Monthly Archives: July 2014

Where you live affects your taxes

Where do you live?  Downtown Chattanooga, Hixson, Ooltewah, Hamilton County, Northwest Georgia?

As in many areas of tax law, what seems a simple question can have broad implications. For example, say you own more than one home. Determining which is your main residence is necessary in order to exclude some or all of the gain from your federal income tax return when you sell.

Where you live affects your state income tax too. Are you considering moving to a state with a lower tax burden? You should know the mere act of relocating might not relieve your tax responsibility to the state you moved from, even if you think of yourself as a resident of the new state. That’s because many states use the legal concept of “domicile” to assess whether you’re liable for state tax. What’s the difference? Residency is where you physically live. Domicile looks to your intent, such as whether you maintain significant business or family ties to your former home.

Domicile also plays a role in estate tax planning, especially when you own property in more than one state. Generally, real property in your estate is taxed based on its location, while other assets are taxed where you are domiciled. If you fail to establish domicile, some of your estate could be taxed twice.

Students, military personnel, and expatriates also face tax effects from domicile decisions. Please call Heinemann CPAs, your Chattanooga CPA Firm, for specific information on your situation.

“Comfort” letters are often requested by lenders

When you finance or refinance a loan, your lender may ask for a “lender” or “comfort” letter from your Chattanooga CPA. If you’re unfamiliar with the terminology, these letters seek verification of your income or employment status and typically reference information from your tax return. A more correct name is “third-party verification” request because the lender is asking for confirmation from an independent source — specifically us, as your Chattanooga CPA.

The request sounds simple. After all, we prepare your tax return, so who better to ask? Yet you may be surprised to find we’re unable to provide specific details or complete a form furnished by the bank.

Why? Several issues affect our response. For example, releasing information from your return, including how much you earn or that you are self-employed, can run afoul of tax laws. Without your express signed consent, we generally cannot share your tax data, either verbally via a telephone verification or in written form.

In addition, professional ethics require — and you have every right to expect — confidentiality in matters related to your finances.

How can you work with us to satisfy your lender’s request? One solution: You can personally give your lender a copy of your tax return and we can provide a letter containing facts, such as a statement that we completed the return based on information you provided.

Other options may also be useful, including the preparation of a financial statement or projection. Please give Heinemann CPAs, your Chattanooga CPA Firm, a call to discuss the many ways we can help.

“Economic substance” is a new tax rule

Suppose someone offered you a Chattanooga business opportunity that would let you defer tax on your passive income, then later benefit from lower tax rates by converting ordinary income to capital gain. Would you invest?

In general, structuring business activities in a tax-efficient manner is part of good planning. However, when you enter into a transaction with no bona-fide business motive and that transaction changes nothing but your tax situation, you can run afoul of the economic substance rules.

These rules were not found in the tax code prior to the 2010 health care laws. Instead, they were applied by courts to individual cases. Now, economic substance is defined by a two-part test. When the rules apply, your economic position must change in a meaningful way and you must have a substantial business purpose for choosing a course of action.

What happens if you fail the economic substance test? You lose any tax benefits you claimed and you may be subject to a penalty of up to 40% of the underpayment caused by the loss of the benefits.

Please call Heinemann CPAs, your Chattanooga CPA Firm, before you decide to participate in ventures that purport to save tax dollars. We’re here to help you make prudent choices.

Marriage matters in the world of taxes

What’s your marital status? Just beginning? Just recognized? Just ending? As your relationships change, so do certain federal tax rules governing your income tax return.

For example, your filing status depends on whether you’re considered married or unmarried on the last day of your tax year. Filing status is important because it plays a role in determining whether you need to file a return, as well as in the amount of your standard deduction and the income breakpoints for tax brackets.

As an illustration, say you’re legally married at the end of the year. If you’re eligible to file a joint return with your spouse, you can use the highest standard deduction amount ($12,400 for 2014), and you can earn up to $73,800 in 2014 while remaining in the 15% tax bracket.

Marital status is also a factor in gift tax planning. For instance, the annual gift tax exclusion for 2014 is $14,000. That’s how much you can give to anyone this year without having to pay gift tax. Married couples can double the exclusion by electing to “split” gifts.

Estate and retirement planning are affected by marital status as well. One example: When you’re a participant in a qualified plan such as a 401(k), your spouse generally must agree in writing if you want to designate someone else as your beneficiary. Are you recently divorced? You may still need the consent of your ex-spouse to change beneficiary forms.

According to the Internal Revenue Service, more than two hundred federal tax provisions and regulations reference marital status. If you have questions about which ones apply to you, please call Heinemann CPAs, your Chattanooga CPA firm. We’re here to keep you informed.

Medigap basics can get complicated

Trying to make sense of Medicare and Medigap plans can be a daunting task. Here are a few of the basics:

  • Medicare. Designed to provide basic health and hospital insurance coverage for people aged 65 and older (as well as certain disabled individuals), this government program is funded through payroll taxes and premiums (for Parts B through D). In general, it’s available to people who are receiving or eligible to receive social security benefits. Part A provides broad coverage for hospital costs. Although you don’t have to pay premiums for Part A coverage, you may be responsible for co-payments and deductibles. In addition, hospital costs must meet certain guidelines to be eligible for payment.

    Medicare Part B, sometimes called “medical insurance,” is available when you become eligible for Part A. It covers certain medical services including outpatient therapies, doctor visits, and preventive health screening. Once an annual deductible is met, Part B pays 80% of covered costs for most services.

    Medicare Part C (also known as Medicare Advantage) is administered by private companies under contract with Medicare. It provides healthcare services through various managed care plans (including Health Maintenance Organizations) and may cover additional services such as eye exams and routine physicals.

    Medicare Part D is a voluntary prescription drug coverage offered through private companies.

  • Medigap. This supplemental health insurance is available from private companies to cover certain costs — such as co-payments, deductibles, and out-of-country emergency healthcare charges — that aren’t covered by Medicare. In general, Medigap policies don’t pay for long-term care, dental or vision services, or prescription drug costs. To be accepted by a Medigap plan, you must be covered by Medicare Parts A and B, and you can’t be enrolled in a Medicare Advantage plan.

    The best time to apply for a Medigap plan is during the open enrollment period, which begins the first day of the month in which you turn 65. During that period, an insurer cannot deny coverage or charge you a higher premium based on a pre-existing condition. Though the law requires each insurer to offer certain standardized benefits, premiums for Medigap coverage vary among insurance companies. Be aware, too, that you and your spouse must purchase separate policies.

Needless to say, selecting the best healthcare plan(s) for your family can be a complicated and far-reaching decision. If you’d like help evaluating your options, give Heinemann CPAs, your Chattanooga CPA Firm, a call.

Don’t bankrupt your business

Building a successful business takes vision, passion, a viable product or service, and lots of hard work. Bankrupting a business is much easier. In fact, doing nothing to address systemic problems is often all that’s needed to drive a company off the cliff. Four pitfalls to avoid include the following:

  • Ignoring the numbers. If management lacks a basic understanding of the company’s financial statements, severe problems may not be addressed. For example, the balance sheet might be carrying obsolete inventory at inflated historical prices. If the asset section of the balance sheet is heavily weighted toward inventory, management may be given a false sense of the firm’s net worth. An unrealistic view of the firm’s financial health also may stem from faulty accounts receivable valuations. If uncollectible accounts aren’t routinely written off, management may fail to intervene with more stringent credit and collections policies — until it’s too late.
  • Disregarding customer complaints. No one likes criticism. But failing to listen to the grumblings of the folks who buy your products and services can lead to adverse publicity, lost sales, and, eventually, bankruptcy. It’s crucial to determine why customer expectations haven’t been met, especially when the same complaints surface from different segments of your customer base. Perhaps your product line needs to be expanded, your existing products tweaked, or your prices lowered to a more competitive level.
  • Turning a blind eye to cash. Preparing a quarterly cash forecast shouldn’t be considered optional. Such a forecast will show expectations for each major source of cash, as well as detailed projections of expenses. Updating this forecast weekly, by comparing actual performance with original expectations, can help management adjust quickly to changing conditions. Managers need to routinely evaluate where cash is coming from, where it’s flowing, and how much is needed to keep the company afloat.
  • Living beyond the company’s means. A penchant for fancy cars, fine dining, season tickets, and other corporate perks may not capsize a company if adequate revenues exist. But when business income is stagnant or declining, managers may need to take a hard look at costs. In some cases, payroll expenses may need to be reduced to better align with revenues. Superfluous real estate, luxury sedans, or outdated equipment may need to be sold to reduce debt and bolster cash balances.

If you’d like help assessing the financial health of your Chattanooga business, give Heinemann CPAs, your Chattanooga CPA Firm, a call.