The beginning of the year is a good time to check your withholding allowances. Are you perpetually behind, or need more money in your paycheck? Remember that you can claim any filing status and number of exemptions on the W-4 for your regular withholding during the year. Read my article.

Don’t rely on 1099’s to tabulate your income, free-lancers. You are responsible for reporting your income accurately, whether or not you receive a 1099. Business owners, make sure your contractors fill out IRS Form W-9 before you hire them, so you can issue them a 1099 if needed. (Doing someone a “favor” by not issuing them a 1099 means that we’re all paying their taxes.)

Reprinted with permission of AppZen

Insurance: Businesses, do you have a “fidelity bond” or employee dishonesty insurance”?  On my first non-profit audit we discovered embezzlement. One of my first business engagements was investigating fraud at a large medical practice. Appropriate controls are important to reduce the threat of fraud; appropriate insurance is necessary to help you recover in case it does happen.

Elder care planning:  Another relaxing subject! Nevertheless, a necessity for kids and parents to start discussing. Contact me to discuss further and to be directed to appropriate resources.

IRS Letters! Don’t panic if you get them, but don’t sit on them either. Because of the IRS’ woeful budget, errors are plentiful and corrections are slow —  you may be getting bills for $12,000 when I sent in the correction making it a refund months ago, but they have not processed it yet.  But don’t be like the non-profit that passed the envelope around like a hot potato for a year without opening it; as a result they missed deadlines and had to appeal to have several thousands of dollars in penalties waived.

UPCOMING EVENTS

I will be back at the fabulous Artisan’s Asylum makerspace in Somerville, MA on Thursday night January 21, 2016 to discuss Tax and Incorporation issues. Join me at 7pm for a short talk, gathering, and refreshments. Free, register here.

NEW BUSINESS CHECKLIST!

Thinking about establishing a small business in Rhode Island? Check please read this article for a list of essential steps, from deciding on your legal structure to staying in good standing on an annual basis.

While Obamacare has expanded healthcare coverage dramatically, it has also created some new difficulties.

Consider:  “June Cleaver” is a single parent of two boys- Wally and Theodore (“Beaver”).  She just became a real estate broker and made $25,000 in 2015.

JUNE’S HEALTHCARE OPTIONS FOR 2016

Medicaid.  The family’s projected income  for 2016 (based on 2015)  is below $27,724* and thus eligible for premium-free healthcare through Rhode Island.* However, Beaver is a behavioral nightmare and his singularly awesome therapist does not accept Medicaid payments; Dr Bigmun Loyd’s direct billing rate is $125/hour.  So June concludes she will need to purchase private health insurance to get these doctor bills covered.

Private Health Insurance:  June can purchase private health insurance on the Exchange; however, if she goes this route, because she’s otherwise Medicaid eligible, she won’t get a subsidy to bring down the cost of the premiums.** The full cost of the monthly premium is beyond the Cleavers’ reach. So at this point June’s only options are to go on Medicaid and take a chance on a new doctor, or sign up for premiums that are beyond her financial means.

Projecting Higher Income: June is self-employed in succeeding years and her income is hard to predict. She hopes 2016 will be more lucrative and, instead of using her 2015 earnings of $25,000, instead projects $55,000 in net earnings on her application. All family members will now be ineligible for Medicaid*. But June is eligible forsome upfront “premium assistance” in 2016; perhaps she can now afford the premiums and continue with the same doctor for Beaver.

What happens if June’s actual income in 2016  turns out to be closer to $25,000? When her 2016 tax return is prepared, the final premium subsidies will be based on this $25,000 ultimate income and she will recoup the subsidies lost when June was paying for health insurance based on her projected income of $55,000 (The tax system has not been designed to  screen for eligibility when computing the finalsubsidy — it’s solely income-based. However, some state exchanges require substantial changes of income to be reported during the year, and there is no guarantee they won’t take action if there is a continuing pattern of disparity between projected and actual income.)

Confused and overwhelmed? You are not alone; even health insurance brokers and workers at the exchanges have trouble sorting all this out.

*The Affordable Care Act dramatically expanded Medicaid eligibility and raised the income limits (which are based on Federal Poverty Guidelines for different family sizes). Rhode Island participates in the Medicaid expansion; the program is voluntary and some states have declined.  In Rhode Island, the upper limit for Medicaid coverage forminors in 2015 was $53,439 for a family of one adult and two children)

** The same would be true if June were eligible for  health care benefits through other government programs like Medicare or Tricare (for military).

CLASSIFIEDS DEPARTMENT!

My wonderful firm needs an experienced tax preparer 5-10 hours a week for the busy season. Must be comfortable with professional tax software.  Will work closely with yours truly. E-mail me.

BECAUSE YOU ASKED

Thank you for the well-wishes for my “frozen shoulder” surgery, to remove “adhesive capsulitis”.  All was smooth and I should be returning to championship weightlifting in no time. As you can see, they successfully unstrapped me from the medieval torture rack they used to manipulate my shoulder after surgically removing the scar tissue.

Because you asked.  And by all means, keep asking,

Miscalculating your Obamacare Subsidy

IRS Impersonation Scams

COMING EVENT

I have a prosperous and intelligent — let’s say attorney — as a client. “Shirley” was experiencing some cash flow issues last summer so I took a look at her year to date income and withholdings and projected what her tax return would look like come April.

The news was good —she had already met her federal tax obligations for the year. I advised her to increase her withholding allowances substantially through December ’14 and take some more money home — but to check back with me after New Year’s. After all, Shirley could only afford to lower her withholding amounts (through higher withholding allowances) for the last part of the year because she had withheld so much up until that time. She would need to reset.

Shirley was busy and disorganized all winter and never got around to resetting with me. Her tax return was extended and we didn’t catch up until a couple of weeks ago. Shirley’s 2014 return was fine — indeed, she had a small refund from her large withholdings for most of the year.  I asked to look at her current paystub to see where things stood for  2015, and we were both horrified.  She was still only withholding about $50 per paycheck, and at the current rate would owe at least $15,000in tax money she didn’t have, come next April. Shirley’s failure to reset would cost her big time.

We had to scramble. Shirley suspended her retirement contributions, cancelled some urgent household repairs to make a couple of estimated tax payments, and increased her withholding amounts dramatically.  She barely avoided having to raid her retirement plan, which would have created yet another tax problem.

The moral of the story is simple: As my magnet says, “Bliss requires careful planning.” Every year I have several clients whose withholding went down substantially from the prior year, or took a new job and filled out the forms incorrectly. Check your pay stubs periodically —companies and payroll services make mistakes as well.  Shirley confessed she was a bit surprised that her cash flow had improved so much, but had not thought to review her paystubs.

If you are interested in becoming a client and would like a free estimate of where your tax liability stands, e-mail me. And if you don’t have at least one of my magnets — why not?

DATES TO REMEMBER

October 15, 2015 Final tax deadline to file individual taxes for 2014. Want to know how the penalties for late filing accrue? Read here. If you can’t pay all at once, read about your options.
November 30, 2015  Rhode Island LLC’s must file their annual renewals with the Secretary of State. It costs $50 and takes a few minutes, and you can file online. Or, as I discussed last month, you can just forfeit your corporate status by not keeping your records up to date.

BECAUSE YOU ASKED

Some years ago my then wife Dorota and her friend Wayne were in a small art group; every month  they would choose a theme to create something for the next meeting. For one month Wayne suggested “Rich Streitfeld.”  Nobody else knew who I was, and all they had to go on was a picture of me.  I attended  the meeting where they each presented their artwork “about me”.

I nearly fainted when Deenie Pacik (a wonderful, Providence-based  glass artist) started by saying she had decided to do something with a Buddhist theme — again, without knowing anything about my background.  The picture you see. which hangs in my office, was the result. In the text I am described as an “enlightened male”  who is “rescuing an ancient goddess…from being escorted off the scene by patriarchy.”

Because you asked.  And by all means, keep asking.

* The Bodhi Tree — according to Buddhist tradition, The Buddha attained enlightenment sitting under a tree in Bodh Gaya, India.

“Why can’t I get through to the IRS?”

Abandoned in Indiana 

That’s the IRS.  Charged with processing 160 million tax returns annually, while handling 100 million phone calls and interacting with more members of the public than any other agency, draconian cuts have forced the Service to cut way back on customer service.   Ten years ago nearly 90% of calls were answered in less than 3 minutes. Meanwhile, both parties load the tax code up with more complexities every year, and as the population grows and lives longer, the number of tax returns continues to expand.

CPA’s have access to a “practioners’ hotline.” I tried calling two consecutive days last week.  I could not even get in the queue — “try calling on another day.” And I have a client being audited — I have to supply the auditor with a copy of the full tax return — his system only allows a skeleton summary.

While politicians make hay about allegations that the IRS targeted the Tea Party, customer service disintegrates.  Wonder why interest and penalties are so high when you get those dreaded letters from the agency for non-filing or underpayment? The fees are assessed as of the tax filing date — let’s say April 15, 2012, but it may take them two years to write to you because of the backlog.

Sure, audits are down, you cheer.  Yet who does this benefit? Not the honest taxpayers (there are some!), not the country’s coffers (official estimates say as much as $385 billion goes uncollected every year .

Yes, you read right,  $385 BILLION  — that could pay for a lot more services, tax cuts, college tuition subsidies, health care — you name it.

To be sure, there are many and complex reasons for the “tax gap.” But studies have shown the IRS collects as much as $10 in revenue for every $1 of enforcement.

Add to the budget cuts the political football the IRS has been for decades and it’s small wonder morale there is low.  So despite my frustration when I wait on hold and patiently explain to the Service that their math was wrong again — with the client paying for my time  — I try to keep some perspective.  They don’t write the tax code and they are — some would say intentionally —being starved of resources so that their customer support and enforcement decline even further, while resentment grows. If anything, I commend many of the ones I interact with for putting up with such circumstances and still acting respectfully and doing their best to help.

You won’t hear politicians campaigning to increase the IRS’s budget — not even Bernie Sanders has gone there! — but I suspect most of them on all sides know exactly what is happening, and why.

BECAUSE YOU ASKED

Over three decades ago I had my first “teaching interview” with the late Zen Master Seung Sahn, the first Korean Zen Master to live and teach in the West. Seung Sahn was the real deal — sharp, compassionate and very, very funny. He asked  me a Zen koan (riddle) and I replied. He then took his Zen stick, tapped me on the head and gently said in his imperfect but perfectly clear English:

“You Jewish — too much thinking!” 

He was right of course.

Because you asked — and by all means, keep asking.

I’ve done over thirty issues of Enlightened Accounting, covering an array of topics. I thought it might be useful to highlight some of the topics I’ve addressed and link them to the appropriate articles.

MARRIAGE AND DIVORCE

Spousal Protection Programs
Did you lose your refund because of Charles’ student loans? There may be hope.

Tax Tips for Divorcing Couples
The divorce agreement is not sacrosanct if there is a custody dispute.

How to Dissolve your Marriage, not your Financial Security
Does your ex-have life insurance? What will substitute for child support if he goes sky diving and it doesn’t work out?

STARTING A BUSINESS

Don’t Flub your Business Structure
S-Corp, C-Corp, LLC…– How to Choose?

Avoiding Business Missteps with Friends
Going into business together can enhance or destroy your relationships.

Business Basics Webinar (with Rich)
My video on the subject.

KIDS, PARENTS, RETIREMENT

Leverage your Child
Did you know there were tax breaks for summer camp?

Back to School Edition
How do I fund both retirement and college?

Retirement Carpentry
Getting started, even with a little.

Student Loans
Options and resources amid the morass.

TAXES

Is Sex Therapy Tax Deductible?
The Medical Deductions Quiz.

Fashion, Charity and Death
Your Tax Questions Answered

The Hazards of Late Filing
I filed an extension, and still got charged interest and penalties. Why?

TONGUE IN CHEEK (AND EDUCATIONAL)

Making a Living as an Artist
Interviews with Picasso, Beethoven and Dostoyevsky

Keeping Records
Interviews with Madoff, Ponzi, Cianci

MISCELLANEOUS

Best Practices for Non-Profits

Embezzlement Made Easy

BECAUSE YOU ASKED

A poem by my 14 year old son, Malcolm, originally performed at Everett’s “Open Stage” in Providence:

Ode to My Imagination

My head is like the workshop of a Victorian watchmaker.

Unwanted ideas are thrown outside, lost forever and never to return. Gears are constantly turning. They produce new inventions by joining together memories and thoughts.

Their similarities make them link together, like several clockwork pieces moving.  Every new world forms a book filled with maps, legends and strange creatures.

Sometimes I sit in an old rocking chair and listen to the crackling furnace as I read peacefully.

And as I read, I fall asleep while the drawings walk off the pages and the words turn into objects, made of pale black ink. When I wake,the workshop is gone.

And as I walk, the workshop is filled with color and springs to life before my very eyes. Creatures gather around me, as I am their creator and they love me, not as a master, but as a friend.

Eventually I come across that same rocking chair and I sit down and drift off to sleep, my hand resting on the head of a beast.

Then I awake to the crackle of the furnace, as animals become drawings and objects turn back to words.

Because you asked. And by all means, keep asking.

You know the story. Student loan debt, well over 1 trillion dollars, exceeds credit card debt and is crippling graduates — and in turn, the whole economy.

I had a pediatrician in my office who was making well over six figures, owes $300,000 on her student debt and yet Sarah cannot deduct a dime of her payments.

George is in sales, he owes far less — but is barely able to make the payments and stay out of default, which would subject his tax refunds and even his eventual social security benefits to “offset” (reduction).

Are there any viable options, Horace Mann?

There are a variety of “income-driven plans” that peg your student loan payment to your income, while extending the payback period to 20 or 25 years. Income-contingent repayment, income-based repayment and  Pay As You Earn plans peg your monthly payments to a percentage of  your net income — 20%, 15% or 10%, respectively.

Balances owed at the end of the period are forgiven!, but the cancelled debt would be taxable (at least under current tax law.) Each program has slightly different criteria and formulas, although none of  them apply to privately-issued loans. The most generous — PAYE — is only available to recent grads.

While the idea of a two-decade plus repayment plan is intimidating, remember that you can always accelerate payments if things get better.  Click here or here! to learn more. Your tax filing status might also come into play, and yes, I can help you “run the numbers.”  E-mail me.

(The SLBA — Student Loan Borrower Assistance — has an excellent “step by step guide to solving your student loan problem.”)

Now, why was Sarah unable to deduct her student loan interest?

Once your income tops  $65,000  (if you file singly), your ability to deduct student loan interest is “phased out.” Once you hit $80,000 it’s gone. You borrowed money to put you on a sustainable career path — and once you are on that path you can barely, if at all, take advantage of this (already minimal, capped at $2,500, even for joint filers) tax deduction. Don’t get me started on the  inequities in the tax code that get little attention.

What else to consider? If you own a home and have sufficient equity you could borrow against it and take advantage of the mortgage interest deduction. However, if the interest rates are not comparative this may not be an attractive option.

This is an issue that is not going away, Elizabeth Warren. Watch for more policy proposals at the federal and state levels,

BECAUSE YOU ASKED

Are there any other mensches in your family?

Berkowitz, Brooklyn

 

My late cousin, Murray Cohn, was principal of Louis D. Brandeis High School in New York City, an inner city school, for decades. He presided there during some tough times — urban riots, union strife, teacher strikes — but his firm, compassionate leadership helped Brandeis weather those storms. He would sometimes butt heads with the unions, but his door was always open.  When he died in 2004, a surprising number of former “adversaries” came to pay tribute.

 In his seventies, Murray was finally forced to retire — I think he was the longest serving city principal at the time,damn near fifty years in the system.

After he was widowed, Murray hooked up with my Mom (not blood cousins, Pat Robertson). 

They shared a love of opera and books. Never lived together, and Mom moved closer to me, Murray near his daughter in Mass. But it didn’t surprise me that they died within months of each other in 2004.

Because you asked.  And by all means, keep asking.

The following is Part II of an excerpt from “Peace, Love and Financial Planning — An Illustrated Guide to Money”, by E. Larson Gunness, a local financial planner (and friend).

Click here for Part I

Note: “You” is the narrator in the book, who is working for a local accounting firm, and has just met Art, a new (artist!) client in distress because he has not filed his taxes for a couple of years. Any resemblance between the fictional “Rich” and myself must be purely coincidental!

Rich Responds — Part One

Art goes silent. He seems exhausted but relieved, as if he’s confessed to a great burden he’s been carrying… for two days. Rich leans back in his chair, props his elbows on the armrests and interlocks his fingers.

“Well, Art,” Rich begins. “That’s quite a story.”

Then you watch Rich as he applies his wisdom and experience to the situation of Art.

“You will not go to jail, even if it will improve your artistic career. The IRS is not out to punish people but to bring them into compliance and have them pay what they owe. You may face penalties if it turns out you owe – but we do not even know that yet. Relax. Sit in the massage chair.

Our plan is to reconstruct your finances for the last two years as best we can. It will not be precise but at least we will be able to file, get you on the right path going forward.

Do you have a copy of your last tax return, three years ago?

What kind of records can you come up with for your income? Can you or did you get a statement from Katya (the gallery owner) ?

Do you have a separate bank account for your painting income?

Do you have copies of your bank statements? I know it’s a long shot but that might shed a light on your business activities. (You have a business, you have income, you have income tax.)

We need to get a sense of how much you made from non-gallery sales.”

Stay out of jail — FOREVER! Attend my free May 6 webinar, Business Basics for Start-Ups , sponsored by Social Enterprise Greenhouse. Click here for information

Rich Responds — Part Two

Rich continued. It was kind of impressive to see how many ways he could think of to help Art. Art was clearly becoming relaxed, really relaxed.

“You are allowed and expected to deduct your professional expenses and only pay taxes on your “net”. Going forward, you will need that separate bank account AND a tool to help you track your income and expenses (e.g. Quickbooks). Going back, do the bank statements have copies of the checks? Did you pay anything by credit card?

Other expenses – we can deduct your roundtrip business mileage to NYC. How many times did you drive there? Supplies? Courses? Memberships?

Is your studio part of your residence? We may be able to take a “home office deduction” if it qualifies. Or was the studio a separate location?

What % of your phone do you use for business?

Do you pay health insurance? That is a deduction.

What is your best projection for this coming year’s sales?

You should plan to save between 30% and 35% of each art sale for taxes, and we will set you up on an “estimated tax plan” for next year.

Learn more in person May 14, in Warren, RI: The Business Of Art: Tax And Accounting Basics For Working Artists And Designers Sponsored by Gallery Night Bristol Warren. Click here to register

Art is Calmed

The meeting with Art is now almost done. The information will be compiled into filings with the IRS.
.
“Not to worry,” Rich says. “It is possible that you may incur a fine. But, at least you’ll be up to date. At least you are trying to do the right thing.

“And from now on,” Rich continues, “you will do this regularly, right? You’ll pay quarterly estimated taxes on self-employment income and file your annual return, either with or without my help?”

“Right,” cries Art.

“Because, they’re your taxes and your responsibility. The money you owe in taxes isn’t yours, even if it’s in your hands for a few weeks or months… got it?”

“Got it!”

This is copyrighted material, text and illustrations reprinted with permission of the author. The entire book — glossary, case studies and more can be found online. It’s a hoot (and helpful too!).

Boston artists: I will be at the famed Artisan’s Asylum in Somerville, May 21 to present Life On The Ledger, How To Make Your Art Add Up click here for details

Summary Of My May Presentations

May 6 – Webinar Business Basics For Start-Ups at Social Enterprise Greenhouse click here

May 14 – Live lecture in Warren RI: The Business Of Art sponsored by Gallery Night Bristol Warren. click here

May 21 – Live lecture Somerville MA: How To Make Your Art Add Up at Artisan’s Asylum.
click here