Federal Tax

In January of this year, two articles appeared in The Washington Post within 2 days of each other that shine a light on the present status of tax collection in this country and help depict a not-so-certain future.

The first, appearing on the front page on January 5, 2010, discusses plans by the Internal Revenue Service (IRS) to regulate people who are paid to prepare tax returns, “stepping into a virtually unregulated business on which millions of American depend for crucial financial services.”  The article describes the range of tax preparation choices, from “fly-by-night operators who can leave taxpayers on their own when the IRS finds fault with their returns” to the national brand-name tax preparation companies like H&R Block and Jackson Hewitt.  The plans to regulate preparers would exempt certified public accountants (CPAs), attorneys and enrolled agents.  CPAs are regulated by individual states, have passed the CPA exam and must fulfill continuing education requirements.  Enrolled agents (EAs) are tax professionals recognized by the IRS as eligible to represent taxpayers before the IRS—they must pass an exam provided by the IRS and must also fulfill continuing education requirements. 

Like most of us, something that only has to be done four times a year is often forgotten.  And so it goes with quarterly estimates.  These late or forgotten payments can cause you to incur underpayment penalty.

The US Treasury offers a payment mechanism that may help. It is the “Electronic Federal Tax Payment System,” or “EFTPS” for short.

EFTPS is a secure, free system where, after enrollment, you can schedule required quarterly federal payments up to one year in advance.  These payments you set up ahead of time will automatically be made on the dates you select – no longer will you need to remember when a payment is due.

Using EFTPS will also eliminate the very real possibility that your check will be credited to someone else’s account or – worse yet – lost in transit.  The system allows you to initiate payments via the Internet or by telephone.

For more information, and to begin making electronic payments, visit the EFTPS Web site at www.eftps.gov.

The Roth IRA can be an extremely powerful vehicle for retirement savings.  Although contributions to a Roth IRA do not provide a current tax deduction, future withdrawals (once you reach the age of 59 and a half) are totally tax-free.  For high net worth taxpayers, whose income is not anticipated to decline substantially after retirement, the benefit of a current deduction can be far outweighed by the tax-free withdrawal of the presumably appreciated investments in the future.

More Benefits of the Roth IRA

Furthermore, the lack of an annual required minimum distribution from the Roth IRA can provide for additional tax-free growth.  While traditional IRAs mandate that the account owner must make annual withdrawals beginning after they reach age 70 and a half, Roth IRA owners and inheriting spouses are not required to make any lifetime distributions.  If assets and income outside of the IRA are sufficient to cover the expenses of the retiree, the Roth IRA can be left untouched allowing the assets to continue to appreciate tax-free.  

A new law can provide you a payroll tax savings for hiring new workers, and may allow you to take advantage of them if you hire your spouse. The Hiring Incentives to Restore Employment Act, P.L. 111-147 provides two tax benefits for employers that hire workers this year: payroll tax forgiveness for hiring unemployed workers and a tax credit for as much as $1,000 for keeping them on the payroll for at least one year.

Under this law qualified employers get to skip paying the employer’s 6.2% share of Social Security taxes on wages paid in 2010 to a newly hired qualified individual. A “qualified individual” is one who:

Begins employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011;

Certifies by signed affidavit or Form W-11, under penalties of perjury, that they haven't been employed for more than 40 hours during the 60-day period ending on the date the employee begins employment with the qualified employer;

Was not hired to replace another employee of the employer unless that other employee left voluntarily or for cause (including downsizing); and

Is not related to the qualified employer in any of the following ways;  an individual cannot be the taxpayer's children or their descendants, siblings or step-siblings, parents or an ancestor of their parents, step-parents, niece or nephew, uncles, or aunts, or in-laws. They also can’t be their dependent. The rules don't mention a spouse.  They also can’t be a person who owns, directly or indirectly, more than 50% of the business.