Wednesday, April 30, 2014

Estimated Tax Penalties

Here is one area that has a lot of misconceptions. First, you will NOT be charged with any criminal behavior if you don't pay estimated taxes. In fact, surprisingly, you don't need to file and pay estimated taxes at all. If you don't, however, you will pay a penalty that is currently set at a non-deductible penalty rate of 3% unless you meet one of the exceptions from the penalty. Thus, if you can make more than 3% after tax with your investments, it might not be wise to pay estimated taxes. Does that make sense?

So, how do you avoid the penalties? Here are the major exceptions:

1. If you didn't pay any taxes last year, you won't be hit with a penalty for nonpayment of estimated taxes this year. Thus, if you paid no taxes last year but won the Power Ball Lottery this year, you will have no penalty. However, you will need to pay income tax on your winnings by April 15.

2. If your total taxes due are less than $1,000, there is no estimated tax penalty.

3. Safe Harbor Rule: If you pay in 90% of your taxes due in quarterly installments, there is no tax due unless you earn over $150,000 of adjusted gross income. At that point, you need to pay in 110% of last year's taxes over four quarterly installments to avoid the penalty. Thus, if you make $200,000 this year of adjusted gross income and last year's taxes were $80,000, you would need to pay in $88,000 under the safe harbor method. I often wonder who thinks of these things!

4. Withholding: Here is one of the biggest secrets to avoiding the tax; however, it is very underutilized. Imagine that you earned income throughout the year and didn't pay any estimated taxes. Wouldn't it be great if you can avoid the penalty anyway? Well, you can by taking advantage of the withholding rules. Withholding is treated as if it were made throughout the year regardless of when the withholding occurred. Thus, if you increase your or your spouse's withholding towards the end of the year so that the total withholding will meet one of the exceptions noted above, there will be no penalty.

Example, John and Katie will owe $20,000 in taxes on commissions paid to John. Katie has a job that has withholding from her paycheck. If they paid in $15,000 last year in taxes, they only need to pay, through estimated taxes and withholding, $15,000 to avoid the penalty (assuming that their adjusted gross income was less than $150,000). If Katie's withholding was $10,000, she can adjust her withholding for November and December and increase the amount withheld. If the total equals what they should have paid in estimates, there will be no penalty even though most of the withholding occurred in the latter part of the year. Pretty slick, huh?

Sandy's note: the new 3.8% surtax on unearned income isn't subject to withholding. Thus, you may have to take care of this extra tax by increasing your withholding.

5. Get a waiver: Surprisingly, under some circumstances, the IRS will waive penalties. Of course, generally asking the IRS to waive penalties is akin to asking Saddam Hussein for good will. However, there are circumstances that the IRS will in fact waive these penalties. These circumstances involve activities that weren't within your control such as the destruction of your home due to a casualty like a hurricane, flood or fire.

Material derived from my book, "Lower Your Taxes - Big Time."

Thursday, April 24, 2014

How Long Do You Need to Keep Your Records and How Long Does the IRS Have to Audit You?

Do you know how long you have to keep your records in case the IRS chooses to audit you? Do you know how long the IRS has to audit you? Here are the rules:

How long does the IRS have to audit you?

* If you filed your tax return on time or with extensions and didn't commit any fraud and didn't omit over 25% of your income, you can be audited for the three most recent open tax years (these include the year you filed your latest tax return and for the two previous years). Thus, if you just filed your tax return for 2013, you can be audited for tax returns 2011, 2012, and 2013.

* If you underestimated your income by 25% accidentally but didn't commit fraud (meaning you intentionally omitted the income), you can be audited for up to six years for the years you omitted up to 25% of your income.

* If you file a fraudulent return, the IRS can audit you forever on that tax return.

* If you didn't file a tax return, the IRS can go back forever to years where you didn't file a return. Thus, you have to always be looking over your shoulder if you didn't file a tax return. This is why I recommend always filing a tax return even if you didn't make enough money to be required to file a return.

How long do you need to keep records?

* For regular receipts, such as invoices, cancelled checks, etc. you need to keep these for six open tax years.

* You must keep your tax returns and attachments for as long as the seas run dry which means forever. No wonder people are buying bigger homes these days!

* If you buy assets such as stocks, bonds, funds, precious metals and real estate, you must keep proof of purchase for as long as you own the item and for three years thereafter (actually until you file that tax return for the third year). Thus, if you bought your home in 2001 and sold it in 2014, you have to keep all purchase documents and proof of basis additions from 2001 through 2014 and three years thereafter until you file your 2017 tax return.

* Depreciable assets that you elected to write off over one year under section 179 election - you must keep proof of purchase of these assets for as long as the depreciable period exists and for three years thereafter unless you sold them before that period is over. In that case you would keep the purchase documents for three years after a taxable sale. Computers are deemed five year assets, cars are deemed six year assets and furniture are deemed seven year assets. Thus, if you elect to write off a desk and copier costing $4,000 in one year, you would have to keep the purchase documents on these items for the full seven-year life plus three years thereafter for a total of ten years.

Thursday, April 10, 2014

Your ATM Could Turn Into "a One-Armed Bandit"

It might look like an Automatic Teller Machine, but the ATM where you withdraw or deposit your money might soon turn into a one-armed bandit able to steal your cash and your identity. Experts have called what might be about to happen an "Armageddon" and an "XP-ocalypse" with the potential to bring disaster to savers and our economy. The computer brains of 95 percent of the world's ATMs have been running Microsoft's old XP operating system. But as of April 8, Microsoft will no longer be fixing any holes that hackers discover in this software. If hackers find a way into your no-longer-protected ATM, they could do a LOT worse than just drain one of your bank accounts. [more...

Tuesday, April 8, 2014

Obamacare and Small Businesses

I have been getting a lot of questions about how Obamacare applies to small businesses. At the outset, most of the strategies such as heath savings accounts, medical savings accounts and flexible spending accounts are still available. As a small employer with less than 50 employees, you do NOT need to provide health insurance to your employees. If you do, however, provide coverage, you have several choices among those selected:

1. Section 105, self-insured medical plan
2. A flexible spending account (FSA)
3. A Health Savings Account (HSA)

I want to note that if you do provide group health insurance, you need to pay at least 50% of the cost of the plan. [more...]

Friday, April 4, 2014

Why Everyone with Money is Moving Out of California and Into Nevada

I already did it. I am a tax refugee from Los Angeles. In the past decade since I left California, I saved over $2 million in personal, property, sales and especially business taxes (this counts the 100+ employees I took with me when I left Los Angeles). And the money I saved paid for my home in Las Vegas. So I got a beautiful home for FREE... with enough money left over to pay for teachers to come to my home each day to homeschool my daughter who was accepted at Harvard. So leaving California led to my daughter being accepted at Harvard.

Californians are brainwashed by propaganda. They don't understand what they are losing in taxes and how their lives and their businesses are being damaged or crippled by taxes, regulations, workers comp and lawsuits. Nor do they realize the great quality of life available in a place with zero state income taxes. Nor do they realize every smart business owner in the state is moving out - just like me.

Wednesday, April 2, 2014

Strange Things that are Taxable

Gambling: If you earn any income from gambling, it is taxable. This includes winnings from fantasy football. Casinos must withhold from gross income if you earn over:
$1,200 from slots
$1,500 from Keno
$5,000 or more from poker
$600 or more from horse racing
NOTE: you can deduct gambling losses against gambling winnings when you file your tax return. [more...]