Individual Tax

All You Wanted to Know About Medicare Tax

Medicare tax is quite popular in theUS. Like land tax and service tax, Medicare tax is imposed on earning/ wage / salary of an employee or a self employed individual. As per 2013 budget the US government has announced an increase in Medicare tax rate; from 2.9% to 3.8%.

Medicare hospital insurance amount is divided amongst the employees and the employer; both are subjected to pay half the amount of the total taxable money. Those that are self employed have to pay the total amount as they themselves are employee and employer, rolled into one. However such individuals can file for half the amount paid as Medicare tax when filing for tax return.

Medicare tax rate will be increased to bring under its fold higher income individuals and investment income. This as a part of health care reform laws is called ‘unearned income Medicare contribution tax and it is calculated as follows:

Multiply 3.8% tax rate by the lower of either of net investment income or the gross income over a certain amount

While the net investment amount covers interests, annuities, rents, dividends, capital gains etc the gross adjusted income includes overseas income/ income from properties abroad etc.

Employers are required to deduct an additional 0.9% from their employee’s salary which is calculated on the threshold amount. This deductible amount is the difference between 3.8% unearned Medicare tax and the 2.9% Medicare contribution tax. Because employers may not have knowledge whether an employee is subjected to additional Medicare tax or not the tax amount is decided upon the individual’s income tax return. All extra tax amounts are to be cleared by the individual who is filing for tax return. On the other hand if employers do not calculate on this basis then they can be subjected to penalties and fines.

If you fall within the higher income group then you might want to calculate the amount that you have to pay as additional Medicare tax at the rate of 3.8%.

  • Tax-deferred plans such as IRAs and 401(k) accounts should be the place where you would need to shift income-producing investments .
  • Avoid taxable bonds in favour of tax-exempt bonds.
  • To ensure net capital gains to be as low as possible you need to pair capital gains with capital losses..
  • When the additional Medicare tax would not apply you would need to postpone selling investments with a capital gain by about a year.
  • Children or other family members who aren’t subject to the additional Medicare tax should be bestowed with income producing investments.
  • Increase payroll withholding or estimated taxes to cover the additional Medicare tax.

By all these methods you would be able to ensure that you plan your medicare axes well and gain greater savings.

2013 Tax Brackets – What Do You Think?

So you think Obama is going to win the elections and get elected for the 2nd term. What does that mean for taxes?  Are they going to go up or down and then there is whole another topic about deductions and tax credits?

President Obama wants to keep the 10% to 28% tax rates with no change.  He also wants to bump the top two rates to 36% and 39.65.  At the same time, Republicans want to keep all the Bush Tax rates as is.

It is quite obvious that rate rates will change and it is hard to predict the change with so much uncertainly.  But here is our best guess.

2013 Tax Rate Guesses

 

These rates in the table below are for a married couple filing jointly.

Taxable Income 2012 Tax Rates 2013 tax rates if Bush tax cuts aren’t extended Obama’s proposed 2013 tax rates
up to $17,400 10% 15% 10%
$17,401 to $70,700 15% 15% 15%
$70,701 to $142,700 25% 28% 25%
$142,701 to 217,450 28% 31% 28%
$217,451 to $250,000 33% 36% 35%
$250,001 to $388,350 33% 36% 39.6%
$388,351 or more 35% 39.6%

Obama's Health Care Plan and Tax Deductions

As many of you may know that starting 2014 Obama’s healthcare plan will kick in that may allow low income families to enroll in qualified health care plan and claim the insurance premium as tax credit.  However, some of us are still wondering what if qualified health plan offered by the Obma’s health care plan is cheaper than the one offered by our employer.    Can we switch to different plan?  If we make the switch, can we still deduct premium?

Answers to these questions are equally important to the employers.   Employers would like to predict their exposure to the employer responsibility excise imposed should if they offer the healthcare that does not provide minimum value (What is the minimum value?), or is unaffordable.   After all, employers want to know if they should continue with their health plans or not?

“Have IRS not finalized the rules?” you may ask.  You can read T.D. 9590 published by the IRS and Treasury Department.  You will find many rules to determine eligibility for and calculation of the tax Code section 36B refundable health insurance premium tax credit added by the Patient Protection and Affordable Care Act, as amended.   These rules address many matter e.g treatment of required waiting periods, or relief from erroneous automatic enrollment in an employer-sponsored plan.  But at the same time they leave many issues for future guidance and public interpretation.

For example, Employers can find out when employer plan coverage is affordable for the employee by using a simply formula (i.e., the employee’s contribution is no more than 9.5% of household income) but do not address whether coverage is affordable for related individuals who can enroll in the employer plan.

Many groups are working closely with IRS and Obama’s administration to finalize the rules and calculation methods to determine how much premium should be deductable.  Tax payers are also being invited by the IRS to comment on these matters.

Would like to share your thoughts on this matter?

IRS and YouTube Partnership To Educate You

Internal Revenue Service has partnered up with online video site, YouTube, to deliver its message to general public.  You can find hundreds of useful tax related videos on YouTube.   You can estimate the popularity of this combination by looking at viewership of IRS channel.  Over 1.7 million views makes the IRS YouTube Channel  the fifth most viewed online channel out of more than one hundred and twenty-five YouTube Channels.

IRS conducts online webcast on various topics and post those webcast as video’s on YouTube.  You can participate in online webcast to ask your questions live to an IRS agent or simply view the video’s to enhance your knowledge.  During tax time you find videos about last minute tax tips or how to arrange payment schedule with the IRS.   However, you will also find wealth of knowledge even after the tax time.

Just last month, IRS conducted a webinar called “Small Business Advantage: Put our knowledge to work for you.”  Webinar was over one hour long and included multiple resources to help small businesses thrive.

You can easily find IRS YouTube channel by simply typing IRS in the search box on YouTube.

Sanjiv Gupta CPA advises all his clients to learn from online videos but don’t depend upon those advises entirely.  Often time interpretation of online video can cause quite a bit of confusion and usually end up costing penalties and late payment charges to tax payers.  ‘You should watch the video to understand the basic concept but always consult with tax professional to understand how you can apply the concept in your business” explains bay area’s popular certified public accountant Sanjiv Gupta.

Tax Strategy For Facebook Stock Holders / Employees

Are you one of the lucky Facebook employee who received millions in Facebook stocks ?  Are you giving away half of your stocks just to pay for taxes ? Are you looking for a strategy that can save thousands of dollars in taxes ?  Than you need to make an appointment with your CPA as soon as possible.   Time can play a big factor in how much tax you will end up paying.

You may also be aware of Facebook selling some of your shares to cover the tax withholdings.   How much tax should be withhold ?  Each situation is unique and Facebook may not be aware of each individual tax status and therefore can not accurately determine how much tax to withhold.  However, this won’t stop them from selling your stocks.

Are you thinking about renouncing your citizenship like  Severin to avoid paying millions in taxes or do you have any other tax strategy in place. Well, if you don’t than you should think about it.   Your CPA should be able to help you come up with one.   In most cases, it is very late to renounce your citizenship but you may have some other options to avoid paying huge taxes.  Moreover,  “There is a  law known as the Reed Amendment which explains that if the Attorney General determines that a U.S. citizen renounced citizenship for the purpose of avoiding tax, the former citizen may be barred from returning to the U.S.” explains Sanjiv Gupta CPA.   You can look at your capital losses to help offset the gains from Facebook stocks., he added.

“I am not going to sell any of my stocks than why do I owe taxes ?,” ask Facebook employee aka 21st century millionaire.

As Facebook employee, you received restricted stock units, or RSUs, that don’t turn into actual stock until there is what is defined as a liquidity event.  Liquidity event is taxable event and  Facebook IPO is one such event.  In other words, you now owe taxes.  Sanjiv Gupta explains that IRS considers income from stocks as regular compensations and should be taxed as any other regular income you may earn.

In other words -Income from RSU turned stocks is not taxed as long-term capital gain tax. Instead they will be taxed as your regular income based upon your tax bracket.   You will be taxed both California Tax and Federal tax.

Just in California State Tax you will pay about 9.3% plus 1% surcharge if your net taxable income is over 1 million dollars.  Now add yourFederal income tax bracket on top of this and you may be close to 50% in taxes alone.

That is lot’s of taxes.   Grab your phone and set up an appointment with your CPA to discuss your situation.  You can also consult with Sanjiv Gupta by calling 510-825-7563.

 

 

Tax Deductions for Independent Contractor or 1099

Starting out a consulting business can be very lucrative. However, it can also result in heavy tax bill you do not organize your income and expense properly.   So, how do you organize your income and expenses?

You can start by opening a different bank account.  Do not mix your business bank account with your personal bank account. All business related income should come to this account and all expenses should be paid from this account.   Your client will send you form 1099-misc at the end of the year.  IRS will also reactive a copy of this 1099.  That being said your total business income should be greater or equal to the amount listed in 1099.  You may get an automated customer generated audit if you report total income less than the amount listed on your 1099.  Keeping a separate bank account will help in calculating total business income and you act as proof in case of audit.

Now you need to deal with your business expenses.   Easiest way to do this is to categories your business expenses.   We recommend you use same or similar categories listed on schedule C.  This will help during tax time.  Now, every time you pay a bill, you simply need to enter that transaction in the correct category.  You can use a simple spread sheet, financial software or you can use shoe-box.  Most CPA firms also provide bookkeeping services. For example, you can simply send us your bank statement at the end of the month and we can do the complete bookkeeping. We will assign each expense into an appropriate categories based upon its tax implication.

What are some of the most popular business expense categories ?

  • Advertising – All expenses paid for online marketing or print marketing including business cards or flyers.
  • Consultation Fees – Fee paid to professionals like attorney, CPA, or marketing professionals.
  • Insurance Cost –  Business Insurance Expenses including life, property & casualty, or business insurance
  • Interest Cost – Interest cost of your business loans. You can include fees and other related cost.
  • Office expense – Any supply or equipment you purchase for your business operation.
  • Rent or lease other business property – Cost of operating your business office.
  • Repairs and maintenance – Include all cost related to your business only.
  • Travel – the cost of traveling to a business related event like convention, meeting, or business trip
  • Meals and entertainment – You can include meals and entertainment expenses related to your business.
  • Utilities –electricity, gas, telephone, internet
  • Other expenses – such as Dues & Subscriptions, Web development, and Business telephone expenses.

 

Health Insurance expenses:  Premiums paid for your health insurance are tax deductible.   You can deduct the full cost of health insurance premiums on form 1040 but you must have an Income from you business.   You can deduct the health insurance cost event if you run into losses but it has to be reported different.  Consult with your CPA to ensure you are reporting the deduction properly.

Still have a question about your business expense?  Leave us a comment or call our office at 510-825-7563

How To You Choose Right CPA For Your Business ?

Are you considering changing your CPA or Tax Accountant ?  I am hoping this blog post can help you make a right choice this time.

Let’s start with basic, your CPA or Tax Accountant should already have a client base similar to you.  He should be able to understand your business and advise you on financial aspects and pitfalls of this kind of business.   If you are set up as corporation or LLC than also make sure your CPA has specialization in this field.   You may want to find out how many financial statements, audits and corporate tax return your CPA is currently making.  This will give you good idea about his practice.

Interview Potential Certified Public Accountant

You are about make an important hiring decision.  You should interview your CPA just like you interview a potential employee.  Great CPA can bring lots of value to your business.  He or She can save taxes and protect your bottom line.  Make sure to ask all of your questions along with refreces.  Also, make sure to see and verify their license.  You can also ask the CPA about their competeive advantage.  In other words, How do they differ from the rest of CPA’s in your area.

Cheapest Is Not Your Best CPA

This may sound obvious but you do need to carefully analyze the cost of CPA services.   One CPA charging more may be providing extra services and therefore you need to ask your CPA to justify the cost.  Find out if they have a rate chart that contains the details of their service.   You may also want to ask them about monthly fee instead of yearly cost.

Do They Do Bookkeeping

Don’t settle for generic answer; Yes.  Ask more detailed questions like what program do they use and why they use that over the other.  Is that program compatible with the program you are currently using at your business.  Will you need to buy an additional program ?  Are they going to do bookkeeping at your site or remotely ? How will you get your paperwork to them ?

Can They Estimate Your Next Year Tax

This is great way to see how qualified your CPA is.  Simply give them your last year tax return and give them estimate of your revenue increase or decrease this year and let your CPA give you an guesstimate for next year taxes.    You will understand a whole lot of tax management with this simple questions

How Do They File Your Tax Return

Find out how your CPA wants you to do bookkeeping and accounting.   Their suggestion can save you lots of time during tax time.  Ask your CPA if they can efile and what documents do you need ?

Your CPA is a Corporation or an Individual

With so many CPA’s at your service, it can be hard to pick the right one.  But you can at least make an attempt to find a perfect match.  If you are looking for big corporate office with lots of employees than you may want to find a large audit firm but if you want personalized service than look for independently owned CPA firm.  In either case, find out who you will be working with and make sure to interview that person.

Hours of Operation

Make sure your CPA is available when you are ready to meet with them.  Find out if they are open on weekends ? Do they respond via email ?  How easy or hard it is to get an appointment.  Do they give special treatment to yearly clients vs walk ins.

Set Expectations

Once you have interviewed and pined down the right CPA, make sure to set some expectations. For example, after the submission of paperwork when can you expect your work to be done.   This will come very handy during the next year negotiations.

Worked in US. Now in India. How do I file?

People come to United States from India for various reasons and for the similar reasons Indians go  back to India.  However, during this transition we often forget to deal with taxes.   United States Tax is based upon world wide income.  If you are a green card holder or citizen or US resident living in India than you are required to pay taxes on your income in India and United States.  This can be quite complicated.  Common questions asked by out clients are:

  • What income should I report ?
  • Should I included my retirement plan income?
  • Should I file taxes in India ?
  • Do I need come to United States to File the Tax Return?
  • I paid taxes in India, Can I get credit in United States ?
  • What kind of deductions can I claim?
  • I do business in India and US, what return do I need file ?
  • What form to file ?

Doing business in two countries can be quite difficult but our office can make your life bit easier. Our firm specialize in filing taxes for US residents living in India.  You can contact our office for a telephonic appointment or send us the details via contact us form on our home page.  Recently, Sanjiv Gupta discussed this topic on television.  You can watch that clip here for some answers.

You may be in India on temporary assignment or moved to India for some other reason but don’t forget to take care of taxes in United States.  As you know penalties for late filing and late payment are big and IRS do not accept “I moved to India” as an excuse for not filing or paying on time.   There are many credits and deductions you can take advantage but you must file your return.  Even if you can not come to United States, our firm can help you file your tax return. You can contact our office at 510-825-7563 or send message via contact us form on our home page.

Hiding Income in India is a Crime

IRS considers non reporting for income from any foreign sources a crime.  IRS has partnered up for foreign tax agencies to make sure US residents can be help accountable.   IRS is actively pursuing those individuals and businesses that hide income or assets in India or other foreign country to evade taxes.   Goal of IRS is ensure that US residents and citizens are reporting their foreign income and paying the correct tax in United States.

Consequences for Evading Taxes on Foreign Source Income

There is no mercy for those who knowingly fraud United States.   Failure to file proper tax return or failure to report foreign income can result in additional taxes,  substantial penalties, interest, fines and even imprisonment.

Do you know some one who is hiding Income in India

IRS has launched a whistle blower program and encourages you to report promoters of off-shore tax avoidance schemes.  If your financial adviser or CPA is telling you to hide income in foreign country than you are talking to a wrong person.  You should report such person to IRS.  You can also apply for reward by filing Form 211 for the reporting of such schemes.

 

Red Flags | Invite For An Audit

One of the common question asked by Tax Payers is “Can I get audited?” or “What can flag my tax return for an audit?”. These questions bug so many tax payers that we are often bombarded with same question via email and phone calls.

Good News | Less than two percent of taxpayers get audited a year. Your chances of getting audited increases with your income. How IRS selects tax returns for audit is “Top Secret” and I would assume that even the IRS employees don’t know the answer to that question. However, experts presume that it is combination of multiple factors that may prompt your tax return for audit. You will need to have multiple flags in order to get audited – but you never know.

1. Making Calculation/Math Error(s): “This is simplest but one of the common flag for an audit,” says Sanjiv Gupta, CPA. Most tax payers use computers these days and this reduces the risk of math error. However, software depends upon the data you enter. So if moved couple of zero’s here and there – you may be called for an audit. Sanjiv pointed out that common math errors typically time pressure. Folks trying to do their tax return at the minute are more prone to making a mistake.

2. Taking Abnormal deductions. How about $100,000 charitable donations from someone making $50,000 year – possible but outrageous. If something is out of ordinary, attach proof with your tax return.

3. Submitting inconsistent information. What happens if you report income of $25K but your employers reports $45K ? Audit, off course. Make sure information going to IRS from all places matches with numbers you put on your tax return. This is especially true if you were paid in cash or have any kind of reported income.

4. Making More Money. Yes – you have a better chance of getting audited if you make $200,000 or more. How much more you may ask ? Recent IRS data shows that audit of tax payers making $200,000 increased by 34& during 2010 tax year. Just imagine, how is it like if you are making over 1 Million dollars.

5. Filing a business return. Most businesses run into losses every now and then. However, if you show loss three out of five years than you are at higher risk of getting audited.

6. Taking home office deductions. This sounds like an easy deduction but big guys at IRS are looking out for home deductions.

7. Handwriting your return. Still filing paper tax return? It is a well known fact that hand written tax returns have more errors than the ones generated by computer. Guess what, IRS knows this too.

Taxes Due Today | Did you file ?

Did you file your taxes ?

Tax returns are due today.  You must get your tax return and tax payment postmarked by today. Unlike previous years post offices are not open late today.  So, get to post office on time.  Most post offices will close at standard 5:00 closing time.

Need to file extension ?

If you are not ready to file than make sure to file an extension for your tax return.  Filing extension will buy you additional time to file the tax return but it won’t buy you time to pay your taxes.  It is a good idea to make an estimated tax payment if you feel you will end up owing taxing.   If you end of owing taxes when you file tax return, you will have to pay penalty and interest.

You can file for extension by visiting IRS site here.  You can file form 4868 to get an automated 6 months extension.

Here are some important pointer you should consider if you are thinking about filing late:

1. File on time even if you can’t pay:   Some customers don’t file tax return because they don’t have enough money to pay for taxes.  This is not good.  You should go ahead and file the taxes.  There is no reason to request an extension.  Pay as much as you. IRS will send you the bill or notice of balance due.  You can also apply for payment agreement by calling IRS at 1-800-829-1040.   You can also apply for payment agreement online from IRS website.
2. Extra time to file An extension will give you extra time to get your paperwork to the IRS, but it does not extend the time you have to pay any tax due. You will owe interest on any amount not paid by the April 18 deadline, plus you may owe penalties.

3. Form to file   As stated earlier, if you do not an extension than make to file by submitting Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to the IRS by April 18, 2011. You can also make an extension-related electronic credit card payment.

4. E-file extension  You can also get e-file for extension.  You can go to your CPA or using one of the tax software. Don’t worry IRS will   acknowledge receipt of the extension request if you file by computer.

5. Traditional Free File and Free File Fillable Forms   Filing for extension is Free.

6. Electronic funds withdrawal While you are filing for an extension, you can also request for electronic funds withdrawal.

 

Have a question about filing your taxes ? Give us a call at 510-825-7563 or leave us a comment below.