William's Tax Planning Blog

I've noticed a lot of people are taking jobs as an independent contractor, sometimes to supplement their income, and sometimes as a way to build a career as their own boss. I'm generally in favor of people being their own boss. It's a rewarding career path and can pay off financially. Nonetheless I do get concerned, and perhaps a little protective, when I hear from new college graduates and other people just entering the workforce that a company is going to treat them as independent contractors. Sometimes this is legitimate, but sometimes this is a move on the part of companies to avoid paying payroll taxes at the expense of their workers.

A comment left on the post "What's Form W-9?" caught my attention in this regard. The question deserves a fuller response, and you might have some advice to add yourself.

The question asked was this:

"Hi, I am a fresh grad with no idea about this income tax thing. I joined a website [...] where people hire you online. My problem is the site is asking me to submit a W9 form and I don’t know what it is for. I have never been employed and I don’t have any ideas what will happen if I pass that form. Will I be doing income tax returns when I submit that form? Will I be he one to compute my income tax? Sorry for being stupid but I really need help."

Read more...

National Taxpayer Advocate Nina Olson highlights the top five tax issues for taxpayers dealing with the IRS in her semi-annual report to Congress. The five top issues are

• complex procedures for responding to identity theft cases,
• identifying how canceled debt income from foreclosures will be processed by the IRS,
• trends towards more aggressive collection activities by the IRS,
• whether outsourcing collection services to third-party firms has created inefficiencies, and
• concerns over lingering tax debts caused by incentive stock options.

Read more...

Yesterday two clients called me to ask about how the FDIC insurance works for covering their bank deposits. The basic idea is the federal government, through the Federal Deposit Insurance Corporation, will insure the safety of your bank deposits up to $100,000 per person per financial institution. Deposits over that $100,000 cap would be uninsured. In the wake of the IndyMac closure, people want to make sure that their bank deposits are safe and sound. You may want to move deposits over this $100,000 cap to a different bank as a way to make sure they are eligible for FDIC insurance.

And what if the worst happens and you do lose your money in the bank? You can deduct the loss on federally insured bank deposits as a casualty loss deduction. Casualty losses have limits built in and may be further reduced by the overall limitations on itemized deductions.

Because of these limitations on how much could be deducted, it would be safer to diversify deposits among multiple financial institutions to make sure the deposits are fully insured.

More information:

• Losses on bank deposits (from IRS Publication 529)
• Casualties, Disasters, and Thefts (IRS Publication 547)
• Frequently Asked Questions about Deposit Insurance (from the FDIC)

Starting this year, there's a new zero percent tax rate for long-term capital gains. To qualify for this zero percent rate, the gains have to be long-term. Also, the individual has to be in the 10% of 15% tax brackets for regular income. Here's a list of the 2008 tax brackets.

This zero percent rate comes with some opportunities to plan ahead. First, you can plan to hold on to profitable investments long enough to qualify as a long-term gain. At minimum, this means holding on to the investment for at least a year and a day. Investments held for a shorter period of time will be taxed as short-term gains at the regular tax rates. Second, tax rates are determined in part by your taxable income, which is your income after all deductions. Accelerating deductions will lower your taxable income, and thus help to keep you in a lower tax bracket.

More information: Capital gains and losses Capital gains tax rates Planning for the 2008–2010 Zero-Percent Adjusted Net Capital Gain Rate (The CPA Journal)

When finances get tight, people think about tapping their retirement savings. Sometimes withdrawing money from a tax-deferred retirement plan can prevent a financial disaster. But taking an early distribution comes with stiff taxes and penalties. Figuring out if cashing out your retirement plan will help involves comparing taxes and penalties owed on a retirement distribution to other financing options.

Here's one scenario, emailed to me by an About.com reader,

"I am thinking about taking an early withdrawal from my traditional IRA account Read more...

The IRS is becoming increasingly interested in US citizens who have sizable investments sitting in foreign banks and brokerage accounts. Not that there's anything wrong with having a foreign bank account. Rather, the IRS is looking for people who haven't reported investment income from abroad, such as interest, dividends and capital gains from their offshore accounts. That's the gist of an article in the Times Online (UK) that caught my eye today, "US expands foreign bank tax evasion probe." According to the Times reporter, the IRS is reaching out to accountants at large, international firms in an effort "to clamp down on tax evasion by US citizens."

The reporter also mentions the ongoing investigation of offshore banking practices at UBS in which wealthy clients allegedly are using foreign accounts to hide income from the IRS.

In my own practice, I more often meet people who are genuinely confused about how to report the income. Sometimes, people don't even realize they are earning significant amounts of money in an overseas account until they, or their accountants, start asking the right questions. One reader shared exactly this sort of situation in the tax forum, relating that he's trying to figure out how to determine how much income he earned from an inheritance left to him years ago by his uncle. It's not that this reader didn't know about the money, because he did. The issue is the banks seem unable to provide the documents he needs to accurately calculate how much income he earned on the investments. And that's going to make filing his taxes much harder, especially with the intense scrutiny the IRS is sure to bring on this and similar situations.

The best advice is to keep track of your investments yourself, and to report all income annually to the IRS, including foreign investments. Also, it's a good idea to report all your foreign bank accounts you own or have signature authority over.

July is a good time to do some quick tax math and make projections for how your taxes might look for the full year. That's because you'll have a full six months of financial information to make some reasonable assumptions about your income for the whole year. For example, if you expect to make about the same amount of income for the rest of the year, you could multiply your January to June wages, dividends, interest and other income by two to get an estimate for your annual income.

Then you can do some quick tax math using the 2008 tax rates and the 2008 standard deduction and personal exemption figures to help you get a good idea of how much tax you'll be responsible for this year. Be sure to compare this tax liability against your projected withholding. You may need to adjust your paycheck withholding or make estimated tax payments if your projections show you might have a balance due. On the other hand, your projections could show that you'll have a significant refund. You'd then be able to adjust your withholding to have less taxes taken out of your paycheck. The IRS has a withholding calculator on their web site to help you figure out how many withholding allowances to claim. But you'll need first need a good estimate of your income, deductions and credits for the year before using the calculator.

This may also be a good time to organize your financial documents or start using personal finance software such as Quicken or Microsoft Money or the free utility GNU Cash. These software programs can help you keep track of your tax-deductible expenses throughout the year, making it easier to print out a report of your deductions at tax time.

The IRS has increased the standard mileage rate for taxpayers who drive their cars for business and medical purposes. Starting July 1, 2008, the standard mileage rate will be 58.5 cents per mile for business use and 27 cents per mile for the medical and moving purposes. The IRS adjusted the standard rates "in recognition of recent gasoline price increases," according to the news release.

The standard rate for charitable driving remains unchanged at 14 cents per mile. That rate is set by law under Internal Revenue Code Section 170(i).

More information:

• Deducting car and truck expenses
• 2008 Quick Tax Facts
• IRS Increases Mileage Rates through Dec. 31, 2008 (from IRS.gov)

Interest charged on balances owed on federal taxes will drop to 5% starting July 1, 2008. The previous interest rate was 6% (effective from April 1st to June 30th, 2008), and before that the rate was 7%. Interest as well as penalties are charged when a taxpayer has a balance due. For people on installment agreements, the lower interest rate will mean more of their monthly payment will go towards paying off their taxes.

Additional resources:

• Interest Rates Drop for the Third Quarter of 2008 (IRS.gov)
• Previous IRS Interest Rates (TaxAlmanac.org)

Mortgage interest is tax-deductible within certain limits. The limitations are $1,000,000 of acquisition debt and $100,000 of home equity debt. Combined, this means that loans of up to $1.1 million in loan principal could be tax-deductible. Once the loan principal goes over this threshold, we need to look at what the loan proceeds were used for to determine how much interest can be deducted.

This is exactly the scenario that one reader emailed me to ask about: Read more...