Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Oct 13

    As we transition from our income earning years to our retirement years we begin to realize that each period has a different set of tax pitfalls. Here are 5 of the most common. Each of which can be avoided with a little planning.

    Missing the tax impact on Social Security
    A portion of your Social Security benefits may be taxable. The formulas are complicated (see example later), but in general terms, if your “Modified Adjusted Gross Income” (MAGI) exceeds $25,000 ($32,000 for joint filers) then it’s likely 15% of your Social Security benefits will be taxable at your ordinary income rates. If your “provisional income” exceeds $34,000 ($44,000 for joint filers) then up to 85% of your benefits could be taxable. Receiving income such as retirement benefits or IRA distributions which cause your income to jump from one level to the next can have a severe impact. You’ll pay income tax on the distribution, plus you’ll increase the portion of Social Security benefits which are taxable, sometimes doubling the tax burden.

    Missing the difference between growth, income, and cash flow
    Growth is what you need your portfolio to do in order to have enough money to last your entire retirement. Income is what you will have to pay taxes on, and cash flow is the after tax cash you have to spend on your needs and desires. The goal is to have sufficient cash flow to live your life like you want while paying the least amount of tax possible, and, at the same time, leaving enough in your portfolio for it to continue to grow at a rate that keeps up with, or exceeds, inflation.

    Missing a required minimum distribution
    Failure to take a required minimum distribution could subject you to penalties as high as 50 percent of the missed distribution. You must take required minimum distributions from any qualified plan or traditional IRA once you reach age 70 ½, and every year thereafter. Don’t rely on your bank, or broker, or anybody else to remind you about this. They will not pay the penalty for you! Roth IRAs are exempt from this requirement.

    Missing beneficiaries on qualified accounts
    Without a named beneficiary, the money in a qualified account reverts to your estate. The name, or names, listed on the account supersedes anything named in your will or trust, so it’s also a good idea to name a successor beneficiary.

    Missing the right beneficiaries
    It is generally best to name individuals as beneficiaries instead of your estate or a trust. You also want to avoid multiple beneficiaries with wide age differences. The minimum distribution will be determined using the “life span” of the oldest beneficiary. To avoid this pitfall, consider dividing your IRAs into separate accounts, each with a different beneficiary.

    For those two of you who are interested, here’s the example I promised:
    John and Jane Smith have an adjusted gross income of $44,000 for 2016. John receives Social Security benefits of $7,200 per year and together they receive $6,000 a year in interest from tax-exempt municipal bonds. On their joint return, the couple would make the following calculations:

  • Sep 29

    Claiming Your Homestead Exemption Can Save You Thousands

    Sometimes you rock along from year-to-year doing the same ole thing because it’s what worked in the past… or someone once told you that’s the way things were. Well, things change. Every day. If you’re over 65, or disabled, and are still paying the property taxes you were paying before that milestone, you may be paying too much.

    According to information obtained from the Mobile County (AL) Revenue Commissioner’s office, all property owners 65 or older are eligible for an exemption from all State property taxes. County, School, and Municipal taxes still apply. The exemptions apply even if only one of the owners of a jointly owned property meet the qualifications.

    To apply for this exemption:

    • You must be 65 years old,
    • Own and occupy the property as your primary residence, and
    • You must visit one of the Revenue Commissioner’s offices to present proof of age and sign an assessment sheet.

    Low income property owners 65 and older may also be eligible
    to claim exemption from a certain portion of the County, School,
    and Municipal property taxes. To qualify you must be 65 years
    old, own and occupy the property as your primary residence,
    and your taxable income must not exceed $12,000 – bring your
    tax return as proof.

    If either you or your spouse is totally and permanently disabled or legally blind, you may be eligible for a complete exemption from all property taxes on your residence regardless of your age or income.

    Homestead exemptions granted on the basis of income or disability must be renewed each year and it is the responsibility of the property owner to claim the renewal. If you do not receive an exemption renewal form by mail, you will need to contact the County Revenue Commissioner to have a duplicate form sent to you, or you may visit an office in person.

    Exemptions cannot be granted retroactively or after the December 31 deadline.

    For more information, contact our office or your local County Revenue Commissioner.

  • Sep 15

    In his book: How Rich People Think, Steve Siebold (http://www.amazon.com/Rich-People-Think-Steve-Siebold/dp/1608102793), explores the thoughts, habits, and philosophies among the rich, as opposed to the middle class, when it comes to wealth:

    • Rich people focus on earning, not saving;
    • They understand that leverage creates wealth, not hard work;
    • See that they are in control of their wealth, not luck or fate;
    • Know that money is earned from focused thought, not hard labor;
    • Don’t see money with emotion, but with logic;
    • Are Action-Takers (as opposed to having a lottery mindset).

    So why do I emphasize that last one? Simple — I’m suggesting you take an action now, which could make a big difference on your 2017 bottom line...

    You know how good coaches are usually famous for making adjustments during the halftime of big games? Well, here I am — acting as your financial coach in matters tax-related, and we’ve hit the halftime mark for 2017.

    You have six months of financial info to use for some quick math about your year as a whole, and to prepare for a pleasant upcoming tax season.

    To begin, all you have to do is take your cash flow for the first half of the year, and multiply by two. Add up your wages, dividends, interest, and any other income, and then–if this represents approximately what you’re expecting for the second half of the year — double the sum.

    Once you have your estimated 2017 income, you can give us a call: 251-633-4070 (or send me an email), and we’ll help you determine the appropriate tax rate and deductions to apply. Because once you’re armed with this info, we can help you determine the amount of taxes you might expect to owe for 2017.

    By then comparing this against your projected withholding, you can adjust the withholding on your paycheck in advance as needed, and ensure a happy visit to our office in the winter.

    This can also be a good time to organize your financial papers and/or get started with some financial software. Getting organized now can make gathering a report of all those deductions a breeze, come tax time.

    We’ve been promised tax changes by the Trump administration. That makes it all the more important to review Uncle Sam’s highest-impact tax breaks, such as donations of appreciated assets, tax-free exchanges and capital-loss harvesting.

    Unlike obvious moves, such as contributing to an Individual Retirement Account or a 401(k) plan, these strategies require a higher degree of awareness and active planning.

    Not all high-impact breaks are for the wealthy. Any homeowner can benefit from a provision allowing taxpayers to pocket tax-free income from renting a residence for as long as two weeks, and low-bracket taxpayers can pay zero tax on long-term capital gains.

    Other important moves can help minimize estate, gift, and inheritance taxes. Really, there are a variety of moves we can make to help you with your planning for the year … but you have to let us help you. It is, after all, why we are here.

    “My favorite things in life don’t cost any money. It’s really clear that the most precious resource we all have is time.” – Steve Jobs

  • Sep 1

    What is a champion? By definition, it’s someone who excels above all others. Generally, it refers to a world class athlete, but it could just as easily apply to a top businessperson. Nancy Holland Morgan, a two time Olympic skier, has identified seven traits that can help us understand how we too can get to the top of our game and become champions.

    You have to really like what you are doing. If you don’t have a love of the activity, an enthusiasm that turns into a burning, white-hot desire, then it may be time to sit down and reassess your life’s interest. Without it, you will not have the passion necessary to sustain the drive. Without passion, none of the other traits will even matter.

    Achieving success invariably means having to learn new techniques, master new skills, develop new strengths, or obtain new knowledge. But more often than not, as we learn new skills and techniques, we don’t get it right the first time. We have to practice. Repetition, practice, review, effort, feedback, all go into learning the fundamentals. Commitment to learning is an absolute necessity for improvement in any activity.

    Combine your desire with commitment to training, and you begin to formulate a thoughtful plan to improve your performance. But, all the desire and commitment in the world won’t do you any good unless you have a goal. Champions set goals based on their strengths and weaknesses. Their plans revolve around reaching new thresholds based on increasing their strengths and overcoming their weaknesses. Champions know that to compete seriously for their personal best, they must surrender themselves to the goal.

    The first three traits prepare us for the fourth: tenacity. Life is a series of tests; we have to pass each one to go on to the next. As we move higher up the mastery scale, we take the chance of falling harder and longer. The falls are always painful. But, we must learn to get up after each fall and continue onward.

    No one today makes it to the top alone. All champions surround themselves with a support team. The strength of others is crucial to achieving the goal of championship status. Your support team may be only your closest family members, it may be a friendship circle, or it may consist of a paid staff of advisors. Your team’s job is to keep you in the right attitude as you gain altitude.

    Do something every day that scares you just a little — not something life threatening, but something that causes you enough discomfort that you will become accustomed to pushing the envelope of your performance. Get to love your zone of discomfort. It means that we are in an awkward phase of learning a new skill or strategy to help us achieve a higher level of performance. Some people seem to move in and out of the discomfort zone more easily. This is generally either because they have more experience living in the zone of discomfort or they have learned to fake it better than others!

    People like to be around those who have an aura of self-confidence and positive self-esteem. Self-confidence means you believe in the potential of achieving your goals. High self-esteem means you are satisfied with your talents and are able to recognize and appreciate the talents of others. This is not about being arrogant, but rather a more humble expression that you are comfortable with yourself, your accomplishments, and your talents.

    Being a champion starts and ends from within. To achieve success, you must start with a strong desire and end with the courage to maintain positive self-esteem and confidence in your ability. But in between is where the real work takes place. Championship status takes every bit of inner strength and external leveraging you can muster. With hard work, the rewards will be those of a champion.

  • Aug 18

    It took more than a year following his death for a judge to confirm that Prince’s six siblings were his rightful heirs. Reportedly, more than 45 people came forward claiming to be his wife, children, siblings, or other relatives.

    Last year, the legendary artist passed away at age 57 leaving behind not only a treasure trove of music and dance, but a $250 million fortune, as well. What he didn’t leave behind was a will or estate plan.

    You may not have people clamoring after your money, but it’s still important to consider hiring an expert to sort through the complicated process of estate planning. We’ve all seen the ads for DIY legal documents, including wills and trusts. And the law does not require you to hire an attorney to prepare your will. But, even the highest ranking jurist of his time, Supreme Court Chief Justice Warren E. Burger, should have relied on estate planning experts to prepare his estate plan. Apparently, Chief Justice Burger typed his own will. The will only contained 176 words but several typographical errors and, more importantly, the will failed to address several issues that a well-drafted one would typically cover. His family paid over $450,000 in taxes and had to seek the probate court’s permission to complete administration tasks like selling real estate.

    To be better prepared than Prince or Chief Justice Burger, seek out the assistance of an attorney and a CPA. Together they can guide you through the unknown of estate planning and will preparation so that your heirs receive what you expect.

  • Aug 3

    In the flurry of launching a new business, filing your taxes may well be one of the last things on your mind. But, you don’t want to wait until the last minute to figure things out. At best, you could leave money on the table – at worst, suffer penalties or other legal ramifications.

    Avoiding these common startup bloopers can ensure your new business is on the right track to handling its tax obligations properly.

    1. Not keeping track of all of your expenses
    From the moment you launch a business, you can deduct “all ordinary and necessary” business expenses such as office supplies, professional fees, and business mileage. Your biggest mistake is not keeping track of these expenses throughout the year, and trying to gather every receipt when it’s time to file. The bottom line is you can’t deduct what you can’t document, and failing to record as you go most likely means you’re forgetting expenses and leaving money on the table.

    Find a method for documenting expenses that works for you. An accounting program, such as QuickBooks®, will let you record and manage revenue and expenses. In addition, there are dedicated apps such as Expensify for tracking expenses, MileBug for recording mileage, or Shoeboxed for capturing paper receipts. The best method is whichever one you will consistently use.

    2. Mixing personal and business
    New startups and small business owners often invest so much of themselves, their time and their money, into their new company that it’s hard to separate them. But separate them you must! The mixing of business and personal funds makes it extremely difficult to make sure you deduct all of your business expenses and only your business expenses. At the very least, you must have separate business and personal checking accounts. Just imagine the look on an IRS auditor’s face when she finds out you can’t tell your business and personal expenses apart.

    3. Choosing the wrong legal entity
    Your business’ legal structure affects how you report your taxes and how much you pay, so it’s important to choose the right entity. For example, many start out as a sole proprietor or partnership because it’s easiest, but soon find themselves paying way too much in self-employment taxes. Creating a corporation can help lower their tax bill significantly.

    4. Mixing equipment and supplies
    Both first-time and experienced business owners get tripped up by what is considered equipment versus supplies. Equipment are often higher value items that will typically last longer than one year, while supplies are generally things that you use up during the year.

    When it comes to equipment, there are a couple of approaches: 1) You can recover a portion of the cost each year, or 2) you may qualify to write-off the full amount in the year of purchase. There are, naturally, some restrictions on the ability to deduct the full amount. Be sure you talk to us first to find out if you qualify.

    If you mistakenly deduct your equipment or other capital item as an operating expense such as supplies, the IRS could determine that you’re not entitled to any deduction.

    5. Not sending Forms 1099
    When you pay any freelancer, contractor, attorney or other non-corporate entity $600 or more for services over the course of the year, you’re required to issue Form 1099-MISC and send copies to both the entity (business, contractor, individual, etc.) and the IRS. If you fail to do so on time the penalty can be as high as $520 per occurrence.

    6. Deducting too much for gifts
    Maybe you sent some of your best clients a holiday present, or sent them a closing gift after a large purchase, or sent a colleague a thank you gift for an especially nice referral. Great! Business gifts are deductible, but there’s a big catch. You can only deduct $25 per gift. So, if you send Paula a $150 fruit basket, you only get to deduct $25 for it.

    Documentation is going to be important. If you report $2,500 in business gifts, you need to be able to have documentation that shows you gave gifts to 100 different people.

    7. Not making estimated tax payments
    If your business is any legal form other than a C corporation you are personally going to be liable for paying taxes on the profits you earn. Business owners are required to pay in sufficient taxes to cover their expected tax obligations. Those payments can be in the form of payroll withholding – if you or someone in your household qualifies – or through quarterly estimated tax payments. Even if it wasn’t required, it is generally easier to make smaller payments on a quarterly basis than to have to pay the entire bill at year end.

    The best way to stay on top of your estimated tax payments is to get into the habit of setting aside a percentage of your revenue on a regular basis. Then, on a quarterly basis, review your revenue and expenses, calculate your tax liability, and make the appropriate payments.

  • Jul 21

    Many Americans appear to be living one big expense away from disaster. A 2014 Federal Reserve poll discovered the startling fact that almost half of all U.S. households could not come up with $400 to cover an emergency expense. They would need to sell something, or borrow cash, to do so.

    If you find yourself belonging to that category, then I have some ideas (11 of them, in fact) I think will help. In my experience, if you want to get out of a hole, you study the behavior of those who have already made it out. And you do everything you can to copy that behavior.

    Yes, some people have been fortunate enough to inherit wealth, etc. But many, MANY more of those who have wealth came about it in a different way.

    Now, so that YOU do not find yourself in the unfortunate place of not being able to scrape up $400 in an emergency … read this now.

    Becoming a household that will be able to ride through instability and uncertainty is only going to become MORE important in future years, not less. So, that being the case, here is a portrait of those who are able to achieve this status.

    You’ll notice that these are just as significantly about your mindset as you relate to your finances, as about your behaviors.

    Here’s what the Financially Secure look like …

    1) He always spends less than he earns. In fact, his mantra is that over the long run, you’re better off if you strive to be anonymously rich rather than deceptively poor.

    2) She knows that patience is truth. The odds are you won’t become a millionaire overnight. If you’re like her, your security will be accumulated gradually by diligently saving your money over multiple decades.

    3) He pays off his credit cards in full every month. He’s smart enough to understand that if he can’t afford to pay cash for something, then he can’t afford it.

    4) She realized early on that money does not buy happiness. If you’re looking for financial joy, you need to focus on attaining financial freedom.

    5) He understands that money is like a toddler; it is incapable of managing itself. After all, you can’t expect your money to grow and mature as it should without some form of credible money management.

    6) She’s a big believer in paying yourself first. It’s an essential tenet of personal finance and a great way to build your savings and instill financial discipline.

    7) She also knows that the few millionaires that reached that milestone without a plan got there only because of dumb luck. It’s not enough to simply “declare” to the universe that you want to be financially free. This is not a “Secret”.

    8) When it came time to set his savings goals, he wasn’t afraid to think big. Financial success demands that you have a vision that is significantly larger than you can currently deliver upon.

    9) He realizes that stuff happens, and that’s why you’re a fool if you don’t insure yourself against risk. Remember that the potential for bankruptcy is always just around the corner, and can be triggered from multiple sources: the death of the family’s key breadwinner, divorce, or disability that leads to a loss of work.

    10) She understands that time is an ally of the young. She was fortunate (and smart) enough to begin saving in her twenties, so she could take maximum advantage of the power of compounding interest on her nest egg.

    11) He’s not impressed that you drive an over-priced luxury car and live in a McMansion that’s two sizes too big for your family of four. Little about external “signals” of wealth actually matter to him.

    And a little bonus, if you will: She doesn’t pay taxes which could have been avoided with a simple phone call to her tax professional. She plans ahead, before tax time.

    “You cannot control what happens to you, but you can control your attitude toward what happens to you, and in that, you will be mastering change rather than allowing it to master you.” – Brian Tracy

  • Jul 7

    How to Write Off Katie’s Soccer Camp

    Yes, it is quite do-able. But, like many things in the tax code, the devil is in the details. Let’s see if I can cut through the Tax Mumbo Jumbo for you.

    If Katie (or Bruce) is younger than 13 and goes to a DAY camp (overnight doesn’t work), and you are both working (or “looking for work”) then,…

    Cha-ching.

    You can then choose to pay for the camp using a Flexible Spending Account (FSA) or you can take the child care credit. Remember credits are better than deductions. With both the FSA and the child care credit, other eligible expenses include the cost of day care or preschool, before or after school care, and a nanny or other babysitter while you work.

    The size of the credit depends on your income and the number of children you have who are younger than 13. You can count up to $3,000 in child care expenses for one child, or up to $6,000 for two or more children.

    There are some limitations. The credit is only good for families of a certain income range and the percentage of eligible costs varies with income.

    All told, it’s a good deal which you should take advantage of, if you qualify.

    Bonus… If you have two or more children and child care costs exceed $5,000 for the year, you can benefit from both accounts. You can set aside up to $5,000 in pretax money in your FSA for child care costs, then claim the child care credit for up to $1,000 in additional expenses.

     

    Other strange, but true deductions

    You can pay your significant other (pay attention now) to do legitimate work for you and take a deduction.

    Bruce hired his live-in girlfriend to manage his rental properties. Her duties included finding furniture, overseeing repairs, and running his personal household. He went to Tax Court and fought the IRS which had disallowed the entire deduction. He won a deduction for the portion of his payments which could legitimately be tied to her business work.

    A married couple owned a junk yard and put out cat food to attract wild cats. Why, you might ask? The feral cats they were trying to attract dealt with snakes and rats on the property. That made for a safer junkyard for customers.

    And that made cat food a business deduction. The IRS first thought this was ridiculous, but before the case reached the Tax Court the IRS agreed!

    The details are always important, so be careful and ask us for advice first.

  • Jun 23

    Question: Like many students, I am looking forward to some time off from school and perhaps a summer job. What are the most important things I should know before I get that first job?

    Answer: Here are seven of the most important tips I could think of:

    1. Taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure your withholding is correct; visit the Withholding Calculator on IRS.gov. If you don’t expect to owe taxes, then you can choose to write “exempt” on the W-4 and not have any taxes withheld.
    2. Whether you are working as a waiter or a camp counselor, you may receive tips as a part of your summer income. All tip income you receive is taxable income and therefore subject to income tax.
    3. Many students do odd jobs over the summer to make extra cash. Earnings you receive 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 Social Security benefits. 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 and Medicare taxes withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.
    5. Subsistence 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 a 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.
    7. Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

    Do you have a question for the Taxpert that you’d like to see answered in a future Taxing Times? Or perhaps just an issue you’d like the Taxpert to address? Send the Taxpert a note to Taxing Times, 1050 Hillcrest Rd., Ste A, Mobile, AL 36695 or an email to taxpert@CPAMobileAL.com.

  • Jun 9

    Congress recently enacted significant changes to partnership audit and adjustment rules. The changes are expected to dramatically increase the audit rates for partnerships, and will require partners to carefully review, if not revise, their partnership’s operating agreement.

    The new rules generally apply to partnership returns filed after 2018, but careful planning today will help mitigate any unfavorable consequences.

    Important new provisions that may impact you:

    • The IRS may collect any additional tax, interest, and penalty directly from the partnership rather than from the partners (the tax could be collected at the highest individual tax rate).
    • Current partners could be responsible for tax liabilities of prior partners.
    • New elections and opt-outs will be available and your agreement may need revision to specify who makes these decisions.
    • There are many new tax terms and concepts that will likely require you to adjust your partnership’s operating agreement.

    Particularly, the new term “partnership representative” replaces the prior “tax matters partner.” The partnership representative is critical; they will act as the single point of contact between the IRS and the partnership and will have full authority to bind the partnership and the partners during an audit.

    Potential opportunities and the need for planning today

    Certain partnerships with 100 or fewer partners may elect out of the provisions. To do so, the partnership may make an annual “opt-out” election with their timely filed tax return (Form 1065).