Monday, July 25, 2011

Ministers, Priests, Rabbis and Social Security Tax

If you are a member of the clergy, you may be aware that you can opt out of the Social Security system. However, there are strict and timely procedures to follow.  This exemption only applies to your ministerial services such as performing sacerdotal functions, conducting religious worship, controlling, conducting, and maintaining religious organizations that are under the authority of a religious body that is a church or denomination.     

There are several conditions that must be met to claim the exemption. If you meet all of the conditions (listed in IRS Pub 517), you must file IRS Form 4361 by the due date of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment income. Part of these earning must have been from ministerial services. Also, the 2 tax years don’t have to be consecutive. The IRS tends to be unforgiving relative to this deadline, so timeliness is extremely important.

The IRS will notify you about you application status. If you are approved, you’ll receive a copy of your 4361 stating so. Be sure and keep this copy for your records, and present it to your tax preparer at tax time.   

If you are granted an exemption to paying Social Security tax, you should be saving for your retirement through some other vehicle. If your church offers a retirement plan, consider participating. Also, you can set up an IRA for yourself. If you have enough self-employment income, you may be able to set up a SEP-IRA and save even more money for your retirement.

Also remember that ministers are not exempt from federal income tax or non-ministerial self-employment tax. The US has a multitude of tax systems. Form 4361 only applies to be exempt from Social Security tax on ministerial income.   

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: (512) 293-4170
Enrolled Agent and  Investment Advisor Representative

Tuesday, July 19, 2011

Avoiding Tax Scams

The IRS is warning taxpayers that it is seeing an increase in tax related scams. Scammers are targeting people who do not have a filing obligation. They are encouraging these individuals to file in order to claim credits, refunds and credits for which that are not entitled.

At Brycast your tax return is prepared by an Enrolled Agent. Enrolled Agents are federally licensed to represent taxpayers in all tax matters before the IRS.  Enrolled Agents must pass all parts of the Special Enrollment Examinations which cover individual and business tax returns, as well as a representation, practices and procedures. Additionally, they must pass a background check to ensure that they have not engaged in any conduct that would justify the suspension or disbarment of an enrolled agent from practice before the IRS.   

Here is a list of red flags that the IRS says you should watch for:
  • Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits.
  • Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS enabling a payout from the IRS.
  • Unfamiliar for-profit tax services teaming up with local churches.
  • Home-made flyers and brochures implying credits or refunds are available without proof of eligibility.
  • Offers of free money with no documentation required.
  • Promises of refunds for “Low Income – No Documents Tax Returns.”
  • Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit.
  • Advice on claiming the Earned Income Tax Credit based on exaggerated reports of self-employment income.
Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: (512) 293-4170
Enrolled Agent and Investment Advisor Reprentative

Friday, July 8, 2011

Do You Want to Pay Taxes? 401(k) and IRA Distributions Consequences

Who in the right mind would answer yes? I’ve had several clients that have taken a distribution from either a 401(k) or an IRA. They were asked by the plan administrator if they wanted to pay taxes. Their answer was of course, “No”.
What the administrator should have said is “We are withholding 20% of the distribution as a payment to the IRS that goes toward your total tax bill. You could owe more or less taxes on the distribution; it depends on your particular situation.  We can withhold a larger percentage if you want us to.”
The money inside a 401(k) has not been taxed, yet. The money in a Traditional IRA probably has not been taxed yet.  I say probably because it is possible to make a nondeductible contribution to an IRA.  When you take a distribution from one of the plans, the IRS is going to require that you pay taxes on the distribution amount that has not been taxed. However, the distribution is not considered in isolation; it is added to all of your income.
For example, let’s say that you earn $90,000 per year from your job, and you take a $10,000 distribution from your IRA. Adding the two together, your total income for the year is $100,000. And that is the amount that will be used to determine your taxable income.  Depending on your deductions, it could be that you are in the 25% tax bracket, or 10% tax bracket.  So, you don’t know what the correct amount of tax is that should be withheld at the time of the distribution. But, you should try to make an educated guess based off of your prior or current year tax situation.  Either ask the plan administrator to withhold that amount, or set the money aside yourself.
By the way, there is an early distribution penalty of 10% on the taxable portion of the distribution, if you are under 59 ½ years old. Although there are exceptions to the penalty, many people do not qualify for the exceptions and are unpleasantly surprised at tax time.  Try to either consult your financial advisor or a tax pro like an Enrolled Agent, before you take a distribution from your retirement plan.
Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: (512) 293-4170
Enrolled Agent and  Investment Advisor Representative

Wednesday, July 6, 2011

Summer Day Camp Expenses May Be Deductible

As you may know, there is a Child and Dependent Care Credit.  The credit applies to children under 13, and can be up to 35% of your qualifying expenses.  You can apply up to $3000 of the unreimbursed expenses for one child, and up to $6000 for two or more children.

The cost of summer day camps are considered qualified expenses. However, expenses for overnight camps are not qualified expenses.

There are several tests you must pass to qualify for the credit, see IRS Pub 503 for a thorough discussion of the credit.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
Enrolled Agent; Investment Advisor