Potts & Company has been plotting and planning for the past few months to make Tax Season 2012 a low stress and comfortable experience for our clients. When considering income taxes, change is inevitable. The present economic and political environment has birthed much change in recent months and years and will guarantee more change in the near future. Potts & Company works hard to stay on top of each change for the protection and benefit of our clients. No Fear! Welcome Tax Season 2012!
Individuals, except in very rare circumstances, are cash basis taxpayers. Many businesses have elected to be taxed on the cash basis of accounting. For income taxes, this means your deduction is allowed when the expense is paid, not when the expense is incurred. For example, if you went to the dentist on December 16th but didn’t pay the bill until January 15th, the medical deduction would be allowable in 2011, not 2010. Or if you bought operating supplies for your business and charged them on your account in December 2010 and didn’t pay the invoice until January 2011, the expense would be deductible in 2011, not in 2010.
If you find yourself short of cash as the year ends but have tax deductible expenses that could be paid if you had the money, check the available balance on your credit cards. If you charge the expense on your credit card in 2010, it is counted as paid in 2010 even if you don’t pay the credit card bill until 2011. A credit card is a line of credit, debt. When you borrow money to pay deductible expenses, the timing of the deduction is when the expense is paid to the vendor, not when the debt to the creditor is paid back. Therefore, by charging deductible expense to your credit card before December 31, you can accelerate the timing of the deduction into 2010 rather than when you actually pay the bill (via paying the credit card) in 2011. This works for business expenses as well as personal deductions such as medical bills or charitable donations.
If you are a landlord, you need to get ready for 2012, now. The Small Business Jobs Act of 2010 imposed a new requirement that recipients of rental income (landlords) are required to file a 1099-MISC with the IRS for every service provider they paid more than $600. This requirement starts for payments made after December 31, 2010. So if you own rental property and you pay your plumber over $600 in 2011, you must file an information return with the IRS and provide the plumber a copy of this return by February 28, 2012 or be penalized (if caught not filing the 1099-MISC).
In order to accurately complete the required 1099-MISC you will need the person's name or company name, address, and social security number. If you don't have this information, you are supposed to withhold 28% of what you owe the service provider and send it to the IRS for him. My advice: download and print several copies of Form W-9 to have your plumber or other service provider complete before you hand him a check.
This reporting requirement has some exceptions. You don’t have to file a 1099-MISC if the rental income is a minimal amount; or when substantially all rental income is derived from renting the individual’s principal residence on a temporary basis; or for any individual for who the requirements would cause hardship. However, as of today, nobody knows what is a “minimal amount”, “substantially all”, “a temporary basis”, or what is meant by “hardship”.
The best way to begin planning what options you have to lower your income tax burden is to determine where you are, or where you will be at the end of the year, tax wise. In other words, start your tax plan by projecting what your taxable income will be by year’s end if you continue on your current path without making any tax planning moves. In most cases your projected taxable income won’t be exact, but this late in the year you should be able to get a reliable estimate.
What is taxable income? Look at last years income tax return. For individuals, 2009’s taxable income can be found on page 2, line 43 of your Form 1040. If you look at the design of the Form 1040, you will see that to calculate taxable income you begin with gross income, subtract adjustments to gross income (e.g. traditional IRA contributions); subtract the higher of your itemized deductions or the standard deduction; and finally you subtract your exemptions. (It’s simple math, right? It is just the rules of what is “taxable” income and “taxable” deductions that are complex.) Once you have projected your taxable income for 2010, look at the tax rate schedules to determine your incremental tax bracket.
Once you have determined your incremental tax bracket, you are able to ask yourself and answer questions such as “if I give the church an additional $1,000 this year, how much will it really cost me?”. If you are in a 25% federal income tax bracket, your after tax cost, if you can itemize deductions, would be $750 rather than $1,000. And we are ignoring the additional tax savings potential on a state income tax return. In Arkansas this contribution would generally give you another 7% in tax savings.
Another benefit of projecting your taxable income? You can determine an accurate estimate of your 2010 income tax so you know whether you will get a refund or owe income taxes in April 2011. If you are unfortunate enough to owe additional income tax and lack cash to pay them, you will have plenty of time to prepare for April 15th rather than have an unpleasant surprise at the last moment. Of course your primary objective is to achieve the lowest possible income tax possible. Depending on your income tax situation, it might be wise for you to ask for professional help. There are many nuances to consider in achieving the best possible tax position. Planning your income taxes BEFORE December 31 is where a CPA can really earn his fee and save his client money. If you need help call me. 1-479-648-2846.
What is a "lame duck"? It has nothing to do with income taxes, but here is an article in the Christian Science Monitor that explains the etymology of the term "lame duck" just as Congress enters its lame duck session.
