Saturday, March 12, 2011

What is a Third Party Designee?

Q.  What is the difference between a Power-of-Attorney and the Third Party Designee indicated on page 2 of Form 1040 ? They sound like the same thing to me. JT, Alabama

A.  The Third Party Designee is very limited in scope. It allows the taxpayer to indicate one person who can exchange information about the return to the IRS, question the status or a refund or payment, request written tax information relating to the tax return, and respond to certain IRS notices. It is good only until April 15th of the following year. I've called the IRS twice regarding a return where I was appointed the Third Party Designee and found the IRS reluctant to give me almost any information without a Power-of-Attorney.

Friday, March 11, 2011

Where's my 1099-R for my IRA rollover?

Q.  I just received another email from my tax preparer wanting a form called a 1099-R regarding an IRA rollover. I sent all the paperwork I had to her. What do I do now? JB, Kentucky

A.  Thank your lucky stars you have such a diligent tax preparer! Conservatively, I spent half my day today emailing clients regarding missing paperwork. All of us need to remember that when it comes to IRS tax forms, the IRS has them, even though you may not! The IRS computers will match all the forms they receive to your tax return, and if it doesn't match, expect that previously mentioned love letter from the IRS wanting more tax, interest, and possibly a penalty.

I found out something interesting yesterday from one of my full-time RV clients who is very investment savvy. At least one of the big investment houses do not report tax free roll-overs on a 1099-R. I don't know the why or how, but apparently they feel since it isn't taxable, they aren't going to report it.

This is the exception rather than the rule. Most big firms issue 1099s for all types of items, taxable or not, simply because it costs them more to pull them rather than to mail them. Do yourself and your tax preparer a favor. Call the brokerage house that handles your IRA and ask them if they issued a 1099-R. If yes, possibly you can download it, or request another copy. At least you won't be guessing!

Thursday, March 10, 2011

Love Letters from the IRS

Q.  Honey, I'm in a total panic!  I just received a letter from the IRS wanting an additional $8,000+ dollars from a stock sale they say I didn't report in 2008.  I know the taxes were paid on the stock as the stock options were  included on my W-2 form. They also want interest and a penalty. What do I do now? MW, New York

A.  Get our all your paperwork for 2008, sit down with a glass of wine, and try to relax!  I really feel there is no need to panic. I'm assuming that you prepared the return yourself, so the first thing you need to do is to see if you filed a Schedule D reporting the sale.  If not, you will need to amend the return. Stock options can be tricky, and quite often are overlooked.

The good news is that the reason the stock options are reported on your W-2, is that you paid tax on the difference between the option price and the FMV of the stock when you exercised the option. This means that if like most people, you sold the stock the same day you exercised the option, your tax basis is the same as the value placed on your W-2. You should have paperwork from your employer telling you exactly what the FMV was that day.

On your amended return, the sale price should match the 1099-B which you will probably find somewhere in that paperwork. Your basis will be the FMV per share associated with the W-2. You should have virtually no gain and quite possibly a small loss.  Return the IRS letter together with the amended return, and that should clear up the matter.

Tax Tip:  Brokers are required by law to report the sale of securities on a 1099-B to the IRS. Never forget to include the gross proceeds reported with the resulting gain or loss on a Schedule D. Failure to do so will result in a love letter from the IRS as they have no knowledge of the transaction other than the gross sales price reported to them by the brokerage house.

Wednesday, March 9, 2011

Pension plans for the Self-Employed

Q.  My wife and I recently started a small business, and are thinking of setting up a small retirement plan. We have no employees other than the two of us. I'm not certain what the difference is between a SEP IRA and a SIMPLE IRA. Can you please clarify it for me? Thanks for your help. SW, Michigan

A.  Either plan will work fine for your business. Here are the basic differences:

  • A SEP (Simplified Employee Pension) allows an employer to contribute to employees' IRA's without the hassle of setting up a profit-sharing plan. The employee (or self-employed individual) must be 21 years of age, and employed at least 3 or the last 5 years. The contribution is the lesser of 25% of an employees' compensation up to, but not exceeding, $49,000. The employer must contribute to every eligible employee who earns at least $550 in compensation.
  • A SIMPLE IRA  pertains to every employee earning at least $5,000 in the preceding plan year. There are less restrictive eligibility requirements. The employees can make elective deferrals, and for those doing so, the employer makes matching contributions limited to $11,500 ($14,000 for employees age 50 or older), or fixed non-elective contributions equal to two percent of each eligible employee's compensation.
Note:  From the above, you can see a SEP allows you to contribute more to your retirement plan each year. As I am NOT an expert on pension/retirement plans, I only have access to the most basic information. ALWAYS contact a specialist in this area. Most brokerage houses, such as Fidelity Investments which I use, have excellent pension departments and can set these up for you at little or no charge. I call them each year prior to filing our taxes to find out the details I need to know to properly comply with current requirements. You should do the same.

Tuesday, March 8, 2011

Business Weekend

Q.  While attending a recent rally where I was a vendor, we were asked to give a presentation on the following Monday. How do I handle the Saturday and Sunday which I did not work? RJ, Texas

A.  This is known as a Business Straddling Weekend. As such, the costs associated with your weekend stay are considered business days, and therefore deductible - yeah!

Monday, March 7, 2011

Where is my refund?

Q.  I filed my taxes in mid-February and haven't received my refund yet. Is there a way I can check on it? KF, Tennessee

A.  The timing mostly depends on the manner you chose to receive your refund. If you opted for a paper check sent by U.S. Mail, expect a 6 - 8 week wait. If you chose the direct deposit method, the method I always choose for my clients, then it depends on the acceptance date of your filing. Usually, if the acceptance is received by noon on a Wednesday, look for your refund to be deposited a week, possibly two, on the following Friday. IRS direct deposit refunds always hit your bank account on a Friday, so keep checking. Refunds received by a paper check via the U.S. P.S. are always supposed to be delivered to your mailbox on Saturdays. If you feel your refund is overdue, use this link to the IRS.  Where is by refund?