Your Average American Earning $200,000+

News from the desk of Ron Wilburn, CPA
MARCH 27

IRS Reveals How “High Income” Earners Pay No Tax

 

The IRS “Statistics of Income” Division last release for high-income tax returns was SOI Bulletin Spring 2012. While we don’t expect it to challenge the latest John Grisham thriller on the bestseller list, the Bulletin actually appeals to an even bigger audience – anyone who wants to pay less tax!

The big news in this issue was this: in 2009, 3,924,489 Americans reported “adjusted gross incomes” of $200,000 or more. 20,752 of them paid zero federal income tax. Zip. Zilch. Nada.

Paying no tax is hardly remarkable. According to the Washington-based Tax Policy Center, this year 47% of Americans will pay no federal income tax. That’s because their income is so low, or because they qualify for enough exemptions, deductions, and credits to eliminate any liability. But making $200,000 and paying no tax – now, that’s an accomplishment. How did they do it?

According to the IRS, here are the items that produced the largest tax effects on high-income returns:

Interest paid (including mortgage interest and investment interest)
Taxes paid
Charitable contributions
Casualty and theft losses
Partnership and “S corporation” losses
Tax-exempt interest
You probably don’t want to count on “casualty and theft losses” to bail yourself out of a big tax bill. But you can count on one thing. Very few of those 20,752 lucky winners sat down to file their taxes and discovered their zero tax bill by surprise. Almost all of them did it through careful planning.

Do we sound like a broken record with the “P” word? Sorry, but that’s just too bad. Planning really is the key to minimizing your taxes. So, while we can’t promise planning will eliminate your tax entirely, we can tell you it gives you your best shot.

Are your friends, family, or colleagues grumbling about unhappy April 15 surprises? You can be a hero by helping them avoid those surprises. Let them know that we can help, with the right plan and the right concepts and strategies for them. And if you don’t have a plan of your own . . . well, you know where to find us!

Follow us on Twitter at @WilburnCPA and let us know how we’re doing.

Thanks for a great year.

Sincerely,

Ron Wilburn
Wilburn CPA

 

Health-Care Reform: Replacing Myths with Facts

The Patient Protection and Affordable Care Act (ACA) passed in 2010 is incredibly broad in scope, so it’s probably not surprising that there’s a good deal of confusion about it, and a number of inaccurate and misleading claims that have been circulated. Here’s some information to help separate fact from fiction

 

Health Care Reform Myths

How to Report Gambling Winnings on Your Tax Return

Image courtesy of FreeDigitalPhotos.netRecreational gamblers must report their gambling winnings on line 21- Other Income on page 1 of Form 1040 U.S. Individual Income Tax Return.  The deduction for gambling losses is limited to the amount of winnings from wagering transactions I.R.C. § 165(d).  The gambling losses are reported as a miscellaneous itemized deduction on Schedule A.  Note, a taxpayer cannot take the standard deduction and still deduct his gambling losses.

The statute I.R.C. § 165(d) refers to gains and losses in terms of wagering transactions.  In order to calculate the gain or loss from wagering, the gambler would have to track each wager as a separate transaction and calculate the gain or loss per wager.  The Courts considered that interpretation as too burdensome and unreasonable according to IRS chief counsel advice memorandum A.M. 2008-011  December 5, 2008.  IRS chief counsel believes that the better view is that a casual gambler recognizes a wagering gain or loss at the time she redeems her tokens or cashes out of the slot machine. Wins that are left in the slot machine and used to continue wagering are not counted as income or winnings until the gambler cashes out and stops playing.

Shollenberger v Commissioner, T.C Memo 2009-306 determined that the Shollenbergers were recreational gamblers that should keep records of gambling wins and losses by sessions.  No court cases have defined the requirements of what constitutes a session, and the IRS has no clear ruling on the matter.  According to the Shollenberger case, on the day in question, they withdrew $500 from their joint bank account to take with them to the casino.  Mr. Shollenberger won $2,000 playing a dollar slot machine, and they each took $200 from his winnings to continue playing the slots.  They ended the day with $1,600, which they took to the bank and deposited the next day.  The IRS contended that the Shollenbergers should have reported the $2,000 jackpot as gambling income.  The court concluded that they net their winnings against the amounts wagered for that particular session of gambling.  The $2000 jackpot minus the original $500 minus the additional $400 wagered, resulted in a net taxable gambling gain of $1,100 for the session.  They should report $1,100 as gambling income on line21 Other Income of the Form 1040.  The Form W-2G that reported their gross winnings from the $2,000 jackpot should not be reported on line 21 as $2,000.

The IRS matches up the earnings reported on your tax return against the amounts reported to them from the Casino’s on Form W-2G.  If they do not match, you will most likely receive an IRS notice stating that you under reported your taxable income.  You should keep a log book of your wagering activity similar to a travel or mileage log book.

To help determine the beginning and ending of a session, consider the time, place, and activity.  Remember, when the chips are cashed in, that signals the end of the session.

Examples are as follows:

Time – When a gambler plays slot machines at the same casino for 2 days in a row, there are 2 separate sessions based on time.

Place – Playing the game on the same day at two different casinos is considered two separate sessions.

Activity – Changing from playing the slot machines to black jack would be considered changing activities and would be two different sessions.

Following is an example of a wagering log book and how the wagering gains and losses would be reported on your tax return.

Date

Location

Others present

Won

Beginning Cash

Winnings Wagered

Net Gain or (Loss) from Session

03/31/2014

River Spirit Casino

Joe Bob

$1500

$100

$600

$800

06/30/2014

Hard Rock Casino

Jim Bob

$2500

$200

$2000

$300

09/30/2014

Million Dollar Elm Casino

Jim Meister

$3500

$300

$3500

($300)

12/31/2014

River Wind Casino

Jimbo Rama

$4500

$400

$4500

($400)

2014 TOTALS

$12000

(Amount per

 W-2G)

$1000

$10600

$400

In the example log book above, the taxpayer should report gambling gains of $1100 on line 21 for Form 1040, and gambling losses on Schedule A Itemized Deductions of $700.  The net amount is $400 gain, but notice that the income amount on line 21 would have been $12000 of gross income if the taxpayer had reported the gross amount per the Form W-2G.  A taxpayer’s Adjusted Gross Income or AGI would be substantially higher if this session method were not used.  Because the AGI is used in numerous phaseout of deduction calculations, the taxpayer can be penalized by not having kept a good wagering session log book.

If you want to make sure you are legally optimizing how you report your gambling income on your tax return, please call (918) 212-9950.  We will prepare your return and make sure you don’t pay Uncle Sam more than his legal share of your gambling winnings!

Creating Bank Rules in Xero Beautiful accounting software

There are two types of bank rules in Xero

  1. Spend Money Rule – applies to debit transactions
  2. Receive Money Rule – applies to credit transactions

Spend Money Rule

We will now explain how to create a spend money rule in Xero that will divide an amount between two or more general ledger accounts. 

Let’s say you use your auto in your business and after tracking your mileage for the IRS in a log book, you determine the business use of your automobile is 75%.  Each time you buy gasoline at QuikTrip you don’t want to have to manually code the transaction.  You can setup a spend money rule that will automatically code 25% of the expenditure to owner’s draw, and the other 75% to automobile expense.

Click the “Go to banking” link from the dashboard, then click “Bank Rules”.  Click “Create Rule” and choose Spend Money Rule.

Line 1. When money spent on the bank statement matches [  ANY  ] of the following conditions…

Description,  Contains,  QT

Line 2. Set the contact…

Payee

Line 3. Automatically allocate fixed value line items…

no entry required

Line 4. With the remainder, allocate items in the following ratios…

Description = gasoline,  G/L Account = Automobile expense,  Percent = 75%

Add a new line, and input the following

Description = personal gasoline,  G/L = Owner’s draw,  Percent = 25%

Line 5. Set the reference…

Set this to either “from the reference” or “by me during bank rec”

Line 6. Target a bank account…

Choose your desired business bank account.

Line 7. Give the rule a title…

Name the rule something like “QT gasoline allocation”.

Next time a bank statement item is downloaded with QT in the description field, this rule will automatically code the amount to the correct general ledger accounts and percentages.  You just accept it and you’re done recording and reconciling the transaction.  It should save you at least 50% of the time required to do it manually each time.  You can setup bank rules for numerous scenarios and each time you setup a new bank rule, it saves you time from now on and the reconciliation process gets faster and faster.

Check back often for more ideas to streamline your use of Xero beautiful accounting software, or better yet subscribe to our newsletter.

Want to talk to someone about how Xero can help your business?  Call us at (918) 289-8212.

IRS Tax deduction for business use of automobile

What is needed to take a tax deduction for using your auto in your business?

There are two methods that you can use to calculate the tax deductible amount.

  1. Standard Mileage Rate
  2. Actual Expenses

Standard Mileage Rate  Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 56.5 cents per mile for business miles driven.
  • 24 cents per mile driven for medical or moving purposes.
  • 14 cents per mile driven in service of charitable organizations.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

Actual Expenses  You cannot deduct amounts that you approximate or estimate.  You must have a record of the actual amount of each expense. Receipts, canceled checks, entries on your bank statement will all be sufficient to prove the amount of expense.  You also need to provide the business destination and purpose.

Business and personal use.  If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. You can divide your expense based on the miles driven for each purpose.

Auto Mileage Log Book   Keeping a mileage log book of your business miles and then comparing your business miles to all other miles driven will give you the business use percentage for the vehicle.  The IRS allows you to keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year. You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year.

 Example.

You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. There is no other business use of the car, but you and your family use the car for personal purposes. You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year.

Smartphone Mileage App  There are some really cool apps available for your smart phone that will use the built in GPS feature to automatically calculate your miles driven for a particular trip.

  • Use the iPhone GPS to accurately track miles traveled.
  • Create an acceptable IRS mileage log
  • Email the log file to yourself so you can add to a spreadsheet
  • Enter purpose and destination

For those of you currently using Xero Beautiful accounting software, once you know your business use percentage, you can setup rules in Xero to automatically code the personal use portion of expenses to owner’s draw and the business use percentage to automobile expense.  To learn more click here.