Tuesday, October 30, 2012
AICPA Focuses on the Fiscal Cliff
We have been talking about the fiscal cliff
for several months now. As a brief reminder -- the fiscal cliff refers to the large number of tax code that is scheduled to expire at the end of this year. It includes tax cuts from the Bush administration and also tax cuts from the Obama administration. This is coupled with spending cuts that are scheduled to go into effect on the first of next year.
Many economists believe that if they are not altered it will lead the US economy back into recession. Some people concerned about the national debt see it as the only way to reign in out of control spending. In the end it is a political hot potato that no individual or party has shown the leadership to fix. Everyone is now resigned to waiting for the lame duck congress to address after the election.
Beyond the issues with an economy in recession; this has a very real impact to the average tax filer. Whether tax rates are increasing dramatically will impact their tax planning decisions. A good accountant or financial planner will work with you on two different plans. One will be if the tax cuts are extended past this year. The second is if congress fails to act and tax rates are allowed to go back to their pre-Bush levels. If there is a plan in place than the changes can be made quickly to reduce the tax liability. As the boy scouts always say, "be prepared."
We are not alone in feeling anxious about what might happen, if anything. The AICPA has set up a website
devoted to the topic. They have information on what cuts are going to expire and a tool to help CPAs
navigate the possible changes.
Labels: AICPA, fiscal cliff
Friday, October 26, 2012
States with the Highest Taxes
The Tax Foundation
has released their numbers for state and local tax burdens. The report estimates the total for income taxes and sales taxes payed to state and local agencies. Numbers reported are from 2010 so things may have changed in your area in the last two years.
So lets look at the big picture before we dive into the top ten. On average, Americans pay 9.9% of their income to local and state governments. It is up from ten years ago when it was 9.3%. Some of the gain can be accounted for by the drop in the average income. So these governments have less in tax revenue which explains a lot of their budget problems.
The states with the lowest tax burdens are:
- Alaska -- 7.0%
- South Dakota -- 7.6%
- Tennessee -- 7.7%
- Louisiana -- 7.8%
- Wyoming -- 7.8%
- Texas -- 7.9%
- New Hampshire -- 8.1%
- Alabama -- 8.2%
- Nevada -- 8.2%
- South Carolina -- 8.4%
One way many of these states keep their tax burdens on residents low is by collecting more in taxes from people who live outside of the state. The Nevada tourism keeps their taxes low. Another strategy that helps Alaska, Louisiana, Texas and Wyoming is to collect taxes on their oil reserves. It is a good strategy if you are lucky enough to be sitting on oil. The last strategy to keep taxes low is to keep government smaller. This is how New Hampshire makes the list.
We have seen who pays the least in taxes so here are the states with the highest tax burdens:
- New York -- 12.8%
- New Jersey -- 12.4%
- Connecticut -- 12.3%
- California -- 11.2%
- Wisconsin -- 11.1%
- Rhode Island -- 10.9%
- Minnesota -- 10.8%
- Massachusetts -- 10.4%
- Maine -- 10.3%
- Pennsylvania -- 10.2%
There is an obvious pattern. The states in the northeast have the highest tax rates in the country. The one state that sticks out is Wisconsin. They collect property taxes at the same rate everywhere in the state. As a result, the tax burden for middle income earners is higher here than for most states. As a result the tax burden for the wealthy is lower relative to other states.
Many people think about the taxes that they pay to Washington but don't consider their sales taxes and property taxes. When it is 9.9% of the average income it is not something that should be ignored. It may make sense to adopt tax planning strategies
for local taxes along with federal taxes.
Labels: local taxes, state taxes, Tax
Tuesday, October 23, 2012
Shaming Tax Delinquents
The State of California has a policy of publicly shaming tax delinquents in their state. State law requires the Franchise Tax Board to disclose the 500 largest tax delinquents every year. To make the list you need to owe the state over $100,000. They also need a lien placed by the state for the past due tax balance.
The program started in 2007 and the board estimates it has lead to a recovery of over $175 million. It is unclear whether it was this program that caused the payment or if standard measures may have reached the same outcome. The latest list
was updated on the 23rd.
Since this is California the list is sure to have a few celebrities. Number eight with $2,598,968.65 owed is Dionne Warwick. I am glad they give the numbers down to the penny because we wouldn't want there to be any rounding errors on a liability of over two and a half million. Dionne has been on the list for several years now. New to the list is Steven Seagal with $347,849.67 in past due taxes.
So lets put our two celebrities in context. If you want to be first on the list you will have to beat out Halsey Minor who has $10, 711,669,29. To even make the list you will need to owe the State of California $130,759.87. The top five hundred owe $29.6 million.
To get off the list the total doesn't have to be paid in full. You just need to be current on a payment plan. This is where a qualified accountant earns their pay. They will work with the taxing authority to reach an agreement before it reaches the level of public shaming. This tax resolution service
takes the headache away from the filer.
Labels: State of California, tax delinquent
Friday, October 19, 2012
IRS Releases Inflation Rates
The IRS has released the inflation numbers
for 2013. They release numbers annually for many tax items based on inflation. This release does not include the adjustments to the tax tables from inflation and many other credits and deductions. The IRS said that much of the code is scheduled to expire at the end of 2012 and they were waiting to see what action the congress takes before releasing the full updates.
So here are some of the highlights of what was released.
- The contribution limit for 401(k) plans was increased to $17,500 from this years limit of $17,000.
- The limit for the gift tax exclusion increased $1,000 to $14,000.
- The rate for unearned income on a child's return has risen to $1,000 from $950.
- Foreign earned income that can be excluded is up $2,500 to $97,600.
- Contributions for traditional IRAs is now $95,000-$115,000 for joint filers and $59,000-$69,000 for individuals.
- The contribution limit for defined contribution plans is now $51,000.
- Medical Saving Accounts (MSA) deductable amounts for out of pocket expenses is up to $4,300 for individuals and $7,850 for families.
But there is a big hole because we don't know:
- The tax rate tables
- Standard deduction amount
- Limit on itemized deductions
- Personal exemption amount
- Interest on school loans
- Credit against estate taxes
- Child tax credit
- Earned income credit
So in the end there is still more we don't know than do know. It is still a good time to schedule a consultation with your account
. A bit of planning this year can lead to thousands in savings next year. Since there is a strong possibility that tax rates are going to increase next year there are steps you can take to limit your overall tax liability.
Labels: inflation rates, IRS, irs announcement, tax planning
Tuesday, October 16, 2012
Passing on Your Wealth
Most entrepreneurs work long hours to provide for their family. The goal is not just to earn a salary today but to build something that will provide for their retirement and then hopefully leave an inheritance to their children. This requires planning by the owner early on. When the owner is looking to retire it is too late and they may leave money on the table because they are desperate to get their money out.
As the baby boomers retire they will be looking to pass along their businesses. The business must be converted to cash so it can be used for retirement by the owner. This is done by selling it to investors or to larger firms. Many private equity firms are bundling up smaller companies to get economies of scale.
The process is more difficult for professionals like CPAs
. It is rare to have contracts with clients and the most value they bring to the table is a client list. That is why the exit plan for many is to sell the practice to junior partners. This provides them with income for their retirement. Most owners don't want to be relying on others to keep the business profitable after they have left.
The AICPA surveyed their members to see what kind of succession planning they had done for their firms. As most businesses in this economy the respondents had spent most of their energy through the recession just trying to keep their firms profitable. As the economy improves it may be time to evaluate your business and start planning for a smooth exit.
As with anything in business the more prepared you can be the more value can be gained for the owner and the company after the succession. To start with do a business analysis. Be honest and identify the strengths, weaknesses, and opportunities of the firm. Some good questions are:
- Are too reliant on too few major clients?
- Are your rates in line with other firms in your area?
- Do you have a unique specialty?
- Are there industries you have strong connections with?
- What is your percentage of individuals to business clients?
Think about how you would market the firm to potential buyers. Begin a plan to eliminate the weaknesses and focus on building up your strengths. You will need to sell a story of how your firm will benefit a larger organization. It should have value even without the partners.
Labels: firm succession, wealth succession
Thursday, October 11, 2012
Reporting Tax Debt
The IRS is considering reporting tax debt to credit reporting agencies. The issue is in front of the Senate Finance Committee. The Government Accountability Office (GAO) on the "Factors for Considering a Proposal to Report Tax Debts to Credit Bureaus
." Currently the IRS does not report any tax debts. The committee is evaluating what, if any, should be reported.
The IRS hopes that by reporting tax debt, some businesses and individuals would be more encouraged to pay their balances. Failure to pay their debts would result in a lower credit score. Lower credit scores increase the cost to borrow or make it more difficult.
The report said there is $373 billion of outstanding tax debt as of 2011. This breaks down into $115 billion in business debt and $258 billion in individual debt. Most of the outstanding debts were relatively small, less than $5,000. But if you consider only the larger amounts that constitutes $310 billion of the $373 billion total. So even if it worked to convince many people and businesses to pay if they are not the filers with the large balances it won't have a significant impact on the total.
It is undetermined when the debt would be reported to the credit agencies. This may affect the $60 billion that is under protest by the taxpayer or currently being payed by an installment plan. It is unlikely that this would be reported but that will be decided by the Finance Committee.
One thing that any program should include is the ability to protest what has been reported. Errors happen all the time and if the reporting is incorrect then there needs to be a process to correct it. For the reason of data accuracy many groups were opposed of this reporting.
If you owe money to the IRS you will want to contact your tax professional
. They can help you manage the maze that is the IRS. By representing you they can create a payment plan that is manageable for you and the IRS.
Labels: back taxes, credit agencies, IRS
Tuesday, October 9, 2012
Business Bankruptcies Down
Equifax has released
some good news for the economy. The credit reporting agency says that the business bankruptcies have fallen again the second quarter of this year. The number of bankruptcies was down almost 17%. They are now at their lowest point since 2007.
The rate peaked in the second quarter of 2009. It has been on the decline since. Most areas of the country were down with California leading the list. The worst area for bankruptcies was the New York metropolitan area.
Since the financial crisis began many small business have been deleveraging. This has put them in a much stronger financial position. They can now weather a bump in the road better than they could have before the crisis. Another factor is the decrease in the number of new businesses being started. It is the newest businesses that are most likely to declare bankruptcy. The final factors that has brought the rate down is that many of the poor business ideas have already gone out of business.
There are several things that every business owner should manage to stay afloat. The old adage that cash is king is still true. Every accountant
in a well run business has a cash flow forecast. This should outline how much money the business has on any given day. If there is ever a negative the business better speed up their flow or receivables or slow down their payables. Failure to do so will signal the end of the business. The better run the company the longer the forecast can be run.
A growing business can be profitable and still go bankrupt. The simple reason is the cash flow may be too slow to cover the increased capital expenditures for growth. Many a business owner has gotten themselves in trouble from only looking at the P/L statement and not the balance sheet and cash flow statement. If you do not understand how all three relate then it is time to get some help from your accountant. A bit of knowledge can be a powerful thing.
Labels: bankruptcy, cash-flow, Equifax, P/L
Friday, October 5, 2012
Internal Audit Standards
The Institute of Internal Auditors
(IIA) has announced changes to their internal auditing standards. The changes will go into effect on January 1, 2013. The proposed changes were approved without edit after a 90 day comment period.
The IIA is an association of internal auditors. Internal auditors assure that internal controls exist and are sufficient for the risks an organization is exposed to on a regular basis. A good internal auditor must understand the business, its organization, and its systems. They are invaluable to a well run business and a great asset to the management.
The IIA produces standards for the internal auditing profession. The standards are set in place to achieve several goals:
- Set the basic requirements for what is required and expected from an internal audit.
- Guidelines for evaluating the performance of auditors.
- Promoting the benefits of audits to the business community at large.
- Set the definitions used but the profession.
Some of the key changes are:
- More focus on quality standards. It defines more clearly on requirements and steps to achieve the quality needed and expected.
- Aligning the goals of the audit with the overall goals of the business. This should include risk to the targets.
- Set up requirements to update the audit plan to in a reasonable time frame.
Labels: audit, IIA, internal auditor
Tuesday, October 2, 2012
What Will Tax Changes Cost You?
A number of tax provisions are set to expire at the end of this year. With the election coming up in November the Congress and President were uninterested in making in changes to the tax code. If there are any changes they will need to take place in the lame duck session after the election. Each party would like to protect the tax breaks for their backers while letting the ones of their opponents expire.
The important question is what will the cost be to your family if the laws are allowed to expire. We can give you estimates but every situation is different. Now is the time to meet with your certified public accountant
to examine your specifics. Together you can come up with a plan to minimize your tax burden if the laws are changed or if they are not. Now is the time to make plans so you are not scrambling at the end of the year.
This is such an large issues because it impacts almost every tax cut that has been enacted since 2001. This includes the Bush tax cuts as well as payroll tax cuts enacted under Obama. The changes will raise the taxes of 90% of all tax filers. It is an increase of 5% on income, 7% on capital gains, and 20% on dividends. The average is $3,500 per family but lets break that down.
So lets look at the numbers. These number were part of a report
from the Tax Policy center at the request of the Urban Institute and the Brookings Institution.
Lower income filers will notice the difference in the payroll tax and social security tax the most. This would amount to around $400 of tax increased in 2013.
Middle income earners would feel the impact of increasing the marginal tax rate as well as the social security tax break. That represents around $2,000 for middle income earners. There is also the risk that they would be hit by the alternative means tax (AMT) which could but them in higher tax brackets.
As you might imagine the largest increases would be seen by the highest wage earners. They will average $120,000 of increased taxes. This is because they were able to take advantage of more of the tax breaks as well as getting the tax increase from the health care law.
Labels: fiscal cliff, tax changes