The Cure For Cold & Flu Season: An Alphabet Soup Of Tax Favored Accounts -

I wasn't home an hour today after taking my middle child to the doctor when the nurse called to let me know that my oldest child just vomited at school. That pretty much completed the trifecta since my youngest child was at the doctor over the weekend with a nasty cough and a low-grade fever. Cold and flu season has officially arrived.

Thank goodness for my health reimbursement account (HRA). Without it, I’d feel a lot worse about all of these out-of-pocket expenses that I’m paying while my kids get better.

Most years, we don’t get the benefit of claiming our medical expenses on our federal income tax return. That’s because in prior years, even though we itemized our deductions on Schedule A, we have rarely met the threshold. Until this year, under the Tax Code, you can only claim eligible medical expenses as a deduction to the extent they exceed 7.5% of adjusted gross income (AGI).

You can find your AGI at line 37 of the form 1040:

It’s even worse now. For 2013, we definitely aren’t going to hit the threshold. This year, taxpayers younger than 65 (that’s us!) can only deduct medical expenses to the extent those expenses exceed 10% of AGI; those taxpayers who are 65 and older in 2013 keep the 7.5% threshold through 2016. That new threshold is a pretty high bar – even with a busy cold and flu season.

It’s not just my family: more taxpayers will find that their expense won’t hit the necessary numbers in 2013 to take advantage of the deduction.

According to the most recent census report, median household income, adjusted for inflation, was $51,017 in 2012. Using that number as our example for AGI, to claim the medical expense deduction, a family reporting those kinds of dollars would have had to spend $3,826.27 (7.5% x $51,017) on qualified medical expenses in 2012 before deducting a single dollar: that’s a lot of co-pays. That explains why only about 6% of taxpayers have traditionally claimed the deduction. With Obamacare, that percentage of taxpayers is about to get a lot smaller.

In 2013, the threshold for the same level of income will increase to $5,101.70 (10% x $51,017). That means that the family in the example would have to spend $5,103 on qualifying medical expense before claiming a single dollar of deduction. And I literally mean a single dollar. Remember that you can only deduct expenses over that the threshold amount. If the family spent $5,000 in medical expenses, there would be no deduction ($5,000 – $5,102 = less than zero); if the family spent $6,000 in medical expenses, the allowable deduction would be $898 ($6,000 – $5,102 = $898).

With those kind of hurdles, I asked around about alternatives and landed on the idea of an HRA. It’s one of a handful of special accounts available to taxpayers for medical expenses.

A health reimbursement arrangement (HRA) is a 100% employer-funded spending account. In other words, it’s not an employee savings plan but a tax-favored perk: contributions to the account are available to employees, tax free, as reimbursements. In fact, amounts in the HRAs aren’t even reported on a federal income tax return.

It’s not just current employees who can participate. Under most plans, current or former W-2 employees, as well as qualified dependents, may participate. But read the fine print: each plan is employer-specific.

Here’s how it works. The contribution amount for each employee is determined each year by the employer. The employer also determines which expenses qualify: typically, the HRA is used to help pay for eligible out-of-pocket medical expenses. Eligible expenses are generally the same sort of out-of-pocket costs that qualify for the medical deduction. That includes the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. That tends to include the costs of visiting to medical professionals as well as the purchase of any medicine or drug which requires a prescription of a physician for legal use.

When expenses are incurred – a good example is a co-pay for a doctor’s visit – those expenses can be reimbursed to the employee, assuming that the expense qualifies and is backed up by documentation. In my case, expenses do include co-pays as well as medications and, thankfully, vision and dental. In terms of documentation, a detailed receipt will generally do – I’m allowed to snap a photo of the receipt on my smartphone and send it electronically for processing.

After the expense is approved, the reimbursement shows up in the form of a check – most commonly included on a paycheck – and it’s tax free. That means that the expenses are paid for with the equivalent of pre-tax dollars: these dollars are subtracted from gross pay before any income or payroll taxes are calculated. In other words, if you earn $50,000 in wages and get $1,000 in reimbursement, your form W-2 will reflect just $50,000.

But what if your employer doesn’t offer an HRA? All is not lost. An individual can, without an employer-sponsored plan, create their own health savings account (HSA).

The HSA is a bit like an IRA for medical expenses. Contributions are made by the taxpayer, or a combination of the taxpayer and his/her participating employer. Those contributions are capped: for 2013, the limits are $3,250 for individuals and $6,450 for families and those numbers increase to $3,300 for individuals and $6,550 for families in 2014. Contributions are not subject to federal income tax. Taxes are handled one of two ways: either the contribution is made with pre-tax dollars if related to an employment benefit or made with post-tax dollars subject to a corresponding deduction if made by an individual or family.

As with an HRA, the payment of qualified medical expenses is federal income tax free. Generally, this is accomplished by pulling the dollars straight out of the HSA. Many accounts offer special debit cards or checks to make this easy; alternatively, other HSAs may operate on a reimbursement basis, as with HRAs.

It’s not a spend or lose it account: if the dollars in the HSA aren’t used up in one year, the account can be rolled over from year to year with no penalty. You cannot, however, roll them into another kind of tax-favored account, like an IRA.

Both accounts, HSAs and HRAs, have advantages and disadvantages to taxpayers. And as with all tax-favored breaks, there are rules, exceptions and limitations which apply. The fine print matters. Check with your human resources office for more information – or your insurance or tax professional if you are setting up a plan on your own.

Don’t assume that these plans are for somebody else: there are so many different variations that you’re liable to find one that benefits you either on its own or, occasionally, in tandem with another plan (MSAs and FSAs, for example). This alphabet soup of accounts and plans could be the tax-favored cure for what ails you

if you'd like to look into an HRA or HSA for your family or small business, give us a call.

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701

www.securitytaxservices.com

11 Reasons Why I Never Want To Own A House Again - (Forbes)

When my phone vibrated, I didn't even have to look. I knew what it meant: the house had finally sold.

I wasn't sure how I was going to feel when it was finally over. I wondered if I would feel sad or anxious or regretful. What I actually felt was relief.

It was a great house. It was where my children took their first steps, where they learned to ride bikes and scooters. It was the location for dinner parties and cocktail parties and birthday parties and our annual Halloween potluck. But it was time to go. We happened upon a great new house that was nearly perfect. And even better: it was a rental.

I know what you’re thinking: didn't you want to buy another house? It was a question we were asked over and over as we approached our closing. But I didn't want to buy another house. After fifteen years, I was tired of being a homeowner. After a few months of renting, I was sold – on not buying again.

There’s a lot of hype about why you need to own a house. But buying a house isn't the key to financial security for everyone – and those alleged tax advantages? Also not quite what they’re painted to be. I hope to never own a house again. Here’s a list of eleven reasons – many of them tax-related – why:

1. As investments go, it’s not always a great deal.While it’s true that some homes do appreciate, so do many other assets. If you bought a house for, say, $200,000 thirty years ago, it would be worth $468,375.09 today. While that gain feels impressive, that appreciation is based solely on inflation – which means that, in theory, the same appreciation would have happened with any asset. While we did “make” money on the sale of our house, I suspect we would have had a similar increase had we invested that money in the market or in our business.
2. The mortgage interest deduction doesn't make up for the fact that you’re still paying a lot of interest. While I understand that it’s possible to buy a house without a mortgage, the large percentage of homeowners (more than 70%) take out a loan. With average mortgage rates at 4.3% (as of this morning), you’ll actually pay $356,307.44 for a $200,000 home: $156,307.44 in interest alone. Averaged over 30 years, that works out to a little over $5,000 per year (even though in practice you pay the most interest at the beginning). Assuming you’re in a 25% bracket – and you itemize – that works out to a tax savings of just over $1,300 per year. But the word “savings” is somewhat of a misnomer because you’re still out of pocket more than you get back in tax savings: in our example, you would “save” less than $40,000 while paying out more than $150,000 in interest.
3. Homes often tempt people borrow more than they can afford. As Congress tosses around the idea of taking away the home mortgage interest deduction, homeowners are screaming that they won’t be able to afford their homes without it. In fact, when you’re looking to buy, most lenders and realtors will use the deduction as a selling point to boost prices. But is that a great strategy? When buying a new dress or a new car, consumers tend to focus on the cost of the item alone when determining how much to spend. But when it comes to mortgages, that number edges up because of the potential for tax savings (again, see #2). With that temptation, combined with a sluggish economy, it’s no wonder that more than 10 million homeowners are currently underwater on mortgages worth more than actual house values. We were fortunately not one of them but not for lack of the banks trying. When we bought our home, we were actually approved for a mortgage which was hundreds of thousands of dollars more than the home we ultimately bought. We opted for a less expensive home – and thankfully so.
4. Owning a house subject to a mortgage drives up debt to income ratios. Assuming that you borrow to buy your home – again, a pretty reasonable assumption – that debt load can be a drag on your credit and ability to borrow for other things (like a new car). I've made no secret about the fact that I owe a significant amount in student loans. That already affects my perceived ability to pay when figuring my credit. A mortgage dramatically increases that ratio. Interestingly, our monthly rental payment is actually more than our monthly mortgage payment – but on paper, our rent is not a debt, it’s an expense. The two may be treated very differently, depending on the circumstances.
5. A mortgage is typically 20 or 30 years while, at any given time, the current administration has only four (or possibly eight). I can’t stress this enough. The home mortgage interest deduction has been around for what seems like forever. Does that mean it that you can count on it to be around in 10, 20 or 30 years? Don’t be so sure. The deduction has become increasingly vulnerable: it has been a talking point in practically every administration from Bush to Obama, despite Reagan’s famous promise to the National Association of Realtors in a 1984 speech that he would “preserve the part of the American dream which the home mortgage interest deduction symbolizes.” Just this year, Eric J. Toder, the co-director of the Urban-Brookings Tax Policy Center, advised Congress that “[a]chieving a revenue-neutral tax reform that reduces marginal tax rates significantly would be difficult or impossible to achieve without cutting back the mortgage interest deduction or some other equally popular and widely used provisions.”
6. A mortgage is typically 20 or 30 years. So yeah, I said that already. But I have another point: home ownership can limit your mobility. We were fortunate that we were able to write checks for our rent and our mortgage. While we could afford to make both payments, chances are that we would not have been able to obtain a mortgage for a second house while continuing to carry the first. Often, in order to move, you have to sell – or rent – your first home. I've been a landlord before and I’m not inclined to do it again. And selling our house in this economy was no small feat. That’s part of the reason that we stayed so long in one place: it was hard to move. In addition to our own missed opportunities, that may not be good for the country’s economy: economists Andrew Oswald and David Blanchflower found that rates of high homeownership lead to higher rates of unemployment in both the U.S. and Europe because, among other issues, owning a home may keep people from moving to areas with good jobs and creates “negative externalities.”
7. Houses take a lot of your money. There’s a reason that many folks refer to their homes as money pits: you often put a lot of money that you’ll never see again into a home. Not all improvements are deductible. Deductible expenses are generally limited to casualty loss deductions. In most cases, significant repairs to your home merely increase your basis for purposes of calculating a gain at sale. As most taxpayers aren’t likely to experience the kind of gain that would subject them to capital gains, basis isn’t always an issue which means that those expenditures get lost. Thousands of dollars to replace the air conditioning unit? The new garbage disposal? Replacing the flooring in the kitchen? The new washer/dryer? Landscaping additions? You can’t write them off and while you may recover some dollars at sale, rarely do you recover the entire amount. If you add all of those expenditures up over a 30 year period, you might see an explanation for some of that “gain” at sale. Often homeowners get fixated on two numbers: the purchase price of the house and the selling price of the house – but don’t forget to account for all of the money you spent in between.
8. If you do hit the home appreciation jackpot, there can be significant taxes. Not all houses bleed money. Not all appreciation can be attributed to inflation and/or a combination of home improvements – sometimes, it turns out to be a good investment. But there is a price: if the gain on the sale of your home exceeds the $250,000 exclusion (or $500,000 for married taxpayers), the proceeds over that exclusion are subject to capital gains. Additionally, under the new health care law, a Medicare tax of 3.8% will be imposed on investment/unearned income, which includes gain from the sale of your home, for high income taxpayers. High income taxpayers means those individual taxpayers reporting income over $200,000 and married taxpayers filing jointly reporting income over $250,000.
9. I like for things to be predictable and real estate taxes can vary.While mortgage payments can remain fairly flat, assuming you have a fixed mortgage rate, you more or less know what you’re paying each year. You don’t always have the same result with real estate taxes. Your tax bill can change based on property assessments and reassessments (just ask Philadelphia) or a change in tax rates – especially in today’s climate as townships and counties search for revenue. Unlike most commercial leases, residential leases don’t tend to be “triple net” meaning that the expenses are not directly passed through but tend to be figured as part of the total rental payments. Real estate taxes are generally accounted for in the cost of the rental; when they are not, they may be limited by statute or otherwise capped.
10. You can’t deduct a loss on the sale of your home. If I lose money on stocks, I can net those losses against other gains. If I lose money in my business, I can deduct those losses or use them to offset other gains (even in other years). But it doesn’t work that way when it comes to housing. You can never claim a capital loss on the sale of a personal residence – no matter how much it hurts. In this market, many taxpayers are finding this to be the case. That makes putting all of your investment eggs in the housing basket a risky proposition.
11. It’s getting more difficult to claim the itemized deduction. Home mortgage interest is only deductible if you itemize on your Schedule A, meaning that only about 1/3 of taxpayers even have the option of taking the deduction. You itemize if your deductions exceed the standard deduction: for 2013, the applicable standard deduction rates are $12,200 for married taxpayers filing jointly; $8,950 for head of household; $6,100 for individual taxpayers and $6,100 for married taxpayers filing separate. Those numbers are getting harder to get to for many taxpayers, including me. Mathematically, the longer you own your house, the less you owe in interest and the smaller the deduction. Add that to the bump in the threshold for the medical expense deduction (which means that I’m not going to be able to claim those expenses in 2013), restrictions due to the Pease limitations and the bar for miscellaneous deductions, and taxpayers are increasingly finding that the deduction is actually quite elusive.
I’m not saying that owning a home is a bad thing. I liked being a homeowner. I just happen to like renting more. I liked that when our oven died, it was replaced – at no additional cost to me – that same day. And I liked that as I wandered through Home Depot, I happily gazed at cabinet pulls and meandered through the garden center rather than making a beeline for caulk, wood putty or other maintenance items. Maintenance is no longer my problem.
I’m also not advising folks to eschew real estate: it can be a good investment for some taxpayers. In addition to owner occupied properties, rentals can be a good financial move. While I have no desire to be a landlord again, it has been a good bet for many taxpayers. My father-in-law has rented properties for years. He realized, like many other taxpayers, that rental real estate is not only a good income stream but a forced retirement plan. But he, like other savvy real estate owners, also understands the rules and the economics, and makes decisions accordingly.
What I am saying is that we shouldn't buy into the idea that owning a home is for everyone. And it’s not just me: at the end of August, the U.S. Census Bureau reported that the home ownership rate was 65.5%, the lowest rate in the past 50 years (downloads as a pdf); adding borrowers in risk of default, the number is closer to 62%. In contrast, ownership in 2010 was nearly 69%: for purposes of context, a one-percent change in the ownership represents well over a million homeowners. That dip doesn't spell disaster for our country. It would be a mistake to assume that countries with high incidents of home ownership are synonymous with a strong economy: Russia, Italy, Greece and Spain – countries with struggling economies – have significantly higher home ownership rates than the U.S. Conversely, some countries with traditionally strong economies like Germany, Switzerland and Japan, have lower home ownership rates than in the U.S.
There are so many considerations when deciding whether to buy a home. It’s not the ‘ideal’ scenario for all families. Don’t be fooled by promises of tax savings and tax-free appreciation: that’s not always the case. A home is a huge investment so be sure to research what it might mean for you before taking the leap – and don’t be afraid to say no. I did. And tonight, as I sit on my rented porch, staring out at my rented view while my kids happily play inside a house that they've already made their home, I don’t regret my decision one bit.
Forbes Article written by the Tax Girl, Kelly Phillips  Erb  - 9/27/13
Questions? Don't hesitate to call us. We're here to help!


Security Tax Services LLC


North Sound                                       South Sound
2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102
Everett, WA 98201                             Federal Way, WA 98003
425.339.2400                                     253.237.0751
fax 425.259.1099                               fax 253.237.0701


www.securitytaxservices.com

Government Shutdown 101: What Happens When The Lights Go Off? -

On September 30 the government will run out of money for the next fiscal year. That means that, unless a compromise is reached in Washington, there will be a government shutdown.

Of course, with that kind of doomsday scenario, Congress must be working desperately to resolve the budget. Or not.

Congress hasn’t actually made any real effort to address the budget woes. In fact, the House and Senate went on summer break knowing that they would return on September 9, just a few weeks before the deadline, without any serious proposals on the table. That’s kind of par for the course for the current Congress: they've only passed a handful of public laws. The rate of passage puts them on pace to accomplish only half as much as last year’s Congress – and that Congress pushed through fewer laws than any Congress since World War II.

The one thing they have been busy at is trying to repeal Obamacare. They’ll try again today for the 40th time. The next vote is tied to a short-term government funding bill that would keep the lights on in government.

That bill won’t pass.

The result of a failure to compromise could be a government shutdown. And that worries a number of economists, including Fed Chair Ben Bernanke. The threat of a government shutdown on the heels of the debt ceiling debate (again) could do serious damage to the economy.

Consider previous government shutdowns. In November 1995, a budget impasse led to a five-day shutdown; a second shutdown in December 1995, lasted 21 days (not unlike today, disagreements about health care issues played a key role in the budget dispute leading to both shutdowns). President Clinton reported that the combined shutdowns cost taxpayers $1.5 billion; the Congressional Research Service pegged it just under, at $1.4 billion (report downloads as pdf). In addition to the loss of funds, the shutdown resulted in widespread confusion for taxpayers and for government workers.

Parts of the shutdown were characterized at the time as “disorganized and illogical at best and chaotic in other instances” as questions swirled about who would report to work and who would not – and whether anyone would get paid.

The December 1995 shutdown furloughed an estimated “non-essential” 260,000 federal employees; to put that into perspective, that workforce is roughly the size of the entire city of Lincoln, Nebraska. Another 475,000 “essential” federal employees continued to work but were not paid for their work until the shutdown was over.

A similar scenario would likely play out with an October 2013 shutdown. Who is “non-essential” and who isn't? And what would stay open and what would close? Those questions are the subject of quite a bit of discretion but judging from what happened in the prior shutdowns, here’s what would likely happen:

• Non-essential employees, about 1/3 of the federal workforce, would be furloughed. The distinction between non-essential employees and those who are needed is discretionary but is guided by instructions from the Office of Management and Budget (OMB) and the Office of Personnel Management (OPM). A memorandum issued by OMB in 1980 defines “essential” government services and “essential” employees as those providing for the national security, including the conduct of foreign relations essential to the national security or the safety of life and property; providing for benefit payments and the performance of contract obligations under no-year or multi-year or other funds remaining available for those purposes; and conducting essential activities to the extent that they protect life and property. With that (and subsequent guidance), federal agencies are required to determine which of their employees are “essential.”
• Other federal employees would continue to work but, as in the mid 1990s, they would not be paid until the shutdown was resolved. And yes, that includes the President and the Congress.
• Federal contractors could work, in theory, since those funds have already been approved – but there may not be adequate staffers to issue paperwork for jobs. And you know how D.C. loves paperwork.
• HeadStart programs – those grants for preschool children to attend school – would not be funded, meaning that school would be out for thousands of children.
• Federal courts would remain open – for about 10 days. If the shutdown goes beyond 10 days, only “essential” work would continue. Most of the judiciary, including staffers, would not be paid until the shutdown was resolved. But Supreme Court justices and federal judges would collect paychecks.
• Social Security benefits would still be paid out but if the shutdown continues beyond a few days, other services provided by the Social Security Administration – including Medicare applications and the issuance of Social Security cards – would likely be put on hold.
• Foster care and adoption assistance services funded with federal funds or reliant on processing of federal paperwork would cease.
• Agencies that focus on public safety would remain open. That means air traffic and border controls would not be affected. National Security Agency offices would likely remain open (monitoring those emails and phone calls can’t wait) as well disaster assistance. Remarkably, however, the Center for Disease Control would likely be shut down as it was in the 1990s: that means no disease surveillance in the heart of flu season.
• Small business loans and mortgage insurance applications tied to government funding or agencies would not be processed.
• Workplace safety inspections would stop.
• Visas and passports would not be processed. In 1995, 20,000-30,000 applications by foreigners for visas went unprocessed each day of the furlough and 200,000 U.S. applications for passports went unprocessed. The loss to the tourism industry was said to be acute.
• Internal Revenue could see some furloughs (something they’re familiar with) but personnel to collect taxes would stay at work. As a rule of thumb, most of the folks who handle money would be safe from the shutdown. But the folks following the money? Agents and investigators would likely be told to stay home.
• The Bureau of Alcohol, Tobacco and Firearms would delay processing alcohol, tobacco and firearms applications.
• National parks would close their doors; in 1995, that meant the loss of 7 million visitors, including those hoping to see the Grand Canyon, which was closed for the first time in its history. National museums would also remain shuttered; in 1995, that was an estimated loss of 2 million visitors. The loss to surrounding communities reliant on tourist dollars was estimated to be $14.2 million.
• Closures would extend to national cemeteries, where, among other things, headstones would not be laid. Additionally, medical and financial services for veterans would likely be put on hold.
• The mail would continue to run: remember, the U.S. Post Office is not reliant on government funds.

After the two shutdowns in 1995 through 1996, Congress thought it might be a good idea for such a thing not to happen again. On June 17, 1997, Representatives Thomas M. Davis (R-VA) and George W. Gekas (R-PA) introduced bills that would prevent government shutdowns by, among other things, extending appropriations bills into the next fiscal year. Those bills got furloughed.

Forbes Article written by the Tax Girl, Kelly Phillips  Erb  - 9/20/13

Questions? Don't hesitate to call us. We're here to help!

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701

www.securitytaxservices.com

STS Tax Tips for Taxpayers Who Travel for Charity Work -

Do you plan to travel while doing charity work? Some travel expenses may help lower your taxes if you itemize deductions when you file next year. Here are five tax tips you should know about travel while serving a charity.

1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status or call us if you have questions about whether a charity you volunteer for is tax-exempt.

2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can't deduct the value of your time or services.

3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.

4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can't deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.

5. Deductible travel expenses may include:

• Air, rail and bus transportation
• Car expenses
• Lodging costs
• The cost of meals
• Taxi fares or other transportation costs between the airport or station and your hotel

Questions? Don't hesitate to call us. We're here to help!

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701

www.securitytaxservices.com

What Income Is Nontaxable? -

Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:

• Child support payments;
• Gifts, bequests and inheritances;
• Welfare benefits;
• Damage awards for physical injury or sickness;
• Cash rebates from a dealer or manufacturer for an item you buy; and
• Reimbursements for qualified adoption expenses.

Some income is not taxable except under certain conditions. Examples include:

Life insurance proceeds paid to you because of an insured person's death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.

Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.

All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering, such as the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.

If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount. If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you. That agency may have made the form available only in an electronic format. You will need to get instructions from the agency to retrieve this document. Report any taxable refund you received even if you did not receive Form 1099-G.

Questions? Give us a call. We're happy to help!

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701

www.securitytaxservices.com

CPA Disbarred for Stealing from Daughter’s Trust Fund -

The Internal Revenue Service today announced that its Office of Professional Responsibility (OPR) has prevailed in seeking the disbarment of David O. Christensen after he was convicted of theft for misappropriating funds as the conservator of his daughter’s trust account. Christensen’s CPA licenses in Washington and Oregon were revoked previously as a result of his conviction.

In a Final Agency Decision the Administrative Law Judge (ALJ) declined to carve out a request by Christensen for limited practice as a tax return preparer, and instead, disbarred him from all practice before the IRS finding that Christensen’s conviction for theft, and the revocation of his CPA licenses, constituted disreputable conduct under Circular 230.  Christensen had argued that he should be permitted to continue to prepare tax returns because his theft conviction resulted from a family matter that had nothing to do with his tax return preparation practice before the IRS. 

"OPR strives to protect the integrity of the tax system from unscrupulous and incompetent practitioners regardless of how those traits become known,” said Karen L. Hawkins, Director of OPR.

Agreeing with OPR’s proposed sanction, the ALJ held the seriousness of Christensen’s offense warranted disbarment from practicing before the IRS finding that the “Respondent has displayed a lack of integrity, including in his testimony at trial, in attempting to distinguish his professional actions from his ‘father-daughter’ relationship.”


Christensen is prohibited from any practice (including tax return preparation) before the IRS for a five year period.

Security Tax Services LLC

North Sound                                       South Sound

2802 Wetmore Ave, Suite 212           33530 1st Way S, Suite 102

Everett, WA 98201                             Federal Way, WA 98003

425.339.2400                                     253.237.0751

fax 425.259.1099                               fax 253.237.0701

www.securitytaxservices.com

Back To School: 10 Smart Tax Lessons To Move You To The Head Of The Class -

School is officially back in session. By now, approximately 50.1 million students have started the new year at public elementary and secondary schools across the country; another 5.2 million students have donned their private school uniforms.

Here’s a brief rundown of ten tax tips you need to know to stay at the head of the class:

1. Saving isn’t just for college. We tend to assume that savings plans only benefit students in college. Today, however, there is an array of plans available to help you pay for college – including the often overlooked Coverdell education savings account (ESA). With a Coverdell ESA, you can pay educational expenses for students in kindergarten through 12th grade, college or trade school – and it doesn't matter if your child attends a public, private or parochial school. Eligible expenses include tuition and fees as well as books, supplies, and equipment. Expenses also may include academic tutoring; special needs services; room and board; uniforms; and transportation. Money that you (or others, like grandparents) contribute to the plan will grow federal income tax free and assuming that you follow the rules, funds which are withdrawn and used for qualifying education expenses won’t cost you a penny in federal income tax.
2. Credits are almost always better than deductions. Credits are great because they are dollar for dollar reductions in your taxes due as opposed to deductions which merely reduce your income subject to tax. Additionally, while it’s rare that you benefit from a deduction when there’s no tax owed, with some credits, you can actually get money back even if you don’t owe any tax. When it comes to credits for educational expenses, there are two that you should know about for 2013: The American Opportunity Credit (the souped up Hope Credit), worth up to $2,500 per eligible student and the Lifetime Learning Credit, worth up to $2,000. Limitations and exceptions apply but if you qualify, you can save thousands of dollars.
3. “Free” isn't always free. Scholarships, fellowships and grants feel like “free money” and, as such, the assumption tends to be that the money is likewise federal income tax free. That’s not always true. Whether scholarships, fellowships and grants are federal income tax free will depend on a number of factors including what the funds can be used for and whether or not you’re pursuing a degree. The easy rule is that a scholarship, fellowship or grant is tax free only if you are pursuing a degree at an eligible educational institution and you use the funds to pay qualified education expenses; if you are not pursuing a degree, the full amount is subject to tax. Other amounts subject to tax would include those funds tied to services (such as teaching) and prizes.
4. Kids pay taxes, too. A child who is a dependent and is under the age of 18, or under the age of 24 while a full time student, can earn up to $1,000 in unearned income (like interest and dividends) income tax free for 2013 for federal purposes; a child under that threshold does not have to file a federal income tax return. After that threshold, however, a child must pay tax at their own income tax rate on unearned income up to $2,000. Unearned income over $2,000 is taxed at the child’s parents’ tax rate. Income which is taxed at the child’s parents’ tax rate does not necessarily mean that the income has to be included on the parents’ tax return; the child can opt to file a separate return (and in fact, that can sometimes be preferable for all kinds of reasons, including the dreaded AMT).
   
   The rules are different for earned income: any salary or wages that a child earns through full- or part-time employment are not subject to the kiddie tax rules and is taxed at the child’s tax rate. If income is earned and it is less than $5,700, there’s no need for that child to file a federal income tax return (a quick caution, though, that if a taxpayer is subject to SE tax, the threshold is generally $400 of net earnings); tips are also considered earned income.
5. You don’t always have to itemize in order to deduct your education-related expenses. The word “deduction” is almost always associated with “itemized” in today’s tax lingo – but that isn't always accurate. There are a number of deductions which are treated as adjustments to income, meaning that they are deducted from gross income without regard to any tax schedules (like the ever popular Schedule A). Since those deductions are found on the front page, they’re often referred to as “above the line” deductions. Popular above the line deductions related to education include the educator expense, the student loan interest deduction, the tuition and fees deduction and for some new grads, moving expenses.
6. Uniforms – no matter how ugly – are never deductible. The IRS does not allow deductions for school uniforms for public, parochial or private schools even if uniforms are required – and even if you could prove that you’d never, ever wear them outside of school. They are considered a personal expense and not deductible. However, the rules are different for students who attend military school; while you still may not deduct the cost of your uniforms, you can deduct the cost of insignia, shoulder boards, and related items. Faculty and staff get a bigger break: under the rules, you can deduct the cost of your uniforms if you are a civilian faculty or staff member of a military school.
7. It doesn't hurt to file. April 15 is often a scary day for taxpayers who fear writing out those big checks. Statistically, however, about half of taxpayers owe no tax – and some are actually due a refund. This can be especially true if you’re a student: due to refundable credits like the Earned Income Tax Credit and the American Opportunity Credit, you may qualify for a refund even if you don’t owe any tax. However, you can’t receive a refund if you don’t file. Even if you don’t meet the filing thresholds for your age and filing status, you should run the numbers to see if you come out ahead.
8. Time is money, except when it comes to deductions. The Internal Revenue Service will never allow you to deduct the value of your time – even if you can clearly value that time in terms of dollars. However, if you’re spending time volunteering for a qualified charitable organization, related out of pocket expenses are deductible on your Schedule A as a charitable deduction so long as you itemize. Keep good records, including receipts; the same rules apply for the donations of goods for charitable purposes.
9. Take advantage of employer-provided benefits: it’s free money.While fringe benefits offered by your employer are generally taxable, there are a few valuable exceptions under the Tax Code. With employer-offered educational assistance benefits, for example, you can claim up to $5,250 in tax free dollars used to pay for educational expenses even if you’re not pursuing a degree. Other useful employer-related benefits include reimbursements for commuting expenses – especially beneficial since commuting is never tax deductible – and health care benefits for children who are no longer minors but are still in school. Additionally, if your former boss used to be Uncle Sam, you may qualify for the G.I. Bill and other perks.
10. What you can’t do one way, do another way. Sometimes, expenses don’t fall into the neat little categories we expect them to. But just because an expense won’t qualify as one kind of deduction or credit doesn't mean that it won’t qualify for another. Consider sports lessons and other after school activities like dance or music, as well as tutoring: while these expenses would not normally be deductible as mere instruction, they might be deductible as child care expenses. Music lessons might also qualify as a medical expense – the IRS allowed a deduction for clarinet lessons in 1962 when prescribed by an orthodontist to help correct an overbite. And similarly, while food is not normally deductible, the cost of a special diet might fly as a medical expense. Re-characterizing expenses can be smart but it can also be tricky – be sure to check with your tax professional for specific guidance.

Enjoy the new school year! Questions? As always, we are here to help! Give us a call today!

Security Tax Services LLC

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