The Purple Briefcase

Two important tax filing tips for your business

2012-01-05T15:04:00.000-05:00

Happy New Year! We at Scott and Company hope 2011 was a good year for you and offer best wishes for an even better 2012. As you begin to think about 2011 tax returns for your business, please keep these two filing tips in mind:

You already know that S Corporation shareholders who provide services to the corporation should receive a W-2 reporting their reasonable compensation for those services. Please make sure that you also include certain benefits paid by the corporation on behalf of the shareholders as compensation on the W-2. These benefits include medical insurance, dental insurance, long-term care insurance premiums, personal use of a business vehicle, and life insurance premiums on any policy for which the shareholder or shareholder’s family is the beneficiary. Of this list, medical insurance premiums are particularly important because, under IRS rules, they cannot be deducted by the shareholder on his/her personal tax return unless they are included on the W-2. The due date for providing W-2s to your employees is January 31, 2012. The due date for filing government copies of W-2s for the 2011 tax year is February 29, 2012, or April 2, 2012 if you e-file.
Don’t forget to prepare 1099-MISC forms for all independent contractors to whom your company paid $600 or more in exchange for services during the year. This rule has been in effect for many years, but these filings are especially important this year because, for the first time, business income tax returns will include a check box on the forms for the owner to affirm that he/she has prepared and filed all necessary 1099-MISC forms. Please take a good look at your vendor list and identify any independent contractors for which this rule may apply. The due date for mailing 1099-MISC forms to contractors is January 31, 2012. The due date for filing copies with the IRS is February 29, 2012, or April 2, 2012 if you e-file.

We are happy to provide preparation services for either of these forms so please call to discuss your needs. Whether you use our services to prepare these forms or not, though, please feel free to contact us at 803-256-6021 with any questions. We are happy to work with your payroll provider or internal staff to make this a smooth filing season.

2011 Year End Tax Planning Ideas

2011-11-07T09:09:00.003-05:00

Year-end tax planning is especially challenging this year because of uncertainty over whether Congress will enact sweeping tax reform that could have a major impact in 2012 and beyond. And even if there's no major tax legislation in the immediate future, Congress next year still will have to grapple with a host of thorny issues, such as whether to once again “patch” the alternative minimum tax (e.g., to avoid a drastic drop in post-2011 exemption amounts), and what to do about the post-2012 expiration of the Bush-era income tax cuts (including the current rate schedules, and low tax rates for long-term capital gains and qualified dividends), and the expiration of favorable estate and gift rules for estates of decedents dying, gifts made, or generation-skipping transfers made after Dec. 31, 2012.

Regardless of what Congress does late this year or early the next, there are solid tax savings to be realized by taking advantage of tax breaks that are on the books for 2011 but may be gone next year unless they are extended by Congress. These include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line deduction for qualified higher education expenses; and tax-free distributions by those age 70 1/2 or older from IRAs for charitable purposes. For businesses, tax breaks that are available through the end of this year but won't be around next year unless Congress acts include: 100% bonus first year depreciation for most new machinery, equipment and software; an extraordinarily high $500,000 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property); and the research tax credit.

We 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 will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Year-End Tax Planning Moves for Individuals

•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 no longer 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 2011.

•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 2012 and accelerate deductions into 2011 to lower your 2011 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2011 that are phased out over varying levels of adjusted gross income (AGI). These include child tax 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 2011. 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 2011.

• If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as-is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

•It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2012.

•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 2011 if doing so won't create an alternative minimum tax (AMT) problem.

•Take an eligible rollover distribution from a qualified retirement plan before the end of 2011 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2011. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2011, but the withheld tax will be applied pro rata over the full 2011 tax year to reduce previous underpayments of estimated tax.

•Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2011, 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 not be accelerated.

•Accelerate big ticket purchases into 2011 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. Unless Congress acts, this election won't be available after 2011.

•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, or an energy efficient heater or air conditioner. You may qualify for a tax credit if the assets are installed in your home before 2012.

•Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2011 in connection with enrollment at an institution of higher education during 2011 or for an academic period beginning in 2011 or in the first 3 months of 2012.

•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.

Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2012, and (2) held for more than five years. In addition, such sales won't cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. Our office can fill you in on the details.

•If you are age 70-1/2 or older, own 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.

• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2011, you can delay the first required distribution to 2012, but if you do, you will have to take a double distribution in 2012—the amount required for 2011 plus the amount required for 2012. Think twice before delaying 2011 distributions to 2012—bunching income into 2012 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2012 if you will be in a substantially lower bracket that year, for example, because you plan to retire late this year.

• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited number of individuals but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for Businesses & Business Owners

•Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax years beginning in 2012, the dollar limit will drop to $139,000, the beginning-of-phaseout amount will drop to $560,000, and expensing won't be available for qualified real property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.

•Businesses also should consider making expenditures that qualify for 100% bonus first year depreciation if bought and placed in service this year. This 100% first-year writeoff generally won't be available next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.

•Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2011. Under current law, the WOTC won't be available for workers hired after this year.

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

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

•Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.

•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.

Source: Checkpoint

2012 Tax Update

2011-10-20T16:19:00.000-04:00

For 2012, the Social Security wage base will increase to $110,100 from the 2011 amount of $106,800. This is the maximum amount of wages or self-employment income on which an individual must pay Social Security tax (also known as Old Age, Survivor, and Disability insurance or OASDI). View the official SSA press release.

The IRS also recently released some 2012 updated figures:

Personal and dependent exemptions will increase to $3,800, up $100 from 2011
2012 standard deductions are:

$11,900 for married filing joint, up $300
$5,950 for single and married filing separate, up $150
$8,700 for head of household, up $200

The 401(k) contribution limit increases from $16,500 to $17,000 and the catch up provision for those over the age of 50 stays at $5,500

View the full IRS news releases

2011 Social Security Tax Cut

2011-01-14T10:46:00.000-05:00

The biggest new tax break for individuals in the recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” is the one-year payroll tax reduction. Under this new provision the payroll tax—which funds Social Security—will be cut by two percentage points during 2011.

Here are the details:

The Social Security payroll tax on individual wages will be lowered to 4.2% in 2011, from the usual 6.2% rate. For an individual with wages of $60,000, that amounts to a $1,200 savings for individuals with an income of $60,000. If the individual gets paid twice a month, it will mean an extra $50 in his or her paycheck starting in January.
Self-employed workers will also get the tax break. Their self-employment taxes will be cut from 12.4% to 10.4%.
There is no phaseout (i.e., gradual reduction) of the payroll tax reduction for higher income workers. It goes to everyone who works, regardless of income. However, since Social Security taxes apply only to the first $106,800 in earnings in 2011, the benefit for high earners tops out at $2,136.
The payroll tax reduction in effect replaces the $400-per-worker tax break included in the 2009 stimulus bill. That break, called the Making Work Pay tax credit, provided a tax credit of 6.2% on the first $6,450 of a workers's wages but was phased out for workers making more than $75,000 ($150,000 for couples). The Making Work Pay credit, which was billed as a way to stimulate the stalled economy, is widely though to have had little if any success in that regard, in part because of the small amounts involved—$400 for individuals, $800 for couples. The new law's payroll tax reduction, by contrast, provides a potentially much bigger tax break for taxpayers (up to $2,136 for individuals, $4,272 for couples). In addition, the benefits of the payroll tax reduction are distributed far differently than they were under the Making Work Pay credit, which was aimed primarily at low and moderate-income workers. For example, an individual making $100,000 in 2011 will be able to keep an extra $2,000 under the payroll tax reduction, but under the Making Work Pay credit (which was phased out for earnings over $75,000), the individuals's tax break would have been zero.
The employer's share of Social Security tax is not affected; it stays at 6.2%. Thus, the cost of hiring new workers isn't directly affected by the payroll tax reduction.
The tax break only applies for one year, 2011—for now anyway. There will almost certainly be efforts to extend it beyond 2011, and I will keep you apprised of any developments in that regard.
The payroll tax reduction will not affect the worker's future Social Security benefit, because benefits are based on lifetime earnings, not the amount of tax paid by the worker into the Social Security system.

If you are processing your own payroll for your small business, then make sure you are using the correct percentage when withholding Social Security tax from your employees' paychecks.

If you need additional information, then feel free to contact me at tperricelli@scottandco.com.

2010 Year End Tax Planning & Another 2010 Tax Relief Act Resource

2010-12-23T09:18:00.003-05:00

Take a look at this 2010 year-end tax planning letter from the national accounting firm BDO. Our firm is an independent member of BDO's Alliance. We work with BDO and other Alliance members across the country to offer the best tax and accounting resources available.

BDO has also written an excellent overview of the 2010 Tax Relief Act that you might find useful.

Overview of the 2010 Tax Relief Act

2010-12-22T14:41:00.000-05:00

The recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses.
Here's a look at the key elements of the package:

The current, favorable income tax rates will be retained for two years (2011 and 2012), with a top tax of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
Employees and self-employed workers get a reduction of two percentage points in Social Security tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.
A two-year AMT “patch” for 2010 and 2011 provides a modest increase in AMT exemption amounts and allows personal nonrefundable credits to offset AMT as well as regular tax.
Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 are retained. For example, the new law extends for two years (a) the $1,000 child tax credit (and maintains its expanded refundability), and (b) the American Opportunity tax credit for higher education, and its partial refundability.
Two crackdowns on deductions for higher-income people have been deferred. For 2011 and 2012, higher-income individuals will not face a reduction in their itemized deductions or a phaseout of personal exemptions.
Businesses can write off 100% of their new equipment and machinery purchases in the placed-in-service year, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.
Many of the popular tax breaks that went off the books at the end of 2009 have been retroactively reinstated for 2010 and extended through the end of 2011. Among many others, the retroactively reinstated and extended individual and business provisions include the election to take an itemized deduction for state and local general sales taxes instead of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit. The credit for making energy-saving improvements for a home has been extended for one year, through 2011, but much tougher rules apply after 2010.
After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35% and a step-up in basis. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010's or 2011's rules.

Again, these are just highlights--if you would like more details about any aspect of the new legislation, then feel free to contact me at tperricelli@scottandco.com.

Key business changes in the 2010 Small Business Jobs Act

2010-10-07T08:59:00.003-04:00

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for businesses. Here's a brief overview of the tax changes in the Small Business Jobs Act.

Enhanced small business expensing (Section 179 expensing). To help small businesses quickly recover the cost of capital outlays, small business taxpayers can elect to write off these expenditures in the year they are made instead of recovering them through depreciation. Under the old rules, taxpayers could generally expense up to $250,000 of qualifying property—generally, machinery, equipment and software—placed in service in during the tax year. This annual limit was reduced by the amount by which the cost of property placed in service exceeded $800,000. Under the Small Business Jobs Act, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment limit to $2,000,000. The Small Business Jobs Act also makes certain real property eligible for expensing. Thus, for property placed in service in any tax year beginning in 2010 or 2011, the $500,000 amount can include up to $250,000 of qualified leasehold improvement, restaurant and retail improvement property.

Extension of 50% bonus first-year depreciation. Before the Small Business Jobs Act, Congress already allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property placed in service in 2008 or 2009 by permitting the first-year write-off of 50% of the cost. The Small Business Jobs Act extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (as well as 2011 for certain aircraft and long production period property).

Boosted deduction for start-up expenditures. The Small Business Jobs Act allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

100% exclusion of gain from the sale of small business stock Ordinarily, individuals can exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). This percentage exclusion was temporarily increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the Small Business Jobs Act, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after September 27, 2010 and held for more than five years. In addition, the Small Business Jobs Act eliminates the alternative minimum tax (AMT) preference item attributable to such sales.

General business credits of eligible small businesses for 2010 get five-year carryback. Generally, a business's unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under Small Business Jobs Act, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years instead of just one. Eligible small businesses are sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

General business credits of eligible small businesses not subject to AMT for 2010. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The Small Business Jobs Act allows eligible small businesses to use all types of general business credits to offset their AMT in tax years beginning in 2010.

Deductibility of health insurance for the purpose of calculating self-employment tax. The Small Business Jobs Act allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.

Cell phones no longer listed property. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

S corporation holding period for appreciated assets shortened to five years. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years or face a built-in gain tax at the highest corporate rate of 35%. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.

New tax break for long-term contract accounting. The Small Business Jobs Act provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation in 2010 is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.

Limitation on penalty for failure to disclose certain reportable transactions. The Small Business Jobs Act generally limits the penalty to 75% of the decrease in tax resulting from the transaction, retroactively to penalties assessed after Dec. 31, 2006. Minimum and maximum penalties apply.

Revenue raisers. These tax breaks come at a cost. To mention a few of these unfavorable provisions, information reporting will generally be required for rental property expense payments made after Dec. 31, 2010, and increased information return penalties will be imposed.

These items are only highlights of the most important changes in the Small Business Jobs Act. If you would like more details about any aspect of the new legislation, then feel free to contact me at tperricelli@scottandco.com.

Do you have a 529 plan? Then read this.

2010-06-09T10:06:00.004-04:00

529 College Savings Plans are popular vehicles through which to save for college expenses, especially for those individuals with income that is too high to qualify for other education credits and deductions. But what are the tax consequences when you withdraw money from a 529 plan?

In general, money withdrawn from a 529 plan is not taxable if it is used for qualified education expenses such as tuition, room & board. But there are some finer points that are good to know and this article does a great job of explaining them. Please take a look if you currently have a 529 plan or plan to open one.

As always, feel free to contact me at tperricelli@scottmcelveen.com with any question or comments.

Can I deduct my Home Office?

2010-03-04T11:24:00.005-05:00

This is a question I get quite often this time of year as I meet with clients, especially small business clients who work as independent contractors.

This article explains the basic requirements to qualify for the deduction.

Contact me at tperricelli@scottmcelveen.com if you would like to discuss this in more detail.

2010 Tax Proposals

2010-02-04T15:25:00.001-05:00

Dean Zerbe has a great article about the likelihood of seeing certain new tax laws passed this year.

Jan/Feb Donations to Haiti relief deductible in 2009

2010-01-26T15:42:00.002-05:00

A new law was recently enacted allowing donors who give to Haiti relief efforts between January 11, 2010 and March 1, 2010 to deduct these donations on their 2009 tax returns rather than wait to deduct them on their 2010 returns.

Read the IRS news release for details.

Is it a repair or a depreciable asset?

2010-01-22T13:22:00.006-05:00

When you pay a contractor to paint one of your rental properties, can you deduct the entire amount as a repair or maintenance expense? In most cases, yes, you can. What about the cost of paving a driveway or parking lot at your company's manufacturing facility? That's a little trickier, but, in some cases, you might be able to deduct the entire cost in the year you incur it rather than capitalizing the expense and taking depreciation deductions slowly over several years.

This article from accountingweb.com discusses some of the nuances and opportunities of this kind of thinking, including the opportunity to file certain paperwork to catch up on any unclaimed deductions from prior years.

If you've ever considered the tax advantages of a real estate cost segregation study, then this discussion about repairs vs. assets may sound familiar. Both are exercises in classifying costs in the proper manner based on the rules and regulations set by Congress and the IRS. Cost segregation studies pick up where the repair vs. asset debate leaves off. Once the proper current expenses are pulled out, then cost segregation studies ensure that all remaining costs classified as assets are being depreciated over the correct number of years (i.e. the least number of years allowable).

Our firm, through our association with the BDO Seidman Alliance, provides high-quality, engineering based cost segregation studies for owners of commercial, industrial and residential real estate. I've personally been involved in many studies and all of them have produced excellent results for the property owners. By combining a thorough assessment of all repair and maintenance costs with an engineering based cost segregation study, you can rest assured that you are taking the maximum amount of deductions allowed for the costs associated with your business or rental property.

Please contact me at 803-753-5244 if you are interested in discussing your tax situation.

Should you convert from a Traditional to Roth IRA?

2010-01-18T12:56:00.007-05:00

There are many factors to consider when answering that question, but a couple of the restrictions that kept many individuals from making the conversion in the past have been eliminated.

Prior to 2010, converting a traditional IRA to a Roth IRA was allowed only if your gross income was less than $100,000 and your filing status was not married filing separate. That changes this year, though. The Tax Increase Prevention & Reconciliation Act of 2005 eliminated the restrictions on income and filing status beginning this year.

That same act allows a special incentive for conversions that occur during 2010--you may elect to recognize the income (and pay the related tax) in equal portions in 2011 and 2012. This delayed recognition will not only give you some extra time to pay the tax due on the conversion, but will also allow you some additional time to be certain that a conversion is right for you. This extra time for assessment is important because if you find after the fact that the conversion is not your best option (because of a drop in account value or any other reason), then you can reverse the conversion up to 6 months after the regular due date of the tax return for the year of conversion.

Please see this article from the January 2010 Journal of Accountancy for a nice rundown of the details and some advice on what factors your should consider in making your decision.

Year-end tax planning tip #3 - Expiring Provisions

2009-12-15T13:10:00.008-05:00

On December 31, 2009, several tax deductions and credits will expire under current tax law. As with any tax law, these could be extended at the last minute. Even so, it pays to know what they are and have the option to take advantage of them before they disappear. Here are a few of the most popular provisions:

$250,000 Section 179 expensing limit for purchases of machinery, equipment, and certain vehicle for use in your business will decrease. This expensing option will not expire at 12/31/2009, but the limit will decrease to $125,000 for years beginning after that date. You might be able to increase your immediate expensing amount by making major purchases and putting the assets into service before 12/31/2009.
50% bonus depreciation will expire on 12/31/09. You will want to coordinate this deduction with the Sec 179 deduction to maximize its effect on your tax bill. Unlike the Section 179 option, though, this one completely disappears so you definitely need to move quickly to take advantage of it.
The above-the-line tuition deduction of up to $4,000 will expire on 12/31/09. If your adjusted gross income is less than $80,000 for single filers or $160,000 for joint filers, then you might benefit from paying college tuition for the Spring 2010 semester before 12/31/09. Tax credits for tuition payments will still be available after 12/31/09, so not everyone will be better off by pre-paying. Careful planning needs to take place to maximize your tax impact.
The option to deduct sales tax instead of state and local income tax expires on 12/31/09.
The special allowance to deduct sales tax paid on the purchase of a new vehicle only applies to purchase made on or before 12/31/09.

Feel free to contact me to discuss any of these provisions and how they might impact your personal tax situation.

Year-end planning article links

2009-12-11T10:04:00.003-05:00

In addition to my personal year-end tax planning, tips, I will update this post with links to articles from other professionals:

http://www.brookfieldnow.com/userstoriessubmitted/78766167.html
http://www.webcpa.com/ato_issues/2009_17/-51781-1.html
http://www.businessweek.com/smallbiz/content/nov2009/sb2009115_957502.htm
http://newsblogs.chicagotribune.com/marksjarvis_on_money/2009/12/use-december-to-cut-2009-taxes.html
http://www.smartmoney.com/personal-finance/taxes/year-end-tax-planning-strategies-for-individuals/

Year-end tax planning tip #2 - Sell Investments to Take Losses

2009-12-08T08:42:00.006-05:00

If you have investments such as stocks, mutual funds, or bonds that are currently trading for less than you originally paid for them, then it might be beneficial to sell those investments before the end of the year so you can deduct the losses on your 2009 tax return. If you are considering this, then please be aware of the following:

Selling these investments at a loss creates a capital loss which is only deductible against capital gains. A special rule does allow up to $3000 of capital loss to be deducted against other income such as wages, interest, and business income, though. So even if you have no capital gains this year, capital losses can still provide a small amount of tax benefit.
If your capital losses exceeds your capital gains by more than $3000, then the excess loss is carried forward and can be used in later tax years.
If you sell an investment holding at a loss and buy back the same holding within 30 days of the loss sale, then the loss will be disallowed under the "wash rule." The "wash rule" applies even if the loss sale occurs in December 2009 and the subsequent purchase of the same holding occurs in January 2010. There is no "reset" at the end of the year. If you wait 31 days to buy back the holding, then the wash rule does not apply.

As with any tax planning technique, though, don't let tax law be the only factor that influences your decision. Educate yourself about the non-tax consequences of this strategy with your investment advisor or other professional to be certain selling investments at a loss fits into your overall financial plan.

What tax changes to expect in 2010 and 2011

2009-12-07T15:27:00.005-05:00

It's always difficult to try and predict the future with any certainty, but Dean Zerbe, a tax credit specialist with AlliantGroup, tries to do so in his recent Forbes article. Mr. Zerbe makes some good points and I think has some good advice for anyone who would like a basic framework for tax planning during this transition period.

The reason for the transition period and so much uncertainty in the next 2 years is because the Bush tax cuts passed in 2001 are about to sunset and Congress has not yet passed permanent or temporary extenders for these laws.

Year-end tax planning tip #1 - Energy Saving Home Improvements

2009-12-01T17:17:00.002-05:00

Don't forget that a tax credit worth up to $1500 is available if you make certain energy-saving home improvements before the end of the year. I mentioned this in a post earlier this year. The credit is available for both 2009 & 2010 so you won't miss out completely if you wait until next year. But if you are already planning to make eligible improvements, then why not make them by the end of 2009 and get the credit sooner?

Another good overview of the new tax law

2009-11-20T11:50:00.001-05:00

Here's a Tax Alert from BDO Seidman, LLP about the Worker, Homeownership and Business Assistance Act of 2009.

New Tax Law signed - Homebuyer Credit officially extended

2009-11-10T16:19:00.004-05:00

The Worker, Homeownership & Business Assistance Act of 2009 was signed into law last week making the extension and expansion of the Homebuyer credit official.

All of the proposals I mentioned in the last article are included.

This law also has some interesting business items such as a generous expansion of the loss carryback rules which could put cash in your pocket if your business suffers a loss this year. Contact me at tperricelli@scottmcelveen.com for details.

See here & here for more details.

Senate Proposal to extend the Homebuyer Credit

2009-11-04T09:08:00.008-05:00

Here is the latest on the Homebuyer Credit extension proposal:

Congress is moving to extend this credit from the original expiration date of November 30, 2009 to a new expiration date of April 30, 2010. Under the current proposal, if you have a contract signed on or before April 30, 2010, then you have an additional 60 days to close the sale and still qualify for the credit.
The current Senate proposal would also add a new Homebuyer Credit of $6500 for anyone who purchases a home and has owned and used the same principal residence for at least 5 consecutive years of the last 8 years.
The revamped credits do have some restrictions:

1) Purchase price of the new home must be less than $800,000
2) Your gross income must be less than $125,000 if filing single or $225,000 if filing joint

Some interesting articles on this topic are here and here.

Links from the July 25 ProSystemOne event in Kissimmee

2009-07-29T20:51:00.002-04:00

Thanks again to the Picis and the rest of the ProSystemOne group for letting me give you some ammunition in your fight to keep the money you've worked so hard to earn. As promised, here are links to all the IRS documents I referenced in my presentation:

Publication 505 - Tax Withholding & Estimated Tax This Publication discusses how to calculate withholding & estimated tax payments to avoid the underpayment penalty

Publication 463 - Travel, Entertainment, Gift & Car Expenses This Publication discusses the proper deductibility, calculations, and record-keeping for this tricky area of tax law.

Publication 587 Business Use of Your Home This Publication discusses the allowable expenses and necessary calculations for deducting a home office.

Publication 502 Medical and Dental Expenses This Publication discusses what types and amounts of medical expenses are deductible.

Publication 560 Retirement Plans for Small Businesses (SEP, SIMPLE and Qualified Plans) I didn't get to discuss this area because of time restraints so look it over if you have an interest in making deductible retirement plan contributions.

Retail Industry Audit Technique Guide This is the document I read from at the end of my presentation. It's the guide the IRS uses to educate its agents about particular types of businesses they will be auditing. Skip to page 3-98 for the section on Direct Sellers. This document could be the most valuable one you download if you are ever faced with the specter of an IRS audit.

Here are a few additional documents that might be useful to you as you manage the taxes related to your business:

Publication 334 Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)

Publication 583 Starting a Business and Keeping Records

Publication 1518 The IRS Tax Calendar for Small Businesses & Self-Employed

If you have questions, then please request my contact information from Joe or Dawn.

Tax Credits for Energy Efficient Home Improvements

2009-05-05T21:10:00.005-04:00

The American Recovery and Reinvestment Act of 2009 made some changes to the tax credits allowed for energy efficient improvements made to a residence. Prior to 2009, the credit was 10% of the cost of certain improvements such as replacement windows. The old law imposed a lifetime limit of $500 on the credit.

Under the new 2009 law, the credit amount is increased to 30% of the cost of energy efficient improvements and the maximum allowed credit is increased to an aggregate of $1500 for the years 2009-2010 which are currently the only years to which the new law applies. The new law also expands the types of improvements that are eligible for the credit to include water heaters and HVAC systems.

The best resource I have found for researching this credit is the Energy Star website's tax credit section. This section gives a complete listing of eligible improvements as well as links to other websites that list model numbers that qualify for the credit.

Another resource you might want to look at is a news release from the IRS website.

First-Time Hombuyer Credit logistics

2009-03-26T09:35:00.002-04:00

Last week I served on the phone bank for WIS-TV's Tax Tuesday segment. The most common subject of questions was the First-Time Homebuyer Credit from the tax bill passed in February. I sense confusion about the timing and logistics of this credit.

The new, $8000 credit that does not require re-payment is only available to qualifying buyers who close from Jan 1, 2009 to Nov 30, 2009. Here's where it gets a little tricky--you can take the credit on your 2009 tax return or your 2008 tax return by using a special election, even if you have already filed your 2008 return.

This IRS news release gives the details.

Another Economic Stimulus Bill link

2009-02-19T11:42:00.004-05:00

This one comes from BDO Seidman, LLP, we are part of their national alliance.

Washington Tax Report: The American Recovery and Reinvestment Tax Act of 2009

Links to info on the 2009 Economic Stimulus Bill tax provisions

2009-02-18T15:23:00.006-05:00

Here are a few links to info on the tax changes included in the bill. I will post more detailed info over the next couple of weeks.

Who gets what in Stimulus Bill?
Tax Breaks for Individuals in the Stimulus Bill
Tax Breaks for Small Business in the Stimulus Bill
Bullet Point Summary of Provisions

Tax Strategies for Stock Losses

2008-12-30T09:36:00.002-05:00

If you're wondering how to best take advantage of stock losses on your income tax returns, then read this article for some good tips.

Other than simply selling shares at a loss and taking the loss on your return, the article also mentions taking advantage of reduced share prices to:

Gift shares to children or grandchildren
Sell inherited stock with a low basis to minimize taxable income
Minimize the tax hit from converting a traditional IRA to a Roth IRA

Don't forget that to the extent that capital losses exceed capital gains, you can only deduct $3000 each year against other income. The rest of the loss has to be carried forward to the next year.

New business incentives for 2008

2008-10-27T16:34:00.007-04:00

The Economic Stimulus Act of 2008 passed earlier this year made three major changes to the way businesses are allowed to write-off, or depreciate, equipment and vehicle purchases.

First, the Act increases the Section 179 special allowance for immediate write-off of business equipment & work vehicles from $128,000 to $250,000 for 2008. Normal depreciation rules allow a business to write-off the purchase price of business assets over a 5 or 7 year period. However, a special allowance in Section 179 of the IRS code allows most small businesses to write-off the total purchase price of business assets up to a pre-set limit each year. The new law allows small businesses to immediately write-off $250,000 of equipment purchases, almost twice the amount under the old law. This write-off is generally reduced, and possibly eliminated, if a business acquires more than a pre-set upper threshold amount of new assets during the year. But the Act allows the full $250,000 write-off as long as a business does not acquire more than $800,000 an increase of $290,000 to this upper threshold.

Second, the Act allows businesses to elect a 50% "bonus" write-off for qualifying assets purchased in 2008. This "bonus" write-off is similar to the write-off provisions passed shortly after September 11, 2001 which expired at the end of 2004. The new law allows businesses to write-off 50% of the purchase price of new business assets purchased before January 1, 2009. After taking the "bonus" depreciation, businesses are allowed to take normal write-offs on the remaining 50% of the purchase price, even the special Section 179 write-off. By combining the 50% "bonus" write-off with the Section 179 write-off, most small businesses should be able to write-off the entire purchase price of most equipment and vehicle purchases made during the 2008 tax year.

Third, the Act increases the first-year write-off limits for passenger vehicles used in a business by $8,000 to a total of up to $11,160. This limitation applies to vehicles that do not qualify under the other write-off provisions and includes most passenger vehicles that are used at least 50% of the time for business purposes. Ii does not apply to work vehicles such as trucks and vans, nor does it apply to any vehicle with a GVW greater than 6000 lbs. that is used at least 50% of the time for business purposes.

New IRS mileage rates effective as of 7/1/08

2008-08-12T16:02:00.003-04:00

New IRS mileage rates are now in effect for the 2nd half of 2008.

IRS announces details about Economic Stimulus payments

2008-03-17T15:07:00.004-04:00

The IRS issued a news release today giving details about the payments including a schedule based on Social Security Numbers.

Economic Stimulus Act of 2008

2008-02-09T11:09:00.000-05:00

There's more than just tax rebates in this bill that Congress recently passed and President Bush is expected to sign. Here is a brief overview of the major provisions.

What is the Alternative Minimum Tax?

2007-12-31T10:26:00.000-05:00

I get this question often, especially when I tell a client that he/she will not get a refund because of it. Here is a nice overview of the AMT and its history.

Do you flip properties?

2007-11-13T09:50:00.000-05:00

This article gives a nice overview of the tax consequences related to flipping properties.

Social Security Tax to increase in 2008

2007-10-18T08:49:00.000-04:00

The Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) in 2008 rises to $102,000 from $97,500 in 2007, an increase of about 4.6%. The $4,500 increase is due to an increase in average total wages. Read the news release.

According to the SSA, "nearly 12 million [workers] will pay higher taxes as a result of the increase in the taxable maximum." (www.ssa.gov)

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).

The FICA tax rate for employees and employers is 7.65% each—6.2% for OASDI and 1.45% for HI. For self-employed workers, the FICA tax is 15.3%—12.4% for OASDI and 2.9% for HI. There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.

2007 Year-End Tax Planning Ideas

2007-10-04T08:57:00.000-04:00

As the end of the year approaches, it is a good time for you to engage in tax planning, which will be more challenging than usual because of uncertainty over whether and how Congress will extend AMT relief to avoid millions more becoming entrapped by it in 2007, and whether Congress will extend a number of important tax breaks expiring at the end of 2007. For individuals, these include the option to deduct state and local sales and use taxes, the above-the-line deductions for qualified tuition expenses and educator expenses, the tax credit for making qualifying energy saving improvements to a home, such as insulation and energy-saving windows, and the option for individuals who have attained age 70 1/2 to exclude up to $100,000 a year for otherwise taxable distributions from an IRA (or a Roth IRA) that are paid directly to a qualifying charitable organization by the IRA trustee.

Here is a checklist of actions that may help you to save taxes if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them.

Increase the amount you set aside for next year in your employer's health flexible spending account if you set aside too little for this year. Don't forget you can set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
If you have any capital gains or losses from sales of stock or other capital assets or you have stock or other capital assets that are ripe for sale, it may be advisable for us to meet to discuss how you can best coordinate timing your gains and losses to minimize tax on your gains and maximize the tax benefit from your losses.
If you or a family member are thinking of selling appreciated stock or other capital assets, and your (or their) income isn't taxed at a rate higher than 15%, it may pay to hold off on the sale until 2008. That way you may pay a zero tax on the gain; if you sell this year, you will pay a 5% tax on the gain.
It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2008.
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 are thinking of making energy saving improvements to your home, such as putting in extra insulation or installing energy saving windows, consider doing so before year end in order to qualify for a tax credit that may not be available after 2007.
If you are thinking of buying a hybrid vehicle eligible for a tax credit, purchase it before year-end after confirming that the particular model still qualifies for the credit.
You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
Business clients also should consider making expenditures that qualify for the $125,000 business property expensing option.
You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
You may be able to save taxes this year and next year by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
Those facing a penalty for underpayment of estimated tax may be able to eliminate or reduce it by increasing their withholding.
Self-employed individuals should consider setting 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 $12,000 in 2007 to an unlimited number of individuals but you can't carry over unused exclusions from one year to the next.
This year, the kiddie tax rules apply to kids under age 18; next year they will also ensnare most children age 18 and most full time students age 19 through 23. If your child holds appreciated stock, and isn't in kiddie tax territory this year but will be in 2008, consider having him or her sell the stock this year. In many cases this will result in a 5% tax on the gain, instead of 15% if the sale is postponed till next year.
If you're thinking of donating a used auto to charity, you may want to inquire whether the charity plans to sell the car or use it in its charitable activities; the latter may yield a bigger deduction for you.
If you are contemplating marriage or divorce consider how marriage penalties could affect you.
If you are age 70 1/2 or older, and own IRAs (or Roth IRAs), and are thinking of making a charitable gift before year-end, arrange for the gift to be made directly by the IRA trustee. Such a transfer can achieve important tax savings but it won't be available after 2007 under current law.
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 asking your employer to increase withholding of state and local taxes to pull the deduction of those taxes into this year (but only if doing so won't cause an AMT problem).
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 2007 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 2008, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.

Telephone Excise Tax Refund

2007-02-01T09:32:00.000-05:00

On 2006 income tax returns, the IRS is offering a one-time credit to refund excise taxes paid on long distance telephone charges from February 28, 2003 to August 1, 2006. This is being done because a federal court ruled last year that the IRS was improperly imposing the tax on most long distance telephone services.

Individuals have two options for claiming the refund:
1) You may request a standard amount of $30-$60 (based on the number of exemptions you claim) on your 2006 individual income tax return, or
2) You may go through your phone bills for the 41-month covered period and request a refund of the actual amount of excise tax improperly paid using IRS Form 8913.

Businesses also have two options for claiming the refund:
1) Businesses may go through phone bills for the 41-month covered period and request a refund of the actual amount of excise tax improperly using IRS Form 8913, or
2) Businesses may use a special formula developed by the IRS to estimate their refund amount.

Tax saving strategies for real estate investors

2006-12-16T14:24:00.000-05:00

Here is a really good article from the New York Daily News about year-end tax strategies for real estate investors.

Key 2007 IRS figures & limitations

2006-11-22T10:13:00.000-05:00

The IRS has recently started releasing 2007 figures & limitations. Here is a brief listing with links to the corresponding IRS news releases:

Personal & Dependency Exemption amount $3,400
Standard Deduction
Married-filing-joint $10,700
Head-of-household $7,850
Single $5,350
401(k) Contribution limit $15,500
Standard business mileage rate $.485/mile
Standard charity mileage rate $.14/mile
Standard Medical & Moving mileage rate $.20/mile

Overview of The Pension Protection Act of 2006

2006-10-31T17:10:00.000-05:00

Here is a pamphlet that gives a good overview of the major provisions of the 2006 law.

Pension Protection Act of 2006 -- Section 529 College Savings Plans

2006-10-31T16:51:00.000-05:00

Section 529 College Savings Plans have become very popular vehicles through which to save tax-sheltered dollars for future education expenses. Before the 2006 tax act was passed, Section 529 Plans were slated to lose many of their favorable tax attributes after the year 2010 due to the "sunset" provisions included in the big 2001 tax law. The Pension Protection Act of 2006 has exempted Section 529 plans from these "sunset" provisions and keeps all of the favorable tax attributes of these plans in place indefinitely.

Social Security Tax to increase in 2007

2006-10-26T09:20:00.000-04:00

The Social Security Administration recently announced that the Social Security tax (OASDI portion) wage base will be increased to $97,500 for the year 2007. Read the press release.

The Federal Insurance Contributions Act (FICA) imposes two taxes on the wages earned by employees & the self-employment income earned by business owners. The Medicare tax (Hospital Insurance) is 2.9% of all earnings with no maximum. The Social Security tax (Old Age, Survivors & Disability Insurance or OASDI) is 12.4% on earnings up to a maximum amount set by the Social Security Administration each year. The tax rates have been the same since 1990, but the wage base for the OASDI portion has consistently increased over the years.

For 2006, the OASDI wage base caps out at $94,200 which means the maximum Social Security Tax that can be imposed on any individual is $11,680.80 ($94,200 x 12.4%). The new wage base for 2007 will result in a maximum OASDI tax of $12,090 ($97,500 x 12.4%) on anyone earning at least $97,500. This is a tax increase of $409.20.

Pension Protection Act of 2006 –- Charity Provisions

2006-10-26T09:09:00.000-04:00

Here is an overview of some of the Charitable Contribution changes made by the Pension Protection Act of 2006:

New restrictions on deductions for donations of clothing & household items. For all donations of clothing & household items made after August 17, 2006, you are only allowed a tax deduction for the fair market value of items that are "in good used condition or better." - IRC Sec. 170(b)(16)(A). Of course, there is no official guidance about what constitutes "good" condition. The new law also leaves a trap door by stating that the IRS "may by regulation deny a [tax] deduction... for any contribution of clothing or a household item which has minimal monetary value." - IRC Sec. 170(b)(16)(B). This provision was enacted to reduce the amount of deductions taken for items of little monetary value such as used socks & undergarments. Neither of these requirements apply to any single item worth more than $500 for which you have a qualified appraisal. So even an item that is not in good condition can be potentially be deductible if you have it appraised.

Increased recordkeeping requirements on monetary contributions of any amount. Starting in 2007, the new law disallows the charitable deduction for any monetary gift (cash, check or credit card) for which the donor does not have a satisfactory record of the contribution. This applies to gifts of any amount--no minimum! Satisfactory records can be:

a cancelled check;
a receipt from the charitable organization showing their name, the date of the contribution, and the amount of the contribution; or
other reliable written records showing name, date & amount (such as a credit card receipt or statement with charity's name).

Read a detailed summary of charitable provisions of The Pension Protection Act of 2006.

Hybrid Vehicle Credit will be reduced soon for Toyota models

2006-09-13T17:26:00.000-04:00

As of the end of the 2nd quarter of 2006 (June 30, 2006), Toyota had manufactured and delivered more than 60,000 hybrid vehicles. This accomplishment has triggered a provision tucked away in the law that allows federal income tax credits for purchasing hybrid vehicles. The provision says that once a manufacturer reaches 60,000 hybrid vehicles delivered, credits on its vehicles will be phased out over a number of months. As the law reads right now, Toyota credits will be allowed at the full statutory amounts until Sept. 30, 2006, but will be cut to 50% of the statutory amounts on October 1, 2006 and will remain at that level until March 31, 2007. On April 1, 2007, the credit will be down to 25% of the original amount and it will be completely phased out on October 1, 2007.

As of the end of the 2nd quarter of 2006, no other manufacturers have reached the 60,000 vehicle mark.

Pension Protection Act of 2006 -- IRA Provisions

2006-08-29T17:11:00.000-04:00

Here is an overview of some of the IRA changes made by the Pension Protection Act of 2006:

Tax-free distributions from IRAs for charitable purposes. If you are over the age of 70½ years, then you can exclude from gross income certain distributions of up to $100,000 from a traditional or Roth IRA if made to a tax-exempt organization to which deductible contributions can be made. The provision is effective for two years through 2007.

Distributions for members of National Guard called to active duty. If you are a member of the National Guard and are called to active duty through the end of 2007, you can make a penalty-free distribution from your IRA or other qualified retirement plan as long as you re-pay the distribution within two years.

Direct payment of U.S. tax refunds to IRAs. Beginning in tax year 2007, the IRS will allow you to make a direct deposit of your refund into an IRA. This is a convenience provision since it will not increase or reduce your total tax liability.

Gross income phase-outs on IRA contributions will be indexed for inflation. Beginning in tax year 2007, the Adjusted Gross Income (AGI) phase-out limitations for traditional & Roth IRAs will be indexed for inflation. For tax year 2006 the IRA gross income phase out ranges are:

Traditional IRA

$50,000 to $60,000 for single individuals who are participants in an employer-sponsored plan

$75,000 to $85,000 for married individuals filing a joint return who are participants in an employer-sponsored plan.

Roth IRA

$95,000 to $110,000 for single individuals
$150,000 to $160,000 for married individuals filing a joint return

Non-spouse beneficiaries of retirement plans can roll inherited proceeds directly into a new IRA. Under existing law, if you inherit the money accumulated in a retirement plan from anyone besides your spouse (i.e. your parent, aunt, uncle, sibling, etc.), then you must receive the funds in a lump sum and pay tax on the whole amount in the year you receive it. The new law will allow you, if you meet all of the requirements and elect to do so, to roll those funds into a new IRA under your name and continue deferring tax on those investments. If the person from whom you inherited the funds was subject to Required Minimum Distributions, then the new account will have those same requirements.

Pension Protection Act of 2006

2006-08-29T17:00:00.000-04:00

The Pension Protection Act of 2006 was signed on August 17, 2006. It contains many provisions relating to the administration of retirement & pension plans, but it also has a number of tax provisions mixed in as well.

Over the next couple of weeks, I will give an overview of these topics:

Individual Retirement Account (IRA) changes
401(k) plan changes
General retirement plan distribution changes
Charitable contribution changes

Hire your children & reduce your taxes

2006-08-11T15:53:00.000-04:00

I advised a client today about the tax implications of hiring his children in his wife's unincorporated business. Here are the basics according to IRS Publication 15 (Circular E) Employer's Tax Guide (pg. 8):

Children under the age of 18 are not subject to payroll taxes (Social Security & Medicare) on wages paid to them by their parent's unincorporated business.
Children age 18 to 21 are not subject to federal unemployment taxes (FUTA) on wages paid to them by their parent's unincorporated business.
The two rules above apply to a business run as sole proprietorship or as a partnership in which the only partners are the two parents.
The rules above DO NOT apply to a corporation of any sort, even if the only shareholders of the corporation are the parents; however, our interpretation is that these rules DO apply to LLCs that are taxed as sole proprietorships or partnerships.

If you choose to use this strategy, please note these two points:

This strategy only reduces payroll taxes & federal unemployment tax so your children might still be subjected to federal income tax when using it. Even so, this strategy can shift income from your higher tax bracket into your child's lower tax bracket and still provide an overall reduction in your tax burden.
Your children need to provide legitimate services to your business for this strategy to stand up to audit. The services need not be highly-skilled, but they should be documented in a consistent manner.