Tax Returns of the Rich and Famous

America’s first billionaire, John D. Rockefeller, once said that “if your only goal is to become rich, you’ll never achieve it.” But some of us still manage to achieve it, and the rest of us want to know how.

Since 1992, the IRS Statistics of Income Division has issued an annual report examining The 400 Individual Tax Returns Reporting the Largest Adjusted Gross Incomes. I know what you’re thinking — the IRS “Statistics of Income” division is where fun goes to die. But read on — there’s some pretty interesting stuff buried in this year’s 13-page report.

What does it take to join the club? Well, for 2009, you had to report $77.4 million in adjusted gross income. Now, that may sound like a lot. But it’s actually down from $109.7 million in 2008, and down even further from the $138.8 record high in 2007. Of course, $77.4 million just gets you in. The 400 earners averaged $202.4 million. (If that sounds like a lot, it’s actually down from a staggering high of $334.8 million in 2007.)
How do the top 400 make their money? Probably not how you imagine. Just 8.6% of it came from salaries and wages. 6.6% came from taxable interest; 13.0% came from taxable dividends; and 19.9% came from partnerships and S corporations. Once again, capital gains made up the biggest share of the top 400′s income. For 2009, it was 45.8%, or $92.6 million each. In fact, the top 400 individuals reported 16% of the entire country’s capital gains! However, that amount was significantly down from 2008, when the top 400 averaged $153.7 million in gains. Clearly, the 2008 economy and stock market crash took a toll on the super-rich as well as the rest of us.
What do they actually pay? 2009′s top 400 averaged $170.3 million in taxable income and paid $40.9 million in tax. That makes their average tax rate 19.9% — up from the 18.1% they paid in 2008. Why the higher rate? Remember, most of their income consists of capital gains, taxed at a maximum of 15%. When the percentage of their income consisting of capital gains goes down, their average rate goes up.
On average, the top 400 are a generous group. 387 of them reported charitable contributions, with the average deduction weighing in at $16.4 million. The top 400 as a whole claimed 4.0% of the nation’s total charitable deductions, down from 5.2% in 2008. (You’ve got to wonder what goes wrong in 13 people’s lives that let them earn tens or hundreds of millions of dollars without deducting a dime for charitable gifts. Maybe they just want to “give” more to Uncle Sam!)

3,869 taxpayers have appeared in the top 400 list since the IRS started tracking them in 1992. But just 27% have appeared more than once. And only 2% have appeared 10 or more times. It’s worth noting that some of today’s highest-profile earners fall short of this group. Billionaire Warren Buffett, who inspired the “Buffett Rule” that would tax million-dollar incomes at a minimum 30%, reported earning “just” $62.9 million in 2011. He probably won’t make the cutoff. Republican presidential candidate Mitt Romney reported earning $20.7 million in 2010 and $20.9 million in 2011. As rich as that sounds, he’s nowhere near the top 400.

We realize you may find these numbers comical. Who makes $200 million in a single year? But someday when your business catches fire and lands you in the top 400, you’ll get pretty heated at the thought of paying $40 million in tax. That’s when you’ll be glad we gave you a proactive plan for paying less tax, contact us at: 773-728-1500.

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail

Filing and Paying Your Business Taxes

Business Taxes

The form of business you operate determines what taxes you must pay and how you pay them. The following are the four general types of business taxes.

Income Tax

All businesses except partnerships must file an annual income tax return.  Partnerships file an information return.  The form you use depends on how your business is organized. Refer toBusiness Structures to find out which returns you must file based on the business entity established.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year.  An employee usually has income tax withheld from his or her pay.  If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax.  If you are not required to make estimated tax payments, you may pay any tax due when you file your return.  For additional information refer to Publication 583.

Estimated tax

Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year. For additional information, refer toEstimated Taxes.

Self-Employment Tax

Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves.  Your payments of SE tax contribute to your coverage under the social security system.  Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.

Generally, you must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

  • If your net earnings from self-employment were $400 or more.
  • If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization.

Note: There are Special Rules and Exceptions for aliens, fishing crew members, notary public, State or local government employees, foreign government or international organization employees, etc.

Employment Taxes

When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file.  Employment taxes include the following:

  • Social security and Medicare taxes
  • Federal income tax withholding
  • Federal unemployment (FUTA) tax

For additional information, refer to Employment Taxes for Small Businesses.

Excise Tax

This section describes the excise taxes you may have to pay and the forms you have to file if you do any of the following.

  • Manufacture or sell certain products.
  • Operate certain kinds of businesses.
  • Use various kinds of equipment, facilities, or products.
  • Receive payment for certain services.

Form 720 – The federal excise taxes reported on Form 720 (PDF), consist of several broad categories of taxes, including the following.

  • Environmental taxes.
  • Communications and air transportation taxes.
  • Fuel taxes.
  • Tax on the first retail sale of heavy trucks, trailers, and tractors.
  • Manufacturers taxes on the sale or use of a variety of different articles

Form 2290 – There is a federal excise tax on certain trucks, truck tractors, and buses used on public highways. The tax applies to vehicles having a taxable gross weight of 55,000 pounds or more. Report the tax on Form 2290 (PDF). For additional information, see the instructions for Form 2290 .

Form 730 – If you are in the business of accepting wagers or conducting a wagering pool or lottery, you may be liable for the federal excise tax on wagering. Use Form 730 (PDF), to figure the tax on the wagers you receive.

If you have questions regarding above, please contact Chicago Accountants at 773-728-1500!!

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail

It’s Tax Time! Are You Ready?

If you’re like most taxpayers, you find yourself with an ominous stack of “homework” aroundTAX TIME! Unfortunately, the job of pulling together the records for your tax appointment is never easy, but the effort usually pays off when it comes to the extra tax you save! When you arrive at your appointment fully prepared, you’ll have more time to:

• Consider every possible legal deduction;
• Better evaluate your options for reporting income and deductions to choose those best suited to your situation;
• Explore current law changes that affect your tax status;
• Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives

The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but later-year returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your tax.

For example, the law allows choices in transactions like:

Sales of property. . . .

If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time, as you receive payments from the buyer.

Depreciation. . . .

You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the cost over a number of years, or in certain cases, you can deduct them all in one year.

Where to Begin?

Ideally, preparation for your tax appointment should begin in January of the tax year you’re working with. Right after the New Year, set up a safe storage location – a file drawer, a cupboard, a safe, etc. As you receive pertinent records, file them right away, before they’re forgotten or lost. By making the practice a habit, you’ll find your job a lot easier when your actual appointment date rolls around.

Other general suggestions to consider for your appointment preparation include. . .

• Segregate your records according to income and expense categories. For instance, file medical expense receipts in an envelope or folder, interest payments in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, make certain you fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully to be sure you don’t miss important data – organizers are designed to remind you of transactions you may miss otherwise.)

• Keep your annual income statements separate from your other documents (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s!

• Write down questions you may have so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to the income for the current year. For instance, a dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale.

• Make certain that you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions for returns filed without them.

• Compare deductions from last year with your records for this year. Did you forget anything?

• Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy Even for Details

To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address, social security number(s), and occupation(s) on last year’s return. Note any changes for this year. Although your telephone number isn’t required on your return, current home and work numbers are always helpful should questions occur during return preparation.

Marital Status Change

If your marital status changed during the year, if you lived apart from your spouse, or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce, or property settlement agreements, if any, to your appointment.

Dependents

If you have qualifying dependents, you will need to provide the following for each:

• First and last name
• Social security number
• Birth date
• Number of months living in your home
• Their income amount (both taxable and nontaxable)

If you have dependent children over age 18, note how long they were full-time students during the year. To qualify as your dependent, an individual must pass five strict dependency tests. If you think a person qualifies as your dependent (but you aren’t sure), tally the amounts you provided toward his/her support vs. the amounts he/she provided. This will simplify making a final decision about whether you really qualify for the dependency deduction.

Some Transactions Deserve Special Treatment

Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions:

Sales of Stock or Other Property:  All sales of stocks, bonds, securities, real estate, and any other type of property need to be reported on your return, even if you had no profit or loss. List each sale, and have the purchase and sale documents available for each transaction.

Purchase date, sale date, cost, and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.

Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the date of the decedent’s death and the property’s value at that time. You may be able to find this information on estate tax returns or in probate documents.

Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends.

Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude all (or a part) of a gain on a home if you meet certain ownership, occupancy, and holding period requirements. If you file a joint return with your spouse and your gain from the sale of the home exceeds $500,000 ($250,000 for other individuals), record the amounts you spent on improvements to the property. Remember too, possible exclusion of gain applies only to a primary residence, and the amount of improvements made to other homes is required regardless of the gain amount. Be sure to bring a copy of the sale documents (usually the closing escrow statement) with you to the appointment.

Purchase of a Home:  If you purchased a home during 2009 and you are a first-time homebuyer or a long-term homeowner after November 6, 2009, you may qualify for a substantial tax credit.  Be sure to bring a copy of the escrow closing statement if you purchased a home.

Vehicle Purchase: If you purchased a new car (or cars) this year, you can deduct the sales tax.  If the car was a hybrid vehicle or one that qualifies as a lean burn vehicle, you may also qualify for a special credit.  Please bring the purchase statement to the appointment with you.

Standard Deduction: If you usually take the standard deduction, you should be aware that a portion of your property taxes, certain vehicle sales taxes and disaster casualty losses can be deducted as part of your standard deduction this year without itemizing your deductions.  Be sure to bring your property tax statements, car purchase statements and records relating to any losses incurred in a federally declared disaster area.

Home Energy-Related Expenditures: If you made home modifications to conserve energy (such as special windows, roofing, doors, etc.) or installed solar, geothermal, or wind power generating systems, please bring the details of those purchases and the manufacturer’s credit qualification certification to your appointment.  You may qualify for a substantial energy-related tax credit.

Ponzi Scheme or Bank Failure Losses:  If you suffered losses as the result of a Ponzi scheme or as the result of a bank failure, there is special tax treatment for these types of losses.  Please be prepared with the details of the losses and the amounts lost.

Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. The government requires that you provide your total mileage, business miles, and commuting miles for each car on your return, so be prepared to have them available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether the reimbursement is included in your W-2.

Charitable Donations: Cash contributions (regardless of amount) must be substantiated with a bank record or written communication from the charity showing the name of the charitable organization, date and amount of the contribution.

Cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, the items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. A record of each item contributed must be kept, indicating the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued less than $250 and dropped off at an unattended location do not require a receipt. For contributions of $500 or more, the record must also include when and how the property was acquired and your cost basis in the property.

Please call us 773-728-1500 the Accountatns in Chicago if you have any questions.

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail

SMART TAX MOVES BY THE END OF THE YEAR

The annual scramble to make smart tax moves before Dec. 31 is proving especially vexing this year, here are some of our CPA in Chicago suggestions.

Congress still hasn’t settled 2013 tax rates on income, investments, large gifts and estates. Deductions and other breaks are also in doubt, now that politicians from both parties are calling for cutbacks—although in different ways.  Many questions remain unanswered even for the 2012 tax year. For example, the Internal Revenue Service on Nov. 13 warned lawmakers that if they don’t act soon, the alternative minimum tax, which reduces the value of some tax breaks, will apply to 33 million households for 2012 rather than four million. More than 60 million people might not be able to file returns or receive refunds until late March, the IRS says, because it would have to reprogram computers.

Yet despite the uncertainties, year-end tax planning is possible and it will impact your Income Tax. We do know that 2013 will mark the debut of the 3.8% flat levy on net investment income for joint filers with adjusted gross income of $250,000 or more ($200,000 for singles). Congress passed this levy, plus a 0.9% increase in Medicare tax for affluent earners, to help fund the massive 2010 health-care changes. The tax introduces new layers of complexity into investors’ planning. (For more details, see box on this page.)

Big unknowns include the top rates on long-term capital gains and qualified dividends, both now 15%. The rate on gains could hit 23.8% or more, and the rate on dividends could be as high as 43.4%. .

There are few ways taxpayers can shrink 2012 taxes after Dec. 31, other than contributing to some retirement accounts or health savings accounts. Here are moves to consider before year end, plus a few to avoid.

  • Make charitable gifts. The best value often comes from donating appreciated assets, because donors can get a full deduction while skipping capital-gains tax on the asset’s growth. Cash donations to charities are often deductible up to 50% of adjusted gross income.
  • If you want to donate IRA assets to charity, wait a bit longer. Since 2006, IRA owners 70½ and older have been able to give up to $100,000 of the required payout directly to a charity. There’s no deduction, but no taxable income either. This wildly popular provision expired at the beginning of 2012, but lawmakers might yet reinstate it—as they did in 2010.
  • Make an extra mortgage payment, or pay down principal. Usually taxpayers can’t accelerate more than one month of mortgage interest, but that helps a bit if you think the mortgage-interest deduction will be curbed next year. Or find cash to pay down principal, which reduces overall interest.
  • Maximize contributions to employer-sponsored retirement plans. Unlike with IRAs, the deadline for 401(k) contributions is Dec. 31. This year, the employee limit is $17,000, or $22,500 for workers 50 or older.
  • Harvest capital losses, up to a point. Investment losses can offset investment gains plus up to $3,000 of ordinary income, both for single and joint filers. Note that “wash sale” rules penalize buyers who acquire the same asset within 30 days of selling at a loss.
  • Use up funds in a medical flexible-spending account. They often don’t carry over, although some employers will allow workers to spend 2012 funds in the first weeks of 2013. Next year, the contribution limit will be $2,500, less than some employers now allow.
  • Accelerate medical expenses. The threshold for deducting these expenses, now 7.5% of adjusted gross income (10% for AMT payers), rises to 10% next year for most taxpayers. People who are 65 and older, however, can use the 7.5% threshold through 2016. This phase-in will be useful, say advisers, because most taxpayers claiming large medical deductions are in the final years of life. Note that the IRS’s list of what’s deductible is far broader than what insurance typically reimburses, extending to contact-lens solution, assisted-living costs and even special education.
  • Write next semester’s tuition checks before year end. The American Opportunity Tax Credit allows qualified taxpayers to get a benefit this year for next spring’s tuition if the payment is made before year end—even though the credit is set to expire for 2013.
  • Prepay state taxes. Deductions for state and local income, sales and property taxes are already disallowed by the alternative minimum tax, and they might shrink further next year, even if Congress reinstates the expired sales-tax deduction for 2012. Consider accelerating next year’s state tax payments if they don’t throw you into the AMT, in which case you’ll lose the write-off altogether.
  • Make gifts up to $13,000 to relatives or friends. Such gifts are tax-free, and the number of recipients isn’t limited as long as the value of each gift doesn’t exceed $13,000. Cash is often the best gift, as presents of assets such as stock carry their “cost basis” with them.
  • Contribute to 529 education savings accounts. Assets in these accounts enjoy tax-free growth, and withdrawals from them are tax-free when used for tuition and other qualified expenses. Some states also provide tax benefits to givers. These accounts also offer a rare benefit: Contributions leave the giver’s estate, yet he or she can take back the principal without penalty if the money is needed. Contributions do count toward the $13,000 gift limit, however.

Please call Accountants in Chicago at 773-728-1500. We can help you plan and get the right tax deductions.

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail

New Tax Rules To Watch Out For!

Here’s a quick rundown of what to expect starting January 1, when a bunch of current tax rules expire, and some new rules take effect. : The Bush tax cuts expire.

That means the top rates on ordinary income goes from 35% to 39.6%; the top rate on capital gains goes from 15% to 20%; and the top rate on qualified dividends jumps from 15% to 39.6%. Much of the debate over tax rates focuses on income at the top. But, the expiration of the Bush tax cuts affects all of us. The lowest 10% rate will disappear entirely, and everyone who actually pays income tax will pay more.

  1. the 2011-2012 payroll tax cuts expire, which means Social Security and self-employment taxes go up by 2% on all earned income up to $113,700. Two percent may not sound like a lot — but it means higher taxes for about 163 million working Americans.
  2. new taxes imposed by the 2010 “Obamacare” legislation take effect – the Medicare portion of Social Security and self-employment taxes goes up from 2.9% to 3.8% on earned income topping $200,000 ($250,000 for joint filers). And there’s a new 3.8% “Unearned Income Medicare Contribution” (which sounds so much better than “tax’) on “net investment income” (interest, dividends, capital gains, rents, royalties, and annuities) over those same amounts.
  3. the Alternative Minimum Tax exemptions revert back to where they stood in 2000. Under current law, those exemptions are not adjusted for inflation. So, every couple of years, Congress “patches” the system by temporarily raising the exemptions to where they would be if they were indexed for inflation. The AMT currently hits about 4½ million Americans – but without the “patch,” that number explodes to 33 million.

Oh, and do not think dying solves your tax problem. That is because estate taxes, which currently start at 45% on estates over $5 million, will jump to 55% on estates over just $1 million.

So, January 1 2013 is our fiscal cliff, and we’re hurtling towards it.  What can we do? Well, plenty of legislators have proposed extending part or all of the Bush tax cuts, extending the payroll tax cuts, patching the AMT, and raising the estate tax exemption. But actually passing anything will be a challenge — Congress has passed just 132 bills this year, and 20% of those were to name post offices!

The partisan gridlock has many observers convinced that we will actually go over that fiscal cliff. We may see Washington wait for the election results and pass something noncontroversial like the AMT patch before the end of the year. Then in 2013 they will pass legislation extending at least part of the Bush tax cuts and make it retroactive to January 1.

We, the Chicago Accountants want you to know that we are watching everything closely to help you make the most of your opportunities and avoid land mines where possible. And remember, we are here for your family, friends, and colleagues, too so give us a call: 773-728-1500

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail

MARRIED COUPLES VS. SAME SEX COUPLES? WHO PAYS MORE: BY CHICAGO CPA

The federal 1996 Defense of Marriage Act doesn’t offer tax breaks for gay spouses even more because the federal government doesn’t recognize gay marriage it results in paying as much as $6,000 extra a year for the same sex couples.

While filing jointly, as a married couple provides tax benefits, the same sex couples can not enjoy the same perks because they are not allowed to file their federal returns jointly.

However, there are some states (more than 12 now) that grant full or partial marriage rights to same sex couples, but the federal government is governed by the 1996 Defense of Marriage Act, which has the support of conservatives who consider that repealing the act would erode religious liberty for people who believe in the traditional definition of marriage.

We, the Chicago CPA have done the following analysis to compare who would pay more in individual income tax – A Married couple or a same sex couple??

Just to make it clearer we will give you an example of the act’s tax implications for a family with one spouse earning $100,000 and the other spouse staying home with the family’s two kids.

Case I: same sex couple

The working spouse files as head of a household and the spouse that stays home with the kids is considered to be a qualifying relative. As a result the federal tax owed by the household’s is $13,199.

Case II: married couple

The tax liability that the married couple who files a jointly tax return would be $8,656.

The result is a $4543 higher payment for the same sex couple. WHY? Because when you file as head of a household such a designation comes with disadvantages. When you file as head of a household instead of married filing jointly exposes more income to a higher bracket, plus the standard deductions are lower for a head of household than they are for married couples filing jointly.

To find out which status is right for you, please call us at 773-728-1500.

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail

Hot Thoughts

What do Margaret Mitchell, Mark Twain, and Shaquille O’Neill all have in common? None of them like paying taxes, that’s what! Here’s a collection of tax quotes to start your day.

“Death and taxes and childbirth. There’s never any convenient time for any of them.”
Margaret Mitchell

“Blessed are the young, for they shall inherit the national debt.”
Herbert Hoover

“You know we all hate paying taxes, but the truth of the matter is without our tax money, many politicians wouldn’t be able to afford prostitutes.”
Jimmy Kimmel

“The government deficit is the difference between the amount of money the government spends and the amount it has the nerve to collect.”
Sam Ewing

“Basic tax, as everyone knows, is the only genuinely funny subject in law school.”
Martin Ginsburg (Professor, Georgetown University Law Center)

“You’d be surprised at the frivolous things people spend their money on. Taxes, for example.”
Nuveen Investments (Advertisement)

“If you sell your soul to the Devil, do you need a receipt for tax purposes?”
Mark Russell

“I shall never use profanity except in discussing house rent and taxes.”
Mark Twain

“Last time I looked at a check, I said to myself, ‘Who the hell is FICA? And when I meet him, I’m going to punch him in the face. Oh my God, FICA is killing me.’”
Shaquille O’Neill

“The invention of the teenager was a mistake. Once you identify a period of life in which people get to stay out late but don’t have to pay taxes — naturally, no one wants to live any other way.”
Judith Martin (“Miss Manners”)

We hope you enjoyed these quotes. But please remember this: there’s nothing funny about paying more tax than you legally have to. If this summer’s heat has your blood boiling about taxes and you’re looking for a plan to pay less, call us today: 773-728-1500!

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail

You’re Fired! The story of an IRS auditor!!

Nobody really likes paying taxes. Sometimes, even the folks who work for the IRS resent paying the taxes that go towards funding their own salaries. Usually they just grumble about it and then go on with their day. But sometimes they try a little “self help.” So now let’s look at what one auditor did when she wanted to minimize her taxes.

Jacynthia Quinn spent 20 years as an IRS auditor in El Monte, California. The IRS audited her and her husband for 2006 (when she claimed $23,549 in charitable deductions and $22,217 in medical expenses) and 2007 (when she claimed $24,567 in charitable deductions and $25,325 in medical expenses). The Service disallowed those charitable and medical deductions, among other write-offs, and the case wound up in Tax Court.

You’d think an IRS auditor would be the first to know how to avoid an audit! So, how did Quinn do on the other end of the hot seat? Well, let’s look at those charitable contributions first:

“Petitioner proffered ‘receipts’ purportedly confirming charitable contributions. They were inconsistent and unreliable. Representatives from seven different charitable organizations credibly testified that the receipts were altered or fabricated. For example, petitioner offered a receipt purportedly substantiating $12,500 of charitable contributions to a religious organization. The purported receipt, however, identified individuals other than the couple as the donors. The organization’s records did not reflect any contributions made by the couple and confirmed that the other identified individuals had contributed $12,500.”

That doesn’t sound good. Bad enough if one donor testifies your receipts are faked. But seven? How about those medical deductions? Any better luck there?

“Petitioner similarly failed to substantiate the claimed medical and dental expenses. Some of her documentation also suffered from authenticity problems and appeared to have been ‘doctored.’ Petitioner offered three documents purportedly issued by Dr. Christopher Ajigbotafe or his staff confirming more than $9,000 in medical expenses for Mr. Quinn. Each document, however, spelled the doctor’s last name differently (‘Ajigohotafe,’ ‘Ajibotafe’ and ‘Ajigbotafe’). One ‘statement’ was dated in January 2006 and estimated expenses for the upcoming year. The amount of expenses for 2007 contained in another ‘statement’ was contradicted by a letter purportedly from the doctor’s staff.”

Keep in mind here that Quinn is an IRS auditor, with 20 years of training and experience auditing exactly these sorts of deductions! Naturally, the Tax Court didn’t show her a lot of sympathy — they sided with the IRS on every issue and even smacked her with a civil fraud penalty. In fact, the IRS Restructuring and Reform Act of 1998 requires the IRS to fire any employee who willfully understates their federal tax liability (unless they can show the understatement is due to “reasonable cause” and not “willful neglect”). Since Quinn’s own “excuse” is on a par with the dog eating her homework, she’s likely to lose her job as well.

It’s certainly entertaining to read about cases like Jacynthia Quinn’s. It’s satisfying to see a cheater get her comeuppance. And it’s great to see the IRS enforcing the same rules for its own employees as it does for us. But there’s a valuable lesson here, even for the majority of us who don’t cheat. Dotting the “i’s” and crossing the “t’s” is important for everyone. That’s why we don’t just outline strategies and concepts to help you pay less tax. We work with you toimplement those strategies and document them to survive scrutiny. And remember, we’re here for your family, friends, and colleagues too, so give us a call: 773-728-1500.

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail

The Cost of Reform – Medicare Tax

By now, of course, you’ve heard the news that the U.S. Supreme Court upheld the Affordable Care Act, also known as “Obamacare.” The Court ruled that the controversial individual mandate is constitutional under the government’s power to tax, rather than its power to regulate commerce.

We’re not here to debate the merits of the Court’s decision. If that’s what you want, turn on any cable news network and you’ll find various assorted bloviators from both sides, bloviatingright now. (Try it. It’s fun!)

What we are here to discuss is how the Court’s decision affects your tax bill. That’s because the original legislation that the Court upheld makes care affordable in part by imposing several new taxes — in addition to the “tax” or “penalty” imposed by the individual mandate — that will now go into effect as already scheduled:

  • On January 1, 2013, the Medicare tax on earned income, currently set at 2.9%, jumps to 3.8% for individuals earning over $200,000 ($250,000 for joint filers, $125,000 for married individuals filing separately).
  • Also on January 1, there’s a new “Unearned Income Medicare Contribution” of 3.8% on investment income of those earning more than $200,000 for individuals or joint filers earning more than $250,000. (Doesn’t that sound better than “tax”?)
  • Beginning January 1, 2014, there’s a $2,500 cap on tax-free contributions to flexible spending accounts.
  • Also beginning January 1, 2014, employers with more than 50 employees face a penalty of $2,000 per employee for not offering health insurance to full-time employees.
  • Finally, the threshold for deducting medical and dental expenses rises from 7.5% of your adjusted gross income to 10%. You probably don’t get to deduct your out-of-pocket medical expenses anyway — but the new, higher threshold will just make it that much harder.

These new taxes raise new planning questions. How can we structure your investment portfolio to avoid the new “Unearned Income Medicare Contribution”? (Doesn’t that sound better than “tax”?) What role should flexible spending accounts play in your finances? Should we look at a Health Savings Account or Medical Expense Reimbursement Plan to write off newly-disallowed medical expenses?

And the new healthcare taxes aren’t the only challenge we face this Independence Day. We’re six months away from what some wags are calling “Taxmageddon.” On January 1, the Bush tax cuts are scheduled to expire. And the 2% payroll tax “holiday” expires as well. These mean higher taxes for everyone, not just “the 1%.” But with Washington geared up for elections, there’s little hope for quick or easy resolution.

Together, these new developments make for some real planning challenges. But when the going gets tough . . . the tough get going. So count on us to get going on today’s most pressing planning questions. And remember, we’re here for everyone just give us a call at: 773-728-1500.

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail

Something to Scream About

It’s one of the most recognizable images in all of art. It’s Norwegian artist Edvard Munch’s iconic vision The Scream:an agonized figure —little more than a garbed skull and hands — set against a background of blood-colored sky. And last month, it sold for a record-setting price. But could it have been inspired, at least in part, by his tax return?

Munch grew up in Oslo, son of a dour priest. At 16, he enrolled in college to become an engineer. He did well, but he quickly dropped out, disappointing his father, to study painting, which he saw as an attempt “to explain life and its meaning” to himself. At 18, he enrolled at the Royal School of Art and Design of Christiana, where he began painting portraits. His personal style addressed psychological themes and incorporated elements of naturalism, impressionism, and symbolism. He wound up studying in Paris and exhibiting in Berlin before painting the first of four versions of The Scream in 1893.

In 1908, Munch suffered a brief breakdown, followed by a recovery. That recovery brightened Munch’s art as well as his life, as his later work becoming more colorful and less pessimistic. He finally gained the public approval he had sought for so long; he was made a Knight of the Royal Order of St. Olav; and he hosted his first American exhibit. Munch spent the last years of his life painting quietly and alone on a farm just outside Oslo. Today, he appears on Norway’s 1,000 kroner note, set against a background inspired by his work.
We remember Munch now for his art, not his life. But that life included some frustrating run-ins with the tax man. Apparently, Munch wasn’t any happier keeping timely and accurate records than the rest of us. Here’s part of a letter that his biographer, Sue Prideaux, quotes him as writing, in her book Edvard Munch: Behind the Scream:

“This tax problem has made a bookkeeper of me too. I’m really not supposed to paint, I guess. Instead, I’m supposed to sit here and scribble figures in a book. If the figures don’t balance I’ll be put in prison. I don’t care about money. All I want to do with the limited time I have left is to use it to paint a few pictures in peace and quiet. By now, I’ve learned a good deal about painting and ought to be able to contribute my best. The country might benefit from giving me time to paint. But does anyone care?”

Even without that tortured face in The Scream, most of us can still probably relate to his frustration!
Last month, Sotheby’s auction house in New York sold a pastel-on-board version of The Scream that Munch painted in 1895 for $119.9 million — a new record for art sold at auction. The seller was Norwegian billionaire Petter Olsen; the buyer remains unknown. If the seller had been American, there could have been quite a tax to pay. “Capital gains” from the sale of appreciated property held more than 12 months are ordinarily capped at 15%. (Republican presidential candidate Mitt Romney has proposed eliminating tax on capital gains for taxpayers earning under $200,000; while President Obama has proposed raising them to 20% for taxpayers earning over $250,000.) But paintings like The Scream are classed as “collectibles” and subject to a top tax of 28%. (You would be disappointed if we didn’t say that’s enough to make a collector scream!).

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail