Check these vehicle tax breaks for 2009
Did you contribute to the popularity of the "Cash for Clunkers" program or the recently announced profitability of a major car company? If so, keep the paperwork for your new vehicle handy. You might be eligible for deductions on your 2009 federal income tax return.
Here are some current year tax breaks.
- Sales tax deduction. New for 2009, this deduction is available on your personal income tax return whether you itemize or take the standard deduction.
The deduction is for state and local sales and excise taxes paid on the first $49,500 of the purchase price. It applies to that new car, light truck, motorcycle, or motor home you bought between February 17 and December 31, 2009. Multiple vehicles can qualify.
The deduction begins to phase out when your income reaches $250,000 on a joint return ($125,000 for singles).
- Increased depreciation deduction. Depending on the type of vehicle you purchase for your business, you could qualify for a Section 179 depreciation write-off of up to $250,000 for 2009. (SUVs are limited to $25,000.)
A special depreciation deduction is also available. This "bonus" depreciation increases the amount of first-year depreciation on new passenger autos used in your business to as much as $10,960 ($11,060 for vans and light trucks).
- Business mileage deduction. Do you use your new vehicle to run business errands, make sales calls, or conduct other business? Update your log book for 2009 to reflect where you went and what you did, and you can deduct 55¢ for each business mile you drove.
Please contact our office for advice on these and other vehicle tax incentives, such as credits for electric and energy efficient vehicles.
Know the rules for backup withholding
As you organize your payroll records for year-end processing, it's a good time to make sure you're complying with backup withholding rules. These rules come into play when you make payments such as rents, commissions, or fees to businesses or individuals who have not supplied you with a valid taxpayer identification number (TIN).
What's backup withholding? It's a 28% tax that you're required to withhold from payments your business makes to certain vendors. Backup withholding applies when a vendor fails to give you a TIN or when the IRS informs you a vendor's TIN is incorrect.
How does backup withholding work? Say you hire an independent contractor to design a website for your business. The contractor operates as a sole proprietor.
You know you have to file "Form 1099-MISC, Miscellaneous Income," when you pay more than $600 for certain services to a noncorporate payee (some corporate payees also) in the course of your business during the year. You ask for a TIN by sending the contractor a blank "Form W-9, Request for Taxpayer Identification Number and Certification."
The contractor ignores your request.
Under the backup withholding rules, you begin withholding 28% of the payments you make. You continue to withhold until the contractor supplies you with a valid TIN.
Until you receive the valid TIN, you remit the backup withholding to the IRS in the same way you make other payroll tax deposits.
In January, you file "Form 945, Annual Return of Withheld Federal Income Tax." You also report the backup withholding on the Form 1099 that you issue to the vendor.
Please call if you are missing TINs from vendors or others with whom you have a business relationship. We can guide you through the steps you'll need to take to avoid penalties.
Tax issues come with gifting stock
Unless you're giving gift cards, you probably remove the price tags from presents you buy for others. But there's at least one situation when admitting how much you paid is not a social faux pas: when you give stock. In that case, telling the recipient what you paid for the investment, its current worth, and how much gift tax you paid on the transfer can save tax dollars down the road.
Here's why. The person to whom you give the stock generally receives your basis along with the shares. Your holding period carries over, too.
How it works. Say you bought a stock that's now worth more than you paid for it. You decide to gift it to your daughter. To calculate the gain when she sells the stock, your daughter will need to know your original purchase price plus adjustments such as commissions. She'll use the date you purchased the stock to determine whether the gain is short- or long-term.
The fair market value at the time of the gift comes into play when the stock is worth less than you paid for it. When this happens, the recipient receives what's called a dual basis. That means she'll use your carried-over adjusted basis if she sells the investment at a gain. If she sells at a loss, she'll use the lower of your basis or fair market value.
The fair market value also determines the amount of your gift — and any tax. When you give more than $13,000 ($26,000 if you and your spouse combine gifts) to any one person in 2009 or 2010, you may have to pay gift tax. A portion of that tax can increase the recipient's basis.
Please call if you're planning gifts of stocks or other investments this holiday season. We'll be happy to help you wrap up the tax numbers.
Shareholder loans can be taxing if you don't follow the rules
Whether you're considering putting money into your corporation this year or taking money out, your loans could have tax consequences.
Here are tips to keep in mind before you write those checks.
- Document your intent. Create a paper trail with an enforceable promissory note and a mention of the transaction in your corporate minutes. Can't be bothered with the paperwork? Think of this: Money you put into — and later take out of — your company that is not considered a "true loan" can be reclassified as wages or dividends, costing you tax dollars.
- Charge interest. Except for certain small loans that qualify for an exception, the payment of interest is an indication of a true debtor-creditor relationship between your company and you. To avoid the possibility of the IRS calculating the amount of interest you should have paid, you can use the "applicable federal rate," or AFR. The AFR is a minimum interest rate for federal tax purposes that's determined monthly by the Treasury.
- Make payments. Set up an amortization schedule reflecting the loan maturity, interest rate, and payment due dates shown in your promissory note. Write checks as required on the due dates. If you miss a payment, revise your promissory note. Why? Keeping transactions at arm's length can help prevent loans to and from your company from looking like a dividend distribution or a second class of stock.
While there are pitfalls to be aware of, properly structured shareholder loans can offer planning opportunities. Please call if you would like more information.
Hiring seasonal employees? What you need to know
Thinking of bringing seasonal workers on staff to help out during your busy season?
Keep in mind that these temporary workers are typically subject to the same employment tax rules as your regular employees. You'll generally have to withhold social security and Medicare taxes, as well as federal income tax from their wages. You'll also have to follow payroll tax deposit rules and employment return filing requirements.
There are special filing rules if you only hire employees at a specific time of year, such as the holiday season. For each quarter that you pay wages, you can check the box for "seasonal employer" on Form 941, "Employer's Quarterly Federal Tax Return." By notifying the IRS of your seasonal status, you're not required to file returns for quarters when you have no wages or tax liability.
State rules regarding seasonal employees vary. In addition to reporting these employees as new hires and filing quarterly state payroll reports, you may have to request classification as a seasonal employer by completing a special form. In some states, you're required to reapply periodically. Qualifying as a seasonal employer can affect your staff's eligibility for unemployment benefits as well as your experience rating, which determines your tax rate.
When you hire seasonal farm or agricultural workers, additional rules may apply, even if you pay your help in cash.
Please call for more information about payroll tax rules, recordkeeping requirements, and documentation for seasonal employees. We're here to make sure your busy season goes smoothly.
Don't get tripped up by a wash sale
Are you eyeing your portfolio with year-end investment loss harvesting in mind? Before you place those sell orders, take a moment for a brief arithmetic quiz.
- First question: When does 30 plus 30 equal 61?
Answer: When you run afoul of the wash sale rules, a section of the Internal Revenue Code that prevents you from claiming a current loss on certain investments you sell, then reacquire within a short time period.
- Second question: Why the seemingly odd math?
Answer: In addition to the thirty days before you sell the investment and the thirty days after, the wash sale rules include the day of the sale.
The rules apply to losses generated by transactions involving "substantially identical" stocks and securities, including mutual funds and stock or option grants you receive as part of your compensation. Whether one security is considered substantially identical to another depends on several factors. Generally stocks or bonds in different companies — even those in the same industry — are not substantially identical.
Wash sales can occur when you repurchase the security in your IRA, or when your spouse or a company you control does the buying.
While wash sale rules defer capital losses, in most cases you'll eventually get the benefit, since the disallowed loss is added to the basis of the reacquired securities. The holding period of the original security is also carried over, creating planning opportunities.
Please call for more answers and information about wash sales. We'll help make sure your investment decisions add up.
New law includes two important tax changes
Are you wondering if any part of the Worker, Homeownership, and Business Assistance Act of 2009 will affect your 2009 federal income tax return? The answer is... maybe.
Here's an overview of two tax provisions in the law, which became effective November 6, 2009.
Changes to the first-time homebuyer tax credit. This refundable credit is now available through April 30, 2010. There's an additional 60-day extension if you have a binding, written contract as of April 30 and close by June 30.
The Act also increases the income threshold that applies before the maximum credit of $8,000 begins to phase out. For homes purchased or closed from November 6, 2009, to June 30, 2010, modified adjusted gross income can be as high as $225,000 when you're married filing jointly ($125,000 if you're single).
Another new rule: You're a "first-time homebuyer" if you used the same residence as your main home five consecutive years of the eight years prior to buying your new house. There's a catch: Qualifying under this "long-time resident" rule limits your credit to a maximum of $6,500.
Additional restrictions:
- You'll have to attach a copy of your settlement statement to your tax return.
- No credit is allowed for homes with a purchase price greater than $800,000.
Business net operating loss carryback extension. If your business will report a loss in 2009, you can elect to offset taxable income from the prior three, four, or five years.
The revised provision allows more businesses to take advantage of net operating losses by removing the gross receipts restriction in the prior law. However, when you carry a 2009 loss back to the fifth preceding year, you can use it to offset only 50% of the taxable income in that year.
You can apply the new rules to your 2009 return even if you elected to carry back a 2008 loss under previous rules.
Please call for details and to discuss how these changes affect you.
Two IRA tax breaks are scheduled to expire soon
Holidays and gifts go together. If you have an IRA, that's especially true for 2009, the last chance to benefit from two federal income tax breaks that can affect year-end planning. The "holiday" for required minimum distributions and the provision for tax-free withdrawals to make charitable gifts both expire December 31.
Here's an overview.
- Required minimum distributions are suspended for 2009. For this year only, you have the option of skipping your required withdrawal from traditional IRAs and certain other qualified pension plans. The holiday applies to distributions you would have had to take because you're over age 70½ or are the beneficiary of an inherited traditional or Roth IRA.
Why the need to plan? Because even though foregoing a distribution lets you defer income, in some situations you can withdraw money "tax-free" this year — which might not be the case in 2010. For instance, when you have expiring carryovers or a net operating loss, the tax impact of an IRA distribution can be reduced.
If you received a 2009 distribution earlier in the year, you generally have until November 30th or 60 days after the receipt of the money to roll it over.
- Another thing to remember as you review your retirement accounts: the provision for tax-free distributions from your IRA to qualified charities is also scheduled to expire at the end of 2009.
You might consider taking advantage of this opportunity to make a donation of up to $100,000 to a charity if you're not able to itemize this year or if you've already contributed the maximum deductible amount.
Please call to talk about these and other IRA moves, such as updating beneficiary forms or rebalancing your investments. There's still time to discuss strategies and get the paperwork in place before the end of the year.
Take a tax deduction for worthless stock
Financial firms, car manufacturers, clothing retailers. As an investor, you know businesses in these industries went through bankruptcy proceedings in recent months — events that are painful to remember if you owned stock in a now defunct company. Once the investment is worthless, you might prefer to forget about it.
Not so fast! Even if a stock has no value on a securities exchange, you may still get some benefit in the form of a tax deduction.
How it works. When you own securities, such as stocks, stock rights, or bonds that become completely worthless, you can claim a capital loss on your tax return. You report the loss in the year the investment loses all value, using the last day of the year as the disposal date no matter when the stock stopped trading. That's important because it affects whether you have a short- or long-term capital loss.
Example. Say you owned common stock in a company that finalized bankruptcy proceedings this past July. You include the loss on your 2009 return, with December 31 as the date of disposal.
What if you just realized a stock became worthless in a prior year, but you forgot to claim the loss? Under a special rule, you generally have up to seven years from the due date of your original return to file for a refund.
Determining when a stock is completely worthless is not always as clear-cut as the situation this summer when management of a major car company announced shareholders would get nothing from pre-bankruptcy common stock. Alternative methods, including a sale to your brokerage firm or abandonment of the investment, can also secure the loss.
Give us a call. We can help you review your portfolio to make sure you can qualify to take a deduction for losses on your 2009 return.
Withdrawals from your SIMPLE IRA may not be so simple
Are you familiar with the SIMPLE IRA two-year rule? If you're thinking of withdrawing money from your SIMPLE IRA, running afoul of this special rule could cost you money.
Here's how. When you're under age 59½ and make a withdrawal within the first two years after your initial SIMPLE IRA contribution, you may have to pay a 25% penalty. The penalty is in addition to any ordinary income tax due on the amount you withdraw.
The 25% penalty also applies to transfers you might not consider distributions. Say you change jobs within the two-year period covered by the rule and want to make a tax-free, trustee-to-trustee transfer of your SIMPLE IRA assets to your new employer's retirement plan. You can't, because this type of transfer is not considered a rollover. Instead, it's a distribution, subject to the penalty.
What if you roll your SIMPLE IRA into another SIMPLE IRA while the two-year period is in effect? In this case, there's no 25% penalty on the transfer – but you'll pay it on any money you take out of the new SIMPLE IRA during the original two-year time frame.
Another situation to keep in mind. The penalty can apply even if you take a distribution within the first two years because your employer terminates your SIMPLE IRA.
Some exceptions are available, such as when you use distributions to pay college tuition or purchase a first home.
Please call so we can help you assess the impact of distributions from your SIMPLE IRA.
Savings bonds can help pay for college
Amid the evolving assortment of education tax breaks is a benefit that has survived since 1988 with few changes: the education savings bond program. When you qualify for this federal income tax exclusion, the interest you receive from bonds redeemed to pay for certain college expenses may be tax-free.
Are bonds you bought years ago eligible? It depends on when you bought them and how they're titled. Eligible bonds include Series EE or Series I savings bonds you purchased after 1989, as long as you were at least 24 years old when they were issued. The age restriction rules out bonds you put in the names of your kids or grandkids, though the children can be named as beneficiaries.
Once you're sure your bonds qualify for the exclusion, the next step is to find out if you meet the income limitation. In 2009, you can exclude all the interest income you receive from eligible savings bonds when you file a joint return and your modified adjusted gross income is less than $104,900 ($69,950 for singles). A partial exclusion is available until your income reaches $134,900 ($84,950 for singles), at which point the exclusion is no longer available.
Finally, the bonds must be redeemed in the same year you pay qualifying educational expenses for yourself, your spouse, or your dependent child. What expenses qualify? The definition includes tuition and fees that you pay out of pocket and for which you claim no other deduction or credit. You can also claim the exclusion when you use the bond proceeds to fund a 529 college savings plan or a Coverdell education savings account.
Savings bonds offer additional, less restrictive, opportunities for education and tax planning. For instance, it may make sense to put the bonds in your child's name and report the interest on an annual basis. Depending on your child's income, the interest could remain tax-free. Alternatively, you may choose to defer recognizing interest on bonds issued in your child's name until the bonds are redeemed.
Please call us to discuss these strategies and others that can help ease the burden of college costs.
Tax tips for first-time employers
So you're planning to hire your first employee? Congratulations on reaching the next level of success with your business! As a soon-to-be employer, you're probably wondering about your payroll tax responsibilities.
Here are four key employment tax concepts to get you started.
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Employee vs. independent contractor. The amount of control you have over your new worker affects your reporting obligations. For example, if you're paying for the on-line services of a self-employed virtual assistant, you may only need to file "Form 1099-MISC, Miscellaneous Income," at the end of the year.
In contrast, when support staff works in your office under your supervision, you are required to withhold employment taxes, make "matching" payments, and file payroll returns such as "Form W-2, Wage and Tax Statement."
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Employment tax withholding and expense. Federal income tax, social security tax, and Medicare tax are deducted from your employee's gross wages.
As an employer, you "match" the social security and Medicare taxes withheld, which means your business is responsible for paying an equal, or matching, amount of these taxes.
Other business payroll tax expenses include federal and state unemployment and industrial accident insurance.
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Paying employment taxes. As a general rule, you remit the taxes withheld from your employee's wages, plus your matching amount, by completing "Form 8109, Federal Tax Deposit Coupon," and making a deposit to your financial institution each month.
An electronic payment system is also available. Depending on how much you owe, you might have the option of mailing a check with your payroll tax return.
Federal and state unemployment taxes may be payable quarterly or annually.
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Employment tax returns. An employer's federal tax return is typically filed four times per year, at the end of each calendar quarter. The return shows the amount of wages you paid, taxes you withheld and deposits you made. State payroll forms may also have a quarterly filing requirement.
You file federal unemployment tax returns, as well as state and federal wage and tax statements, on an annual basis.
Please contact us for more detailed information about employment tax issues. We'll be happy to help you set up a payroll system designed for your business.
First-time homebuyer credit to expire November 30
Going, going.... soon to be gone. The first-time homebuyer credit, a federal income tax credit of up to $8,000, will expire November 30, 2009. If you're in the market for a home, you need to make sure the deal closes before December 1 to get the benefit.
Think you can meet the deadline, but not sure if you qualify? Here are the details.
- You have to be a first-time homebuyer. The definition is less restrictive than you may think. For purposes of the credit, you're a first-time homebuyer if you (and your spouse, if you're married) did not own another principal residence during the three years prior to the purchase of this one.
- To claim the full credit, your modified adjusted gross income must be less than $75,000 ($150,000 if you're married filing jointly). You get a partial credit when you're single and your modified adjusted gross income is between $75,000 and $95,000. If you're married filing jointly, a partial credit is available if your income is between $150,000 and $170,000.
- The credit is refundable, so you might be eligible for a federal income tax refund even if you owe no tax.
In addition, you may remember that the credit was changed for homes purchased in 2009. One of the new provisions eliminated the payback requirement. As long as you live in your new home for three years after the purchase date, you can keep the entire amount.
Congress has been thinking of extending the deadline for the credit and perhaps even increasing the amount. However, if Congress fails to act, the current rules will stand, and this tax break will soon be gone.
Want to know more about the first-time homebuyer credit? Give us a call.
Closing your business has tax implications
If the reality of entrepreneurship differed from the dream, you might be thinking of wrapping up your business venture and pursuing other opportunities. As you're assessing the legal and operational aspects of closing your business, take time to consider the tax implications.
Here are two:
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Plan ahead to benefit from carryovers and other deductions. Did you operate your business as an S corporation? Be sure to check your basis before filing a final return. Losses you were unable to claim in prior years — called "suspended losses" — are of no value to you after liquidation. If possible, consider increasing basis by making capital contributions or loans to your company.
Also review prior-year returns for carryovers affecting the current year, such as credits you claimed that may need to be recaptured.
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File final tax returns. Are you closing your business midyear? Watch out for due dates that differ from the norm. For instance, when you terminate a partnership, a short-year Form 1065 must be filed within three-and-a-half months of the date of closing.
In addition to federal and state income tax forms, you may need to submit final payroll, sales, tangible, and excise tax returns, as well as pension or profit-sharing plan reports.
Additional filings may also be required, such as Form 966 (Corporate Dissolution or Liquidation) or Form 8594 (Asset Acquisition Statement).
Closing your business involves tough decisions. We're here to help ease the stress. Give us a call for checklists, advice, and tax-minimizing exit strategies.
You need basis to deduct an
S corporation loss
Losses can be hard to take — so if you think your S corporation will show a loss for 2009, now's the time to plan to make sure you'll get the full tax benefit.
The Problem. The amount of the business loss you can deduct on your individual income tax return is limited to your basis in your S corporation stock and certain corporate debt. This is true even though the loss reported to you on Schedule K-1 is greater than your basis.
Here's how it works. Typically, stock basis in an S corporation begins with the capital contribution you make to get the company started. (When you receive stock as a gift, an inheritance, or in place of compensation, your initial basis is calculated differently.)
At the end of each taxable year, your stock basis is adjusted to reflect the business's operating results. Taxable income increases your basis, while losses reduce it.
Basis is also increased by capital you put into your company and reduced by amounts you withdraw, such as distributions.
After your stock basis reaches zero, you may be able to deduct additional losses, up to the extent of your debt basis. That's the basis you have in loans you make to your company.
Once your stock and debt basis are both reduced to zero, losses incurred are suspended, which means you get no current tax benefit. However, you can generally take suspended losses in future years, when you again have basis.
The Solution. You can increase your basis — and your ability to take losses — by adding capital or making loans to your business.
Please call to discuss how basis affects your individual income tax return. We can guide you through the rules to optimize available breaks.
Unemployed? Pay health premiums from your health savings account
Health savings accounts (HSAs) have been around since 2004, so you're probably familiar with how they work: You combine a high-deductible health insurance policy with a special savings account used to pay qualified out-of-pocket medical expenses.
But did you know that when you're unemployed you may be able to make tax- and penalty-free withdrawals from your HSA to pay for health insurance premiums?
As a general rule, health insurance premiums are considered nonqualified expenses for purposes of HSA withdrawals. Funds you take from your HSA for nonqualified expenses are subject to federal income tax. In addition, a 10% penalty applies (assuming you're under age 65).
However, two exceptions are available when you're unemployed. You can use HSA funds to:
- Continue health insurance benefits after losing your job (for instance, if you elect COBRA continuation coverage as allowed under federal law), and
- Pay for health insurance premiums while you're collecting federal or state unemployment benefits.
Both exceptions generally apply to amounts you pay for yourself, your spouse, and your dependents.
Under current law, HSA withdrawals are subject to reporting requirements and other rules, and state income tax treatment can vary from federal law. Please contact us for details and assistance.
Some IRA terms you should know
Conversion, recharacterization, reconversion — when you want to make changes to your IRA, it may seem as though you need to learn a foreign language. But the best way to avoid penalties is to know the right term for the action you intend to take.
Here's a review:
- Conversion. Are you planning to move assets from your traditional IRA, SEP, or SIMPLE to a Roth? A conversion is a taxable distribution from one type of account to another.
To be eligible to make a conversion in 2009, your modified adjusted gross income must be less than $100,000. There's no income limit in 2010.
- Recharacterization. What if you've already completed a conversion and you're having second thoughts? A recharacterization lets you change your mind, without penalty.
In a recharacterization, you move the assets — along with the income earned on them — back to the original IRA.
You can also recharacterize contributions between IRAs. For instance, if you contribute to a Roth, you can switch the contribution to your traditional IRA. Just remember the maximum amount of combined contributions is $5,000 for 2009 ($6,000 when you're over age 50).
- Reconversion. A reconversion allows you to have second thoughts about your second thoughts. After you convert (say, a traditional IRA to a Roth), then recharacterize (from the Roth back to the traditional IRA), you can return those assets to the Roth (reconvert).
Recharacterizations and reconversions must be completed within specific time frames. Please contact our office for more information about making changes to your IRAs.
Employee or independent contractor? Don't misclassify workers
Are your workers properly classified as independent contractors? Or are they employees?
With the "tax gap" under scrutiny, Congress wants to learn the answer. Policy makers think misclassification of workers accounts for at least some of the gap, which is the difference between tax dollars the IRS believes are due and what is actually collected.
As attention turns to the issue, you may be wondering about the status of your workers, since the penalties for incorrectly treating an employee as an independent contractor can be severe.
Here's an overview of three categories of indicators that can help you decide.
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Behavioral control. The more control you have over the work performed, the more likely your workers are employees. Behavioral control includes the right to tell a worker how, when, and where to do the work, even if you don't exercise that right.
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Financial control. Do you pay for tools, equipment, facilities, and business and travel expenses? That can indicate an employer/employee relationship. Independent contractors typically take on a certain amount of financial risk.
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Type of relationship. Independent contractors usually provide the same or similar services to others and receive no employee-type benefits from you, such as paid vacation or sick days.
The categories are based on a list of factors the IRS uses as guidelines, but the final decision requires an objective facts-and-circumstances analysis of each situation. What matters is the substance of the relationship your business has with your workers. For help making the determination, please give us a call.
Take a penalty-free IRA withdrawal for medical expenses
Are you considering withdrawing funds from your traditional IRA to pay unexpected medical costs?
You may be hesitating because of the 10% penalty imposed on withdrawals made when you're under age 59½. Since the 10% is calculated on the total you withdraw, the tax hit could be substantial. Worse, the penalty typically is not withheld from the cash you receive, so you'll need to come up with the money when you file your tax return.
Fortunately, in some situations you can take penalty-free withdrawals from your IRA for medical expenses.
One example is the medical insurance exception, which applies if you lost your job and have received unemployment compensation for 12 consecutive weeks. IRA withdrawals used to pay medical insurance premiums for yourself, your spouse, or your dependents aren't subject to the 10% penalty, as long as you take the distributions in the year you receive unemployment (or the year after).
This exception may also be available if you were self-employed and are unable to collect unemployment benefits.
Another exception: You can take penalty-free withdrawals when you incur unreimbursed medical expenses that exceed 7.5% of your gross income. For instance, say your 2009 gross income is $30,000 and your total unreimbursed deductible medical expenses are $5,000. To determine the penalty-free withdrawal amount of $2,750, multiply $30,000 by 7.5%, then subtract the result ($2,250) from $5,000.
You don't have to itemize your deductions to qualify for this exception.
In addition, the penalty does not apply when early IRA withdrawals are due to a permanent, total disability.
For more information about the requirements for these and other exceptions to the 10% early withdrawal penalty, please contact us.
Your business vehicle expenses are deductible
You plot the fastest route to your client's office with an on-board navigation system. You use a hands-free cell phone to leave last-minute instructions for your staff on the way to the meeting. Your computer, presentation materials, and an extra shirt are in the back seat. In short, your vehicle is your office on wheels.
It's also a tax deduction.
Here's what you need to know to reap the benefits.
Overview: You can deduct auto expenses when you own or lease a vehicle and use it for business. Deliveries to customers, traveling to business meetings, and trips to the office supply store qualify as business use. Commuting generally doesn't, even if you discuss work on your phone while stuck in traffic.
The rules: You have two alternatives for calculating the deduction: actual costs or the standard mileage rate. If you choose standard mileage in the first year you use a vehicle you own for business, you can usually switch to actual costs in later years. Choosing standard mileage for a leased vehicle locks you in to that method for the term of the lease.
What's deductible? Under the actual cost method, deductible costs include depreciation, maintenance, gasoline, taxes, insurance, parking fees, and interest expense.
The standard mileage rate for business use during 2009 is 55 per mile. In addition, you can deduct the business portion of parking fees, tolls, certain taxes, and, if you're self-employed, interest on your vehicle loan.
How to benefit: Maintain a log of business and personal mileage and keep receipts. Having both lets you pick the method that generates the largest deduction.
Call us if you would like additional information on taxes and business driving.
Plan for the phase-out of tax breaks
Are you familiar with PEP and Pease? Though they sound like a pop duo, the terms refer to tax rules known as phase-outs that can impact how much federal income tax you owe.
Phase-outs are reductions in the amount of deductions, credits, and other breaks you can claim on your tax return. Though generally based on adjusted gross income, phase-outs vary in rate, amount, and how they're calculated.
Here's an overview of PEP and Pease.
Personal exemption phase-out (PEP). If you're married filing jointly for 2009 and your income exceeds $250,200, the PEP will reduce the amount you claim for yourself, your spouse, and your dependents.
The personal exemption for 2009 is $3,650. But when PEP applies and your income increases, your deduction is reduced accordingly.
This phase-out is itself being phased out under current law and will not apply in 2010.
Itemized deduction phase-out. You probably already know some itemized deductions are limited. For instance, to claim a deduction for medical expenses, your out-of-pocket costs for the year have to exceed 7.5% of adjusted gross income (AGI). Miscellaneous itemized deductions, such as unreimbursed employee business expenses, are limited to amounts over 2% of AGI.
There's also an additional phase-out called the Pease provision that limits the amount of total itemized deductions after the above reductions. For 2009, Pease kicks in when your income exceeds $166,800 ($83,400 if you're married filing separately).
Pease is scheduled to expire in 2010.
Other phase-outs limit the amount and deductibility of IRA contributions; the education, adoption, and childcare credits; the Section 179 expensing election; and the alternative minimum tax exemption. Please call for a review of how phase-outs affect you and what you might be able to do to avoid them.
Your business could benefit from the extended net operating loss carryback
In case you were wondering, there's still time to claim that 2008 net operating loss (NOL).
Thanks to a newly simplified procedure, if you operate an "eligible small business" or are a partner or shareholder in one, you might be able to benefit from the extended NOL carryback period enacted earlier this year.
- Background. Generally, when deductible business expenses exceed gross income during a year, you can use the loss to offset income reported on prior tax returns, subject to a two-year limit. Carrying the loss back nets you a refund of federal income tax paid during those preceding profitable years.
The stimulus bill changed the NOL carryback period for eligible small business losses occurring during 2008. For 2008 losses you can elect a two-, three-, four-, or five-year carryback.
(You qualify as an eligible small business when average annual gross receipts for the past three years are less than $15 million.)
- The hitch. The election to use the extended carryback period has to be made on the return showing the loss — in other words, your 2008 income tax form. There's no problem if you haven't yet filed. You simply pick the most advantageous carryback period and attach the election to your completed return.
But if you have already filed, you may have inadvertently forgotten to include the election, a situation the IRS says is common.
- The solution. As long as you did not previously decide against carrying the loss back, you can elect the new, longer time period by filing either a tentative refund claim or an amended return for the prior years. The forms must be filed within six months of the due date of your 2008 return.
Example: Your sole proprietorship suffered a loss for 2008. You have until October 15, 2009, to file either a refund claim or a return amending the years to which you choose to carry the loss back.
Making the appropriate choice is vital to maximizing your benefit under the new rule. Please call us to discuss the most advantageous election for your business.
Get credit for greening your home
True or false? The federal tax credit for energy efficient home improvements was not available for 2008 returns.
If you said true, you're right. Give yourself bonus points if you knew this tax benefit — called the credit for nonbusiness energy property — is back for 2009 and 2010, bigger and better than before.
- What changed? Instead of varying rates, the credit is now a uniform 30% for qualifying property, up to an increased maximum total of $1,500.
According to a recently released IRS notice, you can take the full amount even if you claimed the $500 credit that was available in prior years.
- What property qualifies? The list encompasses energy-efficient exterior skylights, windows and doors, specified roofing material, and insulation materials that reduce your home's energy loss.
There are other energy-efficient items that qualify for credits of varying amounts.
All property must meet specified energy standards.
- What are the requirements for claiming the credit? To benefit, you have to complete installation of qualifying property in your already existing U.S. home during 2009 or 2010.
In addition, for improvements to the outer shell of your home such as insulation, windows and doors, you must expect the property to remain in use at least five years.
For more information about this credit and others, please call.
When is income taxable, and when is it not?
You only have to examine your paycheck to realize certain income is tax-free. For example, health insurance premiums paid by your employer are generally not includible in your income.
Do you know the tax status of other types of income? Here's a quiz to test your knowledge.
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You tell your son he'll be the sole beneficiary of your estate, and that you've decided to give him an advance on his inheritance. You hand him a check for $10,000. He wants to know how much he'll have to pay in taxes. What do you tell him?
Answer: Gifts, bequests, devises, and inheritances are generally not taxable to the beneficiary. Income produced from those sources is taxable to the beneficiary.
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You withdraw $20,000 of the contributions you made to your Roth IRA over the past five years, but you're not of retirement age. Do you have a taxable event?
Answer: Unlike traditional IRAs, distributions from Roths are first allocated to amounts you contributed to the account. To the extent the distribution is a return of your contributions, it's not included in your income and you can withdraw it penalty- and tax-free.
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You purchase a piano at an auction and take it home. While cleaning it, you discover $5,000 inside. Is this money taxable to you?
Answer: Yes. Once it becomes yours, "treasure trove" property is taxable to you at fair market value.
IRS has a new procedure for correcting payroll returns
Have you seen the 94X series?
No, it's not the latest science fiction hit. The 94X series consists of five new forms designed to make it easier to correct errors on payroll tax returns.
The forms are the result of a procedure issued by the IRS that took effect this year. Instead of making corrections the old way, which involved a supporting statement attached to your regular payroll return, now you file a separate form.
Even better, you file the new form as soon as you discover the error, instead of waiting until after the end of a quarter, when payroll returns are usually due.
Illustration. Say you miscalculated the wages you paid your employees in February, and then reported the incorrect figure on the Form 941 for the quarter ended March 31. You find the mistake in August.
Under the new procedure, you can amend the initial return by completing Form 941X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, and mailing it to the IRS immediately.
You can use Form 941X to adjust taxable social security and Medicare wages and tips, as well as current year federal income tax withholding and any advance earned income credit paid to employees.
Other X-series forms include Form 944X, which you complete if you're an annual payroll return filer, and Form 943X, applicable if you have agricultural employees. A separate form is required for each period you correct.
Please call if you need help amending prior period payroll. We'll be happy to explain the new procedure and assist with other returns affected by the changes, such as state payroll, federal unemployment tax, and W-2 forms.
Capture tax breaks when you refinance
Did you refinance the mortgage on your home this year while interest rates were low? If so, be sure to put a copy of your closing statement in the file you're using to collect your 2009 tax information.
Why? Some of the settlement fees and closing costs might reduce your taxable income. For instance, points you paid to your lender in connection with the refinancing are typically considered deductible mortgage interest.
Ways you can benefit include:
- As a general rule, you can claim an itemized deduction for a portion of the points each year during the life of the loan.
Example: You paid $4,500 in points when you refinanced the mortgage on your home in May. The new loan has a term of 15 years (180 months). Assuming you make six payments on the mortgage during 2009, you can take an itemized deduction of $150 ($4,500 divided by 180 months times six months). That's deductible in addition to regular mortgage interest you pay.
- Did you use part of the refinancing proceeds to improve your home? In that case, the portion of the points associated with the improvements you made are fully deductible this year.
- If you have not completely amortized or deducted the points you paid on your original mortgage, you can deduct the remaining balance in the year you refinance.
You may also qualify for other deductions when you refinance, such as premiums you pay for qualified mortgage insurance. Please call if you need more information or assistance.
Prepare now for a possible disaster
There's never a good time to plan for a disaster. There's never a better time either.
So why wait? Instead of having to reconstruct personal and business records in the aftermath of an unexpected calamity, safeguarding documents before you suffer a loss will make it easier to claim casualty deductions and other tax breaks.
Here's an overview of some of the paperwork to include in your disaster preparedness plan and why you'll need it.
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Purchase and acquisition information. The amount of a casualty loss is generally the lesser of your adjusted basis or the reduction in your property's fair market value due to the casualty. With the exception of gifts, inheritances, and certain other property, adjusted basis typically equals what you paid for your assets plus improvements, reduced by depreciation or other reductions.
Tip: Make duplicates of titles, mortgages, closing papers, and receipts or scan them into digital form. Store the originals and the copies in separate locations, preferably in fire- and water-proof containers.
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Prior-year tax returns. When your loss occurs in a presidentially declared federal disaster area, you can amend an already filed prior-year federal return to claim the deduction and the resulting tax refund.
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Detailed inventory. As a general rule, you're required to reduce the amount of your personal property casualty losses by $500 (for 2009). In addition, losses must exceed 10% of your adjusted gross income (except in federal disaster areas).
A list of your possessions, supplemented by photographs or a video, is essential for maximizing your deduction.
We're here to help you with pre-crisis management and recovery planning for your personal and business assets. Please call if you would like to schedule a review.
First job tax tips
Out of school and into the workforce. If the expression describes you or a family member this summer, filling out Form W-4 properly can make your first job less taxing.
Here's why: The amount of federal income tax withheld from your wages depends on how you complete IRS Form W-4, the "Employee's Withholding Allowance Certificate," which tells your employer your marital status and the number of withholding allowances you're claiming.
Withholding allowances are similar to the number of dependents you have. Claiming more allowances generally reduces the income tax deducted from your paycheck, but you can only claim the number you're entitled to.
Think too much tax will be withheld? As long as you expect to work no more than 245 days for all employers during 2009, you might want to consider making a written request to have your federal withholding calculated using an alternative method. The "part-year employment method" of withholding can boost your net pay. Just be sure to complete a new Form W-4 next January.
Caution: Estimate your annual income carefully. Form W-4 affects only the amount of tax withheld, not the total tax that will be due with the tax return you'll file at the end of the year.
You may also be entitled to tax breaks such as above-the-line deductions for moving expenses and student loan interest. Please call for information and advice.
Tax law changes could affect your 529 plan
As you're reviewing costs for the academic term just ended or the one soon to begin, keep in mind two recent changes to tax rules affecting 529 college savings plans.
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Additional qualifying expenses
QHEE. That's what your financial advisor may say when you ask what expenses are eligible for tax-free withdrawals from your 529 plan. Qualified higher education expenses (QHEE) include tuition, fees, books and supplies, reasonable room and board, and services for special needs students.
The change. During 2009 and 2010, Internet access, computers, peripherals such as printers, and certain educational software are also considered QHEE.
Under prior law, the cost of a computer was allowable as a tax-free distribution only if the equipment was required by the school. Now the tax-free treatment includes other tech equipment and services and is available even if the school doesn't require the purchase, as long as the plan beneficiary is enrolled there.
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Additional investment strategy flexibility
Prior to 2009, you could update the investment strategy of your 529 plan once a year (in addition to changes made when switching the plan's beneficiary).
The change. New regulations permit two changes in strategy for 2009 in addition to changes you make when replacing a beneficiary.
Please call to learn more about these and other education-friendly tax breaks.
Two reasons to review tax payments
Need a nudge to get started on a midyear review of your 2009 federal and state income tax liability? Recent modifications of rules for pension withholding and certain estimated payments may affect you.
What's New
- Additional withholding tables for pensions. Did you adjust the amount of federal income tax being withheld from your pension to compensate for the reduction caused by the "making work pay" credit? If so, you may want to contact your former employer to find out if the change you made is still appropriate.
Why? Because pension payors can now use a new procedure to figure withholding. The update is designed to offset the effect of the making work pay credit, which you might not be eligible to receive if you have no wage income.
- Relaxed estimated payment rule for small business owners. To avoid penalties, estimated tax rules generally require quarterly payments based on a percentage of your current- or prior-year liability. Depending on your income, the amount due during 2009 under prior rules could have been as much as 110% of the tax on your 2008 return.
That's not the case this year, thanks to the American Recovery and Reinvestment Act. For 2009, you may be able to base estimates on 90% of your 2008 tax liability or 90% of your 2009 tax liability, whichever is less.
The special rule applies when your business generated more than 50% of your gross income in 2008 and your adjusted gross income for that year was less than $500,000 ($250,000 if you're married filing separately).
For additional information on these changes, or for assistance calculating your estimated tax liability, please call. We're here to help.
When are social security benefits taxed?
Are you considering post-retirement employment? If you're collecting social security and thinking of returning to the work force, you may have questions about the effect of that income on the taxability of your benefits.
The answer: Under current law, part of your social security benefits may be taxable. How much? The basic rule is that up to 85% of your annual benefits can be subject to federal income tax when your "provisional" income exceeds specified thresholds. Generally speaking, provisional income is the sum of your adjusted gross income plus tax-exempt interest and one-half of your social security benefits.
Benefits are not taxed when your provisional income is below the threshold applicable to your filing status.
The federal thresholds, called base amounts, range from zero, if you're married filing separately and live with your spouse all year, to $32,000, if you're married filing jointly.
A $25,000 base applies when you file as single, head of household, or as a qualifying widow or widower with a dependent child. If you're married, but file separately and do not live with your spouse during the year, you'll also use the $25,000 figure.
Illustration: When you're married, file a joint return and your provisional income exceeds $32,000, a portion of your benefits will be taxed.
Please call us to discuss how income from a new business venture or job will impact your taxes. We'll be happy to help with planning moves, such as the timing of retirement account distributions, that can ease the tax bite.
Business energy tax incentives make it easier to "go green"
Environmentally friendly practices are popular these days, and you may be pondering ways to make your business "greener." If so, you'll be happy to know deductions and credits are available for 2009 that can save you tax dollars.
Here's an overview of four.
Business energy investment credit. Install eligible solar energy property to generate electricity, power water heaters, or heat or light your building and you may be eligible for a credit of up to 30% of the cost. Geothermal heat pumps and combined heat and power systems are eligible for a 10% credit.
Credits reduce your tax liability dollar for dollar. The business energy credit can also be used to offset your alternative minimum tax liability.
Vehicle credits. Tax credits are available when you buy or lease a qualifying vehicle such as a hybrid, which runs on gas and electric, or a diesel that incorporates lean-burn technology. Vehicles using alternative fuel, including compressed natural gas, liquefied natural gas, propane, and hydrogen, also qualify, as do fuel cell vehicles.
Energy-efficient commercial building deduction. You can claim a deduction of up to $1.80 per square foot for energy-efficient improvements to your commercial building. Eligible improvements include interior lighting, heating, ventilating and air conditioning systems, insulation, exterior doors and windows, and certain roofing materials.
Depreciation deductions. Bonus depreciation lets you write off 50% of the adjusted basis of certain energy property purchased and placed in service during 2009. To qualify, the assets must be new and have a depreciable recovery period of 20 years or less.
Please call us to discuss other incentives that may apply to your business, such as the energy-efficient new homes credit for construction companies. We'll make sure you're up to date on federal, state, and local benefits, as well as programs sponsored by local utilities.
Don't fall victim to a tax scam
If you're reading this on a day that ends in 'y', it's likely your e-mail inbox contains at least one message touting a too-good-to-be-true offer. You probably shake your head and delete the pleas from mysterious mock millionaires who need your help recovering imaginary inheritances.
But what do you do when the e-mail has the Internal Revenue Service web address in the FROM box and a subject line that claims you're about to be audited by the Criminal Investigation Division?
- Step 1. Stop and think. You've never given the IRS your e-mail address in relation to your tax return. Even if you had, the government does not request personal information such as your bank account, credit card, or social security numbers via e-mail.
- Step 2. Without clicking on any links or responding to the e-mail, forward the entire message to the IRS (phishing@irs.gov). The IRS established this e-mail box in 2006 to investigate and shut down online fraud.
Note: You will not get a response, either online or off, from the IRS when you report scams.
- Step 3. Delete the e-mail.
Besides the audit subterfuge, other common e-mail tax schemes to know and avoid include a promise of additional money due, bogus government grants, and requests for you to check the status of your refund.
Tax scams never die, and they can be taxing. Before you react to any communication from — or purporting to be from — the Internal Revenue Service, contact us. We're here to help you resolve tax issues.
The COBRA credit: What employers must know
A provision in the American Recovery and Reinvestment Act of 2009 affects the health insurance coverage of your recently terminated employees — and your payroll tax liability.
The overview. The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) contains health insurance rules applicable to your business when you employ 20 or more workers. Forty states have similar "mini-COBRA" laws that apply when your business employs less than 20 workers.
Under COBRA, you are generally required to provide eligible, recently terminated employees who were enrolled in your active health insurance plan the opportunity to continue coverage for up to 18 months. Your former employees pay the full premium.
What's changed. The new law, which became effective February 17, 2009, temporarily reduces the share of health insurance premiums your eligible former employees have to pay to 35%. Your business pays the remaining 65%. You then claim a credit for your share on your federal payroll tax return (Form 941, 943, or 944).
You can use the credit to reduce payroll tax deposits, or you can claim the entire amount at the end of each quarter.
The change applies to employees terminated through December 31, 2009, and is available for up to nine months of coverage.
What you need to do. Employees must be notified of the reduced premiums, and you'll need to keep copies of the notifications.
In addition, maintain records of payments you receive from employees who choose to participate, as well as proof of your remittance to your business's health insurance provider.
The only way to claim the COBRA credit is on payroll tax returns for applicable periods. If you overlooked it on your first quarter payroll return, please call. We can help you file an amended return and assist you with payroll return preparation in future quarters.
Don't waste your tax refund
Expecting a tax refund this year? No doubt you've already heard the standard admonishment about why you should not be giving the government an interest-free loan. Maybe you've decided to "do better" during 2009 by revising your withholding or estimated tax payments to reduce the amount of next year's refund – or maybe you haven't.
Either way, set aside your guilt. Financial planning means creating effective strategies that work for you – which can include forcing yourself to save by overpaying your income tax during the year.
The more important consideration is what you do with the money you get back. Here are ideas for making the most of your refund.
Save. The unexpected happens. The question is, how do you pay the resulting bills? Parking part of your refund in a readily accessible location, such as a bank checking, savings, or money market account, will help you weather short-term, temporary setbacks without incurring penalties or transaction fees.
Spend. Spending your refund wisely can get your finances in shape and pay off over the long run. For instance, home improvements like energy-efficient windows or a new water heater may result in lower electric and insurance bills, utility company rebates, and tax credits. Refinancing your mortgage reduces your monthly cash outlay, freeing money for investing or saving. Ditto for paying down high-interest credit cards – so long as you resist the urge to reload them.
Self-invest. Using your refund to refresh your current career-related skills or to learn new ones can provide a double benefit: more employment opportunities and tax savings. Unsure of your job security? Put your refund to work by financing a home-based business and creating a second stream of income.
Give us a call for assistance related to your tax withholding, estimated tax payments, or tax refund.
The first-time homebuyer credit is new and improved
It's new, improved, and better for you: The First-Time Homebuyer Credit has been extended and enhanced, and you might be able to benefit on your 2008 income tax return, even if you bought or built your home during 2009.
What changed?
- The expiration date. The revised credit is available for U.S. homes purchased through November 30, 2009.
- The amount. The new maximum amount you can claim on a home purchased in 2009 is $8,000 ($4,000 if you're single or married filing separately).
- The payback requirement for 2009 purchases. Under the enhanced rules, if you buy a home in 2009 and use it as your main residence for at least 36 months from the purchase date, you're not required to repay the credit.
What stays the same?
- The definition of a first-time homebuyer. You're considered a first-time homebuyer if your new home is the only primary residence you (and your spouse, if you're married) have owned during the three years prior to the purchase date.
- The phaseout. The credit is reduced when your modified adjusted gross income is between $75,000 and $95,000 ($150,000 and $170,000 for married filing jointly).
- The payback requirement for 2008 purchases. If you closed on your home prior to December 31, 2008, you'll still have to repay the credit (maximum for 2008 purchases is $7,500) in interest-free equal installments over 15 years. The first payment is due with your 2010 income tax return.
The new law offers the option of claiming the expanded 2009 First-Time Homebuyer Credit on your 2008 federal income tax return or on your 2009 return. You can amend an already-filed 2008 return to include it. Since the credit is refundable, you may be eligible for a refund, even if you have no tax liability.
Other exceptions, restrictions, and limitations apply. Please call us for a more detailed explanation.
A new vehicle could give you a new tax break
Are you in the market for a new vehicle? As you head to the car lot, keep this in mind: The American Recovery and Reinvestment Act of 2009 includes a tax break that may benefit you.
- The incentive. When you file your 2009 income tax return, you'll be able to take a deduction for the state and local sales or excise taxes that you pay on your new vehicle.
- The mechanics. If you itemize, you can claim the vehicle sales or excise tax in addition to your state and local income tax deduction.
Alternatively, the new provision allows you to claim an extra amount with your 2009 standard deduction, meaning you can reduce your adjusted gross income even if you don't itemize.
The rules apply to any qualified new vehicle — cars, light trucks, or motorcycles weighing less than 8,500 pounds and motor homes — that you buy on or after February 17, 2009, and before January 1, 2010.
- The limits. The maximum deduction is limited to the tax you pay on the first $49,500 of the vehicle's purchase price, and the benefit begins to phase out when your modified adjusted gross income is greater than $125,000 for singles or $250,000 for joint returns.
Your new vehicle may also be eligible for other federal and state income tax deductions and credits, including breaks for certain hybrids. Please call if you want more information or tax assistance.
Check out the "making work pay" credit
Those extra dollars in your paycheck this month come to you courtesy of the Making Work Pay Credit. This new credit was part of the February 2009 stimulus bill. You'll continue to see the benefit through reduced income tax withholding for the remainder of this year, and you'll be able to claim any additional amount on your 2009 income tax return. The credit is available for 2010 as well.
What you need to know —
- The maximum credit is the lesser of $400 if you're single ($800 if you're married and file a joint return) or 6.2% of earned income.
- Estates, trusts, nonresident aliens, and dependents are not eligible.
- The credit phases out at a rate of 2% once your modified adjusted gross income reaches $75,000 for singles ($150,000 for married filing jointly).
- The credit is refundable, meaning you'll be able to claim it on your 2009 tax return even if you have no tax liability.
What you need to do —
- Estimate your 2009 income. Your employer will automatically reduce your withholding, but the new amount may not reflect your tax situation — or your 2009 tax bill. For instance, if you and your spouse both work, you could end up with too little income tax withheld for the year. In that case, you might want to give your employer a new Form W-4 (Employee's Withholding Allowance Certificate).
- Review your estimated payments. If you're self-employed, you can revise your estimates to include the effect of the new credit.
Give us a call if you're concerned about the impact of the new credit on your withholding. We can help you decide the best way to handle the change.
Should you itemize?
To itemize or not, that is the annual question.
Sometimes the answer is simple. For instance, if you're married but you and your spouse file separate returns, you'll have to itemize if your spouse does. But when you have a choice, taking time to run the numbers could save tax dollars.
Three things to remember as you make the comparison:
1. Maximize your itemized deductions by paying attention to rules allowing special treatment for certain expenses on 2008 returns.
Examples:
- The option to deduct state and local sales taxes instead of income taxes.
- The increased rate for medical care mileage (27¢ from July 1 through December 31, 2008).
- The deduction for qualified mortgage insurance premiums.
2. As a general rule, you'll want to itemize when the deductions you can claim exceed your standard deduction, plus any additional standard deduction amount. For 2008 tax returns, if you're married filing jointly or a surviving spouse, the standard deduction is $10,900 ($5,450 for single or married filing separately).
3. Even if you don't itemize, your standard deduction can be increased when you meet certain requirements. Additional amounts you can add to the base deduction include:
- Up to $1,000 for real estate taxes paid when you're married filing jointly ($500 for singles).
- Your net loss from a 2008 federally declared disaster.
- An extra deduction if you're partially or totally blind.
- An extra deduction when you reach age 65.
Please call if you have questions about itemizing. We have the answers and we're here — and happy — to help.
Don't overlook a theft loss deduction
You probably never thought it would happen to you. Unfortunately, theft does happen, even to the most careful individual. If you suffered a loss last year, you may be able to soften the blow with a tax deduction.
Here are three things you need to know.
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The amount of your loss. In some situations, coming up with the amount of a theft loss is straightforward. For instance, if someone stole cash from you, your loss is the sum that was taken.
When the theft involves business or income-producing property, you'll have to establish the value of the property as well as your basis to arrive at the amount of the loss. Your basis is generally your original investment, adjusted for improvements and previous deductions such as depreciation.
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How the deduction is calculated. For personal property thefts, the loss is reduced by the insurance proceeds you receive. You'll also need to subtract $100 (for 2008) and 10% of your adjusted gross income from the remaining balance.
For business or income-producing property, you only need to take reimbursements into account when calculating the deductible loss. The $100 and 10% limitations don't apply.
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When the loss is deductible. Theft losses, which include losses from burglary and embezzlement, are typically deductible in the year you discover the theft.
However, if you reasonably believe you'll get something back — such as a recovery from a lawsuit — your deduction is limited to the amount of loss in excess of the expected reimbursement.
Depending on the type and amount of the loss, you may qualify for benefits on current and prior year tax returns. If you've suffered a loss, please call our office to discuss your options.
Who owes self-employment tax?
If you earned more than $400 during 2008 from work as a sole proprietor or independent contractor, you may owe self-employment tax. That's true no matter what your age — even if you're receiving social security benefits.
The tax is assessed on your earnings from self-employment, which can include income from qualified joint ventures and partnerships, as well as fees you earn working as a director for a corporation. In this context, "earnings" generally means your income after deducting expenses incurred while operating your business. If you have multiple businesses, you combine the net income and losses.
For your 2008 return, the self-employment tax rate is 15.3% of the first $102,000 that you earned. For 2009, the taxable base rises to $106,800. Income above the base is still subject to Medicare tax at a 2.9% rate.
What happens when you earn social security wages or tips from an employer and also have a side business? Your wages count toward the taxable base. Depending on how much you earn as an employee, your self-employment income may be subject to part or all of the tax.
You can pay self-employment tax on a quarterly basis as part of your estimated tax payments. One half of the total self-employment tax that you pay during the year is deductible on your income tax return, and you don't have to itemize to claim the deduction.
Are you new to self-employment? Give us a call. We're happy to offer guidance and help you make smart tax decisions.
What you should know about depreciation and your 2008 tax return
With multiple changes to depreciation rules over the past few years, you may be wondering what breaks are available for your 2008 federal income tax return.
In general, the types of depreciation you can claim for business property acquired and placed in use during 2008 include Section 179 expensing, 50% special or "bonus" depreciation, and "regular" depreciation.
Here's an overview of these tax provisions and how they work together.
Say you bought a new piece of equipment for your business in 2008. Under Section 179, you could choose to immediately expense up to $250,000 of the cost on your tax return. To receive full benefit of the Section 179 election, the total cost of all qualifying assets you purchased during the year must be $800,000 or less.
Next, you may be able to apply the special depreciation rule. Special depreciation gives you an additional "bonus" tax break of 50% of the asset's remaining basis. What is remaining basis? It's the dollar amount left over after subtracting the Section 179 deduction you claimed from the original cost of the asset.
Finally, you can use regular depreciation to write off whatever balance remains after Section 179 and bonus depreciation. You deduct this amount over the useful life of the asset via an approved IRS depreciation method.
Be aware that certain property may not qualify for all three benefits and some states do not follow the federal rules. Please contact us if you have questions about depreciation.
Check the tax breaks in the American Recovery and Reinvestment Act of 2009
The newly enacted American Recovery and Reinvestment Act of 2009 contains plenty of tax law changes. Most will affect the business and personal income tax returns you file next year.
However, if you suffered a business loss during 2008, a temporary extension of the net operating loss carryback period may offer current benefits. If your gross receipts are less than $15 million, you can now elect to use the loss to offset income you earned in any of the past five years.
In addition, you might be able to make smaller estimated tax payments during 2009 because you can base estimates on 90% of your 2008 tax instead of 100% as was required under the old law. To qualify, your 2009 income must be less than $500,000, with more than 50% of that from a small business.
Other business related changes include:
- A one-year extension of 50% bonus depreciation for new assets that you place in service during 2009.
- A one-year extension of the $250,000 Section 179 depreciation expensing allowance when you buy new or used assets this year.
Provisions for individuals include:
- A refundable credit of up to $800 ($400 for individuals) that will show up in your paycheck later this year and through 2010. Income limits apply.
- A one-time $250 payment if you're a social security recipient, disabled veteran, railroad retiree, or retired government worker.
- An above-the-line deduction for state sales and excise taxes when you buy a new car, light truck, motorcycle, or motor home between February 17 and the end of the year. Income limits apply.
- An increase of the first-time homebuyer credit to $8,000 on homes purchased between January 1 and November 30 of this year. The change also eliminates the previous requirement of paying the credit back as long as you live in the house for three years. Income limits apply.
- An increase in the Hope Scholarship credit (now called the American Opportunity Tax Credit) for tuition you pay in 2009 and 2010. Income limits apply.
- No tax on the first $2,400 of unemployment compensation that you receive in 2009.
- An AMT patch that increases the exemption amounts to $70,950 if you file jointly ($46,700 for singles).
Please call if you have questions about how the new law might affect you.
Get a tax refund for a business loss
Did your C corporation business deductions exceed income in 2008?
While operating losses can be discouraging, you may be able to turn the loss into a federal tax refund.
Here are two methods for getting cash back from the IRS.
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Request an estimated tax refund. You can apply for a refund of your corporate estimated tax before you file your federal income tax return. Use Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, if you overpaid your estimated 2008 tax liability by at least 10%, and the overpayment is $500 or more.
The IRS is required to respond within 45 days.
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File a refund claim. After you prepare your corporate tax return for 2008, use Form 1139, Corporation Application for Tentative Refund, to apply your net operating loss to prior years and to request a refund of the tax you paid in those years.
The form is filed separately from your income tax return, and the IRS generally processes it within 90 days.
Congress is once again debating a change in the carryback period for business net operating losses from the current general rule of two years. Please contact us for the latest details and for more information about how you can expedite tax refunds.
Some will qualify for the "recovery rebate credit"
Have you spotted the new refundable credit on your federal income tax form? The "recovery rebate credit," created by the Economic Stimulus Act of 2008, is related to last year's economic stimulus payments. You may be able to claim it if you received less than the maximum stimulus amount or if your financial situation has changed. (There are phase-out income levels that reduce or eliminate the credit.)
- The background. The 2008 stimulus checks were an advance payment of the recovery rebate credit. When you filed your 2007 federal income tax return by the due date (including extensions), you received a "rebate" based on filing status, income, and number of qualifying children.
The payment consisted of two parts: a basic credit of up to $1,200 for married filing jointly ($600 for individuals), and an additional $300 for each qualifying child.
- The effect on your 2008 tax return. This year you'll complete a worksheet that uses your 2008 tax information to reconcile the rebate you received with the total credit you qualify for. Any extra benefit reduces your 2008 taxes, dollar for dollar.
What if the worksheet shows you received more than you qualify for? You're not required to pay the extra back, so there's no effect on your return.
But say you added a child to your family in 2008. In that case, you might be eligible to claim another $300. A change in dependency status or income could also result in an additional benefit.
You might qualify for the credit even if you were ineligible for the stimulus rebate. Please call for details, or check the IRS Web site at www.irs.gov for more information.
Can you deduct a Roth IRA loss?
Did you liquidate your Roth IRAs in the aftermath of last year's stock market decline? If so, you might be able to claim an itemized deduction on your tax return.
Here's how the rules work.
- While investment losses inside IRAs are typically not deductible, in some cases you can take a write off when you close accounts you funded with after-tax money. That's because nondeductible contributions are considered "basis." For Roth IRAs, basis also includes amounts you converted from traditional IRAs, reduced by your prior withdrawals.
- If the total amount you receive when closing all of your Roths is less than your basis, you have a loss that you may be able to deduct once you withdraw the balance in all of your Roth accounts.
Example. After you open a Roth IRA with a $5,000 contribution, the value of the account falls to $1,200. You decide to cash out. Assuming this is your only Roth account, you have a loss of $3,800 ($5,000 minus $1,200).
The loss is a miscellaneous itemized deduction, which means you're required to reduce it by two percent of your adjusted gross income. The Alternative Minimum Tax rules may also limit the amount you can claim.
- In addition, you have to take the loss in the tax year you close your accounts. No carryover is available.
Please contact us for more details.
Some tax breaks depend on location
Is your business in the zone? If so — that is, if your company operates in a geographic area targeted for special incentives — you may be eligible for federal and/or state tax deductions and credits.
- What they are. Location-based incentives are tax benefits designed to entice you to open or expand your business, buy assets, or hire workers in specific regions of the country.
At the federal level, Congress authorizes these tax breaks under programs such as Empowerment Zones, Renewal Communities, and Rural Renewal Counties. You may have also heard of additional area-specific incentives, including the Gulf Opportunity (GO) Zones established after Hurricanes Katrina, Rita, and Wilma. Among other perks, GO Zone provisions created extra depreciation deductions and work opportunity credits for businesses investing in areas affected by the hurricanes.
States award benefits in defined locations, too. These Enterprise Zones offer savings ranging from wage credits to property and sales tax breaks and may overlap federal regions.
- How to participate. Application procedures and required documentation vary, but generally you have to verify that your business is in a designated zone. For hiring or wage credits, you'll also have to make sure your employees reside within a zone, and you may need certification from your state's workforce agency.
Federal and state incentives can provide significant tax savings. Please call to learn what's available for your business.
Unemployment benefits are taxable
Unemployment compensation can provide a welcome buffer while you're transitioning to a new job. But with the help comes a tax effect, because the benefits provided under federal or state laws are usually includable in your income in the year you receive them.
As a result, depending on the amount of unemployment you expect to receive, you may want to complete Form W-4V, Voluntary Withholding Request, to have federal income tax withheld from your benefits. The withholding rate is generally 10%. You can also ask the unemployment office to withhold state income tax.
Alternatively, you can adjust or begin making quarterly estimated tax payments.
The amount of unemployment compensation you report on your income tax return is also affected by benefits you have to repay. If you receive and repay benefits in the same year, you can subtract the repayment from the total you received.
However, if you make repayments in a year following the receipt of the benefits, the tax treatment depends on how much you repay, and can be claimed either as an itemized deduction or a credit against your current year tax.
Please contact us if your employment situation changes. We can help with tax and benefit related issues such as severance pay, retirement account rollovers, and deductions related to job hunting.
New employment tax rules apply to single member LLCs
Is your business a single member Limited Liability Company? If so, beginning this month you may need to change how you report your employees' wages and the related payroll taxes.
- What's changed. Under regulations that became effective January 1, 2009, your single member LLC is responsible for making employment tax deposits and filing payroll tax returns using the business's name and federal identification number. That means you can no longer file Forms 941 and W-2 under your social security number.
The new rules are mandatory for 2009, but they're not retroactive and don't affect your 2008 tax return.
- What you need to do. Since your LLC is no longer a "disregarded entity" for federal payroll tax purposes, you'll need to request a federal employer identification number. In many cases, you can get an FEIN immediately at the IRS Web site. Remember to use the new number when making your 2009 payroll tax deposits.
In addition, check reporting requirements for your state in case they differ from the federal guidelines, and update your bookkeeping records and software.
The new rules also apply to wholly owned subsidiaries of Subchapter S corporations. Please call our office for details if this change will affect your business.
Plan for these 2009 inflation-adjusted numbers
Are you preparing your tax planning and budget strategies for the new year? Here are some updated figures to take into account.
- Increase your retirement plan contributions. For 2009, the maximum 401(k) contribution is $16,500. If you're over age 50, you can add an additional $5,500 catch-up contribution, for a total of $22,000.
The 2009 SIMPLE contribution limit is $11,500. The SIMPLE catch-up contribution remains at $2,500.
- Update your gift-giving strategy. The amount you can give away, tax-free, to any individual has increased by $1,000 for 2009, to $13,000. If you're married and your spouse joins in the gifting, you can double that to $26,000.
- Adjust business mileage reimbursements. As of January 1, the new standard rate for calculating your deduction for business vehicle expenses is 55¢ per mile.
You can claim the standard rate in place of actual costs. Just remember to keep a log of your business mileage. You'll also want to keep receipts for parking fees and tolls, as those items can be deducted in addition to the standard mileage amount.
- Plan for higher social security taxes. The social security tax rate remains unchanged, but the maximum amount of earnings subject to the tax is $106,800 for 2009, an increase of $4,800.
Please contact us to discuss additional tax figures that have been updated for 2009. And stay alert to even more tax changes this year since the new administration in Washington has expressed its intention to revise the tax code.
Remember the nanny tax
Though it hasn't made headlines recently, the nanny tax is still around — and it still applies to workers other than nannies. If you paid a household employee more than $1,600 during 2008 (or will pay one more than $1,700 in 2009) you may be liable for payroll taxes on their wages.
Here's an overview:
What employees are covered? The nanny tax typically applies to all household workers, including cleaning crews and home health aides, when you control what work is done and how it is done. This is true even if you hire someone part-time or on a casual basis and pay the wages in cash.
There are exceptions, such as payments made to your spouse, parent, or under-age-21 child.
What taxes are due? The nanny tax includes social security, Medicare, federal unemployment, and state unemployment. Generally you'll pay one-half of the social security and Medicare taxes and withhold the other half from your employee's wages. However, you can choose to pay the entire amount.
You don't have to withhold federal income tax unless your employee requests that you do on IRS Form W-4.
What tax benefits are available? You may be able to claim the child and dependent care credit on your personal tax return when you pay someone to care for a qualified dependent so that you can work.
Another potential savings: Set aside pretax money in an employer-provided flexible spending account to pay child and dependent care expenses.
Give us a call if you have questions about federal and state nanny tax responsibilities. We'll be happy to explain the rules and assist with the necessary filings.
Will home foreclosure affect your tax bill?
Are you wondering about the current status of tax laws regarding home foreclosures?
You may remember that back in 2007, when the housing crisis first became evident, Congress enacted the Mortgage Forgiveness Debt Relief Act to provide a tax break if you lost your home through foreclosure in 2007, 2008 or 2009. The Emergency Economic Stabilization Act of 2008, passed in October 2008, extended the provision through 2012.
Here's a summary of tax relief presently available for foreclosures, short sales, and debt restructuring.
- Generally, you can exclude from your taxable income debt forgiveness of up to $2 million ($1 million if you're married filing separately) on certain home loans when the forgiveness is related to your financial condition or a decline in your home's value.
- You can claim the exclusion on fully or partially forgiven mortgage debt, as long as you used the proceeds to buy, build or improve your principal residence and the debt was secured by your home. Refinanced debt may also qualify.
Your lender will send you Form 1099-C, showing the amount of debt cancelled or forgiven. That information is used to complete Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, which is attached to your tax return.
Please give us a call if you have questions regarding debt forgiveness. We're here to help you sort out the tax ramifications.
