Will You See Higher Tax Rates in 2011?

The year was 2001. The top marginal federal income tax bracket was 39.6%, and the tax rate that applied to most long-term capital gains was 20%. Then came the Economic Growth and Tax Relief Reconciliation Act of 2001, followed two years later by the Jobs and Growth Tax Relief Reconciliation Act of 2003. By mid-2003, the top marginal tax rate was 35%, and the 20% capital gains rate had dropped to 15%. But this tax relief was designed to be temporary--the provisions that established lower rates were crafted to self-expire after a period of time. And now, in 2010, we're only months away from seeing those provisions expire.

Federal income tax brackets

Right now, there are six marginal income tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. For 2010, these brackets apply to married couples filing joint federal income tax returns in the following manner:

2010 Marginal Income Tax Brackets
Married Filing Jointly
Taxable Income	Marginal Tax Rate
Not over $16,750	10%
Over $16,750 to $68,000	15%
Over $68,000 to $137,300	25%
Over 137,300 to $209,250	28%
Over 209,250 to $373,650	33%
Over $373,650	35%

As it stands now, these marginal tax brackets will expire at the end of 2010. There would be no 10% bracket for 2011, and the remaining bracket rates would return to their original 2001 levels: 15%, 28%, 31%, 36%, and 39.6%.

Long-term capital gain tax rates

For 2010, if you sell shares of stock that you've held for more than a year, any gain is long-term capital gain, generally taxed at a maximum rate of 15%. If you're in the 10% or the 15% marginal income tax bracket, however, you'll pay no federal tax on the long-term gain (a 0% tax rate applies). That means if you're a married couple filing a joint federal income tax return, and your taxable income is $68,000 or less, you'd pay no federal tax on the gain.

However, these rates are also scheduled to expire at the end of 2010. Absent new legislation, in 2011, a 20% rate will generally apply to long-term capital gains. Individuals in the 15% tax bracket (remember, there won't be a 10% bracket in 2011) will pay the tax at a rate of 10%. Special rules (and slightly lower rates) will apply for qualifying property held for five years or more.

Finally, while qualifying dividends are taxed in 2010 using the same capital gain tax rates described above (i.e., 15% and 0%), in 2011 they'll be taxed as ordinary income.

Will Congress take action?

In the proposed 2011 budget submitted to Congress in February, President Obama asked for a permanent extension of the current 10%, 15%, and 25% marginal income tax brackets, and an expansion of the current 28% tax bracket. The current 33% and 35% brackets would be allowed to expire, resulting in the top two marginal rates for 2011 returning to 36% and 39.6%. The expanded 28% bracket would be calculated in a way that would allow individuals earning less than $200,000 (less the standard deduction amount and one exemption) and married couples filing jointly earning less than $250,000 (less the standard deduction and two personal exemptions) to escape taxation at the top rates.

The President also proposed making the current tax rates that apply to long-term capital gain (i.e., the 0% and 15% rates) permanent, but adding a new 20% rate for those in the newly reestablished 36% and 39.6% brackets.

Will Congress act, or will it simply let current rates expire? There's plenty of time before 2011, so stay tuned …

Eight Things to Know If You Receive an IRS Notice

Did you receive a notice from the IRS this year? Every year the IRS sends millions of letters and notices to taxpayers but that doesn’t mean you need to worry. Here are eight things every taxpayer should know about IRS notices – just in case one shows up in your mailbox.

1. Don’t panic. Many of these letters can be dealt with simply and painlessly. Also the IRS is not always correct - so don't automatically assume you owe the amount the notice reflects.
   
2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.
4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call, to help us respond to your inquiry.
8. It’s important that you keep copies of any correspondence with your records.

For more information about IRS notices and bills, see Publication 594, The IRS Collection Process. Information about penalties and interest charges is available in Publication 17, Your Federal Income Tax for Individuals. Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Of course, we are available to assist you in crafting your response and/or representing you in defending your return.

Time to Rethink Financial Strategies?

The recent credit crisis is just a reminder of the importance and benefits of having a sound strategy that you can use to navigate through turbulent times. We can help you make intelligent financial decisions for the future of your business. In the meantime, here are some tips Charlie, Mike, Danielle and I compiled to help you assess your current financial condition and start re­thinking your business plan to face the current economic challenges.

1. Don't react to the news emotionally. It's difficult to make sound decisions if you do. To get a better sense of where you stand, begin by reviewing your cash position and anticipated cash needs. Are they in line with your business's short-term needs, goals and risk tolerance?
Take a fresh look at your monthly income and expenses. Have you been meeting your budgeted projections? (You do have a budget?) How much of a drop in revenues can your business withstand and for how long? What are your cash-flow needs for the next 90 to 120 days? Or 120 to 180 days? Do you have sufficient cash reserves for the next 30 to 60 days?
Check with your lenders on the status of your credit lines. Are you in compliance with their terms? Will your bank renew their commitments at similar amounts, rates and terms?
Eliminate your reliance on credit by disciplining your spending.
Refocus on your balance sheet and how much credit you are extending to your customers.
If your credit lines are frozen or at their maximum limits, consider meeting with vendors and working out a schedule of partial payments that would allow continued delivery of critical materials and supplies.
Look into alternative types of financing. Some to be considered are loans on life insurance policies, loans from key customers that rely on your business for their materials and supplies, local development agencies or the U.S. Small Business Administration.
Keep an eye on your accounts receivable. Watch for new patterns of slow payments and follow up immediately. Review your largest and riskiest accounts to determine whether credit constraint or economic slowdown will affect their ability to pay you. Keep receivables aging current at all times.
Manage accounts payable more closely. Forfeiting early pay discounts may be more advantageous in preserving cash that may be needed for critical items. Keep payables aging current at all times because that's an important tool for managing cash.
Analyze your expenses and determine which ones can be controlled. Can you reduce spending in any areas to put less of a burden on your cash-flow needs? As necessary, communicate to staff/team members about the need to tighten spending. If you are a manufacturer, review inventory management practices. Are there opportunities to reduce your on-hand inventory? Service companies should make sure they're capturing all their billable hours and invoicing promptly. Have you billed all your contractual items? How about all your pass-through expenses, such as billable third-party services and travel and living expenses?
Consider ways to pass your increased costs (i.e., fuel expense) on to your customers.
Check the safety of any cash deposits you have. On October 3, 2008 the FDIC deposit insurance was temporarily raised from $100,000 to $250,000 per depositor through December 31, 2009. If you have more than $250,000 in any one bank, move the excess to another FDIC insured bank. Consider investments such as CDARs (Certificates of Deposit Account Registry) to spread the risk of short- to medium-term cash you may have invested in CDs.
Don't engage in panic selling of your investments. Make sure your portfolio is diversified and in accordance with your risk tolerance.
Come up with a plan NOW to respond to future declines in revenues, before they actually occur. Re-think your business strategies and update projections. Review your product/service lines to identify the most profitable items and determine how to leverage for future growth in profits.
Contact your good customers. Even casual discussions can lead to new business opportunities.
Review all your insurance coverage, particularly any from companies with weak balance sheets. Be careful not to surrender a policy, as securing new coverage might require underwriting that can affect your coverage.
Calm your employees' fears about how this crisis will affect the company, their jobs and their retirement or other benefit plans. Speculation and gossip are counterproductive, so it's better to address their concerns directly.

We can help you evaluate your balance sheet as well as help develop a budget and integrate it in your QuickBooks data.

10 Planning Questions for Your Business

How well are you managing your business? Is your planning helping you steer the business well? Are you controlling your own destiny? Are you satisfied with the business as is, or do you think you can do better?

Starting, growing and even surviving in business is a matter of navigating through the tough times and steering in the right direction. And that's planning.

It may not be a formal business or marketing plan document, but it better be planning and tracking and reviewing; or else you're not really managing.

With that in mind, test yourself on your planning and planning process by answering these 10 questions for your business. And unless you're a one-person business, ask yourself whether all the key players will answer these questions:

1. How do you define success?

Seems simple but it's critically important and often forgotten. Success might be growth or sales or profits or being able to take off at 3:30 p.m. to coach the kids' soccer team. Fame, fortune, independence, proving yourself right, controlling your time... they're all images of success. Some conflict with others. Do you know what success is for you?

2. What's your strategic focus?

Business strategy is like sculpture: it's about what you take away and what you leave behind. It’s as much about who isn’t your target market as who is. And as much about what you’re not doing as what you are. How are you different? What would your customers say? Do you know your strategic focus, and do your team members know it?

3. What are the main tasks?

You could call it tactics, business activities, programs, priorities or something else; what’s important is that you know what’s coming up and why. Strategy means nothing without concrete specific business actions to implement it. Do you know what’s next? If you’re part of a team, does the whole team know?

4. Do you have task dates and deadlines?

Sorry, but it’s simply human nature; things are more likely to happen right when somebody assigns dates and deadlines. People need to have concrete goals and they need to know results will be tracked.

5. Does every task have an owner?

You need to assign responsibilities to specific people, not groups or committees. Do you really know who’s doing what? Does everybody on the team know? Is peer pressure in operation, with metrics that measure performance, and that, preferably at least, all the key players can see? We’re looking at accountability here, and that’s vital to management. Business needs owners, owners need metrics, and metrics need tracking.

6. Do you know how to measure task results?

This is about metrics. Metrics and tracking generate accountability and management. People like metrics to work on. A good check on tasks is whether or not results can be measured. At the very least, a yes or no on completion. But the ideal is a performance metric like dollars, presentations, trips, proposals, closes, page views, subscriptions, calls, minutes per call, Klout score, etc.

7. Are you forecasting the critical numbers?

Don’t kid yourself. You need to estimate future sales, costs and expenses, and then track cash flow to manage a business. If you’re just watching balances, you aren’t managing that well. You’re risking surprises and losing opportunities. Business life blood is cash, and that’s about forecasts and following up.

8. What are your main assumptions?

We have to make assumptions because we can’t manage without them. But assumptions change. Keeping track of your assumptions and how they change is crucial.

9. When is your monthly review?

You can’t really manage and steer your company without a planning process that includes a regular monthly review. You have to schedule reviews in advance, stick to the schedule, review your assumptions, and make changes to reflect changing assumptions, results and needs. Without regular reviews, your planning is just a plan, use once and throw away.

The key is plan vs. actual review. Not just the numbers, but the trends, performance, and lessons in the numbers.

10. What needs to change?

Planning is about managing change. The business environment is about constant change, and you need the planning process to manage that change. With planning process, tracking, plan review, plan vs. actual analysis, you end up steering a company towards its goals. It’s navigation. And the planning process isn’t just a map; it’s a map beneath a GPS locator with real-time traffic and weather updating.

Cash flow is critical. Everybody knows it, sure, but how can you manage cash flow without planning? It’s not intuitive. People think in terms of profit and loss, but cash flow can be radically different from profits. Profitable companies run out of money. The profits don’t include timing of getting the money from sales, spending the money on goods to sell, buying other assets repaying loans. Planning needs to manage cash flow.

We could call that strategy, and then add the reminder: strategy is focus.

EFTPS (Electronic Federal Tax Payment System) Requirement for 2011

The Treasury Department has announced that, as a part of a three-pronged initiative to reduce the amount of paper transactions it handles, most employers that are now allowed to use Federal Tax Deposit Coupons and checks to make payroll tax deposits will have to make those deposits electronically through the Electronic Federal Tax Payment System (EFTPS) beginning in 2011. The primary exemption will be for employers that have $2,500 or less in quarterly payroll tax liability and that pay their liability when filing their employment tax returns (e.g. Forms 941 or 944).

Currently, employers are required to use EFTPS at the beginning of the second calendar year after their total federal tax deposits (e.g., payroll, income, excise, etc.) exceed $200,000 in a calendar year. Once they meet the threshold, they must use EFTPS even if their total tax deposits dip below $200,000 in a future year.

What does this mean for you? Starting in 2011, if you make your payroll tax liability deposits in any manner other than paying them with the quarterly return, you will be required to deposit them electronically through EFTPS. You will no longer be allowed to pay them at your bank with a coupon.

As soon as possible, you will need to sign up for EFTPS. It is easy and it is free. Just go to www.irs.gov and on the right hand side of the page, you will see the EFTPS logo. Click on this and it will take you to a page that contains a brief description of the program and a link which allows you to register for the program. Some of the items that you will need to complete the registration besides the company name and address include your company’s Federal I.D. number and banking information. You will also need to assign a designated individual as the primary contact.

Once your company is enrolled, you can make any of your federal tax deposits via the internet or telephone. By 7:00 p.m.(CT) at least one calendar day in advance of the due date, you access EFTPS directly to report your tax information. You will instruct EFTPS to move the funds from your account to the Treasury’s account for payment of your federal taxes. Funds will not move from your account until the date you indicate. You receive an immediate acknowledgement of your payment instructions, and your bank statement will confirm the payment was made. You can initiate your tax payment 24 hours a day, seven days a week.

As an added convenience, EFTPS allows taxpayers to schedule tax payments in advance. Businesses can schedule payments up to 120 days in advance of their tax due date. Individuals can schedule payments up to 365 days in advance of their tax due date. EFTPS will automatically make your payments for you on the due date you indicate. Scheduled payments can be changed or cancelled up to 2 business days in advance of the scheduled payment date.

QuickBooks allows you to pay your payroll taxes via EFTPS conveniently through the 'pay liabilities' function rather than by paper check. QuickBooks also allows you to e-file your 941 Quarterly Reports. Furthermore, QuickBooks payroll provides an inexpensive and easy to use direct deposit feature.

We can assist you in your implementation of these convenient, labor saving new features.

If you have any questions regarding EFTPS or anything else regarding your payroll, QuickBooks or business, please contact the professionals at Ed Slovacek CPA at 979.846.4667 (email - info@EdSlovacekCPA.com) and we are always ready to help make your business life easier.

How to Get a Copy of Your Tax Return

If you need an exact copy of a previously filed and processed tax return and all attachments (including Form W-2), you should complete Form 4506 (PDF), Request for Copy of Tax Return, and mail it to the address listed in the instructions, along with a $57.00 fee for each tax year requested. The check or money order for the fee should be made payable to the "United States Treasury". Copies are generally available for returns filed in the current and past six years. Copies of jointly filed tax returns may be requested by either spouse and only one signature is required. Allow 60 calendar days to receive your copies.

Most needs for tax return information can be met with a computer print-out of your return information called a "transcript". A transcript may be an acceptable substitute for an exact copy of a return by the United States Citizenship and Immigration Services and lending agencies for student loans and mortgages. A "tax return transcript" will show most line items contained on the return as it was originally filed. If you need a statement of your tax account which shows changes that you or the IRS made after the original return was filed, however, you must request a "tax account transcript". Both transcripts are generally available for the current and past three years and are provided free of charge. The period in which you will receive the transcript varies from within ten to thirty business days from the time the IRS receives your request for the tax return or tax account transcript.

You can obtain a free transcript by calling 800-829-1040 and following the prompts in the recorded message or by completing and mailing a request for a transcript to the address listed in the instructions.

The IRS has created a new Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript, to order a transcript of a Form 1040 series return. The IRS created this streamlined form to help those taxpayers trying to obtain, modify or refinance a home mortgage. Transcripts may also be mailed to a third party, such as a mortgage institution, if specified on the form. You must sign and date the form giving your consent for the disclosure. Businesses, partnerships or individuals who need transcript information from other forms, such as Form W-2 or Form 1099, can use Form 4506-T (PDF), Request for Transcript of Tax Return, to obtain the information. These transcripts may also be mailed to a third party if there is consent for the disclosure.

Forms can be downloaded by using the following links or ordered by calling 800-829-3676. If you are a taxpayer impacted by a federally declared disaster, the IRS will waive the usual fees and expedite requests for copies of tax returns for people who need them to apply for benefits or to file amended returns claiming disaster-related losses. For additional information, refer to Topic 107, Tax Relief Disaster Situations, or call the IRS Disaster Assistance Hotline at 866-562-5227.

Form Links:

• Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript
• Form 4506-T (PDF), Request for Transcript of Tax Return
• Form 4506 (PDF), Request for Copy of Tax Return

Six Tips for Students with a Summer Job

Six Tips for Students with a Summer Job

School’s out and many students now have a summer job. Some students may not realize they have to pay taxes on their summer income. Here are the six things the IRS wants everyone to know about income earned while working a summer job.

1. All employees fill out a W-4, Employee’s Withholding Allowance Certificate, when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. If you have multiple summer jobs you will want to make sure all your employers are withholding an adequate amount of taxes to cover your total income tax liability. To make sure your withholding is correct, use the Withholding Calculator on IRS.gov.
2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.
3. Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.
4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.
5. Food and lodging allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.
6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:

• You are in the business of delivering newspapers.
• All your pay for these services directly relates to sales rather than to the number of hours worked.
• You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.