Benefits of Roth IRA, by Chicago Accountants.

Many investors and financial professionals are familiar with the primary benefits of a Roth IRA: that after you pay taxes on the money going into the Roth IRA that the plans investments grow tax free and come out tax free.  That being said, there are so many more benefits to the Roth IRA that need to be noted. I’ll note just three.

First, Roth IRAs are not subject to RMD. Traditional retirement plan owners are subject to rules known as Required Minimum Distribution rules which require the account owner to start taking distributions and paying tax on the distributions (since traditional plan) when the account owner reaches the age of 70 ½. Not being subject to RMD rules allows the Roth IRA to keep accumulating tax free income (free of capital gain or other taxes on its investment returns) and allows the account to continue to accumulate tax free income during the account owner’s life time.

Second, a surviving spouse who is the beneficiary of a Roth IRA can continue contributing to that Roth IRA or can combine that Roth IRA into their own Roth IRA.  Allowing the spouse beneficiary to take over the account allows additional tax free growth on investments in the Roth IRA account. A traditional IRA on the other hand cannot be merged into an IRA of the surviving spouse nor can the surviving beneficiary spouse make additional contributions to this account. Non spouse beneficiaries (e.g. children of Roth IRA owner) cannot make additional contributions to the inherited Roth IRA and cannot combine it with their own Roth IRA account. The non spouse beneficiary becomes subject to required minimum distribution rules but can delay out required distributions up to 5 years from the year of the Roth IRA account owner’s death and is able to continue to keep the tax free return treatment of the retirement account for 5 years after the death of the owner. The second option for non-spouse beneficiaries is to take withdrawals of the account over the life time expectancy of the beneficiary (the younger the beneficiary the longer they can delay taking money out of the Roth IRA). The lifetime expectancy option is usually the best option for a non-spouse beneficiary to keep as much money in the Roth IRA for tax free returns and growth.

Third, Roth IRA owner’s are not subject to the 10% early withdrawal penalty for distributions they take before age 59 ½ on amounts that are comprised of contributions or conversions. Growth and earning are subject to the early withdrawal penalty and to taxes too but you can always take out the amounts you contributed to your Roth IRA or the amounts that you converted without paying taxes or penalties (note that conversions have a 5 year wait period before you can take out penalty and tax free).

Roth IRAs are a great tool for many investors. Keep in mind that there are qualification rules to being eligible for a Roth IRA that leave out many high income individuals. However, you can convert your traditional retirement plan dollars to a Roth IRA (sometimes known as a backdoor Roth IRA) as the conversion rules do not have an income qualification level requirement on converted amounts to Roth IRAs. This conversion option has in essence made Roth IRAs available to everyone regardless of income

Ten Facts about the Child Tax Credit, by Chicago CPAs.

The Child Tax Credit is an important tax credit that may be worth as much as $1,000 per qualifying child depending upon your income. Here are 10 important facts from the IRS about this credit and how it may benefit your family.

  1. Amount – With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.
  2. Qualification – A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence.
  3. Age Test – To qualify, a child must have been under age 17 – age 16 or younger – at the end of 2012.
  4. Relationship Test – To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
  5. Support Test – In order to claim a child for this credit, the child must not have provided more than half of their own support.
  6. Dependent Test – You must claim the child as a dependent on your federal tax return.
  7. Citizenship Test – To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien.
  8. Residence Test – The child must have lived with you for more than half of 2012. There are some exceptions to the residence test, which can be found in IRS Publication 972, Child Tax Credit.
  9. Limitations – The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.
  10. Additional Child Tax Credit – If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

Please call Chicago Accountants at 773-728-1500 if you need help in getting your individual or corporation income tax prepared.

Taxable and Nontaxable Income by Chicago CPAs

Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:

• Child support payments

• Gifts, bequests and inheritances;

• Welfare benefits

• Damage awards for physical injury or sickness;

• Cash rebates from a dealer or manufacturer for an item you buy; and

•Reimbursements for qualified adoption expenses. Some income is not taxable except under certain conditions. Examples include:

• Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.

• Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.

All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering – the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.

Please call 773-728-1500, the Chicago Accountants.

Five Facts to Know about AMT, by Chicago Accountants:

The Alternative Minimum Tax may apply to you if your income is above a certain amount. Here are five facts the IRS wants you to know about the AMT:

1. You may have to pay the tax if your taxable income plus certain adjustments is more than the AMT exemption amount for your filing status.

2. The 2012 AMT exemption amounts for each filing status are:

  • Single and Head of Household = $50,600;
  • Married Filing Joint and Qualifying Widow(er) =      $78,750; and
  • Married Filing Separate = $39,375.

3. AMT attempts to ensure that some individuals and corporations who claim certain exclusions, tax deductions and tax credits pay a minimum amount of tax.

4. You should use IRS e-file to prepare and file your tax return. You figure AMT using different rules than those you use to figure your regular income tax. IRS e-file software will determine if you owe AMT, and if you do, it will figure the tax for you.

5. If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax.

We prepare tax returns for our clients who owe AM.  If you need help, please contact us, the Chicago Tax Accountants at 773-728-1500.  If you need help with filing extentions, please call us or email us at asif@taxcutters.com and we will help you out.

‘C’ Corporations

In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

If you are a C corporation, use the information in the chart below to help you determine some of the forms you may be required to file.

For more e-file information, see References/Related Topics listed below.

If you are a C corporation or an S corporation then you may be liable for…

Use Form…

Separate Instructions…

Income Tax

1120, U.S. Corporation Income Tax Return (PDF)

Instructions for Form 1120 U.S. Corporation Income Tax Return(PDF)

Estimated tax

1120-W, Estimated Tax for Corporations (PDF)

Instructions for Form 1120-W(PDF)

Employment taxes:

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

941, Employer’s Quarterly Federal Tax Return (PDF) or943, Employer’s Annual Federal Tax Return for Agricultural Employees (PDF) (for farm employees)

940, Employer’s Annual Federal Unemployment (FUTA) Tax return (PDF)

Instructions for Form 941 (PDF)

Instructions for Form 943 (PDF)

Instructions for Form 940 (PDF)

Excise Taxes

Refer to the Excise Tax Web page

Please call Chicago Tax Accountants us at 773-728-1500 if you have questions regarding your ‘C’ Corporations.

Find out if you qualify for Earned Income Tax Credit EITC / EIC

EITC, the Earned Income Tax Credit, sometimes called EIC is a tax credit to help you keep more of what you earned. It is a refundable federal income tax credit for low to moderate income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

To qualify, you must meet certain requirements and file a tax return, even if you do not owe any tax or are not required to file.

Do You Qualify for EITC?

To qualify for EITC you must have earned income from employment, self-employment or another source and meet certain rules. Also, you must either meet the additional rules for workers without a qualifying child or have a child that meets all the qualifying child rules for you.

Earned Income Tax Credit Rules for Everyone

To qualify for Earned Income Tax Credit or EITC, you and your spouse if married and filing a joint return, must meet all of the following rules:

  1. Have a Social Security Number that is valid for employment
  2. Have earned income from employment, self-employment or another source
  3. Cannot use the married, filing separate filing status
  4. Must be a U.S. citizen or resident alien all year or a nonresident alien married to a U.S. citizen or resident alien and choose to file a joint return and be treated as a resident alien
  5. Cannot be the qualifying child of another person*
  6. Cannot file Form 2555 or 2555-EZ (related to foreign earned income)
  7. Your Adjusted Gross Income and earned income must meet the limits shown on the Income Limits, Maximum Credit Amounts and Tax Law Updates Page
  8. Your investment income must meet or be less than the amount listed on the Income Limits, Maximum Credit Amounts and Tax Law Updates Page

After you meet the EITC rules for everyone, you must also meet the rules for either workers without a qualifying child or have a child that meets the *qualifying child rules.

Find out if you are eligible for the EITC by answering a few questions and providing basic income information, using the IRS’s online EITC Assistant web tool. The assistant also helps determine if your child meets the rules for a qualifying child and estimates the amount of your credit.  Find the English EITC Assistant here or o haga click aquí para seleccionar la Versión en Español del Asistente.

Special EITC Rules

There are special EITC rules for members of the military, ministers, members of the clergy and those receiving disability benefits. Find out more about the special EITC rules.

Rules for those Without a Qualifying Child

If you and your spouse, if filing a joint return, meet the EITC Rules for Everyone and you do not have a qualifying child, you may be eligible for EITC. Find the rules for those without a qualifying child here.

EITC Income Limits, Maximum Credit Amounts and Tax Law Updates

See the EITC Income Limits, Maximum Credit Amounts and Tax Law Updates for the current year, previous years and the upcoming year.

Special EITC Rules

Special EITC rules for members of the military, ministers, members of the clergy, those receiving disability benefits and those impacted by disasters. Read more about the special rules.

Disability and EITC

Many persons with disabilities or persons having children with disabilities qualify for the Earned Income Tax Credit or EITC. Find out more about Disability and EITC.

Please contact Chicago CPAs at 773-728-1500

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!!

Deducting Business Expenses

Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.

What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

It is important to separate business expenses from the following expenses:

  • The expenses used to figure the cost of goods sold,
  • Capital Expenses, and
  • Personal Expenses.

Cost of Goods Sold

If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses that go into figuring the cost of goods sold.

  • The cost of products or raw materials, including freight
  • Storage
  • Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
  • Factory overhead

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.

This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.

For additional information, refer to the chapter on Cost of Goods Sold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods.

Capital Expenses

You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.

  • Business start-up cost (See the note below)
  • Business assets
  • Improvements

Note: You can elect to deduct or amortize certain business start-up costs. Refer to chapters 7 and 8 of Publication 535, Business Expenses.

Personal versus Business Expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 4 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.

Business Use of Your Home

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Home Office Deduction and Publication 587, Business Use of Your Home, for more information.

Business Use of Your Car

If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses. For a list of current and prior year mileage rates see the Standard Mileage Rates.

Other Types of Business Expenses

  • Employees’ Pay – You can generally deduct the pay you give your employees for the services they perform for your business.
  • Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’ retirement.
  • Rent Expense – Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
  • Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities.
  • Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
  • Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.

If you have a business and need help in completing your Income Tax Return, please contact us at 773-728-1500.  We, the Chicago Accountants, are here to help you.

Tax Increases in 2013 That Deserve Consideration

These are the new rates changes for 2013, changes that might affect the budgets of a lot of the contributors:

  1. The capital gains rate is going to increase. Under current law, gain from the sale of an asset held for investment for over one year is taxed at 15%. In 2013 this rate will increase to 20%. If you have an investment you are considering selling next year, you may want to move up your timetable to take advantage of the lower tax rate in 2012.
  2. Second, the alternative minimum tax (AMT) threshold amount will fall to $45,000 per year. This means that if you make more than $45,000 per year you will have to calculate AMT. If you don’t understand AMT you are not alone. The best way to explain AMT is to view it as a separate tax system. It has its own set of rates and its own rules for deductions, which basically amounts to fewer deductions. Under AMT you are simply adding back your deductions and calculating the tax you would owe without your deductions. You then pay whichever is more.
  3. Third, the 3.8% Medicare Surtax will kick in and apply to the lesser of your net investment income, or the amount of your modified gross adjusted income that is over $250k for a married couple, or $125k for a single person. In other words, if you sell an investment property and generate 350k in gain, your tax rate in 2013 will be 23.8%.
  4. Fourth, the estate/gift tax exemption will drop from its current $5,000,000 per person to $1,000,000 and the tax rate will increase from 35% to 55%. If you or your parents have an estate that is valued over $2,000,000, you should consider making moves before the end of the year to reduce your future gift and estate tax by transferring assets to your family now while the exemption is at $5,000,000.

Please give us a call 773-728-1500, we The Chicago Accountants will help you out.

Short Sale or Foreclosure – the Income Tax Consequences

We are CPAs in Chicago and provide the following summary for the benefit of Taxpayers in Chicago and surrounding suburbs.

These days a lot of home owners or real estate investors are encountering numerous questions about the tax consequences of these situations. That’s why it’s more important than ever for real estate owners to understand the basics of how the IRS views tax forgiveness.

How does the IRS view a short sale or foreclosure?

short sale is the discount a mortgage holder may allow in order to sell the property, even though doing so will short or discount the note. This generally results in a benefit to the debtor because the mortgage is reduced.

The process, of course, is different in a foreclosure, but the result is essentially the same.  The mortgage holder forecloses on the property, takes possession or sells the property on the courthouse steps, and will probably end up losing on the original mortgage. In effect, the borrower usually doesn’t have to pay the full mortgage, and whatever the lender can get for the property reduces the mortgage amount and the lender will often take a loss on the rest.

IRS frankly doesn’t care if a property is going through a short sale or foreclosure. The IRS is going to determine if Forgiveness of Debt took place and if it should be taxed to the taxpayer. Keep in mind though that the lender does not always forgive debt in a foreclosure or short sale. If the lender gets a deficiency judgment or comes after the homeowner for the unpaid amount, there is no debt forgiveness and thus no taxable income.

However, for situations where the lender does forgive the debt, determining what should be taxed can be a complicated question with lots of variations based on the facts and circumstances.

Keep in mind that, in almost every situation, the IRS boils the transaction down to the analysis of four questions:

.Question 1: Was the property sold for less than the mortgage or mortgages on the property?

Easy to calculate, simply add up all of the debt on the property (first and second mortgages included), and subtract it from the final sales price. If the result is a negative number, then there is a presumption the seller or prior owner is facing Forgiveness of Debt Income.

In case of foreclosure, it’s a little more difficult to determine the amounts in the equation above, because sometimes the bank/mortgage holder hasn’t sold the property yet; they simply took possession of the property in the foreclosure. Essentially, the calculation can’t be completed until the lender sells the property and their loss is determined.

Question 2: Was the mortgage or mortgages considered recourse or non-recourse debt?

If there is a presumption of debt forgiveness as determined in Question 1, the taxpayer next has to find out if the debt is recourse debt. This simply means the debtor signed personally guaranteeing the debt, or in other words, is personally obligated to pay the mortgage. This is actually an easy fact to determine.

A quick document review by an attorney can help the homeowner determine if the debt is recourse or not. The good news is if they aren’t personally liable, then they don’t have to pay the debt and they don’t have Forgiveness of Debt Income.

            Question 3: Is there Forgiveness of Debt Income after the basis on the property and any loss is calculated?

Often taxpayers overlook this aspect of the analysis.  Assuming there is recourse debt, and hence Forgiveness of Debt Income, taxpayers shouldn’t forget to calculate their loss on the property as a whole. This loss can offset any Forgiveness of Debt Income.

In this more complicated equation, the taxpayer would start with the sales price of the property and then subtract the adjusted basis on the property (i.e., the net cost for the property after adjusting for various items like depreciation or home improvements). This process will tell the homeowner if there is a gain or loss on the property. In sum, a loss would be deductible against the Forgiveness of Debt Income. Note, however, that a primary residence is going to be treated differently during this stage of the analysis (see below).

If there is Forgiveness of Debt Income from recourse debt and the loss on the sale doesn’t wipe out the gain, or it isn’t a primary residence, then the taxpayer’s only option to avoid being taxed on the forgiveness is to qualify under the insolvency or bankruptcy rules provided by the IRS. Essentially, these rules require the taxpayer’s total liabilities to exceed total assets, whether married or single (the details of which are discussed in IRS Publication 4681).

One final option that doesn’t allow the taxpayer to discharge the income but permits deferring the tax over time is to reduce the basis on other real estate owned by the taxpayer by using Form 982.

Question 4: Was the property in question the primary residence of the taxpayer?

The rules have been changed when it comes to principal or primary residences. Congress passed and President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007 to provide relief to families who were going through a short sale or foreclosure on their primary residence through the end of 2012. This law essentially wipes out any acquisition indebtedness (not second mortgages unrelated to the purchase) and is a specific election made on a tax return. (Note there is a limit of $2 million of interest and debt for married couples and a lower limit for single individuals). Taxpayers should consult with their tax advisor regarding the specifics of this exception and they qualify.

Finally, I would be remiss to not mention loan modifications and the impact they may have on a tax bill. Rest assured, most loan modifications don’t create taxable income as they simply modify the terms of a loan to help a debtor better make his or her payments. However, if a lender actually reduces the principal amount of the loan, sometimes called a cram down, then the debtor better expect a 1099 for Cancellation of Debt Income and speak with a tax advisor.

Make sure your Tax Advisor knows how to apply correctly the tax deductions that are allowed.

In summary, if you going through a loan modification, short-sale, foreclosure, or deed in lieu, please know that, we at TaxCutters can help you through the tax paperwork process.  Please give us a call at: 773-728-1500.