Categories
Income Tax

IRS Commissioner Predicts Miserable 2015 Tax Filing Season

“The filing season is going to be the worst filing season since I’ve been the National Taxpayer Advocate {in 2001}; I’d love to be proved wrong, but I think it will rival the 1985 filing season when returns disappeared.”

IRS Commissioner Predicts Miserable 2015 Tax Filing Season.

Categories
Maine

Maine Property Tax Fairness Credit

Maine income tax returns saw a number of changes for the 2013 tax year, including a major revision to the state’s property tax refund program.  In the past, taxpayers needed to file for the property tax and rent “circuitbreaker” relief on a separate application from their income tax return.  For 2013 and later years, that program has been replaced by the Property Tax Fairness Credit.  Certain Maine taxpayers are now able to claim a credit on their state income tax return for a portion of their property taxes or rent paid.Photo of 384 Court Street Auburn, ME 04210

Under the new rules, taxpayers who are Maine residents for at least part of the year and who lived in a home in Maine that they owned or rented can qualify for the credit if they had a Maine adjusted gross income of $40,000 or less and paid more than 40% of their Maine adjusted gross on rent or more than 10% of it on property taxes.

For a taxpayer with a Maine adjusted gross income of $40,000, the credit would likely be available if their property taxes were more than $4,000 a year or their rent was more than $1,250.  This means that the taxpayers most at-risk for overlooking this credit are retirees who have social security or pension income that gets reduced or ignored for figuring Maine income, but may still have a high rent or property tax burden. This credit is generally not available for taxpayers in subsidized housing, unless they also received social security disability income.

This credit is new and hasn’t received a lot of press, so it’s fairly easy to overlook.  Taxpayers who are worried that they might have missed out on this credit should double-check their Maine returns, especially since up to $400 of the credit may be refundable.  That means that the taxpayer may get that much back, even if he or she had no Maine tax withheld during the year.

The Maine Revenue service has a page about the property tax fairness credit, and the worksheet used to calculate it is available on the Maine Revenue Service website.

 

Categories
Federal Income Tax

Don’t incorporate too early!

The decision to incorporate is often one of the first choices new business owners makes, even before they’ve drafted a business plan or secured start-up capital.  In many cases, this can turn out to be a costly mistake.  While it’s true that incorporating a profitable business can sometimes yield tax savings, most businesses lose money during their start-up years and some businesses never manage to become profitable.  Most of the time, these start-up period losses would be more valuable on the owners’ individual income tax returns than they would be on a corporate tax return, and winding-down a business that has been incorporated can be much more expensive than winding-down a business that has never been incorporated. Here are some questions that the business owners should ask themselves before they form a corporation or other legal business entity:

  • What benefit will the business get from incorporating?
  • When will the business become profitable?
  • Does the business include real estate or other property that is likely to increase in value?
  • Where will the money to start the business come from?

Why incorporate?

Sometimes business owners will incorporate just because they think it’s something that people do when they start a business or because they think that they can convert expenses that wouldn’t be deductible without incorporating into business deductions by paying for them as a corporation.  The first is generally not true, and the second is almost always wrong.  A business can operate indefinitely and never  incorporate, and there are very few things that are deductible as a corporation that are not also deductible for an unincorporated business.

 

Corporations do offer tax savings to some businesses, but for a different reason.  A corporation can choose to be either a “C-corporation” or an “S-corporation”.  Both types of corporation can offer tax savings by reducing self-employment taxes. C-corporations have their own set of tax brackets separate from their owners.  C-corporation earnings are not subject to self-employment tax and the first $50,000 of taxable income in a C-corporation each year is taxed at a 15% rate,  but corporations don’t receive a standard deduction or personal exemptions.   This can make  C-Corporation very attractive for business owners when their companies are profitable and retaining some of the earnings to pay for future growth.  They are generally less desirable for business owners who typically take all of the earnings from their companies or each year to pay for personal expenses because these retained earnings cannot be withdrawn forum a C-corporation without being taxable to the owners as dividends.

 

S-corporations don’t offer income tax savings because all of their earnings get reported and taxed on their shareholders’ returns, but they can reduce self-employment taxes.  Unlike an LLC with an operating business, S-Corp profits are not subject to self-employment tax, and unlike a C-corporation,  S-Corp earnings can be withdrawn without a second level of tax. The tax code requires corporate shareholders who work for their companies to receive adequate compensation in the form of a salary or wages subject to payroll tax.  Because S-Corp earnings are not subject to corporate income tax or self employment tax, the IRS reserves the right to reclassify distributions or other payments to shareholders as wages if adequate wages are not paid.

 

Questions about legal liability should be directed at attorneys rather than accountants, but a common reason to incorporate is for liability protection.  A sole proprietor is generally on the hook for any debts incurred by his or her business, including debts that could result from a business-related accident.  Operating as a corporation or an LLC can offer a degree of protection for the shareholders’ personal assets if the businesses is unable to pay its bills.

Why not to incorporate

While there can be some very good reasons to operate a business as a corporation,  there are also a lot of good reasons not to.   Corporations have more tax filing and administrative burdens than unincorporated businesses.   Business losses from an unincorporated business often yield more tax savings than similar losses inside of a corporation.   Additionally, property can generally be placed in a corporation without a tax cost but usually can’t be taken out without the shareholder having to recognize taxable income.    These disadvantages tend to be greatest early in a businesses life.

 

First,  the paperwork burden of a corporation is more than most business owners can handle without paying for outside help.  Corporations must file income tax returns separate from their owners.  Even if the shareholder is the only employee, a corporation must file payroll tax returns and collect and remit payroll taxes and income tax withholding on the shareholders compensation from the corporation.   Most states require corporations to file an annual report each year to remain in good standing and keep its legal protection.  Finally,  a corporation generally needs to hold annual meetings, maintain minutes, and keep other records that just don’t apply to unincorporated business.

Second,  losses in a corporation are often worth less than losses in an unincorporated business.   This author has seen more than one case where a married taxpayer starts a business and runs losses for the first several years.  Self-employment losses not only reduce taxable income, but also earned income and adjusted gross income.   Sometimes this can result in an earned income credit, even when the wage-earning  spouse earns more than the earned income credit phase out.  The deduction of losses from AGI also helps taxpayers with other income avoid the AMT and claim other deductions and credits that are unavailable to high income taxpayers.

Finally,  the tax laws surrounding incorporation are basically a one-way deal.   the owners of a corporation can add assets to it all day long without incurring a tax,  but most withdrawals from a corporation will be taxed as salaries or dividends.  When a shareholder takes something other than money out of his or her business, the IRS considers the property to be sold for whatever it is worth and the cash distributed.  This can result in tax for both the shareholder and the corporation.

New Businesses Hit Hardest

Operating as a corporation can save a business money on income taxes and give it’s owners some liability protection but incorporating too soon can cause an unnecessary burden and unexpected tax costs.   The benefits of incorporating are greatest for profitable,  established businesses.   New businesses that are just starting our are often better off staying sole-proprietors for a while.

 

 

photo credit: Tyler Merbler via photopin cc

Categories
Charitable Contributions Federal Income Tax

Contributions for Specific Individuals

The tax code doesn’t allow a charitable contribution deductions for gifts made for a specific individual.  This is true even when a qualified charity collects the donation for the individual.  Donations made directly to a member of the clergy to be used for their own purposes are also not deductible.  Sadly, this restriction also extends to the payment of medical or other expenses for a needy individual.

Whether or not a contribution is deductible shouldn’t be the last work in whether or not to make a contribution.  Keep in mind that a portion of most donations made to charitable organizations has to be spent on overhead.  When a donation is made directly to someone in need presumably 100% of the donation amount goes to helping them.  That means you can  often do as much good with a non-deductible contribution to an individual as you could with a gift to a church or non-profit group.  Just don’t make the mistake of deducting it on your taxes.

The person who inspired this post is Wynter Przybylski, the 7-year-old daughter of a high school friends and the subject of a recent Bangor Daily News article.  Wynter is battling childhood leukemia and the Pryzbylski’s have a page up seeking donations to help with her care.  I’ve included a couple of links about Wynter’s story below.  The donations they receive for this are not tax-deductible, but can do a lot of good!

http://bangordailynews.com/2014/04/12/news/bangor/community-rallies-behind-brewer-girl-battling-cancer/

http://wabi.tv/2014/04/09/brewer-girl-fighting-leukemia-finds-community-support/

http://www.youcaring.com/medical-fundraiser/cancer-messed-with-the-wrong-girl/154540/update/150281

 

photo credit: N08/6510934443/”>asenat29 via photopin cc

Categories
Income Tax

American Opportunity Tax Credit

There are a number of tax benefits available to college students. While these benefits tend to be small compared to the cost of full-time enrollment in a private university, they can still account for a pretty big piece of tuition at Maine’s state universities or community college system. This can be especially true for students who attend part time while earning money in another job or business.  One of the most generous incentives is the American Opportunity Tax Credit.

The American Opportunity Tax credit was scheduled to expire on December 31, 2013, but has been extended to December 31, 2017.  That’s good news for most undergraduate students because this credit is worth up to $2,500 a year for up to four years of undergraduate course work. That is 100% of the first $2,000 in qualifying expenses and 25% of the next $1,000. The American opportunity tax credit is also partially refundable when the credit comes to more than the tax that would otherwise be due.

Taxpayers and preparers sometimes overlook the fact that the education expenses used to figure this credit include the amount spent on books and other required course materials, in addition to the tuition paid. Students who attend school on a part-time basis are especially likely to leave money on the table by forgetting to consider those costs because their their annual tuition is much more likely to fall below the $4,000 limit on qualifying expenses than students who attend school full-time.

This credit is available to taxpayers based on the education expenses they pay for themselves, their spouse, or their dependents, but only one taxpayer can claim the credit for a given student in the same year. Expenses used to claim the American opportunity tax credit cannot also be used to claim the tuition and fees deduction, the lifetime learning credit, or another educational tax benefit.

Taxpayers with an adjusted gross income above $90,000 if single or $180,000 if married cannot claim the credit, and a taxpayer cannot take the credit if they are listed as a dependent on someone else’s return. Higher income taxpayers sometimes don’t realize that they can choose not to claim the exemption for their dependent student, which may make that student eligible to claim the credit, even if their parents’ income is above the limit.

This credit is almost always worth more than the tax savings that would have come from the forgone exemption, but only 40% of the credit is refundable. If the non-refundable piece of the credit comes to more than the federal income tax that would otherwise be due with the return, then the remaining amount of the credit is wasted.

Families with children in college should discuss who will get the most benefit from the American opportunity tax credit before anyone files his or her return each year.