Wm. F. Horne & Co., PLLC

March 2012 Due Date Reminders

2012-03-05T15:46:00.000-06:00

March 2012 Due Date Reminders – Individual

March 12 Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 12.

Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

March 15 Time to Call For Your Tax Appointment

It is only one month until the April due date for your tax returns. If you have not made an appointment to have your taxes prepared, we encourage you do so before it becomes too late.

Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us.

Even if you think you might need to go on extension, it is best to prepare the return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you.

We look forward to hearing from you.

March 2012 Due Date Reminders - Business

March 15 Social Security, Medicare and Withheld Income Tax

If the monthly deposit rule applies, deposit the tax for payments in February.

March 15 Non-Payroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in February.

March 15 Corporations

File a 2011 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you need an automatic 6-month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information and Other Returns, and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004.

March 15 S-Corporation Election

File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2012. If Form 2553 is filed late, S treatment will begin with calendar year 2013.

March 15 Electing Large Partnerships

Provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner’s Share of Income (Loss) From an Electing Large Partnership, or a substitute Schedule K-1. This due date is effective for the first March 15 following the close of the partnership’s tax year. The due date of March 15 applies even if the partnership requests an extension of time to file the Form 1065-B by filing Form 7004.

Those Gold Sales May Be Taxable

2012-02-28T07:30:00.000-06:00

If you took advantage of the escalating gold and silver prices and made any sales of gold, silver, gems, jewelry, or the like during 2011, you are required to report the sales on your tax return. Whether or not the sales are subject to tax, and at what tax rate, depends upon the type of item sold and your tax basis for the item.

Determining Basis— Generally, your tax basis is what you originally paid for the item, assuming that you can recall the amount. It may be difficult to remember how much you paid for an item; however, if the cost was significant, you hopefully have documentation that can verify the price. Without documentation, you are at the mercy of the IRS should you be audited! Even more complicated is determining the value of an item acquired as a gift. Your tax basis for a gift generally is the same basis as it was for the item in the hands of the individual who gave you the gift. Meanwhile, the basis for an item acquired by inheritance is generally the fair market value of the item on the date of the inheritance. As you can see, simply determining the basis for the items that you sold can be complicated.

Types of Items Sold— Not all items are taxed the same. The percentage depends on whether the item was held for personal use or for investment purposes and whether or not the item is classified as a collectible. A higher maximum tax rate applies to collectibles than to other capital assets.

Jewelry—Generally, jewelry that is held for personal use is excluded from the definition of collectibles and is taxed the same as any other personal use property. Losses are thus not allowed, and gains are taxed as either short-term or long-term capital gains. For the most part, jewelry that an individual may choose to sell will have been owned for over a year, and the gain will be taxed at the long-term rate, which, for 2011, is a maximum of 15% (0% to the extent that the taxpayer is in the 15% regular tax bracket or lower). Beware, however, as some jewelry may include gold or silver coins that are considered collectible items and thus may be taxed at a higher rate, as explained below.
Collectibles—Gold and silver coins and bullion are included on the IRS’s list of collectibles. Unlike jewelry, the sale of “collectibles” can result in either a taxable loss or a taxable gain. In addition, collectible gains are taxed at a maximum rate of 28%, as opposed to a maximum of 15% for other capital assets that are held long-term. The maximum rate does not imply that all collectible gains are taxed at 28%. A taxpayer in a lesser tax bracket will be taxed at that lesser rate.

If you have questions related to selling jewelry and collectibles, please give our office a call.

Schedule Cs in the IRS’ Bull’s-eye

2012-02-23T07:30:00.000-06:00

Schedule C is the form that unincorporated sole proprietor businesses use to report their income and expenses as part of their individual tax returns. Schedule Cs have been center stage in recent IRS “tax gap” estimates.

The tax gap is defined as the amount of tax liability faced by taxpayers that is not paid on time. This past January they released the tax gap figures for 2006. You might say that 2006 was quite a ways back, but you have to remember returns are filed in the subsequent year and then the information must be compiled and analyzed. Thus, most Treasury reports based on filed tax returns are based on information from several years back.

The 2006 report essentially mirrors the 2001 report, except the tax gap has increased from $345 billion to $450 billion. Of that $450 billion, approximately $372 billion is attributed to under reporting in the following categories:

Non-business under reporting 73
Schedule C under reporting 193
Overstated deductions, exemptions & credits 42
Payroll taxes 20
Corporate income tax 39
Estate tax 5

Since Schedule C under reporting represents the largest category, and over half of the under reporting, it is no wonder that the audit rate for Schedule C returns has increased substantially and is among the highest of the rates. Based on 2010 IRS figures, Schedule Cs have a 300% higher chance of being audited than either a partnership or an S-Corporation. Of the Schedule Cs audited in 2010, the average adjustment exceeded $9,000.

Among the areas of under reporting are:

Personal Expenses – Over-deductions attributable to the inclusion of non-deductible personal expenses and the failure to allocate for personal use of a vehicle.
Under reporting Income – Failure to include all income. To counter this problem, the IRS has initiated merchant card and third-party reporting that will provide the IRS with all income from credit card sales.
Worker Misclassification - Misclassifying workers as independent contractors instead of treating them as W-2 employees, and thereby avoiding the employer’s share of payroll, unemployment, and other taxes. The IRS currently has a Voluntary Classification Settlement Program in effect that allows eligible taxpayers to voluntarily reclassify their workers for federal employment tax purposes. Voluntary programs usually precede more aggressive compliance measures.
Failing to Issue Information Returns – Generally, businesses are required to issue 1099s for fees they pay to individuals other than employees or to corporations. This is a huge area of non-compliance and denies the IRS the ability to ensure the payees are properly reporting their income. In an audit where a 1099 should have been issued and was not, the IRS will generally disallow the deduction for those services. The 2011 Schedule C asks two catch-22 questions: “Did you make payments that would require you to file a Form 1099?” followed by “If yes, did you or will you file all required Forms 1099?”
Hobby Losses – Some businesses are actually hobbies where there is no real intention of ever making a profit. Businesses deemed to be hobbies have special rules that limit the expense deductions to the income and require the deductions to be taken as an itemized deduction on Schedule A. Watch for a future article on hobby losses that will appear in the March newsletter.

If you have questions related to your Schedule C or any of the issues in this newsletter, please give our office a call.

Don’t be Scammed by Tax Season Cyber Criminals

2012-02-21T07:30:00.000-06:00

Now that tax season is upon us, so are the e-mail scammers pretending to be the IRS. Most of these scams fraudulently use the IRS name, logo, and/or website header as a lure to make the communication appear more authentic and enticing. They lead you to believe you had a refund of some sort coming and request personal information. The goal of these scams - known as phishing - is to trick you into revealing your personal and financial information. The scammers can then use your information - like your Social Security number, bank account, or credit card numbers - to commit identity theft or steal your money.

DON’T BE A VICTIM – THE IRS DOES NOT INITIATE E-MAIL CORRESPONDENCE

The Internal Revenue Service receives thousands of reports each year from taxpayers who receive suspicious e-mails, phone calls, faxes, or notices claiming to be from the IRS. If you find something suspicious, you should immediately call our office before responding. In fact, it is a good policy to check with our office before responding to any inquiry from the IRS or state or local tax agencies.

Here are some tips you should know about phishing scams.

1. The IRS never asks for detailed personal and financial information like PIN numbers, passwords, or similar secret access information for credit card, bank, or other financial accounts.

2. The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. If you receive an e-mail from someone claiming to be a representative of the IRS or directing you to an IRS site:

Do not reply to the message.
Do not open any attachments. Attachments may contain malicious code that will infect your computer.
Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, you may have compromised your financial information. If you entered your credit card number, contact the credit card company for guidance. If you entered your banking information, contact the bank for the appropriate steps to take. The IRS website provides additional resources that can help. Visit the IRS website and enter the search term “identity theft” for additional information.

3. The address of the official IRS website is http://www.irs.gov/. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site.

4. If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS but you suspect he or she is not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious e-mail to phishing@irs.gov.

If you have any questions or doubts related to a letter, phone call, or e-mail from the IRS or other taxing authorities, please call our office before responding or providing any financial or personal information. Better safe than sorry!

It’s Not Too Late

2012-02-16T07:30:00.000-06:00

It’s not too late to make an IRA and/or SEP contribution or undo a Roth IRA conversion for 2011.

Generally, after the close of the year you can no longer take steps to alter the outcome of your tax return. However, both IRA contributions and SEP contributions can be made for a year after it has closed, and if you converted a traditional IRA into a Roth IRA, you can undo that conversion after the close of the year. Here are the details:

Traditional IRA Contributions - IRA contributions (tax-deductible and non-deductible) for 2011 can be made up to and including the un-extended filing due date for your 2011 tax return, which is April 17, 2012. The maximum contribution allowed is $5,000 ($6,000 if age 50 or over) for each taxpayer. The annual maximum must be allocated between traditional and Roth IRA contributions.

If you are an active participant in an employer-sponsored plan, the IRA contributions are phased out for higher income taxpayers. The traditional IRA AGI phase-outs for 2011 are: between $90,000 and $110,000 for married individuals filing jointly and individuals qualifying as a surviving spouse, $56,000 and $66,000 for unmarried individuals, and $0 to $10,000 for married individuals filing separately.

Where one spouse participates in an employer plan but the other does not, the non-participating spouse’s phase-out is between $169,000 and $179,000 for 2011.

SEP Plan Contributions – SEP plans are tax-deductible retirement plans for self-employed individuals. Contributions can be made up to and including the extended due date, which for the 2011 tax return is October 15, 2012. The maximum annual contribution to a SEP plan is the lesser of “25% of compensation” (20% of net profit after deducting the SEP contribution for the self-employed proprietor’s contribution) or $49,000. SEP plans have no AGI phase-out limitations and no catch-up contributions for older individuals.

Roth IRA Conversions – If you made a conversion from a traditional to a Roth IRA, there is a good chance the entire conversion is taxable. Generally, people plan those conversions for years with low income or when the stock market is down and the IRA value at the time of the conversion is low. However, if subsequent to the conversion conditions change, and you wish you hadn’t made the conversion, or you simply decide you can’t afford to pay the tax on the conversion, you can undo the conversion up to and including the extended due date of the return (October 15, 2012 for 2011 returns). However, don’t wait until the last minute to make that decision because it will require some paperwork on the part of the trustee (bank, broker, etc.).

Other plans – Other plans such as Simple Plans and Keogh plans also permit contributions in 2012 for 2011.

For additional information related to making retirement plan contributions after the close of the tax year, please give our office a call.

New Reporting Requirement for Individuals with Foreign Financial Assets

2012-02-14T07:30:00.000-06:00

New for 2011 is a requirement for any individual who, during the tax year, holds any interest in a “specified foreign financial asset” to complete and attach Form 8938 to his or her income tax return if a reporting threshold is met. The reporting threshold varies depending on whether the individual lives in the U.S. and files a joint return with his or her spouse. For example, someone who is not married and doesn’t live abroad will need to file Form 8938 for 2011 if the total value of his or her specified foreign financial assets was more than $50,000 as of December 31, 2011, or more than $75,000 at any time during 2011. For married taxpayers filing a joint return and living in the U.S., the threshold amounts are doubled. The thresholds also are higher for taxpayers residing abroad.

Specified foreign financial assets include financial accounts maintained by foreign financial institutions and other investment assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counter parties that are non-U.S. persons, and interests in certain foreign entities. However, no disclosure is required for interests that are held in a custodial account with a U.S. financial institution.

The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, additional penalties of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.

To the extent the IRS determines that the individual has an interest in one or more foreign financial assets but he or she doesn't provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 (or other applicable reporting threshold amount) for purposes of assessing the penalty.

No penalty will be imposed if the failure to file the 8938 is due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information isn't reasonable cause.

In addition, if it is shown that the individual failed to report the income from the foreign financial account on his or her income tax return, a 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset.

If you have questions related to this issue or are uncertain if you are required to file Form 8938, please give our office a call to discuss your particular situation.

Nominees Have 1099 Reporting Requirements

2012-02-10T07:30:00.001-06:00

Candidates seeking political offices aren’t the only individuals who are “nominees.” For tax purposes, if you receive, in your name, income that actually belongs to someone else, you are also a nominee. Being a nominee means you must file with the IRS a 1099 form appropriate to the type of income you received and give a copy of the 1099 to the actual owner of the income. However, if the other person is your spouse, no 1099 filing is required.

The most common nominee situation is where a taxpayer and one or more other individuals have a joint financial account, and each person contributed toward the principal that was deposited. For example, let’s say that you and your brother have a joint savings account at Big Bank, into which your brother deposited 30% of the funds and you put in the rest. You’ve agreed to share the income in proportion to your contributions to the account. The annual interest income was $500. Your name and Social Security number were listed on the 1099-INT issued by Big Bank. Of the $500, $150 is actually your brother’s interest and $350 is yours. You will need to issue to the IRS and your brother a 1099-INT for $150 that identifies you as the payer and him as the recipient. On Schedule B of your tax return, you will report $500 of interest income from Big Bank, but will also enter “Nominee Distribution” and $150 as a subtraction. Thus, only your $350 will be taxed on your return. On his return, if he is required to file, your brother will report $150 of income with your name, not the bank’s, as the payer.

If you are a nominee for ordinary dividends received, the same method applies for allocating the income on Schedule B, but Form 1099-DIV is issued instead of 1099-INT. If capital gain distributions from a mutual fund or broker are nominee income, you report only your ownership share on your return and attach an explanation statement to your return; the capital gain distributions would not be included on a 1099-DIV that you issue as the payer.

If, as a nominee, you receive gross proceeds from selling stocks or bonds, you will need to issue a Form 1099-B to the IRS and the actual owner of the income. As with the interest and dividend income received by a nominee, rules are in place for completing your return so that only your portion of the net gain or loss from the sales is included in your income.

Forms 1099-INT and 1099-DIV that you issue as a nominee must be given to the recipients by January 31, while the deadline for giving Forms 1099-B to the other owner(s) is February 15. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28. The 1099s must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS along with the required 1096 transmittal form. This service provides recipient and file copies for your records.

If you have questions, please call our office.

February 2012 Business Due Date Reminders

2012-02-08T07:30:00.000-06:00

February 10 - Non-Payroll Taxes

File Form 945 to report income tax withheld for 2011 on all non-payroll items. This due date applies only if you deposited the tax for the year in full and on time.

February 10 - Social Security, Medicare and Withheld Income Tax

File Form 941 for the fourth quarter of 2011. This due date applies only if you deposited the tax for the quarter in full and on time.

February 10 - Certain Small Employers

File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2011. This due date applies only if you deposited the tax for the year in full and on time.

February 10 - Farm Employers

File Form 943 to report Social Security and Medicare taxes and withheld income tax for 2011. This due date applies only if you deposited the tax for the year in full and on time.

February 10 - Federal Unemployment Tax

File Form 940 for 2011. This due date applies only if you deposited the tax for the year in full and on time.

February 15 - Social Security, Medicare and Withheld Income Tax

If the monthly deposit rule applies, deposit the tax for payments in January.

February 15 - Non-Payroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in January.

February 16 - All Employers

Begin withholding income tax from the pay of any employee who claimed exemption from withholding in 2011, but did not give you a new Form W-4 to continue the exemption this year.

February 28 - Payers of Gambling Winnings

File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2011. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to April 2. The due date for giving the recipient these forms was January 31.

February 28 - Informational Returns Filing Due

File information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2011. There are different forms for different types of payments. These are government filing copies for the 1099s issued to service providers and others (see January 31).

If you file Forms 1098, 1099, or W-2G electronically, your due date for filing them with the IRS will be extended to April 2. The due date for giving the recipient these forms was January 31.

February 29 - All Employers

File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2011. If you file Forms W-2 electronically, your due date for filing them with the SSA will be extended to April 2. The due date for giving the recipient these forms was January 31.

February 29 - Large Food and Beverage Establishment Employers

File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to April 2.

February 2012 Individual Due Date Reminders

2012-02-06T13:57:00.001-06:00

February 10 - Tax Appointment

If you don’t already have an appointment scheduled with our office, you should call to make an appointment that is convenient for you.

February 10 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during January, you are required to report them to your employer on IRS Form 4070 no later than February 10.

Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

February 15 - Last Date to Claim Exemption from Withholding

If you claimed an exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.

New Credits for Hiring Veterans

2012-01-27T07:30:00.000-06:00

Congress recently passed legislation that extends and expands the Work Opportunity Credit (WOTC) for hiring unemployed veterans. This effectively gave a one-year lease on life to the WOTC, but only with respect to qualified veterans who begin work for the employer before January 1, 2013. For all other classifications, the credit ended at the close of 2011.

Under the new law, effective for individuals who begin work for the employer after November 21, 2011, a qualified veteran is a veteran who is certified by the designated local agency as falling within one of the following five categories:

Veteran Who is a Member of a Family Receiving Food Stamps for At Least Three Months - The individual is a member of a family receiving assistance under a food stamp program under the Food and Nutrition Act of 2008 for at least three months, all or part of which is during the 12-month period ending on the hiring date. The maximum qualifying first-year wage taken into account is $6,000. Thus, the maximum WOTC is $2,400 (.4 x $6,000).
Veteran Entitled to Compensation for a Service-Connected Disability Hired Within First Year after Separation from Service - The individual is entitled to compensation for a service-connected disability, and has a hire date that isn’t more than one year after having been discharged or released from active duty. The maximum qualifying first-year wage taken into account is $12,000. Thus, the maximum WOTC is $4,800 (.4 x $12,000).
Veteran Entitled to Compensation for a Service-Connected Disability with Six Months of Unemployment in the Year Preceding the Hire Date - The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date that equal or exceed six months. The maximum qualifying first-year wage taken into account is $24,000. Thus, the maximum WOTC is $9,600 (.4 x $24,000).
Veteran Has Aggregate Periods of Unemployment Exceeding Four Weeks in the Year Preceding the Hire Date - The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed four weeks (but less than six months). The maximum qualifying first-year wage taken into account is $6,000. Thus, the maximum WOTC is $2,400 (.4 x $6,000).
Veteran Has Aggregate Periods of Unemployment Exceeding Six Months in the Year Preceding the Hire Date - The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. The maximum qualifying first-year wage taken into account is $6,000. Thus, the maximum WOTC is $5,600 (.4 x $14,000).

Fast-track qualification process for qualified veterans - Effective for individuals who begin work for the employer after November 21, 2011, a veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of:

If he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than six months during the 1-year period ending on the hiring date.
If he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than four weeks (but less than six months) during the 1-year period ending on the hiring date.

Tax-exempt employers qualify for the credit - Effective for qualified veterans who begin work for the employer after November 21, 2011, a tax-exempt employer may claim a credit for the WOTC it could claim for hiring qualified veterans if it were not tax-exempt.

Credit Limited to OASDI - The credit is allowed against the OASDI (Social Security) tax that the exempt employer would otherwise have to pay on the wages of all its employees during the one-year period beginning with the day the qualified veteran goes to work for the tax-exempt organization and cannot exceed the OASDI tax for that one year period.
Other limits applicable to tax-exempt employers:

The general credit percentage of qualifying first-year wages is 26% (instead of 40%).
The credit percentage of qualifying wages is 16.25% (instead of 25%) for a qualified veteran who has completed at least 120, but less than 400, hours of service for the employer.
The tax-exempt employer may only take into account wages paid to a qualified veteran for services in furtherance of the activities related to the purposes or function constituting the basis of the organization's exemption.

If you would like additional information related to the WOTC and hiring unemployed veterans, please give our office a call.

January 2012 Due Dates

2012-01-24T07:30:00.000-06:00

January 2012 Individual Due Dates

January 31 - File 2011 Return to Avoid Penalty for Not Making 4th Quarter Estimated Payments File 2011

Return to Avoid Penalty for Not Making 4th Quarter Estimated Payment If you file your prior year’s return and pay any tax due by this date, you need not make the 4th Quarter Estimated Tax Payment (January calendar).

January 2012 Business Due Dates

January 31 - 1099s Due To Service Providers

If you are a business or rental property owner and paid $600 or more for the services of individuals (other than employees) during a tax year, you are required to provide Form 1099 to those workers by January 31st. "Services" can mean everything from labor, professional fees and materials, to rents on property. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2012 (April 2, 2012 if filed electronically). They must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. Please call this office for preparation assistance.

Payments that may be covered include the following:

Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish
Compensation for workers who are not considered employees (including fishing boat proceeds to crew members)
Dividends and other corporate distributions
Interest
Amounts paid in real estate transactions
Rent
Royalties
Amounts paid in broker and barter exchange transactions
Payments to attorneys
Payments of Indian gaming profits to tribal members
Profit-sharing distributions
Retirement plan distributions
Original issue discount
Prizes and awards
Medical and health care payments
Debt cancellation (treated as payment to debtor)

January 31 - W-2 Due to All Employees

All employers need to give copies of the W-2 form for 2011 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting.

January 31 - File Form 941 and Deposit Any Undeposited Tax

File Form 941 for the fourth quarter of 2011. Deposit any undeposited Social Security, Medicare and withheld income tax. (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.

January 31 - Certain Small Employers

File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2011. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more for 2011 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return.

January 31 - File Form 943

All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2011. Deposit any undeposited tax. (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.

January 31 - W-2G Due from Payers of Gambling Winnings

If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2011.

January 31 - File Form 940

Federal Unemployment Tax File Form 940 (or 940-EZ) for 2011. 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.

January 31 - File Form 945

File Form 945 to report income tax withheld for 2011 on all non-payroll items, including back-up withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (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.

Are You Liable for a Gift Tax Return?

2012-01-20T07:30:00.000-06:00

Frequently, taxpayers think that gifts of cash, securities, or other assets they give to other individuals are tax-deductible and, in turn, the gift recipient sometimes thinks income tax must be paid on the gift received. Nothing is further from the truth. To fully understand the ramifications of gifting, one needs to realize that gift tax laws are related to estate tax laws.

When a taxpayer dies, the value of his or her gross estate (to the extent it exceeds the excludable amount for the year) is subject to estate taxes. Naturally, individuals want to do whatever they can to maximize their beneficiaries’ inheritances and limit the estate’s amount of inheritance tax. Because giving away one’s assets before dying reduces the individual’s gross estate, the government has placed limits on gifts, and if those gifts exceed the limit, they are subject to gift tax that must be paid by the giver.

Gift Tax Exclusions – Certain gifts are excluded from the gift tax.

Annual Exclusion – This is the annual amount that an individual can give to any number of recipients. This amount is adjusted for inflation, and for 2011, it is $13,000. For example, a taxpayer with five children could have given $13,000 to each child in 2011 without any gift tax consequences. The taxpayer cannot deduct the dollar value of the gifts, and the value of the gifts is not taxable to the recipients. Generally, for a gift to qualify for the annual exclusion, it must be a gift of a “present interest.” That is, the recipient’s enjoyment of the gift can't be postponed into the future. For gifts to minor children, there is an exception to the “present interest” rule where a properly worded trust is established.
Lifetime Limit – In addition to the annual amounts, taxpayers can use a portion of the federal estate tax exemption (it is actually in the form of a credit) to offset an additional amount during their lifetime without gift tax consequences. However, to the extent this credit is used against a gift tax liability, it reduces the credit available for use against the federal estate tax at the taxpayer’s death. For 2011, the credit-equivalent lifetime gift tax exemption is $5 million and is the same as for the estate tax exemption.
Education & Medical Exclusion – In addition to the amounts listed above, there are two additional types of gifts that can be excluded from the gift tax:

Amounts paid by one individual on behalf of another individual directly to a qualifying educational organization as tuition for that other individual.
Amounts paid by one individual on behalf of another individual directly to a provider of medical care as payment for that medical care. Payments for medical insurance qualify for this exclusion.

If, during the year, your gifts exceed the sum of the annual, education, and medical exclusions, you are required to file a gift tax return (even if you have not exceeded the lifetime limit).

Gifts of Capital Assets – Sometimes a gift might be in the form of securities, real estate, or other items that have appreciated in value. In these situations, the gift value is the item’s fair market value at the time of the gift. However, when the recipient of the gift sells that asset, he or she will measure his or her gain from the giver’s tax basis. For example, a parent gifts 100 shares of XYZ, Inc. worth $9,000 to his or her child. If the parent originally paid $5,000 for the shares and if the child sold the shares for $9,000, the child (the recipient) would be liable for the tax on the $4,000 gain. In effect, the parent (giver) transferred the taxable gain in the stock to the child. This can be beneficial from a tax standpoint if the child is not subject to the “kiddie tax” rules and is in a lower tax bracket than the parent. Caution: Watch out for unintended gifts such as an elderly parent placing a child on the title of the home or other assets.

Gift-Splitting by Married Taxpayers - If the gift-giver is married and both spouses are in agreement, gifts to recipients made during a year can be treated as split between the husband and wife, even if the cash or property gift was made by only one of them. Thus, by using this technique, a married couple can give $26,000 a year to each recipient under the annual limitation discussed previously.

If you have additional questions or would like our office to assist you in planning an appropriate gifting strategy, please give us a call.

2012 Standard Mileage Rates Announced

2012-01-18T11:14:00.001-06:00

The Internal Revenue Service has issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes.

Beginning on January 1, 2012, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:

55.5 cents per mile for business miles driven (includes a 23 cents per mile allocation for depreciation);
23 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 is the same as the rate for the second half of 2011, while the rate for medical and moving miles is down a half-cent from the July through December 2011 rate.

The standard mileage rates for business, medical, and moving uses are based on an annual study of the fixed and variable costs of operating an automobile that is conducted by an independent contractor for the IRS.

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 more than four vehicles used simultaneously (i.e., a fleet).

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

If you have any questions, please call our office.

It’s Tax Time! Are You Ready?

2012-01-13T10:13:00.000-06:00

If you’re like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Unfortunately, the job of pulling together the records for your tax appointment is never easy, but the effort usually pays off when it comes to the extra tax money you save! When you arrive at your appointment fully prepared, you’ll have more time to:

Consider every possible legal deduction;
Better evaluate your options for reporting income and deductions to choose those best suited to your situation;
Explore current law changes that affect your tax status;
Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives

The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but later year returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your taxes.

For example, the law allows choices in transactions such as:

Sales of property

If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time, as you receive payments from the buyer.

Depreciation

You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the cost over a number of years, or in certain cases, you can deduct them all in one year.

Higher Education Expenses

If you are paying college expenses for yourself, your spouse, or your dependent(s), you may qualify for a tax benefit of either an above-the-line tax deduction or a tax credit.

Game Show Winners and Taxes

2012-01-03T07:30:00.000-06:00

If you like to watch game shows and enjoy all the excitement that goes with watching contestants win prizes, then you can add another element to your viewing pleasure by considering how the contestants will handle the IRS Form 1099 they receive for the value of the items they won. You may not have thought much about it, but the contestants must pay federal and applicable state income tax on the cash and the value of the goods they win on game shows.

The lucky ones are those who simply win cash. They will have money to pay the taxes— unless, of course, they overlook the tax issue and spend all the winnings and end up with a tax liability they cannot pay. All that winning excitement turns into a stressful financial problem, and they probably end up wishing they hadn’t won.

The winners of non-cash prizes have more complex issues. They are required to pay taxes on the fair market value of the prize. The problem here is that game shows generally report prizes at full retail value and not the price the items would fetch on the open market. Take for example a contestant who wins a trip. Typically, hotel packages are valued by the game shows at their top retail value, not the discounted rates that can be obtained online or through a travel agent. Thus, those who accept the trip may not be able to afford the taxes on the trip, and after a week in paradise, they find themselves in tax purgatory.

The issue becomes a real financial drag for the taxpayer who is unable to pay the tax liability because they end up with failure-to-pay (and perhaps underpayment of estimated tax) penalties and interest that the IRS keeps tacking on until the liability is finally paid in full.

The tax issues can be avoided by refusing the non-cash prize, especially if the prize is something of no use to the winner. Another option for easy-to-sell items is to accept the prize and then sell it (not to a relative or friend). The gap between retail and real value can be especially harmful for winners who accept a prize with the intent to resell it: They're paying taxes on a value they have no hope of recouping, which eats into the profits.

Remember back in 2004 when Oprah Winfrey gave away to everyone in the audience a Pontiac? The sticker price of those cars was $28,500, and that amount had to be claimed as income by the audience members. If the person who received a car was in the 25% tax bracket, they were looking at a tax bill of $7,125. So the free car wasn’t free and could have ended up as a tax headache for some.

One famous contestant on “Survivor” did not report his $1 million winnings, claiming that CBS had told him the network was responsible for the taxes. It turns out that the contract he signed with CBS specifically stated that he was responsible for the taxes, and as a result, Richard Hatch ended up in federal court, where he was convicted of tax evasion and sentenced to a 51-month prison term.

When watching “Extreme Makeover: Home Edition,” you probably never thought about the tax implications to the beneficiaries of the home makeover. The makeover is classified as winnings and subject to income tax, as is the trip the homeowners took while the makeover was in progress. Then there is the real property tax issue; in most jurisdictions, the property taxes are based on the value of the home. Once the improvements are made, the homeowner’s property taxes will substantially increase.

As you can see, there is a down side to being a game show winner! If you have more questions related to prize winnings, please give our office a call.

Maximize Your Charitable Deductions

2011-12-30T09:52:00.000-06:00

As the end of the year approaches, there are still things you can do to increase and properly document your charitable contributions for 2011. Here is a brief rundown:

Non-cash contributions – If you have used clothing or household goods that are in good or better condition that you don’t use any longer, contribute them to a charity thrift shop before the end of the year. Don’t forget: a receipt from the charity is required to document the gift. If the gift’s fair market value (FMV) is more than $500, you will also need an itemized list of the items contributed, how and when each was acquired, and the cost. If the FMV of what you’ve donated is greater than $5,000, or you contributed a vehicle, call our office for additional documentation requirements. A receipt from the charity is not required if the gift’s value is less than $250 and the donation was made at an unattended drop site. However, you will need to document the donation yourself.

Cash Donations – All cash donations must be documented either by a receipt from the charity or by a bank record such as a check, bank statement, or credit card payment. You can no longer claim contributions of cash dropped into the offering plate or Christmas kettle. So, be wise and drop a check instead. If you regularly tithe at a house of worship, you might consider pre-paying your 2012 tithing and moving the deduction into 2011. In doing so, some taxpayers that marginally itemize may be able to itemize every other year and take the standard deduction in alternate years.

Charity Volunteer Expenses – If you volunteer your time for a charity, you may qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a charity, there are deductions permitted for out-of-pocket costs incurred while performing the services. Possible expenses might include:

Away-from-home travel expenses while performing services for a charity, plus lodging and meals at 100 percent, provided there is no significant element of personal pleasure associated with the trip.
Use of your personal vehicle while performing services for the charity, generally at 14 cents per mile. Be sure to keep a written record of the name of the charity, the date the vehicle was used for charitable purposes, and the number of miles driven.
Upkeep and cost of uniforms that aren’t suitable for everyday use and if worn while performing the charitable service.

No charitable deduction is allowed unless the contribution is substantiated with a written acknowledgment from the charitable organization. The documentation must specify the need for your services and include an acknowledgement by the charity that the expenses claimed were required; be sure to maintain the receipts for the expenses.

Vehicle Donations - Generally, the deduction for used cars, boats, planes, etc. is limited to $500. More than $500 can be claimed based upon the charity’s use of the vehicle or the actual amount the charity received from the sale of the vehicle. You will need Form 1098-C from the organization to claim the deduction and attach it to your return. Call for further details related to claiming more than $500.

Timing of Acknowledgments – Whenever you are required to have an acknowledgment from a charity for donations you’ve made, you must have that letter or statement in your hands by the earlier of the date you file the return for the year of the donation or the extended due date of that return.

If you have additional questions or would like to determine how a specific donation will impact your tax return, please give our office a call.

Unmarried Couples and Home Mortgage Interest

2011-12-12T07:30:00.000-06:00

It is becoming increasingly common for couples to live together and remain unmarried, which can lead to potential tax problems when they share the expenses of a home but only one of the couple is liable for the debt on that home.

Home mortgage interest can generally be deducted only by a person who is legally obligated to pay the mortgage (in other words, a person who is named as an obligor on the mortgage document). However, there is an exception to the preceding general rule for interest paid on a real estate mortgage when a person is a legal or equitable owner of the real estate but is not directly liable for the debt.

For example, if the one who is not liable on the mortgage makes the payment, that individual is not allowed to deduct the interest portion of the payment and neither is the other person, because he or she did not pay it. This can lead to some complications where one of the couple is the bread winner and would benefit tax-wise from an interest deduction, but the other person is the liable party on the loan. It is not uncommon for couples who both work to share the mortgage payments in the mistaken belief that they can each deduct their share of the mortgage interest on their individual tax returns.

Although state law governs what constitutes equitable ownership, equitable ownership can generally be established if both parties are on title to the property even if only one is liable on the loan. The premise behind equitable ownership is that an individual is protecting his or her ownership in the home by making some or all of the mortgage payments.

This position was recently upheld in a 2011 Tax Court decision where the court denied a taxpayer’s home mortgage interest deduction that she paid until she became co-owner of the property with her boyfriend and was legally obligated to make the mortgage payments.

If you are in a similar situation and have questions related to sharing potentially tax deductible expenses, please give our office a call.

Misclassifying Workers Can Be Costly!

2011-12-07T11:49:00.001-06:00

Hiring independent contractors instead of employees can save a lot of money in employment taxes and employee benefits. And it can be a mine field of tax problems if workers are misclassified as independent contractors when they should have been treated as employees.

The three primary characteristics the IRS uses to determine the relationship between businesses and workers are behavioral control, financial control, and the type of relationship.

Behavioral Control - Covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
Financial Control - Covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.
Type of Relationship – Relates to how the workers and the business owner perceive their relationship.

If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

This issue has been heating up recently as the government looks for ways to reduce the deficit. A recent study by the IRS estimates there are 3.4 million workers misclassified as independent contractors, causing a loss of $2.7 billion in tax revenue.

The IRS initiated an expanded focus on this issue in 2010 and continues to ratchet up enforcement with increased audits, and now the IRS and the Department of Labor have begun to share information and collaborate on this issue.

The IRS just recently announced a Voluntary Classification Settlement Program (VCSP) that allows employers to come into compliance by making a minimal payment covering past payroll. Employers wishing to participate in this program must apply for the program at least 60 days before they want to start treating the workers as employees. To be eligible, the employer must have filed the required 1099 forms for the workers in the previous three years and not be under audit concerning the employees.

If you have questions related to worker classification, please give our office a call.

Report Those Foreign Financial Connections!

2011-11-30T07:30:00.000-06:00

FinCEN is the acronym for the Treasury Department’s Financial Crimes Enforcement Network. FinCEN is a government-wide, multisource, financial intelligence and analysis network tasked with detecting money laundering, terrorist financing, tax evasion, and other financial crimes. To do its job, FinCEN must collect financial data from a multitude of sources, including each U.S. person with connections to foreign financial transactions. This has resulted in a number of reporting requirements imposed upon taxpayers; many taxpayers are unaware that these requirements can result in severe penalties for non-compliance.

Foreign Account Reporting Requirements - Each United States person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value exceeds $10,000 at any time during the calendar year, must report that relationship to the U.S. government each calendar year. This is done by filing Form TD F 90-22.1 (often referred to as FBAR) on or before June 30 of the succeeding year. No extensions of time to file are available, and failing to comply can result in civil penalties up to $10,000. Willful violations are subject to penalties that are the greater of $100,000 or 50% of the account’s balance.
Reporting Foreign Gifts, Bequests and Trusts - Gifts of more than $100,000 from a non-resident alien individual or foreign estate and gifts of more than $14,375 in 2011 ($14,723 in 2012) from foreign corporations or partnerships must be reported. Form 3520 is used to report the gifts and to report ownership in a foreign trust. Failure to comply can result in a penalty of the greater of $10,000 or 35% of the gross value of any property transferred to a foreign trust.
Annual Report of Individuals with Foreign Assets – This is a new reporting requirement for 2011. Generally, U.S. persons with ownership of certain foreign assets not held by a domestic financial institution with an aggregate value of more than $50,000 must file Form 8938 with their tax returns, providing details of the assets. Failure to file can result in penalties of up to 40% of the undisclosed value.

Watch for Overlooked Accounts – You may not realize you have accounts that fall under one or more of these reporting requirements. Don’t overlook accounts where family members in foreign countries have included you on a foreign account or as part owner of a business entity or trust. Don’t overlook foreign retirement savings accounts such as Canadian RRSP and RRIF accounts. Consider business accounts where, as an officer or board member of a company, you may have signature authority over a foreign account.

If you have questions related to these reporting requirements, please give our office a call.

Year-end Capital Gains Strategies

2011-11-28T07:30:00.000-06:00

2011 has produced some significant gyrations in the financial markets that have had an impact on everyone’s portfolios. But for tax purposes, gains and losses are not measured by the increased or decreased value of your portfolio, but by gains and losses recognized from the sale of capital assets during the year. So you still have until the end of the year to structure your gains and losses to suit your particular tax situation.

Conventional wisdom has always been to minimize gains by selling “losers” to offset gains from “winners,” and, where possible, generate the maximum allowable $3,000 ($1,500 for married taxpayers filing separately) capital loss for the year.

As a reminder, the maximum long-term (assets held for more than a year) capital gains are still at the all-time low maximum rate of 15%, and unless changed by Congress, will remain at that rate through 2012. Taxpayers who are in the 15% or lower marginal tax rate actually enjoy a 0% tax rate on long-term capital gains and should do whatever is possible to take advantage of that tax benefit. The capital gains rates are currently scheduled to revert to 20% (10% to the extent a taxpayer is in the 15% or lower tax bracket) in 2013.

Assets that are not held long-term, referred to as short-term capital gains, do not receive the benefits of the special rates afforded long-term capital gains. Taxpayers achieve a better overall tax benefit if they can arrange their transactions so as to offset short-term capital gains with long-term capital losses.

If you exercised incentive (qualified) stock options with your employer this year and you are still holding the stock, selling the stock before year’s end to avoid phantom income created by the alternative minimum tax may be appropriate.

If you are planning substantial gifts to charity or to relatives and have capital assets that have appreciated in value, gifting the appreciated assets rather than cash may be beneficial.

Finally, as an advance warning, the reporting of the sale of capital assets will become significantly more complicated this year. With the advent of brokerage firms being required to track and report basis for stock sales, the transactions for the year will have to be segregated into four possible groups: those for which the broker reported basis and those for which the broker did not know basis, and each of those categories split by short- and long-term transactions. The IRS has developed the new Form 8949 for this purpose. Each category of transactions must be reported on a separate Form 8949, and then the totals transferred to a redesigned Schedule D. The IRS requires this separation of transactions to facilitate its computer matching of transactions.

The actions mentioned above may have additional factors that must be considered and require careful planning. You are encouraged to consult with our office before acting on any of the suggested strategies.

Business Benefits Abound This Year

2011-11-23T07:30:00.000-06:00

There are an abundant number of provisions that provide tax relief to small businesses this year. Just so that you don’t overlook any of these benefits, or in case your business would like to position itself to take advantage of some before the close of the year, here is a brief rundown on many of the business benefits that are available for 2011. Some of these provisions are currently set to expire after December 31, 2011.

Research Tax Credit - A tax credit of up to 20% of qualified expenditures for businesses that develop, design, or improve products, processes, techniques, formulas, or software or perform similar activities. The credit is calculated on the basis of increases in research activities and expenditures.
Work Opportunity Tax Credit – A tax credit of up to 40% based upon a portion of the first-year wages paid to members of certain targeted groups. The credit is generally capped at $6,000 per employee ($12,000 for qualified veterans and $3,000 for qualified summer youth employees).
Differential Wage Payment Credit - Employers who have an average of less than 50 employees during the year and who pay differential wages to employees for the periods they were called to active duty in the U.S. military can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year.
HIRE Retention Credit – In 2010, employers were granted a payroll tax holiday for hiring long-term unemployed individuals. As an incentive to retain those individuals, a non-refundable credit up to $1,000 per employee is allowed to employers who kept those employees on payroll for a continuous 52 weeks. The credit is limited to 6.2% of the employee’s wages, and will be claimed on the 2011 return.
New Energy Efficient Home Credit - An eligible contractor can claim a credit of $2,000 or $1,000 for each qualified new energy efficient home either constructed by the contractor or acquired by a person from the contractor for use as a residence during the tax year.
100% Bonus Depreciation – Businesses are allowed a 100% bonus depreciation on qualified business property purchased and placed into service during the year. This generally includes machinery, equipment, computers, qualified leasehold improvements, etc. (but see limitations on vehicles).
Expensing Allowance – In lieu of depreciating the cost of new assets, a business is allowed to deduct up to $500,000 expensed under Code Sec. 179. The $500,000 maximum amount is generally reduced dollar-for-dollar by the amount of Section 179 property placed in service during the tax year in excess of $2,000,000.
15-year Write-off for Specialized Realty Assets - Qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service during the year are eligible for a 15-year depreciation write-off instead of the normal 39 years.
Business Autos – As part of the benefit of the 100% depreciation, the first-year luxury auto limit is increased to $11,060 for autos and $11,260 for light trucks and vans. For vehicles with a gross vehicle rating of over 6,000 pounds, the luxury auto limits do apply and are subject to the full benefit of the 100% bonus depreciation.
Domestic Production Deduction – This deduction was created to encourage manufacturing and production within the U.S. and provides a deduction equal to 9% of the lesser of net income from qualified production activities or 50% of the W-2 wages paid to employees allocated to the domestic production activity.

If you have questions or wish more detail on any of the provisions or other business issues, please give our office a call.

Year-End Tax-Planning Moves for Businesses & Business Owners

2011-11-21T07:30:00.000-06:00

Expensing Allowance (Sec 179 Deduction) – Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000, and the investment ceiling limit is $2,000,000. Without Congressional intervention, these limits are scheduled for a significant drop in 2012. That means that businesses that make timely purchases will be able to currently deduct most, if not all, of the outlays for machinery and equipment. Additionally, for 2011, the expensing deduction applies to certain qualified real property such as leasehold improvements, restaurant, and retail property.

100% First-year Depreciation – Businesses also should consider making expenditures that qualify for 100% bonus first-year depreciation if the property is bought and placed in service this year. This 100% first-year write-off rate drops to 50% next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or next should try to accelerate their buying plans if doing so makes sound business sense.

Work Opportunity Tax Credit (WOTC) – Take advantage of the WOTC by hiring qualifying workers, such as qualifying veterans, before the end of 2011. Unless extended by Congress, the WOTC won't be available for workers hired after this year.

Research Credit – Make qualified research expenses before the end of 2011 to claim a research credit, which won't be available for post-2011 expenditures unless Congress extends the credit.

Self-employed Retirement Plans – If you are self-employed and haven't done so yet, you may wish to establish a self-employed retirement plan. Certain types of plans must be established before the end of the year to make you eligible to deduct contributions made to the plan for 2011, even if the contributions aren’t made until 2012. You may also qualify for the pension start-up credit.

Increase Basis – If you own an interest in a partnership or S corporation that is going to show a loss in 2011, you may need to increase your basis in the entity so you can deduct the loss, which is limited to your basis in the entity.

These are just some of the year-end steps that can be taken to save taxes. You are encouraged to contact our office so a plan can be tailored to meet your specific tax and financial circumstances.

Year-End Tax Planning Moves for Individuals

2011-11-18T07:30:00.000-06:00

Employer Flexible Spending Accounts – If you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. Keep in mind, however, that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs.

Capital Gains and Losses – We can employ a number of strategies to suit your specific tax circumstances. For example, some taxpayers may be in the zero percent capital gains bracket and should be looking for gains that benefit from no tax. Others may be affected by the wash sale rules when they are trying to achieve deductible losses while maintaining their investment position. Generally, portfolios should be reviewed near year’s end with an eye to minimizing gains and maximizing deductible losses. It may be appropriate for you to call for a year-end strategy appointment to discuss trades and actions that can produce tax benefits for you.

Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting your traditional IRA into a Roth IRA. Even if your income is at your normal level, with the recent decline in the stock markets, the current value of your Traditional IRA may be low, which provides you an opportunity to convert it into a Roth IRA at a lower tax amount. Thereafter, future increases in value would be tax-free when you retire.

Recharacterizing a Roth Conversion – If you converted assets in a traditional IRA to a Roth IRA earlier in the year, you may have seen the assets decline in value due to the recent market decline, and you will end up paying higher than necessary taxes on that higher valuation. However, you may undo that rollover by recharacterizing the conversion by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later (generally after 30 days) reconvert to a Roth IRA.

IRA to Charity Transfer – This year may well be the last chance for taxpayers ages 70-1/2 or older to take advantage of an up-to-$100,000 annual exclusion from gross income for otherwise taxable individual retirement account (IRA) distributions that are qualified charitable distributions. Such distributions aren't subject to the charitable contribution percentage limits and can't be included in gross income. However, the contribution isn’t deductible.

Advance Charitable Deductions – If you regularly tithe at a house of worship, you might consider pre-paying part or all of your 2012 tithing and thus advancing the deduction into 2011. This can be especially helpful to individuals who marginally itemize their deductions, allowing them to itemize in one year and then take the standard deduction in the next.

Income Deferral – Depending upon your particular tax circumstances, it may be appropriate to defer income into 2012 if possible. For example, if you are receiving an employee bonus, you might ask your employer to defer it until 2012.

Income Acceleration – If your taxable income is unusually low because of lower income or larger deductions, you may be able to absorb additional income with no or minimal additional tax. In that case, you should consider accelerating income when possible without incurring penalties. This would include pension plan and IRA distributions and accelerated capital gains.

Prepay Tax Deductible Expenses – Consider prepaying tax-deductible expenses to increase your 2011 itemized deductions. For example, if you have outstanding dental bills, paying the balance before year-end may be beneficial, but only if you already meet the 7.5% of AGI floor for deducting medical expenses, or if adding the dental payments would put you over the 7.5% threshold. You can even use a credit card to prepay the expenses, but you would only want to do so if the interest expense you’d incur is less than the tax savings.

Home Energy Credits – If you are a homeowner, making energy-saving improvements to your residence such as putting in extra insulation or installing energy saving windows and energy efficient heaters or air conditioners may qualify you for a tax credit, if the assets are installed in your home before 2012. The credit is 10% of the cost of the improvement with a cap of $500; the credit is reduced by any credit claimed in prior years for the purchase of other energy-saving property.

Education Credits and Deductions – If someone in your family is attending college and qualifies for an education credit, you can pre-pay the first three months of 2012’s tuition to reach the maximum credit for 2011. In addition, unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses expires after 2011. Thus, prepaying the first three months of 2012’s eligible expenses will increase your deduction for qualified higher education expenses.

Don’t Forget Your Minimum Required Distribution – If you have reached age 70-1/2, you are required to make minimum distributions (RMDs) from your IRA, 401(k) plan and other employer-sponsored retirement plans. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2011, you can delay the first required distribution to the first quarter of 2012, but if you do, you will have to take a double distribution in 2012. Consider carefully the tax impact of a double distribution in 2012 versus a distribution in both this year and next.

Take Advantage of the Annual Gift Tax Exemption – You can give $13,000 in 2011 to each of an unlimited number of individuals, but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes when income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

It's Time for Year-End Tax Planning

2011-11-15T08:35:00.001-06:00

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Regardless of what Congress does late this year or early next, solid tax savings can be realized by taking advantage of tax breaks that are on the books for 2011. For individuals, these include:

• the option to deduct state and local sales and use taxes instead of state and local income taxes;

• the above-the-line deduction for qualified higher education expenses; and

• tax-free distributions by those age 70-1/2 or older from IRAs for charitable purposes.

For businesses, tax breaks available through the end of this year that may not be around next year unless Congress acts include:

• 100% bonus first-year depreciation for most new machinery, equipment and software;

• an extraordinarily high $500,000 Section 179 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property); and

• the research tax credit.

Not all actions will apply to your particular situation, but you will likely benefit from many of them. There also may be additional strategies that will apply to your particular tax situation. We can narrow down the specific actions that you can take once we meet with you. In the meantime, please review this list and contact us at your earliest convenience so we can advise you on which tax-saving moves to make.

Without a Fix, the AMT will Snare Millions of Taxpayers -Are You in the Crosshairs?

2011-10-31T07:30:00.000-05:00

A recently released Congressional Research Service (CRS) Report entitled “The Alternative Minimum Tax for Individuals” examines the effects of the Alternative Minimum Tax (AMT) without yet another Congressional fix.

The AMT is another way of computing an individual’s income tax with limited deductions and the elimination of certain tax preferences. Taxpayers pay the higher of the regular computed tax and the AMT.

When calculating the AMT, taxpayers are allowed to deduct a specified amount that is not taxable; this is called the AMT exemption. This exemption is not automatically inflation-adjusted, like most other tax deductions, but Congress has been adjusting it annually. For example, the permanent exemption amounts are $33,750 for unmarried taxpayers and $45,000 for joint filers. Congress has temporarily increased these amounts over the years, and for 2011, the exemption amounts were $48,450 for unmarried taxpayers and $74,450 for joint filers. Without Congressional action, these AMT exemption amounts will revert to the permanent amounts in 2012.

Another temporary adjustment to the AMT allows a number of personal credits to be deducted from the AMT. The credits affected include child and dependent care credit, elderly and disabled credit, mortgage credit, and the Hope and Lifetime education credits. These will no longer offset the AMT after 2011 unless Congress acts.

The CRS Report notes that without Congressional action, an estimated 30 million taxpayers (approximately 20% of all taxpayers) will be hit by the AMT in 2012. Compare this to the roughly 600,000 taxpayers (approximately 1% of all 1997 taxpayers) who were subject to the AMT in 1997.

A permanent fix to the AMT without adjustments to the regular tax could be expensive. For example, the CRS Report notes that if the AMT is repealed, the lost revenue would be over $1.3 trillion between 2011 and 2022 if the Bush era tax cuts are not extended and over $2.7 trillion if they are extended.

It is difficult to say what the Congressional Tax Reform committee (also referred to as the “super committee”) will come up with in November. But one thing is for sure: some taxpayers will have to pay more to fix the deficit problem.

Last-Chance Opportunity to Deduct General Sales and Use Taxes?

2011-10-27T07:30:00.000-05:00

For 2011, taxpayers have the option of deducting the amount of state and local income tax that they paid during the year or, if they so elect, of deducting their state and local general sales and use taxes as an itemized deduction on their federal income tax return. This choice is currently scheduled to expire at the end of 2011.

If a taxpayer elects to deduct the sales and use tax, then the taxpayer may opt to deduct the actual sales and use taxes paid or use the amount indicated in the tables published by the IRS, alongside certain big ticket items, such as vehicles, motor homes, boats, aircraft, and mobile and prefabricated homes. The IRS tables take the state of residence, taxpayer’s income, sales and use tax rates, and family size into account.

Although the sales tax option primarily benefits taxpayers in states with no state income tax, it can also benefit taxpayers who make big-ticket purchases. Their sales tax deduction may exceed their state income tax deduction when they itemize their deductions.

Thus, if you are considering a big-ticket purchase, making the purchase prior to the end of the year may enable you to benefit from a potentially increased tax deduction. If you do plan on deducting sales tax in 2011 and you are paying state income tax estimates, you should avoid paying the fourth-quarter estimate installment until after the first of the year. Paying it in 2011 provides no additional benefit for 2011 on your federal return when electing to deduct sales and use tax.

Congress has extended this tax provision before, but at this time, there is no way of telling if it will do so again. Please give our office a call if you have concerns about how the sales tax election and purchasing big-ticket items before the end of the year might benefit you.

Don't Miss Out on the Domestic Production Deduction

2011-10-24T07:30:00.000-05:00

Originally enacted to help offset the repeal of a tax break for U.S. exporters, this provision of the tax code provides a deduction for many U.S. businesses that’s allowed for both regular tax and alternative minimum tax (AMT) purposes. And, despite the deduction’s history, it’s fully available to taxpayers who don’t export.

For 2010 and later years, the deduction equals 9% of the net income from eligible activities but cannot exceed 50% of the wages paid to employees whose work relates to the production of the income eligible for the deduction. This means that businesses operated as sole proprietorships or partnerships with no employees aren’t eligible for the deduction. To take advantage of the deduction, such businesses can incorporate and pay W-2 wages to their principals. (However, the decision to incorporate should not be based solely on claiming this credit - many other factors need to be considered.)

The following is an example of how this deduction works. Suppose your business manufactures a product which you wholesale to retailers. Your net income from sales of that product for the year is $550,000, and the wages you paid to your employees to manufacture that product totaled $100,000. Your deduction would be the lesser of 9% of the $550,000 in revenue or 50% of the $100,000 wages. Thus, your business’ domestic production activities deduction would be $49,500 (.09 x $550,000).

The domestic production activities deduction is allowed with respect to the following activities:

The manufacture, production, growth, or extraction of qualifying production property (tangible personal property, computer software, and certain sound recordings) by the taxpayer in whole or in significant part within the United States;
The production of any qualified film by the taxpayer if at least 50% of the total compensation relating to its production is compensation for services performed in the United States by actors, production personnel, directors, and producers;
The production of electricity, natural gas, or potable water by the taxpayer in the United States;
Real property construction in the United States; and
The performance of engineering or architectural services in connection with U.S. real property construction projects.

The deduction is allowed to all taxpayers, including individuals, C corporations, farming cooperatives, estates, trusts, and their beneficiaries. The deduction is allowed to partners and the owners of S corporations and may be passed through by farming cooperatives to their patrons.

A broad range of activities qualify as eligible manufacturing or production activities. The taxpayer's raw materials and finished products may be brand new, or they may be made out of scrap, salvage, or junk material. Manufacturing or producing components used by another party in later manufacturing or production activities is an eligible activity, as is manufacturing or producing finished items from components manufactured or produced by others.

The processing and preparation of food products for sale at wholesale are eligible “production” activities, but the preparation of food and beverages for sale at retail is not.

Construction activities are eligible for the deduction, but only if the construction is of real property and it is performed in the United States. The real property may consist of residential or commercial buildings and permanent structures. Eligible construction activities don’t include tangential services such as hauling trash and debris or delivering materials, even if the tangential services are essential for construction.

Engineering and architectural services are eligible for the deduction, but only if they’re performed in the United States for real property construction projects in the United States.

The foregoing is only an overview of this deduction; careful analysis of its application to each type of manufacturing activity must be done. The deduction applies to both large and small businesses, so don’t assume that just because your business is small, you won’t benefit from the deduction. If you have questions related to how the domestic production deduction might apply to your specific circumstances, please give our office a call.

Save for Retirement Week Promotes Lifelong Security

2011-10-15T07:30:00.000-05:00

When it comes to saving for retirement, there is never a better time than today to assess your prospects toward meeting your goals. And with our nation's leaders declaring Oct. 16 through Oct. 22 as National Save for Retirement Week, you have a great opportunity.

National Save for Retirement Week is the first congressionally endorsed, national event formally calling on all employees to take full advantage of employer-sponsored retirement plans.

Experts predict that retirees will need from 80 percent to 100 percent of their pre-retirement income to maintain their lifestyle after retirement. Yet, surveys show that most Americans remain unprepared for retirement.

Many workers already participate in company sponsored retirement plans, which provide a foundation for retirement saving. And many workers will also be eligible for Social Security benefits at retirement age.

But, for many, that won't be enough. They will need to add additional retirement savings in order to live comfortably and securely during their retirement years – to fulfill their dreams.

For many Americans today it is important to begin saving for retirement – or increasing contributions to meet their goals. National Save for Retirement Week is dedicated to showing how important it is meet retirement objectives by contributing regularly and investing wisely for the long term.

Here are a few simple examples of what it takes to prepare for when it's time to retire:

Save just $10 per week in a deferred compensation plan for 40 years and earn an average rate of return of 7 percent, and you will have an account with over $100,000. That just shows the power of tax-deferred savings.
If you start a little later, don't be discouraged. You can still save more than $73,000, by setting aside $60 a month in a tax-deferred savings account for 30 years and at a 7 percent return.
If you are saving now, and you increase your contributions, you can really make a difference in your final total. Over 30 years, adding $25 to your $100 biweekly contribution can increase your account from $264,327 to more than $330,409, assuming you earn 7 percent.
Saver's Credit. Sometimes saving seems really hard, especially if your income is limited. The government has a special Saver's Credit just for you. If you are eligible, you can actually receive money back when you file your tax return.

There are many resources available on the Internet to provide you with the information you need to plan for retirement. Here are a few sites that will help you get started:

http://www.ssa.gov/ – Social Security Administration – You will find calculators to determine what your benefit will be, information on how to apply for benefits and other information about the government retirement system.
http://www.asec.org/ –American Savings Education Council – A useful calculator helps you estimate how much you need to save to meet your retirement goals as well as a number of savings tips and useful brochures.

If you need assistance planning for your retirement, please give our office a call. We will be happy to help you as you plan for your future.

Tax Tips for Job Seekers

2011-10-03T07:30:00.000-05:00

If you are unfortunate enough to be out work, you may be spending time attending career fairs and traveling around looking and interviewing for employment. Some of the expenses you incur attempting to secure employment may be deductible on your tax return.

Here are several things you should know about deducting costs related to your job search:

To qualify for a deduction, the expenses must be spent on a job search in your current occupation. You may not deduct expenses you incur while looking for a job in a new occupation.
You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income, up to the amount of your tax benefit in the earlier year.
You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.
If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job. Use of your automobile in 2011 for the travel is deductible at 51 cents per job search mile during the first six months of the year and 55.5 cents per mile for the last six months of the year. The fares for other forms of transportation are also deductible. Lodging and 50% of your meal costs also count when traveling away from home overnight.
You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
You cannot deduct job-search expenses if you are looking for a job for the first time.
The job search expenses are included with other miscellaneous itemized deductions that are reduced by 2% of your adjusted gross income, and therefore may be limited. If you use the standard deduction instead of itemizing deductions, you cannot deduct any of your job-search expenses.

If you have additional questions related to job-search expenses, please give our office a call.

Job Opening at Wm. F. Horne & Co., PLLC

2011-09-30T09:12:00.001-05:00

Wm. F. Horne & Co., PLLC, a growing accounting firm in South Mississippi, is looking for an experienced marketing and administrative coordinator. Responsibilities include firm wide marketing efforts, social media management, advertising, firm development, and additional administrative duties. Bachelor's in marketing or a related degree required. Competitive pay and benefits offered.
Interested parties to submit their resume to info@wfhorne-co.com or mail to Office Manager, PO Box 768, Laurel, MS 39441.

How Long are You on the Hook for a Tax Assessment?

2011-09-29T07:30:00.000-05:00

A frequent question from taxpayers is "how long does the IRS have to question and assess additional tax on my tax returns?" For most taxpayers who reported all their income, the IRS has three years from the date of filing the returns to examine them. This period is termed the statute of limitations. But wait – as in all things taxes, it is not that clean cut. Here are some complications:

You file before the April due date – If you file before the April due date, the three-year statute of limitations still begins on the April due date. So filing early does not start an earlier running of the statute of limitations. For example, whether you filed your 2010 return on February 15, 2011 or April 15, 2011, the statute did not start running until April 18, 2011 (because the due date was changed due to a federal holiday in Washington, DC).

You file after the April due date - The assessment period for a late-filed return starts on the day after the actual filing, whether the lateness is due to a taxpayer’s delinquency, or under a filing extension granted by IRS. For example, say your 2010 return is on extension until October 17, 2011 (October 15 falls on a weekend so the due date is the next business day), and you actually file on September 1, 2011. The statute of limitations for further assessments by the IRS will end on September 2, 2014. So the earlier you file those extension returns, the sooner you start the running of the statute of limitations.

If you want to be cautious you may wish to retain verification of when the return was filed. For electronically filed returns, you can retain the confirmation from the IRS accepting the electronically filed return. If you file a paper return, proof of mailing can be obtained from the post office at the time you mail the return.

You file an amended tax return – If after filing an original tax return you subsequently discover you made an error, an amended return is used to make the correction to the original. The filing of the amended tax return does not extend the statute of limitation unless the amended return is filed within 60 days before the limitations period expires. If that occurs, the IRS generally has 60 days from the receipt of the return to assess additional tax.

You understated your income by more that 25% - When a taxpayer underreports his or her gross income by more than 25%, the three year statute of limitations is increased to six years.

In determining if more than 25% has been omitted, capital gains and losses aren’t netted; only gains are taken into account. These “omissions” don’t include amounts for which adequate information is given on the return or attached statements. For this purpose, gross income, as it relates to a trade or business, means the total of the amounts received or accrued from the sale of goods or services, without reduction for the cost of those goods or services. In addition, any basis overstatement that leads to an understatement of gross income constitutes an omission.

You file three years late – Suppose you procrastinate and you file your return three years or more after the April due date for that return. If you owe money, you will have to pay what you owe plus interest and late filing and late payment penalties. If you have a refund due, you will forfeit that refund and perhaps get stuck with a $135 minimum late filing penalty. No refunds are issued three years after the filing due date.

10-year collection period – Once an assessment of tax has been made within the statutory period, the IRS may collect the tax by levy or court proceeding started within 10 years after the assessment or within any period for collection agreed upon by the taxpayer and the IRS before the expiration of the 10-year period.

Remember not to discard your tax records until after the statute has run its course. When disposing of old tax records, be careful not to discard records that prove the cost of items that have not been sold. For example, you may have placed home improvement records in with your annual receipts for the year the improvement was made. You don’t want to discard those records until the statute runs out for the year you sold the home. The same applies to purchase records for stocks, bonds, reinvested dividends, business assets, or anything you will sell in the future and need to prove the cost.

If you are behind on filing your returns and would like to get caught up, please give our office a call. If you discovered you omitted something from your original return and would like to file an amended return, we can help with that as well.

Is It a Business or a Hobby?

2011-09-26T07:30:00.000-05:00

The distinction between a business activity and a hobby is not a black-and-white issue but instead comes in various shades of gray, which makes it a frequent topic in tax court.

What is at stake? - At issue with the business or hobby determination is the treatment of the activity’s expenses. A for-profit business is able to deduct all of its business expenses even if the net result is a loss, whereas a not-for-profit activity (hobby) can only deduct the expenses related to that activity to the extent there is income from that activity. In other words, no loss is allowed. To further complicate the issue, the expenses of a not-for-profit activity are not netted against income like they are for a for-profit business. Instead, they must be deducted as a miscellaneous itemized deduction subject to the 2% of AGI limitation, and the income from the activity must be included in gross income. In addition, the tax code dictates the order in which the not-for-profit activity’s expenses can be used to offset its income:

First the income is offset with otherwise deductible taxes related to the activity. These include taxes that would be deductible even if not related to the not-for-profit activity.
Next comes all the other expenses, excluding asset depreciation.
Then, finally, if any remaining income is left to be offset, asset depreciation can be claimed.

What is the definition of a for-profit activity? - A transaction is entered into for profit if the taxpayer intends to receive income from it overall. For a transaction involving property, the taxpayer must intend to receive income from it or to profit from disposing of it.

Profit must be the primary motive, not merely incidental. A loss deduction is possible where a secondary nonprofit motive exists, as long as the profit motive predominates. As you can see, the determination can be very subjective, and depends on the facts and circumstances of each situation. The following are factors that the IRS and the Tax Court take into consideration when making the determination:

Does the time and effort put into the activity indicate an intention to make a profit?
Does the taxpayer depend on income from the activity?
If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
Has the taxpayer changed methods of operation to improve profitability?
Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
Has the taxpayer made a profit in similar activities in the past?
Does the activity make a profit in some years?
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

For-profit Presumption - An activity is presumed by the IRS to be engaged in for profit for a tax year if it shows a profit for any three or more out of five consecutive years ending in that tax year (or two out of seven years, for breeding, showing, or racing of horses). A taxpayer who hasn’t engaged in an activity for more than five years (seven, for horse breeding, etc.) can elect (on Form 5213 ) to postpone the determination as to whether these presumptions apply until the close of the fourth tax year (sixth, for horse breeding, etc.) after the tax year in which the taxpayer first engages in the activity.

What the Tax Courts have had to say –

Airplane activities - A licensed airplane pilot and mechanic who worked full-time for a commercial airline also engaged in his own airplane activities such as building, improving, and flying several small airplanes. The taxpayer didn’t engage in those other airplane activities in a businesslike manner. He claimed his business plan was to build airplanes from kits and sell them for a substantial profit. Other than income tax returns, flight logs, and a business license (issued during the last month of the last year at issue), the taxpayer didn’t offer into evidence or any written documentation of his business plans or projections, payroll or other employee records, sales contracts he claimed to have entered into, or any other business records regarding his airplane activity. Activity was judged to be not-for-profit (Parker, John G., (2002) TC Memo 2002-76).

Direct marketing activities - Taxpayers’ activities weren’t engaged in for profit where the manner in which taxpayers conducted their distributorship activity (e.g., freely incurring expenses with no realistic plan for recouping them, maintaining detailed records for substantiation purposes but not for use as tools to increase the likelihood of profit, and relying only on the advice of insiders who stood to profit from taxpayers’ participation) virtually precluded any possibility of realizing a profit; they didn’t prove they had a profit motive. Although the court recognized the business reasons for the taxpayers’ recruiting of “downline” distributors (i.e., to benefit “upline” distributors under the manufacturer’s bonus program, and to earn commissions on the downline distributors’ sales), while selling products to customers and downline distributors at cost, it found the likelihood of taxpayers achieving their bonus point goals (their break-even points) was unrealistic, given that they recruited only family, friends, and acquaintances to be downline distributors. And despite four years of losses, the taxpayers had failed to change tactics to increase the likelihood of earning a profit (Lopez, Jorge N. v. Com., TC Memo 2003-142).

On the other hand, a taxpayer engaged in a similar direct marketing operation was held to be engaged in a profit-seeking activity because he kept records of income, expenses, the success rates of his mailings, and the size of his customer base. He changed methods and products to improve results. Although he didn’t have a formal business plan, the manner in which he conducted the activity evidenced an informal business plan. In addition, he didn’t derive personal pleasure from the operations, and didn’t use the business as an excuse to disguise personal travel as business trips (Dworshak, Duane A., (2004) TC Memo 2004-249).

Dog breeding - Taxpayers’ activities were engaged in for profit where the taxpayers, a husband and wife with full-time jobs, built a kennel adequate to house the dogs used in their dog-breeding activities and acquired supplies and equipment suitable for raising them. They exhibited their dogs at shows in attempts to establish a good reputation for their kennel, so that they could demand a higher price for their puppies. Furthermore, they advertised and sent cards to prospective customers to spur sales and kept records necessary to keep track of the kennel’s profitability (Larson, Ronald Dale Sr., (1991) TC Memo 1991-99).

On the other hand, a taxpayer’s activities weren’t engaged in for profit where only five of her 28 dogs generated any income, she didn’t maintain any records that tracked income and expenses attributable to particular dogs, didn’t have any business plan, didn’t do anything to develop a strategy that would make the activity profitable, and, even though the activity generated persistent losses, didn’t alter the manner in which she conducted the activity to increase the likelihood of a profit (Spranger, Melissa S., (1999) TC Memo 1999-93).

Race car driving - A taxpayer’s drag-racing activities were conducted for profit where he kept careful separate accounts and developed a business plan. He had substantial expertise in racing and considerable business knowledge, and devoted a good deal of time to it. The taxpayer had an income from other activities but not enough to enable him to engage in drag racing on a nonprofit basis. He incurred losses for seven years while developing the activity, but then acquired a sponsor and earned a small profit. Unexpected loss of the sponsor led to a return to losses. Significantly, when it became clear to the taxpayer that he wouldn’t be able to make the activity profitable, he terminated it. There was an element of personal pleasure in the activity for the taxpayer but many aspects that were unpleasant as well, such as heat and discomfort (Morrissey, John E., (2005, DC TN) TC Summary Opinion 2005-86).

A taxpayer’s activities weren’t engaged in for profit where the taxpayer was an expert on drag racing but didn’t conduct his drag-racing activities in a businesslike manneri.e., he maintained no records, had no business plan, didn’t create budgets, didn’t seek business advice, and expected the cars to appreciate in value independently of the drag-racing activities. The taxpayer derived much personal pleasure from his drag-racing activities, and his expenses and losses greatly exceeded (by 54 times) the small amount of income (only $2,150) the activities generated (Zenzen, Ronald J., (2011) TC Memo 2011-167).

Writing – A taxpayer’s activities were engaged in for profit where the taxpayer carried on his television and movie screenplay writing activity in a businesslike fashion. He hired agents to help him negotiate prices for his screenplays, had numerous contacts in the business, and devoted much time and energy to carrying on this activity (Richards, Rick, (1999) TC Memo 1999-163).

A taxpayer’s activities weren’t engaged in for profit where some aspects of the taxpayer’s article- and novel-writing activity (relating to contemporary political commentary, guns, and travel) were conducted in a businesslike manner, but other aspects weren’t. The taxpayer maintained records of his expenses and regularly researched and submitted articles and novels to various periodicals and literary agents. But, although his articles weren’t accepted for publication (during a 17-year period), he didn’t develop a strategy to get published or make changes in order to succeed. And, the taxpayer, who wasn’t a gun-testing expert, conducted his testing and incurred gun-related expenses without determining if there was any interest in the articles, and without regard to the income he could objectively earn (McCarthy, John R., (2000) TC Memo 2000-197).

If you have questions about the conduct of your activity as related to the profit motive rules, please give our office a call.

Do You Owe the IRS Money?

2011-09-22T07:30:00.001-05:00

While the majority of Americans get a tax refund each year, there are many who owe tax and some who can’t pay what they owe all at once. If you find yourself in the position of owing taxes, there are a number of ways to deal with the issue:

1. Get a Loan to Pay the Balance – If you owe the IRS and don’t pay on time, they will assess interest and penalties. If you work out an installment payment agreement with the IRS, they will also charge you a user fee for setting up the agreement. The least expensive way to deal with the liability may be to get a loan and pay the liability in full with the loan proceeds. Whether it is a loan against your property or a loan from a family member, the cost will generally be far less than the interest, penalties and fee the IRS will charge.

2. Credit card payments – You can pay your bill with a credit card. Although credit card interest rates are generally high, your card’s interest rate may be lower than the combination of interest and penalties charged by the IRS. However, the IRS itself does not accept credit cards; instead, there are three companies who can take your credit card charge and then remit your payment to the IRS. You will be required to pay a fee for this service. To pay by credit card, contact one of the following processing companies: Link2Gov at 888-PAY-1040 (or http://www.pay1040.com/), RBS WorldPay, Inc. at 888-9PAY-TAX (or http://www.payusatax.com/) or Official Payments Corporation at 888-UPAY-TAX (or www.officialpayments.com/fed).

3. Installment Agreement – You may request an installment payment agreement if you cannot pay the liability in full. This is an agreement between you and the IRS to pay the amount due in monthly installment payments. You must first file all required returns and be current with estimated tax payments. Then IRS will continue to charge you interest on the unpaid balance and you will be required to pay a one-time user fee of $105. If you allow the IRS to take direct withdrawals from your bank account for the agreed-upon installment amount, the user fee is reduced to $52. For eligible individuals with lower incomes, the user fee can be reduced to $43.

The IRS is bound by a 10-year statute of limitation on collections – If you utilize the installment agreement, the statute of limitations is extended by the amount of time the installment agreement is in place.

If you owe $25,000 or less in combined tax, penalties and interest, you can request an installment agreement using the Online Payment Agreement application or you can apply by mail using Form 9465, Installment Agreement Request, along with your bill in the envelope you received from the IRS. The IRS will inform you (usually within 30 days) whether your request is approved, denied, or if additional information is needed.

You may still qualify for an installment agreement even if you owe more than $25,000, but you are required to complete a Form 433F, Collection Information Statement, before the IRS will consider an installment agreement.

Once you enter into an installment agreement, you must keep your payments and any subsequent tax liability current. If you ended up owing on your last tax return, it may be appropriate for you to adjust your withholding or estimated tax payments.

4. Cash-in Retirement Accounts – Tapping your retirement funds should be avoided at all costs. Not only are you jeopardizing your future retirement, money taken from an IRA or retirement fund generally will be taxable, and if you are younger than 59½ the taxable distribution also is subject to early withdrawal penalties ranging from 10 to 20%. If you reside in a state that has state income tax, the distribution may also be taxable to the state, plus state penalties may be owed.

It may be appropriate for you to make an appointment and come in for a meeting so together we can explore your various options for satisfying your unpaid tax liability with the least amount of cost. Please call for an appointment.

Don't Overlook the Small Employer Health Insurance Credit

2011-09-18T07:30:00.000-05:00

If you are an eligible small employer or a tax-exempt eligible small employer, you may qualify for the small employer health insurance premium credit. This credit is one of the first health care reform provision to take effect as a result of the Health Care Act that was enacted in 2010. The credit reduces a small employer’s tax liability and is claimed on the employer’s income tax return; for eligible tax-exempt employers, the credit reduces the organization’s payroll taxes.

Eligible small employers – Eligible small employers may receive the credit if they had fewer than 25 full-time equivalent employees (FTEs) for the taxable year; paid average annual wages to employees of less than $50,000 per FTE; and offered employer-paid health insurance premiums for each employee enrolled in health insurance coverage under a qualifying arrangement. The employer must pay at least 50 percent of the premium for an employee-only plan.
Figuring the number of FTEs – The number of an employer’s FTEs is determined by dividing the total hours the employer pays wages during the year (but not more than 2,080 hours per employee) by 2,080. The result, if not a whole number, is then rounded down to the next lowest whole number if any.
Credit Amount – For taxable years beginning in 2010 and through 2013, the maximum credit for small employers is 35 percent of premiums paid and 25 percent for tax-exempt small employers. The credit also offsets the alternative minimum tax.
Credit Phase-out – The full credit is only available to eligible small employers with 10 or fewer full-time equivalent employees (FTEs) with an average annual full-time equivalent wage (AAEW) of $25,000 or less. If either or both of these thresholds are exceeded, then the credit is reduced. In addition, the employer’s deduction for health insurance premiums must be reduced by the credit claimed.
Excluded Individuals – The following individuals are excluded from the credit: business owners, including sole proprietors; LLC members; partners in a partnership; 2 percent or greater shareholders in an S corporation; 5 percent or greater owners in a C corporation; family members of the individuals listed above; and seasonal employees.

The credit can be taken every year through 2013. Beginning in 2014 the credit amount increases to 50 percent for eligible small employers and 35% for tax-exempt small employers. However, the post-2013 credit is only available to an eligible small employer that purchases health insurance coverage for its employees through a state exchange and is only available for a maximum coverage period of two consecutive tax years beginning with the first year in which the employer or any predecessor first offers one or more qualified plans to its employees through an exchange.

If you have any questions regarding this credit, please give our office a call.

Sales Tax on Home Sales Rumor

2011-09-12T07:30:00.000-05:00

A rumor has been circulating for some time that home sales will be subject to a 3.8% federal sales tax beginning in 2013. Like most rumors, it has been initiated by someone who doesn’t have all the facts – in this case, someone who does not understand taxes. Unfortunately, the misinformation has been perpetuated through our modern means of communication.

It is true that some part of an individual’s home sale gain might be subject to an additional tax of 3.8%. But it is not a sales tax on the gross proceeds of the sale. It is actually a new surtax that is part of the Health Care Law passed in 2010. Called the Unearned Income Medicare Contribution Tax, it is imposed on individuals, estates, and trusts effective in 2013, and for the first time causes the Medicare tax to be imposed on some taxpayers’ investment (also termed “unearned”) income. For individuals, the surtax is 3.8% of the lesser of:

The taxpayer’s net investment income or
The excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others).

So what does that have to do with home sales, you ask? Well, if you sell your home and have profit remaining after reducing the gain by the $250,000 home sale gain exclusion for single individuals ($500,000 for married couples), that portion of the profit is considered investment income, and is therefore subject to the new surtax, if you are in one of the higher income categories listed in 2 above. Remember, to qualify for the home sale gain exclusion you have to own and occupy the home as your primary residence for 2 of the 5 years prior to the sale.

Example – Joe and Dianne sell their home in 2013 for $600,000. They purchased that home 40 years ago for $50,000. For simplicity, let’s assume they made no improvements to the home and had no selling costs. Thus, they have a $550,000 gain. After they subtract the $500,000 home sale exclusion they end up with a taxable gain of $50,000. Their other gross income for the year is $75,000 (all earned income), for a total modified adjusted gross income (MAGI) of $125,000. Since the $125,000 is less than the $250,000 threshold for the surtax, they have no surtax. However if their other income (none of which is investment income) was $210,000, they would end up with a MAGI of $260,000. That is $10,000 over the $250,000 threshold for joint filers, and results in a surtax of $380 (3.8% of $10,000), which is less than the $1,900 surtax figured on their investment income from the net home sale gain of $50,000. Therefore, Joe and Dianne’s additional Medicare contribution tax is $380.

So you can’t always believe everything you hear. If you have any questions, please give our office a call.

Back to School Tips for College Students and Parents

2011-09-09T09:30:00.000-05:00

Whether you’re a recent high school graduate going to college for the first time or a returning college student, it will soon be time to get to campus—and payment deadlines for tuition and other fees are not far behind. Students or parents paying such expenses should keep receipts and be aware of some tax benefits that can help offset college costs.

Typically, these benefits apply to you, your spouse, or a dependent you claim as an exemption on your tax return.

American Opportunity Credit - This credit has been extended for an additional two years: 2011 and 2012. The credit is valued at up to $2,500 per eligible student and is available for the first four years of post-secondary education. Forty percent of this credit is refundable in most cases, which means that you may be able to receive a tax refund from the government of up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies, and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).
Lifetime Learning Credit - In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled at an eligible educational institution. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, so graduate-level and professional degree courses qualify, but to claim the credit, your modified adjusted gross income must be below $61,000 ($122,000 if married filing jointly). The $2,000 cap applies per return, not per student.
Tuition and Fees Deduction - This deduction can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim a tuition and fees deduction of up to $2,000 for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly). The deduction can be as much as $4,000 if your modified AGI is under $65,000 ($80,000 if married filing jointly).
Student loan interest deduction - Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if married filing jointly), you may be able to deduct interest paid during the year on a qualified student loan used for higher education regardless of when you obtained the loan. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to claim credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

Remember that the education credits are claimed by the individual who claims the exemption for the student, not necessarily the person who pays the tuition. Also, the tuition expenses qualifying for the education credits can be pre-paid for the first three months of the subsequent year if you have not paid enough to take advantage of the full credit in 2011.

You cannot claim the tuition and fees deduction in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit for the same student. You must choose to take either the credit or the deduction and should consider which is more beneficial for you.

If you have questions or would like to schedule an appointment to discuss how best to finance and pay for education expenses and maximize tax benefits, please give our office a call.

Your Broker’s 1099 Statement Will Be Different for 2011

2011-08-31T08:00:00.001-05:00

For years, the IRS has had the ability to identify the gross sales of taxpayers from broker transactions, including security (reported on a 1099-B) and property sales (reported on 1099-S forms). However, these identified only the sales price, quantity sold (for securities), and dates of the transactions. To determine the profit or loss, you must also know the tax basis of the property that was sold. Without confirmation of the basis, which up to now has been obtainable only from the taxpayer via an audit, the IRS has no way to verify the reported profit or loss from the sale, leaving this area open to abuse.

That will be changing starting in 2011, at least for security sales. Beginning in 2011, every broker who is required to file an information return reporting the gross proceeds of a security must include in the informational return the customer's adjusted basis in the security and whether any gain or loss with respect to the security is short-term or long-term.

Securities initially covered under this new requirement include: (a) shares of stock in a corporation, (b) notes, bonds, debentures, or other evidence of indebtedness and (c) commodities, contracts, or derivatives with respect to the commodities.

The requirement is being phased in and will generally apply to:

Corporation stocks acquired after 2010,
Regulated investment companies (mutual funds) and dividend reinvestment plans after 2011,
Certain other securities (as determined by the IRS) after 2012.

The IRS estimates that more than one in three taxpayers who sold securities may have misreported capital gains and losses—in many cases because they misreported their basis—and it expects the new basis reporting rules to go a long ways toward correcting that problem. However, since the effective dates for broker basis reporting will be based on the acquisition dates of the securities, there will still be many sales in the years to come for which brokers may not report the basis because they lack the information. For these sales, the basis of the securities that were sold will need to be determined by taxpayers, as in the past.

Under this new reporting requirement, the gain or loss reported by a brokerage firm will be based on a first-in first-out (FIFO) method unless the customer notifies the broker by means of making an adequate identification of the stock sold or transferred. In the case of securities where the “average cost basis” method is allowable, brokerage firms are to use the “average cost basis” method unless customers notify brokers that they elect another acceptable method with respect to the account in which the stock is held.

This is a complicated undertaking and, undoubtedly, there will be some confusion in terms of matching basis with transactions. For example, under these new rules, a customer's adjusted basis is determined without regard to the wash sale rules unless the transactions occur in the same account. This will create basis matching problems where identical securities are held in other accounts.

If you have questions related to these new broker reporting requirements and how they might affect you, please give our office a call.

Complete our Survey and Enter to Win an Amazon Kindle

2011-08-26T15:37:00.000-05:00

We want to continue to be responsive to your needs while delivering a product of the highest quality. Go to www.surveymonkey.com/s/WFHCO to complete our Client Satisfaction Survey and you could win an Amazon Kindle! The survey will only take 2-3 minutes to complete. At the completion of the survey, you will have the option of entering for a chance to win. The deadline to submit the survey is October 15, 2011.

If you have any questions, please call the office or email your question to info@wfhorne-co.com.

Things to Know about Farm Income and Deductions

2011-08-26T08:00:00.002-05:00

If you have a farming business, several tax issues can impact your tax situation. The following list includes some of those issues.

Crop Insurance Proceeds — You must include in income any crop insurance proceeds you received as the result of crop damage. You generally include them in the year they were received.
Sales Caused by Weather — If you are a cash-method farmer and sell more livestock, including poultry, than you normally would in a year because of drought, flood, or other weather-related conditions, you may be able to postpone reporting the gain from selling the additional animals until the next year. To qualify, your area must be designated as eligible for federal assistance.
Farm Income Averaging - You may be able to average all or some of your current year's farm income by allocating it to the three prior years. To qualify, you must be engaged in a farming business as an individual, a partner in a partnership, or a shareholder in an S corporation. Corporations, estates, and trusts cannot use this averaging method. This may lower your current year tax if your current year income from farming is high, and your taxable income from one or more of the three prior years was low. This method does not change your prior year tax; it only uses the prior year information to determine your current year tax.
Deductible Farm Expenses — The ordinary and necessary costs of operating a farm for profit are deductible business expenses. An ordinary expense is considered common and accepted in the farming business. A necessary expense is one that is appropriate for the business.
Employees and Hired Help — Reasonable wages paid for laborers hired to perform your farming operations can be deducted. This includes full-time and part-time workers. You must withhold Social Security, Medicare, and income taxes on employees.
Items Purchased for Resale — You may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and freight charges for transporting livestock to the farm.
Net Operating Losses — If your deductible expenses from operating your farm are more than your other income for the year, you may have a net operating loss. You can carry that loss back five years or over to future years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.
Repayment of Loans — You cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses. However, if you use the proceeds of the loan for your farming business, the interest that you paid on the loan can be deducted.
Fuel and Road Use — Off-highway business use of vehicles qualifies for a refund of fuel excise taxes. You may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.
Optional Farm Self-Employment Tax Method — A special method of computing the self-employment (SE) tax for farmers allows a taxpayer to continue SE tax coverage even in years when profits are small (or even when there is a loss). A taxpayer who uses one of the optional methods for figuring SE tax also uses the resulting imputed income when calculating the credit for child and dependent care expenses and the earned income credit.
Exclusion of Farm Debt Forgiveness Income – Generally, when a lender forgives or cancels a debt, the debtor must report the forgiven debt as cancellation of debt (COD) income on their tax return unless an exception applies. First, the farm debt is excluded to the extent that the taxpayer is insolvent. An additional farm debt is also excluded under a special farm debt exclusion, provided the indebtedness was incurred directly in connection with the trade or business of farming, and 50 percent or more of the aggregate gross receipts of the taxpayer for the three tax years before the tax year in which the discharge of the indebtedness occurs is attributable to the trade or business of farming. This exclusion is limited to the sum of the taxpayer’s tax attributes and basis of qualified property.

If you have questions related to the issues discussed here, or for other concerns you may have, please give our office a call.

Tax Breaks for Charity Volunteers

2011-08-22T08:00:00.002-05:00

If you volunteer your time for a charity, you may qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a charity, there are deductions permitted for out-of-pocket costs incurred while performing the services. The normal deduction limits and substantiation rules also apply. The following are some examples:

away-from-home travel expenses while performing services for a charity, including out-of-pocket round-trip travel cost, taxi fares, and other costs of transportation between the airport or station and hotel, plus lodging and meals at 100 percent. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not involve lobbying activities;
the cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor (but the cost of your own entertainment or meal is not deductible);
if you use your car while performing services for a charitable organization, you may deduct your actual unreimbursed expenses directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls; and
you can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.

No charitable deduction is allowed unless the contribution is substantiated with a written acknowledgment from the charitable organization. To verify your contribution:

get written documentation from the charity about the nature of your volunteering activity and the need for related expenses to be paid. For example, if you travel out of town as a volunteer, request a letter from the charity explaining why your presence is needed at the out-of-town location;
you should submit a statement of expenses if you are out-of-pocket for substantial amounts, preferably a copy of the receipts to the charity and arrange for the charity to acknowledge in writing the amount of the contribution; and
maintain detailed records of your out-of-pocket expenses—receipts plus a written record of the time, place, amount, and charitable purpose of the expense.

Please call our office if you have questions related to your charitable volunteering expenses.

Getting Older With No Retirement Savings in Sight?

2011-08-15T08:00:00.006-05:00

One of the earliest lessons in life is that actions have consequences, and approaching retirement age without a substantial nest egg is one of those consequences. But if you are in this situation, you are not alone, as millions of other Americans are faced with the same need to save enough to retire comfortably.

Our priorities shift throughout our lives. Early in the life cycle, home ownership is a priority; that is usually followed by raising and educating children. However, as retirement approaches, the focus needs to shift toward retirement funding. By the time most people are 45 or 50, their children are on their own, the mortgage is close to being paid off, and there is more discretionary income to set aside for retirement.

If you are starting to think about retirement, there are three pitfalls you need to avoid: (1) Retiring on your birthday instead of your bank account, (2) not properly managing your risk and (3) retiring with too much debt.

A frequently asked question is "How much do I need to put aside for retirement?" The answer to that question varies with each individual. There a number of factors to consider: current income, existing savings, assets, how many years until you plan to retire, the lifestyle you want in retirement, and what you can afford to put aside.

If you want to make a rough estimate of the savings needed, determine your approximate income needs and calculate the amount of money you will receive, aside from your savings. These other sources could be your Social Security benefit, a pension, or an IRA or a 401(k) plan.

Add up all of the funds that will come from your Social Security benefit, pension, etc., and determine a savings goal that will, after retirement, provide the additional income needed for retirement. Be sure to factor in inflation and a reasonable rate of return, taking into consideration today’s tough economic environment. Also consider your existing savings and assets that help fund retirement.

Then start figuring out how to make up for the difference. Here are some suggestions:

1. Check to see whether your employer offers a 401(k), a 403(b), or some other type of voluntary contribution retirement plan. Take advantage of these plans and contribute the maximum you can afford up to the annual limit, which for 2011 is:

$16,500 for taxpayers below 50 years of age, and
$22,000 for taxpayers 50 years of age and over.

The contribution is before taxes, so making the contribution will lower your gross income and reduce your current tax bite. Also, if your employer matches a percentage of your contribution, that is free money for you.

2. If you have earned income (or receive alimony) but don’t have an employer plan to contribute to or if you can afford to set aside additional funds, you might consider an IRA. Here, you have a choice between a traditional IRA and a Roth IRA. Traditional IRA contributions can be tax deductible or not, depending on your income and whether you have an employer retirement plan. Roth IRAs are not tax deductible, but accrue earnings tax free. However, contributing to a Roth IRA can be complicated for higher income taxpayers. The IRA contribution limit for 2011 is $5,000 ($6,000 if age 50 and over). In some cases, a spouse can also contribute to an IRA based on the other spouse’s earned income.

3. Self-employed individuals can take advantage of a variety of available defined contribution retirement plans that allow contributions nearing 20% on the self-employed individual’s net income, limited to a maximum of $49,000 for 2011. There are also more complicated defined benefit plans available that allow substantially higher contributions.

4. There’s always the option of acquiring a second job or having the spouse acquire employment to generate more income. Invest your additional earnings or use it to pay off any outstanding debts. By getting rid of credit card balances, you also avoid unnecessary interest charges and free up your money for retirement savings.

5. Consider downsizing your home. You can potentially save on utility bills, repairs, and, perhaps, property taxes. Put those savings toward retirement. You might even think of relocating, if you live in an area with a high cost of living. Needless to say, proceeds from the sale that aren’t needed to pay off the old mortgage, other debt, etc. or used to purchase the new home should be put into savings for your retirement years.

Be sure to periodically review your goals, as your financial situation and the economic climate may change and the plan may need to be adjusted. Please call our office for assistance in terms of assessing your financial resources and to help you plan for a financially secure retirement.

Don't be a Victim of a Scam or ID Theft

2011-08-09T08:00:00.000-05:00

The Internal Revenue Service is encouraging taxpayers to guard against being misled by unscrupulous individuals trying to persuade them to file false claims for tax credits or rebates.

The IRS has noted an increase in tax return-related scams, frequently involving unsuspecting taxpayers who normally do not have a filing requirement in the first place. These taxpayers are led to believe they should file a return with the IRS for tax credits, refunds or rebates to which they are not really entitled.

Most paid tax return preparers provide honest and professional service, but there are some who engage in fraud and other illegal activities. Unscrupulous promoters deceive people into paying for advice on how to file false claims. In other situations, identity theft is involved.

Taxpayers should be wary of any of the following:

Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits.
Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS, enabling a payout from the IRS.
Unfamiliar for-profit tax services teaming up with local churches.
Homemade flyers and brochures implying credits or refunds are available without proof of eligibility.
Offers of free money with no documentation required.
Promises of refunds for “Low Income – No Documents Tax Returns.”
Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit.
Advice on claiming the Earned Income Tax Credit based on exaggerated reports of self-employment income.

In some cases, nonexistent Social Security refunds or rebates have been the bait used by the con artists. In other situations, taxpayers deserve the tax credits they are promised but the preparer uses fictitious or inflated information on the return, which results in a fraudulent return.

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file with little or no documentation, have been appearing in community churches around the country. Promoters are targeting church congregations, exploiting their good intentions and credibility. These schemes also often spread by word of mouth among unsuspecting and well-intentioned people telling their friends and relatives. Promoters of these scams often prey upon low-income individuals and the elderly.

They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected or the refund barely exceeds what they paid the promoter. Meanwhile, their money and the promoters are long gone.

Unsuspecting individuals are most likely to get caught up in scams; the IRS is warning all taxpayers, and those who help others prepare returns, to remain vigilant. If it sounds too good to be true, it probably is.

Above all remember that the IRS does not initiate taxpayer contact by e-mail. Whenever you receive an unsolicited or dubious solicitation that includes you providing your SSN, bank account number or other financial information, be skeptical. These scam artists can make communication look and sound like it is legitimate. When in doubt, call our office. Don’t let yourself be a victim of these scams.

Next Year's Tax Refund May Be Lower

2011-08-04T07:50:00.000-05:00

Taxpayers accustomed to receiving a tax refund every year should be aware of the fact that there are two tax changes for 2011 that could impact their tax liability, possibly making the refunds anticipated next spring lower or even resulting in tax due for taxpayers who normally have small refunds.

For 2011, Congress did away with the Making Work Pay tax credit, which was a refundable credit worth up to $400 ($800 for a joint return). Although the payroll withholding tables have been adjusted to compensate for the loss of this credit for employees by increasing tax withholding, these adjustments are not exact and not always suitable for each individual’s specific tax circumstances. For self-employed individuals who pay estimated taxes, there is no equivalent withholding adjustment. Thus, it is quite possible that the loss of this credit may adversely impact many taxpayers’ refunds for 2011.

Congress actually replaced the Making Work Pay credit in 2011 with a 2% (from 6.2% to 4.2%) reduction in FICA withholding for employees and a corresponding SE Tax reduction for self-employed individuals. This change can affect the 2011 refund or balance due for individuals who work for multiple employers and have earnings in excess of the maximum amount subject to FICA withholding for the year ($106,800 for 2011). When individuals have excess FICA withholding, the excess is refunded on their tax returns. Those accustomed to FICA refunds can, therefore, expect about a 1/3 reduction in their FICA refunds, which will also adversely affect the 2011 refund to be received or balance due to be paid next year.

Manage the Tax on Your Social Security Benefits

2011-07-28T08:00:00.000-05:00

Social Security (SS) income is not taxable until a taxpayer’s AGI (without Social Security income), 50% of their Social Security income, tax-exempt interest income, and certain other infrequently encountered additions total and exceed a specific threshold. The threshold is $32,000 for married taxpayers filing jointly, zero for married taxpayers filing separately and $25,000 for all others. Once the threshold is exceeded, the Social Security income subject to tax varies from 50% to 85%.

Few taxpayers understand this threshold for SS taxation and make no attempt to utilize strategies to minimize the SS taxability or take advantage of the unused threshold amount.

If a taxpayer’s only income for the year is from Social Security then there is no tax on the Social Security. However, if that is true and the taxpayer has other possible source(s) of income, the taxpayer can actually take in additional income without causing any of his SS income to become taxable. Take, for example, a 68-year-old single individual with an annual SS income of $18,000. The threshold for single individuals is $25,000, and subtracting ½ the SS income in this example from the $25,000 leaves a $16,000 difference. That is an additional $16,000 of income the taxpayer could have had that year without causing any of his SS benefits to become taxable. For 2011, a single individual age 65 or older gets a standard deduction of $7,250 and an exemption of $3,700. Thus in our example, if the taxpayer had an IRA and took a distribution from it of $16,000, he would have only been taxed on $5,050 ($16,000 - $7,250 - $3,700), and the tax would have been a minimal $505 because he is in the lowest possible tax bracket, 10%.

If that same taxpayer had been saving his IRA for his beneficiaries to inherit, then he just saved them a lot of money, because they would be taxed on the IRA based on their tax rates which will no doubt be higher. They can inherit the bank account he put the distribution in without any tax (assuming the total value of his estate is under the estate tax exemption amount for his year of death). He also reduced his IRA value so when he reaches the 70-½ mandatory distribution age he will not have to take out as much, potentially again reducing his tax.

If a taxpayer is 70-½ years of age or over, they are required to start taking required minimum distributions (RMD) from IRAs and most other retirement plans. The amount of the RMD can impact the taxation of the taxpayer’s Social Security benefits. For 2011, a taxpayer age 70-½ and over can make a direct IRA to charity distribution which also counts toward the taxpayer’s RMD for the year. The distribution is not included in income (therefore does not impact the taxability of the Social Security) and the charitable contribution is not deductible, since the distribution from which the contribution was made is not includable in the income for the year.

An added benefit is when a taxpayer has a substantial charitable contribution and he only marginally itemizes. Donations to charities are tax deductible only when a taxpayer itemizes deductions. By replacing the RMD income and charitable contribution with a direct IRA–to-charity rollover the taxpayer has the satisfaction of contributing to a favorite charity while at the same time being able to exclude the distribution from income and utilize the standard deduction to reduce his tax bite.

Foreign government Social Security benefits received by U.S. Residents are taxed according to the treaty with that country. For example, per treaty provisions, SS benefits from our neighbor Canada are taxed in the same manner as U.S. Social Security benefits. Some U.S. States do not tax U.S Social Security benefits. However, states are not a party to the federal-level tax treaties and may treat the foreign Social Security payments differently. For example, although the state of California does not tax any amount of U.S. Social Security, it treats Canadian Social Security benefits as a fully taxable pension.

If a taxpayer receives a retroactive Social Security payment during the current year that is related to a prior tax year, the entire payment must be included in the current year’s income. This may cause the SS benefits to be taxed at a higher rate than they would have been if they had been reported in the prior year. To adjust for this inequity, the IRS provides a special lump-sum calculation.

Some or all of a taxpayer’s Social Security benefits may have to be repaid if the taxpayer has earned income above an annual threshold and the taxpayer is under the full retirement age. The full retirement age currently is 67 and the 2011 earnings threshold is $14,160.

If you have additional questions related to the strategies suggested in this article and would like to see how they would impact your tax situation, please give our office a call.

Tips to Help You Determine if Your Gift is Taxable

2011-07-22T08:00:00.000-05:00

If you give someone money or property, you may be subject to the federal gift tax. Most gifts are not subject to the gift tax, but here are some tips to help you determine whether your gift is taxable or if you are required to file a gift tax return.

1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2011, the annual exclusion is $13,000.

2. Gift tax returns do not need to be filed unless you give someone other than your spouse money or property worth more than the annual exclusion for that year.

3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.

4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).

5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:

gifts that are not more than the annual exclusion for the calendar year,
tuition or medical expenses you pay directly to a medical or educational institution for someone,
gifts to your spouse,
gifts to a political organization for its use, and
gifts to charities.

6. Gift Splitting – You and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.

7. Gift Tax Returns – You must file a gift tax return on Form 709 if any of the following apply:

you gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year;
you and your spouse are splitting a gift;
you gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until at some time in the future; or
you gave your spouse an interest in property that will terminate due to a future event.

8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.

If you have questions related to gifts, gift planning, or a requirement to file a gift tax return, please give our office a call.

Is the IRS Withholding Some or All of Your Refund?

2011-07-18T08:00:00.000-05:00

If the IRS kept all or a portion of your federal refund, it may be because you owe money for certain delinquent debts. If that is true, the IRS or the Department of Treasury's Financial Management Service (FMS), which issues IRS tax refunds, can offset or reduce your federal tax refund or withhold the entire amount to satisfy the debt.

Here are some important facts you should know about tax refund offsets.

If you owe federal or state income taxes, your refund will be offset to pay those tax liabilities. If you had other debt such as child support or student loan debt that was submitted for offset, FMS will take as much of your refund as is needed to pay off the debt and will send it to the agency authorized to collect the debt. Any portion of your refund remaining after an offset will be refunded to you.
You will receive a notice if an offset occurs. The notice will reflect the original refund amount, your offset amount, the agency receiving the payment, and the address and telephone number of the agency.
You should contact the agency shown on the notice if you believe you do not owe the debt or if you are disputing the amount taken from your refund.
If you filed a joint return and you are the spouse who is not responsible for the debt, but are entitled to a portion of the refund, you may request your portion by filing IRS Form 8379, Injured Spouse Allocation. If you know that your spouse has outstanding debts and anticipates an offset, you can attach Form 8379 to your original individual tax return. If not, it can be filed by itself after you are notified of an offset.
If you reside in a community property state, overpayments (refunds) are considered joint property and are generally applied (offset) to legally owed past-due obligations of either spouse. There are exceptions; please call for additional details.

For assistance with completing Form 8379, please call.

Limited Window of Opportunity on Bush-era Tax Breaks

2011-07-12T08:00:00.000-05:00

Last December, Congress extended a number of the Bush-era tax breaks, but only for a limited length of time. It is probably a safe bet that most won’t get extended further, considering the size of the national debt. Although numerous tax breaks were extended, only a few provide you with an opportunity to take actions that can reduce your tax bite. But if you want to take advantage of those tax breaks, you need to act this year or next. Here is a list of those extended tax breaks and what will happen when they expire.

Individual Tax Rates – The Bush-era tax cuts reduced and replaced individual tax rates with six tax brackets that increase with income: 10, 15, 25, 28, 33, and 35 percent. They will revert to their original higher levels of 15, 28, 31, 36, and 39.6 percent beginning in 2013. That will result in the lowest bracket increasing by 5 percentage points and the highest bracket increasing by 3.6 percentage points, affecting all taxpayers from low to high incomes. In certain circumstances, it may be appropriate to accelerate income to take advantage of the lower rates.

Capital Gains and Qualified Dividends – Under the Bush-era tax cuts, the maximum tax on long-term capital gains (assets owned for more than one year) was reduced from 20 percent to 15 percent for taxpayers in the 25 percent and higher tax brackets. The tax cuts also provided for a zero tax rate to the extent a taxpayer is in the 10 and 15 percent income tax brackets. These lower rates will revert to the higher rates in 2013, impacting taxpayers in all tax brackets. Do you have potential capital gains that you might sell before 2013 to take advantage of the current lower rates?

American Opportunity Tax Credit – The American Opportunity Tax Credit (AOTC) replaced the Hope Education Credit in 2009 and provides a maximum tuition credit of $2,500, of which up to 40 percent can be refundable and applies to the first four years of post-secondary education. This enhanced credit will expire after 2012 and is set to be replaced by the Hope Education Credit that provides a reduced maximum credit of $1,800, of which none is refundable; the Hope credit is only applicable to the first two years of post-secondary education. This will primarily affect lower income families. Note: The administration wants to make the AOTC permanent so watch for further developments.

Home Energy-Savings Improvement Credit – This on-again, off-again credit has been extended for one additional year, 2011, but it has been substantially reduced and only provides a credit up to $500 (it was $1,500 in 2010) and a reduced credit percentage of 10 percent (down from 30 percent in 2010). In addition, the $500 credit limit is reduced by any credit taken after 2005. To take advantage of this credit for energy-saving exterior windows, skylights, doors, insulation, heating systems, etc., you need to act before the end of 2011.

Coverdell Educational Accounts – The $2,000 maximum contribution to Coverdell education accounts will revert to a $500 maximum after 2012. If you want to maximize the contributions for a child’s future education needs, you need to do so before 2013.

Sales Tax Deduction – If you are planning to make a big ticket purchase and want to deduct the sales tax [http://www.irs.gov/individuals/article/0,,id=152421,00.html] as part of your itemized deductions, you need to act before the end of 2011. The option to deduct the larger of state and local income tax or sales tax expires after 2011.

Tax-Free IRA to Charity Distributions - The provision that permits taxpayers age 70½ and over to make direct distributions (up to $100,000 per year) from their Traditional or Roth IRA account to a charity will expire at the end of 2011. The distribution is tax-free, but there is no charitable deduction. This provision can be very beneficial to taxpayers who have Social Security income and/or do not itemize their deductions.

If you have questions related to how these or other tax benefits might fit into your tax planning, please call our office.

Standard Mileage Rate Boosted July 1

2011-07-07T12:16:00.000-05:00

The IRS recently announced that it is revising the optional standard mileage rates for computing the deductible costs of operating an automobile for business, medical, or moving expense purposes and for determining the reimbursed amount of these expenses that is deemed substantiated. This modification results from recent increases in the price of fuel. These increased rates are effective July 1, 2011.

Business Use increases to 55.5 cents per mile (up from 51 cents for the first half of 2011.
Medical & Moving increases to 23.5 cents per mile (up from 19 cents for the first half of 2011.
Charitable rate is statutory and remains fixed at 14 cents per mile.

The revised standard mileage rates apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes on or after July 1, 2011, and to mileage allowances that are paid both (1) to an employee on or after July 1, 2011, and (2) for transportation expenses an employee pays or incurs on or after July 1, 2011.

To see the IRS announcement, click here.

Please feel free to contact our office if you have additional questions.

Can You Benefit From the Expanded Adoption Credit?

2011-06-23T07:00:00.001-05:00

You may be able to take a tax credit in 2011 of up to $13,360 ($13,170 in 2010) for qualified expenses paid to adopt an eligible child. The Affordable Care Act increased the amount of the credit and made it refundable, which means it can increase the amount of your refund. Here are several things you to know about the expanded adoption credit.

1. For tax years 2010 and 2011, the credit is refundable, meaning that you can get it even if you owe no tax.

2. If you claimed the adoption credit in a prior year and have a carryover to 2010, that carryover is also fully refundable in 2010.

3. When claiming the credit, it cannot be e-filed and documents supporting the adoption must be attached. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and the state’s determination for special needs children.

4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child. These expenses may include adoption fees, court costs, attorney fees and travel expenses.

5. An eligible child must be under 18 years old, or physically or mentally incapable of caring for himself or herself.

6. If your modified adjusted gross income is more than $182,520, your credit is reduced. If your modified AGI is $222,520 or more, you cannot take the credit.

7. Without Congressional action, this credit will no longer be available after 2011.

If you have questions about this credit and how it might fit into your adoption plans, please give this office a call.

Tax Tips for Recently Married Taxpayers

2011-06-20T09:48:00.000-05:00

If you, like many others during the summer months, have gotten married or plan to get married in the near future, here are some post-marriage tips to help you avoid stress at tax time.

Notify the Social Security Administration - Report any name change to the Social Security Administration so that your name and SSN will match when filing your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security card at your local SSA office. The form is available on SSA’s Web site, by calling 800-772-1213, or at local offices.
Notify the IRS - If you have a new address, you should notify the IRS by sending Form 8822, Change of Address.
Notify the U.S. Postal Service - You should also notify the U.S. Postal Service when you move so that any IRS or state correspondence can be forwarded.
Notify Your Employer - Report any name and address changes to your employer(s) to ensure receipt of a correct Form W-2, Wage and Tax Statement after the end of the year.
Check Your Withholding and Estimated Tax Payments - If both you and your new spouse work, your combined income may place you in a higher tax bracket and you may have an unpleasant surprise come tax season next year. On the other hand, if only one works, filing jointly with your new spouse can provide a significant tax benefit, enabling you to reduce your withholding or estimated payments. Either way, it may be appropriate to estimate your income tax for 2011 and make any required adjustments as soon as possible.

If you need assistance projecting your joint 2011 taxes and adjusting your withholding or other prepayments, please give our office a call.

Tax Tips for Students with a Summer Job

2011-06-09T15:26:00.000-05:00

Many students hold a summer job during their time off from school. Here are some tax issues that should be considered when working a summer job.

Completing Form W-4 When Starting a New Job – This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure that all of their employers are withholding an adequate amount of taxes to cover their total income tax liability. Generally, a student who is claimed as a dependent of another with income only from summer and part-time employment can earn as much as $5,800 (the standard deduction amount) without being liable for income tax. However, if the student has other investment income, the tax determination becomes more complicated. This is because he or she is a dependent of another and subject to special rules.

Tips – For example, if the student works as a waiter or a camp counselor, he or she may receive tips as part of his or her summer income. All tip income received is taxable income and is therefore subject to federal income tax. Employees are required to report tips of $20 or more received while working with any one employer in any given month. The reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The employer withholds FICA (Social Security and health insurance) and income taxes on these reported tips and then includes the tips and wages on the employee’s W-2. The IRS provides Form 4070A for keeping track of tips.

Cash Jobs – Many students do odd jobs over the summer and are paid in cash. Just because it is paid in cash does not mean that it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see below). These earnings include income from odd jobs like babysitting and lawn mowing.

Self-Employment Tax – When an individual works for an employer, the employer withholds FICA (Social Security taxes) and Medicare taxes from his or her pay, matches the amount dollar for dollar, and remits the combined amount to the government. When someone is self-employed, he or she is required to pay the combined employee and employer amounts on their own (referred to as self-employment tax) if the net earnings is $400 or more. This tax pays for his or her benefits under the Social Security system. Even if he or she is not liable for income tax, this 13.3% tax may apply.

Classification as an Independent Contractor – It does not happen frequently, but some employers will try to avoid paying certain payroll taxes by treating the student employee as an independent contractor. You can tell this is the case if the student receives his or her pay without any income tax or social security withholding, leaving the student holding the bag to pay the 13.3% self-employment tax and income tax liability when he or she file returns the next year after receiving a 1099-MISC instead of a W-2. If this is the case, be prepared and save some of the income to pay the taxes.

ROTC Students – Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

Newspaper Carrier or Distributor – Special rules apply to services performed as a newspaper carrier or distributor. An individual is a direct seller and treated as self-employed for federal tax purposes if he or she meets the following conditions:

They are in the business of delivering newspapers;
All of their pay for these services directly relates to sales rather than to the number of hours worked; and
They perform the delivery services under a written contract which states that they will not be treated as an employee for federal tax purposes.

Newspaper Carriers or Distributors Under Age 18 – Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

Please call our office if you are the student or parent and have additional questions.

Tax Perks for the Business Traveler

2011-06-07T08:24:00.000-05:00

Food and lodging expenses may be deducted when you are away from home for business purposes. Like everything in the tax law, to be tax deductible there are certain rules to follow and the individuals that know the rules and keep good records get the most out of these deductions.

The IRS requires that lodging expenses (and other expenses of $75 or more) be substantiated by records or other evidence. Acceptable records include diaries, logs, receipts, paid bills and expense reports. The records should disclose the amount, date, place and essential character of the expense. The following are some tips to help you stay on top of the required documentation:

Keep good records of travel expenses.
Maintain the records on a contemporaneous basis, i.e., make diary and log notations close to the time the expense is incurred.
Document the business purpose and the expected business benefit.
Retain your travel itinerary to document the business activity while away.

Travel expenses are deductible only if the individual is away from his or her "tax home"—usually considered to be one’s regular place of business—for more than one business day.

Meal expenses are deductible only if the trip is overnight or long enough that there is a need to stop for sleep or rest to properly perform one’s duties. The amount of the meal expenses must be substantiated, but instead of keeping records of the actual cost of meal expenses, a "standard meal allowance" ranging from $46 to $71 can generally be used, depending on where and when the individual travels. Generally, the deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible.

Lodging expenses must be substantiated with actual receipts and are 100% deductible. Meals included in lodging expenses, such as room service or dining costs charged to a hotel room, must be separately identified, since meals have the 50% limitation as noted above.

In addition to the travel, lodging and meal expenses discussed above, the incidental costs incurred on a deductible trip such as laundry, dry cleaning, phone calls, baggage handling, and so on are fully deductible.

Employees must deduct their unreimbursed travel expenses as a miscellaneous itemized deduction which is subject to a 2% of AGI floor. They are not deductible at all to the extent the employee’s income is subject to the alternative minimum tax (AMT). That is why it is to an employee’s advantage to utilize an employer’s “accountable” reimbursement plan (under which qualified reimbursements are not taxable and not reported in the employee’s W-2 wages) rather than deducting the expenses on their tax return. On the other hand, these expenses are fully deductible as a business expense for a self-employed individual.

Taking the Spouse Along? Generally, deductions are denied for travel expenses paid or incurred for a spouse, dependent or employee of the taxpayer who accompany the taxpayer on the business trip unless the:

Spouse or dependent is an employee of the taxpayer, and
Travel of the spouse, dependent or employee is for a bona fide business purpose, and
Expenses would otherwise be deductible by the spouse, dependent or employee.

Strategy - The law allows a deduction for the single rate for lodging and frequently there is no rate difference between one or two occupants. Thus, the entire lodging expense for an accompanying spouse will virtually be deductible. When traveling by car, the law does not require any allocation because the spouse is also traveling in the vehicle. Thus, if you are traveling by vehicle, the entire cost of the transportation would be deductible. That would generally also apply to taxis at the destination. The only substantial cost that is not allowed is the cost of the spouse’s meals, which, even if they were deductible, would be reduced by the 50% rule. If traveling by air or rail, the cost of the spouse’s tickets also would not be deductible.

Please give our office a call if you have questions related to business travel expenses.

Do You Have a Financial Interest or Signature with a Foreign Financial Account? Better Read This! June 30th is a Critical Date.

2011-06-03T09:11:00.000-05:00

Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts (including bank, securities, or other types of financial accounts in a foreign country), if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship to the U.S. government each calendar year.

The government uses this reporting mechanism as a means to uncover hidden foreign accounts and ensure that investment income earned in foreign countries by U.S. taxpayers is included on their U.S. tax returns. The Treasury Department has placed a new emphasis on foreign accounts, and taxpayers with a financial connection to a foreign country should determine whether they have a reporting requirement.

Reporting is accomplished by filing a “Report of Foreign Bank and Financial Accounts”—more commonly referred to as the “FBAR”—which is due on or before June 30 of the succeeding year. Thus the FBAR filing for the 2010 year is due on June 30, 2011. This report is filed separately from the taxpayer’s income tax return, and no extensions of time are available for filing this form. In addition, taxpayers generally are required to answer “yes” or “no” to questions related to foreign bank and financial accounts on their tax returns.

Penalties for failing to comply can be severe. For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. A reasonable cause exception to the penalty is available for non-willful violations but not for willful violations.

Overlooked Accounts – Many taxpayers overlook the fact that they have a reporting requirement in situations such as the following:

Family Accounts – Recent immigrants to the U.S. may still have parents or other family members residing in the “old” country, and those relatives may have included them on an account in the foreign country. This is common practice for some ethnic groups. The taxpayer does not really consider the account his or hers, but it falls under the reporting requirement if he or she has signature or other authority over the account and the value exceeds $10,000.
Inherited Accounts – Accounts in a foreign country and inherited fall under the FBAR reporting requirement even if the funds are subsequently transferred to the U.S. The FBAR rules state that reporting is required if at any time during the year the foreign account exceeds $10,000.
Business Accounts – An officer or board member may have signature authority over a business account held in a foreign country and overlook the need to meet the FBAR reporting requirements.

In addition to including any reportable foreign income on one’s tax return, a taxpayer must ensure that the foreign account questions are completed correctly on the tax return and that the FBAR is filed when required.

If you should have filed the FBAR form in prior years but failed to do so, the IRS has a voluntary disclosure initiative in effect through August 31 of this year. This initiative provides for reduced penalties for those who come forward and pay back taxes and penalties on unreported foreign income for prior years.

If you have questions regarding this reporting requirement, please contact our office.

Surprised By the Kiddie Tax??

2011-05-24T08:37:00.000-05:00

To prevent parents from placing investments in their children’s names to take advantage of the child’s lower tax rate, Congress created, several years back, what is referred to as the “Kiddie Tax”. Under the Kiddie Tax, a child’s investment income in excess of $1,900 is taxed at the parent’s tax rate rather than the child’s. These rules do not apply to married children who file a joint return with their spouse or self-supporting children.

Depending upon your circumstances, this can be either a tax return preparation nuisance or a penalty tax – or maybe both. Many insightful parents seek tax-advantaged ways to put money aside for their children’s education, first home, etc. They should not be deterred by the Kiddie tax, as there are legal ways to minimize or eliminate it. This is generally accomplished by making investments that produce tax-free income or that defer income until a year the child is no longer subject to the Kiddie Tax. If, at that time, the child is in school or just starting in the work force with little or no other income, the deferred income could then be realized with little or no income tax.

The following are examples of investments that either defer income or generate tax-free income. However, you must also consider that some of these might have a lower rate of return than a taxable investment and may not always be appropriate in the current economic climate:

U.S. savings bonds – Interest can be deferred until the bonds are cashed.
Municipal bonds – Generally produce tax-free interest income for Federal taxes. Most states with a state income tax also permit tax-free treatment of interest from bonds of that state or local governments within that state.
Growth stocks – Stocks that focus more on capital appreciation than current income. The child could wait to sell them until he or she is no longer subject to the Kiddie tax.
Mutual funds – Mutual funds that focus on growth stocks or municipal bonds. Although they might throw off some taxable income, their primary goal is capital appreciation or tax-free income.
Unimproved real estate – That provides appreciation without current income.

If the family has a business, that family business could employ the child. The child’s earned income is not subject to the Kiddie tax rules and will generate a deduction for the family business (assuming the wages are reasonable for work actually performed). The child’s earned income can be offset by the standard deduction for a dependent, and the excess income will be taxed at the child’s rate (not the parent’s). In addition, the child would also qualify for a Traditional or Roth IRA, which provides additional income shelter.

If you have questions regarding the Kiddie Tax, please give our office a call.

Can You Write Off a Bad Debt?

2011-05-16T08:44:00.000-05:00

Most small businesses have receivables that cannot be collected. These receivables can be from the sale of products, providing services to customers, or a combination of the two.

Whether or not a bad debt deduction will apply generally depends upon which accounting method is used (either the cash or accrual method). Why does this make a difference? Let’s look at what happens under both methods of accounting.

Accrual – If the accrual method is used, all of your billings must be treated as income whether or not they have been collected. This means that the taxable income already includes the income from your deadbeat customers. Therefore, these items are considered a bad debt when those receivables become uncollectible and can be deducted. If the accrual method of accounting is used, bad debts are deductible.
Cash – On the other hand, if the cash method of accounting is used, income is not reported until it is received (unlike the accrual method). Since the income was never reported in the first place, a deduction cannot be taken if payment was never made for the goods or services that were provided. However, if you made a loan to a customer or supplier and there is a business reason for the loan, you may have a business bad debt.

Proof of Worthlessness – Proving a debt (or receivable) is worthless requires the taxpayer or business to show that the debt has become worthless and that reasonable steps were taken to collect the debt.

Non-Business Bad Debts – Some bad debts may actually be personal debts, such as personal loans to individuals. In those cases, the bad debt is not deducted as a business expense but is treated as a short-term capital loss on Schedule D subject to the $3,000 annual loss limit.

If you still have questions, please give our office a call for additional information.

100 Percent Write-Off for Qualified Leasehold Improvements

2011-05-16T08:43:00.000-05:00

In an effort to get the economy back on the rails again, the 2010 Tax Relief Act permits businesses to claim a 100% depreciation deduction (100% bonus depreciation allowance) in the year that qualifying assets are placed in service. Qualified leasehold improvements clearly are eligible for this special 100% write-off.

Bonus depreciation basics - In general, a leasehold improvement qualifies for the 100% bonus depreciation allowance if it is acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012, and the original use of the improvement commences with the taxpayer.

Qualified leasehold improvement property - Generally, qualified leasehold improvement property includes interior improvements to a building which is nonresidential real property if:

(1) The improvement is real property;

(2) The improvement is made to leased property. A lease for this purpose is defined as any grant of a right to use property, either by the lessee, sublessee or lessor of the building portion;

(3) The leased portion of the building is occupied exclusively by the lessee (or sublessee); and

(4) The improvement is placed in service more than 3 years after the date the building was first placed in service.

The following expenditures, however, do not qualify: amounts paid for the enlargement of a building, a structural component that benefits a common area, an elevator or escalator, or the internal structural framework of the building.

Whether you have already made leasehold improvements or are contemplating in doing so, and have questions on how this special write-off can fit into your business planning for 2011, please give this office a call.

Read This Before Tossing Old Tax Records

2011-05-09T08:16:00.000-05:00

Now that your taxes have been completed for 2010, you are probably wondering what old records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why the records needed to be kept in the first place.

Generally, we keep “tax” records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we actually dispose of them.

With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. And, of course, the statutes don’t begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return in order to evade tax.

If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded; add a year or so to that if you live in a state with a longer statute.

Examples - Sue filed her 2010 tax return before the due date of April 18, 2011. She will be able to dispose of most of her records safely after April 15, 2014. On the other hand, Don files his 2010 return on June 2, 2011. He needs to keep his records at least until June 2, 2014. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The big problem! The problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. They need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into that category:

Stock acquisition data – If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.
Stock and mutual fund statements – Where you reinvest dividends. Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it is finally sold. Keep statements at least four years after the final sale.
Tangible property purchase and improvement records – Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.

For example, when the large $250,000 and $500,000 home exclusion was passed into law several years back, homeowners became lax in maintaining home improvement records thinking that the large exclusions would cover any potential appreciation in the home’s value. Now that the exclusion may not always be enough, records of home improvements are vital. Records can be important, so please use caution when discarding them.

Have questions about whether or not to retain certain records? Give this office a call first; it is better to make sure before discarding something that might be needed down the road.

Is Your Credit Rating Correct?

2011-05-05T15:24:00.000-05:00

Why do you care? Well for starters, people with a better credit rating enjoy significantly lower interest rates that can add up to thousands of dollars less in interest payments over the term of the loan. For example, a fixed 30-year mortgage payment varies with respect to credit score and the interest rates corresponding to the credit score. Having a score that is two hundred points higher can offer a savings of $448 a month for the same $200,000 house loan. Good credit ratings also provide for quicker loan approvals, fairer loan terms, and more credit.

Although there are various credit ratings or scores, the FICO® score is probably the most widely used of credit bureau scores. The FICO® ranges from 300 to 850. If you have a credit score lower than 650, your options for financing, ability to get a job, rent a home, and eligibility for a lease could be significantly affected.

Your credit rating can be affected by fraud and identity theft. So it is important to not only maintain a good credit rating but to periodically check on it for fraudulent activity and errors that can adversely affect your financial security. If someone has accessed your Social Security number, very little additional information is required to commit identity fraud in your name. Identity theft typically entails establishing false bank accounts, credit cards, utilities, and loans. Early detection is the best way to mitigate lasting damage to your credit record.

If you discover an error on a credit report, you should immediately take steps to have the error corrected. The law allows you to ask for an investigation of information in your file that you dispute as inaccurate or incomplete. There is no charge for this. Some people hire a company to investigate on their behalf, but anything a credit repair clinic can do legally, you can do for yourself at little or no cost.

According to the Fair Credit Reporting Act (FCRA):

You are entitled to a free report if a company takes “adverse action” against you, like denying your application for credit, insurance, or employment. You have to ask for your report within 60 days of receiving notice of the action. The notice will give you the name, address, and phone number of the consumer reporting company. You are also entitled to one free report a year if you are unemployed and plan to look for a job within 60 days; if you are on welfare; or if your report is inaccurate because of fraud, including identity theft.

Each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — is required to provide you with a free copy of your credit report once every 12 months, if you ask for it. The three companies have a central website, a toll-free telephone number, and a mailing address for consumers to order the free annual credit reports that the government entitles them to. To order, click on annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request.

You may order reports from each of the three consumer reporting companies at the same time, or you can stagger your requests, ordering one from each company throughout the year from the central address. Don’t contact the three nationwide consumer reporting companies individually or at another address because you may end up paying for a report that you are entitled to get for free. In fact, each consumer reporting company may charge you up to $10.50 to purchase an additional copy of your report within a 12-month period.

It doesn’t cost anything to dispute mistakes or outdated items on your credit report. Under the FCRA, both the consumer reporting company and the information provider (that is, the person, company, or organization that provides information about you to a consumer reporting company) are responsible for correcting inaccurate or incomplete information in your report. To take advantage of all your rights under the FCRA, contact the consumer reporting company and the information provider.

How to challenge an error – Although you can hire firms to do credit repair, there is nothing they can do that you cannot do yourself. Here is the simple 2-step process to challenge an error on your credit report:

STEP 1:

Tell the consumer reporting company, in writing, what information you think is inaccurate. Include copies (NOT originals) of any documents that support your position. In addition to providing your complete name and address, your letter should identify each item in your report that is being disputed; state the facts and the reasons you are disputing the information and ask that it be removed or corrected. You may want to enclose a copy of your report and circle the items in question. Send your letter by certified mail with a “return receipt requested” so you can document that the consumer reporting company received it. Keep copies of your dispute letter and enclosures.

Your letter may look something like the one below suggested by the Federal Trade Commission.

Consumer reporting companies must investigate the items you question within 30 days — unless they consider your dispute frivolous. They also must forward all the relevant data that was provided about the inaccuracy to the organization that provided the information. After the information provider receives notice of a dispute from the consumer reporting company, it is required to investigate, review the relevant information, and report the results back to the consumer reporting company. If this investigation reveals that the disputed information is inaccurate, the information provider has to notify the nationwide consumer reporting companies so they can correct it in your file.

When the investigation is complete, the consumer reporting company must give you the results in writing, too, and a free copy of your report if the dispute results in a change. If an item is changed or deleted, the consumer reporting company is not permitted to put the disputed information back in your file unless the information provider verifies that it is accurate and complete. The consumer reporting company also must send you written notice that includes the name, address, and phone number of the information provider. If you ask, the consumer reporting company must send notices of any correction to anyone who received your report in the past six months. You also can ask that a corrected copy of your report be sent to anyone who received a copy during the past two years for employment purposes.

If an investigation doesn’t resolve your dispute with the consumer reporting company, you can ask that a statement of the dispute be included in your file and in future reports. You also can ask the consumer reporting company to provide your statement to anyone who received a copy of your report in the recent past. You can expect to pay for this service.

STEP 2:

Tell the creditor or other information provider, in writing, that you dispute an item. Be sure to include copies (NOT originals) of documents that support your position. Many providers specify an address for disputes. If the provider reports the item to a consumer reporting company, it must include a notice of your dispute. And if you are correct — that is, if the information is found to be inaccurate — the information provider may not report it again.

For more detailed information, visit the FTC website Consumer Protection page. Please call this office for assistance.

Two Tax Credits to Help Pay Higher Education Costs

2011-05-02T08:29:00.000-05:00

There are two federal tax credits available to help individuals offset the costs of higher education for themselves or their dependents. They are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, a taxpayer must pay post-secondary tuition and fees for themselves, their spouse or their dependent. The credit is claimed by the individual who claims the student as a dependent, even if someone else pays the tuition including the student. However, if the student is not claimed as a dependent of another, then the student will claim the credit.

For each student, only one of the credits can be claimed in a single tax year. For example, the American Opportunity Credit cannot be claimed to pay for part of a student’s tuition charges and then the Lifetime Learning Credit claimed for $2,000 more of the school costs.

However, if college expenses are paid for two or more students in the same year, a taxpayer can choose to take credits on a per-student, per-year basis. Thus, for example, the American Opportunity Credit can be claimed for one child and the Lifetime Learning Credit for the other.

Here are some key facts you should know about these valuable education credits:

American Opportunity Credit

The credit can be up to $2,500 per eligible student.
It is available for the first four years of post-secondary education.
Forty percent of the credit is refundable, which means that a claimant may be able to receive up to $1,000, even if they owe no taxes.
The student must be pursuing an undergraduate degree or other recognized educational credential.
The student must be enrolled at least half-time for at least one academic period.
Qualified expenses include tuition and fees, course-related books, supplies and equipment.
The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return. Above those amounts, the credit quickly begins to phase out.

Lifetime Learning Credit

The credit can be up to $2,000 per eligible student.
It is available for all years of post-secondary education and for courses to acquire or improve job skills.
The credit is non-refundable; thus, the maximum amount credited is limited to the amount of tax that must be paid on your return.
The student does not need to be pursuing a degree or other recognized education credential.
Qualified expenses include tuition and fees, course-related books, supplies and equipment.
The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return. Above those amounts, the credit quickly begins to phase out.

There is also an above-the-line tuition and fees tax deduction available, but you cannot claim the tuition and fees tax deduction in the same year the American Opportunity Tax Credit or the Lifetime Learning Credit is claimed. Choose to take either the credit or the deduction and consider which is more beneficial for you. Generally, the credits provide the greater benefit.

Please call this office if you have any questions related to education credits.

Is a Home Office Right for You?

2011-04-27T08:54:00.000-05:00

In the current economic environment, many smaller businesses are looking for ways to cut costs. One such possible move would be to relocate from a rented office space to a home office. With today’s modern means of communications and virtual marketplace, this may be a good option for your business.

The advantages include the ability for you to deduct from your business income some home expenses, such as utilities and certain maintenance costs that are not otherwise deductible. Those expenses will include a depreciation allowance for the part of your home that is the office. A portion of your mortgage interest and real property taxes will be deducted on your business schedule rather than as itemized deductions. You will be eliminating the costs of your nondeductible commuting travel, while business travel will now generally be measured from your front door.

There are two significant downsides to a home office. First, to the extent of the depreciation taken on the home, gain when you sell it cannot be excluded under the home sale rules. Secondly, if the home office is in a separate structure, then the separate business portion does not qualify for the home gain exclusion. You should also note that the home office deduction is limited in any year that your business operates at a loss.

Generally, a self-employed individual will qualify for a home office deduction if the office is a place where the taxpayer meets with customers, patients or clients, or is used on an exclusive and regular basis for administrative or management activities of his or her trade or business, and there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities of the business. Even if a taxpayer conducts administrative activities at a fixed location outside the home, he or she is still eligible to claim a deduction as long as the administrative activities conducted at the outside location aren’t substantial. Space in the home used to store inventory for a wholesale or retail business also qualifies as business use of the home.

If you would like to learn more about how the business use of your home might affect your taxes, please give this office a call.

100 Percent Write-Off for Heavy SUVs Used Entirely for Business

2011-03-26T07:30:00.003-05:00

The 2010 Tax Relief Act provides a limited-time 100% bonus depreciation allowance for qualified property which allows taxpayers that buy a new heavy SUV and use it entirely for business to write-off the entire purchase price in the placed-in-service year.

Heavy SUVs are vehicles with a gross vehicle weight (GVW) rating of more than 6,000 pounds which are exempt from the luxury auto dollar caps because they fall outside of the definition of a passenger auto. To deal with this “SUV tax loophole,” several years ago, Congress imposed a limit on the Sec. 179 expensing of heavy SUVs. Thus, not more than $25,000 of the cost of a heavy SUV placed in service after Oct. 22, 2004 may be expensed under Sec. 179. These rules apply, with some exceptions, to SUVs rated at 14,000 pounds GVW or less.

Under the 2010 Tax Relief Act, the bonus first-year depreciation percentage is 100% for eligible property that is generally:

Placed in service after Sept. 8, 2010 and before Jan. 1, 2012, and
Acquired by the taxpayer after Sept. 8, 2010 and before Jan. 1, 2012.

Eligible property includes heavy SUVs. Thus, a taxpayer that buys and places in service a new heavy SUV after Sept. 8, 2010 and before Jan. 1, 2012, and uses it 100% for business, may write-off its entire cost in the placed-in-service year. There is no specific rule barring this result for heavy SUVs.

Let’s say a taxpayer purchased a heavy SUV in October of 2010 for $50,000 and used the vehicle 100% for business for the rest of 2010. This taxpayer can write-off the full $50,000 cost of the vehicle on his 2010 return. If the vehicle is used less than 100% for business, the deduction is prorated.

If you have questions related to buying a heavy SUV and how this deduction will apply to your specific tax circumstances, please give this office a call.

Is the Income Taxable or Non-Taxable?

2011-03-23T07:00:00.001-05:00

A question that comes up frequently is whether income you received is taxable or not. Generally, most income you will receive is considered taxable, but there are situations when certain types of income are partially taxed or not taxed at all.

To help taxpayers understand the differences between taxable and non-taxable income, the Internal Revenue Service offers these common examples of items not included as taxable income:

Adoption expense reimbursements for qualifying expenses
Child support payments – Child support payments are reimbursements for the support of a child paid by the non-custodial parent to the custodial parent. Thus, it is not income to the recipient parent, nor is it deductible by the parent making the payments.
Gifts, bequests and inheritances – Gift taxes are paid by the giver and inheritance taxes are paid by the estate of the deceased. Thus, the recipient is not subject to taxation on those items. There are some exceptions to that rule for income that would have been taxable to the deceased if he had received it while living, such as income from installment sale notes, earned but unpaid wages, or annuities. The most prevalent exception is when a traditional IRA is inherited. Distributions from the IRA are taxable to the beneficiary, although part of the distribution will be non-taxable if the deceased IRA owner had made contributions to the IRA that were not deductible on his or her tax returns.
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 – Cash rebates are considered to be a reduction in purchase price and therefore are not treated as income. If the item is used in business, be sure to reduce the depreciable basis by the rebate amount.

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable 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, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.
Municipal Bond Interest – Generally, interest from municipal bonds is tax-free for federal purposes. However, some states only treat municipal bonds issued in their state as tax-free for state purposes.
Social Security Income – Depending upon your total income for the year, Social Security benefits can be tax-free or partially taxable. However, no more than 85% of Social Security income is ever taxable.
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.
Non-Cash Income – Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income by both parties.

Generally, most other items of income—including income such as wages, salaries, tips, unemployment compensation, investment earnings and gains from the sale of assets — are fully taxable and must be included in your income unless specifically excluded by law.

Name Changes Can Complicate Filing

2011-03-20T07:30:00.002-05:00

If you changed your name as a result of a recent marriage or divorce, you should take the necessary steps to ensure the name on your tax return matches the name registered with the Social Security Administration (SSA). A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your return and may even delay your refund.

Here are some tips for recently married or divorced taxpayers who have a name change.

1. If you took your spouse’s last name or if both spouses hyphenate their last names, you may run into complications if you don’t notify the SSA. When newlyweds file a tax return using their new last names, IRS computers can’t match the new name with their Social Security Number (SSN).

2. If you were recently divorced and changed back to your previous last name, you’ll also need to notify the SSA of this name change.

3. Informing the SSA of a name change is easy; you will need to file a Form SS-5, Application for a Social Security Card, at your local SSA office and provide a recently-issued document as proof of your legal name change.

4. If you adopted your spouse’s children after getting married, make sure that the children have an SSN. Taxpayers must provide an SSN for each dependent claimed on a tax return. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number – or ATIN – by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return.

Please notify this office of any name change prior to finalizing your tax return.

Tax Tips for Self-Employed Individuals

2011-03-17T07:30:00.000-05:00

If you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor, you generally would consider yourself self-employed, and you will need to include on your tax return your income and allowable business expenses to determine your net profit. Your net profit is subject to both income tax and self-employment tax.

Here are some things you should know about self-employment:

If you provide services as an independent contractor, each business that engages you will ask you to complete and provide them with a copy of IRS Form W-9. This is the way you provide and certify your contact information and Social Security number to the business that hired you. The hiring company will issue you an IRS Form 1099-MISC and provide a copy to the IRS for the amounts paid to you during the year.
If you are self-employed and have a net profit of $400 or more, you have to pay self-employment (SE) tax. SE tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. However, since you have no employer, you are required to pay both the employer’s and the employee’s share of the social security and Medicare taxes, thus making the SE tax double what an employee would pay. However, you are allowed to deduct half of your self-employment tax in figuring your adjusted gross income.
Since you do not have an employer to withhold taxes from your pay, you generally will be required to make estimated tax payments to cover your income and SE tax liabilities from your self-employment. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you end up owing taxes when you file your tax return after the end of the tax year, you may be penalized for underpayment. If your taxes from self-employment are small and you have other income from employment on which tax is withheld, it may be possible to adjust the withholding to cover the taxes from the self-employment.
You can deduct the costs of operating your business including expenses, cost of goods sold, and depreciation on capital assets used in business. Temporary liberal expensing and depreciation rules mean that most small business owners can fully deduct the purchase costs of nearly all capital assets placed in service during 2010 and 2011. However, careful tax planning is needed to maximize the benefits of the write-offs.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
If you also resale products, you probably will be required to obtain a resale permit from your state, and collect and remit sales tax to the state on a periodic basis.
Depending upon the location of your business, you may also be required to obtain a business tax permit, which is really a way for the local government entity to collect tax on your sales. In addition, if you have fixed assets that you use in your business, the local government entity will probably assess a personal property tax based on the value of the assets.

Setting up a self-employment business can be complicated and you are urged to contact this office for assistance.

Time to Call For Your Tax Appointment

2011-03-14T07:30:00.001-05:00

It is only one month until the April due date for your tax returns. If you have not made an appointment to have your taxes prepared, we encourage you do so before it becomes too late.

Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us.

Even if you think you might need to go on extension, it is best to prepare the return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you.

We look forward to hearing from you.

What to Do if You Are Missing a W-2

2011-03-11T07:30:00.001-06:00

Have you received your W-2? These documents are essential to filling out most individual tax returns. You should receive a Form W-2, Wage and Tax Statement, from all of your employers each year. Employers had until January 31st to provide or send you a 2010 W-2 earnings statement either electronically or in paper form. If you have not received your W-2, follow these steps:

1. Contact this office – And let us know you are missing a W-2. If your appointment is in the near future, we will advise you whether to keep the appointment or change it to another time. Generally, when a W-2 or 1099 is missing, it is best to keep the appointment. We can complete everything else for the return, except for the missing document, which you can mail or drop by the office at a later date. That way, we can finish your return as soon as the W-2 or 1099 is available. This will speed up your refund if you are receiving one.

2. Contact your employer - Contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for them to resend or to issue the W-2.

3. Contact the IRS - If you still have not received your W-2 by February 16, you can contact the IRS for assistance at 800-829-1040. However, we recommend that you hold off from contacting the IRS until you are certain that you will not be receiving a W-2 from the employer. If, and when, you do call the IRS, have the following information at hand:

Employer's name, address, city, and state, including zip code;
Your name, address, city and state, including zip code, and Social Security number; and
An estimate of the wages you earned, the federal income tax withheld, and the period you worked for that employer. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible. This office can assist you in making the estimate.

4. File your return – Even if you don’t receive a W-2, you still must file your tax return or request an extension to file by April 15.

If you anticipate that you will ultimately receive the missing W-2, this office can estimate your 2010 tax liability and file extensions for you. If you have a substantial refund coming, you may opt to have this office prepare a substitute W-2 and you can file without the W-2. Refunds for returns including substitute W-2s can significantly be delayed while the IRS verifies the W-2 information.
If you don’t anticipate receiving the missing W-2, then this office can prepare a substitute W-2, allowing you to file your 2010 tax return.

If a substitute W-2 is used and it is later determined that the information used to prepare the substitute W-2 was in error, we may have to prepare an amended return for you to file.

Please call our office if you have any questions.

Checking the Status of Your Federal Tax Refund is Easy

2011-03-08T09:28:00.000-06:00

If you already filed your federal tax return and are due a refund, you can check the status of your refund online.

Where’s My Refund? is an interactive tool on the IRS web site at IRS.gov. Whether you split your refund among several accounts, opted for direct deposit into one account, or asked the IRS to mail you a check, Where’s My Refund? will give you online access to your refund information nearly 24 hours a day, 7 days a week.

If you e-file, you can get refund information 72 hours after the IRS acknowledges receipt of your return. If you file a paper return, refund information will be available within three to four weeks. When checking the status of your refund, have your federal tax return handy. To access your personalized refund information, you must enter:

Your Social Security Number (or Individual Taxpayer Identification Number);
Your Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and
The exact refund amount shown on your tax return.

Once your personal information has been entered, one of several responses may come up, including the following:

Acknowledgement that your return was received and is in processing.
The mailing date or direct deposit date of your refund.
Notice that the IRS could not deliver your refund due to an incorrect address. You can update your address online using the Where’s My Refund? feature.

Where’s My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you can start a refund trace online.

Where’s My Refund? is also accessible to visually-impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes.

If you do not have Internet access, you can check the status of your refund by calling the IRS TeleTax System at 800-829-4477 or the IRS Refund Hotline at 800-829-1954. When calling, you must provide your Social Security Number (or your spouse’s), your filing status and the exact refund amount shown on your return.

Refunds are sent out weekly on Fridays. If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back.

Are You Making a Move?

2011-02-26T07:45:00.000-06:00

If your home or business address has changed, make sure that you update this information with the IRS to ensure that you receive any refunds or correspondence from them. Since the IRS meets its notice requirements by sending notices to your last known address, it is not an excuse that you did not receive the correspondence if you have not provided the new information.

Although no one likes to receive mail from the IRS, other than a refund check, it is important that you timely receive their correspondence and respond promptly. Otherwise, the IRS will automatically escalate the inquiry, making it far more difficult to deal with. If additional tax will be owed as a result of an inquiry, penalties and interest will continue to accrue.

2011-02-23T07:45:00.002-06:00

If you paid someone to care for a child under age 13, or a qualifying spouse or dependent to allow you to work or look for work, you may be able to reduce your tax by claiming the Child and Dependent Care Credit on your federal income tax return. To qualify, your spouse, children over the age of 13, and other dependents must be physically or mentally incapable of self-care.

The good news is that increased child care benefits provided as part of the Bush era tax cuts have been extended through 2012. That means, instead of the credit percentage dropping to 30%, the higher 35% credit will continue for two more years. In addition, the maximum expenses qualifying for dependent care credit will remain at $3,000 ($6,000 for two or more qualifiers) instead of dropping to $2,400 ($4,800 for two or more qualifiers) as previously scheduled. The credit is a percentage of the amount of work-related child and dependent care expenses paid to a care provider.

To claim the credit for child and dependent care expenses, the following conditions must be met:

The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.
You – and your spouse if you are married filing jointly – must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if he or she were a full-time student or physically or mentally unable to care for themselves.
The payments for care cannot be paid to your spouse, someone you can claim as your dependent on your return, or your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. The care provider(s) must be identified on your tax return.
Your filing status must be single, married filing jointly, head of household, or qualifying widow(er) with a dependent child.
The care must have been provided for one or more qualifying persons.
The qualifying person generally must have lived with you for more than half of 2010. There are certain exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents.
If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax.

There may be some additional limitations on the amount of credit that can be claimed. If you received dependent care benefits from your employer or the care was provided in your home, other rules will apply. Please call this office for additional details.

Important Facts about Dependents and Exemptions

2011-02-20T07:45:00.002-06:00

Some tax rules affect every person who may have to file a federal income tax return; these rules include dependents and exemptions. Here are some important facts you need to know that are related to dependents and to claiming exemptions on your tax return.

Exemptions reduce your taxable income – There are two types of exemptions: personal exemptions (one for the filer or two if married taxpayers are filing jointly) and exemptions for dependents claimed on a tax return. For each exemption claimed on the tax return for 2010, a $3,650 deduction is allowed. For example, a married couple filing jointly with two dependent children would be allowed 4 exemptions for a total deduction equaling $14,600 (4 times $3,650).
A spouse is never considered a dependent – This is because, when filing a joint return, a couple is allowed to claim two exemptions, one for each of them. If filing a separate return, a taxpayer may claim the exemption for a spouse only if the spouse had no gross income, is not filing a joint return, and was not the dependent of another taxpayer. (This exception for separate returns usually does not apply if you live in a community property state such as California, Texas, Washington and others.)
Exemptions for dependents – Generally, an exemption can be claimed for each of a taxpayer’s dependents. A dependent is a taxpayer’s qualifying child or qualifying relative. It is possible for a non-relative to qualify as a dependent if the person lived with the taxpayer all year as a member of the taxpayer’s household and other tests are met. The Social Security number (SSN) of any dependent claimed as an exemption must appear on the tax return. Without the SSN, the IRS will disallow the dependent exemption.
Child of divorced or separated parents – The exemption for a child can be claimed by only one of the parents. If more than one parent claims the child as a qualifying child and the parents don't file a joint return together, the child is treated as the qualifying child of: (a) the parent with whom the child resided for the longer period of time during the tax year, or (b) if the child resides with both parents for the same amount of time during the tax year, the parent with the higher adjusted gross income. However, a child is treated as the qualifying child of the noncustodial parent if the custodial parent releases a claim to the exemption using IRS Form 8332. This is frequently a bone of contention between divorced and separated parents. It is important to understand that the law governing who has the right to claim a child’s exemption is federal tax law, and the IRS will not accept a state court’s allocation of exemptions. For example, a state divorce court cannot award physical custody to one parent and then specify that the other parent can claim the child for tax purposes.
Dependents may still be required to file their own tax returns – Even if an individual is claimed as a dependent on someone else’s tax return, the individual claimed as the dependent may still be required to file their own tax return depending on a number of factors, including the amount of unearned, earned or gross income, marital status, any special taxes owed, and any advance Earned Income Tax Credit payments received.
The dependent of another may not claim an exemption – If someone else – such as a parent – claims an individual as a dependent, then the individual may not claim his or her personal exemption on his or her own tax return.
Some people cannot be claimed as dependents – Generally, you may not claim a married person as a dependent if he or she is filing a joint return with a spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national, or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. Call this office for information related to the exceptions.

For more information on exemptions, dependents, and whether you or your dependent needs to file a tax return, please give this office a call.

Small Business Expenses 101

2011-02-17T07:45:00.000-06:00

For small business owners, tax breaks often come in the form of tax deductions – which can offer a nice little instant cash savings – if you know how to navigate tax law and claim the deductions you deserve (not what you believe you are entitled to).

Large tax deductions are a notorious red flag for the IRS, with home-based businesses, in particular, facing an increase in tax audits due to suspicious deduction activity on income tax returns.

To help you navigate the complex world of business tax deductions, here is some foundational guidance that will help you take the deductions that you deserve.

Recordkeeping - Whatever the deductible expense may be, it is essential to maintain adequate records. There are many bookkeeping and accounting computer software programs available that will provide the basics for tracking expenses. But it is also important to keep receipts, invoices, etc., to back up the numbers. Some types of expenses require additional documentation, such as a log book or diary for business use of your personal vehicle or notations as to the business purpose of the expense (see Entertainment Expenses below). Keeping these records up-to-date will be a time-saver in the long run, especially if the IRS selects your return for audit.

Business Expenses vs. Capital Expenses -One of the first concepts a small business owner needs to understand is the difference between what can be expensed and what must be capitalized.

Business expenses are expenses that can be deducted in the current year, such as: business travel, rents, utilities, supplies, insurance, wages, customer entertainment and tangible items with a useful life of no more than one year or cost less than $100. If you are a for-profit, these expenses are usually tax-deductible.

Capital expenses are those associated with purchasing fixed business assets, such as property and equipment that has a useful life of more than one year, and must be capitalized and depreciated over a period of years rather than be deducted as current year expenses. The number of depreciable years depends on the type of property. Here are some examples: office furnishings – 7 years, autos and light trucks – 5 years, computer equipment - 5 years, residential rental – 27.5 years, commercial rental – 39 years.

Sometimes even capital items can be expensed all in one year by electing to use a special provision of the tax code that allows personal tangible property, such as computers, office equipment, tools and machinery, to be deducted in full in the year the property is placed into service. The list also includes off-the-shelf software for 2011. The maximum amount that can be expensed for 2011 is $500,000 subject to certain limitations.

A special provision for 2011 permits certain real property, such as qualified leasehold improvements, restaurant property and retail improvements, to be expensed, although no more than $250,000 of the $500,000 expense limit can be applied to these real property assets.

For 2011, Congress has reinstated the bonus depreciation and increased it from 50% to 100% of the cost of most personal tangible property, qualified leasehold improvement property and certain computer software with a depreciable useful life of 20 years or less. For qualifying assets placed in service in 2012, the bonus rate drops back to 50%.

Although repairs are generally considered to be currently deductible expenses, there are occasions when that may not be true. If a repair or replacement increases the value of the property, makes it more useful, or lengthens its life, then it must depreciated. If not, it can be deducted like any other business expense.

Common Business Expenses - Below are some typical types of business expenses that qualify for deductions and special rules associated with them.

• Car Expenses – To take the business deduction for the use of your car, you must determine what percentage of the vehicle was used for business. Deductible costs can include the cost of traveling from one workplace to another, making business trips to visit customers or to attend meetings, or traveling to temporary workplaces. Be sure to maintain complete mileage records. However, commuting to and from your regular place of business is not a business expense. When it comes to claiming car expenses, there are two methods:

Actual Expenses – Add your annual car operating expenses (including gas, oil, tires, repairs, license fees, lease payments, interest on vehicle loans, registration fees, insurance and depreciation). Multiply the car operating expenses by the percentage of business usage to get your deductible expense. Business-related parking and road/bridge tolls are fully deductible and don’t have to be reduced by the percentage of business use. Note: the interest paid on vehicle loans is not deductible by employees who use their personal vehicles on the job.
Standard Mileage Rate – The standard rate changes each year. For 2011, it is 51 cents per mile for each business mile driven. Business-related parking costs, road/bridge tolls, and the business-use portion of interest paid on vehicle loans (for other than employees) are also deductible when the standard mileage rate method is used.

• Business Use of Your Home – If you use part of your home for your business, you may be able to deduct expenses for items such as mortgage interest, insurance, utilities, repairs, and depreciation. To qualify, you must meet the following criteria:
a) The business part of your home must be used exclusively and regularly for your trade or business. However, there are exceptions for daycare facilities or storage of inventory/product samples.
b) The business part of your home must be:

- The principal place of business, or

- A place where you meet or deal with patients, clients, or customers in the normal course of your business, or

- A separate structure (not attached to your home) used in connection with your business.

• Entertainment Expenses – This includes any activity considered to provide entertainment, amusement or recreation. To be deductible, you must generally show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your business. Recordkeeping is essential – you will need to keep a history of the business purpose, the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. Entertainment expenses are usually subject to a 50 percent limit.

• Travel Expenses – These are “ordinary” and “necessary” expenses while away from home when the primary purpose is conducting business. Your home is generally considered to be the entire city or general area where your principal place of business or employment is located. Out-of-town expenses include transportation, meals, lodging, tips, and miscellaneous items like laundry, valet, etc.

Document away-from-home expenses by noting the date, destination and business purpose of your trip. Record the business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses - lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense (proves you were out-of-town). However, if any other business expense is less than $75, a receipt is not necessary if you record all the information in a timely diary. You must keep track of the full amount of meal expenses, even though only 50% of the amount will be deductible.

• Conventions – It is not coincidental that most conventions are held in resort areas during the spring through early fall months. Convention planners know quite well that convention timing and location is the key to its success. If planned properly, attendees can deduct a portion of the expenses for establishing business relationships and gaining business knowledge while enjoying a mini-vacation. Even without a convention, business travel can be married with some personal relaxation while still providing a partial or complete deduction. It is important to be aware of when the deductions are legitimate as well as when they are not.

Where a companion, such as a spouse, accompanies the taxpayer, the companion's meals and travel expenses are generally not deductible. In addition, deductible-lodging expense is based upon the single occupancy rate.

There are special rules related to the deductibility of cruise ship conventions, and the meeting must be directly related to the active conduct of the taxpayer's trade or business. The cruise ship must be a vessel registered in the United States. All ports of call must be located in the U.S. or any of its possessions.

Note that a higher standard is applied to foreign conventions than to conventions and seminars held within the North American area. Various factors are considered to determine the reasonableness of the location and convention, including, but not limited to, the meeting's purpose, the sponsor's purpose and activities, the residence of the organization's members, the locations of past and future seminars.

• Marketing and Advertising Expenses - Although marketing and advertising is generally thought of in terms of print ads, flyers and radio and television advertising, they also can include marketing that is intended to portray a business positively. Such marketing creates a long-term potential for business and falls within the ordinary and normal requirements of the tax code.

Examples of such marketing include sponsoring local youth sports teams, distributing samples of your business product, and costs associated with prizes offered by your business in a contest. As long as your marketing expenses can be reasonably related to the promotion of your business, they can be deducted.

The foregoing is a brief overview of some of the many deductions available to the small business owner. However, every business is different and has its own unique expenses. If you have questions related to deductible expenses for your business, please give this office a call.

Are You Supporting Your Parents?

2011-02-14T07:45:00.001-06:00

If you are helping support your parents, you may qualify to claim a tax benefit if you are providing over half of your parents’ support. But you may be having difficulty showing over half of the support for both parents, thus failing to qualify for the dependency exemptions (and for the beneficial head of household filing status if you are a single taxpayer).

You may overcome this problem by designating the support to only one of your parents. This may allow you to claim at least one parent as your dependent and, if you are unmarried, permit you to file as head of household.

To qualify for the head of household filing status, an unmarried taxpayer must maintain a household that constitutes one or both of his or her parents' principal abode, and at least one of the parents must be the taxpayer's dependent, i.e., must individually have gross taxable income for the year of less than the personal exemption amount ($3,650 for 2010) and receive over half of his or her support from the taxpayer. The taxpayer himself need not reside in the household he or she maintains for the parents. The home could even be a retirement home or facility.

To accomplish this, the taxpayer must be able to provide proof that the support is for one of the parents only. Otherwise, the support will be designated as a “fund” equally allocated to both, making it harder to qualify as providing over half the support for either one. The IRS suggests a notation on a check as an acceptable designation procedure. It says, “Notations by the maker on support checks purporting to allocate funds to particular household members made payable to an individual having custody of a claimed dependent will be regarded as evidence of actual support.”

Although having no effect on filing status, when several people together provide over 50% of support, all who provide more than 10% of the support can agree about which of them will claim the dependent. Of course, the agreeing parties must also otherwise qualify to claim the dependent. Each person who is relinquishing the dependent exemption must complete an IRS form for attachment to the return of the taxpayer claiming the dependent.

If you are supporting both parents and would like to discuss how the foregoing might apply to your specific situation, please give this office a call.

Do You Have to File a Tax Return?

2011-02-11T07:58:00.000-06:00

Not all individuals are required to file tax returns. If your income is less than the sum of your standard deduction and personal exemptions, you are generally not required to file a tax return. There are, however, circumstances where you may have to file anyway based on certain types of income or special circumstances.

Even if you are not required to file, it may be in your best interest to do so. The following are some of the instances in which you may want to file a tax return even though you are not required to do so.

Federal or State Income Tax Withheld – You should file to get money back if federal or state income tax was withheld from your pay, if you made estimated tax payments, or if a prior year overpayment was applied to this year’s tax return.
Making Work Pay Credit – You may qualify for the making work pay credit if you had earned income from work. The maximum credit for a married couple filing a joint return is $800; it is $400 for other taxpayers.
Earned Income Tax Credit (EITC) – You may qualify for EITC if you worked but did not earn a lot of money. EITC is a refundable tax credit, which means you could qualify for a tax refund even if you had no withholding.
Additional Child Tax Credit - This refundable credit may be available to you if you have at least one qualifying child and the credit exceeded your tax liability for the year.
American Opportunity Credit – Up to 40% of this credit, which applies to the first four years of post-secondary education, is refundable, and the maximum credit per student is $2,500.
First-Time Homebuyer Credit – The credit is a maximum of $8,000, or $4,000 if your filing status is married filing separately. To qualify for the credit, taxpayers must have bought – or entered into a binding contract to buy – a principal residence located in the United States on or before April 30, 2010. If you entered into a binding contract by April 30, 2010, you must have closed on the home on or before September 30, 2010. If you bought a home as your principal residence in 2010, you may be able to qualify, and claim the credit even if you already owned a home. In this case, the maximum credit for long-time residents is $6,500, or $3,250 if your filing status is married filing separately.
Health Coverage Tax Credit – Certain individuals, who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a Health Coverage Tax Credit worth 80 percent of monthly health insurance premiums when they file their 2010 tax returns.

If you have questions related to whether you must file or whether you should file, please give this office a call.

Do Not Mix Your Business and Personal Bank Accounts!

2011-02-08T07:55:00.004-06:00

Whether you are working on your business part-time, operating as a sole proprietor, or starting a business with a more formal structure (such as a partnership or corporation) – it’s vital that you keep your business banking separate from your personal finances.

Keeping the two separate not only provides your business with credibility, it reduces your personal liability (a must if you are incorporating your business as a distinct and separate legal entity under its own name) and helps you to manage your taxes, bills, and other payments.

Below are some reasons why you might want to consider a business bank account and information about how to go about finding the right one for you. If you aren’t convinced that you need to separate your business and personal banking, consider the following reasons:

It Keeps Your Books in Order and the Tax Man from Your Door – From a recordkeeping and cash flow standpoint, co-mingling your finances can quickly become sticky, even for freelancers and part-time business owners. It is a risk most business owners or start-ups cannot afford to take!

For one thing, IRS recordkeeping requirements for income and tax deductions require that business and personal transactions be kept separate. While the IRS doesn’t require that you maintain a separate bank account for your business, it does require accurate record keeping – and keeping things separate makes it a lot easier to provide a clear audit trail.

It is a Must that You Maintain a Separate Business Banking Account – If your business is incorporated or you have intentions of incorporating, there is no choice in the matter since you are operating a separate tax-paying entity.

Save on Accounting Costs – Rifling through the line-by-line items in a year’s worth of bank statements can also be a headache come tax time; if you use an accountant, it will cost you more in the long run if he or she has to rummage through your messy recordkeeping.

Streamline Your Tax Payments – If you make or plan on making quarterly estimated tax payments to the IRS and your state treasury, it is always useful to have a set-aside business bank account where a percentage of each paycheck is deposited to ensure that your tax obligations are covered. This way, when it comes time for making payments, you are not scrambling with your personal finances to cover your taxes. This is particularly important for sole proprietors and independent contractors who operate under their own business names.

Even if you don’t set up a formal business account, at least maintain a separate online bank account where tax payments can easily be transferred from one bank account to another.

Give Your Business a Professional Image – Another reason, albeit superficial, why you should have a business bank account, is that when it comes to writing checks and paying bills, it will give your business more credibility and also save you plenty of headaches.

Even if your business is registered under a “doing business as” (DBA) name, such as “Creative Web Concepts,” clients will still be using your personal name when making payments unless a bank account with your business name is set up for that purpose.

This can often create problems for your customers' accounting departments when they have invoices in hand from “Creative Web Concepts” but must make checks payable to a separate individual. This can affect your ability to be paid accurately and on time. It can even attach a part-time/lack of professionalism tag to your business.

Setting Up a Business Banking Account

Once you have decided that a business bank account is the way to go, how do you find the right bank and the right account? Choosing a bank for your business can be an overwhelming and frustrating process, but it can have a big impact on your success. Unlike personal checking accounts, a business banking account is fee-based. However, the benefits gained and the headaches avoided as your business grows will outweigh the costs. An additional benefit is that these fees are tax-deductible.

If you have questions or need more information on this topic, please give this office a call.

Does Your Paycheck Seem a Little Larger?

2011-02-05T07:55:00.000-06:00

That is the result of a new stimulus provision included in tax legislation passed late in December last year that takes the place of the Making Work Pay credit that expired at the end of 2010.

This new provision reduces employees’ Social Security (OASDI) payroll tax withholding by a full 2 percentage points from 6.2 percent to 4.2 percent of wages paid. The reduction applies to all wage earners regardless of income. The employer’s share of the payroll tax is unaffected. For wage earners with payrolls in excess of the $106,800 payroll tax cap, their savings for 2011 will be $2,136 (2% of $106,800). The OASDI portion of the self-employed (SE) tax for self-employed individuals would also be reduced by 2 percentage points, reducing the overall SE tax from 15.3% to 13.3%. This reduced Social Security withholding will have no effect on an individual’s future Social Security benefits.

There is a potential tax trap for some individuals with multiple jobs if the income from these jobs exceeds the $106,800 payroll tax cap. These individuals will have too much withheld in the way of payroll tax, which is returned to them as a credit on their tax return for the year. Some may have become accustomed to utilizing the excess payroll tax to offset the tax on other income or to increase their refunds for the year. If this applies to you, keep in mind that you will have already received part of the expected overpayment in the form of reduced withholding during the year.

Without further Congressional action, the rates will return to normal in 2012, at which time the withholding tax will increase and take-home pay will be correspondingly reduced.

If you have questions about this article, please call our office.

Revising Your W-4? Seek Professional Advice.

2011-02-02T07:50:00.001-06:00

Around the beginning of the year, employers typically ask their employees to provide new W-4s. You may have already done that. If you have updated your W-4 recently and did so without knowledge of the consequences, it may be appropriate to revisit the issue and have this office assist you in completing an appropriate W-4 that suits your unique circumstances.

Owing money at the end of the year or receiving excessively large refunds while struggling to make ends meet during the year may be an indicator that your W-4 has been incorrectly completed. There are many factors to consider when completing a W-4, such as those involving individuals and couples with multiple jobs and people who are having children, getting married, getting divorced or buying homes - and the list goes on!

That is why it is helpful to seek professional assistance and have a tax projection for the year.

The W-4 form that is provided to your employer establishes the amount of income tax that is to be withheld from your payroll. It allows you to specify your filing status and the number of dependent exemptions to be claimed on your tax return. This is where frequent errors occur.

Let’s say that you are married and have two dependents. On your tax return, you claim four exemptions. The natural thing for you to do would be to claim “married” and four exemptions on the W-4. However, for W-4 purposes, the exemption for the taxpayer and spouse are automatically built into the married rates, and only two exemptions should be claimed. The result, of course, is that the taxpayer ends up claiming more exemptions than he or she actually has, which can result in under withholding if the standard deduction is used, leading to the potential that tax may be due rather than the taxpayer being entitled to a refund.

It is also common practice and acceptable for taxpayers to claim additional exemptions when they have excessive withholding. The withholding tables do not account for large itemized deductions or other situations that might reduce taxable income.

Some taxpayers increase the number of exemptions to provide more take-home pay from their payroll checks. That might seem like a good idea at the time that they do it, but it could lead to an unexpected and difficult-to-deal-with tax liability when tax time rolls around.

If you wish to change your payroll withholding amount and are unsure about the results, this office can help you determine the correct number of exemptions to produce the desired result.

2011 Required Minimum IRA Distributions

2011-01-30T07:30:00.000-06:00

Now that the New Year is here, you can begin taking your required minimum distribution (RMD) for 2011. The following is an overview of the rules regarding these mandated distributions for older taxpayers.

The IRS does not allow IRA owners to keep funds in a Traditional IRA indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the IRA owner may have to pay a 50% penalty on the amount not distributed as required. Generally, required distributions begin in the year the IRA owner attains the age of 70½.

Beginning Date Requirement - IRA owners must take at least a minimum amount from their IRA each year, starting with the year they reach age 70½.

A taxpayer who fails to take a distribution in the year age 70½ is reached can avoid a penalty by taking that distribution no later than April 1st of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which age 70½ is attained and one for the current year.

If an IRA owner dies after reaching age 70½, but before April 1st of the next year, a minimum distribution is not required because death occurred before the required beginning date.

Multiple IRA Accounts - For purposes of determining the minimum distribution, all Traditional IRA accounts, including SEP-IRAs, owned by an individual must be taken into consideration. The required minimum distribution must be determined separately for each account. However, the amounts can be totaled and distribution can be taken from just one of the accounts or it can be taken from any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts.

Determining the Distribution - The minimum amount that must be withdrawn in a particular year is the value of the IRA account divided by the number of years the IRA owner is expected to live.

Determining Value: The value of each Traditional IRA is based on the IRA’s value at the end of the business day on December 31st of the PRIOR year. Generally, IRA account trustees will provide this information on the year-end statements or on IRS Form 5498.
Determining the Distribution Period: The IRS provides two tables for use in determining the IRA owner’s life expectancy (referred to as “distribution period” by the IRS). Generally, IRA owners will use the “Uniform Lifetime Table” to determine their “distribution period.” If the IRA owner’s spouse is the sole beneficiary (on all the IRA accounts), the Joint and Last Survivor Table may be used. However, the Uniform Lifetime Table will always produce the smallest minimum distribution, unless the spouse is more than 10 years younger than the IRA account owner. Example: The IRA owner is 75 and from the “Uniform Lifetime Table,” the owner’s life expectancy is 22.9 years.
Determining Age: Use the owner’s oldest attained age for the year of the distribution. Example: Suppose an IRA owner takes a distribution in February, when the owner’s age is 74, but later in November, turns 75. For purposes of determining the owner’s life expectancy, the oldest attained age for the year, 75, would be used in computing the minimum distribution. The same rule is used for the spouse beneficiary, if applicable.

Example: The IRA account owner is age 75 and the owner’s spouse, who is the sole beneficiary of the accounts, is age 72. Since the spouse is less than 10 years younger than the IRA account owner, the Uniform Lifetime Table will produce the smallest required distribution. From the table, we determine the owner’s life expectancy to be 22.9. The owner has three IRA accounts with a combined value of $87,000 ($25,000, $60,000 and $2,000) at the end of the prior year. The combined minimum distribution is $3,799 ($1,092 + $2,620 + $87, determined by dividing the value of each account by 22.9). (This is the same result as $87,000 / 22.9, but to comply with IRS rules, each account needs to be figured separately).

Uniform Lifetime Table – The following table is the one that is generally used to determine the Required Minimum Distribution from Traditional IRA accounts. Not illustrated, because of their size, are the Joint and Survivor Life Table used to determine RMDs when the sole beneficiary spouse is more than 10 years younger than the IRA owner and the Single Life Table used for certain beneficiary RMD determinations. For table values not illustrated, please call this office.

Timing of the Distribution – The minimum distribution computation determines the amount that must be withdrawn during the calendar year. The distributions can be taken all at once, sporadically or in a series of installments (monthly, quarterly, etc.), as long as the total distributions for the year are at least the minimum required amount. Amounts that must be distributed (required distributions) during a particular year are not eligible for rollover treatment.

Maximum Distribution – There is no maximum limit on distributions from a Traditional IRA and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.

Under-Distribution Penalty – Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required.

Example: The owner’s required minimum distribution for the calendar year was $10,000, but the owner only withdrew $4,000. The excess accumulation penalty is $3,000, computed as follows: 50% of ($10,000 - $4,000).

If the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution, the owner can request that the penalty be excused by completing applicable sections of Form 5329 and attaching an explanation. IRS will then determine if the penalty will be waived.

Not Required to File – Even though the IRA owner may not be required to file a tax return, they are still subject to the minimum required distribution rules and could be liable for the under-distribution penalty even if no income tax would have been due on the under-distribution.

Death of the IRA Owner – If the IRA owner dies on or after the required distribution beginning date, a distribution must be made in the year of death, as if the IRA owner had lived the entire year. If the distribution is after the owner’s death, the minimum amount must be distributed to a beneficiary.

If you are the beneficiary of an IRA or if you need assistance determining your RMD for 2011, please give our office a call.

Do You Have Enough to Retire?

2011-01-27T07:30:00.001-06:00

Generally, retirees need somewhere between 70 and 80 percent of their pre-retirement salary to maintain their current standard of living upon retirement. This includes income from company pension plans, Social Security benefits, individual retirement plans (such as IRAs, 401(k) plans, etc.) and other investments.

Do you plan to stay in your existing home or are you planning to downsize? Downsizing and relocating may provide additional cash and reduce expenses. How is your health and do you have reasonable medical coverage? When will you be eligible for Social Security and Medicare? What will supplement those benefits until you are eligible? These are some of the major concerns that need to be considered.

Our website offers interactive financial calculators and other tools to assist you with some day-to-day questions and concerns that may arise. A few examples of the interactive Retirement Calculators available:

Retirement Planner: Quickly determine if your retirement plan is on track - and learn how to keep it there.
Retirement Pension Planner: Plan your retirement with a company pension.
Roth vs. Traditional IRA: Use this calculator to determine which IRA may be right for you.
Retirement Shortfall: Running out of your retirement savings too soon is one of the biggest risks to a comfortable retirement. Use this calculator to find a potential shortfall in your current retirement savings plan.
Retirement Income: Use this calculator to determine how much monthly income your retirement savings may provide you in your retirement.

Our website also offers interactive financial calculators in other areas such as tax, debt and credit cards, personal finance, mortgage, investments, and loans. To access the financial tools, click here.

Please note: While these financial tools are not a substitute for financial advice from a qualified professional, they can be used as a starting point in your decision making process. Please contact our office if you have any questions.

Business & Rental Owners – Begin Collecting W-9s for 2011

2011-01-24T07:30:00.000-06:00

If you use independent contractors to perform services for your business or rental and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year to avoid facing the loss of the deduction for their labor and expenses, and to avoid a monetary penalty. (This requirement generally does not apply for payments made in 2011 to a corporation.)

IRS Form W-9 (Request for Taxpayer Identification Number and Certification) is provided by the government as a means for you to obtain the data required (legal name, tax ID number, address) from your vendors in order to file the 1099s. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. It is highly recommended that you have a potential vendor or independent contractor complete the Form W-9 prior to engaging in business with him or her.

Many small business owners and landlords overlook this requirement during the year, and when the end of the year arrives and it is time to issue 1099s to contractors, they realize that the required documentation was not collected. Often, it is difficult to acquire the contractor’s information after the fact, especially from those contractors with no intention of reporting the income.

Let’s say that you have a repairman out early in the year, pay him less than $600, and then use his services again later. As a result, the total you’ve paid him for the year exceeds the $600 limit. You then realize that you do not have the information needed to file the 1099s for the year and will have to spend your valuable time contacting the repairman to obtain the information. Therefore, it is always good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you retain their services. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversight and protects you against IRS penalties and conflicts.

If you have questions, please call our office.

2011 Standard Mileage Rates

2011-01-21T07:30:00.004-06:00

The Internal Revenue Service has issued the 2011 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, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

51 cents per mile for business miles driven (includes a 22 cent per mile allocation for depreciation);
19 cents per mile driven for medical or moving purposes; and
14 cents per mile driven in service of charitable organizations.

The new rates for business, medical and moving purposes are slightly higher than last year’s, reflecting generally higher 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 for the IRS.

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 more than four vehicles used simultaneously (i.e., a fleet). In a change from past rules, the IRS has said that beginning in 2011 the mileage rate method may be used to figure business vehicle expenses for vehicles used for hire (such as a taxi), provided the business isn’t operating a fleet of vehicles.

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

If you have questions, please call our office.

Employers Must Stop Advance Earned Income Credit Payments in 2011

2011-01-18T07:30:00.001-06:00

Advance earned income credit has been repealed for 2011. This credit allowed certain low-income employees to receive an advance payment of the earned income credit in their paychecks. Their withholding was lowered to take into account the payment. However, employers are cautioned that the advance earned income credit has been repealed beginning with the 2011 tax year. Therefore, they must stop the advance EIC credit payments effective for payroll payable in 2011.

If you have questions, please call our office.

It's Tax Time!

2011-01-15T07:30:00.002-06:00

Are You Ready?

If you’re like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Unfortunately, the job of pulling together the records for your tax appointment is never easy, but the effort usually pays off when it comes to the extra tax you save! When you arrive at your appointment fully prepared, you’ll have more time to:

Consider every possible legal deduction;
Better evaluate your options for reporting income and deductions to choose those best suited to your situation;
Explore current law changes that affect your tax status;
Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives

The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but later-year returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your tax.

For example, the law allows choices in transactions like:

Sales of property. . . .

If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time, as you receive payments from the buyer.

Depreciation . . . .

You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the cost over a number of years, or in certain cases, you can deduct them all in one year.

Where to Begin?

Ideally, preparation for your tax appointment should begin in January of the tax year you’re working with. Right after the new year, set up a safe storage location - a file drawer, a cupboard, a safe, etc. As you receive pertinent records, file them right away, before they’re forgotten or lost. By making the practice a habit, you’ll find your job a lot easier when your actual appointment date rolls around.

Other general suggestions to consider for your appointment preparation include . . .

Segregate your records according to income and expense categories. For instance, file medical expense receipts in an envelope or folder, interest payments in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, make certain you fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully to be sure you don’t miss important data - organizers are designed to remind you of transactions you may miss otherwise.)
Keep your annual income statements separate from your other documents (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s!
Write down questions you may have so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to the income for the current year. For instance, a dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale.
Make certain that you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions for returns filed without them.
Compare deductions from last year with your records for this year. Did you forget anything?
Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy Even for Details

To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address, social security number(s), and occupation(s) on last year’s return. Note any changes for this year. Although your telephone number isn’t required on your return, current home and work numbers are always helpful should questions occur during return preparation.

Marital Status Change

If your marital status changed during the year, if you lived apart from your spouse, or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce, or property settlement agreements, if any, to your appointment.

Dependents

If you have qualifying dependents, you will need to provide the following for each:

First and last name
Social security number
Birthdate
Number of months living in your home
Their income amount (both taxable and nontaxable)

If you have dependent children over age 18, note how long they were full-time students during the year.

To qualify as your dependent, an individual must pass several strict dependency tests. If you think a person qualifies as your dependent (but you aren’t sure), tally the amounts you provided toward his/her support vs. the amounts he/she provided. This will simplify making a final decision about whether you really qualify for the dependency deduction.

Some Transactions Deserve Special Treatment

Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions:

Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate, and any other type of property need to be reported on your return, even if you had no profit or loss. List each sale, and have the purchase and sale documents available for each transaction. Purchase date, sale date, cost, and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.

Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the date of the decedent’s death and the property’s value at that time. You may be able to find this information on estate tax returns or in probate documents. If the property was inherited from someone who died in 2010, special complicated rules may apply in determining your inherited basis. Please call for further details.

Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends. If you sold mutual fund shares, you may have received a statement from the fund that shows your average cost basis for the shares sold and any “wash sale” adjustments; be sure to bring this statement to your appointment along with the purchase and reinvestment records you have.

Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude all (or a part) of a gain on a home if you meet certain ownership, occupancy, and holding period requirements. If you file a joint return with your spouse and your gain from the sale of the home exceeds $500,000 ($250,000 for other individuals), record the amounts you spent on improvements to the property. Remember too, possible exclusion of gain applies only to a primary residence, and the amount of improvements made to other homes is required regardless of the gain amount. Be sure to bring a copy of the sale documents (usually the closing escrow statement) with you to the appointment.

Purchase of a Home: If you purchased a home during 2010 and you are a first-time homebuyer or a long-time homeowner, you may qualify for a substantial tax credit. Be sure to bring a copy of the escrow closing statement if you purchased a home.

Vehicle Purchase: If the car was a hybrid vehicle or one that qualifies as a lean burn vehicle, you may qualify for a special credit. Please bring the purchase statement to the appointment with you.

Home Energy-Related Expenditures: If you made home modifications to conserve energy (such as special windows, roofing, doors, etc.) or installed solar, geothermal, or wind power generating systems, please bring the details of those purchases and the manufacturer’s credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit.

Ponzi Scheme or Bank Failure Losses: If you suffered losses as the result of a Ponzi scheme or as the result of a bank failure, there is special tax treatment for these types of losses. Please be prepared with the details of the losses and the amounts lost.

Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. The government requires that you provide your total mileage, business miles, and commuting miles for each car on your return, so be prepared to have them available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether the reimbursement is included in your W-2.

Charitable Donations: Cash contributions (regardless of amount) must be substantiated with a bank record or written communication from the charity showing the name of the charitable organization, date and amount of the contribution. Cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible unless verified by receipt from the charitable organization. For clothing and household contributions, the items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. A record of each item contributed must be kept, indicating the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued less than $250 and dropped off at an unattended location do not require a receipt. For contributions of $500 or more, the record must also include when and how the property was acquired and your cost basis in the property. For contributions valued at $5,000 or more and other types of contributions, please call our office for additional requirements.

Tax-Free IRA to Charity Distributions Reinstated

2011-01-12T07:30:00.001-06:00

The provision that permits taxpayers age 70½ and over to make direct distributions (up to $100,000 per year) from their Traditional or Roth IRA account to a charity has been reinstated for 2010 and 2011. The distribution is tax-free, but there is no charitable deduction. This provision can be very beneficial to taxpayers who have social security income and/or do not itemize their deductions.

The key benefits of this provision lie in the fact that the distribution:

Is not included in the taxpayer’s income for the year,
Counts toward the taxpayer’s minimum required distribution for the year, if any, and
Does count as a charitable contribution for the year (although not a deductible contribution).

How does a taxpayer benefit from this provision?

By making a contribution directly from the IRA, taxpayers are able to exclude the amount that was contributed from their income for the year, which is essentially the same as deducting the contribution without itemizing their deductions.
This technique also lowers a taxpayer’s adjusted gross income (AGI) for other tax breaks pegged at various AGI levels, such as medical expenses, passive losses, etc., allowing them greater benefits from the AGI-limited deductions.
For taxpayers receiving Social Security (SS), the taxability of the SS is also based on income. Thus, excluding the portion of the IRA distribution directly distributed to the charity can, in some cases, reduce the taxable portion of the SS.
Taxpayers who wish to make very large contributions (up to the 100,000 limit) can do so with IRA funds that would have otherwise been taxable to them.

Caution – It is important to stress that a qualified charitable IRA contribution must be directly distributed to the qualified charity. Otherwise, the distribution is taxable as income and the charitable deduction would be taken on the taxpayer’s itemized deductions subject to all the normal limitations. It may be appropriate to call this office before attempting to execute this strategy.

Are You Required to File 1099s?

2011-01-09T07:30:00.002-06:00

If you use independent contractors to perform services for your business and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year to avoid facing the loss of the deduction for their labor and expenses, and to avoid a monetary penalty. The 1099s for 2010 must be provided to the independent contractor no later than January 31, 2011.

In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by the last day of February. The 1099s must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS along with the required 1096 transmittal form. This service provides recipient and file copies for your records. Use the worksheet to provide us with the information needed to prepare your 1099s.

Please attempt to have the information to this office by January 20, so that the 1099s can be provided to the service providers by the January 31st due date.

If you have questions, please call our office.

Federal Estate Tax Retroactively Reinstated

2011-01-06T09:00:00.001-06:00

The Bush era tax cuts slowly phased out the federal estate tax and abolished it altogether for decedents dying in 2010, and replaced it with a rather complicated modified carryover basis regime. Just about everyone assumed Congress would reinstate the estate tax for 2010. As the year wore on, opinions began to change to where just about everyone predicted Congress would not reinstate the estate tax for 2010. Then out of the blue, mixed in with the GOP/Obama Administration compromise agreement tax provisions, was a proposal to retroactively reinstate the estate tax with a $5 million per person exemption and a tax rate of 35%.

Because the reinstatement occurred so late in the year, Congress is allowing a choice for 2010, providing the following two options:

1. Tax Option - Subject the estate to the estate tax provisions for 2010 and provide the beneficiaries with an inherited basis equal to the fair market value (FMV) of assets inherited from the decedent.

2. Modified Carryover Basis Option - Not pay the retroactive estate tax and instead utilize the modified carryover basis regime for determining the basis of inherited items.

For estates worth $5 million or less, the obvious choice would be the tax option of filing an estate tax return and taking advantage of the $5 million exemption, resulting in no tax and providing beneficiaries with an inherited basis of items equal to the items’ FMV at date of death. For larger estates, the question becomes more complex: pay the tax now and provide the beneficiaries with a FMV basis and perhaps a lesser tax in the future when the asset is sold, or avoid the tax now and possibly saddle the beneficiaries with a larger tax when they dispose of an asset in the future? These decisions will have to be made after considering the beneficiaries’ financial and tax circumstances, the intended use of the inherited property, and the makeup of the estate and the ability to pay the estate tax.

Another twist is a new provision that permits the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse, thus eliminating the need by most couples for complicated estate planning such as certain trust arrangements; this provision would take effect for decedents dying after 2010. But don’t get rid of that trust just yet! This extension is only through 2012, and based on prior performance, can we really trust Congress to develop a permanent solution to the estate tax by then? They had eight years to devise a permanent fix last go-around and waited until the 11th hour, only to come up with a two-year, temporary fix.

The $5 million per person exemption and top tax rate of 35% applies to estate, gift and generation skipping taxes through 2012, except the exemption amount will be inflation adjusted beginning in 2012, and the increase from $1 million to $5 million for the lifetime exemption for gifts applies for 2011 and 2012, but not 2010.

Modified Carryover Basis - The modified carryover basis essentially passes the decedent’s tax basis, with some adjustments, on to the beneficiaries so that the beneficiaries will be responsible for the tax on any appreciation over and above the decedent’s basis.

Example: A decedent owned 1,000 shares of Bank of America that were purchased for $2 a share and at the date of death were valued at $20 per share. Under the modified carryover basis regime the beneficiary’s basis would be $2 a share plus any allowable adjustment (discussed next) to that basis, not to exceed the FMV at date of death. Had the estate been taxed, the beneficiaries’ basis would have been $20 per share.

The allowable aggregate increases to basis (not to exceed the FMV at date of death) and allocated to specific inherited assets by the executor of the estate include:

$1.3 million ($60,000 for a non-resident alien), plus
The decedent’s unused capital loss carryovers, plus
The sum of the decedent’s built-in losses (generally losses from the sale of the decedent’s investment or business property if it had been sold at FMV immediately before the decedent's death), plus
The decedent’s unused net operating loss carryovers, and,
If applicable, a spousal property basis increase of $3 million.

As you can see, allocating basis increases and figuring the modified carryover basis for each and every inherited item can be a significant task.

If you have questions, please give our office a call.

New Reduced Payroll Tax for Employees Can Be a Headache for Employers

2011-01-03T15:00:00.001-06:00

As part of the new tax cuts for 2011, the Social Security (OASDI) payroll tax withholding for employees has been cut by a full 2 percentage points from 6.2 percent to 4.2 percent of wages paid.

This late action has created problems for both the IRS and employers in implementing this last minute change. The IRS recently issued guidance to employers:

Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but no later than Jan. 31, 2011. Notice 1036 contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes.

The IRS recognizes that the late enactment of these changes make it difficult for many employers to quickly update their withholding systems. For that reason, the agency asks employers to adjust their payroll systems as soon as possible, but no later than Jan. 31, 2011.

For any Social Security tax over withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but no later than March 31, 2011.

If you use a payroll service or software, make sure they are updated for these changes. If you have questions, please give this office a call.

Bonus Credit for Retirement Savings Contributions

2010-12-30T10:00:00.000-06:00

Generally, taxpayers with lower incomes do not have sufficient financial resources to make retirement savings contributions, often leading to inadequate resources when it comes time to retire in the future. Recognizing this problem, Congress added the Retirement Savings Contributions Credit (Savers Credit) to the tax code a few years back.

What this means is that lower-income taxpayers can have a portion of their retirement savings contributions returned to them in the form of a tax credit—a dollar-for-dollar offset of tax—of as much as 50% of the retirement savings contribution. The credit is phased out as a taxpayer’s modified AGI increases over set limits (see table below), and this credit applies only to the first $2,000 of contributions to retirement savings, even though the law allows substantially larger contributions.

If you make or would like to make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be eligible for a tax credit. Here are some things you need to know about the Retirement Savings Contributions Credit:

Income Limits – For 2010, the Savers Credit applies to individuals with a filing status and income of:

Single, Married Filing Separately, or Qualifying widow(er), with income up to $27,750
Head of Household, with income up to $41,625
Married Filing Jointly, with income up to $55,500

Eligibility Requirements - To be eligible for the credit in 2010, you: (1) must have been born before January 2, 1993, (2) must not have been a full-time student during the calendar year, and (3) cannot be claimed as a dependent on another person’s return.

Credit Amount - If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 (or up to $2,000 if filing jointly). The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income. The table below includes the credit percentages for taxpayers with various income levels.

Let’s say that you file as a single individual. Your wages for the year are $25,000 (your only income), and you contributed $2,000 to an IRA account. You would receive a credit of $200 figured as follows: using the “other” column for a single individual with a modified AGI of $25,000, the credit percentage would be 10. Ten percent of the $2,000 contribution to the IRA is $200. Assuming that you take the standard deduction, you would be in the 15% tax bracket and the $2,000 contribution would save you $300 in federal income taxes. Thus, your tax is reduced by a total of $500 and the IRA contribution will only cost you $1,500 out-of-pocket after taxes. Depending on your state’s rules, your state tax also may be reduced because of the IRA contribution, furthering lowering your out-of-pocket cost.

Caution - This credit is nonrefundable, which means it can only be used to reduce your tax liability to zero and any unused credit is lost.

Distributions - When figuring this credit, the amount of distributions (not including rollovers) you have received from your retirement plans must be subtracted from the contributions you have made. This rule applies for distributions starting two years before the year the credit is claimed and ending with the extended filing deadline for that tax return. Thus, for tax year 2010, distributions received in 2008, 2009, 2010, and up to October 15, 2011, must be taken into account and reduce the 2010 contributions amount eligible for the credit.

Attention Parents and Others - To assist a young adult, parents or others with the financial means might consider gifting the after-tax cost of the retirement savings contribution. This gift, coupled with the tax benefits described above, would start the young adult down the road to retirement savings with no out-of-pocket cost.

If you would like additional information on how this tax benefit can help you build a retirement account, please give our office a call.

Did Congress Save You From the AMT in 2010?

2010-12-29T11:11:00.001-06:00

Alternative Minimum Tax (AMT) – For several years, Congress has failed to permanently resolve the nagging issue of the AMT, and instead, each year has applied a one-year patch without which an estimated 28 million taxpayers would be hit with this punitive tax.

This year, Congress took the AMT issue to the brink, but in the eleventh hour decided to patch it again, this time for two years, 2010 and 2011. For a change, taxpayers will be able to factor the AMT into their tax planning for 2011. The patch continues the inflation adjustments to the AMT exemption amounts and allows personal tax credits to be used against the AMT. For 2010, the AMT exemption amounts will be set at $47,450 for individuals, $72,450 for married taxpayers filing jointly, and $36,225 for married taxpayers filing separately.

AMT is a different (alternative), and generally punitive, method of computing income tax when either certain types of income receive preferential tax treatment or there are excessive deductions in certain categories. Congress originally implemented it to impose a minimum tax on higher-income taxpayers who were avoiding taxes through tax shelters and other legal means. However, years of inflation without corresponding adjustment to the AMT components have, each successive year, caused an increasing number of taxpayers (who mostly were not the originally intended targets of the AMT) to be subject to the AMT.

Some commonly encountered factors (there are more) that can create an AMT for the average taxpayer include the following:

Medical Deductions – Medical deductions are allowed for the AMT computation, but only to the extent that they exceed 10% of a taxpayer’s income. In contrast, the regular tax computation limit is a lesser 7.5%. When a taxpayer knows that they are going to be affected by the AMT, it sometimes is possible to defer or accelerate medical expenses from one year to another, such as paying the orthodontist in installments or all at once. If your employer offers one, consider participating in a flexible spending plan. It allows you to pay medical expenses with pre-tax dollars and avoid both the regular tax and AMT deduction limitations.

Tax Deductions – When itemizing deductions, a taxpayer is allowed to deduct a variety of taxes, including real property, personal property and state income tax. But for AMT purposes, none of the itemized taxes are deductible. For most taxpayers, this represents one of their largest tax deductions and frequently triggers the AMT. If you are affected by the AMT, conventional wisdom would dictate deferring tax payments to a subsequent year when the AMT may not apply. When deferring, care should be exercised in regards to late payment penalties and interest on underpayments for certain taxes. In addition, taxpayers can annually elect to capitalize taxes on unimproved and unproductive real estate. This means foregoing the deduction currently and adding the tax paid to the cost basis of the real property.

Home Mortgage Interest – For both the regular tax and AMT computations, interest paid on a debt to acquire or substantially improve a home or second home is deductible as long as the debt limit (generally $1.1 million) is not exceeded. This is true of refinanced debt, except that any increase in debt is treated as equity debt. For regular tax purposes, the interest on up to $100,000 of equity debt on the two homes can also be deducted. However, equity debt is not deductible against the AMT; neither is the acquisition or equity debt interest on a motor home or boat that qualifies as a second home. Therefore, taxpayers should exercise caution when incurring home equity debt. Generally, loan brokers are not aware of these limitations, and there are numerous pitfalls.

Miscellaneous Itemized Deductions – The category of miscellaneous deductions that includes employee business expenses and investment expenses is not deductible for AMT purposes. For certain taxpayers with deductible employee business expenses, this can create a significant AMT. Employees with significant employee business expenses should attempt to negotiate an "accountable" reimbursement plan with their employer. Under this type of plan, the reimbursement for qualified expenses is tax-free. Because the employee has been reimbursed, he or she no longer claims a deduction for the expenses, thus eliminating the miscellaneous deduction. Another strategy would be to defer the expenses to a year not affected by the AMT.

Personal Exemptions – Personal exemptions for dependents provide no benefit when taxed by the AMT method. Therefore, divorced or separated parents should carefully consider which party should claim the exemption for a dependent child.

Standard Deduction – For AMT purposes, there is not a standard deduction as there is with the regular tax computation. Thus, taxpayers affected by the AMT should always itemize. Granted, the benefit of some deductions will be lost, but there is still a partial advantage. Even the smallest of charitable deductions will benefit at a minimum of 26% (the lowest bracket for the AMT).

The AMT is an extremely complicated area of tax law that requires careful planning to minimize its effects. Please contact our office for further assistance.

Caution: Although not frequently encountered, incentive stock options (ISO) can have a profound impact on the AMT, and clients are strongly encouraged to seek advice prior to exercising incentive stock options.

Increased Year-End Withholding May Avoid or Reduce Underpayment Penalties

2010-12-28T11:05:00.001-06:00

Taxpayers are required to prepay their taxes for the year through withholding or estimated tax payments. The amount that must be paid in advance is an amount equal to the lesser of 90% of the current year’s tax liability or 100% of the prior year’s tax liability. Higher-income taxpayers, those with a 2009 AGI of $150,000 or more, are required to prepay the lesser of 90% of 2010’s tax liability or 110% of 2009’s tax liability. There is no penalty if the amount of federal tax due is $1,000 or less. (The threshold amount and required payment percentage rules may differ for state purposes.)

The penalty is figured on a quarterly basis. Generally, the prepayments for each period must be commensurate with the income for that period. Estimated tax payments are credited in the period paid. Thus, an individual who has underpaid an estimated tax installment can't avoid the penalty for that period by increasing his estimated tax payment for a later period (although payment in a later period will reduce the penalty for the quarter in which the payment was made).

However, income tax withholding is treated as being paid ratably over the entire year no matter when it was withheld. Thus, if you are underpaid for income received earlier in the year, you can possibly make up the shortage by increasing your withholding late in the year.

So, if you are an individual who had an income windfall earlier in the year and did not prepay taxes on that windfall, and your current withholding level will not cover the additional tax liability, it may be appropriate to increase withholding late in the year. The strategy will apply to any circumstance where your 2010 tax return will result in a tax due in excess of the threshold mentioned earlier. The following are two techniques that can be used to substantially increase your withholding in the latter part of the year.

Increased Payroll Withholding – If you are a salaried employee, you can have your employer withhold extra amounts from your payroll. This is the simplest and most convenient approach. The IRS Form W-4 allows you to designate specific amounts to be withheld each pay period. If necessary, your entire check after other taxes and withholding can be credited to Federal withholding tax. Contact your payroll department or company accountant.
Eligible Rollover Distribution – Another possible option for a taxpayer who has underpaid estimated tax is to take an eligible rollover distribution from a qualified plan before the end of 2010. When distributions are made by direct transfer (not a trustee-to-trustee transfer), 20% federal withholding is required and will be applied toward the taxes owed for 2010. The gross amount of the distribution (the amount of the distribution before the withholding) can then be timely (within 60 days) rolled over to a traditional IRA. No part of the distribution will be includible in income for 2010, but the withheld tax will be applied pro rata over the full tax year to reduce previous underpayments of estimated tax. It is essential to timely complete the rollover to avoid paying tax on the distribution and possibly being subject to an early withdrawal penalty.

Other Forms of Withholding – The same rules described above in regard to amounts withheld from payroll also apply to overpayments of Social Security taxes and to income taxes withheld from: supplemental unemployment compensation benefits, sick pay, pensions, annuities, investments, gambling, etc.

If you think your taxes may be underpaid for the year and would like assistance in avoiding an underpayment penalty, please give the office a call as soon as possible.

Congress Extends Tax Breaks

2010-12-27T11:03:00.000-06:00

Congress, in an eleventh-hour compromise agreement worked out with the Obama Administration and the GOP Leadership, has extended many of the Bush era tax reductions. The following is an overview of the more frequently encountered tax changes that will have an effect on just about every taxpayer.

INDIVIDUAL PROVISIONS

Individual Tax Rates – Under the Bush era tax cuts, the individual tax rates were reduced and replaced with six tax brackets that increase with income: 10, 15, 25, 28, 33, and 35 percent. These reduced rates were scheduled to return to their original levels of 15, 28, 31, 36, and 39.6 percent beginning in 2011. That would have resulted in the lowest bracket increasing by 5 percentage points and the highest bracket 3.6 percentage points, affecting all taxpayers from the low- to the high-income. Congress has extended the lower rates for two additional years, through the end of 2012.

Capital Gains and Qualified Dividends – Under the Bush era tax cuts, the tax on long-term capital gains (assets owned for more than one year) was reduced from a 20 percent maximum rate to 15 percent for taxpayers in the 25% and higher tax brackets. The tax cuts also provided for a zero tax to the extent a taxpayer is in the 10 and 15 percent income tax brackets. Qualified dividend income, which had been taxed at ordinary tax rates, also became eligible for the lower capital gains rates under the Bush era tax cuts. These lower rates are scheduled to expire after 2010. Congress has extended the lower rates for both long-term capital gains and qualified dividends for two additional years, through the end of 2012.

Itemized Deduction Limitation – Prior to the Bush era tax cuts, itemized deductions were partially phased out for higher-income taxpayers. This phase-out was gradually eliminated beginning in 2006 and is totally repealed for 2010. However, the full phase-out was scheduled to return in 2011. Congress has extended the repeal for two additional years, through the end of 2012.

Personal Exemption Phase-Out – As with itemized deductions, prior to the Bush era tax cuts, the personal exemptions were phased out for higher-income taxpayers. This phase-out was gradually eliminated and was totally repealed for 2010. However, the full phase-out was scheduled to return in 2011. Congress has extended the repeal for two additional years, through the end of 2012.

Marriage Penalty Relief – Prior to the Bush era tax cuts, the standard deduction for a married couple was not twice the amount of the standard deduction for a single individual. Instead, it was only 167% of the single amount even though there were two people instead of one. This was often referred to as the “marriage penalty.” As part of the Bush era tax cuts, the marriage penalty was eliminated and the standard deduction for a married couple filing jointly became twice the amount for a single taxpayer. The marriage penalty also applies to the high-end cut-off point for the 15% tax bracket.

The marriage penalty was scheduled to resume in 2011. However, Congress has extended the repeal for two additional years, through the end of 2012.

Child Tax Credit – For several years, the maximum child tax credit has been $1,000 per qualified child, and, for 2009 and 2010, a portion of that credit was refundable for certain lower-income taxpayers. The credit was scheduled to drop back to $500 per child and the refundable portion reduced beginning in 2011. Congress has extended, for two additional years, the $1,000 per child credit and the enhanced refund portion, through 2012.

Earned Income Credit (EIC) – There have been a number of enhancements in the past several years including additional credit when there are three or more qualifying children and increased income beginning and end points of the EIC. Congress has extended the EIC enhancements for two additional years, through 2012.

Dependent (Child) Care Credit – As part of the Bush era tax cuts, the maximum expenses qualifying for dependent care credit were raised from $2,400 ($4,800 for two or more qualifiers) to $3,000 ($6,000 for two or more qualifiers) and the income-based maximum credit percentage was raised from 30% to 35%. However, these increases were scheduled to revert to the lower amounts in 2011. Congress has extended the higher expenses limits and credit percentage through 2012.

American Opportunity Tax Credit (AOTC) – For 2009 and 2010, the Hope education credit was replaced by an enhanced AOTC. The AOTC provides a maximum credit of $2,500, of which up to 40% can be refundable, whereas the Hope credit maximum is $1,800 and the credit is not refundable. Generally, tax credits can only be used to offset an individual’s tax liability and any excess is lost, thus the term “refundable” means a portion of the credit in excess of the tax liability can be refunded to the taxpayer.

Without extension, the AOTC was set to expire after 2010 and revert to the lower Hope credit levels without any refundable portion. Congress has extended the AOTC for two additional years, through 2012.

Above-the-Line Tuition Deduction - Taxpayers were allowed up to a $4,000 above-the-line deduction for qualified higher education tuition and related expenses. This deduction expired at the end of 2009. Congress retroactively reinstated this deduction for 2010 and extended it through 2011.

Coverdell Educational Accounts – Coverdell accounts are accounts where taxpayers can contribute funds to pay for future educational needs of their children. The amount contributed is not deductible, but the future earnings of the accounts are not taxable if used to pay for qualified education expenses. For several years, the annual maximum contribution limit to a Coverdell account has been $2,000, but was scheduled to revert to a maximum of $500 in 2011. Congress has extended the $2,000 limit for two additional years, through 2012. Also to be extended for the same time period for Coverdell distribution purposes is the definition of education expenses to include elementary and secondary school expenses.

Teacher’s $250 Above-the-Line Deduction – The special deduction for classroom expenses, which allows educators to deduct up to $250 of expenses whether or not they itemize their deductions, had expired after 2009, but it has been retroactively reinstated for 2010 and extended through 2011.

Option to Deduct Sales Tax In Lieu of State Income Tax - For several years through 2009, taxpayers had the option of deducting on Schedule A as part of their itemized deductions the LARGER of: (1) State and local income tax paid, or (2) State and local sales tax paid during the year. That option expired at the end of 2009. Congress has retroactively reinstated this option for 2010 and extended it through 2011.

Home Energy-Savings Improvement Credit – For 2009 and 2010, taxpayers were allowed a 30% credit for home energy-savings improvements with a 2-year combined maximum of $1,500. For 2011, that credit has been replaced by the more restrictive credit rules in place during 2006 and 2007 with a less lucrative 10% credit and a $500 lifetime cap. Additionally, certain efficiency standards that were weakened in the American Recovery and Reinvestment Act are restored to their prior levels, and the provision provides that windows, skylights and doors that meet the Energy Star standards are qualified improvements.

Unemployment Compensation – Congress has extended federal unemployment benefits through 2011; unemployment benefits continue to be taxable income. (For 2009, the first $2,400 of unemployment compensation received per person was excluded from being taxed; extension of this exclusion to 2010 or later years is not part of the new tax bill.)

Payroll Tax Reduction – The Making Work Pay credit, which was part of the 2009 stimulus package, provided a credit of up to $400 ($800 for married couples filing jointly), subject to income limitations, and expires after 2010. The credit has been replaced for one year only (2011) with a 2 percentage point reduction in the employee’s portion of the payroll tax (OASDI) from 6.2% to 4.2%. The reduction applies to all wage earners regardless of income. The employer’s share of the payroll tax is unaffected. For wage earners with payroll in excess of the $106,800 payroll tax cap, their savings for 2011 will be $2,136 (2% of $106,800). The OASDI portion of the SE tax for self-employed individuals would also be reduced by 2 percentage points, reducing the overall SE tax from 15.3% to 13.3%.

Tax-Free IRA to Charity Distributions Reinstated

Important - Because the extension of this benefit was passed so late in December, Congress included a provision that allows transfers made in January of 2011 to be treated as if made in 2010. Thus, the distribution counts against the 2010, not the 2011, $100,000 exclusion limitation and can be used toward a taxpayer’s 2010 minimum distribution requirement if it hasn’t already been met.

The key benefits of this provision lie in the fact that the distribution:

Is not included in the taxpayer’s income for the year,
Counts toward the taxpayer’s minimum required distribution for the year, if any, and
Does count as a charitable contribution for the year (although not a deductible contribution).

How does a taxpayer benefit from this provision?

By making a contribution directly from the IRA, taxpayers are able to exclude the amount that was contributed from their income for the year, which is essentially the same as deducting the contribution without itemizing their deductions.
This technique also lowers a taxpayer’s adjusted gross income (AGI) for other tax breaks pegged at various AGI levels, such as medical expenses, passive losses, etc., allowing them greater benefits from the AGI-limited deductions.
For taxpayers receiving Social Security (SS), the taxability of the SS is also based on income. Thus, excluding the portion of the IRA distribution directly distributed to the charity can, in some cases, reduce the taxable portion of the SS.
Taxpayers who wish to make very large contributions (up to the 100,000 limit) can do so with IRA funds that would have otherwise been taxable to them.

Caution – It is important to stress that a qualified charitable IRA contribution must be directly distributed to the qualified charity. Otherwise, the distribution is taxable as income and the charitable deduction would be taken on the taxpayer’s itemized deductions subject to all the normal limitations. It may be appropriate to call this office before attempting to execute this strategy.

This year, Congress took the AMT issue to the brink, but in the eleventh hour decided to patch it again, this time for two years, 2010 and 2011. For a change, taxpayers will be able to factor the AMT into their tax planning for 2011. The patch continues the inflation adjustments to the AMT exemption amounts and allows personal tax credits to be used against the AMT. For 2010, the AMT exemption amounts will be set at $47,450 for individuals, $72,450 for married taxpayers filing jointly, and $36,225 for married taxpayers filing separately.

Federal Estate Tax Retroactively Reinstated - The Bush era tax cuts slowly phased out the federal estate tax and abolished it altogether for decedents dying in 2010, and replaced it with a rather complicated modified carryover basis regime. Just about everyone assumed Congress would reinstate the estate tax for 2010. As the year wore on, opinions began to change to where just about everyone predicted Congress would not reinstate the estate tax for 2010. Then out of the blue, mixed in with the GOP/Obama Administration compromise agreement tax provisions, was a proposal to retroactively reinstate the estate tax with a $5 million per person exemption and a tax rate of 35%.

Because the reinstatement occurred so late in the year, Congress is allowing a choice for 2010, providing the following two options:

1. Tax Option - Subject the estate to the estate tax provisions for 2010 and provide the beneficiaries with an inherited basis equal to the fair market value (FMV) of assets inherited from the decedent.

2. Modified Carryover Basis Option - Not pay the retroactive estate tax and instead utilize the modified carryover basis regime for determining the basis of inherited items.

For estates worth $5 million or less, the obvious choice would be the tax option of filing an estate tax return and taking advantage of the $5 million exemption, resulting in no tax and providing beneficiaries with an inherited basis of items equal to the items’ FMV at date of death. For larger estates, the question becomes more complex: pay the tax now and provide the beneficiaries with a FMV basis and perhaps a lesser tax in the future when the asset is sold, or avoid the tax now and possibly saddle the beneficiaries with a larger tax when they dispose of an asset in the future? These decisions will have to be made after considering the beneficiaries’ financial and tax circumstances, the intended use of the inherited property, and the makeup of the estate and the ability to pay the estate tax.

Another twist is a new provision that permits the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse, thus eliminating the need by most couples for complicated estate planning such as certain trust arrangements; this provision would take effect for decedents dying after 2010. But don’t get rid of that trust just yet! This extension is only through 2012, and based on prior performance, can we really trust Congress to develop a permanent solution to the estate tax by then? They had eight years to devise a permanent fix last go-around and waited until the 11th hour, only to come up with a two-year, temporary fix.

The $5 million per person exemption and top tax rate of 35% applies to estate, gift and generation skipping taxes through 2012, except the exemption amount will be inflation adjusted beginning in 2012, and the increase from $1 million to $5 million for the lifetime exemption for gifts applies for 2011 and 2012, but not 2010.

BUSINESS PROVISIONS

Bonus Depreciation – Generally, business assets cannot be written off in the year of purchase and must be depreciated over their useful life. As an incentive to jump start the economy and promote business investment in recent years, Congress has allowed a bonus depreciation of 50% of the cost of the investment in equipment and certain leasehold improvements. Congress has increased the bonus depreciation to 100% for qualified investments made from Sept. 9, 2010 through Dec. 31, 2011. New business equipment placed in service in 2012 will be eligible for a bonus depreciation of 50%. This generally provides a tax break for large businesses and others that can’t take advantage of the Section 179 expensing deduction because of income limitations.

Section 179 Expense Deduction – For 2011, taxpayers are able to expense (rather than depreciate) up to $500,000 of the cost of certain capital expenses. Under the compromise agreement starting in 2012, the maximum Sec.179 expense will drop to $125,000, indexed for inflation.

Research Tax Credit – The research tax credit expired at the end of 2009. Congress has reinstated the credit for 2010 and extended it through 2011.

If you have questions related to these changes, please give the office a call.

Limited Liability Companies Must File Annual Reports Starting in 2011

2010-12-22T08:45:00.000-06:00

Pursuant to Section 79-29-215 Miss. Code Ann. (1972), all limited liability companies operating in Mississippi will be required to file an Annual Report with the Secretary of State starting with the calendar year 2011. The new LLC Annual Reporting Form will be available to the public beginning Monday, January 3, 2011, on the Secretary of State's website, www.sos.ms.gov. The deadline for completing the report is April 15th of each year.

Mississippi LLCs may submit their report without charge. The report can be completed and submitted online. The form is also available to print off for mailing.

For out-of-state or 'foreign' LLCs, a fee of $250.00 is required. Foreign LLCs must print off their report and submit it with payment. There is no online filing for foreign LLCs.

Click here to see Mississippi Secretary of State's LLC Annual Filing Form and other information.

If you have any questions, please contact our office.

Dividing an Inherited IRA Before Year-End Can Improve Tax Results for Each Beneficiary

2010-12-20T11:32:00.000-06:00

December 31, 2010 is an important deadline for individuals who inherited an IRA from an IRA owner who died in 2009. Where there are multiple beneficiaries for the IRA, splitting up the account into several accounts can yield important tax and other benefits for each beneficiary.

When an inherited IRA has several beneficiaries and is left in one account, the required minimum annual distributions are based on the age of the oldest beneficiary (shortest life expectancy) rather than the life expectancy of each beneficiary. This can be a disadvantage for younger beneficiaries by making them withdraw from the IRA in a shorter period of time than would be required based on their own age.

In addition, having the funds of all beneficiaries in one account forces them to utilize the same investment strategy.

These issues can be overcome by splitting the IRA into separate sub-accounts for each beneficiary. Thus, the annual required distribution will be minimized (based on each individual beneficiary’s life expectancy), allowing each to employ their own individual investment strategy.

However, splitting the IRA into sub-accounts for each beneficiary must be accomplished by December 31 of the year following the death of the IRA owner. Thus, for IRA owners that passed away in 2009, the deadline to split the IRA into sub-accounts is December 31, 2010.

If you have any questions related to this strategy, please give our office a call.

Maximizing Credits to Reduce Taxes

2010-12-16T08:42:00.000-06:00

There are a number of credits that can help reduce your tax bite for 2010. Unlike a deduction (which reduces your taxable income and thus provides a benefit equal only to the deduction amount times your tax rate), a tax credit is a dollar-for-dollar reduction of your tax. For some credits―such as the Earned Income Tax Credit, Child Tax Credit, Child and Dependent Care Credit, and others―there’s not much you can do to change the outcome. However, there are some credits, described below, that offer year-end tax planning opportunities.

Maximize Education Credits – If you have a child in college for whom you claim a dependent exemption and you or someone else is paying the tuition for that child, you probably qualify for either the American Opportunity Credit or the Lifetime Learning Credit. The credits begin to phase out for higher-income taxpayers whose modified adjusted gross income is $80,000 or more ($160,000 for married couples filing a joint return).

American Opportunity Credit - Maximum credit is obtained from $4,000 of tuition and qualified expenses that provides a credit up to $2,500 (100% of the first $2,000 and 25% of the balance). Under normal circumstances, education credits are non-refundable; that is, they offset only a taxpayer’s tax liability. However, for this credit, up to 40% can be refundable.
Lifetime Learning Credit - Maximum credit is obtained from $10,000 of tuition and qualified expenses that provide a 20% credit up to $2,000.

If you have not already paid the maximum expenses for the year, it may be appropriate for you to prepay certain expenses that apply to the first quarter of 2011. The laws generally allow you to prepay tuition for an academic period that begins during the first three months of the next tax year, and then you can claim the prepaid amount for the current year’s credit. Please contact this office for additional information on this tax strategy or other issues relating to education tax benefits and credits.

Take Advantage of the Home Energy Property Tax Credit – 2010 is the final year to take advantage of the “Home Energy Property Credit” that provides a tax credit for energy-saving improvements made to a taxpayer’s principal residence. The credit is limited to $1,500 (30% of up to $5,000 of qualified expenditures) for improvements made in 2009 and 2010. So, if you claimed this credit in 2009, the most you can claim for energy property improvements for 2010 is the $1,500 maximum less any amount claimed in 2009.

Qualified improvements (those certified by the manufacturer to qualify for this credit), the use of which must originate with the taxpayer, must have a reasonable expected life of at least five years, and include:

Energy-efficient Exterior Windows and Skylights,
Energy-efficient Exterior Doors,
Energy-efficient Metal Roofs with appropriate pigmented coatings,
Energy-efficient Asphalt Roofing with appropriate cooling granules,
Energy-efficient Heating Systems,
Energy-efficient Air Conditioning Systems and
Insulation Materials or Systems designed to reduce heat loss or gain.

Credit is not allowed for onsite preparation, assembly, or installation of the component. It is a non-refundable personal credit; thus, the credit can be used only to bring your tax (including the alternative minimum tax) down to zero. Any excess is not refundable and cannot be carried over to a subsequent year.

Pick a Hybrid or Lean-Burn Vehicle – If you are planning to purchase a new automobile before the end of the year, it might be appropriate to purchase either a hybrid or lean-burn vehicle. Credits for these types of vehicles range from $900 to $2,350. However, this credit has phased out for most manufacturers and is currently available only on qualified vehicles manufactured by General Motors, Chrysler, Nissan, Mazda, BMW, and Mercedes for hybrid vehicles, and by Volkswagen, Audi, and Mercedes for qualifying lean-burn vehicles.

This credit is a non-refundable personal credit, which means it can reduce your tax only to zero, and any balance is lost. However, if the vehicle is used partially for business, the portion of the credit attributable to business use becomes a general business credit, and any amount not used in 2010 carries back one year and forward for 20 years until used up.

If you have questions about how any of these credits will impact your specific circumstances or would like to schedule a year-end planning appointment, please call our office.

Tips for Year-End Donations

2010-12-14T09:26:00.002-06:00

The year-end brings the holidays and a barrage of charitable solicitations. It is also your last chance to make a charitable contribution and obtain a deduction for 2010.

Over the past few years, the IRS has tightened the recordkeeping rules for charitable contributions. Therefore, it might be appropriate to review the recordkeeping requirements before making your year-end donations to your favorite charities.

Rules for Clothing and Household Items - To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.

Guidelines for Monetary Donations - To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

Reminders – Here are some additional reminders to help taxpayers plan their holiday-season and year-end giving:

Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2010 count for 2010. This is true even if the credit card bill isn't paid until 2011. Also, checks count for 2010 as long as they are mailed in 2010 and clear the bank shortly thereafter.
Verify that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found at IRS.gov under Search for Charities. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.
For individuals, only taxpayers who itemize their deductions can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction. A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. If you only marginally itemize your deductions, it may be appropriate for you to "bunch" your deductions in alternating years to maximize your itemized deductions in one year and then take the standard deduction in the other.
For all donations of property, including clothing and household items, you must have written confirmation from the charity that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity's unattended drop site, a written confirmation from the charity is not required, provided that all such undocumented contributions for the year are less than $250 and a written record of the donations is kept that includes the information listed above, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor's tax return.
If the amount of a taxpayer's deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.

If you have questions, please give our office a call.