The tax laws enacted in the last couple of years contain important income tax and information reporting provisions that are effective for the first time in 2011. To inform you of what's new in the tax rules, here's a summary of the key tax changes for 2011, broken down into three categories: Personal Income Taxes, Retirement Plan Changes, and Tax Changes for Businesses and Investors. If you'd like to discuss how these changes affect your personal, business or investment situation, please give me a call.
Personal Income Taxes
Payroll tax holiday in place. Employees will pay only 4.2% (instead of the usual 6.2%) OASDI (Social Security) tax on compensation received during 2011 up to $106,800 (the wage base for 2011). Similarly, for tax years beginning in 2011, self-employed persons will pay only 10.4% Social Security self-employment taxes on self-employment income up to $106,800. In either case, the maximum savings for 2011 will be $2,136 (2% of $106,800) per taxpayer. If both spouses earn at least as much as the wage base, the maximum savings will be $4,272.
Stricter rules apply to energy saving home improvements. You can claim a tax credit for energy saving home improvements you make this year, but stricter rules apply for 2011 than for 2010. You can only claim a 10% credit for qualified energy property placed in service in 2011 up to a $500 lifetime limit (with no more than $200 from windows and skylights). What's more, the credit you claim for any year can't exceed $500 less the total of the credits you claimed for all earlier tax years ending after Dec. 31, 2005. The amount you claim for windows and skylights in a year can't exceed $200 less the total of the credits you claimed for these items in all earlier tax years ending after Dec. 31, 2005. The credit is equal to the sum of: (1) 10% of the amount you pay or incur for qualified energy efficient improvements (such as insulation, exterior windows or doors that meet certain energy efficient standards) installed during the year, and (2) the amount of the residential energy property expenses you paid or incurred during the year.
The credit for residential energy property expenses can't exceed: (A) $50 for an advanced main circulating fan; (B) $150 for any qualified natural gas, propane, or hot water boiler; and (C) $300 for any item of energy efficient property (advanced types of energy saving equipment, such as electric heat pumps, meeting specific energy efficient standards).
Partial annuitization of annuity contracts. When you receive non-retirement-plan annuity payments from an annuity contract, part of each payment is a tax-free recovery of your basis (cost of the annuity contract for tax purposes), and part is a taxable distribution of earnings. For amounts received in tax years beginning after Dec. 31, 2010, taxpayers may partially annuitize such an annuity (or endowment, or life insurance) contract. If you receive an annuity for a period of 10 years or more, or over one or more lives, under any portion of an annuity, endowment, or life insurance contract, then that portion is treated as a separate contract for annuity taxation purposes. The net effect is that the annuitized portion is treated as a separate contract, and each annuity payment from that portion is partially a tax-free recovery of basis and partially a taxable distribution of earnings. Absent this rule, the payments might have been treated as coming out of income before recovery of any basis. The portion of the contract that is not annuitized is also treated as a separate contract and will continue to earn income on a tax-deferred basis.
Restricted definition of medicine for health plan reimbursements. Beginning this year, the cost of over-the-counter medicines can't be reimbursed with excludible income through a health flexible spending arrangement (FSA), health reimbursement account (HRA), health savings account (HSA), or Archer MSA (medical savings account), unless the medicine is prescribed by a doctor or is insulin. This new rule applies to amounts paid after 2010. However, it does not apply to amounts paid in 2011 for medicines or drugs bought before Jan. 1, 2011. Also, for distributions after 2010, the additional tax on distributions from an HSA that are not used for qualified medical expenses increases from 10% to 20% of the disbursed amount, and the additional tax on distributions from an Archer MSA that are not used for qualified medical expenses increases from 15% to 20% of the disbursed amount.
Retirement Plan Changes
Small employers may establish “simple cafeteria plans.” For years beginning after Dec. 31, 2010, small employers (those having an average of 100 or fewer employees on business days during either of the two preceding years) may provide employees with a “simple cafeteria plan.” An employer that uses this type of plan gets a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for certain types of qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self-insured medical expense reimbursement plan, and benefits under a dependent care assistance program.
Election to treat January 2011 charitable distributions as made in 2010. If you are age 70 1/2 or older, you can make tax-free distributions to a charity from an Individual Retirement Account (IRA) of up to $100,000. This applies for charitable IRA transfers made in tax years beginning before Jan. 1, 2012. In addition, if you make such a distribution in January of 2011, you can treat it for income tax purposes as if it were made on Dec. 31, 2010. Thus, a qualified charitable distribution made in January of 2011 may be treated as made in your 2010 tax year and count against the $100,000 exclusion for 2010. It is also may be used to satisfy your IRA required minimum distribution for 2010.
Tax Changes for Businesses and Investors
Electronic filing rules now in place. Beginning Jan. 1, 2011, employers must use electronic funds transfer (EFT) to make all federal tax deposits (such as deposits of employment tax, excise tax, and corporate income tax). Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be used after Dec. 31, 2010.
Up-to-$1,000 credit for “retained workers” in 2011. Employers may claim a “retention credit” for retaining qualifying new employees (certain formerly unemployed workers meeting specific requirements). The amount of the credit is the lesser of $1,000 or 6.2% of wages you pay to the retained qualified employee during a 52 consecutive week period. The qualified employee's wages for such employment during the last 26 weeks must equal at least 80% of wages for the first 26 weeks. The credit may be claimed for a retained worker for the first tax year ending after Mar. 18, 2010, for which the retained worker satisfies the 52 consecutive week requirement. However, the credit applies only for qualifying employees hired after Feb. 3, 2010, and before Jan. 1, 2011.
New basis and character reporting rules. Generally effective on Jan. 1, 2011, every broker required to file an information return reporting the gross proceeds of a “covered security” such as corporate stock must include in the return the customer's adjusted basis in the security and whether any gain or loss with respect to the security is short-term or long-term. The reporting is generally done on Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions.” A covered security includes all stock acquired beginning in 2011, except stock in certain regulated investment companies (i.e, mutual funds) and stock acquired in connection with a dividend reinvestment plan (both of which are covered securities if acquired beginning in 2012).
Corporate actions that affect stock basis must be reported. Effective Jan. 1, 2011, issuers of “specified securities” must file a return describing any organizational action (e.g., stock split, merger, or acquisition) that affects the basis of the specified security, the quantitative effect on the basis of that specified security, and any other information required by IRS. The issuer's return (and information to nominees or certificate holders) must be filed within 45 days after the date of the organizational action or, if earlier, by January 15th of the year following the calendar year during which the action occurred. Nominees or certificate holders must (unless the IRS waives this requirement) be given a written statement showing (1) the name, address, and telephone number of the information contact of the person required to file the return, (2) the information required to be included on the return for the security, and (3) any other information required by the IRS. In general, a specified security is any share of stock in an entity organized as, or treated for federal tax purposes as, a foreign or domestic corporation.
Reporting requirement for payment card and third-party payment transactions. After 2010, banks generally must file an information return with the IRS reporting the gross amount of credit and debit card payments a merchant receives during the year, along with the merchant's name, address, and TIN. Similar reporting is also required for third party network transactions (e.g., those facilitating online sales).
Information reporting for real estate. For payments made after Dec. 31, 2010, for information reporting purposes, a person receiving rental income from real estate is treated as engaged in the trade or business of renting property. As a result, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more during the tax year to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income must provide an information return (typically Form 1099-MISC) to the IRS and to the service provider.
The rental property expense payment reporting requirement doesn't apply to: (1) an individual who receives rental income of not more than a minimal amount (to be determined by the IRS); (2) any individual (including one who is an active member of the uniformed services or an employee of the intelligence community) if substantially all of his or her rental income is derived from renting the individual's principal residence (main home) on a temporary basis; or (3) any other individual for whom the information reporting requirement would cause hardship (to be defined by the IRS).
Please call our office if you need assistance with any of these issues.
Wednesday, January 26, 2011
2011 Standard Mileage Rates
The Internal Revenue Service today issued the 2011 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
51 cents per mile for business miles driven
19 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Note: The following reflects the changes from last year:
51 cents per mile for business miles driven -- (up $.01 from last year)
19 cents per mile driven for medical or moving purposes -- (up $.025 from last year)
14 cents per mile driven in service of charitable organizations -- (unchanged)
Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
51 cents per mile for business miles driven
19 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Note: The following reflects the changes from last year:
51 cents per mile for business miles driven -- (up $.01 from last year)
19 cents per mile driven for medical or moving purposes -- (up $.025 from last year)
14 cents per mile driven in service of charitable organizations -- (unchanged)
Health Savings Accounts (HSAs)
2010 Changes
Eligibility. For 2010, a qualifying high deductible health plan (HDHP) must have a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,950 for self-only coverage and $11,900 for family coverage.
Employer contributions. Up to specified dollar limits, cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For 2010, you can contribute up to the following amounts to a qualified individual's HSA.
$3,050 for self-only coverage or $6,150 for family coverage.
$4,050 for self-only coverage or $7,150 for family coverage for a qualified individual who is age 55 or older at any time during the year. The $7,150 limit is increased by $1,000 for two married individuals who are age 55 or older at any time during the year provided and each spouse has a separate HSA.
Employers are allowed to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee.
For more information, see Health Savings Accounts in the 2010 Publication 15-B Employer's Tax Guide to Fringe Benefits.
2011 Changes
Eligibility. For 2011, a qualifying high deductible health plan (HDHP) must have a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,950 for self-only coverage and $11,900 for family coverage.
Employer contributions. Up to specified dollar limits, cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For 2011, you can contribute up to the following amounts to a qualified individual's HSA.
$3,050 for self-only coverage or $6,150 for family coverage.
$4,050 for self-only coverage or $7,150 for family coverage for a qualified individual who is age 55 or older at any time during the year. The $7,150 limit is increased by $1,000 for two married individuals who are age 55 or older at any time during the year provided and each spouse has a separate HSA.
Employers are allowed to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee.
For more information, see Health Savings Accounts in the 2011 Publication 15-B.
Eligibility. For 2010, a qualifying high deductible health plan (HDHP) must have a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,950 for self-only coverage and $11,900 for family coverage.
Employer contributions. Up to specified dollar limits, cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For 2010, you can contribute up to the following amounts to a qualified individual's HSA.
$3,050 for self-only coverage or $6,150 for family coverage.
$4,050 for self-only coverage or $7,150 for family coverage for a qualified individual who is age 55 or older at any time during the year. The $7,150 limit is increased by $1,000 for two married individuals who are age 55 or older at any time during the year provided and each spouse has a separate HSA.
Employers are allowed to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee.
For more information, see Health Savings Accounts in the 2010 Publication 15-B Employer's Tax Guide to Fringe Benefits.
2011 Changes
Eligibility. For 2011, a qualifying high deductible health plan (HDHP) must have a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,950 for self-only coverage and $11,900 for family coverage.
Employer contributions. Up to specified dollar limits, cash contributions to the HSA of a qualified individual (determined monthly) are exempt from federal income tax withholding, social security tax, Medicare tax, and FUTA tax. For 2011, you can contribute up to the following amounts to a qualified individual's HSA.
$3,050 for self-only coverage or $6,150 for family coverage.
$4,050 for self-only coverage or $7,150 for family coverage for a qualified individual who is age 55 or older at any time during the year. The $7,150 limit is increased by $1,000 for two married individuals who are age 55 or older at any time during the year provided and each spouse has a separate HSA.
Employers are allowed to make larger HSA contributions for a nonhighly compensated employee than for a highly compensated employee.
For more information, see Health Savings Accounts in the 2011 Publication 15-B.
Tuesday, February 9, 2010
Got Children?
Now that the tax season is now in full session, here are some things you might want to know.
Got Kids? They may have an impact on your tax situation.
Listed below are the top 10 things the IRS wants you to consider if you have children.
Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
Child Tax Credit You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax. For more information see IRS Publication 972, Child Tax Credit.
Child and Dependent Care Credit You may be able to claim the credit if you pay someone to care for your child under age 13 so that you can work or look for work. For more information see IRS Publication 503, Child and Dependent Care Expenses.
Earned Income Tax Credit The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit.
Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. For more information see the instructions for IRS Form 8839, Qualified Adoption Expenses.
Children with Earned Income If your child has income earned from working they may be required to file a tax return. For more information see IRS Publication 501.
Children with Investment Income Under certain circumstances a child’s investment income may be taxed at the parent’s tax rate. For more information see IRS Publication 929, Tax Rules for Children and Dependents.
Coverdell Education Savings Account This savings account is used to pay qualified educational expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free. For more information see IRS Publication 970, Tax Benefits for Education.
Higher Education Credits Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income. For more information see IRS Publication 970.
Student Loan Interest You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions. For more information see IRS Publication 970.
Got Kids? They may have an impact on your tax situation.
Listed below are the top 10 things the IRS wants you to consider if you have children.
Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
Child Tax Credit You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax. For more information see IRS Publication 972, Child Tax Credit.
Child and Dependent Care Credit You may be able to claim the credit if you pay someone to care for your child under age 13 so that you can work or look for work. For more information see IRS Publication 503, Child and Dependent Care Expenses.
Earned Income Tax Credit The EITC is a benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit.
Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. For more information see the instructions for IRS Form 8839, Qualified Adoption Expenses.
Children with Earned Income If your child has income earned from working they may be required to file a tax return. For more information see IRS Publication 501.
Children with Investment Income Under certain circumstances a child’s investment income may be taxed at the parent’s tax rate. For more information see IRS Publication 929, Tax Rules for Children and Dependents.
Coverdell Education Savings Account This savings account is used to pay qualified educational expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free. For more information see IRS Publication 970, Tax Benefits for Education.
Higher Education Credits Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar-for-dollar, unlike a deduction, which reduces your taxable income. For more information see IRS Publication 970.
Student Loan Interest You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income so you do not need to itemize your deductions. For more information see IRS Publication 970.
Tuesday, July 14, 2009
Ten Tax Planning Ideas for Small Businesses in 2009
If you are a small business owner looking for cost cutting ideas here are ten tax planning ideas that may result in substantial tax savings. The following article highlights planning areas often missed by business owners. You should consult a qualified tax advisor to determine if any of these areas are appropriate for you and your business.
S Corporation: Set up an S Corporation to avoid self-employment tax on profits. If you conduct business as a sole proprietor, a partnership, or a limited liability company the first $106,800 of 2009 profits are subject to a self-employment tax rate of 15.3%. The profits in excess of $106,800 are subject to a Medicare tax rate of 2.9%. These self-employment tax rates are in addition to paying income tax on the profits. An S Corporation is not subject to self-employment tax on the profits earned. But you must take "reasonable" compensation as salary subject to F.I.C.A.
Bad Debt Expense: A reserve for bad debts is not deductible, but you can write off accounts receivable in the year in which they become uncollectible. Be sure to take advantage of writing off all those uncollected accounts at year end.If you used a collection agency, you can deduct a portion of the debt that will go to the collection agency as a fee (around 25%). You can write off that amount at the time you turn over the receivable to the agency.
Medical Expense: For 2009, eligible self-employed individuals can deduct from gross income 100% of the amounts paid for health insurance coverage. The deduction is limited to net earned income from the business, less the deduction for 50% of the self-employment tax. Also, you cannot take the deduction for any month you were qualified to participate in an employer sponsored health plan. If you conduct business as a corporation, set up a corporate medical reimbursement plan. Medical costs are generally personal expenses deductible only to the extent that they exceed 7.5% of your Adjusted Gross Income (AGI). However, medical reimbursement plans set up by C Corporations let you deduct all the medical costs you incur for yourself, your spouse, and dependents. These plans must cover all eligible employees.
Equipment Expense: For 2009, Section 179 of the Tax Code lets companies deduct up to $133,000 of new equipment, subject to certain limits. (This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $530,000.) Passenger vehicles are excluded from the expensing election. A passenger vehicle is defined as having a loaded gross vehicle weight of less than 6,000 pounds. The tax code also allows an accelerated method to depreciate the remaining value of that equipment – it’s faster than the straight-line method of depreciation.
Home Office Expense: Write off home-office expenses. You can take this deduction even if you use the space for administrative purposes, as long as there is no where else you can work. When you use one room in your six room home as an office, you can deduct one-sixth of your costs for utilities, security, homeowner’s insurance, etc. as well as all costs for the room such as carpeting. Although you can also claim the depreciation on your home used for home office, you should consult a qualified tax advisor prior to doing so to understand the impact it will have on the exclusion of gain when you sell your residence.
Travel Expense: Deduct business trips by putting your spouse on the payroll. When spouses are on the payroll, even at low salaries, cost of business trips that include the spouse can be fully deducted. You should also be aware that putting your spouse on the payroll in 2009 will also double the amount of Social Security tax owed up to the first $106,800 of income.
Hiring Children in the Family Business: Put your children on the company payroll. When you employ your children in the business, for 2009 you can pay them up to $5,350 in salary free from Federal tax. The “kiddie” tax doesn’t apply to wages, so children under age 18 get this tax break, too. Have your children put $4,000 into a Roth IRA, where it will compound tax-free over time. When the money is left in the account until they turn 59 ½, they will never have to pay out any tax or penalties on that money or its earnings. If your business is not incorporated, and the children are under age 18, neither you, as employer, nor your children will owe Social Security or Medicare tax on their wages.
Retirement Planning: Put more money away in your company retirement plan for yourself than for your employees. Business owners who are more than 20 years older that other company employees can set up a defined-benefit pension plan instead of a defined-contribution plan. Because they are funding a specific benefit (not putting away a percentage of salary) and have fewer years to do so, owners can contribute more to the plan for themselves than their employees.
Claiming Business Losses: Make the most of business losses. If your company has a net operating loss in 2009, it can be carried back two years or carried forward up to 20 years to offset future profits. To get a refund, file an application on Form 1139 for corporations and Form 1045 for sole proprietorships. Most refunds are sent out by the IRS within two months.
Education: Set up a company tuition-reimbursement plan to pay a child’s school cost. Businesses can set up plans that pay up to $5,250 in tuition per employee annually. Business owners’ children must work for the company, be older than age 21, own no company stock and cannot be claimed as a dependent on the owners’ tax returns.
S Corporation: Set up an S Corporation to avoid self-employment tax on profits. If you conduct business as a sole proprietor, a partnership, or a limited liability company the first $106,800 of 2009 profits are subject to a self-employment tax rate of 15.3%. The profits in excess of $106,800 are subject to a Medicare tax rate of 2.9%. These self-employment tax rates are in addition to paying income tax on the profits. An S Corporation is not subject to self-employment tax on the profits earned. But you must take "reasonable" compensation as salary subject to F.I.C.A.
Bad Debt Expense: A reserve for bad debts is not deductible, but you can write off accounts receivable in the year in which they become uncollectible. Be sure to take advantage of writing off all those uncollected accounts at year end.If you used a collection agency, you can deduct a portion of the debt that will go to the collection agency as a fee (around 25%). You can write off that amount at the time you turn over the receivable to the agency.
Medical Expense: For 2009, eligible self-employed individuals can deduct from gross income 100% of the amounts paid for health insurance coverage. The deduction is limited to net earned income from the business, less the deduction for 50% of the self-employment tax. Also, you cannot take the deduction for any month you were qualified to participate in an employer sponsored health plan. If you conduct business as a corporation, set up a corporate medical reimbursement plan. Medical costs are generally personal expenses deductible only to the extent that they exceed 7.5% of your Adjusted Gross Income (AGI). However, medical reimbursement plans set up by C Corporations let you deduct all the medical costs you incur for yourself, your spouse, and dependents. These plans must cover all eligible employees.
Equipment Expense: For 2009, Section 179 of the Tax Code lets companies deduct up to $133,000 of new equipment, subject to certain limits. (This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $530,000.) Passenger vehicles are excluded from the expensing election. A passenger vehicle is defined as having a loaded gross vehicle weight of less than 6,000 pounds. The tax code also allows an accelerated method to depreciate the remaining value of that equipment – it’s faster than the straight-line method of depreciation.
Home Office Expense: Write off home-office expenses. You can take this deduction even if you use the space for administrative purposes, as long as there is no where else you can work. When you use one room in your six room home as an office, you can deduct one-sixth of your costs for utilities, security, homeowner’s insurance, etc. as well as all costs for the room such as carpeting. Although you can also claim the depreciation on your home used for home office, you should consult a qualified tax advisor prior to doing so to understand the impact it will have on the exclusion of gain when you sell your residence.
Travel Expense: Deduct business trips by putting your spouse on the payroll. When spouses are on the payroll, even at low salaries, cost of business trips that include the spouse can be fully deducted. You should also be aware that putting your spouse on the payroll in 2009 will also double the amount of Social Security tax owed up to the first $106,800 of income.
Hiring Children in the Family Business: Put your children on the company payroll. When you employ your children in the business, for 2009 you can pay them up to $5,350 in salary free from Federal tax. The “kiddie” tax doesn’t apply to wages, so children under age 18 get this tax break, too. Have your children put $4,000 into a Roth IRA, where it will compound tax-free over time. When the money is left in the account until they turn 59 ½, they will never have to pay out any tax or penalties on that money or its earnings. If your business is not incorporated, and the children are under age 18, neither you, as employer, nor your children will owe Social Security or Medicare tax on their wages.
Retirement Planning: Put more money away in your company retirement plan for yourself than for your employees. Business owners who are more than 20 years older that other company employees can set up a defined-benefit pension plan instead of a defined-contribution plan. Because they are funding a specific benefit (not putting away a percentage of salary) and have fewer years to do so, owners can contribute more to the plan for themselves than their employees.
Claiming Business Losses: Make the most of business losses. If your company has a net operating loss in 2009, it can be carried back two years or carried forward up to 20 years to offset future profits. To get a refund, file an application on Form 1139 for corporations and Form 1045 for sole proprietorships. Most refunds are sent out by the IRS within two months.
Education: Set up a company tuition-reimbursement plan to pay a child’s school cost. Businesses can set up plans that pay up to $5,250 in tuition per employee annually. Business owners’ children must work for the company, be older than age 21, own no company stock and cannot be claimed as a dependent on the owners’ tax returns.
Monday, June 22, 2009
2009 Gift Tax Guidelines
Source: IRS.govUpdated 1/13/2009
The gift tax law allows a one time transfer from your estate of up to $1 million. Therefore, you can gift $1 million from your estate and your spouse can gift $1 million from her estate without being subject to a gift tax.
In addition to these rules, there is an annual gift tax exclusion of $13,000 that each of you can transfer to others ($26,000 for a married couple). The limitation applies only to gifting to one individual. You can make multiple gifts to multiple individuals and will not pay gift tax as long as each gift does not exceed the exclusion amount.
The following gifts are not taxable gifts:
The gift tax law allows a one time transfer from your estate of up to $1 million. Therefore, you can gift $1 million from your estate and your spouse can gift $1 million from her estate without being subject to a gift tax.
In addition to these rules, there is an annual gift tax exclusion of $13,000 that each of you can transfer to others ($26,000 for a married couple). The limitation applies only to gifting to one individual. You can make multiple gifts to multiple individuals and will not pay gift tax as long as each gift does not exceed the exclusion amount.
The following gifts are not taxable gifts:
- Gifts that are not more than the annual exclusion for the calendar year,
- Tuition or medical expense you pay directly to a medical or educational institution for someone,
- Gifts to your spouse,
- Gifts to a political organization for its use, and
- Gifts to charities.
Annual exclusion. A separate annual exclusion applies to each person to whom you make a gift. For 2009, the annual exclusion is $13,000. Therefore, you generally can give up to $13,000 to any number of people in 2009 and none of the gifts will be taxable.
If you are married, both you and your spouse can separately give up to $13,000 to the same person in 2009 without making a taxable gift. If one of you gives more than $13,000 to a person in 2009, see Gift Splitting, later.
Inflation adjustment. After 2009, the $13,000 annual exclusion may be increased due to a cost-of-living adjustment. See the instructions for Form 709 for the amount of the annual exclusion for the year you make the gift.
Example 1. In 2009, you give your niece a cash gift of $8,000. It is your only gift to her this year. The gift is not a taxable gift because it is not more than the $13,000 annual exclusion.
Example 2. You pay the $15,000 college tuition of your friend. Because the payment qualifies for the educational exclusion, the gift is not a taxable gift.
Example 3. In 2009, you give $25,000 to your 25-year-old daughter. The first $13,000 of your gift is not subject to the gift tax because of the annual exclusion. The remaining $12,000 is a taxable gift. As explained later under Applying the Unified Credit to Gift Tax, you may not have to pay the gift tax on the remaining $12,000. However, you do have to file a gift tax return unless the gift was made from community property funds and is actually a gift one half from the father and one half from the mother.
Gift Splitting
If you or your spouse make a separate property gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of the gift.
In 2009, gift splitting allows married couples to give up to $26,000 to a person without making a taxable gift.
If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion.
Gifts by married couples from community property funds are not taxable and no reporting is required unless the gift exceeds $26,000.
Example. Harold and his wife, Helen, agree to split the gifts that they made during 2009 from inherited funds. Harold gives his nephew, George, $21,000, and Helen gives her niece, Gina, $18,000. Although each gift is more than the annual exclusion ($12,000), by gift splitting they can make these gifts without making a taxable gift.
Harold's gift to George is treated as one-half ($10,500) from Harold and one-half ($10,500) from Helen. Helen's gift to Gina is also treated as one-half ($9,000) from Helen and one-half ($9,000) from Harold. In each case, because one-half of the split gift is not more than the annual exclusion, it is not a taxable gift. However, each of them must file a gift tax return.
Applying the Unified Credit to Gift Tax
After you determine which of your gifts are taxable, you figure the amount of gift tax on the total taxable gifts and apply your unified credit for the year.
Example. In 2009, you give your niece, Mary, a cash gift of $8,000. It is your only gift to her this year. You pay the $15,000 college tuition of your friend, David. You give your 25-year-old daughter, Lisa, $26,000. You also give your 27-year-old son, Ken, $26,000. Before 2009, you had never given a taxable gift. You apply the exceptions to the gift tax and the unified credit as follows:
- Apply the educational exclusion. Payment of tuition expenses is not subject to the gift tax. Therefore, the gift to David is not a taxable gift and not reported on Form 709.
- Apply the annual exclusion. The first $13,000 you give someone during 2009 is not a taxable gift. Therefore, your $8,000 gift to Mary, the first $13,000 of your gift to Lisa, and the first $13,000 of your gift to Ken are not taxable gifts.
- Apply the unified credit. The gift tax on $26,000 ($13,000 remaining from your gift to Lisa plus $13,000 remaining from your gift to Ken) is $5,120. You subtract the $5,120 from your unified credit of $345,800 for 2009. The unified credit that you can use against the gift tax in a later year is $340,680.
You do not have to pay any gift tax for 2009. However, you do have to file Form 709 for the gifts to David and Lisa.
Filing a Gift Tax Return
Generally, you must file a gift tax return on Form 709 if any of the following apply.
You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
- You and your spouse are splitting a gift.
You gave someone (other than your spouse) a gift that he or she cannot actually possess, enjoy, or receive income from until some time in the future. - You gave your spouse an interest in property that will be ended by some future event.
- You do not have to file a gift tax return to report gifts to (or for the use of) political organizations and gifts made by paying someone's tuition or medical expenses.
You also do not need to report the following deductible gifts made to charities:
- Your entire interest in property, if no other interest has been transferred for less than adequate consideration or for other than a charitable use; or
- A qualified conservation contribution that is a restriction (granted forever) on the use of real property.
Saturday, June 20, 2009
State taxes on the rise
There's been talk of late by federal officials and politicians of the "green shoots" of an economic recovery, but at the state level, most economic lawns are still crunchy brown from a serious revenue drought.
State personal income tax collections dropped 26 percent nationwide through the first four months of 2009 compared with a year ago, putting many states' already troubled budgets into deeper holes.
The percentage drop comes to $28.8 billion less than the same period a year earlier, according to an examination of state income tax collections by the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York.
The report, "April Is the Cruelest Month," tallied state tax collections from January to April for 37 of the 41 states that impose broad-based personal income taxes. April is the month during which states collect the most income tax revenue because most follow the federal April 15 filing deadline.
Of the 37 states reviewed, the Rockefeller Institute found that 34 reported revenue declines. Arizona experienced the steepest drop, a 54.9 percent decrease from last year.
Other states with tax revenue decreases greater than the U.S. average this year, in order of revenue lost percentages, include South Carolina, Michigan, California, Vermont, New York, Rhode Island, New Jersey, Massachusetts, Idaho, Ohio and Oregon.
The Rockefeller Institute news wasn't totally terrible. Three states -- Utah, Alabama and North Dakota -- were able to bring a bit more tax money this year versus last year's collections.
Data were not available in time for the report from Kentucky, Missouri, Mississippi, and New Mexico.
"Given the ominous picture of personal income tax collections, deeper overall revenue shortfalls and further deterioration in states’ fiscal conditions are likely on the way for most states for the April-June quarter of calendar year 2009," said Rockefeller Institute Senior Fellow Donald J. Boyd, who co-authored the report with Senior Policy Analyst Lucy Dadayan.
"It is clear that state income tax revenue in April and May has fallen short of what states expected by many billions of dollars," said Boyd. "Exactly how that will translate into new budget shortfalls is not clear, but budget gaps are likely to have increased by several multiples of the amount by which tax revenue has fallen short. Many states have begun revising their budget forecasts so that elected officials can take the new shortfalls into account as they finalize their budgets."
The answer? Raise rates: Many states are responding to the dire collection numbers by increasing their tax rates. My tax blogging colleague taxgirl has taken a look at state tax increases in New Jersey and several other states.
It's a natural reaction, but it might not help. If people aren't making as much money, either because they've lost their taxable income paying jobs or their investment income evaporated as the stock market crashed, then state treasuries also are out of luck.
Target millionaires: So legislators in several states have taken to targeting those they think (hope) will be more able to pay: their wealthiest residents.
The latest state to enact a so-called "millionaire tax" is Hawaii. According to the Tax Foundation, the Aloha State is the fifth one to increase its top individual income tax bracket, joining California, Maryland, New Jersey and New York.
Such taxes are unique, say Tax Foundation analysts, in that they impose a top rate near or above 10 percent on a small subset of high-income earners.
But the problem is that it's not just the wealthy who get caught in the increase.
The income level at which the new top rate applies is often a sharp jump from where the previous top rate applies, according to the Tax Foundation, but with each new "millionaire's tax," the tax is kicking in on more and more people who are not millionaires.
The 10 states with the highest rates: Where does you state rank in the overall income tax rate ranking? According to a recent Forbes.com article, the average rate in the states that levy income taxes is 6.5 percent.
Some, as we noted, have much higher rates.
Forbes.com researchers have compiled a slide show of the 10 states with the highest rates. In case you don't have time to view the details now, here's the list, starting with the 10th highest rate, along with the top rate for each state:
Minnesota, 7.85 percent
Maine, 8.5 percent
New Jersey, 8.97 percent
New York, 8.97 percent
Iowa, 8.98 percent
Oregon, 9 percent
Vermont, 9.5 percent
Rhode Island, 9.9 percent
California, 10.55 percent
Hawaii, 11 percent
As you can see, even taxpayers in the Midwest, a region typically thought to be less-inclined to raise taxes, aren't exempt from the high top tax rate trend.
State personal income tax collections dropped 26 percent nationwide through the first four months of 2009 compared with a year ago, putting many states' already troubled budgets into deeper holes.
The percentage drop comes to $28.8 billion less than the same period a year earlier, according to an examination of state income tax collections by the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York.
The report, "April Is the Cruelest Month," tallied state tax collections from January to April for 37 of the 41 states that impose broad-based personal income taxes. April is the month during which states collect the most income tax revenue because most follow the federal April 15 filing deadline.
Of the 37 states reviewed, the Rockefeller Institute found that 34 reported revenue declines. Arizona experienced the steepest drop, a 54.9 percent decrease from last year.
Other states with tax revenue decreases greater than the U.S. average this year, in order of revenue lost percentages, include South Carolina, Michigan, California, Vermont, New York, Rhode Island, New Jersey, Massachusetts, Idaho, Ohio and Oregon.
The Rockefeller Institute news wasn't totally terrible. Three states -- Utah, Alabama and North Dakota -- were able to bring a bit more tax money this year versus last year's collections.
Data were not available in time for the report from Kentucky, Missouri, Mississippi, and New Mexico.
"Given the ominous picture of personal income tax collections, deeper overall revenue shortfalls and further deterioration in states’ fiscal conditions are likely on the way for most states for the April-June quarter of calendar year 2009," said Rockefeller Institute Senior Fellow Donald J. Boyd, who co-authored the report with Senior Policy Analyst Lucy Dadayan.
"It is clear that state income tax revenue in April and May has fallen short of what states expected by many billions of dollars," said Boyd. "Exactly how that will translate into new budget shortfalls is not clear, but budget gaps are likely to have increased by several multiples of the amount by which tax revenue has fallen short. Many states have begun revising their budget forecasts so that elected officials can take the new shortfalls into account as they finalize their budgets."
The answer? Raise rates: Many states are responding to the dire collection numbers by increasing their tax rates. My tax blogging colleague taxgirl has taken a look at state tax increases in New Jersey and several other states.
It's a natural reaction, but it might not help. If people aren't making as much money, either because they've lost their taxable income paying jobs or their investment income evaporated as the stock market crashed, then state treasuries also are out of luck.
Target millionaires: So legislators in several states have taken to targeting those they think (hope) will be more able to pay: their wealthiest residents.
The latest state to enact a so-called "millionaire tax" is Hawaii. According to the Tax Foundation, the Aloha State is the fifth one to increase its top individual income tax bracket, joining California, Maryland, New Jersey and New York.
Such taxes are unique, say Tax Foundation analysts, in that they impose a top rate near or above 10 percent on a small subset of high-income earners.
But the problem is that it's not just the wealthy who get caught in the increase.
The income level at which the new top rate applies is often a sharp jump from where the previous top rate applies, according to the Tax Foundation, but with each new "millionaire's tax," the tax is kicking in on more and more people who are not millionaires.
The 10 states with the highest rates: Where does you state rank in the overall income tax rate ranking? According to a recent Forbes.com article, the average rate in the states that levy income taxes is 6.5 percent.
Some, as we noted, have much higher rates.
Forbes.com researchers have compiled a slide show of the 10 states with the highest rates. In case you don't have time to view the details now, here's the list, starting with the 10th highest rate, along with the top rate for each state:
Minnesota, 7.85 percent
Maine, 8.5 percent
New Jersey, 8.97 percent
New York, 8.97 percent
Iowa, 8.98 percent
Oregon, 9 percent
Vermont, 9.5 percent
Rhode Island, 9.9 percent
California, 10.55 percent
Hawaii, 11 percent
As you can see, even taxpayers in the Midwest, a region typically thought to be less-inclined to raise taxes, aren't exempt from the high top tax rate trend.
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