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BUSINESS FORUM

S-Corp Owners- Take a Raise to Keep the IRS Away

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A popular income trick played by S-Corp owners is to take a

significantly deflated salary, and then collect large profit distributions. This
tactic lowers tax liability because income collected as salary is subject to a
2.9% Medicare tax and some is subject to a 12.4% Social Security, or FICA, tax.
By shifting that income to a profit distribution one can sidestep those taxes.
Recent IRS statistics have caused an increased scrutiny of S-Corp owners’
salaries. Over the past decade and a half, while executive paychecks exploded,
the salaries of S-Corp owners declined as a percentage of total income, from
52% in 1995 to 39% in 2007. During the same period, S-Corp income doubled,
while salaries increased only 26%. While many think that the IRS can only force
someone to take a salary decrease, a recent district court case showed that one
can also be forced to increase one’s salary. In David E. Watson P.C. vs. U.S.,
Mr. Watson, a CPA with 20 years of experience, took a salary of $24,000 in 2002
and 2003, and made profit distributions of $203,651 and $175,470, respectively.
Recent graduates with no experience earned an average of $40,000 at that time.
The court determined that a fair salary for Mr. Watson would have been $91,044,
and ordered him to pay back the nearly $20,000 he saved in payroll taxes as
well as interest and penalties. What S-Corp owners have going for them,
however, is that fair salary is a very gray area. While Mr. Watson’s salary was
low enough to attract the attention of the IRS, it would be difficult to prove
that a more appropriate salary is too low, even if it is on the lower end of
the spectrum.

Tax Tips for 2011-still time to reduce taxes!

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Here are a few tax-saving tips you should consider before the calendar turns 2012:

  • Get Those New Windows

You still have time this year to make energy-saving home improvements and qualify for either of two home energy credits. Installing energy efficient improvements such as insulation or new windows can provide up to $500 in tax savings.

  • Low Income? Make an IRA Distribution

The saver’s credit, also known as the Retirement Savings Contribution Credit,isa special tax credit that helps offset part of the first $2,000 low- to moderate- income workers voluntarily contribute to IRAs and to 401(k) plans. For more information about the saver’s credit, click here: Retirement Savings Credit

The deadline to set up a new IRA or add money to an existing IRA and receive credit for 2011 is April 17, 2012. You normally can contribute up $5,000 to a traditional or Roth IRA, or up to $6,000 if age 50 or over.

  • Don’t Overlook The Small Business Health Care Tax Credit

If you are a small employer who pays at least half of your employee health insurance premiums, you may qualify for a tax credit of up to 35% of the premiums paid. To qualify you must have fewer than 25 full-time employees who are paid an average wage of less than $50,000 a year.

  • Check Your Portfolio

You may deduct capital losses up to the amount of capital gains, plus $3,000 from other income. It would be wise to check your gains and losses from investments before December 31stto decide if you should sell before year-end.

  • Make a Charitable Contribution on a Credit Card

Want to reduce your 2011 taxes with a donation but don’t have money right now? As long as your credit card is billed before the end of December 31, 2011, your donation is deductible for 2011, even though the bill is not paid until 2012.

 

It’s Time to Plan for the Saver’s Credit

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 Wouldn’t it be nice to have Uncle Sam chipping in for your retirement? Low and moderate income taxpayers can actually grab this perk. All they need to do is take advantage of the saver’s credit (also known as the retirement savings contributions credit), a special tax credit that helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans. This credit is in addition to any other tax savings that apply. In order to ensure credit for 2011, contributions must be made before the deadline of April 17, 2012. Employees who are tight on cash at year end may want to schedule their 2012 contributions soon so their employer can begin withholding them in January. The 2011 income limits to be eligible are as follows: [Read more…] about It’s Time to Plan for the Saver’s Credit

Long-Term Care Insurance- A Wise Investment

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Many people would prefer not to think about the possibility of needing long-term care down the road. “After all,” they rationalize,” won’t my dear daughter/daughter in law care for me in my old age?” They therefore do not see long-term care insurance as relevant to them. This may be a big mistake. Considering the potential cost of long-term care, as well as other factors, it could prove even more costly to put it off. Here are a few reasons you may want to consider long-term care insurance: [Read more…] about Long-Term Care Insurance- A Wise Investment

Great Gift Idea: 529 College Savings Plan

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‘Tis the season of giving, a time of deal-searching, as well as assessing what our loved ones could use.  Here’s a gift you may want to consider: a 529 college savings plan. A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. Every state now has a 529 Plan, and the funds can be used to meet costs of qualified colleges nationwide. Saving for college has never been more important, and a 529 Plan offers several significant perks: [Read more…] about Great Gift Idea: 529 College Savings Plan

NJ Tax Refund for Madoff Victims’ Phantom Income

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A New Jersey Tax court has ruled that investors in Bernard
Madoff’s Ponzi scheme are entitled to refunds on state taxes paid for gains
that never existed. John and Cathy Dalton, a Middletown couple who invested
nearly $700,000 with Madoff, filed amended New Jersey returns for 2005, 2006
and 2007. They had paid taxes on more than $206,000 in capital gains and almost
$37,000 in dividends that proved to be fictitious. They recalculated the taxes
payable, and requested a $5,026 refund. On October 1, 2009, the Division of
Taxation denied the refund, despite the fact that the capital gains and
dividends were non-existent.  Their argument was that since the Daltons had withdrawn a portion of their investment in [Read more…] about NJ Tax Refund for Madoff Victims’ Phantom Income