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Tax Preparation and Strategy

January 22, 2014 by Leave a Comment

The due date for corporation and individual income tax returns is fast approaching. The Corporation income tax return due date is March 15th and individual and partnership income tax return due date is April 17th. In this article, I will focus on the individual income tax return and show you the strategies to help you lower your taxes, save money and avoid penalties when you prepare for your individual income tax return.

First, one of the best strategies to lower your tax liability is to contribute to your retirement plan, such as an IRA, Keogh or SEP. Contribution into qualifying retirement plans, such as IRA, can lower your Adjusted Gross Income (AGI) which is better than the deductions reported on your schedule A which could be subject to AGI level. For example, your medical bills could be deductible only if the amount is above 7.5% of your AGI. The due date for 2011 IRA contribution is April 17, 2012 and if you have Keogh or SEP, the due date could be October 15, 2012 if you file for extension. Contributions to these retirement plans not only reduce your current income (AGI) which could help you get more deductions on your schedule A, but also the gains are tax deferred. The result in 20 years could amount to tens of thousands of dollars more in your account than a regular investment account. It will be very tough to find better deals than this.

Furthermore, contributions to a Roth IRA may not give you the tax break for 2011, but the distributions from a Roth IRA is tax free, so this could be even better than a traditional IRA for some others. Similar to a Roth IRA are the 529 plans and is not tax deductible in your federal income tax return when the contributions are made. However, a 529 plan distributions are tax-free as long as they are used to pay for qualified higher education expenses for a designated beneficiary. But be careful, the money in the 529 plan could have a negative effect on your child’s FAFSA (Free Application for Federal Student Aid) and grants. The government will assume that you have the money to pay for your child’s college. The solution is to have the child’s grandparents own the plan. In the eyes of FAFSA, the assets do not exist in this way.

Second, make sure to get the social security number (or Tax ID) for your dependents. Without the social security number, the IRS will deny the personal exemption which could be $3,700 and additional $1,000 for child tax (for qualifying child). If you have a new born baby and don’t have the social security number by the tax return due date, then file an extension. If you are divorced, make sure that only one parent can claim the child. The IRS has a sophisticate system to match and compare your return with your ex-spouse and if both parents claim the same child then the IRS will find it and contact you.

Third, good record keeping can save you from big headaches when you prepare to meet your CPA for your tax return. This is even more crucial if you are a small business owner. According to the IRS a small business owner should keep their documents such as gross receipts, proofs of purchases, expense documents, documents to verify your assets including purchase and sales invoices, real estate closing statements and canceled checks. Remember that good record keeping not only helps you reduce the time and stress about getting the information to your CPA before the tax return due date, but also it helps you respond to the IRS quickly, if they ever contact you.

Lastly, file it on time. If you don’t have all of the information to file the return by April 17th, then use the Form 4868 to file an extension. This form gives you an extra 6 more months to complete your income tax return, but you must make a reasonable estimate of your 2011 income tax liability. The late filing penalty is 4.5% per month and could be up to 22.5% of your taxes due. The late payment penalty is 0.5% per month and could be up to 25% of your taxes due. So try to file it on time or file for an extension with a reasonable estimate of the tax payment to avoid unnecessary penalties.

If you have questions, need additional information or would like to discuss more on the above topic, please feel free to call us and/or visit our office. We are a Riverside CPA firm that brings 30 years of experience to the tax preparation table.

Filed Under: accounting, tax Tagged With: certified public accountant, cpa riverside, riverside accountant, riverside cpa, tax preparation, tax preparation riverside, tax strategy

US Tax Law, Past, Present, and Future.

January 22, 2014 by Leave a Comment

When the United States was born, there were not that many taxes for its citizens of a newly formed nation. The government’s major source of revenue came from the sales taxes imposed on trading tobacco, sugar, slaves and property sold at auctions; however it did not have income taxes like we experience now. It is hard to believe but back then things were a lot simpler than now and even the US government did not need a lot of money to operate as a functioning government. In fact, even the sales tax was removed in 1817 because the US government could function as a government from just tariffs collected from imported goods. The first income tax law was introduced during the American Civil War in 1861 to support the war effort. Under this new income tax law, 3% of all income over $800 was collected. Compared to our highest tax bracket today, which is 35%, it is incredibly low despite the fact that it was during the darkest and bloodiest moment is US history. The federal income tax became a permanent part of our lives in 1913 when the 16th amendment to the constitution was made which gave Congress real power and authority of collecting income taxes from its citizens. The 16th amendment states “Congress shall have power to lay and collect taxes on incomes, from whatever source derived”. The important key words are “whatever source”. This means that from this point on the US government is your business partner for whatever you do and therefore whatever you earn from your work or business, you now have to legally share it with the US government.

The current federal income tax is just a part of many taxes that we are paying every day. On top of federal income taxes, there are payroll taxes, excise taxes, sales taxes, tariffs, gift taxes, unemployment taxes, state income taxes, property taxes, estate taxes, and self-employment taxes. The federal income tax is a progressive tax meaning that as you make more, you will be taxed more. For 2011, the income tax bracket consists of 10%, 15%, 25%, 28%, 33%, and 35% for individuals and C corporations could be taxed up to 39% of its income. The today’s top tax rate of 35% for an individual and 39% for a business seems a lot, but during War World 2, the top tax bracket for an individual was an incredible 94% to pay for the war effort. The US income tax is unique in that no matter where you live, Korea, India, or Germany, as long as you are a US citizen or legal resident of the US, you will be subjected to US income taxes. In other words, even if you are living alone in the North Pole and earn money by fishing or living in a remote desert of Africa and make money by hunting and never lived in the US, as long as you are a US citizen, you are subject to the US tax law. Most of the other major countries do not apply income tax or estate tax law to expatriated citizens. Looking only from the outside, the current tax law looks extremely complex, more advanced, strict, and rigid than the foreign tax law, but if you look from the inside, there are many loop holes that legally allow the tax payers to pay less tax or pay no tax at all. In 2006, out of 134,372,678 individuals who filed a federal income tax return, about 32.58% didn’t pay any federal income taxes and according to CNN Money that percentage grew to 47% by 2009. Of course with our current bad economy, the government policy to give away tax credits and deductions contributed to this growth of non-income tax payers thus, it is wise to go over the tax credits and deductions carefully to make sure that you did not miss out any new tax credits and deductions.

So what is the future for income taxes? There are some very radical tax reform ideas among a very small group of politicians in Washington such as Rep. John Linder who sponsored the Fair Tax Act of 2003 which now is supported by the House Majority Leader Tom DeLay (Rep. Texas). The idea is to replace the overly complex tax laws, loop holes, and unfair current federal income tax with a flat 23% sales tax on final sales of goods and services. The suggested tax reform will never be passed and, in fact, no country in the world is planning to abandon the income tax or is even considering a personal expenditure tax to replace the income tax, but we can understand where this radical idea came from. The federal income tax is not just complex for tax payers, but also for tax collectors and law makers. For the past almost 100 years, congress has been fixing the loop holes and improving the tax law by making the tax law even more complicated. Every year more and more updates and modifications are added to the current tax laws, but rarely taken out. We can positively assume that it will get even more complicated in the future.

If you have questions, need additional information or would like to discuss more on the above topic, please feel free to call us at (951) 781-2910 and/or visit our office.

Grant Yi is an accountant in Riverside, CA at Trimble & Company. The company provides comprehensive small business accounting services throughout Southern California.

Filed Under: accounting, tax Tagged With: cpa riverside, riverside cpa, Riverside tax preparation, US tax Law, US Taxes

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Trimble and Company

4201 Brockton Ave # 100
Riverside, California 92501
United States (US)
Phone: 951-781-2910
Fax: 951-788-6135

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Company Profile:

James W. Trimble's public accounting experience goes all the way back to 1978. Now a managing shareholder of Trimble & Company, he was initially with a local firm in the Palm Springs area, until 1984 when he started his own firm in Riverside. Trimble & Company has two shareholders, three CPAs, and 15 employees in total, several of whom have been with the firm for over 20 years. Learn more...

Recent Posts

  • Upcoming Changes for our Review, Compilation, and Financial Statement Preparation Clients
  • Healthy Workplaces, Healthy Families Act of 2014: What it Means for Employers
  • New Clients: Get $50 Off Preparing Your 2014 Federal Tax Return
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Trimble and Company
4201 Brockton Ave # 100
Riverside, California 92501
United States (US)
Phone: 951-781-2910
Fax: 951-788-6135
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