Gambling losses: You might “miss” this deduction

Gambling is big business.  Take a look a Vegas.  Lights everywhere and someone is paying for that.  Gambling is a reportable activity for a taxpayer, and casinos are required to issue forms to report the activity.  Income is reportable and losses can be claimed.  Well, sometimes they can be claimed.

Gambling income is always reportable, and usually it will be claimed as miscellaneous income.  Professional gamblers actually report their income on schedule C, but we will get to that in another article.  So you’ve perused the internet and Google provided a link to some information on a blog.  It seems to indicate that all of your gambling income can be offset by your losses.  That’s true, but getting there might be a challenge.

A requirement for deducting gambling losses is that you deduct them on Schedule A.  This schedule is for itemizing deductions.  Interest, taxes, medical expenses, and miscellaneous expenses are recorded on Schedule A.  But let’s assume a taxpayer doesn’t own a home and has no medical expenses.  And assume she is married.  Well, if she files jointly with her husband in 2017, they will have a standard deduction of $12,700.  That’s an automatic deduction on the tax return without ever compiling any itemized expenses. 

Let’s go a step further, shall we?  The couple visits Vegas for their honeymoon and gambles.  We’ll pretend that only the husband gambled.  He spent $8,000 and won a paltry sum of $420.  Simple math indicates a loss of $7,580 for the year. Now, the husband wants to deduct it, but because the total amount of potential itemized deductions does not exceed $12,700, the $7,580 will not be reflected on the tax return. 

By now you want to know “what is the good news”?  Well, it’s the standard deduction.  This deduction exists to promote some fairness in the tax system.  Everyone has some tax that might be deducted, some charitable giving, and some miscellaneous expenses.  While some homeowners with plenty of real estate tax and mortgage interest cross that threshold of $12,700 and pick up their full gambling loss, up to the amount of winnings, others may only have those losses and some bit of income tax, an amount much less than $12,700.  The standard deduction levels out the tax playing field, to some extent.

To summarize, gambling losses are deductible, up to winnings.  If you spend $8,000 and only win $420 you can take up to $420 of the losses on schedule A.  Only then will you see an amount for losses appearing on your return.  The rest of the losses are gone forever, so you won’t be able to claim them.  If you don’t itemize, you won’t actually see a deduction for the losses on your return, but worry not; the losses are built into the standard deduction.  So to an extent, you won’t “miss” them after all.

IRS Letters: What You Need to Know

Today, the IRS emailed taxpayers about "tax notices."  These notices are letters the IRS sends to taxpayers whenever they disagree about what is reported on your tax return.   This IRS page provides excellent information about each type of notice.  If you receive a notice, you can go to the link I mentioned in the last sentence and look it up. 

The most typical notice is the CP2000.  IRS employees don't sit down and type one of these out, rather, the IRS computers typically generate the CP2000 when you fail to report income on your tax return.  These notices are, at times, incorrect. 

Case in point; I helped a client the other day who received a notice because certain real estate transactions were not reported on his return.  The IRS was expecting to see a line item on Schedule D of his return, but instead, his income from this transaction was reported on Schedule C.  You see, he flips houses.  His income overall was hundreds of thousands of dollars, and this one item, which totaled around $50,000, was wrapped up in the number he showed as business income on Schedule C. 

Thankfully, the IRS posts this important information about notices, but something they don't speak much about is how to challenge their claims and win.  You see, the revenue code has many protections built in that actually help the average taxpayer, but finding these helpful bits isn't so easy.  And the IRS isn't likely to provide much guidance.  This is where a good tax professional excels; we can save you plenty of money in the long run by helping you navigate the code, plan for tax changes, and respond to the IRS on your behalf. 

Ric Honsa, CPA
www.honsacpa.com

Influencing Employee Behavior

Normally, my articles address taxation .  Today, I will depart from taxes and write about a subject with much greater importance than taxes.  That subject is employee behavior, and how you influence that behavior. 

I am currently reading a book about coaching.  The writer cites work by a noted behavioral scientist, Frederick Herzberg.  Herzberg identified certain motivational influences on workers, dissatisfiers and satisfiers.  Two of the satisfiers are achievement and recognition, ranked in importance in that order.

These two satisfiers are linked to one another.  Any employee can be induced to perform better by giving him some goal to achieve. Once that goal is achieved, the employee should be recognized for that achievement.  A top notch producer can be driven to new heights, and  someone that is faltering can be induced to falter less.  That's right, mediocre and excellent employees can both give you better performance, but you must do your part.

Recently, a good friend told me about the company he works for, how the owner, a "micro-manager" treats the staff.  This owner frequently grumbles about cost overruns, staff overtime, the cost of supplies, among other various complaints.  I asked this friend, "does your boss ever set goals or recognize achievement at all."  The response was a resounding "no."  But, everyone is sure to hear about mistakes on the job.  One day, the owner exclaimed, "someone is going to get fired for that" when he heard about some seemingly minor error.  The morale at this particular business is very low, and workers feel unappreciated.

Just today, I took my daughter to Chik-fil-A for lunch.  I noticed the flowers at each table, the smile of each employee with the warm greeting, and the cleanliness of the restaurant.  I started to think about their philosophy on workplace management.  Have you ever noticed how busy Chik-fil-A is on any given day?  Well, every day but Sunday.  (A side note:  Chik-fil-A is an extremely successful business, even though they don't sell food on Sunday.)   I've never had a bad experience at Chik-fil-A.  One day, I took a sandwich back that had the wrong bun.  Someone immediately brought me out a new sandwich, then the assistant manager gave me a few cards for free sandwiches after apologizing for the error.  Finally, the manager came to my table, apologized for the oversight, and he gave me a few cards for more chicken sandwiches.  I was impressed.

Nevertheless, today I was even more impressed by the manager at this Chik-fil-A store.  As my daughter and I were walking out, I heard the manager ask the crew, "who has the dining area right now?"  One of the girls spoke up, "me, sir."  The manager replied, "great job.  Thank you."  It impressed me that he would call out this crew member for something that most folks would think was mundane, even trivial.  To that manager, it wasn't trivial at all.  

If you manage workers, take the time to set goals for your staff.  When a worker achieves that goal, give her praise.  Recognize the employee, and be sure to do it in front of other staff members.  Your company's success rises and falls on your employees' behavior.  You need them a thousand more times than they need you, so influence their behavior for the better.  If you aren't sure where to start, stop by the Chik-fil-A in Flowery Branch and observe how they coach their staff.  You might learn a thing or two.

Health Care Law Provisions

New Health Care Law Provisions

The Patient Protection and Affordable Care Act (PPACA) is getting a lot of press these days and I thought this would be a good time to review some of the provisions that could affect you. While some of the law's provisions have already taken effect, many of the provisions will begin taking effect in 2013, 2014, and later years. This is a summary of some of the more significant individual provisions that may be of interest to you.
Penalty for Not Maintaining Minimum Essential Coverage
The crux of PPACA is the requirement for almost all individuals to maintain minimum essential healthcare coverage (i.e., the individual mandate). Beginning in January 2014, non-exempt U.S. citizens and legal residents are required to maintain such coverage or be subject to a penalty. Once the penalty is fully phased in, individuals who fail to maintain minimum essential coverage are subject to a penalty equal to the greater of 2.5 percent of household income in excess of the taxpayer's household income for the tax year over the threshold amount of income required for income tax return filing for that taxpayer or $695 per uninsured adult in the household.
The per-adult annual penalty is phased in as follows: $95 for 2014; $325 for 2015; and $695 in 2016. The percentage of income is phased in as follows: 1 percent for 2014; 2 percent in 2015; and 2.5 percent beginning after 2015. If you file a joint return, you and your spouse are jointly liable for any penalty payment.
Premium Assistance Tax Credit
Effective for tax years ending after December 31, 2013, the law creates a refundable tax credit, called the premium assistance credit, for eligible individuals and families who purchase health insurance through an insurance exchange. The premium assistance credit is generally available for individuals (single or joint filers) with household incomes between 100 and 400 percent of the federal poverty level for the family size involved.
Additional Hospital Insurance Tax
Beginning in 2013, the employee portion of the hospital insurance portion of FICA taxes is increased by an additional tax of 0.9 percent on wages received in excess of the threshold amount. This additional tax is on the combined wages of the employee and the employee's spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.
Unearned Income Medicare Contribution Tax
Beginning in 2013, in the case of an individual, estate, or trust, an additional tax is imposed on income over a certain level. This tax is referred to as the "unearned income Medicare contribution tax." Others have referred to it as a tax on investment income, although it can apply to individuals, estates, and trusts that do not have investment income. For an individual, the tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income over a threshold amount. The threshold amount is $250,000 in the case of taxpayers filing a joint return or a surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.
In the case of an estate or trust, the tax is 3.8 percent of the lesser of undistributed net investment income or the excess of adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.
The new tax does not apply to items that are excludible from gross income under the tax rules, such as interest on tax-exempt bonds, veterans' benefits, and any gain excludible from income when you sell a principal residence.
Increase in Medical Expense Deduction Threshold
For 2013 and later years, the floor for taking a deduction for medical expenses is increased from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI. However, for any tax year ending before January 1, 2017, the floor will be 7.5 percent if the taxpayer or the taxpayer's spouse has reached age 65 before the end of that year.
FSA Limitation
Beginning in 2013, for a health flexible spending arrangement (FSA) to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee's dependents, and any other eligible beneficiaries with respect to the employee, under the health FSA for a plan year (or other 12-month coverage period) must not exceed $2,500.

Taxing the Rich: What Is Fair?

Recently, Warren Buffett joined with the President to say the "rich" should pay their "fair share" of tax.  President Obama mentioned Buffett specifically, pointing out that he pays a lower rate than his secretary (never mind that he pays a factor MUCH higher).  To hear them tell it, the rich are dancing all over the backs of the "working class" while they alternately sip champagne and prune their money trees.  Ignorance helps their argument carry the day, but if we open our minds, we can see the totality of taxes paid by the rich.  Also, we might better understand the total economic impact of those so frequently demonized in the media.

The IRS has amassed a trove of information concerning taxes paid and who pays them.  Whether you look at total amount paid and by whom, or marginal rates vs. effective rates, or even statistical information compiled by groups that peruse the IRS data, the picture is clear; the "rich," or as I like to refer to them, the "producers" carry the overall tax burden by far.  In contrast, the lower 50% of wage earners pay little to no income tax whatsoever.  Moreover, the "earned income credit," a clever device used to create a refundable credit for certain low wage earners, effectively transfers back to them any withholding paid in AND gives back any amounts paid in as social security (Think: Withheld tax, $2,000; FICA, $1,800; total, $3,800; refund, $6000???) As a CPA and tax preparer, I've seen this over and over again. 

But I digress.  This is an article about the rich (producers) and whether or not they pay a "fair share."  By the way, what is fair?  Without a definition of what is fair, an amount, per se, nobody will ever be sure that all the rich folks pay their part.  In fact, even if they paid out 40% or even 50% of all of their income, someone would undoubtedly accuse them of not paying a "fair share." 

The figures readily available have something to say about how much the producers pay, in terms of income tax. That information is incontrovertible.  But have you ever stopped to think about the other taxes paid by these folks?  For instance, most rich people love to play when they are not working.  They buy Ferrari, Louis Vuitton, Gucci, Mooney airplanes, Rolex watches, and so on.  The amount of sales tax paid for these items is staggering.  In comparison, the average person buys items that sell for a fraction of the price of these luxury brands, paying little tax as a result.

Let's say the rich man buys a Rolex.  The tax is $700 for a $10,000 watch.  The "average citizen" goes to Walmart, buys a Timex for $50, and his tax is $3.50.  Rolex and Timex watches are very small, are assembled with metal, and are worn by a person so he can tell the time.  (Do some research on the process by which a Rolex is made; you will be impressed).  The government, in their infinite wisdom, created the sales tax during down economic times to fill their coffers for the public good.  Obviously, infrastructure is maintained by taking money from the citizens to pay for it all.  Does is seem equitable that the Rolex wearer should pay 200 times more in tax than the Timex wearer in order to fulfill the government mission?  Has he used any more resources than the other person?  Who has strained the infrastructure more?  Why did state governments continue to collect sales tax when economic times improved?   

Now, apply this reasoning to cars.  A Ferrari is $300,000, the Prius, $35,000.  Ten times the sales tax will be collected on the Ferrari.  By what reasoning will someone justify this scheme?  Both are cars that traverse our roads  and get us from point A to B.  One driver makes a statement about exclusivity, one-upmanship, and elitism as she brags about little carbon footprints and filling up once every month.   The other driver has people remarking, "I love your Ferrari!!!"  I'll have to admit, I'd love to race past a Prius in a F430 at full throttle with a tag that reads, "MPG LOL."

Now, let's extend our thinking to the property tax.  The rich guy pays a higher amount for that Ferrari when he buys a car tag.  It's called the Ad Valorem tax. That tax is based on value.  The mere ownership of that vehicle creates a much greater liability, in terms of tax, than does a Chevy Chevette.  And what about homes?  Much higher property taxes are paid on those, too.  In fact, the income tax, sales tax, and property tax collected from the producers dwarf what is paid in by the so called working class of working men and women.  The poor?  Forget about it, they have very little to no property tax liability.  And in the end, it is the poorest of us that use up much of what is collected by the government.  Yes, we all use the roads, we call 911, we petition the courts from time to time, but much of the money is spent on social programs, which are overwhelmingly used by those who, in many cases, have failed to position themselves for success.

So the hard work, perseverance, toil, and innovative spirit of a driven person, all of which may culminate in exorbitant wealth accumulating to him or her, is taken by force of law under the guise of fairness and allocated to pay for the misdeeds, mistakes, or simply the lack of resources of so many others.  Does this  seem equitable?  In America, the failure to carefully plan for one's future is met with the omnipresent hand of the government, who reassures those who lack wisdom that the fruits of the wise will be redistributed for their benefit.  Does that sound fair?

Finally, the producers (the "rich") make things happen every day by their habits. They innovate, change processes, rethink old patterns, and create jobs as a consequence.  It appears the desire of wise people to become rich is the driving force behind whatever success is generated, and this is what makes jobs after all, not government.  The hard work can pay off in millions of dollars, but your results may vary.  I think that's fair.

Ric Honsa, CPA

IRS - Beware Phishing Scam!

The IRS has issued a notice recently that warns of phishing scams that could cause some trouble for you.  Phishing is a scam where a low down thief uses an email or a website to obtain personal information from unsuspecting taxpayers.  The IRS does not send email communications to taxpayers to obtain information.  If you receive an email purporting to be from the IRS, report it to phishing@irs.gov immediately.  See the following link for more mind-numbing information straight from the IRS:  http://www.irs.gov/privacy/article/0,,id=179820,00.html

Have a great weekend, and watch some college football!!!

Ric Honsa, CPA, MTax

Important 2011 Tax Planning Information To Reduce Your Tax!

Dear Friends,

Our tax system for the most part remains firmly based upon the calendar year. At year end, a snapshot of your income, deductions and credits is taken. Based on that data, your tax liability for the year is computed. Year-end tax strategies implemented before your tax liability is "set in stone," can therefore make a significant difference in what you owe for the 2011 tax year now drawing to a close.

Tax planning for year-end 2011 should use both traditional year-end strategies as well as those that react to situations unique to this year. Particularly important at year-end 2011 is the impact of certain tax benefits scheduled to end with 2011; a look ahead at possible sea-changes in the tax laws starting in 2013; and attention to new opportunities and pitfalls created during the past year through court cases and IRS rulings.

Income/deduction shifting

The traditional year-end strategy of income shifting applies to year-end 2011 but with an extra twist. Under traditional strategy, you time your income and deductions so that your taxable income is about even for 2011 and 2012 so your tax bracket does not spike in either 2011 or 2012. If you anticipate a higher tax bracket for 2012, you may want to accelerate income into 2011 and defer deductions into 2012. If you anticipate a leaner 2012, income might be delayed through deferred compensation arrangements, postponing year-end bonuses, maximizing deductible retirement contributions, and delaying year-end billings.

The twist for year-end 2011 is the uncertain future for tax rates after 2012. Many political observers forecast that higher-income taxpayers will be asked to pay more, either through higher tax rates or more limited deductions. That may suggest a strategy in which income is not deferred but is recognized now at lower tax rates still available in 2011 and 2012. Our office will keep you posted on developments.

Roth conversions

If you converted an individual retirement account (IRA) to a Roth IRA in 2010, you were given an option: recognize all income in 2010 or defer that income, half into 2011 and half into 2012. If you elected to defer that income into 2011 and 2012, do not forget to figure that income into your year-end planning for 2011.

If you initiated a Roth conversion earlier in 2011 and that Roth account has declined in value since then, you should consider a “Roth reconversion.” Reconverting your Roth IRA back to a regular IRA before year-end will allow you to avoid paying income tax on an account balance at its higher value.

Finally, if you have not yet made a Roth conversion, doing so at year-end 2011 might be an opportunity worth serious consideration. Variables include your present income tax bracket, how close you are to retirement, and your access to other funds both to pay the conversion tax and to delay distributions from your Roth account later. Our office can help you make the right decision.

AMT

Because the AMT was not indexed for inflation, and for other reasons, the AMT today encroaches on many moderate-income taxpayers, especially two-income married couples. With most of your income and deductions for 2011 more predictable as year-end approaches, now is a good time to compute whether you will be subject to the AMT for 2011 or 2012. Our office can explore whether certain deductions should be more evenly divided between 2011 and 2012 and which deductions will qualify, or will not be as valuable, for AMT purposes.

Gains and losses

Our office can also help you time the recognition of capital gains and losses at year-end to minimize your net capital gains tax and maximize deductible capital losses. Many investors have excess capital losses from recent stock market declines that they may now "carry over" to offset capital gains that would otherwise be taxable.

Also of concern is whether the maximum tax rate for capital gains will rise from 15 percent to 20 percent or higher after year-end 2012 because of the scheduled expiration of the Bush-era tax cuts. Since long-term capital gains are only available on stocks and other capital assets held for more than one year, a capital asset must be bought on or before December 30, 2011 in order to be sold in 2012 and guarantee qualifying under the lower capital gains rates. We can help you coordinate your year-end trades with these tax variables in mind.

Finally, if you would like capital gains taxes at a zero percent rate, consider investing in "Section 1202" small business stock before year end. The 2010 Tax Relief Act allows the exclusion of 100 percent of the gain from the sale or exchange of qualified small business stock acquired by an individual after September 27, 2010, and before January 1, 2012, and held for more than five years. The window of opportunity to invest in stock that will yield 100 percent tax-free gain closes on December 31, 2011.

Payroll taxes

All wage earners and self-employed individuals will experience a tax increase in 2012 unless Congress extends the current employee-side payroll tax cut. For calendar year 2011, the employee-share of OASDI taxes is reduced from 6.2 percent to 4.2 percent up the Social Security wage base of $106,800 (self-employed individuals receive a comparable benefit). President Obama has proposed to extend and enhance the payroll tax cut. The fate of the payroll tax cut will likely be decided by Congress late in 2011.

Life changes

Marriage, divorce, the birth of a child, death, a change in job or loss of a job, and retirement are just some of the life events that trigger a special urgency for year-end tax planning. If you have had a life change, please contact our office so we can review how that change will impact your federal tax liability. After December 31, 2011, it will be too late to alter most of your bottom-line tax liability for 2011.

Medical expenses

Effective January 1, 2011, the Patient Protection and Affordable Care Act (PPACA) provides that over-the-counter medications and drugs can no longer be reimbursed from a health flexible spending arrangement (health FSA) unless a prescription is obtained. The rule also applies to health reimbursement arrangements (HRAs), health savings accounts (HSAs), and Archer medical savings accounts (Archer MSAs), an important consideration for employees who are required to make a decision by year-end 2011 on how much to fund their accounts in 2012.

Tax extenders

A number of tax extenders are scheduled to expire after December 31, 2011. They include:

·        the state and local sales tax deduction,

·        the higher education tuition deduction, and

·        the teacher’s classroom expense deduction.

Seniors age 70 1/2 and older should also consider making a charitable contribution directly from their IRAs up to $100,000 and paying no tax on the distribution. This tax break, especially advantageous to those who do not itemize deductions, is scheduled to end for distributions made in tax years beginning after December 31, 2011.

Casualty losses

Taxpayers in many states experienced natural disasters in 2011. A casualty loss can result from the damage, destruction or loss to your property from any sudden, unexpected or unusual event, such as a hurricane, earthquake, wildfire, or flood. Casualty losses are generally deductible in the year the casualty occurred, less ten percent of your adjusted gross income and a $100 per casualty deductible.

However, if you have a casualty loss from a federally declared disaster, you can elect to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster happened, and you can deduct the loss on your return or amended return for that preceding tax year. The election gives taxpayers the opportunity to maximize their tax savings in the year in which the savings will be greatest.

Energy tax incentives

If you are considering replacing your roof, HVAC system, or windows and doors, doing so using energy-efficient materials before January 1, 2012 may generate tax savings. Through the end of 2011, a number of residential energy-efficiency improvements qualify for a tax credit. These include qualified windows and doors, insulation products, HVAC systems, and roofing. The "lifetime"credit amount for 2011, however, is $500 and no more than $200 of the credit amount can be attributed to exterior windows and skylights. Please call our office for details.

Gift/estate tax

The current estate tax through 2012 is set at a maximum 35 percent rate and a $5 million exemption amount. Many experts predict after 2012 that Congress will lower the exclusion to $3.5 million and raise the top rate to 45 percent. In light of this possibility, lifetime gift-giving, ideally on an annual basis, should continue to form part of a master estate plan. The annual gift tax exclusion per donee on which no gift tax is due is $13,000 for 2011 (and, again, for 2012), with $26,000 allowed to each donee by married couples. Making a gift at year-end 2011 to take advantage of this annual, per-donee exclusion should be considered by anyone with even modest wealth.

If you have any questions about the tax provisions and year-end planning techniques described in this letter, please contact me at 678-227-8844.

Richard L. Honsa, CPA