January, 2011

Attorney Fees: Deductible?

Sometimes attorney fees are deductible, and sometimes they aren’t. Even when they are deductible, the way they get deducted makes a difference.

Attorney fees for divorce are generally not deductible, except to the extent that you’re receiving tax advice or to get or collect alimony.

If your business incurs attorney fees, the fees are probably deductible by the business. (Startup fees are usually amortized.)

If you incur attorney fees personally, the fees MAY be deductible. If the fees were for the preservation of income, they are usually deducted on Schedule A, and are subject to the “2% haircut” as Mike Power, E.A. calls it—the expense is reduced by 2% of your AGI (Adjusted Gross Income), and is combined with other itemized expenses like mortgage interest and property taxes on your personal residence.

Each year, you compare your itemized expenses with the “standard deduction” (for 2010 standard deduction is $11,400 for a MFJ couple) and choose the higher deduction. Because attorney fees are a “preference item,” disregarded in the AMT world, you may be subject to AMT tax on the amount you paid your attorney—paying tax on money you don’t have. There’s an IRS case about this where the taxpayer argued his payment of contingent fees to his attorney should be the attorney’s income only, not the taxpayer’s income first then deducted on Schedule A as an itemized deduction; the IRS won. (See Commissioner v. Banks, 543 US 426 (2005).)

There are certain circumstances when attorney fees are deducted “above the line”—and not subject to AMT. This is certainly the situation to be desired. In 2004, there was legislation that led to IRS Code Section 62(a)(20) specifically for attorney fees in discrimination cases. It would appear this covers attorney fees in ERISA cases, but consult your tax preparer to be sure, as your situation may not be included in this code section. One labels these kinds of fees as “UDC” (for Unlawful Discrimination Claim) on line 36 for 2010 Form 1040s, and the deduction is limited to the income from the discrimination claim. For more information, see IRS Publication 525.

2011 Payroll Tax Rate Changes

The IRS and EDD have some new forms and rates for this year.

If you’re a household employer, the magic number you need to know is 6.85%. This is the amount to withhold from each paycheck gross amount to get the net to pay your employee (until they make slightly over $90,000). See details below.

The Social Security withholding rate for employees has gone from 6.2% down to 4.2%, for employees only, the employer “match rate” remains at 6.2% (but now we need to call it something else). If you’re self-employed, instead of paying 15.3%, you’ll pay 13.3%.

The CA SDI withholding rate kept out of an employee’s paycheck has gone up from 1.1% to 1.2% on the first $93,316 earned in the calendar year.

There’s also a change to the Employer FUTA rate—but not until July 2011—for payments to employees who have made under the $7,000 limit. The rate will be 0.8% from January to June like it was, but if there are any employees subject to FUTA after July, the rate will go down to 0.6%—I know that’s going to compel ME to wait until July to hire anyone!

Also, at least at the moment, the “making work pay” credit has ended as of 12/31/10—this was the $400 refund of tax that some of my clients have heard me call the “Obama credit”—so this means the tax tables have changed slightly For more information, see IRS Notice 1036, or attend one of the Basic Payroll classes (see below).

Tax Return Preparation for 2010

The “early bird” program has been quite popular this year and I have more than the usual number of emails arriving each day,. If I don’t respond immediately, it may be because I haven’t started on your return yet. I’m still working on other returns. I’ll try to acknowledge your email within a day or so to let you know I got your tax materials. If you don’t hear from me, please let me know via email as I don’t want to miss anything.

Thanks for your patience in this busy time.

Tax Buddha Messenger Bags

Want to be the first person on your block to sport the fabulous Tax Buddha Messenger Bag? I’ve now got a “shop” on Café Press at www.cafepress.com/TaxBuddha in case you’d like to order your own Tax Buddha logo items. The messenger bag came out particularly well, not quite “saffron,” but easy to find in an airport.

The Eightfold Path to Pay Less Tax and Avoid an Audit

Eight basic things business owners want to know printed in booklet form in “Executive Summary” form. This is ten years of working with the IRS Tax Code distilled down so it doesn’t take YOU ten years.

Just another way we’re trying to simplify your life. And the purchase is tax deductible!

You can order from Amazon.com. Here’s the link to Amazon: http://www.amazon.com/Eightfold-Path-Less-Avoid-Audit/dp/0615233422/ref=sr_1_22?ie=UTF8&s=books&qid=1226611038&sr=1-22 

The booklet also contains sections on how returns are selected for audit, when to seek professional help, and how long to keep your tax records.

EBAEA—Speaker Development Group

I’m tired of going to see boring speakers for my continuing education requirements, so at the East Bay Association of Enrolled Agents we’ve started a group to help develop speaking skills. Our next meeting is scheduled for after the April tax deadline. Go to the “permalink” for the current bulletin for more information http://www.ebaea.org/Bulletin/current.pdf.

Classes—Intermediate S Corporation, Basic Payroll, Schedule C, and Household Employees

Here’s a link to the seminars page on my website: www.taxbuddha.com/seminars.html

Intermediate S Corporation Class
We’ll be looking at how to quickly solve the most common problems encountered with preparing an 1120S, and what to do now to reduce the likelihood of future problems. A very practical class where you have the opportunity to ask questions, this class is for tax preparers.

Monday, May 16th in Alameda, CA, from 10 am to 3 pm with a one hour lunch break on your own.
Fee to attend is $225, but $175 until April 19. CPE credit of 4 hours available for Enrolled Agents who attend, no credit currently available for CTEC, but it’s a good class. Send me an e-mail if you want to attend for reservation of your spot and directions. Class size is extremely limited. Flyer is on the website at www.TaxBuddha.com/1120_S_Flyer.pdf and will be updated soon.

Basic Payroll
In conjunction with the IRS and EDD, I’ll going to be doing some Basic Payroll seminars coming up in the near future.

Basic Payroll Seminar runs 9 am ­ 3 pm with an hour for lunch

The next seminars will be:

San Francisco at the SBA office 455 Market Street, 6th floor (I take BART to Embarcadero or Montgomery Street)
10 am ­ 4 pm, February 8 and March 8.

Oakland at Elihu M. Harris State Building,1515 Clay Street, Room 20, Second Floor,
9 am ­ 3 pm, February 17 and March 24.

Register by going to http://www.edd.ca.gov/Payroll_Tax_Seminars/ and find your favorite location.

These seminars have proven to be very popular for business owners and bookkeepers, plus they’re free.

How to Prepare your Own Schedule C
Prepare your business taxes for ’10 and get ready for ’11. Review what the IRS wants to know from you and how to report it on the Schedule C for your business. This is a class for business owners who need a basic understanding of their 1040 Schedule C tax forms. We’ll also talk about what to do with the numbers once you have them. We can’t guarantee you won’t get audited, but this class will make it less likely.

I will be at the US Small Business Administration offices in San Francisco at 455 Market Street, 6th Floor
Tuesday January 19th, 6-8:30 pm.
This class will be free. To register, check out the SBA website www.SBAtraining.eventbrite.com, or just show up.

Household Employees
This is an update class for both employers and the tax practitioners who help them. This is currently scheduled for late March, 2011 at 100 Lafayette Circle, Lafayette CA in the Chamber of Commerce conference room. Cost to attend this class is $75. Here’s the link to the flyer www.taxbuddha.com/Nannygate_Flyer_Jan_11.pdf and will be updated when I select a date. Feel free to make a suggestion if you’d like to attend!

If you’re in the market for QuickBooks training in a classroom setting, I recommend Mani Business Services. This is a two day QuickBooks seminar offered in various places around the country. The website is http://www.manibusinessservices.com/

For relaxation and Clear Thinking: On The Spot

We recommend meditation and that you check out On The Spot Massage at http://www.onthespotmassage.com/corporate.html to help you relax. A relaxed mind is a clear-thinking mind. It’s at the Alameda Natural Grocery location on Park Street, open daily 11 am ­ 7 pm.

Phone and Fax Numbers

Our northern California physical office is shared commercial space in Alameda and we’ve been meeting people at Starbucks on Mt. Diablo Blvd in Lafayette near the mailing address.
Phone numbers are:
Phone (510) 522-2300
Fax (510) 522-2307
Our mailing address:
3527 Mt. Diablo Blvd #366
Lafayette CA 94549

“The hardest thing in the world to understand is the income tax.” — Albert Einstein, physicist