Tax Tips from Annette Di Bello Kelly, CPA, CFP, Professional Corporation

Year-end tax strategies for stock market investors

2011-09-21T13:44:00.000-07:00

As year-end approaches, you should consider the following moves to make the best tax use of paper losses and actual losses from your stock market investments.

Sell at a loss to offset earlier gains. If you have realized gains earlier in the year from sales of stock held for more than one year (long-term capital gains) or from sales of stock held for one year or less (short-term capital gains), take a close look at your portfolio with a view to selling some of the losers—those shares that now show a paper loss. The best tax strategy is to sell enough of the losers to generate losses to offset your earlier gains plus an additional $3,000 loss. Selling to produce this amount of loss is a good idea from the tax viewpoint because a $3,000 capital loss (but no more) can offset a like amount of ordinary income each year.

For example, let's suppose you have $10,000 of capital gain from the sale of stocks earlier this year. You also have several losing positions, including shares in ABC Corp. The ABC shares currently show a loss of $15,000. Strictly from the tax viewpoint, you should consider selling enough of your ABC shares to recognize a $13,000 loss. Your capital gains will be offset entirely, and you will have a $3,000 loss to offset against a like amount of ordinary income.

Suppose that you believe that the shares showing a paper loss (in our example, the ABC shares) still have the potential to turn around and eventually generate a profit. You can sell and then repurchase the shares without forfeiting the loss deduction only if you avoid the wash-sale rules. This means that you must buy the new shares outside of the period that begins 30 days before and ends 30 days after the sale of the loss stock. However, note that if you expect the price of the shares showing a paper loss to rise quickly, your tax savings from taking the loss may not be worth the potential investment gain you may lose by waiting more than 30 days to repurchase the shares.

Use earlier-in-the-year losses to offset gains you would benefit from taking. If you have capital losses on sales earlier in the year, consider whether you should take capital gains on some stocks that you still hold. For example, if you have appreciated stocks that you would like to sell, but don't want to sell if it will cause you to have taxable gain this year, consider selling just enough shares to offset your earlier-in-the-year capital losses (except for $3,000 of those which can be used to offset ordinary income). You should consider selling appreciated stocks now if you believe those stocks have reached (or are close to) the peak price and you also believe that you can invest the proceeds from the sale in other property that will give you a better rate of return in the future.

For example, suppose you have $20,000 of long-term capital losses from last year's stock transactions, and $4,000 of short-term capital gains. If you don't have other transactions involving securities or other capital assets during last year, you'll wind up the year with a $16,000 long-term capital loss, of which only $3,000 can be used to shelter ordinary income. The $13,000 balance of the loss could be used to offset gain on appreciated stock that you wish to sell but which you would not sell now if you had to pay tax on the gain recognized on the sale.

If this strategy applies to you, and your holdings showing a paper gain consist of stocks you haven't held for more than one year, as well as stocks you have held for more than one year, you should consider selling those stocks on which you will have short-term gain first, and then stocks that would yield long-term gain. This way, you'll be in a better position to wind up with gain taxed at favorable rates when you sell other stocks with paper gains. To the extent possible, you should also try to use long-term capital losses to offset short-term capital gains. This can be done, however, only if the total of your long-term capital losses is more than your long-term capital gains. Deferring long-term capital gains until next year is one way of achieving this goal.

Since individual taxpayers may carry over capital losses indefinitely, there is no reason to sell appreciated stocks just to have offsetting gains. If you don't have a better investment for the proceeds of a sale of these stocks, don't sell them. You can carry over your capital losses to next year when you may have a better opportunity to make use of those losses. You can even offset another $3,000 of the carried over losses against ordinary income next year (and in succeeding years if the full amount of the capital loss carryover is not used next year).

These are just a few of the year-end strategies that can make a big dollar difference to you and your family. To discuss these and other strategies that should be put in place before year end, please call at your convenience.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

How individuals are affected by tax changes in the American Recovery and Reinvestment Act of 2009

2010-05-04T23:07:00.000-07:00

The American Recovery and Reinvestment Act of 2009 (commonly referred to as the Recovery Act), which was signed into law on Feb. 17, 2009, makes a number of beneficial tax changes for individuals. However, most of them are temporary in nature, that is, unless extended by future legislation, they apply for 2009 only or in some cases for 2009 and 2010. Here's a review of the more widely applicable provisions that could have an impact on you and your family.

New Making Work Pay Credit. Individuals who work generally get a credit of up to $400 ($800 for joint filers). The credit is refundable, meaning you get it even if you owe no income tax. This change applies for 2009 and 2010. The credit is the lesser of 6.2% of your earned income or $400 ($800 on a joint return). The credit is phased out for joint filers with modified adjusted gross income between $150,000 and $190,000 and other taxpayers with modified AGI between $75,000 and $95,000.

You won't be getting a separate check from the IRS, as you did with last year's Stimulus payment. Rather, your employer will automatically adjust your withholding so that you will get a little more money in each paycheck. If you have multiple jobs, you may have to adjust your withholding so that too much is not taken out. If you are self-employed, you can effectively receive the credit in advance by reducing your estimated tax payments.

One-time $250 payment or credit for others. The Recovery Act provides a one-time payment of $250 in 2009 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs. It also provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. The Making Work Payment credit is reduced by any $250 payment or credit received.

New sales tax deduction for vehicle purchases. For 2009, there is a new deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles after Feb. 16, 2009 and before Jan. 1, 2010. The deduction generally is available regardless of whether you itemize deductions on Schedule A or claim the standard deduction.

The deduction is limited to the tax on up to $49,500 of the purchase price of an eligible motor vehicle.

The deduction is phased out for joint filers with modified adjusted gross income between $250,000 and $260,000 and other taxpayers with modified AGI between $125,000 and $135,000.

If you itemize and choose the option to deduct state sales taxes in lieu of state income taxes, you don't get the new deduction. This prevents you from getting a double deduction for the sales taxes on the vehicle but it also involves some tricky planning considerations because different rules apply to the optional deduction and the new deduction. For example, the new deduction but not the optional deduction is allowed against the alternative minimum tax. Additionally, the optional deduction is subject to a limitation that caps the deduction for sales tax on a motor vehicle to the general sales tax rate.

Improved first-time homebuyer credit. Last year's Housing Act included a refundable tax credit for first-time homebuyers equal to the lesser of 10% of the purchase price or $7,500 for qualifying purchases after Apr. 1, 2008 and before July 1, 2009. The credit is essentially an interest-free loan because it has to be paid back to the government over 15 years.

The Recovery Act has improved the credit for 2009 purchases by (1) eliminating the requirement to pay it back (subject to exceptions), (2) increasing the maximum credit to $8,000, and (3) making it available for purchases through November 2009.

You can treat a 2009 purchase as having been made on Dec. 31, 2008 and thus get an immediate refund when you file your 2008 taxes by the Apr. 15, 2009 filing deadline. Even if you have already filed your 2008 taxes, you can file an amended 2008 return to get the credit for a 2009 purchase.

You are considered a first-time homebuyer if you or (or your spouse, if married) had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies.

The first time homebuyer credit, whether claimed in 2008 or 2009, phases out for individual taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000–$170,000 for joint filers).

AMT relief. In general terms, to find out if you owe alternative minimum tax (AMT), you start with regular taxable income, modify it with various adjustments and preferences (such as addbacks for property and income tax deductions and dependency exemptions), and then subtract an exemption amount (which phases out at higher levels of income). The result is multiplied by an AMT tax rate of 26% or 28% to arrive at the tentative minimum tax. You pay the AMT only if the tentative minimum tax exceeds your regular tax bill. Although it was originally enacted to make sure that wealthy individuals did not escape paying taxes, the AMT has wound up ensnaring many middle-income taxpayers. Exemption amounts were scheduled to drop and fewer tax credits were to be available to offset AMT for 2009. The Recovery Act provides AMT relief for 2009 by (1) increasing the exemption amounts above last year's levels and (2) allowing nonrefundable credits to offset AMT as well as regular tax.

College tax breaks. The Recovery Act expands tax breaks for individuals seeking a college education. For 2009 and 2010, it gives taxpayers a new “American Opportunity” tax credit of up to $2,500 of the cost of tuition and related expenses paid during the tax year. You receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year. The credit is available for the first four years of post-secondary education in a degree or certificate program. Forty percent of the credit is refundable. The credit is phased out for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers).

Section 529 Education Plans are tax-advantaged savings plans that can be used to pay qualified education expenses, including: tuition, room & board, mandatory fees and books. Under the Recovery Act, for 2009 and 2010, qualified education expenses under these plans include computer technology and equipment, as well as Internet access and related services.

Tax break for the unemployed. Unemployment compensation benefits ordinarily are fully taxable. However, under the Recovery Act, an individual does not have to pay tax on up to $2,400 in unemployment benefits received in 2009.

Limited subsidy for COBRA continuation coverage of unemployed workers. The Recovery Act provides a 65% subsidy for COBRA continuation premiums for up to 15 months for workers who have been involuntarily terminated, and for their families. This subsidy also applies to health care continuation coverage if required by states for small employers. To qualify for premium assistance, a worker must be involuntarily terminated between Sept. 1, 2008 and Feb. 28, 2010. Workers who were involuntarily terminated between Sept. 1, 2008 and Feb. 17, 2009, but failed to initially elect COBRA because it was unaffordable, must be given an additional 60 days to elect COBRA and receive the subsidy. The subsidy is not taxable when received, but higher income recipients—those with modified adjusted gross income above $125,000 ($250,000 for joint filers)—will have to pay back part or all of it at tax return time.

Refundable child credit expanded. A taxpayer receives a $1,000 tax credit for each qualifying child under the age of 17. Before the Recovery Act, this credit was refundable only to a limited extent. The Recovery Act makes the child credit refundable to a much greater extent for 2009 and 2010.

Bigger earned income tax credit (EITC). The Recovery Act makes various changes to the earned income tax credit for 2009 and 2010. These changes will result in a bigger EITC for some taxpayers. For example, in 2009, taxpayers with three or more qualifying children may claim a credit of 45% of earnings up to $12,570, resulting in a maximum credit of $5,656.50.

Increased transit and vanpool transportation fringe benefits. For months beginning on or after Mar. 1, 2009 and before Jan. 1, 2011, the Recovery Act increases the monthly exclusion for employer-provided transit and vanpool benefits from $120 to $230. This figure is adjusted for inflation each year and could go up in 2010.

Improved energy tax breaks. The Recovery Act includes a number of provisions that are designed to promote the creation and use of alternative forms of energy including these new or improved energy tax breaks for individuals:

... The Recovery Act extends the tax credit for energy-efficient improvements to existing homes through 2010 and modifies it in various ways so that a larger credit is possible after 2008.
... Under pre-Recovery Act law, individuals could claim a 30% tax credit for qualified solar water heating property (capped at $2,000), qualified small wind energy property (capped at $500 per kilowatt of capacity, up to $4,000), and qualified geothermal heat pumps (capped at $2,000). For tax years beginning after 2008, the Recovery Act removes these individual dollar caps. As a result, each of these types of improvements is eligible for an uncapped 30% credit.
... The Recovery Act modifies the existing credit for new qualified plug-in electric drive motor vehicles, effective for vehicles acquired after Dec. 31, 2009.
... For vehicles bought after Feb. 17, 2009 and before Jan. 1, 2012, the Recovery Act creates a new 10% nonrefundable personal credit (up to a maximum of $2,500 per vehicle) for electric drive low-speed vehicles, motorcycles, and three-wheeled vehicles.
... For property placed in service after Feb. 17, 2009 and property converted before Jan.1, 2012, the Recovery Act creates a new 10% credit, up to $4,000, for the cost of converting any motor vehicle into a qualified plug-in electric drive motor vehicle.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Tax Consequences of Debt Discharge Income

2010-02-13T09:14:00.000-08:00

In these troubled economic times, many financially distressed borrowers may have had some or all of their debt cancelled or forgiven by their lender last year. While such relief was no doubt welcome to people who received it, what they may not have realized is that debt forgiveness may have tax consequences. Specifically, debt forgiven in 2009 may have to be included as income on your 2009 return. However, not all canceled debts trigger taxable income. And, even if there is no exception or exclusion in a particular case, that may not be the last word. The tax bite may be reduced or eliminated if you can show that the amount reported by the lender is incorrect.

General rule. The tax laws specifically include income from the discharge of indebtedness in gross income. However, there are several exceptions to this rule. In addition, there are numerous exclusions from gross income for certain types of forgiven debts.

Exceptions. If the cancellation of debt by a private lender, such as a relative or friend, is intended as a gift, there is no income. Likewise, a debt cancelled by a private lender's Last Will and Testament triggers no income to the borrower.

There is also an exception for certain student loans. For example, doctors, nurses, and teachers agreeing to serve in rural or low income areas in exchange for cancellation of their student loans won't have income from the cancellation if they meet certain conditions.

Also keep in mind that there is no income from cancellation of deductible debt. For example, if a lender cancels home mortgage interest that could have been claimed as an itemized deduction on Schedule A of Form 1040, there is no tax problem to contend with.

Price adjustment. There is no income if an individual purchases property and the seller later reduces the price. The purchaser's basis (yardstick for measuring gain or loss on a later sale) in the property, however, is reduced by the amount of the purchase price adjustment.

Exclusions. In addition to the above exceptions, there are exclusions from the general rule for reporting canceled debt as income for:

• discharge of debt through bankruptcy,
• discharge of debt of an insolvent taxpayer,
• discharge of qualified farm debt,
• discharge of qualified real property business debt, and
• discharge of qualified principal residence debt.

These exclusions are quite complicated and a detailed discussion of them is beyond the scope of this letter. However, it is worth pointing out that the qualified principal residence debt exclusion applies where individuals restructure their acquisition debt on a principal residence, lose their principal residence in a foreclosure, or sell a principal residence in a short sale (where the sales proceeds are insufficient to pay off the mortgage and the lender cancels the balance). Also, the exclusions require certain tax attributes to be reduced and must be reported to the IRS on its Form 982.

Repurchased business debt. Income from certain repurchased business debt can be stretched out over several years. Although all of the deferred debt discharge income will eventually be recognized, you benefit from the deferral of tax to later years.

Form 1099-C, Cancellation of Debt. A taxpayer should receive a Form 1099-C from a federal government agency, financial institution, or credit union that forgives a debt of $600 or more. The amount of the canceled debt is shown in box 2. Any forgiven interest included in the amount of canceled debt in box 2 will also be shown in box 3. As noted above, if the interest would otherwise be deductible, it does not have to be included in income.

An individual who doesn't agree with the amount shown on Form 1099-C should contact the lender in writing and request it to issue a corrected Form 1099-C showing the proper amount of canceled debt. Even if the lender refuses to issue a corrected report, there still may be recourse if you have adequate documentation to show that the lender incorrectly reported the amount canceled.

If you had a debt forgiven last year, it is important to determine how it may affect your 2009 taxes, gain maximum advantage from any exception or exclusion that may apply, and select from various choices that may be available to you, depending on the specific circumstances of your situation.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

“Worker, Homeownership, and Business Assistance Act of 2009.“

2009-12-11T08:27:00.000-08:00

On November 6, President Obama signed into law the “Worker, Homeownership, and Business Assistance Act of 2009.“

This new law extends and generally liberalizes the tax credit for first-time homebuyers, making it a more flexible tax-saving tool. It also includes some crackdowns designed to prevent abuse of the credit.

These important changes could it make it easier for you or someone in your family to buy a home. And because the changes generally aid buyers and aim to improve residential real estate markets nationwide, they also could make it easier for you or someone in your family to sell a home.

This letter fills you in on the details you need to know about the first-time homebuyer credit.

Homebuyer credit basics. Before the new law was enacted, the homebuyer credit was only available for qualifying first-time home purchases after April 8, 2008, and before December 1, 2009. The top credit for homes bought in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10% of the residence's purchase price, whichever is less.

Only the purchase of a principal residence (i.e., a main home) located in the U.S. qualifies for the credit. Vacation homes and rental properties are not eligible.
The homebuyer credit reduces your tax liability on a dollar-for-dollar basis. If the credit is more than the tax you owe, the difference is paid to you as a tax refund.
For homes bought after December 31, 2008, you must pay back the homebuyer credit if you dispose of the home or stop using it as your principal residence within 36 months of purchase.

The credit is subject to a phase-out based on your modified adjusted gross income (AGI) for the year of purchase. Before the new law, the credit was phased out at modified AGI between $75,000 and $95,000 ($150,000 and $170,000 for joint filers).

Your guide to the revised homebuyer credit. The new law makes four important changes to the homebuyer credit, the first three of which make the credit easier to claim:

New lease on life for the homebuyer credit. The homebuyer credit is extended to apply to a principal residence bought before May 1, 2010. The homebuyer credit also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010.

In general, a home is considered bought for credit purposes when the closing takes place. So the extra two months (May and June of 2010) helps buyers who find a home they like but can't close on it before May 1, 2010. They can go to contract on the home before May 1, 2010, close on it before July 1, 2010, and get the homebuyer credit (if they otherwise qualify).

Certain service members on extended duty outside of the U.S. get an extra year to buy a qualifying home and get the credit; they also can avoid the recapture rules under certain circumstances.

Current homeowners who are “long-time residents“ can claim credit of up to $6,500. For purchases after November 6, 2009, you can claim the homebuyer credit if you (and, if married, your spouse) maintained the same principal residence for any period of five consecutive years during the eight years ending on the date that you buy the subsequent principal residence. For example, if you and your spouse are empty nesters who have lived in your suburban home for the past ten years, you may be eligible for the credit if you buy a house in town.
You don't have to sell your current home in order to qualify for a homebuyer credit on the replacement home. You can buy the replacement home to beat the new deadlines (explained above) before you sell the old home. For that matter, you can hold on to your old home in the hope of achieving a better selling price later on. However, the replacement home must be your principal residence.
The maximum allowable homebuyer credit for qualifying existing homeowners is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.

The homebuyer credit is available to higher-income taxpayers. For purchases after November 6, 2009, the homebuyer credit phases out over higher levels of modified AGI, making the credit available to a bigger pool of buyers. For individuals, the phaseout range is between $125,000 and $145,000, and for those filing a joint return, it's between $225,000 and $245,000.

New home-price limit for the homebuyer credit. For purchases after November 6, 2009, the homebuyer credit can't be claimed for a home if its purchase price exceeds $800,000. It's important to note that there is no phaseout mechanism. A purchase price that exceeds the $800,000 threshold by even a single dollar will cause the loss of the entire credit.

The new purchase price limitation applies whether you are buying a first-time principal residence or are a long-time homeowner purchasing a replacement principal residence.

Other homebuyer credit changes. The new law includes a number of new anti-abuse rules that make it tougher to claim the homebuyer credit. The most important of these are as follows:

... Beginning with the 2009 tax return, the homebuyer credit can't be claimed unless the taxpayer attaches to the return a properly executed copy of the settlement statement used to complete the purchase of the qualifying residence.
... For purchases after November 6, 2009, the homebuyer credit can't be claimed unless the taxpayer is at least 18 years old as of the date of purchase. A married person is treated as meeting this requirement if he or his spouse is at least 18 years old.
... For purchases after November 6, 2009, the homebuyer credit can't be claimed by a taxpayer who can be claimed as a dependent by another taxpayer for the tax year of purchase. It also can't be claimed for a home bought from a person related to the buyer's spouse.
... The new law makes it easier for the IRS to go after questionable homebuyer credit claims without initiating a full-scale audit.

What hasn't changed. The tax law still gives you the extraordinary opportunity to get your hands on homebuyer credit cash without waiting to file your tax return for the year in which you buy the qualifying principal residence. Thus, if you buy a qualifying principal residence in 2009 you can treat the purchase as having taken place on December 31, 2008, file an amended return for 2008 claiming the credit for that year, and get your homebuyer credit cash quickly via a tax refund. Similarly, you can treat a qualifying principal residence bought in 2010 (before the new deadlines) as having taken place on December 31, 2009, and file an original or amended return for 2009 claiming the credit for that year.

What also hasn't changed is the need for getting expert tax advice in negotiating through the twists and turns of the beefed-up homebuyer credit. Please call us today for details on how the homebuyer credit can help you or your family members.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Post-2009 Roth IRA rollovers - Opportunities & Challenges

2009-11-08T09:26:00.000-08:00

I am writing to tell you of an interesting new rollover opportunity that's coming up in a few months. After 2009, you will be able to roll over amounts in qualified employer sponsored retirement plan accounts, such as 401(k)s and profit sharing plans, and regular IRAs, into Roth IRAs, regardless of your adjusted gross income (AGI). Currently, individuals with more than $100,000 of adjusted gross income as specially modified are barred from making such rollovers.

What's so attractive about a Roth IRA? Here's a summary:

Earnings within the account are tax-sheltered (as they are with a regular qualified employer plan or IRA).

Unlike a regular qualified employer plan or IRA, withdrawals from a Roth IRA aren't taxed if some relatively liberal conditions are satisfied.

A Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) after he or she reaches age 70 1/2 as is generally the case with regular qualified employer plans or IRAs. (For 2009, there's a moratorium on RMDs.)

Beneficiaries of Roth IRAs also enjoy tax-sheltered earnings (as with a regular qualified employer plan or IRA) and tax-free withdrawals (unlike with a regular qualified employer plan or IRA). They do, however, have to commence regular withdrawals from a Roth IRA after the account owner dies.

The catch, and it's a big one, is that the rollover will be fully taxed, assuming the rollover is being made with pre-tax dollars (money that was deductible when contributed to an IRA, or money that wasn't taxed to an employee when contributed to the qualified employer sponsored retirement plan) and the earnings on those pre-tax dollars. For example, if you are in the 28% federal tax bracket and roll over $100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA, you'll owe $28,000 of tax. So you'll be paying tax now for the future privilege of tax-free withdrawals, and freedom from the RMD rules.

Should you consider making the rollover to a Roth IRA? The answer may be “yes” if:

You can pay the tax hit on the rollover with non-retirement-plan funds. Keep in mind that if you use retirement plan funds to pay the tax on the rollover, you'll have less money building up tax-free within the account.

You anticipate paying taxes at a higher tax rate in the future than you are paying now. Many observers believe that tax rates for upper middle income and high income individuals will trend higher in future years.

You have a number of years to go before you might have to tap into the Roth IRA. This will give you a chance to recoup (via tax-deferred earnings and tax-deferred payouts) the tax hit you absorb on the rollover.

You are willing to pay a tax price now for the opportunity to pass on a source of tax-free income to your beneficiaries.

You also should know that Roth rollovers made in 2010 represent a novel tax deferral opportunity and a novel choice. If you make a rollover to a Roth IRA in 2010, the tax that you'll owe as a result of the rollover will be payable half in 2011 and half in 2012, unless you elect to pay the entire tax bill in 2010.

Why on earth would you choose to pay a tax bill in 2010 instead of deferring it to 2011 and 2012? Keep in mind that absent Congressional action, after 2010 the tax brackets above the 15% bracket will revert to their higher pre-2001 levels. That means the top four brackets will be 39.6%, 36%, 31%, and 28%, instead of the current top four brackets of 35%, 33%, 28%, and 25%. The Administration has proposed to increase taxes only for those making $250,000, but it is difficult to predict who will get hit by higher rates. What's more, there's a health reform proposal before the House of Representatives right now that would help finance healthcare reform with a surtax on higher-income individuals.

So if you believe there's a strong chance your tax rates will go up after 2010, you may want to consider paying the tax on the Roth rollover in 2010.

Here are some ways individuals can prepare now for next year's rollover opportunity.

(1) Non-high-income individuals who are able to make deductible IRA contributions this year should do so. They'll reduce their 2009 tax bill and, if they make the conversion to Roth IRA next year, they won't have to pay back the tax savings until 2011 and 2012.

(2) Individuals who have never opened a traditional IRA because they weren't able to make deductible contributions (and who never rolled over pre-tax dollars to a regular IRA) should consider opening such an IRA this year and making the biggest allowable nondeductible contribution they can afford. If they convert the traditional IRA to a Roth IRA next year they will have to include in gross income only that part of the amount converted that is attributable to income earned after the IRA was opened, presumably a small amount. In 2010 and later years, they could continue to make nondeductible contributions to a traditional IRA and then roll the contributed amount over into a Roth IRA. However, note that if an individual previously made deductible IRA contributions, or rolled over qualified plan funds to an IRA, complex rules determine the taxable amount.

(3) Some high-income individuals may plan to make large conversions in 2010 but to opt out of the deferral of tax until 2011 and 2012 because they fear they will be in a higher tax bracket in those years than in 2010. These individuals should avoid the standard year-end-planning wisdom of accelerating deductions and deferring income but should, rather, do the reverse in an effort to avoid being pushed into the highest brackets by a large IRA-to-Roth-IRA conversion in 2010. These individuals should be considering ways to defer deductions to 2010, and accelerate income from next year into 2009.

We should discuss your and your family's entire financial situation before you plan for a large rollover to a Roth IRA after 2009. There also are many details that we should go over, such as whether the amounts you are thinking of switching to a Roth IRA are eligible for the rollover (technically, they are called “eligible rollover distributions”), whether you can make rollovers from your employer sponsored plan (for example, there are restrictions on rollovers from 401(k) plans), and the tax impact of rolling over amounts that represent nondeductible as well as deductible contributions.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Year-end tax planning with checklist

2009-10-04T17:52:00.000-07:00

Year-end tax planning could be especially productive this year because timely action can nail down a host of tax breaks that won't be around next year unless Congress acts to extend them. These include, for individuals: the option to deduct state and local sales and use taxes instead of state income taxes; the standard or itemized deduction for state sales tax and excise tax on the purchase of motor vehicles; the above-the-line deduction for qualified higher education expenses; tax-free distributions by those age 70 1/2 or older from IRAs for charitable purposes; and the $8,000 first-time homebuyer credit (expires for purchases after Nov. 30, 2009). For businesses, tax breaks that are available through the end of this year but won't be around next year unless Congress acts include: 50% bonus first year depreciation for most new machinery, equipment and software; an extraordinarily high $250,000 expensing limitation; the research tax credit; the five-year writeoff for most farm equipment; and the 15-year writeoff for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements. Finally, without Congressional “extender” legislation (which has come at the eleventh hour for several years), alternative minimum tax (AMT) exemption amounts for individuals are scheduled to drop drastically next year, and most nonrefundable personal credits won't be available to offset the AMT.

High-income-earners have other factors to keep in mind when mapping out year-end plans. Many observers expect top tax rates on ordinary income to increase after 2010, making long-term deferral of income less appealing. Long-term capital gains rates could go up as well, so it may pay for some to take large profits this year instead of a few years down the road. On the other hand, the solid good news high-income-earners have to look forward to next year is that there no longer will be an income based reduction of most itemized deductions, nor will there be a phaseout of personal exemptions. Additionally, traditional IRA to Roth IRA conversions will be allowed regardless of a taxpayer's income.

I have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them. I can narrow down the specific actions that you can take once I meet with you to tailor a particular plan. In the meantime, please review the following list and contact me at your earliest convenience so that I can advise you on which tax-saving moves to make:

•Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year. Don't forget that you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.

•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 2009.

•Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

•Postpone income until 2010 and accelerate deductions into 2009 to lower your 2009 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2009 that are phased out over varying levels of adjusted gross income (AGI). These include IRA and Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2009. For example, this may be the case where a person's marginal tax rate is much lower this year than it will be next year.

•If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2009.

•It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2010.

•If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

•Consider using a credit card to prepay expenses that can generate deductions for this year.

•If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2010 if doing so won't create an AMT problem (see below).

•Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2009, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the 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, deductions should be deferred rather than accelerated to keep them from being lost because of the AMT.

•Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding.

•Accelerate big ticket purchases into 2009 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction.

•If you are planning to buy a car, do so before year-end in order to nail down a deduction for state sales tax and excise tax on the purchase.

•You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.

•If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, and qualify for a tax credit. Additional, substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home.

•If you or a family member are thinking of becoming a first-time homebuyer, make the purchase before Dec. 1, 2009, in order to qualify for an up-to-$8,000 credit.

•You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

•You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

•Businesses should consider making expenditures that qualify for the business property expensing option, which is up to $250,000 for assets bought and placed in service this year; the maximum expensing amount will drop to $134,000 for assets bought and placed in service next year (higher expensing amounts apply in certain specialized situations). Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus writeoff generally won't be available next year.

•If you are self-employed and haven't done so yet, set up a self-employed retirement plan.

•You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $13,000 in 2009 to an unlimited number of individuals but you can't carry over unused exclusions from one year to the next.

•If you are age 70 1/2 or older, own IRAs (or Roth IRAs), and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.

•If you are age 70 1/2 or older and took a distribution from a retirement plan or IRA earlier this year, you may be able to avoid tax on the payout by rolling it over into an eligible retirement plan (including an IRA) before Dec. 1, 2009.

•If you are receiving Social Security benefits, there are a number of steps you can take to reduce or eliminate tax on your benefits.

•Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2009 miscellaneous itemized deductions subject to the 2%-of-AGI floor.

•Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2010, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.

These are just some of the year-end steps that can be taken to save taxes.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Tax planning for college

2009-08-29T07:10:00.000-07:00

As a parent with college-bound children, you are concerned with setting up a financial plan to fund future college costs. If your children are already college age, your goal is to pay for current or imminent college bills. I'd like to address both of these concerns by suggesting several approaches that seek to take maximum advantage of tax benefits to minimize your expenses. (Please note that the following suggestions are strictly related to tax benefits. You may have non-tax-related concerns that make the suggestions inappropriate.)

Planning for college expenses. In some cases, transferring ownership of assets to children can save taxes. You and your spouse can transfer up to $24,000 for 2008 ($26,000 for 2009) in cash or assets to each child with no gift tax consequences. And for 2008 or 2009, if your child is isn't subject to the “kiddie tax,” he or she is taxed on income from assets entirely at his or her lower tax rates—as low as 10% (or 0% for long-term capital gain). However, where the kiddie tax applies, the child's investment (i.e., unearned) income above $1,800 for 2008 (above $1,900 for 2009) is taxed at your tax rates and not the child's rates. The kiddie tax applies if: (1) the child hasn't reached age 18 before the close of the tax year or (2) the child's earned income doesn't exceed one-half of his or her support and the child is age 18 or is a full-time student age 19–23.

A variety of trusts or custodial arrangements can be used to place assets in your children's names. Note, it's not enough just to transfer the income to them, e.g., dividend checks. The income would still be taxed to you. You must transfer the asset that generates the income into their names.

Tax-exempt bonds. Another way to achieve economic growth while avoiding tax is simply to invest in tax-exempt bonds or bond funds. Interest rates and degree of risk vary on these, so care must be taken in selecting your particular investment. Some tax-exempts are sold at a deep discount from face and don't carry interest coupons. Many are marketed as college savings bonds. A small investment in these so-called zero coupon bonds can grow into a fairly sizable fund by the time your child reaches college age. “Stripped” municipal bonds (munis) carry similar advantages.

Series EE U.S. savings bonds. Series EE U.S. savings bonds offer two tax-savings opportunities when used to finance your child's college expenses: first, you don't have to report the interest on the bonds for federal tax purposes until the bonds are actually cashed in; and second, interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the bond proceeds are used for qualified college expenses.

To qualify for the tax exemption for college use, you must purchase the bonds in your own name (not the child's) or jointly with your spouse. The proceeds must be used for tuition, fees, etc. (not room and board). If only part of the proceeds are used for qualified expenses, then only that part of the interest is exempt. But if your adjusted gross income (AGI) exceeds certain amounts, the exemption is phased out. For bonds cashed in during 2008, the exemption starts to “disappear” when your (joint) AGI hits $100,650 for joint return filers ($67,100 for singles) and is gone entirely if your AGI is at $130,650 ($82,100 for singles). These figures are adjusted annually for inflation. For bonds cashed in during 2009, the exemption begins to phaseout when joint AGI hits $104,900 for joint return filers ($69,950 for singles) and is completely phased out if your AGI is at $134,900 ($84,950 for singles).

Qualified tuition programs. A qualified tuition program (known as a 529 plan) allows you to buy tuition credits for a child or make contributions to an account set up to meet a child's future higher education expenses. Qualified tuition programs can be established by state governments or by private education institutions. Contributions to these programs aren't deductible, and the contributions are treated as taxable gifts to the child but they are eligible for the annual gift tax exclusion ($12,000 for 2008, $13,000 for 2009), and a donor who contributes more than the annual exclusion limit for the year can elect to treat the gifts as if they were spread out over a 5-year period. The earnings on the contributions accumulate tax-free until the college costs are paid from the funds. And distributions from qualified tuition programs are tax-free to the extent the funds are used to pay qualified higher education expenses. Distributions of earnings that aren't used for qualified higher education expenses will be subject to income tax plus a 10% penalty tax.

Coverdell education savings accounts. You can establish Coverdell ESAs (formerly called education IRAs) and make contributions of up to $2,000 for each child under age 18. (This age limitation doesn't apply to a beneficiary with special needs, defined as an individual who because of a physical, mental or emotional condition, including learning disability, requires additional time to complete his or her education.) The right to make these contributions begins to phase out once your AGI is over $190,000 on a joint return ($95,000 for singles). If the income limitation is a problem, the child can make a contribution to his or her own account. Although the contributions aren't deductible, funds in the account aren't taxed, and distributions are tax-free if spent on qualified education expenses. If the child doesn't attend college, the money must be withdrawn when the child turns 30, and any earnings will be subject to tax and penalty, but unused funds can be transferred tax-free to a Coverdell ESA of another member of the child's family who hasn't reached age 30. (These requirements that the child or member of the child's family not have reached 30 do not apply to an individual with special needs.)

The above are just some of the tax-favored ways to build up a college fund for your children. If you wish to discuss any of them, or other alternatives, please call.

Paying college expenses. You may be able to take a credit for some of your child's tuition expenses. There are also tax-advantaged ways of getting your child's college expenses paid by others.

Tuition tax credits. You can take an American Opportunity tax credit (the Hope credit, as modified for 2009 and 2010) of up to $2,500 for 2009 or 2010, per student for the first four years of college (a 100% credit for the first $2,000 in tuition, fees, and books, and a 25% credit for the second $2,000). You can take a Lifetime Learning credit of up to $2,000 per family for every additional year of college or graduate school (a 20% credit for up to $10,000 in tuition and fees). The American Opportunity tax credit is 40% refundable, which means that you can get a refund if the amount of the credit is greater than your tax liability. For example, someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government. Both credits are phased out for higher income taxpayers. The American Opportunity tax credit is phased out for couples with income between $160,000 and $180,000, and for singles with income between $80,000 and $90,000, for 2009 and 2010. The Lifetime Learning credit is phased out for couples with income between $100,000 and $120,000, and for singles with income between $50,000 and $60,000, for 2009. (The phase-out range for the Lifetime Learning credit is adjusted annually for inflation.) Only one credit can be claimed for the same student in any given year. However, a taxpayer is allowed to claim an American Opportunity tax credit or a Lifetime Learning credit for a tax year and to exclude from gross income amounts distributed (both the principal and the earnings portions) from a Coverdell education savings account for the same student, as long as the distribution isn't used for the same educational expenses for which a credit was claimed.

Scholarships. Scholarships (if your child qualifies for any) are exempt from income tax. For this exemption to apply, certain conditions must be satisfied. The most important are that the scholarship must not be compensation for services, and it must be used for tuition, fees, books, supplies and similar items (and not for room and board). (Although a scholarship is tax-free, it will reduce the amount of expenses that may be taken into account in computing the Hope and Lifetime Learning credits, above, and may therefore reduce or eliminate those credits.) Note also that in an exception to the rule that a scholarship must not be compensation for services, a scholarship received under a health professions scholarship program may be tax-free even if the recipient is required to provide medical services as a condition for the award.

Employer educational assistance programs. If your employer pays your child's college expenses, the payment is a fringe benefit to you, and is taxable to you as compensation, unless the payment is part of a scholarship program that's “outside of the pattern of employment.” Then the payment will be treated as a scholarship (if the other requirements for scholarships are satisfied).

Tuition reduction plans for employees of educational institutions. Tax-exempt educational institutions sometimes provide tuition reduction plans for the children of their employees—tuition reductions for those children who attend that educational institution, or cash tuition payments for children who attend other educational institutions. If certain requirements are satisfied, these tuition reductions are exempt from income tax.

College expense payments by grandparents and others. If someone other than you pays your child's college expenses, the person making the payments is generally subject to the gift tax, to the extent the payments and other gifts to the child by that person exceed the regular annual (per donee) gift tax exclusion of $12,000 for 2008 ($13,000 for 2009). Married donors who consent to split gifts may exclude gifts of up to $24,000 for 2008 ($26,000 for 2009). If the other person pays your child's school tuition directly to an educational institution, however, there's an unlimited exclusion from the gift tax for the payment. The relationship between the person paying the tuition and the person on whose behalf the payments are made is irrelevant, but the payer would typically be a grandparent. The unlimited gift tax exclusion applies only to direct tuition costs. There's no exclusion (beyond the normal annual exclusion) for dormitory fees, board, books, supplies, etc. Prepaid tuition payments may qualify for the unlimited gift tax exclusion under certain circumstances.

Student loans. You can deduct interest on loans used to pay for your child's education at a post-secondary school, including some vocational and graduate schools. (This is an exception to the general rule that interest on student loans is personal interest and, therefore, not deductible.) The deduction is an above-the-line deduction (meaning that it's available even to taxpayers who don't itemize). The maximum deduction is $2,500. However, in 2008, the deduction phases out for taxpayers who are married filing jointly with AGI between $115,000 and $145,000 (between $55,000 and $70,000 for single filers). For 2009, the deduction phases out for taxpayers who are married filing jointly with AGI between $120,000 and $150,000 (between $60,000 and $75,000 for single filers).

Some student loans contain a provision that all or part of the loan will be cancelled if the student works for a certain period of time in certain professions for any of a broad class of employers—e.g., as a doctor for a public hospital in a rural area. The student won't have to report any income if the loan is canceled and he performs the required services. This is an exception to the general rule that if a loan or other debt you owe is canceled, you must report the cancellation as income.

Bank loans. The interest on loans used to pay educational expenses is personal interest which is generally not deductible (unless you qualify for the deduction for education loan interest, described above). However, if the loan is “home equity indebtedness,” and interest on the loan is “qualified residence interest,” the interest is deductible for regular income tax purposes, although not for alternative minimum tax purposes. If interest is deductible as qualified residence interest, it can't be deducted as education loan interest.

Borrowing against retirement plan accounts. Many company retirement plans permit participants to borrow cash. This option may be an attractive alternative to a bank loan, especially if your other debt burden is high. However, the loan must carry an interest rate equal to the prevailing commercial rate for similar loans, and, unless you qualify for the deduction for education loan interest (described above), there's no deduction for the personal interest paid. Moreover, unless strict requirements are satisfied, a loan against a retirement account is treated as a premature distribution (withdrawal) that's subject to regular income tax and an additional penalty tax.

Withdrawals from retirement plan accounts. IRAs and qualified retirement plans represent the largest cash resource of many taxpayers.

You can pull money out of your IRA (including a Roth IRA) at any time to pay college costs without incurring the 10% early withdrawal penalty that usually applies to withdrawals from an IRA before age 591/2 . However, the distributions are subject to tax under the usual rules for IRA distributions.

Some qualified plans either don't permit withdrawals or restrict them. For example, a 401(k) cash-or-deferred plan may allow distributions if the participant has an immediate and heavy financial need and lacks other resources to meet that need. IRS regs name a college education as such a need. To the extent they represent previously untaxed dollars and earnings, amounts withdrawn from a retirement plan are fully subject to tax and are also hit by a 10% penalty tax if they are made before the participant reaches age 591/2 . (Note, however, that you cannot roll over a 401(k) plan “hardship” distribution into an IRA to set up a later penalty-free withdrawal to pay college costs.)

A younger plan participant may avoid triggering the penalty tax by annuitization payouts from an IRA or a SEP. This method doesn't work for 401(k) type plans. The strategy works because the penalty tax doesn't apply if annual or more frequent withdrawals are made in substantially equal payments over the life or life expectancy of the taxpayer (or the joint lives or joint life expectancies of the taxpayer and designated beneficiary).

Not all of the above breaks may be used in the same year, and use of some of them reduces the amounts that qualify for other breaks. So it takes planning to determine which should be used in any given situation.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

The gift tax annual exclusion

2009-07-01T11:23:00.000-07:00

Regarding the federal gift tax annual exclusion. As I illustrate below, taxpayers can transfer substantial amounts free of gift taxes to their children or other donees through the proper use of this exclusion.

The statutory exclusion amount ($10,000) is adjusted for inflation annually, using 1997 as the base year. The amount of the exclusion for 2009 is $13,000.

The exclusion covers gifts an individual makes to each donee each year. Thus, a taxpayer with three children can transfer a total of $39,000 to them every year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there is no need to file a federal gift tax return. If annual gifts exceed $13,000, the exclusion covers the first $13,000 and only the excess is taxable. Further, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below). (Note, this discussion is not relevant to gifts made by a donor to his spouse because these gifts are gift tax-free under separate marital deduction rules.)

Gift-splitting by married taxpayers. If the donor of the gift is married, gifts to donees made during a year can be treated as split between the husband and wife, even if the cash or gift property is actually given to a donee by only one of them. By gift-splitting, therefore, up to $26,000 a year can be transferred to each donee by a married couple because their two annual exclusions are available. Thus, for example, a married couple with three married children can transfer a total of $156,000 each year to their children and the children's spouses ($26,000 for each of six donees).

Where gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) the spouses file. IRS prefers that both spouses indicate their consent on each return filed. (Because more than $13,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $26,000 exclusion covers total gifts.

Please contact me regarding the preparation of a gift tax return (or returns), if more than $13,000 is being given to a single donee in any year.)

The “present interest” requirement. For a gift to qualify for the annual exclusion, it must be a gift of a “present interest.” That is, the donee's enjoyment of the gift can't be postponed into the future. For example, if you put cash into a trust and provide that donee A is to receive the income from it while he's alive and donee B is to receive the principal at A's death, B's interest is a “future interest.” Special valuation tables are consulted to determine the value of the separate interests you set up for each donee. The gift of the income interest qualifies for the annual exclusion because enjoyment of it is not deferred, so the first $13,000 of its total value will not be taxed. However, the gift of the other interest (called a “remainder” interest) is a taxable gift in its entirety.

Exception to present interest rule. If the donee of a gift is a minor and the terms of the trust provide that the income and property may be spent by or for the minor before he reaches age 21, and that any amount left is to go to the minor at age 21, then the annual exclusion is available (that is, the present interest rule will not apply). These arrangements (called Code Sec. 2503(c) trusts because of the section in the Internal Revenue Code that permits them) allow parents to set assets aside for future distribution to their children while taking advantage of the annual exclusion in the year the trust is set up.

“Unified” credit for taxable gifts. Even gifts that are not covered by the exclusion, and that are thus taxable, may not result in a tax liability. This is so because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $1 million. However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Tax aspects of self-employment

2009-06-03T10:46:00.000-07:00

As a sole proprietor, you would report net income or loss from your business on your personal income tax return. However, there are several important rules that you should be aware of:

(1) For income tax purposes, you will report your income and expenses on Schedule C of your Form 1040. The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses will be deductible against gross income (i.e., “above the line,” and not as itemized deductions subject to the 2%-of-adjusted-gross-income floor or the 3%/80% reduction rules). If you have any losses, the losses will generally be deductible against your other income, subject to special rules relating to hobby losses, passive activity losses and losses in activities in which you weren't “at risk.”

(2) If you will be working from an office in your home, performing management or administrative tasks from a home office, or storing product samples or inventory at home, you may be entitled to deduct an allocable portion of certain of the costs of maintaining your home. And if you have a home office, you may be able to convert nondeductible commuting expenses (of going from your residence to another work location) into deductible transportation expenses.

(3) You will also be required to pay self-employment taxes at a rate of 15.3% on your net earnings from self employment of up to $106,800 for 2009 ($102,000 for 2008), and at a rate of 2.9% on the excess. (The maximum amount will be reduced by any non-self-employment wages you earn.) One-half of your self-employment taxes will be deductible as a trade or business expense (that is, as a deduction against gross income, not subject to the limits that apply to itemized deductions).

(4) You will be allowed to deduct 100% of your health insurance costs as a trade or business expense. This means your deduction for medical care insurance won't be limited by the normal 7.5%-of-AGI floor on itemized medical expenses.

(5) Your income won't be subject to withholding tax. However, you will be required to pay estimated taxes quarterly. We can work with you to minimize the amount of your estimated tax payments while avoiding any underpayment penalty.

(6) You will have to maintain complete records of your income and expenses. In particular, you should pay attention to recording your expenses in order to be able to take the full amount of the deductions to which you are entitled. Certain types of expenses, such as automobile, travel, entertainment, meals, and home office expenses, are subject to special recordkeeping requirements or limitations on their deductibility and require special attention.

(7) If you hire any employees, you will have to get a taxpayer identification number and will have to withhold and pay over various payroll taxes.

(8) You should consider establishing a qualified retirement plan. The advantage of a qualified retirement plan is that amounts contributed to the plan are deductible at the time of the contribution, and aren't taken into income until the amounts are withdrawn. Because of the complexities of ordinary qualified retirement plans, you might consider a simplified employee pension (SEP) plan, which requires less paperwork. Another type of plan available to sole proprietors that offers tax advantages with fewer restrictions and administrative requirements than a qualified plan is a “savings incentive match plan for employees,” i.e., a SIMPLE plan. If you don't establish a retirement plan, you may still be able to make a contribution to an IRA.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

First quarter 2009 developments

2009-05-07T07:54:00.000-07:00

While the new law tax changes in the American Recovery and Reinvestment Act of 2009 were the most significant developments in the first quarter of 2009, many other tax developments may affect you, your family, and your livelihood. These other key developments in the first quarter of 2009 are summarized below. Please call me for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Clarifying guidance on waivers of RMDs for 2009. Retirement plan account participants, IRA owners, and their beneficiaries do not have to take required minimum distributions (RMDs) for 2009. The IRS has issued guidance clarifying that:

... If you would have been required to make RMDs for 2009 and you do make withdrawals in 2009 (that are not RMDs for 2008): (a) you might be able to roll over the withdrawn amounts into other eligible retirement plans; but (b) you must still include any previously untaxed portion of the withdrawal that you do not roll over in your gross income.

... No 2008 RMDs are waived, even for eligible individuals who chose to delay taking their 2008 RMD until Apr. 1, 2009 (e.g., retired employees and IRA owners who turned 70 1/2 in 2008).

... The 2009 RMD waiver applies to individuals who may be eligible to postpone taking their 2009 RMD until Apr. 1, 2010 (generally, retired employees and IRA owners who attain age 70 1/2 in 2009). However, the law does not waive any RMDs for 2010.

... If a beneficiary is receiving distributions over a 5-year period, he or she can waive the distribution for 2009, effectively permitting the beneficiary to take distributions over a 6-year period.

Getting maximum advantage from the homebuyer credit. In two separate pieces of guidance, the IRS has explained how to take maximum advantage of the credit for first-time homebuyers. The credit is the lesser of 10% of the purchase price or $8,000 for a qualifying 2009 purchase ($7,500 for a qualifying 2008 purchase). The credit is refundable, meaning you get it even if you don't owe taxes.

The credit has to be paid back for a home purchased in 2008 but generally not for one purchased in 2009. A credit for a 2009 purchase can be claimed on the 2008 return. In a news release, the IRS has explained the several different ways that individuals who recently purchased a home or are considering buying one in the next few months can claim the up-to-$8,000 credit for 2009 home purchases including getting an extension, filing now and amending later, amending a previously filed 2008 return or claiming the credit on a 2009 return where higher income in 2008 would reduce the credit under so-called phaseout rules. In separate guidance, the IRS explained how unmarried co-owners can get the maximum credit amount.

New guidance for victims of Madoff-type investment schemes. Just days after Bernard Madoff's guilty plea, the IRS issued comprehensive guidance for the many investors caught in his (and similar) notorious Ponzi-style fraud. The guidance takes an extremely generous, pro-taxpayer position, allowing the losses to be claimed as theft losses against ordinary income and even allowing a net operating loss generated by Madoff-style losses to be treated as sole proprietorship losses potentially eligible to be carried back 3, 4, or 5 years under a business-style tax break enacted by the American Recovery and Reinvestment Act of 2009. The guidance consists of a revenue ruling dealing with specific tax issues that victims of Madoff-type schemes must confront and a revenue procedure providing safe harbors for determining the proper time and amount of loss.

Trademarks and the like may qualify for tax-free swaps. A like-kind exchange is a popular way for a taxpayer to dispose of qualifying appreciated property without paying a current tax. In a complete reversal of the position it had previously taken, the IRS now says that intangibles such as trademarks, tradenames, mastheads, etc., that can be valued separately and, apart from goodwill, qualify as like-kind property that can be exchanged without incurring a current tax. Furthermore, the IRS says that except in rare and unusual situations, intangibles such as trademarks, trade names, mastheads, and customer-based intangibles can be separately described and valued apart from goodwill. Of course, to qualify for a like-kind exchange, various statutory and regulatory rules have to be satisfied.

Settlement offer for disclosing unreported offshore income. The IRS announced a settlement offer for those that voluntarily and timely disclose unreported offshore income. Those meeting the terms of the offer will have to pay back-taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They will also pay a penalty of 20% of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. In other words, the penalty will equal 20% of the highest asset value of an account anytime in the past six years.

However, those who come forward on a timely basis will not face criminal prosecution.

Vehicles qualifying for the hybrid credit. On its website, the IRS has listed 2009 and 2010 model year hybrid vehicles that qualify for the hybrid credit. Due to a production-based limitation, not all hybrids qualify for a full credit. For example, the credit for qualified Toyota and Lexus vehicles was eliminated for purchases on or after Oct. 1, 2007. The phaseout of the credit for qualified Honda vehicles began for purchases on or after Jan. 1, 2008 and the credit was completely eliminated for purchases on or after Jan. 1, 2009. The phaseout of the credit for qualified Ford and Mercury vehicles began for purchases after Mar. 31, 2009.

Courts reject blanket denial of FICA exception for medical residents. Two Circuit Courts of Appeal have held that stipends paid by hospitals to medical residents may qualify for exemption from FICA taxes (i.e., social security taxes) under the FICA student exception. In so holding, they rejected the IRS's view that medical residents per se are ineligible for the student exception. These cases have important ramifications for the many teaching hospitals and their residents. The decisions however, don't affect the income tax aspects of medical residents' stipends. It is well settled that they are not excludible.

More investment flexibility for 529 plans. Section 529 Education Plans are tax-advantaged savings plans that can be used to pay qualified education expenses. In recent guidance, the IRS has determined, that for calendar year 2009 only, 529 plans may permit accounts to change their investment strategy twice (as opposed to once under prior rules) during the year, as well as upon a change in the designated beneficiary of an account. This new flexibility was prompted by concerns from 529 plan sponsors that in today's market environment the lack of flexibility in switching investments could imperil many 529 accounts.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

$25,000 Loss Allowance on Rental Property

2009-04-15T07:16:00.000-07:00

How can you deduct a loss from residential rental property you own and are renting out?

The problem with rental activities is that they generally fall into the category of “passive” activities. Thus, rental losses you incur can only be deducted currently against passive income.

However, if you “actively participate” in the residential rental activity, you may be able to deduct a loss of up to $25,000 against ordinary (nonpassive) income such as your wages or investment income. You actively participate in the rental activity if you make key management decisions such as whom to rent to, the rental terms, approving capital expenditures, etc. You also can show active participation if you arrange for others to provide services. Active participation does not require regular, continuous, substantial involvement with the property. But in order to satisfy the active participation test, you (together with your spouse) must own at least 10% of the rental property. Ownership as a limited partner does not count.

If you meet the above tests, you can claim up to $25,000 in losses against nonpassive income ($12,500 if you're married, file separately, and live apart from your spouse for the entire year—but if you're married, file separately and don't live apart from your spouse for the entire year, you're not eligible for this break at all). If your adjusted gross income (AGI) is above $100,000, the $25,000 allowance amount is reduced by one-half the excess over $100,000. (If you're married, file separately and are eligible for the break, the $12,500 allowance amount is reduced by one-half the excess over $50,000.) Under this rule, if AGI is $150,000 or more ($75,000 or more for eligible married taxpayers who file separately), the allowance is reduced to zero. (For these purposes, AGI is modified to some extent, e.g., you ignore taxable Social Security income and the Individual Retirement Account (IRA) deduction.)

Example. Tina, who's single, has adjusted gross income of $120,000. Thus, one-half of the $20,000 excess ($120,000 − $100,000) equals $10,000. Tina's maximum loss allowance is reduced from $25,000 to $15,000.

Losses which are not allowed because of the amount limitations do not simply disappear. They are carried forward and can be deducted against nonpassive income in future years if you continue to actively participate in the rental real estate activity which originally generated the losses. But if you cease to actively participate, the carried-forward losses are treated as passive activity losses which may only be used to offset passive activity income or your gain when you dispose of your ownership interest in the activity.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Types of retirement plans

2009-03-28T15:55:00.000-07:00

If you've recently started a business, you may be considering setting up a qualified retirement plan for yourself and your employees. There are several different types of plans that can qualify for the tax advantages of a qualified plan—a current deduction from income to the employer for contributions to the plan, tax-free buildup of plan investments and the deferral of income (augmented by investment earnings) to the employees until distribution of the funds. The type of plan you choose will depend on your individual needs and circumstances.

There are two basic types of plans—the defined benefit pension plan, and the defined contribution plan. A defined benefit plan provides for a fixed benefit at retirement based generally upon years of service and compensation. Adoption of a defined benefit plan is a nondiscretionary commitment to fund the plan. These plans will often provide the greatest current deduction from income, and the greatest retirement benefit, where the owners of the business are older and nearing retirement.

A defined contribution plan is a plan that provides for an individual account for each participant with benefits based solely on the amount contributed to the participant's account and any investment income, expenses, gains and losses, and any forfeitures (usually from departing employees) that may be allocated to the participant's account. Profit-sharing plans are defined contribution plans, and can provide you with the flexibility of determining the amount of contributions to be made for a particular year.

A 401(k) plan, or cash or deferred arrangement, is a defined contribution plan, with employer contributions made at the direction of the employee under a salary reduction agreement. The employee elects to have a certain amount of pay deferred and contributed by the employer on his or her behalf to the plan. The employer may or may not provide matching contributions to the amount deferred, as provided for in the plan. This type of plan can provide tax-deferred retirement benefits for employees at little cost to an employer, beyond the costs of administering the plan.

These plans may also allow participants to make after-tax contributions to the plan, which can be invested tax free.

There are other types of plans within these general categories, including employee stock ownership plans (ESOPs) in which shares of stock in the employer are purchased to fund the plan.

Small businesses may adopt a “simplified employee pension” (SEP), and receive similar tax advantages to “qualified” plans by making contributions to SEP-IRAs on behalf of employees. A business with 100 or fewer employees may establish a “SIMPLE” (savings incentive match plan for employees) retirement plan . Under a SIMPLE plan, an IRA is established for each employee, and the employer makes matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. Or, a SIMPLE 401(k) plan may be set up with features similar to a SIMPLE plan, with automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.

Higher education expense deduction

2009-03-24T07:26:00.000-07:00

You may be able to claim a deduction for the cost of tuition and fees to enroll or attend a college or graduate school for yourself, your spouse, or your dependents, even if the education isn't employment- or business-related.

A married couple filing jointly can deduct up to $4,000 annually of qualifying expenses (defined below) if their adjusted gross income (AGI), with certain modifications, doesn't exceed $130,000 for the year ($65,000 for unmarried taxpayers). No deduction is available if modified AGI exceeds the specified amount. If modified AGI is above $130,000 ($65,000 for unmarrieds) but not above $160,000 ($80,000 for unmarrieds), up to $2,000 of qualifying expenses will be deductible. No deduction will be allowed if modified AGI exceeds $160,000 ($80,000 for unmarrieds). Married taxpayers must file jointly to claim the credit; it isn't available for married taxpayers filing separately.

Qualifying expenses are essentially those for tuition and enrollment- or attendance-related fees, but not for the cost of books, room and board, student activity fees, athletic fees, insurance, transportation costs, or other personal expenses. To qualify, the expense must be in connection with enrollment during the year for which the deduction is claimed, or in connection with an academic term beginning within the first three months of the following year.

The deduction will be “above the line”— i.e., it will be taken in arriving at AGI, will therefore be available even if you don't itemize, and won't be subject to reduction the way itemized deductions are. And, it will be allowed for alternative minimum tax (AMT) purposes.

A taxpayer who can be claimed as a dependent by someone else cannot qualify to claim this deduction. Thus, for example, in the case of a dependent child attending college, the parent's expenses for the child can qualify under these rules, but not any expense the child pays for himself or herself. If you're claiming a deduction for expenses incurred on behalf of another individual, that individual's name and social security number must be included on your return.

The deduction isn't available for expenses incurred for an individual if the Hope or Lifetime Learning credit is claimed with respect to that individual for the year. Further, in determining the amount of expenses qualifying for the deduction, amounts received for certain scholarships and other tax-free educational assistance payments are subtracted. Qualifying expenses may also have to be reduced by expenses taken into account to determine amounts excludible from income on interest from U.S. savings bonds used for higher education expenses, and on distributions from qualified tuition programs (also known as 529 plans) or Coverdell education savings accounts (also known as Coverdell ESAs). Thus, in some cases, you may have to compare tax savings available to you from several different tax benefits to determine which is the best one to use.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

AMT relief in the 2008 Extenders Act

2009-03-14T11:07:00.000-07:00

Herein are the details regarding three key provisions in the “Tax Extenders, and Alternative Minimum Tax Relief Act of 2008” (the 2008 Extenders Act), which was enacted on Oct. 3, 2008. The provisions extend partial relief to individual taxpayers from the alternative minimum tax, or AMT. Earlier temporary measures to deal with the unintended creep of the AMT's reach expired at the end of 2007, meaning that more than 20 million additional taxpayers would have faced paying the tax on their 2008 returns without the new relief.

Brief overview of the AMT.
The AMT is a parallel tax system which does not permit several of the deductions permissible under the regular tax system, such as state, local and property taxes. Taxpayers who may be subject to the AMT must calculate their tax liability under the regular federal tax system and under the AMT system taking into account certain “preferences” and “adjustments.” If their liability is found to be greater under the AMT system, that's what they owe the federal government. Originally enacted to make sure that wealthy Americans did not escape paying taxes, the AMT has started to apply to more middle-income taxpayers, due in part to the fact that the AMT parameters are not indexed for inflation.

In recent years, Congress has provided a measure of relief from the AMT by raising the AMT “exemption amounts”—allowances that reduce the amount of alternative minimum taxable income (AMTI), reducing or eliminating AMT liability. (However, these exemption amounts are phased out for taxpayers whose AMTI exceeds specified amounts.) For 2007, the AMT exemption amounts were $66,250 for married couples filing jointly and surviving spouses; $44,350 for single taxpayers; and $33,125 for married filing separately. However, for 2008, those amounts were scheduled to fall back to the amounts that applied in 2000: $45,000, $33,750, and $22,500, respectively. This would have brought millions of additional middle-income Americans under the AMT system, resulting in higher federal tax bills for many of them, along with higher compliance costs associated with filling out and filing the complicated AMT tax form.

New law provides one-year stopgap fix.
To prevent the unintended result of having millions of middle-income taxpayers fall prey to the AMT, Congress has once again relied on a temporary “patch” to the problem, this time a one-year extension of the 2007 exemption amounts, increased slightly. Under the new law, for tax years beginning in 2008, the AMT exemption amounts are increased to: (1) $69,950 in the case of married individuals filing a joint return and surviving spouses; (2) $46,200 in the case of unmarried individuals other than surviving spouses; and (3) $34,975 in the case of married individuals filing a separate return.

Personal credits may be used to offset AMT through 2008.
Another provision in the new law provides AMT relief for taxpayers claiming personal tax credits. The tax liability limitation rules generally provide that certain nonrefundable personal credits (including the dependent care credit, the elderly and disabled credit, and the Hope Scholarship and Lifetime Learning credits) are allowed only to the extent that a taxpayer has regular income tax liability in excess of the tentative minimum tax, which has the effect of disallowing these credits against AMT. Temporary provisions had been enacted which permitted these credits to offset the entire regular and AMT liability through the end of 2007. The new law extends this temporary provision to tax years beginning in 2008.

Extension and modification of AMT credit allowance against incentive stock options (ISOs).
A further provision in the new law liberalizes the AMT refundable credit that was first enacted in 2006 to help taxpayers who were stung by the AMT as a result of exercising incentive stock options (ISOs). Under the regular tax, ISOs are not taxed upon exercise. Under the AMT, however, a taxpayer generally must pay tax on the stock value minus the price paid when the option is exercised. The economic downturn in 2000 resulted in many individuals having to pay tax on “phantom income” because the stock prices dropped dramatically after the date of exercise. In 2006, Congress provided relief for these situations by increasing the amount of the minimum tax credit allowed to individuals generally and providing for a partial refund, but this relief did not correct the ISO problem entirely. The new law provides additional relief to affected taxpayers by accelerating the refund attributable to AMT paid on the phantom ISO income (and other AMTI amounts) and by stopping further IRS efforts to collect unpaid amounts. Specifically, the new law allows 50% of long-term unused minimum tax credits to reduce tax over each of two years (instead of 20% over each of five years as was allowed under pre-2008 Extenders Act law), eliminates a rule that limited the relief available to higher-income taxpayers, and abates any underpayment of tax (and applicable interest and penalties) outstanding on Oct. 3, 2008 that is attributable to pre-2008 phantom ISO income.

I hope this information is helpful. If you would like more details about these changes, or any other aspects of the new law, please do not hesitate to call.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Tax aspects of refinancing a home mortgage

2009-03-09T19:36:00.000-07:00

This letter will discuss whether you can deduct the interest you will pay on your new mortgage, the points that you pay, and other fees that you may pay in connection with the refinancing.

Interest deduction. Interest that you pay on a home mortgage is deductible within limits, depending on whether it is home acquisition debt, home equity debt, or grandfathered debt. Interest on the refinanced mortgage will be deductible if it falls into one of these categories, as explained below.

Home acquisition debt is a mortgage you took out after Oct. 13, 1987, to buy, build, or substantially improve your main or second home, and that is secured by that home. Interest on home acquisition debt is deductible, but your total home acquisition debt can't exceed $1 million ($500,000 if married filing separately).

Home equity debt is any debt secured by your first or second home, other than home acquisition debt, or grandfathered debt. Thus, it includes mortgage loans taken out for reasons other than to buy, build, or substantially improve your home, and mortgage debt in excess of the home acquisition debt limit. Interest is deductible on up to $100,000 of home equity debt ($50,000 if married filing separately).

Grandfathered debt is mortgage debt secured by your first or second home that was taken out before Oct. 14, 1987, no matter how you used the proceeds. All of the interest you pay on grandfathered debt is fully deductible.

Refinancing. If the old mortgage that you are refinancing is home acquisition debt, your new mortgage will also be home acquisition debt, up to the principal balance of the old mortgage just before it was refinanced. The interest on this portion of the new mortgage will be deductible. Any debt in excess of this limit won't be home acquisition debt, but it may qualify as home equity debt, subject to the $100,000/$50,000 limit.

If you are refinancing grandfathered (pre-Oct. 14, 1987) debt for an amount that isn't more than the remaining debt principal, the refinanced debt will still be grandfathered debt. If the new debt exceeds the mortgage principal on the old debt, the excess will be treated as home acquisition or home equity debt.

Grandfathered debt that was refinanced is treated as grandfathered debt only for the period that remained on the old debt that was refinanced. Once that period ends, you must treat the debt as home acquisition debt or home equity debt, based on how the debt proceeds are used. There's an exception that allows a longer period of deduction for balloon notes that are refinanced after Oct. 13, 1987.

Points. In general, points that you pay to refinance your home aren't fully deductible in the year that you paid them. Instead, you can deduct a portion of the points each year over the life of the loan.

To figure your deduction for points, divide the total points by the number of payments to be made over the life of the loan. Then, multiply this result by the number of payments you made in the tax year.

For example, if you paid $3,000 in points and you will make 360 payments on a 30-year mortgage, you can deduct $8.33 per monthly payment. For a year in which you make 12 payments, you can deduct a total of $99.96 ($8.33 × 12).

However, you may be entitled to a larger first-year deduction for points if you used part of the proceeds of the refinancing to improve your home and you meet certain other requirements. In that case, the points associated with the home improvements may be fully deductible in the year they were paid.

For example, say that you refinance a high-rate mortgage that has an outstanding balance of $80,000 with a new lower-rate loan for $100,000. You use the proceeds of the new mortgage loan to pay off the old loan and to pay for $20,000 of improvements to your home. Since 20% of the new loan was incurred to pay for improvements, 20% of the points you paid can be deducted in the year of the refinancing.

If you are refinancing your mortgage for the second time, the portion of the points on the first refinanced mortgage that you haven't yet deducted may be deductible at the time of the second refinancing.

Penalties and fees. A prepayment penalty that you pay to terminate your old mortgage is deductible as interest in the year of payment.

However, fees paid to obtain the new mortgage aren't deductible, nor can you add them to your basis in your home to reduce the gain when you sell it. Examples of such nondeductible fees are credit report fees, loan origination fees, and appraisal fees.

Overall limit on itemized deductions. The rules that reduce the itemized deductions of taxpayers with adjusted gross income above $156,400 (above $78,200 for marrieds filing separately) in 2007 may limit the amount of the above deductions you can take. For 2008, the reduction starts at adjusted gross income above $159,950 ($79,975 for marrieds filing separately).

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

How individuals are affected by tax changes in the American Recovery and Reinvestment Act of 2009

2009-03-02T07:54:00.000-08:00

The American Recovery and Reinvestment Act of 2009 (commonly referred to as the Recovery Act), which was signed into law on Feb. 17, 2009, makes a number of beneficial tax changes for individuals. However, most of them are temporary in nature, that is, unless extended by future legislation, they apply for 2009 only or in some cases for 2009 and 2010. Here's a review of the more widely applicable provisions that could have an impact on you and your family.

New Making Work Pay Credit. Individuals who work generally get a credit of up to $400 ($800 for joint filers). The credit is refundable, meaning you get it even if you owe no income tax. This change applies for 2009 and 2010. The credit is the lesser of 6.2% of your earned income or $400 ($800 on a joint return). The credit is phased out for joint filers with modified adjusted gross income between $150,000 and $190,000 and other taxpayers with modified AGI between $75,000 and $95,000.

You won't be getting a separate check from the IRS, as you did with last year's Stimulus payment. Rather, your employer will automatically adjust your withholding so that you will get a little more money in each paycheck. If you have multiple jobs, you may have to adjust your withholding so that too much is not taken out. If you are self-employed, you can effectively receive the credit in advance by reducing your estimated tax payments.

One-time $250 payment or credit for others. The Recovery Act provides a one-time payment of $250 in 2009 to retirees, disabled individuals and SSI recipients receiving benefits from the Social Security Administration, Railroad Retirement beneficiaries, and disabled veterans receiving benefits from the U.S. Department of Veterans Affairs. It also provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. The Making Work Payment credit is reduced by any $250 payment or credit received.

New sales tax deduction for vehicle purchases. For 2009, there is a new deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles after Feb. 16, 2009 and before Jan. 1, 2010. The deduction generally is available regardless of whether you itemize deductions on Schedule A or claim the standard deduction.

The deduction is limited to the tax on up to $49,500 of the purchase price of an eligible motor vehicle.

The deduction is phased out for joint filers with modified adjusted gross income between $250,000 and $260,000 and other taxpayers with modified AGI between $125,000 and $135,000.

If you itemize and choose the option to deduct state sales taxes in lieu of state income taxes, you don't get the new deduction. This prevents you from getting a double deduction for the sales taxes on the vehicle but it also involves some tricky planning considerations because different rules apply to the optional deduction and the new deduction. For example, the new deduction but not the optional deduction is allowed against the alternative minimum tax. Additionally, the optional deduction is subject to a limitation that caps the deduction for sales tax on a motor vehicle to the general sales tax rate.

Improved first-time homebuyer credit. Last year's Housing Act included a refundable tax credit for first-time homebuyers equal to the lesser of 10% of the purchase price or $7,500 for qualifying purchases after Apr. 1, 2008 and before July 1, 2009. The credit is essentially an interest-free loan because it has to be paid back to the government over 15 years.

The Recovery Act has improved the credit for 2009 purchases by (1) eliminating the requirement to pay it back (subject to exceptions), (2) increasing the maximum credit to $8,000, and (3) making it available for purchases through November 2009.

You can treat a 2009 purchase as having been made on Dec. 31, 2008 and thus get an immediate refund when you file your 2008 taxes by the Apr. 15, 2009 filing deadline. Even if you have already filed your 2008 taxes, you can file an amended 2008 return to get the credit for a 2009 purchase.

You are considered a first-time homebuyer if you or (or your spouse, if married) had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies.

The first time homebuyer credit, whether claimed in 2008 or 2009, phases out for individual taxpayers with modified adjusted gross income between $75,000 and $95,000 ($150,000–$170,000 for joint filers).

AMT relief. In general terms, to find out if you owe alternative minimum tax (AMT), you start with regular taxable income, modify it with various adjustments and preferences (such as addbacks for property and income tax deductions and dependency exemptions), and then subtract an exemption amount (which phases out at higher levels of income). The result is multiplied by an AMT tax rate of 26% or 28% to arrive at the tentative minimum tax. You pay the AMT only if the tentative minimum tax exceeds your regular tax bill. Although it was originally enacted to make sure that wealthy individuals did not escape paying taxes, the AMT has wound up ensnaring many middle-income taxpayers. Exemption amounts were scheduled to drop and fewer tax credits were to be available to offset AMT for 2009. The Recovery Act provides AMT relief for 2009 by (1) increasing the exemption amounts above last year's levels and (2) allowing nonrefundable credits to offset AMT as well as regular tax.

College tax breaks. The Recovery Act expands tax breaks for individuals seeking a college education. For 2009 and 2010, it gives taxpayers a new “American Opportunity” tax credit of up to $2,500 of the cost of tuition and related expenses paid during the tax year. You receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year. The credit is available for the first four years of post-secondary education in a degree or certificate program. Forty percent of the credit is refundable. The credit is phased out for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers).

Section 529 Education Plans are tax-advantaged savings plans that can be used to pay qualified education expenses, including: tuition, room & board, mandatory fees and books. Under the Recovery Act, for 2009 and 2010, qualified education expenses under these plans include computer technology and equipment, as well as Internet access and related services.

Tax break for the unemployed. Unemployment compensation benefits ordinarily are fully taxable. However, under the Recovery Act, an individual does not have to pay tax on up to $2,400 in unemployment benefits received in 2009.

Limited subsidy for COBRA continuation coverage of unemployed workers. The Recovery Act provides a 65% subsidy for COBRA continuation premiums for up to 9 months for workers who have been involuntarily terminated, and for their families. This subsidy also applies to health care continuation coverage if required by states for small employers. To qualify for premium assistance, a worker must be involuntarily terminated between Sept. 1, 2008 and Dec. 31, 2009. Workers who were involuntarily terminated between Sept. 1, 2008 and Feb. 17, 2009, but failed to initially elect COBRA because it was unaffordable, must be given an additional 60 days to elect COBRA and receive the subsidy. The subsidy is not taxable when received, but higher income recipients—those with modified adjusted gross income above $125,000 ($250,000 for joint filers)—will have to pay back part or all of it at tax return time.

Refundable child credit expanded. A taxpayer receives a $1,000 tax credit for each qualifying child under the age of 17. Before the Recovery Act, this credit was refundable only to a limited extent. The Recovery Act makes the child credit refundable to a much greater extent for 2009 and 2010.

Bigger earned income tax credit (EITC). The Recovery Act makes various changes to the earned income tax credit for 2009 and 2010. These changes will result in a bigger EITC for some taxpayers. For example, in 2009, taxpayers with three or more qualifying children may claim a credit of 45% of earnings up to $12,570, resulting in a maximum credit of $5,656.50.

Increased transit and vanpool transportation fringe benefits. For months beginning on or after Mar. 1, 2009 and before Jan. 1, 2011, the Recovery Act increases the monthly exclusion for employer-provided transit and vanpool benefits from $120 to $230. This figure is adjusted for inflation each year and could go up in 2010.

Improved energy tax breaks. The Recovery Act includes a number of provisions that are designed to promote the creation and use of alternative forms of energy including these new or improved energy tax breaks for individuals:

The Recovery Act extends the tax credit for energy-efficient improvements to existing homes through 2010 and modifies it in various ways so that a larger credit is possible after 2008.

Under pre-Recovery Act law, individuals could claim a 30% tax credit for qualified solar water heating property (capped at $2,000), qualified small wind energy property (capped at $500 per kilowatt of capacity, up to $4,000), and qualified geothermal heat pumps (capped at $2,000). For tax years beginning after 2008, the Recovery Act removes these individual dollar caps. As a result, each of these types of improvements is eligible for an uncapped 30% credit.

The Recovery Act modifies and increases the existing new qualified plug-in electric drive vehicle credit.

For vehicles bought after Feb. 17, 2009 and before Jan. 1, 2012, the Recovery Act creates a new 10% nonrefundable personal credit for electric drive low-speed vehicles, motorcycles, and three-wheeled vehicles.

For property placed in service after Feb. 17, 2009 and before Jan. 1, 2012, the Recovery Act creates a new 10% credit, up to $4,000, for the cost of converting any motor vehicle into a qualified plug-in electric drive motor vehicle.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Distinguishing between legitimate and sham trusts

2009-02-24T06:24:00.000-08:00

The purpose of this article is to alert you to the availability of legitimate trusts for tax and estate planning and to steer you away from the use of trusts identified by the IRS as sham trusts, i.e., trusts that don't produce claimed tax benefits and can trigger interest and penalties.
Legitimate trusts that may properly be used to accomplish specific tax and estate planning objectives include:

... marital deduction trusts that can be used to transfer amounts to your spouse without paying gift or estate tax while ensuring that the trust assets will be available for children on the spouse's death.

... grantor retained annuity trusts (GRATs), grantor retained unitrusts (GRUTs) and qualified personal residence trusts (QPRTs), any of which can be set up during life to lower gift and estate tax costs of transferring property to your children.

... charitable remainder annuity trusts (CRATs), charitable remainder unitrusts (CRUTs) and pooled income funds that will yield income, gift and estate tax charitable deductions and that can benefit you and your family members.

... special types of trusts that you can use to you can use to make gifts to your children of amounts that would qualify for the gift tax annual exclusion and yet minimize the risk that your children will squander the funds.

... life insurance trusts that can be used to keep life insurance proceeds that are subject to federal estate tax from being taxed in the insured's estate.

... trusts to make gifts of S corporation stock to your minor children to save income and estate taxes while maintaining trustee control and management of the S stock.

... revocable trusts that provide a benefit in having property pass to beneficiaries on the death of the owner without having to go through the probate process.

On the other hand, in considering your trust options, you should know that the IRS has identified a number of sham trusts including (1) so-called business trusts, (2) equipment or service trusts, (3) family residence trusts, (4) certain purported charitable trusts, and (5) certain trusts located in foreign countries.

The so-called business trust arrangement makes it appear that an individual has given up control of his or her business in an attempt to secure a reduction in income and self-employment taxes and an elimination of estate tax on the business owner's death. This arrangement doesn't provide the claimed tax relief.

The equipment trust is formed to hold equipment that is rented or leased to the business trust, often at inflated rates, and the service trust is formed to provide services to the business trust, often for inflated fees. These trusts seek to reduce income taxes in different ways but the IRS warns that they don't work.

With a family residence trust, an individual transfers the family residence, including furnishings, to a trust, which rents it back to the individual. The trust deducts depreciation and the expense of maintaining and operating the residence including, pool service and utilities. These expenses aren't deductible and the IRS won't allow them.

The purported charitable trust involves a transfer of assets or income to a trust claiming to be a charitable organization. The trust or organization pays for personal, educational, and recreational expenses on behalf of the transferor or one of his or her family members. The trust then claims the payments as charitable deductions on its tax return. The IRS says that many of these organizations aren't exempt from tax and contributions to these trusts aren't deductible.

Some individuals say that tax can be avoided by using trusts located in foreign countries that impose little or no tax on trusts and provide financial secrecy. Abusive arrangements enable taxable funds to flow through several trusts or entities until the funds are ultimately distributed or made available to the original owner. The trust promoter claims that this distribution is tax-free. But the IRS says that the income from these arrangements is fully taxable.

Needless to say, you should avoid doing business with promoters of these sham trust schemes. On the other hand, if you'd like to accomplish a particular tax or estate planning objective through the use of a legitimate trust vehicle, please call me so that we can discuss setting up the appropriate legitimate trust that will meet your needs.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Tax changes affecting individuals and families in the American Recovery and Reinvestment Act of 2009

2009-02-16T07:04:00.000-08:00

The recently enacted “American Recovery and Reinvestment Act of 2009” (the 2009 economic stimulus act) contains a wide-ranging tax package that includes tax relief for low and moderate-income wage earners, individuals and families with college expenses, and home and car purchasers. I'm writing to give you an overview of the more widely applicable tax changes affecting individuals and families in the new law. Please call my office for details of how the new changes may affect you and your family.

“Making Work Pay” credit. The new law provides an individual tax credit in the amount of 6.2 percent of earned income not to exceed $400 for single returns and $800 for joint returns in 2009 and 2010. The credit is phased out at adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly). The credit can be claimed as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return. Under the credit, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. Next year, the extra take-home pay will go down to around $9 per week.

Economic recovery payment. The new law provides for a one-time payment of $250 to retirees, disabled individuals and Social Security beneficiaries and SSI recipients receiving benefits from the Social Security Administration and Railroad Retirement beneficiaries, and to veterans receiving disability compensation and pension benefits from the U.S.Department of Veterans' Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit.

Refundable credit for certain federal and state pensioners. The new law provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction to any allowable Making Work Pay credit.

Unemployment compensation exclusion. A provision temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009.

Expanded earned income tax credit. The new law provides tax relief to families with three or more children and increases marriage penalty relief. The changes apply for 2009 and 2010.

Expanded child tax credit. A measure increases the eligibility for the refundable child tax credit in 2009 and 2010 by lowering the threshold to $3,000 (from $8,500 in 2008).

Expanded and revised higher education tax credit. The new law creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100% of the first $2,000 of tuition and related expenses (including books) paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year, subject to a phase-out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the credit is refundable. The new credit temporarily replaces the Hope credit.

Computers as an education expense. A provision permits computers and computer technology to qualify as qualified education expenses in 529 education plans for tax years beginning in 2009 and 2010.

Expanded first-time credit for first-time home buyers. Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase of a home (up to $75,000) by first-time home buyers. The provision applied to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit were required to repay any amount received under this provision back to the government over 15 years in equal installments (or earlier if the home was sold). The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The new law enhances the credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009, and bumps up the maximum value of the credit from $7,500 to $8,000.

Tax break for new car purchasers. The new law allows taxpayers to deduct State and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break phases out starting with taxpayers earning $125,000 per year ($250,000 for joint returns). The deduction is allowed to both those who itemize their deductions as well as to nonitemizers. However, the deduction cannot be taken by a taxpayer who elects to deduct State and local sales taxes in lieu of State and local income taxes.

Alternative minimum tax (AMT) patch. To hold the number of taxpayers subject to the AMT at bay, the new law increases the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allows the personal credits against the AMT.

I hope this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to call..

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Sidoxia Solutions: Audio Tax Tips from Expert CPA

2009-02-12T10:09:00.001-08:00

Sidoxia Solutions: Audio Tax Tips from Expert CPA

With the goal of providing additional value to our newsletter subscribers, Sidoxia has created a new series of podcast interviews ("Sidoxia Solutions") http://www.sidoxia.com/ in partnership with various financial industry professionals.

What better time than now to discuss the myriad of new tax laws and changes than with tax expert, Annette Di Bello, CPA http://www.dibellocpa.com/ Wade Slome, CFA, CFP explores beneficial tax tips for both individuals and businesses in this approximately 15 minute podcast interview with Ms. Di Bello:

Click Here for Audio Tax Tips

How to cope with the Nanny Tax

2009-02-08T10:36:00.000-08:00

The “Nanny Tax” isn't limited to a nanny. It also applies to a housekeeper, maid, baby-sitter, gardener or other household employee who isn't an independent contractor. The tax doesn't apply to a household employee who's also a farm worker.

If you employ someone who's subject to the “Nanny Tax” you aren't required to withhold federal income taxes. You have to withhold only if your nanny asks you to and you agree to withhold. (In that case, have the nanny fill out a Form W-4 and give it to you, so you can withhold the correct amount.) However, you may be required to withhold social security and Medicare tax (FICA). And you may also be required to pay (but not withhold) federal unemployment (FUTA) tax.

FICA: You have to withhold and pay FICA taxes if your nanny earns cash wages of $1,600 (annual threshold) or more (excluding the value of food and lodging) during the calendar year 2008 (for 2007 the threshold was $1,500). If you reach the threshold, the entire wages (not just the excess) will be subject to FICA. However, if your nanny is under age 18 and child care isn't her principal occupation, you don't have to withhold FICA taxes. Thus, if your nanny is really a student who is a part-time baby-sitter, there's no FICA tax liability for her services. On the other hand, if your nanny is under age 18 and the nanny job is her principal occupation, you must withhold and pay FICA taxes.

You should withhold from the start if you expect to meet the annual threshold; your nanny won't appreciate a large, unexpected withholding from her pay later on. If you aren't sure if the annual threshold will be met, you can still withhold from the start. If it turns out the annual threshold isn't reached, just repay the withheld amount. (If you make an error by not withholding enough, withhold additional taxes from later payments.)

Both an employer and a nanny have an obligation to pay FICA taxes. As an employer, you are responsible for withholding your nanny's share of FICA. In addition, you must pay a matching amount for your share of the taxes. The FICA tax is divided between social security and Medicare. The social security tax rate is 6.2% each for both an employer and a nanny for a total rate of 12.4%. The Medicare tax is 1.45% each for both an employer and a nanny for a total rate of 2.9%.

Example: Assume you pay your nanny $300 a week, and no income tax withholding is required. You must withhold a total of $22.95, consisting of $18.60 for your nanny's share of social security tax ($300 x 6.2%) and $4.35 ($300 x 1.45) for your nanny's share of Medicare tax. You would pay her a net of $277.05 ($300 - $22.95). For your (employer's) portion, you must match the $22.95 (total taxes of $45.90).

Instead of withholding, you may prefer to pay your nanny's share of social security and Medicare taxes from your own funds. If you do pay your nanny's share of these taxes for her, your payments aren't counted as additional cash wages for social security and Medicare tax purposes. In other words, you don't have to compute tax on the taxes. (But your payments of her taxes are treated as additional income to the nanny for federal income tax purposes, so you would have to include them as wages on the Form W-2 you provide, see below.) Thus, using the figures from the above example, for each $300 wages, you would pay your nanny the full $300 and also pay all of the total $45.90 in taxes (i.e., both $22.95 FICA tax amounts.

FUTA: You also have an obligation to pay (but not withhold) FUTA taxes if you pay a total of $1,000 or more in cash wages (excluding the value of food and lodging) to your nanny in any calendar quarter of the current year or last year. The FUTA tax (at a maximum rate of 6.2% for 2008 and 2007) applies to the first $7,000 of wages paid. You pay the FUTA, not the nanny, so don't withhold FUTA from the nanny's wages.

Reporting and paying: You must satisfy your “Nanny Tax” obligations by increasing your quarterly estimated tax payments or increasing your withholding from your wages, rather than making an annual lump-sum payment.

As an employer of a nanny, you don't have to file any of the normal employment tax returns, even if you're required to withhold or pay tax (unless you own your own business, see below). Instead, you just report the employment taxes on your tax return, Form 1040, Schedule H.
On your income tax return, you must include your employer identification number (EIN) when you report the employment taxes for your nanny. The EIN isn't the same number as your social security number. If you already have an EIN from a previous nanny, you may use that number. If you need an EIN, you must file Form SS-4 to get one. I've enclosed a blank form you can use.
However, if you own a business as a sole proprietor, you must include the taxes for your nanny on the FICA and FUTA forms (Forms 940 and 941) that you file for your business. And you use the EIN from your sole proprietorship to report the taxes for your nanny.

You're also required to provide your nanny with a Form W-2. If her 2008 wages are subject to FICA or income tax withholding, the W-2 is due by Jan. 31, 2009. Additionally, you must file a Form W-2 for 2008 with the Social Security Administration by Mar. 2, 2009. Your EIN must be included on the Form W-2.

Recordkeeping: Be sure to keep careful employment records for each nanny and domestic employee. Keep the tax records for at least four years from the later of the due date of the return or the date when the tax was paid. Records should include: employee name, address, social security number; dates of employment; dates and amount of wages paid; dates and amounts of withheld FICA or income taxes; amount of FICA taxes paid by you on behalf of your nanny; dates and amounts of any deposits of FICA, FUTA or income taxes; and copies of all forms filed.

I realize this is a lot of information to absorb. I'd be happy to go over any questions you still have about how to comply with these employment tax requirements. If you think you might have any problems for earlier years I can also help. I look forward to hearing from you.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Pension Act's RMD waiver for calendar year 2009

2009-01-29T18:55:00.000-08:00

Late last year, Congress passed a law that helps individuals who are taking or about to take required payouts from employer-sponsored tax-qualified retirement plans or IRAs. In essence, the law waives these required payouts (called “required minimum distributions” or RMDs) for calendar year 2009. Had the waiver not been granted, many individuals with retirement accounts invested in beaten-down assets such as stocks or mutual funds would have had to sell assets at a loss this year to generate RMDs for 2009. But the new law change helps even those people who would otherwise have to make RMDs from retirement plan accounts and traditional IRAs invested in “bulletproof” assets such as government-insured CDs. If they can afford to skip this year's RMD, they can lower their tax bill for 2009.

The new law change has an impact on three distinct groups of people—here's how you or a family member may be affected.

(1) Older individuals who are retirement plan account and traditional IRA owners. Required payouts from IRAs must begin when you attain age 70 1/2 (but the first year's payout may be deferred until the following April). If you are a regular employee, the first required payout from a company sponsored retirement plan in which you have a separate account (such as a 401(k) or a profit-sharing plan) is for the year you retire, or the year you reach age 70 1/2, whichever is later (but that payout may be deferred until the following April). If you own more than 5% of the company, you're subject to the same rule as IRA owners. Once they begin, RMDs must be made following an IRS schedule over your life (or life expectancy) or over the lives (or combined life expectancies) of you and the person you designate as beneficiary of the retirement account or IRA. The overall purpose of the RMD rules is to make sure retirement accounts and IRAs are used primarily for the owner's retirement, rather than as a tax-sheltered nest egg for the family; a prohibitively expensive IRS penalty rule applies if an RMD isn't made. Distributions from retirement plans or IRAs are fully taxed as ordinary income (unless you made nondeductible contributions).

The new law allows older individuals to skip the RMD that would otherwise be required for calendar year 2009. For example, suppose Dad retired a few years ago and rolled over his 401(k) plan account balance into an IRA. He's age 74 this year and his IRA had an ending balance of $650,000 at the end of 2008. Without the new law change, under the IRS's rules, Dad would have had to withdraw 4.2% of that balance—$27,300—this year, whether or not he needs that money for living expenses, and regardless of how well or how poorly his IRA investments are doing. Thanks to the new law change, Dad can skip the 2009 RMD (and reduce his income subject to tax), or withdraw less than $27,300, if he has other resources to draw on for retirement income.

However, the new law doesn't waive a 2008 RMD that was deferred to April 1 of 2009. For example, suppose IRA owner Jeff turned 70 1/2 last year but decided not to take his first year's RMD (the one for calendar year 2008) last year because his IRA's stock market holdings were depressed in value and he was hoping for a recovery. Jeff must take his first year's RMD (for 2008) by April 1 of this year. But thanks to the new law, he does not have to take the second year's RMD (for 2009).

(2) Beneficiaries of retirement plan accounts or traditional IRAs. If a person dies before exhausting the funds in his or her employer retirement plan account or IRA, the balance may be left to an individual designated as a beneficiary (there may be a group of beneficiaries). If you are a designated beneficiary, you also must make minimum annual withdrawals (which generally are fully taxable) from your inherited retirement plan account or IRA. The pace of the withdrawals depends on a host of factors, such as the decedent's age when he or she died, how the retirement plan or IRA is set up, and whether you are the spouse of the decedent.

The new law allows designated beneficiaries of retirement plans or IRAs to skip the annual payout that would otherwise be required for calendar year 2009.
For example, suppose Ed designated his son, Jack, as the sole beneficiary of his IRA. Ed died last year at the age of 74, and at the end of 2008, his IRA account balance was $300,000. Jack will be age 48 in 2009. Without the new law change, under the IRS's rules, Jack would have had to withdraw 2.77% of that balance—$8,333—this year, whether or not he needs that money for living expenses, and regardless of how well or how poorly the inherited IRA's investments are doing. Thanks to the new law change, Jack can skip the 2009 RMD (and reduce his income subject to tax).

(3) Beneficiaries of Roth IRAs. The new law doesn't affect owners of Roth IRA accounts for the simple reason that they do not have to make lifetime RMDs from these accounts. However, it does affect beneficiaries of Roth IRAs, who must make minimum annual withdrawals after the account owner dies. Thanks to the new law change, designated beneficiaries of Roth IRAs don't have to make a minimum withdrawal for 2009 from their inherited Roth IRAs. This won't affect their income tax, since distributions to designated beneficiaries of Roth IRAs are tax-free. However, it will avoid having to sell reduced-in-value assets to make the otherwise-required distributions, and it will make it possible for designated beneficiaries to leave more money at work within the tax-shelter of the Roth IRA.

Please call my office if you have questions or concerns on how the new law change waiving RMDs for 2009 may affect you or a family member.

2008 Extenders Act

2009-01-27T06:37:00.000-08:00

The “Tax Extenders and Alternative Minimum Tax Relief Act of 2008” (the 2008 Extenders Act), which was enacted on Oct. 3, 2008, provides extensions for several popular tax breaks and the addition of several new relief provisions, including disaster area tax relief. Here's an overview of the key provisions in the new legislation:

Deduction of state and local general sales taxes. The option to deduct state and local general sales taxes is extended through 2009.

Qualified tuition deduction. The above-the-line tax deduction for qualified higher education expenses is extended through 2009.

Teacher expense deduction. The provision allowing teachers an above-the-line deduction for up to $250 for educational expenses is extended through 2009.

IRA rollover provision. The provision allowing qualified taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations is extended through 2009.

Additional standard deduction for real property taxes. The standard deduction for real property taxes for nonitemizers is extended through 2009.

Research and development credit. The research tax credit is extended through 2009. In addition, the alternative simplified credit is increased from 12% to 14% for the 2009 tax year, and the alternative incremental research is repealed for the 2009 tax year.

15-year straight-line cost recovery for qualified leasehold, restaurant, and retail improvements. The 15-year writeoff for qualified leasehold, restaurant and retail improvements is extended through 2008.

Basis adjustment to stock of an S corporation making charitable contributions of property. Favorable Subchapter S basis rules for gifts of appreciated property are extended through 2009.

Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico. The provision allowing a Section 199 domestic production activities deduction for activities in Puerto Rico is extended through 2009.

Other extended provisions. Other provisions extended through 2009 include:

Qualified zone academy bonds.
Indian employment credit.
Accelerated depreciation for business property on Indian reservation.
Tax credit for certain expenditures for maintaining railroad tracks.
7-year recovery period for certain motorsports racetrack property.
Work opportunity tax credit for Hurricane Katrina employees.
New markets tax credit.
Increased rehabilitation credit for structures in the Gulf Opportunity Zone.
Enhanced charitable deduction for qualified computer contributions.
Tax incentives for investments in the District of Columbia.
Enhanced charitable deduction for food inventory.
Enhanced charitable deduction for contributions of book inventory to schools.
Special expensing rules for certain film and television productions.
Exception under Subpart F for active financing income.
Revenue raisers.

The new legislation offsets the cost of the tax break extensions by requiring hedge fund managers and others to account for deferred compensation (income held in offshore accounts and other corporate structures) as it accrues, rather than avoiding appropriate and timely income taxes.

Additional tax relief provisions. In addition to the extensions of tax relief described above, the 2008 Extenders Act also includes liberalizations for the child tax credit, income averaging for Exxon Valdez litigation amounts, a 5-year writeoff for certain farming equipment, and a change in the standards for imposition of the tax return preparer penalty.

Disaster relief. Included in the new legislation is Midwestern disaster area tax relief for victims of the disaster in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin, and a new tax relief package for victims of all Federally-declared disasters occurring after Dec. 31, 2007 and before Jan. 1, 2010 (e.g., eased loss deduction rules, a new business writeoff for demolition, cleanup and repair, a 5-year carryback for casualty losses or qualified disaster expenses, bonus 50% first year depreciation for property placed in service through Dec. 31, 2011 (Dec. 31, 2012 for real property), and increased expensing dollar limits).

I hope this information is helpful. If you would like more details about these changes, or any other aspects of the new law, please do not hesitate to call.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Tax Audits

2009-01-19T07:24:00.000-08:00

IRS will audit hundreds of thousands of individual tax returns this year. Although that represents but a small percentage of all returns filed, this is little consolation if your return is among those selected for audit. But with proper preparation and planning, you should fare well.

The purpose of the audit is to verify items reported on a tax return. The easiest way to survive a tax audit is to prepare for one in advance. On an ongoing basis you should systematically maintain documentation—invoices, bills, cancelled checks, receipts or other proof—for all items to be reported on your tax return. Keep all your records in one place and hold on to your calculations.

The government normally has three years within which to conduct an audit, and often the audit won't begin until a year or more after you file your return. So don't trust your memory. Leave a good trail. If you have to go back to your records later, you should be able to backtrack all of the entries on your return.

The scope of an audit depends on the complexity of the return being examined. A return reflecting business or real estate income and expenses is likely to take longer to audit than a return reflecting only salary income. You can facilitate matters by having the necessary records arranged in an orderly and systematic fashion for presentation to the IRS agent. The typical IRS agent is experienced and knows his job. Trying to outsmart the agent or sidestepping questions is likely to create friction and raise suspicions in the agent's mind.

Representation. Even if you prepared your own return, it is often advisable to have a tax professional represent you at an audit. Your representative knows what issues the IRS agent is likely to focus on and can prepare accordingly. More importantly, a tax professional knows that in many instances IRS agents will take a position (for example, to disallow deduction of a certain type of expense) even though courts and other authority have expressed a contrary opinion on the issue. Because the representative knows and can point to the proper authority, the IRS agent may be forced to throw in the towel.

If you are facing a tax audit or simply want to improve your recordkeeping, my office stands ready to assist you. Please call to set up an appointment to discuss this or any other aspect of your taxes.

Important tax developments in the final quarter of 2008

2009-01-08T09:35:00.000-08:00

While the new law tax changes in the Emergency Economic Stabilization Act of 2008 were the most significant developments in the final quarter of 2008, many other tax developments may affect you, your family, and your livelihood. These other key developments in the final quarter of 2008 are summarized below. Please call me for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

New law waives required minimum distributions (RMDs) for calendar year 2009. A new law enacted in late 2008 provides that retirement plan account participants, IRA owners, and their beneficiaries do not have to take RMDs for 2009. Thus, taxpayers who can take advantage of this change won't be forced to sell stock or mutual fund shares held in retirement accounts when their value is exceptionally depressed. This change helps retired taxpayers who do not need to rely on their RMDs for living expenses. By not making the RMD for 2009 (or withdrawing less than the RMD) from their qualified plan accounts and/or IRAs, they will wind up with less taxable income for 2009, and, possibly, avoid (or mitigate the effect of) AGI-based phaseouts of tax breaks. They will also have more tax-sheltered amounts to leave to their beneficiaries. There's no need to show that a retirement plan account or IRA is “in distress” because of stock market conditions in order to qualify for the 2009 RMD suspension. Thus, for example, the RMD suspension applies equally to IRAs invested entirely in FDIC-insured bank-CDs as well as to IRAs invested in depressed-in-value stocks or mutual funds. The suspension of RMDs for 2009 doesn't help those older taxpayers who must make regular withdrawals (sometimes in excess of the RMD) from their retirement plan accounts and IRAs in order to get by each month.

New law requires qualified plans to offer post-2009 rollover option for nonspouse beneficiaries. A provision in late 2008 legislation requires employer sponsored qualified retirement plans to offer nonspouse beneficiaries the opportunity to roll over an inherited plan account balance to an IRA set up to receive the rollover on the nonspouse beneficiary's behalf. This rule will become effective for plan years beginning after 2009. Until then, under current rules, qualified plans may, but are not required to, offer nonspouse beneficiaries this rollover option. The rollover option will give much-needed flexibility to those who inherit retirement plan accounts from someone other than their spouse, such as a parent, an uncle, or a same-sex partner. For a long time, nonspouse beneficiaries of IRAs have had access to a rollover-type option that IRS has sanctioned. While nonspouse beneficiaries can't treat an inherited IRA as their own, they can make trustee-to-trustee transfers to another IRA if the ownership of the new IRA is set up in the same way as the ownership of the old IRA, that is, in the name of the decedent for the benefit of the IRA beneficiary.

Corporations can gain credits by foregoing special depreciation. A corporation may elect to accelerate its use of unused carryforwards of the minimum tax credit and the research credit from tax years beginning before 2006 and obtain a refundable credit instead of claiming the special depreciation allowance on eligible qualified property. If the election is made, the corporation must forego the special depreciation allowance for eligible qualified property acquired (including manufactured, constructed, or produced) after Mar. 31, 2008, and placed in service generally before Jan. 1, 2009, and use the straight-line method of depreciation on such property. The election is subject to a number of conditions and limitations. They are reflected in a worksheet IRS has posted on its web site. Taxpayers can use the worksheet to calculate their refundable credits from making the election.

Standard mileage rates down for 2009. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 55¢ per mile for business travel after 2008. That's 3.5¢ less than the 58.5¢ allowance for business mileage that applied in the last six months of 2008. Further, the rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 24¢ per mile, down 3¢ from the 27¢ per mile allowance for the last half of 2008.

Simplified per diem rates rise effective Oct. 1. Reimbursements of an employee's business travel costs (lodging, meal and incidental expenses (M&IE)) at a per diem rate are payroll-and income-tax free if simplified substantiation is provided and the daily rate doesn't exceed the federal per diem rate (the maximum amount that the federal government reimburses its employees) for the locality of travel for that day. While the per diem rates vary by travel destination, employers can make reimbursements at the simplified “high-low” per diem rates, which assign one per diem rate to high-cost areas within the continental U.S., and another to non-high-cost areas. The IRS has issued the “high-low” simplified per diem rates for post-Sept. 30, 2008, travel. An employer may reimburse up to $256 for high-cost localities ($198 for lodging and $58 for M&IE) and $158 for other localities ($113 for lodging and $45 for M&IE). The list of high-cost areas is also updated.

IRS regulations explain when creditors are owners when a corporation is reorganized. A corporation can be reorganized in any of several ways (for example, a recapitalization or a merger with another corporation) without adverse tax consequences to the parties (including the shareholders) if numerous requirements are met. One such requirement is the continuity of interest (COI) requirement. The IRS has issued regulations explaining when and to what extent creditors of a corporation will be treated as proprietors of the corporation in determining whether the COI requirement is met. They are effective for transactions after Dec. 12, 2008.

Manipulation of charitable remainder trust identified as “transaction of interest.” Effective Oct. 31, 2008, the IRS identified a new transaction and substantially similar ones as “transactions of interest” (i.e., subject to special scrutiny by the IRS for possibly inappropriate tax avoidance). They involve a sale of all interests in a charitable remainder trust (after the contribution of appreciated assets to and their reinvestment by the trust), that results in the grantor (the person who set up the trust) or other recipient receiving the value of their trust interest while claiming to recognize little or no taxable gain. Persons entering into these transactions on or after Nov. 2, 2006, must disclose the transaction, and material advisors who make a tax statement on or after Nov. 2, 2006, with respect to transactions entered into on or after that date, have disclosure and list maintenance obligations. Failure to follow the disclosure rules can result in steep penalties.

IRS scrutinizing use of rollovers to fund new business start-ups. The IRS issued guidelines to address potentially abusive retirement plan arrangements called Rollovers as Business Start-ups (ROBS). These are designed to allow individuals to convert their existing retirement accounts into seed money for funding new businesses without first paying taxes on the distributions. Having been made aware that ROBS plans are being actively marketed, the IRS has issued guidelines for its employee plans specialists to follow in examining these plans. Though not stating that ROBS plans do not meet IRS requirements for qualified plans in and of themselves, the guidelines signal that IRS is carefully scrutinizing these transactions, particularly with regard to the following key issues: discrimination in benefits, rights and features; improper stock valuation; and prohibited transaction payments of promoter fees.
RIA Research Reference: Federal Taxes Weekly Alert Newsletter: 11/20/2008 Boosted 2008 housing cost allowances for those working abroad in high-cost areas. Guidance from the IRS effectively increased the maximum housing cost exclusion for U.S. citizens and residents working abroad in specified high-cost locations. The increases were based on geographic differences in foreign housing costs relative to U.S. housing costs. For example, assume a U.S. taxpayer was posted to Paris, France, for all of 2008. Under the new IRS guidance, his maximum housing cost exclusion is $86,084 ($100,100 full year limit on housing expense in Paris minus $14,016 base amount).

IRS expedites lien process for homeowners trying to sell or refinance. The IRS has announced an expedited process to make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgages or the sale of a home. Filing a Notice of Federal Tax Lien is a formal process by which the IRS makes a legal claim to property as security or payment for a tax debt. Taxpayers looking to refinance or sell a home where a federal tax lien has been filed, have two options. They or their representatives, such as their lenders, may (1) request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan (subordination), and (2) also request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances. The process to request a discharge or a subordination of a tax lien takes approximately 30 days after the submission of the completed application, but in late 2008 the IRS said it will work to speed those requests in wake of the economic downturn. The IRS urges people to contact the IRS Collection Advisory Group early in the home sale or refinancing process so that it can begin work on their requests.

Final rules for information reporting of employer-owned life insurance. The IRS issued final regulations providing guidance on the information reporting required on employer-owned life insurance contracts. In general, employers must treat death benefits from such insurance on many employees as taxable income, for contracts issued after Aug. 17, 2006. The final regs provide that applicable policyholders owning one or more employer-owned life insurance contracts issued after Aug. 17, 2006, must provide certain information to the IRS by attaching Form 8925, Report of Employer-Owned Life Insurance Contracts, to the policyholder's income tax return by the due date of that return.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

How to pay the minimum in estimated tax without triggering the estimated-tax underpayment penalty

2008-12-31T08:24:00.000-08:00

I am writing to you to explain why it is necessary for you to make estimated tax payments and the applicable rules for paying the minimum amount of estimated tax without triggering the penalty for underpayment of estimated tax.

Individuals must pay 25% of a “required annual payment” by Apr. 15, June 15, Sept. 15, and Jan. 15, to avoid an underpayment penalty. (When that date falls on a weekend or holiday, the payment is due on the next business day.) The required annual payment for most individuals is the lower of 90% of the tax shown on the current year's return or 100% of the tax shown on the return for the previous year. Certain high-income individuals must meet a more rigorous requirement. If the adjusted gross income on your previous year's return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year's return or 110% of the tax shown on the return for the previous year.

Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld by their employer from their paycheck.

If you fail to make the required payments, you may be subject to an underpayment penalty. The penalty equals the product of the interest rate charged by IRS on deficiencies, times the amount of the underpayment for the period of the underpayment. The penalty is avoided if you meet certain specified exceptions or waivers, described below.

Most individuals make estimated tax payments in four installments. In other words, we determine the required annual payment, then divide that number by four and make four equal payments by the due dates. But you may be able to make smaller payments under the annualized income method. This method is useful to people whose income flow is not uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business that you operate in a resort area during June, July, and Aug., no estimated payment is required before Sept. 15. You may also want to use the annualized income method if a significant portion of your income comes from capital gains on the sale of securities which you sell at various times during the year.

The underpayment penalty doesn't apply to you:

(1) if the amount of tax you put down on your return is less than $1,000 after subtracting withholding tax paid;

(2) if you were a U.S. citizen or resident for the entire preceding year, that year was 12 months, and you had no tax liability for that year;

(3) if you are a farmer or fisherman and pay your entire estimated tax by Jan. 15 of the following year, or pay your entire estimated tax by Mar. 1 of the following year and also file your tax return by that date; or

(4) for the fourth (Jan. 15) installment, if you aren't a farmer or fisherman, file your return by Jan. 31 of the following year, and pay your tax in full.

In addition, IRS may waive the penalty if the failure was due to casualty, disaster, or other unusual circumstances and it would be inequitable or against good conscience to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.

If you think you may be eligible to determine your estimated tax payments under the annualized income method, or you have any other specific questions about how the estimated tax rules apply to you, please call me. I would be happy to meet with you.

No information accessed through www.dibellocpa.blogspot.com website constitutes investment, financial, legal, tax, accounting or other advice nor is to be relied on in making an investment or other decisions. Annette R. Di Bello, CPA, CFP's specific advice is given only within the context of her contractual agreements with each client. The information in this website is based on data gathered from sources which she believes to be reliable. It is not guaranteed as to accuracy, does not purport to be complete and is not intended as the primary basis for investment, tax, financial planning, accounting or other decisions. Furthermore, the information resulting from the use of tools or information through this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from an advisor.

Important payroll tax figures for 2009

2008-12-24T07:54:00.000-08:00

Many important payroll tax figures are changing, effective Jan. 1, 2009. The maximum amount of earnings subject to Social Security (OASDI) tax increases to $106,800 in 2009. The old-age, survivor, and disability benefits (OASDI) tax rate remains at 6.2%. The maximum amount of Social Security tax that can be paid by employees and employers in 2009 is $6,621.60. The Medicare (HI) tax rate remains at 1.45% on all wages paid.

Withholding/AEIC. New federal percentage method withholding tables have been issued. An annual federal withholding allowance is now valued at $3,650 (previously, $3,500). You must withhold from the pay of any employee who had claimed exemption from withholding in 2008, but who does not give you a new Form W-4 to continue the exemption by Feb. 16, 2009.

In 2009, the maximum amount that an employee can receive in advance earned income credit (AEIC) payments is $1,826. To qualify for the AEIC, the employee's expected earned income and adjusted gross income must both be less than $35,463 ($38,583 if the taxpayer is filing a joint return). Employees must file a new Form W-5 to receive the AEIC.

Fringe Benefits. Effective Jan. 1, 2009, the standard mileage rate for computing the deductible costs of operating a car (including vans, pickups, or panel trucks) for business use is 55 cents per mile.
If an employer provides a car to an employee which is available for personal use, the value of the personal use must generally be included in the employee's income and wages. There are several methods that can be used to value the personal use. Under the cents-per-mile method, the value of the personal use is determined by multiplying the standard mileage rate by the total miles driven in the vehicle for personal purposes. However, the cents-per-mile method may not be used if the automobile's fair market value exceeds a certain amount, as adjusted for inflation. For employer-provided vehicles first made available to employees for personal use in 2009, the cents-per-mile method cannot be used if the value of a passenger automobile exceeds $15,000 ($15,200 for a truck or van).

An employer may reimburse employee automobile expenses with a mileage allowance, using a flat rate or stated schedule that combines periodic fixed and variable rate payments — a FAVR allowance. The cost of the "standard automobile" may not exceed 95% of the automobile's retail price, plus state and local taxes, nor may the cost exceed $27,200 in 2009.

An employee may exclude up to $230 a month for qualified parking expenses in 2009, and up to $120 a month of the combined value of transit passes and transportation in a commuter highway vehicle. There is a new fringe benefit available to bicycle commuters in 2009. Employer reimbursements to a commuter in a calendar year are limited to $20 per month (maximum annual employer reimbursement is $240). The maximum amount that can be excluded from an employee's gross income in connection with the adoption by the employee of a child (whether or not he or she has special needs) is limited to $12,150 in 2009.

The maximum aggregate annual contribution that can be made to a health savings account in 2009 is $3,000 for self-only coverage and $5,950 for family coverage.

Pension Plan Limitations. The maximum amount that an employee may elect to defer to an IRC §401(k) cash or deferred compensation plan in 2009 is $16,500. The maximum amount that an employee/participant may elect to defer to a savings incentive match plan for employees (SIMPLE plan) is $11,500. The limitation on total annual contributions to defined contribution plans is $49,000. The annual benefit limit for defined benefit plans increases to $195,000. The limitation on deferrals for IRC §457 deferred compensation plans of state and local governments and tax-exempt organizations is $16,500. The limitation used in the definition of highly compensated employee increases to $110,000 for 2009.

The employee compensation amount used in the definition of "control employee" for purposes of the auto commuting valuation rule is $195,000 in 2009. The compensation amount used in the definition of company officers who are ineligible for the commuting valuation rule increases to $95,000 in 2009.
Employees Working in Foreign Countries. An individual who has a tax home in a foreign country and satisfies either the bona fide foreign residence test or the foreign physical presence test may elect to exclude $91,400 of his foreign earned income from gross income in 2009. Qualified individuals may also elect to exclude certain foreign housing costs paid or incurred on their behalf (or claim a deduction where the costs are not paid by the employer). The maximum housing cost exclusion is generally limited to $12,796 in 2009. However, individuals who work outside the U.S. and live in foreign countries with high housing costs may be able to deduct or exclude a greater portion of their housing costs.

Wage Hour. The minimum wage rate is $6.55 per hour and will increase to $7.25 per hour, effective July 24, 2009. New Family and Medical Leave Act regulations go into effect on Jan. 16, 2009.

Do not hesitate to contact me if you have any questions on the above information.

Health Savings Accounts

2008-12-17T07:51:00.000-08:00

Given the ever-escalating cost of providing employee health care benefits, I am writing to advise you of a more cost-effective method of providing these benefits; namely, a health savings account (HSA). For eligible individuals, HSAs offer a tax-favorable way to set aside funds (or have their employer do so) to meet future medical needs. Here are the key tax-related elements:

contributions you make to an HSA are deductible, with limits,
contributions your employer makes aren't taxed to you,
earnings on the funds within the HSA are not taxed, and
distributions from the HSA to cover qualified medical expenses are not taxed.

Who is eligible? To be eligible for an HSA, you must be covered by a “high deductible health plan” (discussed below). You must also not be covered by a plan which (1) is not a high deductible health plan, and (2) provides coverage for any benefit covered by your high deductible plan. (It's okay, however, to be covered by a high deductible plan along with separate coverage, through insurance or otherwise, for accidents, disability, or dental, vision, or long-term care.)

For 2008, a “high deductible health plan” is a plan with an annual deductible of at least $1,100 for self-only coverage, or at least $2,200 for family coverage. For self-only coverage, the 2008 limit on deductible contributions is $2,900. For family coverage, the 2008 limit on deductible contributions is $5,800. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $5,600 for self-only coverage or $11,200 for family coverage.

An individual (and the individual's covered spouse as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2008 of up to $900.

A high deductible health plan does not include a plan if substantially all of the plan's coverage is for accidents, disability, or dental, vision, or long-term care, insurance for a specified disease or illness, or insurance paying a fixed amount per day (or other period) of hospitalization.
HSAs may be established by, or on behalf of, any eligible individual.

Deduction limits. You can deduct contributions to an HSA for the year up to the total of your monthly limitations for the months you were eligible. For 2008, the monthly limitation on deductible contributions for a person with self-only coverage is 1/12 of $2,900. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $5,800. Thus, deductible contributions are not limited by the amount of the annual deductible under the high deductible health plan.

Also, taxpayers who are eligible individuals during the last month of the tax year are treated as having been eligible individuals for the entire year for purposes of computing the annual HSA contribution.

However, if an individual is enrolled in Medicare, he is no longer an eligible individual under the HSA rules, and so contributions to his HSA can no longer be made.

Contributions may be made to an HSA by or on behalf of an eligible individual even if the individual has no compensation, or if the contributions exceed the individual's compensation. Contributions made by a family member on behalf of an eligible individual to an HSA (which are subject to the limits described above) are deductible by the eligible individual in computing adjusted gross income.

Rollovers from IRAs, FSAs, and HRAs. For a limited period (beginning Dec. 20, 2006, and ending December 31, 2011) an eligible individual can make a one-time transfer of amounts from a health flexible spending arrangement (health FSA) or health reimbursement arrangement (HRA) to an HSA. The amount transferred is limited to the lesser of (i) the account balance of the individual's health FSA or HRA as of September 21, 2006, or (ii) the account balance of the health FSA or HRA on the transfer date.

Similarly, on a once-only basis, taxpayers can withdraw funds from an IRA, and transfer them tax-free to an HSA. The amount transferred can be up to the maximum deductible HSA contribution for the type of coverage (individual or family) in effect at the time of the transfer. The amount so transferred is excluded from the taxpayer's gross income, and is not subject to the 10% early withdrawal penalty.

Employer contributions. If you are an eligible individual, and your employer contributes to your HSA, the employer's contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from your gross income up to the deduction limitation, as described above. Further, the employer contributions are not subject to withholding from wages for income tax or subject to FICA or FUTA. The eligible individual cannot deduct employer contributions on his federal income tax return as HSA contributions or as medical expense deductions.

An employer that decides to make contributions on its employees' behalf must make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer does not make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.

Contributions are comparable if they are either: (1) the same amount; or (2) the same percentage of the annual deductible limit under the high deductible health plan covering the employees. For these purposes, comparable participating employees (1) are covered by the employer's high deductible health plan and are eligible to establish an HSA; (2) have the same category of coverage (either self-only or family coverage); and (3) have the same category of employment (either part-time or full-time). (IRS regs provide detailed guidelines for comparable contributions.)

An exception to the comparable contribution requirements applies for contributions made on behalf of nonhighly compensated employees. Under this exception, an employer may make larger HSA contributions for nonhighly compensated employees than for highly compensated employees.

Employer contributions are also excludable if made at the election of the employee under a salary reduction arrangement that is part of a cafeteria plan (i.e., a plan which allows you to elect to use part of your salary towards a variety of benefits). Although contributions to an employee's HSA through a cafeteria plan are treated as employer contributions, the comparability rule does not apply to contributions made through a cafeteria plan.

Earnings. If the HSA is set up properly, it is generally exempt from taxation, and there is no tax on earnings. However, taxes may apply if contribution limitations are exceeded, required reports are not provided, or prohibited transactions occur.

Distributions. Distributions from the HSA to cover an eligible individual's qualified medical expenses, or those of his spouse or dependents, are not taxed. Qualified medical expenses for these purposes generally mean those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 10% tax will apply to the withdrawal, unless it is made after reaching age 65, or in the event of death or disability.

Distributions from an HSA exclusively to pay for qualified medical expenses are excludable from the gross income of the account beneficiary even though the beneficiary is no longer an “eligible individual,” e.g., the individual is over age 65 and entitled to Medicare benefits, or no longer has a high deductible health plan.

As you can see, HSAs offer a very flexible option for providing health care coverage, but the rules are somewhat involved. Again, please call if you would like to discuss this topic further.