Say you receive stock in a startup that is worth $10K, but you are prohibited from selling that stock for 5 years. That means you don’t have taxable income until those restrictions expire. So not paying tax for 5 years is a good thing, except during the next 5 years your company is expected to go public and that $10K worth of stock is going to be worth $250K in 5 years. By not paying tax on the ordinary income of $10K today you now have to pay tax on ordinary income of $250K, 5 years from now. Specifically subsection b of section 83, allows you to accelerate the recognition of income from receiving your stock. You get to say I want to report the $10K of ordinary income today and pay the tax today, then any future appreciation in the value of the stock becomes a capital gain rather than ordinary income. Capital gains are generally taxed at a lower rate than ordinary income which is why you might want to pay tax now rather than later. You are effectively paying ordinary income tax rates on a much smaller amount of income and in the future pay capital gains tax rates on the increase in value of your stock.

The actual section of the code reads:
(b) Election to include in gross income in year of transfer
(1) In general
Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of—
(A) the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over
(B) the amount (if any) paid for such property.
If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture.
(2) Election
An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary of the Treasury.

There is no form you just write (I suggest you print it out) on a piece of paper the following information:
Your name, address, and taxpayer identification number. (social security number usually)
A description of each property for which you are making the choice. (ie: options for 1000 shares of stock in XYZ, Inc.)
The date or dates on which the property was transferred and the tax year for which you are making the choice.
The nature of any restrictions on the property.
The fair market value at the time of transfer (ignoring restrictions except those that will never lapse) of each property for which you are making the choice. (this is an important number, because it and the next one will determine how much tax you pay up front. Your employer should be able to help with this number.)
Any amount that you paid for the property.
A statement that you have provided copies to the appropriate persons. (usually that is just your employer)

The statement must contain all of the information. You must sign the statement and indicate on it that you are making the choice under section 83(b) of the Internal Revenue Code. Mail the statement to the IRS at the same address you mail your tax return and to your employer. (It never hurts to use certified mail with return receipt) Keep a copy and attach it to your tax return for the year in which you make the election.

Some important things to note about an 83(b) election:

• There is a very narrow time window (30 days) in which to make the election.  There is no allowance for not making the election on time.
• The value of any discount from fair market value to what you actually paid for the stock, will be reported as wages on your W-2 (or possibly 1099 if you are an independent contractor) in the year you purchase or receive the stock.
• The election is basically irrevocable.  The dark side of an 83(b) election is if the expected future increase in value of your stock, does not happen for whatever reason, you still have paid tax on what could become a worthless asset and any future loss will be a capital loss which is limited to offsetting capital gains or reducing taxable income up to a maximum of $3,000 per year.

• The 2% reduction in employee FICA tax was extended through December 2012.  The employee portion of FICA tax is 4.2%.  The employer portion stays at 6.2%.  Medicare tax is still 1.45% for both.
• Remember that mid year last year the Federal Unemployment Tax (FUTA) rate dropped to 6% from 6.2%.  The 6% rate is still in effect for 2012.
• Michigan increased the level of earnings subject to unemployment tax (SUI).  The first $9,000 of earnings (up from $8,500) is now subject to unemployment tax.
• Rhode Island also increased their SUI wage base to $19,600 for employers whose tax rate is less than 9.79%.  If the employer SUI rate is greater than 9.79% the first $21,100 of wages is taxable.
• Arizona increased the Special Assessment Tax rate included in SUI from 0.4% to 0.5%.
• South Carolina decreased the maximum SUI surcharge from 0.5533% to 0.486%
• Wyoming also dropped their Employment Support Fund Factor rate from 0.18% TO 0.164%
• Finally Hawaii completely eliminated the Employment and Training assessment rate.

If you need help with payroll, check out our affordable online payroll service.

Past due financial obligations can affect your current federal tax refund. The Department of Treasury’s Financial Management Service, which issues IRS tax refunds, can use part or all of your federal tax refund to satisfy certain unpaid debts.

1. If you owe federal or state income taxes, your refund will be offset to pay those taxes.

2. If you had other debt such as child support or student loan debt that was submitted for offset, FMS will apply as much of your refund as is needed to pay off the debt and then issue any remaining refund to you.

You will receive a notice if an offset occurs. The notice will include the original refund amount, your offset amount, the agency receiving the payment and its contact information.  If you believe you do not owe the debt or you are disputing the amount taken from your refund, you should contact the agency shown on the notice, not the IRS.  If you filed a joint return and you’re not responsible for the debt, but you are entitled to a portion of the refund, you may request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation. Attach Form 8379 to your original Form 1040, Form 1040A, or Form 1040EZ or file it by itself after you are notified of an offset.   You can file Form 8379 electronically. If you file a paper tax return you can include the form with your return, write “INJURED SPOUSE” at the top left of the Form 1040, 1040A or 1040EZ. IRS will process your allocation request before an offset occurs.

If you are filing Form 8379 by itself, it must show both spouses’ Social Security numbers in the same order as they appeared on your income tax return. You, the “injured” spouse, must sign the form. Do not attach the previously filed Form 1040 to the Form 8379. Send Form 8379 to the IRS Service Center where you filed your original return.

The IRS will compute the injured spouse’s share of the joint return. Contact the IRS only if your original refund amount shown on the FMS offset notice differs from the refund amount shown on your tax return.

You can find out more about innocent spouse relief in the IRS Youtube video.

There is actually an IRS regulation more clearly defining what is a “Qualified nonpersonal use vehicle”, the list includes:

(A) Clearly marked police, fire, and public safety officer vehicles (Seems simple right, but there are actually several paragraphs in the regulation explaining what a clearly marked police, fire or public safety officer vechicle is)

(B) Ambulances used as such or hearses used as such.

(C) Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.

(D) Bucket trucks (cherry pickers).

(E) Cement mixers.

(F) Combines.

(G) Cranes and derricks.

(H) Delivery trucks with seating only for the driver, or only for the driver plus a folding jump seat.

(I) Dump trucks (including garbage trucks).

(J) Flatbed trucks.

(K) Forklifts.

(L) Passenger buses used as such with a capacity of at least 20 passengers.

(M) Qualified moving vans.

(N) Qualified specialized utility repair trucks.

(O) Refrigerated trucks.

(P) School buses.

(Q) Tractors and other special purpose farm vehicles.

(R) Unmarked vehicles used by law enforcement officers if the use is officially authorized.

(S) Such other vehicles as the Commissioner may designate. (this is the CYA in case we didn’t think of something option)

You can read the full text of new treasury regulation if you really want to or just take comfort in knowing that you no longer have to keep track of the mileage when you drive your garbage truck to the grocery store.

Here are the reporting thresholds.  If the total of your foreign financial assets exceeds these amounts, you should include a Form 8938 with your tax return.

Foreign Asset Reporting

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In addition to the amount you can deduct using the sales tax table, you can add on sales tax you pay on a vehicle (car, truck, motorcycle etc), an airplane or a boat.  You can also take an additional deduction for sales tax you pay when building a new home or major renovation or addition to your home.

The sales tax deduction on the home is one that can get tricky for folks in Texas.  Under Texas law sales tax is charged on the materials purchased for building or modifying a home, but not on the labor.  If you purchase the materials directly and pay the sales tax or have a contract with your builder that separates out the cost of materials, including sales tax, and the cost of labor, then you qualify for the additional sales tax deduction.  If; however, you pay your contractor a lump sum for the project, under Texas law the contractor is considered the consumer of the materials and the contractor pays and deducts the sales tax on the materials.

Obviously you are the one ultimately paying the sales tax, because the contractor has figured that into what is bid for the project. But you may not be the one getting a tax deduction for sales tax.  If you are considering building or renovating your home, you might consider reviewing how the contract is written to save yourself some tax dollars and make that new home a little more affordable.

Remember in Texas there are two ways to qualify for the additional sales tax deduction on home construction or renovation:

• Purchase the materials directly or
• Negotiate a contract the separates the cost of materials including sales tax from the cost of labor on your job

The original question was asking how to teach your children about finances.  I believe the best lessons in life are learned by living it, so here are my thoughts.

Young children 2-5

Periodically give a 2-5 year old a dollar to spend when you are at the store together.  Let them pick a prize for themselves and allow the option to not spend it and save the money if they wish.  I guarantee you will have a teaching moment when your child want’s something that cost more than a dollar.  Simply say, well save your dollar this trip and next time we are here maybe I can give you another dollar (or two or three whatever it takes) to buy that.  Deferred gratification is one of the greatest skills you need to learn for financial success.

Kindergarten and Grade School

Give children an allowance beginning in kindergarten. Start at $1 per week in kindergarten and increase it $1 each year until they reach 6th grade.  Don’t tie it to chores, just give them an allowance and create opportunities for them to plan what they want to spend their money on and DON’T, ABSOLUTELY DO NOT bail them out when they squander all their money or don’t have enough to pay the sales tax.  On the flip side, don’t berate them over squandering the money either.  Learn to say things like “Wow that sucks, I am really sorry you don’t have the money to buy that, so how about the weather?”  The bottom line is that them not having money is not your problem, it’s their problem.  They will definitely want to make it your problem, but it’s not.  You may have to bite your tongue, because our natural instinct is to point out to our kids where they screw up, but you have to truly not care about their money problems.  The natural consequences in this system will take care of the teaching and you don’t have to be the bad guy.

I mentioned not tying allowances to chores and here is why. Doing chores around the house is part of being in a family and you don’t get paid for that.  At least I have never been paid to do the laundry or clean the dishes at my house, maybe things are different at your house.  It is however, acceptable to give children the opportunity to earn additional money by doing things above and beyond the norm.  Establish the value of the job and what the standards are before the work starts.  No children are not small adults so have reasonable expectations, but do have expectations.

Pre-teen/Teen Middle School and High School

By sixth grade, I like to change the allowance scheme and give them lunch money for school and then allow the option of fixing themselves a lunch to take (you have to provide the items to fix their own lunch, but don’t actually make the sandwich) The kid chooses to keep the money for other things or spend the money on lunch, just be sure you don’t fix the lunch or bail them out when they run out of money.  Lunch money works well, because it is actually a pretty good amount in a typical school, but it is money you were going to spend anyway, so it rarely will break the family budget.  The incremental cost of buying a loaf of bread and lunch meat is usually negligible and allows the opportunity for your pre-teen/teen to accompany and assist you in grocery purchasing.  That is if they want input into the type of lunch items you buy.

The key to your child learning finances is it has to be their responsibility and if they blow all their lunch money on Monday, that’s the kid’s problem you have to let them deal with it. Nobody is going to starve if they miss one lunch or have to fix themselves PBJ’s for the remainder of the week.

Probably the hardest part is to not judge and allow your child to fail with his or her finances.  Their natural failures are actually the best teachers; whereas,  constant financial success rarely teaches a child anything.  Except maybe to expect someone to bail them out when they have a problem.  Remember your child’s financial failures at 5 will help insure they don’t make those same mistakes at 35.

To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by either the parent or the student, but not both. If the student was claimed as a dependent, the student cannot file for the credit.

For each student, you may claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter’s tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.

However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your spouse’s graduate school tuition.

Here are some key facts the IRS wants you to know about these valuable education credits:

1. The American Opportunity Credit

The credit can be up to $2,500 per eligible student.
It is available for the first four years of postsecondary education.
Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
The student must be pursuing an undergraduate degree or other recognized educational credential.
The student must be enrolled at least half time for at least one academic period.
Qualified expenses include tuition and fees, coursed related books supplies and equipment.
The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $80,000 or $160,000 for married couples filing a joint return.
2. Lifetime Learning Credit

The credit can be up to $2,000 per eligible student.
It is available for all years of postsecondary education and for courses to acquire or improve job skills.
The maximum credited is limited to the amount of tax you must pay on your return.
The student does not need to be pursuing a degree or other recognized education credential.
Qualified expenses include tuition and fees, course related books, supplies and equipment.
The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $60,000 or $120,000 for married couples filing a joint return.
If you don’t qualify for these education credits, you may qualify for the tuition and fees deduction, which can reduce the amount of your income subject to tax by up to $4,000. However, you cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

Here are eight important points about the new Form 8949 and IRS Schedule D, Capital Gains and Losses:

1. Short-term capital gains or losses (assets held for one year or less) are now reported on Part I of Form 8949.

2. Long-term capital gains or losses (assets held for more than one year) are now reported on Part II of Form 8949.

3. Fill out Form 8949 before you fill out line 1, 2, 3, 8, 9 or 10 of Schedule D.

4. Most property you own and use for personal purposes, pleasure or investment is a capital asset. Use Form 8949 to report the sale or exchange of a capital asset you are not reporting on another form or schedule (such as Form 6252 or 8824).

5. At the top of each Form 8949 you file, you’ll need to check box A, B or C, based on what is indicated in box 3 of the Form 1099-B or substitute statement.

• Check box A if your broker reported the transaction to you and the basis of the securities sold also was reported to the IRS
• Check box B if the transaction was reported to you but box 3 of the Form 1099-B is blank or your statement says the basis was not reported to the IRS.
• Check box C for all other transactions.

6. If you have a lot of transactions, use as many Forms 8949 as necessary to report all of them, but make sure that each Form 8949 includes only the type of transactions described in the text for the box you checked (A, B or C).

7. The reporting of certain transactions has changed. If you have to adjust your gain or loss, you may have to enter a code in column (b) and an adjustment in column (g). For details, see the 2011 Instructions for Schedule D (and Form 8949).

8. For 2011 transactions, Schedule D-1 is no longer in use. Form 8949 replaces it.