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Will your child’s investment income be taxes at his rate – or yours?

At Sapurstein & Associates, we look at several determining factors when considering your children’s income: their ages, whether or not they are students, and how much earned income and investment income they each had during the tax year.

Investment income includes interest, dividends, and capital gains. Here are the IRS guidelines for children’s 2012 investment income:

• YOUR  tax rate will apply if your child’s investment income is more than $1900 for the year AND he or she meets one of these three age requirements:

- Was under age 18 at the end of the year

- Was age 18 or older at the end of the year and did not have earned income that was more than half of his or her support

- Was a full-time student aged 18 to 24 at the end of the year and did not have earned income that was more than half of his/her support.

• To file taxes for a child tax using the parents’ rate, you must complete Tax for Certain Children Who Have Investment Income of More Than $1,900 (IRS form 8615) and attach that to the child’s federal income tax return.

Under certain circumstances, you can avoid having to file separate tax returns for your children and are allowed to include their income on your return.

You can find more information HERE by linking to Publication 929, Tax Rules for Children and Dependents, or by calling 800-TAX-FORM (800-829-3676). Of course, as federally authorized tax practitioners, our job at Sapurstein & Associates is to keep abreast of all the IRS rules and calculate how each one applies in your unique situation.

Tax information and planning from Sapurstein & Associates concerning your child’s investment income

Will your child’s investment income be taxes at his rate – or yours?

At Sapurstein & Associates, we look at several determining factors when considering your children’s income: their ages, whether or not they are students, and how much earned income and investment income they each had during the tax year.

Investment income includes interest, dividends, and capital gains. Here are the IRS guidelines for children’s 2012 investment income:

• YOUR  tax rate will apply if your child’s investment income is more than $1900 for the year AND he or she meets one of these three age requirements:

- Was under age 18 at the end of the year

- Was age 18 or older at the end of the year and did not have earned income that was more than half of his or her support
- Was a full-time student aged 18 to 24 at the end of the year and did not have earned income that was more than half of his/her support.

• To file taxes for a child tax using the parents’ rate, you must complete Tax for Certain Children Who Have Investment Income of More Than $1,900 (IRS form 8615) and attach that to the child’s federal income tax return.

Under certain circumstances, you can avoid having to file separate tax returns for your children and are allowed to include their income on your return.

You can find more information  www.irs.gov by linking to Publication 929, Tax Rules for Children and Dependents, or by calling 800-TAX-FORM (800-829-3676). Of course, as federally authorized tax practitioners, our job at Sapurstein & Associates is to keep abreast of all the IRS rules and calculate how each one applies in your unique situation.

Corporations should be on the look out for two rounds of random audits soon, the CPAs at Sapurstein & Associates warn.

As a part of the Service’s National Research Audit Program, the IRS is checking a sampling of their returns over a five-year period, beginning with returns for 2010. The IRS will use the results of these audits to update its return selection formulas.

Specifically, the IRS is targeting 2,500 small corporations with assets of less than $250,000, beginning in April. Tax returns from 2010 will be reviewed. Additionally, audits are also set to begin for corporations with assets of more than $10 million and up to $100 million as a part of the same audit program.

If you are a contract manufacturer, you should also be vigilant for an audit announcement from the IRS. The Service is checking claims for the domestic production deduction, the write-off for 9% of income derived from U.S. manufacturing activities. The IRS is looking to be sure that contract manufacturers that take that deduction have indeed taken title to the goods that they fabricate before delivering them to another manufacturer. The IRS will be checking records to be certain that the producer and the party receiving the goods aren’t both taking the write-off.

If you are a small to medium sized business CPA client of Sapurstein & Associates, you can rest assured. As a federally authorized tax practitioner, we stand behind our work, and always support our business and personal clients during an IRS review or audit, knowing our work is top-notch and always by-the-book. Our clients feel confident knowing our CPAs never take short cuts and stay on top of all IRS rules and regulations.

This year’s W-2’s must include an added line item – the value of your health coverage.

Beginning in 2012, Sapurstein & Associates has learned, all employers who file more than 250 W-2s must report the value of the health coverage they provide to each employee.

How will this affect taxpayers? No worries, the Indianapolis CPAs at Sapurstein & Associates assure their individual taxpayer clients.  The amount your employer reports on the W-2 form isn’t taxable to you. The number is there for informational purposes, so employees will have a better appreciation of the amounts their employer spent on their health insurance.

Even though the reporting of health insurance coverage value on W-2s wasn’t required for 2011, many business went ahead and included it anyway (no doubt to fine tune the reporting process in preparation for this year). In fact, as small business tax and accounting professionals, we expect that smaller employers (those who file fewer than 250 W-2s), will do the reporting in 2012 even though they are not required to begin that practice until 2013.

With Sapurstein & Associates clients, we like to get an early start on changes.  All of our small business accounting and tax specialists have already initiated the new accounting step.  That way, there will be no surprises at the end of this year.

When it comes to questions about accounting, bookkeeping, or simply keeping your records up to date, consulting with a CPA with experience in all the steps involved in small business tax preparation is one good way to stay one step ahead of the IRS.

For years the IRS and taxpayers have been at odds over home expenses.  Which constitute repairs? Which should be classified as home improvements?  As CPAs know, for individuals with rental property and small business owners who own their own buildings, the distinction is an important one.

• Repair costs can be deducted from one’s taxes immediately.
• Improvement costs must be capitalized and written off over time.

All of the small business tax specialists in our Indianapolis CPA office are pleased to have a new, more thorough IRS treatise on the subject. We know you wouldn’t want to go through all 255 pages of the new temporary regulations. But for us as professionals, it’s fascinating reading, because it clears up the tax treatment of expenses paid to acquire, produce or improve tangible property.

What’s the IRS definition of repair? At Sapurstein & Associates CPAs, the way we explain it is that a repair keeps the property in good operating condition over its intended useful life. Replacing a broken window or re-roofing a building – those are repairs. Remember – repairs keep things operating.

An improvement, the IRS says, makes things better and

• extends the useful life of the property
• increases its value
• adapts it for a different use

Remember – improvements make things better, different, or longer-lasting.

New IRS regulations can become more complicated and nuanced when it comes to rental properties, to making lease-held improvements, and to moving and reinstallation costs.

When it comes to questions about property repairs or improvements, your best bet is to consult a CPA with experience in small business tax preparation. That way, your personal and business tax returns will not be subjected to any costly IRS “repairs!”

Bring up the topic of a tax audit, and most folks go stone cold and very quiet. Audit? That’s something all of us would go to great lengths to avoid. So, as federally authorized tax practitioners, how do we CPAs help clients avoid random audits?

At Sapurstein & Associates, we’ve taken a look at new data released by the IRS in a memo called Fiscal Year 2011 Enforcement and Services Results, about that very thing.

Here’s what we learned:

• Overall, the IRS audited a little more than one percent of tax returns in 2011. That means that, out of 141 million tax returns, some 16 million were audited.
• Your chance of being audited increases dramatically if your annual earnings hit seven figures.  The audit rate for taxpayers earning over $1 million was 12% last year (up from 8% in 2010).
• Taxpayers earning less than $200,000 have less cause for concern. Just about 4% of these taxpayers were audited (up from 3% in previous years).

After many years offering tax services and tax advice in Indiana, we know that, with proper planning, it is possible to stay under the IRS radar no matter what your income level. To do that, our CPAs are constantly studying the new regulations and making sure to follow the letter of the law.

When it comes to IRS audits, we say, better safe than sorry!

If you prepared your 2011 personal taxes with the help of a federally authorized tax practitioner, chances are, you’re glad you did.

That’s because this year was chock-full of new IRS rules and regulations in an effort to help taxpayers save money – and help the IRS better track and recoup what is legally theirs.

If you received a 1099-B for “covered securities” for 2011, you may have noticed some important changes for information pertaining to those securities. For the first time, securities brokers had to provide cost basis information for covered securities. Using a new form titled Sales and Other Dispositions of Capital Assets (IRS Form 89490), filers were required to report 2011 securities transactions, summarizing the information on a Schedule D.

The new reporting can be cumbersome, with these changes coming as a result of recent legislation that phases in new cost basis reporting rules over a three-year period.

Feeling a little unsure about your tax preparation? A free “look” by one of our federally authorized tax practitioners can help you make sure you’re “covered” when it comes to your covered securities!

Once again this tax season, tax return preparation and planning can prove hazardous to one’s financial health. Sapurstein & Associates has learned that senior citizens are once again targets of a tax refund scheme.

The IRS says perpetrators of this scheme exert pressure on elderly people who have little or no income, and who usually are not required to file a tax return, to get them to file tax returns claiming fraudulent refunds.

Scammers may suggest that a senior is eligible to receive a (nonexistent) “stimulus payment” based on the “American Opportunity Tax Credit.” Offers like these are fraught with typical warning signs. The IRS cautions taxpayers that when they are choosing a tax preparer, they should be on the alert for:

• “Too good to be true” refund or rebate claims
• Unfamiliar for-profit tax services promoting refund and credit schemes to congregations of local churches
• Internet offers prompting seniors to call a toll-free number (and reveal their social security number)
• Offers of free tax money without documentation
• Promises of refunds for “low income/ no document tax returns”
• Claims involving the expired Economic Recovery Credit Program or any “Economic Stimulus Payments”
• Offers to prepare a return and split the refund
• Unknown tax preparation firms soliciting business from distant locales

It’s nothing new, people trying to take advantage of seniors at tax time. Your first step, if you aren’t sure about an offer, is to go to www.irs.gov to check it out.

Best of all, make sure you’re working with federally authorized tax practitioners.  At Sapurstein & Associates, we put a lot of effort into doing things the right way.

If you are a Sub-S small business owner, you should know that the IRS is continuing to go after S-corps that pay low salaries in order to avoid Social Security and Medicare payroll taxes. (Doing that may actually sound like a great idea, a perfect way of passing profits through to owners free of those taxes.)

But, as we’re providing part-time CFO and controllership services to our small business owner clients, we at Sapurstein & Associates need to keep explaining just how bad an idea that is in the eyes of the IRS and the courts!

The following is a good example of what can happen to someone who tried to avoid paying payroll taxes on questionable ‘reasonable compensation’:

• Mr. Watson was a CPA with an advanced degree and 20 years’ experience who formed an S corporation.
• Watson’s S Corp became a partner in Watson’s accounting firm, effectively employing Watson.
• In both 2002 and 2003, Watson received a salary of just $24,000 from the S corporation.
• In addition to his salary, Watson received distributions of $203,651 and $175,470.
• Those distributions were not subject to Federal Insurance Contributions Act (FICA) taxes (which is why Watson thought it was such a bright idea to do things this way).
• The IRS took Watson to court. The decision: An S corporation shareholder’s $24,000 salary, particularly at the level of expertise and education Watson had, was not reasonable compensation. A salary of $91,044 was determined by the government’s expert witness to be fair compensation.
• While there is no rule about exactly what salary must be paid to any individual employee, in the case of an S-Corp shareholder, the issue is whether payments made as distributions are really wages, and therefore subject to FICA tax.

Over the many years we CPAs at Sapurstein & Associates have been doing tax return preparation and planning, we’ve been emphasizing this common sense and tax-sensible rule: To avoid IRS litigation, Sub-S owners must take reasonable compensation!

When you think about estate planning, the professional who comes to mind is an attorney. But, as part of tax return preparation, we CPAs at Sapurstein & Associates are often called upon for help by both clients and their lawyers.

There are many incorrect ideas, we’ve found, about just which long-term care expenses can be deducted and which cannot.  The best person to help you figure out how to comply with the latest IRS regulations is an qualified CPA.

As a general starting checklist, here are some rules that determine which medical care expenses qualify as deductions for long-term care:

• Under new 2012 US tax law, expenses for medical care may be claimed as an itemized deduction IF they exceed 10 percent (up from 7.5% last year) of your adjusted gross income.

• In order for any expense to qualify as “long-term care” expense. A doctor must have determined that you are –or your spouse is– ‘chronically ill.’

• “Chronically ill’ means you “need help with activities like eating, going to the bathroom, bathing, dressing.” It can also include “requiring substantial supervision due to a severe cognitive impairment.”

• Payments to qualified caregivers for assisting and supervising the chronically ill qualify as deductible long-term care expenses.

For most people, paying for long-term care represents a devastating financial hit. That’s why, at Sapurstein & Associates, our CPAs, who are federally authorized tax practitioners continually study the new IRS regulations and make every effort to soften the blow.

You might say we take extra care with our clients’ long-term care.

There seems to be no end to the ins and outs of capital gains and losses, and as federally authorized tax practitioner, we at Sapurstein & Associates spend lots of time answering questions about them.

Here are some of those that keep popping up this year:

• How is a term defined? Capital gains and losses can be classified as long-term or short-term. If you hold a property more than one year, your capital gain or loss is long-term; one year or less is short-term.
• What if you have long-term gains in excess of your long-term losses? The difference is normally a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.
• What tax rates apply to net capital gains? Long term capital gain tax rates are generally lower than rates on earned income. For 2011, the maximum capital gains rate for most people is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of the net capital gain. Rates of 25 or 28 percent may apply to special types of net capital gain.
• What if your capital losses exceed your capital gains? Then you can deduct the excess on your tax return to reduce other income, such as wages, up to an annual limit of $3,000 (or $1,500 if you are married filing separately).

Good news:  If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

Figuring tax on capital gains is a matter of simple arithmetic, but you have to know which numbers to add and which to subtract!

When it comes to tax preparation, spending a no-obligation hour with the professionals at Sapurstein & Associates can “subtract” headaches and “add” up to a great result!