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Tax Audit Red Flag #2 – You Have Assets Overseas

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

Tax Audit Red Flag #2 – You Have Assets Overseas
Most people would rather pay a visit, fee and all, to the proctologist’s office than endure an IRS audit. In fact, many would agree that proctologists are kinder and friendlier than the average IRS auditor. Knowing the red flags that trigger audits may not prevent all audits, but it can help you invite less IRS scrutiny or unwanted attention.

In recent years, the IRS has turned its focus to US accounts in foreign banks. Where US  citizens once set up tax shelters by banking in places like Switzerland or the Cayman Islands,  new laws now levy substantial fines for failing to report holdings in foreign banks.

What has changed?
The Foreign Account Tax Compliance Act was created. It requires overseas banks to provide the IRS with information on American accounts worth at least $50,000. The law doesn’t simply  involve accounts that have $50,000 in them at tax reporting time, but each account that has  contained $50,000 at any time during the tax year.

Of course, you’re required to report foreign bank accounts that have totaled $10,000 or more at any one time during the previous year via FinCEN Form 114. If you have even more financial  assets offshore you may need to attach IRS Form 8938 as well. This is necessary to avoid a  forceful, and costly, smack to the hand by the IRS.

Taking the right action now can save you the painful experience of an IRS audit in addition to
potentially substantial penalties and fines. It’s definitely in your best interest to avoid waving this particular red flag in front of the bull the IRS has become in recent years.

The penalties of undisclosed (i.e. hidden) offshore accounts are no small potatoes; those that
willfully fail to disclose overseas assets include a hefty fine of $100,000 or 50 percent of the balance, whichever is greater.

Be on the lookout for the next article in the series: Tax Audit Red Flag #3 – Forgot to Report Income.

Filed Under: IRS

Tax Audit Red Flag #1 – Your Ex Sends Letters to IRS

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Tax Audit Red Flag #1 – Your Ex Sends Letters to IRS

You’ve just become a member of an elite club. You’d think a hefty congratulations was in order. Think again. This membership isn’t elective or optional, and the dues can be much more than that prestigious country club you’ve been dying to join. Welcome to the IRS Audit club. Or not.There’s no reason to pay more than what the law requires when it comes to taxes. At the same time, however, you don’t want to go waving a big, bright red flag in front of the IRS either.The good news is that the average person isn’t the most likely to pique the interests of the IRS. The bad news is there are a number of triggers, including an ex-spouse contacting the IRS, that cause the friendly IRS agent to take a closer look at your return.

Revenge of the Ex
Divorces often get ugly. Sometimes so much so, that the ex is out for revenge. Some ex’s do so by going after your reputation – by way of the Internal Revenue Service. They do this through a “Dear IRS” letter with “You” as the subject.

All your ex needs to do to wave this red flag is write a seemingly credible letter to the IRS. It doesn’t even need to be your former spouse. Sometimes former in-laws, employees, and business partners are the ones who do the dirty deed.

In many cases, the allegations are completely false. Some claims have been of ex-spouses owning brothels, failing to report income, laundering money, and actively committing major financial crimes.

Regardless of the allegation though, these informants can cause the tax man to look at your return with a fine-toothed comb. This is just one more reason to seek a more amicable divorce to prevent red flag raising retaliatory letters to the IRS.

Be on the lookout for the next installment: Tax Audit Red Flag #2 – You Have Assets Overseas to learn more about what you can do to avoid involuntarily joining the IRS tax audit club.

Filed Under: IRS

Newest Tax Haven for Wealthy Americans – Puerto Rico

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

Newest Tax Haven for Wealthy Americans – Puerto Rico
Puerto Rico took a huge hit during the recession. Unfortunately, tourism, which once brought in big dollars to the region has not fully recovered leaving economic and government leaders to seek new alternatives to bring revenue and investments into communities large and small throughout Puerto Rico. One of the primary methods leaders chose for attracting new money revenue and investments into the region is through significant tax breaks.

Act 22

Act 22, known as the Act to Promote the Relocation of Investors to Puerto Rico, provides investors and traders who maintain residences in Puerto Rico for a minimum of 183 days per year to pay no local or federal taxes on capital gains. They also pay no local taxes on income resulting from most dividends or interest income for a period of up to 20 years. Even people who continue employment with a company on the U.S. mainland while living in Puerto Rico are exempt from paying U.S. federal taxes on their salaries.

U.S. citizens must still pay federal income taxes on dividends and interest income from mainland companies, but the tax savings are significant enough that major investors are taking interest – and inviting friends.

The Beauty of Puerto Rico as an American Tax Haven

These changes, combined with the modern infrastructure available in cities like San Juan, make Puerto Rico an attractive choice for investors – never mind the amazing weather and stunning beaches. As far as tax havens go, this is a beautiful choice when it comes to tax benefits easily reaching six figures for many investors and creature comforts alike.

The real beauty of turning to Puerto Rico as a tax haven for Americans is the fact that you don’t have to sacrifice your citizenship in order to do so.

What Does Puerto Rico Get out of this Deal?

Puerto Rico’s unemployment rate still remains high. The New York Times places it in the range of 13 percent which makes it one of the highest in the U.S. The per capita income, also according to the New York Times for Puerto Rico is also around $15,200, which is half of Mississippi’s per capita income. Mississippi is the poorest state in the U.S. to put things into perspective.

The plan is for the new investments and spending on the island to create jobs that will spur even more spending among the local population. The goal is to bring in high dollar investors who are millionaires, if not billionaires, in order to bring some of the fruits of their labors into Puerto Rico. With a growing discontentment among high income earners in the U.S., it may be an achievable goal.

Proceed with Caution

However, some tax experts are urging caution before diving right in. The U.S. is cracking down on what it considers tax dodging and those who have corporate interests on the mainland might want to avoid any appearance of becoming “unpatriotic” in the eyes of investors and consumers. Consider carefully and consult your accountant before taking the plunge to minimize your risks if this is something you’re considering.

5 Ways Life Insurance Benefits Small Business Owners

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

5 Ways Life Insurance Benefits Small Business Owners
The primary purpose of life insurance is to pay a death benefit – almost always tax free – when the insured dies. We’re all familiar with the need to insure the life of a breadwinner to protect a spouse and children from financial catastrophe. But business owners have some special needs to address, too, over and above their role as breadwinners for their families. Let’s take a closer look at the use of life insurance in a business context.

Life Insurance as an Employee Benefit

You can buy life insurance for your employees as an employee benefit, similar to any other benefit, under Section 7702 of the Internal Revenue Code. Generally, the law lets business owners deduct the premiums for up to $50,000 of term life insurance for their employees. This is important in a society where employees are more and more used to getting insurance coverage from work. In some cases, this coverage may be the only life insurance a worker has.

Funding Buy Sell Agreements

If you have a business with one or more partners or other shareholders who are active in managing or running your business, you should have a buy-sell agreement in place. In a nutshell, this is a written agreement that the survivor will purchase the deceased partner’s interest in the business for cash from the deceased’s estate ? and that the deceased’s estate will sell.

If you fail to create a buy-sell agreement, you may find yourself in business with your partner’s spouse. Or worse, your partners’ spouse’s lawyers. Your partner’s heirs may have no expertise in or interest in running your business, which could create big problems down the road. They will still be entitled to your ex-partner’s share of any dividends or distributions from the business, and will demand their fair share of cash even though they may contribute little or nothing to the business’s operation. A buy-sell agreement protects both sides by ensuring the heirs get the cash they need, while you get to continue running the business.

And where does the cash to fund the agreement come from? Life insurance. Each partner can own a policy on each of the other partners, or the business itself can own the policy.

Key Person Insurance

Does your business have a key salesperson, manager or technician who is so productive, or so crucial to your operation, that it would severely damage your business if this person were to unexpectedly pass away? If so, you have an insurable interest in that individual, and you may want to consider owning a policy on him or her. If the worst happens, the policy will provide your business with enough cash to keep functioning while you search for, hire and train a replacement. This could cost tens or even hundreds of thousands of dollars.

Bonus Plans

Some life insurance policies – specifically “permanent” insurance policies such as whole life or universal life policies, build cash value. The policy owner can use this cash value for any purpose. In some cases, you can structure a plan to award the cash value to a key employee as a bonus after a certain number of years of service. This so-called “golden handcuffs” plan gives your top employees a powerful incentive to stay with your company, and as time goes by, it gets very difficult for competitors to “poach” your key people.

Supplemental Retirement Planning

Cash value plans can also be a great way for you to supplement your retirement income, without all the many restrictions that come with standard retirement plans such as 401(k)s and IRAs. You can restrict life insurance-based retirement plans to owners and executives, for example, to supplement your other retirement savings. By purchasing a modest-sized death benefit, and funding the policy with substantial premiums, you can build significant cash value over time.

You can use this for retirement or even as a source of reserve capital for your business. You don’t have to wait until you are age 59 1/2 to use the money. Or you can simply keep the policy in force and use it for the purpose for which it was designed: Life insurance.

There are nearly as many ways to use a life insurance policy to benefit a business or business owner as there are businesses. Every business is different.

5 Common Mistakes Rental Property Owners Make

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.
5 Common Rental Property Income Mistakes
Entering the property rental market is a common way to increase your net worth in the long run as well as generate some passive income in the short run. If you are new to the landlord business though, you may fall prey to some common rental property income mistakes when you file your tax return. Of course, the best way to ensure that you don’t make any of the following mistakes is to have a professional prepare, or at least review, your return; however, knowing what the most common mistakes are is a good place to start.

Not declaring rent when it is received – any rent received by a landlord must be declared in the year it is received. It is common, for example, to require a deposit as well as first and last month’s rent when leasing a property. Even though the last month’s rent isn’t actually due yet it must be declared in the year when you receive the funds.
Security deposits count as income if not returned – if you collected a $2,000 security deposit and find that you need to keep $1,000 of it when the tenant moves out to repair damages and/or clean the property you need to declare the $1,000 as income. Of course, you may also have corresponding expenses if the funds are used to complete repairs.
Expenses paid by a tenant are income to the landlord – if your tenant fixes something on the property, the money spent by the tenant is actually income to the landlord if the cost of the repairs is deducted off the rent. Again, you may also have a corresponding deduction for the cost of the repairs, meaning you need to declare both income and expenses.
Property and furnishings are depreciated differently – property is often rented “furnished”. You may deduct the cost of the furnishings but make sure you calculate the deduction properly. Residential rental property is depreciated over 27 1/2 years while furniture is depreciated over just seven years.
Failing to document – if it isn’t in writing is doesn’t count! Everything from your original lease agreement to the cost of replacing a lost key should be documented in writing. Not only does this ensure that you will get credit for all your allowable deductions but is also protects you in the event of an audit by the Internal Revenue Service.

By avoiding these five common rental income tax mistakes you can dramatically reduce the chances of an error on your tax return.

Are You Eligible for Health Insurance Tax Credits?

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Tax Tips are not a substitute for legal, accounting, tax, investment or other professional advice. Always consult with your trusted accounting advisor before acting upon any Tax Tip.

Are You Eligible for Health Insurance Tax Credits?

The Affordable Care Act (ACA) can save your small business money through its tax credits.

If your small business has employees, you’ve undoubtedly been paying attention to the news coming out of Washington, D.C., about the Affordable Care Act (ACA). This law was designed to be implemented in waves, rather than all at once, and there have been major changes since it was passed and signed.

Some elements of the ACA have already been incorporated into the health care industry. One of these benefits is a tax credit for the health insurance costs you pay for your employees. For the years 2010-2013, small businesses could take a tax credit of 35 percent of the premiums paid for health insurance. Small tax-exempt businesses got a credit of 25 percent.

Starting in 2014, small business owners can take a tax credit up to 50 percent of the premiums they paid for health insurance. Tax-exempt small business owners’ credit will be 35 percent. This credit can be claimed for two consecutive tax years.

To be eligible for this credit, you will have to meet the following requirements:

  • You must pay at least 50 percent of the cost of employee-only health care coverage for each of your employees.
  • You must also have fewer than 25 full-time equivalent employees. This means the average number of hours worked by your employees is greater than or equal to 40 hours a week.
  • The average wage of the employees covered must be less than $50,000 per year. This amount will be adjusted for inflation every year.

You will have had to pay premiums on behalf of your employees who are enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace. However, if you qualify for an exception to the requirement to buy health insurance through a SHOP Marketplace, you can still take this credit.

This credit is refundable. This means that if you are a small business employer and did not owe tax during the year, you can get a refund on your return, which can be carried back or forward to other tax years. In addition, if you are an eligible small business, you can claim a business expense deduction for the premiums that are in excess of the credit.

In other words, not only do you get to take a credit for these costs, but you can also take a deduction for employee premium payments.

However, keep in mind that you are eligible to receive the credit and have it be refundable as long as it does not exceed your income tax withholding and Medicare tax liability. Further, if you are a small tax-exempt employer, any refund payments you receive are subject to sequestration.