Haircuts

How often do you get a haircut?  On average, I get a haircut every two weeks.  If I don't get a haircut regularly, I start to look funny.  Although the frequency with which you visit the barber or hair salon is at your discretion, if you are a high-income taxpayer, you might be getting an extra haircut in 2013 that you didn't know about. As a part of the new tax laws implemented at the end of 2012, the IRS will be giving high-income taxpayers their own haircut through the provisions known as PEP and Pease.  This refers to the phaseout of personal exemptions (PEP) and certain itemized deductions (Pease) when adjusted gross income (AGI) reaches a certain amount.  The AGI limit is different based on your filing status, which can be Single (S), Head of Household (HOH), or Married Filing Jointly (MFJ).

Personal exemptions

Personal exemptions are allowed to reduce adjusted gross income (AGI) in arriving at taxable income.  Taxpayers typically receive one exemption for themselves, their spouse, and dependents.  For instance, if you are a married taxpayer with two dependent children, you are allowed four personal exemptions.

The personal exemption amount for 2013 has been set at $3,900.  However, the exemption amount will begin to phase out when AGI reaches $250,000 (S) / $275,000 (HOH) / $300,000 (MFJ) and phases out completely at $372,500 (S) / $397,500 (HOH) / $422,500 (MFJ).  The exemption is reduced by 2% for every $2,500 over the AGI limit.

Example: Bonnie and Clyde are married taxpayers with three children.  Their AGI is $330,000 and their personal exemption amount is $19,500.  Their AGI exceeds the limit by $30,000 and therefore their personal exemptions are reduced by $4,680 ($30,000 / $2,500 x 2% x $19,500).

Itemized deductions

Itemized deductions consist of specific expense items that are permitted to be deducted on an individual tax return, the most common of which are medical expenses, state taxes paid, charitable contributions, and mortgage interest.

Itemized deductions will be limited when AGI reaches $250,000 (S) / $275,000 (HOH) / $300,000 (MFJ).  When these limits are reached, itemized deductions will be reduced by an amount equal to the lesser of 1) 3% of AGI or 2) 80% of certain itemized deductions.  All itemized deductions are subject to the 80% calculation except for qualified medical expenses, interest expense, and casualty/theft losses.

Example: Bob is a single, unmarried doctor.  His AGI is $285,000 and he has total itemized deductions of $50,000.  Of these deductions, $10,000 is interest expense.  His itemized deductions are therefore reduced by $8,550, which is the lesser of 3% of his AGI ($285,000 x 3% = $8,550) and 80% of certain itemized deductions (($50,000 total itemized deductions - $10,000 interest expense) x 80% = $32,000).

Conclusion

If you are a high-income taxpayer, you will most likely be affected by one or both of these provisions.  There are still 3 months left in the year, which is plenty of time to consult a tax professional on ways to reduce the impact of the PEP and Pease on your individual situation.  This will ensure that the only haircut you have to worry about is the one you get every two weeks.

Charity

An area that can be considered as one of the most hotly contested on a tax return is charitable contributions. Charitable contributions can be made to qualified organizations in either monetary or non-monetary form. This could be as simple as putting a check in the offering plate at church on Sunday morning, or more complex, such as a charitable remainder trust. Following are some things to keep in mind as you select a charity to contribute to, how to determine what to contribute, and your recordkeeping responsibilities to justify your deduction. Type of charity

When donating to a charity, it's important to know what kind of charity it is. Most charities that you will contribute to are qualified non-profit organizations under the proper Internal Revenue Code section, such as 501(c)(3). Large national/international charities like the American Cancer Society or the United Way, and the majority of organized churches, fall under this category. But there are other types of organizations, like private operating foundations, that do not fall in the same category. Knowing the kind of charity you're giving to is important because contributions are limited to a certain level of your adjusted gross income (AGI). The deduction for contributions to qualified organizations are typically limited to 50% of AGI, whereas contributions to private operating foundations can be limited to 30% or 20% of AGI.

Cash is king

When contributing to a charity, cash is king for two reasons. First, this is the easiest way for you to keep up with your contribution; you write the check, and the charity will send you a receipt saying that you contributed $xx, and that no goods or services were received in exchange for the contribution. Second, cash is the best asset for them to support their programs. With cash they can buy supplies and pay their employees, as opposed to if you contributed a car, which they would have to maintain or sell.

What do I keep?

As mentioned above, when making a contribution to a qualified charity, they should issue you a receipt. You should keep these with your tax documents to support your deduction if you are ever audited by the IRS. Charities that receive non-cash contributions are getting pretty good about issuing receipts as well, such as Goodwill or Habitat ReStore.

There are some contributions that, regardless of what kind of paperwork you come up with, are not deductible. For example, payments to individuals and support of political organizations are usually not deductible.

Benefits of a paid preparer

The United States of America is a great country.  We have many freedoms, a democratic government, and as a population we have to opportunity to chase the American dream and live our lives as we please.  But those benefits come with a price.  As I like to say, "America is the greatest country club in the world, and the membership fees are the taxes that we pay." For most Americans, getting together tax information, figuring out how to report it to the IRS, and filing a tax return can be a cumbersome and stressful process.  To alleviate some of this stress, consider hiring a paid tax preparer.  There are many benefits to engaging a paid preparer to do your taxes.

We know the rules

The tax code is complicated.  Without a full knowledge of the code, you are likely to report income incorrectly or miss deductions.  CPAs know the code and know how to report your information.  They also know the differences between Federal tax code and states in which you might have to file.  They can also help if you get a nasty letter from the IRS and amend previous tax returns if necessary.

We can help you through life changes

Whether you just bought a house or had a child, got divorced or had a death in the family, CPAs know how to guide you through life changes.  They can make sure that you report your situation transparently and accurately, and also explain to you what it all means.

We keep you up to date

Not a day goes by when I don't read something or see something on the news and think "wow, that really might affect my client."  We worry about your taxes so you don't have to, and we keep you up to date on the changing landscape to help you plan during the year.

It's important to find a tax preparer that you trust, that understands your business and family, and that takes a genuine interest in your situation.  Don't be afraid to be honest with your preparer, especially about deadlines and fees.  Instead of stressing about your taxes, let a CPA help and rest easy knowing you are taken care of.

Simplify my home office

Beginning in tax year 2013 (returns which will be filed during 2014), the IRS is offering a simplified option for the Home Office Deduction.  If the space in your house that is used exclusively for business on a regular basis is <= 300 square feet, then long gone are the days of keeping track of your cleaning, insurance, utilities and other household expenses. In previous years, the benefit of the deduction usually did not outweigh the trouble for getting together the information needed to make the calculation, especially when you have a self-employed person using a very small part of their house as an office (< 10% of the home).  The calculation also confused taxpayers because some parts of the deduction, like mortgage interest and real estate taxes, were allocated between the Schedule A Itemized Deductions and the Form 8829 Expenses for Business Use of Your Home.  Then there is the added headache of depreciation, which potentially was recaptured if you later sold the residence that housed the home office (meaning it had to be added back when you sold the house).

The simplified option is as its name implies: simple.  Take the square footage of your home office (not to exceed 300 square feet), multiply by $5, and that's your deduction.  There is no depreciation allowed and no splitting of household costs - all of your mortgage interest and real estate taxes go to the Schedule A.  Some of the characteristics of the deduction will remain the same, such as the space in the home must be exclusively used for business and the deduction cannot exceed your income from the business activity, but overall this simplified method will be much easier for some taxpayers.

It is important to note that the regular (original) option is still available, and can be beneficial to taxpayers that use a significant portion of their home exclusively for business.  The benefits of the deduction will be different for a consultant that has a 150 square foot office in their 3,000 square foot home than for a landscaper that has a 1,000 square foot garage used as a shop in a 2,500 square foot home.  It would also be beneficial for the taxpayer to do a rough calculation to see if the $5 per square foot is consistent with what they would be getting under the regular method.

College

We were just dumb kids with a six-pack that a bad fake ID bought, sitting on the living room couch, hoping that we didn't get caught.  And when we did, my Dad had some good advice for me.  He said "son, there's a time and place for just about everything - it's called college."   "College" by Brad Paisley with Pat Green

If you haven't heard the song, "College" offers a great synopsis of the college experience from packing up his car to having empty pizza boxes covering the floor of a dorm room and ultimately meeting the love of his life.  The song corresponds pretty closely to my college experience, but he did leave the listener with one question - how do you actually pay for college?

According to CollegeData.com, the average cost for in-state public education for the 2012-2013 school year is $22,261, and the average cost for a private college is $43,289 (see full story here: https://www.collegedata.com/cs/content/content_payarticle_tmpl.jhtml?articleId=10064).  This is a serious chunk of change, and it's only for one year!  Stretch that to four years and then add the potential for a Masters degree, Law school, or even Medical school and the resulting stress of sending a kid to college can be overwhelming.

Fortunately, there are a variety of tools out there to help the normal taxpayer save for college and provide a small tax benefit at the same time.  The most popular option is the 529 plan, which are commonly offered by states individually.  The 529 plan in its simplest form allows for a person to make contributions to an account for the benefit of a soon-to-be college student.  Once the student starts college, funds can be withdrawn from the account to pay for qualified education expenses with no tax ramifications.  Also, most states offer a benefit to a taxpayer that makes contributions to a 529 plan offered in that state.  For example, in Arkansas (my state), a taxpayer is allowed a credit on their Arkansas return for contributions to a state-sponsored 529 plan.  To find a list of 529 plans in your state, look here: http://www.savingforcollege.com/529_plan_details/

If you already have a child attending college, there are also some income tax benefits to take advantage of for payments made related to the education.  Student loan interest is allowed to be taken as an adjustment to arrive at AGI for taxpayers meeting certain income limits.  There are also credits available for education, such as the American Opportunity Credit, the Lifetime Learning Credit, and the tuition and fees deduction - see IRS Publication 970 for an overview of these credits and deductions (http://www.irs.gov/pub/irs-pdf/p970.pdf).  Keep in mind that there are many rules for these deductions, such as only being able to take one per student and qualifications related to the type of education.  If you are supporting children in college, consult with your tax adviser on which credits/deductions you might qualify for.

The underlying theme is this - it's never too early to start saving, and even saving a little is better than none at all.  By opening a 529 and saving for your child's education and taking advantage of tax benefits once they are enrolled you can ensure that you can breathe a little easier financially while your child, like Brad Paisley, is having "the best days of my life...in college."

Summertime tax tips

As the summer comes to a close we find ourselves at a transitional point in the year.  The kids are trading in their swimsuits and long days at the pool for backpacks, school supplies, and sack lunches.  I know with the temperatures hanging out in the 90's and 100's it's hard to believe, but fall will be here before you know it.  As this transition in the year happens, it also presents a good opportunity for people to do a little mid-year tax planning.  Below I have listed out a few things to consider as we enter the last five months of the year.

Clean out your closet

Take a look at your closet right now.  Do you see anything hanging up that you haven't worn all summer?  Maybe since last summer?  This is a great chance to go through your closet and bag up any clothes, shoes, and accessories that you feel comfortable passing along to a new owner.  Put all those clothes in a box or a bag and drive them down to your local charity (such as Goodwill) and make your donation.  Don't forget to get a donation receipt, fill out your personal information, list your donated items and assign a conservative value to them.  

Look at your FSA and HSA balances

There are five months left in the year.  But in those five months, you will probably go to the doctor and the dentist at least once, maybe the eye doctor, and possibly have to fill a prescription.  If you have sporty kids at home, you'll probably also been spending some time getting physicals for their various activities.  If you participate in an FSA, HSA, or flex spending account with your employer, this is a good time to see what your balance is, how much you expect to contribute for the remainder of the year, and compare that to your expected expenses.  Remember, in most of these plans you have to use it or lose it.  

Amended tax info

Is there an ominous envelope sitting on your counter at home with the words "IMPORTANT TAX INFORMATION ENCLOSED" that you haven't had a chance to open?  There's a good chance it is from your investment broker with corrected tax reporting information regarding your investments.  Or, it could be from your mortgage company discussing private mortgage insurance premiums.  Either way, you should take a look and discuss with your tax preparer to see if you need to amend your tax return.  

Changes in tax situation

Has 2013 been a year of change for you?  Maybe you bought your first (or third) house, maybe you had your first (or third) kid, or maybe you got nervous and sold a big part of your investment portfolio to avoid the ups and downs of the market.  All of these changes could have an impact on your 2013 tax return which could result in you getting a big refund or having a big balance due in April 2014.  To avoid this, talk with your tax preparer about the changes in your situation, your year-to-date withholdings from your paycheck, and any estimated tax payments you might have already made.  

Get up to date

The "fiscal cliff", "Obamacare", QE3, DOMA...there has been a barrage of news stories about all of these topics and you probably find yourself saying "I feel like this should affect me somehow?"  Well your intuition is correct.  For example, if you expect to make at least $250,000 this year, or you have significant income from investments such as interest, dividends, capital gains, partnerships, etc., or you are a small business owner with employees, then you are right in the crosshairs of several of these changes.  Touch base with your CPA to discuss your situation and consider any planning moves you can make in the closing months of the year.