Tax Tip of the Week Archives

December 27, 2010

Cancelled debt can result in taxable income

Are you talking to your lender about restructuring or forgiving all or part of your business debt? You may be surprised to learn the outcome of your negotiations could lead to taxable income.

Why? When you no longer have to repay a business debt because it's been reduced or forgiven, cancellation of debt (COD) income can result. In general, unless your business qualifies for an exception, COD income is taxable.

Exceptions include bankruptcy, insolvency, indebtedness incurred in direct connection with farming, and qualified real property debt.

Note that these exceptions apply only to COD income. Depending on the kind of debt forgiven, restructuring could lead to other types of income. For instance, say you have a nonrecourse loan, where the lender's only option in the case of default is to take the property back. In this situation, you'll generally have a gain or loss on a sale instead of COD income.

The form of your business can also affect tax consequences. For example, when you operate as a partnership, the determination of whether the insolvency exception applies is made at the partner level. That means even if your partnership has more liabilities than assets, COD income could be taxable to individual partners.

Other rules may apply, including the possibility of deferring certain COD income you receive in 2010 to later years. Please contact us if you need more information.

December 20, 2010

Charitable contribution reminders

Are thoughts of charitable contributions dancing in your head this holiday season?

If you itemize, you may also be thinking of tax deductions. Here are tips to make the most of your generosity.

Choose a qualified charity. To be eligible for a deduction, the organization you contribute to must be qualified. In general, that means charities established for religious, charitable, scientific, literary, or educational purposes. For example, nonprofit hospitals and volunteer fire departments are qualified organizations, while your homeowner's association generally is not.

Decide what to give. You can donate cash (including checks and charges to your credit cards), stocks, and other financial assets. Noncash contributions such as vehicles, real estate, or artwork are also deductible.

Keep records. When you make cash contributions of any amount, a bank record, pay stub, or written acknowledgement from the charity is required to support your tax deduction. If you donate via text message, keep a copy of your phone bill showing the amount you gave, the organization you gave it to, and the date of your donation.

The greater your contribution, the more paperwork you need. As an example, for noncash donations over $500, you'll need to file Form 8283, and for donations of $5,000 and up, a qualified appraisal is required.

Contact our office if you'd like more details about charitable giving tax rules.

December 13, 2010

Year-end tax housekeeping

This year will soon end... but you have a few more days to complete tax tasks before the calendar rolls into 2011.

Here are three you can wrap up quickly.

Review itemized deductions. Take a two-year perspective, looking back at actual expenses for 2010 and forward to your expectations for 2011. Should you schedule routine physicals or dental appointments this year to boost medical expenses over 7.5% of your adjusted gross income? Will paying your final state income tax estimate now benefit you more than waiting until 2011?

Note: Be sure to review your exposure to the alternative minimum tax. Some items, such as taxes, are not deductible when calculating AMT.

Hold your annual corporate meeting. Minutes of business meetings provide support for tax and financial decisions. Document your reasons for employee bonuses and other compensation issues.

Sign up for electronic payments. Beginning January 1, 2011, deposits for payroll taxes, federal unemployment, backup withholding, and corporate income taxes must be made via the Electronic Federal Tax Payment System (EFTPS). You can also pay other federal taxes electronically, including individual estimates.

Note: While sign-up for EFTPS is free, final enrollment may take a few days. If you have tax deposits due the first week of January, complete the registration this month to avoid late-payment penalties.

December 6, 2010

Remember your RMD

Reminder: Required minimum distributions (RMDs) are back for 2010!

RMDs are mandatory withdrawals from certain retirement accounts, generally after you reach age 70½. Thanks to a one-time exception, you could choose to skip your RMD in 2009.

That's not the case for 2010.

This year you must take a withdrawal by December 31 if the rules apply to you — and there's a hefty penalty for procrastinating. Missing the deadline could cost you 50% of the amount you were required to withdraw.

How much do you have to take out of your retirement account? That depends on the balance in your account (or accounts) at December 31, 2009, and your age on your birthday in 2010. Your spouse's age can also affect how much you're required to withdraw in situations when your spouse is the sole beneficiary of the account and is more than ten years younger than you are.

You can always withdraw more than the required amount. Just remember each year's RMD stands on its own, and any excess you take this year has no effect on your 2011 RMD.

One other RMD quirk: If you're thinking of converting to a Roth by the end of December, you'll need to take your RMD from your retirement account first.

Call now to make sure you're in compliance with the RMD rules. We're here to help.

November 29, 2010

Gaining an understanding of capital gains

Are your investments gaining in value? Then you'll want to understand how the capital gain tax works. Here's a refresher.

What is a capital gain? For tax purposes, you have a capital gain when the amount you sell an asset for exceeds your basis in that asset. An example: when you buy stock for $50 and sell for $70, your gain is $20.

Getting your basis right is important — though not always simple. If you purchase an asset, determining your basis is fairly easy. But if you receive an asset by gift or through an estate, your basis can be more difficult to determine.

What are the capital gain tax rates? For 2010, capital gain tax rates range from zero to 35%. The actual rate you'll pay depends on how long you own an asset, the type of asset, and your federal income tax bracket.

Short-term capital gains — assets you've owned a year or less when you sell — are taxed at regular income tax rates, which can be as high as 35%.

Assets you sell in 2010 after owning them more than a year are generally subject to tax at a 15% rate. You may qualify for a zero percent rate — no tax at all on the capital gain — when you're married filing jointly with taxable income of $68,000 or less ($34,000 for singles).

You'll pay a higher rate on some types of assets. For instance, collectibles are taxed at a maximum rate of 28%.

Capital gains offer excellent opportunities for tax planning because you can usually time when you'll pay the tax by choosing how long to hold an asset and when to sell. Please call to discuss how you can benefit from year-end planning strategies.

November 22, 2010

Education tax benefits

Are you or a family member paying education expenses this year? If so, you may be eligible for a variety of tax benefits. Here's a review.

Deductions. An above-the-line deduction is available for interest you pay on student loans. For 2010, you may qualify for a deduction of up to $2,500 even if you don't itemize.

In addition, certain education expenses related to your employment may be claimed as miscellaneous itemized deductions.

Credits. Tax credits are applied directly against the tax you owe. Two available credits: the Hope Scholarship/American Opportunity credit and the lifetime learning credit.

For 2010, the maximum Hope Scholarship/American Opportunity credit is $2,500. Up to 40% of this credit may be refundable to you. That means you could get money back when the credit exceeds your tax bill.

The maximum lifetime learning credit for 2010 is $2,000, and this credit is not refundable.

Exclusions from income. Even better than deductions or credits are amounts you don't have to include in your income at all. For instance, when you redeem qualified U.S. savings bonds to pay for education expenses, the interest is not taxable.

Other amounts you can exclude from income when you use the money for qualified education expenses include withdrawals from 529 college savings plans and Coverdell education savings plans. Amounts you receive from qualified scholarships may also be nontaxable.

Additional education tax benefits are available for 2010 and the best time to plan for making the most of them is now. Please call if you need more information or would like to discuss your options.

November 15, 2010

Information reporting rules don't change for 2010

You've probably been hearing about changes to Forms 1099 for purchases of goods, payments to corporations, real estate rentals, and credit card transactions.

Are you wondering how your business will be affected? The first thing to know is that none of the new rules apply to the 2010 Forms 1099 you will file in January 2011. As in prior years, you'll report payments to independent contractors and other vendors totaling $600 or more.

Reportable payments generally include amounts you pay for services in the course of your business, such as contract labor or bookkeeping. For 2010 returns, there's no need to send Forms 1099 to corporations with which you do business. Exceptions to this rule include payments you make for certain medical or legal costs.

You can continue to use Form W-9, "Request for Taxpayer Identification Number and Certification," to gather the name, mailing address, and identification number of vendors. Keep the completed Form W-9 with your tax records.

In cases when a vendor fails to provide an identification number, the rate you'll use to withhold federal income tax — known as backup withholding — remains at 28%.

One change that takes effect this year is increased penalties. For example, the penalty for failing to file correct information returns can be as much as $100 per Form 1099.

Information reporting requirements continue to expand, with new rules for real estate rental expenses and credit card transactions applying to payments made during 2011.

We'll keep you updated. Please call if you have questions.

November 8, 2010

Tax strategies investors should consider at year-end

As year-end approaches, take a closer look at your investment portfolio. There may be some tax-saving strategies worth considering.

For example —

Wash sales. Thinking of selling a security before December 31 to take advantage of a capital loss? To make sure the loss is deductible, refrain from buying a substantially identical security during the 61-day period that begins 30 days before you sell and ends 30 days after.

Worthless stocks. For capital loss purposes, securities with no value are treated as if you sold them on the last day of the year. Your loss is generally the same as your cost.

If you want to deduct worthless securities on your 2010 return, you'll need to prove the security became worthless during the year and that it truly has no value. Not sure you can meet those requirements? Selling before year-end may be a better option.

Stock donations. Giving appreciated stock to charity lets you avoid capital gains tax and claim a charitable deduction.

In order to deduct the donation on your 2010 return, the gift must be complete. For certificates you endorse and present directly, the date of mailing or other delivery is considered the date of the gift. When your broker or the issuing company handles the transaction, the gift is complete when the stock is titled to the charity.

Tax law changes that are scheduled to take effect in 2011, such as the increase in capital gains tax rates, may also affect your year-end investment planning. Please call us for more guidance in your year-end tax review.

November 1, 2010

Funding your trust is important

A trust can be a valuable part of your financial and estate plan — as long as you do more than just sign the trust agreement. Adding property to your trust, known as "funding," is an important step that allows your trust to function so you can achieve your goals.

Funding your trust means legally re-titling assets into your trust's name. Before you start, you'll want to review which assets to transfer in order to avoid undesirable income tax consequences.

For instance, transferring ownership of your IRA or certain qualified retirement plans to a revocable trust creates a taxable event in the year you make the transfer. That means the balance in your retirement account is considered a distribution, resulting in taxable income. If you're under age 59½ at the time of the transfer, you can also be subject to a 10% penalty.

Tip: A trust can be a beneficiary of your retirement accounts.

Annuities are another investment that may run afoul of tax consequences. While transferring an annuity to your revocable trust might not generate taxable income, naming your trust as a beneficiary of the annuity could affect how quickly the account balance must be distributed.

Other assets, including stock in a small business corporation, may also require careful consideration. Let us work with your attorney to consider the tax implications as you begin to fund your trust.

October 25, 2010

Privacy issues and taxes

Business taxes involve a lot of paperwork, and those papers typically contain a lot of personal financial information. Are you taking steps to make sure your records are secure?

Here are tips.

Protect employees. As an employer, you're required to collect social security numbers and other identification, such as copies of drivers' licenses. Keep this sensitive information secure by restricting physical access to printed or copied documents, using passwords on your accounting software, and creating a unique identifier for employee ID numbers.

Some states require that you safeguard the information obtained from job seekers, such as shredding applications after a certain period of time.

Protect vendors. For 2010 you can "truncate" social security numbers on the paper copy of Forms 1099 that you send to your vendors. Instead of displaying the full nine digits, replace the first five numbers with asterisks or multiple Xs.

Protect customers. Create a company policy for protecting the information your customers provide. Examples: Require your employees to shred account receivable records instead of tossing them in the trash, or employ the services of a document-shredding company.

Protect business information. When sending data to your accountant for tax return or payroll preparation, use encrypted e-mail or upload digital files to a secure website offering encryption and authentication.

Keeping accounting information from falling into the wrong hands is a growing concern for many businesses. Give us a call to discuss new laws and requirements designed to prevent identity theft.

October 18, 2010

Consider the tax aspects of incorporating

October is the traditional month for asking tricky questions, so here's one you may have on your mind: Is incorporating a good idea?

While the answer depends on your individual situation, choosing to structure your business as a corporation can provide planning opportunities that may not be available to sole proprietors. For example, gradually transferring the stock of an incorporated family business from the founding generation to other family members is a standard estate and gift tax planning move.

Forming a corporation will also affect how your business income is reported and taxed.

As an illustration, you can choose to be a C corporation or an S corporation — terms that refer to the part of the Internal Revenue code specifying federal tax treatment. In either case, your business will file its own income tax return.

However, the income of an S corporation will "flow through" the company's tax forms to your personal income tax return. That means profit from your business will be taxed at your individual federal tax rate, and you may be able to use losses to offset other income.

With a C corporation, income is taxed on the business return at corporate rates. For 2010, the rate is 15% on the first $50,000 of net income.

Other tax considerations include pension plans, fringe benefits, dividend payments, shareholder compensation, and state tax.

Give us a call. We'll be happy to work with you and your legal advisor to evaluate what business form makes the most sense for you.

October 11, 2010

Avoid these penalties

Tick-tock. Time is almost up on that six-month extension you filed back in April to give yourself more time to complete your 2009 individual income tax return.

What happens if you fail to file your return by the extended due date? One consequence: Unless a disaster-relief exception applies or you have a valid reason, you may be charged penalties and interest.

For example, the penalty for filing your return after October 15, 2010, is 5% of the amount of your unpaid tax, per month, up to a maximum of 25%. After 60 days, a minimum penalty of $135 or 100% of the tax due applies.

In addition, a late payment penalty of ½ of 1% of the tax due may apply for each month or part of a month that you fail to pay the tax due. The two penalties interact and can be combined.

You'll also have to pay interest on the tax due. During 2010, the rate on underpayment of tax has been 4%. The interest is compounded daily and can be charged on penalties.

Since the penalty and interest are based on unpaid tax, neither applies when your return shows a zero balance. Filing a return is still a good idea, however. Why? The general rule limiting the IRS to a three-year period for assessing tax begins when you file. No return, no statute of limitations.

Give us a call if you think you may miss a deadline. We can help keep penalties to a minimum.

October 4, 2010

New business law includes major tax breaks

It's just in time for year-end tax planning: the Small Business Jobs Act, a new law that extends some federal tax breaks and enhances others.

Here's an overview of selected provisions:

Section 179. You can immediately write off up to $500,000 of assets (including computer software) that you buy for your business. The phase-out threshold — that is, the total-assets-purchased dollar point when your deduction starts to shrink — is $2 million.

The new law also expands the type of property you can elect to expense. For this year and next, you can use Section 179 to expense purchases of qualified leasehold, restaurant, and retail improvements, up to a maximum of $250,000.

Bonus depreciation. In addition to the expanded Section 179 deduction, you can elect to write off additional first-year depreciation of 50% of the cost of assets you purchase for your business in 2010.

Start-up expenditures. This year you can deduct up to $10,000 of costs you incur to get a new business off the ground. You get the full deduction when total start-up costs are less than $60,000, and a reduced benefit for amounts over that.

Self-employment tax deduction. For 2010, you can subtract the cost of health insurance premiums when computing your federal self-employment tax. Before this change, the deduction applied only to income tax.

The new law also increases the carryback period for business credits, authorizes Roth IRA rollovers for 401(k), 403(b), and 457(b) retirement plans, and changes the rules for excluding gain on small business stock sales.

Please call for details on how the new law could affect your business.

September 27, 2010

October tax reminders

It's easy to forget to remember. Unfortunately, forgetting to remember tax deadlines can cost money.

Here are rapidly approaching due dates to keep in mind.

Retirement plans. The deadline for setting up a SIMPLE plan for your business is October 1.

SIMPLE plans are easy to establish and maintain, and you may be eligible for a credit of up to $500 to offset the cost of filing the paperwork and getting your employees enrolled.

The maximum contribution for SIMPLE plans in 2010 is $11,500, plus an extra $2,500 when you're over age 50.

Looking for a different retirement plan? If you're a sole proprietor who extended your tax return, the last day to establish and fund a SEP is October 15. For 2010, the maximum contribution to these simplified employee pension plans is $49,000.

Tip: You can fund a SEP even if you participate in another plan.

IRAs. October 15 is the deadline for recharacterizing a 2009 Roth conversion.

You may want to consider "undoing" a Roth conversion if you made a mistake by converting last year, or if the value of your account is lower than when you originally made the conversion.

October 15 is also the last date to withdraw excess contributions from your IRAs and certain other retirement accounts. Putting too much money into these plans can result in an excise tax of 6%, assessed each year on the excess amount.

Individual income tax returns. The automatic six-month extension of time to file your 2009 federal income tax return ends on October 15.

We're here to help you remember all your important tax due dates. Please call for any filing assistance you need.

September 20, 2010

Limited liability companies and the IRS

After much consideration, you've decided the best form of ownership for your business is a limited liability company (LLC), which offers limited protection from creditors along with managerial flexibility.

Now you may be wondering what tax return you'll file at year-end.

You might be surprised to learn there's no federal income tax form specifically titled "Limited Liability Company."

Why? Because LLCs are ignored for federal income tax purposes.

That doesn't mean the IRS will ignore your income. It does mean you can choose how to classify your company, by filling out Form 8832, "Entity Classification Election." The classification you pick determines what tax returns your business will use.

For example, if you're the only member of your LLC, you have the option of treating your business as a sole proprietorship or a corporation. Elect to be taxed as a sole proprietor and you'll report the business's tax information on your personal income tax return. Treat your business as a corporation and you'll file a corporate income tax return.

What if more than one person owns part of the business? In that case, you can choose to have your LLC taxed as a partnership or a corporation. Either choice requires a separate tax return.

Other tax forms your business may have to file include payroll returns and information statements such as Forms 1099. For assistance with any of your filing requirements, call our office.

September 13, 2010

Build America bonds: Some important facts

When you think of municipal bonds you probably also think of tax-exempt interest income. But did you know some municipal bonds generate taxable income?

Build America bonds, created in 2009 as part of the stimulus bill, are an example of this type of municipal bond. Like other muni's, build America bonds are issued by state and local governments to fund construction projects.

However, because the federal government offers tax credits for build America bonds, the interest you receive is taxable.

Why invest in a taxable municipal bond? The idea is that the federal tax credit reduces the cost of the bond to the state or local government, which in turn can increase the interest rate. In addition, when you buy bonds issued by the state where you live, the interest is generally free from state income tax.

How does the credit work? The municipality issuing the bond can choose to receive the credit itself. These "direct payment" bonds are similar to regular taxable bonds. You get your interest payment in cash and report it on your income tax return.

Alternatively, the municipality can issue "tax credit" bonds. When you invest in this kind of build America bond, you apply for a credit on your federal income tax return of 35% of the net interest you receive. Both the interest and the credit are included in your gross income.

The credit reduces your tax liability dollar for dollar and can be applied against the alternative minimum tax. You can carry any unused amount to future returns.

Depending on your tax bracket, build America bonds may be a sensible addition to your portfolio. Please call if you would like more information.

September 6, 2010

A review course on education tax credits

As the fall semester starts up, so do questions about education tax credits. The interest is natural — credits are valuable tax breaks, because you can subtract them directly from the income tax you owe.

So what education credits can you claim on your 2010 federal income tax return? The Hope Scholarship/American Opportunity Credit and the Lifetime Learning Credit are available this year, and, as you may already know, have many similarities.

For instance, to be eligible for these credits, the qualified out-of-pocket education expenses you pay in 2010 must be for academic periods that begin this year or in the first three months of 2011. Tuition and fees are qualified education expenses for purposes of claiming the credits, while room and board are not.

How do the credits differ? One difference is the maximum available amount. Generally, you can claim up to $2,500 per eligible student when you qualify for the Hope Scholarship/American Opportunity Credit, while the most you can claim for Lifetime Learning Credit is $2,000.

Another difference: The adjusted gross income level at which the credits begin to shrink. For 2010, the phase-out for the Hope Scholarship/American Opportunity Credit starts at $80,000 when you're single ($160,000 for married filing jointly). For the Lifetime Learning credit, the phase-out begins at $50,000 for singles ($100,000 when you're married filing jointly).

Call for more information. We have a complete list of education tax benefits, including qualified savings bond interest, tuition and student loan deductions, and withdrawals from IRAs and college savings plans.

August 30, 2010

Unclaimed property can be a business issue

It sounds like a crossword puzzle clue: Name a seven-letter medieval word that can affect your 21st century business.

The term is escheat, and today it means turning over abandoned property, such as unclaimed security deposits and outstanding accounts receivable credits, to state officials. Your business may be both a holder of unclaimed property and a claimant.

For instance, say you're holding an uncashed payroll check for a former employee. If the check remains outstanding, as the holder you may have to file a form with the Treasurer of your state reporting the amount of the unclaimed property. You might also have a responsibility for attempting to contact your former employee. Then, after a time period set by state law, you'll generally be required to turn the funds over to officials or face penalties for failing to do so.

Since escheat applies to banks, insurance companies, utilities, and other businesses, you could also discover your company needs to file a claim to recover property that's rightfully yours. This could be the case if, for example, you moved your corporate office and neglected to apply for a refund of your utility deposit.

Finding out if you have a claim is free. Just search property databases for various states where your business has operated.

Not sure how escheat laws apply to your business? Let us help.

August 23, 2010

Watch out for special rules when making a Roth conversion

Making a Roth conversion this year? Be aware that not all your retirement funds can be converted.

Why? In order to be eligible for a Roth conversion, your funds first have to meet the eligibility requirements for a "rollover." For example, required minimum distributions — which are again mandatory in 2010 — are specifically excluded from being rolled over.

That means the current year distribution you have to take from your traditional IRA (once you're age 70½) cannot be converted into a Roth. Instead, you need to withdraw your RMD first. If you accidentally convert amounts you're required to withdraw under the RMD rules, a penalty will apply.

Other special rules include:

SIMPLE accounts. Amounts transferred out of your SIMPLE during the first two years of participation in your employer's plan are not eligible for a Roth conversion.

Inherited IRAs. You can convert accounts you inherit from your spouse to a Roth, but not accounts you inherit from others.

Substantially equal periodic payments. Have you been using this special rule to take distributions from your traditional IRA without incurring the 10% early withdrawal penalty? Though the account from which you're making withdrawals can be converted to a Roth, the payment itself is ineligible.

Unsure of which retirement accounts you can or should convert to a Roth during 2010? We're here to help you make the right choice; call us.

August 16, 2010

Some business meals get a full deduction

Are you watching what you eat at work?

Though that may not seem like a tax question, how you account for meals can affect your business tax return.

One reason why: While you can generally deduct only half the cost of meals related to your business activities, the tax code includes specific exceptions that allow a deduction of 100% of what you spend on food and beverages in certain situations.

Here are three exceptions to the general rule.

Meals provided to your employees on a social basis. That once-a-year holiday party qualifies for 100% deductibility as a "recreational, social, or similar activity," as long as it is primarily for the benefit of all your employees.

Food with nominal cost. Do you supply bottled water, morning-meeting donuts or office snacks for your staff? "De minimis" employee benefits — those small items your business pays for that are not considered taxable income to your employees — are typically 100% deductible.

Items available to the public. Food served at seminars, promotions, or a "new office warming" reception where you invite the public is 100% deductible.

Remember that you'll still need to keep detailed records to substantiate your deductions for meals and food served under these exceptions.

We'll be happy to help you review your expenses and set up a system to account for items that qualify for a more generous deduction.

August 9, 2010

DB(k) retirement plans are new this year

Have you heard about Plan X?

A 2006 tax law added section 414(x) to the Internal Revenue Code, creating a retirement plan you can establish for the first time this year. The IRS calls this new option an "eligible combined plan" because it has aspects of a defined benefit (DB) retirement plan and a 401(k), which is a type of defined contribution plan. For the same reason, the new plan is also called a DB(k).

An overview.

The DB(k) combines two types of retirement plans into one.

The rules for the defined benefit portion require your company to make contributions on behalf of eligible employees and to pay specified benefits after retirement.

Under the rules for the 401(k) defined contribution portion, you and/or your employees contribute specified amounts before retirement. After retirement, the amount received by each employee depends on how the contributions were invested and how well those investments did.

Some details.

You can offer a DB(k) when you employ at least two but no more than 500 workers.

You can set up the plan using a single document and you'll file one Form 5500, Annual Return/Report of Employee Benefit Plan, each year.

The DB(k) is exempt from rules that generally apply to retirement plans when most of the benefits go to highly paid employees.

Your plan must follow certain vesting, contribution, and nondiscrimination rules.

Retirement plans offer benefits to your business and employees. Give us a call to discuss whether this new option will work for your company.

August 2, 2010

Pay yourself reasonable wages

What rule do you follow if there are no rules to follow?

As the owner of an S corporation trying to determine a reasonable salary to pay yourself, the question is important — and difficult to answer. The reason: At present, there are no specific regulations, safe-harbor provisions, or minimum wage requirements defining what amount of compensation is "reasonable" for S corporation shareholder-employees.

As a result, when times are tough, the lack of hard and fast rules could tempt you to forego paying yourself a salary and instead take money from your corporation in other ways, such as distributions or loans. Yet that approach might be costly.

Why? While these methods can be legitimate, without the presence of a reasonable salary, it's possible for distributions and loans that you pay yourself from your S corporation to be reclassified as wages. If that happens, you could end up owing interest and penalties in addition to payroll taxes.

Here are two general guidelines for setting your salary.

How much you pay key employees. Wages and other amounts you pay unrelated, non-owner staff can indicate a starting point for your own compensation.

The average salary for your profession or industry. Information from government wage surveys and online benchmarking tools offer compensation trends and information.

Congress is considering new rules concerning certain professional services and the salary paid by S corporations. Give us a call to review your situation.

July 26, 2010

The kiddie tax: A basic review

Got college-bound kids? Then you might have questions about the kiddie tax, since these federal rules can apply to the unearned income of full-time students up to age 24.

Here's an overview.

The basics. The kiddie tax affects how much you'll pay on part of the investment income your child receives, such as interest or dividends. When the rules come into play, this "unearned income" is taxed using your rates.

How the tax is applied. For 2010, the first $950 of your child's unearned income is tax-free. Tax is calculated on the next $950 using your child's federal tax rate, which can be as low as 5%. Unearned income over $1,900 is taxed at your federal income tax rate, when that rate is higher than your child's.

For an 18-year-old, the kiddie tax applies when your child's earned income — that is, money received from wages, salary, tips, commissions, and bonuses — is less than half the cost of providing necessities such as food, clothing, and shelter.

The same 50% support exception applies when your child is a full-time student and age 19 through 23.

Planning tip. Consider hiring your college student in your family business. Wages are earned income and can lessen or eliminate the kiddie tax.

Still have questions about the kiddie tax? Give us a call. We have answers, information, and planning strategies.

July 19, 2010

Follow IRA withdrawal rules

"You put your money in, and you take your money out." Unfortunately, the rules for taking withdrawals from your IRA are not as simple as those for performing the classic children's dance.

Here are three general guidelines.

Early withdrawals. You'll pay regular income tax as well as a 10% penalty on early withdrawals from your traditional IRA unless an exception applies. Early withdrawals are those you take when you're under age 59½.

Exceptions that let you avoid the penalty include amounts you withdraw to use for the following:

• certain educational or medical expenses

• medical insurance when you're unemployed

• building, buying or rebuilding your first home

You may also qualify for an exception to the early withdrawal penalty if you're a military reservist, or when you inherit an IRA, take nontaxable distributions, or roll over eligible amounts within 60 days of the withdrawal.

Required minimum distributions. For 2010, you're once again required to take distributions from your traditional IRA when you reach age 70½. The penalty for withdrawing less than the required amount is 50% of the shortage.

The required minimum distribution rules also apply when you inherit a traditional or a Roth IRA.

Excess contributions. When you deposit more than the allowable maximum contribution into your IRA, you generally need to withdraw the excess along with any earnings by the due date of your tax return. Otherwise you may owe a 6% penalty, which can be assessed each year for as long as you leave the extra amount in your IRA.

The maximum IRA contribution limit for 2010 is $5,000 (plus an extra $1,000 if you're over age 50) or your earned income, whichever is less.

July 12, 2010

Homebuyer tax credit extension

If you signed a contract before May 1 to buy a home, but have been unable to close the deal, you still have time to apply for the homebuyer tax credit. The deadline for finalizing the paperwork on your new home has been extended through September 30, 2010.

Here's what you need to know:

The extension applies only if you already had a contract in place by April 30, 2010. The new deadline is available for first-time homebuyers and long-time residents.

The maximum credit remains unchanged ($8,000 for first-time homebuyers and $6,500 for long-time residents), as do other rules for qualifying.

You can claim the credit on your 2009 or 2010 federal income tax return. You'll have to complete Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, and attach proof that you meet the requirements.

Not sure if you qualify? We can help. Please call for more information.

July 5, 2010

Collectibles face special tax rules

Thinking of selling part of your memorabilia collection or investing in an exchange traded gold fund? While these items are generally considered capital assets, tax rules can differ from those that apply to other investments.

Differences include:

Special long-term capital gain tax rate. The maximum federal capital gain tax rate for sales of collectibles you own more than a year is 28%. The actual rate you pay may vary.

For example, say your entire 2010 capital gain is from the sale of a collection of antiques you've owned for two years. You're single and your taxable income is in the 15% bracket (up to $34,000). You'll pay tax on the gain at the lower 15% rate.

A reminder: The zero-percent federal long-term capital gain rate in effect during 2010 for the 10% and 15% tax brackets does not apply to collectibles.

Rules for certain exchange traded funds. Exchange traded funds (ETFs) are securities similar to mutual funds. Some ETFs invest in collectibles such as gold and other precious metals. Depending on the structure of the ETF, gains from sales of your shares may be taxable at the 28% capital gain tax rate.

The same result could occur when the ETF itself sells gold or other metals.

Whatever you collect, please call to discuss the tax consequences. We're here to help with planning, inventory, appraisals, and basis issues.

June 28, 2010

Rental property tax rules are complicated

Whether you're an intentional landlord or an accidental one, you may have questions about how to report rental income and expenses. That's understandable. The rules are complex. Even the IRS admits it, saying errors related to rental real estate activities contribute to what's called the "tax gap," a measure of tax law compliance.

Here are three areas where rental property tax rules differ from what you might expect.

Depreciation. You're probably familiar with immediate expensing rules, also called Section 179. Using these rules, you write off the cost of business assets in the year you purchase them. But did you know Section 179 is generally not available for residential rental property?

Typically, you'll depreciate residential rentals over 27.5 years. Appliances, carpeting, and furniture are depreciated over five years.

Rental losses. When rental expenses exceed income, the loss may not be deductible on your current year federal income tax return. Your income level and your participation in managing the property affect the deduction of any losses.

Losses you're unable to use in the current year are "suspended." Suspended losses can be applied against income from your rental in future years and can also reduce gain when you sell your property.

Sale of rental property. Depending on how you acquired your rental, the tax basis — the amount used to calculate gain or loss when you sell — may not be your cost.

For instance, say you used the property as your personal residence before renting it. In that case, your basis could be the fair market value of the home on the date you converted it to a rental instead of what you originally paid.

Special rules may also apply if you made a former rental property your residence.

Please call if you need details on the tax treatment of rentals.

June 21, 2010

Payroll tax update

As the second calendar quarter of the year winds down, a business owner's thoughts turn to... payroll tax.

Here are three changes to keep in mind as you complete this summer's payroll reports.

COBRA credit. The COBRA credit, which began last year, was extended into 2010. If you provided health insurance premium assistance to eligible former employees, you can claim a credit on your payroll tax return for the portion you paid.

What if you overlooked the credit in the first quarter? Report it on your second quarter payroll return. Alternatively, you can file Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, to correct the previous quarter.

Be sure to keep back-up to support your claim, including documentation of premiums received from your former employees.

Form W-11. Did you recently hire employees who qualify for the two payroll tax breaks signed into law this year? Use this new form as support for claiming both the 6.2% payroll tax deduction and the year-end federal tax credit for workers who stay with you at least 52 weeks.

Have your new employees sign a Form W-11; then keep them with your tax records.

Electronic deposits. Beginning in 2011, the IRS intends to eliminate Form 8109, the paper tax deposit coupons. In most cases you'll be required to deposit payroll taxes electronically.

Enrolling in the electronic tax payment system is free. Consider setting up an account now to give yourself time to get used to how it works.

For details or assistance, contact our office.

June 14, 2010

Don't overlook the Roth five-year holding requirement

The new, less restrictive rules in effect this year for Roth conversions may have you pondering whether now's a good time to convert your traditional IRA funds to a Roth IRA. While your decision involves many factors, one wrinkle to consider is the five-year holding period for converted assets.

The time limit has nothing to do with distributions of regular contributions from your Roth. As you know, you can withdraw regular contributions at any time, tax- and penalty-free, no matter your age. That's because you deposit those amounts into your Roth using money on which you've already paid income tax.

Rather, the five-year holding period comes into play when you're under age 59½ at the time you make a Roth conversion. In that case, you'll generally have to wait five years (or until you turn 59½, whichever comes first) before you can pull the "conversion assets" out penalty-free.

When you fail to meet the five-year rule, the penalty is the same 10% you'd pay if you took an early withdrawal from your traditional IRA. That's the purpose of the five-year rule — to discourage premature distributions from retirement accounts.

Once you reach age 59½, the 10% penalty disappears, though the five-year holding period for converted assets may still apply. For example, say you use the conversion to fund an initial Roth. During the first five years your new account exists, you'll pay ordinary income tax on withdrawals of the income earned from the converted amounts.

The five-year holding period can also affect your beneficiaries. For instance, if you had no prior Roth account before making a conversion, your beneficiaries will pay ordinary income tax on distributions of earnings. However, they can withdraw converted amounts with no federal income tax or penalty.

Give us a call to discuss this and other Roth conversion rules. We're ready to help.

June 7, 2010

Can you qualify for the small business health insurance credit?

Graphics, videos, and four million postcards from the IRS. The small business tax credit that you might qualify for when you provide health insurance coverage to your employees has gotten a lot of publicity.

Thanks to the blitz, you're probably familiar with the basic idea:

Employ the equivalent of 25 or fewer workers with average wages of less than $50,000.

Pay at least half the cost of health insurance premiums for those employees.

Claim a federal income tax credit of up to 35% of the premiums.

Still, you may have questions, such as when are 25 employees not really 25 employees?

Good question, because the answer affects how much of the credit you can claim, and whether or not you're eligible to claim it at all.

For example, say part of your staff puts in less than 40 hours a week. In that case, you could employ more than 25 workers — yet the number of employees you count to calculate the credit will be less than 25. The odd result is due to a concept called a "full-time equivalent employee," which means you make an adjustment to the hours worked by your part-timers to equate them to full-time employees.

In addition, some seasonal employees and your family members are not included when figuring the amount of the credit you can claim.

Give us a call to review all the requirements of this new tax break. We're ready to help make sure you get the maximum benefit available.

May 31, 2010

Military tax breaks are available

National Military Appreciation Month trivia question: How many military tax benefits can you name?

Here's an overview of three.

Home of record. For your 2009 tax return, if you're the spouse of a military service member, you may be able to keep your home state for tax filing purposes no matter where your family is posted.

When you relocate in order to be with your spouse, the Military Spouses Residency Relief Act makes it easier to maintain permanent residency in your home state, potentially reducing your tax bill and easing filing complexity.

Homebuyer credit. You have an extra year to qualify for the homebuyer credit if you or your spouse served on qualified extended duty outside the U.S. between December 31, 2008, and May 1, 2010. Meet the conditions and you can claim the credit — up to $8,000 as a first-time homebuyer or $6,500 as a long-term resident — when you buy a home by April 30, 2011.

In addition, if you sell your home within three years, you may be able to avoid a recapture of the credit if government orders changed your duty station.

Differential pay. Did you get differential pay from your civilian employer during 2009? You might have noticed a change in the way that pay is reported to you. The reason: Money you receive from your employer to help fill the gap between your regular salary and your military pay is now considered wages and is included on Form W-2.

Differential pay is subject to federal income tax withholding, but not social security or Medicare tax, and is included in compensation for retirement plan calculations.

Give us a call to discuss other benefits available to you as a member of our uniformed services. We're here to help with all your tax and financial decisions.

May 24, 2010

Do you need to file an FBAR?

Remember the FBAR!

No, it's not a reminder for law school students or a rallying call for a historical event. FBAR is the acronym for the Report of Foreign Bank and Financial Accounts, a form you have to file each year by June 30 if you have an interest in a foreign bank or brokerage account.

The filing requirement applies to accounts with a combined value of $10,000 or more at any point during the calendar year. Be aware it's the value of the accounts that matters, not how much income, if any, that you receive.

You may also have to file an FBAR if the bank or brokerage holding the account will dispose of the assets based on your signature — even if you never use this power.

As an illustration, say you're a co-signer on the financial account of a relative in a foreign country. Though you may have this "signature authority" simply as a precaution in case of emergency, under present rules you could be required to report information about the account.

In addition to your personal accounts, FBAR regulations extend to estates, trusts, corporations, partnerships, and other businesses, such as your LLC.

Though there is generally no extension available for the FBAR, Treasury has issued relief related to due dates and filing requirements in certain situations. Please call for the latest information.

May 17, 2010

Roth IRA conversion: Act now, pay later?

Are you thinking of converting your traditional IRA, SEP IRA, SIMPLE IRA, or other qualifying retirement plan to a Roth IRA this year?

Depending on your tax bracket and financial situation, acting in 2010 could be a good idea. One reason: For conversions made this year, a change in the law provides a one-time "act now, pay later" option.

How it works. You instruct the custodian of your retirement plan assets to convert all or part of your account to a Roth during 2010. Normally, the amount you convert is treated as ordinary income on your 2010 federal income tax return — and you can still choose to report it that way.

However, for 2010 conversions only, you have another alternative: You can include the conversion income on your 2011 and 2012 returns instead. You will report no income from the conversion on your 2010 return, 50% on your 2011 return, and 50% on your 2012 return.

What's the catch? As you begin your planning, you'll want to take into account estimated future tax rates. Why? Because you're deferring the income from the conversion, not the tax on that income. In other words, you'll pay federal income tax on the conversion in future years at the rates applicable to those years.

In addition to potential changes in tax law, you'll need to consider your personal financial outlook. Expected — and unexpected — increases in income may put you in a higher tax bracket.

The opportunity to defer income is only one of the many factors to keep in mind as you determine whether a Roth conversion makes sense for you. Please call for a thorough review of your options.

May 10, 2010

Start your 2010 planning with your 2009 tax return

Have you been too busy to start this year's income tax planning? Would having an already completed reference guide help?

If so, pull your just finalized federal income tax return from the stack of to-be-filed paperwork. The forms offer valuable insight into your finances.

Here are two examples of how to use your 1040 for tax planning.

Line 12, Business income or (loss). Your business income impacts your adjusted gross income. AGI, in turn, affects credits and deductions, as well as federal and state income tax and self-employment tax (shown on Line 56 of your federal return).

Tax-saving opportunities to consider for 2010 include hiring family members, starting a retirement plan, and keeping track of "soft" expenses such as business use of your personal vehicle.

Financial planning tip. Assess the structure of your business. Incorporating or forming an LLC can limit personal liability.

Line 40, Itemized deductions or standard deduction. Did you just miss being able to itemize on your 2009 return? Consider timing deductions this year. For instance, you may want to plan now to accelerate charitable contributions or to bunch property tax payments into one year.

As you scan your return, keep in mind the interrelationships between various income and deduction items.

Example. Some itemized deductions, such as medical expenses, are limited to a percentage of AGI. That means tax planning affecting your business income can also have an effect on how much medical expense you may be able to claim.

We'll be happy to help analyze your return and maximize 2010 tax savings. Give us a call so we can begin today.

May 3, 2010

Don't ignore employer penalty notices

So, did you reconcile your payroll reports for 2008? If not, you may want to check your figures.

Here's why: April is the month the IRS and the Social Security Administration (SSA) begin to match the payroll information reported on prior year quarterly and annual employment reports, and to generate notices based on discrepancies.

The program, known as Combined Annual Wage Reporting (CAWR), matches the amount of social security wages and tips, Medicare wages and tips, federal income tax withheld, and advanced earned income credit reported to the two agencies.

If those totals do not agree on the forms you filed with the IRS and the SSA, you can expect to receive a notice. Since the review covers the second and third preceding tax years, notices sent in 2010 will request information about your 2008 and/or 2007 payroll returns.

What to do if you receive a CAWR notice. First, make sure you completed all required forms for the year covered by the notice. Next, check that the IRS figures take into account previously corrected forms you submitted after the original due date of the returns in question.

Finally, respond within the 45-day timeframe shown on the notice. Otherwise the IRS will close your case and assess interest and penalties based on the information they have.

CAWR notices are sent only to you, as the employer, no matter who completes your payroll returns. If you receive one, please call. We're here to help you resolve tax issues quickly and efficiently.

April 26, 2010

Penalty abatement may be possible

Sometimes you can't help doing what you'll have to find an excuse for later.

If one of those actions is filing your tax return after the due date, your explanation will have to be good enough to convince the IRS to abate the resulting penalties.

Fortunately, the IRS will consider "reasonable cause" in most cases.

What qualifies as reasonable cause? In general, when you fail to file a return on time, reasonable cause for the lapse is defined as "ordinary business care and prudence." That means you did your best to comply with your tax responsibilities, but you were unable to do so because of circumstances beyond your control.

Examples of reasonable cause include serious illness, natural disasters, loss of your records, and casualties that affect your ability to file on time.

Suppose you just made a mistake? You may still be able to qualify for penalty abatement under the reasonable cause exception. You'll want to show you acted to correct your mistake as soon as you discovered it and that your error was an unusual event and not a willful act.

Please call if you receive a penalty notice from the IRS. We can help you apply for relief.

April 19, 2010

The HIRE Act offers tax breaks for hiring

Are you thinking of hiring new employees, or rehiring previously laid-off workers? You may qualify for a payroll exemption as well as a business credit under the newly enacted Hiring Incentives to Restore Employment Act (HIRE Act).

Here are details.

Payroll exemption. When you hire certain unemployed workers, you may qualify for forgiveness of the 6.2% social security tax you would normally pay on the wages of those new employees.

Your new hires must start work after February 3, 2010, and before January 1, 2011. In addition, they'll have to certify they worked less than 40 hours during the 60-day period prior to starting the job with you. Relatives are ineligible, and your new workers generally can't displace a current employee.

The exemption is available for wages paid from March 19, 2010 through December 31, 2010. You'll claim it on your quarterly payroll reports, beginning with the second quarter of 2010.

Note that you'll still have to withhold and deposit the employee's portion of the social security tax, and that both you and your employee are required to pay Medicare tax on all wages.

Be aware, too, that while the exemption will free up current cash flow, you will have less payroll tax expense, and therefore a smaller deduction on your business tax return at year end. Also, wages that are eligible for the exemption do not qualify for purposes of calculating the Work Opportunity Tax Credit unless you opt to forego the exemption.

Business tax credit. In conjunction with the exemption for social security tax, you can take a federal tax credit for the newly hired workers who stay with your company for 52 consecutive weeks. The maximum credit is $1,000 per retained employee, and you'll claim it on your year-end business income tax return.

The HIRE Act also extended the enhanced Section 179 expensing rules. Through the end of 2010, you can expense up to $250,000 of machinery and equipment you purchase and use in your business, as long as the total cost of the assets you buy doesn't exceed $800,000. Bonus depreciation, which expired at the end of 2009, was not extended.

Give us a call to discuss the new legislation. We're here to help you get the most benefit from the tax breaks available to you.

April 12, 2010

Direct deposit: Should you buy savings bonds?

Everything old is new again.

Forty years ago, you could choose to have your federal tax refund sent to you in the form of U.S. savings bonds. That option, among others, is once again available on your 2009 return.

This time around, the bonds you can buy with your refund are U.S. Series I savings bonds. And, like other alternatives for saving your refund — such as depositing the money in your IRA, health savings account, or Coverdell education savings account — you'll want to consider your overall financial picture before making the decision to buy.

What they are. "I bonds," as they're known, are savings bonds with an inflation component. When you buy I bonds, part of the interest you earn is based on a fixed rate, and part comes from an inflation adjustment.

The tax effect. I bond interest is not taxable on your state or local income tax returns. Federal income tax does apply, as do both federal and state inheritance and gift taxes. Generally, you can choose to pay federal income tax on the interest annually or defer it until the bonds mature.

In addition, there's a break when you redeem the bonds and use the principal and interest to pay qualified educational expenses for yourself, your spouse, or a dependent. In that situation, you may be able to exclude the interest from your taxable income.

Give us a call to discuss these and other tax planning moves that will help you make the most of your refund.

April 5, 2010

The Patient Protection and Affordable Care Act reforms health care

The recently signed health care legislation has an official name, but you probably think of it simply as health care reform. And now that it's law, you may be wondering what tax changes are in store.

Here's a recap of some rules included in the two health care bills that will affect your individual and business tax returns.

Business tax credit. Starting this year, a new federal tax credit is available when you provide health care insurance for qualified workers. In general, the credit applies when you have no more than 25 employees earning average wages of $50,000 or less. The maximum credit is 35% of the premiums you pay.

Adoption credit. For 2010, you'll be able to claim an increased adoption credit on your personal return. The credit is increased by $1,000 (to $13,170) and is refundable. Also, the credit is extended through 2011.

Changes to health savings plans. In 2011, over-the-counter medications will no longer be considered qualified medical expenses for health savings plans such as HSAs, FSAs, and HRAs. Also, penalties for nonqualified withdrawals will increase.

The maximum contribution you can make to FSAs will be limited to $2,500 starting in 2013.

Increased Medicare tax. A two-part change affects individual tax returns in 2013.

If you're married, filing jointly, and have income of more than $250,000 ($200,000 when you're single), a 3.8% Medicare tax may be assessed on your unearned income. Unearned income includes dividends, interest, royalties and rents.

In addition, when your earned income is greater than $250,000 (for married filing jointly) a .9% increase in Medicare tax will apply. The income threshold is $200,000 when you're single.

Modification of medical expense itemized deduction. Starting in 2013, in order to claim an itemized deduction on your personal return when you're under age 65, your unreimbursed medical expenses will need to exceed 10% of your adjusted gross income. The current threshold is 7.5%.

Penalties for not providing health care to employees. A penalty for failure to provide minimum essential health coverage to your employees takes effect in 2014. The penalty applies when you have 50 or more full time employees.

We'll be providing more information on these and other tax provisions in the health care reform legislation. In the meantime, if you have any questions about how the bill applies to you or your business, please call.

March 29, 2010

Can you take a home office deduction?

As you celebrate "National Organize Your Home Office Day" in March, you might discover a tax break under the clutter: the home office deduction. The deduction is available when you use part of your home regularly and exclusively as your primary place of business, or for meeting clients.

If you're an employee who works from home, there's an additional rule: The exclusive use must be for the convenience of your employer.

In either case, "exclusive" is defined as "all or nothing." Conduct any personal activities in the space you've designated as your office and the deduction is lost.

But satisfy the requirements and you can write off part of the expenses of running your home, including utilities, interest, and property taxes, as a business deduction. That means those costs can directly reduce business income, saving you income tax. If you're a sole proprietor, the deduction may also reduce self-employment tax. Though the amount you can claim is generally limited to business income, disallowed expenses can be carried forward to future years.

You can take the home office deduction on your 2009 return even if you have not done so in prior years, and you're eligible whether you're a renter or a homeowner.

What are the drawbacks? One drawback to taking a home office deduction is the potential for depreciation "recapture" that may apply when you sell your home, potentially reducing the amount of gain you can exclude from income.

Give us a call. We can answer your questions about the tax requirements of a home office deduction in your particular situation.

March 22, 2010

Deducting interest expense: What you need to know

Where does your interest lie? If interest you paid during 2009 rests in a tax-deductible category — or sprawls across several of them — you may be able to reduce your tax bill.

Interest expense can be sorted into five groups, each subject to different rules and restrictions.

Business interest. Interest paid on borrowed funds used for your business can offset business income. In some cases, the deduction may be less than the total amount you paid, such as when you use loan proceeds to buy a vehicle you drive both personally and for business.
Investment interest. The deduction for interest on loans you take out to purchase investment property is limited to "net investment income." That's the amount you earn from interest, dividends, and other investments, less costs incurred to produce the income.
Passive activity interest. When your participation in a business venture is limited, or if you own rental property, the amount you can deduct as interest expense may be subject to the passive activity rules. These rules restrict your current-year deduction to income from passive activities. Nondeductible amounts can be carried forward to future years.
Qualified residence interest. This category includes interest on debt secured by your main home and/or a second home. Mortgage interest is an itemized deduction and includes prepayment penalties, late payment charges, and prepaid interest.
Personal interest. Personal interest generally offers no tax benefit. An exception: interest paid on student loans, which can be deducted even if you don't itemize. For 2009, the maximum student loan interest deduction is $2,500.

Please call to discuss the tax implications before you borrow money.

March 15, 2010

Homeowners get tax breaks

You've no doubt heard about the refundable federal income tax credit for first-time or long-term homebuyers who purchase a new home. But you may be wondering what credits or deductions are available if you're already a homeowner and you're not planning to move.

For 2009 returns, homeowner tax breaks include:

An increased standard deduction for real estate taxes paid. Real estate taxes are deductible when you itemize — and sometimes when you don't. If you paid real estate taxes on your home during 2009 but you're not able to itemize, you can increase your standard deduction by up to $500 ($1,000 when you're married filing a joint return).

An itemized deduction for mortgage insurance premiums. Premiums paid during 2009 for insurance on the mortgage used to acquire your home may be deductible. You'll have to itemize to claim the deduction, which begins to phase out when your adjusted gross income exceeds $100,000.

Credits for energy-efficient improvements. Did you add insulation, exterior windows, or a new heating or air conditioning system to your home in 2009? You might qualify for a credit of 30% of the cost (up to $1,500) for making energy-saving improvements.

Homeowner tax breaks also include an itemized deduction for mortgage interest and points, the home office deduction, and an income exclusion when you sell your home. Please contact our office if you need details or filing assistance.

March 8, 2010

Take a closer look at Form 1099-R

Forms 1099-R — they arrive in your mailbox this time of year, taxing reminders of your retirement account decisions during 2009. Right there, in box one, is the total amount you withdrew from your pension, annuity, IRA, or other retirement plan.

But before you enter that figure as income on your federal tax return, it may pay to review your reasons for the withdrawal, especially in the case of IRA distributions.

For instance, if you took money from a traditional IRA in which you have basis, the taxable portion will be less than the gross distribution reported on Form 1099-R. You account for the difference on Form 8606, "Nondeductible IRAs."

Qualified charitable contributions made directly from your IRA may also reduce the taxable amount of the distributions shown on Form 1099-R. In this case, you indicate the reason for the difference on the first page of Form 1040 with the notation "QCD."

Did you roll part or all of the distribution you received into another qualified IRA? As long as you made only one transfer during the past twelve months, and did so within the statutory 60-day time period, the amount rolled over is tax-free. Notify the IRS that you qualify for this exception by entering "Rollover" on page one of Form 1040.

Other IRA distributions reported on Form 1099-R may require additional action during 2010. For example, you may want to "undo" last year's Roth conversion.

The tax rules governing retirement account withdrawals are complex. Contact our office for any assistance you need.

March 1, 2010

Did you receive Form 1099-C?

What is that mystery form?

If you borrowed money that your lender says you no longer have to repay, you may have received a tax information statement you've never seen before. Form 1099-C, which lenders send to you and to the IRS, shows the amount of the cancelled debt — an amount that may be taxable income to you.

Or maybe not, depending on the type of debt cancelled.

For instance, under present federal law, debt forgiven on loan proceeds you used to buy, build, or improve your main residence (up to a maximum of $2 million) is generally not taxable. That's also true when the forgiveness involves debt you incurred to refinance a loan used for those purposes.

So what if you're sure you're not going to owe tax, since the forgiven debt is a result of a foreclosure or mortgage restructuring on your home? Do you need to report anything?

In most cases, the answer is yes. Why? One reason: Though certain cancelled debt can be excluded from income, the exclusion is not automatic. You have to attach Form 982 to your federal income tax return to claim the tax relief and to show the amount you can exclude.

In addition to mortgage debt relief, you may qualify for other exceptions that make the cancelled debt reported on Form 1099-C nontaxable, such as insolvency or a cancellation resulting from nonrecourse debt.

Please call our office to discuss how the rules apply to your situation and to investigate tax-saving solutions.

February 22, 2010

Missing a W-2?

Accept no substitute.

Fortunately, you can forget that slogan when events like natural disasters or bankruptcies cause your employer to neglect issuing your W-2. The IRS will accept a substitute in situations that leave you unable to obtain year-end wage statements.

What to do. First, make an attempt to get your W-2 by contacting your employer. You can also ask the IRS to do the nudging for you.

If those remedies fail, your next step is to complete Form 4852, Substitute for Form W-2, Wage and Tax Statement.

What you'll need. Since Form 4852 is a replacement for your W-2, you'll need the same information shown on that statement, including your employer's name, address, and federal identification number. You can estimate your 2009 wages and withholdings, using pay stubs or another reasonable method.

What else to do. Consider waiting until April to file your return. That way you avoid having to prepare an amended return if you do receive the actual W-2 and it differs from your estimate.

If you have to use Form 4852, mark your calendar to check next year's annual social security estimate of your potential future benefit. You'll want to be sure the wages are included in the "earnings record" portion of the statement.

Call us if you need additional information about how to proceed when you're missing a W-2.

February 15, 2010

Who has to file an income tax return?

Your father asks if it's true people over age 70 no longer need to send in tax forms. Your workout buddy wonders whether everybody has to file, even when no tax is due. Your college freshman wants to know if she'll need to prepare a return for 2009 since she's a full-time student and you'll be claiming her as a dependent.

Taxes are the topic of conversation this time of year and questions like these are common. So who does have to file a federal income tax return?

As a general rule, you'll need to file when your gross income exceeds the sum of your standard deduction plus your personal exemption. That's true no matter what your age is or whether you will or will not owe tax.

For instance, say you're married, filing jointly, and you and your spouse are both over 65. For 2009 returns, you'll need to complete tax forms when your gross income exceeds $20,900. In this case, the calculation includes:

Standard deduction	$11,400
Plus additional standard deduction ($1,100 each) because you're both over 65	2,200
Plus two $3,650 personal exemptions	7,300
	$20,900

The rules for dependents differ. Assuming your college freshman dependent is single, she'll have to file a return when her unearned income from sources such as interest, dividends, and capital gains is more than $950.

Did she work? The filing requirement kicks in when wages are more than $5,700. When her income is a combination of earned and unearned, the answer depends on the total gross amount received.

Even if it turns out she's not required to file, sending in a return may be a good idea. For example, if withholding was deducted from her wages, she'll have to file a return to get a refund.

Please contact our office if you need additional information or filing assistance.

February 8, 2010

New law allows early deduction for Haiti relief donations

A law signed by President Obama on January 22 lets you take an early tax deduction for contributions you make for earthquake relief to Haiti. And if you use your cell phone to donate via a text message, the new law gives you an easier method for substantiating your contribution.

If you itemize deductions on your tax return, you may elect to take a charitable deduction on your 2009 return for Haiti contributions made after January 11, 2010, and before March 1, 2010. Claiming a 2010 contribution on your 2009 return will give you an earlier tax benefit, though you may also wait until you file your 2010 return to take the deduction.

Here are other important details.

The contributions must be made specifically for relief related to the January 12, 2010, earthquake in Haiti.

The contributions must be made to qualified charities, rather than to specific individuals.

Only cash contributions qualify for the earlier 2009 deduction option; contributions of property or goods do not qualify.

Contributions made to foreign charities generally don't qualify.

You'll need records to substantiate any deductible donations you make. But a special easing of the rules will allow you to use your telephone bill as substantiation for donations made by text message. The phone bill must show the name of the organization receiving your donation, the date of the contribution, and the amount you gave. For other donation methods, you'll need a bank record or written communication from the charity.

If you claim a Haiti relief deduction on your 2009 return, you may not also claim the same donation on your 2010 return (which you'll be filing in 2011). To decide whether to take the deduction on your 2009 or 2010 return, run the numbers to see which year will give you the bigger tax savings. For 2009, higher-income taxpayers have a limit on their total itemized deductions. This limit is eliminated for 2010, so the deduction could actually provide a bigger tax break if taken on your 2010 tax return.

For additional information or filing assistance, please contact our office.

February 1, 2010

The dependency exemption: What you need to know

Who depends on you? When the people counting on you for support are qualifying children or relatives, you may be eligible for a dependency exemption of $3,650 on your 2009 federal income tax return.

Not sure who meets the definition? Consider these tips.

Dependents cannot have dependents. The "dependent taxpayer" test prevents you from claiming a dependent when someone else claims you on their return. Put another way, you can only claim a dependent if you yourself are not one.

The definition of a qualifying child has been updated for 2009 returns. Generally, a qualifying child must not have filed a joint return. In addition, the child must be younger than you are.

Divorced or separated parents need a signed release to claim an exemption. If you're a noncustodial parent who wants to claim a dependency deduction for your child in 2009, you must attach Form 8332 to your federal income tax return. As a general rule, copies of divorce decrees or separation agreements are no longer acceptable.

Qualifying relatives can include family members who do not live with you. Do you support a parent in a nursing home or another state? You may be able to claim a dependency exemption as long as your loved one's gross income is less than $3,650 and you provide more than half the total support.

If other family members pitch in to help but no one individually furnishes more than half of your loved one's total support, you can still benefit. A "Multiple Support Declaration" (Form 2120) lets you decide who claims the exemption.

Need more information? Give us a call. You can depend on us for answers.

January 25, 2010

What's your status?

While gathering information to complete your income tax return, you may give little thought to your filing status. But there's a reason "filing status" choices appear at the beginning of tax forms: They're important.

Why? Because filing status can impact exemptions, reportable income, deductions, credits, tax rates, liability, the type of form you file, and whether you need to file at all. In addition, some states require that you use the status reported on your federal return, which can affect the amount of state tax you pay.

Here are facts to consider when determining filing status.

Your status generally depends on whether you're married or single on the last day of your taxable year (typically December 31). In cases of divorce or separate maintenance decrees, the laws of your state determine whether you're considered married or single. Same-sex marriages are not recognized for federal income tax purposes.
As a married couple, you can choose joint or separate returns. When you file separately, you can change your mind later and amend your return to file jointly. However, you can't switch from joint status to married filing separately after the due date of the original return.
If you were widowed during the year and have not remarried, you have the option of filing jointly with your late spouse. When you're widowed and have dependent children, you can continue to use joint tax rates for two additional years following the year your spouse died.
Head of household status is intended for single taxpayers with dependent children. It may also be available when you're single and maintaining a separate household for a parent — including one living in a nursing home.

Questions about your filing status? Please call for information.

January 18, 2010

Payroll – A 2010 employer update

When it comes to employment tax, 2010 is a year when many things change — and much remains the same.

Here's an overview of what's new and what's not.

Social security wage base. The 2010 wage base is $106,800, the same as 2009. Once an employee's gross wages reach that amount, you no longer have to deduct FICA tax. As in prior years, there is no limit on wages subject to Medicare tax.

FICA and Medicare tax rates. The rates for these taxes remain the same: 6.2% for the FICA portion and 1.45% for Medicare, resulting in a combined total of 7.65%.

Unemployment tax. The federal unemployment tax rate of 6.2% (less a credit for state unemployment payments) has not changed.

However, your state unemployment tax rate is likely to increase, and you may have to pay the higher tax on more wages.

"Making Work Pay" credit. This refundable credit of up to $400 for single workers ($800 for married filing jointly) is still in effect during 2010. The credit is incorporated into federal income tax withholding tables, so be sure your employees give you an accurate W-4.

Form 944 opt-out rules. Would you prefer to prepare quarterly payroll returns instead of this annual report? In 2010 you can opt out of filing Form 944.

Business vehicle mileage. You can reimburse yourself and your employees 50¢ for each mile driven for business during 2010, a decrease from 2009's rate of 55¢.

Identity theft safeguards. Under a new initiative, you can elect to use asterisks instead of identification numbers on certain information returns you send to vendors, such as Form 1099.

Tip program extension. The Attributed Tip Income Program, originally set to expire December 31, 2009, is now extended to December 31, 2011.

Please call for more information on the latest employment tax rules and their application to your business.

January 11, 2010

Review payroll reporting for 2009

Would you be ready if your business was one of the 6,000 companies expected to be randomly chosen for employment tax audits beginning this February?

As you wrap up 2009 payroll reporting, taking time to review your policies and procedures can save headaches down the road.

Here are tips.

Reconcile quarterly and annual figures. Tie the wages you reported during the year on quarterly state and federal payroll tax returns to the total reported on "Form W-3, Transmittal of Wage and Tax Statements."

In addition, whether you file electronically or on paper, the total of individual Forms W-2 must agree with Form W-3.

File all necessary returns. Remember those returns that are due only once a year, such as Form 940, used to report federal unemployment tax, or Forms 1099, for independent contractors and other vendors.

Do you file Form 944, the annual employment tax return? You're required to complete the form even if you paid no wages during the year.

File on time. Forms W-2 are due to your employees by February 1, 2010, and to the Social Security administration by March 1 (March 31 if you file electronically). Quarterly and annual federal payroll returns are generally due by February 1.

For any filing assistance you need, please contact our office.

January 4, 2010

What to expect on your 2009 return

So what's new? If the question is about your 2009 federal income tax return, the IRS has been ready with the answer since June, when a draft copy of this year's Form 1040 was released.

Here are six items you can expect to see.

A reminder that the first $2,400 of unemployment benefits received in 2009 are tax-free.
An adjustment to income for the educator deduction. Up to $250 of qualified out-of-pocket costs for classroom supplies can be deducted, even when you don't itemize.
An increase of the $3,650 exemption for you and your dependents if you provided housing for victims of the 2008 Midwestern disasters. You can claim an additional $500 for each person you helped (up to a $2,000 maximum).
A new deduction for real estate taxes you paid in 2009. You can add up to $1,000 ($500 for singles) to the standard deduction of $11,400 for joint returns ($5,700 for singles).
You can also increase your standard deduction by adding state and local sales and excise taxes on new cars bought between February 17 and December 31, 2009. The deduction is limited to taxes paid on the first $49,500 of the purchase price. Income limits apply.
A potential refund of a portion of the American opportunity education credit. When the amount of your credit exceeds your 2009 tax, you can get a refund of up to $1,000 per eligible student.

Please call for details on these and other changes.