2013 Taxes: Organizer and Letters

Welcome to the new tax filing season. We’ve put together the below PDF files as a help to you in getting ready to file your 2013 taxes:

If you’re new to our firm, be sure to check out Are We a Good Fit? to learn more about us, or give us a ring!

The new individual taxes for 2013

20130708In 2013, we’re going to see three new taxes for individuals that weren’t there before:

  • New 39.6% tax bracket. Income over $450,000 for joint filers is now subject to a new top tax bracket: 39.6%. (The new bracket starts at $400,000 for single filers, and $425,000 for head of household filers.)
  • 0.9% increase in Medicare taxes. If your wages exceed $250,000 for joint filers, expect the Medicare tax on the excess amount to go up from 1.45%, to 2.35%. (The higher Medicare tax kicks in for single filers at $200,000 in wages, and at only $125,000 for those married but filing separate.)
  • 3.8% increase on investment income. If your income is over $250,000 for joint filers, and you have income from investments (e.g., interest, dividends, rents, royalties, capital gains, and other non-active sources), all or a portion of that income will be taxed at 3.8%. I say “all or a portion”, because the new tax will be applied to the lesser of: (a) the amount your total income exceeds $250,000, or (b) your actual investment income. (The new investment income tax starts at $125,000 for those married filing separate, and $200,000 for the remaining filing statuses.)

Needless to say, you might have some surprises come 2013 tax filing time. If you’d like to evaluate the impact of these or other changes on your return, just give us a call and we can run a projection for you, walk you through the impact on your return, and also see if you might benefit from some pro-active planning steps.

And for some additional references, check out these quick answer pages on the IRS’ website: Net Investment Income Tax FAQs and Questions and Answers for the Additional Medicare Tax.

2012 Taxes: Organizer & Newsletter

Welcome to the new tax filing season. We’ve put together the below PDF files as a help to you in getting ready to file your 2012 taxes:

If you’re new to our firm, be sure to check out become a customer to learn more about us, or give us a ring!

Frequency and Inaccuracy of IRS Notices on the Rise

I was recently reading one of journals we follow, and came across this passage I’d like to share:

In 2011, the IRS received more than 1.8 billion information statements for items reportable on Forms 1099, 1098, and W-2 and other similar annual statements. With these statements, the IRS matched income and deductions against 141 million individual tax returns filed. The IRS found almost 20 million discrepancies and issued notices to 4.7 million taxpayers in three rounds…One out of every three CP2000 notices sent does not result in additional taxes owed. Yet, to show that the taxpayer does not owe, the taxpayer must respond effectively by the CP2000′s deadline for the IRS to change its proposal for additional taxes. According to a Forbes article written by Claudia Hill, EA, MBA, CP2000 notices from the IRS are often wrong and long (frequently more than 10 pages, making them hard to understand). The Taxpayer Advocate Office reported approximately 31 million U.S. taxpayers receive some form of correction notice communication annually. In a 1998 General Accounting Office investigate, GAO found that 48% of all IRS correction correspondence and actions regarding account adjustments were incorrect, unresponsive, unclear, or incomplete. Years following their initial audit, the GAO returned to review what kind of oversights and programs had been instituted to correct the inaccuracies they uncovered during their audit. They discovered not much had been done.

I have to say, we’ve also seen the amount of IRS correspondence increasing, and many times it is not correct. That’s why all of our value packages include reviewing with you any notice you receive on returns prepared — we literally should be your first call. And many of our customers select packages that also include automatically replying to the notice for you, or even pro-actively monitoring tax notices for you. To learn more, just give us a call.

Xero vs. Quickbooks

The world of cloud-based accounting systems is here to stay, and will become only more and more widespread as time goes on. We’ve been looking into one such system that hails from the creative folks of New Zealand, and has taken other parts of the world by storm: Xero. Aside from just being in the cloud, Xero also takes a fresh approach to accounting by using automatic bank feeds as the way to get transactions into your records, saving time and removing some of the mystery of accounting.

Here’s a comparison of Xero to Quickbooks our team member Virginia Jackson, CPA put together after we both underwent Xero training, and are now proud to say we’re “Xero Certified Advisors”. So check it out, and let us know if you’d like to learn more about how Xero might help you!

“Both Xero and QB provide access to accounts receivable, accounts payable, invoicing, general ledger, bank reconciliation and reports functions. However, while QB requires some amount of knowledge about basic accounting terms and concepts in order to be use most efficiently and effectively, Xero requires little to no accounting knowledge. Xero marketing focuses on the idea that it is easy to use, and the integration of simple terms like ‘Spend Money’ or ‘Receive Money’ make Xero intuitive and user friendly. However, it also includes tabs for Accounts Receivable and Accounts Payable, which will make an accountant feel like Xero is also speaking their language.

The pricing for these products is about the same but Xero seems to have the advantage when it comes to accessibility. First, Xero allows for unlimited users at no additional cost.  And because Xero is cloud-based, there is no need to e-mail accountant or portable files back and forth between client and accountant. Both client and accountant can access Xero files from any computer with an internet access at anytime.

One of the best features of Xero is its automated daily bank uploads. Xero is a global product which integrates with almost all banks and will automatically download your transactions on a daily basis. The reconciliation process is easy and setting up bank rules so that your bank transactions are matched to the correct account is a breeze. I did find the process of finding and correcting transactions after they were reconciled a little confusing. I also think that using the term reconcile for the process of matching bank transactions to Xero transactions might be confusing for accountant and bookkeepers who are expecting to have to complete a traditional bank reconciliation. Xero’s automated download and matching process are much more user-friendly than the QB bank download which must be manually initiated. Although this post is focusing on the features of QB desktop version, I will note here that the QB online version will automatically download your bank transactions. However, the review and matching process in Xero is still much more user-friendly than the process required by QB online.

There are several areas where QB still has the advantage over Xero. One area is payroll processing. While QB is a leader in providing small business payroll services, Xero does not provide a full service payroll options. Companies wanting a service that will calculate payroll tax withholdings and deductions will need to use an add-on service for Xero. [Update 3/2013: Xero is planning to release payroll functionality in 2013.] Another area that QB excels in is the area of payment process. QB supports merchant account payments and has several other options for receiving electronic payments from customers. Xero will import information from your bank or PayPal account after the payment is received and deposited, but they do not provide other methods of receiving payments. (For this you could use an add-on like Freshbooks.)

Quickbooks’ reports are also more robust and provide more options than Xero. Because the QB has been around for so long, their reporting features are more mature and will meet the needs of accountants who need to customize reports for their clients.

A few other areas to highlight:

  • Xero–Compatible with Windows, Mac, iPhone, Android, Blackberry; QB–Compatible with Windows and Mac (limited functions)
  • Xero–Limited to two tracking categories; QB–Unlimited classes for tracking
  • Xero–Multi-currency functionality is more user-friendly and automated; QB–
    Multi-currency functionality exists but requires manual process for updating exchange rates
  • Xero–Fixed asset tracking is more user friendly and Xero will calculate depreciation for assets and post to general ledger; QB–Fixed assets can be tracked using Fixed Asset Manager but depreciation entries must be manually entered
  • Xero–Printing of 1099′s is not available (but is being worked on), information must be exported and entered into another system [Update 3/2013: 1099's can now be prepared from Xero]; QB–1099 forms can be printed from within the software
  • Xero–Inventory tracking is not available, must use an add-on; QB–Inventory tracking and job costing options are available within the software

Overall, both are great products. For the client whose business is more mature and requires a full suite of accounting options and flexibility, QB is still the way to go. However, for the smaller start up company who needs basic bookkeeping functions and a solution that is easy to use and doesn’t require a lot of time for upkeep and data entry, Xero is a better alternative.” VFJ

2011 Taxes: Organizer & Newsletter

Welcome to the new tax filing season. We’ve put together the below PDF files as a help to you in getting ready to file your 2011 taxes:

If you have any questions or would like to setup an appointment, simply contact us.

Overview of Individual Income Tax Penalties

From time to time I’m asked the types of penalties that can arise on an individual tax return. Here are the common ones, along with ways you can avoid them.

  • Late filing penalty–If you file a return after its due date (including extensions), you can be assessed a late filing penalty. For the IRS, it’s 5% of the unpaid tax each month, up to a maximum of 25%. If the return is more than 60 days late, the penalty will be no less than the smaller of $135 or 100% of the tax due. For MD, the penalty can be be up to 25%, and combined with a late payment penalty.

  • Late payment penalty–If you pay your tax after its original due date (so extensions don’t help on this one), you can be assessed a late payment penalty. For the IRS, it’s 0.5% of the unpaid tax each month, up to a maximum of 25%. (The rate drops to 0.25% if you’re under an installment plan.) For MD, the penalty can be up to 25%, and combined with the late filing penalty.

  • Underpayment penalty–Even if you pay all your tax by its due date, if enough wasn’t paid in throughout the year, you can be assessed an underpayment penalty. For the IRS, it fluctuates, but is around 4% right now. For MD, it’s a hefty 13%.

  • Accuracy related penalty–If you’re found to be negligent when filing your return, or understate your tax by more than the greater of 10% of the amount due or $5,000, or make a substantial valuation misstatement, the IRS could assess a penalty of 20% of the underpayment.

  • Retirement savings penalties–The IRS also has a 10% penalty if you withdraw money from retirement accounts before 59 1/2. And if you don’t start withdrawing by 70 1/2, they’ll assess a 50% penalty on the required minimum you didn’t take out.

  • Fraud penalties–I hope noone gets caught with these, but there are penalties for fraud (75% of the understatement), willfully attempting to evade tax (up to $250,000), perjury (up to $250,000), and similar cases.

  • Interest–Penalties aren’t the end of the story, because there is also interest: which can be on the unpaid tax, AND on the penalties assessed. Again, for the IRS it fluctuates, but is currently around 4%. And for MD, it’s 13%.

That’s definitely enough penalties to make anyone’s head spin. But a couple tips can keep you out of trouble:

  • File on time, or extend and file by the extended due date. Sometimes folks will wait to file their return until they have the money. But it’s better to file regardless, because you can at least avoid the late filing penalty.

  • Be sure your withholding or estimated tax payments are sufficient. Generally speaking, 90% of your current year tax, or 110% of your prior year tax, will keep you out of the underpayment penalty territory. And even if you don’t have the entire tax balance, send what you can–this helps reduce the late payment penalty.

  • Have a decent recordkeeping system. This will keep you from having a large misstatement that could result in an accuracy related penalty.

  • Call us whenever you’re thinking about getting creative and deviating from normal tax patterns. We can help point out any potential pitfalls, and things you should be aware of, so you’ll have the all the facts to make your decision.

Penalties and interest are no fun, but with a little bit of forethought, they don’t have to haunt you. Simply contact us if you’d like to know more.

2010 Taxes: Organizer & Newsletter

Welcome to a new tax filing season. We’ve put together the below PDF files as a help to you in getting ready to file your 2010 taxes:

If you have any questions or would like to setup an appointment, simply contact us.

Choosing a tax preparer

Choosing a tax preparer is not an insignificant decision, since they are someone with whom you need to discuss your financial activity.

The IRS has produced a short YouTube video below with pointers on choosing a preparer, and we’ve also compiled a few thoughts on why you may want to choose our firm.

To find out how we can help you, simply contact our offices.

(UPDATE: Video updated for 2012.)