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Married Filing Jointly or Married Filing Separately?

5/30/2013

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Question: I’m married and I’m not sure which filing status I should choose for my personal tax return: ‘Married Filing Jointly’ (MFJ) or ‘Married Filing Separately’ (MFS)? What is the best choice?

Like most things in life, it depends on your situation.  As a married couple, yes, you are allowed a choice of filing your personal tax return under the status of  ‘Married Filing Jointly’ (MFJ) or  ‘Married Filing Separate’ (MFS).  

MFJ is usually the better choice although here are some situations where MFS might be right for you:
  1. You report itemized deductions that are subject to Adjusted Gross Income (AGI) thresholds.
      1. Medical expenses: It might be better to file MFS if the spouse with high medical expenses also has a low income. The medical deduction is only allowable to the extent that your medical expenses are greater than 7.5% of your AGI. Therefore a lower AGI on an MFS return will offer a greater deduction than an MFJ return with a higher AGI.
      2. Casualty and theft losses: Casualty and theft losses are only deductible when they exceed 10% of your AGI.
      3. Miscellaneous itemized deductions: Misc. itemized deductions are deductible only to the extent they exceed 2% of your AGI. Example: Unreimbursed employee business expenses, tax preparation fees, investment expenses must all exceed 2% of your AGI to be deductible.
  2. One of the spouses has a poor credit history: If one spouse has poor credit and the other one has excellent credit then it may be best to file MFS so the spouse with excellent credit is not subject to credit damage as you may need a strategic ‘partner’ in the marriage to qualify for certain types of loans in the future i.e. mortgage, student loans, etc.
  3.  One of the spouse has a blind spot or 'innovative' approach to taxes: You love your spouse, but you aren't able to control them. They are aggressive with the tax code and you'd prefer not to file jointly.  If this is an issue for you consider filing MFS.  Filing a MFJ return makes you and your spouse ‘jointly & severally liable’ (i.e. you get treated as one entity) for any tax obligations. Filing an MFS return will limit your exposure to only include your own tax liability and it protects you from any liability on your spouse’s tax bill.  This is obviously less than ideal and could possibly surface during divorce transition periods.
  4. One spouse receives alimony from the other: One of the requirements for receiving alimony is that the spouses may not file a joint tax return. Here MFS is imperative. Keep in mind that alimony paid is deductible to the contributing spouse and is treated as income to the receiving spouse.
Other info about MFS that is good to know:
  1. Personal Exemption: When taxpayers file MFS returns each spouse is entitled to claim only his or her own personal exemption (currently $3,800). However, one spouse can claim the others’ personal exemption on their return if:
    1. The other spouse has no gross income.
    2. The other spouse is not claimed as a dependent on another taxpayers return.
  2. Separate returns need co-ordination: Filing a separate return needs cooperation between spouses. Both need to itemize or both need to claim standard deduction. The spouse with a standard deduction that is higher than if they itemized their deductions will be at a loss (and vice versa).
  3. If you change your mind: If you chose MFS filing status and change your mind you can amend to MFJ within three years of the original due date of the return. Changing the opposite direction (from MFJ to MFS), however, can only be done:
    1. Until the April 15th of the current year.
    2. If neither spouse has received a notice of deficiency.
    3. If neither spouse has sued in any court for recovery of any tax for the year.
Conclusion:
The best way to find out what is most beneficial for your particular situation is to prepare the return both ways and compare the results. If you’re not sure which way to go, ask your tax preparer to run a MFJ vs. MFS comparison analysis.

Disclaimer: This article provides general tax information, not legal advice. Individuals should seek specific advice from their tax advisor before acting on any information provided herein.

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NYS Sales tax on Design services? It depends on the medium of delivery

5/28/2013

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Question: I am a graphic designer residing in Brooklyn, New York. Do I have to charge sales tax to my clients on the services I provide?

Graphic design services involve the sale of creative ideas to your client. In New York State only the sale of ‘tangible personal property’ is subject to sales tax*. In this way the taxability of graphic design services and drug laws have something in common: it all boils down to the 'medium of delivery'  i.e. in what form is the end product delivered to your customer?

If the final designs are delivered in hard copy format e.g. computer discs, printed materials, etc. then you are selling ‘tangible personal property’ and the work is subject to New York State Sales tax (this includes any design costs to you and any reimbursable expenses).

However, if the 'medium of delivery' is electronic then you are exempt from charging your client sales tax. A service provided electronically is not ‘tangible property’.  In addition, to be subject to New York State sales tax, the sale must originate and conclude in New York. If you deliver the end product outside of New York for use outside New York then you are exempt from having to collect New York State sales tax. 

In any case, please check the applicability of sales tax for the state of delivery.

Tip: If you are a graphic designer and have to charge sales tax, make separate invoices to segregate the tangible and intangible services you provide. Since tangibility of property is crucial to determining taxability it will be prudent to create a ‘design services’ invoice and a ‘tangible services’ invoice. For example, if you provide printing services with a design logo imprinted on the printing material always make sure there are separate invoices (or separate line items in one invoice) for the printing and designing of the logo. Otherwise, the state may consider it as one and levy sales tax on the entire amount you invoice your client.

*For detailed information on this please refer to the state website athttp://www.tax.ny.gov/pdf/advisory_opinions/sales/a06_32s.pdf

https://docs.google.com/viewer?url=http%3A%2F%2Fwww.tax.ny.gov%2Fpdf%2Fpublications%2Fsales%2Fpub718.pdf

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Converting a 'Traditional IRA' to a 'Roth IRA'

5/26/2013

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Question: Should I convert my traditional, tax deferred IRA to a tax free Roth IRA?

First, yes, this option exists. You are able to convert your traditional Individual Retirement Account (IRA) to a Roth IRA.  BTW, before 2010 funds in a traditional IRA were not allowed to be converted to Roth IRA if your Modified Adjusted Gross Income (MAGI) was over $100,000.

So, why and when should you consider conversion? What are the tax benefits involved? When does it not make sense to convert? These are some of the questions we will address in this blog.  The following are some of the factors to take into account when considering conversion from Traditional to Roth IRA:

1. Do you have cash to pay for the taxes due after conversion to Roth?
In a traditional IRA you accumulate money in an account with pre-tax dollars i.e. you have zero basis in the money and the earnings. In a Roth IRA you do the opposite i.e. you accumulate money post-tax and earnings grow tax-free. Your basis is in what you’ve contributed and the earnings, as well.

What happens when you convert? You pay tax on the amount of your conversion as if it were ordinary income in the year of conversion. The bottom line is, your current tax obligation will go up in the year you convert, so have funds ready to fulfill your tax obligations.

2. Are you younger than 59.5 years old and likely to withdraw cash from the Roth IRA within 5 years, after you convert?
‘Qualified distributions’ from a Roth IRA are tax free however, if you are under 59.5 years of age and withdraw cash within five years after the conversion is made it will not count as a ‘qualified distribution’. There would be a 10% additional tax if distributions were made within 5 years of conversion. But if you have reached the age of 59.5 years this 10% additional tax is not levied. So, bottom line, convert only if you know you do not need the money for the next 5 years.
For detailed information on this please refer to: http://www.irs.gov/publications/p590/ch02.html#en_US_2011_publink1000231064.

3. Are you currently in a high tax bracket and expect to be in a lower tax bracket when you are older and ‘qualified’ to withdraw the distributions?
If yes, a traditional IRA might make more sense.  It would depend on whether contributing to a traditional IRA now would bring down your AGI and consequently your tax liability.  In retirement, when you are in a lower tax bracket, the distributions you take would be taxable at the lower tax rates.

4. Do you have heirs and want to pass on money to them tax free?
In a traditional IRA the IRS forces you to withdraw “Required Minimum Distributions” or RMDs each year and pay taxes on those RMDs. In contrast, distributions from a Roth IRA are at your will. You are not forced to withdraw cash and can leave the money in the Roth IRA for as long as you want. Consequently, it can be passed on to heirs of the deceased. If you know that you are going to be financially solid on retirement, don’t need to supplement income with IRA distributions and want to leave tax free money to heirs then consider conversion to Roth IRA.

5. What if the tax rates go down or up?
Due to the deal on taxes in 2012, there is a some visibility on tax rates So, if you’re comfortable with the tax rate currently and feel that you'll be earning more in the future then OK if you want to convert now.

6. What if I convert and then decide it was not best for me after all?
If you decide, after the fact, that the conversion from traditional to Roth IRA was not a good decision and want to reverse it, you have until October 15th of the subsequent year to re-characterize a current year conversion. The idea is that a conversion is not ‘one way traffic’ (up to a point) and you can go back and undo the conversion if it seems it is better to do so in hindsight.

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XBRL - another acronym

5/25/2013

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The eXtensible Business Reporting Language (XBRL), by its very definition is designed for future growth. The problem is the future seems to be taking a long time.  While you’re probably not going to get CPAs to learn the language (much less HTML), there will be a need for public companies to hire developers who do.

So, XBRL got roots in early 2000s as a way to automate 10K and related SEC reporting.  The challenge as I see it, is on 2 fronts.
  1. The mass of public company hard & soft data (numbers and text) and how to reasonably ‘tag’ this information in a uniform and systemic way.
  2. The learning curve of learning a new computer language and changing habits and schedules to accomodate for these changes.
I think this is why implementation (on a material scale) is taking so long. The benefits for users of financial data are much. If all the data is truly tagged, then analysis is made more accessible to regular folks (if the 3rd party bridges are attractive and consumer friendly – huge business opportunity by the way).

With all the technical talk and all the stakeholders, the end result of implementing XBRL should bring transparency and clarity to what a public company does. Sounds like a pipe dream, huh?

For more info on this, please check out the below article.

http://www.complianceweek.com/fasb-rolls-out-more-xbrl-implementation-guidance/article/285581/

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Value Pricing

5/24/2013

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As a CPA client, do you prefer fixed pricing? i.e. this project will cost $X? Or do you prefer hourly pricing?

If hourly, why? Is hourly pricing just the way everyone does it? Or do you see a correlation between how many hours one takes to do something vs. what it is worth?

Law firms do a good job of hourly because it is tough to scale reading contracts and their hourly fees are quite high (generally). CPA firms, however, partially because of their connection to computations and technology, almost have to find ways to scale basic tasks.

This makes the hourly pricing harder and harder to support.  If we can do some insanely complex task in 15 minutes, but it requires specific knowledge that has taken years to accumulate and practice, does the hourly arrangement still make sense? Should we just charge higher hourly rates?  Change what we do?

The Tunstall Organization, Inc. prices most of our engagements based on an estimate of what the service is 'worth'. Sometimes this is called value pricing. This aims at finding what the service is 'worth' to the particular business, which requires learning more about the business.  The investment in services then becomes budgetable and fixed and is intended to produce a return on investment.  This ROI can be quantified in higher revenue/profits or lower expenses but usually is realized in the dimension of quality of life - comfort in the accounting system goes up.

It is definitely riskier from a pricing standpoint, and scope needs to be well defined...but when done right, it seems to work the best for both practitioner and client.


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Low tax rate as CFO Incentive?

5/24/2013

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David Larcker, a professor of accounting at the Stanford Graduate School of Business, was quoted in the WSJ about CFO compensation as saying, “It would be very surprising if their performance evaluations weren’t heavily weighted to minimizing corporate taxes. That’s their job.”

Does this seems off to anyone as a way to evaluate and incentivize an accountant? It seems to me like this assumption of 'job' contributes to the disconnect between tax revenue and its purposes.

Yes, of course, a CFO should manage expenses and tax payments to pay the right amount, but what tax rate a company paid (if in compliance) shouldn't even be considered as an incentive metric, should it?

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The Tunstall Organization, Inc. 
615 S. College ST. 9th Fl
Charlotte, NC  28202

200 Broadway - 3rd Fl WeWork
​ New York, NY 10038
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​info@tunstallorg.com
212-420-1077

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