Why do I have to pay estimated tax?
The general rule is that you must pay estimated tax for the current year if you had a tax liability for the prior year.  However, there will be no penalty for failure to pay estimated taxes to an individual whose tax liability for the year (after credit for withheld taxes) is less than $1,000.  If your tax liability is more than $1,000, you may generally avoid paying the penalty for failure to pay estimated tax by: (1) paying at least 90% of the tax shown on the current year’s return; (2) paying 100% of the tax shown on the prior year’s return (if the prior year was a 12-month period); or (3) paying installments on a current basis under an annualized income installment method. 

An individual with an Adjusted Gross Income in excess of $150,000 ($75,000 for a married individual filing separately) can avoid the estimated tax penalty by paying 110% of the amount of tax shown on the prior year’s tax return, provided the prior year was a full year. 

Are my children subject to tax?
Anyone claimed as a dependent must file his or her own tax return if he/she has either unearned income exceeding $950 for 2010 or has gross income exceeding the basic standard deduction.  For 2010 the basic standard deduction is the greater of $950 or the individual’s earned income plus $300, but no greater than $5,700. 

If your child’s investment income is more than $1,900, then the kiddie tax will apply.  The first $950 is tax free and the second $950 is taxed at your child’s tax rate.  Anything above that amount will be taxed at the parent’s marginal rate. 

A parent of a child who is under age 19 at the end of the tax year (or under age 24 if a full-time student) who has income only from interest, dividends, and capital gain distributions may elect to report the child’s income on the parent’s return and the child will not have to file his/her own return.  The parent may make this election only if: (1) the child’s income is less than $9,500 (for 2010); (2) the child made no estimated tax payments; (3) the child has no overpayment of tax to be applied to the return; (4) the child has no income tax withheld from income for the year; and (5) the child did not file a joint return for the tax year.  If a parent makes this election, the parent must file Form 1040 (or Form 1040NR) along with Form 8814, Parents’ Election To Report Child’s Interest and Dividents.  Note that a separate Form 8814 must be filed for each child whose income is reported on a parent’s return.

Can I claim my children as dependents if they are over 18?
If your child is under the age of 24 and a full-time student, or if he/she is totally and permanently disabled at any age, you can always claim him/her as a dependent.

In addition to those two circumstances, if your child qualifies as a Qualifying Relative, you can also claim a dependency exemption. In order for your child to be a Qualifying Relative, you must provide at least 50% of his/her support, your child cannot have gross taxable income that is greater than the exemption amount, and your child cannot also file a joint return with a spouse.

I received a notice from the IRS. What do I do?
Send us a copy ASAP! 

The IRS sends out notices for a number of different things, so it is important to read the notice carefully to determine why it was sent, what the IRS is requesting, and what you need to do.  It is important to note the date of the notice as well because many IRS requests are time sensitive and it is important not to miss a deadline. 

Because the IRS is such a large agency, responding to a notice or requesting information can often be a very time-consuming and difficult process.  You should contact your tax professional upon receipt of a notice from the IRS as they will be equipped to help you navigate through the IRS system. 

What is the current gift tax exclusion amount?
The current annual gift tax exclusion is $13,000 per donee ($26,000 per recipient from married couples).  This means that an individual can give up to $13,000 (and a married couple up to $26,000) to an unlimited number of donees without it being considered a taxable gift.  These amounts are neither taxed nor do they use up any of the donor’s lifetime gift tax applicable credit amount. 

The annual exclusion amount is allowed for gifts of “present interests” but not for gifts of future interests in property.  Present interests include any interests, whether vested or contingent, that are available for the donee’s immediate use, possession, or enjoyment.  A transfer of property to benefit a minor pursuant to the Unifrom Transfers to Minors Act (UTMA), the Uniform Gifts to Minors Act (UGMA), or the Gifts of Securities to Minors Act (GSMA) is considered to be a completed gift of the full fair market value of the property.

Remember that the annual exclusion is in the law principally as a rule of convenience - so that the IRS is not in the middle of birthday and holiday giving or other common and recurring family giving arrangements.  But the value of these items technically cannot be ignored - i.e. a gift of cash or Disney stock valued at $13,000 to a child will typically cause the limit to be exceeded due to the presence of other normal gifts during the year.

Also, certain payments for the benefit of another person are statutorily excluded for public policy reasons.  Payments made on someone's behalf for medical care or education (tuition only) are excluded.  To qualify the payments must be made directly to the medical care provider or educational institution (i.e. they cannot be reimbursements). 

Finally, gifts to one's spouse are entitled to a 100% marital deduction. 

If property is gifted (e.g. shares of Disney stock), the donor's tax basis carries over to the donee (recipient).  Thus, except in more advanced gifting strategies, it is better tax-wise to gift cash or high basis property so that the value received by the donee is not reduced by taxes.

When am I required to issue a 1099?
A Form 1099-MISC is an information return that is used to report payments made to recipients during the year to the IRS for the purpose of ensuring that the recipients actually reported the amounts received as income.  This form is filed by payors for each person to whom certain amounts were paid in the course of the payor’s trade or business.  A Form 1099-MISC must be issued if the payor pays at least $10 in gross royalty payments or broker payments in lieu of dividends or tax-exempt interest; or $600 for rents or services paid in the course of business.  Some of the items reported on this form are:

  1. payments for real estate, machine and pasture rentals;
  2. royalties paid to authors;
  3. prizes or awards not paid in exchange for services rendered;
  4. amounts withheld as backup withholding;
  5. payments by medical and health care insurers paid to physicians or health care providers under health, accident and sickness insurance programs;
  6. fees, commissions, awards, and golden parachute payments made to non-employees for services rendered (this includes payments to attorneys for legal services);
  7. sales of $5,000 or more of consumer goods to a buyer for the purpose of reselling the goods in any place that is not a permanent retail establishment;
  8. fishing boat proceeds;
  9. fish purchases of $600 or more paid in cash for resale;
  10. crop insurance proceeds of $600 or more; and
  11. any deferrals for the year under a nonqualified deferred compensation plan 

Under current law, 1099s need not be issued to corporations (like us) or where the services received were not in the course of one's business (e.g. it is not necessary to issue 1099s to doctors, dentists, plumbers, etc.).  However, it is always necessary to issue 1099s for legal services.

I have a nanny/housekeeper/gardener. What are my reporting/tax filing obligations with regard to domestic employees?
If you have a household employee, you may need to pay federal employment taxes (Social Security tax, Medicare tax, federal unemployment tax, and federal income tax withholding) by filing Schedule H, Household Employment Taxes, with your Form 1040. Your household employment taxes will be added to your federal income tax liability and must be paid by the April 15 deadline or with your estimated taxes. You are required to file a Schedule H if you paid any one household employee wages of $1,700 or more during the year, or if you paid total wages of $1,000 or more in any calendar quarter in the past two years to all your household employees. You may also have to pay state employment taxes; please contact us for information pertaining to each state.

When you pay your household employee, you must withhold the employee’s portion of these taxes from each paycheck, and must issue a Form W-2 to the employee by January 31 of the following year detailing the income and withholdings. A copy of Form W-2 must also be sent to the Social Security Administration. In order to issue the Form W-2s, you must get an employer identification number from the IRS by January 31.

In addition, you must complete USCIS Form I-9, Employment Eligibility Verification, for each employee upon hiring, and keep it for your own records. 

What is the home sale exclusion?
The sale of your principal residence is subject to a $250,000 ($500,000 for married couples filing jointly) exclusion from gross income for gain. To qualify for the exclusion, you must have owned and used the property as a principal residence for two years or more during the five-year period ending on the date of the sale or exchange. You can use the exclusion as often as available over your lifetime provided you meet the requirements, but the exclusion can only be used once every two years. Please contact us for further details. 

How does the energy credit work?
There are two credits available for individuals who make energy-efficient improvements to their homes. 

The Residential Energy Property Credit (Section 1121) provides individuals a credit of 30% of the cost of all qualifying improvements to their existing home, up to the maximum credit limit of $1,500. This credit expires on December 31, 2010, and is applicable to both your principal residence and second home. 

The Residential Energy Efficient Property Credit (Section 1122) provides individuals a nonrefundable credit of 30% of the cost of qualified residential alternative energy equipment on new and existing homes, such as solar hot water heaters, geothermal heat pumps and wind turbines. This credit is not subject to a maximum credit limit, except for residential fuel cell and microturbine systems which are subject to a credit limit of $500 per 0.5 kW of power capacity. This credit expires on December 31, 2016, and is applicable only to your principal residence. 

Am I subject to Washington B&O Tax?
Almost all businesses located or doing business in Washington are subject to the state B&O tax, including: corporations, limited liability companies (LLCs), partnerships, sole proprietors (including consultants receiving 1099s), and nonprofit organizations. 

Unlike many other states, Washington does not have an income tax. An income tax is based on business profits AFTER expenses. Washington’s B&O tax is calculated on GROSS income. There are no deductions from the B&O tax for labor, materials, taxes, or other costs of doing business. However, your business may qualify for certain exemptions, deductions, or credits permitted by law. 

You must register your business with the Washington State Department of Revenue if you have gross income of $12,000 or more per year, collect or pay any other taxes such as retail sales tax, or are required to obtain a specialized license.