Tax Quiz

Federal Income Tax QuizHow well do you know tax facts?

As April is tax month, included here is a short quiz to see how well you know your taxes. Since everyone tends to think they have it worse than their neighbors, this year’s quiz revolves around state imposed taxes. Enjoy!

Check Can you name the seven states that impose no individual income taxes?
Answer The seven states with no individual income taxes are: Alaska, Florida, Texas, Wyoming, South Dakota, Washington, and Nevada.
Check If you live in this state, your state government actually sends you a check each year. Can you name the state and the amount of the check you would receive for 2013?
Answer The state that provides a check to its residents each year is Alaska. Qualified residents in 2013 received $900 as an Alaska Permanent Fund dividend. The amount of the check depends on the income received in the fund. In 2008, residents received a record $2,069. The fund was originally established in 1976 as a means to save 25% of the oil revenue from the Trans-Alaska Pipeline System. The idea was to have funds for future generations when the resource would no longer be available.
Check Seven states have no individual income taxes. Can you now name the seven states with the highest marginal state individual income tax rate in 2013?
Answer Here they are in order of highest to lowest:
#1 California (13.3%), #2 Hawaii (11.0%), #3 Oregon (9.9%),
#4 Minnesota (9.85%), #5 Iowa (8.98%), #6 New Jersey (8.97%), #7 Vermont (8.95%)
Check State tax burdens include a combination of many types of tax including income taxes, corporate taxes, property taxes, sales tax, excise taxes and other taxes. Per the nonpartisan group, Tax Foundation, what seven states tax their citizens the most as a percent of their state sourced income?
Answer Here they are ranked from the highest level; #1 New York: 12.6%, #2 New Jersey: 12.3%, #3 Connecticut: 11.9%, #4 California: 11.4%, #5 Wisconsin: 11.0%, #6 Minnesota: 10.7%, and #7 Maryland: 10.6%.Source: Please see their reports for more information and their methodology for their findings.
Check Can you name the state that recently became the first state in the U.S. to tax gifts?
Answer Minnesota. There is a long-standing gift giving tax on the federal level if an individual gives more than $14,000 to any one person ($28,000 for a married couple) in a single year. But until 2013, no state imposed this tax. Minnesota’s law requires gifts made within three years of death be considered part of your estate and subject to potential estate taxes. Thanks Minnesota. Will others follow suit?

Don’t Make this Mistake

Caution with car donations

Car donationsAs the end of the year approaches many taxpayers are looking to reduce their tax bite by making charitable contributions. One of the biggest contributions a taxpayer can make is to donate a used automobile. But if not careful, the value of a donated vehicle could be a lot lower than you think.

The rule

When you donate a vehicle, the value of your donation is either the fair market value of your vehicle when you donate it OR the value received by the charitable organization for your donation. Unfortunately, you do not get to choose the value of the donated vehicle. It all depends:

  • If the organization either uses the vehicle or is in the business of using your vehicle to train others you can deduct the fair market value of the vehicle.
  • If the charitable group simply resells your donated vehicle, your donation is limited to what the organization receives for your vehicle and NOT the usually much higher fair market value of the item.

What you should do

Budget icon Select the organization wisely. Make sure you select an organization that will either use the vehicle themselves or will use it to train others. Qualified organizations include groups that help single mothers obtain transportation to and from work or use the vehicles to deliver meals to seniors. Other organizations teach auto repair and body shop work to the unemployed. The cars then are given to other non-profits or needy folks. From the IRS perspective, a qualifying charitable use either;

  • makes significant intervening use of the vehicle or,
  • makes significant improvement to the vehicle that increases its value or,
  • donates the vehicle (or sells it at a below market rate) to a needy person that helps further the cause of the organization.
Budget icon Research the fair market value. Prior to donating your vehicle go to a reputable source and estimate the value of your vehicle. Online resources like and (Kelley Blue Book) are two reliable sites to do this.
Budget icon Obtain the proper tax form. When donating your vehicle make sure the organization gives you a proper Form 1098-C at the time you provide your vehicle. Double check the value assigned to your donation form to ensure it meets or exceeds the estimated fair market value of your donation.
Budget icon Sell the vehicle and donate the cash. If you cannot find a charitable organization that will allow you to maximize your fair market value deduction, consider selling the vehicle and then donating the proceeds. There are problems with this approach, however. First, take care that you do not create an unplanned taxable capital gain with the transaction. Second, take into account any sales taxes that go with the transaction as this may conceivably reduce the amount you receive for your vehicle.

Why’s Everybody Picking on Me?

States now harassing small out-of-state businesses for use tax collection

Use Tax Many revenue starved states are now using a new strategy of harassing small out-of-state businesses for tax collection. Here is what you need to know.

Sales/use tax obligation

Whenever you purchase an item that has a sales/use tax obligation attached to it, the purchaser is required to pay the tax. To enable the collection of this tax, states have passed this collection obligation to the retailer. The seller must then collect the sales tax on behalf of their customer and send it in to their state revenue department. When your purchase is made from an out-of-state business, if that business does not have a physical presence in your state (called nexus), the purchaser (you) is required to send the correct tax to your state by complying with the state’s use tax laws.

What is happening now

As no surprise to anyone, widespread self-reporting of use tax is not being done. To combat this challenge there is pending Federal legislation called the Marketplace Fairness Act that would create requirements for the collection of these internet and interstate sales. No one is sure this bill will see the light of day. In the meantime, many states are taking matters into their own hands by sending notices to out-of-state businesses. States are telling these businesses they must fill out forms to show they adhere to their state tax laws. These forms are often complicated and the unwary business owner could inadvertently create a tax liability if they are unsure how to respond. Here are some things to know:

Action 1 Understand nexus rules. In order to have the responsibility to collect sales tax for a state that is not your own, you must have a physical presence in that state. These nexus laws are there to protect small businesses from the complex nature of state and local tax laws that vary dramatically from place to place. If you do not have a physical presence in a state you generally do not need to figure out and collect their taxes for them.
Action 1 Common carrier is key. If you ship product into a state, you still do not have nexus if you use a common carrier like USPS, Fed Ex or UPS. If you use your own trucks you could be creating a sales/use tax collection obligation despite the fact that you do not have a physical presence in a particular state.
Action 1 Careful about trade shows. If you attend trade shows in a state, you could be creating nexus. This is especially true if you sell product at your booth while at the trade show. Your safest bet is to display only and not sell your product if you wish to avoid the need to collect sales and use tax.
Action 1 Certain states are active harassers. States like California and Michigan are sending out complicated forms and demanding small businesses fill them out or they provide thinly veiled threats of penalties for non-reporting. These states are “reminding” you of their nexus laws, that may or may not comply with the nexus laws established through Supreme Court tax cases.

Unfortunately, small out-of-state businesses are readily identified during state sales tax audits of other in-state businesses. State auditors follow the invoice trails and send out their notices. The paperwork burden this is putting on out-of-state small businesses that already follow sales tax laws can become overwhelming. If you receive any of these notices from out-of-state revenue departments, please call for help.

In the News:

Severance Pay is Subject to Employment Taxes

In a recent Supreme Court decision, pay received as severance is subject to Social Security and Medicare tax. The case involved an employer who went out of business but paid severance checks to employees based on their seniority and pay. The company’s position was that this pay was not wages.

In the unanimous decision, the Supreme Court ruled that the severance payments were deemed wages and the employment taxes were owed. The impact of this ruling is far reaching. It is estimated that there are pending claims for refunds of over $1 billion from similar tax cases.

What you need to know

While you may never find yourself in this situation, should you receive a severance check please pay special attention to how the payment is treated. If you receive a Form 1099, or receive a W-2 without Social Security and Medicare withheld you could have a problem. Should this happen to you, immediately ask your former employer why they believe Social Security and Medicare payments are not required. Seek advice as soon as possible. If you delay you might be required to pay the employer’s portion of this tax as well as your own.

As always, should you have any questions or concerns regarding your situation please feel free to call.