IRS Gives Business Formula for Telephone Tax Refund

The IRS has announced a formula that businesses can use to determine the amount of a telephone tax refund. A while back, I discussed the fact that individual taxpayers will receive refunds of telephone taxes that were determined to have been illegally charged by the government. Individuals were given a formula based on the number of dependents that would determine their refund amount, but businesses were supposed to add up the tax from their phone bills.

Instead, the IRS has issued an easier way to calculate a refund amount. It's still a little complicated, but better than having to dig out all your old phone bills. You're supposed to figure the percentage of your bill that was made up of the tax, based on your September and April 2006 bills, then apply that percentage to your total phone bills for the refund period, March 1, 2003 to July 31, 2006.

The bottom line is that when we prepare a business's tax return, we're going to need those two months' phone bills in order to figure the refund that's due you. A business, for this purpose, is a corporation or partnership

Here Come the Dems

With the new regime about to take over Washington, tax proposals that would probably not have passed in a Republican-controlled Congress are already flying around. One idea on self-employment tax for S-corporation owners is particularly scary.

S-corporation owners are subject to payroll taxes on their wages, but not to the 15% self-employment tax on the income their company earns. One proposal would end that treatment for all S-corporations. Another more limited proposal would end it only for personal service companies: doctors, attorneys, ACCOUNTANTS, and the like.

This area is being addressed because of abuse in the S-corporation arena. Many owners will unrealistically lower their wages in order to increase company income. This saves them about 15% on the income. Handled appropriately, S-corporations have become a significant planning tool for businesses. Removing their advantage for everyone seems like a little overkill.

Welcome to life in a Democratic congress!

2007 Mileage Rates Released

Mileage rates will be back up to 48.5 cents per mile for business miles driven in 2007, according to the latest figures issued by the IRS. Medical and moving miles will be deductible at 20 cents per mile.
The increase for business miles is 4 cents over 2006. For medical miles, the increase is 2 cents, from 18 to 20.

Of course, charitable mileage rates have remained steady at 14 cents per mile.

Retirement Contribution Limits for 2007 Announced

The IRS has issued the latest limits on retirement plan contributions for 2007. While past years increased because of changes in the law, the 2007 increases are due to inflation adjustments.

Plan	Limit
401(k)	$15,500 (up $500) $20,500 if born before 1958
SIMPLE plans	$10,500 (up $500) $13,000 if born before 1958
Keoghs, profit sharing	$45,000 (up $1,000)

Another Tax Scam Sniped

Folks, we'd love to tell you you've got a $12 million refund coming to you. But when you hear things like that about your tax situation, take them with a grain pound of salt. Otherwise, you might end up indicted like Wesley Snipes!

Snipes bought into a scam that claimed only income earned outside of the United States is taxable under the Internal Revenue Code. Obviously, the scam and its purveyors were full of, well, hot air (this is a family-friendly blog!)

Snipes and his (former) CPA have been indicted on eight counts of tax evasion. With his current career status, I'm just trying to figure out how many decades it will take him to pay back the $12 million.

New Installment Payment System from the IRS

The IRS announced that they have a new, easier system for arranging payments on delinquent taxes. Taxpayers can now go online and arrange for a free 120 day extension of time to pay (interest and penalties will still apply), or for $43, can request to pay their balance on a monthly payment plan (again, with interest and penalties).

While this simplifies the process of applying for an installment payment arrangement, the fact remains that the IRS is not a low-cost lender. Between the interest and late payment penalties, you're going to pay over 13% finance charges. The best bet is always to pay the Service as quickly as you can, and let us help you avoid situations where you would have a delinquent balance in the first place.

Bottom line is, paying the IRS late is bad...almost as bad as paying your CPA late!

Check Your Credit for Free

AnnualCreditReport.com

Thinking about applying for a loan or refinancing your house? Make sure you know what the bank will see before you go. Federal legislation requires Experian, Equifax and TransUnion to allow you to get a free copy of your credit report each year.

The site is sponsored by the three companies, easy to use, and will give you your information without subjecting you to a hard sell for some kind of credit monitoring service. (You know the kind--"you can cancel in the next 30 days, but it's $40 if you don't"!)

You're eligible for a report from each agency each year, which means you can receive three free reports. If you want the FICO score, which many mortgage lenders use to evaluate you, it's a small charge.

Refunds for Everyone!

That's right, everybody's getting a refund! And they could be as much as ... (drum roll) ... sixty dollars!

Okay, maybe that's not much to get excited about.

The federal government has had its hand slapped in court over collecting a tax on telephone service since 1898. The courts decided that the Treasury Department should not have been collecting this tax on long distance service, just on local service. As a result, the IRS will refund $13 billion of the collected tax to taxpayers.

The refund will be claimed on your 2006 tax return, where it will be treated as a payment towards your tax bill. Individuals will receive a refund ranging between $20 and $60, based on the number of exemptions they claim on the return.

Businesses will also receive a refund, but right now, the IRS says businesses must prove the amount of tax paid based on phone bills since 2003. It's likely that they will come up with a method of estimating this amount instead, so you business owners don't need to go digging through your old invoices just yet.

No Receipt? No Contribution!

Contribution documentation will be tightened down in 2007 under the new tax bill passed by congress. To claim a deduction, a donor will be required to have a canceled check, bank record or receipt listing the name of the charity, the date and the amount of the contribution.


Current rules require a receipt from the donor only for contributions exceeding $250. Contributions for less than that amount have been documented in some instances by taxpayers keeping logs of their contributions. That's not going to cut it under the new rules.

Low Capital Gains Rates Extended

Taxes on capital gains and dividends have been locked in at their current low rates in the recent tax bill, at least for another two years.

Capital gains on assets held more than one year and dividends received from qualified corporations have been taxed at a maximum rate of 15% since the 2003 tax bill was passed. However, these rates always had an expiration date of 2008. With the recent changes, the rates are good through 2010.

One other interesting provision of the 2003 capital gains rate changes that will soon take effect: a 0% rate on low-income individuals. Between 2008 and 2010, these individuals will be allowed a certain amount of capital gain with no tax whatsoever! A planning opportunity may exist here...giving appreciated assets to your children (18 or over), who may have low enough income to take advantage of the 0% rate.

Kiddie Taxes Increased in New Tax Bill

The 'Kiddie Tax', which taxes children's unearned income over $1,700 at the parents' rate, has been extended to apply to children up to the age of 18. Until 2006, the additional tax only applied through the age of 14.

One consideration of this new law will be educational savings accounts. Custodial accounts (such as UTMA accounts) typically have the child named as the owner, and may result in income being subject to the Kiddie Tax. However, other college savings vehicles such as Section 529 plans are sheltered from current taxation, and may be a better option.

This is one of the provisions of the new tax bill signed in May. We'll provide more details on other facets of the bill over the next few weeks.

Social Security benefits reduced for upper-income retirees.

2007 will bring with it what is essentially a new tax on seniors with high income. Retirees with income over $160,000 in 2005 ($80,000 if single) will face a soaring Medicare Part B premium beginning in 2007, and increasing in 2008 and 2009.

Will this affect you? First, find your 2005 adjusted gross income - the last line on the front page of your 1040. Then, add tax exempt interest to see if you exceed the income threshhold. If you do, you will face a surcharge ranging from 13% to 73% of the Medicare Part B premium, depending on income levels.

The surcharges will double in 2008, and triple in 2009. By 2009, couples with income over $400,000 will be paying a surcharge equal to 220% of the Part B premium. And you thought all those Medicare taxes you paid were enough to give you coverage in your golden years!

Audits on the Rise

The Internal Revenue Service announced today that the 2005 IRS Data Book is available at IRS.gov. The publication contains tables detailing, among other subjects, the amount of revenue collected, the number of audits (examinations) conducted, and the number of refunds issued between October 1, 2004, and September 30, 2005 – Fiscal Year 2005.

IRS Releases Latest "Dirty Dozen"

The IRS released their 2006 version of the top 12 tax scams they run across in their enforcement duties. Basically, if you hear someone promoting a tax strategy that sounds too good to be true, it's probably on this list.

A couple areas that we've had clients ask us about are on this list: offshore bank accounts and misused trusts. As you can see, these are clearly on the radar screen of the IRS. If you participate in any of these types of schemes, just be ready to pay the penalties when the Service comes knocking!

How Tax Brackets Work

One of the most misunderstood areas of the tax system are the tax brackets. People often assume that being $1 into the next highest bracket results in all of your income being taxed at the higher rate. In reality, only that $1 would be taxed at the new rate. I ran across a helpful article discussing the details.

Self-directed IRA Can't Be Self-Serving

A business owner thought he had a pretty good idea about using his IRA. He wanted to purchase real estate in his IRA and lease it to his company. The Labor Department says that kind of plan won't work, and would be subject to penalty.

Some clients have asked us about moving IRA funds into self-directed accounts that can be used to purchase real estate and other investments. While these accounts are allowed under the law, we don't advise their use for a number of reasons. One of these is that most taxpayers aren't savvy enough to negotiate the myriad rules related to appropriate uses of these funds. Besides, we want your IRA to be there for you at retirement - use other funds for land speculation!