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Frequently Asked Questions | Accounting & Tax FAQ

Frequently Asked Questions | Accounting & Tax FAQ

At Warmels Comstock, our accountants and tax preparers truly believe that an informed client will always help us to produce positive outcomes. Our accounting and tax team also knows that tax laws and changes to the tax law can be overwhelming. As such, we have provided answers to a short list of commonly asked questions to help you navigate the stormy seas of tax preparation.

Click on any of the questions below to learn more:

1. How do I compute the new 20 percent net capital gain rate under the new law?
2. What are above-the-line deductions?
3. How is a major repair on a business vehicle deducted?
4. Must I retain original business expense receipts if I computer scan them?
5. Must I file a joint return if I'm married?
6. How do I pay my payroll taxes electronically?

1. How do I compute the new 20 percent net capital gain rate?

Beginning in 2013 the capital gains rates, as amended by the American Taxpayer Relief Act of 2012, are as follows for individuals:

  • A capital gains rate of 0 percent applies to the adjusted net capital gains if the gain would otherwise be subject to the 10 or 15 percent ordinary income tax rate.
  • A capital gains rate of 15 percent applies to adjusted net capital gains if the gain would otherwise be subject to the 25, 28, 33 or 35 percent ordinary income tax rate.
  • A capital gains rate of 20 percent applies to adjusted net capital gains if the gain would otherwise be subject to the 39.6 percent ordinary income tax rate beginning after December 31, 2012.

Individuals are subject to the 39.6 percent ordinary income tax rate beginning in 2013 to the extent their taxable income exceeds the applicable threshold amount of $450,000 for married individuals filing joint returns and surviving spouses, $425,000 for heads of households, $400,000 for single individuals and $225,000 for married individuals filing separate returns.

Comment: The only change from 2012 rates is the 20 percent rate, applied as described, above. Prior to 2013, the highest tax rate on net capital gain was 15 percent..

Comment: Adjusted net capital gain is net capital gain from capital assets held for more than one year other than unrecaptured Code Sec. 1250 gain (25 percent), collectibles gain (28 percent) or gain from qualified small business stock (varying rates).

Examples

Following the rules outlined above, computations for higher-income taxpayers (those whose taxable income together with net capital gains exceed the 39.6 percent tax bracket threshold amounts, which are also the threshold amounts for the 20 percent capital gain rate) are illustrated under three scenarios:

Example 1: Assume in 2013, joint filers with $475K in net capital gain and $200K in ordinary income:

  • $200K ordinary income will be taxed under the regular income tax tables, which for 2013 indicate a $43,465.50 tax
  • $475K capital gain is taxed:
    • $250K of $475K net capital gain at 15 percent ($450K threshold less $200K ordinary income) = $37,500
    • The remainder of the net capital gain $225K ($475K less $250K that was taxed at 15 percent) is taxed at 20 percent = $45,000

Total tax liability: $43,465.50 on $200K ordinary income and $82,500 on $475K net capital gain.

Example 2: Assume in 2013, joint filers with $200K in net capital gain and $475K in ordinary income:

  • $475K ordinary income will be taxed under the regular income tax tables, which for 2013 indicate a $135,746 tax.
  • $200K capital gain is taxed:
    • All of $200K net capital gain at 20 percent ($450K threshold already exceeded by $475K in ordinary income) = $40,000.

Total tax liability: $135,746 on $475K ordinary income and $40,000 on $200K net capital gain.

Example 3: Assume in 2013, joint filers with $50K ordinary income and $425K in net capital gain:

  • $50K ordinary income will be taxed under the regular income tax tables, which for 2013 indicate a $4,845 tax.
  • $425K net capital gain is taxed:
    • $20,700 at zero percent ($70,700, which is the top of the 15 percent bracket less $50K ordinary income) = $0
    • $379,300 at 15 percent ($450,000 less $70,700) = $56,895
    • $25,000 at 20 percent (balance of ordinary income plus capital gain over $450K threshold) = $5,000

Total tax liability: $4,845 on $50K ordinary income and $40,000 on $200K net capital gain.

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2. What are above-the-line deductions?

An above-the-line deduction is an adjustment to income (deduction) that can be taken regardless of whether the individual taxpayer itemizes deductions. The adjustment reduces the taxpayer's adjusted gross income (AGI). These adjustments are also sometimes called deductions from gross income, as opposed to itemized deductions that are deducted from AGI. An above-the-line deduction is taken out of income "above" the line on the tax form on which adjusted gross income is reported.

Above-the-line deductions are better than itemized deductions because:
  • They are more available (for example, they are not phased out or subject to a floor like many itemized deductions)
  • They can be claimed even if the taxpayer does not itemize deductions
  • They lower the taxpayer's AGI, which can allow the taxpayer to qualify for more and/or larger deductions.

The above-the-line deductions include:

  • Trade or business expenses
  • Net operating loss deduction
  • Loss from sales and exchanges
  • Depreciation and depletion
  • Deductions tied to rents and royalties
  • Teacher's classroom expenses
  • Jury pay turned over to employer
  • Overnight travel expenses of Reserve or National Guard
  • Supplemental unemployment compensation repayments
  • Business expenses of qualifying performing artists
  • Contributions to individual retirement accounts
  • Student loan interest deduction
  • Tuition and fees deduction
  • Health savings account deduction
  • Moving expenses
  • ½ of self-employment tax
  • Health insurance costs of the self-employed
  • Contributions to SIMPLE or SEP plans
  • Penalty for early withdrawal of funds from a savings account
  • Alimony payments
  • Legal fees and costs paid in certain actions involving civil rights violations or whistleblower awards
  • Domestic production activities deduction

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3. How is a major repair on a business vehicle deducted?

A major repair to a business vehicle is usually deductible in the year of the repair as a "maintenance and repair" cost if your business uses the actual expense method of deducting vehicle expenses. If your business vehicle is written off under the standard mileage rate method, your repair and maintenance costs are assumed to be built into that standard rate and no further deduction is allowed.

Standard mileage rate

The standard mileage rate for business use of a vehicle is 56.5 cents per mile for 2013. The standard mileage rate replaces all actual expenses in determining the deductible operating business costs of a car, vans and/or trucks. If you want to use the standard mileage rate, you must use it in the first year that the vehicle is available for use in your business. If you use the standard mileage rate for the first year, you cannot deduct your repairs for that year. Then in the following years you can use the standard mileage rate or the actual expense method.

Actual cost

You can deduct the actual vehicle expenses for business purposes instead of using the standard mileage rate method. In order to use the actual expenses method, you must determine what it actually cost for the repairs attributable to the business. If you have fully depreciated your vehicle you can still claim your repair expenses.

Exceptions

Of course, the tax law is filled with exceptions and that includes issues relating to the deductibility of vehicle repairs and maintenance. Some ancillary points to consider:

  • If you receive insurance or warranty reimbursement for a repair, you cannot "double dip" and also take a deduction;
  • If you are rebuilding a vehicle virtually from the ground up, you may be considered to be adding to its capital value in a manner in which you might be required to deduct costs gradually as depreciation;
  • If you use your car for both business and personal reasons, you must divide your expenses based upon the miles driven for each purpose.

You may want to calculate your deduction for both methods to determine which one will grant you the larger deduction. If you need assistance with this matter, please feel free to give our office a call and we will be glad to help.

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4. Must I retain original business expense receipts if I computer scan them?

No, taxpayers may destroy the original hardcopy of books and records and the original computerized records detailing the expenses of a business if they use an electronic storage system.

Businesses often maintain their books and records by scanning hardcopies of their documents onto a computer hard drive, burning them onto compact disc or saving them to a portable storage device. The IRS classifies records stored in this manner as an "electronic storage system." Businesses using an electronic storage system are considered to have fulfilled IRS records requirements for all taxpayers, should they meet certain requirements. And, they have the freedom to reduce the amount of paperwork their enterprise must manage.

Record-keeping requirements

Code Sec. 6001 requires all persons liable for tax to keep records as the IRS requires. In addition to persons liable for tax, those who file informational returns must file such returns and make use of their records to prove their gross income, deductions, credits and other matters. For example, businesses must substantiate deductions for business expenses with appropriate records and they must file informational returns showing salaries and benefits paid to employees.

It is possible for businesses using an electronic storage system to satisfy these requirements under Code Sec. 6001. However, they must fulfill certain obligations.

Paperwork reduction

In addition, using an electronic storage system may allow businesses to destroy the original hardcopy of their books and records, as well as the original computerized records used to fulfill the record-keeping requirements of code Sec. 6001. To take advantage of this option, taxpayers must:

(1) Test their electronic storage system to establish that hardcopy and computerized books and records are being reproduced according to certain requirements, and
(2) Implement procedures to assure that its electronic storage system is compliant with IRS requirements into the future.

Our firm would be glad to work with you to meet the IRS's specifications, should you want to establish a computerized recordkeeping system for your business. The time spent now can be worth considerable time and money saved by a streamlined and organized system of receipts and records.

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5. Must I file a joint return if I'm married?

Just because you're married doesn't mean you have to file a joint return. This is a common misconception along with thinking that "married filing separately" applies to couples who are separated or seeking a divorce. As a married couple, you have two choices: file a joint return or file separate returns. Naturally, there are benefits and detriments to each and your tax advisor can chart the best course of action for you.

Traditional treatment

Historically, the tax laws reward marriage. Married couples are eligible for many incentives. For example, they can make tax-free gifts of up to $26,000 (for 2009) to the same individual ($13,000 from each spouse). Single taxpayers can only make tax-free gifts up to $13,000 to the same person. Married couples also have a larger home sale exclusion: they can exclude up to $500,000 in gain from the sale of their home. Single taxpayers are limited to an exclusion of up to $250,000.

Moreover, single individuals no longer have a leg-up when it comes to the standard deduction because of the "marriage penalty." The standard deduction for married couples is now twice the deduction for single taxpayers. For 2009, the standard deduction for married taxpayers filing jointly is $11,400 (for single taxpayers, the standard deduction for 2009 is $5,700). Married taxpayers filing separately also individually take a standard deduction of $5,700 for 2009.

Important Credits and Deductions

Credits and deductions significantly lower your tax bill. Unfortunately, some credits and deductions are lost unless you file a joint return.

These include:
  • HOPE Scholarship credit (American Opportunity Education Credit, 2009 - 10)
  • Lifetime Learning credit
  • Dependent care credit
  • Earned Income Tax Credit
  • Adoption credit
  • Deduction for student loan interest.

If these credits and deductions are valuable to you, and you are married, you'll have to file a joint return.

When to File Separately

Two events may make you decide to file a separate return:

  • Your personal itemized deductions are very high
  • You do not want to be legally responsible for your spouse's tax liability.

Let's look at the second one first. When a married couple files a joint return they are both legally liable for any tax owed to the government. This is a hard and fast rule. The moment you sign your name to your joint return, you are just as liable for the tax as your spouse. The IRS can come after both of you or just one for the full amount of the tax liability.

Getting out of joint liability is not easy. If you did not know about errors or false statements on your return, you can petition for relief under the innocent spouse rules. The IRS may excuse you from joint liability but the process takes a long time. If you do not want to be liable for your spouse's taxes, don't sign a joint return.

Sometimes one spouse has a large amount of itemized deductions. This often occurs because of illness. Medical expenses are deductible only to the extent that they exceed 7.5 percent of adjusted gross income. If only one spouse had the majority of the couple's medical expenses, it may be easier to overcome the 7.5 percent threshold when only one spouse's income is reported on the return.
Employee business expenses and casualty losses, such as damage from a natural disaster to property owned by one spouse, also are common triggers for filing separately. If these expenses are high, they may reduce your tax bill if reported on a separate return.

Itemizing

If you decide to file separate returns, you and your spouse must itemize deductions or take the standard deduction. You cannot itemize deductions on your return if your spouse takes the standard deduction on their return.

Weighing the pros and cons of filing separately is complex and unique to each couple. Lots of other factors, such as children, Social Security and pension benefits and residency, can make a difference. Contact this office for help in deciding which filing status will maximize your tax breaks and minimize your tax bill.

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6. How do I pay my payroll taxes electronically?

The Electronic Federal Tax Payment System (EFTPS) allows individuals and businesses to make tax payments by telephone, personal computer or through the Internet.

Paperless

EFTPS is one of the most user-friendly programs developed by the IRS. EFTPS is totally paperless. Everything is done by telephone or computer. Because it's electronic, it's available 24 hours a day, seven days a week.

You make your tax payments electronically by:

· Calling EFTPS
· Using special computer software or the Internet

Who can use EFTPS?

EFTPS is available to businesses and individuals but businesses have more options.

Businesses

If your total deposits of federal taxes are more than $200,000 each year, you must use EFTPS. If not, you can still use EFTPS but you're not required to.

To calculate the $200,000 threshold, you have to include every federal tax your business pays, such as payroll, income, excise, social security, railroad retirement and any other federal taxes.

The IRS wants businesses to use EFTPS and makes it difficult to stop using it. Once you meet the $200,000 threshold, you have to continue using EFTPS even if your annual tax deposits fall below $200,000 in the future.

Individuals

Individuals can also use EFTPS. Many of the individuals using EFTPS are making quarterly estimated tax payments but it's also available to people paying federal estate and gift taxes and installment payments.

How EFTPS works

There are two versions of EFTPS: direct and through a financial institution.

Direct

EFTPS-Direct is just what the name suggests. You access EFTPS directly - by telephone or computer - and make your tax payments. You tell EFTPS when you want to deposit your taxes and on that date EFTPS tells your bank to transfer the funds from your account to the IRS. At the same time, the IRS updates your payroll tax records to reflect the deposit.

Example. Your payroll taxes are due on the 15th. You have to contact EFTPS by 8PM at least one day before your tax due date. You either call EFTPS or log on using special software or through the Internet. You enter your payment and EFTPS automatically debits your bank account and transfers the funds to the IRS on the date you indicate.

If you're a business, you can schedule your tax deposits up to 120 days before the due date. Individuals can schedule tax deposits up to 365 days before the due date.

Through a Financial Institution

You can also access EFTPS through a bank or credit union. Instead of contacting EFTPS directly and making your tax payments, your bank does it for you. Not all banks and credit unions participate in EFTPS so you have to check with your financial institution.

Only businesses can use EFTPS through a financial institution. If you're an individual and you want to use EFTPS, you have to use it directly. Also, while EFTPS-Direct is free, some financial institutions charge a fee for accessing EFTPS.

Getting Started

To access EFTPS, you have to enroll. Your tax advisor can help you navigate the enrollment process and, once you're part of EFTPS, he or she can make the payments for you.

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