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We get a lot of clients that ask us when their Social Security Benefits become taxable. The following information is provided bythe Social Security Administration and clearly explains when your Social Security Benefits become taxable. This is also available by
CLICKING HERE
Should you need assistance or have questions about your Social Security Benefits and their taxability, contact Schutte & Hilgendorf, CPAs, providing tax planning and preparation, auditing, accounting and QuickBooks consulting to the greater Yavapai County. Call us at 928-778-0079 or email at info@prescottaccountants.com
Some people have to pay federal income taxes on their Social Security benefits. This usually happens only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits.
No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules. If you:
- file a federal tax return as an “individual” and your combined income* is
- between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- more than $34,000, up to 85 percent of your benefits may be taxable.
- file a joint return, and you and your spouse have a combined income* that is
- between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
- more than $44,000, up to 85 percent of your benefits may be taxable.
- are married and file a separate tax return, you probably will pay taxes on your benefits.
*Note:
Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your “combined income“
Each January you will receive a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits you received in the previous year. You can use this Benefit Statement when you complete your federal income tax return to find out if your benefits are subject to tax.
If you do have to pay taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or choose to have federal taxes withheld from your benefits.
For more information about taxation of benefits, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
Provided by Professional Education Services, LP. :
For further information or questions, contact Schutte & Hilgendorf, pllc – CPAs. We offer free initial consultations. Schutte & Hilgendorf, pllc – CPA’s, is a full service public accounting firm providing tax planning, preparation, audit, accounting, and QuickBooks consulting to individuals, small businesses, non-profits, and homeowners associations in the Prescott and greater Yavapai County area. Call us at 928-778-0079 or visit www.prescottaccountants.com
Summary of the American Taxpayer Relief Act of 2012
On January 2, 2013 President Barack Obama signed into law the American Taxpayer Relief Act of 2012. Passage of this Act averted the so-called “fiscal cliff” and made “permanent” changes to the tax code. As with all Congressional legislation, however, no change is truly permanent so readers should understand that any of the components of the legislation could be changed in the future.
In a nutshell, the American Taxpayer Relief Act of 2012 extended specific provisions of two major Bush-era tax bills, the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs Growth Tax Relief Reconciliation Act of 2003. A compromise measure, the Act gives permanence to the lower rate of much of the Bush tax cuts, while retaining the higher tax rate at upper income levels that became effective on January 1 as a result of the expiration of the Bush tax cuts.
A. MAJOR TAX PROVISIONS
The following is a summary of some of the major tax provisions of the Act:
1. Individual Income Tax Rates
The American Taxpayer Relief Act of 2012 retains the 10%, 15%, 25%, 28%, and 33% income tax brackets. The 35% tax bracket ends at $400,000 for single filers. Above this threshold, there’s a new 39.6% tax bracket. Thresholds for the new 39.6% bracket for 2013 will be:
- Married Filing Jointly: $450,000 of taxable income;
- Qualifying Widow(er): $450,000 of taxable income;
- Head of Household: $425,000 of taxable income;
- Single: $400,000 of taxable income; and
- Married Filing Separately: $225,000 of taxable income.
2. Capital Gains Rate
The American Taxpayer Relief Act of 2012 retains the 0% and 15% tax rates on qualified dividends and long-term capital gains, and adds a new 20% tax rate that would apply to taxpayers who fall within the new 39.6% tax bracket. Which capital gains tax rate will apply depends on what tax bracket a person is in. The new capital gains tax rates for 2013 and future years will be:
- 0% applies to capital gains income if a person is in the 10% and 15% tax brackets;
- 15% applies to capital gains income if a person is in the 25%, 28%, 33%, or 35% tax brackets; and
- 20% applies to capital gains income if a person is in the 39.6% tax bracket.
3. Alternative Minimum Tax
The American Taxpayer Relief Act of 2012 provides the following AMT exemption amounts for 2012, and provides that these amounts will be indexed for inflation annually:
- Married Filing Jointly: $78,750;
- Qualifying Widow(er): $78,750;
- Single: $50,600;
- Head of Household: $50,600; and
- Married Filing Separately: $39,375.
4. Estate Tax Rates
The American Taxpayer Relief Act extends the $5 million exclusion. The new top tax rate for estates is 40%.
5. Pease Limitation
The American Taxpayer Relief Act resulted in reinstatement of the so-called “Pease Limitation” that caps the amount of itemized deductions high income earners are able to take. Under the new law, itemized deductions are limited for the following taxpayers:
- $300,000 for married couples and surviving spouses;
- $275,000 for heads of household;
- $250,000 for unmarried taxpayers; and
- $150,000 for married taxpayers filing separately.
These levels will be adjusted for inflation after 2013.
6. Personal Exemption Phaseout
The American Taxpayer Relief Act also phases out the amount of the personal exemption high earners are entitled to take. The total amount of exemptions a taxpayer may take is reduced under the new law by two percent for each $2,500 or portion thereof over which the taxpayer’s adjusted gross income exceeds specific levels, i.e., $300,000 for married couples and surviving spouses.
B. MISCELLANEOUS PROVISIONS
The Act contains numerous other provisions relating to both tax deductions and tax credits, including the following:
- The student loan interest deduction is permanently extended. The American Taxpayer Relief Act eliminates the rule that the deduction can be claimed only during the first 60 months of repayment;
- Mortgage insurance premiums will continue to be deductible as part of the mortgage interest deduction through the end of 2013;
- The sales taxes deduction, in lieu of a deduction for state income taxes, is temporarily extended through the end of 2013;
- The charitable deduction for contributing real property for qualified conservation purposes is temporarily extended through the end of 2013;
- The above-the-line tuition and fees deduction is temporarily extended through the end of 2013;
- The child tax credit remains unchanged and is permanently extended. The maximum amount of the child tax credit is $1,000, and the credit is partially refundable. However, the provision that reduces the earnings threshold for the refundable portion of the child tax credit to $3,000 will expire at the end of 2017;
- The dependent care tax credit remains unchanged and is permanently extended. Daycare expenses up to $3,000 for one child and $6,000 for two or more children qualify for the tax credit, and these amounts are not indexed for inflation;
- The adoption credit is permanently extended. The credit is worth up to $10,000 (indexed for inflation); and
- The American opportunity tax credit is extended temporarily through the end of 2017.
- The American Taxpayer Relief Act also allows the two-year old payroll tax cut to expire, meaning employees will see immediate reductions in their paychecks.
In all, the bill included $600 billion over ten years in new tax revenue. The Act did not permanently address the spending cuts that were set to take effect if the legislation had not passed. Rather, it merely extended by two months the time Congress has to reduce spending or have the so-called “sequestration” law take effect that will have a major impact on federal spending.
If you have questions related to any of the above, call Schutte & Hilgendorf, pllc – CPA’s for more information and a free initial consultation. Schutte & Hilgendorf, pllc – CPA’s, is a full service public accounting firm providing tax planning, preparation, audit, accounting, and QuickBooks consulting to individuals, small businesses, non-profits, and homeowners associations in the Prescott and greater Yavapai County area. Call us at 928-778-0079 or visit www.prescottaccountants.com
The link to the article below was published on the National Council of NonProfits’ website. It contains lots of facts about the Small Employer Health Credit and how to claim the credit, which is applicable to both for-profit and nonprofit entities with 25 or fewer full time employees.
Small Employer Health Credit
If you have questions about this credit or need assistance in claiming it, contact Schutte & Hilgendorf, a full service CPA firm, providing auditing, accounting and tax services for individuals, small businesses, non-profits and homeowners associations throughout Yavapai County and Northern Arizona. Call us at 928-778-0079 or email info@prescottaccountants.com
The attached article was written by John E. McEnroe, Jr. and was such a great summary of steps that every Non-Profit should follow, we thought we’d give John credit here and share the article on our website. We found the article when searching for information on the little-mentioned topic of Non-Profit Arizona Registration with the Arizona Secretary of State.
We have observed that many of our non-profit charitable clients are not aware of the registration requirement with the AZ Secretary of State before accepting any charitable donations. Many Non-Profits feel that receiving the IRS determination letter for a 501(c)(3), incorporating through the AZ Corporate Commission, and registering with the AZ Department of Revenue satisfies all setup requirements. Apparently, not so. This doesn’t seem to be widely enforced by the Secretary. An annual renewal is also required every September. Although free, if filed late, there is a $25 fee.
Click on the link below for a copy of the very informative Non-Profit Registration and Reporting Requirements article:
NPO Registration and Reporting_2010
Click here for a link to the Registration Form for the AZ Secretary of State:
SOS Reg Form
Please call Schutte & Hilgendorf, CPAs with any questions related to this article or any non-profit related audit, accounting or tax question. Schutte & Hilgendorf is a Prescott CPA firm specializing in providing audit, tax and accounting services to non-profits, for-profits, and homeowners associations. We also provide tax planning and preparation, bookkeeping, and QuickBooks consulting to individuals and small businesses. We service the greater Yavapai County and Northern Arizona Region. Call us at 928-778-0079 with any of your accounting, auditing or tax needs. Check the rest of our website for constant updates at www. prescottaccountants.com
For November
QuickBooks Tips And Tricks: Make it Yours
No matter which version of QuickBooks you’re using, there are always ways to make your workday easier. As with any software, we tend to learn the features we need and not much more. But small changes in the way you operate can add up to significant time savings and more accurate files. If you jumped into QuickBooks without a thorough introduction, consider these tips.
Click here for the November 2011 QuickBooks Tip
This tip brought to you by Schutte & Hilgendorf, CPAs, a Prescott firm serving the greater Yavapai County, provides auditing, accounting, bookkeeping, tax preparation and planning, and QuickBooks consulting and setup to individuals and small busienesses. Contact us for a free initial consultation at 928-778-0079 begin_of_the_skype_highlighting 928-778-0079
Click on the link below to get this month’s Quickbooks Quick tip. Check back monthly for more easy, time-saving tricks.
QuickBooks Tip for March 2011: MAKE A STATEMENT!
QuickBooks Helps You Make a Statement
How do you let customers know they owe you money? Probably by sending invoices. And how’s that working for you? If your customers are all conscientious and pay on time, maybe that’s all you need to do. But perhaps you need to consider doing at least part of your billing by dispatching statements. These forms have their drawbacks. For example, you can’t include sales tax or discounts on them. You can’t group related charges and subtotal them. And your customization options are weaker than in invoices.
For more QuickBooks training tips, contact Schutte & Hilgendorf, CPAs, a full service accounting firm providing Prescott and the greater Yavapai County with excellent tax, accounting, auditing, bookkeeping and QuickBooks consulting services. We can be reached at 928-778-0079.
Click on the link below to get this month’s Quickbooks Quick tip. Check back monthly for more easy, time-saving tricks.
February 2011 QuickBooks Tip: Memorizing Transactions
For more QuickBooks training tips, contact Schutte & Hilgendorf, CPAs, a full service accounting firm providing Prescott and the greater Yavapai County with excellent tax, accounting, auditing, bookkeeping and QuickBooks consulting services. We can be reached at 928-778-0079.
Small businesses whose books are audited—by a hired certified public accountant, not the Internal Revenue Service—improve their chances of getting a loan, and at far better terms, than businesses with less scrutinized financial statements, a new study shows.
Yet even as owners continue to struggle with tight credit, few can afford the time, effort or cost of preparing complex financial statements, let alone having them audited, small-business owners, lenders and accountants say.
“Banks love when you have audited financials because they view it as a form of insurance,” says Buzz Rose, a certified public accountant in Pittsburgh. “But audits have become very expensive and to have one done ‘just in case’ would seem to be a waste of time and money.”
But the benefits might outweigh the costs.
Based on data from more than 10,000 closely held companies—about half of which have less than 500 employees—a study by the University of Chicago Booth School of Business found audited businesses save an average of $6,900 for every $1 million in outstanding debt every year as a result of lower interest rates, which were more than half a percentage point below rates paid by nonaudited businesses. For a loan of $3.3 million, the average size of loans analyzed in the study, the savings was about $23,000.
A small-business audit costs anywhere from $5,000 to $75,000, depending on the size of the company, the complexity of its data and other factors—typically double the cost of a financial statement review, the next highest level of CPA-verified assurance after an audit.
An audit provides third-party assurance that a company’s financial statements are correctly prepared and based on verified business data, while a review shows the statements are at least internally consistent with data provided by management.
“There appears to be a very real cost benefit to getting an audit, beyond the obvious value of having your financial statements in order,” says Michael Minnis, a Booth School assistant professor of accounting who led the study. The Booth School study is expected to be published in the Journal of Accounting Research in May.
Similarly, a joint study last year by Michigan State University and Indiana University found small businesses with audited financial statements were “significantly less likely” to be denied credit from banks.
David Leuthold, chief executive of Century Negotiations Inc., a North Huntingdon, Pa., consumer-debt settlement firm, says he started having his books audited annually in 2005 to double-check his own bookkeeping, paying about $8,000 an audit. The move paid off when he applied for a $100,000 line of credit the following year.
“The bank required audited financial statements,” says Mr. Leuthold, whose company made $8 million in revenue last year. Even without audited books, he believes the bank might have approved the loan, though at less favorable terms. “We had what they wanted, so it was definitely worth it,” he says.
Still, for many small businesses seeking a loan, lenders say an audit is costly and unnecessary.
“Audits provide good information. The more concrete information a lender can get, the better,” says Tom Burke, the director of Wells Fargo’s Small Business Administration lending division. But he questioned the necessity of audits for every business.
Mr. Burke says a business with less than $1 million in annual revenue can ask a CPA to prepare a compilation, which is a cheaper, unaudited financial statement based on recorded sales, inventory and other data. Since owners often use these statements to manage daily operations—and they’re prepared by CPAs—lenders have some assurance of the statements’ accuracy in making loan decisions.
“I’d hate to see people taking steps that aren’t necessary, or that they can’t afford,” Mr. Burke says.
Small-business accountant David Wilke, of Carnegie, Pa., says he helps borrowers and lenders negotiate loan terms based on mutually acceptable levels of assurance, ranging from compilations to audits. He says a CPA “adds value by determining what a bank wants and what a business can provide at an early stage,” rather than trying to convince every client to get audited.
Mr. Rose, the accountant in Pittsburgh, says it’s only worth going through an audit—which can require days and even weeks of a manager’s time—when a business owner has a loan in hand that’s contingent on providing audited financial statements.
Audited or not, less than a quarter of businesses with fewer than 500 employees keep financial statements of any kind, according to the Federal Reserve Board’s National Survey of Small Business Finances.
“There’s a lot of criticism that it’s expensive and difficult to prepare and audit your financial statements,” says Teri Yohn, an Indiana University associate professor of accounting who sits on the Financial Accounting Foundation’s blue-ribbon panel on private-company accounting standards. “But there are clearly benefits.”
Schutte & Hilgendorf, PLLC, a Prescott based CPA firm provides audits and reviews to small businesses, government entities, non-profit organizations, and homeowners associations. We also provide tax preparation and planning services, QuickBooks consulting and training and payroll and sales tax services to individuals and small businesses. Contact us for pricing or more information about how we can help you!
How many non-profit boards hire an outside auditor?
Eighty-four percent of the respondents of a recent BoardSource governance survey say that they annually hire an auditor to conduct an external financial audit. Smaller organizations are less likely than large organizations to hire an auditor.
Here are five key ways to maximize the audit process:
Be sure the board is in the audit driver’s seat. The nonprofit board has the responsibility to oversee the audit process. This includes assessing the financial controls, policies, procedures, and condition of the organization and overseeing the external auditor.
Review the auditor’s independence. The board should be certain that the auditor is independent and objective in performing duties.
Choose your auditor carefully. Even with rigorous efforts by professional bodies governing the practice of Certified Public Accountants to improve the quality of audits, not all audits are created equal.
Invest your audit dollars wisely. While it is important to be certain the audit fees are reasonable in light of the quality and value of an audit, focusing too much attention on cost can be detrimental to the health of the audit and ultimately to the organization.
Properly use your audit committee. The audit committee should be the fulcrum of the financial reporting function. Start with an independent audit committee. The committee members should not be members of the nonprofit’s staff. Invite staff members to committee meetings to answer questions and to provide information.
Excerpted from the Maximizing the Audit Process by Dan Busby.
Should you have questions regarding this post or any other accounting or auditing needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.
IRS may recharacterize dividend payments to S shareholder-employee as wages
Watson, P.C. v. U.S., (DC IA 12/23/10) 107 AFTR 2d ¶2011-305
A district court has concluded that an S corporation shareholder-employee’s $24,000 salary in 2002 and 2003 was unreasonably low, and allowed IRS to reclassify as salary over $67,000 in dividend payments to the officer during each of those years. The corporation will also owe employment taxes on the reclassified dividend payments.
RIA observation: This is a long standing compliance issue with IRS, which feels that many service professionals try to minimize Medicare and Social Security taxes by routing what would otherwise be self-employment income through an S corporation and then paying themselves a nominal salary. Since the amount of compensation that an S corporation pays its employee-shareholder is within the employee-shareholder’s discretion, he may have an incentive to claim less than a reasonable salary and take from the S corporation other payments (e.g., dividends) that aren’t subject to employment taxes.
RIA observation: In 2010, the House but not the Senate passed legislation that included a crackdown on service professionals who try to minimize Medicare and Social Security taxes by routing their self-employment income through an S corporation and then paying themselves a nominal salary (see Federal Taxes Weekly Alert 06/03/2010).
Facts. David E. Watson had a bachelor’s degree in business administration and a specialization in accounting. He owned a professional corporation (PC) called DEWPC that, since its inception, had elected to be taxed as an S corporation. Watson was its sole shareholder, employee, director, and officer, and was the only person to whom DEWPC distributed money during the years at issue. His $24,000 annual salary was documented in the corporate minutes. In selecting his salary, he did not look at what comparable businesses paid for similar services. For both years at issue, Watson received dividend distributions from DEWPC that totaled over $175,000 annually.
On Feb. 5, 2007, IRS assessed $48,519 in taxes, penalties, and interest against DEWPC for the eight calendar quarters of 2002 and 2003. It made these assessments after it determined that portions of the dividend distributions from DEWPC to Watson should have been characterized as wages paid to Watson that were subject to employment taxes. DEWPC later paid $4,063.93 toward these assessments and then filed a claim for refund of the payments. IRS denied the claim and DEWPC sued in district court.
Background. Employers are liable for FICA (Social Security) taxes on wages paid to their employees. (Code Sec. 3111) Fact Sheet 2008-25, August 2008 warns S corporations not to attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages. Fact Sheet 2008-25, August 2008 lists these factors that courts have considered in determining reasonable compensation:
• training and experience;
• duties and responsibilities;
• time and effort devoted to the business;
• dividend history;
• payments to non-shareholder employees;
• timing and manner of paying bonuses to key people;
• what comparable businesses pay for similar services;
• compensation agreements; and
• use of a formula to determine compensation.
DEWPC argued that IRS did not have the authority to recharacterize any of the dividend payments as compensation. DEWPC cited three federal court cases to support its argument.
Court’s ruling. The district court found that DEWPC’s position was undermined by IRS revenue rulings and case law. For example, in Rev Rul 74-44, 1974-1 CB 287, IRS concluded that dividends received by an S corporation’s two sole shareholders were wages for which the corporation was liable for FICA, FUTA and income tax withholding. In Joseph Radtke v. U.S., (DC WI 4/11/89) 63 AFTR 2d 89-1469, aff’d, (CA 7 2/23/90) 65 AFTR 2d 90-1155, a district court determined that certain funds designated as dividends were actually compensation for which an S corporation owed employment taxes. The district court was not persuaded by the rulings that DEWPC cited because in those rulings, the taxpayer was attempting to recharacterize funds, whereas in DEPW’s case, it was the government that was attempting to recharacterize the funds.
The district court said that the proper tax treatment of funds disbursed by an S corporation to its employees or shareholders turns on an analysis of whether the payments were remuneration for services performed. After reviewing the facts, the court concluded that DEWPC structured Watson’s salary and dividend payments in an effort to avoid federal employment taxes, with full knowledge that the dividends paid to Watson were actually “remuneration for services performed.” The court believed that a reasonable person in Watson’s role as DEWPC’s sole shareholder, officer, and employee would be expected to earn far more than a $24,000 salary for his services. The court pointed out that Watson was an exceedingly qualified accountant, with both bachelor’s and advanced degrees, working as one of the primary earners in a reputable firm that had over $2 million in gross revenues in 2002 and nearly $3 million in 2003.
As a result of the ruling, DEWPC will owe employment taxes, penalties, and interest on the 2002 and 2003 dividend distributions to Watson that were reclassified as salary.
RIA Research References: For S corporation dividends as wages subject to withholding, see FTC 2d/FIN ¶ H-4329; TaxDesk ¶ 532,002.
Source: Federal Tax Updates on Checkpoint Newsstand tab 1/13/2011
Should you have questions regarding this post or any other tax needs, contact us at Schutte & Hilgendorf, PLLC, Prescott accountants serving the greater Yavapai County with tax, accounting, auditing, and QuickBooks consulting expertise.
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Schutte & Hilgendorf PLLC
3140 Stillwater Drive
Prescott, AZ 86305
Phone: 928-778-0079
Fax: 928-778-0261
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