Timothy W. Tuttle &
Edition 12 Please
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Major Events This Month:
Nov 28 - Dec 6 - Hanukkah
December 25 - Christmas Day
December 26 - Kwanzaa begins
January 18 - 4th Quarter Estimated Payments Due
Take final year-end actions
- Deductible gifts
- Dividend income
To help celebrate this holiday season and
momentarily forget about potential supply shortage frustrations you may
encounter while shopping, this month’s newsletter features a fun
quiz about toy crazes from the past. This fun trip down memory lane is sure to
be a crowd pleaser!
Also read about recent tax court cases that have great
tax messages for all of us, five great money tips, and ideas to help your
business prepare for surprise expenses.
Please call if you would like to discuss how this
information could impact your situation. If you know someone who could benefit
from this newsletter, feel free to send it to them.
Is In Session - Notable Tax Court Cases
Despite the COVID-19 pandemic, political unrest and
severe weather events, the Tax Court has continued to churn out decisions
affecting individual and business taxpayers. Here’s a brief sampling of several
cases that may be of particular interest.
Up Aces.(Coleman, TC Memo 146, 10/22/20)
You can generally deduct gambling losses up to the amount of your winnings
from gambling activities if you can provide proper documentation. Now the
Tax Court has allowed one taxpayer to estimate his expenses absent proper
Facts: A compulsive gambler was able to show that he likely spent
the money from a $150,000 personal injury settlement in local casinos. The
gambler, however, didn’t have the usual records to substantiate his
claims. The Court allowed an estimated deduction because it was clear he
had incurred significant expenses. The gambler was able to net his
$350,000 in gambling winnings with $350,000 in estimated gambling losses.
Tax Tip: Save documentation for all your tax deductions, including
gambling winnings and losses. Don't rely on a tax court ruling!
(Not) Sweet Home.(Soboyede, TC Summ. Op. 2021-3,
1/26/21) Your tax home for deducting travel
expenses isn’t necessarily the place where you live. It’s the general area
of your primary workplace.
Facts: The taxpayer was an attorney with separate law practices in
Minnesota and Washington, D.C. He deducted his hotel expenses and other
travel costs in the D.C. area. But his records showed he actually spent
more than 50% of his work time in or near the D.C. location. The Tax Court
concluded that the attorney’s tax home is actually in D.C. As a result, he
couldn’t deduct his hotel and other expenses from the D.C. area.
Tax Tip: You can deduct travel expenses only away from your tax home.
If you work in multiple locations, be sure you know which location the IRS
considers to be your tax home.
Off The Race Track.(Berry, TC Memo 2021-42, 4/7/21)
A business can deduct advertising and marketing expenses that are related
to its business activities. No write-off is allowed, however, for personal
Facts: A father and son who owned a construction company were race
car enthusiasts. They deducted expenses for the son’s racing activities
that were incurred as an advertising and marketing expense of the
construction company. The Tax Court disallowed the deduction, ruling the
expenses were a hobby expenditure, not an ordinary and necessary business
expense that can be deducted for tax purposes.
Tax Tip: Understand what is considered an ordinary and necessary
business expense by the IRS and know whether your activity is deemed to be
either a hobby or a for-profit business enterprise.
Slight Understatement.(Pragrias, TC Memo
2021-82, 6/30/21) The IRS normally has three years
from the due date of a tax return to conduct an audit of that return. This
three-year period is extended to six years, however, if the tax return
omits more than 25% of taxable income.
Facts: The taxpayer received $4.9 million from a complex investment
but reported only about $1.5 million. The IRS audited the return after
three years. Despite the taxpayer’s contention that he didn’t omit taxable
income—he said he merely understated it—the Tax Court ruled that the
longer six-year limit applies. And as a general rule, there is no statute
of limitations for the IRS when fraud is involved.
Tax Tip: Understand the applicable statute of limitations with your tax
Please call if you have any questions about these tax
court cases or any other circumstances that you think apply to your tax
Quiz: These Hot Toys Created Shortages
How well do you know the holiday shortages of yesterday?
With all the talk around ports being clogged and
transportation backups causing product shortages, why not take a look back at
famous holiday shortages caused by the demand for the toy EVERYONE just had to
have! So grab your family and friends, put away the cell phones, take out a
piece of paper, and see who knows more about these true, historic shortages.
1983, this toy came with its own certificate of adoption, but only if you
could find one.
hand-held gadget created a bond that if broken could be fatal. At its peak
they were selling 15 of them every minute!
2014, this supplier limited purchases of this toy to two dozen per person,
but it sold out months before the holidays, with some selling on eBay for
as much as $1,000. Fortunately, the company making the toy was able to
solve the supply problem in time for the holidays. Can you name it?
three years in a row, from 2005 thru 2007, game consoles were all the
rage. Give yourself a point if you can name all three.
and popular, this toy was as scarce as ice in a campfire during 1996. But
every small child just had to have one.
hand-held puzzle was all the rage in 1981. Can you name it?
1998 these small creatures could be trained to speak English…that is if
you could get one.
a TV program inspires scarcities in the toys it creates. This colorful
group was tough to find in 1993. Never fear, the supplier geared up for
the next season only be out of stock once again in 1994. What is the name
of this group of toys?
little furballs were cute, cuddly and hard as ever to find in 2009. This
$9 toy often fetched up to $60 each. Can you name them?
last, but not least, this extremely popular toy in the 1950s may have
started the holiday toy craze…mainly because it was advertised on
television. But the toy required a food product from your pantry to make
it come to life. What was it?
Cabbage Patch Kids, 2. Tamagotchi, 3. Elsa doll from Disney’s Frozen movie, 4.
Xbox 360, PlayStation 3, and Nintendo Wii, 5. Tickle Me Elmo, 6. Rubik’s Cube,
7. Furby, 8. Mighty Power Rangers, 9. ZhuZhu Pets, and 10. Mr. Potato Head
So how did you do?
0 – 2 right…No
worries. Shortages don’t seem to bother you.
3 – 5 correct…You
probably have asked for a couple of these.
6 – 8 correct…You
are a cultural icon! Pat yourself on the back.
9 – 10 correct…You
are a monster shopper.
Great Money Tips
Creating a sound financial foundation for you and your
family is anything but easy. With low interest rates as an incentive to borrow
more and even lower interest rates on savings accounts is it any wonder that
it's tough to retain the discipline to save? Here are five thoughts that may
yourself first. Treat saving money with the same care
you pay your bills. Take a percentage of everything you earn and save it.
Using this technique can help build an emergency fund and keep you from
living paycheck to paycheck.
and use the Rule of 72. You can roughly
calculate the number of years compound interest will take to double your
money using the Rule of 72. Do this by dividing 72 by your rate of return
to estimate how long it takes to double your money. For example, 10%
interest will double an investment in 7.2 years; investments with an 8%
return will double in nine years. Use this concept to understand the power
of saving and investment.
savings versus debt for purchases. Unpaid debt is like
compound interest but in reverse. For instance, using a 12% interest
credit card to pay $1,500 for home appliances costs over $2,000 if paid
back over 5 years. The result is that you have to work harder and earn
more to pay for the items you purchase. A better idea may be to save and
then buy your dream item.
amortization. When a bank loans you money, it gives
you a specific interest rate and a set number of years to pay it back.
Each payment you make contains interest as well as a reduction of the
amount owed, called principal. Most of the interest payments are
front-loaded, while the last few payments are virtually all principal.
Making additional principal payments at the beginning of the loan’s term
will decrease the amount of interest you pay to the bank and help you pay
off the loan more quickly.
are complex and require help. Tax laws are
complicated. They are made even more complex when the rules change, often
late in the year. Even worse, the IRS is not in the job of telling you
when you forget to take a deduction. The best way to stay out of the IRS
spotlight AND minimize your taxes is to ask for help.
Bills: Prepare Your Business for the Unexpected
Getting a bill for an unexpected expense can put a
significant dent in your business’s cash flow. Here are some tips your business
can use to deal with a surprise bill.
to a reconciliation schedule. The best advice is to
be prepared for the unexpected. Do this by knowing how much cash you have
in your bank account at any given time. This is done by sticking to a
consistent bank reconciliation schedule. Conventional wisdom suggests
reconciling your bank account with bills paid and revenue received once a
month. But if your business doesn’t have that many transactions, you could
reconcile once every two or three months. No matter what time frame works
for you, be consistent with your review!
a 12-month rolling forecast. This exercise projects
cash out twelve months. Then each new month you drop the prior month and
add another month one year out. This type of a forecast will reflect the
ebbs and flows of cash throughout the year and identify times that you'll
need more cash so when a surprise bill shows up, you know exactly how it
will impact your ability to pay it.
an emergency fund. Getting surprised with an unexpected
business expense isn’t a matter of if it will happen, but when. Consider
setting money aside each month into an emergency fund to be used only in
case of a significant expense. A longer term goal could be to save enough
money to cover 3 to 6 months of operating expenses.
with a business advisor. Even small businesses
sometime need help keeping their cash flow in line and avoiding unexpected
expenses. Please call if you have any questions about organizing your
business’s cash flow and preparing for surprise expenses.
Payroll Taxes Easy in 2022
Handling employment taxes can be complicated, especially
when you’re required to file important tax documents throughout the year.
Here’s a quick recap of the most vital payroll tax forms and what you can do to
make your payroll life easier heading into 2022.
Important Payroll Tax Forms
941 — Employer's quarterly federal tax return.
This form is used to report income tax withheld from employees' pay and
both the employer's and employees' share of Social Security and Medicare
taxes. Employers generally must deposit Form 941 payroll taxes on either a
monthly or semiweekly deposit schedule.
940 — Employer's annual federal unemployment tax return (FUTA).
This return is due annually at the end of January. However, FUTA taxes
must generally be deposited once a quarter if the accumulated tax exceeds
W-2 — Wage and tax statement. Employers are required
to send this document to each employee and the IRS at the end of the year.
It reports employee annual wages and taxes withheld from paychecks.
Make payroll easier
employees to review withholdings. January is a great
time to remind your employees to check their paycheck’s tax withholding
amounts. Various life events in the preceding 12 months can potentially
lead to one of your employees owing a different amount of taxes in 2022
than they owed in 2021. And no matter how hard you try, employees will ask
for your help. So get ahead of the curve with this simple review reminder.
a payroll forecast. Be prepared for how much you’ll
spend on salaries and wages in 2022 by creating a payroll expense and
benefit forecast. In addition to base salaries and wages, include the
following in total salary and wage expenses: Your share of an employee’s
Social Security and Medicare taxes; health insurance premiums paid on
behalf of employees; and any other benefits you provide to employees.
for help. Payroll compliance involves many moving
parts at the local, state and federal levels. Please call if you have any
questions about your business’s payroll tax compliance, and how to
properly account for payroll expenses on your financial statements.
THE FACTS: Borrowed Money Must Be Paid Back
In the back of every Form 1040 instruction booklet
there’s a section that shows where our federal government gets its money and
where it is spent. As taxpayers, it makes sense to know this information. Here
is the data for the government's fiscal year ending September 30, 2019, as
reported by the IRS in the 2020 instruction booklet for Form 1040. Please note
that this spending is prior to COVID-19 relief bills.
Personal Income Taxes
Social Security, Medicare, Unemployment
Borrowing to Cover Deficit
Excise, Customs, Estate, Gift and Misc
Corporate Income Taxes
Social Security, Medicare, & other
retirement. These programs provide income support for
the retired and disabled and medical care for the elderly.
National defense, veterans, and foreign
affairs. About 15% of outlays were to equip, modernize, and pay
our armed forces and to fund national defense activities; about 4% were for
veterans benefits and services; and about 1% were for international
About 15% of total outlays were for Medicaid, SNAP (formerly food stamps), TANF,
SSI; and 6% for health research and public health programs unemployment
compensation, assisted housing, and social services.
Net interest on the national debt (at
historically low interest rates).
Physical, human, and community development.
These outlays were for agriculture and environment; transportation; aid for
education and college assistance; job training; deposit insurance, commerce
and housing credit; and space, energy, and general science programs.
Law enforcement and general government.
SOURCE: IRS publication i1040gi, P.110, 2020
What You Need To Know
of $1 trillion are not sustainable. No matter where you
fall on the political spectrum, annual deficits of $1 trillion cannot be
sustained. And remember, this information is detailing a pre-pandemic
deficit. It may be several more years before the annual deficit gets back
down to this level, if at all.
borrowing hurts all taxpayers. In 1990, $50,000 worth
of Certificates of Deposits (CDs) earned a cool 8% interest, or $4,164,
each year. Today, that same $50,000 earns just 0.6%, or $301. What
happened to the other $3,863? Your interest income is now helping to cover
money borrowed by the government in the form of lower interest rates. Look
at 2019...almost ¼ of the money spent by the federal government was
interest expense risk. Look at the percentage of money
spent on interest expense in 2019. It’s 8% with interest rates hovering
around zero. So what happens when rates actually start to go up? As a
percentage of overall expenditures, interest expense could double to
16%...and potentially go even higher than that.
a difference. Whether we should spend more or less is
not the issue. It is that spending more than you bring in will cause big
problems…eventually. Money doesn’t just magically appear on printing
presses. That money has to come from someplace and that someplace is from
everyone. So make your voice heard…it’s your money!
As always, should you have any questions or concerns
regarding your tax situation please feel free to call.
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Timothy W. Tuttle & Associates