We hope that 2011 has been a happy and prosperous one for you and your family. 

Our existing clients will be receiving their tax organizer on or close to January 13^th.  The tax organizer is meant to assist you in preparing for your appointment.  It is intended to help you, not to give you more work or worry.  Most of our clients find it useful so we send it to everyone.  If it doesn’t help, please don’t feel bad about not using it, but please bring it with you when you come in or include it with the information you mail to us. 

We utilize engagement letters, which describes the terms of our engagement and clarifies the nature and limitations of the services we will provide.  We ask all of our clients to sign the letter even though, as indicated at the end of the engagement letter, your return of the enclosed organizer package and/or sufficient information to prepare your tax returns will acknowledge your acceptance of this arrangement.  

Secure file sharing system: It is becoming more common for us to receive requests to provide you with electronic copies of your tax returns or other documents that contain your social security number.  Encrypting files with passwords has worked in the past but for 2012, we will be using an encrypted secure data center to handle the data transfers.  You will be able to upload sensitive documents for our use as well.  This will be accessed from our website (www.huxholdandassociates.com) using the secure file sharing button.  We would like to get you setup and want to make sure we have your preferred e-mail address so please e-mail Mark (mhuxhold@sbcglobal.net).  Just type “Sharefile” in the subject line and that’s it.  You can always be setup at a later date so don’t worry. 

Our blog is nothing more than a place for us to post messages keeping you updated on the latest news or topics of interest.  We are working on an e-mail notification system so you will know when new content is available.  For example, this letter will be our first post of 2012.  Our website is also a great place to direct people who may be wondering about our services. 

Sale of Stock and securities: If you sold stock or securities through a broker, the broker will issue you a 1099-B.   This form provides us with the proceeds received from each sale and, beginning with your 2011 form, your basis as well.  Your basis is usually what you paid for the stock.  Since this new requirement is only for security purchases made on or after 1/1/2011 you will still need to provide us with your cost basis for any securities sold in 2011 that were purchased prior to 2011.  Most of you have provided us with excellent details of your stock activities and in many cases, provided us with your own spreadsheets.  Please continue to do so.  Your tax return will be a bit thicker this year because we are required to report, on separate forms, transactions with a broker provided cost basis and transactions that you provide us with the cost basis. 

1099-K’s:  If you accept credit cards, your bankcard processing company is required to issue you a 1099-K if you had more than 200 credit card transactions and $20,000 or more paid to you.  Effective January 1, 2012, you will need to track your sales by merchant cards and third party payments (generally, credit cards) separately from your cash and check sales.  On your 2012 tax return, you will need to report your sales by these two categories.  This requirement applies to sole proprietors (Schedule C), rental properties (Schedule E) and other business returns (corporations, partnerships, etc.).  If you need any help setting up your accounting system to separately track these amounts, please let us know. 

Foreign financial assets: The reporting requirement for assets held overseas is increasing and the penalty for not reporting them is significant.  In addition to the form filed with the Treasury Department, the IRS has its own new reporting requirement.  Not all foreign holdings must be reported but generally money in a foreign bank does.  We can help you determine what, if any, of your foreign assets need to be reported. 

Property tax statements:  California’s Franchise Tax Board has stated that they will require parcel numbers and other information pertaining to property taxes for any taxpayer who deducts property tax paid on Schedule A (itemized deductions).  Although this requirement isn’t slated to take effect until 2012, we would like you to provide us with your property tax statements this year so we can do a preliminary review of them in preparation for the new requirement. 

Use tax: California requires payment of use tax if you purchase goods out-of-state that are used, consumed or stored in California, when no sales tax is collected on the purchase.  This generally occurs when purchases are made over the internet or by mail order from out-of-state sellers.  If you don’t hold a California seller’s permit, you have the option of reporting the use tax on your California income tax return. 

The presumption is that everyone engages in some of these transactions and the Franchise Tax Board is providing us with a couple of options.  All such purchases can be totaled and the use tax due will be computed on this amount or if all purchases were individually under $1,000, a safe harbor “lookup table” can be used to compute the use tax due.  The amount due is roughly .07% (.0007) of adjusted gross income (AGI).  For example, if your AGI is $70,000, your use tax is $49 based on the lookup table.  Any individual purchase over $1,000 will need to have use tax computed on it in addition to any amount reported using the lookup table. 

New tax benefits:  It’s not all bad news, there are still tax benefits available to you that can reduce your tax liability this year and into the future.  For example there are tax credits for employers providing health insurance and to small businesses increasing the number of employees.  If you prepare your own payroll, the payroll tax reduction has been extended.  Roth IRA conversions are still available and can be a useful way to reduce the tax you’ll pay later when you need the money. 

Other changes: There are a number of other changes that might affect your tax return this year, including new rules for those who do not wish to file electronically and an electronic payment requirement for higher income California individuals.

Now that tax season is in full swing, it seems like a distant memory when the Tax Relief Act of 2010 was passed in December of 2010.  This was the legislation that, among other things, extended the Bush tax cuts and provided a patch for the dreaded alternative minimum tax that was set to affect millions of Americans.  This was a big story and the pending tax bill was on everyone’s mind as 2010 came to a close.

The new Federal budget proposal is the latest headline grabber.  Of particular interest are items that change the tax law.  The proposed budget overrides some of the provisions of the Tax Relief Act of 2010, passed less than two months ago.  Some of the proposed changes will have a direct impact, higher tax rates for those making over $250k and higher estate tax rates; there are other proposed changes that will affect us indirectly. 

There are many sources available to learn more about the tax changes included in the proposed budget.  As changes to the tax law become official, I will keep you posted.

As business owners in California, we are inundated with mail.  The volume can be overwhelming and often it’s hard to tell the difference between “official” notices and scams.  If you own a corporation, you have undoubtedly received an official looking offer to keep you in compliance with annual requirements, for a fee.  Something that should not be ignored is the requirement for qualified purchasers to register with the Board of Equalization and file an annual use tax return, even if there is no use tax liability. 

You are considered to be a qualified purchaser if your business receives $100,000 or more in gross receipts in any given calendar year from business operations.  Gross receipts include rental income, personal service income, and all income reported by a business entity (corporations, partnerships, LLCs, trusts, non-profits, and Schedule C or F filers).

 If you are a qualified purchaser, you must register with the Board of Equalization by filing a paper form, BOE-404-A, with your local Board of Equalization field office.  Once registered, you will be provided with information for filing your annual return, due April 15^th of the subsequent year.  This annual use tax return is used to report and pay use tax on untaxed purchases made in the preceding calendar year.

 The requirement to pay use tax on untaxed purchases is not new; in general, you must pay California use tax if you purchase an item from an out-of-state vendor including purchases by telephone or over the Internet.  Use tax is similar to the sales tax paid on purchases you make in California.  If you do not meet the registration requirements, you will continue to report use tax on your California state income tax return.

For additional information or clarification, please don’t hesitate to contact me directly.

The designation of household employee can apply to a babysitter, nanny, maid, health care provider, or other domestic worker, and is not new.  Two tax acts passed in 2010 included increased information reporting requirements for Form 1099.  Do these new requirements apply to household workers?

No.  Form 1099 is used to report only payments made in the course of your trade or business, personal payments are not reportable.

So how do you determine if your domestic worker should be classified as a household employee?  Generally, if a worker controls how the work is done, provides their own tools, and offers services to the general public, they are usually classified as an independent contractor, not an employee.  The worker is generally an employee if the homeowner controls both how and what work is done.

If you have a domestic worker classified as an employee, there are certain thresholds that must be reached before reporting is required.  Federal filing requirements are:

•  If you pay wages of $1,700 or more per person, FICA withholding is required.
• If you pay wages of $1,000 or more in any quarter, FUTA tax must be paid.

Each state has its own requirements and you may be required to pay state unemployment tax even though no FUTA tax is due.  California requires you to register with the EDD after paying $750 in cash wages to one or more employee in a calendar quarter.  SDI is withheld from the employees pay and you are required to pay unemployment and training tax after paying $1,000 or more in cash wages in a calendar quarter.

There are certain exemptions from these requirements and income tax withholding is voluntary.

If you are concerned whether or not you could be classified as a household employer, please don’t hesitate to contact me.

In general, U.S. Taxpayers are required to report their worldwide income, that is income from both U.S. and foreign sources.  What may be unknown to many taxpayers is that in addition to reporting income from foreign sources, taxpayers who have an interest in, or signature authority over, a financial (bank) account in a foreign country are required to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).  This requirement applies if the aggregate value of all such financial accounts exceeds, $10,000 at any time during the calendar year.  The FBAR is not filed with your tax return.  Instead, it is filed with the Department of the Treasury in Detroit, Michigan, no later than June 30 of the year following the calendar year reported.

There are serious consequences for failing to report income in foreign bank accounts, or to file the FBAR, including large monetary penalties and, in some cases criminal penalties.

 In addition to the FBAR filing requirement, new for 2011 calendar year taxpayers (due April 15, 2012), is that any individual who during the tax year holds an interest in a specified foreign financial asset (a financial account maintained by a foreign financial institution) must attach to his or her income tax return the required information for each such asset if the aggregate value of all the individual’s specified foreign financial assets exceeds $50,000.  While this information is similar to FBAR it does not replace your FBAR reporting requirements. 

If you have foreign bank accounts and are unsure whether you are required to file the FBAR, we would be happy to review your portfolio and advise you.