One of the mistakes that people often make is to think of their home as an asset to put on their balance sheet. The problem with thinking like this is that without that asset, you have no place to live. Therefore, I always advise clients and associates that are investment-minded not to think of their home as an investment.
However, if you’re a homeowner, you can look at your home in another way: As a tax shelter. You may deduct the mortgage interest paid on your annual tax return and deduct the property taxes on your Schedule A. If you don’t currently own a home, this tax benefit is significant enough to make you look seriously at home ownership.
“Points”
The concept is simple, but it starts to get a little more complicated when you add in “points.” Points are one type of fee paid at closing to your lender. If you pay points when you buy your new home, these may be deducted in full in the year of purchase. However, if you refinance your loan, the points must then be deducted over the life of the new loan. In the event you are deducting points annually and then decide to refinance again, you will be able to deduct the balance of the points when you pay off the old mortgage. Of course, all these deductions are based on being able to itemize your deductions on Schedule A.
There are some limitations.
Points must not be more than amounts generally charged in your area.
Funds provided at closing must be at least equal to the points.
Loan must be used to buy or build taxpayer’s main home.
Points are stated as a percentage of the principal amount of loan.
Points are clearly stated on the settlement statement as charged for the mortgage.
Predictably, there are limits on mortgage interest deduction. Only the interest on the first $1 million of home acquisition debt is deductible. (Acquisition debt is defined as debt to purchase, build or substantially improve the residence.) Home equity debt limits are the lesser of the fair market value of the home reduced by the acquisition debt or $100,000 ($50,000 if married filing separately).
Probably the greatest advantage of home ownership occurs when you decide to sell your home. If you have owned and lived in your personal residence for two out of five years, you can sell the home and not be taxed on a profit up to $250,000 for singles and $500,000 for couples. The way home values have increased in recent years, this can be a tremendous investment opportunity. This rule seems very straight forward and simple, but beware! There are a number of exceptions.
Job related move—if you have to move out of your area (a 50-mile radius), and are unable to meet the two year time period, you can prorate the time based on a formula utilizing a ratio consisting of the number of days that you owned and lived in the home to the total number of days in the relevant 24-month period (approximately 730), multiplied by the exclusion amount.
Health problems requiring a sale—if health problems force you to move from your principal residence, you can prorate the time and exclusion based on the formula above.
Ideally, a couple that kept good records of time of ownership could buy and live in a home for two years, sell for a profit and then repeat this process. Still, there are a number of pitfalls that cause tax problems, such as the special rules surrounding home offices and move out/rent/return situations that effect the two in five requirement (this involves adjusting for depreciation recapture). Given the many regulations and nuances of the tax laws, many people opt to hire a licensed tax practitioner, such as an enrolled agent.
So there you go…The roof over your head can be a substantial tax shelter, regardless of how much equity you do or don’t have. If you would like to learn more about your home as a tax deduction, or if you are a real estate investor looking to incorporate tax planning into your acquisition and disposition planning, give me a call at (970) 930-1040.
To your tax savings,
Jassen Bowman, EA
The vast majority of small businesses could use the services of an accountant. The number of ways in which it is possible to introduce errors into your business through accounting practices is staggering. Your accounting includes issues related to payroll, monitoring profitability, inventory control, avoiding penalties and interest on taxes, and much, much more. It is wise to select a competent professional in this field to help you navigate the minefield of accounting pitfalls. Selecting such a professional can be difficult, especially since not all accountants are created equal. Here are some questions to ask to help ensure that you are selecting the best accountant you can for your business.
1. Are they recommended by a trusted colleague?
One way to start the search for an accountant is to ask people that you already trust for suggestions. Your banker, insurance agent, attorney, and financial planner most likely know and work with accountants on a regular basis. Also inquire to the companies that you do business with, such as you barber, florist, butcher, and plumber. Chances are, these sorts of business owners use an accountant for some business functions, since these tend to be the types of business owners that are excellent at what they do, but not so great with dealing with the complexities of taxes and accounting.
2. Ask around your Chamber of Commerce.
If you are familiar with your local Chamber, they can be an excellent resource. You can ask at Chamber events for referrals to accountants, and you are likely to meet many such service providers at Chamber functions, trade events, and leads groups. Also, many Chambers have an internal complaint system and can let you know whether or not complaints have been issued locally against an accountant or firm.
3. Do they have any complaints with the Better Business Bureau?
When many individuals decide to take action and make a complaint against a firm, they often think first of the BBB. Check with your local division, or look them up online, and make sure that the company you are considering hiring has a good record with the BBB. If they have a Gold Star award from the BBB, then you’re on the right track to working with a company that is reputable and stands by their word. The BBB’s new letter grading system can also help you in selecting a good firm.
4. Have they ever been investigated by your state Attorney General’s office or state board of accountancy?
This is another place to do your own due diligence. Complaints with the state AG or Board of Accountancy is an automatic red flag and should be highly considered before selecting a firm.
5. What services do they provide, and what services do you NEED?
Think about exactly what you’re looking for in a service provider. Do you need full service accounting, outsourcing all functions to another person or firm? Or do you just need year-end tax preparation? Knowing the answer to what services you need will help you pick the best person to do what you need, and will affect your budget for getting it done. For example, if you just need tax preparation, then you might be better off with an experienced tax preparer instead of a CPA firm that mostly does auditing and general accounting. If you only need payroll services, then you might want to hire a payroll company rather than a bookkeeper that does payroll on the side. If you need the books updated weekly or monthly, most communities have competent, independent full charge bookkeepers that you can hire.
If you’re looking for somebody to come set up your books and show you how to use your accounting software, you may want to consider a general CPA or a competent bookkeeper. If you do all your own books using Peachtree, Quickbooks, MS Money, or another popular commercial software package, it can be very helpful to have somebody to call should something go wrong. The large commercial accounting software publishers all provide some sort of certified expert rating system for individuals that are experts on using their software. You may want to look for and consult with such a certified expert on your particular accounting software. For example, Intuit offers its Quickbooks Certified ProAdvisor program to consultants. Finding one of these certified individuals can really help you a lot if you’re doing the books yourself.
If your only interest is in tax compliance, look for a CPA that specializes in taxation, or an Enrolled Agent (EA). An EA is an individual licensed directly by the U.S. Treasury to handle tax matters, and this individual can represent you before the IRS just like a CPA or an attorney. By nature of the credential, EAs are dedicated tax professionals and are generally more competent in areas of tax issues than a general CPA, unlicensed tax preparer, or bookkeeper.
Selecting the type of professional you need is a serious consideration in this process, and depends largely on what you plan on doing yourself, and what you expect to need help with.
6. Are they licensed in some way?
Credentials are not always the most important thing to consider, but they do reflect at least a minimum level of professional competency, in theory. If they are a CPA, they’ve passed a rigorous four part examination and have at least a bachelor’s degree in accounting and two years of professional experience, at a minimum. If they are an Enrolled Agent, they have passed a very rigorous three part exam covering individuals, businesses, and practices and ethics that is administered directly by the Internal Revenue Service.
The individual preparing your tax returns, doing your books, or processing your payroll doesn’t necessarily need credentials in order to do the tax and do it right, so experience is a critical piece of the puzzle you’ll want to inquire about.
Do keep in mind that if you’re audited by the IRS, only CPAs, EAs, or attorneys can represent you, unless you wish to represent yourself, which is not recommended.
7. How much experience do they have?
How many years have they been doing what they do? What type of companies do they generally work with, such as which industries and what size companies? Inquire as to how many of each of your type of entity they work with each year. If they’re experienced working with your type of legal entity, within your industry, or your size of company, they might be a good fit.
8. How do they charge, and how much?
Don’t be afraid to ask about the money. Some firms will charge by the hour, or on a piece rate for the type of work being done. Bookkeepers will usually charge an hourly rate, while tax preparers often charge a flat rate per form and schedule. If your tax return is pretty complex, expect to pay more, which could be a base rate plus an hourly rate for doing accounting work to generate the numbers needed for various line items on the return. If you’ll be seeking software assistance, find out what they will charge for this, usually at an hourly rate. It can’t hurt to know whether you’ll be over your head in terms of what you can reasonably afford for the services you are seeking.
A word of caution: Price should not be the ultimate determining factor when decided who to use and what services to do yourself. If you’re genuinely over your head when it comes to certain tasks, don’t be afraid to spend the money. There’s an old saying that goes like this, “Do what you do best, hire out the rest.” Accounting can be one of the most frustrating aspects of owning a business, and trying to do it all yourself can take time away from what you should be doing, which is running your business to the best of your ability to generate a profit.
9. Are you comfortable with the individual?
Even if you hire a large firm to do your accounting, there is still going to be an individual person that will be doing the work and with whom you will work with almost exclusively. You need to sit down with this person and make sure that you are comfortable working with them. If anything makes you uncomfortable in any way, you need to find somebody else. Think about it: This person is going to have access to an incredible amount of private financial information, so it has to be somebody you feel comfortable trusting.
10. Don’t be afraid to make a change.
Even after selecting somebody to work with, don’t be afraid to find somebody else if things aren’t working out. Your accounting is too important to the success of your business to leave it in the hands of an incompetent person or somebody you don’t completely trust. Problems with your current accountant could range from having just plain bad interpersonal chemistry to gross incompetence on their part, or perhaps you have the wrong specialist to meet your needs. Regardless, don’t hesitate to take your business elsewhere, since your accounting, bookkeeping, and taxes are simply that important to the life of your business.
Using the ten steps outlined in this article will give you a great start towards finding the accountant that is right for you. Identify the type of professional that can best provide the services you need, ask around for referrals, then check them out and interview them personally. This process will ensure that you get the best accountant for your business needs.
Until next time,
Jassen Bowman
Are you a Florida resident or business owner?
Do you owe the state any sort of back taxes, other than unemployment taxes?
Then the state has an offer for you! Florida is joining an ever growing list of states that have recently offered tax amnesty programs. More and more state legislatures are trying to increase delinquent tax collections to fill the state coffers in these hard economic times by offering “deals” to everybody on their tax debts.
Here’s how Florida’s program will work. The state will waive ALL penalties on your tax liability that was assessed prior to July 1 of this year. In addition, the state will waive 1/4 of the interest charges. If you have not made the state aware of a tax liability that you know is there, they will waive 1/2 the pro-rated interest charges.
In order to participate, you have to be free of criminal prosecution and/or investigation for violation of state tax laws, and you can’t already be on a payment plan. The program ends on September 30th, so if you think you qualify, apply ASAP.
For more information, visit the Florida Tax Amnesty Program web site.
Great article on the MSNBC blog about the tax resolution industry in general, and companies advertising “pennies on the dollar” settlements for IRS tax debt. Well worth reading, as are the comments, actually.
Most of the comments are from people that either got ripped off by a tax resolution firm, or tell about how they just did themselves, and others responded to THOSE comments asking about HOW to do it themselves.
Being in the tax resolution industry, having it be my livelihood, you would think I wouldn’t WANT people to know how to do it themselves, which couldn’t be further from the truth.
Let’s say you owe the IRS $15,000. You can generally resolve this yourself in one phone call. Granted, it’s an hour or two hour long phone call, but it’s still just one phone call. Instead of paying me $1500 to do that for you, you really are better off applying that $1500 towards the tax debt itself.
Those of us that honestly try to do right by our clients and work ethically and charge reasonable fees for our services always have, and always will, have this black cloud hanging over us because of the scumbags in our industry that rip people off. From charging unconscionably high fees, to collecting fees and then never DOING anything (which is what the class action suit against JK Harris was all about), to just doing mediocre work in the interest of ramming as many clients through the door as possible to maximize profits, the industry as a whole does have a bad rap, and understandably so.
One of the commenters on the MSNBC blog article just wanted to know who to contact at the IRS to resolve their tax issues. I posted this comment on their blog and hope the person sees it, since nobody else volunteered the information. I’ll repost it here for my readers:
For personal tax matters, call ACS at 800-429-7650. For business taxes, call 800-829-3903. The hold times are lengthy – expect to wait 30 minutes to an hour.
If you owe LESS than $10,000 in personal income taxes, ask for a Guaranteed Installment Agreement. They’re required to give it to you — just tell them what you can afford and get it set up.
If you owe between $10k and $25k in taxes, ask for a “Streamline Installment Agreement”. The person on the phone may need to have a call center floor supervisor approve it, but they’re painless.
While you’re on the phone, ask for penalties to be removed, and explain WHY you weren’t able to pay the tax on time. You might be surprised and just have them remove some penalties without having to send in a written request.
If you’re interested in seeing whether you qualify for an Offer in Compromise, download Form 656-B from the IRS web site — there is a worksheet on pages 9-11 that walks you through how to calculate your Offer amount. If you owe LESS than that amount, then you are NOT an Offer candidate – no matter what some sales guy tells you.
Bottom line is that you’re always going to be better off talking to a licensed professional, rather than a sales person that most likely doesn’t know much about actual tax code. Look at it this way: If you get a DUI and want to fight it in court, do you want a consultation with a sales guy at the law firm, or with an actual lawyer?
There are plenty of industries where the salesperson actually is a licensed professional, such as when you’re buying life insurance or working with a real estate agent to buy a house. The tax resolution industry, however, does NOT operate that way. There is a 99.9% chance that the sales guy on the other end of the phone is NOT a licensed taxpayer representative, and to be 100% honest, I have yet to meet a sales person in our industry (which we refer to as “openers” and “closers”, just so you know) that really knew much about taxes, beyond what they are told to say in their script, let alone be a licensed representative. I’m in no way trying to disparage the profession of sales, as I’ve been in it myself for years, but when it comes to owing money to the government, your salesperson needs to be a subject matter expert in order to really determine what services you actually need.
If you want to discuss your case (for free, what a concept, eh?) with a licensed person, feel free to send me an email, or call me directly at 866-627-7654.
Until next time,
Jassen Bowman, EA
(866) 627-7654
