Last updated: March 30. 2014 9:38AM - 1404 Views
By Fred J. Croop Contributing Columnist



Story Tools:

Font Size:

Social Media:

As an annual event, Tax Day on April 15 is not looked upon with eagerness for many reasons. For some, it creates anxiety because of the tedious process of collating mounds of paperwork and filling out forms in order to file an accurate return, while others worry about the unknown – will I owe Uncle Sam or will I receive a refund?


A lot of the unknown that is involved with our annual tax returns can be eliminated by taking a cautious approach and with simple planning. Events, decisions and life circumstances that occur in 2014 could have a significant impact on your returns next year – sometimes as a complete surprise.


Tax preparers, like me, wish their clients had told them about these items during the tax year instead of springing it upon them when they meet in the beginning of the New Year. If business partners, for example, decide to change any aspect of their partnership, the accountant should be contacted at that time so they understand the tax ramifications. Businesses recognized by the IRS as “S Corporations” can have only one class of stock. Sometimes shareholders do not realize the actions they take during the year might create a second class and therefore jeopardize their “S” status.


Taxpayers can be tripped up by something as simple as what records and documentation to keep. Sometimes transactions need to be recorded contemporaneously with the activities and not recreated later. Taxpayers often do not understand passive activity loss rules. Therefore, they are caught in a cash-flow bind when they have to pay a significant amount of taxes because these losses have not been offset against the income of non-passive activities. Immediate expensing of furniture and fixtures for rental properties is not allowed as in other non-rental business activities.


Small business owners will often meet with their accountant in the beginning of the year and express a desire to establish a retirement plan for the prior year to maximize tax-sheltering of taxable income and retirement savings. Some of the retirement plans that can best accomplish these goals need to be established by Oct. 1 or Dec. 31. It is too late at the date of the meeting.


Those new to being self-employed often are surprised and caught short by the fact that they pay both the employee’s and the employer’s share of Social Security and Medicare taxes – more than 15 percent of their income for which they did not plan. People already collecting Social Security benefits often are disappointed to learn that they continue to pay those taxes on any wages or self-employment income they earn in their retirement years. Retirees also collecting Social Security often do not realize how the


additional income they generate affects how much of their retirement benefits become taxable, effectively resulting in a very high marginal tax rate on their additional income.


For those of us who have not reached 59½ years of age, there is a penalty in addition to the taxes owed for prematurely taking money out of a tax-sheltered retirement plan or borrowing on the plan without the ability to repay the loan under most circumstances.


For those who have invested in U.S. savings bonds, the tax owed on the interest accrued when the bonds are redeemed can come as quite a shock, especially if the value of the bonds is significant. Some people have had to divest additional bonds in order to pay the taxes and therefore continue the problem for an additional year.


The gain on the sale of a principal residence – or at least much of it – is not taxable. Individuals, though, need to know the tax-code definition of what represents a principal residence and what activities and decisions can make a home something other than a principal residence. Using part of the home for a home office or other business purpose that created eligible, tax-deductible depreciation can create a gain and renting out what was a principal residence must be done carefully in a prescribed manner to avoid losing the tax benefit.


One final word of caution: People in the community who are board members of organizations with nonprofit tax status should contact their tax preparer during the year. There are political activities and transactions with donors, employees, and other related parties that are not allowed and can jeopardize tax-exempt status.


The bottom line for tax season is being prepared. It is wise to contact your tax preparer immediately when you have a significant event occur or decision to make. Do not wait until the tax year has ended. This practice will cut down on taxing surprises and will often result in a better bottom line on the tax return.


Fred J. Croop, Ed.D., M.B.A., C.P.A., is the dean of the College of Professional Studies and Social Sciences at Misericordia University in Dallas Township.

Comments
comments powered by Disqus


Featured Businesses


Poll



Mortgage Minute