Social Security Administration Launches New Online Tool

It's a moment many taxpayers dread. A letter arrives from the IRS and it's not a refund check. But don't panic; many of these letters can be dealt with simply and painlessly.

Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of changes to their accounts, or request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.

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

Here are dos and don'ts to follow if you receive correspondence from the IRS or state tax authority:

• Do immediately get a copy of the correspondence to this office so it can be reviewed and timely responded to.
  
  
• Don't respond if the correspondence requests personal information. There has been substantial identification theft related to scam artists pretending to be the IRS or another authority, especially correspondence by e-mail. Let this office take a look before responding.
  
  
• Don't procrastinate or throw the letter in a drawer, hoping the issue will go away. Most of these letters are computer-generated and, after a certain period of time, another letter will automatically be generated. And, as you might expect, each succeeding letter will become more aggressive and less easily dealt with.
  
  
• Don't automatically pay an amount the correspondence is requesting unless you are positive you owe it. Quite often, you will not owe what is requested, and it will be difficult to get your payment back.

Most notices are computer-generated after comparing the income items reported on your return with those reported by the payers. For example, your employer sends you a W-2 every year and also sends a copy to the government so that your wages are on the IRS computer. Your bank sends the 1099-INT to the IRS showing how much interest you earned. Your brokerage firm reports your dividends with Form 1099-DIV and stock transactions with 1099-B forms. If you are self-employed, those who pay you $600 or more during the year are required to send you and the IRS a 1099-MISC, and if you have credit card transactions, the clearing house will issue a 1099-K. If you are retired and collecting a pension or drawing on your own IRA, a 1099-R will be sent to you. Lenders report how much interest you paid on your home loan during the year. If you are lucky enough to hit it big in Vegas, you will receive a 1099-G for your winnings. The list goes on and on, and if what you reported on your return doesn't match what is on the IRS's computer, you will receive a computer-generated notice. One big problem that has developed over the years is the IRS's willingness to allow payers to use substitute forms that are unrecognizable as income-reporting documents. Many of the brokerage firms are now providing their substitutes in letter-size documents printed front and back on multiple sheets that almost take a financial expert to understand. This results in frequent errors.

There are times when you may receive an income item and it appears to be taxable to the IRS, when in fact it is not. Here are some frequently encountered situations:

• Sold a security with no profit − Whenever you sell a security, the brokerage house will report the gross proceeds of sale to the IRS. In other words, the IRS has on their computer what you sold it for. For purchases made before 2011, they have no clue what you paid for it, which means you must report the sale on Form 8949 and Schedule D on your tax return. If you fail to report it, the IRS treats the entire sales price as a profit. Let's say you sold 200 shares of stock, which originally cost you $5,050, for $5,000. You actually have a loss of $50. Unless you report the transaction and show that you paid $5,050 for the shares, the IRS is going to assume you had a $5,000 profit. This frequently occurs when taxpayers overlook a transaction or simply omit it because there was no profit. If this is what caused the notice, you will need to respond to the IRS to explain the mistake and provide verification of the stock's original cost.
  
  
• Rollovers − Another frequent error is when you rollover an IRA, 401(k), etc. from one plan to another or one trustee to another. If you don't show on the tax return that the distribution was rolled over, the IRS assumes the entire amount to be taxable. If these funds are transferred between trustees, a 1009-R is not supposed to be issued, but sometimes they still are. It is better to make sure. On the other hand, if you take possession of the funds and then redeposit them into another IRA, a 1099-R will be issued, and the rollover must be accounted for on the return. If this is what caused the notice, you will need to provide verification of the rollover to the IRS with your response.
  
  
• Shared accounts − Generally, banks and other financial institutions only have the capability of having one taxpayer ID as the primary owner on an account, even though it may be a joint account with others. These financial institutions will issue the 1099 or other reporting documents under the social security number (SSN) of the primary owner, and the total will be reported to the IRS under that SSN. This also will affect married or separated taxpayers who do not file jointly. The IRS expects to see the same amount that was reported on the 1099 on the return of the individual whose SSN was used on the 1099. When there's a mismatch, the IRS will send out a notice of unreported income. When responding to the IRS notice, you will need to provide the names, addresses, and SSNs of the other owners and a statement to the fact that they each reported their appropriate share.

The foregoing are just a few of the more common examples of computer mismatches that can cause computer-generated notices. Even though the IRS feels the notices are readily understandable, experience has shown that taxpayers can become confused and that the experienced eye of a tax professional is usually required to decipher the notices. That is why we highly recommend that this office review any notice you receive prior to your taking any action or responding.

A Word of Caution - The IRS routinely provides state tax agencies with the results of the correspondence audits. Generally, if the IRS's notice proves to be correct, the results of the correspondence audit will need to be dealt with on the state level through an amended state return, or you can wait to receive the state notice. However, if you wait for the state notice, additional interest and penalties may possibly accrue for the state return.

Please give this office a call if you have questions related to a correspondence you received from the IRS or state authority.

If you discover that you forgot something on your tax return, you can amend that return after it has been filed. The need to amend can include a number of issues:

• Receiving an unexpected or amended K-1 from a trust, estate, partnership, or S-corporation.
• Overlooking an item of income or receiving a corrected 1099.
• Forgetting about a deducible expense.
• Forgetting about an expense that would qualify for a tax credit.

These are among the many reasons individuals need to amend their returns, whether it is for the just-filed 2011 return or prior year returns.

Here are some key points when considering whether to file an amended federal (Form 1040X) or state income tax return.

1. If you are amending for a refund, you should be aware that refunds generally won’t be paid for returns if the three-year statute of limitations from the filing due date has expired. Thus, with the exception of amending a return to carry back a business net operating loss (NOL), the IRS will pay refunds only on returns from 2009 through 2011. Some states have a longer statute.
   
   
2. Generally, you do not need to file an amended return to correct math errors. The IRS or state agency will automatically make those corrections. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS or state agency will send a request asking for the missing forms.
   
   
3. If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
   
   
4. If you owe additional 2011 tax, file Form 1040X and pay the tax before the due date to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.
   
   
5. When amending multiple returns, send them in separate envelopes. Sometimes when filed together, they are mistaken for a single return, and the additional returns filed in the same envelope are not processed.
   
   
6. If the changes involve another schedule or form, it must be completed and included with the amended return. In addition, it may be appropriate to include documentation to avoid subsequent correspondence from the IRS or state agency.
   
   
7. A detailed explanation of the changes must also be attached. This is required to explain to the processing staff the reason for the amendment. In insufficient explanation can lead to additional correspondence and delays.
   
   
8. Depending on why you file an amended federal return, you may be required to amend your state return. However, if the federal amendment is filed to claim or correct a tax credit that the state does not have, no state amended return will likely need to be filed. In most other circumstances, you will need to amend the state return as well as the federal.

An amended return can be more complicated than the original, so please contact this office for assistance in preparing your amended returns.

With the explosion of online businesses, one would think that there would be a standard method of deducting the cost of your business website. But some questions still exist as to what part of a website is considered software, and to date, the IRS has not fully clarified that issue for tax purposes.

Purchased Websites - If the website is purchased from a contractor who is at economic risk should the software not perform, the design costs are amortized (ratably deducted) over the three-year period, beginning with the month in which the website is placed in service. For 2012, non-customized computer software placed in service during the year qualifies as Sec 179 property and can be written off in full up to the limits of this special expense deduction.

In-House Developed Websites - If, instead of being purchased, the website design is “developed” by the company or designed by an independent contractor  who is not at risk should the software not perform, the company launching the website can choose among alternative treatments, one of which is deducting the costs in the year that the costs are paid, or accrued, depending on the taxpayer's overall accounting method. Or, as an alternative, the costs may be amortized under the three-year rule.

Non-Software Expenses - Some website design costs, such as graphics, may not be classified as software and must be deducted over the useful life of the element. Non-software portions of the design with a useful life of no more than a year are currently deductible.

Advertising Content - Advertising costs are generally currently deductible. Thus, the costs of website content that is advertising are generally, currently deductible.

Cost Before Business Starts - Business expenses that are incurred or accrued prior to the actual activation of the business are generally not deductible until the business is terminated or sold. However, a taxpayer can elect to deduct up to $5,000 of the costs in the year that the business starts and amortize the costs in excess of $5,000 over a period of 180 months (15 years), beginning with the month that the business starts.

As you can see, deducting the expenses of a website can be complicated. Please call this office if you have questions.

2013 will bring some big changes for investors, and none of them for the better. Taxpayers affected by these upcoming changes may wish to consider taking actions in 2012 to mitigate the impact of these changes. The following are the changes that will affect investors in 2013.

Long-Term Capital Gains Rates Increase - Taxpayers have enjoyed reduced long-term capital gains rates for several years as a result of the Bush era tax cuts. However, without Congressional action, which is not expected, those reduced rates will return to the higher rates in effect prior to 2003. The table below compares the current long-term capital gains rates to the anticipated rates for 2013 and subsequent years.



Taxpayers with unrealized long-term capital gains may wish to review their holdings and consider whether it is appropriate to sell during 2012 at the lower rates or whether to continue to hold for additional increases in value. Where future increases in value are anticipated, a taxpayer could sell and realize existing gains in 2012 and then repurchase the investment for future anticipated increases. Investment strategies depend on a variety of issues, including existing capital loss carryovers, growth potential of individual investments, and other factors related to each individual, and should be carefully analyzed before taking action.

Regular Tax Rates - In addition to lower long-term capital gains rates, the regular marginal tax rates have been declining since 2001. However, without Congressional action, those reduced rates will return to higher rates in effect prior to 2001. The table below compares the current marginal individual tax rates to the anticipated rates for 2013 and subsequent years.



These increased rates will apply to all varieties of ordinary income including interest, dividends, short-term capital gains, employment income, etc. Marginal tax rates increase as a taxpayer’s overall income increases, taxing the first block of income received at the lowest rate and each subsequent block at ever-increasing rates until the maximum rate is reached. As with assets eligible for the long-term capital gains rates, it may be appropriate for some taxpayers to accelerate ordinary income into 2012 to take advantage of the lower rates.

Surtax on Investment Income - Depending upon what the Supreme Court ultimately decides about the Health Care Law, starting in 2013 a new surtax, called the Unearned Income Medicare Contribution Tax, will be imposed on individuals, estates, and trusts. For individuals, the surtax is 3.8% of the lesser of:

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

Thus, this surtax will only impact higher income individuals.

“Net” investment income is investment income reduced by allowable investment expenses. Investment income includes:

• Income from interest, dividends, annuities, and royalties,
• Rents (other than derived from a trade or business),
• Capital gains (other than derived from a trade or business),
• Trade or business income that is a passive activity with respect to the taxpayer, and
• Trade or business income with respect to trading financial instruments or commodities.

For surtax purposes, the net investment income does not include excluded items, such as interest on tax-exempt bonds, veterans' benefits, and excluded gain from the sale of a principal residence.

For planning purposes, existing law favors tax-exempt bond interest, which avoids both the surtax and the regular income tax. However, you should be aware that President Obama’s tax plan would also tax the income from “tax-exempt” bonds for higher-income individuals at generally the same threshold as this surtax kicks in.

It is not too early to start planning for the 2013 tax increases. Prudent planning can significantly reduce the tax bite. At the same time, keep a watchful eye on Congress. Since this is an election year, tax changes are most likely to come after the November elections. Please call this office if we can be of assistance in your investment tax planning.

Now that you’ve completed your taxes for 2011, you are probably wondering what old tax records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. To determine how to proceed, it is helpful to understand why the records needed to be kept in the first place.

Generally, we keep “tax” records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns; and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we actually dispose of the assets.

With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25% of the income reported on a tax return. And, of course, the statutes don’t begin running until a return has been filed. There is no limit on the assessment period where a taxpayer files a false or fraudulent return in order to evade tax.

If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded; add a year or so to that if you live in a state with a longer statute.


The big problem! The problem with discarding records indiscriminately for a particular year once the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. They need to be separated, and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into this category:

• Stock acquisition data - If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.
  
  
• Stock and mutual fund statements - Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gains when the stock is finally sold. Keep statements at least four years after the final sale.
  
  
• Tangible property purchase and improvement records - Keep records of home, investment, rental property or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.

Have questions about whether or not to retain certain records? Give this office a call first. It is better to be sure before discarding something that might be needed down the road.

The distinction has significant implications for both the employer and the employee. Employers like to treat individuals as independent contractors because they avoid having to match the employees’ payroll tax, pay benefits, pay unemployment insurance, etc. This results in a significant savings for employers.

When you are an employee, the employer pays you a net amount after making all the required tax withholdings and provides you with a W-2 for tax reporting that shows your taxable wages and details all of the withholding amounts. If you are an independent contractor, the employer will pay you a gross amount without any withholding and will issue you a 1099-MISC.

Independent contractors must pay self-employment (SE) tax instead of having FICA (Social Security and Medicare program contributions) deducted from their wages. The SE tax rate is generally twice the amount of the FICA rate. Independent contractors are generally treated the same as self-employed individuals, so the SE tax and income tax are based on their net earnings after deducting any allowable expenses incurred to earn the income.

The problem here is that employees generally do not have tax-deductible expenses related to their jobs, so employees who are incorrectly classified as independent contractors find themselves essentially paying both the employer’s and their own share of the Social Security and Medicare taxes. To make matters worse, as an independent contractor, no federal or state income tax was withheld, leaving the independent contractor with a sometimes unexpected tax liability.

Classifying a worker as an employee or independent contractor is not discretionary for the employer. The employer must follow federal guidelines when making the determination. Basically, it boils down to whether the employer has direction and control over the individual, which includes, among other guidelines, specifying working hours, how to perform the work tasks, the right to fire, etc. If the employer does have direction and control, the individual is probably an employee.

If you have been treated as an independent contractor and think that you are really an employee, you do have recourse. You can file Form 8919. If the IRS agrees with you, you only have to pay the employee share of FICA/Medicare not the self-employment tax. You still have to pay the income tax. The filing will make life miserable for your presumably former “employer,” so it might turn into a bridge-burning exercise.

If you have questions, wish to explore alternatives, or need assistance filing Form 8919, please give this office a call.

Most small businesses have receivables that cannot be collected. These receivables can be from the sale of products, providing services to customers, or a combination of the two.

Whether a bad debt deduction will apply generally depends upon which accounting method is used (either the cash or accrual method). Why does this make a difference? Let’s look at what happens under both methods of accounting.

• Accrual - If the accrual method is used, all of your billings must be treated as income, whether or not they have been collected. This means that the taxable income already includes the income from your deadbeat customers. Therefore, these items are considered a bad debt when those receivables become uncollectible and can be deducted. If the accrual method of accounting is used, bad debts are deductible.
  
  
• Cash - On the other hand, if the cash method of accounting is used, income is not reported until it is received (unlike the accrual method). Because the income was never reported in the first place, a deduction cannot be taken if you were never paid for the goods or services you provided. This is a hard concept to understand, so let’s consider the following example. Jack has a cash basis business with two customers. He invoices both customers for $5,000. One pays Jack promptly, while the other skips out on him without making payment. Jack actually has income of $5,000. If he were allowed to deduct the uncollected $5,000, he would end up with $0 income, which is not the case. Generally, cash basis businesses do not have bad debt deductions, although there are some exceptions (discussed below).

A taxpayer's loan to a customer or supplier may be a business debt if there is some element of necessity for the loan, which is proximately related to the taxpayer's business. An example is a builder who makes advances to a building material supplier and never receives the supplies. In such cases, assuming the taxpayer can prove the debt is worthless, the loan will result in a bad debt for either an accrual or cash basis taxpayer.

Proof of Worthlessness - Proving a debt (or receivable) is worthless requires the taxpayer or business to show that the debt has become worthless and that reasonable steps were taken to collect the debt.

Non-Business Bad Debts - Some bad debts may actually be personal debts, such as personal loans to individuals. In those cases, the bad debt is not deducted as a business expense but is instead treated as a short-term capital loss [on Schedule D. The bottom loss for any year on Schedule D is limited to $3,000 ($1,500 for married filing separate taxpayers). Unless the Schedule D contains gains to offset additional losses, a non-business bad debt could be limited to $3,000 per year. The good news is that any amount not deductible in a particular year carries over to the next subsequent year.

If you have questions related to a bad debt and your taxes, please give this office a call.

 

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

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

1. If you owe federal or state income taxes, your refund will be offset to pay those tax liabilities. If you had other debt, such as child support or a student loan debt that was submitted for offset, FMS will take as much of your refund as is needed to pay off the debt and send it to the agency authorized to collect it. Any portion of your refund remaining after an offset will be refunded to you.
   
   
2. You will receive a notice if an offset occurs. The notice will reflect the original refund amount, your offset amount, the agency receiving the payment, and the address and telephone number of the agency.
   
   
3. You should contact the agency shown on the notice if you believe you do not owe the debt or if you are disputing the amount taken from your refund.
   
   
4. If you filed a joint return and you are the spouse who is not responsible for the debt, but are entitled to a portion of the refund, you may request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation. If you know that your spouse has outstanding debts and anticipates an offset, you can attach Form 8379 to your original Form 1040, Form 1040A, or Form 1040EZ. If not, you can file it after you are notified of an offset.
   
   
5. If you file a Form 8379 with your return, write "INJURED SPOUSE" at the top left corner of the Form 1040, 1040A ,or 1040EZ. IRS will process your allocation request before an offset occurs.
   
   
6. If you are filing Form 8379 by itself, it must show both spouses' Social Security numbers in the same order as they appeared on your income tax return. You, the "injured" spouse, must sign the form. Do not attach the previously filed Form 1040 to the Form 8379, but, to speed up processing, attach a copy of all Forms W-2 and W-2G and any 1099s where federal income tax has been withheld that relate to the Form 1040 you already filed. Send Form 8379 to the Service Center where you filed your original return.
   
   
7. If you reside in a community property state, overpayments (refunds) are considered joint property and are generally applied (offset) to legally owed past-due obligations of either spouse. There are exceptions; please call for additional details.
   
   
8. The IRS will compute the injured spouse's share of the joint return for you. Contact the IRS only if your original refund amount shown on the FMS offset notice differs from the refund amount shown on your tax return.

For assistance with completing Form 8379, please give this office a call.

Some employees may incur certain work-related expenses. If their employers reimburse them for the expenses, then the employees are not out-of–pocket for the expenses and cannot deduct them on their tax returns. If the employers do not reimburse for the expenses, the employees may deduct the expenses as a miscellaneous itemized deduction on their tax returns.

Seems simple enough, right? Well, maybe not. Let’s look at all the issues associated with deducting employee work-related expenses. We shall begin by defining the employee business expenses that can either be deducted or reimbursed. To qualify, expenses must be ordinary and necessary in performance of the employee’s duties and generally include:

• Business travel away from home (does not include commuting from home to work and back).
• Business use of the employee’s vehicle.
• Business meals and entertainment (special rules apply).
• Travel.
• Business use of the employee’s home (difficult to qualify for as an employee).
• Education.
• Supplies.
• Tools.

If an employer does not reimburse the expenses, then the only solution is for the employee to itemize the unreimbursed expenses on IRS Form 2106 and then deduct the expenses on Schedule A as an itemized deduction. But here are several negative aspects associated with deducting the expenses on Schedule A:

1. A taxpayer who takes the standard deduction cannot deduct the expenses because the expenses can only be deducted as a part of a taxpayer’s itemized deductions.
   
   
2. Even when deducting the expenses as miscellaneous itemized deductions, taxpayers are faced with a limitation. Most miscellaneous itemized deductions, including employee business expenses, are reduced by 2% of the individual’s modified adjusted gross income (MAGI). For example, if the taxpayer’s MAGI is $100,000, he gains no benefit from the first $2,000 of miscellaneous itemized deductions. Thus, if his miscellaneous itemized deduction only consisted of work-related expenses of $3,000, he would only benefit from $1,000 of his work-related expenses ($3,000 less $2,000).
3. Finally, a taxpayer subject to the alternative minimum tax (AMT) faces still another limitation. When computing the AMT, miscellaneous itemized deductions are not allowed. So to the extent of the AMT, no benefit is derived from deducting miscellaneous itemized deductions.

Because of all the limitations associated with deducting the expenses, it is always better to have the expenses reimbursed by the employer under an accountable plan. Under this type of arrangement, the employee must account for each expense and provide the employer with written documentation (expense report). The reimbursement is not taxable to the employee and not included in the employee’s Form W-2. An accountable plan must meet three requirements; the employee must:

1. Have paid or incurred expenses that are deductible while performing services as an employee.
   
   
2. Adequately account to the employer for these expenses within a reasonable time period.
   
   
3. Return any excess reimbursement or allowance within a reasonable time period.

If the plan under which the employer reimburses the employee is non-accountable, then the payments the employee receives should be included in the wages shown on his Form W-2. The employee must report the income and itemize deductions to deduct these expenses.

Some employers may not be willing to pick up the additional expense, in which case the employee can try negotiating a pay reduction and corresponding expense reimbursement.

The employee must also keep adequate records of his work-related expenses.

And one last word of advice: if an employee is eligible to be reimbursed for a work-related expense but fails to request reimbursement from his employer, the employee may not claim the expense as a deduction on his tax return.

If you have questions related to the tax treatment of employee work-related expenses, please give this office a call.

If you already filed your federal tax return and are due a refund, you can check the status of your refund online.

Where’s My Refund? is an interactive tool on the IRS website. Whether you split your refund among several accounts, opted for direct deposit into one account, or asked the IRS to mail you a check, Where’s My Refund? will give you online access to your refund information nearly 24 hours a day, 7 days a week.

If you e-file, you can get refund information 72 hours after the IRS acknowledges receipt of your return. If you file a paper return, refund information will be available within approximately four weeks. When checking the status of your refund, have your federal tax return handy. To access your personalized refund information, you must enter:

• Your Social Security Number (or Individual Taxpayer Identification Number);
• Your Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and
• The exact refund amount shown on your tax return.

Once your personal information has been entered, one of several responses may come up, including the following:

• Acknowledgement that your return was received and is in processing.
• The mailing date or direct deposit date of your refund.
• Notice that the IRS could not deliver your refund due to an incorrect address. You can update your address online using the Where’s My Refund? feature.

Where’s My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you can start a refund trace online.

Where’s My Refund? is also accessible to visually impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes.

If you do not have Internet access, you can check the status of your refund by calling the IRS TeleTax System at 800-829-4477. When calling, you must provide your Social Security Number (or your spouse’s), your filing status, and the exact refund amount shown on your return.

The IRS provides a series of frequently asked questions that provide additional information.

If you have questions or need assistance, please give this office a call.

The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who end up owing?

The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest on late payments if you don’t. So if you are unable to pay the tax you owe, it is generally in your best interest to make other arrangements for paying your taxes rather than be subjected to the government’s penalties and interest. Here are a few options to consider.

• Family Loan – Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
  
  
• Credit Card – Another option is to pay by credit card with one of the service providers that work with the IRS. However, since the IRS will not pay the credit card discount fee, you will have to pay it and pay the higher credit card interest rates.
  
  
• Installment Agreement – If you owe the IRS $50,000 or less, you may qualify for a streamlined installment agreement where you can make monthly payments for up to six years. You will still be subject to the late payment penalty, but it will be reduced by half. Interest will also be charged at the current rate, and there is a user fee to set up the payment plan. In making the agreement, a taxpayer agrees to keep all future years’ tax obligations current. If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed. Taxpayers seeking installment agreements exceeding $50,000 will need to validate their financial condition and need for an installment agreement by providing the IRS with a Collection Information Statement (financial statements). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of the streamlined option.
  
  
• Tap a Retirement Account – This is possibly the worst option for obtaining funds to pay your taxes because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket, which adds more taxes to your existing problem. In addition, if you are under age 59½, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.

Whatever you decide, don’t just ignore your tax liability because that is the worst thing you can do. Please call this office for assistance.

Our tax system is a “pay-as-you-go” system, and if your pre-paid amount is not enough, you become liable for non-deductible interest penalties. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. The primary among these include:

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

Determining how much tax to pre-pay through withholding and estimated tax payments has always been difficult, but thanks to Congress’ constant tinkering with the tax laws, usually in late fall, ensuring there are no underpayment penalties or tax surprises when the tax return is prepared next year merely adds complexity.

One of the biggest unknowns for 2012 is the alternative minimum tax (AMT). Beginning in 2001, the exemption to the amount of income not subject to AMT was substantially increased and inflation-adjusted in subsequent years. However, the increased exemption amounts are not permanent and must be extended by Congress on a year-by-year basis. So far Congress has not acted for 2012, and if they do not, the AMT exemption will revert to 2000 levels, roughly one-half of the current amount. Without Congressional action an estimated 30 million taxpayers, approximately 20% of all taxpayers, will be hit by the AMT in 2012. Compare this to the roughly 600,000 taxpayers in 1997 (approximately 1% of all 1997 taxpayers) who were affected by the AMT.

When a taxpayer fails to prepay a safe harbor (minimum) amount, he or she can be subject to the underpayment penalty. This penalty is the short-term federal rate plus 3 percentage points and the penalty is computed on a quarter-by-quarter basis. So, even if you pre-pay the correct amount for the year, if the amounts are not paid evenly you could be subject to a penalty. Interestingly enough, withholding amounts are treated as paid ratably throughout the year, so taxpayers who are underpaid in the earlier part of the year can compensate by bumping up their withholding in the later part of the year.

Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de minimis amount, no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:

1. The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
   
   
2. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for a higher income taxpayer whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.
   
   Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.
   
   However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

If your state has a state tax, the safe-harbor amount may be a different percentage.

This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc.

If you have questions regarding your pre-payments or would like to review and adjust your W-4 payroll withholding, W-4P pension withholding, and estimated tax payments to provide the desired tax result for 2012, please give this office a call.

If you have not yet filed your 2008 tax return and have a refund coming, time is running out! The IRS estimates that there are more than 1 million taxpayers who have not filed their 2008 tax return and that there are approximately $1 billion of unclaimed refunds available for those taxpayers. If you fall in this category, you need to act quickly because the return must be filed by April 17, 2012 to claim a refund for 2008. Otherwise, the money becomes the property of the U.S. Treasury.

By failing to file a return, people stand to lose more than a refund of taxes withheld or paid during 2008. In addition, many low- and moderate-income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families with incomes below certain thresholds, which in 2008 were $38,646 ($41,646 married joint) for those with two or more children, $33,995 ($36,995 married joint) for people with one child, and $12,880 ($15,880 married joint) for those with no children.

When filing a 2008 return, the law requires that the return be properly addressed, mailed, and postmarked by April 17 (normally the due date would April 15, but April 15 falls on a Sunday and Monday the 16th is a legal holiday in Washington, D.C., so the due date has been extended until the 17th). There is no penalty for filing a late return that qualifies for a refund.

As a reminder, taxpayers seeking a 2008 refund should know that their checks will be held if they have not filed tax returns for 2009 and 2010. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to offset unpaid child support or past due federal debts, such as student loans.

Please give this office a call as soon as possible if you have not filed your 2008 return. Sufficient time is needed to prepare and print the return and for you take it to the post office for proof of mailing.

Just a reminder to those who have not yet filed their 2011 tax return that April 17, 2012 is the due date to either file your return and pay any taxes owed, or file for the automatic six-month extension and pay the tax you estimate to be due. Normally the deadline is April 15, but when a due date falls on a weekend or holiday, the due date is extended until the next business day. Thus, since April 15 falls on a Sunday and April 16 is a legal holiday in Washington, D.C. (Emancipation Day), the due date for 2011 tax returns is extended until Tuesday, April 17, 2012.

In addition, the April 17, 2012 deadline also applies to the following:

• Tax year 2011 balance-due payments - Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.
  
  
• Tax year 2011 contributions to a Roth or traditional IRA - April 17 is the last day contributions for 2011 can be made to either a Roth or traditional IRA, even if an extension is filed.
  
  
• Individual estimated tax payments for the first quarter of 2012 - Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2012 estimated taxes are due on April 17. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. Please call this office for any questions.
  
  
• Individual refund claims for tax year 2008 - The regular three-year statute of limitations expires on April 17 for the 2008 tax return. Thus, no refund will be granted for a 2008 original or amended return that is filed after April 17. Caution: The statute does not apply to balances due for unfiled 2008 returns.

If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 17 deadline. Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute. If it is apparent that the information will not be available in time for the April 17 deadline, then let the office know right away so that an extension request, and estimate tax vouchers if needed, may be prepared.

If your returns have not yet been completed, please call right away so that we can schedule an appointment and/or file an extension if necessary.

Beginning with the 2011 tax return, reporting stock transactions has become significantly more complicated because of the new requirement for brokerage firms to track the purchase price of stocks acquired after 2010 and subsequent years and to include that information on the information-reporting document 1099-B.

For several years now, the IRS has required brokerage firms to report the gross proceeds from the sale of stocks and other securities on the Form 1099-B. But just knowing the proceeds from a security sale does not allow the IRS to verify the profit or loss reported by the taxpayer. So beginning with 2011 purchase transactions, brokers are required to track the price paid for the securities and include that information on the 1099-B when that particular security is subsequently sold.

So that the IRS can use the new data to verify taxpayer profit or loss transactions attributable to purchases where the cost information is included with the 1099-B, the year’s transactions must now be broken down into six categories (the last two categories listed do not apply to stock transactions but may apply to sales of other capital assets):

• Long-term sales where the broker IS reporting the cost of the security
• Short-term sales where the broker IS reporting the cost of the security
• Long-term sales where the broker IS NOT reporting the cost of the security
• Short-term sales where the broker IS NOT reporting the cost of the security
• Long-term sales for which no 1099-B is issued
• Short-term sales for which no 1099-B is issued

The IRS has provided a new form 8949 for segregating the transactions within each of these categories. A separate form 8949 must be used for category so the IRS can match what the taxpayer reported as profit/loss for transactions where the broker reported the profit/loss.

Prior to 2011 it was common practice to summarize a taxpayers long-term and short term transactions and make a single long-term and single short-term entry on the old version of Schedule D saying “see attached” in description block and including the broker’s statement of long-term and short-term gains and losses with the return filing. Under this new regimen this is longer possible because brokerage firms are not segregating the transactions into the required categories in reports they provided to their clients.

This has created a reporting nightmare for taxpayers with significant numbers of transactions during the year (typically managed accounts) where the transactions can run in the hundreds. These taxpayers or their tax preparer are faced with entering every transaction on the tax return in order to accomplish the required segregation, which is time consuming and expensive.

Although not a perfect solution, many tax software products will import stock transactions from a spreadsheet and most brokerage firms will provide a spreadsheet of the transactions upon request. Once loaded each transaction coded as to whether the 1099-B included the cost basis or not. Most brokerage accounts use the term “covered” to designate transaction where they report basis and “uncovered” where they didn’t.

If all that is not enough, the reporting process is complicated where the securities traded were acquired by gift or inheritance. Special adjustments are also required for wash sales and when sales can be attributed to a prior purchase of the same security.

There is little chance the IRS will change the new reporting requirement since they feel a significant number of taxpayers overstate the tax basis of their sales and this this new reporting requirement was designed to counter that practice. So, hopefully, the brokerage firms will come to realize the needs of their clients and adjust their reporting to simplify the process for their clients.

Now that the IRS has profit or loss matching capabilities, it is important to correctly report the transactions as the IRS expects to see them. Failure to do so could lead to correspondence audits or even face-to-face audits.

Please call this office if you have questions relating to reporting your security sales this year.

A regular form of fundraising by charitable organizations consists of sales or auctions of property or services at a price in excess of value. These are referred to as “quid pro quo” contributions or dual payments made that consist partly of a charitable gift and partly of consideration for goods or services provided to the donor.

Quid pro quo contributions typically include the purchase of tickets for sightseeing tours, all-expense-paid trips, theatrical or concert performances, books or subscriptions to magazines, stationery, candy, etc., and are sold with a generous mark-up that is designed to help the charity in performing its functions. In these cases, the charitable deduction is the excess of the payment over the value received by the purchaser-contributor. For instance, when tickets to a show are purchased from a charity at a price in excess of the normal admission charge, the excess over the latter (plus tax) is a charitable contribution.

Determining and documenting the amount of the purchase that represents the charitable portion is the key to being able to take a charitable tax deduction for quid pro quo purchases. Tax law requires charitable organizations that receive a quid pro quo contribution in excess of $75 to provide a written statement, in connection with soliciting or receiving the contribution, that informs the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the amount of the purchase that is in excess of the value of the property or service purchased and a good-faith estimate of the value of the good or services purchased.


If you made or are considering making a quid pro quo purchase from a charitable organization and have questions relating to the amount that will represent a charitable contribution, please give this office a call.

The IRS as part of its “Fresh Start” initiative to help struggling taxpayers is making installment agreements available to more people. The Fresh Start provisions also mean that more taxpayers will have the ability to use streamlined installment agreements to catch up on back taxes.

Effective immediately, the threshold for using an installment agreement without having to supply the IRS with a financial statement has been raised from $25,000 to $50,000. This is a significant reduction in taxpayer burden.

Taxpayers who owe up to $50,000 in back taxes will now be able to enter into a streamlined agreement with the IRS that stretches the payment out over a series of months or years. The maximum term for streamlined installment agreements has also been raised to 72 months from the current 60-month maximum.

Taxpayers seeking installment agreements exceeding $50,000 will still need to supply the IRS with financial statements. Taxpayers may also pay down their balance due to $50,000 or less to take advantage of streamlined payment option.

An installment agreement is an option for those who cannot pay their entire tax bills by the due date. Penalties are reduced, although interest continues to accrue on the outstanding balance. In order to qualify for the new expanded streamlined installment agreement, a taxpayer must agree to monthly direct debit payments.

Please call if this office for assistance with setting up an installment agreement.

 

 

 

 

If you are a small employer with fewer than 25 full-time equivalent employees who earn an average wage of less than $50,000 a year and you pay at least half of employees' health insurance premiums…then there is a tax credit that may put money in your pocket.

The Small Business Health-Care Tax Credit is specifically targeted to help small businesses and tax-exempt organizations. The credit can enable small businesses and small tax-exempt organizations to offer health insurance coverage for the first time. It also helps those that already offer health insurance maintain the coverage they currently have.

Here is what small employers need to know so they don’t miss out on the credit for tax year 2011.

• Qualifying businesses include this credit as part of the general business credit. Any unused credit on Form 3800, General Business Credit, would be included with the tax return. Any unused credit carries back one year and then forward up to 20 years.
  
  
• The minimum required number of twenty-five full-time equivalent employees is generally determined by adding up all hours worked by both full-time and part-time employees (not exceeding 2,080 hours per employee) and then dividing the total by 2,080 (rounding down to the next whole number).
  
  
• Average annual wages are determined by dividing the employer’s total FICA wages (without regard to the wage base limitation) for the tax year by the number of the employer's equivalent full-time employees for the year (rounded down to the nearest $1,000).
  
  
• Tax-exempt organizations can also claim this credit.
  
  
• Businesses that couldn’t use the credit in 2011 may be eligible to claim it in future years. Eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.

For tax years 2010 to 2013, the maximum credit for eligible small business employers is 35 percent of premiums paid; for eligible tax-exempt employers, the maximum credit is 25 percent of premiums paid. Beginning in 2014, the maximum credit will go up to 50 percent of qualifying premiums paid by eligible small business employers and 35 percent of qualifying premiums paid by eligible tax-exempt organizations.

For additional information about eligibility requirements and how this credit may apply to your small business or tax-exempt organization, please give this office a call.

Want your refund faster? Have it deposited directly into your bank account. More taxpayers are choosing direct deposit as the way to receive their federal tax refunds. More than 79 million people had their tax refunds deposited directly into their bank accounts in 2011. It’s a secure and convenient way to get your money in your pocket faster.

• Speed - When combining e-file with direct deposit, the IRS will likely issue your refund in as few as 10 days.
  
  
• Security - Direct deposit offers the most secure method of obtaining your refund. There is no check to lose. Each year, the U.S. Post Office returns thousands of refund checks to the IRS as undeliverable mail.
  
  
• Direct deposit eliminates undeliverable mail and is also the best way to guard against having a tax refund check stolen.
  
  
• Convenience - There’s no special trip to the bank to deposit a check!
  
  
• Options - You can deposit your refund into multiple accounts. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts at up to three different U.S. financial institutions.
  
  
• Fund Your IRA - You can even direct a refund into your IRAS account. To set up a direct deposit, you will need to provide the bank routing number (9 digits) and your account number for each account into which you wish to make a deposit. Please have them available at your appointment.

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

The IRS has new penalty relief for the unemployed and certain self-employed individuals on failure-to-pay penalties, which are one of the biggest factors a financially distressed taxpayer faces on a tax bill.

To assist those most in need, a six-month grace period on failure-to-pay penalties will be made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by Oct. 15, 2012.

The penalty relief will be available to two categories of taxpayers:

• Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
  
  
• Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

This penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

Taxpayers meeting the eligibility criteria will need to complete a new Form 1127A to seek the 2011 penalty relief. The new form is available on IRS.gov.

The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until Oct. 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.

Even with the new penalty relief taxpayers are strongly encouraged to file their returns on time by April 17 or file for an extension. Failure-to-file penalties applied to unpaid taxes remain in effect and are generally 5 percent per month, also with a 25 percent cap.

This office can help you minimize filing penalties. Call before April 17 to discuss your options and to obtain assistance in preparing your 2011 return and extensions if required.

If you made a conversion from a traditional to a Roth IRA, there is a good chance the entire conversion is taxable. Generally, people plan those conversions for years with low income or when the stock market is down and the IRA value at the time of the conversion is low.

If subsequent to the conversion, conditions change, such as the market drops, your income is higher than expected, you have second thoughts about the conversion, or you simply decide you can’t afford to pay the tax on the conversion, you can undo the conversion up to and including the extended due date of the return (October 15, 2012 for 2011 returns).

However, don’t wait until the last minute to make that decision, because it will require some paperwork on the part of the trustee (bank, broker, etc.).

If you have questions related to undoing a Roth IRA conversion, please give this office a call.

Don’t get caught with your hand in the government’s pocket, especially if you are not a U.S. Citizen. Case in point: Mr. and Mrs. Kawashima have been U.S. resident aliens since 1984 and own restaurants in Southern California.

They were convicted of tax-related schemes and stipulated the tax loss to the government was $245,126. An immigration judge subsequently ruled that these crimes qualified as “aggravated felonies” and were grounds for removal (deportation). Under immigration law, an aggravated felony includes any offense that “(i) involves fraud or deceit in which the loss to the victim or victims exceeds $10,000; or (ii) tax evasion in which the revenue loss to the government exceeds $10,000.”

The Kawashimas appealed the judge’s ruling to the Ninth Circuit Court of Appeals, arguing that filing a false return did not involve “fraud or deceit” since to secure a conviction, the government is not required to prove any intent to deceive. Their position was that lying or committing perjury is not equivalent to deceit. The Ninth Circuit upheld the lower court’s ruling, and the case ultimately ended up in the U.S. Supreme Court, which upheld both lower courts’ rulings in a 6-3 decision issued in February 2012.

This has significant implications for all aliens, both legal resident and undocumented. Tax evasion of $10,000 or more becomes an aggregated felony with potential for deportation. The dissenting justices, led by Justice Ginsberg, noted that the decision “may discourage aliens from pleading guilty to tax offenses, thereby complicating and delaying enforcement of the internal revenue laws.”

If you have any questions please give this office a call.

On February 22, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012 (HR 3630). This law extends the 2% reduction in employment taxes and a like adjustment in SE taxes through December 2012.

The new law also repeals the 2% recapture tax included in the December legislation that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut. As a result, the now-repealed recapture tax does not apply.

The lower rate will have no effect on workers’ future Social Security benefits. The reduction in revenues to the Social Security Trust Fund will be made up by transfers from the General Fund.

The IRS has also released revised Form 941 enabling employers to properly report the newly extended payroll tax cut.

If you have any questions please give this office a call.

If you work in an occupation where tips are part of your total compensation, you need to be aware of several facts relating to your federal income taxes:

• Tips are taxable - Tips are subject to federal income, social security, and Medicare taxes. The value of non-cash tips, such as tickets, passes, or other items of value, is also income and subject to taxation.
  
  
• Include tips on your tax return - You must include in gross income all cash tips received directly from customers, tips added to credit cards, and your share of any tips received under a tip-splitting arrangement with fellow employees.
  
  
• Tip-splitting and cover charges - Tips given to others under the tip-splitting arrangement are not subject to the reporting requirement by the employee who initially receives them. That employee should report to the employer only the net tips received.
  Service (cover) charges, which are arbitrarily added by the business establishment, are excluded from the tip reporting requirements. The employer should add each employee’s share of service charges to each employee’s wages.
  
  
• Report tips to your employer - If you receive $20 or more in tips in any month, you should report all of your tips to your employer. Your employer is required to withhold federal income, social security, and Medicare taxes. If the tips received are less than $20 in any month, they need not be reported to the employer. However, these tips are still taxable and must be reported on your tax return as they are subject to income and social security taxes.
  
  
• Employer allocation of tips - Tip allocation is applicable to “large food and beverage establishments” (i.e., food service businesses where tipping is customary and that have 10 or more employees). These establishments must allocate a portion of their gross receipts as tip income to those employees who “underreport.” Underreporting occurs if an employee reports tips that are less than 8% of the employee’s applicable share of the employer’s gross sales. The employer must allocate to those underreported employees the difference between what the employee reported and the 8%. The allocation amount is noted on the employee’s W-2, but it does not have to be reported as additional income if the employee has adequate records to show that the amount is incorrect. Note that these allocated tips are not included in the total wages shown on the employee’s W-2. The IRS frequently issues inquiries where the taxpayer’s W-2 shows an allocation of tips and a lesser amount is reported on the tax return.
  
  
• Keep a running daily log of tip income Tips are a frequently audited item and it is a good practice to keep a daily log of your tips. The IRS provides a log in Publication 1244 that includes an Employee's Daily Record of Tips and a Report to Employer for recording your tip income.

If you are receiving tips and have any questions, please give this office a call.

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

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

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

One way to get your retirement funding started is by making tax-advantaged IRA contributions. Self-employed individuals can make tax-advantaged Simplified Employee Pension (SEP) plan contributions. You still have time to make an IRA and/or SEP contribution for 2011.

Generally, after the close of the year you can no longer take steps to alter the outcome of your tax return. However, both IRA contributions and SEP contributions can be made for 12 months after the year has closed, and if you converted a traditional IRA into a Roth IRA, you can undo that conversion after the close of the year. Here are the details:

IRA Contributions – IRA contributions (tax-deductible and non-deductible) for 2011 can be made up to and including the un-extended filing due date for your 2011 tax return, which is April 17, 2012. The maximum contribution allowed is $5,000 ($6,000 if age 50 or over) for each taxpayer. The annual maximum must be allocated between traditional and Roth IRA contributions.

If you are an active participant in an employer-sponsored plan, the IRA contributions are phased out for higher-income taxpayers. Roth IRA contributions are also phased out. The traditional IRA AGI phase-outs for 2011 are between $90,000 and $110,000 for married individuals filing jointly and individuals qualifying as a surviving spouse, $56,000 and $66,000 for unmarried individuals, and $0 to $10,000 for married individuals filing separately.

Where one spouse participates in an employer plan but the other does not, the non-participating spouse’s phase-out is between $169,000 and $179,000 for 2011.

SEP Plan Contributions – SEP plans are tax-deductible retirement plans for self-employed individuals. Contributions can be made up to and including the extended due date, which for the 2011 tax return is October 15, 2012. The maximum annual contribution to a SEP plan is the lesser of “25% of compensation” (20% of net profit after deducting the SEP contribution for the self-employed proprietor’s contribution) or $49,000. SEP plans have no AGI phase-out limitations and no catch-up contributions for older individuals.

Other Plans – Other plans such as Simple Plans and Keogh plans also permit contributions in 2012 for 2011.

For additional information related to making retirement plan contributions after the close of the tax year, please give this office a call.

In a recent study, the IRS determined that over half of all underreporting is attributable to Schedule C, the form used by self-employed individuals to report their profits or losses for the year. It is no wonder that the audit rate for Schedule C returns has increased substantially and is among the highest of all rates. Based on 2010 IRS figures, Schedule Cs have a 300% higher chance of being audited than either a partnership or an S-Corporation. Of the Schedule Cs audited in 2010, the average adjustment exceeded $9,000.

Among the areas of underreporting are:

• Personal Expenses - Over-deductions attributable to the inclusion of non-deductible personal expenses and the failure to allocate for personal use of a vehicle.
  
  
• Underreporting Income - Failure to include all income. To counter this problem, the IRS has initiated merchant card and third-party reporting that will provide the IRS with all income from credit card sales.
  
  
• Worker Misclassification - Misclassifying workers as independent contractors instead of treating them as W-2 employees, thereby avoiding the employer’s share of payroll, unemployment, and other taxes. The IRS currently has a Voluntary Classification Settlement Program in effect that allows eligible taxpayers to voluntarily reclassify their workers for federal employment tax purposes. Voluntary programs usually precede more aggressive compliance measures.
  
  
• Failing to Issue Information Returns - Generally, businesses are required to issue 1099s for fees they pay to individuals other than employees or to corporations. This is a huge area of non-compliance that denies the IRS the ability to ensure that payees are properly reporting their income. In an audit in which a 1099 should have been issued and was not, the IRS will generally disallow the deduction for those services. The 2011 Schedule C asks two catch-22 questions: “Did you make payments that would require you to file a Form 1099?” and “If yes, did you or will you file all required Forms 1099?”
  
  
• Hobby Losses - Some businesses are actually hobbies, where there is no real intention of ever making a profit. Businesses deemed to be hobbies have special rules that limit the expense deductions to the income and require the deductions to be taken as itemized deductions on Schedule A. Watch for a future article on hobby losses that will appear in the March newsletter.

If you have questions related to your Schedule C or any of the issues in this article, please give this office a call.

If you took advantage of escalating gold and silver prices and made any sales of gold, silver, gems, jewelry, or the like during 2011, you are required to report the sales on your tax return. Whether or not the sales are subject to tax, and at what tax rate, depends upon the type of item sold and your tax basis for the item.

Determining Basis - Generally, your tax basis is what you originally paid for the item, assuming that you can recall the amount. It may be difficult to remember how much you paid for an item; however, if the cost was significant, you hopefully have documentation that can verify the price. Without documentation, you are at the mercy of the IRS should you be audited! Even more complicated is determining the value of an item acquired as a gift. Your tax basis for a gift generally is the same basis as it was for the item in the hands of the individual who gave you the gift. Meanwhile, the basis for an item acquired by inheritance is generally the fair market value of the item on the date of the inheritance. As you can see, simply determining the basis for the items that you sold can be complicated.

Types of Items Sold - Not all items are taxed the same. The percentage depends on whether the item was held for personal use or for investment purposes and whether or not the item is classified as a collectible. A higher maximum tax rate applies to collectibles than to other capital assets.

• Jewelry - Generally, jewelry that is held for personal use is excluded from the definition of collectibles and is taxed the same as any other personal use property. Losses are, thus, not allowed and gains are taxed as either short-term or long-term capital gains. For the most part, jewelry that an individual may choose to sell will have been owned for over a year and the gain will be taxed at the long-term rate, which, for 2011 is a maximum of 15% (0% to the extent that the taxpayer is in the 15% regular tax bracket or lower). Beware, however, as some jewelry may include gold or silver coins that are considered collectible items and, thus, may be taxed at a higher rate, as explained below.
  
  
• Collectibles - Gold and silver coins and bullion are included on the IRS’s list of collectibles. Unlike jewelry, the sale of “collectibles” can result in either a taxable loss or a taxable gain. In addition, collectible gains are taxed at a maximum rate of 28%, as opposed to a maximum of 15% for other capital assets that are held long-term. The maximum rate does not imply that all collectible gains are taxed at 28%. A taxpayer in a lesser tax bracket will be taxed at that lesser rate.

If you have questions related to selling jewelry and collectibles, please give the office a call.

Now that tax season is upon us, so are the e-mail scammers pretending to be the IRS. Most of these scams fraudulently use the IRS name, logo, and/or website header as a lure to make the communication appear more authentic and enticing. They lead you to believe you had a refund of some sort coming and request personal information. The goal of these scams - known as phishing - is to trick you into revealing your personal and financial information. The scammers can then use your information - like your Social Security number, bank account, or credit card numbers - to commit identity theft or steal your money.


The Internal Revenue Service receives thousands of reports each year from taxpayers who receive suspicious e-mails, phone calls, faxes, or notices claiming to be from the IRS. If you find something suspicious, you should immediately call this office before responding. In fact, it is a good policy to check with this office before responding to any inquiry from the IRS or state or local tax agencies.

Here are some tips you should know about phishing scams.

1. The IRS never asks for detailed personal and financial information like PIN numbers, passwords, or similar secret access information for credit card, bank, or other financial accounts.

2. The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. If you receive an e-mail from someone claiming to be a representative of the IRS or directing you to an IRS site:

• Do not reply to the message.
  
  
• Do not open any attachments. Attachments may contain malicious code that will infect your computer.
  
  
• Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, you may have compromised your financial information. If you entered your credit card number, contact the credit card company for guidance. If you entered your banking information, contact the bank for the appropriate steps to take. The IRS website provides additional resources that can help. Visit the IRS website  and enter the search term “identity theft” for additional information.

3. The address of the official IRS website is www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site.

4. If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS but you suspect he or she is not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious e-mail to phishing@irs.gov.

If you have any questions or doubts related to a letter, phone call, or e-mail from the IRS or other taxing authorities, please call this office before responding or providing any financial or personal information. Better safe than sorry!

New for 2011 is a requirement for any individual who, during the tax year, holds any interest in a “specified foreign financial asset” to complete and attach Form 8938 to his or her income tax return if a reporting threshold is met. The reporting threshold varies depending on whether the individual lives in the U.S. and files a joint return with his or her spouse. For example, someone who is not married and doesn't live abroad will need to file Form 8938 for 2011 if the total value of his or her specified foreign financial assets was more than $50,000 as of December 31, 2011 or more than $75,000 at any time during 2011. For married taxpayers filing a joint return and living in the U.S., the threshold amounts are doubled. The thresholds also are higher for taxpayers residing abroad.

Specified foreign financial assets include financial accounts maintained by foreign financial institutions and other investment assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counterparties that are non-U.S. persons, and interests in certain foreign entities. However, no disclosure is required for interests that are held in a custodial account with a U.S. financial institution.

The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, there are additional penalties of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.

To the extent the IRS determines that the individual has an interest in one or more foreign financial assets but doesn't provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 (or other applicable reporting threshold amount) for purposes of assessing the penalty.

No penalty will be imposed if the failure to file the 8938 is due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information isn't reasonable cause.

In addition, if it is shown that the individual failed to report the income from the foreign financial account on his or her income tax return, a 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset.

If you have questions related to this issue or are uncertain as to whether you are required to file Form 8938, please give this office a call to discuss your particular situation.

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

The Earned Income Tax Credit (EITC) is for people who work, but have lower incomes. If you qualify, it could be worth up to $5,751 for 2011. So, you could pay less federal tax or even get a refund. The credit is a refundable credit, meaning you can receive the benefits of the credit even if you do not owe any taxes. That's money you can use to make a difference in your life and help carry you through hard times.

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

If you were employed for at least part of 2011, you may be eligible for the EITC based on these general requirements:

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



To qualify, a taxpayer must meet a few basic rules:

• The credit isn't available to individuals when their “disqualified income” (i.e., investment income such as interest and dividends) is more than $3,100.
  
  
• The taxpayer claiming the credit, and any qualifying children, must have a valid Social Security Number.
  
  
• The taxpayer must have earned income from employment or from self-employment.
  
  
• Filing status cannot be married filing separately.
  
  
• The taxpayer must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return.
  
  
• The taxpayer cannot be a qualifying child of another person.
• A taxpayer without a qualifying child must: o Be age 25 but under 65 at the end of the year, o Live in the United States for more than half the year, and o Not be a qualifying child of another person.
  
  
• The taxpayer cannot file Form 2555 or 2555-EZ (related to foreign earned income).
  
  
• Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If the election to do so is made, all nontaxable combat pay received must be included in earned income for purposes of figuring the EITC.

The rules related to EITC are rather complicated, and the IRS requires a great deal of information to substantiate qualification. The IRS places due diligence requirements on tax preparers, which are associated with severe penalties. So if this is the first time you have qualified for the credit through this tax preparation firm, you may need to provide information not normally required to prepare your return.

If you have any questions related to how the credit might apply to you, please give this office a call.

For tax purposes, if you receive, in your name, income that actually belongs to someone else, you are also a nominee. Being a nominee means you must file with the IRS a 1099 form appropriate to the type of income you received and give a copy of the 1099 to the actual owner of the income. However, if the other person is your spouse, no 1099 filing is required.

The most commonly encountered nominee situations include when you have a joint bank account or brokerage account with someone other than your spouse and all the income from those accounts are reported under your SS number. You will need to issue the IRS and your joint account owner a 1099 reporting the co-owner’s share of the income under his or her social security number. Then, when you file your return, you show all of the income but back out the co-owner’s share as “nominee amount.”

The type of 1099 depends upon the type of income: 1099-INT for interest, 1099-DIV for dividends and 1099-B for the proceeds from selling stocks and bonds.

Forms 1099-INT and 1099-DIV that you issue as a nominee are supposed to be given to the recipients by January 31, while the deadline for giving Forms 1099-B to the other owner(s) is February 15. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28. The 1099s must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS along with the required 1096 transmittal form. This service provides recipient and file copies for your records.

If you have questions, please call this office.

Have you received your W-2? These documents are essential to filling out most individual tax returns. You should receive a 2011 Form W-2, Wage and Tax Statement, from each of your employers each year. Employers have until January 31, 2012 to provide or send you a 2011 W-2 earnings statement either electronically or in paper form. However, you should wait a week or so before becoming concerned. If by then you have not received your W-2, follow these steps:

1. Contact this office – Let us know you are missing a W-2. If your appointment is in the near future, we will advise you whether to keep the appointment or change it to another time. Most payroll services provide year-to-date totals of income and withholding with each paycheck, so your final paycheck for the year will probably include all the data needed to prepare your return, and you can still keep your tax appointment. Even if you do not have the year-to-date totals for a missing W-2 or 1099, it is best to keep the appointment. Everything else for the return, except for the missing document, can be completed, and you can mail or drop the missing items by the office at a later date. That way, your return can be finished as soon as the W-2 or 1099 is available. This will speed up your refund if you are receiving one.

2. Contact your employer – If you have not received your W-2, the first step is to contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for them to resend or to issue the W-2.

3. Contact the IRS - If you still do not receive your W-2 by February 15, you can contact the IRS for assistance at 800-829-1040. However, we recommend that you hold off from contacting the IRS until you are certain that you will not be receiving a W-2 from the employer, even at a date substantially later than February 15. If, and when, you do call the IRS, have the following information at hand:

• Employer's name, address, city, and state, including zip code;
  
  
• Your name, address, city, and state, including zip code, and your Social Security number; and
  
  
• An estimate of the wages you earned, the federal income tax withheld, and the period you worked for that employer. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible. This office can assist you in making the estimate.

4. File your return – Even if you don’t receive a W-2, you still must file your tax return or request an extension to file by April 17.

• If you anticipate that you will ultimately receive the missing W-2, this office can estimate your 2011 tax liability and file extensions for you. If you have a substantial refund coming, you may opt to have this office prepare a substitute W-2, and you can file without the W-2. Refunds for returns including substitute W-2s can be delayed significantly while the IRS verifies the W-2 information.
  
  
• If you don’t anticipate receiving the missing W-2, then a substitute W-2 can be prepared, allowing you to file your 2011 tax return.

If a substitute W-2 is used and it is later determined that the information used to prepare the substitute W-2 was in error, an amended return may have to be prepared for you to file.

Please call this office if you have any questions.

If you use independent contractors to perform services for your business and you pay them $600 or more for the year, you are required to issue them a Form 1099-MISC after the end of the year to avoid facing the loss of the deduction for their labor and expenses. The 1099s for 2011 must be provided to the independent contractor no later than January 31 of 2012.

It is not uncommon to have a repairman out early in the year, pay him less than $600, and then use his services again later and have the total for the year exceed the $600 limit. As a result, you overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9s for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.

IRS Form W-9, Request for Taxpayer Identification Number and Certification is provided by the government as a means for you to obtain the data required to file the 1099s from your vendors. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 prior to engaging in business with them. The form can either be printed out or filled onscreen and then printed out. The W-9 is for your use only and is not submitted to the IRS.

In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2012. This must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides recipient and file copies for your records. Use the worksheet to provide us with the information we need to prepare your 1099s.

Please attempt to have the information to this office by January 20, so that the 1099s can be provided to the service providers by the January 31st due date.

If you need assistance or have questions, please give this office a call.

Medical expenses paid for dependents may be deducted. To claim these expenses, the person must have been a dependent either at the time the medical services were provided or at the time the expenses were paid.

Medical Dependent – Frequently overlooked are deductible medical expenses paid for a person you cannot claim as a dependent on your tax return but who is considered to be a dependent for medical expense purposes. These individuals are frequently referred to as medical dependents. A person generally qualifies as a medical dependent for purposes of the medical expense deduction if:

1. That person lived with the taxpayer for the entire year as a member of the household or is related;
2. That person was a U.S. citizen or resident, or a resident of Canada or Mexico for some part of the calendar year in which the tax year began; and
3. The taxpayer provided over half of that person’s total support for the calendar year.

Medical expenses of any person who is a dependent may be included, even if an exemption for him or her cannot be claimed on the return.

Child of Divorced or Separated Parents – Sometimes overlooked are medical expenses paid for a taxpayer’s child when the other parent is claiming the child as a dependent. If either parent can claim a child as a dependent under the rules for divorced or separated parents, each parent can include the medical expenses he or she pays for the child. This is true even if the other parent claims the exemption for the child.

Support Claimed Under a Multiple Support Agreement – A multiple support agreement is used when two or more people provide more than half of a person’s support, but no one alone provides more than half. Whoever is considered to have provided more than half of a person’s support under such an agreement can deduct the medical expenses he or she paid on behalf of the person.

If you have questions related to the deductibility of medical expenses you paid, please give this office a call.

A frequent question asked is whether or not an individual needs to file a tax return. There are two issues associated with this question:

• Is there is a requirement to file?
• Should the taxpayer file even when there isn’t a requirement to file?

The answers to these two questions are quite different. You must file a tax return if your income is above a certain level. The amount varies depending on your filing status, age, and the type of income you receive. Different filing thresholds may apply for federal and state purposes. The table below illustrates the general filing requirements based on age and income for 2011.



For example, for 2011, a married couple both under age 65 generally are not required to file a federal return until their joint income reaches $19,000. However, self-employed individuals generally must file a tax return if their net income from self-employment was at least $400. There are special rules for children or other individuals who are, or could be, claimed as a dependent by someone else.

Even if you don’t have to file a federal return, here are six reasons why you may want to file:

• Federal Income Tax Withheld. If you are not required to file, you should file to get money back if federal income tax was withheld from your pay, if you made estimated tax payments, or if you had a prior year overpayment applied to this year's tax.
  
  
• Earned Income Tax Credit. You may qualify for the Earned Income Tax Credit, or EITC, if you worked but did not earn a lot of money. EITC is a refundable tax credit, meaning you could qualify for a tax refund.
  
  
• Additional Child Tax Credit. This credit may be available to you if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.
  
  
• Refundable Education Credit. Forty percent of the American Opportunity Credit may be refundable (excess over the tax liability can result in a refund).
  
  
• Claimed or Carried-over Tax Credits
  
  
• Claimed or Carried-over Losses

If in doubt, please call this office to see if you are required to file or should file a tax return for 2011.

If you changed your name as a result of a recent marriage or divorce, you will want to take the necessary steps to ensure the name on your tax return matches the name registered with the Social Security Administration (SSA). A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your return and may even delay your refund.

Here are some situations for which notifying the Social Security Administration may be appropriate:

• If you took your spouse’s last name or if both spouses hyphenate their last names, you may run into complications if you don’t notify the SSA.
  
  
• When newlyweds file a tax return using their new last names, IRS computers can’t match the new names with their Social Security numbers (SSNs).
  
  
• If you were recently divorced and changed your name back to your previous last name, you will also need to notify the SSA of this name change.

Informing the SSA of a name change is easy; file a Form SS-5, Application for a Social Security Card, at your local SSA office and provide a recently issued document as proof of your legal name change.

If you adopted your spouse’s children after getting married, the children will need to have an SSN. Taxpayers must provide an SSN for each dependent claimed on a tax return. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number – or ATIN – by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return.

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

This time of the year, many employers will request from their employees updated W-4 forms (and the equivalent state form for those who live in a state with income tax). The W-4 form allows you to specify your filing status and the number of dependent exemptions to be used for figuring the amount of income tax to be withheld from your payroll. Even though the IRS provides an on-line W-4 calculator, it is generally suitable for the more simple returns and may not be appropriate in all cases since it does not take into account all income adjustments, credits, and deductions available. Be careful when completing the W-4 form because errors can create some significant financial problems.

This is where a frequent error occurs. Let’s say that you are married and have two dependents. On your tax return, you claim four exemptions. The natural thing for you to do would be to claim “married” and four exemptions on the W-4. However, for W-4 purposes, the exemption for the taxpayer and spouse are automatically built into the married rates and only two exemptions need to be claimed. The result, of course, is that the taxpayer ends up claiming more exemptions than he or she actually has, which can result in underwithholding if the standard deduction is used.

It is common practice and acceptable for taxpayers to claim additional exemptions when they have excessive withholding. The withholding tables do not account for large itemized deductions or other situations that might reduce their taxable income. It’s also quite common for taxpayers to increase their exemptions to provide more take-home pay from their payroll checks. In doing so, they are essentially borrowing tax money from the government, which they will have to repay, along with possible penalties and interest, when they file their return next year. That might seem like a good idea now, but it could lead to an unexpected tax liability at tax time. This is where a professional tax projection can more accurately establish appropriate withholding amounts.

When the IRS believes a taxpayer is not having enough tax withheld, they have a policy of issuing what is referred to as a “lock-in” letter. If it is determined that not enough tax is being withheld for an employee, a "lock-in" letter will be issued to the employer. The lock-in letter will specify the maximum number of withholding exemptions permitted for the employee. The employee's copy of the letter will explain how the employee can ask the IRS to determine the appropriate number of exemptions within a defined period of time. The employer must forward the copy to the employee or, if the employee no longer works for the employer, respond to the IRS. An employer must make the lock-in withholding rate effective 45 days after the lock-in letter date, unless told otherwise by the IRS.

Determining the appropriate number of exemptions to claim on the W-4 can be tricky if you have other substantial income on which no tax is withheld or when both spouses of a married couple are employed. The guidance of a tax professional also may be beneficial in these cases to help figure the W-4 withholding allowances and to analyze how the withholding amount may affect the need for estimated tax installment payments.

If you feel you need assistance in establishing your withholding amount, please give this office a call.

If you’re like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Unfortunately, the job of pulling together the records for your tax appointment is never easy, but the effort usually pays off when it comes to the extra tax you save! When you arrive at your appointment fully prepared, you’ll have more time to:

• Consider every possible legal deduction
• Better evaluate your options for reporting income and deductions to choose those best suited to your situation
• Explore current law changes that affect your tax status
• Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives

The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but later-year returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your tax.

For example, the law allows choices in transactions like:

Sales of property. . . .

If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time, as you receive payments from the buyer.

Depreciation. . . .

You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the cost over a number of years, or in certain cases, you can deduct them all in one year.

Where to Begin?

Ideally, preparation for your tax appointment should begin in January of the tax year you’re working with. Right after the New Year, set up a safe storage location - a file drawer, a cupboard, a safe, etc. As you receive pertinent records, file them right away, before they’re forgotten or lost. By making the practice a habit, you’ll find your job a lot easier when your actual appointment date rolls around.

Other general suggestions to consider for your appointment preparation include:

• Segregate your records according to income and expense categories. For instance, file medical expense receipts in an envelope or folder, interest payments in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, make certain you fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully to be sure you don’t miss important data. Organizers are designed to remind you of transactions you may miss otherwise.)
  
  
• Keep your annual income statements separate from your other documents (e.g., W-2s from employers; 1099s from banks, stockbrokers, etc.; and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s!
  
  
• Write down questions you may have so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to the income for the current year. For instance, a dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale.
  
  
• Make certain that you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions for returns filed without them.
  
  
• Compare deductions from last year with your records for this year. Did you forget anything?
  
  
• Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy in Every Detail

To ensure the greatest accuracy possible for every detail on your return, make sure you review personal data. Check name(s), address(es), social security number(s), and occupation(s) on last year’s return. Note any changes for this year. Although your telephone number isn’t required on your return, current home and work numbers are always helpful should questions occur during return preparation.

Marital Status Change

If your marital status changed during the year, if you lived apart from your spouse, or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce, or property settlement agreements, if any, to your appointment.

Dependents

If you have qualifying dependents, you will need to provide the following for each:

• First and last name
• Social security number
• Birth date
• Number of months living in your home
• Their income amount (both taxable and nontaxable)

If you have dependent children over age 18, note how long they were full-time students during the year. To qualify as your dependent, an individual must pass five strict dependency tests. If you think a person qualifies as your dependent (but you aren’t sure), tally the amounts you provided toward his/her support vs. the amounts he/she provided. This will simplify making a final decision about whether you really qualify for the dependency deduction.

Some Transactions Deserve Special Treatment

Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions:

Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate, and any other type of property need to be reported on your return, even if you had no profit or loss. List each sale, and have the purchase and sale documents available for each transaction.

Purchase date, sale date, cost, and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.

Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the date of the decedent’s death and the property’s value at that time. You may be able to find this information on estate tax returns or in probate documents.

Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends.

Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude all (or a part) of a gain on a home if you meet certain ownership, occupancy, and holding period requirements. If you file a joint return with your spouse and your gain from the sale of the home exceeds $500,000 ($250,000 for other individuals), record the amounts you spent on improvements to the property. Remember, too, possible exclusion of gain applies only to a primary residence, and the amount of improvements made to other homes is required regardless of the gain amount. Be sure to bring a copy of the sale documents (usually the closing escrow statement) with you to the appointment.

Home Energy-related Expenditures: If you made home modifications to conserve energy (such as special windows, roofing, doors, etc.) or installed solar, geothermal, or wind power-generating systems, please bring the details of those purchases and the manufacturer’s credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit.

Ponzi Scheme or Bank Failure Losses: If you suffered losses as the result of a Ponzi scheme or as the result of a bank failure, there is special tax treatment for these types of losses. Please be prepared with the details of the losses and the amounts lost.

Car Expenses: If you have used one or more automobiles for business, list the expenses of each separately. When deducting business-related auto expenses, the government requires that you provide your total mileage, business miles, and commuting miles for each car on your return, so be prepared to have them available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether the reimbursement is included in your W-2.

Charitable Donations: Cash contributions (regardless of amount) must be substantiated with a bank record or written communication from the charity showing the name of the charitable organization and the date and amount of the contribution.

Cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, the items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. A record of each item contributed must be kept, indicating the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued less than $250 and dropped off at an unattended location do not require a receipt. For contributions of over $500, the record must also include when and how the property was acquired and your cost basis in the property. For contributions valued at more than $5,000 and other types of contributions, please call this office for additional requirements.

If you have specific questions related to preparing for your appointment, please give this office a call.

Congress gave all wage earners a short-lived 2012 reprieve by temporarily extending the 2% payroll tax cut though February of 2012.

The payroll tax, frequently referred to as FICA or OASDI on your paycheck, has historically been 6.2%. This is the tax that funds the Social Security administration. For 2011, as an economic stimulus, Congress temporarily reduced the rate to 4.2%. They also provided self-employed individuals with a corresponding two percentage point reduction by lowering the Social Security portion of the SE tax from 12.4% to 10.4%.

Extending this tax cut into 2012 has been a hotly debated issue in Congress. Unable to reach a compromise, Congress has extended the 2% tax cut temporarily through February while they try to work out a solution for the balance of 2012.

This last-minute change can cause problems for some employers who were set to revert to the normal tax rate. These employers may initially withhold 6.2% of your earnings until they can correct their payroll program back to the 4.2% rate. They will then have to make a subsequent adjustment no later than January 31st to correct the over-withholding.

Odds are the cut will be continued past February. However, if this does not happen and your annual earnings exceed the $110,100 annual wage subject to the payroll tax reduction, you will be required to pay back part of the 2% reduction on the amount you earn in excess of $18,350 in January and February. Why? Because the extension legislation limits the savings to two months of income based upon the annual wage limit. Two months out of 12 equals 1/6 of the annual wage base or $18,350 (1/6 x $110,100). Because all employers are required to withhold the payroll tax at a fixed rate, any excess savings will have to be paid back on your 2012 tax return.

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

We would like to remind you that the last day you may make a tax deductible purchase, pay a tax deductible expense or make a tax deductible charitable contribution for 2011 is Saturday Dec. 31.

That is only 2 days away. But you still have time to make charitable contributions, pay deductible taxes, and make business acquisitions before year-end. If you are making last minute business purchases of equipment, that equipment has to also be placed into service before year’s end. So don’t expect a deduction on your 2011 return if you take delivery after the end of the year, even if you paid for it in 2011.

A charitable contribution to a qualified organization is considered made at the time of its unconditional delivery, which for donations made by check is the date you mail it. If you use a pay-by-phone account, the date the financial institution pays the amount is considered the date you made the contribution.

If you are short of cash, keep in mind that purchases or contributions charged to your credit card are deemed purchased when the charge is made.

Wishing you a happy New Year and looking forward to assisting you with your tax preparation needs during the coming tax season.

Congress created IRAs so that individuals could set aside funds for their future retirement, and as an incentive to contribute to an IRA, permitted the contribution to be tax-deductible, unless the individual also participated in an employer’s retirement plan and had income exceeding a specific threshold. However, Congress put safeguards in place to make sure the IRA funds are not used for purposes inconsistent with prudent retirement savings.

If the IRA owner or his or her beneficiary engages in a prohibited transaction, the IRA is disqualified as of the first day of the tax year in which the prohibited transaction takes place. In this event, the IRA owner or beneficiary is treated as having received a taxable distribution equal to the FMV of the assets in the account as of the first day of the tax year. In addition, if under age 59½, the distribution is subject to a 10% early distribution penalty. The following are examples of prohibited transactions:

• Using the IRA Account as Security - If the individual for whom an IRA is established uses the account or any portion of it as security for a loan, the portion so used is treated as distributed to that individual, and as such, is both taxable and subject to the 10% early distribution penalty if the taxpayer is under age 59½.

• Borrowing from an IRA Account - If an individual borrows money against his IRA annuity contract, the entire annuity ceases to be an IRA annuity as of the first day of the tax year in which the loan is made, and will result in the inclusion in income of the entire FMV of the annuity as of the first day of that year.

Here are additional examples of traditional IRA prohibited transactions:

• Using IRA funds to purchase property for personal use (either currently or in the future)
  
  
• Receiving unreasonable compensation for managing the IRA
  
  
• Selling property to the IRA

If you have questions related to prohibited transactions, please give this office a call.

Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years. Some of these changes include the following:

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

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

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

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Reminders - To help taxpayers plan their holiday season and year-end giving, here are some additional reminders:

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2011 count for 2011. This is true even if the credit card bill isn’t paid until 2012. Also, checks count for 2011 as long as they are mailed in 2011.
  
  
• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, searchable and available online, lists most organizations that are qualified to receive deductible contributions. In addition, churches, synagogues, temples, mosques, and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.
  
  
• For individuals, only taxpayers who itemize their deductions can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction. A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction.
  
  
• For all donations of property, including clothing and household items, if possible, obtain from the charity a receipt that includes the name of the charity, date of the contribution, and a reasonably detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
  
  
• The deduction for a motor vehicle, boat, or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
  
  
• And, as always, it’s important to keep good records and receipts.

Deductions by Businesses – Cash payments made by a business to a charitable organization that are not charitable contributions or gifts may be deductible on the business’ return. An example is a payment to a church for an advertisement of the business placed in a program for a concert sponsored by the church. A payment made by a business (other than a C corporation) that is a charitable contribution or gift, cannot be deducted by the business. Sole proprietors, partners in a partnership, or shareholders of an S corporation may be able to deduct the donation as part of their itemized deductions on their personal income tax returns.

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

It is just a little over a week until the close of the 2011 tax year. But before the year ends, there may be some outstanding IRA issues that may require your immediate action. Here are a few December 31st deadline topics to consider:

• IRA to Charity Transfers - An up-to-$100,000 annual exclusion from gross income is allowed for taxpayers aged 70½ or older who make otherwise taxable IRA distributions that are qualified charitable distributions. However, 2011 is the last year for this tax benefit. Therefore, to take advantage, you must make a direct transfer before the year’s end, so you’ll need to contact your IRA custodian or trustee right away to allow time to process your request before the 31st. The IRA-to-charity distributions aren't subject to the charitable contribution percentage limits nor are they included in your gross income or claimed as a deduction on your return.
  
  
• Splitting Inherited IRAs - Beneficiaries that inherited an IRA in 2010 only have until December 31, 2011 to split the IRA into separate accounts for the beneficiaries. Otherwise, required distributions will be based upon the age of the oldest beneficiary.
  
  
• Roth Conversions – If you are considering converting a traditional IRA to a Roth IRA for 2011, you only have until the year’s end to transfer the funds from the traditional IRA account to the Roth IRA account. If you make the conversion in 2011 and subsequently change your mind, you can reconvert the funds back to a traditional IRA in 2012 and avoid paying the conversion tax on your 2011 return.
  
  
• Required Minimum Distributions (RMD) 

If this office can be of any assistance with these issues, please call immediately as the year-end is close at hand.

The distinction between a business activity and a hobby is not a black-and-white issue but instead comes in various shades of grey, which makes it a frequent topic in tax court.

What is at stake? - At issue with the business or hobby determination is the treatment of the activity’s expenses. A for-profit business is able to deduct all of its business expenses even if the net result is a loss, whereas a not-for-profit activity (hobby) can only deduct the expenses related to that activity to the extent there is income from that activity. In other words, no loss is allowed. To further complicate the issue, the expenses of a not-for-profit activity are not netted against income like they are for a for-profit business. Instead, they must be deducted as a miscellaneous itemized deduction subject to the 2% of AGI limitation, and the income from the activity must be included in gross income. In addition, the tax code dictates the order in which the not-for-profit activity’s expenses can be used to offset its income:

• First the income is offset with otherwise deductible taxes related to the activity. These include taxes that would be deductible even if not related to the not-for-profit activity.
  
  
• Next comes all the other expenses, excluding asset depreciation.
  
  
• Then, finally, if any remaining income is left to be offset, asset depreciation can be claimed.

What is the definition of a for-profit activity? - A transaction is entered into for profit if the taxpayer intends to receive income from it overall. For a transaction involving property, the taxpayer must intend to receive income from it or to profit from disposing of it.

Profit must be the primary motive, not merely incidental. A loss deduction is possible where a secondary nonprofit motive exists, as long as the profit motive predominates. As you can see, the determination can be very subjective, and depends on the facts and circumstances of each situation. The following are factors that the IRS and the Tax Court take into consideration when making the determination:

• Does the time and effort put into the activity indicate an intention to make a profit?
  
  
• Does the taxpayer depend on income from the activity?
  
  
• If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
  
  
• Has the taxpayer changed methods of operation to improve profitability?
  
  
• Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
  
  
• Has the taxpayer made a profit in similar activities in the past?
  
  
• Does the activity make a profit in some years?
  
  
• Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

For-profit Presumption - An activity is presumed by the IRS to be engaged in for profit for a tax year if it shows a profit for any three or more out of five consecutive years ending in that tax year (or two out of seven years, for breeding, showing, or racing of horses). A taxpayer who hasn’t engaged in an activity for more than five years (seven, for horse breeding, etc.) can elect (on Form 5213 ) to postpone the determination as to whether these presumptions apply until the close of the fourth tax year (sixth, for horse breeding, etc.) after the tax year in which the taxpayer first engages in the activity.

What the Tax Courts have had to say –

Airplane activities - A licensed airplane pilot and mechanic who worked full-time for a commercial airline also engaged in his own airplane activities such as building, improving, and flying several small airplanes. The taxpayer didn’t engage in those other airplane activities in a businesslike manner. He claimed his business plan was to build airplanes from kits and sell them for a substantial profit. Other than income tax returns, flight logs, and a business license (issued during the last month of the last year at issue), the taxpayer didn’t offer into evidence or any written documentation of his business plans or projections, payroll or other employee records, sales contracts he claimed to have entered into, or any other business records regarding his airplane activity. Activity was judged to be not-for-profit (Parker, John G., (2002) TC Memo 2002-76).

Direct marketing activities - Taxpayers’ activities weren’t engaged in for profit where the manner in which taxpayers conducted their distributorship activity (e.g., freely incurring expenses with no realistic plan for recouping them, maintaining detailed records for substantiation purposes but not for use as tools to increase the likelihood of profit, and relying only on the advice of insiders who stood to profit from taxpayers’ participation) virtually precluded any possibility of realizing a profit; they didn’t prove they had a profit motive. Although the court recognized the business reasons for the taxpayers’ recruiting of “downline” distributors (i.e., to benefit “upline” distributors under the manufacturer’s bonus program, and to earn commissions on the downline distributors’ sales), while selling products to customers and downline distributors at cost, it found the likelihood of taxpayers achieving their bonus point goals (their break-even points) was unrealistic, given that they recruited only family, friends, and acquaintances to be downline distributors. And despite four years of losses, the taxpayers had failed to change tactics to increase the likelihood of earning a profit (Lopez, Jorge N. v. Com., TC Memo 2003-142).

On the other hand, a taxpayer engaged in a similar direct marketing operation was held to be engaged in a profit-seeking activity because he kept records of income, expenses, the success rates of his mailings, and the size of his customer base. He changed methods and products to improve results. Although he didn’t have a formal business plan, the manner in which he conducted the activity evidenced an informal business plan. In addition, he didn’t derive personal pleasure from the operations, and didn’t use the business as an excuse to disguise personal travel as business trips (Dworshak, Duane A., (2004) TC Memo 2004-249).

Dog breeding - Taxpayers’ activities were engaged in for profit where the taxpayers, a husband and wife with full-time jobs, built a kennel adequate to house the dogs used in their dog-breeding activities and acquired supplies and equipment suitable for raising them. They exhibited their dogs at shows in attempts to establish a good reputation for their kennel, so that they could demand a higher price for their puppies. Furthermore, they advertised and sent cards to prospective customers to spur sales and kept records necessary to keep track of the kennel’s profitability (Larson, Ronald Dale Sr., (1991) TC Memo 1991-99).

On the other hand, a taxpayer’s activities weren’t engaged in for profit where only five of her 28 dogs generated any income, she didn’t maintain any records that tracked income and expenses attributable to particular dogs, didn’t have any business plan, didn’t do anything to develop a strategy that would make the activity profitable, and, even though the activity generated persistent losses, didn’t alter the manner in which she conducted the activity to increase the likelihood of a profit (Spranger, Melissa S., (1999) TC Memo 1999-93).

Race car driving - A taxpayer’s drag-racing activities were conducted for profit where he kept careful separate accounts and developed a business plan. He had substantial expertise in racing and considerable business knowledge, and devoted a good deal of time to it. The taxpayer had an income from other activities but not enough to enable him to engage in drag racing on a nonprofit basis. He incurred losses for seven years while developing the activity, but then acquired a sponsor and earned a small profit. Unexpected loss of the sponsor led to a return to losses. Significantly, when it became clear to the taxpayer that he wouldn’t be able to make the activity profitable, he terminated it. There was an element of personal pleasure in the activity for the taxpayer but many aspects that were unpleasant as well, such as heat and discomfort (Morrissey, John E., (2005, DC TN) TC Summary Opinion 2005-86).

A taxpayer’s activities weren’t engaged in for profit where the taxpayer was an expert on drag racing but didn’t conduct his drag-racing activities in a businesslike manner i.e., he maintained no records, had no business plan, didn’t create budgets, didn’t seek business advice, and expected the cars to appreciate in value independently of the drag-racing activities. The taxpayer derived much personal pleasure from his drag-racing activities, and his expenses and losses greatly exceeded (by 54 times) the small amount of income (only $2,150) the activities generated (Zenzen, Ronald J., (2011) TC Memo 2011-167).

Writing – A taxpayer’s activities were engaged in for profit where the taxpayer carried on his television and movie screenplay writing activity in a businesslike fashion. He hired agents to help him negotiate prices for his screenplays, had numerous contacts in the business, and devoted much time and energy to carrying on this activity (Richards, Rick, (1999) TC Memo 1999-163).

A taxpayer’s activities weren’t engaged in for profit where some aspects of the taxpayer’s article- and novel-writing activity (relating to contemporary political commentary, guns, and travel) were conducted in a businesslike manner, but other aspects weren’t. The taxpayer maintained records of his expenses and regularly researched and submitted articles and novels to various periodicals and literary agents. But, although his articles weren’t accepted for publication (during a 17-year period), he didn’t develop a strategy to get published or make changes in order to succeed. And, the taxpayer, who wasn’t a gun-testing expert, conducted his testing and incurred gun-related expenses without determining if there was any interest in the articles, and without regard to the income he could objectively earn (McCarthy, John R., (2000) TC Memo 2000-197).

If you have questions about the conduct of your activity as related to the profit motive rules, please give this office a call.

It is becoming increasingly common for couples to live together and remain unmarried, which can lead to potential tax problems when they share the expenses of a home but only one of the couple is liable for the debt on that home.

Home mortgage interest can generally be deducted only by a person who is legally obligated to pay the mortgage (in other words, a person who is named as an obligor on the mortgage document). However, there is an exception to the preceding general rule for interest paid on a real estate mortgage when a person is a legal or equitable owner of the real estate but is not directly liable for the debt.

For example, if the one who is not liable on the mortgage makes the payment, that individual is not allowed to deduct the interest portion of the payment and neither is the other person, because he or she did not pay it. This can lead to some complications where one of the couple is the bread winner and would benefit tax-wise from an interest deduction, but the other person is the liable party on the loan. It is not uncommon for couples who both work to share the mortgage payments in the mistaken belief that they can each deduct their share of the mortgage interest on their individual tax returns.

Although state law governs what constitutes equitable ownership, equitable ownership can generally be established if both parties are on title to the property even if only one is liable on the loan. The premise behind equitable ownership is that an individual is protecting his or her ownership in the home by making some or all of the mortgage payments.

This position was recently upheld in a 2011 Tax Court decision where the court denied a taxpayer’s home mortgage interest deduction that she paid until she became co-owner of the property with her boyfriend and was legally obligated to make the mortgage payments.

If you are in a similar situation and have questions related to sharing potentially tax deductible expenses, please this office a call.

If you like to watch game shows and enjoy all the excitement that goes with watching contestants win prizes, then you can add another element to your viewing pleasure by considering how the contestants will handle the IRS Form 1099 they receive for the value of the items they won. You may not have thought much about it, but the contestants must pay federal and applicable state income tax on the cash and the value of the goods they win on game shows.

The lucky ones are those who simply win cash. They will have money to pay the taxes— unless, of course, they overlook the tax issue and spend all the winnings and end up with a tax liability they cannot pay. All that winning excitement turns into a stressful financial problem, and they probably end up wishing they hadn’t won.

The winners of non-cash prizes have more complex issues. They are required to pay taxes on the fair market value of the prize. The problem here is that game shows generally report prizes at full retail value and not the price the items would fetch on the open market. Take for example a contestant who wins a trip. Typically, hotel packages are valued by the game shows at their top retail value, not the discounted rates that can be obtained online or through a travel agent. Thus, those who accept the trip may not be able to afford the taxes on the trip, and after a week in paradise, they find themselves in tax purgatory.

The issue becomes a real financial drag for the taxpayer who is unable to pay the tax liability because they end up with failure-to-pay (and perhaps underpayment of estimated tax) penalties and interest that the IRS keeps tacking on until the liability is finally paid in full.

The tax issues can be avoided by refusing the non-cash prize, especially if the prize is something of no use to the winner. Another option for easy-to-sell items is to accept the prize and then sell it (not to a relative or friend). The gap between retail and real value can be especially harmful for winners who accept a prize with the intent to resell it: They're paying taxes on a value they have no hope of recouping, which eats into the profits.

Remember back in 2004 when Oprah Winfrey gave away to everyone in the audience a Pontiac? The sticker price of those cars was $28,500, and that amount had to be claimed as income by the audience members. If the person who received a car was in the 25% tax bracket, they were looking at a tax bill of $7,125. So the free car wasn’t free and could have ended up as a tax headache for some.

One famous contestant on “Survivor” did not report his $1 million winnings, claiming that CBS had told him the network was responsible for the taxes. It turns out that the contract he signed with CBS specifically stated that he was responsible for the taxes, and as a result, Richard Hatch ended up in federal court, where he was convicted of tax evasion and sentenced to a 51-month prison term.

When watching “Extreme Makeover: Home Edition,” you probably never thought about the tax implications to the beneficiaries of the home makeover. The makeover is classified as winnings and subject to income tax, as is the trip the homeowners took while the makeover was in progress. Then there is the real property tax issue; in most jurisdictions, the property taxes are based on the value of the home. Once the improvements are made, the homeowner’s property taxes will substantially increase.

As you can see, there is a down side to being a game show winner! If you have more questions related to prize winnings, please give this office a call.

The Tax Court has held that a married couple could not deduct losses from their timeshare rental activity because: (1) they did not engage in the activity with the bona fide profit objective as required under the Code Sec. 183 hobby loss rules, (2) they failed to meet the ordinary and necessary requirements of Code Sec 162 for their travel expenses, and (3) they did not meet the strict expense substantiation rules of Code Sec 274.


Both taxpayers worked full-time in other occupations. They purchased four timeshares in 2005 and seven in 2006. The taxpayers traveled frequently, attending timeshare previews and meeting with representatives who discussed the details of the resorts and gave them tours. The timeshare presentations normally took only four or five hours. The taxpayers’ family accompanied them, and they generally stayed overnight at lavish resorts and then went to the beach the next day.

Looking at the amount of profit from the activity, the Court found that the timeshare activity had yet to earn any profits. In the four years in the record, the activity had lost $217,705 and earned only $40,995.

Although the taxpayers submitted their credit card bills and some receipts, they had difficulty identifying which of the charges were incurred in connection with the timeshare activity and which were personal; thus, they failed to meet the required substitution requirements. In addition, the Court determined the expenses were not ordinary and necessary because the taxpayers mixed business with pleasure, staying at lavish resorts with their family and only spending minimal time viewing timeshares.

As result, the court only allowed the taxpayers to deduct their expenses to the extent of the income from the timeshare losses.

If you have question related to timeshares or the hobby loss rules, please give this office a call.

2011 has produced some significant gyrations in the financial markets that have had an impact on everyone’s portfolios. But for tax purposes, gains and losses are not measured by the increased or decreased value of your portfolio, but by gains and losses recognized from the sale of capital assets during the year. So you still have until the end of the year to structure your gains and losses to suit your particular tax situation.

Conventional wisdom has always been to minimize gains by selling “losers” to offset gains from “winners,” and, where possible, generate the maximum allowable $3,000 ($1,500 for married taxpayers filing separately) capital loss for the year.

As a reminder, the maximum long-term (assets held for more than a year) capital gains are still at the all-time low maximum rate of 15%, and unless changed by Congress, will remain at that rate through 2012. Taxpayers who are in the 15% or lower marginal tax rate actually enjoy a 0% tax rate on long-term capital gains and should do whatever is possible to take advantage of that tax benefit. The capital gains rates are currently scheduled to revert to 20% (10% to the extent a taxpayer is in the 15% or lower tax bracket) in 2013.

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

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

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

Finally, as an advance warning, the reporting of the sale of capital assets will become significantly more complicated this year. With the advent of brokerage firms being required to track and report basis for stock sales, the transactions for the year will have to be segregated into four possible groups: those for which the broker reported basis and those for which the broker did not know basis, and each of those categories split by short- and long-term transactions. The IRS has developed the new Form 8949  for this purpose. Each category of transactions must be reported on a separate Form 8949, and then the totals transferred to a redesigned Schedule D. The IRS requires this separation of transactions to facilitate its computer matching of transactions.

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

There are an abundant number of provisions that provide tax relief to small businesses this year. Just so that you don’t overlook any of these benefits, or in case your business would like to position itself to take advantage of some before the close of the year, here is a brief rundown on many of the business benefits that are available for 2011. Some of these provisions are currently set to expire after December 31, 2011.

• Research Tax Credit - A tax credit of up to 20% of qualified expenditures for businesses that develop, design, or improve products, processes, techniques, formulas, or software or perform similar activities. The credit is calculated on the basis of increases in research activities and expenditures.
  
  
• Work Opportunity Tax Credit - A tax credit of up to 40% based upon a portion of the first-year wages paid to members of certain targeted groups. The credit is generally capped at $6,000 per employee ($12,000 for qualified veterans and $3,000 for qualified summer youth employees).
  
  
• Differential Wage Payment Credit - Employers who have an average of less than 50 employees during the year and who pay differential wages to employees for the periods they were called to active duty in the U.S. military can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year.
  
  
• HIRE Retention Credit – In 2010, employers were granted a payroll tax holiday for hiring long-term unemployed individuals. As an incentive to retain those individuals, a non-refundable credit up to $1,000 per employee is allowed to employers who kept those employees on payroll for a continuous 52 weeks. The credit is limited to 6.2% of the employee’s wages, and will be claimed on the 2011 return.
  
  
• New Energy Efficient Home Credit - An eligible contractor can claim a credit of $2,000 or $1,000 for each qualified new energy efficient home either constructed by the contractor or acquired by a person from the contractor for use as a residence during the tax year. o 100% Bonus Depreciation – Businesses are allowed a 100% bonus depreciation on qualified business property purchased and placed into service during the year. This generally includes machinery, equipment, computers, qualified leasehold improvements, etc. (but see limitations on vehicles).
  
  
• Expensing Allowance – In lieu of depreciating the cost of new assets, a business is allowed to deduct up to $500,000 expensed under Code Sec. 179. The $500,000 maximum amount is generally reduced dollar-for-dollar by the amount of Section 179 property placed in service during the tax year in excess of $2,000,000.
  
  
• 15-year Write-off for Specialized Realty Assets - Qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service during the year are eligible for a 15-year depreciation write-off instead of the normal 39 years.
  
  
• Business Autos – As part of the benefit of the 100% depreciation, the first-year luxury auto limit is increased to $11,060 for autos and $11,260 for light trucks and vans. For vehicles with a gross vehicle rating of over 6,000 pounds, the luxury auto limits do apply and are subject to the full benefit of the 100% bonus depreciation.
  
  
• Domestic Production Deduction – This deduction was created to encourage manufacturing and production within the U.S. and provides a deduction equal to 9% of the lesser of net income from qualified production activities or 50% of the W-2 wages paid to employees allocated to the domestic production activity.

If you have questions or wish more detail on any of the provisions or other business issues, please give this office a call.

After 2012, the limitation on deductible medical expenses increases for most taxpayers from the current 7.5% of AGI to 10% (it remains at 7.5% for taxpayers age 65 and over through 2016). So if you need some dental work, laser eye surgery, or other elective but deductible medical procedures, you might consider doing so sooner than later to take advantage of the current lower AGI limit. (But forget that face lift or other nip and tuck procedure you’ve been thinking about - cosmetic surgery costs aren’t deductible unless related to a physical injury or disfiguring disease.) Also, if you are paying for a procedure over time, it might be appropriate to pay it all at once to increase your currently deductible medical expenses.

Determining whether the tax benefits after the AGI limit is applied warrant the current expenditure can be complicated, and you may wish to call this office for assistance.

The following is a checklist of deductible medical expenses. The list is by no means all-inclusive, and some of the deductions listed may have additional restrictions not included here.

Abortion, Legal	Lead-Based Paint Removal
Acupuncture	Learning Disability
Artificial Limb	Learning Disability
Alcoholism Treatment	Medical Services
Ambulance	Medicines, Prescribed
Artificial Limb	Mentally Retarded, Special Home for
Artificial Teeth	Nursing Home
Birth Control Pills	Nursing Services
Braille Books and Magazines	Operations
Chiropractor	Optometrist
Christian Science Practitioner	Organ Donors
Contact Lenses	Osteopath
Crutches	Oxygen
Dental Treatment	Prosthesis
Drug Addiction Treatment	Psychiatric Care
Drugs (Prescription)	Psychoanalysis
Eyeglasses	Psychologist
Fertility Enhancement	Special Schools and Education
Guide Dog	Sterilization
Hearing Aids	Stop Smoking Programs
Hospital Services	Surgery
Impairment-Related Expenses	Therapy
Insurance Premiums	Vasectomy
Laboratory Fees	Weight-Loss Program
Laser Eye Surgery	Wig (Cancer Patient)

Please call this office with questions regarding these or other potential medical deductions.


As the end of the year approaches, there are still things you can do to increase and properly document your charitable contributions for 2011. Here is a brief rundown:

Non-cash contributions – If you have used clothing or household goods that are in good or better condition that you don’t use any longer, contribute them to a charity thrift shop before the end of the year. Don’t forget: a receipt from the charity is required to document the gift. If the gift’s fair market value (FMV) is more than $500, you will also need an itemized list of the items contributed, how and when each was acquired, and the cost. If the FMV of what you’ve donated is greater than $5,000, or you contributed a vehicle, call this office for additional documentation requirements. A receipt from the charity is not required if the gift’s value is less than $250 and the donation was made at an unattended drop site. However, you will need to document the donation yourself.

Cash Donations – All cash donations must be documented either by a receipt from the charity or by a bank record such as a check, bank statement, or credit card payment. You can no longer claim contributions of cash dropped into the offering plate or Christmas kettle. So, be wise and drop a check instead. If you regularly tithe at a house of worship, you might consider pre-paying your 2012 tithing and moving the deduction into 2011. In doing so, some taxpayers that marginally itemize may be able to itemize every other year and take the standard deduction in alternate years.

Charity Volunteer Expenses – If you volunteer your time for a charity, you may qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a charity, there are deductions permitted for out-of-pocket costs incurred while performing the services. Possible expenses might include:

• Away-from-home travel expenses while performing services for a charity, plus lodging and meals at 100 percent, provided there is no significant element of personal pleasure associated with the trip.
• Use of your personal vehicle while performing services for the charity, generally at 14 cents per mile. Be sure to keep a written record of the name of the charity, the date the vehicle was used for charitable purposes, and the number of miles driven.
• Upkeep and cost of uniforms that aren’t suitable for everyday use and if worn while performing the charitable service.

No charitable deduction is allowed unless the contribution is substantiated with a written acknowledgment from the charitable organization. The documentation must specify the need for your services and include an acknowledgement by the charity that the expenses claimed were required; be sure to maintain the receipts for the expenses.

Vehicle Donations – Generally, the deduction for used cars, boats, planes, etc. is limited to $500. More than $500 can be claimed based upon the charity’s use of the vehicle or the actual amount the charity received from the sale of the vehicle. You will need Form 1098-C from the organization to claim the deduction and attach it to your return. Call for further details related to claiming more than $500.

Timing of Acknowledgments – Whenever you are required to have an acknowledgment from a charity for donations you’ve made, you must have that letter or statement in your hands by the earlier of the date you file the return for the year of the donation or the extended due date of that return.

If you have additional questions or would like to determine how a specific donation will impact your tax return, please give this office a call.

FinCEN is the acronym for the Treasury Department’s Financial Crimes Enforcement Network. FinCEN is a government-wide, multisource, financial intelligence and analysis network tasked with detecting money laundering, terrorist financing, tax evasion, and other financial crimes. To do its job, FinCEN must collect financial data from a multitude of sources, including each U.S. person with connections to foreign financial transactions. This has resulted in a number of reporting requirements imposed upon taxpayers that many are unaware can result in draconian penalties for non-compliance.

• Foreign Account Reporting Requirements - Each United States person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value exceeds $10,000 at any time during the calendar year, must report that relationship to the U.S. government each calendar year. This is done by filing Form TD F 90-22.1 (often referred to as FBAR) on or before June 30 of the succeeding year. No extensions of time to file are available, and failing to comply can result in civil penalties up to $10,000. Willful violations are subject to penalties that are the greater of $100,000 or 50% of the account’s balance.
  
  
• Reporting Foreign Gifts, Bequests and Trusts - Gifts of more than $100,000 from a non-resident alien individual or foreign estate and gifts of more than $14,375 in 2011 ($14,723 in 2012) from foreign corporations or partnerships must be reported. Form 3520 is used to report the gifts and to report ownership in a foreign trust. Failure to comply can result in a penalty of the greater of $10,000 or 35% of the gross value of any property transferred to a foreign trust.
  
  
• Annual Report of Individuals with Foreign Assets - This is a new reporting requirement for 2011. Generally, U.S. persons with ownership of certain foreign assets not held by a domestic financial institution with an aggregate value of more than $50,000 must file Form 8938 with their tax returns, providing details of the assets. Failure to file can result in penalties of up to 40% of the undisclosed value.

Watch for Overlooked Accounts – You may not realize you have accounts that fall under one or more of these reporting requirements. Don’t overlook accounts where family members in foreign countries have included you on a foreign account or as part owner of a business entity or trust. Don’t overlook foreign retirement savings accounts such as Canadian RRSP and RRIF accounts. Consider business accounts where, as an officer or board member of a company, you may have signature authority over a foreign account.

If you have questions related to these reporting requirements, please give this office a call.

Hiring independent contractors instead of employees can save a lot of money in employment taxes and employee benefits. And it can be a mine field of tax problems if workers are misclassified as independent contractors when they should have been treated as employees.

The three primary characteristics the IRS uses to determine the relationship between businesses and workers are behavioral control, financial control, and the type of relationship.

1. Behavioral Control - Covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
   
   
2. Financial Control - Covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.
   
   
3. Type of Relationship - Relates to how the workers and the business owner perceive their relationship.

If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

This issue has been heating up recently as the government looks for ways to reduce the deficit. A recent study by the IRS estimates there are 3.4 million workers misclassified as independent contractors, causing a loss of $2.7 billion in tax revenue.

The IRS initiated an expanded focus on this issue in 2010 and continues to ratchet up enforcement with increased audits, and now the IRS and the Department of Labor have begun to share information and collaborate on this issue.

The IRS just recently announced a Voluntary Classification Settlement Program (VCSP) that allows employers to come into compliance by making a minimal payment covering past payroll. Employers wishing to participate in this program must apply for the program at least 60 days before they want to start treating the workers as employees. To be eligible, the employer must have filed the required 1099 forms for the workers in the previous three years and not be under audit concerning the employees.

If you have questions related to worker classification, please give this office a call.

A frequent question from taxpayers is: how long does the IRS have to question and assess additional tax on my tax returns? For most taxpayers who reported all their income, the IRS has three years from the date of filing the returns to examine them. This period is termed the statute of limitations. But wait – as in all things taxes, it is not that clean cut. Here are some complications:

You file before the April due date - If you file before the April due date, the three-year statute of limitations still begins on the April due date. So filing early does not start an earlier running of the statute of limitations. For example, whether you filed your 2010 return on February 15, 2011 or April 15, 2011, the statute did not start running until April 18, 2011 (because the due date was changed due to a federal holiday in Washington, DC).

You file after the April due date - The assessment period for a late-filed return starts on the day after the actual filing, whether the lateness is due to a taxpayer’s delinquency, or under a filing extension granted by IRS. For example, say your 2010 return is on extension  until October 17, 2011 (October 15 falls on a weekend so the due date is the next business day), and you actually file on September 1, 2011. The statute of limitations for further assessments by the IRS will end on September 2, 2014. So the earlier you file those extension returns, the sooner you start the running of the statute of limitations.

If you want to be cautious you may wish to retain verification of when the return was filed. For electronically filed returns, you can retain the confirmation from the IRS accepting the electronically filed return. If you file a paper return, proof of mailing can be obtained from the post office at the time you mail the return.

You file an amended tax return - If after filing an original tax return you subsequently discover you made an error, an amended return is used to make the correction to the original. The filing of the amended tax return does not extend the statute of limitation unless the amended return is filed within 60 days before the limitations period expires. If that occurs, the IRS generally has 60 days from the receipt of the return to assess additional tax.

You understated your income by more that 25% - When a taxpayer underreports his or her gross income by more than 25%, the three year statute of limitations is increased to six years.

In determining if more than 25% has been omitted, capital gains and losses aren’t netted; only gains are taken into account. These “omissions” don’t include amounts for which adequate information is given on the return or attached statements. For this purpose, gross income, as it relates to a trade or business, means the total of the amounts received or accrued from the sale of goods or services, without reduction for the cost of those goods or services. In addition, any basis overstatement that leads to an understatement of gross income constitutes an omission.

You file three years late - Suppose you procrastinate and you file your return three years or more after the April due date for that return. If you owe money, you will have to pay what you owe plus interest and late filing and late payment penalties. If you have a refund due, you will forfeit that refund and perhaps get stuck with a $135 minimum late filing penalty. No refunds are issued three years after the filing due date.

10-year collection period – Once an assessment of tax has been made within the statutory period, the IRS may collect the tax by levy or court proceeding started within 10 years after the assessment or within any period for collection agreed upon by the taxpayer and the IRS before the expiration of the 10-year period.

Remember not to discard your tax records until after the statute has run its course. When disposing of old tax records, be careful not to discard records that prove the cost of items that have not been sold. For example, you may have placed home improvement records in with your annual receipts for the year the improvement was made. You don’t want to discard those records until the statute runs out for the year you sold the home. The same applies to purchase records for stocks, bonds, reinvested dividends, business assets, or anything you will sell in the future and need to prove the cost.

If you are behind on filing your returns and would like to get caught up, please give this office a call. If you discovered you omitted something from your original return and would like to file an amended return, we can help with that as well.

The tax law provides a credit for small business employers in 2010, 2011, 2012, and 2013 that pay the health insurance premiums for their low- to moderate-income workers. This refundable credit can be as much as 35% of the insurance premiums paid by the employer.

To qualify for the credit, the employer can’t have more than 25 full-time equivalent employees, and the average wage of the employees cannot exceed $50,000 for the year. The 25 full-time equivalent employee limit is computed by taking into account both full-time and part-time employees for the year using a formula.

To see if your firm may qualify for the credit, complete the two worksheets below - the results at lines 6 and 9 will tell you if your firm is under the maximum full-time equivalent employee and average wage limitations.

Determine the Number of Full-Time Equivalent Employees:

1. Enter the number of employees who worked 2,080 hours or more during the year _____
2. Multiply line 1 by 2,080 _____
3. Enter the total hours worked by all employees who worked less than 2,080 hours during the year _____
4. Enter the total of lines 2 and 3 _____
5. Divide the result on line 4 by 2,080  _____
6. Number of full-time equivalent employees (round line 5 down to the next whole number,
   unless the number is less than one, in which case enter 1. ____

If line 6 is greater than 25, stop - your firm does not qualify for this credit.

Determine the Average Annual Wage:


If the amount on line 9 is $50,000 or less, you may qualify for the credit. Besides meeting the limits of lines 6 and 9, to qualify for the credit an employer has to contribute at least 50% of the premiums for the employees’ health insurance coverage on a uniform basis. However, for tax years beginning in 2010 only, an employer can meet this requirement even if it pays differing percentages of different employees’ premiums as long as all employer payments are at least 50% of each employee’s premium based on single (employee-only) coverage.

The amount of the credit gradually phases out if the number of full-time equivalent employees exceeds ten or if the average annual wage of the employees exceeds $25,000. Under the phase-out, the full amount of the credit is available only to an employer with ten or fewer full-time equivalent employees and whose employees have average annual wages of less than $25,000.

Please give this office a call if you have questions related to this credit or determining whether your firm can benefit from claiming the credit.

Even though retirement may be years away, and it may not be the most pressing issue on your mind these days, don’t forget your retirement contributions, especially with generous government incentives involved.

There are a variety of retirement plans available to small businesses that allow the employer and employee a tax-favored way to save for retirement. Contributions made by the owner on his or her own behalf and for employees can be tax-deductible. Furthermore, the earnings on the contributions grow tax-free until the money is distributed from the plan. Here are some retirement plan options:

• Simplified Employee Pension Plan (SEP). This plan was designed to avoid the complications of a qualified plan. Contributions to the plan are held in the beneficiaries’ IRA accounts; hence, the title “simplified.” Deductible contributions for 2011 are limited to the lesser of 25% of the participant’s compensation (up to $245,000) or $49,000. A SEP can be established and funded after the close of the year.
  
  
• Qualified Plan (Keogh). Generally, the rules surrounding a Keogh are more complex. This type of plan may include a discretionary contribution profit sharing plan or a mandatory contribution money purchase plan, or a combination of these. SEP plans are favored over Keogh plans by most self-employed individuals. For 2011, deductible contributions are limited to the lesser of 25% of the participant’s compensation (up to $245,000) or $49,000. These plans must be established before the end of the tax year, but contributions can be made afterwards.
  
  
• Savings Incentive Match Plan for Employees (SIMPLE Plan). Under this plan, the business owner takes a deduction, and employees receive a salary deferral. The contribution limit is $11,500 (per employer or employee), with an additional catch-up contribution limit of $2,500 for participants aged 50 or older. The employer can match the contribution up to 3% of compensation or make a non-elective contribution of 2% of compensation.
  
  
• Individual 401(k) Plan. The individual 401(k) plan is similar to the traditional 401(k) plan with added benefits for the small business owner. The owner can contribute and deduct up to 25% of compensation plus an additional $16,500 salary deferral, up to a $49,000 maximum ($54,500 for those who are age 50 and over). For employees, the contribution and salary deferral limit is $16,500, with an additional $5,500 catch-up contribution available to those aged 50 or over. Employers can match employee contributions.

If you do establish a new qualified pension plan for your business, you may be entitled to the “small employer pension startup credit.” The credit is equal to 50% of administrative and retirement-related education expenses for the plan for each of the first three plan years, with a maximum credit of $500 for each year. Plan-related expenses in excess of the amount of the credit claimed are generally deductible as ordinary expenses of the business.

The first credit year is the tax year that includes the date the plan becomes effective, or, electively, the preceding tax year. Examples of qualifying expenses include the costs related to changing the employer’s payroll system, consulting fees, and set-up fees for investment vehicles.

If you would like assistance in selecting a retirement plan for your business or to explore the tax benefits relevant to your particular circumstances, please give this office a call.

Originally enacted to help offset the repeal of a tax break for U.S. exporters, this provision of the tax code provides a deduction for many U.S. businesses that’s allowed for both regular tax and alternative minimum tax (AMT) purposes. And, despite the deduction’s history, it’s fully available to taxpayers who don’t export.

For 2010 and later years, the deduction equals 9% of the net income from eligible activities but cannot exceed 50% of the wages paid to employees whose work relates to the production of the income eligible for the deduction. This means that businesses operated as sole proprietorships or partnerships with no employees aren’t eligible for the deduction. To take advantage of the deduction, such businesses can incorporate and pay W-2 wages to their principals. (However, the decision to incorporate should not be based solely on claiming this creditmany other factors need to be considered.)


The domestic production activities deduction is allowed with respect to the following activities:


The deduction is allowed to all taxpayers, including individuals, C corporations, farming cooperatives, estates, trusts, and their beneficiaries. The deduction is allowed to partners and the owners of S corporations and may be passed through by farming cooperatives to their patrons.

A broad range of activities qualify as eligible manufacturing or production activities. The taxpayer's raw materials and finished products may be brand new, or they may be made out of scrap, salvage, or junk material. Manufacturing or producing components used by another party in later manufacturing or production activities is an eligible activity, as is manufacturing or producing finished items from components manufactured or produced by others.

The processing and preparation of food products for sale at wholesale are eligible “production” activities, but the preparation of food and beverages for sale at retail is not.

Construction activities are eligible for the deduction, but only if the construction is of real property and it is performed in the United States. The real property may consist of residential or commercial buildings and permanent structures. Eligible construction activities don’t include tangential services such as hauling trash and debris or delivering materials, even if the tangential services are essential for construction.

Engineering and architectural services are eligible for the deduction, but only if they’re performed in the United States for real property construction projects in the United States.

The foregoing is only an overview of this deduction; careful analysis of its application to each type of manufacturing activity must be done. The deduction applies to both large and small businesses, so don’t assume that just because your business is small, you won’t benefit from the deduction. If you have questions related to how the domestic production deduction might apply to your specific circumstances, please give this office a call.

Frequently, taxpayers think that gifts of cash, securities or other assets they give to other individuals are tax-deductible and, in turn, the gift recipient sometimes thinks income tax must be paid on the gift received. Nothing is further from the truth. To fully understand the ramifications of gifting, one needs to realize that gift tax laws are related to estate tax laws.

When a taxpayer dies, his or her gross estate (to the extent it exceeds the excludable amount for the year) is subject to estate taxes. Naturally, individuals want to do whatever they can to maximize their beneficiaries’ inheritances and limit the estate’s amount of inheritance tax. Because giving away one’s assets before dying reduces the individual’s gross estate, the government has placed limits on gifts, and if those gifts exceed the limit, they are subject to gift tax that must be paid by the giver.

Gift Tax Exclusions – Certain gifts are excluded from the gift tax.

• Annual Exclusion – This is the annual amount that an individual can give to any number of recipients. This amount is adjusted for inflation, and for 2011, it is $13,000. For example, a taxpayer with five children can give $13,000 to each child in 2011 without any gift tax consequences. The taxpayer cannot deduct the gifts, and the gifts are not taxable to the recipients. Generally, for a gift to qualify for the annual exclusion, it must be a gift of a “present interest.” That is, the recipient’s enjoyment of the gift can't be postponed into the future. For gifts to minor children, there is an exception to the “present interest” rule where a properly worded trust is established.
  
  
• Lifetime Limit – In addition to the annual amounts, taxpayers can use a portion of the federal estate tax exemption (it is actually in the form of a credit) to offset an additional amount during their lifetime without gift tax consequences. However, to the extent this credit is used against a gift tax liability, it reduces the credit available for use against the federal estate tax at the taxpayer’s death. For 2011, the credit-equivalent lifetime gift tax exemption is $5 million (up from $1 million), and is the same as for the estate tax exemption.
  
  
• Education & Medical Exclusion – In addition to the amounts listed above, there are two additional types of gifts that can be excluded from the gift tax:
  
  
  (1) Amounts paid by one individual on behalf of another individual directly to a qualifying educational organization as tuition for that other individual.
  (2) Amounts paid by one individual on behalf of another individual directly to a provider of medical care as payment for that medical care. Payments for medical insurance qualify for this exclusion.

Gifts of Capital Assets – Sometimes a gift might be in the form of securities, real estate, or other items that have appreciated in value. In these situations, the gift value is the item’s fair market value at the time of the gift. However, when the recipient of the gift sells that asset, he or she will measure his or her gain from the giver’s tax basis. For example, a parent gifts 100 shares of XYZ, Inc. worth $9,000 to his or her child. If the parent originally paid $5,000 for the shares and if the child sold the shares for $9,000, the child (the recipient) would be liable for the tax on the $4,000 gain. In effect, the parent (giver) transferred the taxable gain in the stock to the child. This can be beneficial from a tax standpoint if the child is in a lower tax bracket than the parent. Caution: Watch out for unintended gifts such as an elderly parent placing a child on title of the home or other assets.

Gift-Splitting by Married Taxpayers - If the gift-giver is married and both spouses are in agreement, gifts to recipients made during a year can be treated as split between the husband and wife, even if the cash or property gift was made by only one of them. Thus, by using this technique, a married couple can give $26,000 a year to each recipient under the annual limitation discussed previously.

If you have additional questions or would like this office to assist you in planning an appropriate gifting strategy, please give this office a call.

We have compiled a checklist of actions based on current tax rules that may help you save tax dolllars if you act before year-end. Regardless of what Congress does late this year or early next, solid tax savings can be realized by taking advantage of tax breaks that are on the books for 2011. For individuals, these include:

• the option to deduct state and local sales and use taxes instead of state and local income taxes;
• the above-the-line deduction for qualified higher education expenses; and
• tax-free distributions by those age 70-1/2 or older from IRAs for charitable purposes.

For businesses, tax breaks available through the end of this year that may not be around next year unless Congress acts include:

• 100% bonus first-year depreciation for most new machinery, equipment and software;
• an extraordinarily high $500,000 Section 179 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property); and
• the research tax credit.

Not all actions will apply to your particular situation, but you will likely benefit from many of them. There also may be additional strategies that will apply to your particular tax situation. We can narrow down the specific actions that you can take once we meet with you. In the meantime, please review this list and contact us at your earliest convenience so we can advise you on which tax-saving moves to make.


Be Aware of the Alternative Minimum Tax (AMT) - Keep in mind when considering year-end tax strategies that many of the tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, these deductions should not be accelerated. This office has tax planning software that can analyze and minimize the effects of the AMT.

Employer Flexible Spending Accounts - If you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. Keep in mind, however, that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs.

Health Savings Accounts - If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2011.

Capital Gains and Losses - We can employ a number of strategies to suit your specific tax circumstances. For example, some taxpayers may be in the zero percent capital gains bracket and should be looking for gains that benefit from no tax. Others may be affected by the wash sale rules when they are trying to achieve deductible losses while maintaining their investment position. Generally, portfolios should be reviewed near year’s end with an eye to minimizing gains and maximizing deductible losses. It may be appropriate for you to call for a year-end strategy appointment to discuss trades and actions that can produce tax benefits for you.

Roth IRA Conversions - If your income is unusually low this year, you may wish to consider converting your traditional IRA into a Roth IRA. Even if your income is at your normal level, with the recent decline in the stock markets, the current value of your Traditional IRA may be low, which provides you an opportunity to convert it into a Roth IRA at a lower tax amount. Thereafter, future increases in value would be tax-free when you retire.

Recharacterizing a Roth Conversion - If you converted assets in a traditional IRA to a Roth IRA earlier in the year, you may have seen the assets decline in value due to the recent market decline, and you will end up paying higher than necessary taxes on that higher valuation. However, you may undo that rollover by recharacterizing the conversion by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later (generally after 30 days) reconvert to a Roth IRA.

IRA to Charity Transfer - This year may well be the last chance for taxpayers ages 70-1/2 or older to take advantage of an up-to-$100,000 annual exclusion from gross income for otherwise taxable individual retirement account (IRA) distributions that are qualified charitable distributions. Such distributions aren't subject to the charitable contribution percentage limits and can't be included in gross income. However, the contribution isn’t deductible.

Advance Charitable Deductions - If you regularly tithe at a house of worship, you might consider pre-paying part or all of your 2012 tithing and thus advancing the deduction into 2011. This can be especially helpful to individuals who marginally itemize their deductions, allowing them to itemize in one year and then take the standard deduction in the next.

Income Deferral - Depending upon your particular tax circumstances, it may be appropriate to defer income into 2012 if possible. For example, if you are receiving an employee bonus, you might ask your employer to defer it until 2012.

Income Acceleration - If your taxable income is unusually low because of lower income or larger deductions, you may be able to absorb additional income with no or minimal additional tax. In that case, you should consider accelerating income when possible without incurring penalties. This would include pension plan and IRA distributions and accelerated capital gains.

Prepay Tax Deductible Expenses - Consider prepaying tax-deductible expenses to increase your 2011 itemized deductions. For example, if you have outstanding dental bills, paying the balance before year-end may be beneficial, but only if you already meet the 7.5% of AGI floor for deducting medical expenses, or if adding the dental payments would put you over the 7.5% threshold. You can even use a credit card to prepay the expenses, but you would only want to do so if the interest expense you’d incur is less than the tax savings.

Prepay State Income Taxes - State income taxes paid during the year are deductible as an itemized deduction. As long as pre-paying the state taxes does not create an AMT problem and you expect to owe state and local income taxes next year, it may be appropriate to increase your withholding at your employment or make an estimated tax payment before the close of 2011, thereby advancing the deduction into this year.

Avoid Underpayment Penalties - If you are going to owe taxes for 2011, you can take steps before year-end to avoid or minimize the underpayment penalty. The penalty is applied quarterly, so making a fourth quarter estimate will not reduce the penalties applied to the first 3 quarters of the year. However, withholding is treated as paid ratably throughout the year, so increasing withholding at the end of the year can reduce the penalties for the earlier quarters. This can be accomplished with cooperative employers or by taking a non-qualified distribution from a pension plan, which will be subject to a 20% withholding, and then returning the gross amount of the distribution to the plan within the 60-day statutory limit. Please consult this office to determine if you will be subject to underpayment penalties (there are exceptions), and if so, the best strategy to avoid or minimize them.

Sales Tax - Without a congressional extension, 2011 is the final year in which you can elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. You may wish to accelerate big-ticket purchases into 2011 to assure yourself a deduction for sales taxes on the purchases, assuming the increased sales tax deduction is greater than the state and local tax amount. The deduction is extremely helpful in states with no state income tax.

Home Energy Credits - If you are a homeowner, making energy-saving improvements to your residence such as putting in extra insulation or installing energy saving windows and energy efficient heaters or air conditioners may qualify you for a tax credit, if the assets are installed in your home before 2012. The credit is 10% of the cost of the improvement with a cap of $500; the credit is reduced by any credit claimed in prior years for the purchase of other energy-saving property.

Education Credits and Deductions - If someone in your family is attending college and qualifies for an education credit, you can pre-pay the first three months of 2012’s tuition to reach the maximum credit for 2011. In addition, unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses expires after 2011. Thus, prepaying the first three months of 2012’s eligible expenses will increase your deduction for qualified higher education expenses.

Acquire Qualified Small Business Stock (QSBS) - If you have the opportunity, you may wish to acquire QSBS before the close of the year. Doing so won’t save taxes for 2011, but could benefit you in the future. A special provision of the tax code eliminates any tax from sale of QSBS if it is purchased after September 27, 2010 and before January 1, 2012, and is held for more than five years. In addition, such sales won't cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less. There are some other technical requirements, so call this office for additional details.

Don’t Forget Your Minimum Required Distribution - If you have reached age 70-1/2, you are required to make minimum distributions (RMDs) from your IRA, 401(k) plan and other employer-sponsored retirement plans. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2011, you can delay the first required distribution to the first quarter of 2012, but if you do, you will have to take a double distribution in 2012. Consider carefully the tax impact of a double distribution in 2012 versus a distribution in both this year and next.

Take Advantage of the Annual Gift Tax Exemption - You can give $13,000 in 2011 to each of an unlimited number of individuals, but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes when income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.


Expensing Allowance (Sec 179 Deduction) - Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000, and the investment ceiling limit is $2,000,000. Without Congressional intervention, these limits are scheduled for a significant drop in 2012. That means that businesses that make timely purchases will be able to currently deduct most, if not all, of the outlays for machinery and equipment. Additionally, for 2011, the expensing deduction applies to certain qualified real property such as leasehold improvements, restaurant, and retail property.

100% First-year Depreciation - Businesses also should consider making expenditures that qualify for 100% bonus first-year depreciation if the property is bought and placed in service this year. This 100% first-year write-off rate drops to 50% next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or next should try to accelerate their buying plans if doing so makes sound business sense.

Work Opportunity Tax Credit (WOTC) - Take advantage of the WOTC by hiring qualifying workers, such as qualifying veterans, before the end of 2011. Unless extended by Congress, the WOTC won't be available for workers hired after this year.

Research Credit - Make qualified research expenses before the end of 2011 to claim a research credit, which won't be available for post-2011 expenditures unless Congress extends the credit.

Self-employed Retirement Plans - If you are self-employed and haven't done so yet, you may wish to establish a self-employed retirement plan. Certain types of plans must be established before the end of the year to make you eligible to deduct contributions made to the plan for 2011, even if the contributions aren’t made until 2012. You may also qualify for the pension start-up credit.

Increase Basis - If you own an interest in a partnership or S corporation that is going to show a loss in 2011, you may need to increase your basis in the entity so you can deduct the loss, which is limited to your basis in the entity.

These are just some of the year-end steps that can be taken to save taxes. You are encouraged to contact this office so a plan can be tailored to meet your specific tax and financial circumstances.

Monthly Social Security and Supplemental Security Income (SSI) benefits for more than 60 million Americans will increase 3.6 percent in 2012.

The 3.6 percent cost-of-living adjustment (COLA) will begin with benefits that nearly 55 million Social Security beneficiaries receive in January 2012. Increased payments to more than 8 million SSI beneficiaries will begin on December 30, 2011.

Some other changes that take effect in January of each year are based on the increase in average wages.

Maximum Earnings Subject to Social Security Tax - Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $110,100 from $106,800 in 2011. Of the estimated 161 million workers who will pay Social Security taxes in 2012, about 10 million will pay higher taxes as a result of the increase in the taxable maximum.

Earning Limit: The earnings limit for workers who are younger than "full" retirement age (age 66 for people born in 1943 through 1954) and drawing Social Security will be $14,640. ($1 is deducted from an individuals Social Security benefits for each $2 earned over $14,640.) The earnings limit for people turning 66 in 2012 will be $38,880. ($1 is deducted from Social Security benefits for each $3 earned over $38,880 until the month the worker turns age 66.) There is no limit on earnings for workers who are "full" retirement age or older for the entire year.

If you have questions related to Social Security issues please give this office a call.

For 2011, taxpayers have the option of deducting the amount of state and local income tax that they paid during the year or, if they so elect, of deducting their state and local general sales and use taxes as an itemized deduction on their federal income tax return. This choice is currently scheduled to expire at the end of 2011.

If a taxpayer elects to deduct the sales and use tax, then the taxpayer may opt to deduct the actual sales and use taxes paid or use the amount indicated in the tables published by the IRS, alongside certain big ticket items, such as vehicles, motor homes, boats, aircraft, and mobile and prefabricated homes. The IRS tables take the state of residence, taxpayer’s income, sales and use tax rates, and family size into account.

Although the sales tax option primarily benefits taxpayers in states with no state income tax, it can also benefit taxpayers who make big-ticket purchases. Their sales tax deduction may exceed their state income tax deduction when they itemize their deductions.

Thus, if you are considering a big-ticket purchase, making the purchase prior to the end of the year may enable you to benefit from a potentially increased tax deduction. If you do plan on deducting sales tax in 2011 and you are paying state income tax estimates, you should avoid paying the fourth-quarter estimate installment until after the first of the year. Paying it in 2011 provides no additional benefit for 2011 on your federal return when electing to deduct sales and use tax.

Congress has extended this tax provision before, but at this time, there is no way of telling if it will do so again. Please give this office a call if you have concerns about how the sales tax election and purchasing big-ticket items before the end of the year might benefit you.

In the current business environment many smaller firms are looking for ways to cut costs. One such possible move would be to relocate from rented office space to a home office. With today’s modern means of communications and virtual marketplace this may be an appropriate consideration for your business.

The advantages include:

• Eliminating the cost of your rented space, which should be a substantial savings.
  
  
• The ability for you to deduct from your business income some home expenses such as utilities and certain maintenance costs that are not otherwise deductible. Those expenses will include a depreciation allowance for the part of your home that is the office.
  
  
• A portion of your mortgage interest and real property taxes will be deducted on your business schedule rather than as itemized deductions. This is especially helpful to those who do not (or only marginally) itemize their deductions.
  
  
• You will be eliminating the costs of your non-deductible commuting travel, while business travel will now generally be measured from your front door.

Generally, for a portion of one’s home to qualify for the home office deduction, the office area must be used exclusively in a taxpayer’s trade or business on a regular, continuing basis. The taxpayer must be able to provide sufficient evidence to show the use is regular. Exclusive use means there can be no personal use (other than de minimis) at any time during the tax year. Use of only a portion of a room is acceptable as long as the taxpayer shows that section is totally for business.

One of the following must also apply. The home office must be:


Generally a self-employed individual would qualify under the principal place of business test. A home office qualifies as a principal place of business if:


Just because you are self-employed does not mean you automatically qualify for a home office deduction. For example, most real estate sales people are self-employed and work through a broker. In many instances, the broker will also provide the agent with a desk in the broker’s office. When that occurs, the agent no longer meets the requirements of “b” above and must rely upon and meet the exception conditions provided in “c” to qualify for a home office deduction.

There are two significant downsides to a home office. First, to the extent of the depreciation taken on the home, gain when you sell it cannot be excluded under the home sale gain exclusion rules. Second, if the home office is in a separate structure, then total gain attributable to the separate structure does not qualify for the home gain exclusion. You should also note that the home office deduction is limited in any year that your business operates at a loss or the home office expenses are greater than the net income of the business.

Before making such a move, we recommend you contact this office so we can review your unique tax situation to see if the “after-tax” results warrant such a move.

Generally a business can deduct normal business expenses such as rent, payroll, etc. However, the IRS is using an obscure section of the code passed during the Reagan Administration as part of the “War on Drugs” to deny normal business expenses to medical marijuana-related businesses.


Since cannabis (marijuana) falls under the Controlled Substances Act, businesses marketing medical marijuana are subject to IRC Section 280E and are not allowed to deduct business expenses.

The IRS recently used this code section to deny business expenses to the nation’s largest medical marijuana dispensers, Harborside Health Center, based in Oakland, CA. As result the firm was hit with an adjustment of $2.5 million for the 2007 and 2008 tax years.

There has been some Congressional support to change the law. Representative Pete Stark, a California Democrat has introduced legislation (the Small Business Equity Tax Act) that would allow medical marijuana dispensaries to deduct normal business expenses.

Harborside was probably picked by the IRS for audit since they are the largest dispenser in the industry. In the meantime, while this shakes itself out, it has sent chills though the medical marijuana industry and could be the swan song for the industry.

If you are 70.5 years of age or older and are considering making a donation to a charity, you may wish to consider the option of making the contribution from your IRA account.

For 2011, you can donate up to $100,000 to your favorite charity, provided it is an eligible charitable organization, tax free from your traditional IRA, Roth IRA, or a SEP or SIMPLE IRA. To be considered valid, the distribution from the IRA to the charity must be made directly. It cannot pass through your hands or other accounts. Note: These distributions are not permitted from ongoing SEP or Simple Plans, i.e. plans to which a contribution has been made for the year.

Here are the pertinent facts related to making a donation using this provision of the law:

• The distribution is not taxable and does not add to your income for the year. The advantage is that your income remains low and helps to minimize taxable Social Security income and tax disadvantages associated with higher income.
  
  
• There is no charitable donation, as the distribution was tax free. However, this can be a considerable benefit to taxpayers who take the standard deduction and do not itemize anyway.
  
  
• If you have not already taken your required minimum distribution (RMD) for the year, the charitable distribution can count toward this year’s RMD. Without Congressional action, 2011 will be the last year in which this option will be available.

Please call this office for additional information related to this tax provision and how it might help your tax picture for 2011.

If you are unfortunate enough to be out work, you may be spending time attending career fairs and traveling around looking and interviewing for employment. Some of the expenses you incur attempting to secure employment may be deductible on your tax return.

Here are several things you should know about deducting costs related to your job search.

1. To qualify for a deduction, the expenses must be spent on a job search in your current occupation. You may not deduct expenses you incur while looking for a job in a new occupation.
   
   
2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income, up to the amount of your tax benefit in the earlier year.
   
   
3. You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.
   
   
4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job. Use of your automobile in 2011 for the travel is deductible at 51 cents per job search mile during the first six months of the year and 55.5 cents per mile for the last six months of the year. The fares for other forms of transportation are also deductible. Lodging and 50% of your meal costs also count when traveling away from home overnight.
   
   
5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
   
   
6. You cannot deduct job-search expenses if you are looking for a job for the first time.
   
   
7. The job search expenses are included with other miscellaneous itemized deductions that are reduced by 2% of your adjusted gross income, and therefore may be limited. If you use the standard deduction instead of itemizing deductions, you cannot deduct any of your job-search expenses.

If you have additional questions related to job-search expenses, please give this office a call.

A recently released Congressional Research Service (CRS) Report entitled “The Alternative Minimum Tax for Individuals” examines the effects of the Alternative Minimum Tax (AMT) without yet another Congressional fix.

The AMT is another way of computing an individual’s income tax with limited deductions and the elimination of certain tax preferences. Taxpayers pay the higher of the regular computed tax and the AMT.

When calculating the AMT, taxpayers are allowed to deduct a specified amount that is not taxable; this is called the AMT exemption. This exemption is not automatically inflation-adjusted, like most other tax deductions, but Congress has been adjusting it annually. For example, the permanent exemption amounts are $33,750 for unmarried taxpayers and $45,000 for joint filers. Congress has temporarily increased these amounts over the years, and for 2011, the exemption amounts were $48,450 for unmarried taxpayers and $74,450 for joint filers. Without Congressional action, these AMT exemption amounts will revert to the permanent amounts in 2012.

Another temporary adjustment to the AMT allows a number of personal credits to be deducted from the AMT. The credits affected include child and dependent care credit, elderly and disabled credit, mortgage credit, and the Hope and Lifetime education credits. These will no longer offset the AMT after 2011 unless Congress acts.

The CRS Report notes that without Congressional action, an estimated 30 million taxpayers (approximately 20% of all taxpayers) will be hit by the AMT in 2012. Compare this to the roughly 600,000 taxpayers (approximately 1% of all 1997 taxpayers) who were subject to the AMT in 1997.

A permanent fix to the AMT without adjustments to the regular tax could be expensive. For example, the CRS Report notes that if the AMT is repealed, the lost revenue would be over $1.3 trillion between 2011 and 2022 if the Bush era tax cuts are not extended and over $2.7 trillion if they are extended.

It is difficult to say what the Congressional Tax Reform committee (also referred to as the “super committee”) will come up with in November. But one thing is for sure: some taxpayers will have to pay more to fix the deficit problem.

While the majority of Americans get a tax refund each year, there are many who owe tax and some who can’t pay what they owe all at once. If you find yourself in the position of owing taxes, there are a number of ways to deal with the issue:

1. Get a Loan to Pay the Balance – If you owe the IRS and don’t pay on time, they will assess interest and penalties. If you work out an installment payment agreement with the IRS, they will also charge you a user fee for setting up the agreement. The least expensive way to deal with the liability may be to get a loan and pay the liability in full with the loan proceeds. Whether it is a loan against your property or a loan from a family member, the cost will generally be far less than the interest, penalties and fee the IRS will charge.
   
   
2. Credit card payments – You can pay your bill with a credit card. Although credit card interest rates are generally high, your card’s interest rate may be lower than the combination of interest and penalties charged by the IRS. However, the IRS itself does not accept credit cards; instead, there are three companies who can take your credit card charge and then remit your payment to the IRS. You will be required to pay a fee for this service. To pay by credit card, contact one of the following processing companies: Link2Gov at 888-PAY-1040 (or www.pay1040.com), RBS WorldPay, Inc. at 888-9PAY-TAX (or www.payUSAtax.com) or Official Payments Corporation at 888-UPAY-TAX (or www.officialpayments.com/fed).
   
   
3. Installment Agreement – You may request an installment payment agreement if you cannot pay the liability in full. This is an agreement between you and the IRS to pay the amount due in monthly installment payments. You must first file all required returns and be current with estimated tax payments. Then IRS will continue to charge you interest on the unpaid balance and you will be required to pay a one-time user fee of $105. If you allow the IRS to take direct withdrawals from your bank account for the agreed-upon installment amount, the user fee is reduced to $52. For eligible individuals with lower incomes, the user fee can be reduced to $43.
   
   The IRS is bound by a 10-year statute of limitation on collections – If you utilize the installment agreement, the statute of limitations is extended by the amount of time the installment agreement is in place.
   
   If you owe $25,000 or less in combined tax, penalties and interest, you can request an installment agreement using the Online Payment Agreement application or you can apply by mail using Form 9465, Installment Agreement Request, along with your bill in the envelope you received from the IRS. The IRS will inform you (usually within 30 days) whether your request is approved, denied, or if additional information is needed.
   
   You may still qualify for an installment agreement even if you owe more than $25,000, but you are required to complete a Form 433F, Collection Information Statement, before the IRS will consider an installment agreement. Once you enter into an installment agreement, you must keep your payments and any subsequent tax liability current. If you ended up owing on your last tax return, it may be appropriate for you to adjust your withholding or estimated tax payments.
   
   
4. Cash-in Retirement Accounts – Tapping your retirement funds should be avoided at all costs. Not only are you jeopardizing your future retirement, money taken from an IRA or retirement fund generally will be taxable, and if you are younger than 59½ the taxable distribution also is subject to early withdrawal penalties ranging from 10 to 20%. If you reside in a state that has state income tax, the distribution may also be taxable to the state, plus state penalties may be owed.

It may be appropriate for you to make an appointment and come in for a meeting so together we can explore your various options for satisfying your unpaid tax liability with the least amount of cost. Please call for an appointment.

If you converted your traditional IRA to a Roth IRA during 2010 and paid (or will pay) the tax on the conversion and then watched the value of the account decrease due to the overall decline of the stock market in 2011, you still have an opportunity to do something about it.

If you filed your return on time or are on extension, you automatically receive a 6-month extension from the return’s original due date to recharacterize the Roth account back to a Traditional account, thereby avoiding paying taxes on IRA values that have evaporated. Once you make the recharacterization, you must wait 30 days before reconverting the IRA back to a Roth. Be aware that the two-year tax payment option for conversions only applied to the year 2010, making the tax on the reconverted amount due in full on your 2011 return when you file it in 2012.

However, the deadline for both completing your recharacterization and filing or amending your 2010 return is October 17. So if you have questions or wish to implement this strategy, you will need to call this office right away.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

The Joint Select Committee on Deficit Reduction (JSC) is set to convene soon with the goal of reducing the deficit by $1.5 trillion. How will they come up with that amount? Some sources think they may consider fundamental tax changes that include cutbacks to itemized deductions for individuals.

Although both parties purport to be against increasing taxes for the middle class who already shoulder a significant portion of this nation’s tax burden, reducing itemized deductions is a tax increase by another name.

The health care law has already limited medical deductions by increasing the AGI limitation from 7.5% to 10% beginning in 2013.

Just a few years back, Congress tightened up the charitable contribution deduction by imposing strict verification rules. The economy has also taken a toll on charitable contributions, with more and more individuals taking the position that charity begins at home.

All that remains is the deductions for taxes, home mortgage interest, and miscellaneous deductions. Of those, the deduction for home mortgage interest makes up a substantial portion of the itemized deductions, thus making it the rumored target for reduction. We will have wait and see if either party wants to be seen as attacking the American dream of home ownership.

Of concern to any homeowner is what changes to the mortgage interest deduction will do to their tax picture. Many individuals were able to afford their homes based on the tax savings generated by the interest deduction. Without the deduction or with a reduced deduction, will they still be able to manage their mortgage payments? Could tinkering with mortgage interest deductions trigger another round of defaults and foreclosures? Congress needs to act carefully to avoid further impacting an already fragile housing market.

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

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

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

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

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

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

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

If you are adopting a child in 2011, you may wish to familiarize yourself with the adoption tax credit. Here is an overview of this valuable tax credit:

1. The adoption tax credit, which is as much as $13,170, offsets qualified adoption expenses, making adoption possible for some families who could not otherwise afford it. Taxpayers who adopt a child in 2011 may qualify if they adopted or attempted to adopt a child and paid qualified expenses relating to the adoption.
   
   
2. Taxpayers with modified adjusted gross income of more than $182,520 may not qualify for the full amount and it phases out completely at $222,520. Note these values are the 2010 values and may be adjusted slightly for 2011.
   
   
3. You may be able to claim the credit even if the adoption does not become final. If you adopt a special needs child, you may qualify for the full amount of the adoption credit even if you paid few or no adoption-related expenses.
   
   
4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child who is under 18 years old, or physically or mentally incapable of caring for himself or herself. These expenses may include adoption fees, court costs, attorney fees and travel expenses.
   
   
5. To claim the credit, you must attach documents supporting the adoption. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and the state’s determination for special needs children. Failure to include required documents will delay your refund.

If you are considering or are in the process of adoption and would like additional details on this very substantial credit, please give this office a call.

Taxpayers with disabilities and parents of children with disabilities may qualify for a number of IRS tax credits and benefits. Listed below are several benefits which are available if you or someone else listed on your federal tax return is disabled.

Child or Dependent Care Credit - Taxpayers who pay someone to care for their disabled dependent or spouse, regardless of the spouse’s or dependent’s age, can claim the child or dependent care credit. The credit is based upon the lower-earning spouse’s income. So when a disabled spouse does not work, the disabled spouse is treated as having a monthly income of $250 ($500 if more than one qualifying person was cared for during the year). The expenses used to compute the credit are limited to $3,000 where there is one qualifying person and $6,000 where there are two or more. The credit ranges from 20 to 35% of the expenses based on the taxpayers’ income. The higher the income, the smaller the percentage!

Medical Deductions - In addition to the normal medical expense deductions, a taxpayer may also be able to deduct:

• Nursing Homes - The entire cost of nursing homes and assisted living facilities is deductible as a medical expense, if the primary reason for the individual being there is for medical care or the individual is incapable of self-care. This would include the entire cost of meals and lodging at the facility.
  
  
• In-Home Care - As an alternative to nursing homes, many care providers are hiring day help or live-in employees to provide the needed care at home. When this is the case, the services provided by the employees must be allocated between household chores and deductible nursing services. To be deductible, the nursing services need not be provided by a nurse as long as the services are the same services that would normally be provided by a nurse, such as administering medication, bathing, feeding, dressing, etc. If the employee also provides general housekeeping services, then the portion of the employee's pay attributable to household chores would not be a deductible medical expense. Caution: household employees are subject to certain federal and state payroll taxes.
  
  
• Impairment-related Expenses - Amounts paid for special equipment installed in the home or for modifications needed to accommodate a taxpayer's disabled condition, or that of the spouse or dependents who live with the taxpayer, are generally treated as deductible medical expenses. Any portion of an expense that increases the value of the home would not be deductible. The following are examples of deductible improvements:
  
  
  o Constructing entrance or exit ramps for the home,
  o Widening doorways at entrances or exits to the home,
  o Widening or otherwise modifying hallways and interior doorways,
  o Installing railings, support bars, or other modifications,
  o Lowering or modifying kitchen cabinets and equipment,
  o Moving or modifying electrical outlets and fixtures,
  o Installing porch lifts and other forms of lifts but generally not elevators,
  o Modifying fire alarms, smoke detectors, and other warning systems,
  o Modifying stairways,
  o Adding handrails or grab bars anywhere (whether or not in bathrooms).
  
  
  
• Education - Expenses that you incur in order to enable your child to compensate for or overcome disabilities or to prepare your child for future normal education or normal living are deductible medical expenses. Thus, any expenses for therapy that helps your child's adaptation are deductible medical expenses. In addition, the expenses of your child's schooling at a “special school” for mentally or physically disabled individuals are deductible (including the cost of an ordinary education) if the resources of the school are the reason for your child's presence and the educational services provided are rendered only as an incident to the medical care provided.

Earned Income Tax Credit - EITC  is available to disabled taxpayers as well as to the parents of a child with a disability. If you retired on disability, the taxable benefits you receive under your employer’s disability retirement plan are considered earned income until you reach minimum retirement age. The EITC is a tax credit that not only reduces a taxpayer’s tax liability but may also result in a refund. Many working individuals with a disability who have no qualifying children, but are older than 25 and younger than 65, qualify for EITC! Additionally, if the taxpayer’s child is disabled, the age limitation for the EITC is waived. The EITC has no effect on certain public benefits. Any refund you receive because of the EITC will not be considered income when determining whether you are eligible for benefit programs such as Supplemental Security Income and Medicaid.

Impairment-related Work Expenses - Employees who have a physical or mental disability limiting their employment may be able to claim business expenses in connection with their workplace. They are ordinary and necessary expenses, including attendant care services (e.g., a blind taxpayer's use of a reader) at the place of employment, to enable an individual who has a handicap to work. Impairment-related work expenses are itemized deductions but aren't subject to the 2%-of-AGI floor.

Standard Deduction - Taxpayers who are legally blind are entitled to an extra amount of standard deduction. For 2011, the additional amount is $1,150 for a married individual and $1,450 for others.

Gross Income - Certain disability-related payments, Dept. of Veterans Affairs disability benefits, and Supplemental Security Income are excluded from gross income.

Waiver of Early Pension Plan Withdrawals - Generally, if a taxpayer is under age 59-1/2 and withdraws assets (money or other property) from a qualified plan including traditional IRAs, the taxpayer must pay a 10% additional tax, commonly referred to as the early withdrawal penalty. This tax is 10% of the part of the distribution that the taxpayer was required to include in gross income. If a taxpayer becomes disabled before reaching age 59-1/2, any amounts withdrawn because of the disability are not subject to the 10% additional tax. A taxpayer is considered disabled if the taxpayer can furnish proof that he/she cannot perform any substantial gainful activity because of the physical or mental condition. A physician must determine that the taxpayer's condition can be expected to result in death, or is expected to be of a long, continued and indefinite duration.

Moving Deduction Qualification Period Waived - One of the qualifications for the job- related moving deduction is that an individual must work in the general area of the new workplace full-time for 39 weeks during the 12-month period right after the move (78 weeks out of a 24-month period for a self-employed individual). These time periods are waived in the case of death or disability.

Credit for the Elderly or Disabled - This credit is generally available to certain taxpayers who are 65 and older as well as to certain disabled taxpayers who are younger than 65 and are retired on permanent and total disability. However, due to limitations of the credit, only very low-income taxpayers generally qualify for it.

If you have any questions related to these tax benefits, please give this office a call.

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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


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

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

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

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

The domestic production activities deduction was created to encourage manufacturing and production within the U.S., and it provides a substantial business deduction equal to 9% of the lesser of:


The deduction is further limited to 50% of the W-2 wages of the employer for the tax year allocable to the activities eligible for the deduction.

Domestic Production Activities – Although the definition of “domestic production activity” is a little elusive, it generally does not include retail sales or purely service activities. Among the more common eligible activities are:

• Manufacturing and production activities in whole or in significant part within the U.S.,
• Construction of real property in the U.S., and
• Performance of engineering or architectural services in the U.S. in connection with real property construction projects in the U.S.

The following example, one that was used in a Congressional hearing, does a good job of defining what is and is not a qualified domestic production activity: Suppose you are a baker and in the business of producing donuts. Some of the donuts you sell retail directly to the consumers, and some you sell in bulk to hotels and restaurants. The production costs of the donuts sold at retail do not qualify for the deduction, while the costs associated with the wholesale sales to the hotels and restaurants do.

Example of how the deduction is determined – ABC, Inc. produces widgets in the U.S. that it wholesales to retailers. The company’s revenue from the sale of the widgets is $2 million, with a manufacturing cost of $950,000. ABC, Inc. also has $1 million of income from widget repair services. The total “W-2” wages for the year were $400,000, of which $150,000 is properly allocated to the widget manufacturing costs and the balance used to provide the repair services. The deduction would be determined as follows:


Of course, the deduction on ABC Inc.’s tax return will be limited to the company’s taxable income. This example is rather a simplistic illustration of how the deduction is determined. In actual practice, inventory, cost of goods, determination of qualified production wages, and so on all have rules, procedures and complications of their own. However, the deduction can be very beneficial and well worth the added accounting. In fact, most taxpayers who qualify for the deduction are required to claim it, even if the administrative costs of applying the law and regulations outweigh the benefit of claiming the deduction.

Who Gets the Deduction – This deduction is allowed to all taxpayers, including individuals, C corporations, farming cooperatives, estates, trusts, and their beneficiaries. The deduction is allowed to partners and owners of S corporations (not to partnerships or the S corporations themselves) and may be passed by farming cooperatives to their patrons. And, despite the deduction’s history, it is fully available to taxpayers who do not export.

The section above is only an overview of this deduction. If you have questions related to how the domestic production deduction might apply to your specific circumstances, please give this office a call.

U.S. taxpayers with undisclosed offshore accounts are running out of time to take advantage of a soon-to-expire opportunity to come forward and get their taxes current with the Internal Revenue Service.

The IRS is reminding taxpayers that the 2011 Offshore Voluntary Disclosure Initiative (OVDI) will expire on Aug. 31, 2011. Taxpayers who come forward voluntarily get a better deal than those who wait for the IRS to find their undisclosed accounts and income. New foreign account reporting requirements are being phased in over the next few years, making it ever tougher to hide income offshore. As importantly, the IRS continues its focus on banks and bankers worldwide that assist U.S. taxpayers with hiding assets overseas.

“The time has come to get back into compliance with the U.S. tax system, because the risks of hiding money offshore keeps going up,” said IRS Commissioner Doug Shulman. “Our goal is to get people back into the system. The second voluntary initiative gives people a fair way to resolve their tax problems.”

The 2011 initiative, which was originally announced on Feb. 8, 2011, offers clear benefits to encourage taxpayers to come forward rather than risk detection by the IRS. Taxpayers hiding assets offshore who do not come forward will face far higher penalties along with potential criminal charges.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties in certain narrow circumstances.

Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. All original and amended tax returns must be filed by the August 31 deadline.

The IRS decision to open a second special disclosure initiative was based on the success of the first program and many more taxpayers coming forward after the program closed on Oct. 15, 2009. The first special disclosure initiative program closed with about 15,000 voluntary disclosures regarding accounts at banks in more than 60 countries. Many taxpayers came in after the first program closed. These taxpayers were deemed eligible to take advantage of the special provisions of the second initiative.

Further details about this initiative are provided by the IRS in a series of questions and answers.

If you have further questions or need assistance in preparing returns for a voluntary disclosure please give one of our professionals a call.

The new Budget Control Act of 2011 may have resolved the debt ceiling stalemate in Washington, but it leaves us hanging as far as long-term tax planning goes. Although the first $1 trillion round of deficit reduction over fiscal years 2012 through 2021 does not include revenue hikes, the second $1.5 trillion reduction over the same time period could include some fundamental tax changes.

Part of the Act established the Joint Select Committee on Deficit Reduction (JSC). It will be the JSC’s job to figure out how to reduce the deficit by the second $1.5 trillion and provide Congress with recommendations and legislative language that will significantly improve the short-term and long-term fiscal imbalance of the Federal Government, which could include some fundamental tax changes. The timetable for the JSC to complete its work is no later than:

• Aug. 16, 2011 - the 12 members and the co-chairs of the JSC must be appointed by the majority and minority leaders of the Senate, and the Speaker and minority leader of the House, who each must appoint three members. The Speaker and the majority leader of the Senate must each appoint one member to serve as co-chair from among the JSC members.
  
  
• Sept. 16, 2011 - The JSC is to hold its first meeting.
  
  
• Oct. 14, 2011 - House and Senate committees may transmit to the JSC their recommendations for law changes necessary to meet the goal of the JSC.
  
  
• Nov. 23, 2011 - By majority vote, the JSC must approve a report containing the findings, conclusions, and recommendations of the committee. The report must also include estimates provided by the Congressional Budget Office, legislative language in support of the committee’s recommendations, and a statement of the deficit reduction achieved over fiscal years 2012 through 2021. The report shall be made public promptly after the committee’s approval or disapproval.
  
  
• Dec. 2, 2011 - If a majority of the JSC approves a report and legislative language, they must be transmitted to the President, Vice President, the Speaker of the House, and the majority and minority leaders of the House and Senate.
  
  
• Dec. 23, 2011 - If the JSC approves a report and legislative language, it must be voted on by both the Senate and the House of Representatives. No amendments will be considered.

If a majority of the JSC members fail to approve a report and legislative language, across-the-board reductions must be implemented, with annual cuts starting in 2013. The cuts will be split 50-50 between defense and domestic spending.

According to the administration, if the JSC fails to reach agreement on recommendations or if Congress fails to pass the recommendations, the $1 trillion in deficit reduction can almost be achieved by allowing the Bush era tax cuts to expire at the end of 2012.

In addition, Congress still appears to be playing their usual game of brinkmanship since they have not addressed a number of tax issues set to expire at the end of 2011. These expiring tax breaks include:

• Alternative Minimum Tax – The AMT exemptions will revert to the year 2000 levels in 2012 without Congressional action. If they fail to act, the AMT will snare about six to seven times as many taxpayers as are currently subject to AMT.
  
  
• Work Opportunity Credit – Eligible individuals must begin work before 1/1/12.
  
  
• Research Credit – Expires at the end of 2011.
  
  
• Above-the-line Education Expense Deduction – Will no longer be allowed.
  
  
• Teachers’ Above-the-line Deduction – Expires at the end of 2011.
  
  
• Bonus Depreciation – The 100% bonus depreciation expires (50% bonus still allowed) in 2012.
  
  
• Faster Write-off for Leasehold Improvement & Restaurant Property – Will revert from the 15-year write-off back to 39-year depreciation.
  
  
• Sec. 179 Deduction – Will revert to the reduced 2007 levels. 

As you can see, if Congress does nothing there will be tax increases in 2012, followed by the expiration of the Bush era tax cuts after 2012. If you have any questions please this office a call

Food and lodging expenses may be deducted when you are away from home for business purposes. Like everything in the tax law, to be tax deductible there are certain rules to follow and the individuals that know the rules and keep good records get the most out of these deductions.

The IRS requires that lodging expenses (and other expenses of $75 or more) be substantiated by records or other evidence. Acceptable records include diaries, logs, receipts, paid bills and expense reports. The records should disclose the amount, date, place and essential character of the expense. The following are some tips to help you stay on top of the required documentation:

• Keep good records of travel expenses.
• Maintain the records on a contemporaneous basis, i.e., make diary and log notations close to the time the expense is incurred.
• Document the business purpose and the expected business benefit.
• Retain your travel itinerary to document the business activity while away.

Travel expenses are deductible only if the individual is away from his or her "tax home"—usually considered to be one’s regular place of business—for more than one business day.

Meal expenses are deductible only if the trip is overnight or long enough that there is a need to stop for sleep or rest to properly perform one’s duties. The amount of the meal expenses must be substantiated, but instead of keeping records of the actual cost of meal expenses, a "standard meal allowance" ranging from $46 to $71 can generally be used, depending on where and when the individual travels. Generally, the deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible.

Lodging expenses must be substantiated with actual receipts and are 100% deductible. Meals included in lodging expenses, such as room service or dining costs charged to a hotel room, must be separately identified, since meals have the 50% limitation as noted above.

In addition to the travel, lodging and meal expenses discussed above, the incidental costs incurred on a deductible trip such as laundry, dry cleaning, phone calls, baggage handling, and so on are fully deductible.

Employees must deduct their unreimbursed travel expenses as a miscellaneous itemized deduction which is subject to a 2% of AGI floor. They are not deductible at all to the extent the employee’s income is subject to the alternative minimum tax (AMT). That is why it is to an employee’s advantage to utilize an employer’s “accountable” reimbursement plan (under which qualified reimbursements are not taxable and not reported in the employee’s W-2 wages) rather than deducting the expenses on their tax return. On the other hand, these expenses are fully deductible as a business expense for a self-employed individual.

Taking the Spouse Along? Generally, deductions are denied for travel expenses paid or incurred for a spouse, dependent or employee of the taxpayer who accompany the taxpayer on the business trip unless the:



Please give this office a call if you have questions related to business travel expenses.

If you, like many others during the summer months, have gotten married or plan to get married in the near future, here are some post-marriage tips to help you avoid stress at tax time.

1. Notify the Social Security Administration - Report any name change to the Social Security Administration so that your name and SSN will match when filing your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security card at your local SSA office. The form is available on SSA’s Web site, by calling 800-772-1213, or at local offices.
   
   
2. Notify the IRS - If you have a new address, you should notify the IRS by sending Form 8822, Change of Address.
   
   
3. Notify the U.S. Postal Service - You should also notify the U.S. Postal Service when you move so that any IRS or state correspondence can be forwarded.
   
   
4. Notify Your Employer - Report any name and address changes to your employer(s) to ensure receipt of a correct Form W-2, Wage and Tax Statement after the end of the year.
   
   
5. Check Your Withholding and Estimated Tax Payments - If both you and your new spouse work, your combined income may place you in a higher tax bracket and you may have an unpleasant surprise come tax season next year. On the other hand, if only one works, filing jointly with your new spouse can provide a significant tax benefit, enabling you to reduce your withholding or estimated payments. Either way, it may be appropriate to estimate your income tax for 2011 and make any required adjustments as soon as possible.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why do you care?  Well for starters, people with a better credit rating enjoy significantly lower interest rates that can add up to thousands of dollars less in interest payments over the term of the loan.  For example, a fixed 30-year mortgage payment varies with respect to credit score and the interest rates corresponding to the credit score.  Having a score that is two hundred points higher can offer a savings of $448 a month for the same $200,000 house loan.  Good credit ratings also provide for quicker loan approvals, fairer loan terms, and more credit.

Although there are various credit rating or scores, the FICO® score is probably the most widely used of credit bureau scores.  The FICO® ranges from 300 to 850.  If you have a credit score lower than 650, your options for financing, ability to get a job, rent a home, and eligibility for a lease could be significantly affected.

Your credit rating can be affected by fraud and identity theft.  So it is important to not only maintain a good credit rating but to periodically check on it for fraudulent activity and errors that can adversely affect your financial security.  If someone has accessed your Social Security number, very little additional information is required to commit identity fraud in your name.  Identity theft typically entails establishing false bank accounts, credit cards, utilities, and loans.  Early detection is the best way to mitigate lasting damage to your credit record.

If you discover an error on a credit report, you should immediately take steps to have the error corrected.  The law allows you to ask for an investigation of information in your file that you dispute as inaccurate or incomplete.  There is no charge for this.  Some people hire a company to investigate on their behalf, but anything a credit repair clinic can do legally, you can do for yourself at little or no cost.

You are entitled to a free report if a company takes “adverse action” against you, like denying your application for credit, insurance, or employment.  You have to ask for your report within 60 days of receiving notice of the action.  The notice will give you the name, address, and phone number of the consumer reporting company.  You are also entitled to one free report a year if you are unemployed and plan to look for a job within 60 days; if you are on welfare; or if your report is inaccurate because of fraud, including identity theft.

Each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — is required to provide you with a free copy of your credit report once every 12 months, if you ask for it.  The three companies have a central website, a toll-free telephone number, and a mailing address for consumers to order the free annual credit reports the government entitles them to.  To order, click on annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request.

You may order reports from each of the three consumer reporting companies at the same time, or you can stagger your requests, ordering one from each company throughout the year from the central address.  Don’t contact the three nationwide consumer reporting companies individually or at another address because you may end up paying for a report that you are entitled to get for free.  In fact, each consumer reporting company may charge you up to $10.50 to purchase an additional copy of your report within a 12-month period.

It doesn’t cost anything to dispute mistakes or outdated items on your credit report.  Under the FCRA, both the consumer reporting company and the information provider (that is, the person, company, or organization that provides information about you to a consumer reporting company) are responsible for correcting inaccurate or incomplete information in your report.  To take advantage of all your rights under the FCRA, contact the consumer reporting company and the information provider.

How to challenge an error – Although you can hire firms to do credit repair, there is nothing they can do that you cannot do yourself.   Here is the simple 2-step process to challenge an error on your credit report:

o Step 1: Tell the consumer reporting company, in writing, what information you think is inaccurate.  Include copies (NOT originals) of any documents that support your position.  In addition to providing your complete name and address, your letter should identify each item in your report that is being disputed; state the facts and the reasons you are disputing the information and ask that it be removed or corrected.  You may want to enclose a copy of your report and circle the items in question.  Send your letter by certified mail with a “return receipt requested” so you can document that the consumer reporting company received it.  Keep copies of your dispute letter and enclosures.

Your letter may look something like the one below suggested by the Federal Trade Commission.




Consumer reporting companies must investigate the items you question within 30 days — unless they consider your dispute frivolous.  They also must forward all the relevant data that was provided about the inaccuracy to the organization that provided the information. After the information provider receives notice of a dispute from the consumer reporting company, it is required to investigate, review the relevant information, and report the results back to the consumer reporting company.  If this investigation reveals that the disputed information is inaccurate, the information provider has to notify the nationwide consumer reporting companies so they can correct it in your file.

When the investigation is complete, the consumer reporting company must give you the results in writing, too, and a free copy of your report if the dispute results in a change.  If an item is changed or deleted, the consumer reporting company is not permitted to put the disputed information back in your file unless the information provider verifies that it is accurate and complete.  The consumer reporting company also must send you written notice that includes the name, address, and phone number of the information provider.  If you ask, the consumer reporting company must send notices of any correction to anyone who received your report in the past six months.  You also can ask that a corrected copy of your report be sent to anyone who received a copy during the past two years for employment purposes.

If an investigation doesn’t resolve your dispute with the consumer reporting company, you can ask that a statement of the dispute be included in your file and in future reports.  You also can ask the consumer reporting company to provide your statement to anyone who received a copy of your report in the recent past.  You can expect to pay for this service.

o Step 2: Tell the creditor or other information provider, in writing, that you dispute an item.  Be sure to include copies (NOT originals) of documents that support your position.  Many providers specify an address for disputes.  If the provider reports the item to a consumer reporting company, it must include a notice of your dispute.  And if you are correct — that is, if the information is found to be inaccurate — the information provider may not report it again.

For more detailed information, visit the FTC website Consumer Protection page.

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

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

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

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

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

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

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

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

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

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

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

Non-Cash Contributions

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

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



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

1.  The name of the charitable organization,
2.  The date and location of the charitable contribution,
3.  A reasonably detailed description (but not necessarily the value) of any property contributed,
4.  Whether or not the qualified organization gave the taxpayer any goods or services as a result of the contribution (other than certain token items and membership benefits), and
5.  If goods and or services were provided to the taxpayer, the acknowledgement must include a description and good faith estimate of the value of those goods or services.  If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit.

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

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

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

o The cost or other basis, and any adjustments to the basis, of property held less than 12 months and, if available, the cost or other basis of property held 12 months or more.  This requirement, however, does not apply to publicly-traded securities.  If the taxpayer is not able to provide information on either the date the property was obtained or the cost basis of the property and there is reasonable cause for not being able to provide this information, attach a statement of explanation to the return.

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

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

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

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

a.  A description of the services provided,
b.  A statement of whether or not the organization provided the taxpayer with any goods or services to reimburse the taxpayer for the expenses incurred,
c.   A description and a good faith estimate of the value of any goods or services (other than intangible religious benefits) provided as reimbursement, and
d.  A statement that the only benefit received was an intangible religious benefit, if that was the case.  The acknowledgment does not need to describe or estimate the value of an intangible religious benefit.

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

a. The date of filing the return for the year the contribution was made, or
b. The due date, including extensions, for filing the return.

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

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

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



If you have questions regarding charitable recordkeeping or what is deductible as a charitable contribution, please give one of our professionals a call.

In an effort to get the economy back on the rails again, the 2010 Tax Relief Act generally permits businesses to deduct 100% of the cost of leasehold improvements acquired and placed into service during 2011.

This is because leasehold improvements qualify for the special 100% bonus depreciation allowance if it is acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012, and the original use of the improvement commences with the taxpayer.

Generally, qualified leasehold improvement property includes interior improvements to a building which is nonresidential real property if:

(1) The improvement is real property;

(2) The improvement is made to leased property. A lease for this purpose is defined as any grant of a right to use property, either by the lessee, sublessee or lessor of the building portion;

(3) The leased portion of the building is occupied exclusively by the lessee (or sublessee); and

(4) The improvement is placed in service more than 3 years after the date the building was first placed in service.

The following expenditures, however, do not qualify: amounts paid for the enlargement of a building, a structural component that benefits a common area, an elevator or escalator, or the internal structural framework of the building.

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

Systems that qualify for the credit include:

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

Other aspects of the credit: 

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

There are two federal tax credits available to help individuals offset the costs of higher education for themselves or their dependents.  They are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, a taxpayer must pay post-secondary tuition and fees for themselves, their spouse or their dependent.  The credit is claimed by the individual who claims the student as a dependent, even if someone else pays the tuition including the student.  However, if the student is not claimed as a dependent of another, then the student will claim the credit.

For each student, only one of the credits can be claimed in a single tax year.  For example, the American Opportunity Credit cannot be claimed to pay for part of a student’s tuition charges and then the Lifetime Learning Credit claimed for $2,000 more of the school costs.

However, if college expenses are paid for two or more students in the same year, a taxpayer can choose to take credits on a per-student, per-year basis.  Thus, for example, the American Opportunity Credit can be claimed for one child and the Lifetime Learning Credit for the other.

Here are some key facts you should know about these valuable education credits:

American Opportunity Credit

• The credit can be up to $2,500 per eligible student.
  
  
• It is available for the first four years of post-secondary education.
  
  
• Forty percent of the credit is refundable, which means that a claimant may be able to receive up to $1,000, even if they owe no taxes.
  
  
• The student must be pursuing an undergraduate degree or other recognized educational credential.
  
  
• The student must be enrolled at least half-time for at least one academic period.
  
  
• Qualified expenses include tuition and fees, course-related books, supplies and equipment.
  
  
• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return.  Above those amounts, the credit quickly begins to phase out.

Lifetime Learning Credit

• The credit can be up to $2,000 per eligible student.
  
  
• It is available for all years of post-secondary education and for courses to acquire or improve job skills.
  
  
• The credit is non-refundable; thus, the maximum amount credited is limited to the amount of tax that must be paid on your return.
  
  
• The student does not need to be pursuing a degree or other recognized education credential.
  
  
• Qualified expenses include tuition and fees, course-related books, supplies and equipment.
  
  
• The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.  Above those amounts, the credit quickly begins to phase out.

There is also an above-the-line tuition and fees tax deduction available, but you cannot claim the tuition and fees tax deduction in the same year the American Opportunity Tax Credit or the Lifetime Learning Credit is claimed.  Choose to take either the credit or the deduction and consider which is more beneficial for you. Generally, the credits provide the greater benefit.

In today’s economy some taxpayers may need to take money out of their retirement plans to make ends meet. If you have or are contemplating taking a distribution there are some very important and unexpected tax issues you need to be aware of.

1. Withdrawals from tax deferred retirement accounts, such as Traditional IRAs are generally taxable and will be added to your other income for the year and taxed your highest marginal rate.

2. If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.  Be aware that all distributions for an account that contains both deductible and nondeductible contributions is distributed ratably based between the deductible and nondeductible balances in the account.

3. If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.

4. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.

5. Taxable distributions you receive from your retirement plans before you reach age 59 ½ are generally considered early or premature distributions and subject to an additional 10 percent penalty tax.

6. Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. However, you must complete the rollover within 60 days after the day you received the distribution.

7. There are several limited exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain unreimbursed medical or educational expenses or if you are disabled.  Call for additional information and limitations.

Taking money from your retirement plan can not only effect your current year taxes it can have profound impact on your future retirement nest egg.  You are encouraged to carefully consider the overall impact before making a withdrawal.

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

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

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

 

In the current economic environment, many smaller firms are looking for ways to cut costs.  One such possible move would be to relocate from a rented office space to a home office.  With today’s modern means of communications and virtual marketplace, this may be a good option for your business.

The advantages include the ability for you to deduct from your business income some home expenses, such as utilities and certain maintenance costs that are not otherwise deductible.  Those expenses will include a depreciation allowance for the part of your home that is the office.  A portion of your mortgage interest and real property taxes will be deducted on your business schedule rather than as itemized deductions.  You will be eliminating the costs of your non-deductible commuting travel, while business travel will now generally be measured from your front door.

There are two significant downsides to a home office.  First, to the extent of the depreciation taken on the home, gain when you sell it cannot be excluded under the home sale rules.  Secondly, if the home office is in a separate structure, then the separate business portion does not qualify for the home gain exclusion.  You should also note that the home office deduction is limited in any year that your business operates at a loss.

Generally, a self-employed individual will qualify for a home office deduction if the office is a place where the taxpayer meets with customers, patients or clients, or is used on an exclusive and regular basis for administrative or management activities of his or her trade or business, and there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities of the business.  Even if a taxpayer conducts administrative activities at a fixed location outside the home, he or she is still eligible to claim a deduction as long as the administrative activities conducted at the outside location aren’t substantial.  Space in the home used to store inventory for a wholesale or retail business also qualifies as business use of the home.

Most small businesses have receivables that cannot be collected.  These receivables can be from the sale of products, providing services to customers, or a combination of the two.

Whether or not a bad debt deduction will apply generally depends upon which accounting method is used (either the cash or accrual method).  Why does this make a difference?  Let’s look at what happens under both methods of accounting.

• Accrual – If the accrual method is used, all of your billings must be treated as income whether or not they have been collected.  This means that the taxable income already includes the income from your deadbeat customers.  Therefore, these items are considered a bad debt when those receivables become uncollectible and can be deducted.  If the accrual method of accounting is used, bad debts are deductible.
  
  
• Cash – On the other hand, if the cash method of accounting is used, income is not reported until it is received (unlike the accrual method).  Since the income was never reported in the first place, a deduction cannot be taken if payment was never made for the goods or services that were provided.  However, if you made a loan to a customer or supplier and there is a business reason for the loan, you may have a business bad debt.

Proof of Worthlessness – Proving a debt (or receivable) is worthless requires the taxpayer or business to show that the debt has become worthless and that reasonable steps were taken to collect the debt.

Non-Business Bad Debts – Some bad debts may actually be personal debts, such as personal loans to individuals.  In those cases, the bad debt is not deducted as a business expense but is treated as a short-term capital loss on Schedule D subject to the $3,000 annual loss limit.

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

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

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

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

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

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

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

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

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

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

Limitations - The R&D credit is also subject to limitations of the general business credit. Its total and others included in the general business credit are limited to 25% of the taxpayer’s net tax liability over $25,000.  To the extent that a research credit is not available for use in the current year or immediate prior year, unused credits have a 20-year carry forward.
If you have questions related to this credit or need assistance in developing the base amounts needed to compute this credit, please give one of our professionals a call.

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

• Completing Form W-4 When Starting a New Job – This form is used by employers to determine the amount of tax that will be withheld from your paycheck.  Taxpayers with multiple summer jobs will want to make sure that all of their employers are withholding an adequate amount of taxes to cover their total income tax liability.  Generally, a student who is claimed as a dependent of another with income only from summer and part-time employment can earn as much as $5,800 (the standard deduction amount) without being liable for income tax.  However, if the student has other investment income, the tax determination becomes more complicated.  This is because he or she is a dependent of another and subject to special rules.
  
  
• Tips – For example, if the student works as a waiter or a camp counselor, he or she may receive tips as part of his or her summer income.  All tip income received is taxable income and is therefore subject to federal income tax.  Employees are required to report tips of $20 or more received while working with any one employer in any given month.  The reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips.  The employer withholds FICA (Social Security and health insurance) and income taxes on these reported tips and then includes the tips and wages on the employee’s W-2.  The IRS provides Form 4070A for keeping track of tips.
  
  
• Cash Jobs – Many students do odd jobs over the summer and are paid in cash.  Just because it is paid in cash does not mean that it is tax-free.  Unfortunately, the income is taxable and may be subject to self-employment taxes (see below).  These earnings include income from odd jobs like babysitting and lawn mowing.
  
  
• Self-Employment Tax – When an individual works for an employer, the employer withholds FICA (Social Security taxes) and Medicare taxes from his or her pay, matches the amount dollar for dollar, and remits the combined amount to the government.  When someone is self-employed, he or she is required to pay the combined employee and employer amounts on their own (referred to as self-employment tax) if the net earnings is $400 or more.  This tax pays for his or her benefits under the Social Security system.  Even if he or she is not liable for income tax, this 13.3% tax may apply.
  
  
• Classification as an Independent Contractor – It does not happen frequently, but some employers will try to avoid paying certain payroll taxes by treating the student employee as an independent contractor.  You can tell this is the case if the student receives his or her pay without any income tax or social security withholding, leaving the student holding the bag to pay the 13.3% self-employment tax and income tax liability when he or she file returns the next year after receiving a 1099-MISC instead of a W-2.  If this is the case, be prepared and save some of the income to pay the taxes.
  
  
• ROTC Students – Subsistence allowances paid to ROTC students participating in advanced training are not taxable.  However, active duty pay – such as pay received during summer advanced camp – is taxable.
  
  
• Newspaper Carrier or Distributor – Special rules apply to services performed as a newspaper carrier or distributor.  An individual is a direct seller and treated as self-employed for federal tax purposes if he or she meets the following conditions:
  
  - They are in the business of delivering newspapers;
  
  - All of their pay for these services directly relates to sales rather than to the number of hours worked; and
  
  - They perform the delivery services under a written contract which states that they will not be treated as an employee for federal tax purposes.
  
  
• Newspaper Carriers or Distributors Under Age 18 – Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

A frequent taxpayer question is whether it is better to invest for tax-free or taxable interest. Generally, taxable interest will provide the greater return, but this may not hold true after taking into account taxes on the income. Therefore, the question is really which provides the greater "after-tax" return.  There are basically four types of interest that can be excluded from income, either on the Federal or state return, and each has its own special considerations.

• Municipal Bond Interest – Interest earned from municipal bonds is generally tax-exempt for Federal purposes.  However, some states may tax municipal bond interest from bonds from other state municipalities.  Hence, there are two categories of municipal bonds, namely the tax-free Federal and state and the tax-free Federal only.  Note: For those drawing social security, even though the income itself is tax-free, it is included in the computation used to determine how much of your social security income is taxable.
  
  
• Private Activity Bond Interest – Some municipal bonds, classified as Private Activity Bonds, are tax-free for purposes of the regular tax, but may be taxable for purposes of the Alternative Minimum Tax (AMT).  If a taxpayer is subject to the AMT, then the interest from these bonds may be taxable to some extent.
  
  
• U.S. Government Bond Interest – By Federal law, direct obligations of the U.S. government cannot be taxed by the states.

So how do you determine which interest is best?  You must determine the after-tax return for each type of income and then compare them to determine which is best.  Because the differing tax brackets, state taxes and other considerations impact the results, each taxpayer must make that determination based on their own specific circumstances.  Use our calculator to determine which is best for you.

Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts (including bank, securities, or other types of financial accounts in a foreign country), if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship to the U.S. government each calendar year.

The government uses this reporting mechanism as a means to uncover hidden foreign accounts and ensure that investment income earned in foreign countries by U.S. taxpayers is included on their U.S. tax returns. The Treasury Department has placed a new emphasis on foreign accounts, and taxpayers with a financial connection to a foreign country should determine whether they have a reporting requirement.

Reporting is accomplished by filing a “Report of Foreign Bank and Financial Accounts” — more commonly referred to as the “FBAR”—which is due on or before June 30 of the succeeding year. Thus the FBAR filing for the 2010 year is due on June 30, 2011. This report is filed separately from the taxpayer’s income tax return, and no extensions of time are available for filing this form. In addition, taxpayers generally are required to answer “yes” or “no” to questions related to foreign bank and financial accounts on their tax returns.

Penalties for failing to comply can be draconian. For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. A reasonable cause exception to the penalty is available for non-willful violations but not for willful violations.

Overlooked Accounts – Many taxpayers overlook the fact that they have a reporting requirement in situations such as the following:

• Family Accounts – Recent immigrants to the U.S. may still have parents or other family members residing in the “old” country, and those relatives may have included them on an account in the foreign country. This is common practice for some ethnic groups. The taxpayer does not really consider the account his or hers, but it falls under the reporting requirement if he or she has signature or other authority over the account and the value exceeds $10,000.
• Inherited Accounts – Accounts in a foreign country and inherited fall under the FBAR reporting requirement even if the funds are subsequently transferred to the U.S. The FBAR rules state that reporting is required if at any time during the year the foreign account exceeds $10,000.
• Business Accounts – An officer or board member may have signature authority over a business account held in a foreign country and overlook the need to meet the FBAR reporting requirements.

In addition to including any reportable foreign income on one’s tax return, a taxpayer must ensure that the foreign account questions are completed correctly on the tax return and that the FBAR is filed when required.

With summer just around the corner, there is a tax break that working parents should know about.  Many working parents must arrange for care of their children under 13 years of age during the school vacation period.  A popular solution — with a tax benefit — is a day camp program.

The cost of day camp can count as an expense towards the child and dependent care credit. But be careful, expenses for overnight camps do not qualify.  If your childcare provider is a sitter at your home or a daycare facility outside the home, you will get some tax benefit if you qualify for the credit.

The credit is generally 20% to 35% of non-reimbursed expenses; up to $3000 in expenses for one child and up to $6000 for two or more children.  The actual credit is also based on your income.  The credit is 35% of the child care expense if your income is under $15,000.  The credit percentage gradually decreases as the income gets higher, but remains at a fixed 20% rate once your income exceeds $43,000.

The income earned by U.S. citizens and residents from worldwide sources are subject to U.S. income taxes.  However, until recently, hidden offshore accounts have been hard to detect, and the income from these hidden accounts have not been reported by their owners on their U.S. tax returns.  Of late, the Treasury Department has become very aggressive in seeking out and uncovering hidden offshore accounts, and the owners of these accounts have been subject to some extremely severe penalties.

Each United States person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship to the U.S. government on or before June 30 of the succeeding year with the Department of the Treasury.  Penalties for failing to comply can be draconian.  For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation.

IRS is offering a voluntary disclosure plan through August 31, 2011.  For this initiative, the IRS is offering to reduce the penalties to 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period.  Some taxpayers will be eligible for 5 or 12.5 percent penalties for small offshore accounts.  Participants also must pay back-taxes and interest for up to eight years, as well as paying accuracy-related and/or delinquency penalties.

Many U.S. taxpayers may not even realize that they are subject to the foreign bank account reporting rules.  These include individuals who have foreign inheritances, whose parents or other family members reside in the “old” country, and those relatives may have included them on an account in the foreign country and an officer or board member may have signature authority over a business account held in a foreign country.

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

You might say to yourself, "Why would I want to inform the IRS of my change of address since they will find out when I file my next year's income tax return?"  The following are important reasons for promptly notifying the IRS of your address change.

You may have a refund coming and failure to file the change of address could delay that refund from reaching you.

The IRS may send you correspondence which requires a timely response.  By mailing that correspondence to your last known address, the IRS fulfills their legal notification requirements and any repercussions as a result of your lack of response becomes your responsibility, even if you never received the notice.

Therefore, it is always good practice to promptly notify the IRS of an address change by filing Form 8822.  If this change also affects the mailing address for your children who filed income tax returns, complete and file a separate Form 8822 for each child.

If your post office does not deliver mail to your street address, show your P.O. Box number instead of your street address.  If your address is outside the United States or its possessions/territories, enter the information in the following order: city, province or state, and country.  Follow the country's practice for entering the postal code.  Please do not abbreviate the country name.

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

1. Crop Insurance Proceeds — You must include in income any crop insurance proceeds that you received as the result of crop damage.  You generally include them in the year it was received.

2. Sales Caused by Weather — If you are a cash method farmer and sell more livestock, including poultry, than you normally would in a year because of drought, flood, or other weather-related conditions, you may be able to postpone reporting the gain from selling the additional animals due to the weather until the next year. To qualify, your area must be designated as eligible for federal assistance.

3. Farm Income Averaging — You may be able to average all or some of your current year's farm income by allocating it to the three prior years.  To qualify, you must be engaged in a farming business as an individual, a partner in a partnership, or a shareholder in an S corporation.  Corporations, estates, and trusts cannot use this averaging method.  This may lower your current year tax if your current year income from farming is high, and your taxable income from one or more of the three prior years was low.  This method does not change your prior year tax; it only uses the prior year information to determine your current year tax.

4. Deductible Farm Expenses — The ordinary and necessary costs of operating a farm for profit are deductible business expenses.  An ordinary expense is considered common and accepted in the farming business.  A necessary expense is one that is appropriate for the business.

5. Employees and Hired Help — Reasonable wages paid for labor hired to perform your farming operations can be deducted.  This includes full-time and part-time workers. You must withhold social security, Medicare and income taxes on employees.

6. Items Purchased for Resale — You may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and the freight charges for transporting livestock to the farm.

7. Net Operating Losses — If your deductible expenses from operating your farm are more than your other income for the year, you may have a net operating loss.  You can carry that loss back 5 years or over to future years and deduct it.  You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.

8. Repayment of Loans — You cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses.  However, if you use the proceeds of the loan for your farming business, the interest that you paid on the loan can be deducted.

9. Fuel and Road Use — Off-highway business use of vehicles qualifies for a refund of fuel excise taxes.  You may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.

10. Optional Farm Self-Employment Tax Method — A special method of computing the self-employment tax for farmers allows a taxpayer to continue SE tax coverage even in years when profits are small (or even when there is a loss).  A taxpayer who uses one of the optional methods for figuring SE tax also uses the resulting imputed income when calculating the credit for child and dependent care expenses and the earned income credit.

11. Exclusion of Farm Debt Forgiveness Income – Generally, when a lender forgives or cancels a debt, the debtor must report the forgiven debt as cancellation of debt (COD) income on their tax return unless an exception applies.  First, the farm debt is excluded to the extent the taxpayer is insolvent.   An additional farm debt is also excluded under a special farm debt exclusion, provided the indebtedness was incurred directly in connection with the trade or business of farming, and 50% or more of the aggregate gross receipts of the taxpayer for the three tax years before the tax year in which the discharge of the indebtedness occurs is attributable to the trade or business of farming.  This exclusion is limited to the sum of the taxpayer’s tax attributes and basis of qualified property.

The 2010 Tax Relief Act provides a limited-time 100% bonus depreciation allowance for qualified property.  It allows taxpayers that buy a new heavy sports utility vehicle (SUV) and use it entirely for business to write-off the entire purchase price in the placed-in-service year.

Heavy SUVs are vehicles with a gross vehicle weight (GVW) rating of more than 6,000 pounds which are exempt from the luxury auto dollar caps because they fall outside of the definition of a passenger auto.

Under the 2010 Tax Relief Act, the bonus first-year depreciation percentage is 100% for eligible property that is generally:

(1) Placed in service after Sept. 8, 2010 and before Jan. 1, 2012, and

(2) Acquired by the taxpayer after Sept. 8, 2010 and before Jan. 1, 2012.

Thus, a taxpayer that buys and places in service a new heavy SUV after Sept. 8, 2010 and before Jan. 1, 2012, and uses it 100% for business, may write-off its entire cost in the placed-in-service year. There is no specific rule barring this result for heavy SUVs.  As an example, let’s say a taxpayer purchased a heavy SUV in October of 2010 for $50,000 and used the vehicle 100% for business for the rest of 2010.  This taxpayer can write-off the full $50,000 cost of the vehicle on his 2010 return.  If used less than 100% - for example, 70% - then 70% of the cost can be deducted.

The IRS, for some time now, has been trying to combat the underreporting of tip income by waiters and waitresses.  Tips received by individuals are subject to Federal and state (if applicable) income taxes plus Social Security and Medicare taxes.  Also taxable are the value of non-cash tips, such as tickets, passes, or other items of value.

Tipped employees are supposed to keep track of their tips.  If they amount to $20 or more for the month, the employees are supposed to report the tips to their employer who will, in turn, withhold taxes and report the tips on the employees’ W-2s for the year.  Because the employees frequently underreport their tips, the IRS requires large food and beverage establishments to allocate 8% of the establishment’s income as tips reportable to the employees.  Underreporting occurs if an employee reports tips which are less than 8% of the employee’s applicable share of the employer’s gross sale.  The employer must allocate to those underreported employees the difference between the employee’s actual reported tips and the 8% of gross sales.  The allocation amount is noted on the employee’s W-2, but does not have to be reported as additional income if the employee has adequate records to show that the amount is incorrect.

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

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

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

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

The Earned Income Tax Credit (EITC) is a refundable credit primarily for lower-income individuals and couples with qualifying children.  The credit offsets any tax liability of the taxpayer(s) and, if there is any left over, it is fully refundable.  The IRS reports that 1 in 5 individuals that qualify for the credit failed to claim it.

The credit is based upon an individual’s financial, marital and parental status for the year.  The credit increases with earned income until the maximum credit is reached and phases out for higher-income taxpayers.  For 2011, the following is the maximum credit based on the number of children and income level at which the credit is fully phased out.

Number of Qualifying Children:        None         One         Two         Three
Maximum Credit ………                    $464      $3,094      $5,112     $5,751

Totally Phased Out when AGI or Earned Income Exceeds:

Joint Filers                  $18,470     $40,545    $45,373    $48,362
Others                          $13,460     $35,535    $40,363    $43,352

The following are the general requirements to claim the credit:

1.  A federal income tax return must be filed to claim the credit even if the taxpayer is not otherwise required to file. 

2.  A qualifying child must live with the taxpayer in the U.S. for more than half the year. Temporary absence from home (such as to attend school) can still qualify as time spent at home.

3.  Requirements for a qualifying child:

- The child must be under age 19 at the end of the tax year or be a full-time student under age 24 at the end of the tax year.  A child who is permanently and totally disabled is a qualified child regardless of age.

- The child will not be a qualifying child if he or she files a joint return, unless the return is filed solely to claim a refund.

- The child must be younger than the taxpayer who is claiming the EIC.  This means, for example, that a taxpayer cannot claim the credit for an older brother or sister.

4. The credit is NOT available to individuals whose filing status is Married Filing Separately.

5. The credit is NOT available to individuals when their “disqualified income” (i.e., investment income) is more than $3,150.

6. The filer, spouse (if filing a joint return) and any qualifying child included in the computation must have a valid SSN issued by the Social Security Administration.

7. The filer or spouse must have earned income.  Earned income is income from working, such as wages, profits from self-employment, income from farming, and, in some cases, disability income.  If a taxpayer retired on disability, benefits received under an employer's disability retirement plan are considered earned income until the taxpayer reaches minimum retirement age.

8. Special rules apply to members of the U.S. Armed Forces in combat zones.  Members of the military can elect to include their nontaxable combat pay in earned income for the EITC.  If you make this election, the combat pay remains nontaxable.

The IRS does not allow IRA owners to keep funds in a Traditional IRA indefinitely.  Eventually, assets must be distributed and taxes paid.  If there are no distributions, or if the distributions are not large enough, the IRA owner may have to pay a 50% penalty on the amount not distributed as required.  Generally, required distributions begin in the year the IRA owner attains the age of 70½.

IRA owners must take at least a minimum amount from their IRA each year; starting with the year they reach age 70½.  A taxpayer who fails to take a distribution in the year age 70½ is reached can avoid a penalty by taking that distribution no later than April 1st of the following year.  However, that means the IRA owner must take two distributions in the following year, one for the year in which age 70½ is attained and one for the current year.

For purposes of determining the minimum distribution, all Traditional IRA accounts, including SEP-IRAs, owned by an individual must be taken into consideration.  The required minimum distribution must be determined separately for each account.  However, the amounts can be totaled and the distribution can be taken from just one of the accounts or any combination of the accounts.  If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts.

The minimum amount that must be withdrawn in a particular year is the value of the IRA account at the end of the business day on December 31st of the prior year, divided by the number of years the IRA owner is expected to live based on the IRS life expectancy tables using the taxpayer’s oldest attained age for the year.

The minimum distribution computation determines the amount that must be withdrawn during the calendar year.  The distributions can be taken all at once, sporadically or in a series of installments (monthly, quarterly, etc.), as long as the total distributions for the year are at least the minimum required amount.  Amounts that must be distributed (required distributions) during a particular year are not eligible for rollover treatment.

There is no maximum limit on distributions from a Traditional IRA and as much can be withdrawn as the owner wishes.  However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.

Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required.  If the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution, the owner can request that the penalty be excused by completing applicable sections of Form 5329 and attaching an explanation.  IRS will then determine if the penalty will be waived.

If the IRA owner dies on or after the required distribution beginning date, a distribution must be made in the year of death, as if the IRA owner had lived the entire year.  If the distribution is after the owner’s death, the minimum amount must be distributed to a beneficiary.

Although the credit for making energy-efficient improvements to your home have been substantially reduced, there is still time for you to take advantage of this tax break which expires after 2011 without Congressional action.

The credit for 2011 has been reduced to 10% of the cost (was 30%) with an overall cap of $500 (was $1,500) for making certain specified energy-efficient home improvements.  If the credit was claimed in 2006 or 2007, the credit caps are reduced by the amount claimed in those years.

To qualify for this credit, the energy improvements must be made to the taxpayer’s principal residence located in the United States.  Generally, the credit is the cost (up to certain limits) for qualifying improvements meeting specific energy-efficient standards certified by the manufacturer.

Qualifying improvements include heat pumps, boilers, water heaters and attic circulation fans, qualifying insulation, exterior windows including skylights and exterior doors.

However, the combined maximum credit for 2006, 2007 and 2011 is limited to $500, of which no more than $200 can be for window components, $50 for an advanced main air circulating fan, $150 for a qualified furnace or hot water boiler, or $300 for any qualified central air conditioner, heat pump, or water heater.  Installation expenses do not count as part of the cost for determining the credit.

Now that your taxes have been completed for 2010, you are probably wondering what old records can be discarded.  If you are like most taxpayers, you have records from years ago that you are afraid to throw away.  It would be helpful to understand why the records needed to be kept in the first place.

Generally, we keep “tax” records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns; and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we actually dispose of them.

With certain exceptions including substantial unreported income or fraud, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later.  However, the statute of limitations for many states is one year longer than the federal.

But Wait!  The problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets.  They need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed.  Thus, it makes more sense to keep those records separated by asset.  These records would include stock and investment acquisition records, stock and mutual fund statements, escrow closing statements and improvement cost records for real property, purchase costs for business property and equipment, etc.

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

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

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

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

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

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

Sales Tax Deduction – If you are planning to make a big ticket purchase and want to deduct the sales tax as part of your itemized deductions, you need to act before the end of 2011.  The option to deduct the larger of state and local income tax or sales tax expires after 2011.

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

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

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

1. If you owe federal or state income taxes, your refund will be offset to pay those tax liabilities. If you had other debt, such as child support or a student loan debt that was submitted for offset, FMS will take as much of your refund as is needed to pay off the debt and send it to the agency authorized to collect the debt. Any portion of your refund remaining after an offset will be refunded to you.
   
   
2. You will receive a notice if an offset occurs. The notice will reflect the original refund amount, your offset amount, the agency receiving the payment, and the address and telephone number of the agency.
   
   
3. You should contact the agency shown on the notice if you believe you do not owe the debt or if you are disputing the amount taken from your refund.
   
   
4. If you filed a joint return and you are the spouse who is not responsible for the debt, but are entitled to a portion of the refund, you may request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation. If you know that your spouse has outstanding debts and anticipates an offset, you can attach Form 8379 to your original Form 1040, Form 1040A or Form 1040EZ.  If not, it can be filed by itself after you are notified of an offset.
   
   
5. If you file a Form 8379 with your return, write "INJURED SPOUSE" at the top left corner of the Form 1040, 1040A or 1040EZ. IRS will process your allocation request before an offset occurs.
   
   
6. If you are filing Form 8379 by itself, it must show both spouses' social security numbers in the same order as they appeared on your income tax return. You, the "injured" spouse, must sign the form. Do not attach the previously filed Form 1040 to the Form 8379. Send Form 8379 to the Service Center where you filed your original return.
   
   
7. If you reside in a community property state, overpayments (refunds) are considered to be joint property and are generally applied (offset) to legally owed past-due obligations of either spouse.  There are exceptions; please call for additional details.
   
   
8. The IRS will compute the injured spouse's share of the joint return for you. Contact the IRS only if your original refund amount shown on the FMS offset notice differs from the refund amount shown on your tax return. 

For assistance with completing Form 8379, please give this office a call.

Were you caught by surprise when you found out that your almost adult child was subject to the Kiddie Tax?  You are not alone. Kiddie tax rules generally apply to children through the age of 18 and full-time students under the age of 24.
 
To prevent parents from placing investments in their children’s names to take advantage of the child’s lower tax rate, Congress several years back created what is referred to as the “Kiddie Tax”.  Under the Kiddie Tax, a child’s investment income in excess of $1,900 is taxed at the parent’s tax rate rather than the child’s.  These rules do not apply to married children who file a joint return with their spouse or self-supporting children.

Depending upon your circumstances, this can be either a tax return preparation nuisance or a penalty tax – or maybe both.  Many insightful parents seek tax-advantaged ways to put money aside for their children’s education, first home, etc.  They should not be deterred by the Kiddie tax, as there are legal ways to avoid it.  This is generally accomplished by making investments that produce tax-free income or that defer income until a year the child is no longer subject to the Kiddie Tax.  If, at that time, the child is in school or just starting in the work force with little or no other income, the deferred income could then be realized with little or no income tax.

The following are examples of investments that either defer income or generate tax-free income.  However, you must also consider that some of these might have a lower rate of return than a taxable investment and may not always be appropriate in the current economic climate:

• U.S. savings bonds – Interest can be deferred until the bonds are cashed.
  
  
• Municipal bonds – Generally produce tax-free interest income for Federal taxes.  Most states with a state income tax also permit tax-free treatment of interest from bonds of that state or local governments within that state.
  
  
• Growth stocks – Stocks that focus more on capital appreciation than current income.  The child could wait to sell them until he or she is no longer subject to the Kiddie tax.
  
  
• Mutual funds – Mutual funds that focus on growth stocks or municipal bonds.  Although they might throw off some taxable income, their primary goal is capital appreciation or tax-free income.
  
  
• Unimproved real estate – That provides appreciation without current income.

If the family has a business, that family business could employ the child.  The child’s earned income is not subject to the Kiddie tax rules and will generate a deduction for the family business (assuming the wages are reasonable for work actually performed).  The child’s earned income can be offset by the standard deduction for a dependent, and the excess income will be taxed at the child’s rate (not the parent’s).  In addition, the child would also qualify for a Traditional or Roth IRA, which provides additional income shelter.

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

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

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

If you changed your name as a result of a recent marriage or divorce, you will want to take the necessary steps to ensure the name on your tax return matches the name registered with the Social Security Administration (SSA).  A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your return and may even delay your refund.

Here are some situations where notifying the Social Security Administration may be appropriate:

• If you took your spouse’s last name or if both spouses hyphenate their last names, you may run into complications if you don’t notify the SSA.

 

• When newlyweds file a tax return using their new last names, IRS computers can’t match the new name with their Social Security Number (SSN). 

• If you were recently divorced and changed back to your previous last name, you will also need to notify the SSA of this name change. 

Informing the SSA of a name change is easy; file a Form SS-5, Application for a Social Security Card at your local SSA office and provide a recently issued document as proof of your legal name change. 

If you adopted your spouse’s children after getting married, the children will need to have an SSN. Taxpayers must provide an SSN for each dependent claimed on a tax return.  For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number – or ATIN – by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS.  The ATIN is a temporary number used in place of an SSN on the tax return. 

If you use unincorporated independent contractors to perform services for your rental and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year.  This will help you avoid two things, facing the loss of the deduction for their labor and expenses and a monetary penalty.  Issuing 1099s is a new requirement for landlords, beginning in 2011, so if you own rental property be aware that you should be collecting W-9s from your pool service person, handyman, gardener, management company and other unincorporated service providers.

IRS Form W-9, “Request for Taxpayer Identification Number and Certification” is provided by the government as a means for you to obtain the data required (legal name, tax ID number, address) from your vendors in order to file the 1099s. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information.  We highly recommend that you have a potential vendor or independent contractor complete the Form W-9 prior to engaging in business with him or her. 

Many landlords overlook this requirement during the year, and when the end of the year arrives and it is time to issue 1099s to contractors, they realize that the required documentation has not been collected.  Often it is difficult to acquire the contractor’s information after the fact, especially from those contractors with no intention of reporting the income.  

For example, you have a repairman out early in the year, pay him less than $600, and then use his services again.  As a result, the total you end up paying him for the year exceeds the $600 limit.  You realize you overlooked getting the information needed to file the 1099s for the year and will have to spend your valuable time contacting the repairman to obtain the information.  Therefore, it is good practice to always have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services.  Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. 

Update - President Obama signed into law H.R. 4, the Small Business Paperwork Elimination Act, which repeals the 1099 tax-reporting requirement established in the health care overhaul law that passed last year. The provision would have gone into effect in 2012.

 

A Federal shutdown will delay tax refunds for taxpayers who file their returns on paper rather than electronically. The IRS states that electronically filed returns have their refunds processed automatically. The April 18 tax deadline is still in effect for filing 2010 returns. So do not delay if you have not yet filed your tax return. Filing late with a tax due will incur both late filing and late payment penalties.

The length of the delay will be dependent on how long the shutdown lasts. Last year, one in three taxpayers filed paper returns. Though with the new electronic filing mandate for professional preparers, that number will be lower for 2010 returns.

This time of year, the IRS is flooded with returns ahead of the April 18 deadline. Normally it takes six to eight weeks to process paper returns and send refund checks to taxpayers via the U.S. mail. Refunds claimed with electronic returns and direct deposited into taxpayers' bank accounts are often paid within a week or so. The IRS did not address whether electronic returns that call for refund checks to be mailed would be affected if Congress fails to fund the IRS.

The IRS stated that audits and customer service for taxpayer questions may be delayed during the government shutdown period. However, customer service for taxpayer questions may also be affected.

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

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

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

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

1. The first safe harbor is based on the tax owed in the current year.  If your payments equal or exceed 90% of your current year’s tax liability, you can escape a penalty. 

 

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

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

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

The vast majority of Americans get a tax refund from the IRS each spring, but what if you are one of those who ended up owing?   

The IRS encourages you to pay the full amount of your tax liability on time by imposing significant penalties and interest of late payments if you don’t.  It is often in your best interest to make other arrangements for paying your taxes rather than be subjected to the penalties and interest.  Here are a few options to consider.

• Family Loan – Obtaining a loan from a relative or friend may be the best bet because this type of loan is generally the least costly in terms of interest.
   
• Credit Card – Another option is to pay by credit card with one of the service providers that work with the IRS.  However, since the IRS will not pay the credit card discount fee, you will have to pay it and pay the higher credit card interest rates.
   
• Installment Agreement – If you owe the IRS $25,000 or less, you may qualify for an installment agreement where you can make monthly payments up to five years.  You will still be subject to the late payment penalty, but it will be reduced by half.  Interest will also be charged at the current rate, and there is a user fee to set up the payment plan.  In making the agreement, a taxpayer agrees to keep all future years current.  If the taxpayer does not make payments on time or has an outstanding past due amount in a future year, they will be in default of their agreement and the IRS has the option of taking enforcement actions to collect the entire amount owed.
   
• Tap a Retirement Account – This is possibly the worst option to pay your taxes because you are jeopardizing your retirement and the distributions are generally taxable at your highest bracket and adds more taxes to your existing problem.  In addition, if you are under age 59-1/2, the withdrawal is also subject to a 10% early withdrawal penalty that compounds the problem even further.  

Whatever you decide, don’t just ignore your tax liability because that is the worst thing you can do.

Just a reminder that the due date for 2010 tax returns is April 18, 2011!  Normally the deadline is April 15, but when a due date falls on a weekend or holiday, the due date is extended until the next business day.  Thus, since April 15 is a legal holiday in Washington, D.C. (Emancipation Day), the due date for 2010 tax returns is extended until Monday, April 18, 2011. 

There is no penalty for filing late if you are receiving a refund.  However, it is quite a different story if you have a balance due.  There are two types of penalties; late filing and late payment and both can be quite severe.  Filing an extension gives you until October 17th to file and avoid the late filing penalties.  However, there is no extension for paying your tax liability even if you have a valid extension to file.   

April 18 is also the deadline for making contributions to either a Roth or Traditional IRA for 2010, even if an extension is filed, and filing your 2011 first quarter estimated tax payment.

If you have not yet filed your 2010 tax return and have a refund coming, time is running out! The IRS estimates that there are about 1.1 million taxpayers who have not filed their 2010 tax return and that there is approximately $1.1 billion dollars of unclaimed refunds available for those taxpayers.  If you fall in this category, you need to act quickly because the return must be filed by April 18, 2011 to claim a refund for 2010.  Otherwise, the money becomes the property of the U.S. Treasury.

By failing to file a return, people stand to lose more than a refund of taxes withheld or paid during 2010.  In addition, many low- and moderate-income workers may not have claimed the Earned Income Tax Credit (EITC).  The EITC helps individuals and families with incomes below certain thresholds, which in 2010 were $39,783 for those with two or more children, $35,241 for people with one child, and $14,590 for those with no children. 

When filing a 2010 return, the law requires that the return be properly addressed, mailed and postmarked by the April 18th date (normally the due date would April 15th, but it is a legal holiday in Washington, D.C. so the due date is extended until the 18th). There is no penalty for filing a late return qualifying for a refund. 

As a reminder, taxpayers seeking a 2010 refund should know that their checks will be held if they have not filed tax returns for 2008 and 2009.  In addition, the refund will be applied to any amounts still owed to the IRS, and may be used to offset unpaid child support or past-due federal debts such as student loans. 

If you noticed an increase in your take-home pay this year, it is probably the result of a reduction in Social Security withholding.  But don’t get too accustomed to it; the reduced Social Security withholding is only temporary.  

As part of a government economic stimulus measure, the employee’s share of Social Security payroll withholding is reduced to 4.2%, down 2% from the normal rate of 6.2%.  The reduction is for one year only (2011) and will return to the 6.2% in 2012.  

For individuals receiving the maximum wage, this translates to a $2,136 (2% of $106,800) reduction in withholding during the year.  Self-employed individuals enjoy a similar benefit, but that too goes away after 2011.

How much, if any, of your Social Security benefits are taxable depends on your total income and marital status.  Generally, if your only income for the year is Social Security benefits, it is not taxable.  If you received income from other sources or have income from tax-free municipal sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.  

The base amounts are: $32,000 for married couples filing jointly, $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year.

You can do the following quick computation to determine whether some of your benefits may be taxable.  First, add one-half of the total Social Security benefits received to all your other income, including any tax-exempt interest and other exclusions from income.  Then compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

Qualified Tuition Plans offer a unique opportunity for families to save in a tax-advantaged way for their children’s college education.  Although contributions to these plans are not tax-deductible, the plan earnings accrue tax-deferred and are tax-free if used for tuition and other qualified expenses.  The only limitation on contributions is the estimated cost of the future education and gift tax considerations by the donor. 

To maximize the benefit, the contributions should be made as soon as possible to maximize the account earnings before the funds are needed for the education.

After several years of having their personal exemption deductions and a portion of their itemized deductions phased out, beginning for 2010 and through 2012, high-income taxpayers have regained full benefit of those deductions.  However, after 2012, without Congressional action, the phase-outs will be restored for high-income taxpayers.  The administration is considering beginning the phase-out at $200,000 for single individuals and $250,000 for married couples.