Taxbuzz Blog

Documenting Charitable Contributions

Thu, 7 Jul 2011 08:00:00 PST

Do you have plans of making a cash contribution to your favorite charity or donating some items that are sitting in your garage or basement? If so, make sure that you are aware of the requirements that apply to charitable contributions.

A frequently encountered question is what records are required for charitable contributions. In recent years, Congress has passed some very stringent recordkeeping rules for charitable contributions and some harsh penalties for understating taxable income so it is important to keep the correct documentation. The following is a summary of the recordkeeping rules currently in effect for a variety of contribution types. This list is not all-inclusive, so if you don't see anything that applies to your particular situation, please give this office a call.

Cash Contributions - Cash contributions include those paid by cash, check, electronic funds transfer or credit card. Taxpayers cannot deduct a cash contribution, regardless of the amount, unless they can document the contribution in one of the following ways:

1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include:

a. A canceled check,
b. A bank or credit union statement, or
c. A credit card statement.

2. A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.

As a result of these rules, taxpayers may need to change the way they make contributions to certain charities. For example, a taxpayer who has been used to placing a $5 or $10 bill into the collection plate each week at a worship service cannot deduct that donation on his tax return. Same goes for dropping a cash donation in the Christmas Kettle. Instead, one should write a check to the religious organization and put the check into the collection plate, or make other arrangements with the organization for making his contribution to ensure that a bank record or receipt/letter is provided.

Payroll Contributions - For contributions by payroll deduction, a taxpayer must keep:

A. A pay stub, Form W-2, or other document furnished by the employer that shows the date and amount of the contribution, and

B. A pledge card or other document prepared by or for the qualified organization that shows the name of the organization. If the employer withheld $250 or more from a single paycheck, the pledge card or other document must state that the organization does not provide goods or services in return for any contribution made to it by payroll deduction. A single pledge card may be kept for all contributions made by payroll deduction, regardless of the amount, as long as it contains all of the required information.

If the pay stub, Form W-2, pledge card, or other document does not show the date of the contribution, the taxpayer must also have another document that does show the date of the contribution. If the pay stub, Form W-2, pledge card, or other document does show the date of the contribution, the taxpayer need not have any other records except those described in (A) and (B).

Non-Cash Contributions

Deductions of Less Than $250 - A non-cash contribution includes the donation of property, such as used clothing or furniture, to a qualified charitable organization. If a taxpayer claims a non-cash contribution, it must get and keep a receipt from the charitable organization showing:

The name of the charitable organization,
The date and location of the charitable contribution, and
A reasonably detailed description of the property that was donated.

Deductions of At Least $250 But Not More Than $500 - If a taxpayer claims a deduction of at least $250 but not more than $500 for a non-cash charitable contribution, he or she must have and keep an acknowledgment of the contribution from the qualified organization. If the contributions were made by more than one contribution of $250 or more, the taxpayer must have either a separate acknowledgment for each or one acknowledgment that shows the total contribution. The acknowledgment(s) must be written and should include the following:

1. The name of the charitable organization,

2. The date and location of the charitable contribution,

3. A reasonably detailed description (but not necessarily the value) of any property contributed,

4. Whether or not the qualified organization gave the taxpayer any goods or services as a result of the contribution (other than certain token items and membership benefits), and

5. If goods and or services were provided to the taxpayer, the acknowledgement must include a description and good faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit.

Deductions Over $500 But Not Over $5,000 - If a taxpayer claims a deduction over $500 but not over $5,000 for a non-cash charitable contribution, they must have the same acknowledgement and written records as for contributions of at least $250 but not more than $500 (as described above). In addition, the records must also include:

How the property was obtained (for example, by purchase, gift, bequest, inheritance or exchange).
The approximate date the property was obtained or, if created, produced, or manufactured by the taxpayer, the approximate date the property was substantially completed.
The cost or other basis, and any adjustments to the basis, of property held less than 12 months and, if available, the cost or other basis of property held 12 months or more. This requirement, however, does not apply to publicly-traded securities. If the taxpayer is not able to provide information on either the date the property was obtained or the cost basis of the property and there is reasonable cause for not being able to provide this information, attach a statement of explanation to the return.

Deductions Over $5,000 - Because of special rules related to contributions over $5,000, please call this office for documentation requirements of the particular contribution before making the contribution.

Out-of-Pocket Expenses - If a taxpayer renders services to a qualified organization and has unreimbursed out-of-pocket expenses related to those services, the following three rules apply:

1. The taxpayer must have adequate records to prove the amount of the expenses.

2. The taxpayer must get an acknowledgment from the qualified organization that contains:

a. A description of the services provided,

b. A statement of whether or not the organization provided the taxpayer with any goods or services to reimburse the taxpayer for the expenses incurred,

c. A description and a good faith estimate of the value of any goods or services (other than intangible religious benefits) provided as reimbursement, and

d. A statement that the only benefit received was an intangible religious benefit, if that was the case. The acknowledgment does not need to describe or estimate the value of an intangible religious benefit.

3. The acknowledgement must be obtained before the earlier of:

a. The date of filing the return for the year the contribution was made, or

b. The due date, including extensions, for filing the return.

Car Expenses-When a taxpayer claims expenses directly related to the use of their car in giving services to a qualified organization, they must keep reliable written records. Whether the records are considered reliable depends on all the facts and circumstances. Generally, they may be considered reliable if made regularly and at or near the time the expense was incurred. The records must show the name of the organization being served and the date each time the car was used for a charitable purpose. If the standard mileage rate of 14 cents a mile is used, the records must show the miles driven for the charitable purpose.

If the taxpayer deducts actual expenses, the records must show the costs of operating the car that are directly related to a charitable purpose. General repairs and maintenance expenses, depreciation, registration fees, or the costs of tires or insurance cannot be deducted.

Vehicle Donations -When the deduction claimed for a donated vehicle exceeds $500, IRS Form 1098-C (or other statement containing the same information as Form 1098-C) furnished by the charitable organization must be attached to the filed tax return. Without the 1098-C or other statement, no deduction is allowed. When the charity sells the vehicle, the Form 1098-C (or other statement) must be obtained within 30 days of the sale of the vehicle. Otherwise, the Form 1098-C (or other statement) must be obtained within 30 days of the donation.

If you have questions regarding charitable recordkeeping or what is deductible as a charitable contribution, please give this office a call.

Are Charity Auction Purchases Deductible Contributions?

Tue, 5 Jul 2011 08:00:00 PST

It is common practice for charities to hold auction events where attendees will bid upon and purchase items. The question often arises whether the money spent on the items purchased constitutes a charitable donation.

The answer to that question is some but not all of what you paid for the item may be deductible. Donors who purchase items at a charity auction may claim a charitable contribution deduction for the excess of the purchase price paid for an item over its fair market value. The donor must be able to show, however, that he or she knew that the value of the item was less than the amount paid. For example, a charity may publish a catalog, given to each person who attends an auction, providing a good faith estimate of items that will be available for bidding. Assuming the donor has no reason to doubt the accuracy of the published estimate, if he or she pays more than the published value, the difference between the amount paid and the published value may constitute a charitable contribution deduction.

In addition, donors who provide goods for charities to sell at an auction often ask the charity if the donor is entitled to claim a fair market value charitable deduction for a contribution of appreciated property to the charity that will later be sold. Under these circumstances, the law limits a donor's charitable deduction to the donor's tax basis in the contributed property and does not permit the donor to claim a fair market value charitable deduction for the contribution. Specifically, the Treasury Regulations (Sec 170) provide that if a donor contributes tangible personal property to a charity that is put to an unrelated use, the donor's contribution is limited to the donor's tax basis in the contributed property. The term unrelated use means a use that is unrelated to the charity's exempt purposes or function. The sale of an item is considered unrelated, even if the sale raises money for the charity to use in its programs.

If you have questions related to charity auctions please give one of our professions a call.

Eight Tips to Help You Determine if Your Gift Is Taxable

Thu, 30 Jun 2011 08:00:00 PST

If you give someone money or property during your life, you may be subject to the federal gift tax. Most gifts are not subject to the gift tax, but the following are some tips to help you determine if 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 some time in the future.
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 one of our professionals a call.

Are You Missing Out On the Research Credit?

Tue, 28 Jun 2011 08:00:00 PST

The Internal Revenue Code (Sec 41) provides a tax credit of up to 20% of qualified expenditures for businesses that develop, design or improve products, processes, techniques, formulas or software and similar activities. The credit has been available off and on since 1981 and has never been made permanent by Congress. It has been extended several times and is currently scheduled to expire at the end of 2011.

The credit is calculated on the basis of increases in research activities and expenditures. Its purpose is to reward businesses that pursue innovation by continually increasing investment. Even so, an alternative simplified method allows taxpayers to claim research credits if research costs remain the same or even decline when compared with prior years.

The two methods used to compute the credit are the regular method that provides for the 20% credit, or the simplified method which is easier to document but results in reduced credit amounts.

Regular Method - Under the regular research credit method, the credit equals 20% of qualified research expenditures for a tax year over a base amount established by the taxpayer in 1984-1988 or by another method for companies that started up subsequently. This method may be best for companies that can document a low base amount.
Simplified Method - The alternative simplified method credit equals 14% (12% for years prior to 2009) of qualified research expenses over 50% of the average annual qualified research expenses in the three immediately preceding tax years. If the taxpayer has no qualified research expenses in any of the three preceding tax years, the alternative simplified method credit may be 6% of the tax year's qualified research expenses. This method may be the best choice for taxpayers with incomplete records from the mid-1980s, those complicated by mergers and acquisitions, or taxpayers with a high base amount from that period.

Qualified Research - The term "qualified research" means research which is undertaken for the purpose of discovering information which is technological in nature, and the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and relates to:

A new or improved function,
Performance, or
Reliability or quality.

Certain purposes that are not qualified include style, taste, cosmetic, or seasonal design factors. The definition is relatively broad and encompasses such activities as:

Developing new or improved products, processes or formulas;
Developing prototypes or models;
Developing or applying for patents;
Certification testing;
Developing new technology;
Environmental testing;
Developing or improving software technologies;
Building or improving manufacturing facilities; and
Streamlining internal processes.

Qualifying Research Expenditures - Generally, expenses that qualify for the credit include in-house wages and supplies attributable to the qualified research; computer time-sharing costs; 65% of contract research expenses (paid to outside contractors in the U.S. who are conducting qualified research on the taxpayer's behalf); and supplies directly used in the conduct of the qualified research.

Note: Alternately, research and experimental expenses may be deducted or capitalized under Sec 174 on the Internal Revenue Code. However, a taxpayer must elect either to deduct or amortize (not less than 60 months) such expenses OR claim the credit for them - he or she may not do both!

Limitations - The R&D credit is also subject to limitations of the general business credit. Its total and others included in the general business credit are limited to 25% of the taxpayer's net tax liability over $25,000. To the extent that a research credit is not available for use in the current year or immediate prior year, unused credits have a 20-year carry forward.

If you have questions related to this credit or need assistance in developing the base amounts needed to compute this credit, please give one of our professionals a call.

Don't Mix Your Business & Personal Bank Accounts!

Thu, 23 Jun 2011 08:00:00 PST

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.

o 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.

o 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.

o 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 catch-out accounting departments which 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 one of our professionals a call.

Small Businesses Expenses 101

Tue, 21 Jun 2011 08:00:00 PST

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. For 2010, up to $250,000 of such items can be expensed under this provision.

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 be 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:

a) 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 deprecation). 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.

b) Standard Mileage Rate - The standard rate changes each year. For 2010, it is 50 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 one of our professionals a call.

Tax Tips for Students with a Summer Job

Thu, 16 Jun 2011 08:00:00 PST

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 one of our professionals if you are the student or parent and have additional questions.

Tax Breaks for Charity Volunteers

Tue, 14 Jun 2011 08:00:00 PST

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%. 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.
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 and, preferably, a copy of the receipts to the charity and arrange for the charity to acknowledge in writing the amount of the contribution.
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 give one of our professionals a call if you have questions related to your charitable volunteering expenses.

Is the lower tax-free income from municipal bond investments better than the higher rate of return on taxable investments?

Thu, 9 Jun 2011 08:00:00 PST

If you have a farming business, there are several tax issues that 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 that you received as the result of crop damage. You generally include them in the year it was 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 due to the weather 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 labor 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 the 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 5 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 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 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% 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 one of our professionals a call.

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

Tue, 7 Jun 2011 08:00:00 PST

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.

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 draconian. 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 give one of our professionals a call.

Limited Window of Opportunity

Thu, 2 Jun 2011 08:00:00 PST

Last December Congress extended a number of the Bush era tax breaks, but only for a limited amount of time. And it is probably a safe bet to say that most won't get extended further considering the size of the national debt. Although numerous breaks were extended, only a certain 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. The following 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 3.6 percentage points, affecting all taxpayers from the low income to the high income. In certain circumstances it may be appropriate to accelerate income to take advantage of the lower rates.

Capital Gains & 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 a 20 percent rate to 15 percent for taxpayers in the 25% 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% 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 2 years of post-secondary education. This will primarily impact 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. However, the 2011 credit has been substantially reduced and only provides a credit up to $500 (was $1,500 in 2010) and a reduced credit percentage of 10% (down from 30% 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 window, 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. So 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 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 give one of our professionals a call.

Can You Write Off a Bad Debt?

Tue, 31 May 2011 08:00:00 PST

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 one of our professionals a call for additional information.

Read This Before Tossing Old Tax Records

Thu, 26 May 2011 08:00:00 PST

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 one of our professionals a call first; it is better to make sure before discarding something that might be needed down the road.

IRS National Tax Preparer Registration Program - The Basics

Wed, 25 May 2011 08:00:00 PST

(This article was updated May 25, 2011)

We have created this section to highlight the new Paid Tax Preparer Registration program and how it affects CPAs, Enrolled Agents, CTEC Tax Preparers and the new IRS regulated federal tax preparers. We will update this blog with the latest news and answers to your questions.

Note: At the time this article was written the long delayed revised Circular 230 had not been released. Information included herein is based upon public comments made by the Commissioner, OPR Director, RPR Director and other knowledgeable sources.

Who is Required to Register? All individuals (this includes currently enrolled practitioners such as CPAs, EAs and attorneys) who are compensated for preparing, or assisting in the preparation of, all or substantially all of a federal tax return or claim for refund or who sign, or are required to sign, a federal tax return or claim for refund as a paid tax return preparer must register and be assigned a PTIN or register their existing PTIN. The PTIN will be used as the registration number and will be deactivated for practitioners who fail to maintain the requirements of the registration.

When Did the Registration Begin? The initial registration process began in September 2010. The process is still available without passing an examination until such time as the examination becomes available which is currently estimated to be in the fall of 2011. The initial registration group will be required to complete an exam before they can renew their registration at the end of a 3-year period. Those that missed registration during the initial period will be required to pass the exam before becoming registered and issued a PTIN. Note: Enrolled Agents, CPAs and Attorneys and not subject to the examination process.

Tax Compliance Checks - All practitioners applying for or renewing their registration will be subject to tax compliance checks. The checks will determine if the applicant has filed all required tax returns, paid all liabilities or made proper arrangements with the IRS for payment of back taxes. Applicants who fail the tax compliance test may be denied registration and issuance of a valid PTIN. In addition, those failing will be referred to OPR for investigation.

Felony Question - As part of the registration process, applicants will be asked if they have been convicted of a felony in the past 10 years. If the answer to that question is yes, you will be required to provide additional details to OPR who will deal with each case individually. You will be issued a temporary PTIN while OPR investigates the facts of the case and decides whether to cancel or make permanent your PTIN.

Background Checks - Apparently all applicants are subject to an FBI background check.

How Do I Register? The IRS has contracted the registration process to a private firm. According to unofficial sources, the IRS will be mailing notices to practitioners that they are aware of on or about August 1, 2010 explaining the registration process.

Is There a CPE Requirement? Yes! A registered preparer must complete 15 hours of specified CPE each year. The CPE requirements begin January 1, 2011. The required CPE is as follows:

10 Hours in Federal Tax Law
3 Hours of Federal Tax Update
2 Hours of Ethics

Although CPAs, EAs and attorneys are required to register, they are not subject to the above 15-hour CPE requirement, since they are generally subject to the more expansive CPE requirements of their professional designation (license).

The CE is required to annually reregister. However, because the IRS has yet to establish guidelines or establish an approval process for CE providers it is anticipated the CE requirement for the first renewal registration will be waived and CPE will not be required until the 2012 year. (Caution CA and OR preparers - you are still required to meet your states CPE requirements for 2011). Of interest, the IRS originally planned for requiring renewals one year after the initial registration. It appears now that the renewal registrations will be on an annual calendar year basis.

Where Do I Obtain Approved CPE? Circular 230 section 10.6(g) specifies entities that can provide CPE under the registration process. ClientWhys is approved by the IRS Office of Professional Responsibility (OPR) as a CPE provider. ClientWhys has developed courses to specifically meet the 15-hour CPE requirement for registered preparers. Clientwhys is also an approved provider for the California and Oregon preparer requirements and have tailored courses to meet both the Federal and state requirements for practitioners in those states.

Ethical Standards - The IRS is recommending that all signing and non-signing tax return preparers be subject to the provisions of Treasury Department Circular 230, which will make them subject to discipline for unethical and unprofessional conduct. The authority granted to those individuals who either do not have professional licenses or who are not enrolled agents, enrolled actuaries or enrolled retirement plan agents will be limited to preparing tax returns and representing their clients as currently permitted during the examination of any return prepared by that tax return preparer. The ClientWhys course will include the 2-hour ethics element, including the Circular 230 requirements.

Competency Examinations - The IRS plans to develop two levels competency examinations:

Wage and Non-Business 1040 Returns
Wage and Business 1040 Returns*
This category will be expanded to include other small business returns in future years.

Individuals who pass a competency examination will be permitted to prepare and sign returns commensurate with the examination they passed.

Mandated E-Filing - As part of this program, the IRS is planning to mandate nationwide E-Filing as outlined below:

During 2011, practitioners filing 100 or more individual or trust returns will be required to E-File.
During 2012, practitioners filing 11 or more individual or trust returns will be required to E-File.

Is Your Credit Rating Correct?

Tue, 24 May 2011 08:00:00 PST

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 rating or scores, the FICO(r) score is probably the most widely used of credit bureau scores. The FICO(r) 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 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. If you have questions or need assistance, please give one of our professionals

Is a Home Office Right for You?

Thu, 19 May 2011 08:00:00 PST

In the current economic environment, many smaller firms 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 non-deductible 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 one of our professionals a call.

Tax Tips for Self-Employed Individuals

Tue, 17 May 2011 08:00:00 PST

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 one of our professionals for assistance.

What Are the Chances of Being Audited?

Thu, 12 May 2011 08:00:00 PST

What Are the Chances of Being Audited?

Each year, the IRS releases a publication entitled the �Data Book.� The 2010 version of the book was released in early March, which provides statistical data on its fiscal year (FY) 2010 audit activities. The book provides valuable information that include how many tax returns the IRS examines (audits), how they examine them, and what categories of returns IRS is focusing its resources on.

Keep in mind that audits usually occur one to two years after the return is filed. The data found in the 2010 Data Book is based upon returns filed in calendar year 2009, which will be predominantly 2008 returns, and audited in fiscal year 2010. Year-to-year changes are compared to returns filed in 2008, and audited in fiscal year 2010, which are predominantly 2007 returns.

Overall chance of being audited � Out of 142,823,105 total individual income tax returns filed in 2009, 1,581,394 were audited. This works out to roughly 1.1%, a bit higher than the 1% rate for the previous year. But the overall audit percentage can be misleading because certain types of returns are audited more frequently than others. For example, 473,999 (30%) were for returns that included an earned income tax credit (EITC) claim.

Of the total, only 21.7% of the individual audits were conducted by face-to-face meetings with IRS personnel. The bulk of the audits (about 78.3%) were conducted by mail.

The IRS, like any good business, concentrates their efforts where they produce the best results (revenue)! Thus, their audit selection process favors returns that claim the EITC (where a lot of fraud is prevalent) and higher-income taxpayers. As a result, their Data Book presents the statistics in the format. In addition, the audit percentages shown below are based on returns with the same category rather than overall returns filed.

Returns with Net Positive Income under $200,000

Returns That Do Not Claim EITC�� Percent

Returns without Schedules C, E, F or Form 2106�� 0.5
Returns with Schedule E or 2106�� 1.2
Non-farm Business Returns with gross receipts:

Under $25,000�� 1.2
$25,000 under $100,000�� 2.5
$100,000 under $200,000�� 4.7
$200,000 or more�� 3.3

Farm returns�� 0.4

Business & Non-Business Returns That Claim EITC

Tax Credit by size of total gross receipts

Under $25,000�� 2.4
$25,000 or more�� 1.8

Returns with Total Positive Income of $200,000 under $1M

Non-Business Returns �� 2.5
Business Returns �� 2.9

Returns with Total Positive Income of $1M or more � �� 8.4
Small C-Corporation Returns (other than 1120-C and 1120-F):

Balance Sheet Returns by size of total assets:

No Balance Sheet�� 0.4
Under $250,000�� 0.8
$250,000 under $1,000,000�� 1.4
$1,000,000 under $5,000,000�� 1.7
$5,000,000 under $10,000,000�� 3.0
$10,000,000 under $50,000,000�� 13.4

Partnership Returns�� 0.4
S Corporation Returns�� 0.4

Many returns end up being audited due to incorrect reporting on the tax return. This frequently occurs when returns are self-prepared by individuals who are not sensitive to these issues. If you need assistance, please give one of our professionals a call.

�

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

Tue, 10 May 2011 08:00:00 PST

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 one of our professionals a call.

Get Credit for Generating Your Own Home Power

Thu, 5 May 2011 08:00:00 PST

Through 2016 taxpayers can get a 30% tax credit for installing certain power generating systems on their homes.� The credit is non-refundable which means it can only be used to offset a taxpayer�s current tax liability but any excess can be carried forward to offset tax through 2016.

Systems that qualify for the credit include:

Solar water heating system � Qualifies if used in a dwelling unit used by the taxpayer as a main or second residence where at least half of the energy used by the property for such purpose is derived from the sun.� Heating water for swimming pools or hot tubs does not qualify for the credit.� The property must be certified for performance by the Solar Rating Certification Corporation or a comparable entity endorsed by the state government where the property is installed.
Solar electric system � Qualified system that uses solar energy to generate electricity for use in a dwelling unit located in the U.S. and used as a main or second residence by the taxpayer.
Fuel cell plant � This is a fuel cell power plant installed in the taxpayer�s principal residence that converts a fuel into electricity using electrochemical means.� It must have an electricity-only generation efficiency of greater than 30%, and generate at least 0.5 kilowatt of electricity. The credit is 30% of qualified fuel cell expenditures but�limited to $500 for each 0.5 kilowatt of the fuel cell property�s capacity to produce electricity.
Qualified small wind energy - A wind turbine used to generate electricity for use in connection with a dwelling unit used as a main or second residence by the taxpayer.��

Qualified geothermal heat pump - That uses the ground or ground water as a thermal energy source to heat the dwelling unit used as a main or second residence by the taxpayer or as a thermal energy sink to cool the dwelling unit, and meets the Energy Star program requirements in effect when the expenditure is made.�

Other aspects of the credit:

Limited Carryover - the credit is a non-refundable personal credit which limits the credit to the taxpayer�s tax liability for the year.� However, the portion of the credit that is not allowed because of this limitation may be carried to the next tax year and added to the credit allowable for that year.� Thus the credit carryover is available through 2016 which is the final year for the credit.
Installation Costs - expenditures for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the credit, and for piping or wiring connecting the property to the residence, are expenditures that qualify for the credit.
Swimming Pool - expenditures that are heating a swimming pool, hot tub are not taken into account for purposes of the credit.�

If you have questions relating to this credit please give one of our professionals a call.

Health Insurance Tax Breaks for the Self-Employed

Tue, 3 May 2011 08:00:00 PST

Self-employed taxpayers may be able to deduct premiums paid for medical and dental insurance and qualified long-term care insurance for themselves, their spouse, dependents and children under the age of 27 if the self-employed taxpayer is one of the following:

A self-employed individual with a net profit reported from business or farming reported on their 1040 schedules C, C-EZ or F.
A partner with net earnings from self-employment reported on the partnership Schedule K-1, box 14, code A.
A shareholder owning more than 2% of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2.

The insurance plan must be established under the taxpayer’s business.

For self-employed individuals filing a Schedule C, C-EZ, or F, the policy can be either in the name of the business or in the name of the individual.
For partners, the policy can be either in the name of the partnership or in the name of the partner. The taxpayer can either pay the premiums themselves or their partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in the taxpayer’s. However, if the policy is in the taxpayer’s name and the taxpayer pays the premiums them self, the partnership must reimburse taxpayer and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in the taxpayer’s gross income. Otherwise, the insurance plan will not be considered to be established under the taxpayer’s business.
For more-than-2% shareholders, the policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. However, if the policy is in your name and the taxpayer pays the premiums them self, the S corporation must reimburse the taxpayer and report the premium amounts on Form W-2 as wages to be included in the taxpayer’s gross income. Otherwise, the insurance plan will not be considered to be established under the taxpayer’s business.

If you have any questions related to the self-employed health insurance deduction please give one of our professionals a call.

100% Write-off for Qualified Leasehold Improvements

Thu, 28 Apr 2011 08:00:00 PST

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 doing so, and have questions on how this special write-off can fit into your business planning for 2011, please give one of our professionals a call.

Surprised By the Kiddie Tax? There Are Ways To Avoid It!

Tue, 26 Apr 2011 08:00:00 PST

To prevent parents from placing investments in their children’s names to take advantage of the child’s lower tax rate, Congress several years back created 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 avoid 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 or require assistance with your other tax needs, please give one of our professionals a call.

Tips to Avoid a Tax Audit

Thu, 21 Apr 2011 08:00:00 PST

An IRS tax audit can come in a number of forms. The most demanding are the face-to-face audits, which require sitting down with an auditor and reconciling income and deductions. Others are the less demanding correspondence audits where the IRS has reason to believe that the taxpayer failed to include reported income or has overstated deductions.

Correspondence Audits – Employers, banks, lending institutions, schools, brokerage firms, escrow companies and others all feed data to the IRS, which the IRS, in turn, matches by computer the information reported on your tax return. If there is a significant discrepancy, the IRS will correspond with the taxpayer. Sometimes these discrepancies will result in additional tax liability, while other times a simple explanation will satisfy the IRS and make the problem go away. Here are some examples of typically-encountered discrepancies:

Unreported Pension Income – Whenever a taxpayer takes money out of one IRA account and rolls it over within the 60-day statutory limit into another IRA or qualified plan, the income is not taxable. However, the financial institution from which the funds were withdrawn will issue a 1099R and report to the IRS that you made a withdrawal. To show the rollover, a taxpayer must report on their tax return that the distribution was in fact rolled over. All too frequently, taxpayers will fail to bring the distribution to their return preparer’s attention thinking that they have met the 60-day rollover requirement. Because the rollover is unreported, it will result in a correspondence audit. Generally, when moving an IRA from one institution to another, making arrangements for a direct transfer will avoid these types of audits. However, that is not universally true, because some institutions will still issue a 1099R, which must be reconciled on the tax return.
Gross Proceeds of Sale – When real estate, stock or other securities is sold, the IRS computer knows what it sold for. Even if there is no gain or loss, it still needs to be reported on the tax return. Otherwise, the IRS will assume the entire sales price (gross proceeds of sale) is taxable profit. By reporting the sale on the return, the taxpayer is able to show what he or she paid for the sold investment, thus minimizing or even reporting a deductible loss.
Alimony Paid or Received – A taxpayer who pays alimony is able to deduct the amount he or she paid. On the other hand, the recipient of that alimony must report that amount as taxable income. The IRS computer checks to make sure the amounts match; otherwise, a correspondence audit will be initiated by the IRS. This is an area of frequent mismatch because there is a lot of confusion with what constitutes alimony, child support and property settlements.
Home Mortgage Interest – Each of your mortgage lenders will report to the IRS the interest paid on your home mortgage for the year and issue you a 1098 for the same amount. If these amounts don’t reconcile, expect a correspondence audit. Where this frequently becomes an issue is when the loan is from a private party and the paying taxpayer must report on his or her tax return the name and social security number of the individual to which the interest was paid, thus allowing the IRS to make sure the private lender is reporting the income. Another frequently encountered area of mismatch is when two or more individuals are on the same loan, but lenders report the interest paid only under one of the borrower’s social security numbers. Here again, a notation must be made on the return showing the individual who actually received the income, so the IRS can make sure that they are not claiming 100% of that interest and that the total reported paid by all parties does not exceed the total reported paid on the loan.
Tuition Paid – Because of the American Opportunity, Hope and Lifetime education tax credits that can be claimed for paying tuition to a qualified education institution, the IRS requires those institutions to report the tuition received to the IRS and issue the 1098-T to the taxpayers. Thus, the IRS has the ability to verify the tuition paid during the year, and any mismatch could result in a correspondence audit.
Interest and Dividends – The IRS allows many financial institutions to issue substitute 1099s, i.e., forms that are not in the traditional standard 1099 format. These substitute forms can often be misinterpreted by an untrained eye, with various types of interest and dividends reported separately and spread throughout lengthy annual account statements. To make matters worse, many brokerage firms have been issuing amended 1099 statements late in the tax filing season, due to their errors in determining the allocation of a taxpayer’s earnings between dividends, qualified dividends, capital gains dividends, and original issue discount interest. Thus, if the taxpayer has already filed, but the changes are significant and the taxpayer does file an amended return, he or she will probably receive a correspondence audit.
Non-Taxable Interest – Interest from municipal obligations are tax-free for purposes of computing federal tax. However, tax-free municipal interest income is added to income for purposes of computing taxable social security income. It is also counts as income for purposes of determining whether a taxpayer qualifies for earned income credit (EIC). Thus, payers of tax-free municipal interest must report the interest paid to the IRS and issue a 1099 to the taxpayer so that the IRS can match the tax-free income to the computation of taxable social security and EIC disallowance.
Cash Charitable Contributions – Regardless of the amount of cash contributed, a charitable contribution must be backed up with either a bank record or written communication from the donee organization showing the: (1) name of the donee organization, (2) date of the contribution, and (3) amount of the contribution. The recordkeeping requirements may not be satisfied by maintaining other written records.

What this means is that unless the charitable organization provides a written communication, cash donations put into a “Christmas kettle,” church collection plate, and pass-the-hat collections at youth sporting events will not be deductible. Donations by debit or credit card can be substantiated by bank records. These rules will give the IRS the ability to audit taxpayer’s charitable contributions via correspondence audits since all contributions must be backed by written receipt or bank record.

Don’t assume that just because you received a notice that the IRS is correct. They are frequently wrong. Please call this office before responding to any IRS notice. Tax laws are complicated, and the notices are not always easily understood.

Face-to-Face Audits – The more demanding face-to-face audit is rarely encountered by wage-earning taxpayers who report all their income and have deductions that are within the general norms. Self-employed, high-income taxpayers, those who have omitted substantial income, or those who repeatedly fail to show income to support their lifestyle are more likely to be subject to these types of audits.

You can appear for the audit yourself, but that is probably a bad idea since you are not trained in the rules and regulations regarding audit procedures and what limits the IRS’s incursion into your private life. You can authorize this office to handle it for you. Often, this is the best way to prevent the audit from escalating beyond the original areas that attracted the IRS's interest in the first place. Practitioners experienced with IRS audits are less likely to become emotional or to make statements that would lead to additional IRS questioning.

It is strongly recommended that you engage the services of one of our professionals to represent you in audit.

Is the IRS Withholding Some or All of Your Refund?

Thu, 21 Apr 2011 08:00:00 PST

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 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 of the refund 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 Form 1040, Form 1040A or Form 1040EZ.� If not, it can be filed by itself after you are notified of an offset.
If you file a Form 8379 with your return, write "INJURED SPOUSE" at the top left corner of the Form 1040, 1040A or 1040EZ. IRS will process your allocation request before an offset occurs.
If you are filing Form 8379 by itself, it must show both spouses' social security numbers in the same order as they appeared on your income tax return. You, the "injured" spouse, must sign the form. Do not attach the previously filed Form 1040 to the Form 8379. Send Form 8379 to the Service Center where you filed your original return.
If you reside in a community property state, overpayments (refunds) are considered to be joint property and are generally applied (offset) to legally owed past-due obligations of either spouse.� There are exceptions; please call for additional details.
The IRS will compute the injured spouse's share of the joint return for you. Contact the IRS only if your original refund amount shown on the FMS offset notice differs from the refund amount shown on your tax return.

For assistance with completing Form 8379, please give one of our professionals a call.

�

Rejoice - Congress Overturns Enhanced 1099 Reporting Requirements

Thu, 21 Apr 2011 08:00:00 PST

In earlier newsletters we had notified you of two new 1099 reporting requirements for business and rentals. These included:

For Rental Owners - The new requirement for rental owners to report annual payments of $600 or more to service providers such as a pool service person, handyman, gardener, management company and other unincorporated service providers effective for the 2011 and future tax years.
For Business Owners – The new requirement to include incorporated entities in the business 1099 reporting requirements and expanding the scope to include purchases in addition to payment for services. This provision was to become effective for the 2012 and subsequent tax years.

In response to overwhelming objections from business leaders, business organizations and accounting professionals nationwide complaining about the tax compliance burden these new requirement impose on taxpayers, particularly small businesses, Congress has repealed these requirements.

If you have questions, please give one of our professionals a call.

Plan Your Withholding & Estimates for 2011

Thu, 14 Apr 2011 08:00:00 PST

April 18 is the due date for the first estimated tax installment for the 2011 tax year and only a couple of weeks away.

You may not realize it, but taking a few minutes to plan your estimated tax payments and/or proper withholding amounts for the year can actually insulate you from underpayment penalties in 2012.

Congress considers our tax system as a "pay-as-you-go" system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the "pay-as-you-go" requirement. These include:

Payroll withholding for employers;
Pension withholding for retirees; and
Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, he or she can be subject to the underpayment penalty. This nondeductible interest penalty is higher than what might be earned from a bank and is computed on a quarter-by-quarter basis.

Safe Harbor Payments – Federal law and most states have safe harbor rules. There are two Federal safe harbor amounts that apply when the payments are made evenly throughout the year:

The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of your current year’s tax liability, you can escape a penalty.
The second safe harbor – and the one taxpayers rely on most often – is based on your tax in the immediately preceding tax year. If your current year’s payments equal or exceed 100% of the amount of your prior year’s tax, you can escape a penalty. If your prior year’s adjusted gross income was more than $150,000 ($75,000 if you file married separate status), then your payments for the current year must be 110% of the prior year’s tax to meet the safe harbor amount.

Where taxpayers get into trouble is when their income goes up or their withholding goes down for the current year versus the prior year. Examples are having a substantial increase in income, such as when investments are cashed in, thereby increasing income but without any corresponding withholding or estimated payments. Another frequently encountered situation is when a taxpayer retires and his payroll income is replaced with pension and Social Security income without adequate withholding. Taxpayers who don’t recognize these types of situations often find themselves substantially underpaid and subject to the underpayment penalty when tax time comes around.

Bottom line, 100% (or 110% for upper-income taxpayers) of your prior year’s total tax is the only true safe harbor because it is based on the prior year’s tax (a known amount), whereas the 90% of the current year’s tax amount is a variable based on the income for the current year, and often that amount isn’t determined until it is too late to adjust the prepayment amounts.

Therefore, it is very important that you let this office know of any potential tax events so that adjustments to your withholding can be suggested or estimated payment vouchers can be provided. Please call this office for assistance.

Can�t Pay Your Taxes by the April Due Date?

Tue, 12 Apr 2011 08:00:00 PST

The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who have received a tax bill? What do you do if you owe money to the IRS and can’t pay?

The IRS encourages you to pay the full amount of your tax liability on time. If you get a bill for late taxes, you are expected to promptly pay the tax owed including any additional penalties and interest. It is often in your best interest to get a loan to pay the bill in full rather than to make installment payments to the IRS. You can also pay the bill with your credit card. The interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the Internal Revenue Code.

You can pay the balance owed by credit card, electronic funds transfer, check, money order, cashier’s check, or cash. Visit the IRS website for information on how to pay by credit card. To pay using electronic funds transfer, you can take advantage of the Electronic Federal Tax Payment System (EFTPS).

An installment agreement may be requested if you cannot pay the liability in full. This is an agreement between you and the IRS for the collection of the amount due in monthly installment payments. To be eligible for an installment agreement, you must first file all returns that are required and be current with estimated tax payments. If you are an employer, you must be current with your federal tax deposits.

If you owe $25,000 or less in combined tax, penalties, and interest, you can request an installment agreement using the web-based application, Online Payment Agreement (OPA), found on the Internet at IRS.gov. Or, you can complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill in the envelope that you have received from the IRS. The IRS will inform you within 30 days whether your request is approved, denied, or if additional information is needed.

You may still qualify for an installment agreement if you owe more than $25,000, but a Form 433F, Collection Information Statement, may need to be completed.

If an agreement is approved, a one-time user fee will be charged. The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account. For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged.

If you have questions related to paying your tax liabilities, please give this office a call. The worst thing you can do is to ignore the problem and allow it to escalate to the IRS collection’s department.

How to Recognize a Scam and Protect Yourself

Thu, 7 Apr 2011 08:00:00 PST

Identity theft and scams often use the IRS name, logo or web site in an attempt to convince taxpayers that the scam is a genuine communication from the IRS. Scammers may use other federal agency names, such as the U.S. Department of the Treasury.

In an identity theft scam, a fraudster, often posing as a trusted government, financial or business institution or official, tries to trick a victim into revealing personal and financial information, such as credit card numbers and passwords, bank account numbers and passwords, Social Security numbers and more. Generally, identity thieves use someone’s personal data to steal his or her financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns.

Scams come in many forms and are usually initiated by a letter, fax, e-mail or with a phone call. When scam artists use e-mail to lure its victims, it is referred to as “phishing” scams.

The IRS never discusses tax account matters with taxpayers by e-mail. Be safe; never provide your personal information to anyone on the phone, by e-mail, fax or any other means unless you are absolutely sure of the validity of the request. If you are unsure, please call this office for assistance. Better be safe than sorry! In addition, it is always good practice to have this office review any correspondence related to your taxes before acting upon it.

The following are some tax-related scams that are currently being used to lure unsuspecting individuals:

Inherited Funds / Lottery Winnings / Cash Consignment - In this phishing scheme, recipients receive an e-mail claiming to come from the U.S. Department of the Treasury notifying them that they will receive millions of dollars in recovered funds or lottery winnings or cash consignment if they provide certain personal information, including phone numbers, via return e-mail. The e-mail may be just the first step in a multi-step scheme, in which the victim is later contacted by telephone or further e-mail and instructed to deposit taxes on the funds or winnings before they can receive any of it. Alternatively, they may be sent a phony check of the funds or winnings and told to deposit it but pay 10 percent in taxes or fees. Thinking that the check must have cleared the bank and is genuine, some people comply. However, the scammers, not the Treasury Department, will get the taxes or fees.
Form W-8BEN - In this scam, fraudsters modify a genuine IRS form, the W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to request detailed personal and financial information. This could include your nationality, passport number, bank account and PIN numbers, spouse’s name and mother’s maiden name, or other personal or financial information or security measures for financial accounts. The scammers may use the genuine form number and name or make up a new form number, such as W-4100B2. They either e-mail or fax the form or letter. If only a letter is sent, the letter itself contains the request for the personal and financial information. The letter, which claims to come from the IRS, states that the recipient will face additional taxes unless he or she quickly faxes the required information to the number provided by the scammer. In reality, taxpayers file the genuine Form W-8BEN with their financial institutions, not with the IRS. Additionally, the genuine W-8BEN does not request the taxpayer’s passport number, bank account number, security or similar information.
Refund Scam - The bogus e-mail, which claims to come from the IRS, tells the recipient that he or she is eligible to receive a tax refund for a given amount. It instructs the recipient to click on a link contained in the e-mail to access and complete a form for the tax refund. The form requires the entry of personal and financial information. The refund scam is the most common one seen by the IRS. Several recent variations on this scam have claimed to come from the “Exempt Organizations” area of the IRS. Some others have included the name and purported signature of a genuine or a made-up IRS executive.

Taxpayers do not have to complete a special form to obtain a refund. Taxpayer refunds are based on the tax return submitted to the IRS.

How to Spot a Scam

Many e-mail scams are fairly sophisticated and hard to detect. However, there are signs to watch for, such as an e-mail that:

Requests detailed or an unusual amount of personal and/or financial information, such as name, SSN, bank or credit card account numbers or security-related information, such as your mother’s maiden name, either in the e-mail itself or on another site to which a link in the e-mail sends the recipient.
Dangles bait to entice the recipient to respond to the e-mail, such as mentioning a tax refund or offering to pay the recipient to participate in an IRS survey.
Threatens a consequence for not responding to the e-mail, such as additional taxes or blocking access to the recipient’s funds.
Gets the Internal Revenue Service or other federal agency names wrong.
Uses incorrect grammar or odd phrasing (many of the e-mail scams originate overseas and are written by non-native English speakers).
Uses a really long address in any link contained in the e-mail message or one that does not start with the actual IRS web site address (www.irs.gov). To see the actual link address or URL, move the mouse over the link included in the text of the e-mail.

What to Do

The IRS does not initiate taxpayer contact via unsolicited e-mail or ask for personal identifying or financial information via e-mail. If you receive a suspicious e-mail claiming to come from the IRS, take the following steps:

Do not open any attachments to the e-mail, in case they contain malicious code that will infect your computer.
Do not click on any links for the same reason as above. Also, be aware that the links often connect to a phony IRS web site that appears authentic and then prompts the victim for personal identifiers, bank or credit card account numbers or PINs. The phony web site appears legitimate because the appearance and much of the content are directly copied from an actual page on the IRS web site and then modified by the scammers for their own purposes.
Forward the suspicious e-mail or URL address to the IRS mailbox phishing@irs.gov and then delete the e-mail from your inbox.

If you are unsure of what to do, please call one of our professionals for assistance.

Tax Filing Deadline Rapidly Approaching

Tue, 5 Apr 2011 08:00:00 PST

Just a reminder to those who have not yet filed their 2010 tax return that April 18, 2011 is the due date to either file your return and pay any taxes owed, or file for the automatic six-month extension and pay the tax you estimate to be due. Normally the deadline is April 15, but when a due day falls on a weekend or holiday the due date is extended until the next business day. Thus, since April 15 is a legal holiday in Washington DC (Emancipation Day), the due date for 2010 tax returns is extended until Monday, April 18, 2011.

In addition, the April 18, 2011 deadline also applies to the following:

Tax year 2010 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.

Tax year 2010 contributions to a Roth or traditional IRA – April 18 is the last day contributions can be made to either a Roth or traditional IRA, even if an extension is filed.
Individual estimated tax payments for the first quarter of 2011 - Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2011 estimated taxes are due on April 18. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. Please call one of our professionals for any questions.
Individual refund claims for tax year 2007 – The regular three-year statute of limitations expires on April 18 for the 2007 tax return. Thus, no refund will be granted for a 2007 original or amended return that is filed after April 18. Caution: The statute does not apply to balances due for unfiled 2007 returns.

If you are holding up the completion of your returns because of missing information and it is apparent that the information will not be available in time for the April 18 deadline, should immediately file an extension. You should also file and pay your first estimate for 2011 if appropriate.

If your need assistance before the due date call one of our professionals now before it is too late.

Is the Income Taxable or Non-Taxable?

Thu, 31 Mar 2011 08:00:00 PST

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 - 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.

If you need assistance with your taxes, please give one of our professionals a call.

A Name Change Can Complicate Filing

Tue, 29 Mar 2011 08:00:00 PST

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.

You should call your tax preparer’s attention to any name change prior to finalizing your tax return. If you do not have a tax professional, we recommend you contact one of our professionals.

Do You Have to File a Tax Return?

Thu, 24 Mar 2011 08:00:00 PST

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 child tax 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 or should file, please give one of our professionals a call.

Revising Your W-4? Seek Professional Advice.

Tue, 22 Mar 2011 08:00:00 PST

Around the beginning of the year, employers typically ask their employees to provide a new W-4. 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 a professional 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 of the results, please contact one of our professionals for assistance. They can help you determine the correct number of exemptions to produce the desired result.

IRS Offers New Opportunity to Come Clean On Offshore Accounts

Thu, 17 Mar 2011 08:00:00 PST

The Internal Revenue Service recently announced a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011.

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 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. This is done by filing Form TD F 90-22.1 on or before June 30 of the succeeding year with the Department of the Treasury. No extensions of time to file are available. The income from the accounts must also be included on the owner’s tax returns.

The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program had 15,000 voluntary disclosures and closed on Oct. 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years, as well as paying accuracy-related and/or delinquency penalties.

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.

The IRS is also making other modifications to the 2011 disclosure initiative, including the creation of a new penalty category of 12.5 percent for smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate. Also new is a 5 percent penalty category that may apply to taxpayers who did not open or cause the accounts to be opened if additional requirements are met.

The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios, as well as the possibility of criminal prosecution.

The IRS will also launch a new section on IRS.gov that includes the full terms and conditions on the 2011 Offshore Voluntary Disclosure Initiative, including an extensive set of questions and answers to help taxpayers and tax professionals. The web site also includes details on how people can make a voluntary disclosure.

In the first voluntary disclosure program in 2009, taxpayers faced up to a 20 percent penalty covering up to a six-year period. Taxpayers came forward with about 15,000 voluntary disclosures in that effort covering banks in more than 60 countries.

If you have questions or need assistance, please give one of our professionals a call.

Information on Earthquake Relief for Japan Provided

Tue, 15 Mar 2011 08:00:00 PST

Taxpayers and businesses that wish to donate to the earthquake relief for Japan should be aware that in order for the contributions to be tax-deductible, it must be made through a U.S. tax-exempt charitable organization and cannot be made directly to individuals, non-U.S. charitable organizations or entities.

Contributions to domestic tax-exempt, charitable organizations that provide assistance to individuals in foreign lands qualify as tax-deductible contributions for federal income tax purposes, provided that the U.S. organization has control and discretion over the use of funds. Certain organizations, such as churches or governmental organizations, may be qualified to accept charitable contributions, even though they are not included on the IRS listing of qualified charities.

The IRS has provided some information for the many individuals, businesses and charitable organizations that wish to provide assistance to the victims of Japan's recent earthquake. The IRS suggests that donors consult Disaster Relief Resources for Charities and Donors to get information about how to provide assistance to victims through a charitable organization.

Tax-Free IRA to Charity Distributions Reinstated

Thu, 10 Mar 2011 08:00:00 PST

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 is available for 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:

(1) Is not included in the taxpayer’s income for the year,

(2) Counts toward the taxpayer’s minimum required distribution for the year if any, and

(3) 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.

Example: Retired couple (both over 70½) file a joint return. Their income consists primarily of RMD from their IRA accounts totaling $35,500, both of their SS incomes totaling $28,000, and $2,000 of investment income. They are very active with their church and make a $14,000 contribution each year. They have no other income or deductions. Compare the 2011 results with and without a qualified charitable distribution:

In this example, instead of making a charitable contribution, the taxpayers made a qualified charitable distribution of $14,000, lowering their AGI, reducing their taxable SS, and then using the standard deduction. Result: Tax savings of $2,926.

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 contact one of our professionals before attempting to execute this strategy.

Are You Supporting Your Parents?

Tue, 8 Mar 2011 08:00:00 PST

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 ($3,700 for 2011) 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 contact one of our professionals.

Business and Rental Owners: Don�t Forget to Collect W-9s for 2011!

Thu, 3 Mar 2011 08:00:00 PST

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. We highly recommend that you have a potential vendor or independent contractor complete the Form W-9 prior to engaging in business with him or her.

ATTENTION LANDLORDS!
Issuing 1099s is a new requirement for landlords beginning in 2011, so be aware that you should be collecting W-9s from your pool service person, handyman, gardener, management company and other unincorporated service providers if you own rental property.

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. By the time you are done, the total you have paid him for the year exceeds the $600 limit. This is when you realize that you overlooked getting the information needed to file the 1099s for the year. Now you will have to spend your valuable time contacting the repairman to obtain the information.

To avoid finding yourself in this predicament, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.

If you have questions, please call one of our professionals.

What to Do If You Are Missing a W-2

Tue, 1 Mar 2011 08:00:00 PST

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 Your Tax Preparer – And let them know you are missing a W-2. If your appointment is in the near future, they 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. They 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, they 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, an amended return may have to be prepared for you to file.

Please call one of our professionals if you need assistance.

Here We Go Again � More Changes Coming!

Thu, 24 Feb 2011 08:00:00 PST

One thing is for sure in the past few years, our tax system has become quite fluid with numerous changes every year. Included in President Obama’s budget proposal are a number of more proposed tax changes. The following is an overview of the proposed changes:

Limiting Tax Cuts at $250,000 - Allowing the 2001 and 2003 tax cuts to expire for households making more than $250,000 per year, effective beginning in 2013.

Restore Estate Tax to 2008 Level - Restoring the estate tax to 2009 levels, effective beginning in 2013.

Itemized Deduction Tax Benefits - Limiting the tax subsidy for itemized deductions for high-income families to 28%.

American Opportunity Credit - Making the American Opportunity Tax Credit permanent (under current law, it won't apply after 2012).

Student Loan Forgiveness - Permitting borrowers to exclude loan forgiveness on certain student debt, provided that they have met their repayment obligations for the 25-year period required by Federal repayment programs. (For many students on income-contingent or income-based repayment plans, at the end of their payment plans, any outstanding balance on their loans is forgiven. Under current law, those forgiven amounts are taxable.)

Child Care Credit - Increasing tax credits for child care and dependent care expenses.

EITC - Permanently expanding the Earned Income Tax Credit for families with 3 or more children.

Automatic IRAs - Providing for “Automatic IRAs” in the workplace and giving employers tax credits of up to $250 a year for two years for automatically enrolling their employees in IRAs.

Required Minimum Distributions - Eliminating required minimum distributions (RMDs) for taxpayers with aggregate IRA and tax-favored retirement plan account balances of $50,000 or less, effective for taxpayers attaining age 70-1/2 after Dec. 31, 2011.

Non-Spouse IRA Beneficiary - Allowing a surviving non-spouse beneficiary to make 60-day rollovers from a retirement plan or IRA to a non-spousal inherited IRA, effective for distributions after Dec. 31, 2011.

Business Issues:

Research Credit - Expanding the business research credit by nearly 20% and making it permanent.

FUTA Tax Change - Revamping the Federal Unemployment Tax Act (FUTA) tax. Currently, the tax is 6.2% through June of 2011, and 6.0% for the remainder of calendar year 2011 and later years. It is levied on the first $7,000 paid each employee as wages during the calendar year. Under the budget proposal, the FUTA rate would remain at 6.2% after June of 2011, and, beginning in 2014, the FUTA wage base would be raised to $14,000.

LIFO Inventory Repeal - Repealing the use of the LIFO inventory accounting method. Taxpayers currently using this method would be required to write-up their beginning LIFO inventory to its FIFO value in the first tax year beginning after Dec. 31, 2012, but this one-time increase in gross income would be taken into account ratably over ten years, beginning with the first tax year beginning after Dec. 31, 2012.

1099 to Corporations Repeal - Repeal the additional information reporting requirements imposed by the Affordable Care Act, but requiring businesses to file an information return for payments for services or for determinable gains aggregating to $600 or more in a calendar year to a corporation (except a tax-exempt corporation). Regulatory authority would be provided to make appropriate exceptions where reporting would be especially burdensome. Information returns would not be required for payments for property. These changes would be effective for payments made after Dec. 31, 2011.

Schedule M-3 - Requiring all corporations and partnerships that must file Schedule M-3 to file returns electronically, effective for tax years beginning after Dec. 31, 2011.

Reclassification of Workers - Permitting IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law. This would apply upon enactment, with a transition rule.

Oil Production Preferences Elimination - Eliminating tax preferences (e.g., expensing of intangible drilling costs, enhanced oil recovery credit, production tax credit for marginal wells, percentage depletion) for oil, gas and coal companies.

Dealers’ Income Would be Ordinary Not Capital - Effective for tax years beginning after the enactment date, requiring dealers in commodities, commodities derivatives dealers, dealers in securities, and dealers in options to treat the income from their day-to-day dealer activities in Code Sec. 1256 contracts as ordinary in character, not capital.

Electric Vehicle Credit - Reforming the current Code Sec. 30D credit for purchasers of electric vehicles by allowing dealers to claim it, with clear transparency requirements to ensure the benefit of the credit is passed on to consumers.

Sec. 179 Made Permanent at $125K - Making permanent the Code Sec. 179 rule allowing up to $125,000 to be expensed. (Under current law, the maximum expensing amount is $500,000 for tax years beginning in 2010 or 2011, dropping down to $125,000 for tax years beginning in 2012, and then falling to $25,000 for tax years beginning after 2012.)

QSBS - Making permanent the Code Sec. 1202 rule excluding all gain on qualified small business stock. (Under current law, the exclusion applies only for disposition of qualified stock acquired before 2012.)

Have additional questions? Call one of our tax professionals.

Maximize Credits

Tue, 16 Nov 2010 08:00:00 PST

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, like the Earned Income Tax Credit, Child Tax Credit, Child and Dependent Care Credit and others, there is not much you can do to change the outcome.   However, there are some credits, as 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 of 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).

o American Opportunity Credit - Maximum credit is obtained from $4,000 of tuition and qualified expenses which 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, i.e., they only offset a taxpayer’s tax liability. However, for this credit up to 40% of the credit can be refundable.

o Lifetime Learning Credit - Maximum credit is obtained from $10,000 of tuition and qualified expenses which provides 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 pre-pay certain expenses that apply to the first quarter of 2011. The laws generally allows you to pre-pay tuition for an academic period that begins during the first three months of the next tax year, and then claim the pre-paid amount for the current year’s credit. For additional information on this tax strategy or other issues relating to education tax benefits and credits please give this office a call.

Take Advantage of the Home Energy Property Tax Credit - 2010 is the final year to take advantage of the “Home Energy Property Credit” which 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:

o Energy-efficient Exterior Windows and Skylights,
o Energy-efficient Exterior Doors,
o Energy-efficient Metal Roofs with appropriate pigmented coatings,
o Energy-efficient Asphalt Roofing with appropriate cooling granules,
o Energy-efficient Heating Systems,
o Energy-efficient Air Conditioning Systems and
o Insulation Materials or Systems designed to reduce heat loss or gain.

Credit is not allowed for on-site preparation, assembly or the installation of the component. It is a non-refundable personal credit; thus, the credit can only be used 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. Credits for these types of vehicles range from $900 to $2,350. However, this credit has phased out for most manufacturers and is only currently available on qualified vehicles manufactured by: General Motors, Chrysler, Nissan, Mazda, BMW and Mercedes for Hybrid vehicles and Volkswagen, Audi and Mercedes for qualifying Lean Burn Vehicles.

This credit is a non-refundable personal credit which means it can only reduce your tax to zero and any balance is lost. However, if the vehicle is partially used 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 twenty 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 give one of our professionals a call.

Donating Old Business Equipment?

Thu, 28 Oct 2010 08:00:00 PST

Someone recently posted the following question: I am about to replace my business computer system which is over five years old and plan on donating it to my local high school. How do I determine my charitable contribution?

According to the rules for non-cash charitable contributions, used business equipment is generally limited to the lesser of the fair market value of the donated item at the time of the donation or the taxpayer’s tax basis. A taxpayer’s basis in business property is the original cost less any amount of the cost already taken as a business expense. Thus, older business equipment would tend to have a lower basis that will severely limit any additional deductions.

One would have to assume - that for a computer that is five years old - the taxpayer has already deducted the entire cost of the computer as a business expense, either by expensing it under Sec. 179 or through depreciation over the past five years. Therefore, the computer has a zero tax basis, and since a charitable contribution is limited to the lesser of the FMV or tax basis, there is no benefit from the contribution.

However, if you are planning on giving your computer away, be sure to delete sensitive information, if any, on your computer’s hard drive before turning it over. Check with your local computer store for the software that can clean it up.

If you have any questions, please give one of our professionals a call.

Two Tax Rumors Cleared Up

Tue, 26 Oct 2010 08:00:00 PST

There are two false tax rumors that have been circulating around and troubling clients. To set the record straight, a brief explanation of both rumors is provided below.

False Rumor #1 – “Employer-paid health insurance benefits will be taxable in 2011.”

Not true! Starting in 2011, the amount of employer-paid healthcare benefits was to be included on the W-2 as an information entry, but is not included in the taxable wages on the W-2. Many sources failed to properly analyze this requirement and reported that the benefits would become taxable in 2011.

False Rumor #2 – “Home sales will be subject to a sales tax.”

Not true! This rumor came about because of a 3.8% surtax, beginning in 2013, on net investment income of higher-income taxpayers - generally those with an AGI in excess of $200,000 ($250,000 for married taxpayers filing jointly).

Generally, investment income is, as the name implies, income from investments (such as interest, dividends and capital gains). Net investment income is investment income less certain deductible investment expenses.

Gain from the sale of a home is a capital gain and included in net investment income and, as a result, could be subject to the 3.8% surtax on the profit but not the sales price. In addition, for a home used by a taxpayer for 2 of the prior 5 years preceding the sale, the taxpayer can exclude up to $250,000 ($500,000 for a qualifying married couple) of the gain from the sale. Thus, only the excess above the home gain exclusion would be subject to the surtax.

Bottom line, you could get hit by this surtax if your home sale profits exceed the exclusion and you are a higher-income taxpayer - but it is not a sales tax based on the sales price of the home.

If you have any questions, please give one of our professionals a call.

New Roth IRA Opportunities

Thu, 21 Oct 2010 08:00:00 PST

2010 is the first year in which taxpayers—including married taxpayers filing separately—are able to convert funds in regular IRAs (including SEP and Simple IRAs) to Roth IRAs, regardless of income level. This can provide a significant opportunity for certain taxpayers.

There are several advantages to a Roth IRA - All future earnings and distributions at retirement generally will be tax-free, and Roth IRAs are not subject to the required minimum distribution rules. Because distributions from Roth IRAs are tax-free (if they are qualified distributions), they may keep a taxpayer from being taxed in a higher tax bracket than would otherwise apply if he were withdrawing taxable distributions. Roth IRAs don't enter into the calculation of tax owed on Social Security payments and have no effect on AGI-based deductions. What’s more, the benefits flow through to beneficiaries of inherited Roth IRA accounts, who also can make tax-free withdrawals from such accounts (beneficiaries, however, are subject to the same annual post-death minimum distribution rules that apply to beneficiaries of regular IRAs).

Conversion downside – The conversions are taxable, except for previously non-deductible amounts, but they are not subject to the 10% premature distribution tax.

Should you make an IRA-to-Roth IRA conversion? Generally, taxpayers with the following tax profiles should consider making a conversion:

Those who still have a number of years to go before retirement and time to recoup conversion tax dollars.
Those in a lower-than-normal tax bracket in the year of conversion.
Those who anticipate being taxed in a higher bracket in the future.
Those who can pay the tax on the conversion from funds other than non-taxed retirement funds.

Complicating factor for 2010 conversions – A unique income inclusion rule will apply for IRA-to-Roth-IRA conversions occurring in 2010. Unless a taxpayer elects otherwise, none of the gross income from the conversion is included in income in 2010; half of the income resulting from the conversion will be includible in gross income in 2011 and the other half in 2012. This requires some careful planning since it is anticipated that taxes will rise in future years.

Additional items to take into consideration:

It might be appropriate for you to design your own custom conversion plan over a number of years rather than convert everything at once.
Where does the money to pay the conversion tax come from? Generally, it must be from separate funds. If it is taken from the IRA being converted, then for individuals under age 59½, the funds withdrawn to pay the tax will also be subject to the 10% early distribution penalty in addition to being taxed.
Unlike conversions, annual contributions to Roth IRAs are not allowed for certain higher-income taxpayers. However, that problem could be circumvented by contributing to a non-deductible traditional IRA and then making a conversion to a Roth IRA in a subsequent year.
If the traditional IRA being converted consists of assets such as stocks and mutual funds that could decline in value after the conversion, it may be appropriate to apply for an automatic six-month extension to file the conversion year’s return. By waiting to file until the extended due date (October 15 for most individuals), the taxpayer has an opportunity to compare the account’s market value at that time to what it was when the conversion was made. If the value has dropped significantly, the taxpayer may elect to undo the conversion (called a “recharacterization”), provided certain requirements are met, and avoid paying tax on the higher value. After a specified waiting period, a reconversion can be made.

Conversions can be tricky! If you are considering a conversion, please call for an appointment so this office can help you properly analyze your conversion and contribution options.

New Penalties for Failure to File or Furnish Information Returns

Tue, 19 Oct 2010 08:00:00 PST

Tax law requires businesses to provide information returns, such a 1099s, to each payee that the business has paid $600 or more for the year. The law also includes penalties for failure to file the same information returns with the IRS.

To ensure compliance with these requirements, there are substantial penalties, and, as part of the recently passed Small Business Jobs Act of 2010, those penalties have been doubled. The penalties are generally based upon how late the returns are filed with the IRS or provided to the recipient of the income and are broken down into three tiers:

Tier 1 – Where the returns are filed or provided late but within 30 days of the prescribed due date.

Tier 2 – Where the returns are filed or provided more than 30 days after the prescribed due date and before August 1 of the calendar year in which the filing was required.

Tier 3 – Where the returns are filed or provided after August 1 of the calendar year in which the filing was required.

In addition, the maximum penalties for the year are based on business size determined by the business’s gross receipts. Businesses with gross receipts of $5 million or less are subject to the small business penalty maximums.

The following table shows the penalties for information returns required to be filed in 2010 and those imposed for returns required to be filed after 2010.

In addition, the minimum penalty for each intentional failure-to-file act increases from $100 to $250.

Rental Owners Included in the Reporting Requirement Effective in 2011 – Effective for 2011 filings due in 2012, the 2010 Small Business Act provides that solely for purposes of filing information returns, a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider. The new law does provide the IRS with the ability to permit exceptions to the filing requirement for hardship cases and when minimal rental income is received, but neither “hardship” nor “minimal” are yet defined.

In order to comply with these requirements and avoid these substantial penalties requires collecting the payee’s name, SSN number and contact information before making payment. If you need assistance setting up a procedure for collecting the required information or filing your information returns for the year, please give one of our professionals a call.

Best to Maximize or Minimize Deductions?

Thu, 14 Oct 2010 08:00:00 PST

As the end of the year approaches, it's a good time to review your potential tax deductions and develop a strategy that maximizes the benefits. Most taxpayers may deduct the higher of two amounts from adjusted gross income when figuring their taxable income. These amounts are either a fixed amount set by law (the “standard deduction”) or a listing of the expenses the taxpayer paid during the year that the government allows (known as “itemized deductions”).

The basic federal standard deductions for 2010 are: $11,400 for joint filers, $8,400 for head of household, and $5,700 for others. Add-ons to the standard deduction are allowed for taxpayers (and their spouses, if filing jointly) who are blind and/or age 65 or older. In some years, other add-ons—such as a limited amount of real property tax—are also allowed.

It would seem to be a simple choice—use the larger of the standard or itemized deductions. However, strategies may be used to maximize the benefits that add complexity. For example:

o Bunching Strategy – If your itemized deductions and your standard deduction are about the same, it may be possible to maximize your itemized deductions every other year and take the standard deduction in alternate years. Methods of doing this are discussed below.

o The Alternative Minimum Tax (AMT) Effect - If you are subject to the AMT, the standard deduction is not allowed at all, but some itemized deductions are. Therefore, if you are subject to the AMT, you should always itemize your deductions.

Here are some tips on maximizing your itemized deductions:

o Medical – Medical deductions for regular tax purposes are deductible only to the extent that they exceed 7.5% of your Adjusted Gross Income (AGI). That percentage increases to 10% for the AMT. Where possible, consider prepaying or deferring medical expenses to match your deduction strategy. In addition to the normal medical deductions, don't overlook the costs of fertility procedures, learning disability expenses, nursing home expenses, pregnancy tests, certain special education, prescribed smoking-cessation programs, certain weight-loss program expenses, and certain impairment-related expenses.

A child's medical expenses paid for by divorced parents are generally deductible by the parent who pays the expense. You can also deduct medical expenses for an adult “medical dependent.” Generally, one who would qualify as your dependent except for gross income limitations.

o Taxes – Deductible taxes include real and personal property taxes as well as state and local income taxes. Generally, real property taxes are paid in two or more installments during the year. This gives you the opportunity to “bunch” tax payments by paying an entire year's tax bill plus one or more installments from the prior year all in one tax year.

If you are paying state estimated taxes, the fourth quarter's payment is due by January 18, 2011 in most states. However, you have the option to pay it before the end of the year and move the deduction into 2010. Keep in mind that taxes are not deductible for AMT purposes.

o Charitable Contributions – Charitable contributions are deductible for both the regular tax and the AMT. Because they are discretionary, a taxpayer can choose when to make a payment. For example, you could prepay your 2011 tithes in 2010, thereby doubling up deductions in 2010.

Don't overlook year-end non-cash contributions of items lying around the house that are never used. As long as they are in good or better condition and are contributed to a charity before the close of the year, the contribution will count as a deduction for 2010 (provided you have proper documentation).

o Miscellaneous Deductions – This is a catch-all category that generally includes investment and employee business expenses. These deductions are only allowed to the extent that they exceed 2% of your AGI—but not at all for AMT purposes. Don't overlook potential losses from IRA and variable annuity accounts that have declined in value during the recession. However, utilizing these losses requires special action, so please call for details.

Because of the 2% of AGI limitation, certain otherwise-deductible expenses might be handled differently, such as working out a reimbursement plan from your employer for employee business expenses. Doing so may mean reducing your salary, but you will be converting taxable income to non-taxable reimbursement—always a desirable outcome. If your miscellaneous deductions are less than 2% of your AGI, consider paying IRA fees from the IRA account instead of making a separate payment.

If you believe you are a candidate for deduction planning, please call one of our professionals.

Can You Take a Home Office Deduction?

Tue, 12 Oct 2010 08:00:00 PST

If you use a portion of your home for business purposes, you may be able to take a home office deduction whether you are self-employed or an employee. Expenses that can be deducted for the business use of a home may include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, painting and repairs.

This deduction can be claimed for the business use of a part of a home only if it is used regularly and exclusively:

As your principal place of business for any trade or business; or
As a place to meet or deal with your patients, clients or customers in the normal course of your trade or business.

Generally, the amount that can be deducted depends on the percentage of the home that is used for business. The deduction will be limited if the gross income from the business is less than the total business expenses.

If a separate structure not attached to your home is used for an exclusive and regular part of your business, expenses related to it can be deducted.

If you are self-employed, the home office deduction is included on the business schedule. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

If you are an employee, you have additional requirements to meet. The regular and exclusive business use must be for the convenience of your employer. In addition, the home office deduction is a miscellaneous deduction subject to the 2% of AGI limitation; if you are taxed by the alternative minimum tax (AMT), you may not benefit from the deduction since miscellaneous itemized deductions are not deductible for AMT purposes.

If you have questions related to using a portion of your home for business purposes, its tax benefits, and the impact of the sale of your home in the future, please give one of our professionals a call.

Corrosive Drywall Gets IRS Attention

Thu, 7 Oct 2010 08:00:00 PST

Drywall is used in constructing homes and is attached to the building frame to form the walls and ceilings. Some drywall imported from out of the country has been found to be corrosive and causes a number of problems, such as emitting noxious odors (like sulfur or rotten eggs) and causing corrosion to the home's wiring system. The corrosion can also attack electronic equipment, silver jewelry and heirlooms. The problem could result in electrical shortages, which can cause fires and a variety of other serious problems.

It is estimated that over 500 million pounds of corrosive drywall was shipped to the U.S. from foreign sources. This problem primarily exists in the Southeast, but instances of corrosive drywall have been reported nationwide.

If you are unfortunate enough to have had your home affected by this problem, the IRS has provided guidance in the form of a safe harbor casualty loss deduction for the cost of fixing the problem and replacing the drywall, wiring, appliances and other household goods damaged as a result of corrosive drywall.

The IRS guidance provides a formula for determining the amount of the loss, and it applies to any individual who pays to repair damage to his or her personal residence or household appliances that results from corrosive drywall. The loss is treated as a casualty loss in the year of payment.

o Taxpayers who are not pursuing reimbursement - Taxpayers who are not pursuing reimbursement, and who do not intend to pursue reimbursement, may claim all unreimbursed amounts paid during the taxable year to repair damage to the taxpayer's personal residence and household appliances as a casualty loss.

o Taxpayers who are pursuing reimbursement - Taxpayers who are pursuing reimbursement, or who intend to pursue reimbursement, may claim 75% of the unreimbursed amounts paid during the taxable year to repair damage to the taxpayer's personal residence and household appliances as a casualty loss.

Losses claimed for the replacement of household appliances are limited to the lesser of the current cost to replace the appliance or the basis (generally cost) of the appliance.

If you have been affected by corrosive drywall and need assistance in determining loss or have additional questions, please call one of our professionals.

Time is Running Out to Qualify for the 2011 Retention Credit

Tue, 5 Oct 2010 08:00:00 PST

During 2010, there are two tax incentives to induce businesses to hire individuals who have been unemployed for at least 60 days. The first incentive exempts the employer from the matching 6.2% Social Security payroll tax on a qualifying employee's wages for the remainder of 2010.

The second incentive is a Retention Credit, available on the employer's 2011 tax return, for retaining the employee hired in 2010 on payroll for a continuous 52-week period. The Retention Credit is a non-refundable tax credit equal to the lesser of $1,000 or 6.2% of the employee's wages for the year.

In order to qualify for the retention credit, the employee must be hired before the close of 2010. An unemployed individual is one that certifies that they have not been employed more than 40 hours during the 60-day period immediately before their hire date. There is no minimum number of hours that a new employee needs to work in order to qualify, but the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

Although an employer cannot claim the new tax breaks for hiring family members, a spouse is not treated as a family member and would be eligible if otherwise qualified. A worker who replaces another employee who performed the same job for the employer won't qualify the employer for the benefit, unless the prior employee left the job voluntarily or for cause.The benefits can be claimed for rehiring a former worker as long as that worker was terminated due to facts and circumstances, such as a factory closure due to lack of demand for the product.

For additional information related to these tax benefits and how they might apply to your business, please give one of our professionals a call.

New Tax Breaks for Small Business Owners

Thu, 30 Sep 2010 08:00:00 PST

The 2010 Small Business Jobs Act enacted September 27, 2010 includes an assortment of incentives and tax breaks for small businesses. The following is a brief overview of some of the key provisions included in the new law. Watch for additional details in future articles.

o Cell Phones No Longer Listed Property - This means that cell phones can be deducted or depreciated like other business property, without the complicated recordkeeping required for listed property. This is effective for tax years beginning after Dec 31, 2009.

o Business Owners’ Health Insurance Deduction Reduces Self-Employment Tax - The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.

o Boosted Deduction for Start-Up Expenditures – For 2010, businesses can deduct up to $10,000 (was previously $5,000) in trade or business start-up expenditures. However, the $10,000 limit is reduced by the amount by which start-up expenditures exceed $60,000 (was previously $50,000).

o Increased Small Business Section 179 Expensing – Small business taxpayers can elect to write off the cost of certain capital expenses in the year of acquisition in lieu of recovering these costs over a period of years through depreciation.

For tax years beginning in 2010 and 2011, the new law allows a taxpayer to expense up to $500,000 (up from $250,000 under prior law) of qualifying property which includes machinery, equipment and certain software placed in service during the year. For 2010 and 2011, the annual expensing limit is reduced by the cost of qualifying property that is placed into service during the year exceeding the $2 million (was $800,000) investment limit.

o Certain Real Property Can Be Expensed – The new law also makes certain real property eligible for Sec 179 expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 deduction of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

o 50% Bonus First-Year Depreciation Extended - Businesses normally can only deduct the cost of capital expenditures over time through depreciation—most commonly at the rate of about 14% or 20% of the cost of machinery or equipment for the first year. For 2008 and 2009, businesses were permitted to write off 50% of the cost of new machinery and equipment placed in service during those years. In the new law, Congress extends the first-year 50% write-off to qualifying property placed in service in 2010 (2011 for certain property).

o General Business Credits for 2010 Can Be Carried Back 5 Years – Under the new law, for the first tax year beginning in 2010 (2010 for calendar year taxpayers), eligible small businesses (ESB) (generally one with $50 million or less in average annual gross receipts for the prior three years) can carry back unused general business credits for five years. ESBs include sole proprietorships, partnerships and non-publicly traded corporations.

o General Business Credits of Eligible Small Businesses in 2010 Aren't Subject to AMT - Under the Alternative Minimum Tax (AMT) rules, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.

o Other Provisions With Limited Application – Calculations of the built-in gains tax on S-Corporations converted to C-Corporations, special rules for long term contract accounting and limitation on the penalty for failure to disclose certain reportable transactions (including listed transactions) on a return.

If you have questions related to any of these new tax benefits or wish to schedule a tax planning appointment to see how your business might benefit, please give one of our professionals a call.

Deducting Over-the-Counter Medications

Thu, 23 Sep 2010 08:00:00 PST

For many years, taxpayers have not been able to deduct as a medical expense on their tax return the cost of unprescribed over-the-counter medications.

However, taxpayers with Flexible Spending Arrangements (FSA), Health Reimbursement Arrangements (HRA), Health Savings Accounts (HSA) and Archer Medical Savings Accounts (Archer MSA) could reimburse themselves for the cost of over-the-counter drugs, and, as a result, pay for the medication with tax-deductible dollars.

As part of the new Health Care legislation, that benefit will go away in 2011 and the cost of over-the-counter drugs, except for insulin, will no longer be reimbursable unless they are prescribed by a physician. This essentially puts those with the tax-favored FSA, HRA, HSA and MSA plans on an equal status with other taxpayers with respect to over-the-counter medication after 2010.

Taxpayers with these plans should, where appropriate, stock up on essential over-the counter medication before the end of 2010.

If you have additional questions, please give one of our professionals a call.

Time is Running Out for the Home Energy Property Credit

Tue, 21 Sep 2010 08:00:00 PST

Planning to make an "energy-saving" improvement to your home? 2010 is the final year to take advantage of the tax credit available so you will need to act quickly as there are only three months left. Whether you simply want to cut your utility bills or winterize your home, do it soon!

The name "Home Energy Property Credit" given by Congress is not as descriptive as it could have been and is easily confused with other credits. This credit is for energy-saving improvements 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 maximum that can be claimed in 2010 is the $1,500 maximum less any amount claimed in 2009.

Qualified improvements, the use of which must originate with the taxpayer, must have a reasonable expected life of at least five years, and include:

o Energy-efficient Exterior Windows and Skylights,

o Energy-efficient Exterior Doors,

o Energy-efficient Metal Roofs with appropriate pigmented coatings,

o Energy-efficient Asphalt Roofing with appropriate cooling granules,

o Energy-efficient Heating Systems,

o Energy-efficient Air Conditioning Systems and

o Insulation Materials or Systems designed to reduce heat loss or gain.

Credit is not allowed for on-site preparation, assembly or the installation of the component. It is a non-refundable personal credit; thus, the credit can only be used 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.

Each manufacturer must comply with the government’s established standards for the product to be qualified as “energy-efficient.” And each manufacturer who meets those standards will provide a written certification that the product meets the definition of qualified property under IRC Sec 25C. Taxpayers cannot simply rely on an Energy Star label in claiming the Sec 25C credit for exterior windows and skylights.

Reliance on the certification is allowed only if installation of the component is consistent with the certification (for example, the item must be installed in the appropriate climate zone identified in the certificate statement).

Caution - At the time this article was prepared, it was uncertain if this credit will offset the alternative minimum tax (AMT). The law allowing it to offset the AMT in prior years expired for years after 2009 and will require Congressional action to extend.

Don't confuse this credit with the "Residential Energy-Efficient Property Credit" which also provides a 30% tax credit for energy-generation installations (such as solar, fuel cells, geothermal and wind energy). That credit offsets the AMT, is available through 2016, and has no annual maximum credit.

If you have questions related to this credit, please give one of our professionals a call.

Is Your Business Ready for 2011 Credit Card Income Reporting?

Thu, 16 Sep 2010 08:00:00 PST

Beginning in 2011, payment settlement entities (e.g., merchant card processing companies like American Express, Visa and MasterCard merchant banks) will be required to report each business's payment transactions to the IRS.

To facilitate this reporting, the IRS has developed Form 1099-K which will report a merchant's credit and debit card income for the year and will be issued to the merchant in the early part of the subsequent year like 1099s for interest, dividends, pensions, etc. Unlike other 1099 forms, the 1099-K will actually break the income down by the month.

Individuals and merchants with Internet sales (e.g., E-bay and their online sales) can expect to see those sales included in this new reporting requirement.

This new reporting requirement provides the IRS with a far-reaching compliance tool. It will allow them to determine a business's gross income from credit/debit card sales and make it easier to segregate the credit/debit card sales from cash sales.

The IRS will then be in a position to see if the credit card dollar figure reported on the merchant's tax return matches the bank's information return. This also allows them to see if a business's other sales from cash and check payments makes sense in the context of the firm's overall business.

We can probably expect the IRS to develop statistics for various types of businesses related to the ratio of cash payments to credit payments, as a means of imputing cash payments for merchants that do not report a reasonable amount of income over and above that reported by the payment processors.

How Does This Affect You?

(1) You can expect your bank or other payment settlement services to be verifying your tax ID number (generally your SSN or Employer ID number and contact information in the next few months leading up 2011. Be sure that the information you provide them is correct and matches the information on file with the IRS.

(2) If you fail to provide the settlement entity with the information requested or the information does not match the information on file with the IRS, the settlement entity is authorized to withhold 28% of the payment as backup withholding. You will receive credit for the withholding when your tax return is filed, but, if the withholding is in excess of what you owe, you will have to wait until you file your return to get the excess back.

(3) Make sure that your business has an appropriate accounting system in place to properly record card payments so that they can be reconciled with the 1099-K.

Payment Cards - A payment card, as defined by the IRS regulations, includes, but is not limited to, credit cards, debit cards, and stored-value cards (e.g., gift cards or similar cards with a prepaid value). A payment card also includes the acceptance as payment of any account number or other indicia associated with a payment card.

The use of a payment card to obtain a loan or cash advance does not constitute a payment card transaction. The same holds true for the withdrawal of cash from an automated teller machine.

If you have questions related to how the new reporting requirement for credit sales will impact your business, or what steps you should take to prepare for this new requirement, please give one of our professionals a call.

Will You Be Hit By the AMT in 2010?

Tue, 14 Sep 2010 08:00:00 PST

AMT is the acronym for Alternative Minimum Tax. It 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 though 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 to be subject to the AMT.

Much as the regular income tax allows personal exemptions, the AMT calculation allows an exemption but based upon filing status. For the past several years, the IRS has on a year-to-year basis increased that exemption for inflation. However, should they fail to provide an increase for 2010, the exemption amounts would revert to the 2001-2002 levels, which would result in an approximate 30% decrease in the exemption amount. This would snare a significant number of taxpayers (estimated around 28 million) for the first time in 2010. For example, the exemption amount for joint filers was $49,000 in 2002 and was $70,950 in 2009.

Other factors 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.

Exemptions – Personal exemptions and dependent exemptions 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 that the benefit of some deductions will be lost, 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 one of our professionals 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.

Refund Anticipation Loans May Be a Thing of the Past

Thu, 9 Sep 2010 08:00:00 PST

Refund Anticipation Loans which have been around since 1989, were conceived as a means to provide a taxpayer with their tax refund money in a matter of days rather than wait the several weeks it took the IRS to issue a refund check.

However, before a RAL can be made, the lender must be sure a taxpayer’s refund won’t be taken by the government to pay past tax liabilities, arrearages in child support, etc. To facilitate RALs, the IRS has provided the lenders with an underwriting tool referred to as a “debt indicator.” This tells the lender if any portion of the refund would be withheld by the IRS for other liabilities.

With the advent of e-filing and Internet technology, the IRS can now deposit a refund to a taxpayer’s bank account within 10 days. If the taxpayer does not have a bank account, the refund can be applied to a debit card.

Because of the quick turnaround time for e-filed refunds, many sources in the government have long held that the cost of RALs were an unneeded expense for taxpayers. Thus, in August, the IRS announced that they would no longer provide electronically-filing tax preparers and affiliated financial institutions with a debt indicator that is used to facilitate refund anticipation loans, in effect killing RALs.

Subsequently, three of the nation’s largest tax preparation firms, Jackson Hewitt Tax Service, Inc., H&R Block and Liberty Tax Service joined forces to express their “strong opposition” to an IRS decision blocking their access to the agency's “debt indicator.” The companies questioned the wisdom of the Treasury and IRS for taking such unilateral action.

We will have to wait and see how this all unfolds.

Tax Tips for Military Personnel

Thu, 2 Sep 2010 08:00:00 PST

Because military personnel have obligations that can impact their tax situation, they are entitled to special tax breaks. Here are a number of benefits that apply.

o Moving Expenses - If you are a member of the Armed Forces on active duty and move because of a permanent change of station, you can deduct the reasonable unreimbursed expenses of moving yourself and members of your household. You are not subject to the 50-mile distance test or 39 weeks employment test that civilians are subject to for taking a moving deduction. Reasonable expenses include shipping, moving van, truck rental, travel expenses (not meals), packing, insurance and storage en route, moving pets, utility connect and disconnect charges.

o Combat Pay - If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, all of the military pay that is received for military service that month is not taxable. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.

o Home Mortgage Interest & Taxes - A military taxpayer can deduct mortgage interest and real estate taxes on their tax return as an itemized deduction, even if they are paid with nontaxable military housing allowance pay.

o Home Sale Gain Exclusion - In order to claim the home gain exclusion, a taxpayer must generally own and use the home for 2 of the prior 5 years. A military taxpayer may choose to suspend the 5-year look back period for up to 10 years when on qualified official extended duty.

o Extension of Deadlines - The time for taking care of certain tax matters can be postponed. The deadline for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS is automatically extended for qualifying members of the military.

o Uniform Cost and Upkeep - If military regulations prohibit you from wearing certain uniforms when off duty, the cost and upkeep of those uniforms can be deducted, but you must reduce your expenses by any allowance or reimbursement that is received.

Joint Returns - Generally, joint returns must be signed by both spouses. However, when one spouse may not be available due to military duty, a power of attorney may be used to file a joint return.

o Travel to Reserve Duty - If you are a member of the US Armed Forces Reserves, you can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties.

o 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.

o Transitioning Back to Civilian Life - You may be able to deduct some costs that are incurred while looking for a new job. Expenses may include travel, resume preparation fees, and outplacement agency fees. Moving expenses may be deductible if your move is closely related to the start of work at a new job location, and you meet certain tests.

If you or your spouse have questions about any of the above, or have questions related to your designated state of residence for state tax filing purposes, please give one of our professionals a call.

Tax Tips for Business Start-Ups

Thu, 26 Aug 2010 08:00:00 PST

If you are planning to open a new business, there are a number of tax and accounting issues you need to be aware of. The following are some of the more commonly encountered issues a new business owner needs to cope with.

1. Entity Selection – First, you must decide what type of business entity you are going to establish. The type of business entity will determine which tax form you have to file. The most common types of businesses are the sole proprietorship, partnership, corporation, S corporation and limited liability company. This office can assist you in making that determination and setting up the chosen entity. Depending on the type of entity you choose, you may also need the services of an attorney to complete legal documents required to establish the business.

2. Taxes – The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax. This office can assist you with the filings required for whichever business entity you select.

3. EIN – An Employer Identification Number (EIN) is generally used to identify a business entity. If you organize your business as a partnership or corporation, you will need an EIN. If you operate as a sole proprietorship, you will also need an EIN if you have employees or a Keogh pension plan. This office can assist you in determining your need for an EIN and help you obtain one.

4. Local Business License – Depending upon the community in which your business is located, you may also be required to obtain a business tax permit (which is sometimes referred to as a business license). This office can help you determine the need for one and assist with filing the application.

5. Sales Tax Permit – If the new business has retail sales, you will need to obtain a sales tax permit and periodically remit the sales tax collected from the sales. This office can assist you with obtaining the permit and setting up the payments. Even if you won’t be operating a retail sales business, you may need to register with the state for use tax purposes. Again, this office can help you with that registration if it is required.

6. Payroll – If you have employees, you will have to withhold and remit payroll taxes to the federal, state and sometimes local governments. We can help you set up your payroll system and register with the appropriate governmental agencies.

7. Information Reporting – If you make payments totaling $600 or more for the year to individuals who are not your employees, you will be required to issue a 1099-MISC to that individual shortly after the end of the year. This requires obtaining the individual’s name, SSN, and address prior to paying them for the first time. This requirement is extended to payments you make to corporations in 2012. This office can help you establish a procedure for collecting the required information and preparing the required filings after the close of the year.

8. Recordkeeping System – Establishing a good recordkeeping system right away can save a lot of grief in the future. This office can assist you in selecting and setting up a recordkeeping system suited to your business.

9. Accounting Method - Each taxpayer must also use a consistent tax accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

In closing, it is always easier and less expensive to set things up correctly in the first place than it is to fix the mistakes later. Even if you plan to accomplish some of the tasks listed above yourself, we highly recommend you consult with our professionals to ensure you are doing what is needed correctly and on time. There may also be other issues not included above that also need to be dealt with when setting up your particular business.

Will Congress Take Action Or Allow Taxes to Increase?

Thu, 19 Aug 2010 08:00:00 PST

Normally, one would think that Congress would have to take some action to increase taxes. However, it is quite the opposite for 2011. If Congress fails to take action, there will be a tax increase affecting just about everyone in every tax category. In order to skirt a Senate rule that requires 60 votes to pass a bill that increases the deficit beyond a ten-year window, Congress passed the Bush tax cuts in 2001 and 2003 with most provisions designed to sunset this year.

Despite President Obama’s vow of no new taxes for individuals earning less than $200,000 and families earning less than $250,000, stopping these tax increases from taking place will require Congressional action. However, not only are we in an election year - when most of our politicians tend to steer away from tax-related discussions before voting day - Congress is looking for ways to make up some of the budget deficit, and many legislators consider extending the current laws to be too costly. So, we may not see any action on tax increases or extensions until late in November, if then.

To put this all in perspective, the following is a list of some of the automatic tax changes that have already taken place in 2010 or will take place in 2011 and subsequent years as a result of expiring or new tax laws.

Those Affecting 2010:

o Non-Itemizers Real Property Tax Deduction - The $500 ($1,000 for joint filers) property tax deduction for non-itemizers expired after 2009. This most likely will impact lower-income taxpayers, or those whose homes are mortgage-free and have no home interest expense, and who are unable to itemize their deductions. For taxpayers in the 15% tax bracket, this equates to a $75 tax increase (or $150 for joint filers).

o Sales Tax in Lieu of State Income Tax - The option to deduct sales tax in lieu of state income tax as an itemized deduction on a taxpayer's Schedule A expired after 2009. Although this will impact taxpayers with low state income taxes and those that purchased vehicles, boats or airplanes, it will have the greatest impact on taxpayers in states where there is no state income tax and thus no state income tax deduction to take in place of the expiring sales tax deduction.

o Farm Losses - For tax years beginning after 2009, the Farm Act limits the farming loss of a taxpayer, other than a C corporation, for any tax year in which any applicable subsidies are received. The losses are limited to the greater of (a) $300,000 ($150,000 for a married person filing separately), or (b) the taxpayer's total net farm income for the prior five tax years.

o Alternative Minimum Tax - Way back in 2001, Congress increased the AMT exemption to keep middle-class taxpayers from being caught up in this punitive tax and have been inflation adjusting and extending it on an annual basis in recent years. However, they seem reluctant to adjust it for 2010. If they do not, the exemption will return to $45,000 for joint filers (down from $70,950 in 2009) and $33,750 (down from $46,700 in 2009) for unmarried individuals. This will generally snare middle-income taxpayers, and the tax bite can range upwards to several thousand dollars.

o Teacher's Classroom Supplies Deduction - The $250 above-the-line deduction for teacher classroom supplies expired after 2009.

o Above-the-Line Education Deduction - The up-to-$4,000 above-the-line deduction for education expenses (tuition and fees) expired after 2009.

Those Affecting 2011:

o Tax Rates - As part of the Bush era tax cuts, the marginal tax rates (they increase with taxable income) were reduced to 10, 15, 25, 28 and 33 percent. These rates are set to return to their original levels of 15, 28, 31, 36 and 39.6 percent. The 10% and 15% brackets will be replaced with a single 15% bracket. This results in an increase for everyone. Those in the previously lowest bracket (10%) will see a tax increase of approximately 5%, while others will see increases ranging approximately from 2% to 6%. In addition, an expanded 15% bracket for a married couple filing a joint return has applied for several years as relief for the "marriage penalty." This will not apply as of 2011. Instead, the top of the 15% bracket for joint returns will be about 167% of the end point for single returns rather than the 200% it has been.

o Capital Gains Rates - Also, as part of the Bush era cuts, the capital gains rates were substantially reduced, but will return to their old levels of 10% for anyone in the 15% regular tax bracket and 20% for all others. That is up from 0% and 15% in 2010. This will impact investors, business owners and home owners when they sell a capital asset.

o Qualified Dividends - Generally, qualified dividend income is dividend income from stock held for 60 days or longer before the ex-dividend date. These dividends, for a number of years, have been taxed at capital gains rates (0% - 15%). However, the law providing these beneficial rates expires at the end of 2010 and all dividend income will be taxed at ordinary income rates (15% to 39.6%). This will generally impact investors holding income stocks and mutual funds. These individuals will see an overall tax increase greater than just the general 2% to 6% rise noted above.

o Earned Income Credit - This refundable credit currently has four categories of low-income working taxpayers, with the credit increasing as the number of children increase, up to three or more. In 2011, the "three or more children" category will go away, and taxpayers with three or more children will have to use the two or more category. This can reduce the credit for low-income taxpayers with three or more children by up to about $600.

o Child Credit - The tax law provides a tax credit for each of a taxpayer's children under the age of 17. This credit will drop to $500 (was $1,000 in 2010) per child. Since this credit phases out for higher-income taxpayers, it will generally impact lower-income taxpayers.

o American Opportunity Education Credit (AOEC) - This credit took the place of the Hope Education credit in 2009 and 2010. Where the Hope Credit is non-refundable (can only offset one's income tax liability), the AOEC was 40% refundable, and where the Hope Credit is for only the first two years of post-secondary education expenses, the AOEC allowed a credit for the first four years of post-secondary education expenses. In addition, prior to 2009, the Hope credit was limited to a maximum of $1,800 per student but the AOEC maximum was $2,500 per student. If the AOEC is not extended, low-income taxpayers will lose out on the refundable feature of the AOEC and those students in their third and fourth year of post-secondary education. Middle-income taxpayers will also be affected, because the point at which the credit phases out due to income limitations was 60% higher under the AOEC than under the Hope credit rules. Higher-income taxpayers are generally not affected since both credits are phased out for higher-income taxpayers.

o Employer Education Assistance - Employers are allowed to provide up to $5,250 of tax-free educational benefits. This provision expires and is no longer available after 2010. The net effect of this expiring benefit is based on the student's tax bracket. For example, if the student's employer provided the full $5,250 of benefits, and the student is in the 28% tax bracket, the loss of the tax-free benefit would equate to a $1,470 tax increase.

o Business Expense Deduction - Sec 179 of the tax code allows taxpayers to expense rather than depreciate certain tangible business assets and equipment in the year of purchase. For 2011, the amount that can be written off in a tax year will be $25,000, down from $250,000. This will generally impact mid-size businesses that are planning substantial equipment purchases in excess of $25,000 in the near future.

o Standard Deduction - In 2010, the standard deduction of taxpayers filing married joint status is twice the amount of someone filing under the single status. Beginning in 2011, the so-called marriage penalty is back: joint filers' standard deduction will be only 167% (instead of 200%) of the single amount. For a married couple in the 28% bracket, the result is additional tax of about $525.

o Phase-Out of Personal Exemptions - For years before 2006, the personal exemptions were phased out for high-income taxpayers. Then, in 2006 through 2010, that phase-out was gradually reduced to where there is no phase-out in 2010. However, the reduction will no longer apply after 2010, and, in 2011, the phase-out reverts to the rules in effect before 2006. This only impacts high-income taxpayers. Although the phase-out threshold income amounts for 2011 are not currently available, they will be approximately $250,000 for a married couple, $210,000 for head of household and $170,000 for single individuals. The loss of each exemption for a high-income taxpayer in the 36% tax bracket will result in an additional tax of approximately $1,300. Thus, a family of four would see an increase of $5,200.

o Phase-Out of Itemized Deductions - At the same time that the exemption phase-out was being reduced (see immediately preceding item), the phase-out of itemized deductions for high-income taxpayers was also being reduced. Thus, for 2011, the high-income taxpayer's itemized deduction phase-out returns. The phase-out impacts all deductions other than medical, investment interest, casualty and gambling losses. The deductions are phased out by an amount equal to 3% of the taxpayer's AGI in excess of the AGI phase-out threshold, but not more than 80% of the deductions can be phased out. The phase-out threshold for most individuals will be approximately $170,000, which is significantly less than the exemption phase-out amount for married joint or head of household filers. The tax impact on an affected taxpayer will be 28% to 39.6% of the lost deductions.

o Coverdell Accounts - The contribution limit to Coverdell education savings accounts will be reduced from $2,000 per year to $500, tax-free distributions will no longer be allowed for elementary and secondary education (only post-secondary education), education credits will not be allowed in the same year as a Coverdell distribution, and contributions cannot be made to a Coverdell account and a Sec 529 plan in the same year.

o Home Energy Improvement Credit - The $1,500 credit for making improvements that increase the energy efficiency of a taxpayer's home expires after 2010.

o Hybrid & Lean Burn Credits - Most manufacturers have reached the 60,000 unit maximum after which the credit is reduced or no longer allowed. As a result, this credit will have very limited application in 2011.

o Health Savings Accounts - The penalty for a nonqualified distribution from an HSA has been increased from 10% to 20% and distribution for over-the-counter medication is no longer a qualified distribution.

o Making Work Pay Credit - Expires after 2010. This refundable credit of $800 for joint filers and $400 for unmarried individuals phases out for higher-income taxpayers so the loss of the credit impacts middle- to low-income taxpayers.

o Higher Education Interest Deduction - This deduction will phase-out for joint filing taxpayers beginning at an AGI of $60,000 (down from $120,000 in 2010). The phase-out for an unmarried taxpayer remains the same. In addition, the deduction is limited to interest paid on the first 60 months (was previously unlimited) in which interest payments are required. This will impact higher-income joint filers and taxpayers who have already exceeded the 60-month limitation.

o Estate Tax - The estate tax, which was eliminated for 2010, returns in 2011 with an exemption of $1 million dollars (down from $3.5 million in 2009), and a maximum tax rate of 55%, up from 45%.

On top of all these changes, there are the Health Care provisions that are taking effect in 2013, including the following: increasing the medical deduction floor to 10% for most individuals (up from 7.5%), adding a 3.8% unearned income surtax to high-income taxpayers, and tacking on an additional .9% to the current 1.45% hospitalization insurance (HI) portions of the FICA withholding (or the SE tax in case of self-employed individuals). The surtax and additional HI withholding apply to incomes in excess of $250,000 for married joint filers, $125,000 for married individuals filing separately and $200,000 for others.

It is anticipated that Congress will extend certain provisions and perhaps limit high-income taxpayers from benefiting from those extended provisions.

If you have questions related to any of these issues, please give one of our professionals a call.

Small Business Expenses 101

Tue, 17 Aug 2010 08:00:00 PST

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 a 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. For 2010, up to $250,000 of such items can be expensed under this provision.

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:

a) 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.

b) Standard Mileage Rate – The standard rate changes each year, and, for 2010, it is 50 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 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 your 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 contact one of our professionals.

Maximizing Medical Deductions Before 2013

Thu, 12 Aug 2010 08:00:00 PST

Medical expenses are deductible if you itemize your deductions. However, there is a limit on how much of those medical expenses you can deduct based upon your income for the year. Currently, only medical costs that exceed 7.5% (10% if you are subject to the alternative minimum tax of your adjusted gross income (AGI) can be deducted.

Example: Let’s say you have wages of $50,000 and interest income of $1,000 and no adjustments to your income. Your AGI is $51,000 and 7.5% of the AGI is $3,825. In this case, you would only be able to deduct your medical expenses that exceed $3,825. Thus, if your deductible medical expenses for the year were $5,000, you can only deduct $1,175.

This all changes in 2013 when, as part of the new health care provisions, the 7.5% floor is increased to 10%! So if you have been putting off discretionary medical procedures, such as braces for the children, eye surgery, new dentures, or a knee replacement, you might consider having the work done and paying for it before 2013 to take advantage of the lower AGI threshold. Costs of cosmetic surgery (other than that necessitated by an accident or illness) aren’t deductible, so don’t schedule that facelift or teeth whitening as part of this strategy.

Another technique to employ is to bunch your medical expenses into one year so you can overcome the medical threshold. So, instead of paying the orthodontist over a period of years, pay him all in one year.

Example: Your AGI is $75,000, and you are planning to pay the orthodontist $3,000 a year for a three-year period. You typically have other medical expenses each year of $2,000. 7.5% of $75,000 results in a medical expense deduction floor of $5,625. Thus, if you pay the orthodontist in installments, your total medical expense for a year would be $5,000 ($3,000 + $2,000) and you would not be able to deduct any medical because the $5,625 medical floor exceeds the $5,000 expense. However, if you paid the entire orthodontist bill in one year, your medical expenses would be $11,000 ($9,000 + $2,000) and you would have a $5,375 medical deduction.

If you are short of cash and cannot pay the entire medical bill at one time, it may be appropriate to borrow the money to pay the medical expense. However, you need to factor in the cost of borrowing the money when deciding if it makes sense to borrow.

Even if you are affected by the AMT, the bunching strategy may be able to get you over the 10% floor.

If you are a senior, age 65 (before close of year) or older, you will be able to use the 7.5% rate though 2016.

Contact one of our professionals for assistance with planning a medical strategy or to answer any questions related to the deductibility of a medical expense.

Do You Qualify for an Offer in Compromise?

Tue, 10 Aug 2010 08:00:00 PST

The objective of the IRS’ Offer in Compromise (OIC) program is to accept an offer for less than the amount of tax that’s owed when it is in the best interest of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements.

If you are unable to pay your tax liability in a lump sum or through an installment agreement, and you have exhausted your search for other payment arrangements, you may be a candidate for an offer in compromise.

An offer in compromise is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.

Unless the amount offered by the taxpayer is equal to or greater than what the IRS refers to as a reasonable collection potential (RCP), it will generally not be accepted. The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.

Example: Let’s say that you have assets worth $15,000. Your future income within the collection period less the amount the IRS deems that you need to meet basic living expenses is $10,000. Your minimum offer must be $25,000 ($15,000 + $10,000) for the IRS to take it into consideration.

Don’t be misled by those “pennies on the dollar” promotions that lead people to believe that all tax liabilities can be negotiated. The IRS adheres to their RCP guidelines and generally won’t give the store away. In fact, in the last few years, the IRS’ offer in compromise acceptance rate has been less than 25%.

Grounds for an Offer - The IRS may accept an offer in compromise based on three grounds:

Doubt as to Collectibility - Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.

Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax owed is correct. The taxpayer’s monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.

Doubt as to Liability - A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the IRS examiner made a mistake interpreting the law, (2) the examiner failed to consider the taxpayer’s evidence or (3) the taxpayer has new evidence.

Example: The taxpayer was Vice President of a corporation from 2004-2005. In 2006, the corporation accrued unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2005. Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.

Effective Tax Administration - There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.

Example: Mr. & Mrs. Taxpayer have assets sufficient to satisfy the tax liability and provide full-time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.

In order for your offer in compromise to be considered by the IRS, the following requirements must be met:

You are not a debtor in an open bankruptcy proceeding.
You must have filed all tax returns that are legally required.
If you are making estimated tax payments, they must be up-to-date.

Pay the $150 application fee with your offer submission, or provide a signed IRS Form 656-A certifying that you meet the fee waiver based upon your family unit size and income. (See Low Income Exemption and Guidelines below)

Generally, one of the following payments must be submitted with the offer:
- Lump Sum Offer – When making a lump sum offer, you must be able to submit 20 percent of the amount you are offering as payment and be able to pay the balance in five or less payments after the offer is accepted by the IRS.
- Short-Term Periodic Payment Offer – When making a periodic payment offer, you must submit your first payment with the application and continue to make the periodic payment to the IRS while they are investigating and considering your offer. The entire offer must be paid in regular installments within 24 months.
- Deferred Periodic Payment Offer – The offer is payable in non-refundable installments paid over the remaining statutory period for collecting the tax. The first payment is due with the offer in compromise application and regular payments must be made during the IRS investigation and consideration of the offer.

Low-Income Exemption and Guidelines – The application fee is waived if an individual (not a corporation, partnership or other entity) taxpayer’s income falls at or below IRS Low Income Guidelines. Qualifying taxpayers are also exempt from making any OIC payments while the offer is being investigated.

IRS Investigation – The IRS is not bound by either the offer amount or the terms proposed by the taxpayer. The IRS investigator may negotiate a different offer amount and terms, when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms are too protracted to recommend acceptance. In this situation, the OIC investigator may advise the taxpayer as to what larger amount or different terms would likely be recommended for acceptance.

The Downside – Not only is it a lengthy, drawn-out process, the IRS may ask for a myriad of documents before deciding whether or not to accept your offer. In addition, you will have to disclose all of your assets, making it easier for them to initiate collection actions should your offer be turned down.

Generally, any of the mandatory payments listed above and made in connection with an offer will be applied to the tax liability and will not be refundable if the IRS rejects the offer.

The application fee submitted with the offer will be kept by the IRS unless the offer was not accepted for processing.

The offer is only valid if you comply with all the provisions of the Internal Revenue Code relating to filing of your returns and paying the required taxes for a period of five years or until the offered amount is paid in full, whichever is longer.

Determining if you qualify for an offer in compromise is the first step in the process. There is no need to go to the expense and effort if you clearly do not qualify. Pursuing an offer in compromise can be a complex and time-consuming task that can take anywhere from six months to as long as two years to complete. That is why using a professional to prepare the offer is generally a wise thing to do. Please call one of our professionals for assistance.

Flipping Homes � A Reviving Trend in Real Estate

Thu, 5 Aug 2010 08:00:00 PST

Prior to the recent economic downturn, flipping real estate was popular. With mortgage interest rates low and home prices at historical lows, flipping appears to be on the rise again. House flipping is, essentially, purchasing a house or property, improving it, and then selling it (presumably for a profit) in a short period of time. The key is to find a suitable fixer-upper that is priced under market for its location, fix it up, and resell it for more than it cost to buy, hold, fix up and resell it.

If you are contemplating trying your hand at flipping, keep in mind that you will have a silent partner, Uncle Sam, who will be waiting to take his share of any profits in taxes. (And most likely Sam’s cousin in your state capitol will also expect a share, too.) Taxes play a significant role in the overall transaction, and tax treatment can be quite different depending upon whether you are a dealer, an investor or a homeowner. The following is the tax treatment for each.

Dealer in Real Estate – Gains received by a non-corporate taxpayer from business operations as a real estate dealer are taxed as ordinary income (15% to 39.6% in 2011), and in addition, individual sole proprietors are subject to self-employment tax as high as 15.3% of their net profit (the equivalent of the FICA taxes for a self-employed person). Thus, a dealer will generally pay significantly more tax on the profit than an investor. On the other hand, if the flip results in a loss, the dealer would be able to deduct the entire loss in the year of sale, which would generally reduce his tax at the same rates.
Investor – Gains as an investor are subject to capital gains rates (maximum of 20% in 2011) if the property is held for more than a year (long-term). If held short-term, ordinary income rates (15% to 39.6% in 2011) will apply. However, an investor is not subject to the 15.3% self-employment tax. A downside for the investor who has a loss from the transaction is that, after combining all long- and short-term capital gains and losses for the year, his deductible loss is limited to $3,000, with carryover to the next year of any excess capital loss. The rules get a bit more complicated if the investor rents out the property while trying to sell it, and are beyond the scope of this article.
Homeowner – If the individual occupies the property as his primary residence while it is being fixed up, he would be treated as an investor with three major differences: (1) if he owns and occupies the property for two years and has not used a homeowner gain exclusion in the two years prior to closing the sale, he can exclude gain of up to $250,000 ($500,000 for a married couple), (2) if the transaction results in a loss, he will not be able to deduct the loss or even use it to offset gains from other sales, and (3) some fix-up costs may be deemed to be repairs rather than improvements, and repairs on one’s primary residence are not deductible nor includible as part of the cost basis of the home.

Being a homeowner is easily identifiable, but distinguishing between a dealer and an investor is not clearly defined by the tax code. A real estate dealer is a person who buys and sells real property with a view to the trading profits to be derived and whose operations are so extensive as to constitute a separate business. A person acquiring property strictly for investment, though disposing of investment assets at intermittent intervals, is generally not regularly engaged in dealing in real estate.

This issue has been debated in the tax courts frequently, and both the IRS and the courts have taken the following into consideration:

whether the individual is already a dealer in real estate, such as a real estate sales person or broker;
the number and frequency of sales (flips);
whether the individual is more committed to another profession as opposed to fixing and selling real estate; and
how much personal time is spent making improvements to the “flips” as opposed to another profession or employment.

The distinction between a dealer and an investor is truly based on the facts and circumstances of each case. Clearly, an individual who is not already in the real estate profession and flips one house is not a dealer. But one who flips five or more houses and/or property and has substantial profits would probably be considered a dealer. Everything in between becomes various shades of grey and the facts and circumstances of each case must be considered.

If you have additional questions or need assistance with your specific situation, please call one of our professionals.

Nine Tips on the 10 Percent Tax on Tanning Services

Tue, 3 Aug 2010 08:00:00 PST

Starting July 1, 2010, many businesses offering tanning services must collect a 10 percent excise tax on the tanning services they provide. This excise tax requirement is part of the Affordable Care Act that was enacted in March 2010.

Here are nine tips on the tanning excise tax that providers must collect.

1. Businesses providing ultraviolet tanning services must collect the 10 percent excise tax at the time the customer pays for the tanning services.

2. If the customer fails to pay the excise tax, the tanning service provider is liable for the tax.

3. The tax does not apply to phototherapy services performed by a licensed medical professional on his or her premises.

4. The tax does not apply to spray-on tanning services.

5. If a payment covers charges for tanning services along with other goods and services, the other goods and services may be excluded from the tax if they are separately stated and the charges do not exceed the fair market value for those other goods and services.

6. If the customer purchases bundled services and the charges are not separately stated, the tax applies to the portion of the payment that can be reasonably attributed to the indoor tanning services.

7. The tax does not have to be paid on membership fees for certain qualified physical fitness facilities that offer indoor tanning services as an incidental service to members without a separately identifiable fee.

8. Tanning service providers must report and pay the excise tax on a quarterly basis.

9. To pay the tax, businesses must file IRS Form 720, Quarterly Federal Excise Tax Return, using an Employer Identification Number assigned by the IRS. Businesses that don’t already have one can apply for an EIN online at IRS.gov. The first return is due October 31, 2010.

For more information about the excise tax on tanning services, please give one of our professionals a call.

New Regulations Provide More Insight to Health Care Reform

Thu, 29 Jul 2010 08:00:00 PST

The Departments of Labor, Treasury and Health and Human Services recently issued regulations to implement a new Patient's Bill of Rights as part of the Health Care Reform Act. The major initial provisions include the following:

INSURANCE FOR UNINSURED AMERICANS WITH PRE-EXISTING CONDITIONS

Beginning July 1, 2010, a Pre-Existing Condition Insurance Plan will provide new coverage options to individuals who have been uninsured for at least six months because of a pre-existing condition. States have the option of running this new program in their state. If a state chooses not to do so, then the individual can utilize the Federal programs. This program serves as a bridge to 2014, when all discrimination against pre-existing conditions will be prohibited. To learn more about the plan for a particular state, visit the Department of Health and Human Services website.

EXPANDING COVERAGE FOR EARLY RETIREES

Too often, Americans who retire without employer-sponsored insurance and before they are eligible for Medicare see their life savings disappear because of high rates in the individual market. To preserve employer coverage for early retirees until more affordable coverage is available through the new Exchanges required to be established by 2014, the new law creates a $5 billion program to provide needed financial help for employment-based plans to continue to provide valuable coverage to people who retire between the ages of 55 and 65, as well as their spouses and dependents.

The program provides reimbursement to sponsors of participating employment-based plans for a portion of the cost of health benefits for early retirees and their spouses, surviving spouses, and dependents. The Secretary will reimburse sponsors for certain claims between $15,000 and $90,000 (with those amounts being indexed for plan years starting on or after October 1, 2011).

Employers wishing to participate in the program can obtain additional information on the Department of Health Services website.

PROVIDING FREE PREVENTIVE CARE

Effective for health plan years beginning on or after September 23, 2010, all new plans must cover certain preventive services, such as mammograms and colonoscopies, without charging a deductible, co-pay or coinsurance.

PRE-EXISTING CONDITION EXCLUSIONS FOR CHILDREN UNDER AGE 19

Effective for health plan years beginning on or after September 23, 2010, for new plans and existing group plans, the new law includes rules to prevent insurance companies from denying coverage to children under the age of 19 due to a pre-existing condition. This limit applies to both specific coverage denials (because of a pre-existing condition) AND banning benefit limits (refusing you a policy). This pre-existing condition will also apply to all individuals effective in 2014.

ELIMINATION OF ARBITRARY RESCISSION OF COVERAGE

Effective for health plan years beginning on or after September 23, 2010, insurance companies may no longer retroactively cancel a policy due to sickness or because of an "unintentional" mistake on paperwork. The only exception is if the case involves fraud or intentional misrepresentation of the facts.

LIFETIME LIMITS ARE PHASED OUT

Effective for all policies issued after September 23, 2010 and those renewing after this date, there can no longer be lifetime limits placed on health care plans.

ANNUAL DOLLAR LIMITS

There is a phase-out of annual dollar expenditure limits on health plans over the next three years until 2014 when the Affordable Care Act bans them for most plans. Thus, plans issued or renewed beginning September 23, 2010 will be allowed to set annual limits no lower than the amounts shown in the following table:

Beginning	Minimum Limit
September 23, 2010	$750,000
September 23, 2011	$1.25 Million
September 23, 2012	$2 Million
January 1, 2014	Not Allowed

If you have additional questions, please give one of our professionals a call.

Having a Bad Year? You May Qualify For Earned Income Credit.

Tue, 27 Jul 2010 08:00:00 PST

Many individuals find themselves earning less during these troubled economic times than in years past. As a result, they may qualify for a credit that they previously were not entitled to because of income limitations.

The Earned Income Tax Credit (EITC) is for people who work, but have lower incomes. If you qualify, it could be worth up to $5,666 for 2010. So, you could pay less federal tax or even be eligible for a refund. The credit is a refundable credit, meaning you can receive the benefits of the credit even if you may not owe any taxes. That’s money you can use to make a difference in your life and help to carry you through hard times.

The EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. If you have children, they must meet the relationship, age, and residency requirements. While taxpayers without children may qualify for the EITC, the potential amount of the credit is significantly more for eligible taxpayers who have one or more qualifying children. These taxpayers are also allowed to earn over 2½ times more income before the credit is phased out than workers without qualifying children.

If you were employed for at least part of 2010, you may be eligible for the EITC based on the general requirements included in this article.

The credit calculation is rather complicated and takes into account a taxpayer’s income from working, his or her total income (AGI), number of children, and tax filing status. The best way to describe how this credit works is that it is zero if a taxpayer has no income from working (the credit is devised as an incentive for individuals to work) and increases as the income from working increases until the credit reaches the maximum allowed, at which point it becomes smaller as the income grows. The table below shows (1) maximum credit and corresponding earned income and (2) the income at which the credit totally phases out.

In addition, to qualify, a taxpayer must meet a few basic rules:

The credit isn't available to individuals when their “disqualified income” (i.e., investment income such as interest and dividends) is more than $3,100.
The taxpayer claiming the credit and any qualifying children must have a valid Social Security number.
Have earned income from employment or from self-employment.
Filing status cannot be married filing separately.
The taxpayer must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien, and filing a joint return.
The taxpayer cannot be a qualifying child of another person.
A taxpayer without a qualifying child must:

o Be age 25, but under 65 at the end of the year,
o Live in the United States for more than half the year, and
o Not be a qualifying child of another person.

The taxpayer cannot file Form 2555 or 2555-EZ (related to foreign earned income).
Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If the election to do so is made, all nontaxable combat pay received must be included in earned income for purposes of figuring the EITC.

The rules related to the EITC are rather complicated, so, if you have any questions related to how the credit might apply to you, please give one of our professionals a call.

Final Year for the American Opportunity Education Credit?

Thu, 22 Jul 2010 08:00:00 PST

Without Congressional intervention, 2010 is the final year for the American Opportunity credit, which is a modified version of the Hope Education credit for tax years 2009 and 2010. The American Opportunity credit is available to a broader range of taxpayers with expanded income limitations and a more liberal list of qualified expenses than was the Hope credit. Many of those eligible will qualify for the maximum annual tax credit of $2,500 per student.

The American Opportunity credit, in many cases, offers greater tax savings than other existing education tax breaks! Here are some key features of the credit:

Tuition, related fees, books and other required course materials generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
If you otherwise qualify, you can take this credit even if you have previously taken the Hope or Lifetime Learning credit in years prior to 2009.
The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less (for married couples filing a joint return, the limit is $160,000 or less). The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the former Hope and current lifetime learning credits.
Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Other existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parent’s rate, commonly referred to as the kiddie tax.

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

There are some post-secondary education expenses that do not qualify for the American Opportunity credit. They include expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college. That’s because the credit is only allowed for the first four years of post-secondary education. However, for those students who qualify, the Lifetime Learning credit may be claimed instead.

The IRS website provides a series of questions and answers related to this credit.

To maximize your credit for 2010, it may be appropriate for you to prepay certain education expenses that apply to the first quarter of 2011. For additional information on this tax strategy or other issues relating to education tax benefits and credits, please give one of our professionals a call.

Divorced Parents � Who Claims the Child�s Exemption?

Mon, 19 Jul 2010 08:00:00 PST

A very frequent issue related to divorce is which parent should claim the tax exemption for the child. Generally, the custodial parent is the one that is entitled to deduct the exemption for a child unless the custodial parent releases the exemption to the non-custodial parent.

The IRS regulations state that if the custodial parent releases to the non-custodial parent the claim to the child as a dependent, the release must be a written declaration and it must be unconditional (no strings attached such as requiring the non-custodial parent to meet support payment obligations). It must name the non-custodial parent and specify the year or years for which it is effective. If it specifies “all future years,” it is treated as specifying the first taxable year after the year in which it is executed and all subsequent years. The written declaration may be made on Form 8332, or a successor form designated by the IRS.

If the release is not made on the official IRS form, it must conform to the substance of that form, and it must be executed for the sole purpose of serving as a written declaration under this section. A court order or decree or separation agreement may not serve as a written declaration (because it has other purposes than releasing the exemption to the non-custodial parent). The IRS also will not accept a state court’s allocation of exemptions because the Internal Revenue Code, not state law, determines who may claim a child’s exemption for federal income tax purposes.

The non-custodial parent must attach a copy of the written declaration to his or her return for each year in which the child is claimed as a dependent.

A recent tax court case points up the need for an unconditional signed release. Under a modified divorce agreement, the custodial spouse was, per the agreement, supposed to sign and deliver a release to the non-custodial parent if the non-custodial parent was current with the child support payments. Even though the non-custodial parent lived up to his end of the bargain, the custodial spouse never executed an unconditional signed release. Both parents claimed the child and the case ended up in tax court.

Although the judge sympathized with the non-custodial parent, the awarding of the child’s exemption to the non-custodial parent in the divorce decree was conditioned on his payment of the child support. Thus, it was not an unconditional signed release. In addition, the custodial parent never signed a separate unconditional release. Thus, the non-custodial parent was denied the exemption.

If you are a divorced parent and have questions related to claiming the exemption for a child(ren), please give one of our professionals a call.

Tax Tips for Recently Married Taxpayers

Thu, 15 Jul 2010 08:00:00 PST

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 your name and SSN will match when you file 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.�
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Notify the IRS - If you have a new address, you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from the IRS website IRS.gov or order it by calling 800�TAX�FORM (800�829�3676).�
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Notify the U.S. Postal Service - You should also notify the U.S. Postal Service should you move so it can forward any IRS or state correspondence. �You can obtain a change of address form from your local post office or you can change your address online at the USPS website.��
Notify Your Employer - Report any name and address changes to your employer(s) to ensure receipt of your Form W-2, Wage and Tax Statement after the end of the year.�
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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. In addition to possibly being underpaid, you may also be subject to underpayment penalties.� 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 2010 and make any required adjustments to your W-4 and Estimated Tax Payments, if applicable, as soon as possible.�

Although the IRS provides an online withholding calculator, it cannot take into account a number of variables that can have a significant impact on the projected withholding.� Therefore, where both spouses work, have multiple employers, itemize deductions, and have significant income, credits, deductions or losses from other sources than wages, professional assistance is probably needed in projecting their joint tax liability and the amounts that need to be withheld or paid via estimates.

Please call one of our professionals for assistance.

Misclassifying Workers Can Be Costly!

Mon, 12 Jul 2010 08:00:00 PST

With the current economy, and not always knowing what lies ahead, most business owners and executives tend to be financially conservative and preserve the cash of the business. This conservative approach frequently carries over to hiring activities, with many employers choosing to hire independent contractors/freelancers as opposed to full-time employees. In doing so, they eliminate the cost of company benefits such as vacation, sick pay, health insurance and retirement funding. Another big benefit is eliminating the employer’s matching share of Social Security and Medicare payroll taxes, not to mention the savings on unemployment taxes and worker’s compensation insurance.

Eliminating all those costs associated with employees and hiring independent contractors may save a lot of money, but it can also be a mine field. Just because you pay a worker like an independent contractor does not necessarily make them one. And if you are subsequently challenged on that classification by the IRS or your state taxing authority, and eventually end up losing, you will pay back all those savings plus penalties and interest. The company’s retirement plan could also be in jeopardy of losing its qualifying status if workers who should have been eligible to participate have been excluded from the plan. The line between independent contractor and employee is not always clear, but the following are some guidelines that can be used in making the determination.

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.
The Type of Relationship – This factor 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.

Here are some additional factors to consider when making a determination:

Sole Employer – An independent contractor is in business for him or herself and generally will have additional clients for whom services are provided. If you are the only client and he or she is not actively pursuing work from others, then it becomes an indicator favoring employee status.

Work Schedule – An independent contractor generally sets their own work schedule. Requiring the worker to maintain regularly scheduled work hours is an indicator of employee status.

Materials & Supplies – Independent contractors generally provide their own materials and equipment and invoice their clients for labor and materials. If you provide all of the material and supplies, that is another indicator of employee status.
Work Location – Another indicator of employee status is when a worker performs services only at your work location and does not maintain an office or facilities elsewhere.

If, after considering all the factors and issues, you feel you cannot reach a definitive determination, then you, as an employer, can request the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the IRS. However, the IRS does not issue determinations for proposed or hypothetical situations. A worker may also file Form SS-8 requesting an IRS determination.

One final word of caution: if a worker that you classified as an independent contractor is subsequently determined to be an employee, you will be open to a lawsuit for back benefits or even other demands related to the worker’s specific circumstances.

If you need more information about the critical determination of a worker’s status as an independent contractor or employee, please give one of our professionals a call.

Three New IRS Information Reporting Tools Coming Your Way

Thu, 8 Jul 2010 08:00:00 PST

The IRS has long used information reporting as a tool to enforce compliance with the tax laws. This is done in a variety of ways. Information reporting provides the IRS with the ability to perform vast numbers of compliance checks using their computer system. For example, Bank A issues a Form 1099-INT to Customer X and the IRS that reports the $1,000 of interest it paid to Customer X during the year. The IRS then checks X’s tax return to see if the $1,000 of income has been reported. The most commonly encountered compliance checks include the following:

o Wages (W-2)
o Income as an Independent Contractor (1099-MISC)
o State tax refunds and unemployment compensation (1099-G)
o Certain gambling income (W-2G)
o Interest and dividend income (1099-INT and 1099-DIV)
o Pension income, IRA withdrawals, etc. (1099-R)
o Social Security benefits/Medicare premiums (SSA-1099)
o Dependent Exemptions (Match against all other returns filed)
o Filing status (Match against other returns filed)
o Alimony (Match recipient to payer)
o Gross proceeds from the sales of stock and property (1099-B and 1099-S)
o Home Mortgage Interest (1098)

There are more, but this gives you an idea of how information reporting can be used as a tool to uncover noncompliance, unreported or under-reported income, and underpayment of taxes. Beginning in 2011 and 2012, the IRS has added three additional tools to their toolbox which will significantly increase their ability to uncover noncompliance by security investors and business entities.

Here is an overview of the forthcoming new information reporting tools:

Payment Card and Third-Party Payment Transactions - The “Housing Assistance Tax Act of 2008” added Code Sec. 6050W which adds one of the new compliance tools for the IRS. This new tool will affect businesses that accept credit or debit cards, or other electronic payments received during 2011. Beginning in 2012, payment processors will have to make an annual information report (for the year 2011) to the merchant and the IRS, stating the gross amount paid to the merchant during the previous calendar year.

This will allow the IRS to determine the business’s gross income from credit and debit card sales and make it easier to segregate the credit/debit card sales from cash sales. The IRS will then be in a position to see if the credit card dollar figure reported on the tax return matches the bank's information return and will also allow them to see if a business’s other sales from cash and check payments makes sense in the context of the firm's overall business.

We can probably expect IRS to develop statistics for various types of businesses related to the ratio of cash payments to credit payments as a means of imputing cash payments for merchants that do not report a reasonable amount of income over and above that reported by the payment processors.

The new reporting form is Form 1099-K. The draft version of this form includes a box for reporting the annual amount of merchant card/third party payments and also has a box for each month’s credit/debit card sales.
Basis Reporting – For years, the IRS has had the ability to identify the gross sales received by taxpayers from broker transactions including security (1099-B) and property sales (1099-S). However, the profit or loss from those sales is the amount that is taxable, and the only way to determine the profit or loss is to know the basis in the property that was sold. The profit or loss is the difference between gross sales price and the taxpayer’s basis in the property. Without confirmation of the basis, which up to now is only obtainable from the taxpayer via an audit, the IRS has no way to verify the reported profit or loss from the sale, leaving the area open to abuse.

That will be changing beginning in 2011, at least for security sales. Under tax changes enacted as part of the Emergency Economic Stabilization Act of 2008, every broker that is required to file an information return reporting the gross proceeds of a covered security must include in the 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. Generally, this will apply to corporation stocks acquired after 2010 (2011 for regulated investment companies and dividend reinvestment plans and 2012 for other securities to be determined by the IRS).

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 expects the new basis reporting rules will go a long way towards correcting that problem.
Payments to Corporations – For as long as most can remember, payments for services made by one business to an unincorporated business required the payee to report the payments on a 1099-MISC if the aggregate payments for the year to a single entity were $600 or more. Payments for merchandise (unless made in connection with services that were purchased) have been excluded from 1099-MISC reporting. As part of the Health Care Act passed in 2010, the exemption from reporting payments to incorporated businesses will end, as will the exclusion of payments for merchandise, beginning for transactions occurring in 2012. Thus, all business-related aggregate payments for the year to a single entity of $600 or more, including payments for merchandise, will need to be reported by all business entities.

This will place a significant burden on businesses not only to track and report payments but also to reconcile their income with their accounting method and their reporting year (if not a calendar year).

To ease the burden this requirement may impose on businesses, the IRS has indicated it plans to use its administrative authority to exempt from this new requirement business transactions conducted using payment cards (such as credit and debit cards). These transactions will already be covered by the new reporting requirements on payment card processors, so there will be no need for businesses to report them as well.

It is not too early to start thinking about the impact these new reporting requirements will have on your investment transactions or your business. You need to be prepared when 2011 rolls around. If you have questions, please give one of our professionals a call.

2010 is the Last Year for the Lean Burn Vehicle Credit

Mon, 5 Jul 2010 08:00:00 PST

2010 is the final year during which taxpayers can purchase an advanced lean burn technology vehicle and claim a tax credit for the purchase. Unlike the hybrid credit, the lean burn credit is available to vehicles with internal combustion engines that are designed to operate primarily using more air than is necessary for complete combustion of the fuel, incorporate direct injection, and achieve at least 125% of the 2002 model year city fuel economy rating. The table below lists the vehicles currently certified by the IRS as qualifying for the advanced lean burn credit.

If a vehicle is used both for business and personal use, the credits are divided between personal and business use and can be used to offset both the regular and alternative minimum tax. The personal portion is a non-refundable credit, and can only reduce your current year tax to zero; any excess is lost. The business portion becomes part of the general business credit, and unused credits are carried back one year and forward twenty years.

The credit will be phased out starting in the quarter following the one in which the manufacturer records its 60,000th sale of hybrid and lean burn vehicles. Volkswagen Group America (includes Audi vehicles) has already reached that limit; thus, the allowable credits (as shown in the table below) are reduced by 50% for Audi and Volkswagen vehicles purchased for the balance of 2010.

If you are contemplating purchasing a vehicle that qualifies for the advanced lean burn technology tax credit or one that qualifies for the hybrid tax credit, it may be appropriate for you to call this office in advance to see how the credits will or won’t benefit you. This is especially true if you are basing your purchase decision on receiving the credit. Keep in mind that the personal portion of the credit is not refundable and cannot be carried over to another year. Therefore, you may not benefit as much from the credit as the car salesperson might lead you to believe.

Health Care Professionals Working in Underserved Areas May Qualify for Special Benefit

Thu, 1 Jul 2010 08:00:00 PST

Under the Affordable Care Act, health care professionals who received student loan relief under state programs that reward those who work in underserved communities may qualify for refunds on their 2009 federal income tax returns, as well as an annual tax cut going forward. (IR-2010-74, June 16, 2010)

The Affordable Care Act included a change in the law, effective in 2009, that expands a tax exclusion for amounts received by health professionals under loan repayment and forgiveness programs. Prior to the new law, only amounts received under the National Health Service Corps Loan Repayment Program or certain state loan repayment programs eligible for funding under the Public Health Service Act qualified for a tax exclusion.

The Affordable Care Act expands this tax exclusion to include any state loan repayment or loan forgiveness programs intended to increase the availability of health care services in underserved areas or health professional shortage areas and makes this exclusion retroactive to the 2009 tax year.

Health care professionals participating in these programs who have reported income from repaid or forgiven loan amounts on their 2009 returns, possibly after receiving a Form W-2, Wage and Tax Statement, or Form 1099, may be due refunds. Those who believe they qualify for this relief may want to consult their state loan program offices to determine whether the program is covered by the new law.

Health care professionals who have not yet filed for 2009 need not report eligible loan repayment or forgiveness amounts when they file. Those who have already filed may exclude eligible amounts by filing an amended tax return.

Individuals filing an amended return to claim this exclusion should write “Excluded student loan amount under 2010 Health Care Act” in the Explanation of Changes box.

Health care professionals may request an employer or other issuer to provide a Form W-2c, Corrected Wage and Tax Statement, or 1099 and may attach the corrected form to the amended return. However, the amended return may be filed without attaching a corrected form.

An individual whose employer withheld and paid taxes under the Federal Insurance Contributions Act (FICA) on payments covered under the new exclusion may request that the employer seek a refund of withheld FICA on the employee’s behalf. And because employers also pay a portion of the FICA tax, the employer also may also be entitled to a refund.

To obtain a refund, an employer should file a separate amended Employer’s Quarterly Federal Tax Return or Claim for Refund (Form 941-X) for each Form 941, Employer’s Quarterly Federal Tax Return, which needs to be corrected. An employer filing a Form 941-X is also required to file a Form W-2c for each employee who benefits from the exclusion.

If you need assistance amending either an individual return or an employer payroll return, please give one of our professionals a call.

Additional Guidance Related to the Health Insurance Coverage for Children Under Age 27

Tue, 29 Jun 2010 08:00:00 PST

The Department of Health Services and the Treasury Department have recently released additional guidance and details related to the health insurance coverage for a child under the age of 27. Before the passage of the Affordable Care Act into law, many health plans and issuers could remove adult children from their parents' policies because of their age, whether or not they were a student, or where they lived. Under this new law, plans and issuers that offer dependent coverage will be required to make the coverage available until an adult child reaches the age of 26.

Being a Child under Age 27 is the ONLY Requirement!

There are no additional requirements other than being the taxpayer’s child under the age of 27. No income limitation, marital status, student status or any other requirement. Thus, an emancipated child, and even a married child, of the insured will qualify, but not an in-law; thus, the spouse of a child will not qualify.

Effective Dates - This new provision is effective for plan years beginning on or after September 23, 2010. Therefore, for plans in existence before the September date, the mandatory coverage for children could be delayed until the next anniversary date for the policy. With that said, there are a huge number (65 at publication date) of insurers that have agreed to an early implementation of this provision. Check with your employer, insurer or plan administrator to see when the coverage will be available for your health policy.

Tax Benefits - Under a change in tax law included in the Affordable Care Act, the value of any employer-provided health coverage for an employee's child is excluded from the employee's income through the end of the taxable year in which the child turns 26. This tax benefit applies regardless of whether the plan or the insurer is required by law to extend health care coverage to the adult child or the plan or insurer voluntarily extends the coverage. The tax benefit is effective March 30, 2010. Consequently, the exclusion applies to any coverage that is provided to an adult child from that date through the end of the taxable year in which the child turns 26.

Broad Eligibility - This expanded health care tax benefit applies to various workplace and retiree health plans. It also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.

Self-Employed Individuals

Thus, self-employed individuals can include their child under the age of 27 in their self-employed plan and deduct the premium cost as part of their above-the-line, self-employed health insurance deduction.

Pre-Tax Coverage Through Employer’s Cafeteria Plan - In addition to the exclusion from income of any employer contribution towards qualifying adult child coverage, an employee may pay the employee’s portion of the health care coverage for an adult child on a pre-tax basis through the employer's cafeteria plan - a plan that allows employees to choose from a menu of tax-free benefit options and cash or taxable benefits. The IRS provided in recent guidance that the cafeteria plan could be amended retroactively up until December 31, 2010 to permit these pre-tax salary reduction contributions.

Enrollment Notice - For plan or policy years beginning on or after the September 23, 2010 implementation date, plans and issuers must (see an exception below) give children who qualify, an opportunity to enroll that continues for at least 30 days regardless of whether the plan or coverage offers an open enrollment period. This enrollment opportunity and a written notice must be provided no later than the first day of the first plan or policy year beginning on or after September 23, 2010. The new policy does not otherwise change the enrollment period or start of the plan or policy year.

Exception - There is one exception for group plans in existence on March 23, 2010. Those group plans may exclude adult children who are eligible to enroll in an employer-sponsored health plan, unless it is the group health plan of their parent. This exception is no longer applicable for plan years beginning on or after January 1, 2014.

Equal Benefits - Any qualified young adult must be offered all of the benefit packages available to similarly situated individuals who did not lose coverage because of cessation of dependent status. The qualified individual cannot be required to pay more for coverage than those similarly situated individuals. The new policy applies only to health insurance plans that offer dependent coverage in the first place; while most insurers and employer-sponsored plans offer dependent coverage, there is no requirement to do so.

If you have questions related to health care for children, please give one of our professionals a call.

Reasonable Compensation is Becoming a Hot Issue

Thu, 24 Jun 2010 08:00:00 PST

Corporate officers will sometimes attempt to disguise what should be payment for services as distributions of cash, dividends, and loans as a means of avoiding payroll taxes on the income. Because they are pass-through entities, Sub Chapter S corporations are especially prone to the misclassification of income attributable to a misunderstanding of the compensation rules or by deliberate attempts to reduce the payroll tax bite. Hence, the IRS and Congress are placing an increased emphasis on “reasonable compensation” and the collection of additional payroll taxes from the business and additional withholding from the officer or owner.

The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.

Who's an Employee of the Corporation? Generally, an officer of a corporation is an employee of the corporation. The fact that an officer is also a shareholder does not change the requirement that payments to the corporate officer be treated as wages. Courts have consistently held that S corporation officers/shareholders who provide more than minor services to their corporations and receive or are entitled to receive payment are employees whose compensation is subject to federal employment taxes.

Treasury regulations provide an exception for an officer of a corporation who does not perform any services or who performs only minor services and who neither receives nor is entitled to receive, directly or indirectly, any remuneration. Such an officer would not be considered an employee.

What's a Reasonable Salary? The instructions to the Form 1120S, U.S. Income Tax Return for an S Corporation, state that “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.”

The amount of the compensation will never exceed the amount received by the shareholder either directly or indirectly. However, if cash or property or the right to receive cash and property did go to the shareholder, then a salary amount must be determined and the level of salary must be reasonable and appropriate.

There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.

In IRS Fact Sheet 2008-25, the IRS warns S corporations not to attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.

The following are some factors considered by the courts in determining reasonable compensation:

Training and experience
Duties and responsibilities
Time and effort devoted to the business
Dividend history
Payments to non-shareholder employees
Timing and manner of paying bonuses to key people
What comparable businesses pay for similar services
Compensation agreements
The use of a formula to determine compensation

In a recent district court case (Watson v. U.S., (DC IA 05/27/2010)) in which the IRS claimed that a portion of the dividend distributions by an S corporation to its sole owner should be recharacterized as wages subject to employment taxes, the court sided with the IRS and rejected the corporation's assertion that the IRS could not compel the corporation to pay a higher salary to the owner.

The American Jobs, Closing Tax Loopholes and Preventing Outsourcing Act of 2010, which passed the House on May 28, 2010 (currently awaiting Senate action), contains a provision that would clamp down on certain service professionals who try to minimize Medicare and Social Security taxes by routing their self-employment income through S corporations and then paying themselves nominal salaries.

If you have questions about this hot-button topic, please give one of our professionals a call.

Hiring Family Members in a Family Business

Tue, 22 Jun 2010 08:00:00 PST

In today’s tough job market, students seeking summer employment, young adults looking for full-time employment, and college graduates looking to begin their careers are finding it difficult to land a job. The family business may be the only place for some family members to find work, even if only temporarily until another opportunity arises. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided that the family member is suitable for the job.

So rather than helping to support them with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the hours and the job worked. The following are typical situations encountered when hiring family members.

Employing a Child – A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child.

When a child under the age of 19 or a student under the age of 24 is claimed as a dependent of the parents, the child is generally subject to the kiddie tax rules if their investment income is upwards of $1,900. Under these rules, the child’s investment income is taxed at the same rate as the parent’s top marginal rate using a lower $950 standard deduction. However, earned income (income from working) is taxed at the child’s marginal rate, and the earned income is reduced by the lesser of the earned income plus $300 or the regular standard deduction for the year, which is $5,700 for 2010. Assuming that a child has no other income, the child could be paid $5,700 and incur no income tax. If paid more, the next $8,375 earned by the child is taxed at 10%.

Example: You are in the 25% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $10,700 for the year. You reduce your income by $10,700, which saves you $2,675 of income tax (25% of $10,700), and your child has a taxable income of $5,000 ($10,700 less the $5,700 standard deduction) on which the tax is $500 (10% of $5,000).

If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Hospital Insurance (aka Medicare or HI) – taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes and the business won’t have to pay its half either. In addition, by paying the child, and thus reducing the business’s net income, the parent’s self-employment tax payable on net self-employment income is also reduced.

Use the same example from above. Assuming your business profits are $130,000, and by paying your child the $10,700, you not only reduce your self-employment income for income tax purposes, you also reduce your self-employment tax (HI portion) by $287 (2.9% of $10,700 times the SE factor of 92.35%). But if your net profits for the year were less than the maximum SE income ($106,800 for 2010) that is subject to Social Security tax, then the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion.

A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. However, there's no extra cost to your business if you're paying a child for work that you would pay someone else to do anyway.

Retirement Plan Savings - Additional savings are possible if the child is paid more (or works part-time past the summer) and deposits the extra earnings into a traditional IRA. For 2010, the child can make a tax-deductible contribution of up to $5,000 to his or her own IRA. The business also may be able to provide the child with retirement plan benefits, depending on the type of plan it uses and its terms, the child's age, and the number of hours worked. By combining the standard deduction ($5,700) and the maximum deductible IRA contribution ($5,000) for 2010, a child could earn $10,700 of wages and pay no income tax.

However, referring back to our original example, the tax to be saved by making a traditional IRA contribution is only $500 and it might be appropriate to make a Roth IRA contribution instead, especially since the child has so many years before retirement and the future tax-free retirement benefits will far outweigh the current $500 savings.

Hiring Your Spouse - Reasonable wages paid to a spouse entitles the employer-spouse to a business deduction. The wages are subject to FICA taxes, and the spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, the spouse may also be eligible to receive coverage under the business’ qualified retirement plan, and the employer-spouse may obtain a business deduction for health insurance premium payments made on behalf of the employed spouse. While maintaining the same family coverage, the business deductions could be increased by providing the spouse with family health insurance coverage as an employee.

If the spouse was unemployed (worked less than 40 hours) during the prior 60-day period, the employer will qualify for the HIRE Act exemption from the employer’s 6.2% share of the Social Security payroll tax on the spouse’s wages for the remainder of 2010. If the spouse continues to work for an uninterrupted period of 52 weeks, the business would also be entitled to a retention credit of up to $1,000 in 2011. (Unemployed relatives such as children, siblings or parents whom you may hire are not qualified employees for this credit.)

If you have questions about the information provided here and other possible tax benefits or issues related to hiring your spouse or child, please give one of our professionals a call.

Final Year for the American Opportunity Education Credit?

Thu, 17 Jun 2010 08:00:00 PST

Tuition, related fees, books and other required course materials generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
If you otherwise qualify, you can take this credit even if you have previously taken the Hope or Lifetime Learning credit in years prior to 2009.
The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less (for married couples filing a joint return, the limit is $160,000 or less). The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the former Hope and current lifetime learning credits.
Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Other existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed at the parent’s rate, commonly referred to as the kiddie tax.

Employer Tax-Free Medical Benefits Available to Children under Age 27

Tue, 15 Jun 2010 08:00:00 PST

As a result of changes made by the recently enacted Affordable Care Act, health coverage provided for an employee's children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010. Generally, under pre-Act law, to be a qualifying child of a taxpayer for this purpose, the child must have been the taxpayer’s dependent under age 19 (or under age 24 in the case of a full-time student).

Child – Broad Definition for this Purpose
Other than age, the “child” definition has no other restriction. Thus, there is no income or marital restrictions.

These changes immediately allow employers with cafeteria plans – plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits – to permit employees to begin making pre-tax contributions to pay for this expanded benefit.

Employees with children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child.

Employees may immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.

In addition to changing the tax rules as described above, the Affordable Care Act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided no later than plan years beginning on or after Sept. 23, 2010.

Contact your employer for further information regarding the employer’s plan related to this very beneficial change. If you have other tax questions, please contact one of our professionals.

Have a Financial Interest or Signature with a Foreign Financial Account? Better Read This!

Thu, 10 Jun 2010 08:00:00 PST

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. 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 draconian. 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 have questions regarding this reporting requirement, please contact one of our professionals.

Tax Tips for Students Taking a Summer Job

Tue, 8 Jun 2010 08:00:00 PST

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

Establish Proper Tax Withholding – It is important to make sure that your tax withholding (both Federal and state, if applicable) is enough to cover your taxable income. The last thing you want to find out when you file your tax return next year is that you owe money. Employers are required to have employees complete a Form W-4 which the employer uses to determine how much income tax to withhold from your paycheck. Here are some tips on completing the W-4:

Completing the Form W-4 Worksheet - If you are claimed as a dependent by someone else (such as your parents), you should leave Line A blank. The only other entry you should probably make is to enter a 1 on Line B. As a result, the total exemptions will probably be 1.
Filling in the W-4 – Use care when completing this form. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Enter your name, address, and social security number. Assuming that you are unmarried, check box 3 as “single.” Enter the total from the W-4 worksheet, in most cases “1”, in Box 5. 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 for the combined incomes. Box 6 is provided for those who feel more should be withheld. Resist writing “Exempt” in Box 7 unless you are positive you will not owe any taxes for 2010.

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 $5,700 for 2010 (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.

Be Wary of Form W-9 – Some employers, in order to avoid paying payroll taxes, will try to misclassify you as an independent contractor. When they attempt to do that, they will ask you to complete a W-9 instead of a W-4. As an independent contractor, the employer will pay you a gross check with no withholding. This leaves you with the liability to pay not only your income tax, but also your share and the employer’s share of the Social Security and Medicare taxes (see self-employment tax below) when you file your tax return next year. Be wary!

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.

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 also 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 are $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 15.3% tax may apply.

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 one of our professionals if you are the student or parent and have additional questions related to summer employment.

PTIN for Tax Practitioners

Fri, 4 Jun 2010 08:00:00 PST

Paid preparers are required to include either their SSN or Preparer Tax Identification Number (PTIN) in the signature block of returns they prepare. The original purpose of the PTIN was to eliminate the need for the preparer to include his or her SSN on the return and eliminate the potential for identity theft.

With the advent of the new national tax preparer registration, the PTIN will take on a new role; that of the registration number for tax preparers. The SSN can no longer be used as the ID number for a preparer after the close of 2010.

Beginning approximately September 1, 2010, ALL tax preparers including CPAs, Enrolled Agents (EAs) and Attorneys will be required to register with the IRS. It is anticipated that a notice and instructions for registration will be sent to all known preparers during August. As part of that registration, the IRS will assign each successful registrant a PTIN if they do not already have one. If the registrant already has a PTIN, they will include it with registration and it will be assigned as the registration number. One would assume those PTINs already issued but not included in the new registration process will be cancelled. At the conclusion of the registration process, only preparers with registered PTINs will be allowed to legally prepare a tax return.

The question arises whether a preparer who does not already have a PTIN should acquire one before the registration process begins. A concern when applying for the PTIN now is if it will be timely issued or will your registration be delayed waiting for the PTIN. Sources indicate it take about 6 weeks to obtain a PTIN using form W-7P or through e-services. If this is true, then theoretically, one could apply for a PTIN between now and July 15 and have it in time to register at the beginning of the initial September through December 31, 2010 registration period. On the other hand, it may be appropriate to simply wait and have the number assigned during the registration process. The following Q&A was posted on the IRS website (dated 5/26/2010):

Question - Because a Preparer Tax Identification Number (PTIN) is going to be mandatory in the future, can I go ahead and get one now?

IRS Website Answer - Yes, you may obtain a PTIN if you do not already have one and begin using it now. However, once the new online preparer registration system becomes available, you will still need to register and pay a fee. The system will ask if you already have a PTIN and it will reassign you the same number. To apply for a PTIN now, you can apply by using e-Services – Online Tools for Tax Professionals or by filing Form W-7P, Application for Preparer Tax Identification Number. Online applications are processed faster, and return preparers are encouraged to apply online.

So that none of you CPAs, EAs or Attorneys who read this article get too excited...although you will be required to register (and pay a registration fee estimated between $100 and $200), you will not be subject to the examination unlicensed preparers will have to pass sometime before they can register at the end of the 3-year registration cycle. Neither will you be subject to the CPE requirement for unlicensed preparers but will continue to meet the CPE requirements of your professional designation.

Can a Spouse Qualify for HIRE Act Benefits?

Thu, 3 Jun 2010 08:00:00 PST

Under the recently enacted HIRE Act, the following benefits are derived from hiring previously unemployed workers:

Payroll Tax Holiday - The law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days (can have worked 40 hours within the 60 days) from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee’s wages for the remainder of 2010. Thus, if the newly-hired and previously-unemployed worker earns $106,800 after March 18, 2010 and before the end of the year, the company could save a maximum of $6,621. This provides the employer with an immediate benefit by reducing the amount the employer must pay in employment taxes.
Retention Credit - As an additional incentive, for any qualifying employee hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit equal to the lesser of $1,000 or 6.2% of the wages. Since the 52-week requirement cannot be met until the subsequent year, the credit will be taken on the employer’s 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period. This credit is not available for domestic workers.

Will the payroll tax holiday and the employee retention credit apply if the new hire is the spouse of the business owner? The law specifically excludes the taxpayer's children or their descendants, siblings or step-siblings, parents or a parent's ancestor, step-parents, nephews, nieces, uncles, or aunts, and in-laws but not the business owner’s spouse. Thus, a spouse who has not worked more than 40 hours in the 60 days prior to the hire date may qualify, provided the spouse does not fail the relationship test with another co-owner of the same business. For example, a father-son owned business, where the father owns more than 50% of the business, would preclude the son’s spouse from qualifying since she would be related to the father, a more than 50% owner.

In order for an employer to take advantage of these benefits, a qualified employee must certify by a signed affidavit, under penalties of perjury, that they have not been employed for more than 40 hours during the 60-day period ending on the date they started employment. The IRS has issued Form W-11 for this purpose.

The IRS website provides frequently asked questions related to HIRE tax benefits.

If you have questions related to hiring your spouse, or how the HIRE tax benefits might apply to your business, please give one of our tax professionals a call.

Small Employers Receive Tax Credits for Offering Health Coverage

Tue, 1 Jun 2010 08:00:00 PST

The Patient Protection and Affordable Care Act provides a tax credit for an eligible small employer (ESE) for nonelective contributions to purchase health insurance for its employees. The term "nonelective contribution" means an employer contribution other than an employer contribution pursuant to a salary reduction arrangement.

2010 through 2013 – For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000 will be eligible for a tax credit of up to 35% of the cost of nonelective contributions to purchase health insurance for its employees. (Note, however, that the phase-out of the credit operates in such a way that an employer with exactly 25 full-time equivalent employees or with average annual wages exactly equal to $50,000 is not eligible for the credit The maximum credit is available to employers with no more than 10 full-time equivalent employees with annual full-time equivalent wages from the employer of less than $25,000.
2014 and Later - In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.

An eligible small employer generally is an employer with no more than 25 full-time equivalent employees employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000.

The credit percentage that can be claimed varies with the number of employees and average wages. The full amount of the credit is available only to an employer with 10 or fewer full-time equivalent employees and whose employees have average annual full-time equivalent wages (AAEW) from the employer of less than $25,000.

Calculating the credit amount - The credit is equal to the lesser of the following two amounts multiplied by an applicable tax credit percentage (shown in the table below) and subject to the phase-outs discussed later:

(1) The amount of contributions the eligible small employer made on behalf of the employees during the tax year for the qualifying health coverage.

(2) The amount of contributions that the employer would have made during the tax year if each employee had enrolled in coverage with a small business benchmark premium. Contributions under this method are determined by multiplying the benchmark premium by the number of employees enrolled in coverage and then multiplied by the uniform percentage that applies for calculating the level of coverage selected by the employer. (See table below)

*For years after 2013, only available for a maximum coverage period of two consecutive tax years

Computing the Credit Phase-Out – The full credit is only available to eligible small employers with 10 or less full-time equivalent employees 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.

There is no credit reduction if there are 10 or less full-time equivalent employees FTEs with an AAEW of $25,000 or less.

There is no credit if the full-time equivalent employees exceed 25 or the AAEW exceeds $50,000.

To figure the reduction of credit when the limits are exceeded, the number of the employer’s full-time equivalent employees and average annual full-time equivalent wages (AAEW) for the year must be determined.

Figuring the number of full-time equivalent employees - An employer's full-time equivalent employees (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.

Calculating average annual wages (AAEW) - Average annual equivalent wages is determined by dividing the employer’s total FICA wages (without regard to the wage base limitation) for the tax year by the number of the employer's full-time equivalent employees for the year (rounded down to the nearest $1,000 if need be).

Credit reduction - If the number of full-time equivalent employees exceeds 10 or if AAEW exceed $25,000, the amount of the credit is reduced (but not below zero). Both reductions can apply at the same time!

Example – Joe owns a small California wood working business and has 12 employees, not counting himself or family members. The total FICA wages (without regard for wage base limitations) for the year were $297,500 and total hours worked by his employees during the year were 24,400. None of his employees worked more than 2,080 hours during the year. Joe made nonelective contributions to purchase health insurance for his employees in the amount of $49,800 for the year. Joe’s credit is determined as follows:

Small Business Benchmark Premium (from Table Below) = 12 x 4,628 = $55,536
Smaller of actual premium paid or Benchmark premium = $49,800
Tentative credit = $49,800 x 0.35 = $17,430
Full-time equivalent employees (FTEs) = 24,400/2080= 11.7 rounded down = 11
Average annual full-time equivalent wages (AAEW) = $297,500/11 = $27,045 rounded down = $27,000
FTE Reduction = ((11-10)/15) x $17,430 = $1,162
AAEW Reduction = ((27,000-25,000)/25,000) x $17,430 = $1,394
Joe’s health insurance tax credit = $17,430 - $1,162- $1,394 = $14,874

The IRS offers over a dozen examples in a recently released notice.

Other Issues:

o The credit reduces the employer's deduction for employee health insurance.

o  Aggregation rules apply in determining the employer.

o  Self-employed individuals, including partners and sole proprietors, 2% shareholders of an S Corporation, and 5% owners of the employer are not treated as employees for purposes of this credit.

o  The credit is not available for a domestic employee of a sole proprietor of a business, and there's a special rule to prevent sole proprietorships from receiving the credit for the owner and their family members.

o  The credit is a general business credit and can be carried back one year and forward for 20 years. However, because an unused credit amount cannot be carried back to a year before the effective date of the credit, any unused credit amounts for taxable years beginning in 2010 can only be carried forward.

o  The credit is available for tax liability under the alternative minimum tax.

o  The credit is initially available for any tax year beginning in 2010, 2011, 2012 or 2013. Qualifying health insurance for claiming the credit for this first phase of the credit is generally health insurance coverage purchased from an insurance company licensed under State law.

o For tax years beginning in years after 2013, the 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.

The IRS offers a step-by-step guide to determine if an employer qualifies for this credit and frequently asked questions related to this credit.

If you have questions related to Tax Credits for Small Employers Offering Health Coverage, please give one of our tax professionals a call.

Big Break for Adoptive Parents

Thu, 27 May 2010 08:00:00 PST

As part of the Health Care legislation passed earlier this year, the credit for expenses of adopting a child was increased and made refundable. Prior to this change, the credit was non-refundable and could only be used to reduce the adoptive parent’s tax to zero, with any unused portion of the credit carried over for up to five years and used against future years’ tax.

What this means is that taxpayers with unused adoption credit carryovers will be able to get the full benefit of those carryovers in 2010, and depending on the amounts of their tax and carryovers, reducing their tax to zero and a refund of any excess credit. Those who qualify for the credit in 2010 and 2011 also benefit from the new refundable provision and any excess credit not used to reduce their tax for the year will be refundable.

The maximum amount of the credit was scheduled to drop to the pre-2002 level after 2010, but the reversion to the old law has been postponed until 2012, giving those who wish to adopt one additional year to take advantage of this substantial benefit at the higher amount.

For 2010, adoptive parents may be able to claim a credit against their federal tax for up to $13,170 of “qualified adoption expenses” for each adopted child. That's a dollar-for-dollar reduction of tax, the equivalent, for someone in the 25% marginal tax bracket, of a deduction of over $52,000. Where an adoptive parent’s employer has an adoption assistance program, the adoptive parent may exclude from their gross income up to $13,170 of qualified adoption expenses paid by an employer. Adoptive parents may claim both a credit and exclusion for expenses of adopting a child, but not the credit and exclusion for the same expense.

Qualified adoption expenses - Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to the legal adoption of an “eligible child.”

Qualified adoption expenses don't include expenses connected with the adoption of a child of a taxpayer's spouse, expenses of carrying out a surrogate parenting arrangement, expenses that violate state or federal law, or expenses paid using funds received from a federal, state, or local program.

Expenses in connection with an unsuccessful attempt to adopt an eligible child before successfully finalizing the adoption of another child can qualify. Expenses connected with a foreign adoption (i.e., one in which the child isn't a U.S. citizen or resident) qualify only if the child is actually adopted.

Eligible child – Generally, an eligible child is a child under the age of 18 at the time the qualified adoption expense is paid. A child who turned 18 during the year is an eligible child for the part of the year he or she is under age 18. A person who is physically or mentally incapable of caring for himself is also eligible, regardless of age.

Credit phased out for higher-income taxpayers - The credit for 2010 is ratably phased out for taxpayers with an adjusted gross income (AGI) over $182,520 and is completely phased out at $222,520.

If you are contemplating or in the process of an adoption and have additional questions, or would like to determine how this credit will apply to your specific situation, please give one of our professionals a call. You may also be able to reduce your current withholding and/or estimated taxes based upon your credit carryover or 2010 credit.

Inherited Basis Clouded in 2010

Tue, 25 May 2010 08:00:00 PST

Legislation enacted nearly 10 years ago repeals the estate tax for individuals dying in 2010, and then brings it back for those dying after 2010. Although many had thought Congress would revoke the repeal for 2010, and keep the tax at 2009’s level, that has not happened yet.

Last December, the House by a vote of 225-200 approved H.R. 4154, the “Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009.” The bill made permanent the estate, gift, and generation skipping transfer (GST) tax laws in effect for 2009. However, we are now well into 2010 and the Senate has not taken up that legislation.

For decedents dying in 2010 and later years, the House-passed legislation provides for an effective exemption amount for estate tax purposes of $3.5 million, an effective exemption amount for gift tax purposes of $1 million and a maximum estate and gift tax rate of 45%. In addition, the house-passed bill would repeal the modified carryover basis rules that apply for purposes of determining basis in property acquired from a decedent who dies in 2010 (see overview of the computation below) and return to the step-up/step-down basis method that was in effect previously.

We have received questions related to determining the basis of property acquired from decedents dying in 2010. Barring intervention by Congress, the step-up/step-down basis adjustment for inherited assets that was in effect for as long as most can remember does not apply to 2010. Instead, a complicated (what else would you expect?) modified carryover basis system will apply to property acquired from decedents dying in 2010. Thus, absent of any retroactive Congressional action, the basis of property inherited in 2010 is determined as follows:

Lesser of:
(1) the decedent’s adjusted basis, or
(2) the FMV at the date of death.

Plus:
(3) an allowable aggregate basis increase of $1,300,000 plus loss carryovers and built-in losses, and
(4) if applicable, a spousal property basis increase.

(1) Substitute $60,000 for a non-resident alien.
(2) Tax loss carryovers that would have carried over to a subsequent tax year but for the death of the decedent.
(3) Losses from the sale of the decedent’s property if it had been sold at FMV immediately before the decedent's death, generally to the extent the loss would have been allowed as a trade or business loss.
(4) Aggregate basis increase that is allocated among all the assets of the decedent. If the amount of the basis increase available is less than the unrealized appreciation in the assets whose bases are eligible to be increased, it will be up to the executor to determine which assets receive a basis increase. The basis of any individual asset cannot be adjusted above its fair market value.
(5) Additional basis increase that is allocated only to the surviving spouse’s “qualified spousal property”. Note: If the spouse were the sole beneficiary, then the spouse would be entitled $4,300,000 of basis increase plus allowable carryovers and built-in losses.

Community Property – Generally applies where at least one-half of the whole community interest is included in the decedent's estate; both the decedent's and the surviving spouse's share of community property could be eligible for a basis increase.

Ownership Requirement - Where property was owned by the decedent and another person as joint tenants with right of survivorship or as tenants by the entirety, the following ownership rules will apply:

(A) if the only other person who is a joint tenant or tenant by the entirety is the surviving spouse, the decedent will be treated as the owner of only 50 percent of the property,

(B) in any case to which the rule at (A) doesn't apply and in which the decedent furnished consideration for the acquisition of the property, the decedent will be treated as the owner of the property to the extent of the portion of the property which is proportionate to that consideration, and

(C) in any case, to which the rule at (A) doesn't apply and in which the property has been acquired by gift, bequest, devise, or inheritance by the decedent and any other person as joint tenants with right of survivorship (and their interests are not otherwise specified or fixed by law), the decedent will be treated as the owner of the property to the extent of the value of a fractional part to be determined by dividing the value of the property by the number of joint tenants with right of survivorship.

Income in Respect of a Decedent Property that results in income in respect of a decedent is not covered by these rules.

This may all be overturned if Congress gets around to estate tax reform this year. But in the meantime, please give one of our professionals a call if you have questions.

Taking Your Business Home

Thu, 20 May 2010 08:00:00 PST

The economic downturn has many businesses struggling to stay afloat. With so much at stake, some owners have moved their businesses into their homes to save money. If you are considering this option, then you need to be aware of the rules that apply when deducting home office expenses.

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.

Deductible home office expenses fall under two basic categories: direct and indirect expenses. Those that are directly attributable to the home office, such as painting the office, repairs to the office space, etc., are 100% deductible to the business. The second category is indirect expenses that are attributable to the entire home, for which only a fraction of the total amount is allocated to the home. These include home mortgage interest, property taxes, insurance, certain utilities and depreciation. If the home is rented, substitute rent paid for interest, taxes and depreciation. The fraction used to allocate business portions of the indirect expenses is determined by dividing the business use square footage by the total square footage of the home.

The home office deduction is, however, limited to the gross income of the business derived from the use of the home for that business, and where the gross income is less than the expenses, certain expenses can be carried forward for the same trade or business in the subsequent years but cannot be used against a positive income from another business. Carryover never includes home interest, taxes and casualty losses because they are allowed without regard to the gross income limitation.

If the self-employed taxpayer owns the home, there is a negative aspect to the home office deduction that can create unexpected consequences when the home is sold. First, the allowable home office depreciation is never excludable under the $250,000 ($500,000 for joint filers) exclusion of gain for primary residences and will end up being recaptured as taxable income upon sale. Worse yet, if the office is located in a separate structure, then the home sale is treated as two sales, the sale of the home portion and a sale of the office portion. Any gain from the office portion would not qualify for the home gain exclusion and would be taxable.

For example, a married couple sells a home that includes a home office in a separate structure that is 20% of the total home square footage. The home originally costing $150,000 is sold for $500,000. If the home office had never been claimed, or if the office had not been in a separate structure, the entire home gain, except recaptured depreciation, could be excluded from income. However, in this case, $70,000 (20% of the gain) becomes taxable income. (For this example, to keep it simple, we haven’t taken into account improvements, selling costs, or depreciation.)

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

IRS Considers the Auditing of Cash Intensive Businesses as an Art and Science!

Tue, 18 May 2010 08:00:00 PST

The IRS recently posted an Audit Techniques Guide (ATG) to provide its agents with guidance when auditing cash intensive businesses.� The following are some excerpts from the guide that points up the importance of maintaining detailed records for your business, especially one that is cash intensive.� The audit guide essentially encourages the agent to turn over every stone in search of unreported income, and points up the importance of proper preparation for an audit should you be chosen for examination.

There are three main ways to misappropriate cash from a business - The ATG for cash intensive businesses lists three main ways that cash can be misappropriated from a business:

It can be skimmed from receipts, for example, pocketed before it is recorded. If this happens, it will not be discovered by auditing the books.
It can be stolen after it has been recorded, for example, cash removed from the cash register or goods stolen from the shelf for future resale.
A fraudulent disbursement can be created, for example, a payment to a vendor that is actually cashed by the owner�s son.

Indicators of unreported income - The most significant indicator that income has been underreported is a consistent pattern of losses or low-profit percentages that seem insufficient to sustain the business or its owners.� Other indicators of unreported income include:

A lifestyle or cost of living that can�t be supported by the income reported.
A business that continues to operate despite losses year after year, with no apparent solution to correct the situation.
A Cash T analysis (measuring the taxpayers' personal expenditures against their reported income) shows a deficit of funds.
Bank balances, debit card balances and liquid investments increase annually despite reporting of low net profits or losses.
Accumulated assets increase even though the reported net profits are low or at a loss.
Debt balances decrease, remain relatively low or don�t increase, but low profits or losses are reported.
A significant difference between the taxpayer�s gross profit margin and that of their industry.
Unusually low annual sales for the type of business.

Auditing cash businesses is both a science and an art - Tax law, accounting and the process of reporting income are sciences.� These require specific knowledge and are concrete and tangible.� These can all be verified.� The art comes from the examiner�s own creativity in developing a method to determine that all income is properly included.� For this, the examiner must use their individual style and flexibility to modify the examination process as needed for each particular case.

If an examiner wants to find income, they must actively look for income.� Unlike examining expenses, which can either be verified or not, hidden income is harder to find and requires a proactive approach.� Examination techniques must be tailored to provide for the best analysis of a specific taxpayer's possible income stream.

Whenever you are audited, it is wise to be represented by a professional who is experienced in taxes and dealing with the IRS.� Don�t attempt to handle an audit on your own; call one of our professionals for assistance.�

Don�t Forget Those W-9s

Thu, 13 May 2010 08:00:00 PST

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. (This requirement generally does not apply for payments made to a corporation.)

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 they have not collected the required documentation. 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. By the time you’re done, the total that you’ve paid him for the year exceeds the $600 limit. You then realize that you have overlooked getting the information needed to file the 1099s for the year, so you will have to spend your valuable time contacting the repairman to obtain the information. Therefore, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.

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 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. We highly recommend that you have a potential vendor or independent contractor complete Form W-9 prior to engaging in business with him or her.

If you have questions related to recordkeeping for payments to independent contractors, or require assistance in filing the form 1099s with the government, please contact one of our professionals.

Big Break for Self-Employed Health Insurance Deduction

Tue, 11 May 2010 08:00:00 PST

Background - A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on himself, his spouse and his dependents subject to the following requirements.

The deduction cannot exceed the individual’s net earnings from self-employment derived from the trade or business for which the plan providing the coverage is established.
For a more-than-2% S corporation shareholder, that shareholder's wages from the S corporation are treated as his earned income.
No individual who is eligible to participate in any subsidized health plan maintained by any employer of the individual or of the individual's spouse is entitled to the deduction. This test for eligibility is made for each calendar month and applied separately to long-term care insurance.

New Benefit - As part of the new health care reform law, this deduction, after March 31, 2010, also applies to a self-employed individual’s child under the age of 17 as of the end of the year. The definition of “child” for this purpose includes the individual’s:

child,
stepchild,
legally-adopted individual,
an individual lawfully placed with the employee for legal adoption, and
an eligible foster child.

Previously, the child would have had to qualify as a dependent. No other requirements apply so long as the individual meets the definition of a child and has not reached age 27 by the last day of the year. Even a married child is included by this definition.

If the self-employed individual utilizes a group policy provided by an association, be aware that although group policies offered by insurers are also required to cover older children, they are only required for children under the age of 26. Also, that law change only becomes effective for plan years beginning on or after September 23, 2010.

If you have questions about how these new rules will affect your particular circumstances, please contact one of our professionals.

Tips for Unemployed Taxpayers

Thu, 6 May 2010 08:00:00 PST

If you have been unfortunate and joined the many individuals who are unemployed due to the current economic downturn, there are a number of tax provisions available in 2010 that you may find helpful in weathering a difficult period.

Unemployment Compensation – Although some states don’t tax unemployment compensation, it is taxable income for Federal purposes. Unfortunately, the exclusion for the first $2,400 of unemployment compensation expired at the end of 2009.

COBRA Continuation Premium Subsidy – If you were eligible for COBRA medical insurance continuation with your prior employer between September 1, 2008 and March 31, 2010, you are probably qualified for the tax-free premium subsidy equal to 65% of the cost of the insurance for a period of up to fifteen months. The former employer pays the subsidy but is reimbursed by the government. This benefit is not available if your adjusted gross income for the year is over $145,000 ($290,000 married joint filers). If you think you might qualify, contact your former employer.

Costs of Seeking New Employment – The costs incurred seeking new employment are generally deductible as a miscellaneous itemized deduction. These include the cost of preparing, reproducing and mailing resumes; employment agency fees; travel expenses including auto travel at 50¢ per mile, airfare, out-of-town lodging and 50% of meals; long distance telephone charges; etc. The expenses must be for searching for a new job in the same field as was your previous employment.

Certain Penalty-Free Pension Withdrawals Permitted – Although all pension withdrawals are generally taxable, the early withdrawal penalties can be avoided where the withdrawals are to pay:

Unreimbursed Medical Expenses - Amounts withdrawn from any qualified plan to pay unreimbursed
Medical Insurance - This exception allows you, if qualified, to make penalty-free withdrawals from your IRA to pay for medical insurance for yourself, your spouse and dependents. To qualify for this exception, you or your spouse must have lost your job; received unemployment compensation for 12 consecutive weeks; made withdrawals during the year the unemployment was received or in the following year, and made the withdrawals no later than 60 days after being reemployed.
Higher Education Expenses - Withdrawals made from an IRA during the year for qualified higher education expenses for yourself, spouse, children or grandchildren are exempt from the early withdrawal penalty.

Home Sale Exclusion – Generally, to qualify for exclusion of gain, a taxpayer must own and use the home as their primary residence for two of the prior five years. However, where you are forced to sell the home because of a job-related move, you can no longer afford to maintain it, or you are eligible for unemployment benefits, you can qualify for a partial prorated exclusion without meeting the two-year qualification period.

Gifts – If you are receiving assistance from a family member in the form of a gift, you should be aware that the gift is not taxable income to you nor is it deductible by your benefactor. However, the person making the gift may need to file a Gift Tax Return, if he or she gives you more than $13,000 during 2010. The giver can gain some tax benefit by gifting appreciated property, thereby transferring the tax liability for the gain to you at hopefully a lower tax rate. For example, a parent makes a gift to his child of appreciated stock. If the parent sells the stock and gives the child the cash, the parent must also pay the income tax on the gain. On the other hand, if the parent gives the stock to the child, who then sells it, the child will be taxed on the gain. Call this office if you are considering such a strategy.

If you would like to discuss any of the tax provisions mentioned here, please contact one of our professionals for an appointment.

Don't Panic If You Receive an IRS Notice

Tue, 4 May 2010 08:00:00 PST

If it is not your refund check in the mail box, that letter from the IRS will probably increase your heart rate a little.� Don�t panic; many of these letters can be dealt with simply and painlessly.

Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of a change to their account, or to request additional information.� The notices that are sent out normally cover a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what needs to be done to satisfy the inquiry.

However, the letters also have to advise you of your rights and other information required by law.� Thus, these letters can become overly lengthy and sometimes difficult to understand.

Do not procrastinate or throw the letter in a drawer hoping the issue will go away.� Most of these letters are computer generated and, after a certain period of time, another letter will automatically be generated.� And, as you might expect, each succeeding letter will become more aggressive and less easily dealt with.

Most importantly, don�t automatically pay an amount the IRS is requesting unless you are positive you owe it.� Quite often, you will not owe what is requested and it will be difficult to get your payment back.

If you need assistance interrupting or responding to IRS correspondence, please contact one of our professionals.� It is good practice to have the correspondence reviewed by a professional prior to making any payment.

It is important for any IRS correspondence to be dealt with promptly and correctly.� Our professionals can handle these matters for you, so please call for assistance.

2010 Liberalized IRA-to-Roth IRA Conversions

Thu, 29 Apr 2010 08:00:00 PST

Beginning this year, taxpayers are able to convert funds in regular IRAs (as well as qualified retirement plans) to Roth IRAs regardless of their income level. Prior to 2010, taxpayers could not make a conversion if their gross income was in excess of $100,000.

Roth IRAs provide two big advantages: all future earnings and distributions at retirement will be tax-free, and the Roth IRAs are not subject to the required minimum distribution rules.

There are other tax advantages as well. Because distributions from Roth IRAs are tax-free (if they are qualified distributions), they may keep a taxpayer from being taxed in a higher tax bracket than would otherwise apply if he or she were withdrawing taxable distributions, don’t enter into the calculation of tax owed on Social Security payments, and have no effect on AGI-based deductions and credits. What’s more, the benefits flow through to beneficiaries of Roth IRA accounts, who also can make tax-free withdrawals from such accounts (they are, however, subject to the same annual post-death minimum distribution rules that apply to beneficiaries of regular IRAs).

Should You Make an IRA-to-Roth IRA Conversion? Everyone’s financial circumstances are unique and it may not be an appropriate choice in your situation. It can also be a tough decision because the conversions are taxable, except for non-deductible amounts. Thus, to gain the benefits in the future, a tax hit must be taken now.

Generally, taxpayers with the following tax profiles should consider making a conversion:

Taxpayers that still have a number of years to go before retirement and time to recoup the conversion tax dollars;
Are in a lower than normal tax bracket in the year of conversion;
Anticipate being taxed in a higher bracket in the future; and
Can pay the tax on the conversion from funds other than pre-tax retirement funds.

Special Rules for 2010 – Although conversions, without income limitations, can be made in any year after 2009, Congress has provided a unique income inclusion rule that applies for IRA-to-Roth-IRA conversions occurring in 2010. Under this rule, unless a taxpayer elects otherwise, none of the gross income from the conversion is included in income in 2010. Instead, half of the income resulting from the conversion will be includible in gross income in 2011 and the other half in 2012. This requires some careful planning since, without Congressional action, the current lower tax brackets of 35%, 33%, 28% and 25% will revert to their pre-2001 levels of 39.6%, 36%, 31% and 28% after 2010. So it may be less costly for certain taxpayers to opt out of paying the tax in 2011 and 2012 and instead pay it in 2010.

These are additional items to take into consideration:

It might be appropriate for you to design your own custom conversion plan over a number of years rather than to convert everything at once.
Where does the money to pay the conversion tax come from? Generally, it must be from separate funds. If it is taken from the IRA being converted, then for individuals under age 59½ the funds withdrawn to pay the tax will also be subject to the 10% early distribution penalty in addition to being taxed.

Conversions can be tricky! If you are considering a conversion, it might be appropriate to call one of our tax professionals for an appointment so they can help you properly analyze your conversion options.

April 30th is the Deadline for the Homebuyer Tax Credit

Thu, 22 Apr 2010 08:00:00 PST

If you (or your spouse) are at least 18 years of age and plan on taking advantage of the liberalized homebuyer tax credit, time has almost run out. Unless extended by Congress, this refundable tax credit will no longer be available for homes purchased after April 30, 2010 unless you have entered into a binding contract to purchase the home by June 30, 2010. So, if you are actively looking, you need to either close escrow or enter into the binding contract to purchase by Friday, April 30th.

The homebuyer credit is 10% of the purchase price but not exceeding $8,000 for first-time homebuyers and $6,500 for long-time residents. This refundable credit is yours to keep, even if you are subject to the alternative minimum tax, as long as the home continues to be used as your principal residence for 36 months after purchase.

A qualifying home can include a conventional single-family structure, house trailer, mobile home, houseboat, cooperative apartment, condominium, duplex, or row house as long as it can qualify as the buyer’s principal residence but not exceed $800,000 in cost.

You also have the option to claim the credit on your 2009 tax return, thus putting the money into your hands more quickly. When making the decision to claim the credit in 2009 or 2010, the homebuyer will need to consider in which year the credit will provide the best benefit. This is because the credit phases out for higher-income taxpayers based upon the taxpayer’s AGI. So, if you qualify for the credit and your income is in the credit phase-out range, you probably will want to claim the credit in the year with the lower income. The credit is ratably phased-out for individual taxpayers between $125,000 to $145,000 ($225,000 and $245,000 for married taxpayers filing jointly).

A taxpayer is considered a first-time homebuyer if he or she had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies. A long-time resident is any individual who has owned the same principal residence for any 5 consecutive years during the 8-year period ending on the date of purchase of a subsequent principal residence. Caution: If either spouse fails the first-time homebuyer or long-time resident definition, neither gets the credit (even if filing separately).

To prevent fraudulent claims of this credit, the IRS is requiring additional documentation to be attached to the return, including a copy of the final settlement statement (generally Form HUD-1) from the purchase or the certificate of occupancy for a newly-built home. In addition, long-time residents must attach documentation such as mortgage interest statements, property tax records, or homeowner’s insurance records for the 5-out-of-8-years consecutive period being used to claim the credit.

In addition to the credit, the tax law also allows first-time homebuyers to make a penalty-free withdrawal of up to $10,000 from their IRAs for the purchase of a home. Married individuals each can withdraw up to $10,000 from separate IRA accounts for this purpose. Although the withdrawal is penalty-free, it is still taxable, so you should consider carefully the tax ramifications and the impact on your future retirement before invading your IRA accounts.

If you need assistance claiming the new homebuyer or long-time resident credit on your tax 2010 return, or wish to amend your 2009 return to claim the credit, please contact one of our professionals.

Convert Unused Property into a Tax Deduction

Tue, 20 Apr 2010 08:00:00 PST

As we approach the season for spring house cleaning, it may be appropriate for you to really clean house and get rid of all those clothes that no longer fit and household items that are never used. They have the potential of providing you with a tax deduction.

When you give away items like clothing, appliances, vehicles and other goods to a qualified charity, your generosity can add up to a tax write-off if you itemize your deductions. The amount of your deduction is generally the donated property's “fair market value.” The IRS definition of FMV is “the price a willing buyer would pay and a willing seller would accept for an item, when neither party is compelled to buy or sell and both parties have reasonable knowledge of the relevant facts.”

In addition to IRS Publication 561 “Determining the Value of Donated Property”, the guidelines below will help determine FMV on the most common types of non-cash donations (miscellaneous personal items) that have decreased in value since the time they were first acquired:

Used Clothing: The IRS provides no set formula for valuing clothing items. However, keep in mind that the fair market value of used clothing and other personal items is usually much less than what was paid for them. A guideline is to claim as the value the price that buyers of used clothing actually pay in used clothing stores, such as thrift stores and consignment shops, for similar items. Generally, the tax code requires that the clothing be in good used condition or better before a deduction is allowed. In addition, items of minimal monetary value, such as used socks and undergarments, are generally not deductible.
Household Items: Household items include furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the definition of household items. The value of used household goods is also much less than their original cost. If the property is worn, inoperable or out of style, it may have little or no market value. For these reasons, the IRS does not accept formulas such as a percentage of original or replacement cost as a way to determine FMV. Like used clothing, the items must generally be in good used condition or better before a deduction is allowed. Establishing true value can be difficult. Some charities do that for you while others do not. If you are making a substantial contribution, it may be appropriate to visit a thrift shop to get an idea of how to value your contribution. Photographs, purchase receipts and newspaper ads describing similar property should help support a valuation.

Documentation Requirements for Non-Cash Contributions – The documentation required depends upon the value of the contribution. The higher the value, the more complicated the documentation requirements become.

Deductions of Less Than $250 - A taxpayer claiming a non-cash contribution must obtain and keep a receipt from the charitable organization showing the name of the charitable organization, the date and location of the charitable contribution, and a reasonably detailed description of the property. In addition, the taxpayer must keep a record of the FMV at the time of the contribution and how it was determined. A taxpayer is not required to have a receipt where it is impractical to get one (for example, if the property was left at a charity’s unattended drop site). Caution: this rule is based on the total deduction claimed for the year and not on individual contributions made during the year.

Deductions of At Least $250 But Not More Than $500 - If a taxpayer claims a deduction of at least $250 but not more than $500 for a non-cash charitable contribution, he or she must have and keep an acknowledgment of the contribution from the qualified organization. If the contributions were made by more than one contribution of $250 or more, a taxpayer must have either a separate acknowledgment for each or one acknowledgment that shows the total contribution. The acknowledgment(s) must be written and include:

1. The name of the charitable organization;

2. The date and location of the charitable contribution;

3. A reasonably detailed description (but not necessarily the value) of any property contributed;

4. Whether or not the qualified organization gave the taxpayer any goods or services as a result of the contribution (other than certain token items and membership benefits); and

5. If goods and/or services were provided to the taxpayer, the acknowledgement must include a description and good faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony), that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit.

Deductions Over $500 But Not Over $5,000 - If a taxpayer claims a deduction over $500 but not over $5,000 for a non-cash charitable contribution, they must have the same acknowledgment and written records as for contributions of at least $250 but not more than $500 described above. They also must complete and attach IRS form 8382. In addition, the records must also include:

o How the property was obtained. For example, by purchase, gift, bequest, inheritance, or exchange.

o The approximate date the property was obtained or, if created, produced, or manufactured by the taxpayer, the approximate date the property was substantially completed.

o The cost or other basis, and any adjustments to the basis, of property held less than 12 months and, if available, the cost or other basis of property held 12 months or more. If the taxpayer is not able to provide information on either the date the property was obtained or the cost basis of the property, and there is reasonable cause for not being able to provide this information, a statement of explanation can be attached to the return.

Deductions Over $5,000 - If the taxpayer claims a deduction of over $5,000 for a charitable contribution of one property item or a group of similar property items, they must obtain acknowledgment from the charitable organization and have the written records described in the “Over $500 But Not Over $5,000” section above. In determining whether the deduction is over $5,000, combine the deductions for all similar items donated to any charitable organization during the year. Generally, the taxpayer must also obtain a qualified written appraisal of the donated property from a qualified appraiser.

For all donations that require an acknowledgment from the charitable organization, the taxpayer must obtain the acknowledgment by the earlier of the date the taxpayer files his or her tax return for the year of the contribution or the extended due date of that return (usually October 15 of the year following the donation year).
For additional information related to non-cash contributions, visit IRS.gov.

If you have additional questions related to non-cash contributions, please contact one of our professionals.

The April 15 Tax Deadline for 2010 is Here!

Thu, 15 Apr 2010 08:00:00 PST

Just a reminder to those who have not yet filed their 2009 tax return that today April 15, 2010 is the due date to either file your return, pay any taxes owed, or file for the automatic six-month extension (to October 15, 2010) using IRS Form 4858.

In addition, the April 15 deadline also applies to the following:

• Tax year 2009 balance-due payments - Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.

• E-file balance due - April 15 is the last day to submit any balance due using the 1040-V payment voucher if the taxpayer has already e-filed (or paper filed) his or her returns and still needs to make a payment. Payments after the 15th will be subject to late payment penalties.

• Tax year 2009 contributions to a Roth or traditional IRA - April 15 is the last day contributions can be made to either a Roth or traditional IRA, even if an extension is filed.

• Individual estimated tax payments for the first quarter of 2009 - Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2010 estimated taxes are due on April 15. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter's payment on the final return when it is filed at a later date. Please call one of our professionals for assistance.

• Individual refund claims for tax year 2006 - The regular three-year statute of limitations expires on April 15, 2010 for the 2006 tax return. Thus, April 15 is the last day a refund will be granted for any return or amended return for 2006.

If you need assistance with any of the foregoing issues, please contact one of our professionals immediately.

California Enacts Mortgage Forgiveness Debt Relief

Tue, 13 Apr 2010 08:00:00 PST

A new California state law allows taxpayers to immediately exclude from their income the amount of mortgage debt on their home loan that has been forgiven by their lender. The law is retroactive to January 1, 2009 and generally brings California statutes into conformity with current federal law but with a lower maximum exclusion amount.

Where Federal law allows $2 million ($1 million for married taxpayers filing separately), the new California law only allows $500,000 ($250,000 for a married taxpayer or a registered domestic partner filing separately). The good news is that this is sufficient for most homeowners to exclude all or most of the debt relief income from their California tax return.

This new law applies to debt forgiveness in 2009 through 2012 resulting from a foreclosure, “short sale,” or loan modification of a taxpayer’s qualified personal residence. This new law does not apply to a taxpayer’s second home, business or investment property.

California has always conformed to the Federal debt relief income exclusion for insolvent taxpayers. Under the insolvency provision, taxpayers are able to exclude debt relief to the extent that they are insolvent (to the extent liabilities exceed assets). Taxpayers who were unable to utilize the insolvency exclusion or where the insolvency exclusion was not enough to exclude all of the debt relief income may also benefit from the new law.

According to FTB estimates, approximately 100,000 people may benefit from mortgage debt relief for tax years 2009-2012. For more information, visit the California Franchise Tax Board’s website.

Qualifying taxpayers who have already filed their 2009 tax returns should file Form 540X, Amended Individual Income Tax Return to subtract the amount of debt relief from income. To expedite processing, write “Mortgage Debt Relief” in red across the top of the amended tax return. Taxpayers must attach a copy of their federal return, including Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), with their state tax return.

Completing the necessary paperwork can be a complicated task. If you need assistance, please contact one of our professionals.

IRS Releases Form W-11 Required for the New Hire Act Incentives

Tue, 13 Apr 2010 08:00:00 PST

The IRS has posted the finalized Form W-11, Hire Act Employee Affidavit, that a new hire signs under penalty of perjury indicating that he or she was employed for a total of 40 hours or less during the 60-day period ending on the date the employment begins, thus qualifying the employer for the new HIRE incentives.

The “Hiring Incentives to Restore Employment Act” (HIRE Act) encourages companies to hire unemployed workers by exempting the employer from the employer’s share of the 6.2% Social Security payroll tax on that employee’s wages for the remainder of 2010. Thus, if the newly-hired and previously-unemployed worker earns $106,800 after March 18, 2010 and before the end of the year, the company could save a maximum of $6,621. In addition, the Act provides employers with a business tax credit if new hires are retained for at least 52 consecutive weeks. The credit(1), which will be taken on the employer’s 2011 tax return is non-refundable and is the lesser of $1,000 or 6.2% of the wages.

Additional Form Changes to Watch For:

• Form 941. IRS will be revising the second quarter Form 941, Employer's Quarterly Federal Tax Return, due on Aug. 2, 2010. It expects to finalize the new version sometime in April 6.

• Form W-2/W-3. There will be a new code on box 12 of the 2010 Form W-2 (Code CC) to indicate that a new hire had wages that qualified for the payroll tax exemption. Form W-3, Transmittal of Wage and Tax Statements, will be revised to include a line for total aggregate exempt wages.

(1) In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period. This credit is not available for domestic workers.

Higher Expensing Limits Extended By HIRE Act of 2010

Thu, 8 Apr 2010 08:00:00 PST

A new tax change has been initiated that will change the rules for Sec. 179 expenses. This article will cover these changes and clarify "qualifying property" for purposes of the expensing election.

Generally, taxpayers can elect under Sec. 179 to expense the cost of business machinery and equipment placed in service during the tax year, instead of depreciating it over a number of years. As part of the stimulus legislation, these amounts had been temporarily increased for 2008 and 2009 and were scheduled to return to normal levels in 2010.

The HIRE Act of 2010 has extended the higher amounts for one additional year (through 2010). Thus, for tax years beginning in 2008 through 2010, the maximum amount that can be expensed each year is $250,000. The maximum deductible expense is reduced (i.e., phased out, but not below zero) by the amount by which the cost of property placed in service during the tax year exceeds $800,000.

Qualifying property for purposes of the expensing election is depreciable, tangible personal property purchased for use in the active conduct of a trade or business, including “off-the-shelf” computer software placed in service in tax years beginning before 2011.

Barring any additional legislation, the maximum amount will drop approximately to $134,000 in 2011.

New Law Offers Employers Incentives to Hire the Unemployed

Tue, 6 Apr 2010 08:00:00 PST

Businesses can now take advantage of the new employer tax credit opportunities. This article discusses the new law in detail, including the new employee qualifications, employee documentation, and the payroll tax holiday.

The “Hiring Incentives to Restore Employment Act of 2010,” more commonly referred to as the HIRE Act, was passed by Congress and recently signed into law by the President. The Act provides employers with incentives to hire unemployed individuals. The provisions of this new legislation apply to workers hired after Feb. 3, 2010, but only for wages paid after March 18 (the date the legislation was signed into law).

• Payroll Tax Holiday - The law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer's 6.2% share of the Social Security payroll tax on that employee’s wages for the remainder of 2010. Thus, if the newly-hired and previously-unemployed worker earns $106,800 after March 18, 2010 and before the end of the year, the company could save a maximum of $6,621. This provides the employer with an immediate benefit by reducing the amount the employer must pay in employment taxes.

• Retention Credit - As an additional incentive, for any qualifying employee hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit equal to the lesser of $1,000 or 6.2% of the wages. Since the 52-week requirement cannot be met until the subsequent year, the credit will be taken on the employer’s 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period. This credit is not available for domestic workers.

New Employee Qualifications - Although there is no minimum number of hours that a new employee needs to work in order to qualify for either benefit, an employer cannot claim the new tax breaks for hiring family members. A worker who replaces another employee who performed the same job for the employer isn't eligible for the benefit, unless the prior employee left the job voluntarily or for cause. The payroll tax holiday can be claimed for rehiring old workers as long as that worker was terminated due to facts and circumstances, such as a factory closure due to lack of demand for the product.

Employee Documentation – To validate the new hire for the benefits, an employer must have the employee sign an affidavit, under penalties of perjury, stating that he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins.

Interaction with the Work Opportunity Credit (WOTC) – An employer must choose, on an employee-by-employee basis, whether to claim the HIRE benefits or the WOTC; double dipping is not allowed. The WOTC is in many cases more valuable than the payroll tax holiday, especially for low-wage employees, because it is generally 40% of “qualified first-year wages” of up to $6,000, for a maximum credit of $2,400 per worker.

The payroll tax holiday is equal to 6.2% of wages, and applies only to wages paid through Dec. 31, 2010. However, the WOTC is harder to qualify for, because the employee must be certified by an agency as belonging to a targeted group. The main qualification for a payroll tax holiday is that the employee has been unemployed for 60 days, and the employee's affidavit is sufficient for this purpose.

The Health Care Bill and Taxes

Thu, 1 Apr 2010 08:00:00 PST

One of the most heavily debated pieces of legislation was passed this year. The massive health care bill will result in dramatic changes that will impact everyone. This article summarizes the key elements of the new legislation.

On March 23, 2010, President Obama signed into law the new health care legislation. The legislation will affect virtually every individual in one way or another and will significantly impact tax returns in the future. The following overview of the tax-related provisions of the legislation is based upon the House of Representatives’ version and the one signed by President Obama on March 24, 2010. At the time this article was prepared, the Senate was taking up the measure, but it is expected to pass without changes since only a simple majority is required.

• Penalty For Not Being Insured – Beginning in 2014, taxpayers will be penalized for failing to maintain the minimum essential coverage. The penalty will be phased in beginning in 2014 and the fully-implemented penalty in 2016 will be the greater of:

o 2.5% of household income over the threshold amount of income required for income tax filing, or

o $695 (indexed for inflation after 2016) per uninsured adult in the household ($348 if under age 18).

Maximum Penalty – The total household penalty cannot exceed 300% of the per-adult penalty ($2,085) or national annual premium for the “bronze level” health plan offered through the Insurance Exchange that year for the household size. Penalties are based upon the months that the required insurance is not in force.

Penalty Phase-In – The maximum penalty will not be imposed until 2016. The phase-in rates are:

                                           2014             2015
Per-adult annual penalty           $95              $325
% of income penalty                 1%               2%
Family maximum                      $285             $975

Taxpayers Exempt from the Penalty – Individuals are exempt from the penalty if either their employer’s sponsored coverage or the lowest cost “bronze” coverage exceeds 8% of household income. Also exempt are individuals residing outside of the U.S., those exempted for religious purposes, and those with income below the threshold for having to file a return.

• Low-Income Health Exchange Participation Credits – Beginning in 2014, tax credits will be available for low-income individuals and families with incomes up to 400% of the federal poverty level that are not available for Medicaid, employer-sponsored insurance, or other acceptable coverage. To qualify for the credits, these individuals and families would have to obtain coverage in the newly-established Insurance Exchange. Based upon the current poverty levels, the credit would phase-out at $42,420 for individuals and $88,200 for a family of four. Additionally, a cost-sharing subsidy will be provided for low-income individuals to help pay for their coverage.

• Large Employer Responsibilities – Beginning in 2014, large employers, generally those with 50 or more full-time employees in the prior calendar year, that:

o Do not offer coverage for all its full-time employees,

o Offer minimum essential coverage that is unaffordable, or

o Offer minimum essential coverage where the plan's share of the total allowed cost of benefits is less than 60%,

Would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy discussed previously.

Penalty – The excise tax penalty for any month would be $167 times the number of full-time employees in excess of 30.

• Free Choice Vouchers – Beginning in 2014, employers who offer minimum essential coverage through an eligible employer-sponsored plan and pay a portion of that coverage will be required to offer an equivalent value voucher, allowing a qualified employee the option of purchasing coverage through the Insurance Exchange. An employee qualified to make this choice is an individual with a required contribution to the employer plan that exceeds 8%, but does not exceed 9.5% of the household income and has income that does not exceed 400% of the poverty line for the family.

• Tax Credits for Small Employers Offering Health Coverage – For tax years 2010 through 2013, qualified small employers, generally those with no more than 25 full-time employees with an average annual full-time equivalent wage of no more than $50,000, will be eligible for a tax credit of up to 35% of the cost of non-elective contributions to purchase health insurance for its employees. The maximum credit is available to employers with no more than 10 full-time equivalent employees with an annual full-time equivalent wage from the employer of less than $25,000.

2014 and Later - In 2014 and later, eligible small employers who purchase coverage through the Insurance Exchange would be eligible for a tax credit for two years of up to 50% of their contribution.

• Dependent Coverage – Effective March 23, 2010, the exclusion for reimbursements for medical care expenses under an employer-provided accident or health plan to any child of an employee is extended to children who have not attained age 27 as of the end of the tax year, provided the child also is eligible to be claimed as a dependent for tax purposes.

• Excise Tax on High-Cost Employer-Sponsored Health Coverage – Beginning in tax year 2018, there will be a 40% non-deductible excise tax on insurance companies and plan administrators for any health coverage plan where the premiums exceed the following amounts:

Single Coverage: $10,200
Single Coverage, high-risk employment or retired age 55 and older: $11,850
Family Coverage: $27,500
Family Coverage, high-risk employment or retired age 55 and older: $30,950

The tax would apply to self-insured plans and plans sold in the group market, but not to plans sold in the individual market (except for coverage eligible for the deduction for self-employed individuals). Stand-alone dental and vision plans would be disregarded in applying the tax. The dollar amount thresholds may be later adjusted for inflation.

• Employer W-2 Reporting Responsibilities – Beginning in tax year 2011, employers will be required to disclose the value of the benefit provided by them for each employee's health insurance coverage on the employee's annual Form W-2.

• Taxpayers Earning Over $200,000 – Beginning in 2013, higher-income taxpayers will be subject to the following additional taxes:

o Additional Hospital Insurance Tax - The Hospital Insurance (HI) tax rate (currently at 1.45%) would be increased by 0.9 percentage points on an individual taxpayer earning over $200,000 ($250,000 for married couples filing jointly).

o Surtax on Unearned Income – A 3.8% surtax, called the Unearned Income Medicare Contribution, would be placed on the net investment income of a taxpayer earning over $200,000 ($250,000 for a joint return). Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business). “Net” investment income is investment income reduced by allowable investment expenses. Distributions from qualified retirement plans and IRAs will not be subject to the surtax.

• Employer Flexible Health Spending Plan Contributions Limited – Beginning in 2013, the maximum that can be contributed to an employer’s health flexible spending accounts (FSAs) would be limited to $2,500 per year. The amount will be indexed for inflation after 2013.

• Over-the-Counter Medication Restriction for Employer-Provided Plans – Beginning in 2011, over-the-counter medications, except for doctor prescribed over-the-counter medication and insulin, will no longer qualify for reimbursement. This restriction applies to health reimbursement accounts (HRAs), health flexible savings accounts (FSAs), health savings accounts (HSAs), and Archer medical savings accounts (MSAs).

• Increased Tax on Nonqualifying HSA or Archer MSA Distributions – Beginning in 2011, the additional tax for HSA withdrawals for other than qualified medical expenses before age 65 is increased from 10% to 20%, and the additional tax for Archer MSA withdrawals for other than qualified medical expenses is increased from 15% to 20%.

• Medical Itemized Deductions Limited – Beginning in 2013, the itemized deduction for medical expenses will be limited in the following manner:

o AGI Threshold - The AGI threshold for claiming medical expenses on a taxpayer’s Schedule A is increased from 7.5% to 10%, which is the same as the current alternative minimum tax (AMT) rate. Individuals (and their spouses) age 65 and older will continue to use the 7.5% rate through 2016.

o Deduction for Employer Part D would be Eliminated - The deduction for the subsidy for employers who maintain prescription drug plans for their Medicare Part D eligible retirees is eliminated.

• Expansion of Information Return Reporting – Currently, a business paying more than $600 per year to a noncorporate service provider who is not an employee is required to file an information return (Form 1099-MISC). The new law expands the return filing requirement to include both corporate and noncorporate providers of property and services, beginning with tax years beginning in 2012.

• Adoption Credit Limit Raised, Made Refundable and Extended – One of the non-health care-related items included in the new law is an increase in the dollar limitation for the adoption credit to $13,170 (adjusted for inflation after 2010) and an extension of the credit through 2011. The credit also is changed from being nonrefundable to a refundable credit.

Don't Let the April Deadline Get the Best of You

Tue, 30 Mar 2010 08:00:00 PST

With April 15 right around the corner, last minute tax filers are scrambling to meet the deadline and avoid penalties. This article provides some helpful tips to get you through this stressful time. If you are up against the April deadline and still need some information to complete your tax return, you can obtain a six-month automatic extension of time to file your 1040.

The filing extension will give you extra time to get the paperwork together, but it does not extend the time to pay any tax due. You have to make an accurate estimate of any tax due and pay at least 90 percent when requesting an extension. Interest will be owed on any amounts not paid by the April deadline.

If your return is completed but you are unable to pay the tax due, do not request an extension. File your return on time and pay as much as you can. The IRS will send you a bill or notice for the balance due and will charge interest and penalties only on the unpaid balance.

If you cannot pay the full amount due with your return, you can ask to make monthly installment payments for the full or partial amount by requesting an installment agreement.

The foregoing is only an overview of the options available to you and discusses the problems that may arise if you don’t file and pay your tax by the April 15 due date.

If you are unable to file or pay on time, it is important to contact one of our professionals listed in our directory prior to April 15 so you can take the appropriate steps to mitigate penalties and interest.

RMDs Start Back Up in 2010

Thu, 25 Mar 2010 08:00:00 PST

A new year typically brings many changes with it. One of the changes that might impact you is the return of Required Minimum Distributions (RMDs) in 2010. For 2009, Congress suspended Required Minimum Distributions (RMDs) from IRAs and other qualified retirements accounts for taxpayers age 70½ and older, giving their retirement accounts a chance to recover from the market crash of 2008. This suspension was for 2009 only, and for 2010 taxpayers must once again begin taking RMDs.

The purpose of RMDs is to prevent taxpayers from avoiding taxation on the retirement funds indefinitely. Generally, distribution begins in the year the IRA owner attains the age of 70½. To enforce the RMD withdrawals the government imposes a penalty of 50% on any amount of under-distribution for a year.

Distributions for 2010 can be taken anytime before the close of the year. However, individuals who turned 70½ during 2010 can delay taking their 2010 distribution until 2011 provided their withdrawal is made no later than April 1, 2011. Delaying the distribution until 2011 will double-up the income in 2011 since the 2011 distribution will be required as well.

In some cases, distributions from a qualified retirement plan (but not an IRA) may be delayed until April 1 of the year following the year the employee retires from the employer maintaining the plan, even if the employee is already age 70½.

The minimum amount that must be withdrawn in a particular year is the fair market value of the IRA account divided by the number of years the IRA owner is expected to live (also known as the distribution period).

The value is based on the value of the owner’s account at the end of the business day on December 31st of the prior year. The life expectancy is determined from one of two IRS tables, the “Uniform Lifetime Table” or in certain circumstances the “Joint Life and Last Survivor Expectancy Table.”

For purposes of determining the minimum distribution, the RMD for each Traditional IRA account owned by an individual must be figured separately, and the minimum amounts totaled. Then the total 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.

In addition to IRAs, qualified retirement plans, such as employer-provided defined contribution plans, and individual retirement annuities are subject to the RMD rules. Be aware that distributions must be determined separately for each type of account. Thus, for example, distributions from a Tax-Sheltered Annuity do not satisfy the distribution requirements from IRAs.

Advance planning can, in many cases, minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise where a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not be required to file a tax return but can increase their distributions and still avoid any tax.

If you need guidance with your planning needs, please contact one of our professionals listed in our directory.

Running a Husband and Wife Business

Tue, 23 Mar 2010 08:00:00 PST

It can be challenging to run a business with a family member, especially with your spouse. More importantly, you should be aware of the tax requirements when your husband or wife is your business partner.

One of the advantages of operating your own business is hiring family members. However, the employment tax requirements for family employees may vary from those that apply to other employees. Below are some issues to consider when operating a husband and wife business.

How spouses earn Social Security benefits - A spouse is considered an employee if there is an employer/employee type of relationship, i.e., the first spouse substantially controls the business in terms of management decisions and the second spouse is under the direction and control of the first spouse. If such a relationship exists, then the second spouse is an employee subject to income tax and FICA (Social Security and Medicare) withholding. However, if the second spouse has an equal say in the affairs of the business, provides substantially equal services to the business, and contributes capital to the business, then a partnership type of relationship exists and the business's income should be reported as a partnership on IRS Form 1065 or as a qualified joint venture (see below).

Both spouses carrying on the trade or business - A provision of the tax code generally permits a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business, if: (1) the only members of the joint venture are a husband and wife, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply.

Under the provision, a qualified joint venture conducted by a husband and wife who file a joint return is not treated as a partnership for Federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse would account for his or her respective share on the appropriate form, such as Schedule C. For purposes of determining net earnings from self-employment, each spouse’s share of income or loss from a qualified joint venture is taken into account just as it is for Federal income tax purposes under the provision (i.e., in accordance with their respective interests in the venture).

This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. However, this may not be true if either spouse exceeds the social security tax limitation.

One spouse employed by another - If your spouse is your employee, not your partner, you must pay Social Security and Medicare taxes for him or her. The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and Social Security and Medicare taxes, but not to FUTA tax.

If you have questions related to the tax treatment of your specific husband and wife business, please contact one of our professionals listed in our directory.

Do You Qualify for the Foreign Earned Income Exclusion?

Thu, 18 Mar 2010 08:00:00 PST

This article gives you a basic overview of the foreign earned income exclusion. If you are working abroad, the information provided here will help you determine if you qualify or not. The worldwide income of a U.S. citizen or resident alien generally is subject to U.S. income tax regardless of where the taxpayer is living. However, taxpayers are allowed to exclude from their income a certain amount of foreign earned income and housing allowance if they meet certain requirements while living abroad. Here are some facts related to the income exclusion.

1. The Foreign Earned Income Exclusion: United States citizens and resident aliens who live and work abroad may be able to exclude all or part of their foreign salary or wages from their income when filing their U.S. federal tax return. They may also qualify to exclude compensation for their personal services or certain foreign housing costs.

2. The General Rules: To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must have a tax home in a foreign country and income received for working in a foreign country (otherwise known as foreign earned income). The employer can be a U.S. employer or a foreign one as long as the income is earned while working in a foreign country. The taxpayer must also meet one of two tests: the bona fide residence test or the physical presence test.

• Bona fide residence test - Generally, to meet the bona fide residence test, a U.S. citizen or U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect must be a resident of a foreign country for an uninterrupted period that includes an entire tax year. Thus, except in rare circumstances, the first tax year living and working in a foreign country will not meet the entire tax year requirement, and a taxpayer will need to qualify under the physical presence test to exclude income.

• Physical presence test - To qualify under the physical presence test, a U.S. citizen or a U.S. resident alien must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. The 12-month period will span two years, requiring a prorated exclusion for the first year living and working in a foreign country. Because the exclusion period must actually be met before a return can be filed taking the exclusion, a filing extension may be required.

3. The Exclusion Amount: The foreign earned income exclusion is adjusted annually for inflation. For 2010, the maximum exclusion is up to $91,500 per qualifying person ($91,400 in 2009). Thus, a husband and wife both living and working out of the country can each qualify for the full exclusion amount.

4. Housing Exclusion: In addition to the foreign earned income exclusion, there is also a foreign housing exclusion when the housing costs are in excess of a government set base amount. The base amount for 2010 is $14,640 (up slightly from $14,624 in 2009), and the maximum housing exclusion amount for 2010 is $12,810 (up slightly from $12,796 for 2009).

5. Taking Other Credits or Deductions: Once the foreign earned income exclusion is chosen, a foreign tax credit or deduction for taxes cannot be claimed on the excluded income.

The foregoing is only a brief summary of the foreign earned income exclusion. If you are currently living and working in foreign country, or have plans of doing so in the future, and would like to find out if this deduction will work for your particular circumstances, please contact one of our professionals listed in our directory.

When is a Solo 401(k) Plan the Best Option?

Tue, 16 Mar 2010 08:00:00 PST

The Solo 401(k) plan allows you to set aside more for retirement than ever before. This article will help you determine if this plan is the right choice for you.

It goes by many names: Solo 401(k), Mini 401(k) and single-participant 401(k). We will use Solo 401(k) in this article to describe probably the best type of pension plan for owner-only businesses. It provides for larger contributions, including a Roth option for a portion of the contribution, and the ability to borrow funds from the plan at reasonable rates. As a result, Solo 401(k) plans have become more attractive options than SEP-IRAs, Simple IRAs or profit-sharing or money purchase plans. In addition, if the plan permits and most do, assets for other retirement plans can be rolled over into the Solo 401(k) plan.

Generally, Solo 401(k) plans are a natural fit for two categories of businesses. The first includes independent contractors, sole proprietors, and owner-only C or S corporations. The second is those who have dual incomes. They are W-2 wage earners employed by a company that offers a 401(k) plan who also have consulting income from corporate directorships or freelance work that requires them to file a Schedule C as a sole proprietor. Since the 401(k) contribution limits apply to each individual for the year and not the individual plans, if the taxpayer has multiple 401(k) plans, he or she needs to make sure that not more than the annual limit is contributed to the combination of plans.

For 2010, the rules limit employer contribution (profit-sharing contribution) to 25% of compensation. The employee can also make salary deferral contributions up to $16,500. Together, these contributions cannot exceed the lesser of $49,000 or 100% of compensation. In addition, if the employee is age 50 or over he or she can make an additional catch-up contribution of $5,500.

Example – Susan Lewis, age 49, is the sole employee of an incorporated business. Her earned income is $100,000 in 2010. Under the law, Susan can contribute $25,000 to a SEP-IRA ($100,000 x .25), $14,500 (11,500 plus 3% of $100,000) to a Simple IRA, or $25,000 to a profit-sharing or money purchase plan. However, she can contribute $41,500 to a Solo 401(k) plan ($25,000 employer contribution plus $16,500 employee deferral), still under the $49,000 maximum for the year. If Susan were age 50 or over, she could also make a catch-up contribution of $5,500, increasing her 401(k) contribution total to $47,000.

Note: Generally, 401(k) plan contributions for an unincorporated business will be slightly lower than the above amounts. For unincorporated businesses, compensation is net profit minus half of self-employment taxes minus employer contributions.

Although Solo 401(k) plans are limited to the business owner and his or her spouse, business owners should note the added benefits of having his or her spouse as the business’s only other employee. Having the spouse on the payroll gives the business owner the opportunity to shelter some or all of his or her income by having the spouse make an elective deferral to a 401(k) plan in addition to the business making a profit-sharing contribution. Although the spouse and the business would be responsible for their respective share of employment taxes on the salary, combined employer and employee contributions can be up to the lesser of $49,000 (for 2010) or 100% of compensation. This limit applies separately to the business-owner and spouse, thus allowing a combined total of up to $98,000 (for 2010). In addition, if age 50 or over, each individual could defer an additional $5,500 each year.

Potential downside - If a business grows and begins hiring employees, the Solo 401(k) plan must become a full-blown 401(k) plan subject to other more stringent rules including discrimination testing that can serve to limit contributions by highly-paid executives. Many providers recommend that businesses with immediate expansion plans not set up one of the Solo 401(k) arrangements. Caution: If the business owner has other businesses or is part of a controlled group of corporations, partnerships, proprietorships or affiliated service groups, the employer aggregation rules may apply and the employees of those other businesses may have to be considered for purposes of meeting qualification and minimum coverage requirements for the Solo 401(k).

For additional information regarding Solo 401(k) plans and how it might fit into your tax strategy and retirement planning, please contact one of our professionals listed in our directory. If you are considering a Solo 401(k) plan for 2010, be aware that the plan must be set up before year’s end.

Domestic Production Deduction Up in 2010

Thu, 11 Mar 2010 08:00:00 PST

The percentage used to figure the domestic production activities deduction increases for tax years beginning after 2009. This article provides an overview of how the deduction works and the more common eligible activities.

The domestic production deduction was created to encourage manufacturing and production within the U.S., and it provides a substantial business deduction equal to 9% (up from 6% in 2009) of the lesser of:

(1) the taxpayer’s net income from qualified production activities or

(2) the taxable income (modified adjusted gross income for individual taxpayers) without regard to this deduction for the tax year.

The deduction is further limited to 50% of the W-2 wages of the employer for the tax year allocable to the activities eligible for the deduction.

Domestic Production Activities – Although the definition of “domestic production activity” is a little elusive, it generally does not include retail sales or purely service activities. Among the more common eligible activities are:

• manufacturing and production activities in whole or in significant part within the U.S.,

• construction of real property in the U.S., and

• performance of engineering or architectural services in the U.S. in connection with real property construction projects in the U.S.

The following example, one that was used in a Congressional hearing, does a good job of defining what is and is not a qualified domestic production activity: Suppose you are a baker and in the business of producing donuts. Some of the donuts you sell retail directly to the consumers, and some you sell in bulk to hotels and restaurants. The production costs of the donuts sold at retail do not qualify for the deduction, while the costs associated with the wholesale sales to the hotels and restaurants do.

Computing the Deduction – The following is an example of how this deduction works: Suppose your business manufactures a product that you wholesale to retailers. Your net income from sales of that product for the year is $800,000, and the wages you paid to your employees to manufacture that product totaled $200,000. Your deduction for 2010 would be the lesser of 9% of the $800,000 in revenue or 50% of the $200,000 wages. Thus, the domestic production activities deduction for your business would be $72,000 (.09 x $800,000). The deduction is allowed for both regular and alternative minimum tax purposes.

Who Gets the Deduction – This deduction is allowed to all taxpayers, including individuals, C corporations, farming cooperatives, estates, trusts, and their beneficiaries. The deduction is allowed to partners and owners of S corporations (not to partnerships or the S corporations themselves) and may be passed by farming cooperatives to their patrons. And, despite the deduction’s history, it is fully available to taxpayers who do not export.

The foregoing is only an overview of this deduction. If you have questions related to how the domestic production deduction might apply to your specific circumstances, please contact one of our professionals listed in our directory.

What's the Status of Your Federal Tax Refund?

Tue, 9 Mar 2010 08:00:00 PST

Until recently, there was no way to follow up on your tax refund without contacting the IRS directly and being put on hold. The only other option was to wait for it to arrive. The IRS now provides status updates through an interactive tool on their website. 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.

Dependents and Exemptions: What You Need to Know

Thu, 4 Mar 2010 08:00:00 PST

Personal exemptions and exemptions for dependents form a basic part of the U.S. individual income tax law. Knowing the criteria and requirements for claiming these exemptions will ensure that you don’t miss out on this important tax benefit.

There are a number of misconceptions related to dependents and claiming a dependent’s exemption on a tax return. If you have a child or someone else that you are claiming as a dependent, you should review these commonly encountered situations.

• Dependents may be required to file their own tax return – Just because you claim someone as a dependent on your return, it does not mean that they are not required to file their own tax return. Whether or not a return must be filed depends on several factors, including: the amount of the dependent’s unearned, earned or gross income, his or her marital status, any special taxes he or she owes, and any advance Earned Income Credit payments that was received.

• Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption, you can deduct $3,650 on your 2009 and 2010 tax return. Exemption amounts are reduced for taxpayers whose adjusted gross income is above certain levels, which is determined by your filing status.

• Dependents may not claim an exemption. If you claim someone as a dependent, such as your child, that dependent may not claim a personal exemption on their own tax return.

• Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you are filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.

• Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their 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.

If you have questions related to these issues, please contact one of our professionals listed in our directory.

How to Determine Your Filing Status

Tue, 2 Mar 2010 08:00:00 PST

This article provides tips to help you choose the correct filing status. You don't want to make a costly mistake that could easily be avoided.

Everyone who files a federal tax return must determine which filing status applies to them. It is important that the correct filing status is chosen as it determines your standard deduction, the amount of tax you owe, and any refund that may be owed to you.

Here are several important facts about the five filing status options that may apply to your specific situation.

1. Your marital status on the last day of the year determines your marital status for the entire year.

2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.

3. The Single Filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.

4. A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.

5. If your spouse died during the year and you did not remarry during 2009, you may still file a joint return with that spouse for the year of death, provided the joint return election is not revoked by a personal representative for the deceased spouse.

6. A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately, unless they lived apart for the last six months of the year and one or both qualify as Head of Household.

7. Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.

8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2007 or 2008 and you have a dependent child. Take note that certain other conditions must be met.

If you have questions regarding your filing status, please give this office a call.

Homebuyer Tax Credit is Almost Up!

Thu, 25 Feb 2010 08:00:00 PST

For those of you who plan to take advantage of the homebuyer tax credit, don't wait too long. It was put into place to help the real estate market recover, however, it was not intended to be around permanently.

If you (or your spouse) are at least 18 years of age and plan on taking advantage of the liberalized homebuyer tax credit, time is running out. Unless extended by Congress, this refundable tax credit will no longer be available for homes purchased after April 30, 2010 or after June 30, 2010 when a binding contract to purchase was entered into prior to May 1.

The homebuyer credit is 10% of the purchase price but not exceeding $8,000 for first-time homebuyers and $6,500 for long-time residents. This refundable credit is yours to keep, even if you are subject to the alternative minimum tax, as long as the home continues to be used as your principal residence for 36 months after purchase.

A qualifying home can include a conventional single-family structure, house trailer, mobile home, houseboat, cooperative apartment, condominium, duplex, or row house as long as it can qualify as the buyer’s principal residence but not exceed $800,000 in cost.

You also have the option to claim the credit on your 2009 tax return, thus putting the money into your hands more quickly. When making the decision to claim the credit in 2009 or 2010, the homebuyer will need to consider in which year the credit will provide the best benefit. This is because the credit phases out for higher-income taxpayers based upon the taxpayer’s AGI. So, if you qualify for the credit and your income is in the credit phase-out range, you probably will want to claim the credit in the year with the lower income. The credit is ratably phased-out for individual taxpayers between $125,000 to $145,000 ($225,000 and $245,000 for married taxpayers filing jointly).

A taxpayer is considered a first-time homebuyer if he or she had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies. A long-time resident is any individual who has owned the same principal residence for any 5 consecutive years during the 8-year period ending on the date of purchase of a subsequent principal residence. Caution: If either spouse fails the first-time homebuyer or long-time resident definition, neither gets the credit (even if filing separately).

To prevent fraudulent claims of this credit, the IRS is requiring additional documentation to be attached to the return, including a copy of the final settlement statement (generally Form HUD-1) from the purchase or the certificate of occupancy for a newly-built home. In addition, long-time residents must attach documentation such as mortgage interest statements, property tax records, or homeowner’s insurance records for the 5-out-of-8-years consecutive period being used to claim the credit.

In addition to the credit, the tax law also allows first-time homebuyers to make a penalty-free withdrawal of up to $10,000 from their IRAs for the purchase of a home. Married individuals each can withdraw up to $10,000 from separate IRA accounts for this purpose. Although the withdrawal is penalty-free, it is still taxable, so you should consider carefully the tax ramifications and the impact on your future retirement before invading your IRA accounts.

It would probably be appropriate to contact one of our professionals listed in our directory if you or family members are contemplating utilizing the new credit or withdrawing from an IRA.

Documentation Requirements Clarified for First-Time Homebuyer Credit

Tue, 23 Feb 2010 08:00:00 PST

This article provides some helpful tips if you are taking advantage of the First-Time Homebuyer Credit. It will give you an idea of what to expect, including the items that have to be submitted in order for you to qualify. Claiming the First-Time or Long-Time Resident Homebuyer Tax Credit on either your 2009 or 2010 return includes some complex documentation requirements. The IRS recognizes that the settlement documents can vary from location to location, so they have provided some clarification related to the documentation requirements.

1. Settlement Statement - Purchasers of conventional homes must attach a copy of Form HUD-1 or other properly executed Settlement Statement.

2. Properly Executed Settlement Statement - Generally, a properly executed settlement statement shows all parties' names and signatures, property address, sales price and date of purchase. However, settlement documents, including the Form HUD-1, can vary from one location to another and may not include the signatures of both the buyer and seller. In areas where signatures are not required on the settlement document, the IRS encourages buyers to sign the settlement statement when they file their tax return -- even in cases where the settlement form does not include a signature line.

3. Retail Sales Contract - Purchasers of mobile homes who are unable to get a settlement statement must attach a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.

4. Certificate of Occupancy - For a newly constructed home, where a settlement statement is not available, attach a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

5. Long-Time Residents - If you are a long-time resident claiming the credit, the IRS recommends that you also attach documentation covering the five-consecutive-year period such as Form 1098, Mortgage Interest Statement or substitute mortgage interest statements, property tax records or homeowner’s insurance records.

If you have questions related to this credit or the documentation required, please contact one of our professionals listed in our directory.

Foreign Financial Accountholders Beware of Reporting Requirement

Thu, 18 Feb 2010 08:00:00 PST

A reporting requirement may apply to certain taxpayers with a financial connection to a foreign country. The penalties can be steep so this requirement should not taken lightly. 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 ensurThe e 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. 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 draconian. 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 have questions regarding this reporting requirement, please contact this office.

Proposals and Expiring Benefits Impact Long-Range Tax Planning

Tue, 16 Feb 2010 08:00:00 PST

When it comes to taxes, it seems that planning ahead has almost become an impossible task. The only thing we can really do is to stay informed and keep track of the latest changes.

Long-range income-tax planning for individuals has always been challenging, what with the steady stream of changes and last minute action by Congress. This year, it goes to an all-new level taking into account the sunset provisions for many current benefits – those provisions that were enacted with a specified ending date – and the President’s 2011 budget proposals.

The following lists a number of provisions that will impact long-range tax planning. However, one thing is for sure; for higher-income taxpayers, the tax bite is going up, and for some, substantially.

o Tax Rates – Currently, the lowest tax bracket is 10% and the highest is 35%. Beginning in 2011, without Congressional action, the lowest bracket will be 15% (the 10% bracket goes away) and the top bracket increases to 39.6%. So where we currently have 10%, 15%, 25%, 28%, 33% and 35%, beginning in 2011, we will have 15%, 28%, 31%, 36% and 39.6%.

Administration’s Budget Proposal – The budget proposal would have the rates increase for 2011 as follows:

(1) The four bottom brackets of 10%, 15%, 25% and 28% would be retained.

(2) The 28% bracket would be expanded to assure that taxpayers won't see their taxes rise as a result of the increase in the top two brackets.

(3) The top two brackets, currently 33% and 35%, would increase to 36% and 39.6%.

(4) For married taxpayers filing jointly, the 36% rate would apply to taxable income above $231,300 ($250,000 less the standard deduction and two personal exemptions), indexed from 2009; and for single taxpayers, it would apply to taxable income above $190,650 ($200,000 less the standard deduction and one personal exemption), indexed from 2009.

(5) The 39.6% rate would begin at taxable incomes over $373,650 for married taxpayers filing jointly, heads of household and single filers, with the taxable income level indexed for inflation.

Alternative Minimum Tax (AMT) - Without Congressional intervention, the alternative minimum tax (AMT) exemption amounts for 2010 drop to $33,750 (down from $46,700) for unmarried taxpayers, $45,000 (down from $70,950) for joint filers, and $22,500 (down from $35,475) for married individuals filing separately. If the exemption amounts aren’t propped up again by Congress, an estimated additional 20 million taxpayers will be subject to the AMT in 2011. In addition, many nonrefundable personal credits claimed after 2009 can't exceed the excess of: (a) the individual's regular tax liability, over (b) the individual's tentative minimum tax, determined without regard to the AMT foreign tax credit. For 2009, this limitation didn't apply.

Anticipated 2010 AMT - Since Congress is bogged down with other issues and does not have time to deal with meaningful AMT relief, it is the general consensus, although not guaranteed, that Congress, as they have done in the past, will enact another one-year patch for the AMT. If this happens, the exemptions will be temporarily restored to the 2009 levels (as indexed for inflation), and nonrefundable personal credits will be allowed to offset the AMT as well as regular tax.

o Capital Gains – Currently, most long-term capital gains are taxed at a maximum rate of 15%, and if the long-term capital gain would otherwise be taxed at a rate below 25% if it were ordinary income, it is taxed at a zero percent rate. Beginning in 2011 without Congressional intervention, long-term capital gains tax rates will be increased to 20%.

o Qualified Dividends – Currently, qualified dividends are taxed using the same long- term capital gains rates as shown in the previous paragraph. However, beginning in 2011 and absent Congressional intervention, qualified dividends will be taxed at ordinary income rates.

Administration’s Budget Proposal - Beginning in 2011, a 20% tax rate would apply to long-term capital gains and qualified dividends of married taxpayers filing jointly with income over $231,300 as indexed for inflation and $190,650 for single taxpayers. These two income levels are determined in the same manner as the tax rate proposal above. Taxpayers below these income levels would be subject to the rates that currently apply (i.e., 0% or 15% rate) for long-term capital gains and qualified dividends.

o Deductions & Exemptions - Under current rules, the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) is 200% of the standard deduction for single taxpayers. In addition, for 2010, the phase-out of itemized deductions and exemption allowances has been eliminated for higher-income taxpayers.

Beginning in 2011, without Congressional action, the current rules will sunset and the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) will revert to 167% (down from the current 200%) of the standard deduction for single taxpayers, and thus restoring the marriage penalty.

Also beginning in 2011, without Congressional action, the phase-out of itemized deductions and exemptions will return for higher-income taxpayers.

Administration’s Budget Proposal – For 2011

• The standard deduction for married taxpayers filing jointly (and qualified surviving spouses) would remain at 200% of the standard deduction for single taxpayers.

• The AGI-based reduction of itemized deductions and the AGI-based personal exemption phase-out would be reinstated only for higher-income taxpayers.

• The tax value of all itemized deductions would be limited to 28% whenever they would otherwise reduce taxable income in the 36% or 39.6% tax brackets. A similar limitation also would apply under the AMT.

• The optional deduction for state and local general sales taxes would be extended through 2011.

o Other Expiring Individual Tax Benefits – Additionally, and without Congressional action, the following tax benefits have or will expire soon.

• Up to $5,250 of tax-free, employer-provided education assistance – expires after 2010;

• The above-the-line education expense deduction – expired after 2009;

• Teacher’s $250 above-the-line deduction for classroom supplies - expired after 2009; and

• The $500 maximum ($1,000 for joint filers) standard deduction add-on for property taxes paid during the year - expired after 2009.

Administration’s Additional 2011 Budget Proposal Items:

o Make the saver's credit (maximum $1,000) refundable and raise the AGI phase-out limits;

o Expand the child and dependent care tax credit by increasing the AGI level at which the 35% credit starts to phase out to 20% from $15,000 to $85,000, thus raising the level at which the 20% rate takes effect to AGI in excess of $113,000 (currently $43,000);

o Making the American Opportunity Tax Credit for education (currently only available in 2009 and 2010) permanent; and

o Extending the Making Work Pay Credit (MWPC) through 2011 ($400 per person and $800 per family). The President would like this credit to be made permanent, but it is unlikely Congress will agree, due to the federal budget deficit.

o Other Expiring Small Business Tax Benefits – In addition to the expiring individual benefits, without a Congressional extension, the following business tax options have expired after 2009.

• The 50% bonus depreciation;

• The maximum Sec 179 expense deduction will drop to $134,000 (down from the $250,000 allowed in 2009). The investment-based phase-out will drop to $550,000 (down from $800,000 allowed in 2009); and

• The 15-year depreciable life for leasehold improvements and restaurant property.

Administration’s Small Business 2010 Proposal Items:

o A new $5,000 small business job creation tax credit. It provides a tax credit of up to $5,000 for new workers added in 2010, plus a reimbursement for payroll taxes on wage increases.

o Temporary extension of Code Sec. 179 expensing benefits for small businesses through 2010, permitting a maximum of $250,000 to be expensed with an investment-based phase-out level of $800,000.

o Extension of bonus depreciation for qualifying property placed in service through 2010.

Keep in mind that the information included in this article is based primarily on proposed changes and expiring benefits that could be extended by Congress. Hopefully, a clearer picture will develop as Congress tackles these issues during the year.

Speed Up Your Refund With Direct Deposit

Thu, 11 Feb 2010 08:00:00 PST

Are you tired of waiting around for your refund? This article shows you how to speed up the process! Don't wait around for a paper check. Have your federal tax and state (if applicable) refund deposited directly into your bank account. Choosing direct deposit is a secure and convenient way to get your money in your pocket faster.

• Secure - There is no chance for a check to get lost in the mail. Thousands of checks are returned to the IRS by the U.S. post office every year as undeliverable mail. Direct deposit eliminates the possibility of not receiving your check and prevents your refund from being stolen.

• Convenient - The money goes directly into your bank account. You won't have to make a special trip to the bank to deposit the money yourself.

• Easy - Simply provide this office with your bank routing number and account number when your return is prepared, and you will receive your refund far quicker than by check.

• Multiple Options - You can also electronically direct your refund to multiple accounts. With the "split refund" option, taxpayers can divide their refunds among as many as three checking or savings accounts and U.S. financial institutions. Refunds can also be directed into an IRA account or to buy Series I Savings Bonds. A word of caution - some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted.

If you have questions about direct depositing your refund or the split refund option, please contact one of our professionals listed in our directory.

Should You Invest for Tax-Free or Taxable Interest?

Tue, 9 Feb 2010 08:00:00 PST

If you are an investor, there are many things to consider. This article discusses some areas of concern, specifically one that comes up quite often.

A frequent tax strategy question is whether it is better to invest for tax-free or taxable interest. Generally, taxable interest will provide the greater return, but this may not hold true after taking into account taxes on the income. Therefore, the question is really which provides the greater "after-tax" return. Generally, interest derived from “municipal bonds” is tax-free for federal purposes and also tax-free for a particular state if the bonds are issued by that state or its local governments. In addition, interest from U.S. Government Bonds cannot be taxed by any state.

The following are issues related to making a decision on taxable or tax-free income:

• Municipal bond interest. Interest earned from general purpose obligations of states and local governments, which are issued to finance their operations, are generally tax-exempt for Federal purposes. However, the various states usually only exempt interest from bonds issued from the state itself and local governments within the state. Hence, there are two categories of municipal bonds, namely the tax-free Federal and state and the tax-free Federal only. Individuals can invest in municipal bonds by directly purchasing a bond or through funds that invest in municipal bonds. Some funds invest in bonds issued in a particular state only, providing residents of that state with income that is excludible on their state’s return.

In general, tax-free bonds are likely to be more attractive for taxpayers in higher brackets, since they receive a greater benefit from excluding interest from income. For lower-bracket taxpayers, on the other hand, the tax benefit from excluding interest from income may not be enough to make up for the lower interest rate generally paid on this type of bond.

Even though municipal bond interest isn't taxable, it must be shown on the return. This is because tax-exempt interest is taken into account when determining the amount of social security benefits that is taxable, and may affect the alternative minimum tax computation, as well as the earned income credit, investment interest deduction and sales tax deduction.

• Tax-deferred retirement accounts. It generally doesn't make sense to buy and hold municipal bonds in your regular IRA, Keogh, or 401(k) plan account. The income in these accounts is not taxed currently, but once you start making withdrawals, the entire amount withdrawn is likely to be taxed even though it includes income from tax-free sources. Thus, if you want to invest your retirement funds in fixed income obligations, it is generally advisable to invest in higher-yielding taxable securities.

• Alternative minimum tax consequences. Even though interest on municipal bonds is generally excluded from income for purposes of the regular federal income tax, interest on certain “private activity bonds” is included in income for purposes of the alternative minimum tax. Your broker can tell you whether the particular bond you are considering is a private activity bond subject to this rule.

The alternative minimum tax is a separate tax system that applies if the tax determined under that system exceeds your regular income tax. Whether or not the alternative minimum tax applies will depend on your overall tax picture; however, in general, the effect of the alternative minimum tax would be to prevent you from achieving too low an effective tax rate by means of tax-favored techniques, such as investing in municipal bonds. This office can help you determine how the alternative minimum tax would apply to your situation, and how it would affect the after-tax yield if you were to invest in municipal bonds.

• Effect of exempt interest on taxation of Social Security benefits. In general, a portion of Social Security benefits is taxable if your adjusted gross income, subject to certain modifications, exceeds specified amounts. For this purpose, the modifications to adjusted gross income include adding in tax-exempt interest. The effect of this rule is that, if you receive Social Security benefits, investing in municipal bonds could increase the amount of tax you have to pay with respect to your Social Security benefits. While technically, the municipal bond interest remains exempt from tax, the effect is the same as though a portion of that interest were taxable. One technique to solve this problem is to invest in tax-deferred, rather than tax-free, investments. For instance, income earned by an annuity is not taxable until the annuity is cashed in, and thus would not impact the Social Security taxation except in the year cashed in. This office can assist you in determining the impact of tax-free income on the taxability of your Social Security benefits.

• Effect of exempt interest on earned income credit. If you are otherwise eligible to take an earned income credit, you will lose the credit completely for 2009 and 2010 if you have more than $3,100 of “disqualified income,” generally, interest, dividend, non-business rental, passive, and capital gain net income. Disqualified income includes tax-exempt income. Thus, municipal bond income could cause loss of the credit. However, in most cases, an individual who's eligible for the earned income credit will be in a low tax bracket, thus making municipal bonds an unattractive investment in view of their lower yield. Disqualifying income can be avoided by using tax-deferred investments as discussed under Social Security Benefits above.

• No deduction for interest on obligations incurred in connection with tax-exempt investments. If you borrow money for the purpose of investing in municipal bonds, you can't deduct the interest expense with respect to that borrowing. Moreover, even if the proceeds of borrowing aren't directly traceable to tax-exempt investments, interest deductions could be disallowed if the IRS could establish that you continued the borrowing in effect (that is, you didn't pay it off) for the purpose of acquiring or carrying the municipal bonds.

• No deduction for investment expenses related to tax-exempt investments. If you itemize your deductions, you may deduct the costs of investment advisory, custodial or agency fees, if your total miscellaneous deductions exceed 2% of your income. However, if the investment management services you paid for are connected to the account from which you receive tax-exempt income from municipal bonds or bond funds, the related expenses are not deductible.

• Sale, call or redemption of bond. Normally, the sale, call before maturity, or redemption of a municipal bond is treated the same as a taxable bond. If you held the bond long enough, any gain is taxed at favorable rates. Capital losses can be used to offset other capital gains. Up to $3,000 of any remaining losses can generally be applied against other income, with a carryover of any excess to later years.

• U.S. government bond interest. By Federal law, the interest income of direct obligations of the U.S. government cannot be taxed by the states (but it is federally-taxed). This includes interest from U.S. Savings Bonds, U.S. Treasury bills, notes, bonds, or other obligations of the United States. Interest earned from the Federal National Mortgage Association (Fannie Mae), Government National Mortgage Association (Ginnie Mae) and the Federal Home Loan Mortgage (FHLMC) Corporations are not direct obligations of the U.S. government, and therefore, are not excludable from state taxation unless specifically allowed by state law (generally not the case). If you reside in a state with no state income tax, U.S. government bond interest provides no tax benefit.

• Itemized deductions. If you do have a state tax and the investment is tax-free in your state, then it also makes a difference whether or not you itemize your deductions on your Federal return. When you do itemize deductions, the state income tax you pay is included as a deduction on your Federal return. Since having state tax-free income reduces your state tax, the reduced state tax lowers your itemized deductions and increases your Federal tax.

• Municipal bond funds. If you are looking for diversity and professional management for your municipal bond holdings, you may want to consider buying shares of a fund that invests in tax-exempt municipal bonds. These funds may be broadly based or targeted to the bonds of a particular state. Dividends municipal bond funds are treated essentially the same as municipal bond interest. To preclude a potential tax loophole, if an investor buys fund shares, receives an exempt-interest dividend, and then sells the shares at a loss within six months after the purchase, the loss is disallowed to the extent of the exempt-interest dividend.

Use the worksheet below to determine the tax-exempt interest equivalents for your particular tax bracket, state tax (if applicable), and type of tax-exempt in investment. Enter all rates in decimal format. For example, 5.75% would be entered as .0575. Carry all calculated values to at least 4 places after the decimal.

If you have questions regarding the information in this article, please contact one of our professionals listed in our directory. Making the right decision for your particular circumstances can have a significant effect over long periods of time.

New Bill Passed: Early Tax Deduction for Haiti Relief Contributions

Thu, 4 Feb 2010 08:00:00 PST

This article discusses an important bill passed by Congress that affects those who have made contributions to the Haiti relief effort. When claiming your donation, find out what you need to do to get the most tax benefit.

Haiti Contributions Deductible on 2009 Return - Congress has passed a bill (HR 4462) to permit taxpayers contributing to Haitian relief charities to elect to treat contributions made after Jan. 11, 2010, and before Mar. 1, 2010, as if the contributions had been made on Dec. 31, 2009. If the election is made, Haiti relief donations would be deductible on the 2009 return, not the 2010 return. This option would be available only if the contribution is made in cash and otherwise meets the requirements for charitable contribution deductions under Code Sec. 170 as summarized below.

• Contributions to domestic, tax-exempt, charitable organizations providing assistance to individuals in foreign lands are tax-deductible, provided that the U.S. organization has full control and discretion over the uses of donations.

• Contributions to foreign organizations generally are not deductible, nor are contributions to benefit specific individuals or families.

• To substantiate charitable contributions 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. One additional substantiation method is allowed individuals for Haitian relief contributions: monetary contributions made via text message on a cellular telephone may be substantiated with a telephone bill that shows the charitable organization’s name, contribution date, and the amount of the contribution.

• Contributions are deductible in the year made unless donated for Haitian relief after Jan. 11, 2010, and before Mar. 1, 2010 in which case the contribution can be taken in on either the 2009 or 2010 return. To claim the donations, the taxpayer must itemize deductions.

• Generally, the deduction for charitable contributions is limited to 50% of the taxpayer’s adjusted gross income, with a 5-year carryover period for excess deductions. The Haitian relief donations are subject to the normal limitations and carryover.

For high-income taxpayers, there is also a limitation on overall itemized deductions for 2009, but there is no overall limitation for 2010. Therefore, the tax benefit for these individuals may be greater by waiting until 2011 to claim their Haitian relief donations on their 2010 returns.

Donating Your Time Gives You Some Tax Breaks

Tue, 2 Feb 2010 08:00:00 PST

Many people miss out on important tax deductions because they weren't aware of them. Read this article to find out what you may be entitled to. 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 roundtrip travel cost, taxi fares, and other costs of transportation between the airport or station and hotel, plus lodging and meals are allowed at 100%. Unlike other areas of taxes, meals are not subject to the 50% limitation. 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. Any "significant element of personal pleasure" negates a deduction (i.e., not even partial deduction is allowed). Significant personal pleasure is assumed if the taxpayer has only minor duties and is not required to perform any duties for the charity for major portions of the away-from-home stay.

• 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.

• 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 for a contribution of $250 or more 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 you're needed at the out-of-town location.

• Submit a statement of expenses if you are out-of-pocket for substantial amounts and, preferably, a copy of the receipts to the charity. Also arrange for the charity to acknowledge in writing the amount of the contribution.

• Maintain detailed records of your out-of-pocket expenses - includes receipts plus a written record of the time, place, amount and charitable purpose of the expense.

If you have questions related to your volunteer expenses or any other charitable contributions, please contact one of our professionals listed in our directory.