Category Archives: Tax Planning

Goodbye Capital Gains Tax Breaks

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USA EconomyMomentum is building for a tax code overhaul, and lower taxes on stock transactions could be doomed.
By Joy Taylor, May 6, 2013

Tax breaks for capital gains and dividends are likely to end by 2015, as lawmakers look for ways to broaden the tax base, allowing income tax rates on individuals to be cut. There is precedent for this — the tax break for long-term capital gains was axed in 1986, the last time that lawmakers significantly reformed the tax code.

Tax overhaul won’t happen swiftly. Lawmakers won’t have time to complete tax reform until 2014, and when they do finish it, the effective date probably will be prospective, so changes aren’t likely to occur until 2015. There will be plenty of time to mull the impact on your investment portfolio and contemplate actions to minimize the tax wallop.

But discussions will intensify in the coming months. One reason: Senator Max Baucus (D-MT), who heads the Senate committee responsible for writing tax laws, has announced that he’ll leave the Senate when his term ends at the end of 2014. Look for him to push hard for tax reform before he leaves, making a revamped tax code his policymaking legacy.

In the end, we expect long-term capital gains and dividends to be taxed as ordinary income — a big change from the 20% maximum rate they now incur. If President Obama succeeds in winning a top income tax rate on individuals of more than 28%, however, it’s possible that the maximum rate on long-term capital gains and dividends will be limited to 28%.

Consider taking gains before 2015 to lock in the lower rate currently in place. But be careful not to let the tax tail wag the investment dog. Tax savings aren’t the only consideration when culling your portfolio; your moves should also make financial sense. Note that we expect taxwriters to keep the stepped-up basis rule for inherited assets, so 100% of pre-death appreciation on those assets will escape income tax when the heirs sell, regardless of the capital gains rate.

Take care in engaging in installment sales before then. The 1986 law provided that installments received after the capital gains rate rose weren’t protected, even though the sale occurred before the rate change. We expect that a similar rule will be passed this time, too.

Weigh the impact on succession plans for family firms. Corporate redemptions of shareholders’ stock will be hit. Family firms hoping to redeem stock of senior owners to shift control to the next generation will need to take that into account.

Keep in mind that the relative advantages and disadvantages of components in your portfolio may need reevaluating. Dividend paying stocks will lose their tax-favored status if dividends are taxed at ordinary income rates. And there will be no tax disadvantage for having growth stock in retirement plans. Without a capital gains preference, it won’t matter that appreciation on the stock will be taxed as ordinary income when distributed to the owner of the retirement plan or IRA.

And it’s worth noting one other tax reform proposal that affects investors: Stock sellers could lose the right to direct that the highest-basis stock be sold first. They may be forced to use the average basis of their shares to compute the gain or loss recognized on a sale, rather than use the specific identification method. The tax reform plan drafted in the House includes such a provision, and we think it has a good chance of making it into law.

Trim Down Your Tax Obligations in 2013 Without Having to Convince the IRS

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My Comments: From time to time, I get requests from various individuals who want to contribute an article for me to use as a blog post, giving them credit. This one is the result of such an effort. The writer has made several attempts to create an easy to read and understandable blog post. He deserves credit for his efforts, so, with some final editing, here is what he has to say.

The apparent motivation is to drive traffic to a web site, in this case one that promotes debt counseling and help in repairing one’s credit scores. I make no claims at all that these folks know what they are doing, or are legitimate in any way.

What I can say is that the suggestions Andy talks about below are not unreasonable, and might indeed have a positive impact on your tax liabilities going forward. But the devil is in the details, and how you go about it will have a lot to do with the outcome you are looking for.

By Andy Raybuck

Are you looking for ways to minimize your 2012 tax bills without having to convince the IRS? If you answered “yes”, you’re pretty much out of luck. But if you want to avoid being in the same position next year, you can still take steps to reduce your 2013 taxes. As the clock strikes midnight on 31st December this year, most opportunities to reduce your 2013 taxes will vanish like bubbles in champagne.

By the time your 1099s or W2 roll in, there’s not enough time to argue about the year you received your income, interest rates or the gains. While everyone is taking steps to reduce their debts and taxes in order to lead a debt free life, you can read through the concerns of this article in order to get some fresh ideas for minimizing your stress.

• Bump up your contribution to your 401(k): The money you sock away in your workplace 401(k) account reduces your taxable income and therefore your taxes will also be reduced. You’d be surprised to see how contributing 1% more to your 401(k) affects your monthly income and your budget. Assume you make $80,000 annually and you get paid weekly. If you contribute 5% of your salary to a 401(k), that puts you in the 25% tax bracket. While your pre-tax contribution is $77, this will reduce your pay by $58. You can just bump up your contribution to 6%, you can easily add $92 a week and pre-tax $15 more.
• Consider moving to municipal bonds: Apart from a retirement account, if you own a bond fund, you may consider shifting to municipal bonds. The interest you earn from the munis is free from federal income taxes. And if they’re issued by the same state where you reside, they’re even free of state taxes. Presently, a 10 year, high quality muni bond yields 1.7% as compared with a 10 year Treasury bond note that yields around 1.83%. However, it is possible to keep more after taxes by investing in the munis.
• Switch to dividends: Dividend-paying stocks will yield more than a Certificate of Deposit or a CD offered by the banks and they’re also taxed at a lower rate. The tax rate on the dividends is 15% for most people and 20% for most single filers who earn less than $400,000 of taxable income. In case of married couples, the limit is $450,000. The interest income from CDs will be taxed at ordinary income tax rates. Only use CDs if you’re not comfortable with the risk factor involved with stocks.
• Sell the losers: Did you purchase an Apple stock due to a moment of enthusiasm? If this is in your taxable account, you can sell off the stock. However, if you have enough faith on the future performance of the Apple stocks, you may even buy back the stock after 30 days.
• Leverage the tax credits to minimize taxes: A tax credit reduces the amount of tax that you have to pay. The Earned Income Tax Credit is a refundable credit for all those people who work hard but aren’t able to earn a huge amount of money. The Child and Dependent Care Credit is for the expenses you paid for the care of your qualifying children under 13. The Child Tax Credit may apply to you when you have a qualifying child under the age of 17. The American Opportunity Tax credit helps you offset certain costs that you have to pay for higher education.

No one likes to pay higher taxes. With the fiscal cliff hanging over the heads of Americans, it is most likely that consumers will be more worried about reducing their tax liabilities. Start reducing your taxes now by following the above mentioned tips so you can avoid forging birth certificates for your quadruplets next year.

The U.S. Tax System: How Did We Get Here? Pt. 1, the Early Years

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IRS-formsMy Thoughts on This: I was taught long ago that no one has a responsibility to pay more in taxes than is required. It’s up to you and I to figure out what is required. So we push the envelope and either through good fortune or because we really know what we are doing, we get it right. At least until a tax audit shows up and says you pushed too hard and got it wrong. But that doesn’t mean you stop pushing.

By Mike Patton | March 4, 2013

Income taxes, payroll taxes, property taxes, sales taxes, import taxes, and estate and gift taxes are just a few of the taxes that we, as Americans, are required to pay. Moreover, we are taxed at the federal level, the state level, the county or parish (in my state of Louisiana) level and even at the city level. Finally, we are taxed while we are alive and some unfortunate souls (although they’re really fortunate) are taxed from the grave. Yes, taxes are as much a way of life as baseball, hotdogs, apple pie and Chevrolet (I’m dating myself). How did we ever get to the point where our government is leveraging our future to the extent it is today? For perspective, I’d like to journey back to the beginning of our tax system and learn how our forefathers addressed this situation.

In the beginning was man and man had a need for governance. To facilitate this, we established a central governing authority to protect citizens from egregious acts from forces within or outside of our borders. Hence, government is a necessary institution which requires proper funding.

When America was founded, we spent little in the way of public purposes. In 1643, the colonists adopted what would be the forerunner to the income tax and called a “faculty tax.” It was assessed on people according to their “faculties” or their “property and ability to earn income.” During the American Revolution (1775-1783) most of the 13 states levied this tax.

Americans have always possessed an independent spirit. Following “oppressive” taxation imposed by England such as the 1765 Stamp Act (imposed specifically on “the British colonies and plantations in America” because of the massive debt incurred by England following the Seven Years war) American colonists began to cry “No taxation without representation.” Their collective emotions reached a boiling point in 1773 with the Boston Tea Party, which eventually led to the revolution.

After independence, another instance of taxpayer revolt began in 1791. At that time, whiskey cost less than 50 cents per gallon and because our government needed to pay down the national debt, levied a 30 cent per gallon tax, the Whiskey Rebellion resulted (which ended in 1794 when George Washington himself led an army into western Pennsylvania and the armed resisters melted away). These are just two examples of Americans rising up in protest of aggressive taxation.

The first national tax system did not emerge until well after the American Revolution. In fact, the Constitution of 1789 gave taxation powers to the federal government to “pay debts and provide for the common welfare of the United States.” Obviously, the federal government’s role is greatly expanded from its earlier days.

In my next post, we’ll look at the period from 1800 to the early twentieth century up to the advent of the modern tax system in 1913. History provides great perspective on the ebb and flow of the tax system. Moreover, if we fail to heed the lessons of history, we may well be destined to repeat its follies.

Legacy, Estate Planning as Important as Retirement

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will with clockMy Comments: I expected to be retired now. But I’m one of millions who find it better to keep working and use the daily mental challenge to stay healthy, and because the income is welcome.

But the topic here is not an easy one to resolve. I can attest to the difficulty of talking with folks about their mortality. Funerals are not generally fun events. But they are inevitable and to the extent you can make life better for those you leave behind, I think you have an obligation to at least make an attempt.

By Paula Aven Gladych

People always talk about their plans for retirement, and they spend a good portion of their lives saving money in retirement accounts so they can maintain their lifestyles in their later years. But planning for the future isn’t just about retirement accounts or what you want to do with all of your free time.

According to financial experts, people also need to plan for what comes after their retirement—end-of-life planning.

That means legacy and estate planning, life insurance, long-term care and burial preparations.

Many people don’t want to talk about their own mortality, so they avoid planning for it.

The single biggest gap in legacy and estate planning is education, said David Richmond, president of Richmond Brothers, a registered investment advisory firm in Michigan.

“Do parents talk to their kids as they age about their money and how it is going to come to them? Do we teach, as an American culture, how to give money away or how to manage money? It is not taught in high school or college. It is not taught anywhere,” he said.

Wealthier families have always taught these things because they have more money to pass down, but conversations about money should take place in all families, regardless of income.
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New Survey Validates That US Physicians are Ailing

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healthcare reformMy Comments: Some of you are aware of my efforts to bring a new idea about medical malpractice insurance to those physicians who own their own practice. Essentially, its a financial strategy that causes 50% of the premiums to return when there are few or no claims made in any given year.

Clearly, not all the complaints and problems described below have anything to do with financial issues. However, they are not far below the surface. The adoption of the idea I’m talking about has potentially huge implications for physicians in private practice and what they can expect financially from their efforts down the road. Any help you can provide in getting this message into the right hands will be greatly appreciated.

By James Doulgeris

In the largest survey of its type since one conducted by the Doctor Patient Medical Association a few months back, an even more extensive survey by the Physicians Foundation that generated 13,575 responses from practicing physicians is equally sobering.

The survey was conducted by the recruiting and consulting firm Merritt Hawkins in an e-mail containing 48 questions to 630,000 physicians in active care, 8,000 of which included comments by the respondents ranging from positive to defeated. I believe that the key statistics, quoted directly from the report below, clearly show that the U.S. healthcare system, which has become increasingly out of control year after year for decades, is in real danger of collapse, and that the Affordable Care Act is more the last straw than culprit.

KEY FINDINGS
Responses to the survey combined with some 8,000 written comments submitted by physicians reflect a high level of disillusionment among doctors regarding the medical practice environment and the current state of the healthcare system. How physicians will respond to ongoing changes now transforming healthcare delivery varies. Many physicians plan to continue practicing the way they are, but over half of physicians surveyed have reached a tipping point and plan to make changes to their practices. Many intend to take one or more steps likely to reduce patient access to their services, limiting physician availability at a time when doctors already are in short supply.

Key findings of the survey include:

Over three quarters of physicians — 77.4 percent — are somewhat pessimistic or very pessimistic about the future of the medical profession.

Over 84 percent of physicians agree that the medical profession is in decline.
The majority of physicians — 57.9 percent — would not recommend medicine as a career to their children or other young people.
Over one third of physicians would not choose medicine if they had their careers to do over.

Physicians are working 5.9 percent fewer hours than they did in 2008, resulting in a loss of 44,250 full-time-equivalents (FTEs) from the physician workforce.

Physicians are seeing 16.6 percent fewer patients per day than they did in 2008, a decline that could lead to tens of millions of fewer patients seen per year.

Physicians spend over 22 percent of their time on non-clinical paperwork, resulting in a loss of some 165,000 FTEs.
Over 60 percent of physicians would retire today if they had the means.

Physicians are not uniform in their opinions — younger physicians, female physicians, employed physicians and primary-care physicians are generally more positive about their profession than older physicians, male physicians, practice owners, and specialists.

Over 52 percent of physicians have limited the access Medicare patients have to their practices or are planning to do so.

Over 26 percent of physicians have closed their practices to Medicaid patients.

In the next one year to three years, over 50 percent of physicians plan to cut back on patients, work part-time, switch to concierge medicine, retire, or take other steps that would reduce patient access to their services.

Over 59 percent of physicians indicate passage of the Patient Protection and Affordable Care Act (i.e., “health reform”) has made them less positive about the future of healthcare in America.

Over 82 percent of physicians believe doctors have little ability to change the healthcare system.

Close to 92 percent of physicians are unsure where the health system will be or how they will fit into it three to five years from now.

Over 62 percent of physicians said Accountable Care Organizations (ACOs) are either unlikely to increase healthcare quality and decrease costs or that that any quality/cost gains will not be worth the effort.

Physicians are divided on the efficacy of medical homes, and many (37.9 percent) remain uncertain about their structure and purpose.

Over 47 percent have significant concerns that EMR poses a risk to patient privacy

Over 62 percent of physicians estimate they provide $25,000 or more each year in uncompensated care.

Editor’s Note: To read more about the Physicians Foundation report, see Dr. Richard Reece’s blog for an interview with Walker Ray, MD, chairman of the research committee of the Physicians Foundation.

http://www.physicianspractice.com/blog/content/article/1462168/2104882

10 Overlooked Tax Breaks

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With October 15 behind us and April 15 still comfortably far away, it’s a good time to start boning up on ways to save money once things start getting serious. With that in mind, Bankrate.com identified 10 great deductions that individual taxpayers should use – but often forget.

1. Charitable expenses
Sure, the donation is deductible, but so are expenses incurred while doing charitable work – including possibly cleaning your candy-striper’s outfit, or your mileage on your car for taking all those (insert life-saving materials here) to those (insert needy recipient here).

2. Moving expenses
Not only can you deduct many moving expenses when you relocate – you can even deduct your very first relocation – say, after college.

3. Job hunting costs
Costs associated with looking for a new job while in a current job are deductible, as long as the taxpayer itemizes – and the costs, along with other miscellaneous itemized expenses, exceed 2 percent of the taxpayer’s adjusted gross income.

4. Military reservists’ travel credits
Reservists and members of the National Guard who travel more than 100 miles in a day and stay overnight for training can deduct related expenses.

5. Child and other care credits
Child care costs for looking after the rugrats during the summer can be deductible, too – but only for day-camp, not sleep-away camp. Care expenses for adult dependents may also be deductible.

6. Mortgage refinancing points
If a taxpayer used the proceeds of a mortgage refinancing to improve their principal residence, they may be able to deduct the points paid on the load for the year of purchase.

7. Many medical costs
Various miscellaneous medical costs – like travel expenses to and from treatments – may help taxpayers reach the 7.5 percent of AGI threshold for claiming medical expenses.

8. Retirement savings
The Retirement Savings Contribution Credit aims to get moderate- and low-income taxpayers to save, and can be worth as much as $1,000 on contributions to an eligible retirement account.

9. Educational expenses
There’s tons here, including deductions for tuition and fees, the Lifetime Learning Credit, and the American Opportunity Tax Credit. If the taxpayer is getting any kind of education, they’re worth looking into.

10. Energy-efficient home improvements
While not quite as generous as before, there are still credits worth up to $500 for energy-efficient home improvements available for 2011 returns.

Studying a Paradox: When Higher Tax Rates HELPED the Economy

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My Comments: OK, if you can’t stand reading about economics, then skip this blog post.

On the other hand, if you have concerns about the economy and whether your vote in the upcoming election will have any influence on the amount of money you have to spend ten years from now, then you might want to read this article.

It comes courtesy of Nicholas Paleveda MBA J.D. LL.M who practices in Bellingham, WA

Higher marginal rates actually helping the economy is a counter-intuitive thought. Generally, it is the thinking of the hoi palloi that lower marginal tax rates lead to prosperity; however the historical data indicates otherwise. This study takes us from1951, where the highest marginal tax rates were 92 percent, until the present, where the highest marginal tax rates are 35 percent.

The study compares the returns of the S&P 500 and its relationship to the highest marginal tax rates during that time period. An abecedarian concept of taxation is to focus on the highest marginal tax rates. This study compares the highest marginal tax rates with the growth in the economy as measured by the S&P 500.

In reviewing the data, the optimal tax rates to keep the economy moving forward falls between 39.6 percent and 50 percent. The call for lower marginal rates or the benighted tea party movement appears only to hurt the people who are supporting the movement. The pledge not to raise taxes appears also as a pledge not to help the economy.

1951-1963
Tax rates 91 percent to 92 percent
Growth 11.8 percent +-

During this time period, the marginal tax rates were a staggering 91 percent to 92 percent. If high tax rates could only hurt the economy, this period cannot be explained, as the S&P 500 grew on an average of 11.92 percent (mean growth), 11.8 percent (median growth). The double-digit growth cannot be explained along with the higher marginal tax rates and especially what happened next.

1964-1970
Tax rates 70 percent to 77 percent
Growth 3.6 percent +-

The first paradox: Marginal tax rates fall and the economy slows down. During this time period, tax rates actually fell from between 91 percent and 92 percent to between 70 percent and 77 percent. At the same time, the economy grew at 3.6 percent (mean growth) or 7.7 percent (median growth). In any event, with lower marginal tax rates, the economy actually did not do as well as when tax rates were between 91 percent and 92 percent.

1971-1981
Tax rates 70 percent
Growth 4.35 percent

The second paradox: Tax rates continue to decrease and the economy still is sluggish. During this time period, marginal tax rates were 70 percent and the economy continued at an anemic pace of 4.35 percent (mean growth), 10.8 percent (median growth). The tax rates remained high, but the economy did not grow rapidly for a decade.
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Exploring Mitt Romney’s Taxes and Tax Plan

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My Comments: There’s really nothing I can add to this.

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

An examination of the two years of tax returns that the Republican presidential nominee Mitt Romney has made public sheds light on some fundamental concepts of taxation that illuminate his proposed tax cut. These include the meaning of “taxes” and “income.”

For most people, income is simple: it means wages or perhaps a pension or Social Security benefits. Income from capital – dividends, interest, rent and capital gains – seldom enters into the calculation. The vast bulk of such income is earned by the ultrawealthy, like Mr. Romney.

According to the Tax Policy Center, in 2011 those in the middle of income distribution got about 70 percent of their income from labor and only about 3 percent from capital. By contrast, those in the top 1 percent of income distribution got 30 percent of their income from labor and 35 percent from capital.

The disparity is even more pronounced when one looks at the distribution of aggregate capital income. The total came to $1.1 trillion last year. Of this, 86 percent was earned by those in the top 20 percent of households, ranked by income. But this figure is misleading, because within the top quintile, the vast bulk of capital income went only to those at the very top.

Those in the lower three-quarters of the top quintile – that is, those in the percentiles from 80 percent to 95 percent – received only 13 percent of aggregate capital income. Those in the top 1 percent of the income distribution received $634 billion, 57 percent of the total. And those in just the top 0.1 percent – the top 10 percent of the top 1 percent – received $425 billion of that, 38 percent of all capital income.

Among the reasons that this is important is that the tax code makes a sharp distinction between income from labor and income from capital. Wages are fully taxed at rates as high as 35 percent by the income tax, plus taxes for Social Security and Medicare. In contrast, realized capital gains and dividends on corporate stock are taxed at a maximum rate of 15 percent and do not bear any taxes for Social Security or Medicare.

This is the key reason that Mr. Romney paid a federal income tax rate of 13.9 percent in 2010 and 15.4 percent in 2011. By contrast, his running mate, Representative Paul D. Ryan of Wisconsin, paid a rate of 15.9 percent in 2010 and 20 percent in 2011, despite an income that was 10 percent of Mr. Romney’s in 2010 and 15 percent in 2011.

According to Mr. Romney’s 2011 return, he had no wage income at all; 100 percent came from capital. About 20 percent of Mr. Romney’s income came from interest, about 15 percent from dividends, 13 percent from rent and 51 percent from realized capital gains. We don’t know what his total capital gain was because unrealized gains are not taxable.

By contrast, 47 percent of Mr. Ryan’s income came from wages, 36 percent from rent, 10 percent from capital gains, 5 percent from dividends and 1 percent from interest.

Against the complaint that he pays taxes at a rate much lower than others with multimillion-dollar incomes, Mr. Romney points to that he makes large charitable contributions. As a Mormon, he is required to tithe and pay at least 10 percent of his income to the church. The Mormon Church is, of course, a tax-exempt institution.

Mormons define income for tithing purposes. An academic study found that while there was some variation in how they interpreted the term “income,” in general it consisted of cash receipts less savings. In Mr. Romney’s case, he appears to have defined income for tithing purposes as roughly meaning adjusted gross income from line 37 of his tax return. On an A.G.I. of $20.9 million, he gave $2.6 million to the church. He also made other charitable contributions for a total of $4 million in 2011.

Mr. Romney has said that his charitable contributions are akin to tax payments insofar as both finance social welfare. Of course, social welfare is only a small portion of federal spending that would get even smaller under Mr. Romney’s budget proposal.

Nor is it reasonable to assume that all of his charitable contributions financed private social welfare; much of the Mormon Church’s received contributions go into business investments, as Bloomberg Businessweek has reported.

The distribution of income is extremely relevant for Mr. Romney tax plan. He has said that he will close enough tax loopholes so that the wealthy will pay the same share of taxes they are paying now, even though he will cut their income tax rates by 20 percent. However, he has also said that the current low rates on dividends and capital gains, which expire at year’s end, will be made permanent.

Thus Mr. Romney would preserve exactly those provisions of the tax code most responsible for millionaires like himself paying tax rates considerably lower than those with a fraction of his income, like Mr. Ryan.

It is principally for this reason that the Tax Policy Center recently concluded that Mr. Romney’s numbers don’t add up. Either he will greatly increase the deficit or he will have to raise taxes on the middle class to maintain revenue neutrality. Even if every deduction, exclusion and credit for the wealthy was abolished, their taxes would still go down under Mr. Romney’s plan.

Democrats have said that the Romney tax plan would raise taxes on the middle class. While this is logically consistent with what Mr. Romney has said about his plan, I do not believe that is his intention or what will happen if he is elected president. Rather, I think he and his advisers simply made up a proposal that was everything to everybody without bothering to check for internal consistency.

For someone who has made his business acumen and expertise with finance a cornerstone of his presidential run, that Mr. Romney’s signature campaign proposal doesn’t add up may be the most telling fact voters need to know about him.

IRS Exams: What They Mean for Taxpayers

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My Comments: Right now is a relatively quiet time for those individuals and firms who make a living doing tax returns. Everyone I know, and I know many of them, have a lump in their throat when they think about January and the coming year. That’s when the rubber hits the road and most, if not all, are looking at 80 hour weeks at a minimum for about 4 months and stress up the wazoo.

And relatively few new people are stepping into the breach. Not because it’s too difficult, or there aren’t “custormers” waiting for help, but because it’s sometimes hard to reconcile the amount of time it takes to do it right and get paid appropriately. Before you decide to go on the internet and try and do it yourself, call me and I’ll give you the names of several professionals whom I trust and know will treat you right.

by Bob Jennings | Published May 30, 2012

The IRS recently changed its requirements for tax preparers, and now individuals wishing to make a living preparing income tax returns must register with the agency and pass testing to prove competency by the end of 2013.

While this seems like good news for taxpayers, the testing and competence levels vary greatly and the “grandfathering” rules for certain special groups can also cause concern for consumers. Here’s how to evaluate a professional and find a tax specialist to meet your needs.

Generally, there are four groups of individuals who can legally prepare taxes: attorneys, certified public accountants (CPAs), enrolled agents (EAs) and registered tax return preparers (RTRPs).

Attorneys who passed their state’s bar exam are allowed to prepare tax returns. At issue is that there is no nationwide requirement that they take continuing education on income tax issues. Most states do not even require that they take income tax courses in law school. Most attorneys involved in the income tax field are specialists dealing in tax court and audit issues and are usually the best choice for consumers in trouble with the IRS.

Certified Public Accountants (CPAs) with an active license may also prepare tax returns. They are required in almost all states to have received very intense accounting training, take at least one tax class in college and pass an extremely difficult exam. On a troubling note, very few states require CPAs to take continuing education in income tax fields, just accounting and ethics courses, so there is no guarantee that they are current in the tax law. Most CPAs preparing tax returns are extremely competent professionals who are accustomed to preparing complex tax returns, but tax law is always changing, so be sure to ask about their continuing education, particularly in the last couple of years.

IRS Enrolled Agents (EAs) specialize in income tax issues. Some have taken the difficult EA exam, but some have been grandfathered in by working for the IRS and aren’t required to take the exam. Here’s the thing: not taking the test doesn’t mean they are not competent, but I would not want open-heart surgery done on me by someone who works for a hospital but has never performed surgery.

All EAs are unique because they are the only group required to have income tax continuing education every year, which as a group, tends to make them the most currently knowledgeable professionals in the country. When considering hiring an EA, protect yourself by asking about their actual return-preparation experience.

Starting this year, Americans will be seeing a newly-licensed tax preparer: the Registered Tax Return Preparer or RTRP. This group is required to pass an entry-level competency exam by the end of 2013, maintain a minimum level of tax continuing education, and stay out of trouble with the IRS.

The National Society of Registered Tax Preparers (www.NSRTP.ORG) reports that it expects 350,000 or more RTRP’s by the end of 2013, and everyone else who works on returns will either have to be an RTRP, or work for the previous three groups. Because RTRPs are entry-level return preparers, in many cases the IRS has limited their legal ability to represent taxpayer beyond an initial audit stage.

As a professional who has taken and passed all three of the above non-law tax exams, I can advise consumers that this new testing requirement is long overdue, and consumers need to carefully ask potential preparers about their license and look for continuing education of at least 16 hours of tax classes every year.

Start your search for a reputable professional by scanning websites to check credentials and calling and ask about continuing education. Without a client release, the IRS client confidentiality rules prohibit the tax preparer from providing you with references, so you should ask business associates for referrals, and then check out the previous qualifications.

If Taxes Rise, Should You Form An LLC or Incorporate?

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My Comment: I was asked a similar question the other day, posed by a distant cousin in England. You have an idea for a business enterprise and among the questions you ask yourself is how it should be structured. This is sometimes an convenient excuse to avoid asking whether the idea has the necessary potential to be financially viable and whether or not you have the necessary skills and discipline to make it work. But after all that, it is a legitimate question. I run into it all the time as a volunteer for SCORE.

By Colleen Debaise

Question: Why, in this age of ever-increasing personal taxes, do business owners prefer to set up a limited liability company? With an LLC, profits are taxed at individual tax rates. Wouldn’t it be better to form a C corporation, where profits are taxed at the corporate rate?
– Don Sutherland, Naples, Fla.

Answer: No. In almost all cases, the LLC provides a distinct tax advantage over the C corporation – and that’s likely to remain the case, even if individual tax rates do go up.

Merl & Hanley accountant Michael Hanley tells WSJ Small Business Editor Colleen DeBaise the advantages and disadvantages of LLCs versus other types of companies.

Here’s why: When you set your company up as an LLC, profits from the business “pass through” to your personal income tax return, so you’re taxed at individual rates, the highest of which is 35% for 2009. When you set your company up as a C corporation, the business is technically a separate entity that pays taxes on its profits at the corporate rate, which starts at 15% for the first $50,000 of income, but can run as high as 39% for 2009. Then you’re taxed again – the infamous “double tax” trap – at your individual tax rate when you withdraw some of those profits as a dividend. For that reason, “there’s rarely a tax benefit with a C corporation,” says Michael T. Hanley, a managing partner with Merl & Hanley in Smithtown, N.Y.

In recent years, the LLC has become the entity of choice for most start-ups, largely because it allows pass-through tax treatment while shielding members from personal liability. The management structure of an LLC is also more flexible than that of a corporation, so owners can divvy up operational duties and split income as they see fit, says Alan C. Ederer, an attorney with Westerman Ball Ederer Miller & Sharfstein in Mineola, N.Y. However, the C corporation is often the best choice for business owners seeking venture capital, as its shares are easily transferrable to investors, he says.