S Corp Draw
January 27, 2009 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from VP in California who tells us. “I am VP of an S Corp. I do not draw a salary, but the president does. Does the dollar amount of owner’s draw affect taxes in any way?”
Dear VP,
I guess I am confused. There’s no such thing as an owner’s draw in an S corp. It’s either wages or dividends. Worst case, money drawn can be consulting fees. But that’s not the best idea.
If the company has enough money to pay the president enough to live on, the president should be on payroll. You will be attracting an audit and taxes, penalty and interest if you don’t establish a payroll – and fast.
As an officer, a Vice President, you are responsible for the company being properly administered – even if you don’t get paid. If IRS conducts an audit and determines that there should have been payroll, and all the related payroll taxes, YOU can be held personally liable for paying those taxes if the company doesn’t pay them. Incidentally, if IRS audits and determines this is payroll, you’ll owe all the same kinds of bucks to California, too. This is not a smart arrangement.
Right now, BEFORE the tax return is prepared, you need to recharacterize the money the president has taken as a draw. It should properly be payroll – you still have time to file a 4th quarter payroll tax return to fix this problem.
If not, it should be outside services – which means the president will have to personally pay both sides of the Social Security/Medicare taxes – total 15.3%, instead of the company paying their half when she’s on payroll.
It could be a loan – in which case you need a legal document spelling it out as a loan, with an interest rate, and repayment terms. And it must be repaid.
This is the kind of thing that really, really should have been worked out when you two started the company – not the following year, when it’s time to file tax returns.
Basically, you really need to have a tax professional come in and look at what you gals did with the books and clean them up before the S Corp tax returns need to be filed in March.
And remember, you can find answers to all kinds of questions about S Corporations and other tax issues, free. Where? Where else? At TaxMama.com
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Garnishment Scam
January 27, 2009 by Tax Blog
Filed under Questions & Answers
Today TaxMama hears from Phyllis in Florida with this problem. “Is it legal to garnish wages for 1997 state taxes? I didn’t know anything about them until recently, when I received a collection letter from an agency. I thought for sure it was a scam because so much time had lapsed.”
Dear Phyllis,
Find out from the state in question if these are really taxes you owe. Go back to source to get the proof of the taxes due.
You don’t say who is garnishing your wages. Is it a state agency? Or is it a collection agency?
A state, depending on their arrangements with the courts in your state, has the right to collect taxes as long as their statutes of limitations on collections are open. States have different time frames during which they may collect. For instance, California’s is either unlimited, or 30 years, I am not sure which. Either way, it’s a lifetime.
If it’s a collection agency, you may want to have an attorney get an injunction to prevent the garnishment. Or you may want to go to court to sue the collections agency. It’s quite possible that the collections agency does NOT have the right – if they cannot prove the actual tax liability to the court’s satisfaction. Consult with an attorney for some guidance.
There are some interesting twists in collections laws as it relates to agencies. And some agencies operate aggressively because the debtor doesn’t know enough to stop them.
And remember, you can find answers to all kinds of questions about wage levies and other tax issues, free. Where? Where else? At TaxMama.com
[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]
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- www.TaxQuips.com :: The number ONE free tax podcast online
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Tax on joint interest income for couples living in different states?
January 26, 2009 by Tax Blog
Filed under Questions & Answers
I live in CA and my wife lives in NJ. We have a joint account with a CA credit union. Now CA only taxes the interest of CA residents. Since my wife’s non-CA income also contributes to this interest, how should I split it for tax purposes?
FileYourTaxes.com
January 21, 2009 by Tax Blog
Filed under Federal Tax, Softwares, State Tax
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Financing Health Insurance Coverage: California’s Revenue Structure and Options
California’s health care reform effort may have been one of the first casualties of the national economic downturn. Yet the conditions that gave rise to the initiative did not disappear when the plan failed, and other states are pushing ahead with proposals to expand health coverage. So it remains useful to reflect on the California experience. In particular, it will be helpful to understand the proposed funding sources, how they would have interacted with California’s revenue system, and what alternative funding streams might have withstood the politics of reform. In this policy brief, we analyze the options for financing expanded health insurance coverage in California and offer our own preferred solution in light of the state’s fiscal and political constraints.
Bad Markets and Deficits
Crumbling financial markets mean more awful news for governments already reeling from an economic slowdown and mortgage foreclosures. The only glimmer of optimism is that the sluggish revenues and rising spending that are around the corner should only be transitory. Assuming the markets and the economy rebound, these fiscal shocks will be a fading memory after a few years.
That won’t relieve short-term budget pressures. Nor will it make life any easier for a newly-elected President who will take office in the face of a deficit that CBO projected at nearly half a trillion dollars even before the markets cratered this week. But there is a big difference between the kind of one-time budget shocks caused by crashing financial markets and the trillions in long-term unfunded obligations that Washington is happily ignoring. That slow wasting of the nation’s financial underpinnings doesn’t grab headlines, but is far more dangerous.
If the current market correction ends up looking more or less like our last three big financial hiccups in 1987, 1990, and 2001-2003, capital gains tax collections will plunge for a year or two, but then bounce back.
After the market’s crash in 1987, these revenues fell 19 percent in 1988, flat-lined for a year, and then, as the stock market sagged again, dropped another 27 percent by 1991. However, through the rest of the 1990’s, capital gains taxes grew strongly as the market boomed. By 2000, Washington was collecting more than $120 billion in capital gains taxes, nearly four times what it got a decade before.
The pattern held after the tech bubble burst in 2001. Taxes on gains plunged by 59 percent through 2003, but then, with the market, they recovered. By 2005, revenues had climbed 50 percent, even though the top rate on gains had been cut to 15 percent.
Some states did not fare so well. California saw taxes on capital gains and stock options plunge by nearly $10 billion after the dot.com bust. And while those revenues have rebounded, the state has never quite gotten back on its fiscal feet.
Of course, some things are different this time, even for Washington. Thanks to the government’s unprecedented bailouts of Fannie Mae, Freddie Mac, Bear Stearns, and now AIG, Washington is on the hook for tens of billions and perhaps hundreds of billions more in spending that nobody foresaw even a couple of months ago.
It is not possible to put a dollar amount on those new obligations, which is very frightening. If the government ends up nationalizing more failing firms, the fiscal cost could become far more worrisome. But like spending for natural disasters, these bailouts are likely to be one-off expenditures. The government, thankfully, can buy AIG’s toxic assets only once.
Don’t get me wrong. This is all a very, very bad business. But unlike the future prospects for, say Medicare, this grim news has the potential to improve fairly soon.
Kick the Can or California Dreaming?
After close to three months of debate, California finally passed its $103.4 billion general fund budget last week. While other outrageous fiscal events trump the state’s fiasco, it is worth noting that no one in California actually thinks the state’s budget problems are solved. Rather, they’ve plastered over a mess that will worsen with economic conditions next year and make it even tougher to balance the budget after that.
California Dreaming, Take 2
What’s the solution to the short term credit problems of California? A federal loan, of course. According to a story by Randal Archibold in the New York Times Governor Schwarzenegger sent a letter to Secretary Paulson asking for a $7 billion loan. If it works for AIG, why not states? Though maybe Treasury should demand the Golden Gate Bridge as collateral.
IRS reports increased tax refunds, more electronic filing
The Internal Revenue Service reported Wednesday that the average refund grew to $2,436 for tax returns filed through last Friday. That’s a 9% increase from the average $2,230 check sent to early filers last year.
The IRS also said it’s seen an uptick in tax returns filed electronically, with strong growth among individuals using tax software to file from home.
The nation’s tax collectors estimate that, for the first time, more than half the tax returns filed by individual and family tax returns will arrive electronically.
“It’s fast, easy and you get refunds in half the time,” said IRS Commissioner Mark Everson.
Tax refunds tend to be higher during the early part of the filing season, as individuals expecting a check act quickly to claim their money.
This year’s growing refunds can be partly pegged to tax changes that took effect last year, which increased tax benefits for low-income families, said Kathy Burlison, director of tax implementation at H&R Block.
Those changes include an increase in the amount of child tax credit that can be claimed as a tax refund. The old law let families claim 10% of their earned income over $10,500, but a change now lets families claim 15% of earned income over $10,750.
Low-income families also benefited from a small increase in the earned income tax credit, a benefit aimed at lifting low-wage workers out of poverty.
“That’s certainly meaning bigger refunds,” she said.
Burlison said other tax law changes could be contributing to the trend. Taxpayers who live in states without income taxes got a new deduction for state sales taxes, and parents and students saw a deduction for tuition and fees increase.
A tax refund in the spring means a taxpayer overpaid throughout the previous year. Financial planners counsel taxpayers who get big refunds to make adjustments that let them get that money sooner.
“In general, it’s not a good idea to make an interest free loan to the government or to anybody else,” said Alan Straus, an attorney and certified public accountant in Manhattan.
“Most people would do better off adjusting their withholdings so that they take home more every week and don’t wind up with a huge refund at the end of the year.”
For others, waiting to get that tax refund in the spring might be the best way to save money.
“Everybody has different levels of discipline,” said Peggy Cabaniss, a certified financial planner in Orinda, Calif.
Taxpayers who got a big refund or a big bill who want to get closer to their true tax liability next year can change the amount of taxes withheld from their paychecks to either increase or decrease the amount withheld from their paychecks.
Constantly changing tax laws can make it difficult to anticipate what next year’s tax return will look like, Cabaniss said. She recommended taxpayers ask their tax professionals to get a forecast for the coming year.
“The tax laws are changing every year,” she said. “All of our finances and our taxes are getting more and more complicated, so it’s requiring more preplanning and more work,” she said.
Source:IRS.Gov
Income Splitting Barred to California Registered Domestic Partner
In a 2006 legal memorandum, the IRS concluded that the community property income-splitting rule allowed to California spouses does not apply to registered domestic partners, despite the California law (effective in 2005) that extended to registered domestic partners community property rights and virtually all other spousal rights and responsibilities. Thus, a California registered domestic partner must report all of his or her earned income from personal services. He or she cannot report on a separate federal return only one-half of the combined income of both partners, as he or she could if married. According to the IRS, domestic partners under the new California law are not married and Supreme Court precedent allowing married couples in community property states to split income applies only to husbands and wives.