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Monthly Newsletter

Stay current with recent tax changes, news,

Monthly Update:

Federal Income Tax Withholding Adjustment & Tax Calendar

Do you need to adjust your federal income tax withholding amount?

With over half the year already gone, now is a good time to check to see if you are on track to have about the right amount of federal income tax withheld from your paychecks for 2014. The problem with not having the correct amount of taxes withheld for the year is that:

  • If your taxes are significantly underwithheld for the year, you risk being hit with a nondeductible IRS interest rate penalty.
  • If your taxes are significantly overwithheld for the year, you are basically making an interest-free loan to the government when you could be putting that money to work for you.

Neither situation is good. The simplest way to correct your withholding is by turning in a new Form W-4 ("Employee's Withholding Allowance Certificate") to your employer. Taking this action now will adjust the amount of federal income tax that is withheld from your paychecks for the rest of 2014.

Specifically, you can adjust your withholding by increasing or decreasing the number of allowances claimed on your Form W-4. The more allowances claimed, the lower the withholding from each paycheck; the fewer allowances claimed, the greater the withholding. If claiming zero allowances for the rest of the year would still not result in enough extra withholding, you can ask your employer to withhold an additional amount of federal income tax from each paycheck.

While filling out a new Form W-4 seems like something that should be quick and easy, it's not necessarily so - because the tax rules are neither quick nor easy. Fortunately, there is an online Form W-4 calculator on the IRS website at www.irs.gov that can help to make the job simpler. From the IRS home page, click on the "More ..." link under "Tools." Then click on the "IRS withholding calculator" link. You will see the entry point for the online calculator. It's pretty easy to use once you assemble information about your expected 2014 income and expenses, plus your most recent pay stub and tax return.

Please understand that the IRS calculator is not perfect. (Remember, it's free, and to some extent, you always get what you pay for.) However, using the calculator to make withholding allowance changes on a new Form W-4 filed with your employer is probably better than doing nothing, especially if you believe you are likely to be significantly underwithheld or overwithheld for this year.

Of course, if you want more precise results, we would be happy to put together a 2014 tax projection for you. At the same time, we can probably recommend some planning strategies to lower this year's tax bill. Contact us for details.




Tax Calendar

July 15

  • If the monthly deposit rule applies, employers must deposit the tax for payments in June for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

July 31

  • If you have employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through June exceeds $500.
  • The second quarter Form 941 ("Employer's Quarterly Federal Tax Return") is also due today. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until August 11 to file the return.

August 15

  • If the monthly deposit rule applies, employers must deposit the tax for payments in July for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

September 15

  • Third quarter estimated tax payments are due for individuals, trusts, and calendar-year corporations.
  • If a five-month extension was obtained, partnerships should file their 2013 Form 1065 by this date.
  • If a six-month extension was obtained, calendar-year corporations should file their 2013 income tax returns by this date.
  • If the monthly deposit rule applies, employers must deposit the tax for payments in August for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

Archived Monthly News Updates:

June 2014 - Midyear Tax Planning Ideas & IRS Warns Taxpayers to Beware of Phishing

Midyear Tax Planning Ideas

Tax planning is a year-round process, so now is a good time to think about the following:

Are you considering making a cash gift to a relative? If so, consider making the gift in conjunction with the overall revamping of your stocks and mutual funds held in taxable brokerage accounts to achieve better tax results. Don?t gift loser shares (currently worth less than you paid for them). Instead, sell these shares, recognize the capital loss on your tax return, and then gift the cash proceeds to a relative. However, do gift winner shares to lower tax bracket relatives (unless they are under age 24 and subject to the Kiddie Tax). The 2014 annual gift tax exclusion is $14,000.

Are you considering making a contribution to a favorite charity? The previous strategies will also work well for contributions to qualified charities. Sell loser shares, recognize the loss on your tax return, and then give the cash proceeds to the charity and claim the resulting charitable contribution (if you itemize). Donate winner shares to the charity and deduct the full current fair market value at the time of the gift (without being taxed on the capital gain). The tax-exempt organization can sell your donated shares without owing tax.

Are you self-employed? Consider employing your child in the business (but pay a reasonable wage for their age and work skills). This practice can shift income (which is not subject to the Kiddie Tax) to the child who is normally in a lower tax bracket, decrease payroll taxes, and enable the child to contribute to an IRA.

Is your estate plan current? If you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. For 2014, the unified federal gift and estate tax exemption is a generous $5.34 million, and the rate is 40%. Furthermore, the impact of the Supreme Court?s Windsor decision and resulting IRS changes in the federal definition of marriage mean that legally married same-sex couples need to revise their estate plan. Plus, there may be nontax reasons to update your estate plan.

Please contact us to discuss any tax planning strategies you are interested in implementing.




IRS Warns Taxpayers to Beware of Phishing Scams

Phishing is a scam typically carried out by unsolicited e-mail and/or bogus websites posing as legitimate sites luring unsuspecting victims to provide personal and financial information. The IRS has recently warned consumers to watch for e-mails appearing to be from the Taxpayer Advocate Service (TAS) that include a bogus case number. The e-mail may include the following message: ?Your reported 2013 income is flagged for review due to a document processing error. Your case has been forwarded to the Taxpayer Advocate Service for resolution assistance. To avoid delays processing your 2013 filing contact the Taxpayer Advocate Service for resolution assistance.? The e-mail may contain links appearing to provide information about the ?advocate? assigned to the recipient?s case but actually lead to Web pages soliciting personal information.

If you receive an e-mail claiming to be from the IRS that contains a request for personal information, do not reply to the e-mail, open any attachments, or click on any links. Instead, forward the e-mail to the IRS at phishing@irs.gov. After forwarding the e-mail to the IRS, delete the original e-mail you received.

Remember, the IRS, including the TAS, does not initiate contact with taxpayers by e-mail, text, or any social media.

If you receive a phone call from an individual claiming to be from the IRS but you suspect they are not an IRS employee: (1) Ask for a call-back number and employee badge number, and (2) contact the IRS to determine if the caller is an IRS employee with a legitimate need to contact you. If you determine it is a legitimate call, then call the IRS employee back or call us to handle it for you. If you receive a notice or letter via paper mail, contact us to help you determine if it is a legitimate IRS letter. If it is a legitimate IRS letter, we can help you reply if needed. For information on how to contact the IRS, see http://www.irs.gov/uac/How-to-Contact-the-IRS-1. If either the caller or letter is not legitimate, report the incident to the Treasury Inspector General for Tax Administration at http://www.treasury.gov/tigta/contact_report.shtml.


May 2014 - Taxing Social Security Benefits & Taxing a Child

Taxing Social Security Benefits

Some taxpayers must include up to 85% of their Social Security benefits in taxable income, while others find that their benefits are not taxable at all. If Social Security is your only source of income, your benefits probably won?t be taxable. In fact, you may not even need to file a federal income tax return. If you get income from other sources, however, you may have to pay taxes on at least a portion of your Social Security benefits. Your income and filing status will also affect whether you must pay taxes on your Social Security benefits.

A quick way to find out if any of your benefits may be taxable is to add half of your Social Security benefits to all your other income, including any tax-exempt interest. Next, compare this total to the following base amounts. If your total is more than the base amount for your filing status, then some of your benefits may be taxable. The three base amounts are:

  • $25,000 for single, head of household, qualifying widow or widower with a dependent child, or married individuals filing separately and who did not live with their spouse at any time during the year.
  • $32,000 for married couples filing jointly.
  • $0 for married persons filing separately who lived together at any time during the year.

To avoid tax time surprises, Social Security recipients can request that federal income tax be withheld from their benefit payments. Withholding is voluntary and can be initiated by completing IRS Form W-4V (?Voluntary Withholding Request?), requesting to have 7%, 10%, 15%, or 25% (those are the only choices) withheld for federal income tax, and submitting the form to the local Social Security Administration office. Voluntary withholding can be stopped by completing a new Form W-4V.




Taxing a Child's Investment Income

Some children who receive investment income are required to file a tax return and pay tax on at least a portion of that income (and possibly at the parents? marginal tax rate). This is often referred to as the kiddie tax. The kiddie tax cannot be computed accurately until the parents? income is known. Thus, the child?s return may have to be extended until the parents? return has been completed. Additionally, if the parents? return is amended or adjusted upon IRS audit, the child?s return could require correction (assuming the changes to the parental return affect the tax bracket). If a child cannot file his or her own tax return for any reason, such as age, the child?s parent or guardian is responsible for filing a return on the child?s behalf.

There are tax rules that affect how parents report a child?s investment income. Investment income normally includes interest, dividends, capital gains, and other unearned income, such as from a trust. Some parents can include their child?s investment income on their tax return. Other children may have to file their own tax return. Special rules apply if a child?s total investment income is more than $2,000. Finally, the parents? tax rate may apply to part of that income instead of the child?s tax rate.

Note: Higher income individuals subject to the 3.8% net investment income tax (3.8% NIIT) may benefit from shifting income to and having their child claim investment income on the child?s tax return. This may be advantageous because the child receives his or her own $200,000 exclusion from the 3.8% NIIT.


Apr 2014 - Tax Implications of Investor or Trader Status & Double Benefit From a Tax Deduction

Tax Implications of Investor or Trader Status

Most taxpayers who trade stocks are classified as investors for tax purposes. This means any net gains are going to be treated as capital gains vs. ordinary income. That's good if your net gains are long term from positions held more than a year. However, any investment-related expenses (such as margin interest, stock tracking software, etc.) are deductible only if you itemize and, in some cases, only if the total of the expenses exceeds 2% of your adjusted gross income.

Traders have it better. Their expenses reduce gross income even if they can't itemize deductions, and not just for regular tax purposes, but also for alternative minimum tax purposes. Plus, in certain circumstances, if they have a net loss for the year, they can claim it as an ordinary loss (so it can offset other ordinary income) rather than a capital loss, which is limited to a $3,000 ($1,500 if married filing separate) per year deduction once any capital gains have been offset. Thus, it's no surprise that in two recent Tax Court cases the taxpayers were trying to convince the court they qualified as traders. Although both taxpayers failed, and got hit with negligence penalties on top of back taxes, the cases provide good insights into what it takes to successfully meet the test for trader status.

The answer is pretty simple. A taxpayer's trading must be "substantial." Also, it must be designed to try to catch the swings in the daily market movements, and to profit from these short-term changes rather than from the long-term holding of investments.

So, what counts as substantial? While there's no bright line test, the courts have tended to view more than a thousand trades a year, spread over most of the available trading days in the year, as substantial. Consequently, a few hundred trades, especially when occurring only sporadically during the year, are not likely to pass muster. In addition, the average duration for holding any one position needs to be very short, preferably only a day or two. If you satisfy all of these conditions, then even though there's no guarantee (because the test is subjective), the chances are good that you'd ultimately be able to prove trader vs. investor status if you were challenged. Of course, even if you don't satisfy one of the tests, you might still prevail, but the odds against you are presumably higher.

If you have any questions about this area of the tax law or any other tax compliance or planning issue, please feel free to contact us.




Double Benefit From a Tax Deduction

For most taxpayers, the amount of federal income tax they pay depends on where they fall in the federal income tax brackets and the breakdown of their taxable income between ordinary (e.g., wages) and capital gains from the sale of assets (e.g., common stock). Taxpayers eligible for the lower federal income tax brackets (those under 25%) on their ordinary income can generally expect to be taxed at 0% on their long-term capital gains. Taxpayers in the 25% or higher federal income tax brackets can generally expect to be taxed at either 15% or 20% (again, exceptions apply) on at least a portion of their long-term capital gains.

It seems inevitable that, as federal taxable income increases, the rate we pay on at least a portion of that income also increases. The converse should and does apply. That is, as federal taxable income decreases, the rate of tax we pay on at least a portion of that income also decreases. In addition, if a taxpayer has a long-term capital gain that, after considering ordinary income, is partially taxed at the 0% rate, any additional deduction that decreases ordinary income will simultaneously decrease the tax rate on a comparable amount of long-term capital gain from 15% to 0%. This has the effect of producing a double benefit for that deduction, as shown in the following example.

Example: Jack and Julie, filing jointly for 2014, have net ordinary income of $60,000 and a long-term capital gain from the sale of stock of $40,000, for total income of $100,000. For 2014, the joint rates applicable to ordinary taxable income change from 15% to 25% at $73,800. Accordingly, $13,800 ($73,800 - $60,000) of their long-term capital gain will be taxed at 0% and the balance of $26,200 ($40,000 - $13,800) is taxable at 15%. All income, both capital and ordinary, is taxed at a rate of 15% or less.

If Jack and Julie contribute $11,000 to their deductible IRAs ($5,500 each for 2014, assuming they are both under age 50), they receive a 30% tax rate savings, even though their highest tax bracket is 15%. The $11,000 IRA deduction reduces ordinary income at the 15% rate, but also shifts $11,000 of capital gain taxation from the 15% to the 0% bracket, for another 15% savings. This produces a total tax benefit of 30% on the $11,000 reduction.

A similar impact would occur for any expenditure or deduction that reduced ordinary income (i.e., Section 179 expense, additional interest expense, etc.). Conversely, adding ordinary income at the 15% bracket would cause a 30% impact, as additional ordinary income would push a portion of the capital gains formerly at 0% upward into the 15% bracket.


Mar 2014 - Lifetime vs. Testamentary Contributions & Passive Activity Loss Limitations

Lifetime vs. Testamentary Contributions

Many taxpayers with charitable intentions struggle with the decision of whether to donate property to charity during their lifetimes or to make a charitable bequest in their wills that will be fulfilled from property included in their estates (testamentary bequests). While taxpayers frequently base their choice between lifetime charitable gifts and testamentary bequests on nontax considerations, they need to be aware of the tax implications of their decision.

For income tax purposes, the deduction for charitable contributions is limited to a percentage of adjusted gross income (AGI), depending on the type of charity and the type of property donated. In contrast, no percentage limitation exists on the amount of charitable donations that may be deducted from the gross estate (as long as the donated property is included in the gross estate). However, in most instances a charitable gift during lifetime will provide a double tax benefit. The donation produces an income tax deduction at the time of the gift, plus the donated property and any future income and appreciation from the property are fully excluded from the donor's gross estate. The cost of the double benefit is giving up the property and all future income while the donor is still living.

Example: Greater tax benefits by lifetime giving

Tom, who is in the top tax bracket, plans on leaving $1 million to a qualifying charity. If he makes a $1 million testamentary bequest, this could save his estate up to $400,000 ($1,000,000 x an assumed marginal federal estate tax rate of 40%). If Tom makes a current gift, this will save him up to $396,000 in federal income taxes ($1,000,000 x 39.6% for 2014). In addition, if he has a taxable estate, it could also save another $241,600 [($1,000,000 - $396,000) x 40%] based on his estate being reduced by the net amount of $604,000, the difference between the value of the donated property and income taxes he saved. Thus, the total income and estate tax savings from making a current gift is $637,600 ($396,000 + $241,600).

The donor generally must transfer his or her entire interest in the contributed property for the gift to qualify for the charitable donation income tax deduction. Transfers of less than the donor's entire interest in the property (i.e., split-interest gifts) qualify for the deduction only if they meet certain criteria.

A charitable bequest has the obvious advantage of allowing the donor full use of the property until death. However, many lifetime gifts can be structured in a manner that allows the donor to continue to use the property or receive its income for life. In these instances, the donor gets the double tax benefit associated with lifetime contributions while retaining some benefit from the property until his or her death.




Passive Activity Loss Limitations

The passive activity loss (PAL) rules were introduced by the Tax Reform Act of 1986 and were designed to curb perceived tax shelter abuses. However, the PAL rules are far-reaching and affect activities other than tax shelters. Additionally, these rules limit the deductibility of losses for federal income tax purposes.

The PAL rules provide that passive losses can only be used to offset passive income, not active income the owners may earn from business activities in which they materially participate or portfolio income they receive from investments, such as dividend and interest income. So, while taxpayers may not benefit currently from losses sustained from passive activities, they may be able to use those losses to offset gains in future years.

A passive activity is a trade or business in which the taxpayer does not materially participate or, with certain exceptions, any rental activity. Rental activities generally are passive regardless of whether the taxpayer materially participates. However, the rental real estate activities of certain qualifying taxpayers in real estate businesses are subject to the same general rule that applies to nonrental activities. In other words, if the taxpayer satisfies certain participation requirements, the rental activity is nonpassive and any losses or credits it generates can be used to offset the taxpayer?s other nonpassive income. Additionally, federal regulations provide several exceptions to the general rule allowing a rental activity to be treated as either a trade or business or an investment activity.

A special rule allows taxpayers who actively participate in a rental activity to deduct up to $25,000 of loss from the activity each year regardless of the PAL rules. Examples of what would constitute active participation include approving new tenants, deciding on rental terms, and approving capital or repair expenditures. The $25,000 special allowance is, however, subject to a limitation. The $25,000 amount is reduced if the taxpayer has an adjusted gross income (AGI) (before passive losses) in excess of $100,000. The allowance is reduced by 50% of the amount by which AGI exceeds the $100,000 level. Consequently, the allowance is completely phased out when AGI exceeds $150,000. If taxpayers have rehabilitation or low-income housing credits, a special rule allows the credits to offset tax on nonpassive income of up to $25,000, regardless of the limitation based on AGI.

Another special rule is the exception for real estate professionals. This provision allows qualifying real estate professionals to deduct losses from rental real estate activities as nonpassive losses if they materially participate in the activity. To qualify as a real estate professional, a taxpayer must demonstrate that he or she spends more than 750 hours during the tax year in real property businesses in which they are a material participant. In addition, they must demonstrate that more than 50% of the services they perform in all of their businesses during the tax year are performed in real property businesses in which they materially participate.

Please contact us to discuss the passive activity provisions or any other tax planning or compliance issue.


Feb 2014 - Social Security Update & Retirement Plan Review

Social Security Update

The annual inflation adjustments have been announced for the various Social Security amounts and thresholds, so we thought it would be a good time to update you for 2014.

For Social Security beneficiaries under the full retirement age, the annual exempt amount increases to $15,480 in 2014, up from $15,120 in 2013. These beneficiaries will be subject to a $1 reduction in benefits for each $2 they earn in excess of $15,480 in 2014. However, in the year beneficiaries reach their full retirement age, earnings above a different annual exempt amount apply. Earnings greater than $41,400 in 2014 (up from $40,080 in 2013) are subject to a $1 reduction in benefits for each $3 earned over this exempt amount. Social Security benefits are not reduced by earned income beginning with the month the beneficiary reaches full benefit retirement age. But remember, Social Security benefits received may be subject to federal income tax.

The Social Security Administration estimates the average retired worker will receive $1,294 monthly in 2014. The average monthly benefit for an aged couple where both are receiving monthly benefits is $2,111. These amounts reflect a 1.5% cost of living adjustment (COLA). The maximum 2014 Social Security benefit for a worker retiring at full retirement age is $2,642 per month, up from $2,533 in 2013.




Retirement Plan Review

Your retirement plan savings (e.g., qualified plans and IRAs) are important to your financial well-being for many reasons. You can accumulate income without currently paying tax, and the power of compounding pretax dollars makes a retirement plan one of the most powerful investment vehicles available. When you reach retirement age, your retirement plan assets may be a significant portion of your overall savings. Therefore, it is important to do everything you can to get the most out of one of the best investment opportunities you have. Listed below is information to consider when conducting a review of your retirement plans.

Generally, when you begin to withdraw funds from your retirement plans, you will be subject to tax on the distributions. If you made after-tax contributions to your plan, a portion of each distribution will be tax-free. Also, special rules apply to Roth IRAs that make them particularly beneficial. If distributions begin prematurely (generally before age 59 1/2), you may be hit with a 10% penalty tax, but exceptions are available.

When you reach age 70 1/2 (or in some cases, retire), you must start withdrawing a minimum amount from your traditional IRAs and qualified plans each year. Severe penalties can result if required minimum distributions are not made on a timely basis. However, distributions from Roth IRAs are not required during your lifetime.

At the time of your death, the beneficiary designation in effect will determine not only who gets the retirement plan assets, but also how quickly your account must be paid out to your beneficiary and, therefore, how quickly the benefits of tax deferral are lost. Beneficiary designation adjustments may be necessary as family and beneficiary conditions change (e.g., divorce).

Your retirement plan savings may be critical for you and your dependents' future well-being. With proper planning, you can maximize tax-deferred earnings, avoid penalty taxes, choose a desired beneficiary, and minimize the amount your heirs are required to withdraw (and pay taxes on) after your death.


Jan 2014 - Tax Calendar & Additional 0.9% Medicare Tax

Tax Calendar

January 15

  • Individual taxpayers? final 2013 estimated tax payment is due unless Form 1040 is filed by January 31, 2014, and any tax due is paid with the return.

January 31

  • Most employers must file Form 941 (Employer?s Quarterly Federal Tax Return) to report Medicare, Social Security, and income taxes withheld in the fourth quarter of 2013. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.
  • Give your employees their copies of Form W-2 for 2013. If an employee agreed to receive Form W-2 electronically, have it posted on the website and notify the employee. Give annual information statements to recipients of certain payments you made during 2013. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be filed electronically with the consent of the recipient.
  • File Form 940 [Employer?s Annual Federal Unemployment (FUTA) Tax Return] for 2013. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 945 (Annual Return of Withheld Federal Income Tax) for 2013 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, etc. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return. File Form 943 (Employer?s Annual Federal Tax Return for Agricultural Employees) to report Social Security and Medicare taxes and withheld income tax for 2013. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28

  • The government?s copy of Form 1099 series returns (along with the appropriate transmittal form) should be sent in by today. However, if these forms will be filed electronically, the due date is extended to March 31.
  • The government?s copy of Form W-2 series returns (along with the transmittal Form W-3)



Additional 0.9% Medicare Tax

Individuals must pay an additional 0.9% Medicare tax on earned income above certain thresholds. The employee portion of the Medicare tax is increased from 1.45% to 2.35% on wages received in a calendar year in excess of $200,000 ($250,000 for married couples filing jointly; $125,000 for married filing separately). Employers must withhold and remit the increased employee portion of the Medicare tax for each employee whose wages for Medicare tax purposes from the employer are greater than $200,000.

There is no employer match for this additional Medicare tax. Therefore, the employer?s Medicare tax rate continues to be 1.45% on all Medicare wages. An employee is responsible for paying any of the additional 0.9% Medicare tax that is not withheld by an employer. The additional tax will be reported on the individual?s federal income tax return.

Because the additional 0.9% Medicare tax applies at different income levels depending on the employee?s marital and filing status, some employees may have the additional Medicare tax withheld when it will not apply to them (e.g., the employee earns more than $200,000, is married, filing jointly, and total annual compensation for both spouses is $250,000 or less). In such a situation, the additional tax will be treated as additional income tax withholding that is credited against the total tax liability shown on the individual?s income tax return.

Alternatively, an individual?s wages may not be greater than $200,000, but when combined with a spouse?s wages, total annual wages exceed the $250,000 threshold. When a portion of an individual?s wages will be subject to the additional tax, but earnings from a particular employer do not exceed the $200,000 threshold for withholding of the tax by the employer, the employee is responsible for calculating and paying the additional 0.9% Medicare tax. The employee cannot request that the additional 0.9% Medicare tax be withheld from wages that are under the $200,000 threshold. However, he or she can make quarterly estimated tax payments or submit a new Form W-4 requesting additional income tax withholding that can offset the additional Medicare tax calculated and reported on the employee?s personal income tax return.

For self-employed individuals, the effect of the new additional 0.9% Medicare tax is in the form of a higher self-employment (SE) tax. The maximum rate for the Medicare tax component of the SE tax is 3.8% (2.9% + 0.9%). Self-employed individuals should include this additional tax when calculating estimated tax payments due for the year. Any tax not paid during the year (either through federal income tax withholding from an employer or estimated tax payments) is subject to an underpayment penalty.

The additional 0.9% Medicare tax is not deductible for income tax purposes as part of the SE tax deduction. Also, it is not taken into account in calculating the deduction used for determining the amount of income subject to SE taxes.

Please contact us if you have questions about the additional 0.9% Medicare tax or any other tax compliance or planning issue.

Individual is responsible for paying the additional 0.9% Medicare tax

Josh and Anna are married. Josh?s salary is $180,000, and Anna?s wages are $150,000. Assume they have no other wage or investment income. Their total combined wage income is $330,000 ($180,000 + $150,000). Since this amount is over the $250,000 threshold, they owe the additional 0.9% Medicare tax on $80,000 ($330,000 ? $250,000). The additional tax due is $720 ($80,000 × .009). Neither Josh?s nor Anna?s employer is liable for withholding and remitting the additional tax because neither of them met the $200,000 wage threshold. Either Josh or Anna (or both) can submit a new Form W-4 to their employer that will result in additional income tax withholding to ensure the $720 is properly paid during the year. Alternatively, they could make quarterly estimated tax payments. If the amount is not paid until their federal income tax return is filed, they may be responsible for the estimated tax penalty on any underpayment amount (whether the underpayment is actually income taxes or the additional Medicare taxes).


Dec 2013 - Itemized Medical Deductions & Qualified Charitable Deductions

Itemized Medical Deductions

Before this year, you could claim itemized deductions for medical expenses paid for you, your spouse, and your dependents to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI). But the rules have changed for the worse in 2013 and beyond.

Due to the 2010 Affordable Care Act, the old 7.5%-of-AGI hurdle is now 10% for most taxpayers in 2013. An exception applies for taxpayers, or their spouse if married, who are age 65 or older on December 31. They can still use the 7.5%-of-AGI threshold through 2016.

Many individuals have flexibility regarding when certain medical expenses will be incurred. They may benefit from concentrating expenses in alternating years. That way, an itemized medical expense deduction can be claimed every other year instead of lost completely if it doesn?t exceed the threshold.

Medical expenses paid for a taxpayer?s dependent, such as a parent or grandparent, can be added to the taxpayer?s own expenses for itemized medical expense deduction purposes. For a person (other than a qualified child) to be the taxpayer?s dependent, the taxpayer must pay more than half of that person?s support for the year. If that test is passed, the taxpayer can include medical expenses paid for the supported person?even if the taxpayer cannot claim a dependency exemption for that person. While the taxpayer must still clear the applicable AGI threshold to claim an itemized medical expense deduction, including a supported person?s expenses in the computation can really help.




Qualified Charitable Deductions

IRA owners and beneficiaries who have reached age 70 1/2 are permitted to make donations to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions, or QCDs, are federal-income-tax-free to you, but you get no charitable deduction on your tax return. But, that is fine because the tax-free treatment of QCDs is the same as an immediate 100% deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages, too.

A QCD is a payment of an otherwise taxable distribution made by your IRA trustee directly to a qualified public charity. The funds must be transferred directly from your IRA trustee to the charity. You cannot receive the funds yourself and then make the contribution to the charity. However, the IRA trustee can give you a check made out to the charity that you then deliver to the charity. You cannot arrange for more than $100,000 of QCDs in any one year. If your spouse has IRAs, he or she has a separate $100,000 limitation. Unfortunately, this taxpayer-friendly provision is set to expire at year-end unless extended by Congress.

Before Congress enacted this beneficial provision, a person wanting to donate money from an IRA to a charity would make a withdrawal from his or her IRA account, include the taxable amount in gross income, donate the cash to charity, and then claim an itemized charitable donation.

QCDs are not included in your adjusted gross income (AGI) on your federal tax return. This helps you remain unaffected by various unfavorable AGI-based phase-out rules. It also keeps your AGI low for computation of the 3.8% NIIT. In addition, you don?t have to worry about the 50%-of-AGI limitation that can delay itemized deductions for garden-variety cash donations to public charities. QCDs also count as payouts for purposes of the required minimum distribution (RMD) rules. Therefore, you can donate all or part of your 2013 RMD amount (up to the $100,000 limit on QCDs) and thereby convert otherwise taxable RMDs into tax-free QCDs. Individuals can arrange to simply donate amounts that they would normally be required to receive (and pay tax on) under the RMD rules.

Note that the charity must provide you with a record of your contribution. Also, you cannot receive any benefit from the charity in return for making the contribution. If the donor receives any benefit from the charity that reduces the deduction under the normal rules, tax-free treatment is lost for the entire distribution.


Nov 2013 - New Tax Rules for Legally Married Same-sex Couples & Employment Tax Withholding--Refunds and Adjustments for Same-sex Married Couples

New Tax Rules for Legally Married Same-sex Couples

The U.S. Supreme Court?s decision in the Edith Windsor Case, invalidating a key provision of the Defense of Marriage Act, raised many questions regarding the federal income tax rights and responsibilities of same-sex couples. The U.S. Department of the Treasury and the IRS recently ruled that same-sex couples, legally married in a jurisdiction that recognizes their marriages, will be treated as married for federal tax purposes. This ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.

Same-sex couples will now be treated as married for all federal tax purposes (income, gift, and estate taxes) where marriage is a factor. The ruling applies to filing status, personal and dependency exemptions, the standard deduction, employee benefits, IRA contributions, and the earned income and child tax credits.

For 2013, legally married same-sex couples must file their tax return using either the married filing jointly or married filing separately filing status. For years prior to 2013, these couples may, but are not required to, file amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.




Employment Tax Withholding--Refunds and Adjustments for Same-sex Married Couples

Federal income and employment tax rules provide exclusions from gross income and from wages for specific benefits employers provide to the spouse of an employee. Prior to the Windsor decision, married same-sex taxpayers were excluded from receiving the benefit of these provisions. As a result, employers withheld and paid employment taxes on certain benefits provided to the same-sex spouse of an employee because (1) the marriage was not recognized and (2) the benefits were not treated as excludable from gross income or from wages for federal income or employment tax purposes.

Following the Supreme Court?s decision in Windsor, the IRS provided guidance to employers and employees on how to make claims for refunds or adjustments (corrections) of overpaid payroll taxes. Specifically, taxpayers who overpaid FICA (Social Security and Medicare) taxes and federal income tax withholding for certain benefits provided and remuneration paid to same-sex spouses may now be entitled to a refund of or an adjustment to their withholding.

The IRS has provided two alternative procedures for employers to correct the overpayment of employment taxes attributable to same-sex spousal benefits.

  1. An employer can repay its employees for the over-collected FICA and federal income tax withholding with respect to same-sex spousal benefits for the first three quarters of 2013 during the fourth quarter of 2013. The employer will then reduce fourth quarter wages, tips, and other compensation on its fourth quarter Form 941.

  2. An employer that does not reimburse the employee?s over-withholding by December 31, 2013, can file one Form 941-X for the fourth quarter of 2013 to correct FICA taxes paid in all four quarters of 2013. This procedure will correct overpayments of FICA taxes for same-sex spouse benefits paid in 2013. The employer does not correct for over-withheld income taxes; instead, the employees will receive credit for the over-withheld income taxes when they file their 2013 federal income tax return.

The IRS has also provided a special administrative procedure for employers to make adjustments or claims for overpayments during years before 2013 still open under the statute of limitations (2010, 2011, and 2012). For these years, an employer can file one Form 941-X for the fourth quarter of each open year. This fourth quarter Form 941-X would include adjustments or refunds of all overpayments of FICA (but not income) taxes with respect to same-sex spousal benefits provided during that entire year.

These refund and adjustment procedures are complex. Please contact us if you have questions about these provisions or any other tax compliance or planning issues.


Oct 2013 - Tax Calendar & Fourth Quarter Tax Planning

Tax Calendar

October 15 — Personal returns that received an automatic six-month extension must be filed today and any tax, interest, and penalties due must be paid.

— Electing large partnerships that received an additional six-month extension must file their Forms 1065-B today.

— If the monthly deposit rule applies, employers must deposit the tax for payments in September for social security, Medicare, withheld income tax, and nonpayroll withholding.

October 31 — The third quarter Form 941 (Employer's Quarterly Federal Tax Return) is due today and any undeposited tax must be deposited. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until November 12 to file the return.

— If you have employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through September exceeds $500.

November 15 — If the monthly deposit rule applies, employers must deposit the tax for payments in October for social security, Medicare, withheld income tax, and nonpayroll withholding.

December 16 — Calendar-year corporations must deposit the fourth installment of estimated income tax for 2013.

— If the monthly deposit rule applies, employers must deposit the tax for payments in November for social security, Medicare, withheld income tax, and nonpayroll withholding.




Fourth Quarter Tax Planning

For many individuals, the ordinary federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the so-called fiscal cliff legislation passed early this year increased the maximum rate for higher-income individuals to 39.6% (up from 35%). This change only affects taxpayers with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, $425,000 for heads of households, and $225,000 for married individuals who file separate returns. Higher-income individuals can also get hit by the new additional 0.9% Medicare tax and the 3.8% net investment income tax (3.8% NIIT), which can result in a higher-than-advertised federal tax rate for 2013.

Despite these tax increases, the current federal income tax environment remains relatively favorable by historical standards. This article presents some tax planning ideas to consider this fall that may apply to you and/or your family. Note that it is critical to evaluate all tax planning strategies in light of the alternative minimum tax (AMT).

Leverage Standard Deduction by Bunching Deductible Expenditures

If your 2013 itemized deductions are likely to be just under, or just over, the standard deduction amount, consider bunching together expenditures for itemized deduction items every other year, while claiming the standard deduction in the intervening years. The 2013 standard deduction is $12,200 for married joint filers, $6,100 for single filers, and $8,950 for heads of households.

For example, say you're a joint filer whose only itemized deductions are about $4,000 of annual property taxes and about $8,000 of home mortgage interest. If you prepay your 2014 property taxes by December 31 of this year, you could claim $16,000 of itemized deductions on your 2013 return ($4,000 of 2013 property taxes, plus another $4,000 for the 2014 property tax bill, plus the $8,000 of mortgage interest). Next year, you would only have about $8,000 of mortgage interest, but you could claim the standard deduction (it will probably be around $12,500 for 2014). Following this strategy will cut your taxable income by a meaningful amount over the two-year period (this year and next). You can repeat the drill all over again in future years. Examples of other deductible items that can be bunched together every other year include charitable donations and state income tax payments.

Consider Deferring Income

It may pay to defer some taxable income from this year into next year if you expect to be in the same or lower tax bracket in 2014. For example, if you're self-employed and a cash-method taxpayer, you can postpone taxable income by waiting until late in the year to send out some client invoices. That way, you won't receive payment for them until early 2014. You can also postpone taxable income by accelerating some deductible business expenditures into this year.

Both moves will defer taxable income from this year until next year. Deferring income may also be helpful if you are affected by unfavorable phase-out rules that reduce or eliminate various tax breaks (child tax credit, education tax credits, and so on). By deferring income every other year, you may be able to take more advantage of these breaks.

Time Investment Gains and Losses

For many individuals, the 2013 federal tax rates on long-term capital gains are the same as last year: either 0% or 15%. However, the maximum rate for higher-income individuals is now 20% (up from 15% last year). This change only affects taxpayers with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, $425,000 for heads of households, and $225,000 for married individuals filing separately. Higher-income individuals can also get hit by the new 3.8% NIIT on net investment income, which can result in a maximum 23.8% federal income tax rate on 2013 long-term gains.

As you evaluate investments held in your taxable brokerage firm accounts, consider the tax impact of selling appreciated securities (currently worth more than you paid for them). For most taxpayers, the federal tax rate on long-term capital gains is still much lower than the rate on short-term gains. Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling to qualify for the lower long-term gain tax rate.

Biting the bullet and selling some loser securities (currently worth less than you paid for them) before year-end can also be a tax-smart idea. The resulting capital losses will offset capital gains from other sales this year, including high-taxed short-term gains from securities owned for one year or less. For 2013, the maximum rate on short-term gains is 39.6%, and the 3.8% NIIT may also apply, which can result in an effective rate of up to 43.4%. However, you don't need to worry about paying a high rate on short-term gains that can be sheltered with capital losses (you will pay 0% on gains that can be sheltered).

If capital losses for this year exceed capital gains, you will have a net capital loss for 2013. You can use that net capital loss to shelter up to $3,000 of this year's high-taxed ordinary income ($1,500 if you're married and file separately). Any excess net capital loss is carried forward to next year.

Selling enough loser securities to create a bigger net capital loss that exceeds what you can use this year might also make sense. You can carry forward the excess capital loss to 2014 and beyond and use it to shelter both short-term gains and long-term gains recognized in those years. Note that the wash sale rules can limit the deduction for securities losses.

Make Charitable Donations from Your IRA

IRA owners and beneficiaries who have reached age 70 1/2 are permitted to make cash donations of up to $100,000 to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions (QCDs) are federal-income-tax-free to you, but you get no itemized charitable write-off on your Form 1040. That's okay, because the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to worry about restrictions that can delay itemized charitable write-offs.

Note: To qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Also, this favorable provision will expire at the end of this year unless Congress extends it.


Sep 2013 - The 3.8% Net Investment Income Tax & Business Tax Breaks

The 3.8% Net Investment Income Tax - More Than Meets the Eye

There's a lot for taxpayers to know when it comes to the 3.8% net investment income tax (3.8% NIIT). This new tax is imposed on income from several sources and its impact is far reaching. Analyzing its impact can get complicated fast.

Originating as a component of 2010 health care legislation and first effective in 2013, the 3.8% NIIT is assessed on the lesser of net investment income (NII) or modified adjusted gross income (MAGI) above specific thresholds. MAGI is adjusted gross income plus any excluded net foreign earned income. The MAGI thresholds are $200,000 for single individuals, $250,000 for joint filers and surviving spouses, and $125,000 for married taxpayers filing separate returns.

Only individuals with some amount of NII, and MAGI above the applicable threshold amount, will be subject to the 3.8% NIIT. For example, if a married couple has $200,000 of wage income and $100,000 of interest and dividend income (i.e., MAGI totaling $300,000), the 3.8% NIIT applies to the $50,000 that is over the $250,000 MAGI threshold.

Trusts and estates can also be hit with the 3.8% NIIT. But for them, the tax applies to the lesser of their undistributed net investment income or AGI in excess of the threshold for the top trust federal income tax bracket. For 2013, that threshold is only $11,950, so many trusts and estates will no doubt be affected this year.

The components of NII generally include gross income from interest, dividends, royalties, and rents; gross income from a trade or business involving passive activities; and net gain from the disposition of property (other than property held in a trade or business in which the owner materially participates). All of these components are reduced by any allocable deductions. This may sound simple, but as always, the devil is in the details.

On a positive note, NII does not include tax-exempt bond interest, veterans' and social security benefits, excluded gain from the sale of a principal residence, life insurance proceeds received by reason of an insured's death, lottery winnings, and the tax-free inside buildup of the cash surrender value of life insurance, among other items.

Fortunately, distributions from retirement plans are generally not included in NII. However, if included in MAGI, qualified plan distributions may push the taxpayer over the threshold that would cause other types of investment income to be subject to the 3.8% NIIT.

Another positive aspect of the 3.8% NIIT is that it does not apply to income from a trade or business conducted by a sole proprietor, partnership, or S corporation; but income, gain, or loss on working capital is not treated as derived from a trade or business and thus is subject to the tax. The term working capital generally refers to capital set aside for use in, or the future needs of, a trade or business.

Unfortunately, the 3.8% NIIT does apply to income derived from a trade or business if it is a passive activity or a trade or business of trading in financial instruments or commodities.

With regard to property dispositions, a gain from the disposition of property that is considered held in the ordinary course of a trade or business is generally exempt from the 3.8% NIIT. Despite the preceding exception, gains from dispositions of property held in a passive business activity or in the business of trading in financial instruments or commodities (whether passive or not) are included in the definition of NII.

For business owners, a gain or loss from the disposition of an interest in a partnership or S corporation may be subject to the 3.8% NIIT. However, a complex calculation involving a deemed sale analysis may be required to make this determination.

Finally, a taxpayer may be subject to both the 3.8% NIIT and the additional 0.9% Medicare tax, but not on the same income. The additional 0.9% Medicare tax applies to wages and self-employment income over certain thresholds, but it does not apply to items included in investment income. So, taxpayers who have both high wages or self-employment income and high investment income may be hit with both taxes.

Taxpayers face numerous challenges in learning about and dealing with the 3.8% NIIT. Please contact us to discuss the 3.8% NIIT or any other tax compliance or planning issue.




Business Tax Breaks

Several favorable business tax provisions have a limited term life that may dictate taking action between now and year-end. They include the following two provisions.

Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment, software, and eligible real property costs. For tax years beginning in 2013, the maximum Section 179 deduction is $500,000, including up to $250,000 for qualifying real property costs. However, you cannot claim a Section 179 write-off that would create or increase an overall business tax loss. For tax years beginning in 2014, the maximum deduction is scheduled to drop back to only $25,000, and most real property costs will be ineligible.

50% First-year Bonus Depreciation. Above and beyond the Section 179 deduction, your business can also claim first-year bonus depreciation equal to 50% of the cost of most new (not used) equipment and software placed in service by December 31 of this year. For a new passenger auto or light truck that's used for business and is subject to the luxury auto depreciation limitations, the 50% bonus depreciation break increases the maximum first-year depreciation deduction by $8,000. The 50% bonus depreciation break will expire at year-end unless Congress extends it.




Aug 2013 - The Affordable Care Act & 2014 HSA Amounts

The Affordable Care Act

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (together, the Affordable Care Act), was landmark legislation that dramatically affects how health care is delivered in the United States. Provisions of the legislation affect not only those directly involved in providing health care, but also most individuals and employers.

The health care reform legislation is extremely complex, and many items in the legislation change rules and regulations that were already in place. The IRS, Department of Labor (DOL), Department of Health and Human Services (HHS), and other agencies have the monumental task of interpreting the legislation and providing guidance. Many temporary and proposed regulations, as well as some final regulations, have been issued.

The purpose of this legislation was to provide affordable minimum health care benefits to all individuals. With that in mind, the legislation provides for the establishment of qualified health plans that must provide essential health benefits consisting of minimum essential coverage.

Caution: Some of the rules originally enacted have already been repealed and the effective date of other rules has been modified. It is possible that more changes will occur as these rules are implemented. This information is current as of July 11, 2013.

Employer Responsibility

Beginning in 2015, certain applicable large employers (i.e., generally those who had an average of at least 50 full-time employees in the previous calendar year) that do not offer health insurance coverage to their full-time employees (and their dependents), or employers that offer health insurance coverage that is unaffordable or does not provide a certain minimum value, must pay a penalty if the employer is notified that any full-time employee receives a premium assistance credit to purchase health insurance in the individual market through a state insurance exchange or a cost-sharing-reduction subsidy to help with out-of-pocket expenses. Any penalty paid under this provision is not deductible as a business expense for federal income tax purposes.

To determine if an employer is an applicable large employer, the full-time equivalent value of the hours worked by part-time employees must be calculated and added to the employer's number of full-time employees. This calculation can be challenging. Although part-time employees must be considered when determining applicable large employer status, applicable large employers only need to offer full-time employees (and their dependents) adequate health insurance coverage to avoid paying a penalty. However, the rules for determining full-time status can be complicated for certain variable-hour employees. Employers will be subject to many new notice and reporting requirements.

Individual Mandate for Health Coverage

The health care reform legislation requires most U.S. citizens and legal residents (i.e., applicable individuals) to have minimum essential health insurance coverage every month beginning on or after January 1, 2014. Those who do not have such health insurance will be subject to a penalty for each month they do not have minimum essential coverage. The penalty will be the greater of a flat fee amount (for each individual not covered by health insurance) or a percentage of household income over a threshold amount. For applicable individuals who are at least age 18, the maximum applicable annual dollar amount is $95 for 2014, $325 for 2015, and $695 for 2016 and later years. An inflation adjustment will be applied in calendar years beginning after 2016. For individuals under age 18, the maximum applicable penalty is 50% of these amounts.

Individuals who meet certain financial or hardship criteria are exempt from the mandate. In addition, members of an Indian tribe and individuals who are members of certain religious sects or members of certain health care sharing ministries are exempt from the mandate.

Premium Assistance Credits and Cost-sharing-reduction Subsidies

To assist individuals in meeting the mandate for having minimum essential health insurance coverage, the legislation also provides for premium assistance credits and cost-sharing-reduction subsidies. Beginning in 2014, some individuals will qualify for a premium assistance credit to help them pay the premiums on health insurance purchased in the individual market through the state insurance exchanges that will be operational beginning October 1, 2013. Individuals can elect to have this credit payable in advance directly to the insurer.

The premium assistance credit will be available (on a sliding scale basis) for individuals and families with incomes up to 400% of the federal poverty level ($45,960 for an individual or $94,200 for a family of four, using 2013 poverty level figures) who are not eligible for Medicaid, CHIP, a state or local public health program, employer-sponsored insurance that is both affordable and provides a certain minimum value, or other acceptable coverage.

Excise Tax on High-cost Employer-sponsored Health Coverage (Cadillac Plans)

Beginning in 2018 under the current law, a nondeductible 40% excise tax will be levied on so-called Cadillac plans. These plans are employer-sponsored health plans with annual premiums (i.e., excess benefits) exceeding $10,200 for self-only coverage and $27,500 for any other coverage. Slightly higher premium thresholds apply for retired individuals age 55 and older who are not eligible for enrollment in Medicare or entitled to Medicare benefits, and for plans that cover employees engaged in high-risk professions. For coverage under a group health plan, the 40% excise tax will be imposed on insurance companies, but it is expected that employers (and their employees) will ultimately bear this tax in the form of higher premiums passed on by insurers. Employers will be responsible for the tax if coverage is provided by employer contributions to HSAs or Archer MSAs.

Employers will be responsible for calculating the excess benefit amounts and reporting those amounts to the applicable insurer. Employers that currently offer generous health benefits (especially if the benefits are to the owners and related persons) should carefully analyze their plans to see if changes are needed to avoid having plans that will be subject to this tax. Additional guidance will be issued on this excise tax (additional legislation may change some of these provisions).

2014 HSA Amounts

Health savings accounts (HSAs) were created as a tax-favored framework to provide health care benefits mainly for small business owners, the self-employed, and employees of small- to medium-sized companies who do not have access to health insurance.

The tax benefits of HSAs are quite substantial. Eligible individuals can make tax-deductible (as an adjustment to AGI) contributions to HSA accounts. Funds in the account may be invested (somewhat like an IRA), so there is opportunity for growth. The earnings inside the HSA are free from federal income tax, and funds withdrawn to pay eligible health care costs are tax free.

An HSA is a tax-exempt trust or custodial account established exclusively for paying qualified medical expenses of the participant who, for the months for which contributions are made to an HSA, is covered under a high-deductible health plan. Consequently, an HSA is not insurance; it is an account that must be opened with a bank, brokerage firm, or other provider (i.e., insurance company). It is therefore different from a flexible spending account in that it involves an outside provider serving as a custodian or trustee.

The 2014 inflation-adjusted deduction for individual self-only coverage under a high-deductible plan is limited to $3,300, while the comparable amount for family coverage is $6,550. This is an increase of 1.5% and 1.6%, respectively, from 2013. For 2014, a high-deductible health plan is defined as a health plan with an annual deductible that is not less than $1,250 for self-only coverage and $2,500 for family coverage, and the annual out-of-pocket expenses (including deductibles and copayments, but not premiums) must not exceed $6,350 for self-only coverage or $12,700 for family coverage.


Jul 2013 - Tax Calendar & Tax Impact of Investment Strategies

Tax Calendar

July 15 - If the monthly deposit rule applies, employers must deposit the tax for payments in June for social security, Medicare, withheld income tax, and nonpayroll withholding.

July 31 - If you have employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through June exceeds $500.

  • The second quarter Form 941 (Employer?s Quarterly Federal Tax Return) is also due today. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until August 12 to file the return.

August 15 - If the monthly deposit rule applies, employers must deposit the tax for payments in July for social security, Medicare, withheld income tax, and nonpayroll withholding.

September 16 - Third quarter estimated tax payments are due for individuals, trusts, and calendar-year corporations.

  • If a five-month extension was obtained, partnerships should file their 2012 Form 1065 by this date.
  • If a six-month extension was obtained, calendar-year corporations should file their 2012 income tax returns by this date.
  • If the monthly deposit rule applies, employers must deposit the tax for payments in August for social security, Medicare, withheld income tax, and nonpayroll withholding.

Tax Impact of Investment Strategies

Higher 2013 income and capital gains rates and the new 3.8% net investment income tax (3.8% NIIT) may cause high-income investors to reexamine their investment strategy. The type of account, taxable or tax deferred (e.g., qualified retirement plan), could affect the investment strategy in a number of ways. Qualified retirement plans, because of their tax-deferred nature, tend to favor the following strategies:

  • More frequent turnover (securities transactions within the portfolio) can be tolerated. Recognition of gains is not an issue in a qualified plan account; therefore, a strategy that allows frequent buying and selling (turnover) of the underlying investments would not have a detrimental effect because of associated tax liabilities.
  • More active management might be appropriate for a qualified plan, whereas passive investments such as index funds, might be held in taxable accounts.
  • Large-cap investments, which are more likely to be dividend-paying companies, may be better suited for qualified plan accounts because the income is not currently taxed.
  • Portfolio rebalancing (e.g., shifting funds from small cap to large cap stocks) is better accomplished using assets in a qualified plan to minimize the recognition of taxable income.

Taxable accounts tend to favor the following strategies:

  • Buy-and-hold strategies are appropriate to limit gain recognition and to limit gains to assets that qualify for preferential long-term gain treatment.
  • Passive investments, particularly index funds that have minimal taxable distributions, are more appropriate for taxable accounts.
  • International funds, which frequently have associated foreign tax payments, are more appropriate for taxable accounts so the foreign tax credit can be claimed.
  • Small-cap growth stocks are more appropriate because of the minimal dividend income generally associated with these types of investments.

A topic of continuing discussion among investment professionals is where to hold fixed-income investments and where to hold equity investments. Generally, sufficient fixed-income investments need to be in taxable accounts to provide liquidity. Those investments could be, for example, either tax-free or taxable bonds, depending on the after-tax yield as determined by your marginal tax rate. The need for current income will also affect whether additional fixed-income investments are held outside of qualified plans. Beyond the liquidity amount and provision for current income, the remainder of the fixed-income portfolio can be held in a qualified plan.

Similarly, for stocks, that part of the portfolio that is intended to be long-term, low-turnover, passively managed investments can be held in the taxable accounts. More aggressive parts of the portfolio that call for active management and potentially high turnover can be held in qualified plans.



June 2013 - Higher Education Costs Continue to Escalate & Help Grandchildren with College Costs

Higher Education Costs Continue to Escalate

The cost of attending college continues to increase. The College Board reports that 2012-2013 tuition and fees have risen significantly (www.collegeboard.org). Private four-year colleges are up 4.2% (to an average of $29,056) from 2011-2012 for tuition and fees. Public four-year colleges are up 4.8% (to an average of $8,655) from last year for in-state tuition and fees. Public four-year colleges are up 4.2% (to an average of $21,706) from last year for out-of-state tuition and fees. Even public two-year schools are up 5.8% (to an average of $3,131). The report indicates that the subsidies provided to full-time undergraduates at public universities through the combination of grant aid and federal tax benefits averaged $5,750 in 2012-2013.


Help Grandchildren with College Costs

Contributing to a Section 529 college savings program is a great way for grandparents to help their grandchildren pay for college. It is also a great way to remove assets from the grandparent's estate without paying estate tax. As an added feature, money in a 529 plan owned by a grandparent is not assessed by the federal financial aid formula when qualifying for student aid.

Grandparents, as well as other taxpayers, have a unique opportunity for gifting to Section 529 college savings plans by contributing up to $70,000 at one time, which currently represents five years of gifts at $14,000 per year. ($14,000 is the annual gift tax exclusion amount for 2013.) A married couple who elects gift-splitting can contribute up to double that amount ($140,000 in 2013) to a beneficiary's 529 plan account(s) with no adverse federal gift tax consequences.

Example: Electing to spread a 529 plan gift over five years.

In 2013, Linda contributes $75,000 to a 529 plan account for the benefit of her grandson, James. She makes no other gifts to James in 2013. Because the gift exceeds the $14,000 annual gift tax exclusion, Linda elects to account for the gift ratably over five years beginning with 2013. Only $70,000 (five times the current annual gift tax exclusion) is eligible for the election; therefore, Linda is treated as having made an excludible gift of $14,000 in years 2013-2017, and a taxable gift of the remainder ($5,000) in 2013.



May 2013 - Tax Breaks for Families and Students & Increased Medicare Payroll Tax
Tax Breaks for Families and Students

Recent legislation made permanent or extended several tax breaks for families. In addition, several education breaks were made permanent or extended.

Child Credit. For 2013 and beyond, the maximum credit for an eligible under-age-17 child (Child Credit) was scheduled to drop from $1,000 to only $500. The legislation permanently installs the $1,000 maximum credit.

Adoption Expenses. The Bush tax cut package included a major liberalization of the adoption tax credit and also established tax-free employer adoption assistance payments. These taxpayer-friendly provisions were scheduled to expire at the end of 2012. The credit would have been halved and limited to only special needs children. Tax-free adoption assistance payments from employers would have disappeared. The legislation permanently extends the more-favorable Bush-era rules.

Education Credit. The American Opportunity Credit, worth up to $2,500, can be claimed for up to four years of undergraduate education and is 40% refundable. It was scheduled to expire at the end of 2012. The legislation extends the American Opportunity Credit through 2017.

College Tuition Deduction. This write-off, which can be as much as $4,000 at lower income levels and as much as $2,000 at higher income levels, expired at the end of 2011. The legislation retroactively restores the deduction for 2012 and extends it through 2013.

Student Loan Interest Deduction. The student loan interest write-off can be as much as $2,500 (whether the taxpayer itemizes or not). Less favorable rules were scheduled to kick in for 2013 and beyond. The legislation permanently extends the more favorable rules that have applied in recent years.

Coverdell Education Savings Accounts. For 2013 and beyond, the maximum contribution to federal-income-tax-free Coverdell college savings accounts was scheduled to drop from $2,000 to only $500, and a stricter phase-out rule would have limited contributions by many married filing joint couples. The legislation makes permanent the favorable rules that have applied in recent years.


Increased Medicare Payroll Tax

The Medicare payroll tax is the primary source of financing for Medicare, which generally pays medical bills for individuals who are 65 or older or disabled. Wages paid through December 31, 2012, were subject to a 2.9% Medicare payroll tax. Workers and employers pay 1.45% each. Self-employed individuals pay both halves of the tax, but are allowed to deduct the employer-equivalent portion (i.e., 1.45%) for income tax purposes. Unlike the social security payroll tax, which applies to earnings up to an annual ceiling ($113,700 for 2013), the Medicare tax is levied on all of an employee's wages subject to FICA taxes.

Beginning in 2013, individuals who have wage and/or self-employment income exceeding $200,000 ($250,000 if married, filing a joint return; $125,000 if married, filing separately) are subject to an additional 0.9% Medicare tax (i.e., 2.35% total) on their earned income exceeding the applicable threshold. The employer portion of the Medicare tax is not increased. However, employers are required to withhold and remit the additional tax for any employee to whom it pays over $200,000. Companies are not responsible for determining whether a worker's combined income with his or her spouse makes the employee subject to the additional tax. Therefore, many individuals (especially those who are married with each earning less than $200,000, but earning more than $250,000 combined) should adjust their federal income tax withholding (FITW) by submitting a new Form W-4 to the employer or make quarterly estimated tax payments to be sure they are not hit with an underpayment penalty when filing their income tax return each year.

Self-employed individuals who pay both halves of the Medicare tax (i.e., 2.9%) will pay a total Medicare tax of 3.8% on earnings above the thresholds. The additional 0.9% tax is not deductible for income tax purposes. Self-employed individuals should adjust their quarterly estimated income tax payments to account for this additional tax.

Married couples with combined incomes approaching $250,000 should keep tabs on their total earnings to avoid an unexpected tax bill when filing their individual income tax return. At this time, the threshold amounts ($200,000/$250,000) are not adjusted for inflation. Therefore, it is likely that increasingly more people will be subject to the higher payroll taxes in coming years.



Apr 2013 - Residency Issues for Retirees & Home Office Deductions
Residency Issues for Retirees

With 10,000 baby boomers turning 65 each day, some may decide to move to another state for a variety of reasons. These include living in a warmer climate, being closer to children or other relatives, avoiding state income tax, health reasons, or a combination thereof. But, states and municipalities are looking for every available dollar to shore up shrinking budgets. So retirees should use caution to avoid being overtaxed due to a move.

If the retiree's move is intended to be permanent, it is important that legal domicile be established in the new state. If domicile is not established, the retiree may be subject to income tax as a resident of both the old and new states. In addition, since each state has its own rules relating to residence and domicile, both states may try to impose taxes on the retiree even if he or she has established domicile in the new state, but has not adequately relinquished domicile in the previous state.

Furthermore, if the retiree dies without establishing domicile, both the old and the new states may claim jurisdiction over the retiree's estate.

The more time that elapses after the move and the more steps the retiree takes to establish domicile in the new state, the more difficult it will be for the old state to assert that the retiree resides or has domicile there.

The following steps tend to establish domicile in a new state:

  • Register to vote in the new location.
  • File a change of address form with the post office at the old location and change the address on documents, such as tax returns, wills, contracts, insurance policies, passports, and living trust agreements.
  • Obtain a driver's license and register automobiles in the new location.
  • Open and use bank accounts in the new location.
  • Move items from safe deposit boxes in the old location to the new location.
  • Purchase or lease a residence in the new state and sell the residence in the old state.
  • If an income tax return is required, file a resident return in the new state and a nonresident return (or no return, if appropriate) in the old state.
  • File for property tax relief under a homestead exemption (if any) in the new state.

For many purposes, the location of property is determined by reference to state law, and legally may be deemed to be somewhere other than where the property is physically located. The state in which the property is deemed to be located may assess income taxes (if any) on income or gains relating to the property. The state may also assess death and succession taxes, and that state will be where probate proceedings will occur when the individual dies. Furthermore, rules of that state will be used to determine whether testamentary instruments are valid and whether the terms of the instruments (such as the powers of a trustee) are legally enforceable.

The retiree's state of domicile generally determines the rules relating to the ownership and tax treatment of intangible personal property. Thus, if the retiree established domicile in a new state, that state's laws generally will apply to his or her intangible assets, such as bank accounts, stocks, bonds, notes, partnership interests, trust income rights, and insurance contracts. Interest income from a savings account, for example, will normally be taxed by the state of domicile, rather than the state in which the account is located.

New Simplified Home Office Deduction

The IRS recently announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes. The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses. The new option is available beginning in 2013.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A, if they choose to itemize their deductions. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, can still be fully deductible. Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

In tax year 2010, the most recent year for which figures are available, the IRS indicates nearly 3.4 million taxpayers claimed deductions for business use of a home. Please contact us if you would like more information on the home office deduction or any other tax compliance or planning issue.


Mar 2013 - Overview & Business Provisions of the American Taxpayer Relief Act of 2012

American Taxpayer Relief Act of 2012

After a great deal of wrangling, Congress passed and the President signed the American Taxpayer Relief Act of 2012 (Act) in early 2013. The Act provides relief for most taxpayers, but will increase the tax bill for high-income folks. The Act includes, among other items, permanent extension of the Bush-era tax cuts for most taxpayers; revised tax rates on ordinary and capital gain income for high-income individuals; modification of the estate tax; permanent fix of the AMT for individual taxpayers; limits on deductions and exemptions of high-income individuals; and numerous retroactively reinstated and extended tax breaks for individuals and businesses. In this article we will discuss several of the Act's provisions impacting individual taxpayers. Business provisions are discussed on page 3.

Tax rates on ordinary income. For tax years beginning after 2012, the 10%, 15%, 25%, 28%, 33%, and 35% tax brackets from the Bush tax cuts will remain in place and are made permanent. This means that, for most Americans, the tax rates on ordinary income will stay the same. However, there will be a new 39.6% rate, which will begin at the following inflation-adjusted thresholds: $400,000 (single), $425,000 (head of household), $450,000 (joint filers and qualifying widows and widowers), and $225,000 (married filing separately).

Estate tax. The new law prevents steep increases in estate, gift, and generation-skipping transfer (GST) taxes that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation; $5,250,000 in 2013). However, the new law also permanently increases the top estate, gift, and GST rate from 35% to 40%. It also continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse.

Capital gains and qualified dividends rates. The new law retains the 0% tax rate on long-term capital gains and qualified dividends, modifies the 15% rate, and establishes a new 20% rate. Beginning in 2013, the rate will be 0% if ordinary income falls below the 25% tax bracket; 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if income falls in the 39.6% tax bracket. It should be noted that some taxpayers in the 15% and 20% tax brackets could also be required to pay the new 3.8% surtax on investment-type income and gains for tax years beginning after 2012, which applies on investment income of taxpayers with modified adjusted gross income above $250,000 (joint filers), $125,000 (separate), and $200,000 (others).

Personal exemption phase-out. Beginning in 2013, personal exemptions will be phased out (i.e., reduced) for adjusted gross income over $250,000 (single), $275,000 (head of household), and $300,000 (joint filers). Taxpayers claim exemptions for themselves, their spouses and their dependents. For 2013, each exemption is worth $3,900.

Itemized deduction limitation. Beginning in 2013, itemized deductions will be limited for taxpayers with an adjusted gross income over $250,000 (single), $275,000 (head of household), and $300,000 (joint filers).

AMT relief. The new law provides permanent, inflation-adjusted alternative minimum tax (AMT) relief. Prior to the Act, the individual AMT exemption amounts for 2012 were to have been $33,750 for unmarried taxpayers, $45,000 for joint filers, and $22,500 for married persons filing separately. Retroactively effective for tax years beginning after 2011, the new law permanently increases these exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers, and $39,375 for married persons filing separately. In addition, for tax years beginning after 2012, it indexes these exemption amounts for inflation.

Tax credits for low- to middle-wage earners. The new law extends for five years the following items that were originally enacted as part of the 2009 stimulus package and were slated to expire at the end of 2012: (1) the American Opportunity tax credit, which provides up to $2,500 in tax credits for undergraduate college education; (2) eased rules for qualifying for the refundable child credit; and (3) various earned income tax credit (EITC) changes.

Tax break extenders. Many of the "traditional" tax extenders are extended for two years, retroactively to 2012 and through the end of 2013. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes, $250 above-the-line deduction for certain expenses of elementary and secondary school teachers, special rule for contributions made for conservation purposes, above-the-line deduction for qualified tuition and related expenses, and limited tax-free distributions from individual retirement plans for charitable purposes (see page 4).

Payroll tax cut. The 2% payroll tax cut available in 2011 and 2012 was allowed to expire.

 

Business Provisions of the American Taxpayer Relief Act of 2012

The recently enacted 2012 American Taxpayer Relief Act includes a wide-ranging assortment of tax changes affecting both individuals and businesses. On the business side, two of the most significant changes provide incentives to invest in machinery and equipment by allowing for faster cost recovery of business property. Here are the details.

Enhanced small business expensing (Section 179 expensing). Generally, the cost of property placed in service in a trade or business can't be deducted in the year it's placed in service if the property will be useful beyond the year. Instead, the cost is "capitalized" and depreciation deductions are allowed for most property (other than land), but are spread out over a period of years. However, to help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. The expense election is made available, on a tax-year-by-tax-year basis, under Section 179 of the Internal Revenue Code, and is often referred to as the "Section 179 election" or the "Code Section 179 election." The new law makes three important changes to this expense election.

First, the new law provides that for tax years beginning in 2012 or 2013, a taxpayer will be allowed to write off up to $500,000 of capital expenditures subject to a phase-out (i.e., gradual reduction) once capital expenditures exceed $2 million. For tax years beginning after 2013, the maximum expensing amount will drop to $25,000 and the phase-out level will drop to $200,000.

Second, the new law extends the rule that treats off-the-shelf computer software as qualifying property through 2013.

Finally, the new law extends through 2013 the provision permitting a taxpayer to amend or irrevocably revoke an election for a tax year under IRC Sec. 179 without IRS consent.

Extension of additional first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, by permitting an additional first-year write-off of the cost. For qualified property acquired and placed in service after December 31, 2011, and before January 1, 2013 (before January 1, 2014, for certain longer-lived and transportation property), the additional first-year depreciation was 50% of the cost. The new law extends this additional first-year depreciation for investments placed in service before January 1, 2014 (before January 1, 2015, for certain longer-lived and transportation property).

The new law also extends for one year the election to accelerate the AMT credit instead of claiming additional first-year depreciation for certain corporate taxpayers.

The new law leaves in place the existing rules as to what kinds of property qualify for additional first-year depreciation. Generally, the property must be (1) depreciable property with a recovery period of 20 years or less, (2) water utility property, (3) computer software, or (4) qualified leasehold improvements. Also the original use of the property must commence with the taxpayer-used machinery doesn't qualify.

Please contact us if you would like more information about the new cost recovery provisions or any other aspect of the new legislation.


Feb 2013 - Standard Mileage Rates for 2013 and Social Security & Medicare Updates

Standard Mileage Rates for 2013

The 2013 standard mileage rates for use of an automobile are 56.5˘ per mile for business miles driven (an increase of 1˘ from 2012), and 24˘ per mile for medical or moving purposes (up 1˘ from 2012). The rate for rendering gratuitous services to a charitable organization remains unchanged at 14˘ per mile.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving expenses is based on variable costs. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rate.

A taxpayer may not use the business standard mileage rate for any vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or claiming a Section 179 deduction for that vehicle, or for more than four vehicles used simultaneously.

Social Security and Medicare Update

The annual inflation adjustments have been made for the various social security amounts and thresholds. So, we thought it would be a good time to update you for 2013.

The social security wage base, for computing the social security tax (OASDI only), increases to $113,700 in 2013, up from $110,100 for 2012. The additional $3,600 for 2013 represents an increase of 3.3% in the wage base. There is no taxable earnings limit for Medicare (HI only) contributions.

New for 2013, the 0.9% Medicare Surtax is imposed on wages and self-employment (SE) income in excess of the following modified adjusted gross income (MAGI) threshold amounts: $250,000 for joint filers, $125,000 for married separate filers, and $200,000 for all other taxpayers. The employer portion of the tax is not increased. This new tax is a provision of the Patient Protection and Affordable Care Act.

For social security beneficiaries under the full retirement age, the annual exempt amount increases to $15,120 in 2013 up from $14,640 in 2012. These beneficiaries will be subject to a $1 reduction in benefits for each $2 they earn in excess of $15,120 in 2013. However, in the year beneficiaries reach their full retirement age, earnings above a different annual exemption amount ($40,080 in 2013, up from $38,880 in 2012) are subject to $1 reduction in benefits for each $3 earned over this exempt amount. Social security benefits are not reduced by earned income beginning with the month the beneficiary reaches full benefit retirement age. But remember, social security benefits received may be subject to federal income tax.

Individuals may have to pay federal income taxes on up to 85% of their benefits. Inclusion within taxable income can occur if you have substantial income from wages, self-employment, interest, dividends, and other taxable income, in addition to your benefits. However, no one pays federal income tax on more than 85% of his or her benefits.

The Social Security Administration estimates the average retired worker will receive $1,261 monthly in 2013. The average monthly benefit for an aged couple where both are receiving monthly benefits is $2,048. These amounts reflect a 1.7% cost of living adjustment (COLA).

The maximum 2013 social security benefit for a worker retiring at full retirement age is $2,533 per month, up from $2,513 in 2012.


Jan 2013 - Filing Status Implications & Retirement Contribution Limitations

Filing Status Implications

For married taxpayers, the implications of filing a joint or separate return extend beyond tax rates and the standard deduction. Like many aspects of income taxation, there is usually more than one approach to finding the optimal solution. We have listed some of the more common implications of filing either a joint or separate return. Although not an exhaustive list, it highlights several issues to consider.

Some of the implications of filing a joint return include (among others):

  • The requirement that individuals who file a joint return cannot be claimed as dependents on another return. This can be important when married students are still supported by their parents.
  • An individual who files a joint return is not subject to the "kiddie tax" provisions.
  • Joint filers are both responsible for the tax on their joint return. Thus, nontax factors should be considered (i.e., questionable business transactions). In addition, divorced taxpayers will each be liable for tax, interest, and penalties due on a joint return filed before the divorce.
  • Finally, monthly Medicare premiums can increase substantially for a couple filing jointly versus filing separately, especially for a lower-income spouse.

The implications of filing a separate return include (among others):

  • If one spouse itemizes deductions, the other must also, even if total deductions are less than the standard deduction.
  • Taxpayers can generally only deduct expenses they actually paid versus those paid by either.
  • Credits for child care, adoption, education, and earned income are generally not available.
  • If separate filers lived with their spouse during any part of the year, a greater percentage of social security benefits may be taxable because the income threshold for determining the taxable amount is reduced to zero.
  • The exclusion of gain on the sale of a principal residence is limited to $250,000 (each) for separate filers versus $500,000 for a joint return.
  • The $25,000 passive loss exception for actively managed rental real estate may be totally or partially lost. Also, one spouse's passive income cannot be offset by the other spouse's passive losses.
  • The limit on the capital loss deduction on a separate return is $1,500 (each).
  • No exclusion is allowed for interest income from Series EE bonds used for higher education expenses.
  • The deduction for interest on qualified education loans is not available.
  • Taxpayers filing separate federal returns typically must also file separate returns for state income tax purposes.

There you have it: the implications for married taxpayers filing jointly or separately. Please contact us to discuss the most advantageous filing status or any other tax compliance or planning issue.

Retirement Contribution and Other Limitations for 2013

The IRS has announced cost-of-living adjustments affecting the dollar limitations for retirement plans, deductions, and other items. Several of the limitations are higher for 2013 because the increase in the cost-of-living index met the statutory threshold. However, some limitations did not meet that threshold and remain unchanged from 2012.

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan increased from $17,000 in 2012 to $17,500 in 2013. The catch-up contribution limit for those age 50 and over remains unchanged at $5,500.

The contribution limit for both Roth and traditional IRAs has increased $500 from 2012. You can contribute up to $5,500 ($6,500 if you are age 50 or older by year-end) to your IRA in 2013 if certain conditions are met (i.e., sufficient earned income). For married couples, the combined contribution limits are $11,000 ($5,500 each) and $13,000 ($6,500 each if both are age 50 by year-end) when a joint return is filed, provided one or both spouses had at least that much earned income.

Keep in mind that contributions to traditional IRAs may be tax-deductible, subject to specific limitations that increase for 2013. When you establish and contribute to a Roth IRA, contributions are not deductible, but withdrawals are tax-free when specific requirements are satisfied. In addition, there are no mandatory distribution rules at age 70 1/2 with a Roth IRA, and you can continue to make contributions past age 70 1/2 if you meet the earned income requirement.

The 2013 limitation for SIMPLE retirement accounts increased $500 to $12,000. However, the SIMPLE catch-up contribution for those age 50 by year-end is unchanged from 2012 at $2,500.

The 2013 contribution limit for profit-sharing, SEP, and money purchase pension plans is the lesser of (1) 25% of the employee's compensation-limited to $255,000, an increase of $5,000 from 2012 or (2) $51,000, an increase of $1,000 from 2012.

The social security wage base, for computing the social security tax (OASDI), increases to $113,700 in 2013, up from $110,100 for 2012. The additional $3,600 for 2013 represents an increase of 3.3% in the wage base.

Finally, the annual exclusion for gifts increased by $1,000 and is $14,000 in 2013.


Dec 2012 - Filing Options for Your Final Form 1040 & Start-up Expenses

Filing Options for Your Final Form 1040

Although we can't escape death or taxes, we may be able to minimize the federal income taxes due on our final Form 1040. Filing a tax return after we die (we are then known as the "decedent") is probably not something most of us think much about. But, a final Form 1040 generally must be filed for the year of our death and, just as in life, is typically due by April 15th of the following year. Normal tax accounting rules regarding the recognition of income and deductions generally apply for this final return. And, as is the case during life, tax planning opportunities are available both when death is imminent and after death. For instance, several decisions can affect the income or deductions reported on that final return. However, as we will discuss below, a major decision for married individuals concerns whether to file a joint return for the year of death.

When a married taxpayer dies and the surviving spouse does not remarry during the year, the spouse may file a joint return with the decedent for the year of death, but is not required to do so. The joint return will include income and deductions for the decedent prior to the date of death and the surviving spouse's income and deductions for the entire year. If the surviving spouse remarries before the close of the tax year that includes the date of death, the spouse may not file jointly with the decedent. Instead, a separate return must be prepared for the decedent. Listed below are some of the advantages and disadvantages for joint filers to consider when filing that final return.

Advantages of Filing a Joint Return. Since the surviving spouse's tax year does not end upon the death of the decedent, it may be possible to reduce their combined income tax liability by accelerating or postponing income or deductions to maximize use of the joint tax rates. Some other benefits include, but are not limited to: (a) use of one spouse's excess deductions against the income of the other spouse (e.g., excess charitable contributions); (b) an increase in the IRA contribution limit (because of the spousal IRA rules); and (c) the ability of the decedent's net operating loss (NOL), capital loss, and passive activity loss (subject to the limitation) carryovers to offset income of the surviving spouse. Note that any NOL or capital loss carryover of the decedent that is not used on the final return (whether separate or joint) will expire unused.

Disadvantages of Filing a Joint Return. Filing a joint return with the surviving spouse is not always the best option. One disadvantage of filing a joint return for the decedent's final tax year is that the decedent's estate and the surviving spouse are jointly and severally liable for any tax, interest, and penalties due on the joint return. In addition, when the surviving spouse is not the sole beneficiary of the estate, the decedent's personal representative may not be willing to expose the estate to potential unknown liabilities (e.g., tax on the surviving spouse's unreported income). Potentially, this exposure may be avoided because of the innocent spouse rules. Also, filing a joint return can negatively impact the amount of the decedent's deductions that are subject to adjusted gross income (AGI) limitations (e.g., medical, casualty, miscellaneous itemized) since AGI is based on joint income rather than separate income. Finally, the surviving spouse must cooperate with the decedent's personal representative by sharing the information necessary to prepare the return and by signing the return once it is prepared.

Planning for that final 1040 is something we may not think much about, but it is a good idea all the same.

Maximizing the Deduction for Start-up Expenses

Individuals starting a new business or acquiring the assets of an existing business often incur start-up expenses, which can be considerable, in the investigation and acquisition phase before actual business operations begin. Most start-up expenditures can be segregated into two broad categories: (a) investigatory expenses and (b) business preopening costs.

Taxpayers can immediately deduct up to $5,000 of start-up expenses in the year when active conduct of a business begins. However, the $5,000 instant deduction allowance is reduced dollar for dollar by cumulative start-up expens-es in excess of $50,000 for the business in question. Start-up expenses that cannot be immediately deducted in the year a business begins must be capitalized and amortized over 180 months on a straight-line basis. In many cases, start-up expenses for small businesses will be modest enough to qualify for immediate deduction under the $5,000 instant deduction allowance in the year when active conduct of business commences.

Example: Claiming the deduction for start-up expenses.

Suzie (a calendar-year taxpayer) incurs $4,200 of start-up expenses in 2012 before opening her new car wash in November of 2012. Suzie's 2012 deduction is $4,200. Since her start-up expenses did not exceed $50,000, she can deduct the entire $4,200 in 2012.

Note: A taxpayer is not considered to be engaged in carrying on a trade or business until the business has begun to function as a going concern and has performed the activities for which it was organized.


Nov 2012 - Charitable Contributions & Year-end Tax Planning

Substantiating Charitable Contributions

One of the most popular tax deductions for individuals is the one allowed for donations to charitable organizations - from the local church or synagogue to the Red Cross and various other national organizations. Unfortunately, this deduction has also been among the most abused. Thus, perhaps it is not surprising that Congress has responded to the problem by regularly enacting more rules around documenting donations.

What we're left with is a confusing array of rules that you must comply with in order to claim a deduction. For example, donors must obtain a written acknowledgment from the charity if the value of the contribution (cash or other property) is $250 or more - a canceled check is not sufficient proof. A recent court case illustrates how easy it is to run afoul of the documentation requirements.

In the case, the taxpayers donated $22,517 to their church during the tax year. Several individual donations were made by check, each of which was in excess of $250. Although the donations were made by check and the taxpayer provided canceled checks to document the gift, the IRS disallowed the deduction because the taxpayers failed to obtain a timely receipt from their church to support the donations. Such receipt (or receipts) must be received by the time you file your return for the year of the donation (or, if earlier, by when the return is due). In addition, it must include all of the following:

  • The name and address of the charity.
  • The date of the contribution.
  • The amount of cash or a description (but not an estimate of value) of any property contributed.
  • A list of any significant goods or services received in return for the donation (other than intangible religious benefits) or a specific statement that the donor received no goods or services from the charity.

In the case at hand, the taxpayers had a receipt from their church, but it did not contain the required statement regarding whether goods or services were provided. They tried to correct this omission by getting a new receipt from their church after the IRS challenged the deduction. By then, of course, it was too late.

While this gives you a glimpse at the substantiation requirements for charitable donations, the rules can get much more complicated, especially when you make charitable donations of property rather than cash. Please contact us to discuss the requirements for specific types of donations or with questions on other tax compliance or planning issues.

Individual Year-end Tax Planning

The current federal income tax environment remains favorable through December 31st. Here are some tax planning ideas to consider as we approach year-end.

Leverage Standard Deduction by Bunching Deductible Expenditures. Are your 2012 itemized deductions likely to be just under or just over the standard deduction amount? If so, consider bunching expenditures for itemized deduction items every other year, while claiming the standard deduction in the intervening years. The 2012 standard deduction for married joint filers is $11,900; $5,950 for single and married filing separate filers; and $8,700 for heads of households.

For example, say you're a joint filer whose only itemized deductions are $4,000 of annual property taxes and $8,000 of home mortgage interest. If you prepay your 2013 property taxes by December 31st, you could claim $16,000 of itemized deductions on your 2012 return ($4,000 of 2012 property taxes, plus an-other $4,000 for the 2013 property tax bill, plus the $8,000 of mortgage interest). Next year, you would only have the $8,000 of interest, but you could claim the standard deduction. Following this strategy will cut your taxable income by a meaningful amount over the two-year period (this year and next). You can repeat the drill again in future years. Finally, check for any negative AMT implications before implementing this strategy.

Examples of other deductible items that can be bunched together every other year to lower your taxes include charitable donations and state income tax payments.

Caution: If you think you'll be in a higher tax bracket next year, you may want to claim the standard deduction this year and bunch your itemized deductions into 2013 when they can offset the higher taxed in-come. This will boost your overall tax savings for the two years combined.

Take Advantage of the 0% Rate on Investment Income. For 2012, the federal income tax rate on long-term capital gains and qualified dividends is 0% when they fall within the 10% or 15% federal income tax rate brackets. This will be the case to the extent your taxable income (including long-term capital gains and qualified dividends) does not exceed $70,700 if you are married and file jointly ($35,350 if you are single). While your income may be too high to benefit from the 0% rate, you may have children, grandchildren, or other loved ones who will be in one of the bottom two brackets. If so, consider giving them some appreciated stock or mutual fund shares that they can then sell and pay 0% tax on the resulting long-term gains. Gains will be long-term as long as your ownership period plus the gift recipient's ownership period (before he or she sells) equals at least a year and a day.

Giving away stocks that pay dividends is another tax-smart idea. As long as the dividends fall within the gift recipient's 10% or 15% rate bracket, they will be federal-income-tax-free.

Caution: The Kiddie Tax rules could cause capital gains and dividends to be taxed at the parent's tax rate. Also, the gift tax exclusion is $13,000 in 2012.

Time Investment Gains and Losses. As you evaluate investments held in your taxable accounts, con-sider the impact of selling appreciated securities this year. The maximum federal income tax rate on long-term capital gains in 2012 is 15%. Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling. On the other hand, now may be a good time to cash in some long-term winners to benefit from today's historically low capital gains tax rates.

Biting the bullet and selling some loser securities (currently worth less than you paid for them) before year-end can also be a good idea. The resulting capital losses will offset capital gains from other sales this year, including short-term gains from securities owned for one year or less that would otherwise be taxed at ordinary income tax rates. The bottom line is that you don't have to worry about paying a higher tax rate on short-term gains if you have enough capital losses to shelter those short-term gains.

If capital losses for this year exceed capital gains, you will have a net capital loss for 2012. You can use that loss to shelter up to $3,000 of this year's ordinary income from salaries, bonuses, self-employment, and so forth ($1,500 if you're married and file separately). Any excess net capital loss is carried forward to next year.

For the Charitably Inclined. Say you want to make some gifts to favorite relatives (who may be hurting financially) and/or favorite charities. You can make gifts in conjunction with an overall revamping of your stock and equity mutual fund portfolio. Here's how to get the best tax results from your generosity:

Gifts to Relatives (nondeductible). Do not give away loser shares. Instead sell the shares, and take ad-vantage of the resulting capital losses. Then give the cash sales proceeds to the relative. Do give away winner shares to relatives. Most likely, they will pay less tax than you would pay if you sold the same shares. In fact, relatives who are in the 10% or 15% federal income tax brackets will generally pay a 0% federal tax rate on long-term gains from shares that were held for over a year before being sold in 2012. (For purposes of meeting the more-than-one-year rule for gifted shares, you get to count your ownership period plus the recipient relative's ownership period, however brief.) Even if the shares are held for one year or less before being sold, your relative will probably pay a lower tax rate than you would (typically only 10% or 15%). However, be aware that gains recognized by a relative who is under age 24 may be taxed at his or her parents' higher rates under the so-called Kiddie Tax rules.

Gifts to Charities (deductible). The strategies for gifts to relatives work equally well for gifts to IRS-approved charities. Sell loser shares and claim the resulting tax-saving capital loss on your return. Then, give the sales proceeds to the charity and claim the resulting charitable write-off (assuming you itemize deductions). This strategy results in a double tax benefit (tax-saving capital loss plus tax-saving charitable contribution deduction). Give away winner shares to charity instead of giving cash. Here's why. For publicly traded shares that you've owned over a year, your charitable deduction equals the full current market value at the time of the gift. Plus, when you give winner shares away, you walk away from the related capital gains tax. This idea is another double tax-saver (you avoid capital gains tax on the winner shares, and you get a tax-saving charitable contribution write-off). Because the charitable organization is tax-exempt, it can sell your donated shares without owing anything to the IRS.

This article should get you started thinking about tax planning moves for the rest of this year. Please don't hesitate to contact us if you want more details or would like to schedule a tax planning strategy session.


Oct 2012 - 2013 Healthcare Provisions & College Loan Repayment Plan Application Is Simplified

Noteworthy 2013 Healthcare Provisions

The 2010 Healthcare Act included several significant tax changes scheduled to take effect next year. Listed below is information on two provisions that could impact numerous taxpayers. We have also noted what you can do before year-end to minimize the negative impact of these provisions.

$2,500 Cap on Healthcare Flexible Spending Account (FSA) Contributions. Before the Healthcare Act, there was no tax-law limit on the amount you could contribute each year to your employer's healthcare FSA plan. That said, many plans have always imposed their own annual limits. Amounts you contribute to the FSA plan are subtracted from your taxable salary. Then, you can use the FSA funds to reimburse yourself tax-free to cover qualified medical expenses. Good deal! Starting in 2013, however, the maximum annual FSA contribution for each employee will be capped at $2,500.

Note: An employee employed by two or more unrelated employers may elect up to $2,500 under each employer's health FSA.

Tax Planning Implications: If you have an FSA plan, your employer will ask you near the end of the year to decide how much you want to contribute to your healthcare FSA for 2013. At that point, the new $2,500 contribution limit may affect you. Other than that, just make sure you use up your 2012 contribution before the deadline for doing so.

Higher Threshold for Itemized Medical Expense Deductions. Before the Healthcare Act, the allowable itemized deduction for unreimbursed medical expenses paid for you, your spouse, and your dependents equaled the excess of your qualified medical expenses over 7.5% of your adjusted gross income (AGI). Starting in 2013, the deduction threshold will be raised to 10% of AGI for most individuals. However, if either you or your spouse reaches age 65 by December 31, 2013, the new 10%-of-AGI threshold will not take effect until 2017 (in other words, the long-standing 7.5%-of-AGI threshold will continue to apply to those taxpayers for 2013-2016). Also, if you or your spouse turns age 65 in any year 2014-2016, the long-standing 7.5%-of-AGI threshold will apply for that year through 2016. Starting in 2017, the 10%-of-AGI threshold will apply to everyone.

Tax Planning Implications: If you will be affected by the new 10%-of-AGI threshold next year, consider accelerating elective qualifying unreimbursed medical expenses into 2012 so that your allowable medical expense deduction for this year will be based on the more taxpayer-friendly 7.5%-of-AGI threshold.

College Loan Repayment Plan Application Is Simplified

Federal college loan borrowers have several repayment plan options. One option-Income-Based Repayment (IBR)-is about to get simpler. Under IBR, required monthly payments are capped based on income and family size. Previously, applicants had to enter their income tax data onto the application. Now, the Department of Education is collaborating with the IRS so applicants can import their tax return data directly into the IBR application and submit it online. This will allow borrowers to complete the application in one sitting.

Visit this site for more information.


Sep 2012 - New Medicare Contribution Tax & Strategies for a Secure Retirement

New 3.8% Medicare Contribution Tax on Unearned Income

Beginning in 2013, the 2010 Health Care Act, as amended by the 2010 Health Care Reconciliation Act, imposes a Medicare contribution tax on unearned income (Medicare contribution tax) on individuals, estates, and trusts. The tax is generally levied on income from interest, dividends, annuities, royalties, rents, and capital gains, but can also be levied on home sale gains in excess of the applicable exclusion amount.

For individuals, the tax is 3.8% of the lesser of (a) net investment income or (b) the excess of modified adjusted gross income (MAGI) over the applicable threshold amount. Net investment income is investment income reduced by the deductions properly allocable to such income. Fortunately, qualified retirement plan distributions are not included in investment income. MAGI is adjusted gross income (AGI) increased by the amount excluded from income as foreign earned income, net of the deductions and exclusions disallowed with respect to the foreign earned income. The threshold amount for those subject to the tax is $250,000 for joint returns or surviving spouses, $125,000 for separate returns, and $200,000 in other cases.

Where possible, taxpayers can reduce their 2013 MAGI by receiving 2012 bonus, profit sharing, or other incentive payments in 2012 versus 2013. But recognize that doing so will accelerate into 2012 the regular income tax due on these payments. If 2013 MAGI is under the applicable threshold amount, there will be no Medicare contribution tax liability.

Example: Single taxpayer's MAGI exceeds the $200,000 threshold.

Carol, a single taxpayer, has net investment income of $100,000 and MAGI of $220,000 in 2013. She would pay a Medicare contribution tax on $20,000, the amount by which her MAGI exceeds the $200,000 threshold since this is less than her net investment income of $100,000. Carol's 2013 Medicare contribution tax would be $760 ($20,000 × 3.8%).

However, if a taxpayer's 2013 MAGI exceeds the threshold amount by at least the amount of the net investment in-come, the taxpayer will pay 3.8% on the full amount of his or her net investment income.

Example: Taxpayer's MAGI exceeds the threshold by more than net investment income.

Wesley, a single taxpayer, has 2013 net investment income of $110,000 and MAGI of $400,000. Because his MAGI exceeds the $200,000 threshold amount by more than his net investment income, he would pay a Medicare contribution tax on his full $110,000 net investment income. Wesley's 2013 Medicare contribution tax would be $4,180 ($110,000 × 3.8%).

A large home sale gain could be subjected to the Medicare contribution tax. However, any amount realized from the sale of a principal residence excluded from federal taxation (up to $250,000; $500,000 for certain married couples filing a joint return) is not subject to the Medicare contribution tax.

Example: Home sale gain in excess of the $500,000 exclusion.

The Clarks, a married couple, have 2013 AGI of $260,000. They sell their principal residence for $1.2 million, and realize a net gain of $700,000. Their 2013 MAGI is $460,000 ($260,000 AGI + $200,000 home sale gain in excess of $500,000). Because their MAGI exceeds the $250,000 threshold for joint filers, they would pay a Medicare contribution tax on $200,000 from the sale of their home. [The Medicare contribution tax is computed on the lesser of the $200,000 applicable home sale gain or $210,000 ($460,000 MAGI x the $250,000 threshold).] Their 2013 Medicare contribution tax would be $7,600 ($200,000 × 3.8%).

Planning Tip: If a taxpayer anticipates receiving large capital gains from the sale of a business, investments, a principal residence, real estate, etc., these transactions should be completed before 2013, if possible, to avoid the Medicare contribution tax in 2013.

Finally, the Medicare contribution tax is paid in addition to the 0.9% Medicare surtax on wages and self-employment income in excess of the applicable threshold amounts (see above). Taxpayers who have both high wages or self-employment income and high investment income may be hit with both taxes in 2013.

Cash Management Strategies for a Secure Retirement

For those of us looking forward to achieving a financially secure retirement, an overriding question is "how much will I need to live comfortably during retirement?" Unfortunately, there is no one-size-fits-all answer; everyone has different goals and objectives. However, we have listed below some ideas to help build that retirement nest egg.

Budgeting. Develop a budget that minimizes nonessential current expenditures in the interest of saving for the de-sired standard of living during retirement. Developing a budget is also a good first step in accumulating some cash for emergencies.

Building a Cash Reserve. Develop and maintain a cash reserve to meet emergency needs. Building an adequate reserve can help avoid having to liquidate investments when the market is depressed or it is otherwise inadvisable to sell.

Forced Savings. Some people are less likely to spend money if they do not actually see the funds, and some need the discipline of having savings taken care of automatically. These individuals may find it easier to set funds aside if they arrange to have their bank automatically and systematically transfer funds from checking to savings or investment accounts. Also, they may have their employer take automatic payroll deductions to fund voluntary contributions to retirement [e.g., 401(k)], savings, or stock plans.

Allocating Less to Other Parts of Financial Plan. Consider allocating a lesser amount of funds to other parts of your financial plan. For example, education costs for children or grandchildren may need to be revised and less expensive institutions considered. Gifts to family members and preretirement travel and entertainment may need to be reduced.

Minimizing, Restructuring, or Eliminating Debt. Generally, debt should be minimized as retirement approaches. If borrowing is necessary, home equity loans or borrowing from a qualified retirement plan (if permitted) should be considered. Home equity loans are generally a relatively cheap source of financing (considering the after-tax borrowing rate), and the repayment terms often are more generous than those of unsecured loans. The interest on a home equity loan up to $100,000 is generally tax deductible on your federal return, regardless of how the loan proceeds are used. Loans from qualified plans generally carry relatively low interest rates, and the interest paid on the loan is an addition to your account balance.

Using a Reverse Mortgage. A reverse mortgage is a loan in the form of monthly payments or a lump-sum payment against the equity in your personal residence. If age 62 or above, you might consider a reverse mortgage for one or more of the following reasons: (a) paying off personal debts, (b) paying for medical care, (c) covering financial emergencies, (d) delaying withdrawals from a retirement plan, or (e) supplementing monthly income. The loan is not repaid until the homeowner permanently moves from the residence, the property is refinanced or sold, or the home-owner dies.

Delaying Retirement. Working for a longer period can make a significant difference in your retirement picture. For example, in addition to continuing earnings, working longer may provide continued fringe benefits and contributions to retirement plans. Extending the working period could also delay IRA or other retirement account withdrawals needed to cover living expenses, thus allowing them to grow longer on a tax-deferred basis. Delaying social security benefits can also result in a higher monthly benefit amount.


Aug 2012 - Local Lodging Expenses and Social Security Statements

New Tax Rule for Local Lodging Expenses

The IRS recently issued long-awaited regulations that permit certain not-away-from-home lodging expenses to be deducted by workers if they are not reimbursed by their employer. Alternatively, if paid for by the employer, the expense can be treated as a tax-free working condition fringe benefit (WCFB) or tax-free accountable-plan reimbursement.

Thanks to prior IRS guidance, the value of an employer-provided WCFB is excluded from the recipient employee's gross income for federal income and employment tax purposes. A WCFB is defined as any property or service provided to an employee to the extent that, if the employee paid for the property or service, it would be deductible by the employee as an unreimbursed employee business expense. Employer-paid lodging for an employee who is out of town on the employer's business counts as a tax-free WCFB.

Prior regulations provide that the cost of an individual's lodging that is not incurred while traveling away from home on business is generally a personal expense and is therefore generally not deductible by the individual. An individual is not considered away from home unless he or she is away from home overnight, or at least long enough to require rest or sleep.

The new regulations stipulate that an individual's local lodging expenses can be deducted by the individual as business expenses if the applicable facts and circumstances dictate that such treatment is appropriate. In turn, expenses that would qualify for deductions if paid for by an employee will qualify as a tax-free WCFB if paid by the employer, or if advanced or reimbursed by the employer under an accountable plan. However, local lodging expenses will not qualify for the aforementioned tax-favored treatment if the lodging is lavish or extravagant, or if it is primarily to provide the individual with a social or personal benefit.

Safe Harbor Rule. Under the new regulations, local lodging expenses are automatically treated as ordinary and necessary business expenses if all of the following conditions are met: (1) the lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity, or other business function; (2) the lodging is for a period that does not exceed five calendar days and does not occur more frequently than once per calendar quarter; (3) in the case of an employee, the employer requires the employee to remain at the activity or function overnight; and (4) the lodging is not lavish or extravagant under the circumstances and does not provide any significant element of personal pleasure, recreation, or benefit.

Example: Tax-favored treatment allowed for employees.

Distant Corporation puts on periodic employee training sessions at a hotel near its main office. Distant requires all attending employees, including employees from the local area, to remain at the hotel overnight for the bona fide business purpose of maximizing the effectiveness of the training sessions.

If Distant directly pays the lodging costs for attending employees, the costs qualify as tax-free WCFBs for the attending employees, including those who live in the local area, and Distant can deduct the costs as business expenses. If Distant reimburses attending employees for the lodging costs under an accountable plan, the reimbursements are tax-free to the employees, including those who live in the local area, and Distant can deduct the reimbursements as business expenses.

Please contact us if you have questions concerning business travel expenses or any other tax compliance or planning issue.

Social Security Statements

The Social Security Administration (SSA) recently announced that Social Security statements may now be viewed online at www.ssa.gov/mystatement. The statements provide workers with an estimate of benefits under current law and an earnings record with Social Security and Medicare for taxes paid over their working career. A printable version of the Social Security statement is available. To get an online statement, a person must be 18 or older and able to provide information that matches their SSA file. After verification, an account is created with a unique user name and password to access the online statement.

Boomer Alert: Approximately 3 million baby boomers are turning 65 each year. According to the Social Security Administration, social security was the major source of income for most beneficiaries.


Jul 2012 - 2013 HSA Limitations & Kiddie Tax Update

2013 HSA Limitations

Health savings accounts (HSAs) were created as a tax-favored framework to provide health care benefits mainly for small business owners, the self-employed, and employees of small- to medium-sized companies who do not have access to health insurance.

The tax benefits of HSAs are quite favorable and substantial. Eligible individuals can make tax-deductible (as an adjustment to AGI) contributions into HSA accounts. The funds in the account may be invested (somewhat like an IRA), so there is an opportunity for growth. The earnings inside the HSA are free from federal income tax, and funds withdrawn to pay eligible health care costs are tax free.

The recently released 2013 inflation-adjusted deduction for individual self-only coverage under a high-deductible plan is $3,250, while the comparable amount for family coverage is $6,450. This is an increase of 4.8% and 3.2%, respectively, from 2012. For 2013, a high-deductible health plan is defined as a health plan with an annual deductible that is not less than $1,250 for self-only coverage and $2,500 for family coverage, and the annual out-of-pocket expenses (including deductibles and copayments, but not premiums) must not exceed $6,250 for self-only coverage or $12,500 for family coverage.

Kiddie Tax Update

In the good old days, highly taxed parents could shelter some of their investment income by attributing it to their lower taxed older children. No more. The kiddie tax captures that income at the parent's rate. Parents may not realize there are tax rules that could affect their child's investment income. Here's how it works. A child is subject to the kiddie tax if:

  • He or she has not attained age 18 as of the close of the tax year; or has earned income that does not exceed half of his or her support and is either age 18 or a full-time student age 19-23;
  • Either parent of the child is alive at the end of the tax year; and
  • The child does not file a joint return for the tax year.

Note: The kiddie tax applies to children under age 18 regardless of their earned income level.

A child subject to the kiddie tax pays tax at his or her parents' highest marginal rate on the child's unearned income over $1,900 (for 2012) if that tax is higher than the tax the child would otherwise pay on it. The parents can instead elect to include on their own return the child's gross income in excess of $1,900 (for 2012).

An individual eligible to be claimed as a dependent on another taxpayer's return may not claim a personal exemption. Thus, a child cannot claim a personal exemption ($3,800 in 2012) if his or her parents can claim an exemption for him or her; whether they actually claim the exemption is irrelevant.

The 2012 standard deduction for a child claimed (or eligible to be claimed) as a dependent on another return is the greater of $950 or the sum of $300 plus earned income, but not to exceed the $5,950 (for 2012) standard deduction that would otherwise be allowable. For 2012, a child with no earned income (e.g., wages) may use a standard deduction to avoid tax on the first $950 of unearned income (e.g., dividends); the next $950 is taxed at the child's tax rate. Therefore, in 2012, the kiddie tax provision does not affect the child until unearned income exceeds $1,900 (or greater if the child itemizes deductions and deductible expenses directly connected to the unearned income exceed $950).

Example: Child with earned income.

Johnny, age 17, earns $2,000 delivering newspapers. He also had $1,300 of dividend income, for a total of $3,300. The earned income from the paper route ($2,000) is fully sheltered from tax by Johnny's standard deduction of $2,300 ($2,000 earned income plus $300; limited to $5,950 in 2012). So, the $1,000 excess ($3,300 - $2,300) will be taxed at a normal 10% tax rate. The kiddie tax does not apply because unearned income is less than $1,900.


June 2012 - "Dirty Dozen" & Reverse Mortgage As Cash Resource

"Dirty Dozen" Tax Scams

IRS Commissioner Doug Shulman recently stated "taxpayers should be careful and avoid falling into a trap with the Dirty Dozen. Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money. Don't be fooled by these scams."

The Dirty Dozen are the 12 most prevalent scams detected by the IRS. Taxpayers should take precautions to avoid these and other suspicious activities of scam artists. The following scams make up the IRS's 2012 "Dirty Dozen" listing.

  1. Identity Theft. Topping this year's list is identity theft. The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer's identity and personal information to file a tax return and claim a fraudulent re-fund.
  2. Phishing. Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure potential victims and prompt them to provide valuable personal and financial information that can be used to commit identity or financial theft.
  3. Return Preparer Fraud. Questionable return preparers have been known to skim off their clients' refunds, charge inflated fees for return preparation services, and attract new clients by promising guaranteed or inflated refunds.
  4. Hiding Income Offshore. Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in off-shore accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities, or insurance plans.
  5. "Free Money." Scammers have been preying on low-income individuals and the elderly by posting flyers in community churches promising that tax returns can be filed with little or no documentation to receive "free money" from the IRS or Social Security Administration.
  6. False/Inflated Income and Expenses. This tactic is used by scam artists who file false or misleading returns to claim refunds they are not entitled to receive. One popular scam is to report income that was never earned to obtain refundable credits.
  7. False Form 1099 Refund Claims. In this scam, the perpetrator files a fake information return reporting false with-holding amounts that are subsequently used to file erroneous refund claims.
  8. Frivolous Arguments. Frivolous scheme promoters encourage people to make unreasonable and unfounded claims to avoid paying taxes.
  9. Falsely Claiming Zero Wages. Filing a phony wage-related or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed.
  10. Abuse of Charitable Organizations and Deductions. Misuses of tax-exempt organizations include arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property, and overvaluation of contributed property.
  11. Disguised Corporate Ownership. In this scam, domestic corporations and other entities are formed to disguise the ownership of a business. They are then used to under-report income, claim fictitious deductions, avoid the filing of tax returns, or participate in listed transactions, money laundering, financial crimes, and even terrorist financing.
  12. Misuse of Trusts. Unscrupulous promoters have urged taxpayers to transfer assets into trusts, promising reduced taxable income, deductions for personal expenses, and reduced estate or gift taxes that don't deliver as promised.

Please contact us if you are concerned about these or any other questionable activity.

Use a Reverse Mortgage as a Cash Resource

When an older homeowner has significant equity in his or her residence and needs funds, but lacks the resources to make monthly payments on a conventional mortgage, a reverse mortgage might provide a solution. A reverse mortgage is so-called because the mortgage balance normally increases over the term of the loan, rather than decreasing as the balance of a conventional mortgage does. A reverse mortgage allows a homeowner to receive loan proceeds over a certain period (by borrowing against equity in the home) while continuing to live in the house. (Other loan distribution options are available.)

An older homeowner may be motivated to obtain a reverse mortgage for many reasons. These include paying off an existing mortgage; purchasing a new residence; paying taxes, medical expenses, insurance, and household upkeep costs; covering financial emergencies; supplementing monthly income; paying nursing home expenses; and providing rainy day funds.

The amount a lender will advance depends primarily on the borrower's age, equity in the home, and the interest rate. The older the homeowner, the larger the advances can be because there will probably be fewer advances than a younger homeowner would receive. Also, the more equity in the home, the larger the monthly advances can be. Finally, a lower interest rate can lead to larger advances.

In a typical case, the house will be sold at some point (normally after the borrower dies) to pay off the mortgage. Since the loan typically defers all repayment until the house is sold or the borrower dies, lending decisions may be based primarily on the home's value rather than on the borrower's creditworthiness and ability to make monthly payments as in the typical loan underwriting process.

In most cases, to qualify for a reverse mortgage, the homeowner must be at least 62 years old. He or she must also own the home outright or be able to pay off any balance with a portion of the reverse mortgage proceeds. To avoid default, the homeowner must maintain the home, pay property taxes, and provide insurance.

Caution: The expenses associated with reverse mortgages are high. Homeowners could pay as much as 7% to 8% of their home's value in closing costs as well as a higher interest rate than with a regular mortgage or home equity loan.


May 2012 - Education Tax Credits and Charitable Organizations

Education Tax Credits

We continually hear and read reports on the escalating cost of higher education. However, two tax credits are available to provide some relief for taxpayers who are paying these education costs for themselves or family members. The American Opportunity Tax Credit and Lifetime Learning Credit are available in 2012 to help students and parents cover the cost of higher education. Taxpayers will generally use the American Opportunity Tax Credit, as opposed to the Lifetime Learning Credit, since it will yield a greater monetary benefit.

The American Opportunity Tax Credit is a per student credit that may be claimed for each eligible student pursuing an undergraduate degree or other recognized education credential. The student must be enrolled at least half-time for one academic period to qualify for the credit.

The maximum American Opportunity Tax Credit is $2,500 per student in 2012 based on 100% of the first $2,000 and 25% of the next $2,000 of the qualified tuition and related expenses paid during the tax year for education furnished to an eligible student. Qualified expenses include tuition and fees and course-related books, supplies, and equipment. 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. This credit does phase out, but 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.

Unlike the American Opportunity Tax Credit, the Lifetime Learning Credit is a per taxpayer (per return) credit, rather than a per student credit. It is available for all years of postsecondary education, including graduate level degree work, and for courses to acquire or improve job skills (e.g., work-related community college courses). The student does not have to be pursuing a degree or other recognized education credential to obtain the credit.

For 2012, the maximum Lifetime Learning Credit allowed is $2,000 (20% of up to $10,000 of the aggregate qualified tuition and related expenses paid during the tax year for education furnished to an eligible student during any academic period). Qualified expenses include tuition and fees and course-related books, supplies, and equipment, but only if required by the eligible education institution for enrollment. The maximum credit is limited to the tax you must pay on your return-the credit is nonrefundable. (Special rules apply for AMT.) This credit does phase out, but the full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $52,000, or $104,000 for married couples filing a joint return in 2012.

Although several of the rules and requirements are the same for both education credits, taxpayers can elect to claim only one of these credits for the same student in a tax year. However, this does not prevent a taxpayer from claiming a different credit (or the same credit) for different students in the same tax year.

IRS's Information on Exempt Charitable Organizations

The IRS recently launched a new online search tool entitled "Exempt Organizations Select Check." This search tool can be found at www.irs.gov/charities/article/0,,id=249767,00.html and allows users to search for:

  1. 1. Organizations eligible to receive tax-deductible contributions.
  2. 2. Organizations whose federal tax exemption has been automatically revoked for not filing a Form 990-series return for three consecutive years.
  3. 3. Form 990-N (e-postcard) filers that are small charities whose annual gross receipts are normally $50,000 or less.

A search for eligible organizations may now be done by Employer Identification Number (EIN). The Auto-Revocation List (#2) may be searched by EIN, name, city, state, ZIP code, country, and revocation posting date. Information is updated monthly.


Apr 2012 - Roth IRAs for Kids

If you have a child who works, consider encouraging the child to use some of the earnings for Roth IRA contributions. All that is required to make a Roth IRA contribution is having some earned income for the year. Age is irrelevant. Specifically, for 2012 your child can contribute the lesser of: (1) earned income or (2) $5,000.

By making Roth IRA contributions for just a few years now, your child can potentially accumulate quite a bit of money by retirement age. Realistically, however, most kids will not be willing to contribute the $5,000 annual maximum even when they have enough earnings to do so. Be satisfied if you can convince your child to contribute at least a meaningful amount each year. Remember, if you are so inclined, you can make the Roth IRA contribution for your child.

Here's what can happen. If your 15-year-old contributes $1,000 to a Roth IRA each year for four years starting now, in 45 years when your child is 60 years old, the Roth IRA would be worth about $33,000 if it earns a 5% annual return or $114,000 if it earns an 8% return. If your child contributes $1,500 for each of the four years, after 45 years the Roth IRA would be worth about $50,000 if it earns 5% or about $171,000 if it earns 8%. If the child contributes $2,500 for each of the four years, after 45 years the Roth IRA would be worth about $84,000 if it earns 5% or a whopping $285,000 if it earns 8%. You get the idea. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your child approaches retirement age.

For a child, contributing to a Roth IRA is usually a much better idea than contributing to a traditional IRA for several reasons. The child can withdraw all or part of the annual Roth contributions-without any federal income tax or penalty-to pay for college or for any other reason. (However, Roth earnings generally cannot be withdrawn tax-free before age 59 1/2.) In contrast, if your child makes deductible contributions to a traditional IRA, any subsequent withdrawals must be reported as income on his or her tax returns.

Even though a child can withdraw Roth IRA contributions without any adverse federal income tax consequences, the best strategy is to leave as much of the account balance as possible untouched until retirement age in order to accumulate a larger federal-income-tax-free sum.

What about tax deductions for traditional IRA contributions? Isn't that an advantage compared to Roth IRAs? Good questions. There are no write-offs for Roth IRA contributions, but your child probably will not get any meaningful write-offs from contributing to a traditional IRA either. That is because an unmarried dependent child's standard deduction will automatically shelter up to $5,950 of earned income (for 2012) from federal income tax. Any additional income will probably be taxed at very low rates. Unless your child has enough taxable income to owe a significant amount of tax (not very likely), the advantage of being able to deduct traditional IRA contributions is mostly or entirely worthless. Since that is the only advantage a traditional IRA has over a Roth IRA, the Roth option almost always comes out on top for kids.

By encouraging kids with earned income to make Roth IRA contributions, you're introducing the ideas of saving money and investing for the future. Plus, there are tax advantages. It's never too soon for children to learn about taxes and how to legally minimize or avoid them. Finally, if you can hire your child as an employee of your business, some additional tax advantages may be available.


Mar 2012 - IRS Announces Major Expansion of "Fresh Start" Initiative

IRS Commissioner Doug Shulman announced a major expansion of the "Fresh Start" initiative in a press release dated March 7th, 2012. The Fresh Start initiative, first introduced in 2008 as a part of a larger program to help taxpayers address their tax liabilities, assists qualified taxpayers in three major areas: penalty relief, installment agreements, and offers in compromise.

Penalty Relief

Late-payment penalties (0.5% per month of the unpaid tax amount up to a maximum of 25%) are abated until October 15, 2012 as long as the tax, interest and any other penalties are paid by that date. Certain wage earners and self-employed individuals are given a six-month grace period for failure-to-pay penalties. The penalty relief will be available to wage earners who were unemployed for at least 30 consecutive days during 2011 or in 2012 (up to the April 15, 2012) and self-employed individuals who experienced a 25% or greater reduction in 2011 business income (compared to 2010) due to the economic downturn.

A qualifying taxpayer filing as single or head of household may not have Adjusted Gross Income (AGI) greater than $100,000. Married taxpayers who file jointly do not qualify if their AGI is more than $200,000. This penalty relief is restricted to taxpayers whose calendar year 2011 balance due (taxes owed less payments and withholding) does not exceed $50,000.

Tax returns must be filed timely. This means taxpayer(s) must file their returns by April 17, 2012 or file for an extension to October 15, 2012. Failure-to-file penalties will not be waived. New form 1127-A must be filed to qualify for relief.

Installment Agreements

The Fresh Start provisions also allow more taxpayers to qualify for installment agreements to pay taxes owed. Effective immediately, taxpayers owing taxes of $50,000 (double the previous threshold of $25,000) or less can begin an installment agreement without supplying the IRS with a financial statement. Qualified taxpayers who cannot pay the entire amounts owed by the due date may enter into a payment plan extending payments up to a maximum term of seventy-two months. Although penalties are reduced, interest continues to accrue on the outstanding balance. In addition, taxpayers must agree to monthly direct debit payments. Taxpayers can set up an agreement online at www.irs.gov by going to the online payment agreement (OPA) page and following the instructions.

Offers in Compromise

Liberalized rules for offers in compromise (agreements between taxpayers and the IRS to settle a taxpayer?s liability for less than the full amount owed) as set forth in the earlier Fresh Start remain in effect. Those changes allow more taxpayers to qualify and allow for some changes to the program to more closely reflect real-world situations.

According to Mr. Shulman, the changes to the Fresh Start initiative reflect the IRS? obligation to assist taxpayers struggling to pay their bills. "Our goal is to help people meet their obligations at get back on their feet financially," Shulman said. If you have questions about the Fresh Start Initiative and how it may apply to your financial situation, please give us a call


Feb 2012 - IRS Cracks Down on Identity Theft Nationwide

In a press release from January 31, 2012, IRS commissioner Doug Shulman announced the results of a nationwide effort to cut down on identity theft and refund fraud. The IRS worked in conjunction with the Justice Department's Tax Division and local U.S. Attorneys' offices to target more than one hundred people across twenty-three states. The sweep resulted in 939 criminal charges against would-be tax frauds.

In addition to the sweep, IRS auditors and investigators visited approximately 150 money-service businesses to conduct extensive compliance visits and insure these businesses aren't engaged in practices which may facilitate refund fraud and identity theft.

Taxpayer identity theft normally occurs when a thief uses a legitimate taxpayer's identity to falsely file a tax return and claim a refund. A victim of identity theft is rarely aware their identity has been stolen until he or she attempts to file a legitimate return later in the tax season and discovers that another return has already been filed using their Social Security Number.

If you receive an IRS notification for any of the following reasons, you should take immediate action:

  • More than one return was filed for you in a single tax year
  • You have a balance due, refund offset or have had collection actions taken against you for a year you did not file a tax return, or
  • IRS records indicate you received wages from an employer unknown to you.

Immediately respond to the name and number printed on the letter if you receive such notification.

The IRS advises you to minimize your risk of identity theft by:

  • Rarely carrying your Social Security card or documents with your SSN on them.
  • Disclosing your SSN only when required. Many businesses may ask for your SSN but do not actually need it. Do not give out your SSN unless absolutely necessary.
  • Protecting your financial information, both online and in print.
  • Checking your credit report periodically. You may check your credit without charge once a year at www.equifax.com, www.experian.com, or www.transunion.com . By using each of these services only once each year, you can actually check your credit report every four months.
  • Protecting your personal computers using firewalls, anti-spam and anti-virus software. Keep your software current via frequent updates. Use secure passwords and change them often.

By taking action against tax fraud criminals, Commissioner Shulman sends a clear message to anyone considering participation in a tax fraud scheme. He said "We are aggressively pursuing cases across the nation with the Justice Department, and people will be going to jail". The IRS is taking additional steps to prevent identity theft and detect fraud by using new identity-theft screening filters and placing identity-theft indicators on taxpayer accounts to track and manage incidents of identity theft. Despite these advances, you should always be vigilant in protecting your Social Security number and financial information.


Jan 2012 - Highlights of 2012 Tax Code Changes

Happy New Year! Tax returns for 2011 are barely begun but it is not too early to start thinking about tax planning strategies for 2012. This is by no means an all-encompassing list, so be sure to discuss your specific situation with your tax professional. Some important tax code changes for 2012 are:

Individuals

  • Each personal and dependent exemption is $3,800 - an increase of $100 over 2011.
  • The 2012 standard itemized deduction rose slightly. A taxpayer filing as single (or married filing separately), saw a $150 increase to the basic deduction as it rose to $5,950. Married couples filing a joint return gained a $300 deduction to $11,900. Those filing as Head of Household have an additional $200 deduction as the amount increased to $8,700.
  • The maximum earned income tax credit for low and moderate income workers rose to $5,891 for 2012, a $140 increase from 2011.
  • Standard mileage rates regarding charitable miles driven remained unchanged at 14 cents per mile. The deduction for medical mileage changed to 23 cents per mile. Business miles driven increased to 55.5 cents per mile for most vehicles earlier in 2011 and that amount remains unchanged going into 2012.
  • Though the credit amounts don't change for 2012, the modified adjusted gross income threshold at which the lifetime learning education credit begins to phase out is $104,000 for joint filers and $52,000 for single filers. This is up from $102,000 and $51,000, respectively.
  • Perhaps the item with the potential for greatest impact is the decreased Alternative Minimum Tax (AMT) exemption from $74,500 to $45,000 for a married couple. Single taxpayers and those filing Head of Household experience an exemption decrease from $48,450 to $33,750. Be sure to discuss this change with your tax professional - the potential impact could be significant.
  • Lastly, the FICA ceiling rose to $110,100 from $106,800. The good news is that the employee rate remains at 4.2% at least through February 29, 2012. Currently, that rate is slated to increase to the historic rate of 6.2% after that date, but many believe the lower rate will be extended for the entire year. Touch base with your CPA in mid-February to see what happens.

Businesses

  • Depreciation is often a significant deduction for businesses. Unfortunately, two significant depreciation deductions decreased for 2012. The Code Section 179 deduction for equipment purchases is $139,000 of the first $560,000 of business property placed in service during 2012. This is down from $500,000 of the first $2,000,000 in 2011. First-year bonus depreciation also decreased to 50% of qualified property (down from 100%).
  • Many other very specific changes occurred regarding certain employee fringe benefits, estimated tax payments and qualified retirement plans - to mention just a few.

Please keep in mind this is not a complete list of changes for tax year 2012 - and there likely will be further changes as the year progresses. Due to current economic conditions - and the fact that this is an election year - it is more important than ever to keep in contact with your CPA. Income tax planning is only one of the many ways to increase your wealth potential!


Dec 2011 - Tax Benefits for Education

To assist taxpayers with the ever-increasing costs of higher education, there are a variety of tax advantages available. For the 2011 tax year, there are two tax credits (reduce the amount of tax owed) available, the American Opportunity Credit, and the Lifetime Learning Credit. In addition, some taxpayers may be able to deduct tuition and fees (to reduce the amount of taxable income). Lastly, both parents and student should consider whether opening tax-advantaged savings accounts to help pay for education may yield some benefit. Additional education-related benefits exist (interest deductions for student loans and work-related education expenses) - be certain to address any questions you have with your tax professional soon so you can take the necessary actions before December 31, 2011.

The American Opportunity Credit

The American Opportunity Credit is available as a result of the American Recovery and Reinvestment Act. The American Opportunity Credit was originally set to expire in 2010 but was extended with a few small changes. In 2011 and 2012, the American Opportunity Credit applies to a broader range of taxpayers, the credit can be applied towards four years of post-secondary education instead of two years, and adds required reading materials to the list of qualified expenses.

The maximum annual credit allowed is $2,500 per student. The full credit is available to taxpayers whose modified adjusted gross income is $80,000 or less for individuals and $160,000 or less for married couples filing jointly. Expenses such as tuition, course materials, and supplies necessary for enrollment or attendance are considered qualified expenses. A computer may qualify as a qualified expense if it is needed as a condition of enrollment or attendance at the educational institution. If you have questions about what does or does not qualify, be sure to contact your tax advisor for guidance.

Lifetime Learning Credit

The Lifetime Learning Credit could reduce taxes up to $2,000 per year for qualified educational expenses. It is most useful for graduate students, part time students, and those who are not pursuing a degree because there is no limit on the number of years the lifetime learning credit can be claimed for each student. A taxpayer may not take both the American Opportunity Credit and the Lifetime Learning credit for the same student in the same year. But, if you pay for qualified educational expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. The American Opportunity Credit may be available for one student and the Lifetime Learning Credit for another.

Tuition and Fees Deduction

If your income is too high to claim the American Opportunity Credit, you may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. The tuition and fees deductions can reduce the amount of income subject to tax by up to $4,000. The tuition and fees deduction is not allowed if any of the below conditions are true:

  • Your filing status is married filing separately,
  • Another person can claim an exemption for you as a dependent on his or her tax return,
  • Your modified adjusted gross income is more than $80,000 (single) or $160,000 (married/joint), you were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes or
  • You or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid.

Savings Plans

Section 529 of the IRS Code allows taxpayers to prepay or contribute to certain specified savings accounts to pay for a student's qualified higher education expenses. Distributions from 529 plans are tax-free if they are used to pay for qualified higher education expenses including tuition, required fees, books and supplies. If the designated student attends school at least half-time, room and board expenses also qualify. These plans offer significant flexibility if a student's education plans change - be sure to discuss these options with your tax professional.

Coverdell Education Savings Accounts were also created to incentivize both parents and students to pay for both primary and secondary education. Total contributions for the beneficiary of a Coverdell Education Savings Account cannot be more than $2,000 in any year, no matter how many accounts have been established so it is important that all contributors to these accounts for a child communicate with one another. Contributions to a Coverdell Education Savings Account are not deductible. However, the principal grows tax-free until distributed. When distributed, the beneficiary is not required to pay tax on these funds provided the amount distributed is less than the qualified education expenses incurred in the year distribution occurs.


Nov 2011 - In 2012, Many Tax Benefits Increase Due to Inflation Adjustments

Our office would like to make you aware that, for tax year 2012, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation. Please read further to see which inflationary measures may affect your return next year:

By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following:

  • The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.

  • The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

  • Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.

Credits, deductions, and related phase outs.

  • For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

  • The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.

  • The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

  • For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts; please see the table below:


The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Estate and Gift

For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.

The annual exclusion for gifts remains at $13,000.

Other Items

  • The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.

  • Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains $1,150 for married individuals and $1,450 for singles and heads of household.

Please feel free to reach out to our firm via phone or email anytime to talk about your personal tax situation. We are always here for you!


Oct 2011 - The Importance of Good Recordkeeping

Benjamin Franklin once said: "An ounce of prevention is worth a pound of cure." When it comes to record keeping, the 18th century inventor could not have been more correct. In the event that a natural disaster strikes your home or office, being well organized and redundant in your record keeping can save you or your loved ones considerable time and effort getting life back to normal when the dust settles. Here are a few useful tips any taxpayer can use to help minimize potential damage:

Utilize Electronic Recordkeeping

Talk to your bank about paperless bank statements so that you will always have access to them. Instead of receiving them in the mail, they can be sent to your email or you can access your account online with a username and password.

Important documents you receive regarding finances and taxes, such as W-2s and tax returns, can be scanned to your computer and stored on an external hard drive or CD for safekeeping. You should keep these external storage devices in secure locations with important documents like your medical directives and powers of attorney, wills and trusts, birth and marriage certificates.

You also might consider using an online service to back up your computer's hard drive. These services will store all of the information on your computer on their servers. That way, all of your files are backed up and can be easily recovered if your computer is lost or damaged.

Whether or not you choose to utilize paperless recordkeeping, you should keep physical copies of documents which are difficult to replace in at least one secure location. Secure locations include household safes, fireproof boxes, or safe deposit boxes. You should also consider storing a second set of those documents in a secure location as well.

Keep Evidence of Valuable Belongings

In order to ensure that you can claim your valuable lost property if it is lost or damaged, you should make lists of the objects in each room of your house and be sure to note their value. You should also take digital photos or videos of the belongings in your home. Just be sure to store copies of those files in a secure place. Business owners should create lists to record your possessions by category, such as office furniture and fixtures, information systems, motor vehicles, equipment, etc. Again, be sure to store the pictures, videos, or lists you make in a secure location so that they cannot be stolen or damaged by water and/or fire.

Have a Plan

It is important to have a way to receive information about extreme weather conditions before and after they occur. NOAA Weather Radios send out warnings and post-messages in the event of earthquakes, avalanches, oil spills, floods, and more. Be sure to keep working batteries in yours at all times. Also, be ready to take action if a disaster were to hit; have an emergency plan that you go over annually. Communicate this to your family, employees, or customers, and practice it if necessary.


Sep 2011 - About the Small Business Health Care Tax Credit

As the upcoming filing extension tax deadlines approach, the Internal Revenue Service, in partnership with the Department of Health and Human Services, is announcing a new round of outreach to small employers and the professional service providers they rely on to encourage them to review the new Small Business Health Care Tax Credit to see if they are eligible.

The small business health care tax credit was included in the Affordable Care Act enacted last year. Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for the small business health care tax credit. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ 25 or fewer workers with average income of $50,000 or less.

Small employers face two important tax filing deadlines in coming weeks:

  • September 15. Corporations that file on a calendar year basis and requested an extension to file to September 15 can calculate the small employer health care credit on Form 8941 and claim it as part of the general business credit on Form 3800, which they would include with their corporate income tax return.
  • October 17. Sole proprietors who file Form 1040 and partners and S-corporation shareholders who report their income on Form 1040 and request an extension have until October 17 to complete their returns.

In addition, tax-exempt organizations that file on a calendar year basis and requested an extension to file to November 15 can use Form 8941 and then claim the credit on Form 990-T, Line 44f, a task with which our office can assist you!

As these 2010 deadlines approach and businesses begin planning for the end of 2011 and 2012, the IRS's new outreach campaign is focusing on working with us, the small business and tax practitioner community, to provide this information to you. Information will also be available through social media and other venues, including IRS YouTube videos in English, Spanish and American Sign Language.

We want to remind employers about the upcoming extension deadlines and will also provide details on other important information about the credit, including:

  • Businesses who have already filed can still claim the credit: For small businesses that have already filed and later determine they are eligible for the credit, they can always file an amended 2010 tax return. Corporations use Form 1120X and individual sole proprietors use Form 1040X
  • Businesses without tax liability this year can still benefit: The Small Business Jobs Act of 2010 provided that for Tax Year 2010, eligible small businesses may carry back unused general business credits (including the small employer health care tax credit) five years. Previously these credits could only be carried back one year. Small businesses that did not have tax liability to offset in 2010 should still evaluate eligibility for the small business health care tax credit in light of this expanded carry back opportunity.
  • Businesses that couldn't use the credit in 2010 can claim it in future years: Some businesses that already locked into health insurance plan structures and contributions for 2010 may not have had the opportunity to make any needed adjustments to qualify for the credit for 2010. So these businesses may be eligible to claim the credit on 2011 returns or in years beyond. Small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.

In addition to this month's newsletter, please do not hesitate to call our office for any assistance, help, or other inquiries about your personal and business situation! We look forward to hearing from you!


Aug 2011 - Summary Of Debt Ceiling Increase

Congress approved a bill on August 2 increasing the debt ceiling by $2.1 trillion, averting default and limiting the downgrade of the federal government's AAA bond rating.

The legislative package not only raised the debt limit enough to keep the government operational through 2012, it also established an ambitious and complicated deficit reduction plan that includes spending cuts, a special "super committee" that will recommend further cuts in spending, enforcement triggers, and a vote on a balanced budget amendment to the U.S. Constitution.

Below is a summary of most of the agreement's major components (as of August 4, 2011):

Debt Ceiling Increase

The current $14.3 trillion ceiling on federal borrowing would be increased by an amount between $2.1 trillion and $2.4 trillion - a sum presumed sufficient to allow the Treasury Department to operate beyond the 2012 election and into 2013.

The increase would come in two steps. The debt limit would be increased by $900 billion immediately. Of that first $900 billion, $500 billion would be subject to a congressional resolution of disapproval. To block the increase, such a resolution would presumably have to be enacted over the president's veto, a step that requires two-thirds majority votes in both chambers.

A second increase of $1.2 trillion to $1.5 trillion would be available later. The size of the second increase would be determined by actions Congress takes to curtail growth in the debt.

If by early 2012 a joint congressional committee created by the legislation has recommended, and Congress has enacted, $1.5 trillion in additional savings for fiscal 2012-2021, the second increase in the debt limit would be $1.5 trillion. Alternatively, the debt limit would be increased by $1.5 trillion if a constitutional amendment requiring a balanced budget is sent to the states for ratification.

If the joint committee recommends, and Congress enacts, savings of less than $1.5 trillion, or if no additional savings are enacted, the second debt limit increase would be $1.2 trillion. The second debt limit increase would also be subject to a congressional resolution of disapproval, which could be vetoed.

Spending Cuts - First Round

An immediate reduction in the deficit would be achieved by placing statutory caps on discretionary appropriations for fiscal years 2012 through 2021. The savings would amount to $935 billion over 10 years, according to the Congressional Budget Office, when compared with spending levels estimated in January, or $756 billion when compared with CBO's March estimate that took into account savings enacted as part of fiscal 2011 appropriations (PL 112-10).

The discretionary spending cap for fiscal 2012 would be $1.043 trillion, which is about $24 billion more than the amount set by the House-adopted budget resolution (H Con Res 34). The cap for fiscal 2013 would be $1.047 trillion. For both years, a "firewall" would be erected between security (national defense, homeland security, and related activities) and non-security accounts - meaning domestic programs could not be targeted to provide more security spending.

The caps for fiscal 2014 through fiscal 2021 would not segregate security and non-security spending.

Enforcement Mechanism for Spending Caps

If lawmakers did not adhere to the discretionary appropriations caps, a process for imposing across-the-board, automatic spending cuts from discretionary accounts would take effect after Congress adjourns for the year.

The automatic mechanism would be similar to the system of spending "sequesters" enacted as part of the 1985 Gramm-Rudman anti-deficit law (PL 99-177). Some spending, including military pay, would be exempt from the automatic cuts.

Spending Cuts - Second Round

The new joint committee could recommend specific ways to reduce the deficit by an additional $1.5 trillion by 2021. The panel would be required to consider recommendations from regular legislative committees, and to report its recommendations to both chambers, subject to up-or-down votes without amendment.

The committee would be required to report by Nov. 23, and the House and Senate would be required to act by Dec. 23.

All of the federal budget would presumably be on the table, including entitlement cuts and revenue increases.

Enforcement Triggers for Panel Recommendations

Should the enacted recommendations from the joint committee not produce at least $1.2 trillion in savings, a process for automatic spending cuts would be triggered to achieve the desired savings and spread spending cuts equally across nine fiscal years.

Any sequester would be equal to the portion of the $1.2 trillion savings target that was not achieved. The first automatic cuts would take effect Jan. 2, 2013, and would fall equally on defense and non-defense accounts, including both discretionary spending and some entitlement spending.

Programs targeting low-income individuals and families would largely be exempt from the sequester, as they were under Gramm-Rudman. Medicare cuts would be restricted to no more than 2 percent of the program's outlays, and would only affect payments to providers, not beneficiaries.

Entitlement Cuts

The special joint committee would be likely to look closely at entitlement spending to achieve its deficit reduction goals. The spending cuts would be subject to tough negotiations over the next four or five months.

If a sequester was triggered, some restricted automatic cuts in Medicare spending might occur. It is unclear what other entitlement spending might be subject to a sequester.

Taxes

The proposal does not include immediate increases in revenue, although the joint deficit-reduction committee might consider revenue increases.

Earlier in the negotiations, Boehner proposed an increase of $800 billion in revenue. Such an increase might come either from elimination of tax breaks for individuals or corporations, or a comprehensive overhaul of the tax code might be structured to yield a net revenue increase.

Balanced-Budget Amendment

The plan requires both the House and the Senate to vote on a proposed balanced-budget amendment to the Constitution by the end of the year. If two-thirds of both chambers voted to adopt this amendment - and send it to the states for ratification - the second debt limit increase would be $1.5 trillion.


Jul 2011 - IRS Raises Standard Mileage Rates

On June 23rd , the IRS announced that it will raise the optional standard mileage rates for the final six months of 2011. From July 1, 2011 to December 31, 2011, taxpayers can deduct 55.5 cents per mile for business miles, and 23.5 cents per mile for medical and moving expenses. These rates are up from fifty-one cents and nineteen cents respectively, while the per-mile deduction for charitable expenses remains fixed at fourteen cents.

If you use your vehicle for business-related purposes, and you do not want to keep track of every vehicle-related expense, like your gas, oil, and tires, you can use an IRS shortcut and deduct a standard amount per mile. Most taxpayers qualify for the standard mileage rate, but there are some exceptions. Also, you should keep in mind that the standard mileage rate does not excuse you from keeping detailed records. Should you decide to use the standard deduction, although you do not need to keep records of your expenses, you do need to record the date, destination, names and relationships of business parties, and mileage driven for each business trip.

It is not typical for the IRS to change the per-mile deductions in the middle of the year. Normally the IRS sets the standard deductible rate for the year, and it is not adjusted. "This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."


June 2011 - Spring Cleaning Tax Tips

With summer right around the corner, many people have been doing some spring cleaning around the house. Instead of bringing old clothes, sporting equipment, and household items to the dump, you should consider donating them to a local charity or thrift store. Someone will find a use for your unwanted items and you could potentially lower your taxable income if you qualify for itemized deductions. You can qualify for itemized deductions if you exceed the allowable standard deduction, which in 2011 is $5,800 for singles and $11,600 for married couples filing jointly.

In order to maximize the tax benefits of your donations, you must first make sure that you are donating the items to an accredited organization. The IRS specifically defines a qualified organization, but the organization must, in general, operate for religious, charitable, educational, scientific, anti-animal or child abuse, and/or literary purposes. Note that donations made to specific individuals or political organizations and their candidates never qualify. However, donations to an entity which performs a substantial government function, like a donation to your local police department, can be deducted. If you have questions about whether or not a specific organization qualifies, please see IRS publication 526, or give us a call here in the office.

Secondly, if you're donating clothing or household items to charity, the items must be in good condition and you are only allowed to deduct the fair market value of the item. In general, the fair market value is the price at which property would change hands between a willing buyer and seller. This is sometimes referred to as the “thrift market” cost of an item. Moreover, if your contribution recently appreciated in value, this would mean more money in your pocket. Remember that you'll need to collect a signed receipt from the organization as proof of your donation. Furthermore, for contributions equal to or greater than $250 in value, you must obtain written acknowledgement from the organization showing the amount of cash or a description of any property contributed, and whether the organization provided any goods or services in exchange for the contributions. If you are feeling especially generous and plan to donate an item or group of items worth more than $5,000, you might want to consider having it appraised. In today's digital age, you might even consider taking a pictures or a video of your non-cash charitable contribution as further documentation of your donation. If you receive a benefit from donating—like tickets to a baseball game for instance—you may only deduct the amount that exceeds the fair market value of the benefit received. So, if you are planning on doing some spring cleaning, be sure to follow these simple guidelines. There are many other ways to leverage the tax benefits of your deductible charitable contributions. If you have any questions, be sure to contact this firm.


May 2011 - Your Rights As A Taxpayer

You probably don't think of the phrase "taxpayer rights" in conjunction with the IRS. But income tax obligations are not a one-way street. The IRS itself spells out your rights, and it is charged with reminding you of them during any interaction.

You have the right to:

  • Privacy. Unless authorized by law, the IRS will not disclose your personal/financial information.
  • Representation. You can represent yourself, or be represented by an authorized individual (CPA, attorney, enrolled agent, etc.). You can even record a meeting (with ten days' notice).
  • Pay only the tax due under the law. No more, no less. You might be allowed to make monthly installment payments.
  • Ask for help in resolving disputes. Write this number down and file it: 877-777-4778. It's the phone number for the Taxpayer Advocate Service. If you cannot see eye-to-eye with a representative of the IRS on a tax issue, call this number or write to the Taxpayer Advocate at the office that last engaged you. If a tax bill is causing you exceptional hardship, you can also work with this office.
  • Be relieved of certain penalties and interest. Yes, you do have that right -- in some specific cases. If an IRS employee has given you erroneous information, or if you acted, "…reasonably and in good faith," the agency will waive penalties when allowed by law. The same holds true for interest, if an IRS employee causes, "certain errors or delays".
  • Appeal. Don't think you owe the amount stated? Or feel that, "certain collection actions" were unwarranted? You can request a review of your case by the IRS Appeals Office – or a U.S. court. This step should only be taken if you kept accurate records and cooperated with the IRS.

Make sure the IRS does not violate your rights as a taxpayer. If you have any questions or would like to discuss this further, please give us a call at the office. Remember that dealing with the IRS can be a daunting process, but we are here to help.


Apr 2011 - IRS Mandates E-filing for 2011 and Beyond

The IRS recently released final regulations for mandatory E-filing requirements. Beginning January 1, 2011, all tax preparers who expect to file 100 or more returns for individuals, trusts, and estates are required to e-file. Next year, beginning January 1, 2012, preparers who expect to file 10 or more tax returns will be required to e-file their returns.

Although the IRS is encouraging E-filing, there are still some forms which they are unable to process electronically. As of right now, the IRS cannot process Form 990-T, Exempt Organization Business Income Tax Return; Form 1040-NR, Nonresident Alien Income Tax Return; and Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts. So if your return requires any of these forms, it will need to be filed through the mail.

According to www.irs.gov, more than 100 million returns were e-filed last year, and they have securely transmitted more than 800 million returns since 1990. The IRS advertises that e-filing is the safest, fastest, and easiest way to file your taxes. They promise faster refunds, greater accuracy, secure and confidential submission, and 24/7 access.

April 18th is around the corner, so be sure to submit all necessary information promptly, if you haven't already. For tax tips and other information, visit our website below and as always, feel free to get in touch with us through our website. We look forward to successfully weathering another tax season with you!


Mar 2011 - IRS owes Taxpayers $1.1 Billion from 2007

Did you file a tax return in 2007? Last week, the IRS announced that it has a surplus of $1.1 billion from 2007 that was never returned because a tax return was not filed.  About 1.1 million people are affected. It is estimated that more than half of these potential 2007 refunds are $640 or more.  In order to collect your refund you must file a tax return no later than this year’s tax return deadline, April 18th.

You might be wondering how it is possible that the IRS has a $1.1 billion surplus from 2007. It is speculated that some of this surplus is a result of the fact that many people may not have filed because they had too little income to require filing a tax return, even though they had taxes withheld from their wages. The tax law provides these people with a three-year window to claim their refund, and if the refund is not claimed, the money becomes a part of the US treasury.

However, the IRS reminded taxpayers who file for a tax return from 2007 that their check will be withheld if they have not filed tax returns for 2008 and 2009. Furthermore, the refund amount will be applied to any outstanding federal debts, including student loans or unpaid child support. In addition to the tax refund, low income earners are also foregoing monetary assistance from the Earned Income Tax Credit. In 2007, if you had 2 or more children, you were eligible for this tax credit if your income was less than $39,783, $35,241 for people with one child, and $14,590 for people with no children.

But this brings up a larger point about the IRS in general. While it is certainly noble that the IRS is publicly announcing this $1.1 billion surplus to give taxpayers the opportunity to recoup the return they are owed, they are not making public announcements about the deductions people miss when they attempt to file taxes on their own. To be fair, it would be impossible to expect the IRS to inform individuals about the deductions they miss. In fact, it would be a large intrusion on your privacy for the IRS to keep track of your individual expenditures. Therefore, it is your responsibility to ensure that you pay the proper amount of taxes. The US tax code is extremely complicated, so you want to be sure to take advantage of all the deductions applicable to your return or you will end up paying more than your fair share of taxes.


Feb 2011 - IRS Launches the IRS2Go App for iPhone, Android

The Internal Revenue Service today unveiled IRS2Go, its first smartphone application that lets taxpayers check on their status of their tax refund and obtain helpful tax information.


The IRS2Go phone app gives people a convenient way of checking on their federal refund. It also gives people a quick way of obtaining easy-to-understand tax tips.


Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app.


The phone app is a first step for the IRS. They will look for additional ways to expand and refine their use of smartphones and other new technologies to help meet the needs of taxpayers.


The mobile app, among a handful in the federal government, offers a number of safe and secure ways to help taxpayers. Features of the first release of the IRS2Go app include:

Get Your Refund Status

Taxpayers can check the status of their federal refund through the new phone app with a few basic pieces of information. First, taxpayers enter a Social Security number, which is masked and encrypted for security purposes. Next, taxpayers pick the filing status they used on their tax return. Finally, taxpayers enter the amount of the refund they expect from their 2010 tax return.


For people who e-file, the refund function of the phone app will work within about 72 hours after taxpayers receive an e-mail acknowledgement saying the IRS received their tax return.


For people filing paper tax returns, longer processing times mean they will need to wait three to four weeks before they can check their refund status.


About 70 percent of the 142 million individual tax returns were filed electronically last year.

Get Tax Updates

Phone app users enter their e-mail address to automatically get daily tax tips. Tax Tips are simple, straightforward tips and reminders to help with tax planning and preparation. Tax Tips are issued daily during the tax filing season and periodically during the rest of the year. The plain English updates cover topics such as free tax help, child tax credits, the Earned Income Tax Credit, education credits and other topics.

Follow the IRS

Taxpayers can sign up to follow the IRS Twitter news feed, @IRSnews. IRSnews provides the latest federal tax news and information for taxpayers. The IRSnews tweets provide easy-to-use information, including tax law changes and important IRS programs. 


IRS2Go is the latest IRS effort to provide information to taxpayers beyond traditional channels. The IRS also uses tools such as YouTube and Twitter to share the latest information on tax changes, initiatives, products and services through social media channels. For more information on IRS2Go and other new media products, visit www.IRS.gov or please do give us a call here at the office!

 


Jan 2011 - Filing Delay for Reinstated Deductions and Taxpayers Who Itemize

Following late December’s tax law changes, the Internal Revenue Service announced recently the upcoming tax season will start on time for most people, but taxpayers affected by three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns. In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid- to late February to file as well.

The start of the 2011 filing season began in January for the majority of taxpayers. However, December’s changes in the law mean that the IRS will need to reprogram its processing systems for three provisions that were extended in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17.

People claiming any of these three items - involving the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction as well as those taxpayers who itemize deductions on Form 1040 Schedule A - will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid- to late February.

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the late tax law changes. In the interim, people in the affected categories can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes.

The IRS urged taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax changes and ensure accurate tax returns.

Taxpayers will need to wait to file if they are within any of the following three categories:

  • Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted Dec. 17, which primarily benefits people living in areas without state and local income taxes and is claimed on Schedule A, Line 5. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
  • Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students - covering up to $4,000 of tuition and fees paid to a post-secondary institution - is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.
  • Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.

 

For those falling into any of these three categories, the delay affects both paper filers and electronic filers. Please give us a call or email if you have further questions about this delay.

The IRS emphasized that e-file is the fastest, best way for those affected by the delay to get their refunds. Those who use tax-preparation software can easily download updates from their software provider. The IRS Free File program also will be updated.

Updated information will be posted on IRS.gov and you can of course call our firm for help and clarification. In addition, our firm would like to remind employers about the new withholding tables released last week for 2011. Employers should implement the 2011 withholding tables as soon as possible, but not later than Jan. 31, 2011. We also remind employers that Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, should now be available on IRS.gov.


Dec 2010 - Year End Tax Planning and Quickbooks Tips

Though there has already been legislation with major tax changes this year, more legislation is almost certainly on the way. Looking into the future is especially important here in 2010 because of the increase in individual income tax rates that may come in 2011. Therefore, it is important to examine some traditional tax strategies with more than just 2010 tax implications in mind, because potential tax changes have the possibility of changing your short-term tax outlook.

Traditional Strategy of Deferring Income for 2010, and Possible 2011 Tax Rate Increases

Generally the time value of money says that it is better to pay taxes later rather than sooner. However, be careful when considering the time-honored strategy of deferring taxable income from 2010 into 2011. If you believe that you will remain in the same or lower tax bracket next year the strategy holds. If you believe you might be in a higher tax bracket in 2011, you might want to reverse traditional thinking and accelerate income into this year in order to take advantage of this year?s lower rates. Please give us a call here at the firm if you have questions about these ideas.

Investment Strategy

Remember that, currently, the max federal income tax rate for long-term capital gains in 2010 is 15%. If the Bush Tax Cuts are allowed to expire in 2011, the maximum rate on long-term capital gains is scheduled to increase to 20%. This is one point to keep in mind with long-term securities you are holding and might consider redeeming before the turn of the year. Our firm would be happy to assist you in planning for capital gains now or in the future.

Convert Traditional IRA into Roth IRA?

Starting in 2010, all taxpayers are eligible to convert their traditional IRAs to Roth IRAs. For 2010 conversions only, you are allowed to elect to recognize all the income in 2010 or spread the income ratably over two years, 2011 and 2012. The decision to pick up the income in 2010 or in the following years is based not only on the tax bracket you will be in for each of those years, but also the time value of money. This may be a hard decision to make right now with the uncertainty of the 2011 tax rates. The decision to convert a traditional IRA account to a Roth IRA account is complicated for these reasons, so please do consult with our firm before you decide (or do not decide) to make the conversion.

Business Ideas

Qualifying small employers may claim a new tax credit of up to 35% of the employer paid portion of the premium for providing health insurance coverage for their employees. A qualifying small employer: (A) has no more than 25 Full-time Equivalent (FTE) workers, (B) pays an average FTE wage of less than $50,000, and (C) has established a qualifying healthcare arrangement.

Employers may also claim a new tax credit of up to $1,000 for wages paid to each qualified new employee (certain definitions apply). Additional requirements are thus: You must keep the worker on the payroll for at least 52 consecutive weeks, and wages during the second 26 weeks must equal at least 80% of wages paid during the first 26 weeks. Please contact our office to learn more about this credit.


Nov 2010 - FAQs Regarding Your Social Security Statement

Q. Are my benefits figured on my last five years of earnings?
A. No. Retirement benefit calculations are based on your average earnings during a lifetime of work under the Social Security system. For most current and future retirees, we will average your 35 highest years of earnings. Years in which you have low earnings or no earnings may be counted to bring the total years of earnings up to 35.

Q. I stopped work at the end of last year at age 52. I don't expect to work again before I start my Social Security benefits when I turn 62. Will I still get the same benefit amount the SSA shown for age 62 on the Social Security Statement that they recently sent me?
A. Probably not. When they averaged out your 35 highest years of earnings to estimate your benefits on your Statement, they assumed you would continue to work up to age 62, making the same earnings you made last year. If, instead, you have $0 earnings each year over the next 10 years, your average earnings will probably be less and so will your benefit. You can use our Retirement Calculator or Benefit Calculators on our Financial Tools page to see how this will affect your monthly benefit amount.

Q. Will my retirement pension from my job reduce the amount of my Social Security benefit?
A. If your pension is from work where you also paid Social Security taxes, it will not affect your Social Security benefit. However, pensions based on work that is not covered by Social Security (for example, the federal civil service and some state, local, or foreign government systems) probably will reduce the amount of your Social Security benefit. For more information, read the following fact sheets:

  • "Windfall Elimination Provision" and
  • "Government Pension Offset."

Q. My wife and I both worked under Social Security. Her Social Security Statement says she can get $850 a month at full retirement age and mine says I would get $1450. Do we each get our own amount? Someone told me we could only get my amount, plus one-half of that amount for my wife.
A. Since your wife's own benefit is more than one-half of your amount, you will each get your own benefit. If your wife's own benefit were less than half of yours (that is, less than $725), she would receive her amount plus enough on your record to bring it up to the $725 amount.

Q. If I work after I start receiving Social Security retirement benefits, will I still need to pay Social Security and Medicare taxes on my earnings?
A. Yes. Any time you work in a job that is covered by Social Security--even if you are already receiving Social Security benefits--you and your employer must pay the Social Security and Medicare taxes on your earnings. The same is true if you are self-employed. You are still subject to the Social Security and Medicare taxes on your net profit.

Q. I have Medicare, but I didn't apply for retirement benefits because I'm under full retirement age and still working. How do I decide when to start receiving retirement benefits?
A. Deciding when to start receiving benefits is an important decision that needs to be made carefully. You can:

  • Read the SSA's "Retirement Information For Medicare Beneficiaries" fact sheet,
  • Call our office for personalized assistance on helping you decide when best to start receiving benefits,
  • Use our Retirement Calculators on our Financial Tools page to see how different retirement dates will affect your benefit amount, and
  • Find other information you can use to help you decide when to start your benefits in the SSA's "Near Retirement" section of their website.

 


Oct 2010 - Taxpayers Face Oct. 15 Deadlines; Due Dates for Extension Filers

Oct. 15 is fast approaching and is a key deadline for millions of individual taxpayers who requested an extension to file their 2009 tax returns. It is also a crucial due date for thousands of small nonprofit organizations at risk of losing their tax-exempt status because they have not filed the required forms in the last three years.

"The Oct. 15 deadline is particularly important this year because it’s the last chance for many small charities to comply with the law under the one-time relief program the IRS announced in July," said IRS Commissioner Doug Shulman. "And as always, it’s an important deadline for taxpayers who took an extension to file their returns."

Don’t Miss Your 1040 Deadline

The IRS expects to receive as many as 10 million tax returns from taxpayers who used Form 4868 to request a six-month extension to file their returns. Some taxpayers can wait until after Oct. 15 to file, including those serving in Iraq, Afghanistan or other combat zone localities and people affected by recent natural disasters.

The IRS encourages taxpayers to e-file. E-file with direct deposit results in a faster refund than by using a paper return. Electronic returns also have fewer errors than paper returns. Oct. 15 is the last day to take advantage of e-file and the Free File program.

Free File is a fast, easy and free way to prepare and e-file federal taxes online. The Free File program provides free federal income tax preparation and electronic filing for eligible taxpayers through a partnership between the IRS and the Free File Alliance LLC, a group of private sector tax software companies.

File If You Are Tax Exempt

Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file the required returns for 2007, 2008 and 2009 can preserve their status by filing returns by Oct. 15 under the one-time relief program.

The IRS has posted on a special page of IRS.gov the names and last-known addresses of these at-risk organizations, along with guidance about how to come back into compliance. The organizations on the list have return due dates between May 17 and Oct. 15, 2010, but the IRS has no record that they filed the required returns for any of the past three years.

Two types of relief are available for small exempt organizations - a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice (e-Postcard) , and a voluntary compliance program (VCP) for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.

Small organizations required to file Form 990-N simply need to go to the IRS website, supply the eight information items called for on the form, and electronically file it by Oct. 15. That will bring them back into compliance.

Under the VCP, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by Oct. 15 and pay a compliance fee. Details about the VCP are on the IRS website, along with frequently asked questions.

Check Your Withholding

With little more than three months remaining in the calendar year, individual taxpayers are encouraged to double check their federal withholding now to make sure they are having enough taxes taken out of their pay.

"Now is a good time to make sure your employer is withholding the proper amount," Shulman said. If you face a shortfall in your federal withholding, there is still time left in the year to make up the difference."

The average refund for 2009 was $2,887, up 8 percent from 2008. Even though the Making Work Pay Tax Credit lowered tax withholding rates in 2009 and 2010 for millions of American households, some workers and retirees still need to take steps to be sure enough tax is being taken out of their checks.

Those who should pay particular attention to their withholding include:

  • Married couples with two incomes
  • Individuals with multiple jobs
  • Dependents
  • Some Social Security recipients who work and
  • Workers who do not have valid Social Security numbers.


Retirees who receive pension payments may also need to check their federal withholding.

As was the case in 2009, taxpayers who wind up owing tax because too little was taken out of their paychecks during 2010, may qualify for special relief on a penalty that sometimes applies. Depending on their personal situation, some people could have less withheld from their paychecks than they need or want. Failure to adjust withholding could result in potentially smaller refunds or in limited instances may cause a taxpayer to owe tax rather than receive a refund next year.


Sep 2010 - List of Tax Provisions Scheduled to Expire on December 31, 2010

Provided nothing is done by Congress on tax policy from now through the end of the year, massive tax changes will take place. The odds of Congress amending nothing are small, but our firm feels it is worth considering why Congress is highly likely to address the tax code this year: Many key provisions are scheduled to change when the year turns on January 1, 2011.

Most of the key provisions that expire at the end of 2010 originated with early 2001-03 tax breaks, often referred to as the \"Bush tax cuts.\" There were other tax changes that took place further into Bush\'s term, and President Obama has also pushed through some changes in tax law that are set to expire at the end of 2010.

The table below presents a partial list of the most relevant tax provisions scheduled to expire at the end of 2010. Note that there were some key tax provisions that technically \"expired\" at the end of 2009, but which will likely be retroactively put back into law such as the AMT patch for 2010 and the list of \"tax extenders.\" Our firm asks that you peruse the list compiled below, and call us with any questions about how this pertains to your filing for the upcoming tax year.

Bush Tax Cut (2001 and 2003) Provisions Scheduled to Expire on December 31, 2010

Major Individual Income Tax Provisions

  • Increase of the size of 15 percent rate bracket for married filers to double that of unmarried filers.
  • Increase of the standard deduction for married filers to double that of unmarried filers.
  • Reduced capital gain rates for individuals.
  • Dividends of individuals taxed at capital gain rates.
  • Ten percent individual income tax rate.
  • Reduction in other individual income tax rates - size of 15 percent rate bracket modified to reflect 10 percent rate, and 28 percent, 31 percent, 36 percent and 39.6 percent rates are reduced to 25 percent, 28 percent, 33 percent and 35 percent, respectively.
  • Child credit - increase from $500 to $1,000, expand eligibility for refundable portion of the credit, AMT relief, provide that child credit not treated as income or resources for purposes of benefit or assistance programs financed in whole or in part with Federal funds.
  • Earned income tax credit (\"EITC\") - increase in the beginning point of the phase-out range for joint returns, modification of EITC treatment of amounts not includible in income, repeal of reduction of EITC for AMT liability, expansion of math error authority.
  • Repeal of the personal exemptions phase-outs (\"PEP\") for high income taxpayers.
  • Repeal of overall limitation on itemized deductions.
  • Dependent care credit - increase of dollar limit on creditable expenses from $2,400 to $3,000 ($4,800 to $6,000 for two or more children), increase of applicable credit percentage from 30 to 35 percent, increase of beginning point of phase-out range from $10,000 to $15,000.
  • Adoption credit and adoption assistance exclusion - increase to $10,000 for maximum credit and maximum exclusion, special needs adoptions deemed to have $10,000 eligible expenses for purposes of credit and exclusion, increase the beginning and ending points of phase-out range for credit and exclusion, the credit is allowed against AMT.
  • Student loan interest deduction - increase and indexation for inflation of the phase-out ranges, repeal of the limit on the number of months that interest payments are deductible, repeal of the rule that voluntary payments of interest are not deductible.
  • Education IRAs (Coverdell education savings accounts) - increase of maximum annual contribution from $500 to $2,000, expansion of definition of qualified education expenses, increase in the size of the phase-out range for married filers to double that of unmarried filers, provision of special needs beneficiary rules, contributions by corporations and other entities, and contributions until April 15th, permitted.

Estate Tax Provisions

  • Modified carryover basis rules for property acquired from a decedent who dies during 2010.
  • Estate tax deduction for State death taxes paid.
  • Expansion and clarification of estate tax conservation easement rules.
  • Temporary repeal of the estate and generation-skipping transfer taxes.
  • Reduction in the maximum gift tax rate to 35 percent.
  • Treatment of certain transfers in trust as taxable gifts under section 2503.
  • Repeal of the qualified family-owned business deduction.
  • Modifications to generation-skipping transfer tax rules regarding deemed allocations of exemption to certain transfers in trust, severing of trusts, valuation, and relief for late elections.
  • Modifications to estate tax installment payment rules.

Obama Stimulus Provisions Scheduled to Expire on December 31, 2010

Major Individual Income Tax Provisions

  • Making Work Pay credit.
  • Refundable child credit floor amount.
  • American Opportunity Tax credit.
  • Earned income tax credit:
    a. Credit percentage of 45 percent for three or more qualifying children;
    b. Phase-out threshold for marriage penalty relief.
  • Modification of AMT limitations on tax-exempt bonds.

Aug 2010 - One-Time Special Filing Relief Program for Small Charities

 

Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file required returns for 2007, 2008 and 2009 can preserve their status by filing returns by October 15, 2010, under a one-time relief program, the Internal Revenue Service announced today.

The IRS today posted on a special page of IRS.gov the names and last-known addresses of these at-risk organizations, along with guidance about how to come back into compliance. The organizations on the list have return due dates between May 17 and October 15, 2010, but the IRS has no record that they filed the required returns for any of the past three years.

“We are doing everything we can to help organizations comply with the law and keep their valuable tax exemption,” IRS Commissioner Doug Shulman said. “So if you do not have your filings up to date, now’s the time to take action and get back on track.”

Two types of relief are available for small exempt organizations — a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice, and a voluntary compliance program (VCP) for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.

Small organizations required to file Form 990-N simply need to go to the IRS website, supply the eight information items called for on the form, and electronically file it by October 15. That will bring them back into compliance.

Under the VCP, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by October 15 and pay a compliance fee. Details about the VCP are on the IRS website, along with frequently asked questions.

The relief announced today is not available to larger organizations required to file the Form 990 or to private foundations that file the Form 990-PF.

The IRS will keep today’s list of at-risk organizations on IRS.gov until October 15, 2010 which can be found by Clicking Here. Please note that this is an incomplete list, as there may be entities out there that need to comply but are not found at that link. Organizations that have not filed the required information returns by that date will have their tax-exempt status revoked, and the IRS will publish a list of these revoked organizations in early 2011. Donors who contribute to at-risk organizations are protected until the final revocation list is published.

The Pension Protection Act of 2006 made two important changes affecting tax-exempt organizations, effective the beginning of 2007. First, it mandated that all tax-exempt organizations, other than churches and church-related organizations, must file an annual return with the IRS. The Form 990-N was created for small tax-exempt organizations that had not previously had a filing requirement. Second, the law also required that any tax-exempt organization that fails to file for three consecutive years automatically loses its federal tax-exempt status. The IRS conducted an extensive outreach effort about this new legal requirement but, even so, many organizations have not filed returns on time.

If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status. Any income received between the revocation date and renewed exemption may be taxable.
 

 

 


Jul 2010 - Amend a 2009 / File a 2010 Return for Homebuyer Credit

Amend a 2009 / File a 2010 Return for Homebuyer Credit

Taxpayers who qualify for the first-time homebuyer credit or the long-time resident homebuyer credit who buy a home in 2010 don't have to wait to claim the credit when filing their 2010 returns. They can instead amend their 2009 tax returns to claim the credit and receive it sooner.

Buyers who purchased in 2009 and didn't claim the credit on their 2009 returns can also amend those returns to get the credit.  Recently we have been asked which documents our clients must prepare in order to claim the credit on either an original 2009 return or on an amended 2009 return:

First-time homebuyer

  • A copy of the settlement statement showing all parties' names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.
  • For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.
  • For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

 

Long-time residents

Long-time homebuyers claiming the credit for buying a new principal residence must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. The IRS has stepped up compliance checks involving the homebuyer credit, and it encourages homebuyers claiming this part of the credit to avoid refund delays by attaching documentation covering the five-consecutive-year period:   

  • Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
  • Property tax records or
  • Homeowner’s insurance records.

The IRS says it's not necessary to have five years of the same documentation. Any combination of these documents verifying that you owned and lived in your home as a principal residence for at least five consecutive years is acceptable.

For example, suppose you owned and lived in your previous home from Nov. 1, 2004, to Oct. 31, 2009. You could send a copy of Form 1098 showing the mortgage interest you paid for the part of 2004 during which you owned and lived in the home, as well as the Form 1098s for 2005, 2006 and 2007, proof of homeowners insurance for 2008 and a property tax statement for the part of 2009 when you owned and lived in the home.


June 2010 - IRS Offers Tax Tips for the 2010 Summer

Here are some tips from the IRS that may help you lower your taxes and avoid tax problems:

1. Make sure summer employer classifies you correctly. Summer workers sometimes are misclassified as independent contractors (self-employed) rather than as employees. Employers who do this usually fail to withhold taxes from the worker's wages, often leaving the worker responsible at tax time for paying income taxes plus Social Security and Medicare taxes. Workers can avoid higher tax bills and lost benefits if they know their proper work status.

2. Summer workers, students may be exempt from tax withholding. If you got a refund of all withheld income taxes for 2009 and you expect the same for 2010, you may claim "exempt" on your Form W-4 when you're hired. That can increase your paycheck and possibly let you avoid having to file a 2010 federal tax return. If you claim exempt status, your employer should withhold Social Security and Medicare taxes from your wages but no federal income tax.

3. Getting married? Newlyweds can help make the wedded bliss last longer by doing a few things now to avoid problems at tax time. First, report any name change to the Social Security Administration before you file your next tax return. Next, report any address change to the Postal Service, your employer and the IRS to make sure you get tax-related items. Finally, use the Withholding Calculator at IRS.gov to make sure your withholding is correct now that there are two of you to consider.

4. Clean out, donate, deduct. Those long-unused items you find during spring or summer cleaning can probably be donated to a qualified charity and may garner you a tax deduction as long as they're in good condition. You must itemize deductions to qualify to deduct charitable contributions and you must have proof of all donations.

5. Help with service project, deduct mileage. While there's no tax deduction for time donated toward a charitable cause, driving your personal vehicle while donating your services on a trip sponsored by a qualified charity could get you a tax break. Itemizers can deduct 14 cents per mile for charitable mileage driven in 2010. Keep good records of your mileage.

6. Get tax credit for summer day camp expenses. Many working parents must arrange for care of their younger children under 13 years of age during the school vacation period. A popular solution - with favorable tax consequences - is a day camp program. Unlike overnight camps, the cost of day camp may count as an expense towards the Child and Dependent Care Credit.

7. Owner of vacation home may get two tax breaks. First, mortgage interest and real estate taxes paid on a second home are usually deductible if you itemize. Second, if you rent your vacation home out fewer than 15 days per year, that rental income is typically not taxable.

8. Report winnings, possibly deduct losses. If Lady Luck smiles on you during your vacation, remember that gambling winnings must be reported on your tax return. Losses are deductible only if you itemize and have winnings that equal or exceed your losses. Good records are a must.

9. Deduct job-related moving expenses. Relocating due to a job? A tax break may be coming your way and you won't have to itemize deductions to get this one. If you can satisfy the distance and time tests, job-related moving expenses are deductible. Other requirements apply if you are self-employed. Members of the armed forces do not have to meet these tests if the move was due to a permanent change of station.

10. Deduct storm damage losses. You may be able to claim a casualty loss for the reduction in value of property damaged by floods, storms, fire or other disasters. And if your county was declared a federal disaster area, you may be able to file a tax return immediately to claim that loss. And if you're repairing storm damage, remember the energy tax credit is available when you purchase things like insulation or certain heating and cooling systems, water heaters, windows or doors.


May 2010 - American Opportunity Credit Helps Pay for First Four Years of College

More parents and students can use a federal education credit to offset part of the cost of college under the new American Opportunity Credit. This credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

In many cases, the American Opportunity Credit offers greater tax savings than existing education tax breaks. Here are some of its key features:

  • Tuition, related fees and required course materials, such as books, generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
  • The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  • The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for filers of a joint return). The credit is reduced or eliminated for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
  • Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed, or may be taxed, at the parent's rate, commonly referred to as the kiddie tax. See IRS Publication 929, Tax Rules for Children and Dependents, for details.

Though most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. The limitations include a married person filing a separate return, regardless of income, joint filers whose MAGI is $180,000 or more and, finally, single taxpayers, heads of household and some widows and widowers whose MAGI is $90,000 or more.

There are some post-secondary education expenses that do not qualify for the American Opportunity Credit. They include expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college. That's because the credit is only allowed for the first four years of a post-secondary education.

Students with more than four years of post-secondary education still qualify for the lifetime learning credit and the tuition and fees deduction.

For details on these and other education-related tax benefits, please give us a call at the firm, or see IRS Publication 970, Tax Benefits for Education.

 


Apr 2010 - Small Business Health Care Tax Credit: 15 FAQs

The new health reform law gives a tax credit to certain small employers that provide health care coverage to their employees, effective with tax years beginning in 2010.  The following questions and answers provide information on the credit as it applies for 2010-2013, including information on transition relief for 2010. An enhanced version of the credit will be effective beginning in 2014. The new law, the Patient Protection and Affordable Care Act, was passed by Congress and was signed by President Obama on March 23, 2010.

1. Which employers are eligible for the small employer health care tax credit?

A.  Small employers that provide health care coverage to their employees and that meet certain requirements ("qualified employers") generally are eligible for a Federal income tax credit for health insurance premiums they pay for certain employees.  In order to be a qualified employer, (1) the employer must have fewer than 25 full-time equivalent employees ("FTEs") for the tax year, (2) the average annual wages of its employees for the year must be less than $50,000 per FTE, and (3) the employer must pay the premiums under a "qualifying arrangement" described in Q/A-3.  See Q/A-9 through 15 for further information on calculating FTEs and average annual wages.

2. Can a tax-exempt organization be a qualified employer?

A.  Yes.  The same definition of qualified employer applies to an organization described in Code section 501(c) that is exempt from tax under Code section 501(a).  However, special rules apply in calculating the credit for a tax-exempt qualified employer.  See Q/A-6.

3. What expenses are counted in calculating the credit?

A.  Only premiums paid by the employer under an arrangement meeting certain requirements (a "qualifying arrangement") are counted in calculating the credit.  Under a qualifying arrangement, the employer pays premiums for each employee enrolled in health care coverage offered by the employer in an amount equal to a uniform percentage (not less than 50 percent) of the premium cost of the coverage.

If an employer pays only a portion of the premiums for the coverage provided to employees under the arrangement (with employees paying the rest), the amount of premiums counted in calculating the credit is only the portion paid by the employer.  For example, if an employer pays 80 percent of the premiums for employees? coverage (with employees paying the other 20 percent), the 80 percent premium amount paid by the employer counts in calculating the credit.  For purposes of the credit (including the 50-percent requirement), any premium paid pursuant to a salary reduction arrangement under a section 125 cafeteria plan is not treated as paid by the employer.

In addition, the amount of an employer's premium payments that counts for purposes of the credit is capped by the premium payments the employer would have made under the same arrangement if the average premium for the small group market in the State (or an area within the State) in which the employer offers coverage were substituted for the actual premium.  If the employer pays only a portion of the premium for the coverage provided to employees (for example, under the terms of the plan the employer pays 80 percent of the premiums and the employees pay the other 20 percent), the premium amount that counts for purposes of the credit is the same portion (80 percent in the example) of the premiums that would have been paid for the coverage if the average premium for the small group market in the State were substituted for the actual premium.

4.  What is the average premium for the small group market in a State (or an area within the State)?

A.  The average premium for the small group market in a State (or an area within the State) will be determined by the Department of Health and Human Services (HHS) and published by the IRS.  Publication of the average premium for the small group market on a State-by-State basis is expected to be posted on the IRS website by the end of April.

5. What is the maximum credit for a qualified employer (other than a tax-exempt employer)?

A.  For tax years beginning in 2010 through 2013, the maximum credit is 35 percent of the employer's premium expenses that count towards the credit, as described in Q/A-3.

Example.  For the 2010 tax year, a qualified employer has 9 FTEs with average annual wages of $23,000 per FTE.  The employer pays $72,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit.  The credit for 2010 equals $25,200 (35% x $72,000).

6. What is the maximum credit for a tax-exempt qualified employer?

A.  For tax years beginning in 2010 through 2013, the maximum credit for a tax-exempt qualified employer is 25 percent of the employer's premium expenses that count towards the credit, as described in Q/A-3.  However, the amount of the credit cannot exceed the total amount of income and Medicare (i.e., Hospital Insurance) tax the employer is required to withhold from employees? wages for the year and the employer share of Medicare tax on employees? wages. 

Example.  For the 2010 tax year, a qualified tax-exempt employer has 10 FTEs with average annual wages of $21,000 per FTE.  The employer pays $80,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit.  The total amount of the employer's income tax and Medicare tax withholding plus the employer's share of the Medicare tax equals $30,000 in 2010.
 
The credit is calculated as follows:

(1) Initial amount of credit determined before any reduction: (25% x $80,000) = $20,000
(2) Employer's withholding and Medicare taxes: $30,000
(3) Total 2010 tax credit is $20,000 (the lesser of $20,000 and $30,000).

7. How is the credit reduced if the number of FTEs exceeds 10 or average annual wages exceed $25,000?

A.  If the number of FTEs exceeds 10 or if average annual wages exceed $25,000, the amount of the credit is reduced as follows (but not below zero).  If the number of FTEs exceeds 10, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the number of FTEs in excess of 10 and the denominator of which is 15.  If average annual wages exceed $25,000, the reduction is determined by multiplying the otherwise applicable credit amount by a fraction, the numerator of which is the amount by which average annual wages exceed $25,000 and the denominator of which is $25,000.  In both cases, the result of the calculation is subtracted from the otherwise applicable credit to determine the credit to which the employer is entitled.  For an employer with both more than 10 FTEs and average annual wages exceeding $25,000, the reduction is the sum of the amount of the two reductions.  This sum may reduce the credit to zero for some employers with fewer than 25 FTEs and average annual wages of less than $50,000.

Example.  For the 2010 tax year, a qualified employer has 12 FTEs and average annual wages of $30,000.  The employer pays $96,000 in health care premiums for those employees (which does not exceed the average premium for the small group market in the employer's State) and otherwise meets the requirements for the credit. 

The credit is calculated as follows:

(1) Initial amount of credit determined before any reduction: (35% x $96,000) = $33,600    
(2)  Credit reduction for FTEs in excess of 10: ($33,600 x 2/15) = $4,480
(3) Credit reduction for average annual wages in excess of $25,000: ($33,600 x $5,000/$25,000) = $6,720
(4) Total credit reduction: ($4,480 + $6,720) = $11,200
(5) Total 2010 tax credit: ($33,600 ? $11,200) = $22,400.

8. Can premiums paid by the employer in 2010, but before the new health reform legislation was enacted, be counted in calculating the credit?

A.  Yes.  In computing the credit for a tax year beginning in 2010, employers may count all premiums described in Q/A-3 for that tax year. 

9.  How is the number of FTEs determined for purposes of the credit?

A.  The number of an employer's FTEs is determined by dividing (1) the total hours for which the employer pays wages to employees during the year (but not more than 2,080 hours for any employee) by (2) 2,080.  The result, if not a whole number, is then rounded to the next lowest whole number.  See Q/A-12 through 14 for information on which employees are not counted for purposes of determining FTEs.

Example.  For the 2010 tax year, an employer pays 5 employees wages for 2,080 hours each, 3 employees wages for 1,040 hours each, and 1 employee wages for 2,300 hours.

The employer's FTEs would be calculated as follows:

(1) Total hours not exceeding 2,080 per employee is the sum of:

a. 10,400 hours for the 5 employees paid for 2,080 hours each (5 x 2,080)
b. 3,120 hours for the 3 employees paid for 1,040 hours each (3 x 1,040)
c. 2,080 hours for the 1 employee paid for 2,300 hours (lesser of 2,300 and 2,080)

These add up to 15,600 hours

(2) FTEs: 7 (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number)
 
10. How is the amount of average annual wages determined?

A.  The amount of average annual wages is determined by first dividing (1) the total wages paid by the employer to employees during the employer's tax year by (2) the number of the employer's FTEs for the year.  The result is then rounded down to the nearest $1,000 (if not otherwise a multiple of $1,000).  For this purpose, wages means wages as defined for FICA purposes (without regard to the wage base limitation).  See Q/A-12 through 14 for information on which employees are not counted as employees for purposes of determining the amount of average annual wages.
 
Example.  For the 2010 tax year, an employer pays $224,000 in wages and has 10 FTEs.

The employer's average annual wages would be: $22,000 ($224,000 divided by 10 = $22,400, rounded down to the nearest $1,000)

11. Can an employer with 25 or more employees qualify for the credit if some of its employees are part-time?

A. Yes. Because the limitation on the number of employees is based on FTEs, an employer with 25 or more employees could qualify for the credit if some of its employees work part-time.  For example, an employer with 46 half-time employees (meaning they are paid wages for 1,040 hours) has 23 FTEs and therefore may qualify for the credit.

12. Are seasonal workers counted in determining the number of FTEs and the amount of average annual wages?

A.  Generally, no.  Seasonal workers are disregarded in determining FTEs and average annual wages unless the seasonal worker works for the employer on more than 120 days during the tax year. 

13. If an owner of a business also provides services to it, does the owner count as an employee?

A.  Generally, no.  A sole proprietor, a partner in a partnership, a shareholder owning more than two percent of an S corporation, and any owner of more than five percent of other businesses are not considered employees for purposes of the credit.  Thus, the wages or hours of these business owners and partners are not counted in determining either the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.

14. Do family members of a business owner who work for the business count as employees?

A.  Generally, no.  A family member of any of the business owners or partners listed in Q/A-13, or a member of such a business owner's or partner's household, is not considered an employee for purposes of the credit.  Thus, neither their wages nor their hours are counted in determining the number of FTEs or the amount of average annual wages, and premiums paid on their behalf are not counted in determining the amount of the credit.  For this purpose, a family member is defined as a child (or descendant of a child); a sibling or step-sibling; a parent (or ancestor of a parent); a step-parent; a niece or nephew; an aunt or uncle; or a son-in-law, daughter- in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.

15.  How is eligibility for the credit determined if the employer is a member of a controlled group or an affiliated service group?

A.  Members of a controlled group (e.g., businesses with the same owners) or an affiliated service group (e.g., related businesses of which one performs services for the other) are treated as a single employer for purposes of the credit.  Thus, for example, all employees of the controlled group or affiliated service group, and all wages paid to employees by the controlled group or affiliated service group, are counted in determining whether any member of the controlled group or affiliated service group is a qualified employer.  Rules for determining whether an employer is a member of a controlled group or an affiliated service group are provided under Code section 414(b), (c), (m), and (o).


Mar 2010 - The Making Work Pay Tax Credit

Check Your Withholding

How will the Making Work Pay tax credit affect you?

Most wage earners will benefit from larger paychecks in 2009 and 2010 as a result of the changes made to the federal income tax withholding tables to implement the Making Work Pay tax credit. However, some people may find that the changes built into the withholding tables result in less tax being withheld than they prefer.

If you're not eligible for the Making Work Pay tax credit, withholding changes could mean a smaller refund next spring. A limited number of people, including those who usually receive very small refunds, could in some situations owe a small amount rather than receiving a refund. Those who should pay particular attention to their withholding include:

  • Pensioners (see more information under Pensioners, below)
  • Married couples with two incomes
  • Individuals with multiple jobs
  • Dependents
  • Some Social Security recipients who work
  • Workers without valid Social Security numbers

The Making Work Pay tax credit, normally a maximum of $400 for working individuals and $800 for working married couples, is reduced by the amount of any Economic Recovery Payment ($250 per eligible recipient of Social Security, Supplemental Security Income, Railroad Retirement or Veteran's benefits) or Special Credit for Certain Government Retirees ($250 per eligible federal or state retiree) that you receive. If you are affected by this reduction, you should review your withholding to ensure that sufficient funds have been withheld to meet your tax obligation.

If you wind up owing tax because too little was taken out of your paychecks during 2009, you may qualify for special relief on a penalty that sometimes applies.

If you believe your current withholding is not appropriate for your personal situation, you can perform a quick check using the IRS withholding calculator. If you are not familiar with the withholding calculator, watch this IRS how-to video for instructions. When you have determined your correct withholding, make any adjustments by filing a revised Form W-4, Employee's Withholding Allowance Certificate, with your employer.

Pensioners

Pensioners do not qualify for the Making Work Pay credit, unless they receive earned income. However, because the 2009 and the 2010 withholding tables also apply to pensioners, the IRS has provided pension plans with an optional adjustment procedure. If you are a pensioner with questions about your withholding, contact your pension plan administrator.

If desired, pensioners can adjust their withholding by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments.

Self-Employed

Self-employed individuals can also benefit now from the Making Work Pay tax credit by evaluating their expected income tax liability, allowing for this tax credit if they are eligible, and making the appropriate adjustment in the amount of their regularly scheduled estimated tax payments.

Your 2009 Tax Return

Information on completing your tax return if you're claiming the tax credit is available.

Questions and Answers

If you have questions, please contact our office for more information or to check your eligibility. Additionally, these questions and answers might help.


Feb 2010 - 2009 Tax Law Changes Provide Saving Opportunities for Nearly Everyone

In 2009, numerous new and expanded deductions and credits came into being for a broad cross-section of taxpayers: College tax benefits for parents and students; energy credits for homeowners who are going green; and even tax breaks for home buyers and car buyers.

Following is a summary of these and other key changes taxpayers will find when they start preparing their 2009 federal income tax returns.

Note:See Fact Sheet 2010-6 for more information on the first-time homebuyer credit and Fact Sheet 2010-7 for details on the making work pay credit.

American Opportunity Credit Helps Pay for First Four Years of College

More parents and students can use a federal education credit to offset part of the cost of college under the new American Opportunity Credit. This credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

In many cases, the American Opportunity Credit offers greater tax savings than existing education tax breaks. Here are some of its key features:

  • Tuition, related fees and required course materials, such as books, generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
  • The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  • The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for filers of a joint return). The credit is reduced or eliminated for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
  • Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed, or may be taxed, at the parent\'s rate, commonly referred to as the kiddie tax. See Publication 929, Tax Rules for Children and Dependents, for details.

Though most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. The limitations include a married person filing a separate return, regardless of income, joint filers whose MAGI is $180,000 or more and, finally, single taxpayers, heads of household and some widows and widowers whose MAGI is $90,000 or more.

There are some post-secondary education expenses that do not qualify for the American Opportunity Credit. They include expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college. That\'s because the credit is only allowed for the first four years of a post-secondary education.

Students with more than four years of post-secondary education still qualify for the lifetime learning credit and the tuition and fees deduction.

For details on these and other education-related tax benefits, see Publication 970, Tax Benefits for Education.

Many Energy Improvements Qualify for Expanded Tax Credits

People who weatherize their homes or purchase alternative energy equipment may qualify for either of two expanded home energy tax credits: the non-business energy property credit and the residential energy efficient property credit.

Non-business Energy Property Credit: This credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. This means that a homeowner can get the maximum credit by spending at least $5,000 on qualifying improvements. Homeowners must make the improvements to an existing principal residence; this tax credit is not available for new construction. Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs are also eligible for the credit, though the cost of installing these items does not count.

Residential Energy Efficient Property Credit: Homeowners going green should also check out a second tax credit designed to spur investment in alternative energy equipment. The residential energy efficient property credit, equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Qualifying property purchased for new construction or an existing home is eligible for the credit. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property.

Not all energy-efficient improvements qualify for these tax credits. For that reason, homeowners should check the manufacturer\'s tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer\'s Web site or the product packaging. Normally, a homeowner can rely on this certification. The IRS cautions that the manufacturer\'s certification is different from the Department of Energy\'s Energy Star label, and not all Energy Star labeled products qualify for the tax credits. Use Form 5695, Residential Energy Credits, to figure and claim these credits.

New Vehicle Purchase Incentive

New car buyers can deduct the state or local sales or excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and eligible taxpayers may claim the deduction for taxes paid on multiple purchases. However, the deduction is limited to the tax on up to $49,500 of the purchase price of each qualifying new vehicle. Qualifying new vehicles must be purchased, not leased, after Feb. 16, 2009, and before Jan. 1, 2010.

Taxpayers who buy a new vehicle may deduct state or local fees or taxes that are similar to a sales tax whether or not their state imposes a sales tax. To qualify, the fees or taxes must be assessed on the purchase of the vehicle and must be based on the vehicle\'s sales price or as a per-unit fee.

The amount of the deduction is reduced for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers. This deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A. Itemizers claim the deduction on either Line 5 or Line 7 of Schedule A. See the Schedule A instructions for details. Non-itemizers claim the deduction on new Schedule L, Standard Deduction for Certain Filers.

Tax Credits Increased for Low and Moderate Income Workers

More workers and working families are eligible for the Earned Income Tax Credit. In particular, expanded benefits are now available for those with three or more qualifying children and married couples. The EITC helps taxpayers whose incomes are below certain income thresholds, which in 2009 rise to:

  • $48,279 for families with three or more qualifying children
  • $45,295 for those with two or more children
  • $40,463 for people with one child
  • $18,440 for those with no children

One in six taxpayers can claim the EITC, which, unlike most tax breaks, is refundable, meaning that individuals can get it even if they owe no tax and even if no tax is withheld from their paychecks.

In addition, the earned income formula for the additional child tax credit is revised for tax years 2009 and 2010. As a result, more low and moderate income families qualify for the full $1,000 child tax credit. See Form 8812 for more information.

Standard Deduction Increases for Most Taxpayers

Nearly two out of three taxpayers choose to take the standard deduction rather than itemizing deductions such as mortgage interest and charitable contributions. The basic standard deduction is:

  • $11,400 for married couples filing a joint return and qualifying widows and widowers, a $500 increase compared with 2008
  • $5,700 for singles and married individuals filing separate returns, up $250
  • $8,350 for heads of household, up $350.

Higher amounts apply to blind people and senior citizens. The standard deduction is often reduced for a taxpayer who qualifies as someone else\'s dependent.

In addition, eligible taxpayers can further increase their standard deduction by any of the following three deductions:

  • State or local real estate taxes paid in 2009
  • A net disaster loss reported on Form 4684 and
  • State or local sales or excise taxes on the purchase of a qualifying new motor vehicle.

Use new Schedule L, Standard Deduction for Certain Filers, to claim these additional deductions.

AMT Exemption Increased for One Year

For tax-year 2009, Congress raised the alternative minimum tax exemption to the following levels:

  • $70,950 for a married couple filing a joint return and qualifying widows and widowers, up from $69,950 in 2008
  • $35,475 for a married person filing separately, up from $34,975
  • $46,700 for singles and heads of household, up from $46,200

Under current law, these exemption amounts will drop to $45,000, $22,500 and $33,750, respectively, in 2010. Form 6251 and the AMT calculator provide more information.

Other Changes

The standard mileage rate for business use of a car, van, pick-up or panel truck is 55 cents for each mile driven. The standard mileage rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 24 cents per mile. The rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile.

The value of each personal and dependency exemption is $3,650, up $150 from 2008. Most taxpayers can take personal exemptions for themselves and an additional exemption for each eligible dependent. This is one of more than three dozen individual and business tax provisions that are adjusted each year to keep pace with inflation. A complete rundown of these changes can be found in 2009 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits.

The amount of taxable investment income a child can have without it being taxed at the parent\'s rate is $1,900, up $100 from 2008. For details, see Form 8615.

There are several modifications to the definition of a qualifying child. For example, the child must be younger than the taxpayer, unless the child is totally and permanently disabled. These changes affect who can claim various tax benefits including the dependency exemption, child tax credit, credit for child and dependent care expenses, head of household filing status and the EITC. See the instructions for Forms 1040 or 1040a for more information.

A new rule applies to the noncustodial parent in situations where a couple is divorced or legally separated after 2008. To claim a child as a dependent, the noncustodial parent must attach Form 8332 or a similar statement to his or her tax return. For pre-2009 divorces and separations, the noncustodial spouse still has the option of attaching certain pages from the divorce decree or separation agreement, instead of Form 8332. See Form 8332 for further details.

A $3,500 or $4,500 voucher or payment made for such a voucher under the CARS \'cash for clunkers\' program is not taxable to the consumer buying or leasing a new car.

Unemployment benefits up to $2,400 received in 2009 are tax free for unemployed workers. Every person who receives unemployment benefits can exclude the first $2,400 of these benefits on their return. Unemployment benefit amounts over $2,400 are taxed.


Jan 2010 - New Mileage Rates and ROTH IRA Conversion Rules

2010 Standard Mileage Rates

The Internal Revenue Service today issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
  • 50 cents per mile for business miles driven
  • 16.5 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than last year’s. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Revenue Procedure 2009-54 contains additional details regarding the standard mileage rates.

ROTH IRA Conversions in 2010

Beginning in January of this year, taxpayers with modified adjusted gross income (MAGI) of more than $100,000 will be allowed to convert a traditional IRA to a Roth IRA. This change applies to all years beyond 2010, and additionally, your income taxes due on the conversion can be spread over two years if desired. For example, if you chose to convert this year, the conversion amount may be included as taxable income in 2011 and 2012 - helping to spread out the tax consequence.

While MAGI has been eliminated for ROTH conversions, it is important to note that MAGI limits still exist to fund a ROTH IRA.

Example:

Suppose you funded traditional IRAs from 2006 through 2009 and now, in 2010, you have $40,000 in your account. Additional, let us suppose this entire account consisted of $30,000 tax deductible dollars and $10,000 of growth.

In this example, you'd need to pay income taxes on all $40,000 in initial funding and growth when you convert to a ROTH IRA. However, the good news is you will never have to pay income taxes on this account again, regardless of future growth, and you can spread the tax liability over two years.

Dec 2009 - First-Time Homebuyer Credit Extended to 2010

A new law that went into effect Nov. 6 extends the first-time homebuyer credit five months and expands the eligibility requirements for purchasers.

The Worker, Homeownership, and Business Assistance Act of 2009 extends the deadline for qualifying home purchases from Nov. 30, 2009, to April 30, 2010. Additionally, if a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase.

The maximum credit amount remains at $8,000 for a first-time homebuyer -- that is, a buyer who has not owned a primary residence during the three years up to the date of purchase.

But the new law also provides a \"long-time resident\" credit of up to $6,500 to others who do not qualify as first-time homebuyers. To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.

For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns.

A new version of Form 5405, First-Time Homebuyer Credit, will be available in the next few weeks. A taxpayer who purchases a home after Nov. 6 must use this new version of the form to claim the credit. Likewise, taxpayers claiming the credit on their 2009 returns, no matter when the house was purchased, must also use the new version of Form 5405. Taxpayers who claim the credit on their 2009 tax return will not be able to file electronically but instead will need to file a paper return.

A taxpayer who purchased a home on or before Nov. 6 and chooses to claim the credit on an original or amended 2008 return may continue to use the current version of Form 5405.

Income Limits Rise

The new law raises the income limits for people who purchase homes after Nov. 6. The full
credit will be available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000,
or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000
for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

For homes purchased prior to Nov. 7, 2009, existing MAGI limits remain in place. The full credit is available to taxpayers with MAGI up to $75,000, or $150,000 for joint filers. Those with MAGI between $75,000 and $95,000, or $150,000 and $170,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

New Requirements

Several new restrictions on purchases that occur after Nov. 6 go into effect with the new law:

  • Dependents are not eligible to claim the credit.
  • No credit is available if the purchase price of a home is more than $800,000.
  • A purchaser must be at least 18 years of age on the date of purchase.

For Members of the Military

Members of the Armed Forces and certain federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and still qualify for the credit. An eligible taxpayer must buy or enter into a binding contract to buy a home by April 30, 2011, and settle on the purchase by June 30, 2011.

For more details on the credit, visit the First-Time Homebuyer Credit page on IRS.gov


Nov 2009 - Tax Credits to Help Winterize Your Home

November 2009 News Update

Tax Credits Help Homeowners Winterize Their Homes and Save Energy

People can now weatherize their homes and be rewarded for their efforts. According to the Internal Revenue Service, homeowners making energy-saving improvements this fall can cut their winter heating bills and lower their 2009 tax bill as well.

The American Recovery and Reinvestment Act (Recovery Act), enacted earlier this year, expanded two home energy tax credits: the nonbusiness energy property credit and the residential energy efficient property credit.

Non-business Energy Property Credit

This credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items does not count.

By spending as little as $5,000 before the end of the year on eligible energy-saving improvements, a homeowner can save as much as $1,500 on his or her 2009 federal income tax return. Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. These tax savings are on top of any energy savings that may result.

Residential Energy Efficient Property Credit

Homeowners going green should also check out a second tax credit designed to spur investment in alternative energy equipment. The residential energy efficient property credit, equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property.

Not all energy-efficient improvements qualify for these tax credits. For that reason, homeowners should check the manufacturer's tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer's website or with the product packaging. Normally, a homeowner can rely on this certification. The IRS cautions that the manufacturer's certification is different from the Department of Energy's Energy Star label, and not all Energy Star labeled products qualify for the tax credits.

Eligible homeowners can claim both of these credits when they file their 2009 federal income tax return. Because these are credits, not deductions, they increase a taxpayer's refund or reduce the tax he or she owes. An eligible taxpayer can claim these credits, regardless of whether he or she itemizes deductions on Schedule A. Use Form 5695, Residential Energy Credits, to figure and claim these credits. A draft version of this form is available now by searching www.IRS.gov.


Oct 2009 - Required Minimum Distribution Waiver


October 2009 News Update

IRS Issues Guidance on 2009 Required Minimum Distribution Waiver

The Internal Revenue Service today provided guidance for retirement plan administrators, plan participants and retirees regarding recent legislation affecting required minimum distributions. The Worker, Retiree, and Employer Recovery Act of 2008 waives required minimum distributions for 2009 from certain retirement plans.

Generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employerâ??s plan beginning with the year the account owner reaches age 70½. The 2008 law waives required minimum distributions for 2009 for IRS and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 required minimum distributions to be rolled over into an IRA or another retirement plan.

Notice 2009-82 provides relief for people who have already received a 2009 required minimum distribution this year. Individuals generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution.

The notice also provides guidance for retirement plan sponsors. It contains two sample plan amendments that plan sponsors may adopt or use to amend their plans to either stop or continue 2009 required minimum distributions. Both sample amendments provide that participants and beneficiaries can choose to receive or not to receive 2009 required minimum distributions. Also, both sample amendments allow the employer to offer direct rollover options of certain 2009 required minimum distributions.

Plan sponsors may need to tailor the sample amendment to their planâ??s particular terms and administration procedures and must adopt the amendment no later than the last day of the first plan year beginning on or after Jan. 1, 2011 (Jan. 1, 2012 for governmental plans).


Sep 2009 - IRS Builds New International Tax Group

For anyone who wondered if the Internal Revenue Service was done with offshore accounts now that it received its UBS AG (UBS) settlement, there is this:

The agency has started putting together a new group to focus on international tax issues, including offshore bank accounts used to evade taxes.


An IRS unit that deals with large corporations and large partnerships has posted job openings for several positions in a new group that will "focus on examinations involving the complicated business arrangements and entities controlled by the high-wealth taxpayer segment," according to IRS spokesman Frank Keith. Naturally, the move to create the new group has caught the attention of tax lawyers working on the UBS case.


The IRS looks to be assembling a more sophisticated group of examiners for the group. However, while an earlier press report indicated the group was formed to deal with the UBS tax evasion case, which has drawn hundreds of people into an IRS voluntary disclosure program, it won't deal strictly with UBS. It points to the fact that the IRS windfall from the UBS case has prompted it to comb elsewhere for similar circumstances.


It follows on a pledge by IRS Commissioner Doug Shulman to beef up international tax compliance, partly through a crackdown on people who use offshore accounts to evade taxes. President Obama's 2010 budget earmarked extra IRS funds for this purpose. Scott D. Michel, an attorney in Washington, said it appears that the IRS is working hard to devote substantial audit and enforcement resources to deal with the aftermath of the UBS settlement.

Aug 2009 - Car Allowance Rebate System (CARS) Act of 2009

The Cash for Clunkers program, or CARS, has only been under way since July, but the federal government has already handed out a large portion of the billions available. Needless to say, plenty of people have taken advantage of the vouchers toward new vehicles. Please peruse frequently asked questions regarding the following bullets, and see if the program may be something advantageous for you:
  • 25 Year Rule
  • CARS Credit
  • Consumer
  • Definitions
  • Dealer
  • Eligibility
  • Fuel Economy/MPG
  • MSRP
  • NHTSA
  • New Vehicle
  • Program Timelines
  • Pre-Rule Transactions
  • Rebates and Incentives
  • Scrap value
  • Taxes
  • Trade-in
  • Vehicle Categories


25 Year Rule

How do I find out when my vehicle was manufactured?

The month and year of manufacture (e.g., 1-96 (January 1996)) appear on the safety standard certification label that is located on the frame or edge of the driver\'s door in most vehicles.

CARS Credit

Do I need to get a voucher or sign up for this program?

No. You do not need a voucher and you are not required to sign up or enroll in this program. Participating new car dealers will apply a credit, reducing the price you pay at the time of your purchase or lease, provided the vehicle you buy or lease and the vehicle you trade in meet the program requirements. The dealer will then obtain reimbursement from the government.

May I receive or use more than one credit under the CARS program?

No, the CARS Act specifies that not more than one credit may be issued to a single person, not more than one credit may be issued for joint registered owners of a single eligible trade-in vehicle, and that only one credit under this program may be applied toward the purchase or lease of any single new vehicle.

What is the amount of the credit?

The amount of the credit is $3,500 or $4,500, and generally depends on the type of vehicle you purchase and the difference in fuel economy between the purchased vehicle and the trade-in vehicle. Different requirements apply for work trucks.

What is the value of the credit for the purchase or lease of a new passenger car?

The value of the credit for the purchase or lease of a new passenger car depends upon the difference between the combined fuel economy of the vehicle that is traded in and that of the new vehicle that is purchased or leased. If the new vehicle has a combined fuel economy that is at least 4, but less than 10, miles per gallon higher than the traded-in vehicle, the credit is $3,500. If the new vehicle has a combined fuel economy value that is at least 10 miles per gallon higher than the traded-in vehicle, the credit is $4,500.

What is the value of the credit for the purchase or lease of a new van, pickup truck or SUV?

The value of the credit given for the purchase or lease of a category 1 or 2 truck also generally depends on the difference between the combined fuel economy of the vehicle that is traded in and that of the new vehicle that is purchased or leased. If the new vehicle is a category 1 truck that has a combined fuel economy value that is at least 2, but less than 5, miles per gallon higher than the traded-in vehicle, the credit is $3,500. If the new category 1 truck has a combined fuel economy value that is at least 5 miles per gallon higher than the traded-in vehicle, the credit is $4,500.

If both the new vehicle and the traded-in vehicle are category 2 trucks and the combined fuel economy value of the new vehicle is at least 1, but less than 2, miles per gallon higher than the combined fuel economy value of the traded in vehicle, the credit is $3,500. If both the new vehicle and the traded-in vehicle are category 2 trucks and the combined fuel economy of the new vehicle is at least 2 miles per gallon higher than that of the traded-in vehicle, the credit is $4,500. A $3,500 credit applies to the purchase or lease of a category 2 truck if the trade-in vehicle is a category 3 (work) truck that was manufactured not later than model year 2001, but not earlier than 25 years before the date of the trade in.

What rules apply to new work trucks?

A work truck, which is called a category 3 truck under the CARS Act, is subject to special rules. Work trucks are not rated for fuel economy by the EPA. Thus, the eligibility of work trucks for the program does not depend on combined fuel economy. Instead, work trucks may only be traded in under the program if they were manufactured not later than model year 2001 and not earlier than 25 years before the date of the trade in. In addition, work trucks may only be traded in for the purchase of a category 2 truck or another category 3 truck that is of similar size or smaller than the traded-in vehicle. Finally, the Act provides only for a $3,500 credit for trading in a work truck.

The CARS Act limits the amount of funds that can be used to provide credits for purchases or leases of work trucks. Only 7.5 percent of the funds appropriated for the program may be used for credits for work trucks. Once that limit is reached, NHTSA will stop making payments for these transactions. NHTSA will keep the public informed as to the funds that remain available for these credits.

Consumer

Is the credit subject to being taxed as income to the consumers that participate in the program?

The CARS Act expressly provides that the credit is not income for the consumer.

Do I have to pay State or local sales tax on the amount of the CARS program credit?

The question of whether a consumer must pay State or local sales tax on the amount of the CARS program credit would depend on the sales tax law of each State or locality. Consumer should review the law of their respective States or consult a tax advisor to answer this question.

Can dealers charge me a fee for buying or leasing a vehicle under the CARS program?

While dealers can charge their normal types of fees, the CARS Act specifically prohibits dealers from charging a fee for purchasing or leasing a vehicle under the program.

What will I need to bring to the dealer in order to participate in the program?

You should bring documentation establishing the identity of the person who currently owns the vehicle, preferably the title of the vehicle, and documentary proof that the vehicle has been continuously insured consistent with the applicable State law and registered to the same owner for a period of not less than 1 year immediately prior to the trade-in. The final rule will specify what types of documentation would be acceptable.

Definitions

Can I use this credit in combination with manufacturer\'s rebates and discounts?

The CARS Act requires the dealer to use the credit under the CARS program in addition to any rebates or discounts advertised by the dealer or offered by the new vehicle\'s manufacturer. The dealer may not use the credit to offset these rebates and discounts.

Dealer

Is the credit subject to being taxed as income to the consumers that participate in the program?

The CARS Act expressly provides that the credit is not income for the consumer.

Do I have to pay State or local sales tax on the amount of the CARS program credit?

The question of whether a consumer must pay State or local sales tax on the amount of the CARS program credit would depend on the sales tax law of each State or locality. Consumer should review the law of their respective States or consult a tax advisor to answer this question.

Can dealers charge me a fee for buying or leasing a vehicle under the CARS program?

While dealers can charge their normal types of fees, the CARS Act specifically prohibits dealers from charging a fee for purchasing or leasing a vehicle under the program.

What will I need to bring to the dealer in order to participate in the program?

You should bring documentation establishing the identity of the person who currently owns the vehicle, preferably the title of the vehicle, and documentary proof that the vehicle has been continuously insured consistent with the applicable State law and registered to the same owner for a period of not less than 1 year immediately prior to the trade-in. The final rule will specify what types of documentation would be acceptable.

How do I know if a dealer is participating in the program?

The law requires dealers to be registered to participate in the program. We will be moving as quickly as possible to register interested dealers as soon as the registration process begins in the near future. As dealers are registered, we will list them on this website. We will continue to update this list during the life of the program. Meanwhile, you may wish to contact dealers in your area to ask whether they plan to participate in the program. The CARS Act requires that dealers be licensed by their respective state for the sale of new automobiles in order for them to participate in the program.

Eligibility

How do I find out when my vehicle was manufactured?

The month and year of manufacture (e.g., 1-96 (January 1996)) appear on the safety standard certification label that is located on the frame or edge of the driver\'s door in most vehicles.

Does the program apply if I want to lease a vehicle, or must I purchase a vehicle?

Under the program, you may purchase a new vehicle or lease a new vehicle, provided the lease period for the new vehicle is at least five years.

I don\'t drive an American car but I would like to trade in my old car for a newer, more fuel efficient one. Is this program only for American cars?

No. You may trade in or buy a domestic or a foreign vehicle.

What new vehicles may be acquired under the CARS program?

The CARS Act applies to new vehicles. Thus, used vehicles do not qualify under the program.

The new vehicle must have a manufacturer\'s suggested retail price of not more than $45,000. That price appears on the window sticker on new vehicles. The new vehicle must also achieve minimum combined fuel economy levels. For passenger automobiles, the new vehicle must have a combined fuel economy value of at least 22 miles per gallon. For category 1 trucks, the new vehicle must have a combined fuel economy value of at least 18 miles per gallon. For category 2 trucks, the new vehicle must have a combined fuel economy value of at least 15 miles per gallon. Category 3 trucks have no minimum fuel economy requirement; however, there are special requirements that apply to the purchase of category 3 vehicles.

As noted above, the CARS Act also requires that NHTSA make available on an Internet website a comprehensive list of new vehicles that meet the requirements of the program. Until that information is posted on the program\'s website, consumers may determine whether a new vehicle meets the fuel economy requirements of the program in two ways. First, the combined fuel economy of a new vehicle will be posted under the heading \"Combined Fuel Economy\" on the window sticker (\"Monroney label\") of a new vehicle. Second, you may also find the combined fuel economy value of a new vehicle by visiting www.fueleconomy.gov/cars and searching for their vehicle to find its combined fuel economy value. When searching that website, consumers will need to know their vehicle\'s model year, make, model, engine size, and transmission type.

I just traded in my old car for a new vehicle last month. Can I go back to the dealer and apply for a credit?

If you purchased the vehicle before July 1 you are not eligible for credit. If you purchased the new vehicle on or after July 1, 2009 you may be eligible for credit. Please contact your dealer to see if you meet the eligibility requirements.

Is there a cap on the price of the vehicle I can buy or lease under the program?

Yes. The new vehicle base MSRP the price on the Monroney label, before any features, options, taxes, or destination charges are added to the price, cannot exceed $45,000.

Does the program apply if I want to buy a used car?

No. The program does not apply to the purchase of used vehicles.

What is the amount of the credit?

The amount of the credit is $3,500 or $4,500, and generally depends on the type of vehicle you purchase and the difference in fuel economy between the purchased vehicle and the trade-in vehicle. Different requirements apply for work trucks.

How do I know if my car or truck is an eligible trade-in vehicle?

There are several requirements (but you also have to meet certain conditions for the car or truck you wish to buy). Your dealer can help you determine whether you have an eligible trade in vehicle.

Your trade-in vehicle must
  • have been manufactured less than 25 years before the date you trade it in
  • have a \"new\" combined city/highway fuel economy of 18 miles per gallon or less
  • be in drivable condition
  • be continuously insured and registered to the same owner for the full year preceding the trade-in
  • The trade-in vehicle must have been manufactured not earlier than 25 years before the date of trade in and, in the case of a category 3 vehicle, must also have been manufactured not later than model year 2001

Note that work trucks (i.e., very large pickup trucks and cargo vans) have different requirements.

Fuel Economy/MPG

How do I find out the combined city/highway fuel economy rating of my trade-in vehicle?

Go to www.fueleconomy.gov/feg/sbs.htm and click on the model year of your vehicle, the make, and then the model. Under the words \"ESTIMATED NEW EPA MPG\" in the red banner, there is a red number with the word \"COMBINED\" under it. That is the new combined city/highway fuel economy for your vehicle. You may then enter the make, model, and model year of a new vehicle you may want to buy and see its combined MPG for comparison.

Why is fuel economy important?

Buying a fuel efficient vehicle is important because it can:
  • Save you money
    You can reduce fuel costs each year by choosing the most efficient vehicle that meets your needs.
  • Reduce greenhouse gas emissions
    Carbon dioxide (CO2) from burning gasoline and diesel contributes to global climate change. You can do your part to reduce climate change by reducing your carbon footprint.
  • Improve energy security and reduce oil dependence costs
    Our dependence on oil makes us vulnerable to oil market manipulation and price shocks.
  • Increase energy sustainability
    Oil is a non-renewable resource, and we cannot sustain our current rate of use indefinitely. Using it wisely now allows us time to find alternative technologies and fuels that will be more sustainable.

  • For more information on the importance of better fuel economy, go to www.fueleconomy.gov/feg/why.shtml. For the 2009 Fuel Economy Guide, go to www.fueleconomy.gov/feg/FEG2009.pdf.

    I have a truck and I cannot find its fuel economy rating. Is it an eligible trade-in vehicle?

    Maybe. Some trucks, such as work trucks, were never rated for fuel economy. For these trucks, age is the only criterion for determining whether they are eligible trade-in vehicles. If you have one of these trucks, it must be from model year 2001 or earlier, but also the date of manufacture must be less than 25 years from the date you trade it in, to be an eligible trade-in vehicle. Other restrictions may also apply.

    What is the amount of the credit?

    The amount of the credit is $3,500 or $4,500, and generally depends on the type of vehicle you purchase and the difference in fuel economy between the purchased vehicle and the trade-in vehicle. Different requirements apply for work trucks.

    What is the value of the credit for the purchase or lease of a new passenger car?

    The value of the credit for the purchase or lease of a new passenger car depends upon the difference between the combined fuel economy of the vehicle that is traded in and that of the new vehicle that is purchased or leased. If the new vehicle has a combined fuel economy that is at least 4, but less than 10, miles per gallon higher than the traded-in vehicle, the credit is $3,500. If the new vehicle has a combined fuel economy value that is at least 10 miles per gallon higher than the traded-in vehicle, the credit is $4,500.

    What is the value of the credit for the purchase or lease of a new van, pickup truck or SUV?

    The value of the credit given for the purchase or lease of a category 1 or 2 truck also generally depends on the difference between the combined fuel economy of the vehicle that is traded in and that of the new vehicle that is purchased or leased. If the new vehicle is a category 1 truck that has a combined fuel economy value that is at least 2, but less than 5, miles per gallon higher than the traded-in vehicle, the credit is $3,500. If the new category 1 truck has a combined fuel economy value that is at least 5 miles per gallon higher than the traded-in vehicle, the credit is $4,500.

    If both the new vehicle and the traded-in vehicle are category 2 trucks and the combined fuel economy value of the new vehicle is at least 1, but less than 2, miles per gallon higher than the combined fuel economy value of the traded in vehicle, the credit is $3,500. If both the new vehicle and the traded-in vehicle are category 2 trucks and the combined fuel economy of the new vehicle is at least 2 miles per gallon higher than that of the traded-in vehicle, the credit is $4,500. A $3,500 credit applies to the purchase or lease of a category 2 truck if the trade-in vehicle is a category 3 (work) truck that was manufactured not later than model year 2001, but not earlier than 25 years before the date of the trade in.

    What rules apply to new work trucks?

    A work truck, which is called a category 3 truck under the CARS Act, is subject to special rules. Work trucks are not rated for fuel economy by the EPA. Thus, the eligibility of work trucks for the program does not depend on combined fuel economy. Instead, work trucks may only be traded in under the program if they were manufactured not later than model year 2001 and not earlier than 25 years before the date of the trade in. In addition, work trucks may only be traded in for the purchase of a category 2 truck or another category 3 truck that is of similar size or smaller than the traded-in vehicle. Finally, the Act provides only for a $3,500 credit for trading in a work truck.

    The CARS Act limits the amount of funds that can be used to provide credits for purchases or leases of work trucks. Only 7.5 percent of the funds appropriated for the program may be used for credits for work trucks. Once that limit is reached, NHTSA will stop making payments for these transactions. NHTSA will keep the public informed as to the funds that remain available for these credits.

    How do I know if my car or truck is an eligible trade-in vehicle?

    There are several requirements (but you also have to meet certain conditions for the car or truck you wish to buy). Your dealer can help you determine whether you have an eligible trade in vehicle.

    Your trade-in vehicle must
    • have been manufactured less than 25 years before the date you trade it in
    • have a \"new\" combined city/highway fuel economy of 18 miles per gallon or less
    • be in drivable condition
    • be continuously insured and registered to the same owner for the full year preceding the trade-in
    • The trade-in vehicle must have been manufactured not earlier than 25 years before the date of trade in and, in the case of a category 3 vehicle, must also have been manufactured not later than model year 2001

    Note that work trucks (i.e., very large pickup trucks and cargo vans) have different requirements.

    MSRP

    Is there a cap on the price of the vehicle I can buy or lease under the program?

    Yes. The new vehicle base MSRP the price on the Monroney label, before any features, options, taxes, or destination charges are added to the price, cannot exceed $45,000.

    Does the program apply if I want to buy a used car?

    No. The program does not apply to the purchase of used vehicles.

    NHTSA

    What is the Car Allowance Rebate System?

    The Car Allowance Rebate System is a new program from the government that will help you pay for a new, more fuel efficient car or truck from a participating dealer when you trade in a less fuel efficient car or truck.

    New Vehicle

    Does the program apply if I want to lease a vehicle, or must I purchase a vehicle?

    Under the program, you may purchase a new vehicle or lease a new vehicle, provided the lease period for the new vehicle is at least five years.

    I don\'t drive an American car but I would like to trade in my old car for a newer, more fuel efficient one. Is this program only for American cars?

    No. You may trade in or buy a domestic or a foreign vehicle.

    What new vehicles may be acquired under the CARS program?

    The CARS Act applies to new vehicles. Thus, used vehicles do not qualify under the program.

    The new vehicle must have a manufacturer\'s suggested retail price of not more than $45,000. That price appears on the window sticker on new vehicles. The new vehicle must also achieve minimum combined fuel economy levels. For passenger automobiles, the new vehicle must have a combined fuel economy value of at least 22 miles per gallon. For category 1 trucks, the new vehicle must have a combined fuel economy value of at least 18 miles per gallon. For category 2 trucks, the new vehicle must have a combined fuel economy value of at least 15 miles per gallon. Category 3 trucks have no minimum fuel economy requirement; however, there are special requirements that apply to the purchase of category 3 vehicles.

    As noted above, the CARS Act also requires that NHTSA make available on an Internet website a comprehensive list of new vehicles that meet the requirements of the program. Until that information is posted on the program\'s website, consumers may determine whether a new vehicle meets the fuel economy requirements of the program in two ways. First, the combined fuel economy of a new vehicle will be posted under the heading \"Combined Fuel Economy\" on the window sticker (\"Monroney label\") of a new vehicle. Second, you may also find the combined fuel economy value of a new vehicle by visiting www.fueleconomy.gov/cars and searching for their vehicle to find its combined fuel economy value. When searching that website, consumers will need to know their vehicle\'s model year, make, model, engine size, and transmission type.

    Is there a cap on the price of the vehicle I can buy or lease under the program?

    Yes. The new vehicle base MSRP the price on the Monroney label, before any features, options, taxes, or destination charges are added to the price, cannot exceed $45,000.

    How do I know if a dealer is participating in the program?

    The law requires dealers to be registered to participate in the program. We will be moving as quickly as possible to register interested dealers as soon as the registration process begins in the near future. As dealers are registered, we will list them on this website. We will continue to update this list during the life of the program. Meanwhile, you may wish to contact dealers in your area to ask whether they plan to participate in the program. The CARS Act requires that dealers be licensed by their respective state for the sale of new automobiles in order for them to participate in the program.

    Program Timelines

    I just traded in my old car for a new vehicle last month. Can I go back to the dealer and apply for a credit?

    If you purchased the vehicle before July 1 you are not eligible for credit. If you purchased the new vehicle on or after July 1, 2009 you may be eligible for credit. Please contact your dealer to see if you meet the eligibility requirements.

    Pre-Rule Transactions

    I just traded in my old car for a new vehicle last month. Can I go back to the dealer and apply for a credit?

    If you purchased the vehicle before July 1 you are not eligible for credit. If you purchased the new vehicle on or after July 1, 2009 you may be eligible for credit. Please contact your dealer to see if you meet the eligibility requirements.

    Rebates and Incentives

    Can I use this credit in combination with manufacturer\'s rebates and discounts?

    The CARS Act requires the dealer to use the credit under the CARS program in addition to any rebates or discounts advertised by the dealer or offered by the new vehicle\'s manufacturer. The dealer may not use the credit to offset these rebates and discounts.

    Can I combine this credit with other government incentives?

    Yes. You can combine this with other State and Federal incentives, such as the hybrid vehicle credit. For information on this credit, go to www.fueleconomy.gov/Feg/tax_hybrid.shtml.

    In addition to this credit, will I get the full value of my trade-in vehicle?

    No. The law requires your trade-in vehicle to be destroyed. Therefore, the value you negotiate with the dealer for your trade-in vehicle is not likely to exceed its scrap value. The law requires the dealer to disclose to you an estimate of the scrap value of your trade-in vehicle.

    Scrap value

    What happens to the vehicle I trade in?

    The CARS Act requires that the trade-in vehicle be crushed or shredded so that it will not be resold for use in the United States or elsewhere as an automobile. The entity crushing or shredding the vehicles in this manner will be allowed to sell some parts of the vehicle prior to crushing or shredding it, but these parts cannot include the engine or the drive train.

    Taxes

    Is the credit subject to being taxed as income to the consumers that participate in the program?

    The CARS Act expressly provides that the credit is not income for the consumer.

    Do I have to pay State or local sales tax on the amount of the CARS program credit?

    The question of whether a consumer must pay State or local sales tax on the amount of the CARS program credit would depend on the sales tax law of each State or locality. Consumer should review the law of their respective States or consult a tax advisor to answer this question.

    Trade-in

    What happens to the vehicle I trade in?

    The CARS Act requires that the trade-in vehicle be crushed or shredded so that it will not be resold for use in the United States or elsewhere as an automobile. The entity crushing or shredding the vehicles in this manner will be allowed to sell some parts of the vehicle prior to crushing or shredding it, but these parts cannot include the engine or the drive train.

    How do I know if my car or truck is an eligible trade-in vehicle?

    There are several requirements (but you also have to meet certain conditions for the car or truck you wish to buy). Your dealer can help you determine whether you have an eligible trade in vehicle.

    Your trade-in vehicle must
    • have been manufactured less than 25 years before the date you trade it in
    • have a \"new\" combined city/highway fuel economy of 18 miles per gallon or less
    • be in drivable condition
    • be continuously insured and registered to the same owner for the full year preceding the trade-in
    • The trade-in vehicle must have been manufactured not earlier than 25 years before the date of trade in and, in the case of a category 3 vehicle, must also have been manufactured not later than model year 2001

    Note that work trucks (i.e., very large pickup trucks and cargo vans) have different requirements.

    Vehicle Categories

    How do I determine whether the vehicle I want to purchase or lease is a passenger automobile or a category 1, 2, or 3 truck?

    The CARS Act divides the eligible vehicles into four groups: passenger automobiles; category 1 trucks; category 2 trucks; and category 3 trucks. NHTSA will soon publish a list of the vehicles that fall into these groups. For the present, we describe here the statutory definitions, give examples of types of vehicles that satisfy those definitions, and refer readers to the large table at the end of this notice.

    The term \"passenger automobile\" and its definition are borrowed from the fuel economy statute. The definition excludes from that term (1) vehicles that NHTSA has determined are not manufactured primarily for transporting persons and (2) vehicles that are capable of off-highway operation. Vehicles not manufactured primarily for transporting persons include pickup trucks and certain vehicles that permit expanded use of the vehicle for cargo-carrying purposes. See 49 CFR 523.5(a). Under NHTSA\'s regulations (49 CFR 523.5(b)), there are two groups of vehicles with capability of off-highway operation. The first includes vehicles that have 4-wheel drive and have at least four out of five specified physical characteristics relating to ground clearance. The second includes vehicles that are rated at more than 6,000 pounds gross vehicle weight and have at least four out of five specified physical characteristics relating to ground clearance, but do not have 4-wheel drive. Passenger automobiles are what are commonly known as passenger cars

    A category 1 truck is a nonpassenger automobile. This category includes sport utility vehicles (SUVs), small and medium pickup trucks and small and medium passenger and cargo vans.

    A category 2 truck is a large van or a large pickup truck, based upon the length of the wheelbase (more than 115 inches for pickup trucks and more than 124 inches for vans). Note: some pickup trucks and cargo vans exceeding these thresholds are treated as category 3 trucks instead of category 2 trucks.

    A category 3 truck is a work truck and is rated between 8,500 and 10,000 pounds gross vehicle weight. This category includes very large pickup trucks (those with cargo beds 72 inches or more in length) and very large cargo vans.

    By July 24, NHTSA will make available on an Internet website a comprehensive list of the trucks that fall into these categories and meet the requirements of the program.

    Jul 2009 - American Recovery and Reinvestment Act of 2009 (ARRA)

    The American Recovery and Reinvestment Act of 2009 (ARRA) provides a number of tax incentives for businesses. Most of the tax incentives for businesses are found in Subtitle C of Division B, Title I of ARRA. In addition, some of the energy incentives, contained in Subtitle B, [and a subsidy for premiums for COBRA health continuation coverage in Title III of Division B,] provide tax relief for businesses.

    Here is a summary of the key ARRA provisions, in numerical order, which may impact businesses, large and small:

    TAX INCENTIVES FOR BUSINESS (SUBTITLE C)

    50-Percent Special Depreciation Allowance/Bonus Depreciation (Section 1201) - The new law extends the 50 percent special depreciation allowance that was available for 2008 acquisitions to acquisitions of qualifying property in 2009. This provision enables businesses to deduct half the adjusted basis of qualifying property in the year it is placed in service. The extension applies to qualifying property placed in service in 2009 (2010 for long production period property and certain transportation property).

    Acceleration of Certain Business Credits (Section 1201): Corporations that acquire eligible business property have an additional year to accelerate certain tax credits in lieu of a bonus depreciation deduction. The extension applies to eligible business property placed in service in 2009 (2010 for long production period property and certain transportation property).

    Section 179 Expensing (Section 1202): During 2009, small businesses can elect to expense up to $250,000 of the cost of qualifying property under section 179. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sports utility vehicles. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000.

    Expanded Net Operating Loss Carryback (Section 1211): Many small businesses that had expenses exceeding their income for 2008 can choose to carry the loss back for up to five years, instead of the usual two years. For small businesses that were profitable in the past but lost money in 2008, this could mean a special tax refund. The option is available for a small business that has no more than an average of $15 million in gross receipts over a three-year period. This option is available for most eligible taxpayers for a limited time. A corporation that operates on a calendar-year basis, for example, must file a claim by Sept. 15, 2009. For eligible individuals, the deadline is Oct. 15, 2009.

    Estimated Tax Requirement Modified (Section 1212): Many individual small business taxpayers may be able to defer until the end of the year paying a larger part of their 2009 tax obligation. For 2009, eligible individuals can make quarterly estimated tax payments equal to 90 percent of their 2009 tax or 90 percent of their 2008 tax, whichever is less. Individuals qualify if they received more than half of their gross income from their small business in 2008 and meet other requirements. For details, see Publication 505.

    Discharge of Business Indebtedness (Section 1231): The act allows certain businesses that repurchase specific types of debt in 2009 and 2010 to pay taxes on cancellation of debt income over a five year period, starting with tax year 2014.

    Exclusion of Gain on the Sale of Certain Small Business Stock (Section 1241): ARRA provides an extra incentive for investment in small businesses. The new law provides an increase in the Section 1202 exclusion from 50 percent (60 percent for enterprise zone qualified business entity stock) to 75 percent for any gain from the sale or exchange of qualified small business stock acquired after Feb. 17, 2009 and before Jan. 1, 2011, and held for more than five years. This provision is limited to individual investors and not available to corporations.

    S-Corporation Built-in Gains Holding Period (Section 1251): For tax years beginning in either 2009 or 2010, the new law eliminates the corporate level tax on the built-in gains of an S-Corporation that converted from C-corporation status at least seven tax years before the current tax year.

    COBRA PREMIUM ASSISTANCE (TITLE III)


    COBRA: Health Insurance Continuation Subsidy (Section 3001): Under the new law, employees who were involuntarily terminated after Aug. 31, 2008 and before Jan. 1, 2010, and who elect COBRA health continuation coverage, are entitled to receive a 65 percent subsidy on their COBRA premiums. For periods of COBRA coverage beginning after Feb. 16, 2009, the involuntarily terminated employee must be treated as having paid the required COBRA premium if the individual pays 35 percent of the premium amount. The employer (or, in some cases, multiemployer health plan or insurer) may recover the other 65 percent by taking the subsidy amount as a credit on their quarterly employment tax return.

    ENERGY INCENTIVES (SUBTITLE B)


    Extension of Renewable Energy Production Tax Credit (Section 1101): The new law generally extends the "eligibility dates" of a tax credit for business facilities producing electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower and marine and hydrokinetic renewable energy. The new law extends the "placed in service date" for wind facilities to Dec. 31, 2012. For the other facilities, the placed-in-service date was extended from Dec. 31, 2010 (Dec. 31, 2011 in the case of marine and hydrokinetic renewable energy facilities) to Dec. 31, 2013.

    Election of Investment Credit in Lieu of Production Credit (Section 1102): Businesses that place in service facilities that produce electricity from wind and some other renewable resources after Dec. 31, 2008 can choose either the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects or the production tax credit, which can provide a credit of up to 2.1 cents per kilowatt-hour for electricity produced from renewable sources. A business may not claim both credits for the same facility.

    Repeal of Certain Limits on Business Credits for Renewable Energy Property (Section 1103): The new law repeals the $4,000 limit on the 30 percent tax credit for small wind energy property and the limitation on property financed by subsidized energy financing. The repeal applies to property placed in service after Dec. 31, 2008.

    Coordination with Renewable Energy Grants (Section 1104): Business taxpayers also can apply for a grant instead of claiming either the energy investment tax credit or the renewable energy production tax credit for property placed in service in 2009 or 2010. In some cases, if construction begins in 2009 or 2010, the grant can be claimed for energy investment credit property placed in service through 2016, and for qualified renewable energy facilities, the grant is 30 percent of the investment in the facility and the property must be placed in service before 2014 (2013 for wind facilities).

    New Clean Renewable Energy Bonds (Section 1111): Certain State utilities, governmental entities and cooperatives that initiate projects to generate electricity from renewable sources (for example wind and solar) can finance those projects through qualified tax credit bonds. The new law increases the amount of funds available to issue new clean renewable energy bonds from the one-time national limit of $800 million to $2.4 billion.

    Temporary Increase in Credit for Alternative Fuel Vehicle Refueling Property (Section 1123): The new law modifies the credit rate and limit amounts for property placed in service in 2009 and 2010. Qualified property (other than property relating to hydrogen) is now eligible for a 50 percent credit, and the per-location limit increases to $50,000 for business property (increases to $2,000 for other/residential locations). Property relating to hydrogen keeps the 30 percent rate as before, but the per-business location limit rises to $200,000.

    Increased Exclusion Amount for Commuter Transit Benefits and Transit Passes (Section 1151): The new law increased to $230 the monthly tax exclusion for employer-provided commuter transportation and transit pass benefits, effective from March through the end of 2009. Employers can generally deduct these qualified transportation fringe benefits as a business expense. These benefits are also excluded from an employee's wages for income tax and payroll tax purposes. Because of this exclusion from employee wages, the employer can reduce the amount paid in employment taxes.

    June 2009 - The 'What Ifs' of an Economic Downturn

    There can be a tax impact to events such as job loss, debt forgiveness or tapping a retirement fund. If your income decreased, you may be newly eligible for certain tax credits, such as the Earned Income Tax Credit. Most importantly, if you believe you may have trouble paying your tax bill, contact the IRS immediately, as there are steps they can take to help ease the burden. You also should file a tax return even if you are unable to pay so you can avoid additional penalties.

    Here are some \"What if\" scenarios and the possible tax impact:

    What if I lose my job?

    The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable. The IRS has updated a helpful publication which lists a number of job-loss related tax issues. For more information, see Publication 4128, Tax Impact of Job Loss.

    What if I receive unemployment compensation?

    Unemployment compensation you received under the unemployment compensation laws of the United States or of a state must be included in your income. It is taxable income. If you received unemployment compensation, you should receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld. For more information, see Publication 525, Taxable and Nontaxable Income.

    Note: The American Recovery and Reinvestment Act temporarily will change the taxation of unemployment benefits for the 2009 tax year only. Under the new economic stimulus law, the first $2,400 of unemployment benefits received in 2009 will not be subject to federal taxes. The exemption will be reflected on those tax returns filed in 2010.

    What if I lose my home through foreclosure?

    Under the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers generally can exclude income from the discharge of debt on their principal residence or mortgage restructuring. This exception does not apply to second homes or vacation homes. In some cases, you may be able to file an amended tax return for previous tax years. For more information, see The Mortgage Forgiveness Debt Relief Act and Debt Cancellation.

    What if I canâ??t pay my taxes?

    Donâ??t panic. If you cannot pay the full amount of taxes you owe by the April deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. You also should contact the IRS to discuss your payment options at 1-800-829-1040. The agency may be able to provide some relief such as a short-term extension to pay, an installment agreement or an offer in compromise. In some cases, the agency may be able to waive penalties. However, the agency is unable to waive interest charges which accrue on unpaid tax bills. For more information, see The Collection Process and Tax Payment Options. The Form 1040 Instructions also provide guidance on filing and paying your taxes.

    What if I withdraw money from my IRA?

    Generally, early withdrawal from an Individual Retirement Account (IRA) prior to age 591/2 is subject to being included in gross income plus a 10 percent additional tax penalty. There are exceptions to the 10 percent penalty, such as using IRA funds to pay your medical insurance premium after a job loss. For more information, see Publication 590, Individual Retirement Accounts.

    May 2009 - Recovery Payments to Social Security and SSI Beneficiaries

    Vice President Joe Biden and Michael J. Astrue, Commissioner of Social Security, announced today that the federal government will send out $250 economic recovery payments to people who receive Social Security and Supplemental Security Income (SSI) benefits beginning in early May 2009 and continuing throughout the month. No action is required to get the payment, which will be sent separately from the person\'s regular monthly payment.

    \"The Social Security Administration and Commissioner Astrue have been working closely with other federal agencies to get these payments out the door in record time and into the hands of folks who need it most,\" said Vice President Biden. \"These are checks that will make a big difference in the lives of older Americans and people with disabilities - many of whom have been hit especially hard by the economic crisis that has swept across the country.\"

    \"We have been working diligently to issue the $250 one-time recovery payments as soon as possible,\" Commissioner Astrue said. \"The legislation requires extensive coordination with other federal agencies and I\'m pleased we are on track to issue these recovery payments earlier than the statute requires. Soon more than $13 billion will be in the hands of more than 50 million Americans.\"

    The American Recovery and Reinvestment Act of 2009 provides for a one-time payment of $250 to adult Social Security beneficiaries, and to SSI recipients, except those receiving Medicaid in care facilities. To receive the payment the individual must be eligible for Social Security or SSI during the months of November 2008, December 2008 or January 2009.

    The legislation also provides for a one-time payment to Veterans Affairs (VA) and Railroad Retirement Board (RRB) beneficiaries. The VA and RRB will be responsible for paying individuals under their respective programs. However, if someone receives Social Security and SSI, VA or RRB benefits, he or she will receive only one $250 payment. People getting Social Security or SSI should not contact the agency unless a payment is not received by June 4, 2009.

    For more detailed information about the $250 one-time economic recovery payments, go to www.socialsecurity.gov/payment.

    Apr 2009 - Tax Free Unemployment Benefits

    All or part of unemployment benefits received in 2009 will be tax free for many unemployed workers, according to the Internal Revenue Service.

    "This morning we learned that a record 5.6 million people were receiving unemployment benefits in the middle of March. This underscores the need for the relief provided by the American Recovery and Reinvestment Act, which includes making the first $2,400 of unemployment insurance exempt from tax," said IRS Commissioner Doug Shulman. "I urge all unemployed workers to take this special tax break into account as they plan their tax withholding and quarterly estimated tax payments for the year. This change offers a helping hand to millions of Americans who are out of work and struggling to make ends meet."

    Under the American Recovery and Reinvestment Act, enacted this March, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their tax return next year. For a married couple, the exclusion applies to each spouse, separately. Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits they receive.

    The new law doesn't affect the return taxpayers are filling out now. Unemployment benefits received in 2008 and prior years remain fully taxable.

    Unemployed workers can choose to have income tax withheld from their unemployment benefit payments. Withholding on these payments is voluntary. However, choosing this option may help avoid a surprise year-end tax bill or a possible penalty for having paid too little tax during the year. Those who choose this option will have a flat 10 percent tax withheld from their benefits.

    Unemployed workers who expect to receive more than $2,400 in benefits this year should consider having tax withheld from their benefit payments in excess of that amount. Those unemployed workers who have already chosen to have tax taken out of their benefits, should consider the $2,400 exclusion in determining whether to continue to have tax withheld.

    Use Form W-4V, Voluntary Withholding Request, or the equivalent form provided by the payer to request withholding to begin or end. Form W-4V is also available on IRS.gov or by calling the IRS toll-free at 1-800-TAX-FORM (829-3676).

    Mar 2009 - Law Offers Special Tax Breaks for Small Business

    Small Business Week is May 17 to 23, and the Internal Revenue Service urges small businesses to act now and take advantage of tax-saving opportunities included in the recovery law.

    The American Recovery and Reinvestment Act (ARRA), enacted in February, created, extended or expanded a variety of business tax deductions and credits. Because some of these changes - the bonus depreciation and increased section 179 deduction, for example - are only available this year, eligible businesses only have a few months to take action and save on their taxes. Here is a quick rundown of some of the key provisions.

    Faster Write-Offs for Certain Capital Expenditures

    Many small businesses that invest in new property and equipment will be able to write off most or all of these purchases on their 2009 returns. The new law extends through 2009 the special 50 percent depreciation allowance, also known as bonus depreciation, and increased limits on the section 179 deduction, named for the relevant section of the Internal Revenue Code. Normally, businesses recover these capital investments through annual depreciation deductions spread over several years. Both of these provisions encourage these investments by enabling businesses to write them off more quickly.

    The bonus depreciation provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service.

    The section 179 deduction enables small businesses to deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture and other qualifying property placed in service during 2009. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sport utility vehicles. A special phase-out provision effectively targets the section 179 deduction to small businesses and generally eliminates it for most larger businesses.

    Bonus depreciation and the section 179 deduction are claimed on Form 4562. Further details are in the instructions for this form.

    Expanded Net Operating Loss Carryback

    Many small businesses that had expenses exceeding their incomes for 2008 can choose to carry those losses back for up to five years, instead of the usual two. For small businesses that were profitable in the past but lost money in 2008, this could mean a special tax refund. The option is available for a small business that has no more than an average of $15 million in gross receipts over a three-year period.

    This option is still available for most eligible taxpayers, but only for a limited time. A corporation that operates on a calendar-year basis, for example, must file a claim by Sept. 15, 2009. For eligible individuals, the deadline is Oct. 15, 2009.

    Eligible individuals should file a claim using Form 1045, and corporations should use Form 1139. Details can be found in the instructions for each of these forms, and answers to frequently-asked questions are posted on IRS.gov.

    Exclusion of Gain on the Sale of Certain Small Business Stock

    The new law provides an extra incentive for individuals who invest in small businesses. Investors in qualified small business stock can exclude 75 percent of the gain upon sale of the stock. This increased exclusion applies only if the qualified small business stock is acquired after Feb. 17, 2009 and before Jan. 1, 2011, and held for more than five years. For previously-acquired stock, the exclusion rate remains at 50 percent in most cases.

    Estimated Tax Requirement Modified

    Many individual small business taxpayers may be able to defer, until the end of the year, paying a larger part of their 2009 tax obligations. For 2009, eligible individuals can make quarterly estimated tax payments equal to 90 percent of their 2009 tax or 90 percent of their 2008 tax, whichever is less. Individuals qualify if they received more than half of their gross income from their small businesses in 2008 and meet other requirements. For details, see Publication 505.

    COBRA Credit

    Employers that provide the 65 percent COBRA premium subsidy under ARRA to eligible former employees claim credit for this subsidy on their quarterly or annual employment tax returns. To help avoid imposing an unnecessary cash-flow burden, affected employers can reduce their employment tax deposits by the amount of the credit. For details, see Form 941. Answers to frequently-asked questions are posted on IRS.gov.

    Other ARRA business provisions relate to discharges of certain business indebtedness, the holding period for S corporation built-in gains and acceleration of certain business credits for corporations. Also see Fact Sheet FS-2009-11.

    Feb 2009 - 2008 Tax Change Highlights

    AMT exemptions rise; several expiring deductions and credits get a new lease on life; a new standard property tax deduction and a special first-time homebuyer credit are available to some homeowners; and retirement savings incentives expand. These are among the changes taxpayers will find when they fill out their 2008 tax returns. More information about these and other changes, summarized below, can be found on IRS.gov and by asking your accountant.

    Economic Stimulus Payments Tax Free

    Economic stimulus payments are not taxable, and they are not reported on 2008 tax returns. However, the stimulus payment does affect whether a taxpayer can claim the Recovery Rebate Credit and how much credit he or she can get. The credit is figured like last year\'s economic stimulus payment except that the amounts are based on tax year 2008 instead of 2007. A taxpayer may qualify for the Recovery Rebate Credit if, for example, she did not get an economic-stimulus payment or had a child in 2008. In most cases, the IRS can figure the credit. The instructions for Forms 1040, 1040A and 1040EZ have more information.

    AMT Exemption Increased for One Year

    For tax-year 2008, Congress raised the alternative minimum tax exemption to the following levels:

    $69,950 for a married couple filing a joint return and qualifying widows and widowers, up from $66,250 in 2007
    $34,975 for a married person filing separately, up from $33,125 and
    $46,200 for singles and heads of household, up from $44,350
    Under current law, these exemption amounts will drop to $45,000, $22,500 and $33,750, respectively, in 2009. Your accountant can provide more information.

    Expiring Tax Breaks Renewed

    Several popular tax breaks that expired at the end of 2007 were renewed for tax-years 2008 and 2009. As a result, eligible taxpayers can claim:

    The deduction for state and local sales taxes
    The educator expense deduction
    The tuition and fees deduction
    The District of Columbia first-time homebuyer credit
    In addition, the residential energy-efficient property credit is extended through 2016. In general, solar electric, solar water heating and fuel cell property qualify for this credit. Starting in 2008, small wind energy and geothermal heat pump property also qualify. Ask your accountant if you feel you feel this credit may apply to you.

    The non-business energy property credit for insulation, exterior windows, exterior doors, furnaces, water heaters and other energy-saving improvements to a main home is not available in 2008 but will return in 2009.

    Standard Deduction Increased for Most Taxpayers

    Nearly two out of three taxpayers choose to take the standard deduction rather than itemizing deductions such as mortgage interest and charitable contributions. The basic standard deduction is:

    $10,900 for married couples filing a joint return and qualifying widows and widowers, a $200 increase over 2007
    $5,450 for singles and married individuals filing separate returns, up $100 and
    $8,000 for heads of household, up $150
    Higher amounts apply to blind people and senior citizens. The standard deduction is often reduced for a taxpayer who qualifies as someone else\'s dependent.

    New this year, taxpayers can claim an additional standard deduction, based on the state or local real-estate taxes paid in 2008. Taxes paid on foreign or business property do not count. The maximum deduction is $500, or $1,000 for joint filers.

    Also new for 2008, a taxpayer can increase his standard deduction by the net disaster losses suffered from a federally declared disaster. A worksheet is available from the IRS or from your accountant.

    First-Time Homebuyer Credit

    Those who bought a main home recently or are considering buying one may qualify for the first-time homebuyer credit. Normally, a taxpayer qualifies if she didn\'t own a main home during the prior three years. This unique credit of up to $8,000 works much like a 15-year interest-free loan. It is available for a limited time only - on homes bought from April 9, 2008, to June 30, 2009. It can be claimed on new Form 5405 and is repaid each year as an additional tax. Income limits and other special rules apply.

    Tax Relief for Midwest Disaster Areas

    Special tax relief related to severe storms, tornadoes or flooding, occurring after May 19, 2008, and before Aug. 1, 2008, is available to individuals in portions of Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin that were affected by these disasters. Tax benefits include:

    Liberalized rules for certain personal casualty losses and charitable contributions
    An additional exemption amount for persons who provided housing for someone displaced by these disasters
    The option to use 2007 earned income to figure a 2008 earned income tax credit (EITC) and additional child tax credit
    An increased charitable standard mileage rate for use of personal vehicle for volunteer work related to these disasters
    Special rules for withdrawals and loans from IRAs and other qualified retirement plans
    Details on these and other relief provisions are in Publication 4492-B.

    Contribution Limits Rise for IRAs and Other Retirement Plans

    This filing season, more people can make tax-deductible contributions to a traditional IRA. The deduction is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $53,000 and $63,000, compared to $52,000 and $62,000 last year.

    For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $85,000 to $105,000, up from $83,000 to $103,000 last year.

    Where an IRA contributor who is not covered by a workplace retirement plan is married to someone who is covered, the deduction is phased out if the couple\'s income is between $159,000 and $169,000, up from $156,000 and $166,000 in 2007.

    The phase-out range remains $0 to $10,000 for a married individual filing a separate return who is covered by a retirement plan at work.

    Your accountant can help you figure the IRA deduction.

    For 2008, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b) and most 457 plans remains unchanged at $15,500. This limit rises to $16,500 in 2009. The catch-up contribution limit for those aged 50 to 70 remains at $5,000 in 2008 but rises to $5,500 in 2009.

    The AGI phase-out range for taxpayers who contribute to a Roth IRA is $159,000 to $169,000 for joint filers and qualifying widows and widowers, compared to $156,000 to $166,000 in 2007. For singles and heads of household, the comparable phase-out range is $101,000 to $116,000, compared to $99,000 to $114,000 in 2007.

    Standard Mileage Rates Adjusted for 2008

    The standard mileage rate for business use of a car, van, pick-up or panel truck is 50.5 cents per mile from Jan. 1, 2008, to June 30, 2008, up 2 cents from 2007. The rate is 58.5 cents for each mile driven during the rest of 2008.

    From Jan. 1, 2008, to June 30, 2008, the standard mileage rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 19 cents per mile, down a penny from 2007. The rate is 27 cents from July 1 to Dec. 31.

    The standard mileage rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile. As noted earlier, special rates apply to the Midwest disaster area.

    Exemptions Rise

    The value of each personal and dependency exemption is $3,500, up $100 from 2007. Most taxpayers can take personal exemptions for themselves and an additional exemption for each eligible dependent. An individual who qualifies as someone else\'s dependent cannot claim a personal exemption, and though personal and dependency exemptions are phased out for higher-income taxpayers, the phase-out rate is slower than in past years.

    This is one of more than three dozen individual and business tax provisions that are adjusted each year to keep pace with inflation. A complete rundown of these changes can be found in 2008 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits.

    Earned Income Tax Credit Rises

    The maximum earned income tax credit (EITC) is:

    $4,824 for people with two or more qualifying children, up from $4,716 in 2007
    $2,917 for those with one child, up from $2,853 last year and
    $438 for people with no children, up from $428 in 2007.
    Available to low and moderate income workers and working families, the EITC helps taxpayers whose incomes are below certain income thresholds, which in 2008 rise to:

    $41,646 for those with two or more children
    $36,995 for people with one child and
    $15,880 for those with no children
    One in six taxpayers claim the EITC, which, unlike most tax breaks, is refundable, meaning that individuals can get it even if they owe no tax and even if no tax is withheld from their paychecks.

    Taxes Lowered for Many Investors

    The five-percent tax rate on qualified dividends and net capital gains is reduced to zero. In general, this reduction applies to investors whose taxable income is below:

    $65,100, if married filing jointly or qualifying widow or widower
    $32,550, if single or married filing separately or
    $43,650, if head of household.
    Note that taxable income is normally less than total income. There is an available worksheet from the IRS, or you can ask your accountant.

    Kiddie Tax Revised

    The tax on a child\'s investment income applies if the child has investment income greater than $1,800 and is:

    Under 18 old
    18 years of age and had earned income that was equal to or less than half of his or her total support in 2008 or
    Over 18 and under 24, a student and during 2008 had earned income that was equal to or less than half of his or her total support.
    Previously, the tax only applied to children under age 18. Your trusted advisor can figure this tax.

    Self-Employment Tax Changes

    For those who receive Social Security Retirement or disability benefits, any Conservation Reserve Program (CRP) payments are now exempt from the 15.3-percent social security self-employment tax.

    More farmers and self-employed people this year can choose the optional methods for figuring and paying the self-employment tax. These optional methods allow those with net losses or small amounts of business income a way to obtain up to four credits of Social Security coverage. The income thresholds for both the farm optional method and the non-farm optional method are increased for 2008 and indexed for inflation in future years. Choosing an optional method may increase a taxpayer\'s self-employment tax but it may also qualify him for the earned income tax credit, additional child tax credit, child and dependent care credit or self-employed health insurance deduction. Schedule SE and its instructions have details.


    Jan 2009 - First-Time Homebuyers Tax Credit

    Congress recently approved a tax credit for first-time homebuyers that can be worth up to $7,500. The credit, however, acts more like a no-interest loan because it must be repaid to the government over 15 years. First-time homebuyers can begin planning in 2009 to take advantage of a new tax credit included in the recently enacted Housing and Economic Recovery Act of 2008.

    Available for a limited time only, the credit:
    • Applies to home purchases after April 8, 2008, and before July 1, 2009.
    • Reduces a taxpayer's tax bill or increases his or her refund, dollar for dollar.
    • Is fully refundable, meaning that the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax that they owe.

    However, the credit operates much like an interest-free loan, because it must be repaid over a 15-year period. So, for example, an eligible taxpayer who buys a home today and properly claims the maximum available credit of $7,500 on his or her 2008 federal income tax return must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on his or her 2010 return.

    Eligible taxpayers will claim the credit on new IRS Form 5405. This form, along with further instructions on claiming the first-time homebuyer credit, will be included in 2008 tax forms and instructions and be available later this year on IRS.gov, the IRS Web site.

    If you bought a home recently, or are considering buying one, the following questions and answers may help you determine whether you qualify for the credit.

    Q. Which home purchases qualify for the first-time homebuyer credit?

    A. Only the purchase of a main home located in the United States qualifies and only for a limited time. Vacation homes and rental property are not eligible. You must buy the home after April 8, 2008, and before July 1, 2009. For a home that you construct, the purchase date is the first date you occupy the home.

    Taxpayers who owned a main home at any time during the three years prior to the date of purchase are not eligible for the credit. This means that first-time homebuyers and those who have not owned a home in the three years prior to a purchase can qualify for the credit.

    If you make an eligible purchase in 2008, you claim the first-time homebuyer credit on your 2008 tax return. For an eligible purchase in 2009, you can choose to claim the credit on either your 2008 (or amended 2008 return) or 2009 return.

    Q. How much is the credit?

    A. The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. The limit is $3,750 for a married person filing a separate return. In most cases, the full credit will be available for homes costing $75,000 or more. Whatever the size of the credit a taxpayer receives, the credit must be repaid over a 15-year period.

    Q. Are there income limits?

    A. Yes. The credit is reduced or eliminated for higher-income taxpayers.

    The credit is phased out based on your modified adjusted gross income (MAGI). MAGI is your adjusted gross income plus various amounts excluded from income - for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000.

    This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.

    Q. Who cannot take the credit?

    A. If any of the following describe you, you cannot take the credit, even if you buy a main home:
    • Your income exceeds the phase-out range. This means joint filers with MAGI of $170,000 and above and other taxpayers with MAGI of $95,000 and above.
    • You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
    • You stop using your home as your main home.
    • You sell your home before the end of the year.
    • You are a nonresident alien.
    • You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year.
    • Your home financing comes from tax-exempt mortgage revenue bonds.
    • You owned another main home at any time during the three years prior to the date of purchase. For example, if you bought a home on July 1, 2008, you cannot take the credit for that home if you owned, or had an ownership interest in, another main home at any time from July 2, 2005, through July 1, 2008.

    Q. How and when is the credit repaid?

    A. The first-time homebuyer credit is similar to a 15-year interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer's income tax return for that year. For example, if you properly claim a $7,500 first-time homebuyer credit on your 2008 return, you will begin paying it back on your 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.

    You may need to adjust your withholding or make quarterly estimated tax payments to ensure you are not under-withheld.

    However, some exceptions apply to the repayment rule. They include:

    • If you die, any remaining annual installments are not due. If you filed a joint return and then you die, your surviving spouse would be required to repay his or her half of the remaining repayment amount.
    • If you stop using the home as your main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions. Taxpayers are urged to consult a professional to determine the tax consequences of an involuntary conversion.
    • If you sell your home, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. Taxpayers are urged to consult a professional to determine the tax consequences of a sale.
    • If you transfer your home to your spouse, or, as part of a divorce settlement, to your former spouse, that person is responsible for making all subsequent installment payments.

    Dec 2008 - 2009 Standard Mileage Rates

    The Internal Revenue Service today issued the 2009 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

    Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
    • 55 cents per mile for business miles driven
    • 24 cents per mile driven for medical or moving purposes
    • 14 cents per mile driven in service of charitable organizations

    The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.

    The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.

    The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.

    The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

    A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

    Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

    Nov 2008 - 2009 Inflation Adjustments Expand Benefits

    For 2009, personal exemptions and standard deductions will rise and tax brackets will widen because of inflation adjustments announced today by the Internal Revenue Service.

    By law, the dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being adjusted for 2009. Key changes affecting 2009 returns, filed by most taxpayers in early 2010, include the following:
    • The value of each personal and dependency exemption, available to most taxpayers, is $3,650, up $150 from 2008.
    • The new standard deduction is $11,400 for married couples filing a joint return (up $500), $5,700 for singles and married individuals filing separately (up $250) and $8,350 for heads of household (up $350). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
    • Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $67,900, up from $65,100 in 2008.
    • The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.
    • The annual gift exclusion rises to $13,000, up from $12,000 in 2008.

    Information about the pension and retirement plan-related changes can be found in IR-2008-118. Other inflation adjustments are described in Revenue Procedure 2008-66.

    Oct 2008 - Wall Street Bailout, Explained

    News reports about the upheaval in the world of finance have been full of esoteric terms like \"mortgage-backed securities\" and \"credit-default swaps,\" but the crisis has resonated for people who know little about Wall Street and who did not think they would ever have to know. Here are several questions and answers of concern to Main Street Americans:

    Q. The bailout program being negotiated by the Bush administration and Congressional leaders calls for the government to spend up to $700 billion to buy distressed mortgages. How did the politicians come up with that number, and could it go higher?

    A. The recovery package cannot go higher than $700 billion without additional legislation. As for that figure, it lies between the optimistic estimate of $500 billion and the pessimistic guess of $1 trillion about the cost of fixing the financial mess. But the $700 billion is in addition to an $85 billion agreement on a bailout of the insurance giant American International Group, plus $29 billion in support that the government pledged in the marriage of Bear Stearns and JPMorgan Chase. On top of all that, the Congressional Budget Office says the federal bailout of the mortgage finance companies Fannie Mae and Freddie Mac could cost $25 billion.

    Q. Who, really, is going to come up with the $700 billion?

    A. American taxpayers will come up with the money, although if you are bullish on America in the long run, there is reason to hope that the tab will be less than $700 billion. After the Treasury buys up troubled mortgages, it will try to resell them as they appreciate to investors. The Treasury\'s involvement in the crisis and the speed with which Congress is responding could generate long-range optimism and raise the value of those mortgages, although it is impossible to say by how much. So it would not be correct to think of the federal government as simply writing a check for $700 billion. It is just committing itself to spend that much, if necessary. But the bottom line is, yes, this bailout could cost American taxpayers a lot of money.

    Q. So is it fair to say that Americans who are neither rich nor reckless are being asked to rescue people who are? What is in this package for responsible homeowners of modest means who might be forced out of their homes, perhaps for reasons beyond their control?

    A. Yes, you could argue that people who cannot tell soybean futures from puts, calls and options are being asked to clean up the costly mess left by Wall Street. To make the bailout palatable to the public, it is being described as far better than inaction, which administration officials and members of Congress say could imperil the retirement savings and other investments of Americans who are anything but rich. The voters expressed their discontent most recently with this reality when the House rejected the initial plan. It has been seen that the negotiations between the administration and Capitol Hill will include ideas about ways to help middle-class homeowners avoid foreclosure and perhaps some limits on pay for executives. And it should be noted that neither party is solely responsible for whatever neglect inched the country to the brink of disaster.

    Q. How is it that the administration and Congress, which have not tried to find huge amounts of money to, say, improve the nation\'s health insurance system or repair bridges and tunnels, can now be ready to come up with $700 billion to rescue the financial system? And is it realistic to think that the parties can reach agreement and get legislation passed in a hurry?

    A. The first question will surely come up again, involving as it does not just issues of spending policy but also more profound questions about national aspirations. As for rescuing the financial system, elected officials in both parties became convinced that, while a couple of venerable investment banks could fade into oblivion or be absorbed by mergers, the entire financial system could not be allowed to collapse. With that said, yes, the parties are likely to reach an accord. Many members of Congress are eager to leave Washington to go home and campaign for the November elections, and no one wants to face the voters without having done something to protect modest savings portfolios as well as giant investors.

    Sep 2008 - IRS Alters Certain Extension Periods

    The IRS recently changed the extended due date for certain types of business and fiduciary tax returns. The purpose of the change is to help individual taxpayers better meet their filing obligations. The change reduces the extension period from six to five months and applies to the following types of returns:
    • Form 1065, U.S. Return of Partnership Income
    • Form 1041, U.S. Income Tax Return for Estates & Trusts
    • Form 8804, Annual Return for Partnership Withholding Tax

    Items of income, deductions and credits from partnerships, S corporations, and estates and trusts are reported to partners, investors and beneficiaries on Schedules K-1 and other similar statements. The recipients then use that information to complete their own tax returns.

    Currently, the extended due dates for these returns (assuming a calendar year-end) and individual taxpayers fall on the same date -- October 15. The IRS believes this creates a burden for individual taxpayers who rely on the information from the Schedule K-1 and similar documents to prepare and file their personal tax returns in a timely manner. Requiring these statements to be issued one month earlier, generally by September 15, will provide recipients time to prepare and file their tax returns within the extended time frames.

    This change will be effective for extension requests with respect to tax returns due on or after Jan. 1, 2009, and applies to business entities that file the affected returns and forms that have a tax year ending on or after September 30, 2008.

    Aug 2008 - Scammers Use e-Mail, Fax to Pose as IRS

    The Internal Revenue Service cautions taxpayers to be on the lookout for a new wave of scams using the IRS name in identity theft e-mails, or phishing, that have circulated during the last two months.

    In June and July alone, taxpayers reported almost 700 separate phishing incidents to the IRS. In 2008 so far, taxpayers have reported about 1,600 phishing incidents to the IRS.

    “Taxpayers should take steps to keep their personal information out of the hands of identity thieves,” said IRS Commissioner Doug Shulman. “That includes not falling for any of the phony e-mails or faxes now in circulation pretending to come from the IRS.”

    The most common scams involve tax refunds and, this year, economic stimulus payments.

    Although most of these scams consist of e-mails requesting detailed personal information, the IRS generally does not send e-mails to taxpayers, does not discuss tax account matters with taxpayers in e-mails, and does not request security-related personal information, such as PIN numbers, from taxpayers.

    Refund e-Mail Scam

    There are several variations of the refund scam, in which an e-mail claiming to come from the IRS falsely informs the recipient that he or she is eligible for a tax refund for a specific amount. The bogus e-mail instructs the recipient to click on a link to access a refund claim form. The form requests personal information that the scammers can use to access the e-mail recipient’s bank or credit card account.

    This notification is phony. The IRS does not send unsolicited e-mail about tax account matters to taxpayers.

    Filing a tax return is the only way to apply for a tax refund; there is no separate application form.

    Economic Stimulus Payments Scam

    In this scam, a taxpayer receives an e-mail pretending to come from the IRS which tells the recipient he or she is eligible for an economic stimulus payment. The message recommends direct deposit into the taxpayer’s checking or savings account. To receive the payment, recipients must click on a link to complete and submit an online form by a certain date; otherwise, the e-mail warns, payment may be delayed. The form requests personal and financial data, including checking or savings account numbers that the scammers can use to gain access to the accounts.

    In reality, the way members of the public receive their economic stimulus payment is to file a tax return with the IRS, not a special form. Additionally, the IRS does not request personal or financial information via e-mail.

    Substitute Form 1040 Fax Scam

    This scam consists of a cover letter and form that are faxed, rather than e-mailed. The cover letter is addressed “Dear Valued Tax Payer (sic)” and appears to be signed by an IRS employee. The letter says that the IRS is updating its files and that recipients who supply the requested information will receive a nominal tax refund. It also states that those who fail to immediately return the completed form risk additional tax and withholding. The attached form is labeled a substitute Form 1040 and is titled “Certificate of Current Status of Beneficial Owner For United States Tax Recertification & Withholding.” It requests a large amount of detailed personal and financial information, such as mother’s maiden name (often used in security screening), bank account numbers, estimated assets and more. It asks the recipient to sign and fax back the completed form, as well as a copy of the recipient’s driver’s license and passport.

    The letter, signature and form are all fraudulent. Moreover, the IRS does not send unsolicited faxes to taxpayers and does not request such detailed personal and financial information.

    How Scams Work

    To lure their victims, phishing scams use the name of a known institution, such as the IRS, to either offer a reward for taking a simple action, such as providing information, or threaten or imply an unpleasant consequence, such as losing a refund, for failing to take the requested action.

    The goal of the scams is to trick people into revealing personal and financial information, such as Social Security, bank account or credit card numbers, which the scammers can use to commit identity theft.

    Typically, identity thieves use a victim’s personal and financial data to empty the victim’s financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name, file fraudulent tax returns or even commit crimes. Most of these fraudulent activities can be committed electronically from a remote location, including overseas. Committing these activities in cyberspace allows scammers to act quickly and cover their tracks before the victim becomes aware of the theft.

    People whose identities have been stolen can spend months or years — and their hard-earned money — cleaning up the mess thieves have made of their reputations and credit records. In the meantime, victims may lose job opportunities or may be refused loans, education, housing or cars. Anyone wishing to access the IRS Web site should type www.irs.gov into their Internet address window, rather than clicking on a link in an e-mail or opening an attachment, either of which may download malicious code or send the recipient to a phony Web site.

    Jul 2008 - Gas Prices Spark Standard Mileage Increase

    Due to rising gas prices, the IRS has increased the "standard mileage rate" for business drivers in 2008.

    The standard mileage rate is an IRS-approved shortcut. It allows you to use the prescribed flat rate for the year rather than tracking all the actual business expenses of your vehicle. However, you still must keep detailed records of every business trip.

    The new rate of 58.5˘ per business mile ? up 8˘ per mile ? applies to travel during the last half of this year. For the first half, the previous rate of 50.5˘ per mile still applies. In addition, you may deduct any business-related parking fees and tolls. The mid-year change is clearly a move by the IRS to alleviate the traveling businessperson's tax burden.

    Example: You drive 2,000 business miles a month in 2008. Over the course of the year, you incur $500 in related tolls. For the first six months, you can deduct $6,060 (50.5˘ x 12,000). For the last six months, the deduction increases to $7,020 (58.5˘ x 12,000). When you add $500 in tolls, your deduction for 2008 equals $14,080 ($6,060 + $7,020 + $500).

    Note that the IRS also increased its standard mileage rate for medical and job-related moving expenses from 19˘ a mile to 27˘ a mile for the last six months of this year. However, because the rate for charitable driving is set by law, it remains unchanged at 14˘ per mile.

    June 2008 - Fix for High Gas Prices?

    Rising oil and gas prices have lawmakers and consumers scrambling for solutions, but it is unclear whether anything can be done to lower energy costs in the short term, experts say. A confluence of factors, from supply and demand to speculation and a weakened dollar, are driving gas prices higher.

    The price of oil has doubled over the past year. A barrel of crude oil cost about $65 in June 2007; it is currently hovering around $130 a barrel.

    Gas prices have skyrocketed as a result, with some American consumers paying more than $4 a gallon. The national average is $3.95 per gallon, according to a AAA survey published May 29. A year ago, the national average was about $3.20. Observers say several factors, domestic and global, are responsible for the price increases. Although demand is falling in places like the United States and Europe because of high prices, it is surging in emerging markets like China and India. Meanwhile, concerns are rising that supply -- battered by political instability in some oil-rich countries and a decision by others to not increase production substantially -- is not keeping up with demand. Additionally, the declining value of the dollar, the currency used by the international oil market, has made it easier for Asian and European countries to purchase oil.

    Some experts say speculation may also be playing a role in the rising price of oil. Many investors look to commodities like oil to act as a buffer against inflation, which typically occurs when -- as is the case now -- interest rates are low and the dollar is weakened. Other experts say the effect of speculation is minimal to negligible. Whatever the cause, federal and state lawmakers are anxiously searching for short-term relief. Their options, however, seem limited.

    The gas tax holiday debate

    Two presidential candidates, Arizona Republican Sen. John McCain and New York Democratic Sen. Hillary Clinton, proposed a federal gas tax holiday this year to provide some savings for American consumers. The plan would place a moratorium on the 18.4 cent-a-gallon federal gas tax for the summer, the time of year when Americans tend to drive the most. McCain admitted that the tax break would have a limited effect. He said it would amount to a "little bit of a break for the summer" for low-income Americans.

    Democratic presidential nominee Barack Obama, an Illinois senator, called the proposal a gimmick. He voted for such a tax holiday in his home state in 2000 but said it provided little benefit for consumers. In addition to Illinois, three states -- Florida, Indiana, and Georgia -- have enacted gas tax holidays over the past decade. Lawmakers in several states are mulling similar cuts this year, according to published reports. The combination of local, state and federal taxes can total more than 40 cents a gallon in some parts of the country, according to the American Petroleum Institute, a trade group that represents the American oil and natural gas industry. In short, there is very little the government can do in the very short-term, other than providing information about the potential for government to act.

    May 2008 - Fed Cuts Rates Again

    The US Federal Reserve has, as expected, cut interest rates by a modest quarter percentage point. The decision by Fed Chairman Ben Bernanke and his policymakers may have been influenced by GDP increasing at a faster than expected pace in the first three months of the year.

    Trying to stop the world's biggest economy slipping into recession, the US central bank has slashed its benchmark rate over the last eight months from 5.25% to 2%.

    However the cuts are not getting through to home owners. The average US 30-year fixed mortgage is 6% and adjustable mortgage rates have risen during that time. Existing home prices continue to slide and foreclosures have surged.

    The fed funds rate, as it is more commonly known, is a benchmark for home equity lines of credit, credit cards and other consumer loans as well as the prime rate used for short-term business loans.

    The Fed's statement repeated earlier ones about how rate cuts up to this point should help to spur the economy and lessen the risk of a downturn. But the central bank removed the following language form the current statement: "downside risks to growth remain."

    The latest GDP figures, which show the US economy grew by 0.6% in the first quarter, seem to indicate that that economy is struggling but still growing. But they were not solid enough to end the debate on whether the country is sliding into recession.

    The question now is whether the Fed will pause in its rate cutting campaign. Some analysts said that would be a positive sign, indicating the US economy has steadied with the worst of the market turmoil over, but other fear that things could turn negative again in the second quarter.

    Apr 2008 - Facts About the 2008 Stimulus Payments

    Basic Eligibility

    The IRS will use the 2007 tax return to determine eligibility and calculate the basic amount of the payment. In most cases, the payment will equal the amount of tax liability on the return with a maximum amount of $600 for individuals ($1,200 for taxpayers who file a joint return) and a minimum of $300 for individuals ($600 for taxpayers who file a joint return).

    Even those who have little or no tax liability may qualify for a minimum payment of $300 ($600 if filing a joint return) if their tax return reflects $3,000 or more in qualifying income. For the purpose of the stimulus payments, qualifying income consists of earned income such as wages and net self-employment income as well as Social Security or certain Railroad Retirement benefits and veterans' disability compensation, pension or survivors' benefits received from the Department of Veterans Affairs in 2007. However, Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.

    Low-income workers who have earned income above $3,000 but do not have a regular filing requirement must file a 2007 tax return to receive the minimum stimulus payment. Similarly, Social Security recipients, certain Railroad retirees, and those who receive the veterans' benefits mentioned above must file a 2007 return in order to notify the IRS of their qualifying income.

    The IRS emphasized that people with no filing requirement who turn in a tax return to qualify for the economic stimulus payment will not get a tax bill. People in this category will not owe money because of the stimulus payment.

    Additional Payments for Parents and Others with Qualifying Children

    Parents and anyone else eligible for a stimulus payment will also receive an additional $300 for each qualifying child. To qualify, a child must be eligible under the Child Tax Credit and have a valid Social Security number.

    Limitation

    To be eligible for a stimulus payment, taxpayers must have valid Social Security numbers. Anyone who does not have a valid Social Security number, including those who file using an Individual Taxpayer Identification Number (ITIN), an Adoption Taxpayer Identification Number (ATIN) or any other identification number issued by the IRS is not eligible for this payment.

    Both individuals listed on a married filing jointly return must have valid Social Security numbers to qualify for a stimulus payment.

    Eligibility for the stimulus payment is subject to maximum income limits. The payment, including the basic amount and the amount for qualifying children, will be reduced by 5 percent of the amount of income in excess of $75,000 for individuals and $150,000 for those with a Married Filing Jointly filing status.

    Individuals who pay no tax and who have less than $3,000 of qualifying income will not be eligible for the stimulus payment.

    Special Circumstances for Recipients of Social Security, Railroad Retirement and Certain Veterans Benefits

    Individuals who receive Social Security benefits, Railroad Retirement benefits and certain veterans' benefits may have to follow special filing requirements in order to receive the basic amount:
    • Those who have already filed a 2007 return reflecting qualifying income of $3,000 or more do not have any additional filing requirements and do not need to do anything more to receive their payment.
    • Those who have already filed a 2007 return showing less than $3,000 in qualifying income and did not list their Social Security, Railroad Retirement or certain veterans benefits should file a Form 1040X to list those non-taxable benefits and qualify for a payment.
    • Those who are not required to file a 2007 return but whose total qualifying income including Social Security, certain Railroad Retirement and certain Veterans benefits would equal or exceed $3,000 should file a return reporting these benefits on Line 14a of Form 1040A or Line 20a of Form 1040 to establish their eligibility. Please note the form lines just mention Social Security, but use these lines even if your only benefits were Railroad Retirement or veterans' benefits.

    Notices

    Most taxpayers will receive two notices from the IRS. The first general notice from the IRS will explain the stimulus payment program. The second notice will confirm the recipients' eligibility, the payment amount and the approximate time table for the payment. Taxpayers will need to save this notice to assist them when they prepare their 2008 tax return next year.

    Anyone who moves after they have filed their 2007 tax return should notify the IRS by filing Form 8822, Change of Address, and also notify the Post Office.

    Exclusions

    Individuals who file Form 1040NR, 1040PR or 1040SS are not eligible for the stimulus payments. These returns are normally filed by Nonresident Aliens, residents of Puerto Rico and residents of the U.S. Virgin Islands, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI). Residents of U.S. possessions will be receiving their rebates directly from the possessions.

    Also ineligible are individuals who can be claimed as dependents on someone else's return.

    Dividends, interest and capital gains income is not included when determining qualifying income. Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment. Also not included in qualifying income are non-veterans or non-Social Security pension income (such as those from Individual Retirement Accounts).

    Stimulus payments will be subject to offset against outstanding tax and non-tax liabilities in the same fashion as regular tax refunds.

    In addition, the IRS emphasizes the stimulus payments will not count toward or negatively impact any other income-based government benefits, such as Social Security benefits, food stamps and other programs.

    Mar 2008 - Economic Stimulus

    Starting in May, the Treasury will begin sending economic stimulus payments to more than 130 million households. To receive a payment, taxpayers must have a valid Social Security number, $3,000 of income and file a 2007 federal tax return. IRS will take care of the rest. Eligible taxpayers will receive between $300 to $600 if single or $600 to $1,200 if married filing jointly. Millions of retires, disabled veterans and low-wage earners who usually are exempt from filing a tax return must do so this year in order to receive a stimulus payment.

    Basic Information on the Stimulus Payments


    What is it? It\'s an economic stimulus payment that more than 130 million households will receive starting in May. It\'s not taxable, and it won\'t reduce your 2007 or 2008 refund or increase the amount you owe when you file your 2008 return.

    Are you eligible? You\'re eligible if you have a valid Social Security Number (SSN) and show qualifying income of at least $3,000 on your federal tax return. Both people listed on a \"married filing jointly\" return must have valid SSNs to qualify for the payment -- if only one has a valid SSN, neither can receive the payment.

    Can you use an ITIN instead of an SSN? Taxpayers with an Individual Taxpayer Identification Number (ITIN) instead of an SSN are not eligible to receive a stimulus payment. Both people listed on a \"married filing jointly\" return must have valid SSNs to qualify for the payment -- if only one has a valid SSN, neither can receive the payment.

    Not eligible at the current time? If your circumstances change and you become eligible after you file your 2007 federal tax return, you can always file an amended return using Form 1040X. If you\'re not eligible this year but you become eligible next year, you can claim the economic stimulus payment next year on your 2008 tax return.

    How do you get it? Just file a a federal tax return for 2007, even if you normally don\'t have to because your income usually doesn\'t meet the filing threshhold. You can\'t get it if you don\'t file.

    How much will you get? The actual amount depends on the information contained on your tax return. Eligible individuals will receive between $300 and $600. Those who are eligible and file a joint return will receive a total of between $600 and $1,200. Those with children will get an additional $300 for each qualifying child. To qualify, a child must be eligible under the Child Tax Credit and have a valid Social Security number.

    The payments phase out at certain income levels, so those with higher incomes may receive a reduced payment or even no payment.

    Feb 2008 - Changes for Gifts, Estates, and Trusts

    Gifts

    Annual Exclusion for Gifts for 2007

    For calendar year 2007, the first $12,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year.

    For calendar year 2007, the first $125,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts made during that year.


    Estates and Trusts

    Reduction of Maximum Estate and Gift Tax Rate

    For estates of decedents dying, and gifts made, after 2006, the maximum rate for the estate tax and the gift tax for 2007, 2008, and 2009 is 45%.


    2007 Federal Tax Rates for Estates and Trusts

    The 2007 federal estate and trust tax rates are as follows.

    2007 Federal Estate and Trust Tax Rates
    If taxable income is: The tax is:
    Not over $2,150 15% of the taxable income
    Over $2,150 but not over $5,000 $322.50 plus 25% of the excess over $2,150
    Over $5,000 but not over $7,650 $1,035.00 plus 28% of the excess over $5,000
    Over $7,650 but not over $10,450 $1,777.00 plus 33% of the excess over $7,650
    Over $10,450 $2,701.00 plus 35% of the excess over $10,450



    Increased Estate Tax Applicable Exclusion Amount

    An estate tax return for a U.S. citizen or resident needs to be filed only if the gross estate exceeds the applicable exclusion amount, listed below.

    Applicable Exclusion Amounts
    Year Exclusion Amount
    2007 and 2008 $2,000,000
    2009 $3,500,000



    Limit on Contributions to Funeral Trusts

    For a contract entered into during calendar year 2007 for a qualified funeral trust, as defined in section 685 of the Internal Revenue Code, the trust may not accept aggregate contributions by or for the benefit of an individual in excess of $8,800.


    Valuation of Qualified Real Property in Decedent's Gross Estate

    For the estate of a decedent dying in calendar year 2007, if the executor elects to use the special use valuation method under Section 2032A of the Internal Revenue Code for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use this election that is taken into account for purposes of the estate tax may not exceed $940,000.

    Jan 2008 - 2007 Tax Change Highlights

    AMT Exemption Increased for One Year

    For tax-year 2007, Congress raised the alternative minimum tax exemption to $66,250 for a married couple filing a joint return, up from $62,550 in 2006. The exemption rises to $33,125 for a married person filing separately, up from $31,275, and it rises to $44,350 for singles and heads of household, up from $42,500. Under current law, these exemption amounts will drop to $45,000, $22,500 and $33,750, respectively, in 2008. Form 6251 and the AMT Calculator, which is being updated and will be available later in January, provide more information.

    While the vast majority of taxpayers can file as usual, about 13.5 million taxpayers who file any of five tax forms affected by recent tax law changes related to the AMT will have to wait until Feb. 11, 2008, to file their returns. IRS.gov has more information on this important subject, including a list of affected forms and questions and answers.

    Extender Tax Breaks Reappear on IRS Forms

    Several popular tax breaks, renewed too late to be included on 2006 forms, once again appear as separate items on various 2007 IRS forms. As a result, unlike last year, eligible taxpayers will no longer have to follow special instructions in order to claim the deduction for state and local sales taxes, the educator expense deduction and the tuition and fees deduction.

    Those who itemize, rather than taking the standard deduction, can choose to claim state and local sales taxes on Form 1040 Schedule A, Line 5.

    The educator expense deduction is reported on Form 1040, Line 23 or Form 1040A, Line 16.

    Taxpayers who choose to claim the tuition and fees deduction must fill out and attach new Form 8917. The resulting deduction is reported on Form 1040 Line 34 or Form 1040A Line 19. Note that many who qualify for the tuition and fees deduction may reap greater tax savings by instead claiming the Hope credit or the lifetime learning credit for a particular student. Figure these credits on Form 8863. Publication 970 has details on these and other education-related tax benefits.

    Contribution Limits Rise for IRAs and Other Retirement Plans

    This filing season, more people can make tax-deductible contributions to a traditional IRA. The deduction is phased out for singles and heads of household who are covered by a workplace retirement plan, with incomes between $52,000 and $62,000, compared to $50,000 to $60,000 last year. The phase-out range is $83,000 to $103,000, up from $75,000 to $85,000 last year, if the spouse making the IRA contribution is covered by a workplace retirement plan. Where an IRA contributor, not covered by a workplace retirement plan, is married to someone who is covered, the deduction is phased out if the couple's income is between $156,000 and $166,000, up from $150,000 to $160,000 in 2006. The phase-out range remains $0 to $10,000 for a married individual filing a separate return who is covered by a retirement plan at work. Use the worksheet in the line instructions for Form 1040 Line 32 or Form 1040A Line 17 to figure the IRA deduction.

    For 2007 and 2008, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b) and most 457 plans rises $500, to $15,500. The catch-up contribution limit for those aged 50 to 70-½ remains at $5,000. For SIMPLE plans, the limit is also up $500, to $10,500, and the catch-up limit remains $2,500. This year for the first time income limits for the saver's credit are adjusted for inflation. The saver's credit supplements other tax benefits available to low- and- moderate income taxpayers who save for retirement. Begun in 2002 as a temporary provision, the saver's credit is now a permanent part of the tax code. Use Form 8880 to claim the credit.

    Mortgage Insurance Premiums May be Deductible

    Some borrowers may be able to deduct mortgage insurance premiums paid on mortgages taken out or refinanced during 2007. A borrower who prepays premiums for later years may deduct only the premiums that relate to 2007, except for prepayments for guarantees made by the Department of Veterans Affairs or the Rural Housing Service. Only mortgage insurance contracts issued during 2007, 2008, 2009 or 2010 qualify for this new itemized deduction. Proceeds of the mortgage, secured by a first or second home, must be used exclusively to buy, build or improve these homes, or alternatively, to refinance a mortgage, secured by the home and used for these purposes. Home-equity loans used for other purposes are not eligible. The deduction for mortgage insurance premiums is phased out for taxpayers with adjusted gross incomes exceeding $100,000 ($50,000, if married filing separately). Claim this deduction on Schedule A, Line 13. Further details are in Publication 936.

    The Internal Revenue Service this month issued the 2008 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

    Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:
    • 50.5 cents per mile for business miles driven;
    • 19 cents per mile driven for medical or moving purposes; and
    • 14 cents per mile driven in service of charitable organizations.

    The new rate for business miles compares to a rate of 48.5 cents per mile for 2007. The new rate for medical and moving purposes compares to 20 cents in 2007. The rate for miles driven in service of charitable organizations has remained the same.

    The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile; the standard rate for medical and moving purposes is based on the variable costs as determined by the same study. Runzheimer International, an independent contractor, conducted the study for the IRS.

    The mileage rate for charitable miles is set by law.

    A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, for any vehicle used for hire or for more than four vehicles used simultaneously. Revenue Procedure 2007-70 contains additional information on these standard mileage rates.

    Dec 2007 - New 2008 Mileage Rates

    The Internal Revenue Service this month issued the 2008 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

    Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:
    • 50.5 cents per mile for business miles driven;
    • 19 cents per mile driven for medical or moving purposes; and
    • 14 cents per mile driven in service of charitable organizations.

    The new rate for business miles compares to a rate of 48.5 cents per mile for 2007. The new rate for medical and moving purposes compares to 20 cents in 2007. The rate for miles driven in service of charitable organizations has remained the same.

    The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile; the standard rate for medical and moving purposes is based on the variable costs as determined by the same study. Runzheimer International, an independent contractor, conducted the study for the IRS.

    The mileage rate for charitable miles is set by law.

    A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, for any vehicle used for hire or for more than four vehicles used simultaneously. Revenue Procedure 2007-70 contains additional information on these standard mileage rates.

    Nov 2007 - Roth IRA Conversions

    Just because you qualify to make contributions to a Roth IRA does not mean you are also entitled to convert your plain-vanilla IRA into a Roth. Unfortunately, the income limit for conversions is slightly lower - $100,000 of modified adjusted gross income for both joint filers and singles - than the income limits for contributions. However, if you qualify to convert, there are situations where you should. Besides allowing tax-free and penalty-free withdrawals of contributions, the Roth IRA enables most savers to amass a greater nest egg because withdrawals from earnings during retirement are tax-free (as long as you are over 59 1/2 and have had the account for at least five years). Should you convert? In most cases, the answer is yes. But there are some things to carefully consider before making a final decision:

    Do You Have the Money to Pay the Taxes on the Conversion?

    When you convert your regular IRA to a Roth, you will have to pay tax on any earnings and pretax contributions. This, in lieu of paying taxes upon later withdrawals from the Roth account. You should not withdraw from your IRA to pay the conversion tax, however. If you do so before age 59 1/2, you will generally owe a 10% penalty on that amount. Plus you will permanently give up the opportunity for tax-free Roth IRA compounding of that amount. Do not think that you can avoid the conversion tax by just rolling over an amount equal to your after-tax (nondeductible) contributions. Each dollar you roll over from a regular IRA is considered a \"blended\" dollar. Therefore, a percentage of the amount rolled over into the Roth account will be taxed no matter what (except in the unlikely event that your IRAs are worth less than the amount of your after-tax contributions).

    Will the Rollover Disqualify You for Important Tax Benefits?

    The conversion income could push you into a higher tax bracket and disqualify you from other tax benefits such as the dependent child and college tuition tax credits.

    How Much Time Do You Have Until Retirement?

    Generally, the older you are, the less sense it makes to convert a traditional IRA to a Roth. You\'ll have less time to make up for what you lost in taxes on the conversion.

    Do You Plan to Leave All of Your IRA to Your Heirs?

    One case in which it makes sense for an older traditional IRA holder to transfer funds to a Roth IRA is when he or she is planning to leave the money to heirs. Why? First, unlike traditional IRAs, Roths require no minimum withdrawals during the life of the IRA owner. If the surviving spouse inherits the Roth account, he or she need not take any minimum withdrawals either. With a regular IRA, you must begin taking taxable withdrawals from that account no later than the year after you turn 70 1/2. So you lose out on the chance for that money to continue to compound without paying taxes. That can mean a lot less money for your heirs. Secondly, conversion to a Roth will reduce your taxable estate by the amount of income tax you pay to convert. This can reduce estate taxes for your heirs.

    Will Your Income Tax Bracket Drop After Retirement?

    The clearest case in which converting from a regular tax-deductible IRA to a Roth IRA does not make sense is when you expect to drop into a much lower income tax bracket after you retire (say, from 25% to 15%). Why? You will have to pay income tax on the conversion at your current high rate. Instead, let the money compound in your regular IRA and pay taxes at your lower rate in retirement. However, if your tax rate is only expected to drop a few points after retirement (for example, from 28% to 25%), conversion is probably still the right maneuver.



    Oct 2007 - Home Foreclosure and Debt Cancellation

    1. What is Cancellation of Debt?

    If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

    Here\'s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $8,000, which generally is taxable income to you.

    2. Is Cancellation of Debt income always taxable?

    Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

    Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

    Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.

    Certain farm debts:If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.

    Non-recourse loans:A non-recourse loan is a loan for which the lender\'s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below.


    3. I lost my home through foreclosure. Are there tax consequences?

    There are two possible consequences you must consider:

    Taxable cancellation of debt income.(Note: As stated above, cancellation of debt income is not taxable in the case of non-recourse loans.)
    A reportable gain from the disposition of the home (because foreclosures are treated like sales for tax purposes).(Note: Often some or all of the gain from the sale of a personal residence qualifies for exclusion from income.)
    Use the following steps to compute the income to be reported from a foreclosure:

    Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt.)

    1. Enter the total amount of the debt immediately prior to the foreclosure.___________
    2. Enter the fair market value of the property from Form 1099-C, box 7. ___________
    3. Subtract line 2 from line 1.If less than zero, enter zero.___________

    The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.

    Step 2 - Figuring Gain from Foreclosure

    4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure ________
    5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.) ____________
    6. Subtract line 5 from line 4. If less than zero, enter zero.

    The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.

    4. I lost money on the foreclosure of my home. Can I claim a loss on my tax return?

    No. Losses from the sale or foreclosure of personal property are not deductible.


    5. Can you provide examples?

    A borrower bought a home in August 2005 and lived in it until it was taken through foreclosure in September 2007. The original purchase price was $170,000, the home is worth $200,000 at foreclosure, and the mortgage debt canceled at foreclosure is $220,000. At the time of the foreclosure, the borrower is insolvent, with liabilities (mortgage, credit cards, car loans and other debts) totaling $250,000 and assets totaling $230,000.

    The borrower figures income from the foreclosure as follows:

    Use the following steps to compute the income to be reported from a foreclosure:

    Step 1 - Figuring Cancellation of Debt Income (Note: For non-recourse loans, skip this section. You have no income from cancellation of debt.)

    1. Enter the total amount of the debt immediately prior to the foreclosure.___$220,000__
    2. Enter the fair market value of the property from Form 1099-C, box 7. ___$200,000__
    3. Subtract line 2 from line 1.If less than zero, enter zero.___$20,000__

    The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions in question 2. Enter it on line 21, Other Income, of your Form 1040.

    Step 2 - Figuring Gain from Foreclosure

    4. Enter the fair market value of the property foreclosed.For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure. __$200,000__
    5. Enter your adjusted basis in the property.(Usually your purchase price plus the cost of any major improvements.) ___$170,000__
    6. Subtract line 5 from line 4.If less than zero, enter zero.___$30,000__

    The amount on line 6 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income. If you do not qualify for this exclusion, or your gain exceeds $250,000 ($500,000 for married couples filing a joint return), report the taxable amount on Schedule D, Capital Gains and Losses.

    In this situation, the borrower has a tax-free home-sale gain of $30,000 ($200,000 minus $170,000), because they owned and lived in their home as a principal residence for at least two years. Ordinarily, the borrower would also have taxable debt-forgiveness income of $20,000 ($220,000 minus $200,000). But since the borrower\'s liabilities exceed assets by $20,000 ($250,000 minus $230,000) there is no tax on the canceled debt.

    Other examples can be found in IRS Publication 544, Sales and Other Dispositions of Assets, under the section Foreclosures and Repossessions.



    6. I don\'t agree with the information on the Form 1099-C. What should I do?

    Contact the lender. The lender should issue a corrected form if the information is determined to be incorrect. Retain all records related to the purchase of your home and all related debt.



    7. I received a notice from the IRS on this. What should I do?

    The IRS urges borrowers with questions to call the phone number shown on the notice. The IRS also urges borrowers who wind up owing additional tax and are unable to pay it in full to use the installment agreement form, normally included with the notice, to request a payment agreement with the agency.



    Sep 2007 - Risks of Interest-Only Loans

    Market Risk I

    Not repaying principal, and therefore not building equity through debt retirement, means that an interest-only borrower is counting on market appreciation (price inflation) to help him own more of his home. Of course, this requires that prices increase while he holds the mortgage. Now, folks who follow the national realty markets are quick to point out that there hasn't been a broad decline in home prices since the Great Depression. However, you don't own the national realty market; you own a single home in a single neighborhood in a single town, and those followers will also concede that prices can and do increase and decrease regularly on a localized basis.

    So what does this mean to the interest-only borrower? There is a danger in not reducing the balance. If prices should fail to increase during the interest-only period, and if the borrower should find a need to sell the home, he could potentially be liable for thousands of dollars in sales costs which would need to be paid out of whatever equity (in the form of the down payment) he started out with. According to the National Association of Realtors, typical down payments have fallen from 10% in 1990 to about 3% in 2007, so it's likely that at least some borrowers could be courting trouble here.

    Market Risk II

    The more extreme side of Market Risk I, of course, is that prices actually decline during the mortgage holding period. If our borrowers finds themselves in that situation, coupled with a low down-payment, they could easily find themselves "underwater" -- a descriptive term that means they'll sell the property for less than the remaining balance of the mortgage. In that unhappy case, the borrowers cannot sell without somehow coming up with what would likely be several thousand dollars to satisfy the mortgage balance as well as any sales charges (commissions, inspections, etc).

    We noted before that payments made in the early years of a fully-amortizing are largely comprised of interest.

    Interest Rate Risk

    All the examples so far have been based on mortgages with a fixed interest rate. Unfortunately, most of the interest-only loans being made today feature only short fixed interest periods, if any; some featuring adjustable rates which can change each month. As this is written, low interest rates are the order of the day, with some short-term rates at or near historic lows -- but if history teaches us nothing else, it's that low rates inevitably rise.

    Above, we discussed term compression and its effect on payments, which causes them to rise above what they otherwise would be when the interest-only period ends. Now, magnify that compressed repayment term with a jump in interest rates, and you've got a recipe for a fiscal catastrophe.

    Figure this: you, the interest-only borrower, have been happily making payments at $600 for the first five years of your (for now) fixed-rate loan. All the while, interest rates have been rising from their near-40 year lows to what could be considered "normal" -- about 7% -- and your monthly payment climbs over 40% to $848 per month. If you should find yourself in a period of considerably higher interest rates when the fixed-rate and interest-only period ends, your rate could climb to 9% or more -- in which case your monthly payment could jump to $1,000 per month, or more.

    Also at the moment, liberal and flexible mortgage underwriting standards are allowing borrowers to borrow more money for the same income, because qualifying ratios have been greatly expanded. Theoretically, a borrower's budget might already be pretty stretched to the limit -- and that's before a nasty rate and payment hike.

    Aug 2007 - What to Know about 401(k)s

    1. A 401(k) offers three compelling benefits.

    A 401(k) represents a way to reduce your taxable income since contributions come out of your pay before taxes are withheld; many plans include a matching contribution from your employer; and the money you save benefits from tax-deferred growth, which lets your money compound more quickly than it would if it were taxed yearly.

    2. The federal limit on annual pre-tax 401(k) contributions is on the rise.

    In 2007, the maximum contribution rose to $15,500, or $20,500 if you're 50 and older.

    3. Matching contributions are "free money."

    If you can't afford to max out your 401(k), contribute at least enough to get the matching contribution, a.k.a.. free money. The typical match is 50 cents on the dollar up to 6 percent of your salary. To help you do the math on your match, click on our Financial Tools page.

    4. Taking money out of a 401(k) before retirement is expensive.

    Loans must be repaid with after-tax money plus interest. And, with few exceptions, if you withdraw money before age 59-1/2 you must pay income taxes plus a 10 percent penalty. What's more, lost time for compounding will substantially shrink your nest egg.

    5. When setting up your 401(k) investments, figure out what your mix of stocks and bonds should be.

    Two factors influence this decision: your time horizon until retirement and your risk tolerance.

    6. You're limited to the investments your employer chooses for your 401(k) plan.

    If you don't like many of the selections, keep your choices simple by investing, for example, in a broad-based index fund. Don't boycott the plan altogether. If you do, you lose out on tax-advantaged compounding and a matching contribution.

    7. When you change jobs, you'll often have three choices: leave your 401(k) money where it is, roll it into an IRA or another 401(k), or cash out.

    If your account balance is less than $5,000, your employer may insist you take it out of the plan, but cashing out is like shooting yourself in the foot financially. Even small amounts can grow large with time and tax-deferred compounding. You'd be better off rolling the money into another retirement account.

    8. When you do roll money into an IRA or 401(k), make it a "trustee-to-trustee" transfer.

    That is, have the check made out to the custodian of your new account, not you. Otherwise, you risk possible penalties if you fail to execute the rollover properly.

    9. IRS rule 72(t) provides one way to take early 401(k) withdrawals without penalty.

    You must take a fixed amount of money out for five years or until you reach 59-1/2, whichever is longer. The annual withdrawal amount is based on your life expectancy.

    10. Some employers let you leave money in your 401(k) account when you retire.

    Find out what rules, if any, the employer imposes on when and how you must start taking distributions. If there are none, you may leave the money untouched until you're 70-1/2. That's the age when Uncle Sam insists all retirees begin withdrawing money from traditional IRAs and 401(k)s.

    Jul 2007 - Interest Rates for Q3 2007

    WASHINGTON - The Internal Revenue Service today announced there will be no change in the interest rates for the calendar quarter beginning July 1, 2007. The interest rates are as follows:
    • eight (8) percent for overpayments [seven (7) percent in the case of a corporation];

    • eight (8) percent for underpayments;

    • ten (10) percent for large corporate underpayments; and

    • five and one-half (5.5) percent for the portion of a corporate overpayment exceeding $10,000.



    Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

    The interest rates announced today are computed from the federal short-term rate based on daily compounding determined during April 2007.

    June 2007 - Guidance on Health Savings Accounts

    Set forth below are six common questions and answers concerning HSAs:

    Q-1. What is an HSA?
    A-1. An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary who, for the months for which contributions are made to an HSA, is covered under a high-deductible health plan.

    Q-2. Who is eligible to establish an HSA?
    A-2. An "eligible individual" can establish an HSA. An "eligible individual" means, with respect to any month, any individual who: (1) is covered under a highdeductible health plan (HDHP) on the first day of such month; (2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage); (3) is not enrolled in Medicare (generally, has not yet reached age 65); and (4) may not be claimed as a dependent on another person's tax return.

    Q-3. What is a "high-deductible health plan" (HDHP)?
    A-3. Generally, an HDHP is a health plan that satisfies certain requirements with respect to deductibles and out-of-pocket expenses. Specifically, for self-only coverage, an HDHP has an annual deductible of at least $1,000 and annual outof- pocket expenses required to be paid (deductibles, co-payments and other amounts, but not premiums) not exceeding $5,000. For family coverage, an HDHP has an annual deductible of at least $2,000 and annual out-of-pocket expenses required to be paid not exceeding $10,000. In the case of family coverage, a plan is an HDHP only if, under the terms of the plan and without regard to which family member or members incur expenses, no amounts are payable from the HDHP until the family has incurred annual covered medical expenses in excess of the minimum annual deductible. Amounts are indexed for inflation. A plan does not fail to qualify as an HDHP merely because it does not have a deductible (or has a small deductible) for preventive care (e.g., first dollar coverage for preventive care). However, except for preventive care, a plan may not provide benefits for any year until the deductible for that year is met. See A-4 and A-6 for special rules regarding network plans and plans providing certain types of coverage.

    Example (1): A Plan provides coverage for A and his family. The Plan provides for the payment of covered medical expenses of any member of A's family if the 2 member has incurred covered medical expenses during the year in excess of $1,000 even if the family has not incurred covered medical expenses in excess of $2,000. If A incurred covered medical expenses of $1,500 in a year, the Plan would pay $500. Thus, benefits are potentially available under the Plan even if the family's covered medical expenses do not exceed $2,000. Because the Plan provides family coverage with an annual deductible of less than $2,000, the Plan is not an HDHP.

    Example (2): Same facts as in example (1), except that the Plan has a $5,000 family deductible and provides payment for covered medical expenses if any member of A's family has incurred covered medical expenses during the year in excess of $2,000. The Plan satisfies the requirements for an HDHP with respect to the deductibles. See A-12 for HSA contribution limits.

    Q-4. What are the special rules for determining whether a health plan that is a network plan meets the requirements of an HDHP?
    A-4. A network plan is a plan that generally provides more favorable benefits for services provided by its network of providers than for services provided outside of the network. In the case of a plan using a network of providers, the plan does not fail to be an HDHP (if it would otherwise meet the requirements of an HDHP) solely because the out-of-pocket expense limits for services provided outside of the network exceeds the maximum annual out-of-pocket expense limits allowed for an HDHP. In addition, the plan's annual deductible for out-of-network services is not taken into account in determining the annual contribution limit. Rather, the annual contribution limit is determined by reference to the deductible for services within the network.

    Q-5. What kind of other health coverage makes an individual ineligible for an HSA?
    A-5. Generally, an individual is ineligible for an HSA if the individual, while covered under an HDHP, is also covered under a health plan (whether as an individual, spouse, or dependent) that is not an HDHP. See also A-6.

    Q-6. What other kinds of health coverage may an individual maintain without losing eligibility for an HSA?
    A-6. An individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage for any benefit provided by "permitted insurance." Permitted insurance is insurance under which substantially all of the coverage provided relates to liabilities incurred under workers' compensation laws, tort liabilities, liabilities relating to ownership or use of property (e.g., automobile insurance), insurance for a specified disease or illness, and insurance that pays a fixed amount per day (or other period) of hospitalization.

    May 2007 - Taxes on College Savings Accounts

    In recent years, parents have lent an ear to a similar tune: Take the reins of any and every type of tax-advantaged savings account in order to save for your children's enormous college bills.

    The message has resonated very clear. A majority of families are now saving for college using on average two types of college savings vehicles. Almost 16% of households are utilizing three.

    Often, this mix includes the more traditional accounts, such as Uniform Gifts to Minors Act (UGMA), as well as tax-deferred education programs like 529 savings plans and Coverdell Education Savings Accounts (ESAs). Alternatively, other households are investing in a combination of aforrementioned tax-advantaged plans, and taxable brokerage accounts.

    There is a scary measure to this story: After spending several years trying to decipher UGMAs, ESAs, IRAs, and 529s to figure out the best path, parents face the equally confusing task of determining how to properly utilize these accounts under the tax code when their child is ready for college. Even for those parents with consolidated accounts, determining how to distribute these savings is not cut and dry. The decision could dictate financial aid grants, as well as affect the household's tax rate.

    Aid considerations are a big reason that planners suggest that parents holding traditional custodial accounts like UGMAs deplete those first to pay for initial college costs. The reasoning is that money saved in a custodial account is held in the child's name to take advantage of his/her lower tax bracket. Furthermore, anything held in a child's name considered "for college money" as opposed to monies held by parents (35 percent of the student's assets are considered "tuition eligible" while only 5.6 percent of the parental assets are considered).

    This is just one area in which choosing the correct 529 plan can diminish your tax liability. Please call us today with any further questions about your secondary education questions.

    Apr 2007 - New-Home Sales Fall

    New-home sales fell sharply in March, the second straight month of declines, and the weaker-than-expected performance dimmed hopes for a rebound in the nation's housing market.

    The Commerce Department reported last month that sales of new single-family homes fell by 3.9 percent from January to a seasonally adjusted annual rate of 848,000, the slowest sales pace in nearly seven years.

    While the Commerce Department doesn't break out data on local levels, the report did find that new-home sales in the West rose 24.6 percent in February from January.

    Analysts said that the back-to-back monthly declines in new-home sales nationwide provide evidence that the housing market is continuing to struggle with lagging demand and a glut of unsold homes.

    The weakness in sales pushed the median price of a new home down to $250,000 in February, a drop of 0.3 percent from a year ago. It marked the second straight month that the median price fell compared with the same period a year ago.

    Declines in new-home sales were greatest in the Northeast and Midwest , which were battered by winter storms. In the past year, new-home sales fell 36.9 percent in the Northeast and 32.2 percent in the Midwest compared with the same period a year earlier. Sales also fell in the South, dropping by 17.1 percent, while sales in the West were off 5.7 percent.

    The performance of new-home sales was in contrast to a report last week that sales of existing homes rose in February by the largest amount in nearly three years.

    Analysts had expected new-home sales to increase in March as well, based on a view that January's steep plunge had overstated the weakness in housing.

    The back-to-back monthly declines in the new-home market served to support the forecasts of analysts who say the slowdown in housing has more months to run its course.

    The sales decline that has occurred over the past year has left a glut of unsold homes on the market, forcing builders to slash prices and offer incentives to attract buyers.

    For February, the number of unsold homes rose by 1.5 percent to 546,000. That means it would take 8.1 months to sell all of those homes at the February sales pace, up from 7.3 months in January.

    The problems in housing are being increased by spreading financial difficulties with mortgage lenders who specialized in the subprime market, where borrowers with weaker credit histories could qualify for mortgages.

    Mar 2007 - Business Expenses

    Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.

    What Can I Deduct?

    To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

    It is important to separate business expenses from the following expenses:
    • The expenses used to figure the cost of goods sold,
    • Capital Expenses, and
    • Personal Expenses.

    Cost of Goods Sold

    If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

    The following are types of expenses that go into figuring the cost of goods sold.
    • The cost of product or raw materials, including freight
    • Storage
    • Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
    • Factory overhead

    Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.

    This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.

    For additional information, refer to the chapter on Cost of goods sold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods.

    Capital Expenses

    You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business.There are, in general, three types of costs you capitalize.
    • Business start-up cost (See the note below)
    • Business assets
    • Improvements

    Note: You can elect to deduct or amortize certain business start-up costs.

    Personal versus Business Expenses

    Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

    For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 5 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.

    Business Use of Your Home

    If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Publication 587, Business Use of Your Home, and Standard Mileage Rates.

    Business Use of Your Car

    If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses. For a list of current and prior year mileage rates see the Standard Mileage Rates.

    Other Types of Business Expenses
    • Employees' Pay - You can generally deduct the pay you give your employees for the services they perform for your business.
    • Retirement Plans - Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees', retirement.
    • Rent Expense - Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
    • Interest - Business interest expense is an amount charged for the use of money you borrowed for business activities.
    • Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
    • Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.

    This list is not all inclusive of the types of business expenses that you can deduct. For additional information, refer to Publication 535, Business Expenses.

    Feb 2007 - CBO Predicts Smaller 2007 US Deficit

    The Congressional Budget Office has estimated that if America\'s laws and the government\'s policies do not change in the coming year, the budget deficit will equal $172 billion in 2007.

    In a report released last week, the CBO, a non-partisan arm of Congress, predicted that current laws and policies would translate to total federal spending of $2.7 trillion and would yield tax revenues of $2.5 trillion.

    The additional funding that is likely to be needed to finance military operations in Iraq and Afghanistan would put that deficit in the vicinity of $200 billion. Even so, this year\'s shortfall would be smaller than the 2006 deficit of $248 billion, the CBO forecast.

    Current laws and policies would also reduce the deficit in 2008 to $98 billion, the report predicted. That decrease results primarily from two factors. On the revenue side of the budget, receipts from the alternative minimum tax (AMT) are estimated to increase by about $60 billion next year because of the scheduled expiration of the relief provided through tax year 2006. (In addition, telephone- tax refunds, which totaled $13 billion in 2007, are projected to drop by $10 billion in 2008.) On the spending side of the budget, outlays for operations in Iraq and Afghanistan and for relief and recovery from hurricane damage are about $14 billion lower in 2008 than in 2007 under the assumptions of the baseline.

    The baseline deficit is projected by the CBO to rise modestly over the following two years, 2009 and 2010, as outlays grow by about 3.8% annually, and revenues increase by about 3.3% a year. That projected growth rate for revenues is lower than in recent years, mainly because corporate profits and capital gains realizations are expected by the CBO to revert to levels that are more consistent with their historical relationship to GDP.

    After 2010, the report predicts that spending related to the aging of the baby-boom generation will begin to raise the growth rate of total outlays. The baby boomers will start becoming eligible for Social Security retirement benefits in 2008, when the first members of that generation turn 62. As a result, the annual growth rate of Social Security spending is expected to increase from about 4.5% in 2008 to 6.5% by 2017.

    In addition, because the cost of health care is likely to continue rising rapidly, spending for Medicare and Medicaid is projected to grow even faster - in the range of 7% to 8% annually. Total outlays for those two health care programs are projected to more than double by 2017, increasing by 124%, while nominal GDP is projected to grow only half as much, by 63%. Consequently, under the assumptions of CBOâ??s baseline, spending for Medicare, Medicaid, and Social Security will together equal nearly 11% of GDP in 2017, compared with a little less than 9% this year.

    Tax revenues are projected to increase sharply after 2010, given the assumption that various tax provisions expire as scheduled. In the baseline, total revenues would grow by 9.2% in 2011 and by 7.5% in 2012, thereby bringing the budget into surplus. Beyond 2012, revenues are projected to grow at about the same pace as outlays (by roughly 4.5% a year), keeping the budget in the black through 2017 under baseline assumptions.

    Relative to the size of the economy, outlays are projected to range between 18.8% and 19.7% of GDP during the 2008 - 2017 period under the assumptions of CBO\'s baseline - lower than the 20.6% average of the past 40 years. Mandatory spending (funding determined by laws other than annual appropriation acts) is projected to grow by 5.9% a year over that period, which is faster than the economy as a whole. By contrast, discretionary appropriations are assumed simply to keep pace with inflation and, to a lesser extent, with the growth of wages. Thus, discretionary outlays are projected to increase by about 2.0% a year, on average, or less than half as fast as nominal GDP.

    CBO projects that revenues will average 18.7% of GDP from 2008 to 2010 (close to the 18.6% level expected for this year) before jumping sharply in 2011 and 2012 with the expiration of tax provisions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). After that, revenues are projected to continue growing faster than the overall economy for three reasons: the progressive structure of the tax code combined with increases in total real income, withdrawals of retirement savings as the population ages, and the fact that the AMT is not indexed for inflation. Under the assumptions of the baseline, CBO projects that revenues will equal 20.1% of GDP by 2017 - a level reached only once since World War II.

    Federal government debt that is held by the public (mainly in the form of Treasury securities sold directly in the capital markets) is expected to equal almost 37% of GDP at the end of this year. Thereafter, the baseline\'s projections of smaller annual deficits and emerging surpluses diminish the government\'s need for additional borrowing, causing debt held by the public to shrink to 20% of GDP by 2017.

    Jan 2007 - IRS Begins Implementing Extenders Legislation

    IRS Begins Implementing Extenders Legislation; Works to Help Taxpayers During Filing Season

    The Internal Revenue Service announced new guidance today to help tax filers in 2007 claim the extended deductions and other tax advantages in the Tax Relief and Health Care Act of 2006 signed into law this week.

    The start of the 2007 filing season will begin on time. However, the recent changes in the law mean the IRS will not be able to process a small percentage of individual tax returns until early February, primarily involving three tax deductions â?? the state and local sales tax, higher education tuition and fees, and educator expenses.

    "The IRS is taking a number of steps to ensure taxpayers have the correct information on these deductions when they prepare and file their tax returns," IRS Commissioner Mark W. Everson said.

    Among the ways taxpayers can get information:
    • Taxpayers will be able to visit IRS.gov for updated information on the late legislation.
    • The IRS will conduct a special mailing of Publication 600, which will include the state and local sales tax tables and instructions for claiming the sales tax deduction on Schedule A (Form 1040), to 6 million taxpayers. Publication 600, State and Local General Sales Taxes, will be sent to taxpayers who will receive the 2006 Form 1040 package in early January. Publication 600 was posted to IRS.gov today, with the special mailing for taxpayers arriving in mid-January.
    • For people using IRS e-file or Free File, tax software will be updated to include the three key tax provisions. E-file gets refunds to taxpayers faster than paper returns.
    The IRS urged taxpayers to use e-file instead of the paper forms to minimize confusion over the late changes and reduce the chance of making extender-related errors on their returns.

    "As we always do, we encourage taxpayers who think they may claim these deductions to file electronically," Everson said. "They will get their refunds faster through e-file. Even more importantly, e-file will greatly reduce the chances for making an error compared to claiming the deductions on the paper 1040."

    This new legislation affects a number of areas of tax law, but the most significant effect on individual taxpayers involves the deductions for state and local sales tax, higher education tuition and fees, and educator expenses. The sales tax deduction was claimed on approximately 11.2 million tax returns filed in 2006 for Tax Year 2005. The tuition and fees deduction was claimed on about 4.7 million returns and the educator expense deduction was claimed on 3.5 million returns.

    The IRS will not be able to process tax returns claiming these extender-related deductions until early February. Based on filings earlier this year, only about 930,000 tax returns claimed any of the three extenders provisions by Feb. 1. This year, the IRS expects to receive about 136 million tax returns.

    Form 1040 Changes

    The IRS also announced details today on how taxpayers can use existing lines on the current Form 1040 and other tax documents to claim the three major extenders provisions. The key forms (Forms 1040, 1040A, Schedule A&B, and instructions) went to print in early November and reflected the law in effect at that time. The instructions contain a cautionary note to taxpayers that the legislation was pending at the time of printing.

    The majority of taxpayers file electronically, but taxpayers using a paper Form 1040 will have to follow special instructions if they are claiming any of the three deductions. Form 1040 will not be updated. Instead, taxpayers should follow these steps:

    State and Local General Sales Tax Deduction:
    • The deduction for state and local general sales taxes will be claimed on Schedule A (Form 1040), line 5, "State and local income taxes." Enter "ST" on the dotted line to the left of line 5 to indicate you are claiming the general sales tax deduction instead of the deduction for state and local income tax.
    • The IRS also will issue Publication 600 for 2006, which includes the state and local sales tax tables, a worksheet and instructions for figuring the deduction.
    • This option is available to all taxpayers regardless of where they live, though itâ??s primarily designed to benefit residents of the eight states without state and local income taxes.
    Higher Education Tuition and Fees Deduction:
    • Taxpayers must file Form 1040 to take this deduction for up to $4,000 of tuition and fees paid to a post-secondary institution. It cannot be claimed on Form 1040A.
    • The deduction for tuition and fees will be claimed on Form 1040, line 35, "Domestic production activities deduction." Enter "T" on the dotted line to the left of that line entry if claiming the tuition and fees deduction, or "B" if claiming both a deduction for domestic production activities and the deduction for tuition and fees. For those entering "B," taxpayers must attach a breakdown showing the amounts claimed for each deduction.
    Educator Expense Adjustment to Income:
    • Educators must file Form 1040 in order to take the deduction for up to $250 of out-of-pocket classroom expenses. It cannot be claimed on Form 1040A.
    • The deduction for educator expenses will be claimed on Form 1040, line 23, "Archer MSA Deduction." Enter "E" on the dotted line to the left of that line entry if claiming educator expenses, or "B" if claiming both an Archer MSA deduction and the deduction for educator expenses on Form 1040. If entering "B," taxpayers must attach a breakdown showing the amounts claimed for each deduction.
    The new law also affects an even smaller number of business taxpayers who donâ??t use the Form 1040 series. There could be minimal processing delays for some of these business filers in January and early February.

    January is the slowest part of the filing season for the IRS, with less than 6 percent of all individual returns coming in during the agencyâ??s first two weeks of processing. Typically, early returns are from taxpayers with simpler refund returns who do not claim the extender provisions. Earlier this year, the IRS had less than 2.5 million returns filed by Jan. 20. An additional 4.2 million returns came in by Jan. 27.

    Dec 2006 - 2007 Inflation Adjustments Widen Tax Brackets, Expand Tax Benefits

    Personal exemptions and standard deductions will rise, tax brackets will widen and income limits for IRAs will increase in 2007, thanks to inflation adjustments announced today by the Internal Revenue Service.

    By law, the dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being adjusted for 2007. Key changes affecting 2007 returns, filed by most taxpayers in early 2008, include the following:

    • The value of each personal and dependency exemption, available to most taxpayers, will be $3,400, up $100 from 2006.
    • The new standard deduction will be $10,700 for married couples filing a joint return (up $400), $5,350 for singles and married individuals filing separately (up $200) and $7,850 for heads of household (up $300). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
    • Tax-bracket thresholds will increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket will be $63,700, up from $61,300 in 2006.

    In 2007, for the first time, inflation adjustments will raise the income limits that apply to the retirement savings contributions credit, contributions to a Roth IRA and deductible contributions to a traditional IRA where the taxpayer or the taxpayerâ??s spouse is covered by a retirement plan at work.

    Businesses and Tax-Exempts Can Use Formula for Telephone Tax Refund

    The Internal Revenue Service today announced a formula that will allow businesses and tax-exempt organizations to estimate their federal telephone excise tax refunds.

    â??The formula will provide a less burdensome option than gathering up to 41 months of old phone records,â?? said IRS Commissioner Mark W. Everson.

    In May 2006, the IRS announced that individuals, businesses and tax-exempt organizations who paid the long-distance telephone excise tax can request the refund on their 2006 federal income tax returns.

    â??Businesses and tax-exempt organizations generally have more varied phone usage patterns than individuals,â?? Everson said. â??The IRS has met with a number of businesses and tax-exempt organizations to understand their concerns. We believe we have developed a reasonable method for estimating telephone excise tax refund amounts while reducing burden.â??

    To request a refund, businesses (including sole proprietors, corporations and partnerships) and tax-exempt organizations must complete Form 8913, Credit for Federal Telephone Excise Tax Paid. To complete this form, businesses and tax-exempt organizations may determine the actual amount of refundable long-distance telephone excise taxes they paid for the 41 months from March 2003 through July 2006, or use the formula to figure their refunds. Businesses should attach Form 8913 to their regular 2006 income tax returns. Tax-exempt organizations must attach it to Form 990-T.

    Businesses and tax-exempt organizations can figure their refund amounts by comparing two telephone bills from this year to determine the percentage of their telephone expenses attributable to the long-distance excise tax. The bills they should use are the bill with a statement date in April 2006 and the bill with a statement date in September 2006. They must first figure the telephone tax as a percentage of their April 2006 telephone bills (which included the excise tax for both local and long-distance service) and their September 2006 telephone bills (which only included the tax on local service). The difference between these two percentages should then be applied to the quarterly or annual telephone expenses to determine the amount of their refunds.

    The refund is capped at 2 percent of the total telephone expenses for businesses and tax-exempt organizations with 250 or fewer employees â?? which covers more than 99 percent of all businesses. The refund is capped at 1 percent for those with more than 250 employees. Most organizations in this category typically are able to figure the actual amount they paid in long-distance excise tax. However, the formula provides a more limited, but simpler, approach for those large employers who wish to use it.

    For example, if a business has an April 2006 telephone bill of $1,000, which includes federal telephone excise tax of $28, the tax percentage is 2.8 percent. If the September 2006 bill is $1,100 including federal telephone excise tax of $16.50, the tax percentage is 1.5 percent. The businessâ?? long-distance excise tax percentage is 1.3 percent (2.8 percent for April minus 1.5 percent for September). The business multiplies 1.3 percent by its total phone expenses over the 41-month period to arrive at the amount of its refund. If this business had more than 250 employees, its refund would be limited to 1 percent of its total phone expenses for the period. If the business had 250 or fewer employees, the 2-percent cap would apply and would not limit the amount of the refund.

    The IRS developed the formula after receiving public input and discussing the issue with business organizations, the Small Business Administration and representatives from the tax-exempt community.

    The IRS already has provided individual taxpayers with the option to use standard amounts based on the number of exemptions allowed to that taxpayer. Individual taxpayers can request a $30 refund with one exemption, $40 for two exemptions, $50 for three exemptions and $60 for four or more exemptions.

    Options for requesting this refund vary for sole proprietors, who file a Schedule C with the Form 1040, depending on the gross income reported on the Schedule C. Sole proprietors who report gross income of $25,000 or less on their Schedule C may use the standard amounts or request a refund based on their actual expenses. Sole proprietors reporting more than $25,000 of gross income have three options: they can use the standard amounts which cover both personal and business expenses, they can use the formula for their business expenses and actual for their personal ones, or they can choose to use actual amounts for both business and personal.

    Similar rules depending on the amount of gross income reported on Schedule F or Schedule E apply to farmers and individual owners of rental property.

    Trusts and fiduciaries may not use the standard amount available to individuals. They should use the formula to figure their refunds, or request the actual amount paid.

    The Treasury Department announced in May that the government would stop collecting the federal excise tax on long-distance telephone service beginning Aug. 1, 2006, and provide refunds for taxes billed after Feb. 28, 2003.

    Details on the telephone tax refund will be included in 2006 tax return materials and on this Web site.


    Nov 2006 - A Tax Credit for Hybrid Auto Buyers

    With recent concerns about the cost of fuel, many auto purchasers are considering fuel efficient vehicles that could meet their transportation needs. Hybrid autos have become hot items on buyers’ wish lists. For 2005, a hybrid buyer could take an income-tax deduction of up to $2,000. For 2006 and subsequent years through 2010, however, a tax credit is available for the purchase of a new hybrid. The credit varies from $400 to $3,400, depending on the model of the vehicle.

    Many Types of Hybrids

    For purposes of the tax credit, hybrids are passenger vehicles or light trucks (8,500 pounds or less in weight) equipped with both a gasoline engine and an electric motor, which is usually recharged as the vehicle is operated.

    What About the Credit?

    Essentially, the amount of the allowable tax credit will depend on factors such as the vehicle’s weight, its fuel economy, and its lifetime fuel savings. Vehicles using less gasoline will generally qualify for a higher credit amount.

    Note that the credit may expire sooner than the end of 2010 for some vehicles. The reason: The tax law provides that, once a manufacturer has sold 60,000 qualifying hybrids, the credit will be phased out over the next five calendar quarters for hybrids sold by that manufacturer.

    How S Corporation Income Is Taxed

    When it comes to taxes, complicated rules are the norm. So new shareholders of S corporations shouldn’t be surprised to learn that there are some seemingly illogical rules that will govern the way they’ll be taxed on corporate income.

    Pass-through treatment. As opposed to a regular corporation’s income, the income of an S corporation generally isn’t taxed at the corporate level. Instead, the income is “passed through” the corporation for inclusion on the shareholders’ returns.

    No cash, no tax? Under these rules, shareholders have to report corporate income even if it is not distributed to them. For example, let’s say an S corporation has two 50% shareholders and earns a $100,000 net profit in 2006. The company needs all its cash to fund operations and makes no distributions to the shareholders beyond their regular salaries. Each shareholder would still report $50,000 of income (plus salary) in 2006.

    Having to pay taxes on money that hasn’t been received may seem harsh. On the upside, the income will not be subject to taxes again if and when it is distributed. A “basis” calculation required under the tax law serves as a tracking mechanism to prevent S corporation income from being taxed twice. Shareholders receive basis for passed-through income and must reduce basis by cash distributions. Only distributions in excess of basis are subject to taxes.

    Questions? Please let us know if you’d like more information about the S corporation rules. We’d be happy to explain them in more detail.

    Section 529 Plans Catch a Break

    Distributions from Section 529 college savings and prepaid tuition plans are currently excludable from income to the extent the funds are used to pay qualified education expenses, but this tax-free treatment was scheduled to “sunset” after 2010. The income exclusion was recently made permanent.

    State Tax Exemption for Retirement Income

    A 1996 federal law prohibited states from taxing the retirement income of nonresident retirees. At least one state argued that the tax exemption didn’t apply to retired partners. Now, legislation has clarified that partner-retirees are entitled to the same exemption as retired employees.

    Boating Club’s Tax-exempt Status Torpedoed

    A tax-exempt boating club owned and maintained a boat house and associated facilities for its members. It also owned shoreline residences, which were leased to club members. When the IRS audited the club recently, it revoked the club’s exempt status because the leasing activities constitute a business.

    Oct 2006 - A Reminder Regarding Capital Gains

    In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income, but the tax rate for individuals is lower on "long-term capital gains", which are gains on assets that had been held for over one year before being sold. The tax rate on long-term gains was reduced in 2003 to 15%, or to 5% for individuals in the lowest two income tax brackets. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. In 2011 these reduced tax rates will "sunset", or revert back to the rates in effect before 2003, which were generally 20%.

    The reduced 15% tax rate on eligible dividends and capital gains, previously scheduled to expire in 2008, has been extended through 2010 as a result of the Tax Reconciliation Act signed into law by President Bush on May 17, 2006. As a result:

    In 2008, 2009, and 2010, the tax rate on eligible dividends and capital gains is 0% for those in the 10% and 15% income tax brackets.

    After 2010, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless of his or her tax bracket.

    After 2010, the long-term capital gains tax rate will be 20% (10% for taxpayers in the 15% tax bracket).

    After 2010, the qualified five-year 18% capital gains rate (8% for taxpayers in the 15% tax bracket) will be reinstated.

    Technically, a "cost basis" is used, rather than the simple purchase price, to determine the taxable amount of the gain. The cost basis is the original purchase price, adjusted for various things including additional improvements or investments, taxes paid on dividends, certain fees, and depreciation.

    Exemptions from capital gains taxes (CGT) in the United States include:

    An individual can exclude up to $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of real property if the owner used it as primary residence for two of the five years before the date of sale. The two years of residency do not have to be continuous. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. There are allowances and exceptions for military service, disability, partial residence and other reasons. See IRS Publication 523.
    If an individual or corporation realizes both capital gains and capital losses in the same year, the losses cancel out the gains in the calculation of taxable gains. For this reason, toward the end of each calendar year, there is a tendency for many investors to sell their investments that have lost value. For individuals, if losses exceed gains in a year, the losses can be claimed as a tax deduction against ordinary income, up to $3,000 per year. Any additional net capital loss can be "carried over" into the next year and again "netted out" against gains for that year. Corporations are permitted to "carry back" capital losses to off-set capital gains from prior years, thus earning a kind of retroactive refund of capital gains taxes.
    The IRS allows for individuals to defer capital gains taxes with tax planning strategies such as the charitable trust (CRT), installment sale, private annuity trust, and a 1031 exchange.

    Sep 2006 - Summary of Pension Protection Act (PPA)
    SUMMARY OF PENSION PROTECTION ACT (PPA) OF 2006:

    As you may have heard, on Aug. 17 the President signed the Pension Protection Act of 2006 (PPA). Besides strengthening traditional pension plans, the act includes provisions affecting retirement savings plans (such as IRAs and 401(k) plans), charitable deductions, charitable organizations, Section 529 college savings and prepaid tuition plans, and other areas of tax law.

    Following is a summary of key PPA provisions. Our firm offers this information to help you understand how the act may affect you. Please let us know if you have any questions about this new law or other tax or benefits matters. Just send a reply e-mail or call us and let us know how we can help.

    Traditional pension plans
    To help ensure the security of employer-provided pension plans, PPA takes measures to ensure full funding, including even stricter requirements on plans deemed at risk. It also prohibits employers maintaining underfunded or terminated single-employer pension plans from funding nonqualified deferred compensation plans (which typically benefit top executives). This provision is effective for transfers or other reservations of assets that occur after Aug. 17, 2006, the date of enactment.

    On the other hand, PPA allows assets in excess of 120% of current liability to be used to fund retiree health benefits for both single-employer plans and collectively bargained plans, effective for transfers made after Aug. 17, 2006.

    In addition, the act makes permanent the increases in the annual benefit limit that had been set to expire after 2010.

    IRAs and defined contribution plans
    PPA includes provisions that enhance the retirement savings benefits of IRAs and defined contribution plans, such as 401(k)s, 403(b)s, 457s and SIMPLEs. For example, the act:

    • Makes permanent provisions from the 2001 tax act that were to "sunset" after 2010. These include the higher annual contribution limits for IRAs and defined contribution plans, catch-up contributions for those 50 and over, and Roth 401(k) and 403(b) plans.
    • Makes permanent the Saver's credit, which had been set to expire Dec. 31, 2006.
    • Waives the early withdrawal penalty from IRAs or 401(k)s (and similar plans) for National Guard members and Reservists who are called up between Sept. 11, 2001, and Dec. 31, 2007, for a period exceeding 179 days. Plus it allows repayment within two years of the distribution without regard to the annual contribution limit.
    • Simplifies the rules for automatic enrollment in employer-sponsored defined contribution plans, effective for plan years beginning after Dec. 31, 2007.
    • Allows taxpayers to direct the IRS to deposit their income tax refunds into an IRA, effective for taxable years beginning after Dec. 31, 2006.

    Charitable giving
    In an effort to encourage donations, PPA:

    • Allows taxpayers to make tax-free distributions from their IRAs (up to $100,000 annually) to tax-exempt charities through 2007.
    • Extends to Dec. 31, 2007, the enhanced food and book contribution rules that were enacted after Hurricane Katrina.

    But to curtail charitable deduction abuses, the act:

    • Allows deductions for cash contributions only if the donor can produce a bank record or written communication from the charity as to the contribution amount, effective for contributions made in tax years beginning after Aug. 17, 2006.
    • Allows deductions for donations of clothing and household goods only if they are at least in "good condition," effective after Aug. 17, 2006.
    • Clarifies the charitable deduction allowed with respect to easements for buildings and for land and structures located in a historic district.
    • Lowers the threshold for imposing accuracy-related penalties on taxpayers who claim a deduction for donated property for which a qualified appraisal is required, effective for returns filed after Aug. 17, 2006.

    Charitable organizations
    To further curtail charity-related abuses, PPA also tightens federal oversight of the organizations themselves. For example, the act:

    • Requires reports to the Treasury on an exempt organization's acquisition of certain life insurance contracts after Aug. 17, 2006.
    • Doubles fines and penalties for certain activities by exempt organizations, effective for taxable years beginning after Aug. 17, 2006.
    • Requires certain organizations exempt from annual filing requirements because of their level of gross receipts to file an annual notice with the IRS containing basic contact and financial information, beginning with taxable years beginning after Dec. 31, 2006.
    • Extends present-law public disclosure requirements applicable to Form 990 to the Unrelated Business Income Tax (UBIT) returns of Section 501(c)(3) organizations, effective for returns filed after Aug. 17, 2006.
    • Applies an excess benefits transaction tax on any loan, grant, compensation or other similar payment from a donor-advised fund to a donor, donor advisor or related party, and from a supporting organization to a substantial contributor or related person, effective for transactions after Aug. 17, 2006.

    Other provisions
    PPA also includes several miscellaneous provisions, the most notable of which is a permanent extension of the Section 529 provisions with respect to college savings and prepaid tuition plans.

    But a provision to allow a carryforward of up to $500 of unused Flexible Spending Account holdings didn't make it into the final bill. And legislation containing extensions of expiring tax provisions, estate tax relief and an increase in the minimum wage was defeated in the Senate. This legislation may resurface again in some other form.


    Aug 2006 - Government to Stop Collecting Long-Distance Telephone Tax

    The Internal Revenue Service today announced that it will stop collecting the federal excise tax on long-distance telephone service.

    The tax on telephone services was first imposed in 1898. The current rate is 3% of the charges billed for these services. The IRS announcement follows decisions in five federal appeals courts holding that the tax does not apply to long-distance service as it is billed today. This decision to eliminate the long-distance tax has a profound affect on individuals and businesses alike.

    Taxpayers will be eligible to file for refunds of all excise tax they have paid on long-distance service billed to them after Feb. 28, 2003. Interest will be paid on these refunds.

    Taxpayers will claim this refund on their 2006 tax returns. In order to minimize burden, the IRS expects to announce soon a simplified method that individuals may use.

    "So taxpayers won't have to spend time digging through old telephone bills, we're designing a straightforward process that taxpayers may use when they file their tax returns next year," said IRS Commissioner Mark W. Everson. "Claiming a refund will be simple and fair."

    The IRS announcement does not affect the federal excise tax on local telephone service, which remains in effect. Likewise, various state and local taxes and fees paid by telephone customers are also unaffected.

    More information can be found in IRS Notice 2006-50. It will also be published in Internal Revenue Bulletin 2006-25, dated June, 19, 2006.



    Jul 2006 - The "Invisible" Risks of Investing

    Many people only hear the negative news associated with investing in the stock market. In reality, proper investing is almost a necessity in keeping your saved dollars working toward your retirement, college savings, etc. More hazardous than trying to “time the market” by investing lump sums of dollars at a specific time are the “invisible” risks involved with investing:

    Invisible Risk #1: Inflation
    Inflation is the decrease in purchasing power of a dollar over time. Historically, 3% has been the rate of inflation. This means if you have $100 today, in 25 years it will be the equivalent of about $47. If your investments are “safe” and provide you with a 3% rate of return, you are still losing money because your purchasing power is decreasing. Also, you have to pay taxes on that 3% gain each year as well.

    Since its inception, the stock market has returned an average of 11.1%, even with the down years of 2002 & 2003. Compare that to the rate of inflation and you can see how your money can maintain, or improve your purchasing power in the future.

    Invisible Risk #2: Conservatism

    It is possible to invest in the stock market and still play it too safe. Placing more than a small percentage of your money in accounts granting immediate access to cash, (high liquidity) don't offer very high returns. These accounts include money market funds, conservative mutual funds, and the like.

    Younger investors, pre-50's, can have as much as 80% of their retirement assets in stocks because they have time to weather the ups and downs of the market. Even older investors should still have 50% of the assets in the stock market. A key to investing successfully is to know and understand your investment style and match your asset allocation to it.

    Invisible Risk #3: Asset Allocation

    About once a year you should rebalance your portfolio of investments. Even the perfect portfolio will become unbalanced over time as stocks split, change in value or whatever else happens to unbalance it.

    Rebalancing gives you the opportunity to sell high and buy low or improve your long-term financial picture. Don't try to be a market timer, that's short term investment thinking and can lead to some big wins, and some bigger loses.

    With the burden of retirement planning on the backs of individuals now more than ever, it is critical investors understand the risks, both visible AND invisible.



    June 2006 - The Tax Increase Prevention and Reconciliation Act

    The Tax Increase Prevention and Reconciliation Act, signed into law by President George W. Bush on May 17, 2006, provides higher income taxpayers with another retirement planning opportunity.

    If you qualify, you may be able to make a Roth IRA (Individual Retirement Account) part of your retirement plan due to a provision that lifts income limitations on rollovers to these types of IRAs.

    First, let's review how Roth IRAs differ from traditional IRAs. Contributions to Roth IRAs are not deductible, but the withdrawals from the account, including all the buildup in value over the years, are tax-free as long as certain conditions are met. The conditions are that the withdrawals are made five years or more after the account was opened, and after you attain age 59 1/2 or have become disabled.

    Currently, the law allows you to convert an IRA to a Roth IRA if your adjusted gross income is under $100,000 (single or joint), without incurring a withdrawal penalty. The newly enacted tax law provides that, beginning in 2010, the $100,000 income limitation is removed and higher income taxpayers can roll over an IRA to a Roth IRA. The amount being rolled over must be included in gross income, so taxes will be due, but they can be spread over a two-year period if the rollover is made in 2010. And a withdrawal penalty will not be imposed.

    Should you take advantage of this new rule if you qualify? The answer may very well be yes. Qualified withdrawals from Roth IRAs are not taxable, and Roth IRAs are not subject to the minimum distribution requirements at age 70 1/2 of Traditional IRAs.

    Your retirement plan should take into consideration the tax rate you will be subject to when you retire. It's likely that you have a good idea of what your income stream will be when you're ready to retire and the resulting tax consequences. And while you cannot predict whether tax rates will go down in the future, it is a fact that the current lowered tax rates are due to expire after 2010.

    Last, while the Roth IRA conversion changes go into effect in 2010, you may be able to incorporate this new provision into your retirement planning as early as this year. Even if the income limitations render your current contributions to a regular IRA nondeductible, you may want to consider making nondeductible contributions to a regular IRA anyway, before 2010, and then convert the IRA into a Roth IRA in 2010. The nondeductible contributions will not be subject to tax during a Roth conversion, although any accumulated earnings will be.

    Again, while part of the amount being converted is considered a taxable distribution, the taxes can be spread over a two-year period if the rollover is made in 2010 and the lower income tax rates will still be in effect. A smart move for those in a higher income bracket.


    May 2006 - IRS Strengthens Withholding Compliance Programs

    WASHINGTON - Employers will no longer be required to send copies of potentially questionable W-4 withholding forms to the Internal Revenue Service, the IRS announced today.

    At the same time, the IRS will step up its withholding compliance program by making more effective use of information reported on W-2 wage statements to ensure that employees have enough federal income tax withheld from their paychecks.

    "We can eliminate this reporting requirement without hurting our enforcement efforts," said IRS Commissioner Mark W. Everson. "Wherever we can, we try to reduce burden."

    Temporary and proposed regulations, issued today by the Treasury Department, eliminate the requirement that employers send copies of potentially questionable Forms W-4, Employee's Withholding Allowance Certificate, to the IRS. The new regulations take effect on April 14, 2005.

    In the past, employers had to send to the IRS any Form W-4 claiming more than 10 allowances or claiming complete exemption from withholding if $200 or more in weekly wages was expected.

    Forms W-4 are still subject to review by the IRS. However, employers will no longer have to submit them to the tax agency, unless directed to do so in a written notice to the employer or pursuant to specified criteria set forth in future published guidance, the IRS said.

    This change follows a comprehensive review of the withholding compliance program conducted recently by the IRS, which found that withholding noncompliance remains a problem with some employees.

    Subsequently, the IRS has developed a process to use information already reported on Forms W-2 to more effectively identify workers with withholding compliance problems. In some cases where a serious under-withholding problem is found to exist for a particular employee, the IRS will notify the employer to withhold income tax from that employee at a more appropriate rate. The new process will also enable the IRS to more effectively address situations in which employees fail to file a federal income tax return.

    The withholding calculator found on our Financial Tools Page is available to help employees determine the proper amount of federal income tax withholding. Another useful resource, Publication 919, How Do I Adjust My Tax Withholding? is available on the IRS Web site or can be obtained by calling 1-800-TAX-FORM (829-3676).

    Apr 2006 - Sale Of A New Home


    If you sold your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more frequently than once every two years.

    To qualify for this exclusion of gain, you must meet ownership and use tests.

    • Ownership Test: During the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years.
    • Use Test: During the 5-year period ending on the date of the sale, you must have lived in the home as your main home at least 2 years.


    If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. But both of you would have to meet the use test to claim the $500,000 maximum amount.

    If you do not meet the ownership and use tests, you may be allowed to exclude a reduced maximum amount of the gain realized on the sale of your home if you sold your home due to health, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.

    If you can exclude all the gain from the sale of your home, you do not report the gain on your federal tax return. If you cannot exclude all the gain from the sale of your home, use Schedule D, Capital Gains and Losses, of the Form 1040 to report it.

    For more details and information see IRS Publication 523, Selling your Home, available at IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676)


    Mar 2006 - What Income is Taxable?


    IRS Tax Tip 2006-29

    Generally, most income you receive is taxable. But there are some situations when certain types of income are partially taxed or not taxed at all. A complete list is available in IRS Publication 525, Taxable and Nontaxable Income.

    Some common examples of items that are not included in your income are:

    • Adoption Expense Reimbursements for qualifying expenses
    • Child support payments
    • Gifts, bequests and inheritances
    • Workers' compensation benefits
    • Meals and Lodging for the convenience of your employer
    • Compensatory Damages awarded for physical injury or physical sickness
    • Welfare Benefits
    • Cash Rebates from a dealer or manufacturer


    Examples of items that may or may not be included in your income are:

    Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.
    Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.


    These examples are not all-inclusive. For more information, visit the IRS Web site at IRS.gov to view or download Publication 525 from the Forms and Publications section or call 1-800-TAX-FORM (1-800-829-3676).

    Feb 2006 - Missing Your Form W-2?

    You should receive a Form W-2, Wage and Tax Statement, from each of your employers for use in preparing your federal tax return. Employers must furnish this record of 2005 earnings and withheld taxes no later than January 31, 2006 (if mailed, allow a few days for delivery).

    If you do not receive your Form W-2, contact your employer to find out if and when the W-2 was mailed. If it was mailed, it may have been returned to your employer because of an incorrect address. After contacting your employer, allow a reasonable amount of time for your employer to resend or to issue the W-2.

    If you still do not receive your W-2 by February 15th, contact the IRS for assistance at 1-800-829-1040. When you call, have the following information handy:

    • The employer's name and complete address, including zip code, the employer’s identification number (if known), and telephone number,
    • Your name and address, including zip code, Social Security number, and telephone number; and
    • An estimate of the wages you earned, the federal income tax withheld, and the dates you began and ended employment.

    If you misplaced your W-2, contact your employer. Your employer can replace the lost form with a “reissued statement.” Be aware that your employer is allowed to charge you a fee for providing you with a new W-2.

    You still must file your tax return on time even if you do not receive your Form W-2. If you cannot get a W-2 by the tax-filing deadline, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement, but it will delay any refund due while the information is verified.

    If you receive a corrected W-2 after your return is filed and the information it contains does not match the income or withheld tax that you reported on your return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.

    Forms 4852 and 1040X and their instructions are available on the IRS Web site, IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676).

    Jan 2006 - 2005 Tax Rate Schedules


    Note: These tax rate schedules are provided so that you can compute your estimated tax for 2005. To compute your actual income tax, please see the instructions for 2005 Form 1040, 1040A, or 1040EZ as appropriate when they are available.

    Schedule X — Single

    If taxable income is over-- But not over-- The tax is:
    $0 $7,300 10% of the amount over $0
    $7,300 $29,700 $730 plus 15% of the amount over 7,300
    $29,700 $71,950 $4,090.00 plus 25% of the amount over 29,700
    $71,950 $150,150 $14,652.50 plus 28% of the amount over 71,950
    $150,150 $326,450 $36,548.50 plus 33% of the amount over 150,150
    $326,450 no limit $94,727.50 plus 35% of the amount over 326,450




    Schedule Y-1 — Married Filing Jointly or Qualifying Widow(er)

    If taxable income is over-- But not over-- The tax is:
    $0 $14,600 10% of the amount over $0
    $14,600 $59,400 $1,460.00 plus 15% of the amount over 14,600
    $59,400 $119,950 $8,180 plus 25% of the amount over 59,400
    $119,950 $182,800 $23,317.50 plus 28% of the amount over 119,950
    $182,800 $326,450 $40,915.50 plus 33% of the amount over 182,800
    $326,450 no limit $88,320.00 plus 35% of the amount over 326,450

     

    Schedule Y-2 — Married Filing Separately

    If taxable income is over-- But not over-- The tax is:
    $0 $7,300 10% of the amount over $0
    $7,300 $29,700 $730 plus 15% of the amount over 7,300
    $29,700 $59,975 $4,090 plus 25% of the amount over 29,700
    $59,975 $91,400 $11,658.75 plus 28% of the amount over 59,975
    $91,400 $163,225 $20,457.75 plus 33% of the amount over 91,400
    $163,225 no limit $44,160.00 plus 35% of the amount over 163,225



    Schedule Z — Head of Household

    If taxable income is over-- But not over-- The tax is:
    $0 $10,450 10% of the amount over $0
    $10,450 $39,800 $1,045 plus 15% of the amount over 10,450
    $39,800 $102,800 $5,447.50 plus 25% of the amount over 39,800
    $102,800 $166,450 $21,197.50 plus 28% of the amount over 102,800
    $166,450 $326,450 $39,019.50 plus 33% of the amount over 166,450
    $326,450 no limit $91,819.50 plus 35% of the amount over 326,450






    Dec 2005 - IRS Warns of e-Mail Scam about Tax Refunds


    WASHINGTON — The Internal Revenue Service today issued a consumer alert about an Internet scam in which consumers receive an e-mail informing them of a tax refund. The e-mail, which claims to be from the IRS, directs the consumer to a link that requests personal information, such as Social Security number and credit card information.

    This scheme is an attempt to trick the e-mail recipients into disclosing their personal and financial data. The practice is called “phishing” for information.

    The information fraudulently obtained is then used to steal the taxpayer’s identity and financial assets. Generally, identity thieves use someone’s personal data to steal his or her financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns.

    The bogus e-mail, which claims to come from “tax refunds@irs.gov,” tells the recipient that he or she is eligible to receive a tax refund for a given amount. It then says that, to access a form for the tax refund, the recipient must use a link contained in the e-mail. The link then asks for the personal and financial information.
    The IRS does not ask for personal identifying or financial information via unsolicited e-mail. Additionally, taxpayers do not have to complete a special form to obtain a refund.

    If you receive an unsolicited e-mail purporting to be from the IRS, take the following steps:

    Do not open any attachments to the e-mail, in case they contain malicious code that will infect your computer.
    Contact the IRS at 1-800-829-1040 to determine whether the IRS is trying to contact you about a tax refund.
    The IRS has seen numerous attempts over the years to defraud the public and the federal government through a variety of schemes, including abusive tax avoidance transactions, identity theft, claims for slavery reparations, frivolous arguments and more. More information on these schemes may be found on the criminal enforcement page at IRS.gov.

    Nov 2005 - Record Retention Guide


    The American Institute of Certified Public Accountants has developed and distributed detailed a guide for record retention. We reproduce below selections that may be of particular interest to housing cooperatives and condominiums and their residents.
    Keep Permanently
    Appraisals by outside appraisers
    Audit reports
    Blueprints and plans
    Bylaws
    Capital stock and bonds records
    Cash books
    Charter
    Charts of accounts
    Cancelled checks for
    • important payments
    • taxes, special contracts
        * file with papers for the transaction
    Contracts, mortgages,
    • leases in effect

    Correspondence on
    • legal matters

    Deeds, mortgages, bills of sale A A A A
    Depreciation schedules
    Year end financial statements
    General ledgers, year-end
    • trial balance

    Insurance records,
    • current accident reports, claims, policies

    Journals
    Minute books of directors, stockholders
    Retirement and pension records
    Tax returns and related worksheets
    Training manuals
    Union agreements
    Vouchers/payment to employees, vendors

    Keep for 7 Years
    Accident reports/claims (settled cases)
    Accounts payable ledgers and schedules
    Cancelled checks (see exceptions at left)
    Expense analyses/expense distributions
    Expired contracts, mortgages, leases
    Garnishments
    Inventories of products, materials, supplies
    Invoices
    Notes receivable ledgers and schedules
    Option records (expired)
    Payroll records and summaries
    Personnel files (terminated)
    Purchase orders
    Stock and Bond certificates (cancelled)
    Subsidiary ledgers
    Time books/cards
    Voucher registers and schedules
    Withholding tax schedules

    Keep for 3 Years
    Bank statements
    Employment applications
    Insurance policies (expired)
    Internal audit reports
    Internal reports (miscellaneous)
    Petty cash vouchers
    Sales commission reports

    Keep for 2 Years
    Bank reconciliations
    General correspondence
    Duplicate deposit slips

    Keep for 1 Year
    Magnetic tape and tab cards
    Purchase orders
    Requisitions

    Oct 2005 - Business Incentives Included in the 2005 Energy Act

    The Energy Tax Incentive Act of 2005 provides tax incentives for builders of energy efficient homes, commercial building developers, and manufacturers of appliances, as shown below.

    Credit for Builders of Energy Efficient New Homes: Contractors that build new energy-efficient homes in the U.S. are eligible for a credit of $2,000 per housing unit. To qualify, the unit must have annual energy consumption for heating and cooling that is at least 50% less than comparable units. The credit can also apply to a substantial reconstruction and rehabilitation of an existing home. These credits only apply to homes sold by contractors for use as personal residences. Construction must be substantially completed after August 8, 2005, and the home must be purchased after 12/31/05 and before 2008. This credit will benefit consumers to the extent contractors pass along their tax savings.

    Deduction for Energy Efficient Commercial Building Improvements: An immediate deduction (as opposed to multiyear depreciation) is allowed for the cost of qualified energy-saving improvements to commercial buildings in the U.S. The maximum deduction is generally limited to $1.80 per square foot on a lifetime basis. The improvements must be installed as part of interior lighting systems; heating, cooling, and ventilation systems; hot water systems; or the building envelope. To qualify, the improvements must meet a 50% reduced energy consumption standard. In some circumstances, a reduced deduction amount of $.60 per square foot may apply. The deduction is available for qualified energy-efficient commercial building property placed in service after 12/31/05 and before 2008.

    Credit for Manufacturers of Energy-Efficient Appliances: Manufacturers are allowed a business tax credit for the manufacture of qualifying energy-efficient dishwashers, clothes washers, and refrigerators in the U.S. The credit is available for appliances manufactured after 12/31/05 and before 2008. This credit goes directly to the appliance manufacturers, and consumers will only benefit to the extent manufacturers pass along their tax savings.

    Please call us to discuss the potential to reduce your business' taxes using these new incentives.

    Sep 2005 - Interest Rates Rise 1 Percentage Point for Fourth Quarter 2005

    WASHINGTON — The Internal Revenue Service today announced there will be a one-percentage-point increase in interest rates for the calendar quarter beginning Oct. 1, 2005. The interest rates are as follows:
    ·          Seven (7) percent for overpayments [six (6) percent in the case of a corporation];
    ·          Seven (7) percent for underpayments;
    ·          Nine (9) percent for large corporate underpayments; and
    ·          Four and one-half (4.5) percent for the portion of a corporate overpayment exceeding $10,000.
     
    Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points.  The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.
     
    The interest rates announced today are computed from the federal short-term rate based on daily compounding determined during July 2005.

    Aug 2005 - Are you moving this summer?

    If your move is closely related to the start of a new job location, you may be able to deduct unreimbursed moving expenses on your federal tax return. You must also meet certain tests relating to distance and time.

    First-time home buyers
    Moving can also mean selling or buying a home. If you’re a first-time home buyer, you should know that mortgage interest “points” paid to obtain the mortgage and real estate taxes are expenses that you may be able to itemize and deduct to help reduce the amount of taxes owed.

    Selling your main home
    If you sell your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return when it’s time to do your taxes. To be eligible for this exclusion, your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale.

    Change of address
    And don’t forget to report your change of address to the U.S. Postal Service and to the IRS, so you can continue to get your tax refunds. 

    Jul 2005 - Is Form 1040 Really

    LOS ANGELES - It says right there in the Internal Revenue Service\'s official instructions for filling out Form 1040 that the tax system is \"voluntary.\" But you better wait before you file for a complete refund of withheld taxes. Voluntary \"refers to our system of allowing taxpayers to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them,\" the IRS declares in a statement.

    To the agency, therefore, \"voluntary\" apparently means little more than \"not done at gunpoint.\"

    You probably don\'t need an MBA from Wharton, or even the tax preparers at H&R Block (nyse: HRB - news - people ), to know that payment of federal income taxes is not really a discretionary matter. But that hasn\'t stopped the IRS from feeling the necessity to cite legal authority against voluntary taxes in a lengthy report on its Website entitled, \"The Truth About Frivolous Tax Arguments\".

    The summary--and rebuttal--of several dozen other arguments by tax protestors is clearly intended to scare taxpayers. One has to wonder, though, whether the collected array of contentions might have the unintended effect of enticing some taxpayers to sample forbidden fruit.

    Despite the obvious self-interest of the IRS, many of these recurring tax objections clearly are frivolous. What other tag can be applied to arguments that wages paid in Federal Reserve notes--currency--aren\'t income, that \"United States\" only refers to residents of the District of Columbia and territories like Puerto Rico and Guam, or that only Federal Government employees are liable for federal taxes?

    Even the average uninformed taxpayer likely would dismiss out of hand an argument that the 16th Amendment, which authorized the federal income tax, was invalidly adopted in 1913. Or that a wage isn\'t income subject to tax, but merely an even trade of money for services rendered.

    The deficiencies in some other listed objections aren\'t quite so obvious. One popular objection says that the IRS violates the Paperwork Reduction Act of 1980 by failing to put a required Office of Management and Budget control number on form instructions. The IRS cites court decisions rejecting this contention--although admitting the rulings were made \"on different grounds.\"

    June 2005 - How and Why I Hired My Tax Accountant

    By JOHN CANTER

    Until I owned my business, I had always prepared my own income-tax returns. No longer. I'm glad to say that I have an accountant.

    Finding the right person wasn't easy. It took me time and some personal evaluation to decide on the best one for me. Here's the process I went through.

    First, I considered doing my own taxes -- for about a nanosecond. I had always prepared my tax returns. Since I had only my income, and then my wife's, to report, the process was straightforward. A couple of hours using tax software, and I was ready to file with the Internal Revenue Service.

    That changed when I bought my hobby-and-game store. The complexities of owning a business and all the tax rules that come with it made the job much more difficult.

    I realized this after spending hours on the phone with various city and state agencies trying to compile the tax-identification numbers needed to apply for a bank loan. I was astonished by how many taxes a small-business owner has to pay. Assessments may be levied at the city, county, state and federal level, and the rules and regulations change frequently. Complicating matters, a separate identification number is required for each tax. Failing to file just one of the returns triggers a penalty, something I didn't dare risk.

    In short, I quickly concluded this was no job for an amateur. Plus, for small-shop proprietors like me, time is money, and unless I hired a professional, I'd be doomed to taking the latest tax-preparation class instead of focusing on my business.

    To find the right accountant, I first considered hiring a friend. I knew one accountant personally. He's someone I hung out with during college, but he lives in another state. So I initially dismissed the thought of hiring him since I felt it would be better to have someone local.

    I then interviewed several firms in my area. These ranged from independents to local offices of the Big Four. My criteria for choosing a firm were the amount of service I'd receive, the fees involved, their general philosophy and approach, and something I'll call the "personal touch."

    Most of the firms offered similar services, such as federal-tax preparation and filing monthly local and state taxes, with a couple specializing in particular areas such as payroll taxes. The range seemed somewhat dependent on the size of the accounting firm, with the larger firms offering "one-stop" service -- they'd do all my tax work -- compared to the small outfits, which would do only payroll taxes. But hiring a big firm didn't necessarily mean I'd be working with the most experienced people. Although I was meeting with the partners of the large firms, I learned lower-level staffers would do the work, and the "senior" accountants would simply sign off on it.

    As for fees, I'd be charged by the hour, at rates that also varied by size of the firm. Although I expected some variance in the fees, I was surprised by the disparity. The larger firms charged between $150 and $300 per hour, while smaller ones cost between $75 and $100 an hour. For a small company like mine, paying $300 an hour isn't an option.

    In regard to tax strategies, I looked at how aggressive the firms would be. One accountant asked whether I had children. When I said I'd just had a baby boy, he started to pitch me on a tax shelter for my son. He said he had just read about it, and although the IRS had not ruled on it yet, he told me he thought it would likely get a favorable ruling. While I'm all for accountants being aggressive about seeking deductions, I wasn't sure that my then-one-month-old son should be involved.

    Finally, and most important, there was the personal touch. Financial decisions are touchy. Consider that disagreements over money are among the top reasons for divorce in the U.S. If discussing money is so difficult with your spouse, how are you going to talk candidly about finances with a stranger?

    I sensed that my accountant would be my closest business confidant, and that when all was said and done, I needed to work with someone I could trust. I decided to forgo my prior requirement for proximity and hire my friend from college. John Reasbeck (a.k.a. Reas) and I have stayed close since graduation even though he lives in West Virginia and I'm in Kentucky. We're the same age (32) and at the same point in our professional lives. He has been an accountant since leaving college and consequently has years of experience to offer me.

    An accountant can -- both directly and indirectly -- drastically influence the success of a business. I already trusted and confided in Reas and knew he had my best interests at heart. Never mind that he wasn't a "senior tax partner." Those people weren't going to be doing my work anyway. And the price is right at $100 an hour.

    One year later, I know I made the right decision. My accountant-friend is a key member on my advisory team, not someone who just keeps track of my statements and prepares my year-end taxes. We talk by phone once or twice a week, but not necessarily about taxes. Often I seek his feedback on business ideas, such as possible expansion opportunities.

    Some might question the wisdom of hiring an accountant from out of state. But West Virginia and Kentucky are adjacent states, so their rules tend to be similar, and my accountant has several other out-of-state clients. Still, if I weren't comfortable with reading tax documents, I might feel differently, because agencies send notices and coupons directly to me, and I handle some of this work myself. But I have a finance background, and I already take care of tasks like bookkeeping and reconciling bank statements on my own.

    I dislike organizing the paperwork (mostly receipts) necessary for me to properly file my taxes. But after seeing the results, I'm more than happy to pay my accountant's bill because he's saved me time and minimized my year-end taxes.

    May 2005 - Amended Returns

    Tax Tip 2005-72, April 12, 2005

    Oops! You’ve discovered an error after your tax return has been filed. What should you do? You may need to amend your return.

    The IRS usually corrects math errors or requests missing forms (such as W-2s) or schedules. In these instances, do not amend your return. However, do file an amended return if any of the following were reported incorrectly:
    • Your filing status
    • Your total income
    • Your deductions or credits

    Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed paper or electronically-filed Form 1040, 1040A, or 1040EZ return. Be sure to enter the year of the return you are amending at the top of Form 1040X. If you are amending more than one tax return, use a separate 1040X for each year and mail each in a separate envelope to the IRS processing center for your state. The 1040X instructions list the addresses for the centers.

    Form 1040X has three columns. Column A is used to show original or adjusted figures from the original return. Column C is used to show the corrected figures. The difference between the figures in Columns A and C is shown in Column B. You should explain the items you are changing and the reason for each change on the back of the form.

    If the changes involve another schedule or form, attach it to the 1040X. For example, if you are filing a 1040X because you have a qualifying child and now want to claim the Earned Income Tax Credit, you must complete and attach a Schedule EIC to the amended return.

    If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund. If you owe additional tax for 2004, Form 1040X must be filed and the tax paid by April 15, 2005, to avoid any penalty and interest.

    You generally must file Form 1040X to claim a refund within three years from the date you filed your original return, or within two years from the date you paid the tax, whichever is later.

    You may download Form 1040X or order it by calling toll free 1-800-TAX-FORM (1-800-829-3676).

    Apr 2005 - Filing Extensions Available by Phone or Computer



    IR-2005-43, April 8, 2005



    WASHINGTON — People who need more time to complete their forms will find it easy to extend their filing deadline — they don’t need an excuse or even a stamp. Automatic four-month extensions are available by phone or by computer, as well as through the paper Form 4868. The IRS expects to receive almost 9 million extension requests, which must be made by the normal filing deadline.

    An extension of time to file does not give more time to pay any taxes owed. A person may choose to pay any projected balance due when requesting an extension, and the payment may be made electronically. Even without a payment, one can still get the extension.

    Whether requesting an extension electronically or on paper, the taxpayer must estimate the total tax liability based on the information available. If the IRS later finds this estimate to be unreasonable, the extension will be null and void. The taxpayer will still get credit for any payments made with the extension request.

    The IRS has a special toll-free phone line for extensions — 1-888-796-1074 — for those who filed a tax return for 2003. Callers may use Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, as a worksheet to prepare for the call, figuring their 2004 tax and total payments made. They get a confirmation number signifying that the extension request has been accepted. They should put this confirmation number on Form 4868 and keep it for their records. They do not send the form to the IRS.

    Taxpayers may also e-file an extension request using tax preparation software on their own computer or by going to a tax preparer. Those filing by computer get an acknowledgment that the IRS has received their request.

    Taxpayers asking for extensions by phone or computer can choose to pay any expected balance due by authorizing an automatic withdrawal from a checking or savings account. They will need the appropriate bank routing and account numbers for that account. They must also have the adjusted gross income (AGI) from their 2003 tax return to verify their identity.

    Another way to get a filing extension is to charge an extension-related payment to an American Express, Discover Card, MasterCard or Visa account. The authorized processors take payments through their phone and Web site systems. There is no IRS fee for credit card payments, but some processors may charge a convenience fee. Use Form 4868 as a worksheet; it has details on making credit card payments.

    Taxpayers may also charge the taxes due for 2004, estimated taxes for 2005, or installment agreement payments for 2000 or later, but such charges do not give an extension of time to file.

    Taxpayers who live outside the United States and Puerto Rico and whose main place of work is outside the United States and already have a filing extension to June 15. This June deadline also applies to those in military service on duty outside the country, but not in a combat zone or a qualified hazardous duty area. (A special, longer extension applies to those in such a zone/area, or away from their permanent duty station in support of operations in such a zone/area.) Taxpayers with the June deadline can file a Form 4868 or make an extension-related credit card payment by June 15 to get an additional two months to file. They cannot request this extension by phone. Merely being outside the United States on the April deadline does not give a person an extension to June 15.

    Interest charges apply to any tax not paid by the regular deadline. The current rate is 6 percent a year, compounded daily, and is subject to change each calendar quarter. Taxpayers who request an extension may also be liable for a late payment penalty of 0.5 percent per month if the total tax paid by the regular deadline is less than 90 percent of the actual 2004 tax.

    One deadline that taxpayers cannot extend is the date to claim a refund for Tax Year 2001 if they have not yet filed for that year. Unless they had a filing extension in 2002 for their 2001 return, they must mail such late returns by April 15, 2005.

    Mar 2005 - Tax Shelters

    A tax shelter is an investment that usually requires substantial contributions with a degree of risk. It often involves current losses to produce future gains. An investment in low income property that provides depreciation benefits is one example of a legitimate tax shelter. Generally, the amount of your deductions or losses from most activities is limited to the amount that you have at risk. You are considered at risk in an activity for the following amounts:
    # The amount of cash you invested in the activity,
    # The adjusted basis of other property you contributed to the activity; and
    # The amount you borrowed to invest in the activity, to the extent that you are personally liable on the loan or have pledged property not used in the activity as security.
    For more information on the at–risk rules, refer to Publication 925, Passive Activity and At–Risk Rules.

    Note – –Tax shelter trade or business activity losses or credits are often considered passive activity losses or credits. Such losses or credits may only be used to offset income from other passive activities. They cannot be deducted against other income such as wages, salaries, professional fees, or portfolio income such as interest and dividends. Allowable losses or credits are computed on Form 8582 (PDF), Passive Activity Loss Limitations.

    The excess passive losses and credits generated from passive activity tax shelters can be carried forward until you can use them or until you dispose of your investment in the tax shelter.

    For more information on passive income and losses, refer to Topic 425, Passive Activities — Losses and Credits or to Publication 925.

    Feb 2005 - 2004 Tax Changes

    * Educators\' Deduction - This had expired at the end of 2003, but was restored for two more years. IR-2004-124 has more information.

    * Clean Fuel Vehicle Deduction - The maximum amount of this deduction was scheduled to drop this year and next, but has been retained at the $2,000 level through 2005. IR-2004-125 has information on this deduction and the newest vehicle to qualify for it.

    * Child Tax Credit - Taxpayers with a credit amount more than their tax could get a refund of the difference, up to 10% of the amount by which their 2004 taxable earned income exceeds $10,750. This percentage was raised to 15% for 2004, meaning a larger refund for many of these taxpayers.

    * Combat Pay - Some military personnel receiving combat pay get larger tax credits because of two law changes. The new law counts excludable combat pay as income when figuring the Child Tax Credit and gives the taxpayer the option of counting or ignoring combat pay as income when figuring the Earned Income Tax Credit. Counting combat pay as income when calculating these credits does not change the exclusion of combat pay from taxable income.

    For more about the effect of excludable income on the EITC, see Q&A-37 in Miscellaneous Provisions - Combat Zone Service.

    For more details on combat pay, see Military Pay Exclusion - Combat Zone Service

    * Sales Tax Deduction - Taxpayers who itemize deductions will have a choice of claiming a state and local tax deduction for either sales or income taxes on their 2004 and 2005 returns. Publication 600, Optional State Sales Tax Tables (PDF 93K) provides tables to use in determining the deduction amount, relieving taxpayers of the need to save receipts throughout the year. Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate. Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for sales or income taxes. For more details on the sales tax deduction, see news release IR-2004-153.

    * New Law Encourages Tsunami Relief Contributions - Contributions made to qualified charities to help victims of the Tsunami can be deducted for tax year 2004 even if they are made in January 2005, under a new law enacted on Jan. 7.

    * Expense Limit for SUVs - Businesses should be aware of a change regarding the deduction for certain sport utility vehicles (SUVs) placed in service after Oct. 22. Under the American Jobs Creation Act of 2004, businesses cannot take a first-year deduction of more than $25,000 for an SUV. The business would depreciate the remaining cost. (The limit for vehicles placed in service before Oct. 23 was $100,000.) The new limit does not affect other types of property where the taxpayer decides to expense the cost instead of depreciating the property.

    * Sale of Personal Residence Acquired in a Like-kind Exchange - Taxpayers who convert rental property to a principal residence should know that a tax law change may limit their ability to exclude gain on the sale of that residence if they obtained the property through a like-kind exchange. Generally, a taxpayer can exclude up to $250,000 of gain on the sale of a home, provided the individual has owned and used it as a principal residence for two out of the five years before the sale. The exclusion is $500,000 for a married couple if both meet the use test. The American Jobs Creation Act of 2004 does not allow any exclusion if the taxpayer sells the home within five years of acquiring the property through a like-kind exchange. The new law applies to sales after October 22, 2004.

    * Deduction for Discrimination Suit Costs - A new deduction is available for those who pay attorney\'s fees and court costs in connection with discrimination suits. Taxpayers can take the new deduction whether they itemize or not. The deduction cannot exceed the amount includible in income for the year on account of a judgment or settlement resulting from the discrimination claim. Generally, personal legal expenses are not deductible, but an employee who incurs legal expenses related to doing or keeping his job could deduct these expenses on Schedule A as a miscellaneous itemized deduction. However, under The American Jobs Creation Act of 2004, an individual with legal fees and court costs arising from a discrimination suit may deduct the costs directly from income on the front of the tax return; this is known as an above-the-line deduction.

    Under this new deduction, amounts paid for attorney\'s fees and court costs are deductible in computing alternative minimum tax, and are not subject to the 2 percent floor on miscellaneous itemized deductions or the overall limitation on itemized deductions. The Act, signed into law on Oct. 22, 2004, describes the discrimination claims qualifying for this new deduction. Only costs paid after Oct. 22, 2004, for judgments or settlements occurring after that date qualify for this deduction.

    Jan 2005 - IRS Begins 2005 Filing Season

    IR-2005-1, Jan. 3, 2005

    WASHINGTON — The Internal Revenue Service today opened the 2005 tax filing season, highlighted by expanded electronic services, easier tax filing rules and new tax law changes. The IRS also expects to surpass a milestone in the e-file program by the April 15 filing deadline.

    The IRS will mail almost 29.5 million tax packages to Americans this week, but, increasingly, taxpayers are swapping their pencils for their mouse.

    The IRS projects the number of individual taxpayers filing their taxes electronically will surpass 50 percent for the first time. More than half of the expected 133 million individual tax returns will be filed through IRS e-file in 2005. Last year, almost 62 million Americans used e-file.

    “In 2005, we expect more than half of all individual tax returns will be filed electronically. E-filing is fast, secure and reliable. Taxpayers who e-file will get their refunds in half the time,” said Mark W. Everson, IRS Commissioner.

    Taxpayers who use IRS e-file have a higher satisfaction rating than those who still use paper returns, according to the American Customer Survey Index, which rates private and public sector service industries.

    The IRS is taking steps in several areas to help taxpayers. Many of these features can be found on IRS.gov, including:

    * Added EITC help. The EITC Assistant, available in English and Spanish, will allow taxpayers to type in a little information and follow easy directions to determine if they are eligible for the Earned Income Tax Credit (EITC). Tax professionals, who prepare the majority of EITC tax returns, also can use the EITC Assistant to help determine their clients’ eligibility.

    * Expanded 1040 Central. Taxpayers again will find a one-stop shop for their tax return needs by visiting 1040 Central on IRS.gov. The newly expanded page will connect taxpayers to basic income tax preparation needs such as key forms, answers to frequently asked questions and critical links to key tax issues.

    * “Where’s My Refund.” The popular “Where’s My Refund?” function on IRS.gov allows taxpayers to answer the most frequent question they pose during the tax year. All taxpayers need is their Social Security number, filing status and exact amount of their anticipated refund. Last year, it was used 20 million times.

    * Simpler forms for more taxpayers. The income limits for using the Form 1040EZ and Form 1040A will increase from less than $50,000 to less than $100,000. Last year, approximately 18 million taxpayers filed a Form 1040EZ and another 24 million filed a Form 1040A. The change in the threshold will mean 1.6 million more taxpayers are eligible to file the 1040EZ or 1040A.

    Dec 2004 - Recent Changes May Affect Your 2004 Taxes

    Some recent tax law changes are effective for the 2004 Tax Year. If these items affect you, be sure to get the details when you prepare your tax return early next year.

    * Educators’ Deduction — This had expired at the end of 2003, but was restored for two more years. IR-2004-124 has more information.

    * Clean Fuel Vehicle Deduction — The maximum amount of this deduction was scheduled to drop this year and next, but has been retained at the $2,000 level through 2005. IR-2004-125 has information on this deduction and the newest vehicle to qualify for it.

    * Child Tax Credit — Taxpayers with a credit amount more than their tax could get a refund of the difference, up to 10% of the amount by which their 2004 taxable earned income exceeds $10,750. This percentage was raised to 15% for 2004, meaning a larger refund for many of these taxpayers.

    * Combat Pay — Some military personnel receiving combat pay get larger tax credits because of two law changes. The new law counts excludable combat pay as income when figuring the Child Tax Credit and gives the taxpayer the option of counting or ignoring combat pay as income when figuring the Earned Income Tax Credit. Counting combat pay as income when calculating these credits does not change the exclusion of combat pay from taxable income.

    For more about the effect of excludable income on the EITC, see Q&A-37 in Miscellaneous Provisions - Combat Zone Service.

    For more details on combat pay, see Military Pay Exclusion – Combat Zone Service

    * Sales Tax Deduction — Taxpayers who itemize deductions will have a choice of claiming a state and local tax deduction for either sales or income taxes on their 2004 and 2005 returns. The IRS will provide optional tables for use in determining the deduction amount, relieving taxpayers of the need to save receipts throughout the year. Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate. Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for sales or income taxes.

    * Expense Limit for SUVs — Businesses should be aware of a change regarding the deduction for certain sport utility vehicles (SUVs) placed in service after Oct. 22. Under the American Jobs Creation Act of 2004, businesses cannot take a first-year deduction of more than $25,000 for an SUV. The business would depreciate the remaining cost. (The limit for vehicles placed in service before Oct. 23 was $100,000.) The new limit does not affect other types of property where the taxpayer decides to expense the cost instead of depreciating the property.

    * Sale of Personal Residence Acquired in a Like-kind Exchange — Taxpayers who convert rental property to a principal residence should know that a tax law change may limit their ability to exclude gain on the sale of that residence if they obtained the property through a like-kind exchange. Generally, a taxpayer can exclude up to $250,000 of gain on the sale of a home, provided the individual has owned and used it as a principal residence for two out of the five years before the sale. The exclusion is $500,000 for a married couple if both meet the use test. The American Jobs Creation Act of 2004 does not allow any exclusion if the taxpayer sells the home within five years of acquiring the property through a like-kind exchange. The new law applies to sales after October 22, 2004.

    * Deduction for Discrimination Suit Costs — A new deduction is available for those who pay attorney’s fees and court costs in connection with discrimination suits. Taxpayers can take the new deduction whether they itemize or not. The deduction cannot exceed the amount includible in income for the year on account of a judgment or settlement resulting from the discrimination claim. Generally, personal legal expenses are not deductible, but an employee who incurs legal expenses related to doing or keeping his job could deduct these expenses on Schedule A as a miscellaneous itemized deduction. However, under The American Jobs Creation Act of 2004, an individual with legal fees and court costs arising from a discrimination suit may deduct the costs directly from income on the front of the tax return; this is known as an above-the-line deduction.

    Under this new deduction, amounts paid for attorney’s fees and court costs are deductible in computing alternative minimum tax, and are not subject to the 2 percent floor on miscellaneous itemized deductions or the overall limitation on itemized deductions. The Act, signed into law on Oct. 22, 2004, describes the discrimination claims qualifying for this new deduction. Only costs paid after Oct. 22, 2004, for judgments or settlements occurring after that date qualify for this deduction.

    IRS.GOV

    Nov 2004 - Social Security Announces 2.7 Percent Benefit Increase for 2005



    November, 2004 News Update

    Jim Courtney, Press Officer
    SOCIAL SECURITY
    News Release
    Social Security Announces 2.7 Percent Benefit Increase for 2005

    Monthly Social Security and Supplemental Security Income benefits for more than 52 million Americans will increase 2.7 percent in 2005, the Social Security Administration announced today.

    Social Security and Supplemental Security Income benefits increase automatically each year based on the rise in the Bureau of Labor Statistics' Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), from the third quarter of the prior year to the corresponding period of the current year. This year's increase in the CPI-W was 2.7 percent.

    The 2.7 percent Cost-of-Living Adjustment (COLA) will begin with benefits that more than 47 million Social Security beneficiaries receive in January 2005. Increased payments to 7 million Supplemental Security Income beneficiaries will begin on December 30.

    Some other changes that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $90,000 from $87,900. Of the estimated 159 million workers who will pay Social Security taxes in 2005, about 9.9 million will pay higher taxes as a result of the increase in the taxable maximum in 2005.

    It is important to note that no one's Social Security benefit will decrease as a result of the 2005 Medicare Part B premium increase, announced last month. By law, the Part B premium increase cannot be larger than a beneficiary's COLA increase. Information about Medicare changes for 2005 can be found at www.hhs.gov, The Internet site for the Department of Health and Human Services.

    Taken from SSA.GOV website

    Oct 2004 - Sarbanes-Oxley compliance is lagging

    10/14/2004 10:48:44 AM, CBS MarketWatch via NewsEdge Corporation : WASHINGTON (CBS.MW) - U.S. companies must do much more to implement the requirements of the Sarbanes Oxley Act, a top accounting regulator said Thursday.

    I do not see the private sector in this country dignifying itself by a heroic response to this challenge, said William J. McDonough, chairman of the Public Company Accounting Oversight Board.

    Some companies are doing the right thing and some business groups are saying the right things. Vastly more needs to be done -- and soon, McDonough said in a speech in New York.

    Congress passed the law in 2002 after a wave of corporate accounting scandals shook public confidence in companies\' governance.

    But McDonough said citizens continue to press Congress about excessive executive pay and questionable financial reporting.

    Corporations have grappled with the implementation of Sarbanes-Oxley, which requires tougher auditing. Corporate pleas for additional time haven\'t gone unheard. Recognizing corporations\' burdens, the Financial Accounting Standards Board postponed for six months Wednesday a rule that would require companies to treat stock options as expenses.

    The nonprofit PCAOB was created by the Sarbanes-Oxley Act to oversee the auditors of public companies.

    Any accounting firm that audits a company whose securities trade in U.S. markets must register with the board. The Securities and Exchange Commission won\'t allow a public company to submit a financial statement that is audited by an accounting firm not registered with the PCAOB.

    McDonough didn\'t single out any companies in his speech.

    Sep 2004 - New tax law revises year-end tax strategies


    Just as year-end tax planning season for 2004 approaches, Washington has added an unexpected variable -- the Working Families Tax Relief Act of 2004. Although this piece of major tax legislation was expected to pass earlier in the year, it did not. Within the last few weeks of the Congressional session before Election Day, however, the logjam unexpectedly broke. Now, certain year-end tax strategies need to be abandoned and others retooled. Most traditional year-end tax strategies will work, but some will not.

    The new law
    The Working Families Tax Relief Act of 2004 impacts on year-end planning in several different ways. First, most tax laws for 2004 and 2005 will remain the same. Without the new tax law, you would have been in a higher tax bracket in 2005, especially if you are married,file joint returns, and take the standard deduction. Someone with gross income of about $150,000 would have paid on average over $1,000 more in taxes in 2005.

    Second, it raises the level at which income continues to be taxed at the 10 percent level by several thousand dollars for most taxpayers. Upper bracket taxpayers also benefit from this increase. If you are managing a portfolio of investments for your child, the new ten percent bracket becomes doubly important because it, and the 15 percent bracket,defines the levels at which the child's long-term capital gains are taxed a 5 percent rate, instead of the usual 15 percent capital gains rate.

    Third, if you have children under 17, your child tax credit remains at $1,000 per child for 2005, rather than dropping to $700 as had been scheduled. Making certain a child qualifies as your dependent becomes a more important tax issue because of the higher credit amount.

    Fourth, the alternative minimum tax (AMT) exemption has been continued at its higher 2004 level. Without it, some experts estimate that over one million more taxpayers would pay AMT in 2005. Even with this gift in the new law, planning to avoid the AMT and, if within its grasp, to minimize it, may yield significant benefits.

    Ironically, some taxpayers will be thrown into the AMT because of the new law. The reason is that whenever regular income tax liability (which is reduced by the new law) is less than the tax under the AMT, the AMT becomes the tax you must pay. Balancing between 2004 and 2005 income and deductions that trigger AMT is frequently a solution; but sometimes, loading AMT income into just one year is the better strategy.

    Teachers benefit from the new law, with a retroactive extension of an above-the-line deduction of up to $250 for out-of-pocket classroom expenses. This deduction had expired at the end of 2003, but now runs through 2005. Since the $250 deduction starts fresh each year, teachers should organize receipts and spending plans to maximize their 2004 deduction before the end of the year.

    Traditional year-end planning
    With the worry of higher tax rates for next year behind us, traditional tax planning concepts may serve you well. Generally, this means deferring income into 2005 whenever possible and accelerating deductions into 2004. Of course, doing the math is important because over-utilizing that strategy may put you in a higher bracket for one of the years.

    Accelerating deductions and deferring income, itself, becomes a strategy. It's not as easy as it first looks because of a rule called "claim of right." If someone owes you money or you owe payment on a bill, simply ignoring collection or payment until next year won't necessarily defer tax treatment. Special rules also apply in certain circumstances.

    Timing is especially useful in planning to have your portfolio of investments taxed at the lowest rate. Before the next year rolls in, taking a look at capital gains and losses for the year, as well as dividends, can help you "net out" gains against losses and maximize their tax benefits.

    Business planning
    Businesses have two special concerns this year: taking bonus depreciation before it permanently ends in 2004; and qualifying for any one of a handful of tax credits that have been renewed under the new law, retroactively to January 1, 2004.

    Bonus depreciation can be of tremendous value to a business. A full additional 50 percent of the cost of business equipment and other property, in addition to regular depreciation, may be written off in the year of purchase. Bonus depreciation ends, however, on December 31, 2004, and almost certainly will not be renewed. If your business is planning a purchase, doing it in 2004 rather than in early 2005 can save you thousands of tax dollars.

    The new law has been generous is extending many business tax credits and deductions that had already expired during 2004. Among those your business might review before the year ends are the work opportunity tax credit; welfare-to-work tax credit; the research credit; charitable contributions of computer technology and equipment used for educational purposes; expensing of environmental remediation costs; credit for electricity produced from certain renewable resources; suspension of the 100-percent-of-net-income limitation of percentage depletion; credit for qualified electric vehicles; deduction for qualified clean-fuel vehicle property; and Archer medical savings accounts.


    Aug 2004 - Refinancing a Home Mortgage?


    With home mortgage rates at their lowest level in years, you may be considering refinancing your adjustable rate or higher interest rate mortgage to lock in what looks like a real bargain. Although taxes take a back seat to the basic issue of whether refinancing saves enough money to be worthwhile, you should be aware of the basic tax rules that come into play. In some cases, you may be pleasantly surprised at the tax deductions you'll be able to claim as a result of refinancing. In some circumstances, however, you may wind up with fewer deductions than you had expected.

    Interest on the New Loan

    The most widely applicable rules are as follows:

  • The interest you pay on the new loan will be completely deductible if
  • 1. the new loan amount doesn't exceed the balance remaining on your old mortgage,
    2. when you got the mortgage you're replacing, you used the loan proceeds to buy or substantially improve your home, and
    3. the new loan balance doesn't exceed $1 million.
  • Interest you pay on borrowed funds in excess of the amount necessary to retire the old mortgage also will be completely deductible to the extent that the new money is used to substantially improve your home (for example, adding a bedroom).
  • To the extent they aren't used for substantial improvements, borrowed funds in excess of the amount necessary to retire the old mortgage will be deductible as "home equity debt." Generally, the interest paid on up to $100,000 of that debt is deductible as home mortgage interest regardless of how the proceeds are used (but you cant deduct the interest if you use the proceeds to buy tax-exempt bonds).

  • What these rules boil down to is that the interest you pay on the new loan usually will be deductible if:
    1. You are refinancing your old mortgage dollar-for-dollar,
    2. Your new loan amount exceeds the old mortgage's remaining balance and you use the new money for substantial improvements to your home, or
    3. The new loan money isn't used for home improvements, but doesn't exceed $100,000.

    Points on the New Loan

    Points paid in connection with buying or substantially improving your main home are currently deductible. However, if you must pay points on a refinance loan, this charge will be currently deductible only if you pay the charge out of your own cash at the closing (that is, the charge is not withheld from the mortgage loan) and only to the extent that the new loan proceeds are used to substantially improve your home. So if you refinance your existing home mortgage and use none of the new loan for substantial improvements to your home, any points you pay on the transaction wont be currently deductible. Instead, you'll have to deduct the points over the life of the new mortgage.

    Deductions from Bailing out of the Old Mortgage

    You may have to pay the bank a prepayment penalty to pay off your existing mortgage. If that's the case, the penalty will be fully deductible if the interest you paid on the retired mortgage was deductible as home mortgage interest.

    Points Balance on the Old Mortgage

    You may have had to pay points when you got the mortgage you now want to refinance. If you were required to deduct the points over the life of your existing mortgage, the part of the points that you haven't yet deducted may be deducted currently as interest (again, assuming that the interest you paid on your existing mortgage was deductible as home mortgage interest).

    For example, suppose you refinanced your home mortgage several years ago and used the proceeds to pay off in full your original home mortgage. Your refinancing mortgage (loan #2) was a 30-year fixed rate loan for $100,000. You paid three points ($3,000) on the refinancing. Because all of the loan proceeds were used to pay off the original mortgage and none were used to buy or substantially improve your home, all the points on the refinancing loan had to be deducted over the loan term. This year, you refinance again with a lower interest mortgage (loan #3) when there's a remaining (not-yet-deducted) points balance of $2,400 on loan #2. You can deduct the $2,400 as home mortgage interest in the year loan #2 is paid off.


    Jul 2004 - Making The Dividend Tax Cut Work

    Ari Weinberg, 11.12.03, 7:00 AM ET
    Forbes.com

    NEW YORK - Dividends entered a whole new era on May 28, the day President George W. Bush signed the 2003 tax cut.

    As a result, major U.S. companies began passing out money like a Vegas casino. SBC Communications (nyse: SBC - news - people ) awarded investors with 35% more cash in the last two quarters. Citigroup (nyse: C - news - people ) increased its quarterly dividend 75% to 35 cents in August. And Microsoft (nasdaq: MSFT - news - people ), a payout holdout until January of this year, doubled its annual dividend in September.

    Cut Next Year's Taxes Now Shelter That Urge To Shelter Making The Dividend Tax Cut Work When The IRS Says You're Rich... The 'Shelter' Shelter Sizing Up Tax Cut Legislation Eight Things To Do If You Are Audited The IRS Wants You To Fess Up

    These windfalls are, of course, due to the lowered tax rate on corporate dividends. For 2003, the rate on corporate dividends dropped to 15% for most taxpayers. Previously, those dividends were taxed at the same rate as ordinary income. But taking advantage of the lower rate is not as easy as the pronouncement lets on. And don't forget, the 15% rate applies only to corporate dividends--not bond coupons, REIT payouts or money market dividends. If you want to get it all right on your returns next April 15, you've got to lay the groundwork now.

    "We're going from taxpayers to tax planners," says Derrick Kinney, an American Express financial adviser based in Arlington, Texas.

    Kinney says the law aims to get people as much current income as possible from dividends. People who hold all of their investments in 401(k) plans and Individual Retirement Accounts, among other qualified accounts, are out in the cold.

    "As opposed to settling for a deductible IRA, they're shifting their attention to Roth IRAs," says Kinney. While assets in both types grow tax-free, funds are taxed going into a Roth, not as they are withdrawn. For deductible IRAs, investments are made before taxes, but withdrawals are taxed as ordinary income.

    If the Bush Administration reintroduces next year its three savings plans in which already taxed assets grow and can be withdrawn tax-free, expect the current-income crowd to step up its buying.

    But there are still stipulations in this year's legislation investors must meet in order to get the tax break.

    "To prevent against rate arbitrage, the law says you have to hold the stock for at least 60 days when the dividend is paid," says Bernard Kent, a tax partner at PricewaterhouseCoopers.

    This rule pertains to the intricacies of short-term capital losses and ex-dividends. When companies declare a dividend, they don't just pay it immediately but set a date, usually two to three weeks before the dividend is actually paid, on which shareholders of record are locked into the dividend. In that intervening period, shares are said to trade "ex-dividend" and can sometimes dip.

    A tax bandit could buy before the ex-dividend and sell a few days later. He would gain the dividend and, perhaps, line himself up for a short-term capital loss. That loss could be deducted from short-term gains, taxed at ordinary income, say 35%. But throw in dividend income gained during the period, taxed at just 15%, and you'd effectively arbitrage that short-term rate down to 20%.

    The law was set up to minimize such opportunities. For the 120 days surrounding a dividend payout, the shareholder must hold the shares for at least 60 consecutive days.

    On top of that, he must hold the actual shares. "If your shares are lent out by your broker, any payments you receive in lieu of dividends do not get the low rate," says Kent. Any shares held in "street name" are eligible for lending unless you notify your broker.

    A more complicated clause for receiving the 15% rate requires that the investor have no diminished risk of loss, according to Kent. That means you have to be fully exposed to the whims of the individual stock. Going long and short the same amount of shares or employing certain options and futures hedges are two situations that would negate the rate.

    "The general gist of the tax legislation is to bring out more investments," says Kinney. But, if you're not careful, it can actually bring more taxes as well.

    An overriding consequence of the 15% dividend rate, along with the new 15% rate on long-term capital gains, is that higher amounts of investment income could push millions more people into the alternative minimum tax.

    While the lower tax rates drew much applause, fear of the AMT has many critics hoping that the rates ride off into the sunset. Unless a supermajority of 60 senators agrees to make the cuts permanent before 2009, the 15% rates for both dividends and long-term capital gains will revert back to 2002 levels.

    But if you hold your assets in qualified retirement accounts, it won't really matter.


    June 2004 - How Long Should You Keep Your Records?


    Just how long you should keep records is a matter of judgement, space, and a combination of state and federal statutes of limitations.

    Returns can be audited for up to 3 years after filing for your Federal return (6 years if underreported income is involved). So all records substantiating tax deductions should be kept for at least that long.

    Following are recommended retention periods for the listed records:

    Records Retention Period
    Cancelled Checks 7 years
    Bank Deposit Slips 7 years
    Bank Statements 7 years
    Tax Returns permanent
    Employment tax returns 7 years
    Expense reports 7 years
    Entertainment records 7 years
    Financial Statements permanent
    Contracts permanent
    Minutes of meetings Life of Company plus 7 years
    Corporate stock records permanent
    Employee records Period of employment Plus 7 years
    Depreciation schedules Life of Business Plus 7 years
    Real Estate records Permanent
    General ledger Life of Business Plus 7 years
    Inventory records 7 years
    Home improvement records Ownership period Plus 7 years
    Investment records Ownership period Plus 7 years


    May 2004 - Can You Deduct Home Office Expenses?


    by Richard J. Eckstein, CPA, MST, Director of Tax Services

    So I'll set up an office in my home and I'll be able to "write off" my house operating expenses as a business expense. You all know the rule - "if it sounds too good to be true it probably is". A home based business can offer a way to deduct some of your expenses, however, there are strict rules that govern what and how much you can deduct.

    You may deduct your home office expenses if you meet any of the three tests described below:

    Separate structures: The easiest test allows a deduction for the costs of a separate unattached structure on the same property as your home - for example, an unattached garage, artist's studio, or workshop - that is used as a home office. To qualify for the deduction, the separate structure must be used exclusively and regularly in connection with your business.

    Home office used for meeting patients, clients, or customers: You may deduct home office expenses if you use the home office exclusively and regularly to meet or deal with patients, clients, or customers in the normal course of your business. You have to meet with them inside your office - telephone meetings (calls) won't do the trick.

    Principal place of business: If you use your home office exclusively and regularly as a principal place of business, as the main location of a business that you operate, you may deduct the expenses. If your home is the sole location of your business, and you supply services (or sell goods) from that location, then you automatically meet the principal place of business test. However, if you perform some business functions inside and outside of your home, determining where your principal place of business is located can be difficult. Business people or professionals who manage their business from a home office, but provide goods or services outside the home cannot satisfy this test. Home office deductions have been denied for many individuals, such as doctors who work at a clinic but do their paperwork at home, salespeople who use their home office as a base but sell outside the home, and owners of retail businesses or tradespeople who do their business paperwork at home. Fortunately, relief is on the way! Scheduled to go into effect in 1999, these types of business people and professionals will regain the right to their home office deductions.

    So what do you get if you qualify for the home office deductions? You may take business expense deductions for:

    • The direct expenses of the home offices, such as the costs of painting or repairing the home office, and


    • The indirect expenses of maintaining the home office, such as part of the utility costs, depreciation, insurance, etc., for your home, as well as part or your mortgage interest, real estate taxes, and casualty losses.


    There are limitations (of course!). The amount you may deduct as home office expenses is subject to several limitations. In addition, several years ago, the IRS introduced a special form (8829) which must be filed to claim the deduction. If you are getting the idea that home office deductions aren't a do-it-yourself proposition, you're right! The rules are quite complex BUT they can be rewarding for those who know how to apply them properly. We can put you on the right track quickly and efficiently.



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