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

IDENTITY THEFT ISSUES

The IRS, in conjunction with the Justice Department and other Federal, state, and local agencies, has intensified their efforts at preventing, detecting, and resolving identity theft and refund fraud.

The identity theft and refund fraud effort has involved 734 enforcement actions involving 389 individuals. The effort included 109 arrests, 189 indictments and complaints, and 47 search warrants.

In addition, the IRS began a special compliance effort that began on
January 28, 2013. IRS auditors and criminal investigators will visit 197 money service businesses to help make sure that these businesses are not assisting identity thieves or refund fraud when cashing checks.  These compliance visits took place in 17 high-risk areas identified by the IRS which included: New York, Philadelphia, Atlanta, Tampa, Miami, Chicago, Houston, Phoenix, Los Angeles, San Diego, El Paso, Tucson, Birmingham, Detroit, San Francisco, Oakland, and San Jose.

As part of this effort, the IRS has made a significant increase in the number and quality of identity theft filters in their processing system for the 2013 Filing Season. These filters are designed to spot fraudulent tax returns before the refund is issued.

Also, by late 2012, the IRS has more than doubled the number of IRS employees that are devoted to identity theft related issues.  They have also trained 35,000 employees that work with taxpayers to recognize identity theft indicators and help people victimized by identity theft.

If you have been a victim of identity theft and have not contacted the IRS about this, you should  contact the IRS Identity Protection Specialized Unit at 1-800-908-4490. Once you contact them, the IRS will ask you to complete Form 14039 (IRS Identity Theft Affidavit).

If you receive a notice from the IRS indicating that you might have been the victim of identity theft, you should follow the instructions on that notice.

For more information on what the IRS is doing to help prevent and combat identity theft and what a taxpayer should do if they might have been a victim, see the following:

If you have any questions we, Chicago Accountants are here to help you 773-728-1500!!

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail

Direct Deposit Puts Your Money in Your Pocket…Faster

One of the most frequent questions that I am getting as a CPA during the tax season is: “How long will it take to get my refund? Will it be faster if I choose direct deposit?”

I always suggest getting direct deposit as it’s faster and safer, but some clients just want to see a check written with a big amount on their name.

However, I would say don’t wait around for a paper check. Have your federal tax and state (if applicable) refund deposited directly into your bank account. Choosing direct deposit is a secure and convenient way to get your money in your pocket faster.

  • Secure – there is no chance for a check to get lost in the mail. Thousands of checks are returned to the IRS by the U.S. post office every year as undeliverable mail.  Direct deposit eliminates the possibility of not receiving your check and prevents your refund from being stolen.
  •  Convenient – the money goes directly into your bank account.  You won’t have to make a special trip to the bank to deposit the money yourself.
  •  Easy – simply provide this office with your bank routing number and account number when your return is prepared, and you will receive your refund far quicker than by check.

Please call Accountants in Chicago at TaxCutters 773-728-1500 and we will answer your questions!!

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail

Is the rental cost of a safe deposit box Tax Deductible?

We are Accountants in Chicago and we were recently asked the following question by a client of ours.

Which is the best solution for the investment? Should Investments Be Kept In A Safe Deposit Box?  Is the cost of Safe Deposit box tax deductible?

Depending on the investment it could be a good idea to keep our investments in a safe deposit box. Certainly, some investments definitely require this sort of protection, such as rare coins, stamps, and similar collectables, gold and silver, and negotiable instruments, such as bearer bonds that can be cashed by anyone who possesses them. The cost of renting the box isjustifiable for keeping these items safe.

When we talk about stock certificates and other such proof of ownership, the need is less critical since these can be replaced, but the delay and inconvenience of replacing them may warrant safeguarding them as well. Although less critical, many individuals feel the need to also include insurance policies, deeds, birth certificates, wills, trust documents, etc., in their safe deposit box. If you do include the originals of these documents in the lockbox, be sure to make digital copies or photocopies for everyday reference. It is also important that the individual(s) you designate to handle your affairs in case of death or incapacity has a list of your investments and important documents and knows where they are kept.

However, if you do rent a safe deposit box to store valuables, you may wonder, is the cost a tax deduction?  For Individual Income Tax Return, the answer is YES if the box is used to store taxable income-producing stocks, bonds, or investment-related documents, if you itemize your deductions, and if the box rental plus other “miscellaneous” deductions exceeds 2% of your adjusted gross income. The answer is NOwhen you prepare your Individual Income Tax Return,  if you use the safe deposit box only to store jewelry or other personal items or for tax-exempt securities.

Call CPA in Chicago, Illinois at 773-728-1500 for questions regarding Individual Income Tax and the appropriateness of Tax Deductions.

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail

The taxes alphabet

Taxes can be fun, accountant is a seerious word, but the tax preparation can be a lot of fun.

A is for Alimony

Alimony payments are deductible by the payer and taxable as income to the recipient. The deduction is “above the line” which means that you do not have to itemize to claim the deduction

B is for Barter.

The treatment of bartered goods and services is like accepting cash: the exchange of services is still reportable and taxable. You must include in gross income on your federal income tax return the fair market value of goods and services received in exchange for goods or services you provide.

C is for Capital Losses

When you sell or otherwise dispose of a capital asset, the difference between the amount you sell it for and your basis is a capital gain (if the value at disposition is more than your basis) or a capital loss (if the value of the disposition is less than your basis). You can only deduct capital losses on investment property, not on personal use property.

D is for Deductible Taxes.

If you itemize, you may be able to deduct state and local taxes; real estate taxes; foreign income taxes and property taxes on your federal income tax return. You may not deduct federal income taxes, Social Security taxes, Medicare taxes, FUTA (federal unemployment taxes), and RRTA (railroad retirement taxes).

E is for Educator Expenses.

If you are an eligible educator, you can deduct up to $250 of any unreimbursed expenses paid or incurred for books, supplies, computer equipment, other equipment, and supplementary materials used in the classroom; these expenses must be paid or incurred during the tax year

F is for FSA.

FSAs are flexible spending accounts. The most common FSA is a health flexible spending arrangement which allows you to pay qualified medical expenses from a fund set up with pre-tax dollars: withdrawals from the fund are income tax free.

G is for Gift Expenses.

Generally, if you provide an item to a customer (or a customer’s family) without an expectation of payment or compensation, that’s a gift. The IRS limits the amount that you can deduct for gifts: you can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year.

H is for Home Improvements.

In most cases, repairs to your home increase your basis for purposes of calculating a gain or a loss at sale, but your run of the mill home repair expenses – even if significant – are not deductible on your federal income tax return

I is for Injured Spouse.

You are an injured spouse if your share of your tax refund as shown on your joint return was, or is expected to be, applied against your spouse’s past-due federal debts, state taxes, or child or spousal support payments. If you are an injured spouse, you may be entitled to get your share of the refund released to you.

J is for Job Search Expenses.

If you itemize, you can deduct out of pocket expenses related to your job hunt even if you don’t get a new job.

K is for Kiddie Tax.

When income is unearned (generally, income from dividends and interest) for children under the age of 18, or under the age of 23 while a full time student, the first $950 is considered tax-free and the next $950 is taxed at the child’s rate. Unearned income over $1,900 is taxed at the child’s parents’ tax rate

L is for Levy.

One of the ways that the IRS works to make sure they get paid is the use of a levy. A levy is a legal seizure of your property.

M is for Making Work Pay Credit.

There is no Making Work Pay Credit for 2011. That also means no Schedule M.

N is for Non-Citizen Spouse.

Generally, a husband and wife cannot file a joint return if either spouse is a nonresident alien at any time during the year. However, if you were a nonresident alien or a dual-status alien and were married to a U.S. citizen or resident alien at the end of 2011, you may elect to be treated as a resident alien and file a joint return.

O Is For Offer in Compromise.

If you can’t pay your tax debt in full, you might consider an Offer in Compromise (OIC) which allows you to resolve your tax obligations for less than the full amount you owe.

P is for Penalty on Estimated Tax.

If you receive income without having any federal income taxes withheld, you should consider making estimated payments throughout the year to avoid any penalties.

Q is for Qualified Dividends.

For 2011, taxpayers who would normally have paid a 10% or 15% ordinary income tax rate will pay 0% on qualified dividends. All other taxpayers pay a mere 15%.

R is for Refund.

If you e-file and use direct deposit, you can receive your refund in as few as ten days.

S is for Standard Deduction.

For the tax year 2011, the standard deduction for single taxpayers or for those married filing separately is $5,800; for married taxpayers or qualifying widow(er)s, the standard deduction is $11,600; and for head of household, the standard deduction is $8,500.

T is for Tuition and Fees Deduction.

You may be able to deduct qualified tuition and related expenses of up to $4,000 that you pay for yourself, your spouse, or a dependent, as a tuition and fees deduction.

U is for Unreasonable Compensation.

S corporations must be sure that compensation paid to shareholders who are also employees is not unreasonable.

V is for Vacation Home.

Assuming that your vision of a vacation home and the IRS’ vision are similar enough, you can get a tax break or two on purchasing and owning a vacation home.

W is for Wash Sale.

A wash sale is, at its most basic, when you sell or trade stock or securities at a loss while simultaneously (or nearly simultaneously) buying something nearly identical.
For tax purposes, you generally cannot deduct losses from sales or trades of stock or securities in a wash sale.

X is for X-Mark (Signature).

No matter how thorough and accurate your tax return is, it’s not considered a valid return unless you sign it. If you are filing a joint tax return, your spouse must also sign.

Y is for Year End.

Y is for Year End. Tax returns are filed based on your tax year end. Individual filers have a calendar year which means that federal income tax returns are due on April 15 of each year – unless that day falls on a Saturday, Sunday or holiday as it does in 2012. This year, we have both (!) so returns are due April 17, 2012

Z is for Zero.

The general rule is that the more exemptions that you claim, the less in federal taxes is withheld. If you claim zero exemptions, the maximum amount of withholding will be taken from your check.

Please give us a call 773-728-1500 if you have any questions regarding your tax return, we the accountants in Chicago are here to help you!!

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
Photo from Nouhailler on flickr.com

Income Tax Tip: Save money by deducting mileage expenses

Don’t miss out on tax savings this year by forgetting about tax deductible travel expenses. There are four cases in which you may deduct your travel expenses. In each case, if you drove, you may deduct a standard rate per mile. If you took another form of transportation, the actual fare for a taxi, bus, or train may be deducted.

  • BUSINESS: Business miles are those driven for business, other than your daily commute. If you are travelling out of town, or even nearby for a meeting, conference, or seminar, you may deduct these miles. If your principle place of business is a home office, you may deduct miles driven to and from other work locations.
  • MEDICAL:  Qualifying miles are those driven to medical or dental appointments occurring in order to prevent or alleviate a physical or mental defect or illness. This includes miles driven to and from doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and more.
  • MOVING: Moving expenses may be deducted if the move is for business purposes. For moving to qualify, the new residence must be located fifty miles or more closer to the new place of business than the old residence.
  • CHARITY:   Travel expenses that necessarily arise while performing services for a charitable organization–such as through volunteer work or as an appointed representative of a religious institution–are considered charitable and thereby deductible. This applies whether you pay the expenses directly or indirectly (by contributing to the organization) as long as the trip is not significantly for recreation or vacation.

Using the most up-to-date mileage rates will help you get the biggest deductible possible from your 2011 tax return. Standard mileage rates are used to calculate the deductible costs of driving a vehicle for business purposes, charitable purposes, medical purposes, or for moving over 50 miles for business purposes.

For cars, vans, and pick-up trucks, the mileage is:

55.5 cents per mile for business miles

23 cents per mile for medical or moving

14 cents per mile for charitable organizations

These mileage rates were given on July 1st, 2011 by the IRS for the mid-year adjustment. The IRS recently came out with the mileage rates effective January 1st, 2012, and they are the same as the current rates.

These tips come from your favorite Chicago accountants at TaxCutters, Inc.  Feel free to call us at (773) 728-1500 or email info@taxcutters.com for more information or tax help.

facebooktwittergoogle_plusredditpinterestlinkedinmailfacebooktwittergoogle_plusredditpinterestlinkedinmail