Friday, November 28, 2014

Meet The Angels: Sylvia Barata

Sylvia Barata, Owner/President, Enrolled Agent
Sylvia started her tax career with the Internal Revenue Service. While there she answered tax questions, instructed IRS employees, monitored the toll-free line for accuracy, supervised, and made public appearances as the Media Relations tax expert. She was recognized for her expertise with many awards, including "Federal Employee of the Year." After 10 years, she decided to open her own company, Affordable Tax Service, and in 1985 became an Enrolled Agent. For nearly 38 years Sylvia has been preparing both individual and business tax returns. With her extensive knowledge, Sylvia often assists clients with personal finance planning customized to their needs. She is also trained in the special rules for clergy, people with disabilities, foreign tax issues, and small business needs. Sylvia is dedicated to bringing her clients the best service available. She and her staff of Tax Angels work diligently to help clients reach their goals.

Sunday, November 23, 2014

Tax Refunds: How Do They Work?

The best part about filing your taxes is getting the tax refund check! Chances are, you have been paying your taxes directly, or your employer has been withholding tax dollars from your paychecks. Many individuals overpay on their taxes, so they quickly file their taxes to get their tax refunds and soon as possible.
How do tax refunds work?
Your employer withholds some of money from your paycheck, based on a formula and the information you provided on your W4 when you got hired. This withheld amount is applied towards your tax payment to the IRS.
Because the formula is only based on the allowances you showed on your W4 and of your paycheck, it doesn't take other factors of your life into consideration. For example, hospital expenses, tuition payments, and childcare expenses aren't considered.
When you file your taxes, you have the opportunity to claim these expenses as deductions. A deduction reduces your overall income. Therefore, you owe less in taxes and are qualified for tax refunds.
Because you pay taxes to both the federal government and to the state, you might receive two tax refunds. The amount will depend on how much you have overpaid throughout the year. To make sure you receive both tax refunds, you will have to file your taxes with both the federal government and the state government.
How do I get my tax refunds?
To get your tax refunds, you have to file your tax returns. You can do this on your own or by hiring a tax accountant or specialist. You must also make the deadline, which is usually in April, or file for an extension. You can find more information on these topics at the IRS website.
Most individuals opt to file taxes on their own to save from having to pay professional fees to tax specialists. Thanks to the Internet, almost anyone can easily file their taxes online! There are many software and program choices available online.
You will need your W2's or 1099's, and other documents to file your taxes. Once you have these documents, you can use online tax filing programs to plug in your information. Tax filing programs are easy to use, with clear instructions and instant help. The program will guide you through each step, and will even help you find deductions to maximize your deductions and refund checks!
Where do I get my tax refunds?
You will usually receive your tax refund checks in the mail within three weeks. When you file your taxes online, you can also choose to have your tax refunds directly deposited into your bank account. All you need is your bank account and routing numbers, which you can easily locate at the bottom of your personal check. When you choose the direct deposit option, you'll receive your check in half the time.
The most important thing to remember about tax refunds is that you have to file to receive them. So save all your receipts and documents for deductions, and get your tax returns in by April - your money is waiting!

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Wednesday, November 19, 2014

10 Must Keep Tax Documents For Small Businesses

For record keeping, If you want to keep folders with appropriate labels it's fine. Label them neatly in a chosen file storage. But if you want to save some trees and GO GREEN, I suggest purchasing a data storage device such as a USB drive, etc. and the best format to use is Adobe's PDF file format. Some new business owners cannot afford to hire a professional bookkeeper or have no time to take a bookkeeping course so they can do this themselves, either way it's a must. I also suggest reading IRS Publication 583, Starting a Business and Keeping Records. So here you go, the 10 Must Keep Documents for your Small Business - for Tax Purposes:
1. Keep copies of all forms of payments from your clients. Checks, money orders, cashier's checks, etc. including copies of the invoices you've sent out. Make sure you attach payments to all invoices, in case of an IRS audit, it might raise a question if they don't see a payment to an invoice. Also, keep the check payments separate from loan checks, because they are not actually income but a debt.
2. Keep all bank statements, including all pages. For personal, business and investments accounts.
3. Keep all receipts. Everything that you paid for by cash, check or credit card. For all bills paid including utilities, contractors, advertising, marketing, business gifts, inventory, maintenance, professional help, salaries, furniture, equipment, etc...
4. Keep all purchase contracts for major purchases like trucks, cars, machines and commercial real estate. To be safe, keep them for 10 years to calculate depreciation and in case of audit. The IRS may request for original documents and go back 2, 5, 7 or more years.
5. Loan contracts, promissory notes, etc... for all business debts including business loans and cash advances. It should show pertinent information such as loan term, interest rate, monthly payment, creditor and collateral if there's any.
6. Keep individual and business income tax returns including all schedules and amendments if applicable. ALL state and federal government records such as business license, city and county filings, state tax documents, etc. for 10 years or more, yes I said 10 yrs. Better be safe than sorry.
7. Keep all payroll records, time cards, direct deposits, employee cash rewards, employee expense reports, reimbursements, payments to independent contractors, etc.
8. If you use a cash register for your business, keep the cash register receipts. Most cash registers nowadays has the ability to give you daily, weekly or monthly totals, which is great for your books.
9. Any Financial statements such as Balance Sheets. Profit and Loss, General Ledger, Retirement Summary, and other investments.
10. Bankruptcy papers, if any.
I strongly suggest to keep all of the above items for 7-10 years. For one particular reason: Peace of mind.

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Saturday, November 15, 2014

Sunday, November 9, 2014

Taxes, Our Share to Building a Better Nation

Taxes have been with us since the birth of civilization, taxes like, transport tax, tax relief, income tax and whatever word that may come before and after that one word which we call tax.
Indeed there is truth when we say that we are paying taxes since the very moment of our birth until such time that we leave this world, taxes obligates us to face it either which way but head on. That is the truth about it and nothing in this world could ever change that truth, because without it the civilized world as we know it would seize to exist and nobody would dare want for that to happen.
We often hear people complain of the taxes they pay, and some would even say that it is an unnecessary obligation that we should not respect to pay at all. Maybe they are just burdened with the obligation of taxes or they just need to realize the importance of taxes. Tax relief could very well help people like them and they can very well acquire such tax relief if only they know how and obligate themselves to learn the nook and cranny about taxes, its importance and its role in making our life better.
Why does the government collect taxes? Why do we obligate ourselves in paying taxes and what is in taxes that we need it to make our lives better? These are just a few questions that we asked ourselves when we face those documents on our mailboxes, billing us of our monthly, quarterly, and annual obligation to our governing institution. Are taxes really that essential to our daily living? The answer to that is a definite yes.
Taxes or tax money is the life source of this civilization we call government, without the financial aspect of taxes no government can sustain itself and therefore could not survive. Tax money funds the government's programs and activities which are needed to keep the wheel of the government rolling. Even taxes with tax relief paid diligently can really make a difference in changing and sustaining the lives of the people who are looking up to its governing body for protection, stability and survival. No civilization, government, city or municipality in the world exists today that does not collect taxes in one way or the other, either directly or not. Taxes are there for every commodity that we enjoy every day. Most of us do not even take time to learn about the taxes we pay every time we purchase something, yes we pay taxes every day of our lives and we often take it for granted.
When we pay taxes either with tax relief or not, the money goes to our government's treasury. There, it will be accumulated for some period until such time that it will be audited and presented unto our representatives, government officials, senators and budget officers. From there our elected representatives in the government will decide as to where to allocate this tax money or funds, Setting priorities and amount which are necessary to sustain a certain department or welfare, which the government is giving its constituents.
Social welfare, social security, public hospitals and all government entities that cater to the people are being funded by taxes. Taxes that the common people pay from purchasing basic commodities, through income taxes, tax relief and all the other taxes that we heard or read and pay for and even for some time complained about.
Some people do complain, while others are just content on keeping silent when it comes to the topic of taxes. While there may be a significant number of people who obligate themselves in paying taxes there are still a handful or even numerous sector who would rather prefer not to pay it if given the chance. For yes indeed not all are fortunate when we speak of financial status, and in this financially trying times most of us would likely prefer a tax relief if not a tax exemption if possible.
Tax exemption is really a catchy idea, and what person in his or her right mind would not accept such an invitation or notion. Indeed there are activities, events and endeavors which the internal revenue department would give you tax relief or much better yet tax exemption, but not without certain guidelines imposed and followed to the letter of course.
To learn more of how to you can file for tax exemption or tax relief you will have to visit the nearest internal revenue office near you.
The next best thing which you can have besides tax exemption is tax relief, which the government is giving to taxpayers who deserves such privilege. You do not have to be someone especial instead you only have to meet certain criteria to be able to acquire the privilege of tax relief.
There are many types of tax relief available and used by the internal revenue, and they are intended for specific criteria and target taxpayers. One type of tax relief may be available for a certain class of taxpayer while rendering it inapplicable to another. This way the taxes we pay are balanced and equally implemented to its rightful taxpayer.
These are only a few of the taxes that are being implemented to taxpayers, and each and every one of these taxes have been carefully researched, developed and made into law and implemented as to make it feasible and helpful towards the betterment of the government and the life of the taxpayer.
Indeed there are times when we the taxpayer would want to somehow ease our lives from taxes even for just some limited time or for certain percentage of what we are presently contributing. There is a solution indeed to it and taxpayers only need to understand how taxes, its collection, rules and regulations work in order to qualify for certain privileges which would greatly help in alleviating a taxpayer's obligation. One way is finding out how to acquire or pass for a tax relief. It really isn't hard, you just need to ask for help from the nearest internal revenue office near you.

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Thursday, November 6, 2014

Why Hire A Tax Preparation Service?

While the season of filing your returns is just around the corner, you're still contemplating whether hiring an individual or an accounting firm would carry out the entire procedure the best for your business. In the process of deciding, it may occur to you that you may not actually need any of their services.
You may be considering just ignoring any tax preparation services offers and doing everything by yourself. That would cost you less but let me ask you this - will that be a more efficient endeavor? Do you have enough expertise and knowledge about the finance field that you can meet all the necessary requirements with accuracy? If ever you're wondering, here are some things you need to consider why hiring tax preparation services would be an efficient endeavor.
Hiring Accountants Will Save You A Lot of Time
Running a business can be frustrating and hassling at times. There would be those situations that you will feel your hand is full of all the things to do. With an accountant or an accounting firm handling your tax preparation needs, it would take a lot of load off your shoulders to not worry about your finances for a moment and let them do the auditing, bookkeeping, accounting and financial reporting. This saves you a great deal of time. Now, you can work on other important things on your business. You can also use this time to spend quality time together with your family.
Hiring Accountants Cost You Less
Your business may be small this time, but it would be bigger in the coming years. With this kind of thinking, it would be a good investment to hire accountants or accounting firms for your tax preparation services. Now is the right time to do so as they provide great deals and offers. Do not forsake the quality of their service just because you're cutting down costs. Eventually, you will need accountants to manage your business by the time it is competing with other large companies. Your accountants will have the best knowledge about your business and can help you boost your profits. In the future, you will be amazed that you didn't make a mistake in investing in something that can give you a lot of benefits.
Hiring Accountants Gives You a Great Deal of Accuracy
It would not be efficient to do all the work and find out there are discrepancies in your calculations. While doing your tax preparation, you must be keen enough to sort things out or else you'll end up serving penalties for evasion. These accountants and accounting firms know what they're doing. They breathe business and finance. They have the mastery of this field and so it would be apt to trust their knowledge in order for you to have accurate financial reports.

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Monday, November 3, 2014

Tax Scams

The IRS warns taxpayers about an increasing number of tax scams in communities across the country. For even more information go to and type “scam” in the search box.

Friday, October 31, 2014

Form 5500-EZ Pilot Penalty Relief Program

Learn about the pilot penalty relief program for late filed Form 5500-EZs. To get even more in depth information, go to and type "form 5500 corner" in the search bar.

Tuesday, October 28, 2014

IRS Commissioner: What to Expect at Tax Time

Learn how the Affordable Care Act will affect you when you file your tax return. For even more in depth information, go to

Friday, October 24, 2014

What Does Extending Your Taxes Mean to You?

As the tax filing deadline is quickly approaching, many procrastinators and those who legitimately are just not ready to file their returns become stressed out and frantic, trying to meet what may virtually be an impossible deadline. Many would rather rush to get their returns prepared than file an extension. Common concerns include, but are not limited to, being flagged as a late filer, being assessed penalties, or being more likely to be audited. If you are one of these individuals, I hope that I can put your mind at ease and inform you of what it really means to extend your tax return and the benefits of doing so.
A few notes before getting started:
  • This article is written assuming a tax year that is the same as the calendar year, which is the case for most individual taxpayers.
  • If a tax deadline noted falls on a holiday or weekend, the deadline is actually the next business day.
  • The focus of this article is on the filing of federal individual extensions except where noted otherwise.
  • "Tax professional" as opposed to "tax preparer" is referred to in this article. My definition of "tax professional" is someone who has extensive knowledge, education, and experience in taxation and can provide tax consultation and planning services in addition to preparing returns. Two commonly recognized credentials held by tax professionals include CPA (Certified Public Accountant) and EA (Enrolled Agent). CPAs and EAs are by no means the only tax professionals out there and not all CPAs do tax-related work.
With those preliminary notes out of the way, I will now discuss what you should know about extensions.
What is an extension?
First and foremost, it is important to know that an extension is an extension of time to file an income tax return, not an extension of time to pay the tax due. Unfortunately, many taxpayers miss the part about it not being an extension of time to pay, perhaps due to wishful thinking.
There are two federal individual income tax extensions that can be filed. The first extension, which is "automatic," is due by the April 15th tax deadline and is a four month extension of time to file. Thus, if you file this first "automatic" extension, you will have until August 15th to file your income tax return. Your best estimate of the tax that will be due with the actual return is still due by April 15th.
As for the first extension being "automatic," that does not mean it just happens - you need to actually file the extension. There are various ways to do so which are convenient and are discussed later. The reason it is referred to as "automatic" is that you do not need to provide an explanation for why you need additional time to file.
The second extension is not "automatic" like the first one. If you cannot complete your returns by the August 15th first extension deadline, you can "apply" for an additional two months. The second extension is considered an "application" because you need to provide a good reason why you need the additional two months to file. You need to demonstrate that you made a reasonable effort to get your returns completed within the first four month extension period or that you had extenuating circumstances. If the reason is merely for your convenience, your request can be denied. If your application is denied, your return will be due immediately or within a 10-day grace period. If you did not timely file a first extension, a second extension will only be approved in cases of undue hardship.
Between the two extensions, that gives you up to six months additional time to file beyond the April 15th tax filing deadline. Six months is generally the maximum total time a return can be extended by law.
Why should I extend?
The Internal Revenue Service prefers that you file a complete and accurate return. A return you have to rush through, do not have all information for, or make estimates of figures for is unlikely to be complete and accurate. Thus, it is better to file an extension if you are approaching April 15th and you do not have all information needed or otherwise cannot file complete and accurate returns.
If you use a tax professional and you are getting your tax information to him or her just a few weeks or so before April 15th, do not be surprised if he or she indicates an extension will need to be filed. You are more likely to have a complete and accurate return if your tax professional is not trying to rush to make the April 15th deadline.
A few more comments for those of you who use tax professionals. If it is approaching the tax deadline and you have not yet contacted your tax professional, do not be surprised if he or she is unable to speak with you when you call his or her office. Also, do not assume that just because you used his or her services last year they will file an extension for you without you specifically requesting it. Tax professionals are very busy dealing with many clients and working long hours all of tax season and they get even busier as April 15th approaches. Moving forward, you should consider getting in contact with your tax professional's office well in advance of the tax deadline to determine what he or she needs to file an extension, if necessary, and prepare your taxes.
In addition to having a complete and accurate return, there are certain planning opportunities that can be taken advantage of if you or your tax professional is not forced to rush through your return. One example is funding certain retirement plans such as SEPs and Keogh Plans - these can be funded for the prior year through the extended deadline of the return that falls in the current year. Some plans, such as a SEP, can actually be established for the prior year up through the extended due date of the tax return. It is important to note that traditional and Roth IRAs need to be funded by April 15th to qualify as contributions for the prior year. For more information on such planning opportunities for the year just past as well as the current and future years, you should consult with your tax professional.
What are common concerns over extending?
As referenced earlier, many individuals are adverse to even the idea of extending due to concerns such as being "flagged" as a late filer, being assessed penalties, or being more likely to be audited. Filing an extension in and of itself is not going to raise any "red flags" or cause problems as long as your extension is timely filed and the tax due is paid by April 15th. As for being audited, you are more likely to be audited if your return is incomplete, includes estimated figures, or is inaccurate.
Another concern individuals have is that it will cost them more to file an extension. The IRS does not charge for filing an extension. Your tax professional may charge you for doing so, but the fees charged most likely will be far outweighed by the benefits of the return being complete and accurate. Incomplete and/or inaccurate returns can result in you being contacted by the IRS and generally require that an amended return be filed. Your tax professional will likely charge you for preparing an amended return. If additional tax is due, penalties and interest may be assessed. A complete and accurate return is much less likely to result in any correspondence from the IRS. Additionally, it includes an accurate tax liability, which means lower taxes or reduced penalties and interest as related to an understated tax liability. Like with many things in life, it is better to do something right the first time as there is more time, effort, and expense associated with having to correct something later.
Yet another reason that some individuals do not want to extend is because they are in the process of buying a new home or refinancing and their lender is requesting a copy of their tax return. Many lenders will accept a copy of an extension along with copies of documents substantiating income (W-2s, 1099s, K-1s, etc.) and copies of the prior year tax returns.
What information is needed to file an extension?
You will need your general taxpayer information, which includes your name, name of your spouse if married and filing a joint extension, your social security number, your spouse's social security number (if applicable), and your complete address. To avoid potential delays in the processing of your extension, special attention is required if any of the following apply: your name has changed due to marriage, divorce, etc.; your address has changed since you last filed a tax return; or you want to have correspondence related to your extension sent to your tax professional or otherwise. You should refer to the instructions for the extension form to properly address any of these items.
There is not much other information needed. The items needed for the tax year that the extension is for are an estimate of your total tax liability and the total tax paid. The estimate of the total tax liability is the more difficult of the two. You need to come up with your best estimate of what the tax liability is. The IRS instructions for the completion of Form 4868, "Application for Automatic Extension of Time to File U.S. Individual Income Tax Return" clearly state: "Make your estimate as accurate as you can with the information you have. If we later find that the estimate was not reasonable, the extension will be null and void." If that were to be the case, your return would be considered late. A late filed return is subject to late filing and late payment penalties and interest.
How do I file an extension and, if applicable, pay the (estimated) tax due?
Either you or your tax professional can prepare and file your extension. The methods for filing it include e-file by phone, e-file by computer, or filing a completed paper Form 4868. Regardless of who is going to prepare and file your extension, the information discussed in the previous section will be needed. Thus, if you use a tax professional, you need to get in touch with him or her in advance of the tax deadline to ensure that he or she has that information.
E-file by phone is a very convenient option if you are going to file your own extension. The Form 4868 and its instructions can be easily downloaded from the IRS' website. After reviewing the instructions for the form, use Form 4868 as a worksheet and then call the toll free number in the instructions. You will be prompted for the information from the completed form and given a confirmation number at the conclusion of the call. In order to e-file by phone, you must have filed a federal return for the prior tax year.
As for paying the (estimated) amount due, you can do so via electronic funds withdrawal (EFT, from a checking or savings account), credit card, or check. The EFT option can be used if you e-file by phone or e-file by computer. You will need to enter additional information when filing the extension to include AGI (Adjusted Gross Income) from your prior year tax return and the routing and account numbers for your bank account. Payment by credit card can be done via one of several service providers, each of which charge a convenience fee based on the amount of the tax payment being made. Payment by check can be made if you e-file by phone, e-file by computer, or file a paper extension form. More detail about these payment options is included in the instructions for Form 4868.
It should be noted that if you are a taxpayer that makes or should be making estimated tax payments, you should compute and timely make those payments for the current year even if you filed an extension. The federal income tax system is a "pay as you go" system and if you are self-employed or otherwise have income that results in a tax liability that is not paid via withholding, you may be required to make estimated tax payments throughout the year. If you are not sure if this applies to you, it is recommended that you research this topic or consult with a tax professional.
For further information about filing a second extension, please refer to the instructions for Form 2688, "Application for Additional Extension of Time to File U.S. Individual Income Tax Return" which can be easily downloaded from the IRS website as
What about state, local, and other income tax returns?
Some states will accept the federal extension while others require that you file an extension document with them. Ohio accepts the federal extension and does not require that you send them a copy of it, though you do need to send in the tax due, if applicable, by the April 15th deadline. If you live in a state with municipal or other local income taxes, you may need to file an extension with the locality (or localities) that you have a filing responsibility with. Further discussion about state and municipal filing requirements are beyond the scope of this article as they vary from state to state. Check with the respective department(s) of taxation or your tax professional for more detail. Like with the federal extension, you generally need to pay any state or local tax due at the time the extension is filed.
In Conclusion
Whether you prepare your own taxes or work with a tax professional, I hope that you have a better understanding of what an extension is, when it should be considered, and what is involved in completing and filing one. If it is close to the April 15th filing deadline and you have not finished or even started preparing your returns, you should consider filing an extension. This will allow additional time to ensure that the returns are complete and accurate and, in turn, should reduce the stress associated with filing your taxes.

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Monday, October 20, 2014

About Our Company

ATS was first conceived on the 4th of July 1985 in the historic Benicia City Park landmarked by the gazebo pictured here to the left. On this day, numerous townspeople came together to picnic in the park, enjoy the entertainment in the gazebo and wait for the waterfront fireworks that night. Amongst the many picnickers were a few members of a local church discussing some community needs. One of these subjects was the need for a local full-time tax office. At that time both Frank and Sylvia Barata were employed as tax specialists with the IRS and intrigued by the idea of fulfilling this need.
Within a few weeks Sylvia chose to leave her ten year IRS career and take on the challenge while Frank kept a foothold at the IRS. With the financial support of Gene and Nancy Duplin, active ATS partners for the first two years, an office was secured in August and the Benicia phone number 745-1040 was captured.
Unlike many established tax practices, ATS had no clients. By way of advertising with mailers, articles, commercials, live radio call-in talk programs and many personal presentation, ATS began to grow. Many of the first comers are still with us today and we continue to strengthen our relationships. The confidence, trust and loyalty portrayed by ATS clients, old and new, is an affirmation that the idea conceived on July 4, 1985 was a true inspiration and reminder of our original purpose.
ATS has become a growing family serving clients coast to coast. Over the years, the clients have given us the name "Tax Angels". The "Tax Angels" continue to live up to this calling. They remain true and loyal to these clients by providing quality tax services.
The "Tax Angels" thank you for your confidence and trust, and value your referrals.

Friday, October 17, 2014

Changed Your Name After Marriage or Divorce?

Find out what you need to do if you have changed your name due to marriage, divorce or some other reason.

Tuesday, October 14, 2014

The History of Income Taxes in the US

1913 celebrates the 16th Amendment to the constitution of the United States marking the beginning of income taxes. The tax code is more complicated than anyone can imagine and a look at the major events over the past 100 years might help you understand how we got to where we are today.
In researching for this article, I kept looking for a single word or phrase that could easily describe the "History of Taxes". The only thought that kept popping into my head was... "Schizophrenia". Defined by Webster: schiz·o·phre·ni·a Noun; 1) A long-term mental disorder of a type involving a breakdown in the relation between thought, emotion, and behavior, leading to faulty... 2) A mentality or approach characterized by inconsistent or contradictory elements.
Today's tax code is made up of perhaps the most complex assembly of contradictory rules, regulations, and laws on earth. For the sake of this article, I'm only going to touch on the key factors and point out how to make your way through this maze. Even the most respected authorities on the topic of taxes are confused by the nearly 10,000 pages of tax code.
There were many taxes before the 16th Amendment. To help fund the War of 1812 there was a tax on gold, silver, jewelry, and watches. Once the debts from the war were completely settled, the taxes were halted in 1817. Revenue to operate the government was adequate with tariffs and fees on traded goods until the Civil War. In 1862 Congress enacted the first income tax law to support the costs of the Civil War. The tax rate was at 3% and higher on some luxury items. Then in 1868 Congress enacted a new tax on tobacco and distilled spirits. This is the first sign of a 'parallel' tax along with an income tax. Revenue was the highest ever achieved at $310 million and quickly settled all debts of the country, so in 1872 Congress eliminated the income tax.
Following the Civil War, America experienced a great economic boom with the 'Reconstruction Era'. In the years from 1870-1900 the benefits from the Industrial Revolution were put into action. Chicago hosted the World's Fair in 1893, celebrating the 400th anniversary of Columbus' arrival in the new world in 1492. In 1894, Congress revived the income tax law and looked to aggressively grow revenue. Just one year later on May 21st 1895 the Supreme Court Ruled that income taxes were 'unconstitutional'. The 5/4 decision stated that a direct tax on the income of real and personal property was unconstitutional and void. In the years that followed this Supreme Court decision the economy once again grew rapidly. The very wealthy became wealthier and there were jobs for everyone. The good life in America was celebrated with growing immigration from Europe bringing tradesmen looking for a better life. In 1904, Saint Louis hosted the World's Fair celebrating 100 years of the 1803 Louisiana Purchase. This event showed the world how abundant every aspect of life was in America.
In 1907, only three short years later, America faced a huge crisis. The economy of America fell to a point where the average family income fell by 40%. A panic set in because many banks closed and people lost trust and hope. Times were difficult for average families. When banks closed, hardworking people lost their savings. President Taft addressed Congress in 1909 proposing a 2% federal income tax on corporations (for the privilege of doing business). On July 12, 1909, Congress passed a resolution proposing the 16th Amendment. This amendment to the constitution allows Congress to levy an income tax. Federal Income tax is not required to be distributed or apportioned to states nor have any connection to Census results. It was written to avoid being a 'direct tax' and avoid conflict with the Supreme Court ruling in 1895. With 48 states in the union, 36 states were needed to ratify before it could be passed as an amendment.
Then in 1910 a secret meeting was held on secluded Jekyll Island with the most powerful bankers and financial decision makers of the time. This event really requires much more discussion and entire books have been written about this meeting. What is important to take from this is the fact that this meeting was the start of what we know today as the Federal Reserve Bank. Few people even today understand the impact of this meeting.
It is interesting to note that since the proposed 16th amendment in 1909; only 31 states ratified it through 1911. The US presidential election of 1912 was a rare four way contest. Incumbent President William H. Taft ran along with former President Theodore Roosevelt and Woodrow Wilson (finally nominated by his party on the 46th ballot) and Eugene Debs from the Socialist Party. Throughout the 1912 presidential campaign (typically a 2 month event), the 16th Amendment was a 'hot topic'. At the time of the election in November only two more states were needed to ratify the 16th amendment. Woodrow Wilson was elected and the 16th Amendment to the US Constitution was ratified on February 3, 1913.
With the Congress' windfall of revenue it was time to jump on the roller coaster of cash. World War I came along and in 1918 Congress set the taxes at a rate of 77% for those with income over $ 1,000,000. That's a 2012 equivalent of $15 million annual income, so most people didn't even care that there was an income tax. With this first major income tax in 1918, our US annual revenue surpassed one billion dollars for the first time ever. That's a "one" as in single and "B" for Billion. Then just two years later, in 1920 the US annual internal revenue grew to $5.4 billion. This represents a 500% increase in just 24 months.
A lot of other history was being made over the years from 1920 to 1940 and the tax front was relatively quiet. The economy grew at a rapid pace during the 20's, hence the name 'Roaring Twenties'. Then in October of 1929 the "What goes up must come down" effect took place. The stock market crashed and brought with it a depression. Like many events in history, the government's intervention slowed the normal recovery and this era is now known as the "Great Depression".
When people talk about the 'highest tax rate' they often see a number that is reserved for the very rich. What gets overlooked in addition to that highest rate is the income 'threshold' which determines the number of people impacted by that rate. In 1941 the highest income tax rate was 81.1% for those making over $5,000,000. That certainly limited this high rate to a minimal number of people. Then in 1942 (the very next year), the highest rate was raised to 88%. In itself, this does not seem too bad until you consider that the threshold was lowered to those making over $200,000. Lowering the threshold from $5 million to $200,000 meant that many more people would be paying that new higher rate. In 1942, World War II created a huge increase in employment and stimulation of the economy (compared to the years of the depression). With this spike in employment there was also a spike in tax revenue and the US revenue exceeded $7.3 billion in collections.
Up to this point in time the collection of taxes were voluntarily paid by taxpayers. People filed their tax reports and made payment of their taxes. In 1943, Congress adopted 'Mandatory Federal Income Tax Withholding' requiring employers to pull out taxes from employee's pay and forward it to the US Treasury. This measure increased the number of taxpayers to over 60 million (estimated increase of 30+% in number of taxpayers). After WWII ended in 1945, Congress increased that top rate to 94% and kept the threshold at $200,000. Congress/IRS closed some loopholes on the 'tax withholding' bill and included more complications on who had to pay quarterly tax payments. The annual internal revenue in 1945 surpassed $43 billion, up nearly 50% each year for 15 years.
The end of WWII marked a period of substantial growth, both the economy and the birthrate. We entered a new era in America with tremendous growth and individual responsibility. Families were living the American Dream. Congress and the Internal Revenue Service continued to 'tinker' with the tax codes after WWII. At the end of 1969, Congress enacted the "Tax Reform Act of 1969" which established the Alternate Minimum Tax (AMT). This was a new totally separate tax system for some Americans. The number of Americans who were required to pay the AMT in 1970 was around 19,000 and the amount collected was $122 Million.
Years go by with an obvious abundance of income for the Federal Government. Budgets are set to automatically increase, regardless of the actual amounts needed or spent. In 1981 Congress enacted the largest tax cut in US History by cutting $750 Billion over 6 years from revenue. Then in 1982, yes just the very next year, Congress passes a tax act to INCREASE revenue. The increase wasn't enough, so in 1984, Congress passed another tax act increasing revenue. Between the 1982 and 1984 tax acts, the total revenue was around $265 Billion. This is about 1/3 of the revenue cuts passed in 1981, which were to take place over 6 years.
On October 22, 1986, President Ronald Reagan signed the "Tax Reform Act of 1986" which dropped the top tax bracket from 50% to 28%. This represents a significant drop in the top rate, the lowest top rate since 1916. Another part of the 1986 Act was a change in the AMT to expand and include many homeowners. Congress got into a bad habit of making their "Tax Act" an annual event with more changes in 1987, 88, and 89.
On November 5, 1990 the "Revenue Reconciliation Act of 1990" was signed into law. This was just a fancy name for "Tax Act" and had most of the same tinkering with our income taxes. This Act primarily focused on raising taxes on wealthy Americans. The economy was growing and inflation rates were recovering from the 80's. When President Clinton signed the "Reconciliation Act of 1993", the purpose was to reduce the federal deficit by $496 Billion. Revenue to the Federal government was still greater than what was required to operate and surpluses existed. In 1997, President Clinton signed the tax Act cutting taxes by $152 Billion. This bill brought down the capital gains tax, provided a $500 per child tax credit, and had tax incentives for education.
In 2001, President Bush signed the "Economic Growth and Tax Relief Reconciliation Act of 2001". This contained the 3rd largest tax cut since WWII, set to cut $1.3 Trillion over 10 years. With such a long name and such a huge tax cut, you would hope that maybe this would be enough to last 10 years. Well that makes too much sense. In 2003, President Bush signed the "Jobs and Growth Tax Relief Act of 2003" accelerating the rate cuts of 2001.
While not a law, in 2004 the 'World Trade Organization' ruled that the US Corporate tax provision was illegal. This did have an impact on how corporations planned their business and tax strategies. This also indicates the foreign influence and encouragement for American corporations to be more like European business models. In 2005 the favorable rates on capital gain and dividends were extended. The exemption levels for the Alternative Minimum Tax were raised in 2006.
Remember a few paragraphs ago when we looked at that Alternative Minimum Tax? Established in 1969, the AMT was established as an entirely separate tax system to the income taxes. While most Americans were not aware that this tax even existed, the changes made to the AMT affected nearly 5 Million taxpayers in 2011. In 1970 the AMT accounted for $122 Million in revenue and in 2011 the AMT revenue exceeded $40 Billion. This is nearly 260 times more than 1970.
Through the years since our founding, America has been on a path of rapid government growth. Taxes are the price we pay to live in a civilized society providing basic services and caring for those unable to care for themselves. If the government showed a history of being good stewards with our tax dollars, more Americans would proudly pay taxes without complaining. However, the layers upon layers of tax regulation have brought us to a point of dependency for many who rely on our complicated tax system. The kind of changes that are needed will require a major overhaul. Most politicians and special interest groups today will not allow the drastic measures needed to establish a new fair tax system. This means that anyone looking to the future would have sense enough to figure that future taxes will most likely be much higher than they are today.

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Saturday, October 11, 2014

Is Social Security Taxable?

There's a simple calculation that will help determine if your Social Security benefits may be taxable.

Wednesday, October 8, 2014

Amending My Return

Forgot to claim a credit or need to correct your tax return? These tips will make amending your return a breeze.

Sunday, October 5, 2014

Form 5500-EZ Pilot Penalty Relief Program

Learn about the pilot penalty relief program for late filed Form 5500-EZs. To get even more in depth information, go to and type "form 5500 corner" in the search bar.

Wednesday, October 1, 2014

Taxpayer Bill of Rights

Learn about the 10 fundamentals in your Taxpayer Bill of Rights. For even more information, go to and type "taxpayer bill of rights" in the search field.

Wednesday, September 24, 2014

IRS Commissioner: Premium Tax Credit-Changes in Circumstances

The Internal Revenue Service commissioner discusses what you should do if you have a change in circumstances that affects advance payments of the premium tax credit you may have received. For even more information, go to

Saturday, September 20, 2014

How Homeowners Can Get The Maximum Tax Refund.

How Homeowners Can Get The Maximum Tax Refund.
Owning a home. Ask any homeowner what's so great about owning versus renting, and most will say "the tax deductions!" That's right because all homeowners who itemize their taxes are able to deduct 100% of their mortgage interest and property taxes from their income tax returns. But how do you get the maximum tax refund for homeowners? If you don't own a home yet, there may be good reasons, but the advantages of owning a home far outweigh renting. There are really only two reasons not to own a home-you may live rent free with your parents or friends or perhaps you are planning on moving in 3 years or less. Even if you are single, but plan on staying in the area for more than 3 years, consider buying a home.
The major tax incentive to owning a home is that it allows you to deduct the interest you pay for your mortgage. This is usually the biggest tax break for most people, because a significant amount of your house payment goes toward interest during the early years of a mortgage. The major advantages of being a homeowner when tax season comes around?
Deductible mortgage interest including "points" when you buy your home.
Deductible property taxes on your return.
Deductions for improvements made to your home when you sell.
Up to $500,000 in tax free capital gains profit when you sell your home.
To get the maximum tax refund for homeowners you will have to use Form 1040 and itemize your deductions. If you're in a 28% tax bracket, the government effectively subsidizes about a third of your borrowing costs, making your home more affordable. Also, your closing costs and points are tax deductible, and hundreds of thousands of dollars of any capital gains profit that you realize when you sell your home are exempt from income taxes.
At tax time, it's critical to know what you're entitled to, so you can claim it. So, here are five essential tax tips to get the maximum tax refund for homeowners.
1. Fill out the long form at least once and learn to itemize your deductions.
Nearly 40% of homeowners lose out on the number one tax advantages every year when they fail to itemize their income taxes. If you own a home and otherwise have a fairly simple return, it might be tempting just to take the standard deduction or file Form 1040A. In some cases where your mortgage, property taxes and income are low enough, the standard deduction may be a larger deduction than your itemized deductions. But you'll never know unless you fill out both forms at least once.
So before you start filling in Form 1040A or 1040EZ, get your paperwork together and answer the questions on tax software like TurboTax, which will automatically do the math on whether itemizing or taking the standard deduction will result in the lowest tax bill.
Why do the extra work? You can only pay less tax, never more by filling out the longer Form 1040.
2. Home office deduction.
The average home office deduction is over $3,000. Of course there are special IRS rules on what you can claim as a home office. The space you claim as your home office cannot be exempted from capital gains tax when you sell your home. Visit the website for complete details.
3. Tax relief for loan modifications, foreclosures and short sales.
The Making Home Affordable ® Program (MHA) ® is an important part of the Obama Administration's comprehensive plan to stabilize the U.S. housing market by helping homeowners get mortgage relief and avoid foreclosure. To meet the various needs of homeowners across the country, Making Home Affordable ® programs offer a range of solutions that may be able to help you take action before it's too late. You may be able to refinance and take advantage of today's low mortgage interest rates and reduce your monthly mortgage payments.
While the long-term housing outlook began improving in 2011, loan modifications are projected to be the peaking this year. Distressed homeowners who are on the brink of a short sale, loan modification or foreclosure should be aware that normally, any mortgage balance that is wiped out by one of these outcomes is taxed as what the IRS calls Cancellation of Debt Income, or CODI.
Under the Mortgage Debt Forgiveness Relief Act of 2007, the IRS is currently not charging income taxes on CODI incurred through a loan modification, short sale or foreclosure on most residences through 2012. But banks are taking many months, or even years, to work out new mortgages. If you see any of this happening in your future, don't put things off. Get free advice from a housing expert atMakingHomeAffordable.Gov. or call 888-995-HOPE (4673) to speak with an expert.
4. The tax consequences of a refinance or property tax appeal.
Homeowners everywhere are working on applying for a lower property tax bill on the basis of the last few years' decline in their home's value. Those who have equity have tried to refinance their existing home loans into the 4% to 5% rates of the last few years. These strategies offer some of the biggest savings today. But here's a small warning for homeowners who are able to cut these costs. Property taxes and mortgage interest, the very costs you're minimizing, are also the basis for the major tax benefits of being a homeowner. So plan ahead for your tax deductions to go down along with your taxes and interest.
5. Don't forget the closing costs.
If you bought or refinanced your home, you may be focused on your mortgage interest and property tax deductions that you forget all about your closing costs. Remember that any origination fees or discount points that were paid to your mortgage lender at closing are tax deductible on your return. When you finance a home, you may pay what are called "points." Points lower the interest rate on your mortgage by effectively prepaying a portion of the interest at closing. Points are paid by the borrower to the lender as part of the loan deal, and they are a percentage of the loan. Points may also be called loan origination fees, maximum loan charges, loan discount or discount points. If you can't figure out exactly what you paid, look for your HUD-1 settlement statement. It is full of line item credits and debits that you should have received from your escrow provider or title attorney at closing.
Helpful Hint:There are two things you can count on when you become a homeowner: You get more tax breaks, and your taxes get more complicated. Whether you've purchased a single-family home, townhouse or condominium, tax breaks are available to you. It's time to get familiar with tax forms because that's where you will have to provide all the details about your new tax-deductible expenses.
Don't forget PMI premiums on your tax return. PMI is private mortgage insurance premiums on certain mortgages. If you make a down payment of less than 20%, you are generally required to carry private mortgage insurance. This type of insurance is paid for by the buyer but protects the lender in case the borrower stops paying on the loan. PMI premiums can be deducted if the mortgage was issued after 2006. This deduction may be changed in 2012 so check the IRS website for current information.
Final Thought: There are also huge tax savings on the gain when you sell. If you are going to live in your home for at least 5 years considering buying a home just for this reason. When you sell your home, the amount of your gain from the sale is tax-free if you meet the criteria. If you are married, you can have up to $500,000 profit on the sale, and you won't have to pay tax on the earnings. If you are single, you can earn up to $250,000 profit without paying any federal tax. There's only one catch: You have to own and occupy your home for at least two of the past five years. Visit for more information.

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Wednesday, September 17, 2014

Sunday, September 14, 2014

Is Social Security Taxable?

There's a simple calculation that will help determine if your Social Security benefits may be taxable.

Wednesday, September 10, 2014

Federal Gift Tax - When This Tax Has to Be Paid

Definition of a Gift
The IRS defines a gift as "giving property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. The gift tax applies whether the donor intends the transfer to be a gift or not." In other words, if you make a transfer for which you receive nothing or less than the fair market value of the property in return, it is a gift. If you sell your house to a relative for less than the fair market value, the difference is a gift. A promise to make a gift is not enough and a gift must be made of your own free will voluntarily. The gift must be delivered and accepted without the ability to revoke it and be a present interest (you no longer retain control over the property). The gift transaction date is considered to be the date title passes, in the case of cash when the check is cashed. Taxable gifts are reported using IRS Form 709 where a running tally is kept that is used against your unified federal gift and estate tax lifetime exemption (the amounts are cumulative). If a gift is taxable, the donor, not the recipient pays the tax. A ?le of Forms 709 should be maintained through one's lifetime.
Non-Taxable Gifts
A) The annual gift tax exclusion is $14,000 for 2014. This is the amount an individual may give, free of gift tax and without impacting his/her lifetime exemption, to as many individuals as he/she wishes. A married couple may double the amount. For example, a married couple may gift $28,000 to any one of their children; if a child is married they may gift $28,000 to their child (gift splitting) and their child's spouse (totaling $56,000 cash or property at fair market value).
B) Tuition, if you pay it directly to the school (no other incidental expenses)
C) Medical expenses you pay directly
D) Gifts to your spouse (if your spouse is a U.S. citizen)
E) Gifts to a political organization for its use
F) Gifts to qualifying charities if not a partial interest (this can be very complex if trusts are involved)
2014 unified estate/gift tax exemption
Gift and estate taxes have a unified federal gift and estate tax lifetime exemption of $5.34 Million per individual for 2014 ($10.68 Million for a married couple); this is the total amount of taxable gifts and taxable estate property and that can be transferred without paying gift or estate taxes. A taxable gift is other than noted above (for example the excess of a gift from one person to another over the $14,000 annual exclusion is a taxable gift). A surviving spouse can add any unused exclusion of the spouse who died most recently to their own, enabling transfers of up to $10.68 million tax-free, if an estate tax return is filing on behalf of the deceased with this election made. Gifts made during your lifetime will reduce the unified tax exemption against your taxable estate at time of death. If you exceed the limit, you will owe tax of up to 40% on the amount in excess. Gift tax applies to lifetime taxable gifts; estate tax applies to property left at death. Gifts are generally valued at cost basis while estate property is valued at fair market value at date of death.
Gifting Strategies
Gifts made during your lifetime will reduce your taxable estate, if you gift property away before the event of death, your estate will not be worth as much. This may especially matter if you are gifting property that will increase in value such as stocks or closely held business interest, art/collectibles etc. At the same time gifts in excess of the $14,000 annual exclusion reduces your estate tax exemption (they are unified as noted above). For example if a married couple gifts $250,000 cash to a single child for ten years, their estate will be worth $2.5 Million less, and their unified exemption will decrease from $10.68 to $8.18 Million.
As an example if stock is given, totaling $250,000 fair market value at time of gifting however originally purchased for $100,000 (cost basis) the value of the gift is the cost basis of $100,000. The stock at the time of the parent's death may be worth many times more than $250,000, thus if the transfer was not made, it would increase the estate value and possibly the estate tax as estate property gets a 'step up' in basis to fair market value at time of death. Thus gifting appreciating assets shelters the gain from estate tax. If the recipient then were to sell the stock in the example they would pay capital gains tax; also the cost basis would include any gift taxes paid on the transfer. Certain valuation discounts may apply to the value of stock/membership interest for closely held businesses such as a FLP due to a lack of liquidity. You need to get a professional appraisal at the time you make the transfer for any asset that is either not cash or publicly traded securities, especially if it is a hard to value asset, like a piece of real estate or a share in the family business.
A family limited partnership (FLP) can be an effective way to manage and control family assets while providing for the tax-effective transfer of wealth to others. The parents gift the majority of the partnership interest to family members in the form of limited partnership interests. Limited partners do not manage the partnership and the operating agreement can specify restriction on sale or borrow against their partnership interests.
Another use of the annual exclusion is to put money in Section 529 College savings plans, setting up a separate account for each family member you want to benefit.
Pay tuition and medical expenses without the payment being treated as a taxable gift to the student or patient, as long as the payment is made directly to the school or provider
Speak with an estate and gift tax attorney regarding various irrevocable trusts that you can gift to on behalf of beneficiaries such as a grantor retained annuity trust (GRAT) a Irrevocable Life Insurance Trust.
Crummey Notices
Typically the annual exclusion is used to fund a trust such as an Irrevocable Life Insurance Trust. In doing this, beneficiaries receive 'Crummey powers' which is the right for 30 or 60 days, to withdraw from the trust the yearly gift attributable to that beneficiary. A Crummey notice must be sent each year to the beneficiaries letting them know about their right to withdraw their portion of the annual gift to the trust. The IRS in an audit can and will ask for them.
State Gift Taxes
Many states have estate or inheritance taxes and they do not all follow the Federal estate tax system. This means the state applies different tax rates or exemption amounts. The exemption amount for your particular state will vary. Consult with a CPA or estate tax Attorney on specific state law and potential options to mitigate state estate or inheritance taxes.
Same Sex Marriages
The IRS states "For federal tax purposes, the terms "spouse," "husband," and "wife" includes individuals of the same sex who were lawfully married under the laws of a state whose laws authorize the marriage of two individuals of the same sex and who remain married. Also, the Service will recognize a marriage of individuals of the same sex that was validly created under the laws of the state of celebration even if the married couple resides in a state that does not recognize the validity of same-sex marriages"
Non-US Citizen Spouse
If your spouse is not a U.S. citizen you must file a gift tax return if your gifts to your spouse total more than $145,000 per year. Additional gifts to a non-citizen spouse count against your $5.34 million lifetime exclusion and must be reported on Form 709. Certain large gifts or bequests from certain foreign persons must be reported on Form 3520.
When to file Form 709
If you make gifts in excess of the annual exclusion, you must file Form 709, which is the United States Gift (and Generation-Skipping Transfer) Tax Return. The return is due by April 15 of the year after you make the gift, if you are on extension for form 1040 (form 4868), the extended due date applies to your gift tax return (October 15). To request an automatic six-month extension to file Form 709 without an extension for form 1040, you can file Form 8892. If any gift tax amounts are owed they are due April 15th, if not paid on time, interest and penalties may result. Married couples cannot file a joint gift tax return. Each spouse files their own Form 709 for taxable gifts. Gifts may be "split" with your spouse, doubling the annual exclusion from $14,000 to $28,000 to any one person.
The current federal gift/estate tax rate is 40%.

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