Tax credit for hiring "Returning Heroes and Wounded Warriors"

As part of the President's "Jobs" bill endeavor, last week congress passed and the President signed into law the "Returning Heroes Tax Credit" and the "Wounded Warriors Tax Credit". These new tax credits will assist employers that hire "qualified" veterans with a tax break between $2,400 and $9,600 for each qualified veteran hired. The amount of the credit depends, in part, on how long the veteran has been unemployed, and the credit increases to the maximum if the veteran has a qualified service related disability. A tax credit is much better for the employer than a tax deduction. A tax credit reduces your taxes dollar for dollar, whereas a tax deduction only reduces your taxable income.

The goal of the jobs bill is to incent employers to hire the thousands of veterans that have or will be returning from the war. It would be great if the bill reduces the number of veterans on the unemployment line. I'd love to see all veterans gainfully employed after serving our country. Hopefully the next bill will assist other citizens that have been searching for employment as well.

Now for the details of the new tax law.

Employers that hire veterans who have been looking for employment for more than six months may be eligible for a Returning Heroes Tax Credit of up to $5,600 per employee; employers that hire veterans who have been looking for employment for less than six months may be eligible for a credit of up to $2,400 per employee.

Employers that hire veterans with service-connected disabilities who have been looking for employment for more than six months may be eligible for a Wounded Warriors Tax Credit of up to
$9,600 per employee.

Of course both tax credits have strings attached.

1-In addition to the above criteria, the individual must begin after the date the law was passed, November 21, 2011.
2-State workforce agencies must certify that an individual is qualified for the credit.
3-Employers must complete Form 8850 Pre-Screening Notice and Certification no later than 28 days after the date of hire.
4-Other requirements must also be met to qualify for the credit.

This new tax law is meant to be tax neutral, as a number of other laws were changed to increase revenue.

1-Veterans Administration(VA) mortgage applications contain an application fee. These fees were scheduled to be reduced, but the new tax law delays the mortgage application fee.
2-After the year 2013, it will be more difficult to qualify for a health insurance premium assistance tax credit. Health insurance exchange options are scheduled to be available under the Patient Protection and Affordable Care Act.upcoming premium assistance tax credit for qualified individual who obtain health insurance through a heals insurance exchange after 2013

New IRS Inflation Adjustments could help or hurt your cash flow

The IRS recently announced inflation adjustments in the tax code for 2012. IRS statistics report inflation increased just over 3.8%. Obviously, this doesn't take into consideration the rising cost of food and gasoline, as these items have increased much more than that!

For some, the IRS inflation adjustments will result in lower tax burden for 2012. For others, their paycheck will be a little lower than in the past with an increase to the Social Security Wage base.

First the bad news.

Employees and self-employed individuals pay social security taxes on the wages, or profit for self-employed individuals. The maximum wage base subject to this tax increases for 2012 to $110,100 from $106,800. This is the first increase in the wage base since 2009.

Now some good news.
RETIREMENT PLANS
401Ks The maximum amount an individual can contribute tax-free to a 401(k) plan increased to $17,000. If you are 50 years old or more, you can contribute an extra $5,500 to you retirement plan.

Traditional IRAs.. The deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of households who are covered by a workplace retirement plan and whose modified adjusted gross incomes fall within certain ranges. For 2012, the income phaseout range starts at $58,000 and ends at $68,000, up from $56,000 and $66,000, respectively, for 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phaseout range for 2012 starts at $92,000 and ends at $112,000, up from $90,000 and $110,000, respectively, for 2011. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out for 2012 if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000, respectively, for 2011.

Roth IRAs. are subject to similar rules. The AGI limit for maximum Roth IRA contributions for a married couple filing a joint return for 2012 is $173,000, an increase of $4,000 from 2011. The AGI limitation for all other taxpayers (other than married taxpayers filing separate returns) increases from $107,000 for 2011 to $110,000 for 2012.

Individual income tax brackets
Although tax rates have not gone down, inflation also impacts the individual income tax rate brackets (which are 10, 15, 25, 28, 33, and 35 percent, respectively, for 2011 and 2012). Indexing of the income tax rate brackets effectively lowers tax bills by including more of an individual’s income in lower brackets.

Standard deduction. Taxpayers who elect not to itemize deductions use the standard deduction amount. The standard deduction increases by $500 for married couples filing a joint return from $11,400 for 2011 to $11,900 for 2012. The standard deduction for single individuals increases from $5,700 for 2011 to $5,950 for 2012.

Personal exemption. Taxpayers may claim a personal exemption deduction (and an exemption deduction for each person they claim as a dependent). The amount of the personal exemption and the dependency exemption increases from $3,700 for 2011 to $3,800 for 2012. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) repealed the personal exemption phaseout for higher income taxpayers for 2011 and 2012.

Estate tax. The 2010 Tax Relief Act provided that the basic exclusion amount for determining the amount of the unified credit against estate tax for estates of decedents dying after December 31, 2009 is $5 million. The $5 million amount is adjusted for inflation for tax years beginning after December 31, 2011. For 2012, the inflation-adjusted amount is $5,120,000.

Gift tax exclusion. For 2012, you can give up to $13,000 to any person without incurring gift tax. Married couples can gift up to $26,000 tax-free to any person. There is no limit on the number of individuals you can make the $13,000 ($26,000) gift. The $13,000 and $26,000 amounts are unchanged from 2011.

So you have a little ebay business? Do you need to report the income?

On a recent family road trip to visit my brother-in-law in Louisville, KY, my 14 year old daughter was anxiously awaiting payment confirmation for her largest sale-to-date for her ebay business.  Correction, her ebay hobby....

She's been busy generating cash for vacation....  I was a bit amazed that she was able to sell her old camera for $60, plus shipping.  I was even more surprised the buyer paid her extra money to ship it express mail so he would have it in time for his vacation, in Florida of course!

Always the skeptic, I suggested she not mail the camera to the buyer until she had confirmation that his payment was received in her paypal account.  She assured me the buyer had only positive comments in his transaction history, so I figured he was probably legit, but still......About halfway to Louisville, she received confirmation payment was received, so her business transaction went well!

However, it was time for this father to have another uncomfortable conversation with his 14 year old daughter.....this time about taxes.  You see, in order to help narrow the "tax gap" caused by unreported income, the IRS is enforcing a new tax regulation meant to ensure all taxable income is reported.  The new Form 1099-K reports the recipient and amount of credit card sales processed by third party settlement organization, like Visa, Mastercard, American Express and yes, Paypal.  This is sure to trip up many home-based ebay and internet businesses that may not have reported taxable income in the past.

The good news for my daughter is that she will fall under two exeptions from tax reporting requirements.

#1 Since there is no way she will ever sell her "inventory" for more than she(I) paid for it, there will never be any profit from the business.  Unless of course there is ever a resurgence of polularity of beannie babbies, in which case I'll gladdly bring up her tax reporting requirements!  A business in which there will never be profit is considered a hobby in the eyes of the IRS.  Income may need to be reported in certain circumstances, but expenses can never exceed income in order to generate a tax loss.  Disclaimer....other reporting requirments may be required.

#2 The new 1099-K is not required if credit card volume is under $20,000 and 200 transactions during the calendar year.  If she sold all of the "inventory" during the year, she would still be under these thresholds. (wanna buy a beannie babby?)

The hight of Louisville today was a predawn tour of Churchill Downs by my brother-in-law Kevin.  He is an exercise jockey and trained last years Derby winner Supersaver ridden by Calvin Borel.  Saw Calvin breeze by on a new horse this morning. Could be another Derby winner!

Do not respond to IRS Email!

Recently I've received several emails from the IRS alleging Unreported/Underreported Income (Fraud Application).  As a general rule, the IRS does not email information to taxpayers.  Unsolicited emails from the IRS are scams.  Do not go to any link in the emial, reply to the email or even open any emails from the IRS, United States Department of the Treasury, or Internal Revenue Service, unless you have a current tax case, audit or examination in process and have been in personal contact with an agent or representative from the IRS.

Our experience has shown that very few auditors communicate via email during the course of an audit or examination.  However, their initial contact with taxpayers is never via email.

We find ourselves representing clients undergoing IRS or Department of Revenue audits with increasing frequency.  Audits levels are up tremeandously and are anticipated to increase more as the government searches for more cash-flow.  Most new clients that are undergoing audit find it not so successful representing themselves in an audit.  Auditors have an understandable increased workload and pressure to close a case in the most expeditious manner.  Unfortunate for the taxpayer, the most expeditious manner of closing the audit is usually the most beneficial for the IRS, and most clostly for the taxpayer.

If you are undergoing an audit, be aware of your rights as a taxpayer.  Our recommendation is that you assign a CPA power of attorney to communicate with the auditors directly.  This leaves you completely out of direct communication with the auditor.  Clients tend to appreciate the fact that they don't need to personally meet the IRS agent, which aleviates a great amount of stress and anxiety during an audit.

 

A solution to breaking the debt ceiling crisis

As the debt ceiling crisis continues, the question remains as to how our country's credit rating will be impacted, and what will the lingering impact be on the finances and taxes of businesses and individuals.  Raising the debt ceiling is like giving an addict another hit to get him through the night.  If our individual financial house was as dire as the governments, we wouldn't be able to sustain the debt service and operating costs of our households.  It appears the real solution to the problem will require not only change, but a new attitude to debt and spending.

Out of all the possible changes available, I believe Dave Ramsey has the most refreshing and hopeful approach to solving the debt crisis, one family, one business at a time.  It's not a new approach, but rather one that goes back to the beginning of time.  Check out his presentation on the Great Recovery.

I've become a big Dave Ramsey fan this year.  With many many clients stuck in a bad financial place, forced to reduce spending due to reduce income, the approach to debt and finances from generations ago is becoming more practical, and certainly more sustainable.  Dave Ramsey has a healthy perspective on generating positive change in our environment.

It's hard to believe that just a mere generation or two ago, our family members struggled through a major financial hardship of the time known as the Great Depression.  Many lessons on saving and spending were learned by that generation, some lessons passed on to us if we were lucky. 

I recall my grandfather speaking about owning a corner grocery store during the Great Depression.  He struggled with trying to balance financial survival for his family, yet extending credit to families so they could put food on the table, knowing good and well he would never receive payment from his unemployed customers.

Later in life, I recall how proud he was when he would find a good deal on a used car.  His favorite car to buy was a three year old, big 4 door Buick, preferably with 50,000 miles on it.  His perspective was that a car with 50,000 miles on it was perfect because it was "broken in" and had a lot of life left.  I suspect this was a "value" purchase motivated by an awareness of the value of a dollar, formed by the Great Depression.

What a refreshing idea....buying a car for cash.  I think I'll tell my kids about this story tonight.  They'll probably roll their eyes like I did when my grandfather told me the same stories over and over again, but maybe they'll remember it too!

A New Chapter at McCarron CPAs...

     We at McCarron CPAs realize that the current economy prevents small business owners from receiving  adequate bookkeeping services with affordable prices.  The saying goes, "You get what you pay for."  When hiring a bookkeeper, you must be selective in order to achieve quality.  Sometimes we sacrifice quality for price.  Therefore, we have designed an opportunity to provide QuickBooks clients with full charge bookkeeping services in house or at our location at reduced rates.  At McCarron CPAs, our clients come first!

Call Patty today to schedule an appointment for your bookkeeping needs!

407-897-7050