Tax filing and refunds have been particularly challenging this year, not just due to the increased complexity of the tax code. The IRS reports this year that the number identity fraud cases has skyrocketed as thieves steal social security numbers and collect tax refunds. This is becoming such an industry, that social security numbers are now selling for $1000 on the street. If you are one of the thousands of people wondering what happened to your tax refund, you might want to consider the following tips to determine whether your identity was stolen or not.

1. You owe additional tax after filing
2. Multiple returns filed with your social security number
3. Your refund is offset
4. IRS record show that you received wages from an unfamiliar employer

These are all signs of identity fraud. Should you suspect this being done to you, there are several action steps for you to take.

First, contact the IRS to alert them of your situation. There is also an Identity Theft Affidavit form to fill out. Of course, the IRS may not respond in a way that is satisfactory. In that case, there is also a hotline for IRS Identity Protection Specialized Unit at 1-800-908-4490.

Prevent identity theft by never carrying your social security card with you. Also never give it out over the phone or by email unless you are the one that initiated the conversation. There is also a variety of software available to protect you from identity theft by way of your email and online financial accounts. 

For many small businesses, there is no succession plan other than to sell the business when the owner is ready to retire. At first pass, this seems like a great idea, until one considers the tax impact of selling a business and making perhaps millions of dollars at one time. However, that has not stopped many business owners from trying to sell their company before the tax rates increase any further. In light of the prospect of increased tax rates and closed loopholes, here are some tips on how to minimize the impact of taxes on the sale of a company.

Accept an installment schedule. By electing to receive the sale in annual installments, the seller can avoid paying taxes on one single very large amount, which would drive the tax rate to close to 50%.  Instead, smaller portions paid out over a five or ten year period can make the sale easier for both the buyer and the seller.

If the company is an S-corporation, elect to treat the sale as an asset sale. The reason for this is that the capital gains tax just went up from 5% to 8.8%.

ESOP’s can also be used to purchase stock tax-free, as long as it owns at least 30% of the stock.

There are numerous ways to buy and sell companies that can help lower the taxes for the seller.It is especially valuable to know these strategies as the economic environment remains volatile, and the regulatory atmosphere continues to be a challenge for businesses.

For many people, their biggest asset is their 401k account. After the housing crash, many people’s 401k’s had more value than their house. Unfortunately however, most people do not take full advantage of the 401k offered by their company. Below are some of the ways to maximize this investment to make sure that you have enough to live will in your retirement.

1. Invest more than the default saving rate. Most companies recommend a 3% contribution. However, that may not be enough to support you in your retirement. Invest more than that, and increase a percentage point every time you get a raise.
2. Take full advantage of a match, if one is offered, and don’t leave the company until you are fully vested. If your company matches 50 cents on the dollar, up to 6%, then contribute 6%. And stay until you have received the full match, not just portions of it.
3. Diversify both your investments and the 401k itself using a good stock-to-bond ratio, and using Roth and Tradition 401k accounts.
4. Leave your account in place after you retire. This lets you continue to take advantage of market gains throughout your retirement, and helps you avoid paying a huge tax penalty on the lump sum distribution.
5. Minimize fees by investing in index funds, which have a much lower internal expense ratio, meaning they are much less expensive to invest in.

These are just a handful of tips for really maximizing the 401k as a tool to save for the future. If your company offers a 401k, speak to an investment advisor for more specific investment advice. 

Corporate income tax has been around since 1909, and has been the subject of a lot of debate both in Washington, throughout the states, Wall Street, and Main Street. There is nearly universal agreement that corporate tax is too high, driving companies out of the country to more tax-friendly nations where they can save significantly. This year, Congress is expected to enact some legislation to lower corporate tax and make the United States a bit more tax-friendly. One question though, remains: who exactly pays the corporate tax?

Economists have been unable to answer this question since the inception of the corporate tax. Theories have ranged from owners, to workers, to customers and consumers. Eventually, economists boiled it down to figure that the corporate tax was paid by the workers in the form of lower wages. They came to this conclusion because the supply of capital would shrink, in an effort to raise the rate of return on capital. Small capital of stock reduced the productivity of labor, causing real wages to be lower in the long run. Today, economists agree that to an extent, the burden of corporate tax falls on the workers employed in corporations.

Various studies have made the case that the burden falls on the laborers, but there is also a large portion of studies that concludes the exact opposite; that the tax laws are so complex, particularly internationally, that it is impossible to say that the workers bear the brunt of the burden.

The US Treasury concluded, based on detailing how the taxes are collected, that 82% of the burden falls on capital (shareholders), and 18% falls on the workers. This study is more significant because the Treasury has access to more detailed information than most other researchers. Their study was in line with another study by the Tax Policy Center, which put 20% of the burden on the workers, and 80% of the burden on the capital.

The new year has brought some significant changes for small businesses. The fiscal cliff brought about a lot of changes that owners are struggling to understand and comply with the large number of tax changes. The changes started with docking employee’s pay and their own pay to comply with the 2% payroll tax increase.

Tax rates also increased on dividends, which will affect many owners of C-corporations that take their pay as dividends from the company as opposed to a salary. The result of this tax could make S-corps and Partnerships a more attractive and affordable option for companies looking to incorporate. Companies may also have had to increase the tax withholding for Medicare taxes too.

Several deductions and incentives were renewed or expanded to cover more manufacturing expenses. The Work Opportunities Tax credit and the Research Tax credit, which apply to hiring veterans, ex-felons, and those coming off government assistance, and research expenditures respectively, were both renewed and made retroactive to 2012.

Tax planning will reach new levels of intensity as January 1, 2014 nears. The Affordable Care Act regulations will go into effect, and will require a lot of work to comply with. Companies with 50 or more employees that work at least 30 hours will be required to offer them healthcare that meets certain federally mandated requirements. The penalties for failing to comply with the ACA will be very steep. Not only are businesses penalized for failing to offer appropriate coverage, but they are also penalized when the premium exceeds 9.5% of the employee’s wages.

The greatest cost though to small businesses might not be the taxes and penalties themselves, but could actually end up being the cost of complying, since the new rules, particularly the Affordable Care Act are fairly complex and sophisticated. Companies are facing a lot of man hours spent trying to figure out all the new tax rules and other regulations.

In his State of the Union Address, President Obama outlined a plan to help small businesses and big corporations by slashing corporate tax to 28% from 35%. He also stated that small business deserve simplicity with filing taxes, and that there is a need to streamline the filing process. Small businesses and big corporations both agree, and lowering the corporate tax rate will hopefully help businesses move back onshore and regain their competitiveness.

However, most small businesses were left out of this tax plan. The great majority of small businesses in America have a pass-through tax structure, where the owners pay taxes for the company from their own income. Lowering the corporate tax rate while increasing income tax rates can have a dramatic effect on the profits of a company. Pass-through companies will be the hardest hit by the tax increase for high income people, since small business owners are the ones that will pay the tax penalty. In addition to the tax rates, small business owners have been dismayed by many of the non-tax regulations now in place, such as the Affordable Care Act. The cost of running a business has increased quite a bit in recent years, and not including tax cuts for pass-through tax structured small businesses doesn’t help the small businesses grow and reinvest in employees and expansion. Furthermore, raising the minimum as proposed from $7.25 to $9 per hour will reduce the amount of employees that companies can afford to hire.

There are, however, a few tax incentives. Obama touched on the need to add more incentives for hiring, in addition to the Startup America Initiative. It remains to be seen whether Obama will allow the tax rates for pass-through companies to be lowered, or if he will continue to try to increase the tax rates while adding incentives.

Currently small businesses in America have to cope with a sluggishly recovering economy where consumer demand is faltering and the credit markets remain tight. It’s bad enough to have to deal with that but on top of this small businesses also have to tackle the constant burden of federal regulations and the resulting paperwork and tax compliances that follow. Indeed, all of these compliance issues have been holding small businesses back for years and despite the frequent claims from politicians, mainly during election seasons, to clean up and reduce the number of regulations facing small businesses, the problem is worse than ever.

Exactly how much are all of these regulation compliance issues costing small businesses and holding back potential output? The Office of Management and Budget (OMB) conducted a Costs and Benefits study and as of 2011 estimated that it takes almost 8.783 billion, yes billion, hours to complete the mandatory regulatory paperwork per annum. that’s up from the 7.4 billion estimate in 2000 but surprisingly down from 2009. If each hour of required regulatory work was priced at the national average wage of roughly $20 per hour then the dollar cost of simply filling out paperwork is $176 billion. That’s $176 billion in labor potential that could be put towards better use.

However, that’s using the national average hourly wage. Since the people who generally fill out compliance paperwork are lawyers or other professionals earning more that the average that OMB estimate is significantly lowballing it. Simply assuming $40 per hour shoots that estimate for wasted manpower to roughly $350 billion. That’s a significant figure by anyone’s definition. OpenMarket continues, “Those wages give some idea of hourly compliance costs. In the Small Business Administration’s 2010 “The Impact of Regulatory Costs on Small Firms,” with respect to estimating costs of compliance with the federal tax code, costs were divided between businesses and individuals/nonprofits, with (also BLS) figures of $49.77 and $31.53, respectively. The SBA report relies primarily on 2008 Internal Revenue Service data regarding paperwork hours for businesses and individuals/non-profits. It employs an overall burden of 4.3 billion hours (2.3 billion for businesses and 2 billion for individuals and non-profits). Using BLS data on hourly wage rate for tax form preparation, SBA computes $159.6 billion for compliance in 2009 dollars…”

The fiscal cliff deal in actuality did little for the economy, and did nothing to prevent ongoing disputes in Washington. Sequestration battles will start in March, with the battles continuing into April. Budget battles begin in May, and the Democrats have not passed a budget in years, and Obama again missed the deadline for this year’s budget. While the Republicans put off the debt limit for a few more months, the battle returns in August. Essentially, with the exception of tax rates, the fiscal cliff deal did nothing to solve any of the problems that Washington has continued to postpone.

Obama says that he will consider some spending cuts, in exchange for increased federal revenue from Republicans, likely in the form of closing loopholes, ending tax breaks, and considering more taxes on the wealthy. This is a concession that Republicans say they are unwilling to make, since they raised taxes already once this year, and Obama has not cut spending at all. Rather, he has proposed modest cuts, coupled with increased spending in other areas.

The spending cuts that Obama has asked for include cuts to defense spending, along with other programs loved by Republicans. He has conceded that he will consider some sort of Medicare reform, although he has not proposed any sort of spending cut, but instead suggested ways to make it more readily available, which inevitably leads to increased spending.

The coming year will be one full of battles, and tonight’s State of the Union address from the President will give foresight to the course of action we can expect from both parties. 

The American Taxpayer Relief Act, or ATRA, changed the regulations on Roth 401k options. Before going further, let’s talk about the Roth option. Traditional 401k’s allow the investor to contribute to a retirement plan before paying taxes, which allows the investor to lower his or her taxable income. Taxes are then paid when the participant begins taking distributions. The Roth option allowed the participant to make contributions after paying taxes, which made the distributions tax-free, even on the capital gains.

Previously, the investor was only allowed to convert as much as he or she could distribute from the plan, usually due to termination from the employer, or on reaching the age of 59 1/5. This meant that the investor could only convert part of his or her traditional 401k into a Roth account.

The new regulations make it possible for a participant to convert the entire amount in the traditional 401k into a Roth 401k account. In this scenario, the investor pays the income tax on the income upon conversion, and avoids paying taxes when taking distributions. The benefit of such a conversion lies principally in tax rates. If the tax rates continue in their new upward trajectory, then such a conversion as this makes a great deal of sense. It is essentially locking in today’s tax rate to prevent against paying more taxes in the future. However, if taxes for some reason drop, locking in today’s tax rates doesn’t make sense.

As with any major financial decision, talk to a qualified professional who can help you make these decisions. 

The IRS and HHS released Obama’s proposed regulations dealing with exemptions from the Affordable Care Act. These regulations detail which people will be exempt from the ACA, how to file for exemption, and which agencies impose the regulation and penalize for failing to have insurance. Exemptions will be given to those with “hardships” or religious objections. “Hardships” are defined within the list of proposed regulations. The first exemption listed allows for individuals with income so low that they can’t afford any of the options on the healthcare exchanges. The next one is the most contentious of the exemptions, and it allows for people to be exempt from purchasing insurance if they are eligible for Medicaid, but their state has not expanded to meet the federal requirement of the Affordable Care Act. A major concession made the Human Health Services is that they will allow state-based exchanges as opposed to national exchanges.

The IRS will be in charge of addressing exemptions in four of the nine categories: individuals who cannot afford coverage, individuals who experience short gaps in coverage, taxpayers with income below the filing threshold and individuals who are not lawfully present in the US. The exchanges themselves will be responsible for monitoring the hardship exemptions or religious conscience exemptions. Members of Indian tribes, members of health care-sharing ministries, and incarcerated people will be handled by either the IRS or the health care exchange itself.

The Affordable Care Act is now beginning to take effect and impact people, but the real impact of the mandate is yet to be seen. 

As you file your taxes this year, it is important to pay attention to how you define them. For example, Modified Adjustable Gross Income (MAGI) is very similar to Adjustable Gross Income, and in most cases are the same. The Medicare tax of 3.8% kicks in this year, and has separate thresholds for MAGI vs AGI. MAGI over $250,000 for married couples gets hit with the tax, while the threshold for AGI is $300,000 for married couples.

Shareholder Income (K-1) vs Wages (W-2) also matters, as K-1 employment tax is lower. This only applies to S-Corps, where the tax is passed through to the owners, much like LLC’s. K-1 can also result in the loss of disability payments, so be cautious with this one.

W-2 vs 1099. W-2 automatically removes the taxes before the employee receives wages, while the 1099 leaves the taxes in, but the employee has to pay taxes at the end of the year. This can actually create a lot of problems, particularly for low-wage employees, who might not be able to afford a check for a few thousand dollars at the end of the year.

The tax environment has gotten a little more complex this year, with several new taxes going into effect and some old tax cuts expiring. Additionally, most of these changes were made at the last minute, creating a bit of a headache for tax filing. As you file your taxes for last year, obtain the help of a qualified tax accountant. Be sure to keep accurate records of your business this year, to help with filing next year. 

January 1^st ushered in several new taxes, from the Obamacare tax, to reinstatement of higher payroll tax rates, Medicare rates, and more. The fiscal cliff solution was to delay the spending cuts until March, when Washington would evaluate what should be cut, and what should stay. Republicans temporarily raised the debt ceiling, and will be tying to spending cuts to raising the debt ceiling permanently. Washington is in the process of writing and passing the annual budget, and the House has passed theirs. The White House did not meet the deadline for passing a budget, and the Senate has not passed a budget in three years. Obama has come out saying that he will be willing to cut spending- if it’s tied to increased federal revenue. This would largely be in the form of elimination of tax loopholes, which the Republicans earlier tried to make a part of the tax deal. The changes would include elimination of “last-in first-out” accounting, oil and gas tax preferences, tax carried interests from investment income, special depreciation rules for corporate aircraft, and also require companies to pay minimum tax on profits overseas, and finally remove the deductions for moving production overseas, and creating incentives for bringing production back on-shore.

Republicans will likely push back against this, and try to focus on spending cuts to federal programs. David Camp, Chairman of the House Ways and Means committee said that reforming the tax code should be about simplification, not raising more taxes.

Expect the debate to heat up in the next month as the March 1^st deadline approaches. 

Suze Orman, the popular finance expert, explains why it is better to leave the funds in your 401k when you retire, rather than cashing out. Unfortunately, the video would not embed, so click on the link to see the video:

http://huff.to/WrvFK8

Today is the 100^th anniversary of the beloved federal income tax. Surprisingly, the federal income tax has only been in effect since 1913, although there have been previous short-lived income taxes, and attempts to implement taxes before 1913. Lincoln introduced the first, a flat tax of 3% on those earning more than $800, to help fund the Civil War in 1861. It became a sliding scale the next year for those earning $800, and those earning $10,000, who were taxed at 5%. The government also required employers to remove the tax, as people were not willingly sending their money to the government. This tax expired, but the Commission of Internal Revenue was born. In 1887, the Socialist Labor Party pushed the Income Tax Act, which was passed in 1894. The Supreme Court rejected this as unconstitutional, but three quarters of the states ratified it, and the 16^th Amendment came to be. It was a sliding tax, with the lowest income bracket paying 1% in taxes. During WWI, Congress got more greedy and raised taxes dramatically. Clinton raised them again, but George W. slashed them to the rates we had last year.

In 2012, there were 150 million taxpaying Americans in the workforce. These Americans paid $1.2 trillion. To put that in perspective, in 1913 there were 50 million workers, and were you to triple the number of workers to 150 million, the federal revenue would be only $2 billion. As the government expands to take the helm of more private sector services, the federal income tax has been the vehicle to provide the means. 

The House of Representatives Small Business Committee is giving small businesses a little help by creating a platform for them to have a voice in regulatory processes. Small Biz Reg Watch, a website that highlights proposed regulations that could affect small businesses, directs SMB’s through the various regulations, helping them find the pertinent ones, and gives them a platform to comment on the regulations. This is done to help them have a voice in the matters that are relevant. Lately, regulations have been particularly burdensome on small business, and the House is attempting to let the small business community educate Washington on how the regulations are burdensome, before they become law.

Immigration is turning into one of the hottest topics this year in Washington, surpassing even gun control. Verifying illegal immigrants and keeping them out of the workforce that should be occupied by legal residents is one of the key points of discussion that the President, Republicans, and even immigration rights groups agree on. However, the penalties for not checking the status of an employee have been much lighter than those of checking the statuses of employees. In fact inquiring about the legality of employees opens the door for nationality- and citizenship-based discrimination suits.

However, the government is pursuing more aggressive strategies to weed out illegal immigrants who are working under the radar and collecting benefits. E-Verify, a government website, allows employers to check the social security number and resident alien status of their employees. If the search does not find any matches, it gives the employee eight days to prove their legality. If they can’t prove it, the employer is mandated to fire them.

Law enforcement is also changing the way illegal immigrants are kept out of the workplace. Obama has shifted the burden from the immigrants themselves, to the employers. Under the Bush administration, immigrants were targeted in ICE raids. Now, the employers are the ones being audited and arrested for not doing enough to prevent illegal immigrants from entering the workforce. Washington is debating various forms of documentation in order to ensure the identity of the individual, with the most popular option being a hard PIN, which includes finger prints and DNA.

Whatever Washington decides, it must back it’s plan fully, and commit to enforcing it.