Certainty in Federal Student Loan Rates
Congress recently passed legislation that will lower federal student loan rates. This legislation provides a level of certainty for all taxpayers. While more details will be forthcoming, here is what is known.
In a recent announcement, Congress has passed a bill that will take much of the politics out of establishing student loan rates….at least for now.
Background
With over $1 trillion in student loan debt, the cost of student borrowing is quickly becoming a major economic issue in the United States. The rates for many popular government sponsored loan programs doubled on July 1st from 3.4% to 6.8%. Since some 18 million loans could be affected, Congress determined it was necessary to address the scheduled change.
New Rate Program
Under the recently passed legislation, the rates for these loans will now be set against a market rate formula with a cap on the highest possible rate. The hope is that by making the rate a formula, it removes politics from the process and allows families and students to better plan their costs. Specifically,
- Interest rates will be set annually with the rate linked to the 10-year Treasury note rate.
- The current rates are as follows:
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With the passage of this law, approximately 11 million loans will see an average interest savings of $1,500 per the White House.
Challenges
While the passing legislation provides some certainty in student loan rates, there are already rumblings that future legislation is forthcoming. Why?
- The rates noted are well above the interest rates the federal government is providing banks. There are many in the legislature that believe students should receive a similar benefit.
- Many believe the rate should be more closely tied to the cost of funds, not a market pegged rate.
- With the projected federal student loan debt at $1.4 trillion in the next decade, the interest cost paid by students could impact the economy as these interest payments could delay purchasing first homes, cars and other items.
Should you Reduce Your Charitable Giving? – New itemized deduction phase-out causing concern
With the re-introduction of itemized deduction phase-out, does it still make sense to contribute to charities? For most taxpayers, the answer is a resounding yes. Continue to make charitable contributions. Here is what you need to know.
In 2013 federal tax legislation reintroduces the phase-out of itemized deductions for certain taxpayers. Because of this, many who are subject to itemized deduction phase-outs wonder if the benefit of charitable giving is reduced. Here is what you need to know.
- Most taxpayers are not impacted. The phase-out of itemized deductions for 2013 is based on Adjusted Gross Income (AGI) in excess of $250,000 for single filers, $300,000 for joint filers ($150,000 for married filing single), and $275,000 for head of household. So if your income is below these amounts your itemized deductions will not be reduced because of the new phase-out rules.
- Alternative Minimum Tax (AMT) does not impact charitable giving.If you have been subject to the AMT in the past, please note that charitable giving generally does not impact this alternative tax calculation. Other things like state taxes and property taxes are a couple of items that do impact this alternative tax calculation.
- The phase-out calculation is based on income not deductions. This means that unless you are in a low or no tax state your charitable deductions will probably not be impacted by the deduction phase-out. Why? The itemized deduction phase-out amount is based upon your income. Say, for example, the phase-out calculation will reduce your itemized deductions by $8,000. Income required to produce this phase-out amount will also generate state taxes in most states in excess of this amount. Therefore the phase-out reduction will almost always be absorbed by your state income taxes.
“Are there cases when the phase-out will eat up a lot of your charitable giving? Yes, especially in no or low tax states. Because of this risk it is a good idea to review the phase-out impact on your situation as soon as possible. Otherwise, you might be foregoing an opportunity to reduce your tax liability this year with planned charitable giving.”
Five Big Tax Mistakes – Don’t let them happen to you
Every year thousands of taxpayers go through a ”gotcha” with the IRS. A large, unexpected tax bill. Here are five common causes of tax surprises from lost refunds to retirement plan mistakes.
Every year taxpayers are hit with tax surprises that could be avoided if they just knew the rules. Here are five big ones that are easy to avoid with some simple planning.
Mistake #1. Withholding too little. This results in a tax surprise when filing your income tax. Don’t be too hard on yourself if this happens to you. Social Security withholdings have changed each year and new tax laws in 2013 make it very difficult to withhold the proper amount from each paycheck.
The plan: Check your withholdings after filing each year’s taxes. Make adjustments as necessary by filing a new W-4 with your employer.
Mistake #2. Inadvertently withdrawing funds from retirement plans. Amounts taken out of pre-tax retirement plans like 401(k)s and IRA’s can create taxable income. The most common inadvertent withdrawal occurs when you roll over funds from one retirement plan to another. If done incorrectly all the rollover could be deemed taxable income.
The plan: Do not touch your retirement accounts if at all possible (Exception: when you reach age 70 ½ you may be subject to Required Minimum Distribution rules). If you do withdraw funds, ensure you have the proper withholdings taken out at time of withdrawal. Direct rollovers into your new plan are always a better alternative than receiving the withdrawal from the plan administrator and then conducting the transfer yourself.
Mistake #3. Not taking advantage of tax-deferred retirement programs. There are numerous opportunities to shelter income from tax through tax preferred retirement programs.
The plan: Review your retirement savings options and plan to contribute as much as possible to your plans. Pay special attention to plans that include an employee match component. This attention can reduce your taxable income each year.
Mistake #4. Direct deposit mix-ups. You may now have tax refunds directly deposited in up to three bank accounts. The problem: what if one of the account numbers is entered incorrectly? Unfortunately, unlike replacing a lost check, the IRS does not have a good means of correcting this type of error. There have been instances where taxpayers have lost their refund when this occurs.
The plan: Many taxpayers do not feel comfortable giving the IRS direct access to their bank account. If you are in this camp, the digital deposit problem is solved. If you use direct deposit, avoid depositing your refund into more than one account. Ideally have a second person double check the account number on your tax form prior to submitting the return.
Mistake #5. Not keeping correct documentation. You know you drove the miles, donated the items to charity, had the medical expense, and paid the daycare. How can the IRS be disallowing your valid deductions? Remember without correct documentation the IRS is quick to disallow them.
The plan: Set up good recordkeeping habits at the beginning of each year. Create both a digital and paper folder separated by income and expense type. Keep a mileage log and properly document your charitable contributions.
IRS Notices with Interest Calculation Error – IRS to send out special mailings
The IRS recently announced it send a number of Form CP2000s out to taxpayers with interest rate calculation errors on them. Please be aware of the problem.
Noted here is a copy of a recent interest error calculation announcement made by the IRS. If you recently received a form CP2000 from the IRS please be aware an adjusted, higher interest amount may be owed.
The IRS alerted taxpayers and tax professionals about an interest calculation error on certain notices mailed the weeks of July 1 and July 8.
The IRS discovered errors in the CP2000 notices during a two-week period this July. The notices contained an incorrect calculation on the interest owed on proposed taxes from under reported income. The interest figures were lower than they should be. The IRS has corrected the issue for future mailings.
Later this month, the IRS will be sending a special mailing to the recipients of the notices. Taxpayers should follow the directions on the letter, and they will be encouraged to either call a special toll-free number or write to the IRS to receive the corrected interest amount.
A CP2000 notice shows proposed changes to income tax returns based on a comparison of the income, payments, credits and deductions reported on a tax return with information reported by employers, banks, businesses and other payers. The CP2000 also reflects any corrections made to an original tax return during processing.
Source: IRS.gov
Should you have any questions or need assistance please feel free to call. (813) 283-0642
Avoid the Gambling Winnings Tax Surprise
It’s your lucky day. You just won $5,000. Are you prepared for the tax event to follow? Here are some things to think about.
With the increased popularity of lotteries and casinos, more unsuspecting winners are experiencing a lucky payday only to end up with a huge tax head-ache when filing their income taxes. Here is what you need to know:
Look for the warning signs
You are required to report as income any winnings you receive including, but not limited to:
| • slot machines | • bingo | • pull tabs | • horse/dog racing |
| • game shows | • raffles | • lottery | • gambling (e.g. cards, roulette) |
The winnings could be in cash, but also includes the fair market value of prizes such as a car, boat or vacation package. When you win the payer is required to give you a Form W-2G. Receipt of this form should be your clear signal that you have a taxable event.
How the tax math works
Unlike a business, gambling winnings are reported on one part of your tax return while any offsetting gambling losses are reported as a miscellaneous itemized deduction. In plain English, this means:
- Your income is increased by the amounts listed on W-2Gs and any other winnings you had during the year.
- If you do not itemize, you cannot deduct any gambling losses during the year.
- If you do itemize, you must be able to substantiate any gambling losses with an accurate diary, receipts, tickets, statements and other records.
- You may never deduct more in losses than winnings.
Some tips
- Merchandise. If you win a non-cash item, make sure you agree with the market value attributed to the item won. Often the item is overstated by the game organizer as a promotional technique. Ask to see a copy of the invoice that the organizer actually paid for the item. Consider printing out a dated copy of an advertisement of a similar item that is offered for less money.
- Losses. Losses do not need to match winnings for time and date. You may play bingo all year long at a locally hosted charitable bingo hall, but only win the big payout once during the year. You can offset all your losses against this one win, as long as you have accurate records.
- Casino assistance. When you win at a casino ask them for help. They often can help you understand and record your costs/losses. Consider joining the casino’s player’s club. With it they will send you a winning/loss statement at the end of each year.
- Tax withholdings. Consider withholding some of your winnings to pay for your federal and state tax obligation. This will help reduce the sting on tax day. Also consider submitting quarterly estimated tax payments.
- Professionals. If you consider yourself a professional gambler, business tax rules apply. But make sure this consideration is a defensible position in the eyes of the IRS. The IRS often challenges professional gamblers that attempt to take more in expense than they earn in winnings.
- Reselling merchandise. A special caution if you win an item and then resell it. Using a new car as an example, say you don’t need the car so you sell it for $25,000. You could find your W-2G has a market value of $30,000. In this case you would have $30,000 in taxable income, but only received $25,000. Your personal loss is not a tax deductible item.
- Is there good news? Yes, gambling losses cannot be reduced at the federal level if you are subject to the Alternative Minimum Tax (AMT) or if you are subject to the reinstated itemized deduction phase-out.
Business Capital Expensing – Good or bad decision?
The bonus depreciation and Section 179 tax code provisions allow small businesses to expense large capital purchases. Is this better than depreciating the purchase over time? Here are some thoughts on the matter.
As a reminder, businesses may accelerate the expensing of qualified capital purchases. This can be done within two special provisions in the tax code.
Section 179
The American Taxpayer Relief Act of 2012 extends the annual $500,000 amount of qualified assets that may be expensed (instead of depreciated) for 2013. This benefit can be maximized as long as total assets purchased by your firm does not exceed $2 million. Qualified purchases can be new or used equipment and qualified software placed in service during the year.
Bonus Depreciation
The recent tax law also extends an additional first-year bonus depreciation of 50% of the cost of qualified property. To qualify the property must be purchased and placed in service after 1/31/2012 and before 1/1/2014. For property to qualify it must be “original use” property. This typically means new property. Not interested in accelerating your depreciation expense? Then you may choose to opt out of this provision for each category (class) of property you place in service.
What should you do?
So is taking advantage of these provisions good for your business? Not always.
Remember if you use these special asset “expensing” provisions, depreciation expense taken this year is given up in future years. This is especially important to plan for if your company is organized as a “flow through” entity like an S-Corporation as more income could be exposed to higher marginal tax brackets in a number of future years. How many future years? It depends on the recovery period of the asset, but the additional tax exposure could be from two to six years!
More importantly, if you think Congress will increase tax rates to help balance the budget, your future income may be exposed to a higher tax rate than your current income.
If you have some predictability in your business, it probably makes sense to forecast your projected pre-tax earnings with and without the accelerated depreciation to ensure you are making the right tax decision over the long-term.
Avoid the 50% Penalty! – Understanding Required Minimum Distribution (RMD) Rules
Each
year select clients must withdraw minimim amounts from their qualified retirement plans. If you don’t the penalty is a severe 50% in addition to paying regular income tax on the withdrawal. Don’t let this happen to you.
Every year thousands of taxpayers are hit with a heavy 50% penalty for not withdrawing enough money from their retirement plan(s). Here is what you need to know to ensure this does not happen to you or someone you know.
Who is subject to Required Minimum Distribution (RMD) rules?
- Anyone who participates in a qualified retirement plan like IRAs (traditional, SEP, SARSEP, and SIMPLE), Roth 401(k), 401(k), 403(b), 457(b) and profit sharing plans AND
- is 70 ½ years or older,*
- who is generally retired OR
- who is the beneficiary of a plan
- Exception: Owners of qualified Roth IRA accounts
The confusion of multiple tables
To determine the amount that must be withdrawn each year you need to go to the correct life expectancy table published by the IRS in Publication 590. There are three tables:
- Joint & Last Survivor.
When to use: Your spouse is the sole beneficiary AND your spouse is more than 10 years younger than you.
- Uniform Lifetime Table.
When to use: Your spouse IS NOT more than 10 years younger than you OR your spouse is not your sole beneficiary
- Single Life Expectancy.
When to use: You are a beneficiary of another account
How much do I need to take out and when?
Once you find the correct table, determine your life expectancy and divide the result by the balance in your account as of December 31st of the previous year.
- The amount must be withdrawn by December 31st of the year. Exception: in your initial RMD year you have until April 1st of the following year to withdraw the funds.
- Thankfully, many retirement account administrators will make the RMD calculation for you. But it is still your responsibility to ensure the calculation is correct.
- The deadlines are strict so don’t miss them. The 50% penalty can be applied each year, so the impact can be dramatic over time. On the other hand, if you are penalized and have a defensible reason you did not take the RMD, you should try to get the penalty reduced or eliminated.
- Remember to conduct the calculation each year. Not only do life expectancy numbers change as you age, so does the balance in your retirement savings accounts.
Some Tips to Help Never Forget
Want to make sure this doesn’t happen to you? Here are some tips.
- Calculate the RMD for each account in early January each year. Set up automatic periodic withdrawals from the account to accommodate the RMD.
- Make a review of your accounts part of your tax planning each year.
- Ask for help. At first, finding the correct life expectancy table and determining the correct calculation can be overwhelming. Have someone review your calculations until you feel comfortable with the process.
- Connect your RMD to a key event like your birthday or anniversary. Then give yourself the additional gift of a payday out of your retirement account.
* Can be later if you are still actively working. If, however, you are a 5% or greater owner of the business sponsoring the retirement plan you must take an RMD when 70 ½ whether retired or not.
Does Your Mileage Log Travel the Distance?
What you need to know to ensure your allowable business, charitable and medical miles are not dismissed during an audit.
The tax code allows deductions for qualified miles driven for business, medical, moving and charitable purposes. But to claim this deduction you must keep adequate records of actual miles driven. During an audit this is an often disallowed deduction, despite the fact that you actually drove the distance claimed. How to make sure this doesn’t happen to you? Here are some tips.
- Keep a log. The tax code is clear on this point. You may not estimate your miles driven. You must support your claimed deduction, ideally with a detailed mileage log.
- Create good habits. Your odometer reading and miles driven should be noted as soon as possible after the event. Keep a log book in your car and note the miles each day. Logs created after the fact with estimated miles driven could be disallowed during an audit.
- Make thorough entries. Note the odometer readings, date, miles driven, the to/from locations, and the qualified purpose for the trip.
- Don’t lose out on the extras. The deduction for miles driven is meant to provide a deduction for fuel, depreciation, and repairs. You can also deduct out-of-pocket expenses for tolls, parking and other transportation fees. Keep a running total of these fees in the back of your mileage log.
- Keep separate logs for each deduction. Remember you may deduct mileage for business, charitable purposes, qualified moving and medical miles. It is best to keep track of each in a separate mileage log.
- Alternative business transportation deduction. When it comes to deducting business transportation expense, remember the miles driven method is not the only one available to you. You may also deduct your actual expenses, but how and when you make this determination is important. In the initial year of placing your auto into service for your business, it is best to keep track and record all your actual auto expenses. An analysis can then be conducted to see which method is best for you to maximize your deduction.
Who Pays What?
With all the chatter about who is paying what in federal income taxes, wouldn’t it be nice to know what the IRS statistics say they collect? Here are the facts.
In a continuing effort to provide information as we listen to the budget and debt debates out of Washington D.C., outlined here are some IRS statistics on who pays individual income taxes. The information provided here is the most current available information.
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How to read:The top 10% of Adjusted Gross Income (AGI) on 2010 tax returns reported approximately 45.2% of the income and paid 70.6% of the total individual income tax collected in 2010.1
Observations:
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The top 1% of income paid 37.4% of the federal individual income taxes with 18.9% of the reported income. |
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The largest gap between income representation and amount of tax paid is in the top 10%. The top 10% of reported income have approximately 45.2% of claimed income, and pay approximately 70.6% of the individual income taxes. |
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The Tax Policy Center estimates that 46.4% of households paid no federal income tax for 2011. |
Note: The above figures net out “negative” income tax returns for those who filed a tax return, but due to adjustments and credits have negative adjusted gross income.
1 Source: Internal Revenue Service. SOI Bulletin Table 5 – Selected Income and Tax Items, Shares of Adjusted Gross Income and total income tax and average tax rates. All figures are based on estimates from sampling conducted by the Internal Revenue Service using 2011 tax filing data for 2010 taxes. Income means Adjusted Gross Income (AGI) as reported on individual income tax returns.
2013 Award
Press Release
FOR IMMEDIATE RELEASE
Hallmark CPA Group LLC Receives 2013 Best of Tampa Award
U.S. Commerce Association’s Award Plaque Honors the Achievement
NEW YORK, NY, May 31, 2013 — For the third consecutive year, Hallmark CPA Group LLC has been selected for the 2013 Best of Tampa Award in the Certified Public Accountants category by the U.S. Commerce Association (USCA).
The USCA “Best of Local Business” Award Program recognizes outstanding local businesses throughout the country. Each year, the USCA identifies companies that they believe have achieved exceptional marketing success in their local community and business category. These are local companies that enhance the positive image of small business through service to their customers and community.
Nationwide, only 1 in 120 (less than 1%) 2013 Award recipients qualified as Three-Time Award Winners. Various sources of information were gathered and analyzed to choose the winners in each category. The 2013 USCA Award Program focuses on quality, not quantity. Winners are determined based on the information gathered both internally by the USCA and data provided by third parties.
About U.S. Commerce Association (USCA)
U.S. Commerce Association (USCA) is a New York City based organization funded by local businesses operating in towns, large and small, across America. The purpose of USCA is to promote local business through public relations, marketing and advertising.
The USCA was established to recognize the best of local businesses in their community. Our organization works exclusively with local business owners, trade groups, professional associations, chambers of commerce and other business advertising and marketing groups. Our mission is to be an advocate for small and medium size businesses and business entrepreneurs across America.
SOURCE: U.S. Commerce Association