Last month I told you about my travel adventure with Stephen E, AKA Steve E. “AKA” is police lingo short for  “also known as”.   You don’t want any mix-up with your identity, or with the identity of your dependents, when it comes to your income tax return!   Today it seems a newborn baby gets their social security number before they leave the hospital. What about a baby born at home? The important point is that any parent wanting to claim that new little bundle of joy must include the child’s social security number on the tax return.   When I add that baby to the return I also track the date of birth so we can claim every tax credit available. And different taxes apply to different taxpayers depending on their ages.   When you file your tax return you enter your name, address and social security number, or SSN. When you file a joint return with your spouse, you put both names and social security numbers. One person’s name and SSN are listed first. The other person’s name and SSN are listed second.   The name and number listed first is called the PRIMARY taxpayer. The other person is called the SECONDARY taxpayer. This does NOT mean that one is better than the other.   Remember this when you first marry: You can CHOOSE whose name and number goes first. The primary taxpayer is not always the male of the couple. But once you decide that HER name is going first, don’t change that order next year or any other year. That will just buy you trouble from the Internal Revenue Service. They might be expecting a tax return from HER next year and not be able to find any record. Then you get your letter asking to explain everything.   Other important numbers required for your tax return could include the daycare provider’s SSN. If that daycare provider is operating as a business they may have an EIN, Employer Identification Number.   With electronic filing of the income tax returns, name and number mismatch (when things don’t match up) can cause what is known as a reject. Something must be corrected before we can file that return. If someone has stolen your identity or the identity of your dependent, that can cause very inconvenient delays of your refund.   One year a return was rejected because the dependent’s name and SSN did not match. The IRS had just begun matching tax return identities with Social Security records. I called my taxpayer, let’s call him Mr Smith. I learned that for years I had been filing the return for Mr and Mrs Smith and their daughter, Ms Smith. But the daughter was MRS Smith’s daughter. And Ms Smith was really Ms Jones. The adoption was never legally finalized, the SSN records had never been changed and the tax return was rejected. We then mailed the return in with the explanation. Mr Smith’s nerve-wracking situation could have been avoided if he had just understood the importance of telling me the whole truth for his tax return.   Identity theft can also bring about other legal problems. If you find yourself in that position, please contact me so I can talk with you about what action you might want to take next.

Do you have employees? Did you pay them during April, May or June? If yes, then you have payroll reports due for the 2nd quarter of this calendar year. sssss What if you didn’t pay any employees during April, May or June? If you have been filing these quarterly reports and did not tell the Internal Revenue Service that you stopped having employees, you have to file these reports for the second quarter, too. You will just report zero wages and zero withholdings. sssss There is nothing simple about the IRS. There is a little wrinkle here for some employers. If you have been given permission to file an annual 944 instead of the quarterly 941, you may just have quarterly state reports to file. sssss But for most of us, you now know July 31st is the due date for Q2 (second quarter) payroll reports. Not just the reports, but the payments due with them, also. sssss It is easier for some people to work with numbers. I am a number cruncher. I prepare reports for my own company and I prepare reports for several business clients. All my payroll clients have to do is tell me the details. sssss The details are not difficult. they give me a list of employees with their names, addresses and social security numbers. MAJOR TIP: Never write anyone any paycheck until you have this information AND you have their completed form I-9. sssss For every paydate, I need the following information. 1) the name of the employee, 2) the amount of the check, 3) the amounts withheld and for what. sssss The amount you wrote the check for is called the “net” check. “Net” take-home pay is AFTER deductions. The amount of the paycheck BEFORE deductions is called “gross” paycheck. I need to know how much you withheld for each of the taxes your employee may be subject to. sssss Taxes must be withheld from each employee’s paycheck. These taxes start with the employee’s one-half of social security and medicare taxes. Based on the employees gross check they may also have federal income taxes withheld. And if you pay workers who live in a state that has stare income tax, you may also be withholding state income taxes. sssss You may have other employee benefits that the employee pays for out of his check. An example of this could be the tools a mechanic buys for his job that he pays for out of his paycheck. This deduction does not change what he makes, but it does change what he takes home. sssss When it comes to social security and medicare taxes, the employee is only responsible to pay half. YOU, the employer, pay the other half of these two taxes. If you fail to withhold these taxes from your employee’s pay, you are responsible to pay the WHOLE amount. You can wind up paying both halves when you don’t withhold from the employee. sssss You, the employer, are also responsible for paying federal unemployment taxes. You may send a payment every quarter, but this report is not due until the end of the year. Your state, however, may have a report and payment due each quarter. sssss What’s next? File your reports and pay the taxes due for Q2 before July 31st to avoid penalties and interest for late filing and/or late payment.  

Ever since I was a little girl, Fourth of July has been of on my favorite holidays. In my little town we had a great celebration. The children decorated their bicycles to ride with the floats in the parade through town. The town’s fire truck sounded it’s horn and gave short blasts of the siren. We ate hot dogs and ice cream. And, of course, we always looked forward to the fireworks! 

Do you know what the fireworks represent? Think about the words of the Star Spangled Banner: “The rockets red glare, the bombs bursting in air…” 

What was this American Revolution all about? You guessed it. TAXES! The original “tea party” in Boston, Massachusetts was the beginning of this long-brewing war. The people settling the American colonies were unhappy paying taxes to the King of England. They did not want taxation without representation.  

This article is not about any political posturing. It is totally about income taxes. I am not just an Audit Specialist. I am also an Income Specialist. I always hope you have to pay a LOT of tax because I want you to have made a LOT of money. At the same time, I want you to pay your lowest legal tax and not a penny more.  

An individual pays tax on their individual income. A business owner has several choices. If you choose to file your business taxes as a sole proprietor, you will report your business income and expenses using Schedule C on your 1040 personal income tax return.  

If you choose to be a Limited Liability Company, LLC, you will file your Articles of Organization. Now you may choose to be taxed as a corporation or as a “disregarded entity.” This is just a fancy way of saying Schedule C.

If you choose to be taxed as a corporation, you file Articles of Incorporation. You may also qualify to elect “S” Corporation status. This “S” status is not available to everyone corporation. The “S” corporation does not pay tax on its profits. Those profits pass through to the shareholders. The “S” corporation profit is included in the individual shareholders’ taxable income. 

The “S” corporation must be sure to pay a fair wage to the owner or shareholder who works in the business. They cannot pass through their entire profit as dividend to avoid employment tax issues.

A regular or “C” Corporation will pay tax on their net business income. The net income is the result of subtracting business expenses from total, or gross, income. When the “C: Corporation declares a dividend and pays that dividend to the stockholder, that stockholder also pays tax on the dividend income. This is why the “C:” corporation is subject to what is called double taxation. 

The freedom of choice is one of our great rights we have as Americans. We are fortunate to be able to choose the type of entity that best suits our business. Enjoy your red, white, and blue holiday. Keep your business “in the black”. And stick with me to learn the rules of this tax game so you can play to win. Beat, not cheat, the IRS. Keep more of what’s yours from becoming theirs, spelled the-IRS.

According to Benjamin Franklin, the only things certain in life are Death and Taxes.

I just spent most of my Saturday reaching out to people who I thought needed to know that a good friend of ours had passed away. This lady had more influence than any single one of us realized. Let’s call her Jill.

Why am I sharing this with you? Why am I playing with the many pieces to the puzzle of her life?  Well, because Jill left no will and I am trying to make some sense of what is left. How does that involve me? I helped her buy her apartment and the neighbors and manager reached out to me as someone who might be the one to start trying to tie up loose ends. 

I want YOU to understand the importance of drafting your will or even creating a revocable living trust. I have helped many people work with the legal community in preparing these critical documents. Because we had had conversations in the past, we think we know what Jill’s wishes were. But did she change her mind since we talked long ago?

Where did she keep her important documents? Will I find them all in one place? Do I have a responsibility as co-owner of her apartment? Am I biting off more than I want to chew by letting people know of her death? Have I forgotten anyone? I have no map to follow. But I do have a law firm I can call for advice.

Will I have a liability that I am not aware of? I learned at the Internal Revenue Service, that ignorance is no excuse. Just because I don’t know the answer doesn’t mean I can risk blundering into committing some grave mistake.

Jill is not just a friend. She is also a former tax client. Jill filed her last tax return many years ago. She has not had sufficient income to require her to file since that last return. But will that be the case for you? Some clients DO have income that keeps them filing a tax return up until the date of their death.

Other clients have created a revocable living trust. As long as they are living, they can change their mind. They can revoke one or more provisions of that trust. While they are alive, they report all that income on their personal return.

The day after the trust owner’s death, the trust becomes IRREVOCABLE. No more changes can be made and the trust then must file it’s own tax return. Have you ever heard of Elvis Presley or Michael Jackson? They both are making more money after their death than anyone ever imagined. As long as there is income, there is tax to pay.

After you die, your spirit will not really care what happens to the stuff you leave behind. But the people you leave behind may feel this stuff is important. Help them know what you would want them to do.

• Step One:  Make out your will or trust, or have someone assist you. This is your last love letter to family and friends.
• Step Two:  Tell someone where you have put your important papers.

• Step Three:  Enjoy your life. This is NOT a dress rehearsal.

Nothing is deductible. Unless Congress says it is, of course. It is our elected Senators and Representatives, our Congress, that make the tax laws. It is the Internal Revenue Service that is charged with enforcing the tax laws. All income is taxable. The IRS expects you to report all of your income. When you take a deduction, you are subtracting that deduction from you income and you pay less tax. I want you to pay your lowest legal tax, not a penny more. And to do that well, I think you need to know the rules of this tax game. Generally, the cost of food is not deductible. We all have to eat. Food is a personal expense. But food can sometimes be a business expense. And business or job-related expenses can be deductible. You just need to structure the circumstances. Most of the time my husband does the cooking. He loves to cook. He is a good cook. I can cook too. But when I cook now, I make reservations. 🙂 Not long ago we went to dinner at a popular restaurant. The food is always good but this night it was very noisy. I was thinking how hard it would be to have a business conversation in such a noisy place. When you want to deduct the cost of your meals, you need to do certain things. First, there must be a business purpose for this meal. How do you conduct business over a meal? There are several different ways you might have a deductible meal. Is this a business meeting in your place of business? Are you the business owner feeding your employees at a meeting? That meal could be 100% deductible. Are you the business owner entertaining customers at a get-together? Are you a business person entertaining a client at a restaurant. Are you taking a customer or a client to a social event? Those meal expenses could be 50% deductible. Why only 50%? Because the cost of your own meal is not deductible. The cost of your guest’s meal is. But you are not looking at who ordered what, just the whole bill, including tax and tip. How do you make these expenses deductible? DOCUMENTATION is the key! Recordkeeping is what protects your deduction. The expense must be directly related to conducting business. Your objective must be to generate income. After all, this is INCOME tax we are talking about. The business can be conducted immediately before, during or immediately after the meal. The meal cannot be lavish or extraordinary if you want the government to pay for it. Isn’t that what we’re asking when we reduce the income we pay tax on by taking an allowable deduction? Meals with co-workers or associates are generally not deductible. The IRS says you don’t need an actual receipt for meals under $75, but I still encourage my clients to keep all of the receipts you can for any tax deductible expenses. You do still need records to substantiate your deductions. Your records do still need to show for each separate expense: the date, the name of the place, the business purpose (who you entertained), and the amount spent. This amount can include the cost of the meal including tax and tip. I ask my clients if the remember the 5 “w”s of journalism? Write down WHO your entertained, WHAT was the purpose of your meal or event, WHEN (the date) you did this, WHERE you went, WHY this is going to help your business and finally, How Much did you spend? If you do not keep adequate records, you can lose you deduction. So you decide. Is your deduction worth the extra time to protect it, to save it?  

My mother was a Secret Keeper. My father was a private man. They both survived The Great Depression and World War II. I thought it was their generation that kept them tight lipped. I was never taught how to gossip.

 

The very first movie I remember seeing in the theater with my Mother was “Bambi”. In that movie Thumper’s mother told him, “If you can’t say anything nice, don’t say anything at all.”

 

Being a secret keeper means I hold the information you share with me with greatest confidence. I am not your confessional priest who will  absolve you of your sins. I am your Enrolled Agent who can represent you at all levels of the Internal Revenue Service worldwide. Not just nationwide, but anywhere in the world the IRS has an office.

 

I became an Enrolled Agent, an EA, after working five years for the IRS. I was a Tax Audit Supervisor. That specialized training is what I rely on to help me in defending you and your tax return in a tax audit.

 

When I prepare your tax return I look at the information you give me with the eyes of the IRS. I sign your tax return as your preparer based on all information of which I have knowledge. You sign you tax return under penalty of perjury. That  statement is called a “jurat.” It states that you have examined the return and the schedules and attachments, and to the best of your knowledge and belief, they are true, correct and complete.

 

I am thorough when I prepare your return. I want you to pay your lowest legal tax. But I don’t want either of us to invite trouble from the IRS. And as your preparer, I am obligated to answer any IRS question about the preparation of your return. That is different that representing you in an audit.

 

When I represent you in a tax audit I have confidentiality with you, but I do not have the client privilege that an attorney does. If I did NOT prepare your return, and represent you in a tax audit, I have an advantage. I will answer their questions the best I can. But I will not volunteer anything unless I think it will help your case.

 

If you are a new client to me, and I feel there are some audit issues that may reveal the return being examined is not totally accurate, if I think you might be flirting with tax fraud, I will refer you first to a tax attorney. Neither of us were involved in preparing your return, so we don’t have knowledge to answer IRS questions about the process of preparing your return. And if the attorney chooses to engage me to do the work of representing you in the audit, the attorney may choose to extend the client privilege to me for this audit.

 

Does that mean you are making a mistake by choosing me to prepare your return? Heck no! You have the best on your side. My aim is to help you file a complete and accurate return and at the same time avoid an IRS audit. Just like in Las Vegas, what happens at my desk stays at my desk. I am a secret keeper.

 

Always to your lowest legal tax,

Nellie T Williams, EA