Don't Overlook the Small Employer Health Insurance Credit

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

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

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

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

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Sales Tax on Home Sales Rumor

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

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

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

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

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

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

 

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Back to School Tips for College Students and Parents

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

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

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

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

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

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

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

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Your Broker’s 1099 Statement Will Be Different for 2011

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

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

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

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

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

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

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

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

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

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Complete our Survey and Enter to Win an Amazon Kindle

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

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

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Things to Know about Farm Income and Deductions

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

1. Crop Insurance Proceeds — You must include in income any crop insurance proceeds you received as the result of crop damage. You generally include them in the year they were received.
2. Sales Caused by Weather — If you are a cash-method farmer and sell more livestock, including poultry, than you normally would in a year because of drought, flood, or other weather-related conditions, you may be able to postpone reporting the gain from selling the additional animals until the next year. To qualify, your area must be designated as eligible for federal assistance.
3. 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.
4. 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.
5. Employees and Hired Help — Reasonable wages paid for laborers hired to perform your farming operations can be deducted. This includes full-time and part-time workers. You must withhold Social Security, Medicare, and income taxes on employees.
6. Items Purchased for Resale — You may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and freight charges for transporting livestock to the farm.
7. Net Operating Losses — If your deductible expenses from operating your farm are more than your other income for the year, you may have a net operating loss. You can carry that loss back five years or over to future years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.
8. 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.
9. 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.
10. Optional Farm Self-Employment Tax Method — A special method of computing the self-employment (SE) tax for farmers allows a taxpayer to continue SE tax coverage even in years when profits are small (or even when there is a loss). A taxpayer who uses one of the optional methods for figuring SE tax also uses the resulting imputed income when calculating the credit for child and dependent care expenses and the earned income credit.
11. Exclusion of Farm Debt Forgiveness Income – Generally, when a lender forgives or cancels a debt, the debtor must report the forgiven debt as cancellation of debt (COD) income on their tax return unless an exception applies. First, the farm debt is excluded to the extent that the taxpayer is insolvent. An additional farm debt is also excluded under a special farm debt exclusion, provided the indebtedness was incurred directly in connection with the trade or business of farming, and 50 percent or more of the aggregate gross receipts of the taxpayer for the three tax years before the tax year in which the discharge of the indebtedness occurs is attributable to the trade or business of farming. This exclusion is limited to the sum of the taxpayer’s tax attributes and basis of qualified property.

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

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Tax Breaks for Charity Volunteers

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

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

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

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

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

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Getting Older With No Retirement Savings in Sight?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Taxpayers should be wary of any of the following:

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

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

 

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

 

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

 

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

 

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

 

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Next Year's Tax Refund May Be Lower

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

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

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

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Manage the Tax on Your Social Security Benefits

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

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

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

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

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

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

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

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

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

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

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Tips to Help You Determine if Your Gift is Taxable

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


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

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

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

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

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

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

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

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

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

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

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

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Is the IRS Withholding Some or All of Your Refund?

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

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

1. If you owe federal or state income taxes, your refund will be offset to pay those tax liabilities. If you had other debt such as child support or student loan debt that was submitted for offset, FMS will take as much of your refund as is needed to pay off the debt and will send it to the agency authorized to collect the debt. Any portion of your refund remaining after an offset will be refunded to you.
2. 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.
3. 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.
4. If you filed a joint return and you are the spouse who is not responsible for the debt, but are entitled to a portion of the refund, you may request your portion by filing IRS Form 8379, Injured Spouse Allocation. If you know that your spouse has outstanding debts and anticipates an offset, you can attach Form 8379 to your original individual tax return. If not, it can be filed by itself after you are notified of an offset.
5. If you reside in a community property state, overpayments (refunds) are considered joint property and are generally applied (offset) to legally owed past-due obligations of either spouse. There are exceptions; please call for additional details.

For assistance with completing Form 8379, please call.

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Limited Window of Opportunity on Bush-era Tax Breaks

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

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

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

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

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

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

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

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

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

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Standard Mileage Rate Boosted July 1

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

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

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

 

To see the IRS announcement, click here.

 

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

 

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