The Federal government, however, still does not allow same-sex marriage, so those couples must file Federal tax returns as if they were not married. What this means is that same-sex couples will be spending a bit more time preparing their tax returns this year. For New York taxpayers this affects, they must prepare separate Federal returns as single — or head of household, if they qualify — then prepare the Federal return as married filing jointly or married filing separately. Figures from the latter return, which are not filed with the government, then flow onto their State return and then the State tax liability is calculated by making adjustments to the Federal adjusted gross income they calculated as a married couple.

In New York State, which for 2011 has a progressive tax structure — that is, people at higher income levels are taxed at a higher rate than people at lower levels — couples may find themselves paying more tax as a couple than as two single persons, but it really depends on their income. When you have a couple where one person makes a lot of money and the other one has a very low income, there could be tax advantages to filing a joint return. On the other hand, two high-income earners will probably be paying more taxes when filing together. One thing to keep in mind, though, is that once you’ve tied the knot in New York State, there’s no going back. You need to file your State return as either married filing jointly or married filing separately.

If you have a same-sex couple with a child, for Federal purposes, one of the couple could file as head of household, while the other files as single. But for State purposes, the couple would file together, losing some of the tax advantage of the head of household filing status.

Last year I had a client who, after many years, married the father of her child, with whom she had lived for over a decade. She always filed as head of household, and because of her modest income, was able to claim the Earned Income Credit (EIC). But after they married, their incomes were combined and went well above the limit for the EIC. After I prepared their tax return, they faced a hefty tax bill!

So keep in mind, if you’re thinking of getting married, your marital status may affect your taxes, and this holds true regardless of your sexual orientation!

In my mind, I consider all legal tax deductions — and there are many — when preparing a client’s tax return. But dishonesty is not in my repertoire. Sure taxes are high (and living and owning a home in New York State, don’t I know that!) but that’s what we pay to live in our society. We get a lot back for it — good educations, good roads, police protection, welfare allowing us to keep beggars off the streets, health care for the elderly and indigent. It’s the price we pay to live here, and I don’t believe anyone should evade the responsibility of paying what they legitimately owe.

It must be awful to be a tax evader. They break out in a cold sweat when they see an IRS notice in the mail. Uh-oh, they think. But if you keep good, accurate records, and you are truthful on your tax return, you really have nothing to fear from the IRS.

The first was where Harold is in the back room at the bakery. Ana brings in a box full of random receipts and envelopes, and drops them in front of Harold. The conversation goes like this:
Harold: What’s this?
Ana: My files.
H: What?
A: My tax files.
H: You keep your files like this?
A: No, actually I’m quite fastidious. I put them in this box just to screw with you.
I thought this was interesting, because if you’re going to be audited, it’s probably not a good idea to antagonize the auditor. That’s just common sense. But if an auditor can’t easily find documentation for an expense, he or she might be inclined to disallow it, throwing the burden of proof back on to you. So, first takeaway from this scene (and proof that a financial professional wasn’t involved in the screenplay) is: keep your records organized.

The second scene was at a tender moment between Harold and Ana, where Harold tells her that all the food she’s been giving away is tax deductible as a charitable contribution. I might have to qualify this if there’s a back story to this remark that wasn’t obvious, BUT we see Ana earlier in the film giving coffee and a Danish to a person who appears to be homeless. If that’s what they’re talking about, no, that is not deductible, for reasons I pointed out in the last post. Now, if she’s donating baked goods to a registered 501c(3) charity, it’s possible that she could donate the fair market value of the donations on her tax return. But not if it’s going to an individual instead of a charity.

If I hadn’t been working, I would have gone over to the raffle table and pointed out to this helpful volunteer that no, raffle tickets are not a tax-deductible expense to the person who is buying it. Even though the proceeds go to the organization, the IRS is very specific that raffles, even when purchased from a not-for-profit organization, are not a tax-deductible item.

And while my time is very valuable, to me at least, I cannot deduct the value of my time when I volunteer to help out a non-profit. Nobody can.

Have you ever gone to a benefit for a local person who has fallen on hard times, a family with a sick child, a kid who is raising money to attend school somewhere, or any fundraiser where the money is earmarked for a specific person or persons? That’s not tax-deductible either.

And while the Trumansburg Rotary Club is an organization that is exempt from paying taxes, it is not a 501(c)3 charitable organization, and therefore money contributed to the Club itself is not tax-deductible. (However, dues to service organizations can be deducted as a business expense, and Rotary International does have a not-for-profit arm, called the Rotary Foundation, to which tax-deductible contributions can be made.)

What about contributions to lobbying groups? Sorry, not tax-deductible. This includes the American Civil Liberties Union, for an example. However, the ACLU has set up a foundation to which contributions are tax-deductible. So you need to pay attention to exactly who is getting your dollar.

Contributions to political candidates? Nada. The Democratic Senatorial Campaign Committee? Nope. Sarah Palin’s political action committee? Sorry, not deductible. If you have questions, go to the organization’s website. It should tell you whether or not a donation is tax-deductible. The IRS also has a very helpful website where you can search to see if the organization to which you are giving is tax-deductible:

The IRS states that not-for profit organizations, 501(c)3 organizations, should issue receipts for donations, and clearly state on the receipt what amount of the donation is tax-deductible. For instance, if membership in a not-for-profit includes a subscription to a magazine, then the fair market value of that magazine must be deducted off the donation to arrive at the portion of the donation that is tax-deductible. However, my experience is that some organizations, especially small ones, do not know about this rule. Every year, I get a very nice handwritten note from the director of an organization to which I contribute, but she doesn’t mention the amount of money donated. She should. If I were to be audited by the IRS, they wouldn’t necessarily just take my word that I contributed what I said I contributed. They like to see backup documentation.

Finally, be aware that charitable contributions are really only deductible by those who itemize deductions. If you’re one of the many people who don’t either have a very high income (paying big state taxes), pay property taxes or a mortgage, chances are small that you’ll be itemizing deductions.

Which is not to say that charity is not worthwhile. That raffle ticket you buy, that kid with cancer whose spaghetti dinner you attend, that soccer team who is raising money for a trip to Europe, that donation to the organization whose beliefs are in line with your own — they’ll be quite pleased that you helped them out. But the IRS won’t recognize the value of that generosity by granting you a tax-deduction.

The IRS has come out with a new advisory, making the preparation of tax organizers — those forms you might use in preparing your tax information for your tax preparer — every more challenging.  Now, if you make a cash donation to an eligible organization for earthquake relief in Haiti, you can deduct this contribution on your 2009 tax return.  But be advised of these provisions:

• You must make the contribution between January 11 and March 1, 2010
• You must itemize deductions on Schedule A in order to take this deduction
• Donations made by text message are deductible (save your telephone bill!)
• Only donations made to organizations certified as 501(c)3 charitable organizations are eligible for this special tax treatment.  This means that foreign organizations, unless they have a USA branch, probably do not qualify.
• You may take the deduction on either your 2009 return, or your 2010 tax return, but not both.

It is this amazing spirit of Americans that make me proud to be a citizen of this country — and despite its many faults, we still know how to rally for a cause, and open our hearts to those in need.

Some people may think, well, instead of going through all that rigamarole, I’ll just pay this person as an independent contractor.  In years past, that was the tactic many potential employers took in order to avoid paying the 7.65% tax on employee wages, as well as the attendant insurance benefits.  But the IRS frowns on that, and has come up with a list of criteria that help to determine if a person should be considered an employee or a contractor.  The criteria address control and direction, with people who are controlled and directed being more on the employee end of the scale, and those who exhibit more independence being on the contractor end of the scale.  So, for instance, if you have your own tools, if you make your own hours (at least as far as the work you do for the employing entity goes), if you work for other people as well as this employer, if you have a contract to perform the work, then you might be considered an independent contractor.  If you, the employer are not sure if someone is an employee or a contractor, you can ask the IRS to make that determination for you, by filing Form SS-8, which is available here:  http://www.irs.gov/pub/irs-pdf/fss8.pdf But be forewarned, it may take several months to get a determination on a worker’s status!

Well, Mom’s way of doing taxes, with pencil and scrap paper, has fallen by the wayside.  An IRS study shows that increasingly, people are turning to paid tax preparers to do their taxes.  They’re also using more software packages to prepare their taxes themselves.  In fact, for the  2007 and 2008 tax years, 80% of taxpayers filed their taxes using either software or a paid preparer.

What many people don’t know is that tax preparation is a field that has no prerequisites.  That’s right.  Anyone can be a tax preparer.  It’s easier to become a tax preparer than a hair stylist.  All you need to do is hang out a shingle or print up a business card.  Of course, many people who are in the business of preparing taxes do have education and certification in the field:  attorneys, certified public accountants (of which I am one) and enrolled agents.  These people are subject to professional oversight, and have to register and establish competency in their field, and submit to continuing education every year in order to remain certified.  But there’s this vast number of tax preparers who don’t fall into any of those categories, including most of the preparers at the big-box tax companies (H&R Block, and Jackson-Hewitt, for example) and whose work is completely unregulated.  The IRS doesn’t really know how many tax preparers there are, but suspects the number is somewhere between 900,000 and 1.2 million.

The IRS is about to shake things up, though, in the tax world.  (I know, I know, that’s kind of an odd image, isn’t it?)  Starting in 2011, the IRS would require all tax preparers in every state who are not attorneys, CPAs or Enrolled Agents to pass a basic competency exam, register, and take annual continuing education in tax law and ethics.  It’s already changed this year for preparers in New York State.  The previously-unregulated preparers will have to register with the state, pay a fee, and get an ID number to allow the state to track, and possibly deny registration to preparers who consistently file erroneous returns.   However, the changes that the IRS are proposing are more comprehensive, and to my mind, make much more sense.  Why not have the people charged with preparing taxes at least submit to exhibiting a basic competency in the field before you allow them to prepare taxes?

Taxes are complicated, and getting more so all the time.  Every year there are changes, and new tax rulings.  This change will create a more level playing field in the area of tax preparation.  After all, if you have someone who has an advanced degree, 16 hours of rigorous testing, 24 hours per year of continuing education, an expensive triennial registration fee, and a professional tax preparation software costing upwards of $600 competing against someone who simply bought a software program — maybe even a single return copy of TurboTax for $29.95 and files an unlimited number of returns, guess who’s going to be able to prepare your return more cheaply?

I applaud the IRS for this step, as did 98% of the people who provided public comment on this new regulation.  And with the IRS and the tax-strapped State performing more audits, it really pays to have your return prepared professionally.  Maybe not for the college student who basically has a handful of interest and a W-2 from a summer job, but for the person with perhaps a home purchase or sale, or a small side business, or rental properties, it makes sense to engage a professional.  As the saying goes, “you get what you pay for!’  How true!

But do you know, really, how well your business is doing?  What are your margins?  How much do you make on different product or service lines?  Does it pay for you to hire employees?  What is your business worth right now?

For too many small businesses, much of this is a mystery, because they have no structured way to record and review the activity in their businesses.  But it doesn’t have to be like this.  Perhaps this will be the year that you begin to record your activity on a regular basis, review your activity and actually start making decision on the information that you have.  This is called management, and I hope that you begin doing more than just “running” the business — you begin to “manage” it.  Happy 2010!