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Should Olympic Medal Winners Pay Tax?

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A Taxing Question

By Children’s Home Society of Florida Foundation

At press time this evening, the United States was embarked on a successful 2012 Olympics. The U.S. had received 90 medals — 39 gold, 25 silver and 26 bronze. Our Olympic team was on a path to receive well over 100 medals.

While each medal has very high personal value, there also is value to the tangible materials. The gold medals contain approximately $675 in materials, the silver $385 and the bronze medal value is $5. However, the U.S. Olympic Committee (USOC) also provides a cash gift for medal winners. The gift values are $25,000 for a gold medal, $15,000 for a silver medal and $10,000 for a bronze medal.

Should the Olympic winners pay tax?

The general income tax rule is that all prizes are taxable unless specifically excluded. Several Senators and Representatives have proposed that the value of the medal and USOC cash award should be excluded from taxable income.

Senator Marco Rubio (R-FL) introduced the Olympic Tax Elimination Act. It would exempt medal winners from paying tax. Rubio stated, “Athletes representing our nation overseas in the Olympics shouldn’t have to worry about an extra tax bill waiting for them back home.”

Similar bills were introduced in the House by Rep. Blake Farenthold (R-TX), Rep. Mary Bono Mack (R-CA) and Rep. Aaron Schock (R-IL).

 Expenses to Offset Income

All of the bills would exempt the medal and cash award from taxation. CPAs who have commented on the proposal note that the athletes would need to report the cash awards as income, but also could offset this income with “ordinary and necessary” expenses related to the awards. For example, the five women gymnasts who won the gold medal could take deductions for their classes, costs of coaches and their travel expenses.

Assessment

House Ways and Means Committee Chairman Dave Camp (R-MI) joined the group that favors excluding the Olympic medals from taxation. He stated, “These athletes deserve every bit of our support and appreciation for representing the United States on the world stage. Allowing our Olympians to receive and enjoy their medals and awards without having to worry about whether they can pay the taxes on their accomplishment is just one small way we can show that support.”

Conclusion

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Physician’s Understanding Payroll Tax Deductions

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Doctor as Employer or Employee [A Primer]

The Payroll and Tax Deductions infographic from Paycor takes an unbelievably dry topic and makes it interesting by visually walking someone through their paycheck. The design allows them to understand all of the different things that may come out prior to the final amount that makes it to their bank account.

Are We Un-Aware

Some American healthcare workers aren’t aware of the factors that determine how much is deducted from their paychecks, yet it’s important to have that understanding so you can speak up about any errors.

Typical Deductions

So what exactly is that payroll software deducting from your paycheck? Typical deductions include federal income tax, OASDI, Medicare tax, disability and state income tax. Your tax bracket will range from 10% to 35% depending on your amount of taxable income. Medicare tax rates will be different depending on whether you work for a hospital or medical company; or are self-employed in private practice.

State Level

At the state level, individual states handle taxes differently, with seven states charging all residents a flat tax rate and nine other states not collecting any income taxes at all.

Assessment

Use this calculator  to help determine the impact of changing your payroll deductions. You can  enter your current payroll information and deductions, and then compare them to  your proposed deductions. Try changing your withholdings, filing status or  retirement savings and let the payroll deduction calculator show you the [approximate] impact on your take home pay.

LinkPayroll Tax Calculator http://www.bankrate.com/calculators/tax-planning/401k-deduction-calculator-taxes.aspx#ixzz1x3EbwgTf

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Where Tax Dollars Go?

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Conclusion

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IRS Help for Last-Minute Tax Filing Doctors

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2011 Tax Tips for 2012 [Are You Ready to File?]

By Children’s Home Society of Florida Foundation

The IRS published information letters last week to assist taxpayers who are filing their taxes before the April 17, 2012 deadline. Doctors, dentists and some other medical professionals may especially need some help.

And, the IRS YouTube channel is the fourth most popular government channel.

The IRS receives about 1 million views per year. Taxpayers may find several YouTube programs helpful. They are available in English, Spanish and American’s Sign Language.

IRS YouTube Programs

* Need more time to file your tax return?
* Last-Minute Tax Tips
* IRS Tax Payment Options
* Owe Taxes but can’t pay?
* When will I get my refund?

Smart Phone Accessible

The IRS YouTube videos are also available on iPhone or Android through the IRS2Go application that may be downloaded through the App Store or Android Marketplace. This is a nice feature for doctors interested in m-health.

For individual physicians who need extra time to file, it is possible to request an extension with Form 4868 (either electronically or by paper). This extension filing requires that you estimate and pay the correct tax, but your time to file is extended to October 15th. If you do not pay the correct tax, there is interest of 3% per year and a late penalty of 0.5% per month on the balance.

The Exceptions

There are three exceptions to the filing date. If you live and work abroad or are on military duty outside the U.S., you may pay on April 17 and file by June 15. Military members serving in Iraq or Afghanistan may file 180 days after departing the combat zone. Finally, several federal disaster areas in the Midwest are permitted to file and pay on May 31.

Need More Time?

Some taxpayers will need more time to pay. If your tax, penalties and interest are $50,000 or less, you may request a payment agreement from the IRS with Form 9465-FS. If you are unemployed or self-employed with a 25% reduction in income for 2011, you may file Form 1127-A to request permission to pay by October 15, 2012. You still must to pay the tax plus interest at that time.

Assessment

Finally, if you have a substantial overdue tax obligation, you may be able to negotiate an “offer-in-compromise” with the IRS. This will require the IRS to review all of your income and assets to make a determination as to the correct tax payment.

Conclusion

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Half of All Americans Don’t Pay Income Tax to Uncle Sam

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Were you Aware?

It often seems [especially to frustrated medical professionals] that we all have that cash-creative “friend” who manages to find every loophole, legal or otherwise, come tax time.

But, a startling new infographic from the Heritage Foundation shows that nearly half of all Americans avoided paying federal income taxes in 2009.

Assessment

That’s not even counting the folks who’ve fallen off the paycheck grid because of the nation’s high unemployment rate – OR – financial advisors, doctors and medical management professionals who’ve experienced same.

Conclusion

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On the White House Tax Proposals

Reviewing the State of the Union Address

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By Children’s Home Society of Florida Foundation

In his State of the Union Address last week, President Obama included several tax proposals. He stated his hope that high-income earners pay larger taxes in the future. The President also proposed a substantial number of major tax changes for businesses with international operations.

White House Examples

For example, he restated the “Buffet rule” that asks high income individuals to pay at least as high a rate as that paid by middle-income earners. The President noted, “Right now, because of loopholes and shelters in the Tax Code, a quarter of all millionaires pay lower tax rates than millions of middle-class households.”

The White House also proposed that those with incomes over $1 million pay a minimum tax rate of 30%. Taxpayers with incomes over $1 million will have new limits on deductions for mortgage interest, healthcare expenses, qualified retirement plan contributions and childcare.

The Proposals

Many of the proposals for businesses were outlined in a White House press release on January 25th 2012. These major changes are designed to encourage U.S. companies to maintain their U.S. operations and increase employment here rather than overseas:

1. Overseas Plants – There would not be deductions for moving plants overseas. In addition, there would be a 20% tax credit against the cost of moving jobs from overseas back to the United States.

2. Manufacturing – Those manufacturers who purchase equipment would be able to expense 100% of those purchases. This option also existed in prior years and is expected to encourage building factories in the U.S. rather than abroad.

3. Major Job Losses – Areas that have experienced a closing of a military base or a major factory could qualify for a new investment credit of up to $2 billion. This credit creates incentives for building new plants or factories in depressed areas.

4. Minimum Tax – Corporations could be subject to a new minimum tax on their overseas jobs and profits.

Conclusion

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Change in Distribution of Income Among Tax Filers 1996-2006

A Congressional Research Services White Paper

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As tax season draws near, here is an important essay from CRS, by:

Thomas L. Hungerford

[Specialist in Public Finance]

Assessment

Link: http://taxprof.typepad.com/files/crs-1.pdf

Conclusion       

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Tim Geithner and Harry Reid Support Top Tax Rate Increases

Obama Plans to Increase Top Two Tax Brackets

By Children’s Home Society of Florida Foundation

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On a national media program on July 25, 2010, Treasury Secretary Timothy Geithner emphasized that the Obama administration plans to increase the tax rates for the top two brackets. When asked whether the 2001/2003 tax reductions should be extended for all brackets, Secretary Geithner stated, “I don’t believe they should and I don’t believe they will.”

New Top Rates

In the view of Secretary Geithner, the increase of the top two rates to 36% and 39.6% affects only “2% to 3% of Americans, the highest-earning Americans in the country.” He suggested that the increased rates on top earners will not have a “negative effect on growth.”

[picapp align=”none” wrap=”false” link=”term=income+tax&iid=76590″ src=”http://view.picapp.com/pictures.photo/image/76590/drawer-full-receipts/drawer-full-receipts.jpg?size=500&imageId=76590″ width=”337″ height=”506″ /]

Steny Speaks

House Majority Leader Steny Hoyer (D-MD) agreed with Secretary Geithner. He advocated extending the tax cuts for middle-income taxpayers and remarked that their taxes are “lower than they were in any single year” when compared to prior administrations. However, in his view, the increase in the top two brackets is necessary to keep America from going “deeper into debt.”

So Does Orrin

Sen. Orrin Hatch (R-UT) is a member of the Senate Finance Committee. He spoke on the floor of the Senate and expressed frustration over the decision by Majority Leader Harry Reid (D-NV) to refuse to allow a vote on the Hatch proposal to extend all of the tax cuts. Sen. Hatch offered a motion to commit the pending small business bill back to the Finance Committee in order to amend it and extend all of the tax cuts.

Sen. Hatch indicated that this “largest tax increase in history” will dramatically impact small businesses. These businesses, with between 20 to 500 workers, are owned by individuals who face substantial tax increases.

In the view of Sen. Hatch, the top bracket tax increases will reduce the ability of small business to perform its normal function during an economic recovery of generating 70% of new jobs. Sen. Hatch noted that new jobs typically have three components.

Assessment

First, there must be entrepreneurs who are willing to take risks. Second, there must be adequate access to capital. He indicated that the banks and large companies currently hold record amounts of cash reserves, so there certainly is cash available. Third, there must be “reasonable economic certainly” so that the businesses are willing to expand. With the prospect of higher taxes and greater regulations, Sen. Hatch indicates that there is a high level of uncertainly that is directly reducing job growth in America.

Conclusion

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Top Income Tax Rates Will Increase

So Says Speaker Nancy Pelosi

By Children’s Home Society of Florida Foundation

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Members of both Parties joined the debate this week on income taxes. Without action by Congress, all of the tax reductions in the 2001/2003 tax acts will be phased out on January 1, 2011.

White House Steadfast

The White House has steadfastly maintained that the reductions for lower and middle-income brackets should be retained, while the reductions for the top brackets must be phased out. Under the White House proposal, individuals with incomes over $200,000 ($250,000 for married couples) would pay higher taxes. The top two brackets will increase to 36% and 39.6%. In addition, the White House proposes that the capital gains tax rate returns to 20%.

The Concerns

Senator Ben Nelson (D-NE) has expressed concern about the increase in taxes on upper income individuals. He is joined by Sen. Charles Grassley (R-IA), who has consistently supported extending all of the 2001/2003 tax brackets. Sen. Grassley suggested that it would be important to continue the tax reductions in order to encourage small business owners to hire new employees and reduce unemployment.

A Temporary Extension?

A long-term deficit hawk on the Democratic side is Senate Budget Committee Chair Kent Conrad (D-ND). He stated for the first time this week that he may be open to a temporary extension of the top brackets at the current 33% and 35% rate. Senator Conrad indicated that at some future time it will be necessary to “pivot” and move aggressively toward deficit reduction. However, he questioned whether the economy is strong enough to start the process of tax increases this year.

[picapp align=”none” wrap=”false” link=”term=income+tax&iid=76487″ src=”http://view4.picapp.com/pictures.photo/image/76487/hourglass-top-calendar/hourglass-top-calendar.jpg?size=500&imageId=76487″ width=”337″ height=”506″ /]

Assessment

House Speaker Nancy Pelosi (D-CA) joined the debate with a strong affirmation of the White House position. She stated, “Our position has been that we support middle-income tax cuts. The tax cuts at the high end have increased the deficit enormously and they have not created jobs in the eight years.”

Editor’s Note: With Congress soon turning to the fall election, it is highly probable that action on income taxes will be deferred until after the election. With bipartisan concern about unemployment and the economy, it is quite likely that the tax reductions at the lower and middle brackets will be extended. The result for upper-income individuals is still uncertain.

Conclusion

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On the Proposed Tax Cuts

Senate Debate on Extending 2001/2003 Tax Cuts

By Children’s Home Society of Florida Foundation

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The Senate Finance Committee conducted a hearing on July 14, 2010 to discuss the potential extension of tax cuts. In the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), there were tax reductions for nearly all Americans. The tax reductions continue through 2010, but are set to be repealed on January 1, 2011.

Proposals

The White House has proposed to extend these tax cuts for single persons with incomes under $200,000 ($250,000 for couples), but to increase the capital gain rate and top income tax brackets. Under the White House plan, the capital gain rate will increase from 15% to 20%, the 33% bracket increases to 36% and the 35% tax bracket is raised to 39.6%.

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The Senate

Senate Finance Chair Max Baucus (D-MT) opened the hearing by stating, “Americans are struggling to make ends meet, and we need to do all we can to put more money back in the hands of workers, middle-class families and small businesses so our economy can grow. I support extending the middle-class tax cuts permanently, as soon as possible, so working families can keep more of their hard-earned money.”

Sen. Baucus and the White House are both advocating a permanent extension of the tax cuts for low and middle-income taxpayers, with an increase in taxes for those in the upper brackets.

Ranking Member on the Senate Finance Committee Charles Grassley (R-IA) has repeatedly expressed concern about the increase of taxes on small business owners. He noted, “To those who are pushing the higher marginal rates, I say the burden is on you to show that you are not harming our primary job creators.” Sen. Grassley has noted that two-thirds of new jobs in the past decade have been created by the small business owners who will be subject to the higher taxes.

Editor’s Note: The hearings on taxes are the first step in creation of a tax bill. Because the failure to act this year would result in repeal of all of the tax cuts, it is probable that there will be a tax bill prior to the end of 2010. However, with the shortened legislative calendar due to the fall elections, the tax bill is quite likely to be deferred until after the election.

Conclusion

Douglas Holtz-Eakin is President of the American Action Forum and was formerly the Congressional Budget Office Director. He testified that approximately one-half of the $1 trillion in business income that will be reported in 2011 will be subject to the higher 36% and 39.6% tax brackets. In his opinion these higher rates will reduce the willingness of small businesses to hire new employees.

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About Tax Record Retention

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Which Ones to Keep—How Long?

[By Staff Writers]fp-book2

By law, we are all required to keep records the IRS could use to determine our tax liability accurately. And doctors, more than most, know what it’s like to keep records. So you should retain whatever papers and documents support or clarify your calculations. If the IRS thinks you owe it money, you—both as an individual taxpayer and as a medical business owner—must prove it wrong. Your records are your only real protection if the IRS sets its sights on you for an audit.

Query: But what papers? And how long does the IRS have to determine your taxes for any given year? Do you have to keep everything forever? He following information may provide some clarity to this query.

Individual Tax Records

Accuracy means more to the IRS than the form of recordkeeping you use. Even more important is thoroughness. While certain papers are more significant than others, all of them together build your case for stated adjusted gross income, taxable income, deductions, exemptions, etc. For example:

Income:

Your medical, and other, employment-related records are top priority. The basic ones are W-2s from your hospital, clinic or medial practice, W-2P (for recipients of pensions, annuities, and IRA payouts), and 1099s for freelance income, speaking and pharmaceutical fees, and royalties, etc. You will also need 1099s that show interest and dividend income, as well as stock brokerage statements and any other documents that contain information pertaining to the amount you report as income.

Deductions

Generally, to back up your various deductions, the records you keep should include all related canceled checks and receipts. Here are some specific deductions and their requirements:

Medical expenses:

Keep all canceled checks and receipts. Keep records of any expense reimbursed or paid directly by medical insurance and medical insurance policies on which you deduct the premium cost. The person on whose behalf payments were made should be noted on every check, bill, and receipt.

Mortgage interest:

Keep bank (or mortgage company) statements, notes, and canceled checks.

Child-care credit:

Maintain a record of the name and address of the person or center providing the care, copies of canceled checks, and receipts to verify costs, and amounts paid for household services during the year. The latter will allow you to differentiate costs if the IRS tries to claim your child-care payments were really for a housekeeper. If you pay an individual to provide child care, keep a record of his or her taxpayer ID number, since you need that to get the credit.

Alimony:

You should maintain a copy of the divorce decree, separate maintenance agreement, or other document that specified the basis for the payments; name and address of the ex-spouse to whom you made payments; and canceled alimony checks. If you made payments indirectly through insurance policies, annuity contracts, or endowments, keep the documents showing the source of the payments.

Charitable contributions:

To prove charitable contributions, keep canceled checks and receipts showing the donee’s name, plus the date and amount of the contributions. If you don’t have a check, you need other reliable records showing the same information. If contributions are made by credit card, keep the receipt, the bill, and a statement from the charity with the required information. If you make a contribution of above certain periodically indexed thresholds, or more, to a particular charity, you must get a written acknowledgment from the charity (letter, postcard, etc.). A canceled check is not enough. Generally speaking, if you make separate deminimus contributions each year, the written acknowledgment rule may not apply.

A donation of property will complicate recordkeeping. You need the same items as above, plus a description of the property and the place you made the contribution. You should also keep documents showing the method you used to determine the fair market value of the property, with a signed copy of appraisal reports, if any. If you have an agreement with the charitable organization regarding the use of the donated property, hang on to a copy of that as well.

For property, you will also need documents showing how and why you acquired the property and your cost or other basis (except for publicly traded securities) if you held it for less than one year. For property valued over certain thresholds, you must get a qualifying appraisal and keep a copy of the report

IRS

Business Tax Records

As a medical business owner, your recordkeeping requirements are more substantial. There are so many more soft spots where the IRS can probe. The following areas are of particular importance:

Depreciation:

Keep any records needed to establish the reasonableness of a depreciation deduction, such as the original sales receipt showing what you paid for the property. Records must show the yearly depreciation claimed.

Withholding:

Keep all compensation records. For each employee, show name, address, job, and Social Security number, total amount and date of each wage payment, and any other type or form of payment; amount of wages subject to withholding; amount of tax collected; employee W-4 forms; and any agreement with employees regarding additional withholding.

Travel and entertainment:

The IRS does not accept estimates. You must keep itemized bills and receipts, Back them up with a diary showing cost, time, place of travel or entertainment, business purpose, and business relationship of guests.

Also, you must keep a log of your business use of items, such as a car, pager, computer, or server; or PDA, ipod or cell phone, etc., that you use partly for business and partly for personal purposes. For travel, your diary should show the date of departure and return, plus how many days of the total trip were spent on business. If you are an independent medical contractor, keep a diary of your daily work activities. This will reinforce the specific items and pull them together.

How Long to Retain Records?

By law, you have to keep tax records “as long as material” to the administration of the tax law. Since the statute of limitations runs for three years from the time you file your return or the due date of the return (whichever is later), and the IRS is free to audit your return during this time, you want to keep the records at least that long. After an assessment, the IRS has six years to begin collecting, so you are up to nine years. But you then have two years to claim a refund after payment, giving you a grand total of 11 years.

This may seem extreme, and not everyone keeps records that long. Many individuals keep records for six years—the amount of time the IRS has to audit if it suspects a gross error—an underreporting of 25% or more of the gross income shown on your return.

The 11-year time frame is the maximum time frame for assessment, collection, and refund claim. Business owners would be wise to use that period as a rule of thumb, even if individual taxpayers don’t.

Homeowners—

Keep any documents connected to home ownership that have a bearing on your taxes, if any, for the entire time you own your home. If you sell your home, keep the documents as long after the last tax filing as they have a bearing on your tax records. Remember the newer rules for homeowner tax exemption.

Withholding—

These records are subject to a special four-year retention rule. Most doctors and medical business owners keep them longer.

Fraud

In the case of fraud, there is no limit on the time the IRS has to charge you. But here, the burden of proof shifts to the IRS, and you get the presumption of innocence. So you need not feel you have to keep records forever to protect yourself against such an accusation. 

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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