Bonus Credit for Retirement Savings Contributions

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

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

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

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

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

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

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

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

 

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

 

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

 

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

 

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

Read More

Did Congress Save You From the AMT in 2010?

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

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

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

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

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

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

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

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

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

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

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

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

Read More

Increased Year-End Withholding May Avoid or Reduce Underpayment Penalties

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

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

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

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

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

Other Forms of Withholding – The same rules described above in regard to amounts withheld from payroll also apply to overpayments of Social Security taxes and to income taxes withheld from: supplemental unemployment compensation benefits, sick pay, pensions, annuities, investments, gambling, etc.

If you think your taxes may be underpaid for the year and would like assistance in avoiding an underpayment penalty, please give the office a call as soon as possible.

 

Read More

Congress Extends Tax Breaks

Congress, in an eleventh-hour compromise agreement worked out with the Obama Administration and the GOP Leadership, has extended many of the Bush era tax reductions. The following is an overview of the more frequently encountered tax changes that will have an effect on just about every taxpayer.

INDIVIDUAL PROVISIONS

Individual Tax Rates – Under the Bush era tax cuts, the individual tax rates were reduced and replaced with six tax brackets that increase with income: 10, 15, 25, 28, 33, and 35 percent. These reduced rates were scheduled to return to their original levels of 15, 28, 31, 36, and 39.6 percent beginning in 2011. That would have resulted in the lowest bracket increasing by 5 percentage points and the highest bracket 3.6 percentage points, affecting all taxpayers from the low- to the high-income. Congress has extended the lower rates for two additional years, through the end of 2012.

Capital Gains and Qualified Dividends – Under the Bush era tax cuts, the tax on long-term capital gains (assets owned for more than one year) was reduced from a 20 percent maximum rate to 15 percent for taxpayers in the 25% and higher tax brackets. The tax cuts also provided for a zero tax to the extent a taxpayer is in the 10 and 15 percent income tax brackets. Qualified dividend income, which had been taxed at ordinary tax rates, also became eligible for the lower capital gains rates under the Bush era tax cuts. These lower rates are scheduled to expire after 2010. Congress has extended the lower rates for both long-term capital gains and qualified dividends for two additional years, through the end of 2012.

Itemized Deduction Limitation – Prior to the Bush era tax cuts, itemized deductions were partially phased out for higher-income taxpayers. This phase-out was gradually eliminated beginning in 2006 and is totally repealed for 2010. However, the full phase-out was scheduled to return in 2011. Congress has extended the repeal for two additional years, through the end of 2012.

Personal Exemption Phase-Out – As with itemized deductions, prior to the Bush era tax cuts, the personal exemptions were phased out for higher-income taxpayers. This phase-out was gradually eliminated and was totally repealed for 2010. However, the full phase-out was scheduled to return in 2011. Congress has extended the repeal for two additional years, through the end of 2012.

Marriage Penalty Relief – Prior to the Bush era tax cuts, the standard deduction for a married couple was not twice the amount of the standard deduction for a single individual. Instead, it was only 167% of the single amount even though there were two people instead of one. This was often referred to as the “marriage penalty.” As part of the Bush era tax cuts, the marriage penalty was eliminated and the standard deduction for a married couple filing jointly became twice the amount for a single taxpayer. The marriage penalty also applies to the high-end cut-off point for the 15% tax bracket.

The marriage penalty was scheduled to resume in 2011. However, Congress has extended the repeal for two additional years, through the end of 2012.

Child Tax Credit – For several years, the maximum child tax credit has been $1,000 per qualified child, and, for 2009 and 2010, a portion of that credit was refundable for certain lower-income taxpayers. The credit was scheduled to drop back to $500 per child and the refundable portion reduced beginning in 2011. Congress has extended, for two additional years, the $1,000 per child credit and the enhanced refund portion, through 2012.

Earned Income Credit (EIC) – There have been a number of enhancements in the past several years including additional credit when there are three or more qualifying children and increased income beginning and end points of the EIC. Congress has extended the EIC enhancements for two additional years, through 2012.

Dependent (Child) Care Credit – As part of the Bush era tax cuts, the maximum expenses qualifying for dependent care credit were raised from $2,400 ($4,800 for two or more qualifiers) to $3,000 ($6,000 for two or more qualifiers) and the income-based maximum credit percentage was raised from 30% to 35%. However, these increases were scheduled to revert to the lower amounts in 2011. Congress has extended the higher expenses limits and credit percentage through 2012.

American Opportunity Tax Credit (AOTC) – For 2009 and 2010, the Hope education credit was replaced by an enhanced AOTC. The AOTC provides a maximum credit of $2,500, of which up to 40% can be refundable, whereas the Hope credit maximum is $1,800 and the credit is not refundable. Generally, tax credits can only be used to offset an individual’s tax liability and any excess is lost, thus the term “refundable” means a portion of the credit in excess of the tax liability can be refunded to the taxpayer.

Without extension, the AOTC was set to expire after 2010 and revert to the lower Hope credit levels without any refundable portion. Congress has extended the AOTC for two additional years, through 2012.

Above-the-Line Tuition Deduction - Taxpayers were allowed up to a $4,000 above-the-line deduction for qualified higher education tuition and related expenses. This deduction expired at the end of 2009. Congress retroactively reinstated this deduction for 2010 and extended it through 2011.

Coverdell Educational Accounts – Coverdell accounts are accounts where taxpayers can contribute funds to pay for future educational needs of their children. The amount contributed is not deductible, but the future earnings of the accounts are not taxable if used to pay for qualified education expenses. For several years, the annual maximum contribution limit to a Coverdell account has been $2,000, but was scheduled to revert to a maximum of $500 in 2011. Congress has extended the $2,000 limit for two additional years, through 2012. Also to be extended for the same time period for Coverdell distribution purposes is the definition of education expenses to include elementary and secondary school expenses.

Teacher’s $250 Above-the-Line Deduction – The special deduction for classroom expenses, which allows educators to deduct up to $250 of expenses whether or not they itemize their deductions, had expired after 2009, but it has been retroactively reinstated for 2010 and extended through 2011.

Option to Deduct Sales Tax In Lieu of State Income Tax - For several years through 2009, taxpayers had the option of deducting on Schedule A as part of their itemized deductions the LARGER of: (1) State and local income tax paid, or (2) State and local sales tax paid during the year. That option expired at the end of 2009. Congress has retroactively reinstated this option for 2010 and extended it through 2011.

Home Energy-Savings Improvement Credit – For 2009 and 2010, taxpayers were allowed a 30% credit for home energy-savings improvements with a 2-year combined maximum of $1,500. For 2011, that credit has been replaced by the more restrictive credit rules in place during 2006 and 2007 with a less lucrative 10% credit and a $500 lifetime cap. Additionally, certain efficiency standards that were weakened in the American Recovery and Reinvestment Act are restored to their prior levels, and the provision provides that windows, skylights and doors that meet the Energy Star standards are qualified improvements.

Unemployment Compensation – Congress has extended federal unemployment benefits through 2011; unemployment benefits continue to be taxable income. (For 2009, the first $2,400 of unemployment compensation received per person was excluded from being taxed; extension of this exclusion to 2010 or later years is not part of the new tax bill.)

Payroll Tax Reduction – The Making Work Pay credit, which was part of the 2009 stimulus package, provided a credit of up to $400 ($800 for married couples filing jointly), subject to income limitations, and expires after 2010. The credit has been replaced for one year only (2011) with a 2 percentage point reduction in the employee’s portion of the payroll tax (OASDI) from 6.2% to 4.2%. The reduction applies to all wage earners regardless of income. The employer’s share of the payroll tax is unaffected. For wage earners with payroll in excess of the $106,800 payroll tax cap, their savings for 2011 will be $2,136 (2% of $106,800). The OASDI portion of the SE tax for self-employed individuals would also be reduced by 2 percentage points, reducing the overall SE tax from 15.3% to 13.3%.

Tax-Free IRA to Charity Distributions Reinstated

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

Important - Because the extension of this benefit was passed so late in December, Congress included a provision that allows transfers made in January of 2011 to be treated as if made in 2010. Thus, the distribution counts against the 2010, not the 2011, $100,000 exclusion limitation and can be used toward a taxpayer’s 2010 minimum distribution requirement if it hasn’t already been met.

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

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.

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

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

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

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

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

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

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

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

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

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

BUSINESS PROVISIONS

Bonus Depreciation – Generally, business assets cannot be written off in the year of purchase and must be depreciated over their useful life. As an incentive to jump start the economy and promote business investment in recent years, Congress has allowed a bonus depreciation of 50% of the cost of the investment in equipment and certain leasehold improvements. Congress has increased the bonus depreciation to 100% for qualified investments made from Sept. 9, 2010 through Dec. 31, 2011. New business equipment placed in service in 2012 will be eligible for a bonus depreciation of 50%. This generally provides a tax break for large businesses and others that can’t take advantage of the Section 179 expensing deduction because of income limitations.

Section 179 Expense Deduction – For 2011, taxpayers are able to expense (rather than depreciate) up to $500,000 of the cost of certain capital expenses. Under the compromise agreement starting in 2012, the maximum Sec.179 expense will drop to $125,000, indexed for inflation.

Research Tax Credit – The research tax credit expired at the end of 2009. Congress has reinstated the credit for 2010 and extended it through 2011.

If you have questions related to these changes, please give the office a call.

Read More

Limited Liability Companies Must File Annual Reports Starting in 2011

Pursuant to Section 79-29-215 Miss. Code Ann. (1972), all limited liability companies operating in Mississippi will be required to file an Annual Report with the Secretary of State starting with the calendar year 2011. The new LLC Annual Reporting Form will be available to the public beginning Monday, January 3, 2011, on the Secretary of State's website, www.sos.ms.gov. The deadline for completing the report is April 15th of each year.

Mississippi LLCs may submit their report without charge. The report can be completed and submitted online. The form is also available to print off for mailing.

For out-of-state or 'foreign' LLCs, a fee of $250.00 is required. Foreign LLCs must print off their report and submit it with payment. There is no online filing for foreign LLCs.

Click here to see Mississippi Secretary of State's LLC Annual Filing Form and other information.

If you have any questions, please contact our office.

Read More

Dividing an Inherited IRA Before Year-End Can Improve Tax Results for Each Beneficiary

December 31, 2010 is an important deadline for individuals who inherited an IRA from an IRA owner who died in 2009. Where there are multiple beneficiaries for the IRA, splitting up the account into several accounts can yield important tax and other benefits for each beneficiary.

When an inherited IRA has several beneficiaries and is left in one account, the required minimum annual distributions are based on the age of the oldest beneficiary (shortest life expectancy) rather than the life expectancy of each beneficiary. This can be a disadvantage for younger beneficiaries by making them withdraw from the IRA in a shorter period of time than would be required based on their own age.

In addition, having the funds of all beneficiaries in one account forces them to utilize the same investment strategy.

These issues can be overcome by splitting the IRA into separate sub-accounts for each beneficiary. Thus, the annual required distribution will be minimized (based on each individual beneficiary’s life expectancy), allowing each to employ their own individual investment strategy.

However, splitting the IRA into sub-accounts for each beneficiary must be accomplished by December 31 of the year following the death of the IRA owner. Thus, for IRA owners that passed away in 2009, the deadline to split the IRA into sub-accounts is December 31, 2010.

If you have any questions related to this strategy, please give our office a call.

Read More

Maximizing Credits to Reduce Taxes

There are a number of credits that can help reduce your tax bite for 2010. Unlike a deduction (which reduces your taxable income and thus provides a benefit equal only to the deduction amount times your tax rate), a tax credit is a dollar-for-dollar reduction of your tax. For some credits―such as the Earned Income Tax Credit, Child Tax Credit, Child and Dependent Care Credit, and others―there’s not much you can do to change the outcome. However, there are some credits, described below, that offer year-end tax planning opportunities.

Maximize Education Credits – If you have a child in college for whom you claim a dependent exemption and you or someone else is paying the tuition for that child, you probably qualify for either the American Opportunity Credit or the Lifetime Learning Credit. The credits begin to phase out for higher-income taxpayers whose modified adjusted gross income is $80,000 or more ($160,000 for married couples filing a joint return). 

• American Opportunity Credit - Maximum credit is obtained from $4,000 of tuition and qualified expenses that provides a credit up to $2,500 (100% of the first $2,000 and 25% of the balance). Under normal circumstances, education credits are non-refundable; that is, they offset only a taxpayer’s tax liability. However, for this credit, up to 40% can be refundable.
• Lifetime Learning Credit - Maximum credit is obtained from $10,000 of tuition and qualified expenses that provide a 20% credit up to $2,000.

 

If you have not already paid the maximum expenses for the year, it may be appropriate for you to prepay certain expenses that apply to the first quarter of 2011. The laws generally allow you to prepay tuition for an academic period that begins during the first three months of the next tax year, and then you can claim the prepaid amount for the current year’s credit. Please contact this office for additional information on this tax strategy or other issues relating to education tax benefits and credits.

Take Advantage of the Home Energy Property Tax Credit – 2010 is the final year to take advantage of the “Home Energy Property Credit” that provides a tax credit for energy-saving improvements made to a taxpayer’s principal residence. The credit is limited to $1,500 (30% of up to $5,000 of qualified expenditures) for improvements made in 2009 and 2010. So, if you claimed this credit in 2009, the most you can claim for energy property improvements for 2010 is the $1,500 maximum less any amount claimed in 2009.

 

Qualified improvements (those certified by the manufacturer to qualify for this credit), the use of which must originate with the taxpayer, must have a reasonable expected life of at least five years, and include: 

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

Credit is not allowed for onsite preparation, assembly, or installation of the component. It is a non-refundable personal credit; thus, the credit can be used only to bring your tax (including the alternative minimum tax) down to zero. Any excess is not refundable and cannot be carried over to a subsequent year.

 

Pick a Hybrid or Lean-Burn Vehicle – If you are planning to purchase a new automobile before the end of the year, it might be appropriate to purchase either a hybrid or lean-burn vehicle. Credits for these types of vehicles range from $900 to $2,350. However, this credit has phased out for most manufacturers and is currently available only on qualified vehicles manufactured by General Motors, Chrysler, Nissan, Mazda, BMW, and Mercedes for hybrid vehicles, and by Volkswagen, Audi, and Mercedes for qualifying lean-burn vehicles.

 

This credit is a non-refundable personal credit, which means it can reduce your tax only to zero, and any balance is lost. However, if the vehicle is used partially for business, the portion of the credit attributable to business use becomes a general business credit, and any amount not used in 2010 carries back one year and forward for 20 years until used up.

 

If you have questions about how any of these credits will impact your specific circumstances or would like to schedule a year-end planning appointment, please call our office.

Read More

Tips for Year-End Donations

The year-end brings the holidays and a barrage of charitable solicitations. It is also your last chance to make a charitable contribution and obtain a deduction for 2010.

Over the past few years, the IRS has tightened the recordkeeping rules for charitable contributions. Therefore, it might be appropriate to review the recordkeeping requirements before making your year-end donations to your favorite charities.

Rules for Clothing and Household Items - To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.

Guidelines for Monetary Donations - To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

Reminders – Here are some additional reminders to help taxpayers plan their holiday-season and year-end giving:

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2010 count for 2010. This is true even if the credit card bill isn't paid until 2011. Also, checks count for 2010 as long as they are mailed in 2010 and clear the bank shortly thereafter.
  
• Verify that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found at IRS.gov under Search for Charities. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.
  
• For individuals, only taxpayers who itemize their deductions can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction. A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. If you only marginally itemize your deductions, it may be appropriate for you to "bunch" your deductions in alternating years to maximize your itemized deductions in one year and then take the standard deduction in the other.
  
• For all donations of property, including clothing and household items, you must have written confirmation from the charity that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity's unattended drop site, a written confirmation from the charity is not required, provided that all such undocumented contributions for the year are less than $250 and a written record of the donations is kept that includes the information listed above, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
  
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor's tax return.
  
• If the amount of a taxpayer's deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
  

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

Read More

Is it Best to Maximize or Minimize Deductions?

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:

• 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.

• 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:

• 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.

• 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.
  

• 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).

• 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 our office for an appointment.

Read More

Pick a Hybrid or Lean-Burn Vehicle

If you are planning to purchase a new automobile before the end of the year, it might be appropriate to purchase either a hybrid or lean-burn vehicle. Credits for these types of vehicles range from $900 to $2,350. However, this credit has phased out for most manufacturers and is currently available only on qualified vehicles manufactured by General Motors, Chrysler, Nissan, Mazda, BMW, and Mercedes for hybrid vehicles, and by Volkswagen, Audi, and Mercedes for qualifying lean-burn vehicles.

This credit is a non-refundable personal credit, which means it can reduce your tax only to zero, and any balance is lost. However, if the vehicle is used partially for business, the portion of the credit attributable to business use becomes a general business credit, and any amount not used in 2010 carries back one year and forward for 20 years until used up.

Read More

Capital Gains Strategies

One of the greatest benefits of the tax code is the special tax rates that currently apply to gain recognized from the sale of capital assets held for more than a year (long-term). The special tax rates apply to virtually all capital assets including land, improved real estate, your main and vacation homes, and business assets in excess of the accumulated depreciation previously deducted. These special long-term capital gains (LTCG) rates for 2010 are 0% (yes that is correct - zero) to the extent your regular tax rate is in the 15% or 10% brackets and 15% for most other capital gains. These rates also apply for the alternative minimum tax. The following are some issues and strategies that you may find of interest before year's end.

Historically, the end of the year has been a good time to plan tax savings by carefully structuring capital gains and losses. Conventional wisdom has always been to minimize gains by selling "losers" to offset gains from "winners," and where possible, generate the maximum allowable $3,000 ($1,500 for married taxpayers filing separately) capital loss for the year.

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

For those who would benefit from the zero LTCG rate in 2010, it may be appropriate to sell assets and create long-term capital gains to the extent those gains would be taxed at the zero rate. However, this is a balancing act since LTCG also increases your income, which may push you into higher tax brackets. Of course, you can also use losses to offset the gains, and contrary to conventional strategy, you should only have enough losses to keep the gain within the zero tax rates. If your income is too high to take advantage of the zero tax rates, then continue to employ the conventional strategies discussed above.

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

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

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

Read More

Rental Owners Need to Prepare for the New 2011 Reporting Requirement

If you are a rental owner and during 2011 make payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income, the 2010 Small Business Jobs Act says that you are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider. In order to do that, you must obtain the payee's name, SSN and contact information before making payment. The IRS provides Form W-9 for that purpose.

There is a "Catch-22" you need to watch out for. Suppose you call a plumber and pay him $400 for a service call at your rental property and don't bother to have him complete and sign a W-9 since the amount is under $600. Later in the year, you need him again and pay him another $400 for the second service call at the rental. Again, you fail to obtain the completed W-9. Now you have a 1099 filing requirement but do not have the information you need to file the information returns in 2012. If the plumber can't be found, then you are left holding the bag. The moral of this story is to always collect a completed W-9 from the payee before paying him!

What happens if you don't meet your filing obligation? Well, there are monetary penalties! And as part of the 2010 Small Business Act, the penalties were doubled for information returns required to be filed after 2010. So if you are 30 days late filing the information return with the IRS or furnishing a copy to the payee, you are subject to a $30 per payee penalty. If the returns are more than 30 days late but filed by August 1, the penalty per payee is $60; if filed after August 1, the penalty jumps to $100 per payee.

The penalties can be substantial and you are cautioned to establish a procedure for obtaining W-9s from your service providers before the beginning of 2011. Note: Payments to incorporated businesses and those made for the purchase of merchandise are not included in these requirements until 2012.

When filing 1099s, your SSN or an Employee ID Number (EIN) must be included on the form provided to each payee. It may be in your best interest to file for an EIN so that individuals who are issued 1099s don't end up with your SSN.

Please call our office if you need assistance.

Read More

New Roth IRA Opportunities

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.

Read More

Beware of a New Fraud Risk!

There is a fraud risk related to the Electronic Federal Tax Payment System (EFTPS) that you need to be aware of.

Always remember that the IRS does not initiate taxpayer contact by e-mail. Therefore, if you receive an e-mail that appears to be from a tax agency telling you that your federal electronic funds transfer (EFT) payment did not go through, it is part of a phishing scheme and you should not respond to it. The perpetrators of this scheme have duplicated the IRS's EFTPS logo and other characteristics of that system in an attempt to convince taxpayers that it is an official e-mail from the IRS. It is not!

If you receive a message claiming to be from the IRS or EFTPS, take the following steps:

1. Do not reply to the sender, access links on the site, or submit any information to them.

2. Forward the message as-is immediately to IRS at phishing@irs.gov.

3. Visit the IRS website to find out how to report and identify phishing, e-mail scams and bogus IRS websites.

4. If you receive a suspicious e-mail or discover a website posing as the IRS, please forward the e-mail or URL information to the IRS at phishing@irs.gov.

5. EFTPS is a tax payment system provided free by the U.S. Department of Treasury.

Whenever you receive a communication from the IRS, it is generally good practice to contact our office before responding.

Read More

Tax Rumors Abound

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 our office a call.

Read More

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

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.

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 our office a call.

Read More

Over-the-Counter Medication and Medical Reimbursement Plans

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.

Read More

Is Your Business Ready for 2011 Credit Card Income Reporting?

Beginning for sales made 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 just like 1099s for interest, dividends, pensions, etc., are. Unlike other 1099 forms, the 1099-K will actually break the income down by the month. The first 1099-Ks will be issued in early 2012.

Individuals and merchants with Internet sales (e.g., eBay and their online sales) that utilize an internet payment system such as PayPal can expect to see those sales included in this new reporting requirement if their annual third-party transactions total more than $20,000 and the number of transactions is over 200.

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 those payment 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 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 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—it is not considered a payment card transaction.

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

Read More

Will You Be Hit by the AMT in 2010?

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.

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

Standard Deduction – For AMT purposes, there is not a standard deduction as there is with the regular tax computation. Thus, taxpayers affected by the AMT should always itemize. Granted 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 our office for further assistance.

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

Read More

Time is Running Out for the Home Energy Property Credit

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:

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

Credit is not allowed for 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 our office a call.

Read More

New Penalties for Failure to File or Furnish Information Returns

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.

	Small Businesses		General
	Filings in 2010	Filings after 2010	Filings in 2010	Filings after 2010
Tier 1	$15 (Max $25,000)	$30 (Max $75,000)	$15 (Max $75,000)	$30 (Max $250,000)
Tier 2	$30 (Max $50,000)	$60 (Max $200,000)	$30 (Max $150,000)	$60 (Max $500,000)
Tier 3	$50 (Max $100,000)	$100 (Max $500,000)	$50 (Max $250,000)	$100 (Max $1,500,000)

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 our office a call.

Read More

New Breaks for Small Businesses

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 newsletters.

• 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.
  
• 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.
  
• 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).
  
• 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.
  
• 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).
  
• 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).
  
• 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.
  
• 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.
  
• 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 our office a call.

Read More

Does the IRS Owe You Money??

If you have not filed a prior year tax return and are due a refund, you should consider filing the return to claim that refund. If you are missing a refund for a previously filed tax return, you should check the status of your refund and confirm your current address.

Unclaimed Refunds

Some people may have had taxes withheld from their wages but were not required to file a tax return because they had too little income. Others may not have had any tax withheld but would be eligible for the refundable Earned Income Tax Credit.

• To collect this money, a return must be filed with the IRS no later than three years from the due date of the return.
  
• If no return is filed to claim the refund within three years, the money becomes the property of the U.S. Treasury.
  
• There is no penalty assessed by the IRS for filing a late return qualifying for a refund.
  

Undeliverable Refunds

Were you expecting a refund check but never received it?

• Refund checks are mailed to your last known address. Checks are returned to the IRS if you move without notifying the IRS or the U.S. Postal Service.
  
• You may be able to update your address with the IRS on the "Where's My Refund?" feature available on IRS.gov. You will be prompted to provide an updated address if there is an undeliverable check outstanding within the last 12 months. If you do not have access to the Internet, please call this office for assistance.
  
• You can also ensure the IRS has your correct address by filing Form 8822, Change of Address.
  

If you need assistance in filing past due returns or tracing a refund, please call our office.

Read More