The House on April 18 approved the two largest bills of a bipartisan IRS reform package. On April 17, the House approved seven other bills, by voice vote, which are also part of the larger bipartisan package. Its aim is to restructure the IRS for the first time in 20 years. The entire package of bills was approved by the Ways and Means Committee several weeks ago.

The House on April 18 approved the two largest bills of a bipartisan IRS reform package. On April 17, the House approved seven other bills, by voice vote, which are also part of the larger bipartisan package. Its aim is to restructure the IRS for the first time in 20 years. The entire package of bills was approved by the Ways and Means Committee several weeks ago.

"Congress this week, the House this week, will undertake the first major reform of the IRS in more than two decades," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an April 17 leadership press briefing. "A new tax code really demands a new tax collector – and, Republicans and Democrats together, are launching reforms that create a ‘Taxpayer First’ IRS."

In an April 18 statement, Brady further remarked that "[w]ith this package, we are taking a monumental step in redesigning the IRS for first time in 20 years, refocusing the agency to live up to its mission of quality service, and reining in its enforcement powers to prevent future abuse."

IRS Reform
The Taxpayer First Act (HR 5444), which is the lead bill, passed by a 414-to-3 vote. HR 5444, proposes changes to the IRS’s appeals process and customer service programs, and would implement other organizational restructuring.

The 21st Century IRS Act (HR 5445) was approved 414-to-0. HR 5445 focuses primarily on improving cybersecurity and taxpayer identity protection, and modernizing IRS information technology.

In addition, the House approved seven bills by unanimous consent on April 17: HR 2901, HR 5440, HR 5438, HR 5446, HR 5437, HR 5439, and HR 5443. The measures include proposals to establish a single point of contact for tax-related identity theft victims, expand the use of Low-Income Taxpayer Clinics (LITCs), and require electronic filing for certain tax-exempt organizations, among other things.

The IRS reform package has no effect on revenue, according to the Joint Committee on Taxation (JCT) ( JCX-10-18).

Senate
How the IRS reform bills will fare in the Senate remains to be seen. Although Senate Finance Committee (SFC) Chairman Orrin G. Hatch, R-Utah, has commended the House’s efforts toward restructuring the IRS, no word has been released as for when the Senate will consider the measure.

The IRS provided an additional day for taxpayers to file and pay their taxes, following system issues that surfaced early on April 17. Individuals and businesses with a filing or payment due date of April 17 had until midnight on Wednesday, April 18, to file returns and pay taxes. Taxpayers did not need to take extra actions to receive the extra time.

The IRS provided an additional day for taxpayers to file and pay their taxes, following system issues that surfaced early on April 17. Individuals and businesses with a filing or payment due date of April 17 had until midnight on Wednesday, April 18, to file returns and pay taxes. Taxpayers did not need to take extra actions to receive the extra time.

System Issues
The IRS encountered system issues during the morning of Tuesday, April 17. While the system was down, taxpayers could file their tax returns electronically through software providers and Free File. Taxpayers using paper to file and pay their taxes at the deadline were not affected by the system issue.

"Currently [on April 17], certain IRS systems are experiencing technical difficulties. Taxpayers should continue filing their tax returns as they normally would," the IRS said in a statement sent to Wolters Kluwer on April 17.

"[T]he IRS apologizes for the inconvenience this system issue caused for taxpayers," said Acting IRS Commissioner David Kautter. "The IRS appreciates everyone’s patience during this period. The extra time will help taxpayers affected by this situation."

One Day Extension
The IRS advised taxpayers to continue to file their taxes as normal. Returns filed and taxes paid before midnight on Wednesday, April 18—whether electronically or on paper—would be considered timely. In addition, automatic six-month extensions were available to taxpayers who needed additional time to file.

Up and Running Again
On April 18, the IRS informed taxpayers that the Service’s processing systems were fully back up and running, and that the system outage had been caused by a hardware issue. The IRS pointed out that as of 9 a.m. Eastern time on April 18, it had accepted more than 14 million tax submissions since processing systems reopened.

"IRS teams worked hard throughout the night," explained Kautter. "The overnight performance means that the IRS is current with all of the tax submissions, and no backlog remains."

The IRS reminded taxpayers that help, including automatic six-month extensions to file, was available at IRS.gov.

The White House and Republican lawmakers are continuing discussions focused on a second round of tax reform, according to President Trump’s top economic advisor. National Economic Council Director Lawrence Kudlow said in an April 5 interview that Trump and House Ways and Means Committee Chairman Kevin Brady, R-Tex., spoke earlier in the week again about a "phase two" of tax reform

The White House and Republican lawmakers are continuing discussions focused on a second round of tax reform, according to President Trump’s top economic advisor. National Economic Council Director Lawrence Kudlow said in an April 5 interview that Trump and House Ways and Means Committee Chairman Kevin Brady, R-Tex., spoke earlier in the week again about a "phase two" of tax reform

Trump and most GOP lawmakers are in agreement that full expensing for business investments and individual tax cuts should be made permanent, according to Kudlow. Those specific tax provisions under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) are currently temporary. "I think you get more bang for the buck on these tax cuts if you do make it permanent," Kudlow said.

Likewise, Trump, while speaking at an April 5 roundtable event in West Virginia, touted the full expensing provision of the TCJA. "I think it’s going to be the greatest benefit of the whole bill," Trump said.

According to Kudlow, there are other ideas being discussed that could also become part of the plan, but he did not elaborate on specifics. "Perhaps, later this year we will see something more concrete," he said.

Looking Forward
Trump also spoke to the tax return filing process changes expected for next year. "Next April, you’re going to, in many cases, [file on] one page, one card…you’ll have a nice simple form next year," Trump said.

To that end, Senate Majority Leader Mitch McConnell, R-Ky., wrote in an April 6 op-ed in Kentucky Today that the current tax return filing process, which includes "complicated paperwork," will soon come to an end. "As a result of the historic overhaul of the federal tax code, this is the last time that you will have to file under the outdated and expensive system that has held our country back for far too long," McConnell wrote.

Democratic Changes
Meanwhile, most Democratic lawmakers continue to criticize the tax law changes under the TCJA. House Minority Leader Nancy Pelosi, D-Calif., said in an April 6 statement that only corporations and the wealthy benefit from the new law. "Powerful special interests are reaping massive windfalls from the GOP tax scam," Pelosi said.

Earlier in the week, while speaking at a tax event in California, Pelosi reportedly said that Democrats would take a bipartisan approach toward revising the TCJA if they regain the House majority in 2019. According to Pelosi, Democrats are interested in creating a tax bill that creates growth and jobs while simultaneously reducing the deficit.

Certain proposed regulations issued by Treasury will now be subject to additional oversight by the Office of Management and Budget (OMB). A Memorandum of Agreement (MOA) between Treasury and OMB released on April 12 specifies terms under which the Office of Information and Regulatory Affairs (OIRA) within OMB will review future tax regulations.

Certain proposed regulations issued by Treasury will now be subject to additional oversight by the Office of Management and Budget (OMB). A Memorandum of Agreement (MOA) between Treasury and OMB released on April 12 specifies terms under which the Office of Information and Regulatory Affairs (OIRA) within OMB will review future tax regulations.

The MOA comes on the heels of recent debate on whether OMB should have increased oversight of Treasury’s tax-related regulations. While some lawmakers have argued for additional oversight of tax rules, others have expressed concern that more oversight will lead to delays in issuing guidance. The subject has been of particular focus on Capitol Hill as Treasury and the IRS prepare to implement the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) enacted in December 2017.

Previous MOA
A previous agreement adopted in 1983, and reaffirmed in 1993, allowed for OIRA review of some regulations but exempted most tax rules. "The MOA announced today replaces the 1983 agreement with a new review process tailored to tax regulations—it focuses on reducing regulatory burdens while providing timely guidance to taxpayers," according to a Treasury Department news release. Treasury Secretary Steven Mnuchin and OMB Director Mick Mulvaney both praised the MOA in a joint news release, for ensuring clarity and transparency for taxpayers.

Generally, OIRA will have 45 days to review submissions from Treasury, according to the MOA. However, to allow for timely implementation of the TCJA, the Treasury secretary or deputy secretary, with the approval of the OIRA administrator, may designate certain tax rules for expedited release.

Increased Oversight
Under the terms of the MOA, tax rules will be subject to OIRA review if they interfere with an action taken by another agency, raise novel legal or policy issues, or have an annual nonrevenue effect on the economy of $100 million or more.

"There may be perfectly good reasons for adding an additional layer of review to finalize Treasury regulations," John Gimigliano, principal-in-charge of federal legislative and regulatory services in the Washington National Tax practice of KPMG LLP, told Wolters Kluwer on April 13. "But speeding up implementation of the new tax law is not one of them. The practical effect of this is that taxpayers will have to wait longer for Treasury to issue interpretations of the new law."

The IRS is already working on implementing tax reform, according to IRS Acting Commissioner David Kautter. Speaking at a Tax Executives Institute event in Washington, D.C., Kautter discussed current IRS efforts toward implementing tax law changes under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

The IRS is already working on implementing tax reform, according to IRS Acting Commissioner David Kautter. Speaking at a Tax Executives Institute event in Washington, D.C., Kautter discussed current IRS efforts toward implementing tax law changes under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97).

"The Tax Cuts and Jobs Act represents the most sweeping change to U.S. tax law since 1986," Kautter said according to his prepared remarks, which were provided to Wolters Kluwer by the IRS. He added that the new law will "involve creating or changing a large number of forms and publications, updating scores of tax processing systems, retraining our workforce and educating the taxpaying public about the changes."

TRIO
The IRS in January created the Tax Reform Implementation Office (TRIO). The TRIO is responsible for establishing and monitoring implementation action plans and ensuring communication with external and internal stakeholders, among other things, according to Kautter. "The TRIO is our tax reform linchpin," he said.

IRS Funding
The IRS was provided $320 million specifically for the implementation of tax reform in the omnibus government spending package that President Trump signed on March 23 ( P.L. 115-141). According to Kautter, more than 70 percent of the IRS funding for tax reform will go toward reprogramming IRS IT systems. Additionally, new forms will need to be developed at a cost of approximately $75,000 per form, and the IRS estimates about 450 products (including forms, instructions and publications) need to be revised. Most of these products need to be updated by the 2019 filing season, which is a "tall order," Kautter said. Additionally, over 1,000 new employees will need to be hired for taxpayer services and for tax reform implementation across the Service, including within the Office of Chief Counsel.

Outreach
The IRS cannot wait for taxpayers to call about the new tax law’s requirements, according to Kautter. "The IRS also needs to be proactive, and provide education and outreach to help taxpayers, tax professionals and other industry partners understand how the law applies to them, and prepare them for the 2019 tax filing season," Kautter said.

The IRS’s Communications and Liaison operation is preparing to start education outreach to increase public awareness of the new tax law’s provisions. The IRS will be conducting events across the country for both taxpayers and tax professionals, according to Kautter. "This summer, the IRS will again be conducting its Nationwide Tax Forums for tax professionals in five cities around the country, where the new tax law will take center stage," he said.

Section 199A
Formal published guidance such as regulations and notices, as well as "soft guidance"including press releases and frequently asked questions, will need to be issued to explain various tax provisions under the new law, according to Kautter. A particular area in "critical"need for guidance is the Code Sec. 199A deduction for qualified business income of pass-through entities, Kautter said, calling it a "challenging" area. While Kautter could not provide a specific time frame for when to expect the guidance, he said the IRS is working to develop the guidance as "quickly and expeditiously as possible."

Technical corrections to the partnership audit rules were included in the bipartisan Consolidated Appropriations Act (CAA), 2018 ( P.L. 115-141), which was signed by President Trump on March 23. The omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions, including technical corrections to the partnership audit provisions of the Bipartisan Budget Act (BBA) of 2015 ( P.L. 114-74).

Technical corrections to the partnership audit rules were included in the bipartisan Consolidated Appropriations Act (CAA), 2018 ( P.L. 115-141), which was signed by President Trump on March 23. The omnibus spending package, which provides funding for the government and federal agencies through September 30, contains several tax provisions, including technical corrections to the partnership audit provisions of the Bipartisan Budget Act (BBA) of 2015 ( P.L. 114-74).

Scope
The CAA clarifies the scope of the partnership audit rules. The new rules are not narrower than the TEFRA partnership audit rules; they are intended to have a scope sufficient to address partnership-related items. The CAA eliminated references to adjustments to partnership income, gain, loss, deduction, or credit, and replaced them with partnership-related items. "Partnership-related items" are any item or amount that is relevant to determining the income tax liability of any partner, according to the Joint Committee on Taxation (JCT). Among other things, partnership-related items include an imputed underpayment, or an item or amount relating to any transaction with, basis in, or liability of the partnership.

According to the JCT, the partnership audit rules do not apply to withholding taxes except as specifically provided. However, any partnership income tax adjustment will be considered when determining and assessing withholding taxes when the partnership adjustment is relevant to that determination. Further, the technical corrections clarify that an imputed partnership underpayment is determined by appropriately netting partnership adjustments for that year, and then applying the highest rate of tax for the reviewed year.

Pull-In; Push-Out
Also included in the CAA is a "pull-in" procedure, which allows for modifying an imputed underpayment without requiring individual partners to file an amended tax return. The "pull-in" procedure, if elected, would replace the "push-out" election. A push-out shifts liability to individual partners. The "pull-in" procedure contemplates that partner payments and information could be collected centrally by the IRS. However, the procedure permits the partnership representative or a third-party accounting or law firm to collect the data and remit it to the IRS.

Penalties
The partnership adjustment tracking report required in a push out is a return for purposes of failure to file, frivolous submission, and return preparer penalties. Also, the failure to furnish statements in a push-out is subject to the failure to file or pay tax penalties. However, neither an administrative adjustment request nor a partnership adjustment tracking report are returns for purposes of the partner amended return modification procedures.

A: If you have the money, contributing to your IRA immediately on January 1^st or as soon thereafter as possible is the best strategy.  The #1 advantage of an IRA is that interest or other investment income earned on the account accumulates without tax each year. The sooner the money starts working at earning tax-free income, the greater the tax advantage. With a traditional IRA, that tax advantage means no tax until you finally withdraw the money at retirement or for a qualified emergency. In the case of a Roth IRA, the tax advantage comes in the form of the investment income that is never taxed.

While the earliest date to contribute to an IRA for a current year is January 1^st of that year, the latest date is 15 1/2 months later, on April 15^th of the next year when your tax return is due. (Because of the weekend-next business day rule that's April 16, 2007 for 2006 tax-year contributions.)

Although you may file for an extension to file your tax return, that extension does not extend the time you have to contribute to an IRA; April 15^th is the deadline. Another caveat: If you make a contribution after December 31^st it will be presumed to be made for the next year unless you designate it as relating back to the year just ended. Finally, until the due date for your return, you are allowed to withdraw any IRA contribution, plus earnings on that contribution.

Soon, the recently-passed Pension Protection Act of 2006 will give you another option: designating all or a portion of your tax refund for the year to be directly deposited into your IRA account. In fact, the IRS has moved quickly to provide several refund options, already announcing that new Form 8888 will be created to give all individual filers the ability to split their refunds in up to three financial accounts, such as checking, savings and retirement accounts.

In addition to knowing when to make IRA contributions, you also need to know how much you are able to contribute and whether a traditional or a Roth IRA makes more sense. For those who are already covered by a retirement plan, restrictions on contributing to deductible IRAs must be heeded. Nondeductible and "spousal" IRAs also are options to be considered. Please call our offices if you need further guidance on any of the IRA rules. They are worth using and can grow into a substantial additional nest egg for you at retirement.

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. The new Pension Protection Act cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."

Good used or better condition

The new law does not define good or better condition. For guidance, you can look to the standards that many charities already have in place. Many charities will not accept your donations of clothing or household items unless they are in good or better condition.

Clothing cannot be torn, soiled or stained. It must be clean and wearable. Many charities will reject a shirt with a torn collar or a jacket with a large tear in a sleeve. As one charity spokesperson summed it up, "Don't donate anything you wouldn't want to wear yourself." 

Household items include furniture, furnishings, electronics, appliances, and linens, and similar items.  Food, paintings, antiques, art, jewelry and collectibles are not household items. Household items must be in working condition. For example, a DVD player that does not work is not in good used or better condition. You can still donate it (if the charity will accept it) but you cannot claim a tax deduction. Household items, particularly furnishings and linens, must be clean and useable. 

The new law authorizes the IRS to deny a deduction for the contribution of a clothing or household item that has minimal monetary value. At the top of this list you can expect to find socks and undergarments, which have had inflated values for years.

Fair market value

You generally can deduct the fair market value of your donation. Unless your donation is new - for example, a blouse that has never been worn - its fair market value is not what you paid for it. Just like when you drive a new car off the dealer's lot, a new item loses value once you wear or use it.  Therefore, its value is less than what you paid for it.  

If you're not sure about an item's value, a reputable charity can help you determine its fair market value. Our office can also help you value your donations of used clothing and household items.

Get a receipt

Generally, you must obtain a receipt for your gift. If obtaining a receipt is impracticable, for example, you drop off clothing at a self-service donation center, you must maintain reliable written information about the contribution, such as the type and value of the property.

Charitable contributions of property of $250 or more must be substantiated by obtaining a contemporaneous written acknowledgement from the charity including an estimate of the value of the items. If your deduction for noncash contributions is greater than $500, you must attach Form 8283 to your tax return. Special rules apply if you are claiming a deduction of more than $5,000.

Exception

In some cases, the new rules about good used or better condition do not apply. The restrictions do not apply if a deduction of more than $500 is claimed for the single clothing or household item and the taxpayer includes an appraisal with his or her return.

If you have any questions about the new charitable contribution rules for donations of clothing and household items, give our office a call. The new rules apply to contributions made after August 17, 2006.

The AMT is difficult to apply and the exact computation is very complex. If you owed AMT last year and no unusual deduction or windfall had come your way that year, you're sufficiently at risk this year to apply a detailed set of computations to any AMT assessment. Ballpark estimates just won't work.

If you did not owe AMT last year, you still may be at risk. The IRS estimates that half million more individuals will be subject to the AMT in 2006 because of rising deductions and exemptions. If Congress doesn't extend the same AMT exclusion amount given in 2005, an estimated 3 million more taxpayers will pay AMT.

For a system that was intended originally to target only the very rich, the AMT now hits many middle to upper-middle class taxpayers as well. Obviously something has to be done, and will be, eventually, through proposed tax reform measures. In the meantime, expect AMT to be around for at least another year.

Basic calculations. Whether you will be liable for the AMT depends on your combination of income, adjustments and preferences. After all the computations, if your AMT liability exceeds your income tax liability, you will be liable for the AMT. Here are the basic steps to take to determine in evaluating whether you will owe the AMT:

• Step #1: Calculate your regular taxable income. If your regular tax were to be determined by reference to an amount other than taxable income, that amount would need to be determined and used in the next steps.
  
• Step #2: Calculate your alternative minimum taxable income (AMTI) by increasing or reducing your regular taxable income (or other relevant amount) by applying the AMT adjustments or preferences. These include business depreciation adjustments and preferences, loss, timing and personal itemized deductions adjustments, and tax-exempt or excluded income preferences. This is the step with potentially many sub-computations in determining increases and reductions in tax liability.
  
• Step #3:  If your AMTI exceeds the applicable AMT exemption amount, pay AMT on the excess.

While no single factor will automatically trigger the AMT, the cumulative result of several targeted tax benefits considered in Step #2, above, can be fatal. Common items that can cause an "ordinary" taxpayer to be subject to AMT are:

• All personal exemptions (especially of concern to large families);
• Itemized deductions for state and local income taxes and real estate taxes;
• Itemized deductions on home equity loan interest (except on loans used for improvements);
• Miscellaneous Itemized Deductions;
• Accelerated depreciation;
• Income from incentive stock options; and
• Changes in some passive activity loss deductions.

Q. A promising investment opportunity proved too good to be true and I have incurred some stock losses. I still have faith in the company and don't want to abandon it but can I use some of these losses to offset gains from other stocks? If I sell these shares at a loss and immediately buy them back, what would the tax consequences be?

A. The IRS calls these transactions "wash sales." Very simply, a wash sale takes place when a person sells stocks or bonds at loss and buys substantially similar stocks or bonds within 30 days. The wash sale rules are intended to curb this practice, which the IRS views as done only for tax reasons.

Here's an example:

Donna invested part of her inheritance in an airline company. Donna purchased 3,000 shares of the airline's stock. Two years later, the airline is teetering on bankruptcy. Donna sells 1,000 shares at a loss of $2,000. Less than one month later, Donna buys another 1,000 shares of the same company's stock for $5,000. Instead of allowing the deduction of the $2,000 on Donna's return, the wash sale rules require Donna to adjust the basis of her newest purchase to $7,000.  When Donna sells the stock later at $10,000, instead of having a $5,000 gain ($10,000 sales price minus $5,000 purchase price), Donna's gain would only be $3,000 ($10,000 sales price minus $7,000 adjusted basis).

The wash sale rules can be made less harsh with careful planning. You must keep good track of the purchase and sale dates of your securities overall.

If you decide to reinvest in a similar investment vehicle, make sure that some element of the new security is different enough to avoid the "substantially similar" rule. For example, if you sell a stock mutual fund, you can purchase another type of stock mutual fund. Or if you sell shares in one oil company, you can purchase stock in another oil company and therefore maintain your position in that specific industry.

This is merely a brief introduction to the wash sale rules. If you have any questions or are concerned that a transaction you entered into could be viewed by the IRS as a wash sale, give our office a call. We'll be happy to take a look at your portfolio and help you avoid any potential wash sale troubles.

When trying to maximize retirement savings contributions, you may find you have contributed too much to your IRA.  Typically, you either have too much income to qualify for a certain IRA or you can't recall what contributions you made until they are added up at tax time and you discover they were too much. There are steps you can take to correct an excess contribution.

What is an excess contribution?

An excess contribution is the amount by which your total contributions to one or more IRAs exceed the applicable dollar limit for the tax year. For tax years 2005 through 2007, the maximum annual combined contribution to a taxpayer's traditional IRAs and Roth IRA is $4,000. For those 50 years or older, an additional $500 is allowed in 2005, and $1,000 for 2006 and subsequent years.  

Your total contributions also include any rollover contributions completed more than 60 days after a distribution is received from a qualified plan or an IRA. If you contribute more than the allowable amount to all IRAs, the excess is subject to a six percent excise tax.

The six percent tax is nondeductible. The tax applies in each subsequent year if excess is not withdrawn or eliminated by treating it as allowable contribution in a future year. The excise tax is also imposed on excess contributions to a Roth IRA. This tax is reported on Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts, and medical savings accounts (MSAs).

Steps to take

The IRS treats an amount distributed from an IRA to the individual making the contribution, before the due date (including extensions) of the individual's tax return, as not contributed to the IRA.  If your excess contribution was made by mistake, you can avoid the excise tax on excess contributions (and premature withdrawals) by withdrawing the contribution and any earnings on the contribution, on or before the due date, including extensions, of your return. 

Keep in mind that IRA contributions can only be made up to the due date of the return excluding extensions. The "corrective distribution" can be made up to the due date of the return including extensions.

If you withdraw the contribution in a timely manner, you don't have to include the contribution in your gross income if no deduction is allowed and the interest attributable to the contribution is returned. The interest, however, must be included in your income for the year the contribution was made.

It's very important that you make certain that contributions to your IRA do not exceed the allowable limits. Otherwise, you could be paying the six percent excise tax.  Fortunately, there are remedies. If you discover that you have over-contributed to your IRA, please contact our office immediately. We can help you correct your excess contribution.

Starting for tax year 2005, businesses have been able to take a new deduction based on income from manufacturing and certain services. Congress defined manufacturing broadly, so many businesses -just not those with brick and mortar manufacturing plants-- will be able to claim the deduction. The deduction is 3 percent of net income from domestic production for 2005 and 2006. This percentage rises to 6 percent and then 9 percent in subsequent years.

Domestic production includes the manufacture of tangible personal property and computer software in the U.S. It also includes construction activities and services from engineering and architecture. Income from these activities must be calculated on an item-by-item basis and cannot be determined by division, product line or transaction. Direct and indirect costs are subtracted to determine "qualified production income." Land does not qualify as domestic production property.

The 3 percent rate is applied to the lower of net income from domestic production and overall net income. That amount is then capped at 50 percent of wages paid out by the employer for all its business activities.

Example. In 2005, Company X has $300,000 of income from domestic production activities. The company's overall net income was $500,000.  The 3 percent rate is applied to $300,000, yielding a potential deduction of $9,000.

Company X paid its employees $50,000 in wages and reported this amount on Forms W-2 for 2005.  Since the deduction is limited to 50 percent of wages paid and reported, Company X's deduction for 2005 is capped at $25,000 (50 percent of $50,000 in wages).  X is entitled to a $9,000 deduction.

W-2 wage limitation

In some cases, the W-2 wage limit can easily trip up taxpayers. A successful sole proprietor who earns income but has no employees would not have any W-2 wages and, therefore, could not take the deduction.  Self-employment income is not treated as wages. Neither are payments made to independent contractors. A small business that is incorporated but has no employees would have the same problem. Because payments to partners are not W-2 wages, a partnership with two partners and no employees also would be unable to take the deduction. Sole proprietors and other small businesses may want to consider putting a family member on the payroll, so that they have W-2 wages to satisfy this requirement.

An incorporated business, such as an S corporation, could put an owner on the payroll and apply the W-2 limit to reasonable wages paid to the owner. Employees include officers of the corporation and common law employees, as defined in the Tax Code.  The more labor-intensive the manufacturing process, the more likely that a deduction will not be reduced by the W-2 wage limitation. The more automated the manufacturing process, the more likely it is that the manufacturer will find itself restricted by the wage limitation and not be able to take the full manufacturing deduction.

Code Sec. 199 defines W-2 wages as the sum of the total W-2 wages reported on Forms W-2, "Wage and Tax Statement," for the calendar year ending during the employer's taxable year. W-2 wages are defined as wages and deferred salary that is included on Form W-2.  Deferred salary includes elective deferrals for a 401(k) plan or tax-sheltered annuity; contributions to a plan of a state and local government or tax-exempt entity; and designated Roth IRA contributions. IRS guidance provides three methods for calculating W-2 wages.

Our office can help you determine your eligibility for the manufacturing deduction and the amount of the deduction. Give us a call today.

Information returns usually arrive in January or February and consist of either Form 1099 or Form 1098. For some, they seem as ubiquitous as their holiday mail in December. Form 1099s are especially likely to populate your mailbox, being used to report a whole array of income other than wages, salaries and tips. While a Form 1099 is not needed to record every taxable transaction, one Form 1099 can record multiple transactions; for example, from your broker for dividends and stock trades. The payer will send a Form 1099 to you by the end of January and will file the form with the IRS by the end of February. Typical forms are sent out for dividend and interest income, self-employment or independent contractor's income, student loan interest and mortgage interest statements.

Information returns usually arrive in January or February and consist of either Form 1099 or Form 1098. For some, they seem as ubiquitous as their holiday mail in December. Form 1099s are especially likely to populate your mailbox, being used to report a whole array of income other than wages, salaries and tips. While a Form 1099 is not needed to record every taxable transaction, one Form 1099 can record multiple transactions; for example, from your broker for dividends and stock trades. The payer will send a Form 1099 to you by the end of January and will file the form with the IRS by the end of February. Typical forms are sent out for dividend and interest income, self-employment or independent contractor's income, student loan interest and mortgage interest statements.

If you happen to receive an incorrect information return, there is no need to panic. However, you do need to act quickly to prevent a bigger problem; namely, having your tax return not match what your information returns say. Therefore, the first step to take when receiving any Form 1099 or 1098 is to open it immediately and take a look at whether it reflects the amount that you think should be reported. If the Forms just sit unopened in your shoe box until you bring it for return preparation, valuable time has been lost.

Should you determine that you have received an incorrect information return, first contact the entity providing the form and ask for a corrected form. Use the number the sender provides on the form. You should receive a revised form that has "corrected" marked on it. Sometimes the information provider itself catches a mistake and sends you a corrected form without your having to ask.

Sometimes, the discrepancy on an information return may be the result of a difference of opinion in interpreting the tax law. This can occur, for example, when determining in which tax year a transaction falls, or whether forgiveness of indebtedness income exists on a contested loan. In those cases, it is best to first try to persuade the information return provider to change its mind rather than just reporting the transaction on your return based on your interpretation. Once the IRS becomes aware of a difference of opinion, the issue usually will take a lot more effort to resolve.

If all else fails in your trying to correct an information return with the return provider, after February 15, 2013 you should contact the IRS at (800) 829-1040. An IRS agent will assist in filing a complaint by sending Form 4598 to the payer requesting that a corrected form be sent out. If no corrected Form is issued, you will have to file a Form 4852 which will allow for you to claim the true amount on your tax return. If you have already filed and have received a form not reported or forget to report income, you are obligated to file a Form 1040X to report income that was not previously reported.

Penalties do exist for payers who fail to provide you with the correct payee statements when they cannot show reasonable cause for the failure. However, if you operate a business and also wear the hat of an information provider, you'll be glad to know that inconsequential error or omission will not be considered a failure to include the correct information.

Nevertheless, both the party who provides and who receives an information return have obligations under the tax law that must be met in good faith and with reasonable efforts to comply. Otherwise, the IRS will not hesitate to use its penalty powers.

Please feel free to contact this office if you have any concerns over an incorrect information return over this coming tax season.

Given a choice between recognizing income now or in a later year, most people want to be paid now and be taxed in a later year.  As a practical matter, however, an employee cannot defer compensation after performing services and becoming entitled to payment.  Routine compensation earned over a prescribed pay period -- a week, two weeks, or a month, for example - usually is paid or made available in the same year it was earned.  Recognition of the income cannot be put off to a later year.

If the employee earns compensation in one year but will not receive it until the following year, the amount is treated as deferred compensation (unless the employer has funded or secured its obligation to pay, or the 2 1/2 month rule, noted below, applies). If an amount is treated as deferred compensation, the employer cannot take a deduction until the year the employee includes the compensation in income. This rule applies even if the employer is on the accrual basis and all events have occurred that entitle the employee to a specific bonus amount. This "matching" principle is contained in Code Sec. 404(a)(5).

The 2 1/2 Month Rule

However, payments made in the first 2 1/2 months of the end of the year that the services were performed are not treated as deferred compensation. This allows the employer to accrue and deduct the compensation in the year it is earned (the year the services were performed), not the later year when it is paid. Nevertheless, the employee still is entitled to defer his or her recognition of income into the next year if certain conditions are satisfied.

Employers who want to spare their employees from being taxed in the year a bonus is earned should not make any amounts available to the employee until the following year. This is particularly important if the employee earns a bonus based on an objective measure, such as corporate earnings. If the bonus is paid solely in the employer's discretion, the amounts will not be taxable until the year paid. If the bonus is paid within the first 2 1/2 months of the following year, the amount is not deferred compensation, and an accrual-basis taxpayer can deduct the bonus in the year the employee performed the services.

Elective Deferral Requirements

If an employer wants to give the employee an election to defer the bonus, it is necessary to look to Code Sec. 409A, enacted in the American Jobs Creation Act of 2004. Under Code Sec. 409A, a bonus based on measures of the company's or the individual's performance is treated as deferred compensation. If the bonus is based on services performed over a 12-month period or longer, the employee must make an election to defer income at least six months before the end of the bonus period.

You've just disposed of a collectible item (or your entire collection), such as an old coin, artwork, figurine, or even those old baseball cards you somehow managed to keep away from the spokes of your bike and your mother's desire to clear some space, and got a sum of money for your efforts. Congratulations, you've just had a taxable event. How do you calculate your gain (assuming you actually have one) so that you can pay the taxes? To do this, you need to answer a few more questions.

The starting point for any inquiry regarding the computation of gains is basis. This is true whether you have sold collectibles, securities or even real estate. So the first question you must answer is "How did you acquire it?"

If you bought the item, then calculation of basis starts with your acquisition cost. This not only includes what you paid for the item, but also certain expenses related to the acquisition. For instance, if you were looking for a specific item that you later purchased, your costs incurred in the search, to the extent that they can be substantiated, should also be included. Examples of these costs include travel to the locations where you hoped to find your collectible, catalog costs, and any fees paid that were not dependent on a purchase (such as an admission fee charged at an antiques show). Fees related to the sale itself should also be included, such as a broker's or auctioneer's fee or an appraisal and authentication fee.

If you inherited the item, then your basis was the item's fair market value at the time of the inheritance. Fair market value may be determined using either of two principal methods. The item might have been appraised for estate purposes, for example. Another means of determining the value would be contemporaneous sales of comparable items. This can be tricky, because condition means so much to the value of a collectible.

If the item was a gift from a living person, then your basis is the same as that of the person who gave it to you. This means you need to know how the donor acquired it, and start the calculations over again from that point.

If you traded another piece of property, such as another collectible, to acquire the piece you just sold, then your basis in the new item is the same as your basis in the previous item, unless at that time you calculated a gain on the exchange and reported it on that year's taxes. If you did the latter, your basis in the item you acquired is the amount you reported that you realized at the time of the exchange. If you did not report a gain (or loss), go back to how you acquired the original item and start over.

The next important question is "How did you maintain the item?" Once you acquired the item, you may have incurred additional costs to maintain your collectible in its condition, or to restore it from its condition at purchase. Whether this meant payments to a professional or purchase of materials for the express purpose of maintenance, these costs may be included. However, the cost of reusable items must be allocated among any other collectibles also stored, restored or maintained.

Finally, you must answer the question "How did you dispose of the item?" You might have sold the item at an auction, whether a live auction or over the internet, or through a broker. You might also have advertised the sale of the item in a magazine, newspaper or catalog. An appraisal might have been necessary to determine your asking price. Costs related to the sale should be subtracted from the amount of the sale price. If your collectible was destroyed and you received an insurance settlement at replacement value, but did not replace the item, then the amount you were paid is a substitute for a sale price. This is called the amount realized.

Once you have determined your basis in the collectible, by taking your acquisition costs, the basis of the person who gave you the collectible, or the fair market value at the time you inherited it, and adding to it your maintenance costs, you subtract the basis from the amount you realized. This is your capital gain.

Capital gains on collectibles are taxed at a maximum rate of 28 percent (as opposed to a maximum rate of 15 percent for most other capital gains), and the capital gains are reported on Schedule D of Form 1040. If you are a typical collector, then you are not treating your purchase and sale of collectibles as a business, and this is how you should report gains and losses.

If you buy and sell collectibles on a regular basis, have developed a degree of skill in identifying profitable transactions and devote a substantial portion of time and effort to this activity, you may be engaged in a trade or business. If so, then your stock of collectibles is inventory, and your profits are taxable as ordinary income. However, with that tax disadvantage can come significant opportunities to deduct office-at-home expenses and a variety of other business-related costs.

If you collect --for either business, pleasure, or both--feel free to call this office for advice on how to best organize your collection so that Uncle Sam collects the minimum in taxes from your efforts.

It's back-to-school time and many families are looking for ways to stretch their education dollars. To help, there are some generous tax breaks. Deductions and credits are available and while they won't lower the cost of education, they can lower the tax bill.

Hope Scholarship credit

The Hope Scholarship credit can help pay for college as well as vocational training. The credit reaches $1,500 per student for the first two years of post-secondary education. It is a 100 percent credit for the first $1,000 and a 50 percent credit on the second $1000 paid in tuition and expenses other than books, healthcare costs, room and board or transportation.

Tax-free grants lower the amount of tuition that is eligible for the credit. The student must attend a qualified institution and no two taxpayers can claim the credit in the same year. This means that either the student or the student's guardian may take the credit, but not both.

The Hope Scholarship credit has special qualifications. The student cannot have completed the first two years of post-secondary education, must be enrolled at least half-time and cannot have been convicted of a felony drug charge.

Lifetime Learning credit  

The Lifetime Learning credit is much akin to the Hope credit. It helps to offset the same expenses. However, this credit can be used in any year that the Hope is not taken. It's available for 20 percent of eligible expenses, up to a maximum of $2,000 per taxpayer, not per student.

Coverdell education savings accounts

Coverdell education savings accounts (ESAs) can also help pay for college, as well as secondary and elementary, schooling. The maximum annual contribution is $2,000 per beneficiary. Any distribution not made for education costs, will be taxed, and an additional 10 percent penalty will be added. This is also true of students whose distributions fund attendance at a military academy, if the student is expected to serve upon dismissal from the institution. Distributions are treated like gifts and may be used for tuition, books, supplies, and equipment.

Scholarships/ fellowships

Scholarships and fellowships, both for merit and financial need, are excluded from income if they are used to pay for tuition, and other related expenses such as books and supplies, but not incidentals, such as room and board. Some grants, such as those in exchange for services the student provides, for example, research, are treated like wages and are included in gross income.  Athletic scholarships are not considered exchange for service.

Student loan interest payments

Student loans may also produce a tax break. There is a valuable above-the-line deduction for interest paid on education loans. For taxpayers making less than $50,000 ($100,000 for joint filers), $2,500 is deductible annually. Only the loan holder can take this deduction. If the loan is taken out in the student's name, but the parent is paying for it, the parent cannot deduct the interest.

Education costs are going up every year and these tax breaks, when they are used well, can help you save some money. Give our office a call today. We'll review your educational expenses and design a tax strategy that maximizes these valuable tax breaks.

The Tax Code encourages charitable donations by businesses and industries. In fact, it is one tax incentive that President Bush has told his tax reform panel that he wants to preserve and strengthen. Taxpayers can make many different types of contributions, including inventory.

Amount of deduction

The amount of your deduction is generally the fair market value (FMV) of the contributed property, reduced by the amount of income you would have recognized if you had sold the property. FMV is the price the property would sell for on the open market. This rule effectively limits your deduction to your basis in the property.

Example. Elsa owns and operates a retail clothing store. She donates inventory that she normally sells in the ordinary course of her business to a charity. The inventory has a FMV of $1,000. It cost $400. If Elsa had sold the inventory, she would have recognized $600 income. Elsa's charitable contribution deduction is $400, her basis in the donated property.

The fair market value of your inventory may be less than its basis. In this case, only the fair market value may be deducted.

Example. Owen also owns and operates a retail clothing store. He follows Elsa's lead and donates inventory that he normally sells in the ordinary course of his business to the same charity. The inventory has a fair market value of $1,000. It cost $1,800. If Owen had sold the inventory, he would have recognized an $800 loss. In this case, the FMV of Owen's inventory is less than its basis. Owen's charitable contribution deduction is limited to $1,000, the FMV of the donated inventory. In this case, Owen is probably better off selling the inventory, recognizing the loss and then contributing $1,000 cash, which is fully deductible.

Costs and expenses

Any costs and expenses pertaining to contributed property incurred in prior tax years must be removed from inventory if they are properly reflected in opening inventory for the year of contribution. They are not part of the costs of good sold. Costs and expenses incurred in the year of contribution, which are properly reflected in the costs of goods sold for that year, are treated as part of the costs of goods sold for that year.

If you are thinking of donating inventory to a charitable organization, give our office a call. We'll help you maximize this valuable deduction.

One of the easiest ways for a business to limit liability is to use independent contractors instead of employees. Of course, merely calling employees "independent contractors" will not make those individuals independent contractors.

Control

The determination of whether a worker will be considered a contractor or an employee is a question of control. If the worker determines his or her own fees (usually per job), sets his or her own working hours, and provides his or her own tools, he can reasonably be considered an independent contractor. If the worker does not control his or her hours worked or wages, and uses tools provided for him or her by the employer, the worker is probably an employee.

There is a 20-factor common law test that can help determine if a worker is an independent contractor. It is important to work through the factors to determine the correct classification for the worker has been chosen, as the classifications have distinct consequences.

Benefits

The difference between independent contractors and employees is stark, and is not simply limited to the label of the worker.

Independent contractors need not be included in retirement plans. You will only have to pay the contractor gross pay, rather than withholding wages for tax purposes. As you need not pay Social Security, Medicare or unemployment insurance for an independent contractor, record keeping is much simpler.

Independent contractors are also responsible for their own tort and contract liability. If an independent contractor commits a tort, in most cases the contractor will be solely liable.

Proceed with caution

Use extreme caution when labeling workers. Mislabeling workers can lead to serious problems.

You could be responsible for back employment taxes, which are often considerable when interest and penalties attach. You could also be liable for damages in a tort claim decided against the mislabeled worker.

Tort liability for a mislabeled worker can have repercussions beyond the payment of the damages. If the worker is deemed to be an employee, the use of contractors instead of employees for liability limitation is lost, which can impact whether the business was operated in such a manner as to limit liability on the whole.

Using independent contractors can be a smart business move but without careful planning, you could be in for some expensive tax consequences. Give our office a call and we'll take a look at your options.

The closely-held corporate form of entity is widely used by family-owned businesses. As its name implies, the owners of the business are typically limited to a small group of shareholders. Many businesses operate for years as closely-held corporations without giving a second thought to a little-known danger: the personal holding company tax.

The personal holding company tax lurks in the background to prevent the use of closely-held family corporations as reservoirs in which to collect investment income. The government wants corporations to distribute income rather than enabling shareholders to build an investment portfolio subject only to the corporate income tax.

The tax is triggered by a corporation's percentage of investment to total income. It is imposed on undistributed earnings and is added to the regular corporate tax. One frequent trigger for the personal holding company tax is the accumulation of income earmarked for expanding the business. Despite its ominous nature, the tax can be anticipated and maybe even averted through strategic planning.

Some triggers

Here are some scenarios that have unfortunately triggered the personal holding company tax for other businesses:

• A consolidated return group becomes unaffiliated, or an ineligible group, as the result of a change in stock ownership or a line of business
  
• A large amount of insurance proceeds are invested until replacement property can be purchased
  
• For asset protection purposes, a corporation holds investment assets or operating equipment without engaging in other operations
  
• During a plan of liquidation, a line of business is sold and the sale proceeds are invested while management is attempting to sell remaining assets or businesses
  
• As part of a plan to invest in a new line of business, a line of business is sold and the sale proceeds are invested while management is attempting to acquire a business or grow its new line of business

Two tests

It's important to remember that any corporation can be a personal holding company. The IRS has developed two tests: (1) an income test and (2) an ownership test.

Income test

The income test is met if 60 percent or more of the corporation's adjusted ordinary gross income is "personal holding company income." This type of income is frequently derived from investment properties and includes:

• Interest, dividends and royalties,
• Rents,
• Mineral, oil and gas royalties,
• Copyright royalties,
• Produced film rents,
• Amounts received in compensation for use of the corporation's property,
• Compensation from personal contracts, where the corporation is not a personal service company, and
• Estate and trust income.

There are some important exceptions to this list. Some types of royalties, for example, are excluded.

Note. The PHC income test is not a test of gross receipts. The income test compares gross receipts less the cost of goods sold to investment income less its direct costs. Gross profit margins are significant to the test and investment activities generally have few direct costs. Thus, an increase in investment income is leveraged for purposes of the PHC income test and an increase in investment income that is insignificant to total gross income can cause investment income to exceed 60 percent of adjusted gross income (AGI). Manufacturing businesses are at a disadvantage. Because of high cost of goods sold when compared to a service business that has little or no costs of goods sold.

Ownership test

The ownership test is met if five or fewer individuals owned more than 50 percent of the corporation's stock value at any time during the last half of the tax year. The ownership test also has some important exceptions. Some important - and common - types of corporations are excluded:

• S corporations,
• Tax-exempt corporations,
• Banks, lending or finance companies,
• Small business investment companies, and
• Corporations in bankruptcy.

The personal holding company tax doesn't have to be an unwelcome and expensive surprise. If your business has experienced - or is planning - any of the events that could trigger the tax, give our office a call.  Careful planning can help avoid or minimize the tax; at any rate, it can alert you to your possible liability for the tax.

Whether a parent who employs his or her child in a family business must withhold FICA and pay FUTA taxes will depend on the age of the teenager, the amount of income the teenager earns and the type of business.

FICA and FUTA taxes

A child under age 18 working for a parent is not subject to FICA so long as the parent's business is a sole proprietorship or a partnership in which each partner is a parent of the child (if there are additional partners, the taxes must be withheld). FUTA does not have to be paid until the child reaches age 21. These rules apply to a child's services in a trade or business.

If the child's services are for other than a trade or business, such as domestic work in the parent's private home, FICA and FUTA taxes do not apply until the child reaches 21.

The rules are also different if the child is employed by a corporation controlled by his or her parent. In this case, FICA and FUTA taxes must be paid.

Federal income taxes

Federal income taxes should be withheld, regardless of the age of the child, unless the child is subject to an exemption. Students are not automatically exempt, though. The teenager has to show that he or she expects no federal income tax liability for the current tax year and that the teenager had no income tax liability the prior tax year either. Additionally, the teenager cannot claim an exemption from withholding if he or she can be claimed as a dependent on another person's return, has more than $250 unearned income, and has income from both earned and unearned sources totaling more than $800.

Bona fide employee

Remember also, that whenever a parent employs his or her child, the child must be a bona fide employee, and the employer-employee relationship must be established or the IRS will not allow the business expense deduction for the child's wages or salary. To establish a standard employer-employee relationship, the parent should assign regular duties and hours to the child, and the pay must be reasonable with the industry norm for the work. Too generous pay will be disallowed by the IRS.

Owning a vacation home is a common dream that many people share...a special place to get away from the weekday routine, relax and maybe, after you retire, a new place to call home. When thinking about buying a vacation home, you should also think about what you will ultimately do with it. Will it one day be your principal residence? Will you sell it in five, 10 or 20 years? Will you rent it? Will you leave it to your children or other family members? These decisions have important tax consequences.

You'll want to think about:

Capital gains

The maximum long-term capital gains tax rate for 2009 is currently 15 percent taxpayers in the highest brackets. For taxpayers in the 10 and 15 percent brackets, the maximum long-term capital gains rate is zero through 2010. However, these lower rates expire at the end of 2010. The maximum rate is set to rise to 20 percent in 2011. Congress also eliminated a special holding period rule but, again, only through the end of 2011.

The process of computing capital gains because of all these changes is very complicated. Yet, "doing the math" up front in assessing the benefits of a vacation home as a long term investment as well as a source of personal enjoyment is recommended before committing to such a large purchase. Our office can help you make the correct computations.

Renting your vacation home

Renting your vacation home to help defray some or a good portion of your carrying costs, especially in the early years of ownership, can be a sound strategy. Be aware, however, that renting raises many complex tax questions. Special rules limit the deduction you can take. The rules are based on how long you rent the property. If you rent your vacation home for fewer than 15 days during the year, all deductions directly attributable to the rental are not allowed, but you don't have to report any rental income. If you rent your vacation home for more than 15 days, you must recognize the rental income while being allowed deductions only on certain items depending on your personal use of the property. The methodology is very complicated. We can help you pin down your deductions and plan the true cost of ownership, especially if you're planning to swing a vacation home purchase on plans to rent it out.

Home sale exclusion

One of the most generous federal tax breaks for homeowners is the home sale exclusion. If you're single, you can generally exclude up to $250,000 of gain from the sale of your principal residence ($500,000 for married joint filers). Generally, you have to have owned your home for at least two of the five years before the sale, but like all the tax rules, there are exceptions.

Congress modified the home sale exclusion for home sales occurring after December 31, 2008. Under the new law, gain from the sale of a principal residence home will no longer be excluded from gross income for periods that the home is not used as a principal residence. This is referred to as "non-qualifying use." The rule is intended to prevent use of the home sale exclusion of gain for appreciation attributable to periods after 2008 during which the residence was used as a vacation home, or as a rental property before being used as a principal residence. However, the new income inclusion rule is based only on periods of nonqualified use that start on or after January 1, 2009, good news for vacation homeowners who have already owned their properties for a number of years.

Buying a vacation home is a big investment. We can help you explore all these and other important tax consequences.

For U.S. taxpayers, owning assets held in foreign countries may have a variety of benefits, from ease of use for frequent travelers or those employed abroad to diversification of an investment portfolio. There are, however, additional rules and requirements to follow in connection with the payment of taxes. Some of these rules are very different from those for similar types of domestic income, and more than a few are quite complex.

Two documents do not apply directly to federal income taxation, but are nevertheless highly important. The first of these is a Treasury form, Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. Any individual or organization that owns or has control over a bank or brokerage account must complete this form if the aggregate value of all such accounts under that taxpayer's ownership or control exceeds $10,000. The second such form is not a requirement per se, but taxpayers who have income in a foreign country with which the United States has a treaty would be seriously remiss in failing to complete it. IRS Form 8802, Application for United States Residency Certification, helps to speed and simplify the application process for eligible taxpayers claiming the benefits of tax treaties in connection with foreign taxes paid. Requirements for organizations that may have dual or layered status offer complications that depend on the type of entity, so these instructions must be parsed carefully.

Taxes on real and personal property held overseas are treated quite differently for purposes of federal income taxation, as opposed to the treatment of domestic property. Individuals may claim foreign real property taxes as itemized deductions on Schedule A of Form 1040, just as they would with U.S. real estate. However, taxes on personal property may only be deductible if used in connection with a trade or business or in the production of income.

U.S. taxpayers who own homes in foreign countries are eligible for the capital gains exclusion on the sale of a principal residence subject to the same requirements as domestic homeowners. Likewise, if a taxpayer derives rental income from a home, the rules for reporting income and deductions are the same. However, claiming depreciation expenses in connection with rental income subjects taxpayers to a different set of rules. Code Sec. 168(g) indicates that tangible property used predominantly outside the United States must be depreciated using the alternative depreciation system (ADS), rather than the modified accelerated cost recovery system (MACRS), and involves longer recovery periods. This is true whether the tangible property in question is the residence itself or household appliances contained therein, as well as any other tangible property.

Intangible property such as patents, licenses, trademarks, copyrights and securities produce a variety of types of income, and the taxation of such income may be subject to different rules than similar domestic income. The provisions for taxation of foreign income are often subject to modification by treaty, and the United States has negotiated treaties with over sixty nations.

Income from all sources must be reported in U.S. dollars, regardless of how it is paid. One exception to this rule is that if income is received in a currency that is not convertible to U.S. dollars because of prohibitions placed on conversion by the issuing country, then the taxpayer may choose when to report the income. The income may be reported either in the year earned, according to the most accurate valuation means available, with the taxes paid from other income, or the taxpayer may choose to wait until the currency becomes convertible again.

The federal government makes a lot of money from interest people owe on their taxes. Unless you are proactive, interest will accrue and before you know it, your original tax bill will be much higher. You can stop interest from accruing if you act early.

When you are under examination, interest on possible underpayments continues to accrue while you and the IRS dispute liability. If the IRS issues a notice of deficiency, you pay interest on the underpayment from the original due date of the return until the date of payment. The amount of interest that can accrue is often very large.

Traditionally, you had two choices to stop the running of interest. You could pay the tax, which would suspend further interest from accruing, and file a refund claim. If you went down this route, you could not contest the liability in the U.S. Tax Court but had to go to a district court for relief. Alternatively, you could make "a deposit in the nature of a cash bond."

A deposit in the nature of a cash bond stops the running of interest on an amount of underpayment equal to the deposit. However, if you ultimately prevail, your deposit doesn't earn any interest.

Deposits for future underpayments

Taxpayers can deposit cash with the IRS to subsequently pay an underpayment of income, estate, gift, or generation-skipping transfer tax. If the IRS ultimately prevails, you will only have to pay interest on the deposit from the original due date of your return until the day you made the deposit.

Here's an example:

Kendra, a calendar-year taxpayer, deposits $20,000 with the IRS on June 15, 2007 because of a dispute over her 2006 income taxes. On July 1, 2009, the IRS and Kendra agree that she underpaid her 2006 taxes by $30,000. The $20,000 deposit is applied toward the underpayment. Kendra pays the $10,000 outstanding on the same date. Kendra will owe interest on the $10,000 from April 15, 2006 (the due date of her return) to July 1, 2097. However, she will only pay interest on the $20,000 deposit from April 15, 2007 (the due date of her return) to June 15, 2007 (the date she deposited the $20,000).

If you ultimately prevail in your dispute with the IRS, the government must now pay you interest on your deposit. The government will also pay you interest if you decide to withdraw the deposit before your dispute is resolved. You will be paid interest at the federal short-term rate compounded daily.

Written statement is necessary

Along with your check or money order, you must send a letter designating the money as a deposit. If you don't designate your check or money order as a deposit, the IRS will treat it as a payment.

The written statement must identify the:

• Type of tax;
• Tax years; and
• Amount and basis for the disputed tax.

You can also designate a deposit in the nature of a cash bond as a deposit under the new rules.

Return of your deposit

Sometimes, you may want to request a return of your deposit. Again, you must make your request in writing. The IRS needs to know the date and amount of the original deposit, the type of tax and the tax years.

Our office can help you determine if making a deposit is the best strategy for you. Give us a call today.

If you pay for domestic-type services in your home, you may be considered a "domestic employer" for purposes of employment taxes. As a domestic employer, you in turn may be required to report, withhold, and pay social security and Medicare taxes (FICA taxes), pay federal unemployment tax (FUTA), or both.

The tax on household employees is often referred to as "the nanny tax." However, the "nanny tax" isn't confined to nannies. It applies to any type of "domestic" or "household" help, including babysitters, cleaning people, housekeepers, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. Excluded from this category are self-employed workers who control what work is done and workers who are employed by a service company that charges you a fee.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What and when you need to pay

If you pay cash wages of $1,700 or more in 2009 to any one household employee, then you must withhold and pay social security and Medicare taxes (FICA taxes). The taxes are 15.3 percent of cash wages. Your employee's share is 7.65 percent (you can choose to pay it yourself and not withhold it). Your share is a matching 7.65 percent.

If you pay total cash wages of $1,000 or more in any calendar quarter of 2008 or 2009 to household employees, then you must pay federal unemployment tax. The tax is usually 0.8 percent of cash wages. Wages over $7,000 a year per employee are not taxed. You also may owe state unemployment tax.

The $1,700 threshold

If you pay the domestic employee less than $1,700 (an inflation adjusted amount applicable for 2009), in cash wages in 2009, or if you pay an individual under age 18, such as a babysitter, irrespective of amount, none of the wages you pay the employee are social security and Medicare wages and neither you nor your employee will owe social security or Medicare tax on those wages.You need not report anything to the IRS.

If you pay the $1,700 threshold amount or more to any single household employee (other than your spouse, your child under 21, parent, or employee who under 18 at any time during the year) then you must withhold and pay FICA taxes on that employee. Once the threshold amount is exceeded, the FICA tax applies to all wages, not only to the excess.

As a household employer, you must pay, at the time you file your personal tax return for the year (or through estimated tax payments, if applicable), the 7.65 percent "employer's share" of FICA tax on the wages of household help earning $1,700 or more. You also must remit the 7.65 percent "employee's share" of the FICA tax that you are required to withhold from your employee's wage payments. The total rate for the employer and nanny's share, therefore, comes to 15.3 percent.

Withholding and filing obligations

Most household employers who anticipate exceeding the $1,700 limit start withholding right away at the beginning of the year. Many household employers also simply absorb the employee's share rather than try to collect from the employee if the $1,700 threshold was initially not expected to be passed. Domestic employers with an employee earning $1,700 or more also must file Form W-3, Transmittal of Wage and Tax Statements, and provide Form W-2 to the employee.

Household employers report and pay employment taxes on cash wages paid to household employees on Form 1040, U.S. Individual Income Tax Return, Schedule H, Household Employment Taxes. These taxes are due April 15 with your regular annual individual income tax return. In addition, FUTA (unemployment) tax information is reported on Schedule H. If you paid a household worker more than $1,000 in any calendar quarter in the current or prior year, as an employer you must pay a 6.2 percent FUTA tax up to the first $7,000 of wages.

Household employers must use an employer identification number (EIN), rather than their social security number, when reporting these taxes, even when reporting them on the individual tax return. Sole proprietors and farmers can include employment taxes for household employees on their business returns. Schedule H is not to be used if the taxpayer chooses to pay the employment taxes of a household employee with business or farm employment taxes, on a quarterly basis.

Deciding who is an employee is not easy. If you have any further questions about how to comply with the tax laws in connection with household help, please feel free to call this office.

This is a simple question, but the question does not have a simple answer. Generally speaking the answer is no, closing costs are not deductible when refinancing. However, the answer depends on what you mean by "closing costs" and what is done with the money obtained in the refinancing.

Costs added to basis. Certain expenses paid in connection with the purchase or refinancing of a home, regardless of when paid, are capital expenses that must be added to the basis of the residence. These include attorney's fees, abstract fees, surveys, title insurance and recording or mortgage fees. Adding these costs to basis will lower any capital gain tax that you pay when you eventually sell your home. If your gain is sheltered anyway by the home sale exclusion of $250,000 ($500,000 for couples filing jointly) on the eventual sale of a principal residence, any previous addition to basis, while doing no harm, will also do no good.

Costs neither deductible nor added to basis. Other costs are neither deductible nor added to basis. These costs include fire insurance premiums, FHA mortgage insurance premiums and VA funding fees, settlement fees and closing costs.

Interest expense. Taxpayers may deduct qualified residence interest, however. "Qualified residence interest" is interest that is paid or accrued during the tax year on acquisition or home equity indebtedness with respect to a qualifying residence.

Points. Points are charges paid by a borrower to obtain a home mortgage. Other names used for deductible points are loan origination fees, loan discounts, discount points and maximum loan charges. While a fairly broad rule permits the deduction of home mortgage interest, the rule governing the deduction of points is narrower and has a number of restrictions. Points paid to refinance a mortgage on a principal residence, like other pre-paid interest that represents a charge for the use of money, are generally not deductible in the year paid and must be amortized over the life of the mortgage. However, if the borrower uses part of the refinanced mortgage proceeds to improve his or her principal residence, the points attributable to the improvement are deductible in the year paid.

Prepayment penalties. In cases where a creditor accepts prepayment of a secured debt, such as a mortgage debt on a home, but imposes a prepayment penalty, the prepayment penalty is deductible as interest.

Parents typically encourage their children to save for college, for a house, or simply for a rainy day. A child's retirement, however, is a less common early savings goal. Too many other expenses are at the forefront. Yet, helping to plan for a youngster's retirement is a move that astute families are making. Individual retirement accounts (IRAs) for income-earning minors and young adults offer a head-start on life-long financial planning.

Parents typically encourage their children to save for college, for a house, or simply for a rainy day. A child's retirement, however, is a less common early savings goal. Too many other expenses are at the forefront. Yet, helping to plan for a youngster's retirement is a move that astute families are making. Individual retirement accounts (IRAs) for income-earning minors and young adults offer a head-start on life-long financial planning.

Traditional and Roth IRAs

Two types of individual retirement accounts are the traditional IRA and the Roth IRA. To contribute to an IRA account, whether it's a traditional or a Roth, an individual must have earned income. In general, the maximum amount that can be deposited in either type of IRA is $3,000 in 2004; $4,000 in 2005 through 2007.

Contributions to a traditional IRA are tax deductible. Amounts earned in a traditional IRA are not taxed until a distribution is made. If money is withdrawn from a traditional IRA before the individual reaches age 59 1/2, a 10 percent penalty applies to the principal. Mandatory withdrawals are required when the individual reaches age 70 1/2.

Contributions to Roth IRAs are not tax deductible, but all earnings are tax-free when the money is withdrawn from the account, if certain requirements are met. Tax-free withdrawals are a big advantage to the Roth IRA that will likely outweigh the lack of a tax deduction on contributions. Qualified distributions from a Roth IRA are not included in the individual's income if a five-year holding period and certain other requirements are met; otherwise, the 10 percent penalty applies. Unlike the traditional IRA, individuals can make contributions to a Roth IRA even after age 70 1/2.

Penalty flexibility

Both the traditional and the Roth IRAs offer some flexibility on the 10 percent penalty. Early withdrawals, without penalty, are allowed if the money is used for:

--College expenses;

--First home purchase (up to $10,000);

--Medical insurance in case of unemployment for a certain amount of time; or

--Expenses attributable to disability (Roth IRA).

Although designed for retirement planning, flexibility in how the money can be used makes IRAs very attractive for young family members.

Kid with a job

In order to contribute to an IRA, however, the child or young adult must have earned income. In other words, the kid needs a W-2, a 1099 or some other "proof" that wages were earned. Although occasional baby-sitting or lawn-mowing generally doesn't count, the money made on those jobs could qualify as earned income if adequate receipts and records are kept.

Working for the parents

Some moms and dads, who own their own businesses, are taking the "kiddy IRA" concept a step further: their sons and daughters come to work for the family business. The child earns income, making him or her eligible to contribute to an IRA. The parents, as their employers must pay employment tax and issue a W-2, but they can also make a business deduction for the child's wages, just like for any other employee. Parents should be mindful that the wage their child earns for the work performed is comparable to the going rate. If the child's wage is too large, the IRS will disallow the deduction.

Let's make a deal

The tough part of the plan may be getting the young person to "lock away" his or her hard-earned cash. After all, retirement is much harder to imagine compared to more pressing, front-burner issues like college expenses or a car. Some parents, however, are convincing their kids to put their earnings to work for their future in an IRA by promising to match their child's pay as an extra incentive to save. For example, if Susan earns $3,000, her dad promises to put $3,000 in her IRA. Susan keeps the money she made. There's no rule that restricts the origin of the IRA contribution, so long as the IRA owner earned at least that amount and the contribution doesn't exceed the cap for that year.

Conclusion

Individual retirement accounts for children and young adults are a growing part of family financial planning. A potential hazard, however, is that the money in the IRA belongs to the child. The child, or young adult, has the right to do whatever they wish with the IRA and its assets, including making a withdrawal for a new car or exotic trip. Parents do not "own" the IRA, even if they contributed the dollars as a match to their child's earnings. Families who utilize IRAs for their offspring will have to consider the risk and stress to the youngsters that the money is better off in the IRA. Through investing in an IRA, a young person's earnings from working part-time at the local ice cream parlor, or a summer job loading trucks, can have lasting effects.

Please feel free to contact this office for advice more specific to your family situation.

The bartering system is an ancient form of commerce that still thrives today. From livestock in exchange for grain, to legal advice in exchange for accounting services, money-less trades are still common. However, a major difference between bartering in antiquity versus modern American times is that the IRS wants in on the deal. Just because money does not change hands, does not mean that a traded good or service loses its value, or its taxability. And, unfortunately, the IRS won't accept a pig or a mule for its payment, making cash a necessary part of any barter arrangement when it's time to pay tax on it.

The bartering system is an ancient form of commerce that still thrives today. From livestock in exchange for grain, to legal advice in exchange for accounting services, money-less trades are still common. However, a major difference between bartering in antiquity versus modern American times is that the IRS wants in on the deal. Just because money does not change hands, does not mean that a traded good or service loses its value, or its taxability. And, unfortunately, the IRS won't accept a pig or a mule for its payment, making cash a necessary part of any barter arrangement when it's time to pay tax on it.

The IRS requires that the fair market value of bartered property or services be included in the recipient's income. In general, the value must be included in income in the same year the property or service is received. The income is typically reported on Schedule C (Profit or Loss From Business) or Schedule C-EZ of Form 1040. However, depending on the item exchanged, you may have to use a different form, as illustrated below.

Services for goods

An accountant performs accounting services for a small company. In exchange for her work, the company gives her shares of its stock. The accountant must include the fair market value of the shares as part of her income and report it on Schedule C or Schedule C-EZ (Form 1040) in the year she received them. In another example, a landlord trades three months rent-free use of a studio space in exchange for a custom-made stained-glass window. The landlord must report the value the stained-glass window as rental income on Schedule E (Supplemental Income and Loss). The glass artist must report the fair rental value of the studio space as income on Schedule C or Schedule C-EZ.

Goods for goods

A specialty produce farmer and a restaurant owner strike a deal. The farmer exchanges a specified amount of produce over the course of the growing season in exchange for a catered wedding reception for his youngest daughter. The farmer reports the value of the reception as income on Schedule F (Profit or Loss From Farming) and the restaurateur reports the value of the produce as income on Schedule C. In another scenario, a custom cabinetmaker and a welder exchanged furniture for an ornate gate. Both craftsmen would report their barter income on schedule C or C-EZ.

Barter credits

A landscaper, a travel agent, and an attorney are all members of barter club. The club members periodically exchange services. Each individual must report the value of services received on his or her Schedule C or Schedule C-EZ. Later, they decide to exchange their services for "credits" with each other. The value of the credits for future services must be reported as income at the time the credits are received, even if the bargained-for service is not delivered until a later date.

Organized barter exchange

A barter exchange is an organized group of individuals that contract with each other to trade or barter property or services on a commercial basis. Barter exchanges are required to file Form 1099-B for all transactions unless certain exceptions are met. For example, no 1099-B is required if there are fewer than 100 exchange transactions per year, or exchanged items have a fair market value of less than $1.00. Form 1099-B shows the value of cash, property, services, credits, or scrip you received from exchanges during the year. The IRS also gets a copy of the Form 1099.

State tax on barter transactions

State taxes also apply to barter transactions. The value of the traded property or service is included in the recipient's income for state tax purposes. Some states, however, base the tax calculation on the value of the receipt or the exchange, whichever is more clearly evident, if you do not keep good records of your barter transactions. In addition, some states allow greater flexibility than the IRS in valuing bartered goods and services.

Entertaining business clients and employees at sports events or arts performances can be good for the bottom line; and tax deductible, too. Whether to maintain contacts with existing customers, woo new business, or reward your employees; footing the bill at the ball game or hosting an evening at the theater can go a long way to generate positive returns.

General rule

In general, you can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses are either directly related or associated with your business. An "ordinary" expense is one that is common and accepted in your trade, business, or profession. For example, a contractor may have the ordinary expense of taking clients to lunch to discuss the business deal.

A "necessary" expense is one that is helpful and appropriate for your business. However, an expense does not have to be required to be considered "necessary." For example, the cost of fresh flowers, periodically sent to a business contact's office, may help maintain your professional network. Likewise, basketball tickets may be appropriate for keeping business communication lines open.

"Directly-related" test

Ordinary and necessary entertainment expenses must also be directly related to, or associated with, your trade or business. To satisfy the "directly-related" test, you must show that:

-- The active conduct of business was the entertainment's main purpose;

-- You engaged in business with the person during the entertainment period; and

-- There was an expectation of garnering specific business or income in the future.

You do not have to spend more time on business than on entertainment, but if business is only incidental, then the entertainment expenses do not meet the "directly-related" test.

Entertainment expenses are not directly related to business if you do not attend the event with your client. In addition, costs are not considered "directly-related" if the event is so distracting that you are prevented from actively conducting business.

"Associated" test

Although the theater or sporting events may be too riveting for continued business talk, these activities may still qualify as deductible business entertainment expenses. Even if they do not meet the directly-related test, expenses may still be deductible as "associated" with the active conduct of your trade or business if the expenses are incurred either directly before, or after, a substantial business discussion. A business presentation just before the game, or a meeting right after the concert, can qualify the recreational activities as business entertainment expenses.

Deductible amount

In general, the deductible amount is 50 percent of un-reimbursed entertainment expenses. Generally, you cannot deduct more than the face value of an entertainment ticket, even if you paid a higher price. Handling fees are not included in the amount you can deduct. Deductions for sky boxes and other luxury seats that are rented for more than one event are limited to the price of regular, non-luxury seats (subject to the 50 percent rule). Luxury seats are for "more than one event" if they are rented for a series of games or performances.

Expenses for non-business guests are not deductible as entertainment expenses. The cost of the entire outing must be pro- rated if it's difficult to separate the costs for business and non-business guests. However, if a business contact's spouse attends the event because it would be inconvenient not to, the cost for the spouse's ticket is also a business expense.

With the exception of some city ordinances, companies are not required to offer benefits to a domestic partner of an employee. One major change occurs on January 1, 2005 when California will start requiring employers to offer domestic partner benefits. Recent legislation in California extends the rights and duties of marriage, including the right to employee benefits, to persons registered as domestic partners. It may signal a trend that other states will follow.

Generally, no. With the exception of some city ordinances, companies are not required to offer benefits to a domestic partner of an employee. One major change occurs on January 1, 2005 when California will start requiring employers to offer domestic partner benefits. Recent legislation in California extends the rights and duties of marriage, including the right to employee benefits, to persons registered as domestic partners. It may signal a trend that other states will follow.

Even so, an increasing number of companies voluntarily offer domestic partner benefits. Why are they doing it? Offering domestic partner benefits can strengthen a company's image as an innovative employer and foster diversity in the workplace. These can translate into greater employee loyalty and engagement. Some surveys suggest that about one-third of America's largest companies offer domestic partner benefits.

Many employers offer the same benefits to domestic partners that they offer to employees' spouses and on the same terms. Alternatively, employers may choose to limit the offerings to health insurance or specific benefits, such as bereavement leave.

Eligibility

You need to define who is a domestic partner. Should benefits be limited to domestic partners who cannot marry under state law or should benefits be offered to all partners? Remember, not all domestic partners are same-sex couples. A man and woman may prefer not to marry and live as domestic partners for economic reasons.

Typically, employers offering domestic partner benefits require that domestic partners:

--Be over age 18

--Have an exclusive, committed relationship;

--Reside in the same home (sometimes for a minimum period of time);

--Share financial obligations; and

--Plan to remain each other's sole domestic partner indefinitely.

Verification

You may want proof of the relationship. Some employers require employees to submit a written affirmation of the partnership or documents that confirm the partners reside at the same address. Employers should be careful that proof of the relationship is relative and not an invasion of privacy.

Tax treatment

Domestic partner benefits will be tax-free if the employee's partner qualifies as a dependent. Otherwise, the benefits are taxable to the employee.

Qualifying as a dependent is not easy. Generally, a dependent is a family member who receives more than one-half of his or her support from the taxpayer. To qualify as a dependent, four tests must be satisfied. They are similar to the characteristics of a domestic partner relationship.

--The employee provides more than one-half of his or her partner's annual support;

--The domestic partner is a member of the employee's household;

--The domestic partner's principal abode is the employee's residence; and

--The relationship between the employee and the domestic partner does not violate local law.

Several bills have been introduced in Congress to make domestic partner benefits tax-free. Benefits provided to an employee's domestic partner would be treated the same as benefits provided to an employee's spouse. The proposed legislation would not require employers to offer domestic partner benefits; only change the tax treatment of those benefits.

If you are contemplating extending benefits to domestic partners of your employees, give our office a call. The laws affecting domestic partners vary from state to state and change from year to year. We can help you understand the rules and craft a policy that best fits your company and your employees.

You should beware of fancy footwork when it comes to estimating, filing, and paying federal taxes. One misstep can lead to harsh penalties. Willful or fraudulent mistakes can generate criminal sanctions as well.

Failure to pay tax

If you don't pay your taxes when due, the IRS may impose a penalty in addition to the tax. The addition to tax is one-half of one percent of the amount not paid, for each month (or part of a month) it remains unpaid, up to a maximum of 25 percent.

Delinquent returns

Failure to file on time may result in an "addition to tax" (the formal name that the IRS gives to its late-payment fee). This penalty is five percent for each month that no return is filed, up to 25 percent. If the return is not filed within 60 days of the due date (including extensions), the penalty will be at least $100 or 100 percent of the tax due on the return, whichever is less.

The penalty doesn't apply if you can show a reasonable cause for not filing. However, a "reasonable cause" for failure to file does not include (1) reliance on the advice of an agent; (2) reliance on the accountant to do the filing; or (3) misjudging the extension date.

Understatement of tax

If you substantially understate taxes due, the IRS can impose a 20 percent accuracy-related penalty. A "substantial understatement" occurs if the amount is (1) 10 percent of the tax required to be shown on the return (including self-employment tax) or (2) $5,000, which ever is greater.

You may be able to avoid this penalty if:

-- You acted in good faith and there was reasonable cause for the understatement;

-- The understatement was based on substantial authority; or

-- There was a reasonable basis for the tax treatment and the relevant facts were adequately disclosed.

Negligence, fraud, and criminal acts

If underpayment is due to negligent, reckless or intentional disregard of the tax laws, the IRS may impose a 20 percent accuracy-related penalty. Negligence includes failure to reasonably comply with the tax laws, to exercise reasonable care in preparing a tax return, to keep adequate books and records, or to properly substantiate items.

Fraud is punished more harshly. A penalty may be imposed on 75 percent of the underpayment due to fraud. The fraud penalty will not apply, however, if no return is filed, other than a return prepared by the IRS when a person fails to file a return. Criminal sanctions also are likely.

Frivolous returns

If you file a frivolous return, you risk a $500 penalty. A return is "frivolous" if it omits necessary information, shows a substantially incorrect tax, is based on a frivolous position, or is filed in an attempt to avoid tax collection. Changing or crossing-out the "penalty of perjury" language above the signature line on a return is treated as filing a frivolous return.

Many employers opt to provide their employees with transportation benefits in addition to their regular compensation. Employers can offer this extra perk in the form of transportation passes, parking vouchers, or both. The transportation fringe benefit is income tax free to employees, up to a certain limit.

Qualified transportation

Qualified transportation fringe benefits that you provide to your employees can be excluded from employee income, up to certain limits (as discussed above). A qualified transportation fringe benefit includes:

• Transportation in a commuter vehicle, such as van pooling;
• A transit pass; or
• Qualified parking.

A transit pass is any pass, token, farecard, voucher, or similar item entitling a person to ride mass transit (whether public or private) or a commuter highway vehicle for free or at a reduced rate. Transit benefits can be used for the subway, bus, ferry, or commuter trains.

Qualified parking is parking provided to an employee at or near the employer's place of business. It also includes parking provided at or near the location from which the employee commutes to work in a commuter vehicle or carpool. It does not include parking at or near the employee's home.

2009 dollar limits

For 2009 and 2010, qualified transportation fringe benefits for parking, transit and commuter highway transportation can be combined to a maximum of $460 per month. Previously, two separate monthly exclusion amounts existed, one for transit passes and commuter highway transportation and a different, higher rate for parking. For 2009 and 2010, however, the benefits are not mutually exclusive and there is one limit that applies for each benefit.

From March 2009 through 2010, employees can exclude up to $230 per month for each benefit (commuter transportation, transit passes and parking). The limits for van pooling also increased to $230 per month (from $120).

Any excess over these limits must be included in the employee's income.

Transportation dollars

Employees can designate the dollar amount of transportation benefits they wish. This amount is subtracted from the employee's gross compensation, pre-tax, on a periodic basis. The employer (or designee) purchases vouchers or passes for parking or transportation and distributes them to employees in the amounts corresponding to each employee's transportation dollar designation.

Tax reporting

The amount by which an employee elects to reduce his or her cash compensation in exchange for qualified transportation fringe benefits is not subject to FICA, FUTA, or income tax withholding. However, any amount that exceeds the monthly limit is included in the employee's income, is treated as wages for income tax and employment tax purposes, and is reported on the employee's Form W-2, Wage and Statement.

In addition to reporting and depositing other employment taxes, employers are required to report and deposit amounts withheld from cash reimbursements. Qualified transportation benefits can be provided directly by the employer or through a bona fide reimbursement arrangement. However, there are special rules regarding when cash reimbursements, rather than vouchers, qualify.

If an employee receives a pass in advance, then terminates employment, the value of the pass for months in which the individual is not an employee is included in the employee's wages for income tax purposes. The exception to this rule is a pass that was not distributed more than three months before it was determined that the employee's employment will terminate.

Voucher agents

Employers may wish to contract with an independent company to handle employee transportation and parking vouchers. Depending on the contract, the "voucher agent" may handle obtaining vouchers or passes, keep track of the employee transportation dollar designation, and maintain tax records. However, the employer is ultimately liable for federal income tax and employment tax reporting.

If you are considering implementing a transportation fringe benefit program for your employees, please give our office a call to discuss the tax consequences and for assistance in designing a program that works best for your company.

FAQ: Must I retain original business expense receipts if I computer scan them?

No, taxpayers may destroy the original hardcopy of books and records and the original computerized records detailing the expenses of a business if they use an electronic storage system.

Business often maintain their books and records by scanning hardcopies of their documents onto a computer hard drive, burning them onto compact disc, or saving them to a portable storage device. The IRS classifies records stored in this manner as an "electronic storage system." Businesses using an electronic storage system are considered to have fulfilled IRS records requirements for all taxpayers, should they meet certain requirements. And, they have the freedom to reduce the amount of paperwork their enterprise must manage.

Record-keeping requirements

Code Sec. 6001 requires all persons liable for tax to keep records as the IRS requires. In addition to persons liable for tax, those who file informational returns must file such returns and make use of their records to prove their gross income, deductions, credits, and other matters. For example, businesses must substantiate deductions for business expenses with appropriate records and they must file informational returns showing salaries and benefits paid to employees.

It is possible for businesses using an electronic storage system to satisfy these requirements under Code Sec. 6001. However, they must fulfill certain obligations.

Paperwork reduction

In addition, using an electronic storage system may allow businesses to destroy the original hardcopy of their books and records, as well as the original computerized records used to fulfill the record-keeping requirements of Code Sec. 6001. To take advantage of this option, taxpayers must:

(1) Test their electronic storage system to establish that hardcopy and computerized books and records are being reproduced according to certain requirements, and

(2) Implement procedures to assure that its electronic storage system is compliant with IRS requirements into the future.

Our firm would be glad to work with you to meet the IRS's specifications, should you want to establish a computerized recordkeeping system for your business. The time spent now can be worth considerable time and money saved by a streamlined and organized system of receipts and records.

The answer to this question would depend on a number of facts and circumstances. To be able to deduct work-related educational expenses as a business expense, you must: work as an employee or be self-employed; itemize your deductions on Schedule A (Form 1040) if you are an employee; file Schedule C (Form 1040) or Schedule F (Form 1040) if you are self-employed; and have expenses for education that meet certain criteria under the "qualifying work-related education" tests, explained below.

The answer to this question would depend on a number of facts and circumstances. To be able to deduct work-related educational expenses as a business expense, you must:

--Work as an employee or be self-employed;

--Itemize your deductions on Schedule A (Form 1040) if you are an employee;

--File Schedule C (Form 1040) or Schedule F (Form 1040) if you are self-employed; and

--Have expenses for education that meet certain criteria under the "qualifying work-related education" tests, explained below.

Education required by employer or by law

Once you have the minimum educational requirements for your job, your employer or the law may require you to get more education. Additional education is considered qualifying education if all three of the following requirements are met:

--The additional education or training is required for you to keep your present salary, status, or job;

--The requirement serves a business purpose of your employer; and

--The education is not part of a program that will qualify you for a new trade or business.

Example

You are a teacher who has satisfied the minimum requirements for teaching. Your employer requires you to take an additional foreign language class to keep your teaching job as teacher of foreign language. If the courses will not qualify you for a new trade or business, they are "qualifying education" even if you eventually receive a master's degree or an increase in salary because of this extra education.

Education to maintain or improve skills

If the education or training is not required by your employer or by law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments, and academic or vocational courses.

Example

Your business is global and you work with many business people from France. To keep up with the latest changes, you take a French language course. These courses maintain and improve your skills in communicating more effectively with your clients and are deductible.

If you stop working for a year or less in order to get education to maintain or improve skills needed in your present work and then return to the same general type of work, your absence is considered temporary. Education that you get during a temporary absence is qualifying education if it maintains or improves skills needed in your present work.

Example

You quit your teaching job to become a full-time graduate language student for one year. If you return to work as a foreign language teacher after completing the courses, the education is related to your present work even if you do not go back to work with the same employer.

The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers to give former employees, spouses and children the opportunity to continue their group health coverage for 18 months and sometimes longer.p>

Business owners know that when employees leave they may be entitled to temporarily continue health coverage at group rates. The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires employers to give former employees, spouses and children the opportunity to continue their group health coverage for 18 months and sometimes longer. The American Recovery and Reinvestment Tax Act of 2009 (2009 Recovery Act) made a significant, but temporary, change for COBRA coverage.

Changes for 2009

Under the 2009 Recovery Act, eligible individuals who have been involuntarily separate from work between September 1, 2008 and January 1, 2010 can elect to pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the employer or other coverage provider through a new credit. This special treatment applies only to periods of health coverage beginning on or after February 17, 2009 and lasts for up to nine months.

Employers will be required to pay the remaining 65 percent. However, the employer will be reimbursed by crediting those amounts against income tax withholding and payroll taxes it is otherwise required to remit to the IRS. Income and other limits on COBRA coverage continue to apply. Employers can claim the credit on revised Form 941, Employer's Quarterly Federal Tax Return. The COBRA credit is claimed on Line 12a of revised Form 941. Filers also must report the number of individuals provided COBRA premium assistance on Line 12b.

Triggering events

COBRA coverage is triggered by specific events. They are:

--Termination of employment;

--Reduction in hours worked;

--Death of an employee;

--Divorce or legal separation;

--Losing status as a dependent.

Sometimes, it is the responsibility of the employer to notify the health care plan when a triggering event occurs. This is the case when an employee terminates his or her employment, work hours are reduced, the employee dies, or he or she enrolls in Medicare.

Other times, the employee, or a family member, must notify the health care plan of a change. When an employee divorces or becomes legally separated from his or her spouse, he or she must inform the plan. If a dependent is no longer eligible for group health coverage, the employee must notify the plan.

Timing and content

Generally, employers must notify plans of triggering events within 30 days. If the employer administers its own health plan, it may have additional time. Employees have more time to notify plans about triggering events. They generally have 60 days. The rules are more complicated if the employee applies for Social Security disability.

Employees generally give notice of triggering events on special forms provided by the health plan. The new rules permit plans to require employees file certain forms but the forms must be readily available at no charge to employees or family members. Plans must also explain clearly and comprehensively how employees are to give the required notice. Failure to precisely follow the notice requirements is not always fatal, the DOL has stressed, as long as the employee satisfies the minimum rules about content.

Notice to employees

Notifications sent by plans to employees about COBRA coverage must be very specific under the new rules. The DOL requires plans to explain COBRA coverage, how to elect or decline coverage, the consequences of electing or declining coverage, and alternatives to COBRA coverage.

If an employee is ineligible for COBRA coverage, plans also must specifically explain why the employee doesn't qualify. Generally, plans must detail the reasons for ineligibility within 14 days of receiving notice of a triggering event from an employee or family member. However, if notice is late, the plan may be excused from explaining why the employee, or other individual, is not entitled to COBRA coverage.

If COBRA coverage ends prematurely, plans must notify individuals as soon as practicable. Plans must explain why coverage is ending early and the consequences of early termination of coverage.

The new rules are complex and, in many instances, very different from the old rules. Contact this office today so we can make sure you are fully compliant with the new COBRA notification rules.

Some gifts to employees are too insignificant for the IRS to care about. The IRS calls these gifts de minimis fringe benefits. A de minimis fringe benefit is any gift or service with a value so small that accounting for it is unreasonable or administratively impracticable. The value must be nominal or very low. Turkeys given to employees at Thanksgiving are a good example.

Deduction for employer

If a gift is de minimis, you can deduct the cost of the gift as a business expense. It's a win-win situation for your employees too. They do not have to include the value of the gift in their taxable incomes or pay employment taxes on the gift.

Examples

The precise meaning of de minimis is difficult to define. Lots of gifts and services are treated as de minimis. Some are easy to identify; others are not. A list of de minimis gifts has been developed over many years by the IRS and the courts. It's the result of a lot of litigation.

Here are some frequent examples:

• Coffee and soft drinks;
• Doughnuts and other pastries;
• Fruit;
• Flowers;
• Holiday and birthday gifts with a low monetary value;
• Local telephone calls; and
• Photocopying.

Meals

Meals are tricky. Meals are not de minimis merely because an employer seldom feeds its employees or, when it does feed them, it fails to keep track of who had what. Substantial food and beverages are not de minimis. For example, the IRS ruled that an employer that paid between $100 and $700 per person to cater a luncheon at a business conference for its salespersons could not deduct the cost of the meal. In that case, the IRS determined that accounting for the cost of the meal was reasonable and administratively practicable.

Picnics are treated differently. So long as they are occasional and food costs are insubstantial, picnics generally qualify as de minimis fringe benefits. You can deduct the cost of the picnic and your employees don't have to include the value of the picnic in their incomes. You'll want to keep costs reasonable. An extravagant feast is not a picnic. Standard picnic foods and desserts, such as hamburgers, hot dogs and apple pie, should be deemed insubstantial. Contact our office today so we can help you plan an event for your employees that satisfies all of the de minimis rules.

Hiring new employees imposes many burdens on an employer. One of the most important is the collection and filing of Form W-4, Employee's Withholding Allowance Certificate. Mistakes can be very costly to employers and employees. Here's a look at some problems and simple steps employers can take to avoid them.

Hiring new employees imposes many burdens on an employer. One of the most important is the collection and filing of Form W-4, Employee's Withholding Allowance Certificate. Mistakes can be very costly to employers and employees. Here's a look at some problems and simple steps employers can take to avoid them.

Name and social security number

First, an employer should verify the name and social security number submitted on the W-4. The Social Security Administration (SSA) offers a free program to confirm an employee's name and social security number. To request SSA assistance, employers should contact the SSA, provide their employer identification number, and the name and social security number of the employee in question. If the information is inaccurate, the employer should give the employee the opportunity to submit a new form before taking disciplinary action. Employers should also advise the IRS of the incorrect social security number.

Invalid W-4s

Employers must reject a W-4 form if the employer is aware that the form is invalid. This occurs in one of two circumstances: (1) the form has been altered or (2) the employee makes a comment to the employer that the W-4 is inaccurate.

The second scenario includes, for example, a statement by the employee that he or she is claiming to be exempt from withholding because the tax system is unconstitutional or the payment of taxes is voluntary. These claims are wrong and would invalidate the W-4. The employer must reject the W-4 until the employee submits an accurate form. During the interim, the employer must withhold at the highest withholding rate.

The employer also must withhold at the highest rate if an employee fails to submit a Form W-4 unless the employee had previously filed a valid W-4. In that case, the employer should withhold at the rate indicated on the old W-4.

Questionable W-4s

Employers may also be confronted with so-called "questionable" W-4s. An employer must send a copy of Form W-4 to the IRS for verification when the employee is claiming:

--More than 10 allowances; or

--Exemption from withholding if expected wages exceed $200 per week.

In either of these situations, however, the employer is not free to reject the W-4, but must withhold at the rate indicated by the employee until the IRS instructs otherwise. The law presumes that the form, unless "invalid," is accurate until proven otherwise.

Questionable W-4s should be submitted to the IRS with a letter asking the IRS to determine the accuracy of the submission. The letter must include the employer's name, address and EIN.

Caution. Only in the two situations outlined above is the employer required to consider the Form W-4 "questionable." In other questionable cases, there is no obligation to inform the IRS. However, if the IRS deems the reason sufficient to make it "invalid" rather than "questionable" the employer may have been required to withhold taxes at the highest rate rather than at the level indicated on the W-4.

After the IRS conducts an examination, it will send the employer and the employee a "lock-in" letter stipulating the correct rate of withholding. The letter is binding and failure to comply may result in the imposition of civil penalties on the employer. To encourage employees to submit an accurate W-4, employers should remind them that filing a false W-4 may result in a $500 penalty.

If you file a joint return and your taxable income is less than that of your spouse, the "spousal" IRA rules may allow you to contribute up to $5,000 in 2009 (or $6,000 if you are 50 or older) to an individual retirement account (IRA) this year. A "spousal IRA" is a term more commonly used to describe an IRA set up for a nonworking, stay-at-home spouse.

If you file a joint return and your taxable income is less than that of your spouse, the "spousal" IRA rules may allow you to contribute up to $5,000 (or $6,00 if you are 50 or older) to an individual retirement account (IRA) this year. A "spousal IRA" is a term more commonly used to describe an IRA set up for a nonworking, stay-at-home spouse.

Traditional IRA

Individuals under the age of 70 1/2 can make contributions to traditional IRAs. Contributions are deductible and amounts earned in a traditional IRA are not taxed until distributions are made. As an alternative, the contribution may be made to a Roth IRA, in which case it is not deductible (but neither will any qualified withdrawals be taxed later on).

2009 contribution limits

In 2009, the maximum contribution is $5,000. An individual who will be at least 50 years old by the end of the tax year is able to make an additional contribution to an IRA. For 2009, the maximum amount of the catch-up contribution is $1,000.

Impact of employer-sponsored plans on contributions

A spouse's participation in a qualified retirement plan (through an employer or self-employment), affects whether, and how much, the other spouse can contribute to an IRA. The deduction for an IRA contribution is limited if one spouse is an active participant in an employer-maintained retirement plan (an individual is not considered an active participant in an employer-sponsored plan merely because his or her spouse is treated as an active participant).

One participating spouse

An individual spouse can make a deductible contribution to an IRA of up to $5,000 in 2009 (if 50 or older, $6,000). For 2009, the working spouse's ability to take an IRA contribution deduction must be reduced if he or she is an active participant in a plan and the couple's combined AGI falls between $89,000 and $109,000.

The maximum deductible contribution for a nonworking spouse whose husband or wife is an active participant in a retirement plan, phases-out when the couple's combined AGI falls between $166,000 and $176,000. Thus, the deductibility of the nonworking spouse's contribution to an IRA begins to phase-out when the couples' AGI exceeds $166,000, if the working spouse participates in a qualified retirement plan.

Non-participating spouses

When neither spouse participates in a qualified retirement plan both the nonworking spouse and the working mate can make deductible contributions of up to $5,000 to traditional IRAs -- $10,000 in total for 2009 -- regardless of AGI. For example, say the couple's joint AGI is $400,000 from one spouse's self-employment activity. If that spouse has no retirement plan, each spouse can make a $5,000 deductible IRA contribution for 2009 ($6,000 each if both are age 50 or older).

Impact of filing status on contributions

Filing status also affects the amount of the IRA contribution deduction. If either spouse is covered by a retirement plan through his or her employer, the deduction may be reduced or eliminated depending upon the couple's filing status. For example, if separate returns are filed, the lower compensated spouse may only be able to contribute up to the amount he or she earned in taxable compensation that year.

Example

Wendy, who is 45 years of age, is not employed, but her husband Harold participates in a 401(k) plan sponsored by his employer. The couple files a joint income tax return and reports an AGI of $105,000. Wendy can make a deductible contribution to a traditional IRA up to the full $5,000 because she is not an active participant in an employer-sponsored retirement plan and their combined AGI is below $166,000.

Wendy's contribution to an IRA can be as much as $5,000 in 2009, since she's less than 50 years old, a nonworking spouse, and her husband is a qualified plan participant. However, Harold cannot make a deductible IRA contribution because their combined AGI is above the 2009 phase-out range for plan participants who are married and filing jointly ($166,000 to $176,000 in 2009).

If Wendy and Harold filed separate returns, however, the amount that Wendy could contribute to her IRA, and still be able get a deduction, could be less than $5,000 if her taxable income for 2009 is less than $5,000. That is, her deductible contribution amount would be limited to the amount of her gross income this year.

Many tax issues arise when an employee leaves, or is terminated, from employment. How they are handled can make the difference between having an employee leave feeling more in control of the situation and one who may perceive the need for a better severance package. Here are some considerations that should not be ignored.

Many tax issues arise when an employee leaves, or is terminated, from employment. How they are handled can make the difference between having an employee leave feeling more in control of the situation and one who may perceive the need for a better severance package. Here are some considerations that should not be ignored.

Unemployment compensation: Unemployment insurance payments are taxable as income. Payments to laid-off employees from company-financed supplemental unemployment benefit plans (referred to as "guaranteed annual wage" plans) also constitute taxable income to the employees in the year received.

Severance payments: In some circumstances, terminated employees may receive a severance package. Severance pay is taxable and must be reported along with other employee salary or wages.

Golden parachutes: Highly compensated employees or independent contractors may have "golden parachute" clauses in their contracts specifying that they will receive certain benefits, beyond their usual compensation, in the event the ownership or control of the corporation changes. Golden parachute benefits can include a bonus, severance package, stock options or a combination. If the employee receives an "excess parachute payment," a complex calculation under the tax code, the employee may be subject to an excise tax of 20 percent plus the income tax due.

Incentive stock options: Incentive stock options (ISOs) are not taxed as income at the time the stock option is granted to an employee, nor are they taxed as regular income at the time the employee exercises the option and buys the stock. Instead, tax is generally deferred until the employee sells the stock, at which time the lower capital gains tax rates apply, so long as the stock is held for at least two years after the options were granted and at least one year after they were exercised. If the holding period test is not met, the stock may be treated as compensation, which will result in tax being paid at regular income tax rates, rather than at capital gains rates, when the stock is sold.

Although no income tax is generally due when the stock option is exercised, the alternative minimum tax (AMT) can be triggered. Depending on your overall tax situation, you may have to pay AMT in the year you exercise your stock options.

IRA rollovers: In many situations, a distribution from a qualified plan may be rolled over to a traditional IRA or to another qualified plan, tax-free. Generally, the transfer must be accomplished within 60 days of the distribution or withdrawal. However, any portion of the withdrawal that is not rolled over within the 60-day period will be taxed as ordinary income and may be subject to a 10 percent penalty on premature distributions if the distributee is less than 59 ½ years old.

Job hunting expenses: Individuals may deduct all expenses incurred in seeking employment in the same trade or business regardless of whether or not the search is successful. Such expenses include the preparation and mailing of resumes, as well as travel expenses. Job-hunting expenses are not deductible, however, if an individual is seeking employment in a new trade or business. If an employee receives a severance package that includes assistance from a job placement or resume writing service, it can usually be arranged to come under the "tax-free fringe benefit" category while preserving a full deduction for the employer.

Health care issues: An itemized deduction is allowed for medical expenses that exceed 7.5% of adjusted gross income. The deduction can be taken for the taxpayer and his or her spouse and dependents. Also, the employee, spouse and dependents may be eligible for continued health care coverage through the former employer's group plan, for a limited period of time, under the Consolidated Omnibus Budget Reconciliation Act (COBRA) rules.

In many parts of the country, residential property has seen steady and strong appreciation for some time now. In an estate planning context, however, increasing property values could mean a potential increase in federal estate tax liability for the property owner's estate. Many homeowners, who desire to pass their appreciating residential property on to their children and save federal estate and gift taxes at the same time, have utilized qualified personal residence trusts.

In many parts of the country, residential property has seen steady and strong appreciation for some time now. In an estate planning context, however, increasing property values could mean a potential increase in federal estate tax liability for the property owner's estate. Many homeowners, who desire to pass their appreciating residential property on to their children and save federal estate and gift taxes at the same time, have utilized qualified personal residence trusts.

What is a QPRT?

The qualified personal residence trust, referred to as a "QPRT," is an estate planning technique used to transfer a personal residence from one generation to the next without incurring federal estate tax on the trust property. This type of irrevocable trust allows a homeowner to make a future gift of the family home or a vacation property to his or her children, while retaining the right to continue living in the home for a term of years that the homeowner selects.

Creating a QPRT

The homeowner transfers title to his or her residence into trust for a set time period (for example, 10 years), but retains the right to live in the house during the trust term. At the end of the term, the trust property is distributed to the donor's children without passing through the donor's estate, thereby avoiding federal estate tax on the trust assets. However, if the donor wishes to continue living in the residence after the end of the trust term, the donor must pay fair market rent to his or her children, the new owners of the residence.

Gift tax advantage

Through the use of a QPRT, the full value of your residence can be transferred to your children. However, for federal gift tax purposes, the property is valued at a discount. The actual value of the gift (and the gift tax savings) depends upon your age, the length of the QPRT term, and the federal interest rates in effect at the time you transfer the house to the trust. For example, the longer the trust term, the lower the gift value for gift tax purposes and the greater the gift tax savings. Also, the higher the applicable federal interest rate, the greater the potential gift tax savings.

If you would like to discuss how a QPRT might work for you as part of your overall estate plan, or if you currently have an established QPRT and you wish to review its effect in light of current interest rates and other factors, please do not hesitate to contact this office.

Just because you're married doesn't mean you have to file a joint return. This is a common misconception along with thinking that "married filing separately" applies to couples who are separated or seeking a divorce. As a married couple, you have two choices: file a joint return or file separate returns. Naturally, there are benefits and detriments to each and your tax advisor can chart the best course of action for you.

Traditional treatment

Historically, the tax laws reward marriage. Married couples are eligible for many incentives. For example, they can make tax-free gifts of up to $26,000 (for 2009) to the same individual ($13,000 from each spouse). Single taxpayers can only make tax-free gifts up to $13,000 to the same person. Married couples also have a larger home sale exclusion: they can exclude up to $500,000 in gain from the sale of their home. Single taxpayers are limited to an exclusion of up to $250,000.

Moreover, single individuals no longer have a leg-up when it comes to the standard deduction because of the "marriage penalty." The standard deduction for married couples is now twice the deduction for single taxpayers. For 2009, the standard deduction for married taxpayers filing jointly is $11,400 (for single taxpayers, the standard deduction for 2009 is $5,700). Married taxpayers filing separately also individually take a standard deduction of $5,700 for 2009.

Important credits and deductions

Credits and deductions significantly lower your tax bill. Unfortunately, some credits and deductions are lost unless you file a joint return. These include:

-- HOPE Scholarship credit (temporarily renamed the American Opportunity Education credit for 2009 and 2010);

-- Lifetime Learning credit;

-- Dependent care credit;

-- Earned Income Tax Credit;

-- Adoption credit; and the

-- Deduction for student loan interest.

If these credits and deductions are valuable to you, and you are married, you'll have to file a joint return.

When to file separately

Two events may make you decide to file a separate return:

--Your personal itemized deductions are very high; or

--You do not want to be legally responsible for your spouse's tax liability.

Let's look at the second one first. When a married couple files a joint return they are both legally liable for any tax owed to the government. This is a hard and fast rule. The moment you sign your name to your joint return, you are just as liable for the tax as your spouse. The IRS can come after both of you or just one for the full amount of the tax liability.

Getting out of joint liability is not easy. If you did not know about errors or false statements on your return, you can petition for relief under the innocent spouse rules. The IRS may excuse you from joint liability but the process takes a long time. If you do not want to be liable for your spouse's taxes, don't sign a joint return.

Sometimes one spouse has a large amount of itemized deductions. This often occurs because of illness. Medical expenses are deductible only to the extent that they exceed 7.5 percent of adjusted gross income. If only one spouse had the majority of the couple's medical expenses, it may be easier to overcome the 7.5 percent threshold when only one spouse's income is reported on the return.

Employee business expenses and casualty losses, such as damage from a natural disaster to property owned by one spouse, also are common triggers for filing separately. If these expenses are high, they may reduce your tax bill if reported on a separate return.

Itemizing

If you decide to file separate returns, you and your spouse must itemize deductions or take the standard deduction. You cannot itemize deductions on your return and your spouse take the standard deduction on his return.

Weighing the pros and cons of filing separately is complex and unique to each couple. Lots of other factors, such as children, Social Security and pension benefits, and residency, can make a difference. Contact this office for help in deciding which filing status will maximize your tax breaks and minimize your tax bill.

The IRS has some good news for you. Under new rules, you may be able to gain a partial tax break on the full $250,000 capital gain exclusion ($500,000 if you file jointly with your spouse), even if you haven't satisfied the normal "two out of five year test" necessary to gain that tax benefit. You may qualify for an exception.

The IRS has some good news for you. Under generous tax rules, you may be qualify for a partial tax break on the full $250,000 capital gain exclusion ($500,000 if you file jointly with your spouse), even if you haven't satisfied the normal "two out of five year test" necessary to gain that tax benefit. You may qualify for an exception. However, under new rules established in the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income under Code Sec. 121 for periods that the home was not used as a principal residence.

Traditional approach

Homeowners who have owned or used their principal residence for less than two of the five years preceding the sale or exchange, or who have excluded gain from another sale or exchange during the last two years, may qualify for the reduced maximum exclusion if the sale or exchange is due to a change in place of employment, health, or unforeseen circumstances. The reduced exclusion is equal to the regular $250,000 ($500,000 for joint filers) exclusion amount multiplied by the number of days of ownership and use over the two-year period.

Reduced home sale exclusion

The 2008 Housing Act changed the homesale exclusion for home sales after December 31, 2008. Under the 2008 Housing Act, gain from the sale of a principal residence will no longer be excluded from a homeowner's gross income for periods that the home was not used as a principal residence (i.e. "non-qualifying use"). A period of absence generally counts as qualifying use if it occurs after the home was used as the principal residence.

In effect, the rule prevents the use of the Code Sec. 121 exclusion of gain from the sale of a principal residence of up to $250,000 ($500,000 for joint filers) for appreciation attributable to periods after 2008 that the home was used as a vacation home or rental property before being used as a principal residence.

Traditionally, the IRS was very reluctant to dispense people from the strict home exclusion rules. The IRS could make an exception based on a hardship or an unforeseen circumstance, but the criteria for these exceptions weren't very clear. The exceptions weren't always uniform. Now, the government has clarified the exceptions and significantly expanded them.

Criteria

Health reasons You may exclude gain if you sell your residence because of ill health. If your physician recommends a change in residence, the IRS explained that would be sufficient grounds to qualify for the exclusion. This important exclusion is also available if your spouse, the co-owner of your home or a household member must relocate for health reasons.

Change in employment If you must relocate because of a change in employment, you may be able to exclude gain from the sale of your residence. Your new place of employment must be at least 50 miles farther away. Like the special exception for health reasons, you can qualify for this exception if you, your spouse, another co-owner of your home or a household member must move for this reason.

Unforeseen circumstances This exception is very broad and can be confusing. Before you think you qualify under this exception, seek advice from a tax professional. Here are some events that qualify as an unforeseen circumstance:

--(1) Death;

--(2) Divorce or separation;

--(3) Unemployment;

--(4) Multiple births from the same pregnancy;

--(5) Moving closer to care for a close relative who is ill;

--(6) Condemnation or seizure of your home;

--(7) War or terrorism; and

--(8) Natural or man-made disasters.

In addition to these exceptions, the IRS has discretion to determine other circumstances as unforeseen. Like the health and change in employment exceptions, you may be eligible for an exclusion based on unforeseen circumstances if you, your spouse, the co-owner of your home, or a household member satisfies one of these criteria.

Professional guidance

Before you think you qualify under any of the exceptions, seek advice from a tax professional. For example, to qualify for the unemployment exception, you must be eligible for unemployment compensation. To come under the exception that accommodates moving to take care of a close relative, careful medical records and personal logs should be maintained. By gathering the proper proof in advance, major headaches with the IRS may be avoided.

As a business owner you have likely heard about the tax advantages of setting up a retirement plan for you and your employees. Many small business owners, however, have also heard some of the horror stories and administrative nightmares that can go along with plan sponsorship. Through marketing information that you receive, you may have learned that a simplified employer plan (SEP) is a retirement plan you can sponsor without the administrative hassle associated with establishing other company plans, including Keoghs.

Evaluate your needs

Getting started

Once you establish a SEP, the administrative requirements are simple. The IRS and each employee must be sent an annual statement about SEP contributions made on behalf of the employee and the value of that employee's accounts at the beginning and the end of the year. This responsibility can be handled by the financial institution for a small fee.

If you want assistance in establishing a SEP for your business, contact us for further information.

U.S. citizens and resident aliens working abroad may exclude up to $91,400 of their foreign earned income for 2009. Additionally, expatriates may deduct or exclude their foreign housing costs in excess of a base amount. The housing exclusion is for reimbursed expenses while the deduction is for unreimbursed costs.

Earned foreign income

Before being able to claim these exclusions, you must meet some primary requirements. Foreign earned income is an individual's earned income from foreign sources during the time period that he or she has a foreign tax home and either satisfies the bona fide or physical residence test.

Tax home

Your tax home also must be in a foreign country. Generally, the IRS and the courts hold that your principal place of business or employment is your tax home.

Status

Finally, you must be a:

U.S. citizen who is a bona fide resident of a foreign country or countries for a continuous time period including the entire tax year;

U.S. resident alien who is a citizen or national of a country having an income tax treaty with the U.S. and who satisfies the continuous residency requirement; or

U.S. citizen or resident alien physically present in a foreign country or countries for a minimum of 330 days during any consecutive 12 month period.

Q. I converted my regular IRA to a Roth IRA when the account had a high value because the stock market was at an all time high. I paid the required tax on the conversion when the conversion proceeds pushed me up into the 36% tax bracket. The Roth IRA is now worth only about 40% of its original value. Is there any type of tax deduction that I can take based on this loss?

Q. I converted my regular IRA to a Roth IRA when the account had a high value because the stock market was at an all time high. I paid the required tax on the conversion when the conversion proceeds pushed me up into the 36% tax bracket. The Roth IRA is now worth only about 40% of its original value. Is there any type of tax deduction that I can take based on this loss?

A. Unfortunately, the answer is no. The benefit you get when you have a Roth IRA is that all income earned on the value of your account accumulates tax-free. Further, when it comes time to withdraw funds from your Roth IRA, you pay no taxes on these withdrawals (which includes the amount of earnings that accumulated on a tax-free basis). The other side of this equation is that you do not get a tax deduction when the assets in the account lose value.

Q. If I had acted earlier, was there any way out of the Roth IRA conversion?

A. You do have a way out if you can see that your account is losing money in the year in which you made the conversion. You have the ability to recharacterize the Roth IRA contribution which you made through the conversion back to a regular IRA if you meet the following requirements:

1. You make a "trustee-to-trustee" transfer of the amounts in the Roth IRA back to a regular IRA.

2. The transfer is accompanied by any earnings on the amount you first contributed to the Roth IRA.

3. When you made the contribution (conversion) to the Roth IRA, you were not allowed a deduction.

4. The recharacterization is made by the due date (plus extensions) of your tax return for the year that you made the Roth IRA conversion. For this purpose, the IRS lets you include the regular four-month automatic extension, plus the additional two-month extension if you apply for it.

This means that if you apply for the regular four-month extension for your tax return and the additional two-month extension, you will have until October 15th of the year following the year of the Roth conversion to transfer your money back to a regular IRA. If you accomplish the recharacterization within this timeframe, the IRS will refund the tax you paid when you made the Roth conversion.

If you find yourself in this situation, please feel free to contact us so that we can give you specific advice that possibly will save you money.

A taxpayer who may have misplaced or lost a copy of his tax return that was already filed with the IRS or whose copy may have been destroyed in a fire, flood, or other disaster may need information contained on that return in order to complete his or her return for the current year. In addition, an individual may be required by a governmental agency or other entity, such as a mortgage lender or the Small Business Administration, to supply a copy of his or a related party's tax return.

A taxpayer who may have misplaced or lost a copy of his tax return that was already filed with the IRS or whose copy may have been destroyed in a fire, flood, or other disaster may need information contained on that return in order to complete his or her return for the current year. In addition, an individual may be required by a governmental agency or other entity, such as a mortgage lender or the Small Business Administration, to supply a copy of his or a related party's tax return.

In such circumstances, you may obtain a copy of your tax return by filing Form 4506, Request for Copy or Transcript of Tax Form, along with the applicable fee, to the IRS Service Center where the return was filed. Also, tax account information based on the return may be obtained free of charge from IRS Taxpayer Service Offices. You may also request a transcript that will show most lines from the original return, including accompanying forms and schedules.

Fees

There is no charge to request a tax return transcript of the Form 1040 series filed during the current calendar year and the three preceding calendar years. For other requests, a fee of $23.00 per tax period requested must be paid in order to obtain copies of a return. Taxpayers seeking tax account information (such as adjusted gross income, amount of tax, or amount of refund) should contact their local IRS Taxpayer Service Office, which will provide the account information free of charge.

Timing of requests

A request for a copy of a return must be received by the IRS within 60 days following the date when it was signed and dated by the taxpayer. It may take up to 60 calendar days to get a copy of a tax form or Form W-2 information. If a return has been recently filed, the taxpayer must allow six weeks before requesting a copy of the return or other information. The IRS cautions that returns filed more than six years ago may not be available for making copies; tax account information, however, is generally available for these periods.

You may be able to save some time by going directly to your tax return preparer for the information. Although a return preparer may retain a copy of the taxpayer's return, however, there is no absolute requirement to do so. Preparers must retain for three years either a copy of each completed return and claim for refund or a list of the names and taxpayer identification numbers of taxpayers for whom returns or claims have been prepared.

Generally, if you do volunteer work for a charity, you are not entitled to deduct the cost of services you perform for the charity. However, if in connection with the volunteer work you incur out-of-pocket expenses, you may be entitled to deduct some of those expenses.

Q. I spend 20 hours every week cooking meals and delivering them to an organization that feeds the hungry and homeless. Am I entitled to a deduction for my time and the food I pay for out of my own money?

A. Generally, if you do volunteer work for a charity, you are not entitled to deduct the cost of services you perform for the charity. However, if in connection with the volunteer work you incur out-of-pocket expenses, you may be entitled to deduct some of those expenses.

Qualifying expenses

If the amounts that you pay for food and other supplies used in the preparation and packaging of the meals are not reimbursed by the charity, generally you may deduct these expenses as contributions to the charity.

In addition, if the amounts that you pay to travel by car or other means to deliver the meals are not reimbursed by the charity, and you derive no personal benefit from the travel, the expenses are deductible. Qualifying expenses include gasoline for your car and fares for taxis or public transportation.

Special mileage rate

If you drive your own vehicle to deliver the meals, you can use a special IRS mileage rate to calculate charitable contribution deductions involving use of your car. The standard mileage rate for charitable purposes, which is statutorily set, is 14 cents per mile.

Other expenses

Other out-of-pocket expenses incurred in connection with services you provide to a charity that are deductible include costs related to uniforms, travel, meals, and lodging. Sometimes, expenses incurred while serving as a charity's delegate to a convention may be deducted.

Keep receipts

If you take a deduction for out-of-pocket expenses you incurred incident to your performance of services for a charity, it is important to have receipts to document expenses. It is also a good idea to get a written acknowledgement from the charity for the services you provide.

Q: What tax deductions am I entitled to as an investor?

A: Certain investment-related expenses are deductible, others are specifically restricted. Still others won't get you a deduction, but you will be able to add them to your tax basis in the underlying investment, or net them from the amount you are otherwise considered to have received on its sale.

Certain investment-related expenses are deductible, while others are specifically restricted. Still other expenses likely will not provide you with a deduction, but you will be able to add them to your tax basis in the underlying investment, or net them from the amount you are otherwise considered to have received on its sale.

Investor expenses

Investment counsel fees, custodian fees, fees for clerical help, office rent, state and local transfer taxes, and similar expenses that you pay in connection with your investments are deductible as an itemized deduction on Schedule A of Form 1040, subject to the 2% floor for all such itemized deductions.

Travel expenses related to the production or collection of income are deductible if you provide proof both of the expenses and the necessity for incurring them. Deductions for travel expenses related to attending investment seminars, however, are specifically prohibited. Travel expenses to attend stockholder meetings are permissible deductions only if travel is not for personal reasons and expenses are reasonable in relation to value of the investment.

Interest expenses

If you take out a loan to carry investment property, you are entitled to an itemized deduction for the interest you pay, reported on Form 4952, which is limited to your net investment income (dividends, interest, rents, etc.) Margin interest paid connected with your stock portfolio qualifies. The investment interest deduction is not subject to the 2% floor - you can start with deducting the first dollar of interest paid. Any disallowed interest over the net investment income limit can be carried over to a succeeding tax year.

Caution. Net capital gain from the disposition of investment property is not considered investment income. However, you may elect to treat all or any portion of such net capital gain as investment income by paying tax on the elected amounts at their ordinary income rates. This is usually not advisable.

Brokerage commissions

Brokerage commissions related to a particular stock purchase or sell, on the other hand, are considered a cost of the sale itself. As such, any commissions paid to buy a stock are added to your tax basis in the shares, which will later determine the amount of taxable gain you have when the property is sold. Any commission on the sale of the shares is netted from the amount you will be considered to realize on that sale.

Once you retire or reach age 70 ½ (depending on your retirement plan), the law requires that you start making -at a minimum-some periodic withdrawals. These withdrawals are called required minimum distributions.

Why required minimum distributions?

First, the tax policy behind letting you save in a tax-deferred account was to allow you to use those funds in your retirement, rather than to use them as just another way to build up your estate for your heirs. Second, because those accounts are usually tax-deferred, withdrawals after retirement are taxed to you as ordinary income. As a result, the IRS wants you to withdraw at least a minimum amount from those accounts each year so that it can be taxed.

New IRS rules substantially simplify the computation of required minimum distributions (RMDs). In addition, Congress has forced the IRS to adopt new life expectancy tables that reflect longer life expectancies, resulting in distributions to be made over a longer time-period and for the RMD to be smaller than would have been required in previous years.

Good tax news

Good news for taxpayers who are interested in retaining funds in their IRAs and their tax-qualified plans because it means deferring income tax on the funds even longer.

If you are alive in the year in which you must begin required minimum distributions, your new MRD is calculated each year by dividing the account balance by your life expectancy, as determined by the uniform distribution period table (the "Uniform Table") in the new IRS rules.

Example. At the time his required beginning date is reached (usually retirement or 70 ½), John Smith had a balance of $1 million in his IRA, as of the previous December 31. He previously named a beneficiary, who is age 67.

The difference in the computation of the RMD under the new rules is dramatic.

Under pre-2001 rules, he checks the joint and last survivor table and finds that his divisor for his $1 million account is 22.

Under revised rules in effect in 2001, his divisor is 26.2.

Under the new Uniform Lifetime Tables now in effect, his divisor is 27.4.

The difference in required distributions is significant.

Under pre-2001 rules, John must withdraw at least $45,454 this year

Under the 2001 rules, John must withdraw at least $38,168 this year.

Under the new tables, John must withdraw at least $36,496 this year.

Because of the new regulations, John has an extra $8,958 in his IRA at the end of the year over what he could have kept under the rules only a few years ago. This amount can then continue to accumulate earnings. This savings can be realized-and compounded-every subsequent year for the next 27 years. As a bonus, John's federal income tax (assuming a marginal rate of 35 percent) is more than $3,135 less ($12,773 instead of $15,908).

If you die before reaching your retirement having designated your spouse as beneficiary, distributions must begin by December 31 of the year following your death or the year that you would have turned 70½, whichever is later. At that time, RMD is computed over your spouse's life expectancy.

Caution!

The new rules-although more flexible-leave little room for mistakes in timing. Failure to take the minimum required distribution by the RBD will result in a 50 percent excise tax equal to half of the amount that should have been paid out but wasn't. Although early versions of proposed legislation included a decrease in the penalty from 50 percent to 10 percent, that provision is not the law.

If you'd like more specific advice on how the new Minimum Required Distribution rules apply to your retirement strategies, please contact this office.

Making gifts is a useful, and often overlooked, tax strategy. However, when thinking about whether to make a gift, or gifts, to your children or other minors, the tax consequences must be evaluated very carefully. Many times, though, the tax consequences can be beneficial and lower your tax bill.

When thinking about whether to make a gift, or gifts, to your children or other minors, the tax consequences must be evaluated very carefully. Many times, though, the tax consequences can be beneficial and lower your tax bill.

Different strategies, whether used alone or in combination, can produce the most advantageous tax results for you and the recipients of your generosity. However, everyone's situation is unique so before you start making gifts, talk to a tax professional.

Basic considerations

-- Generally, a minor is any person under age 18.

-- Different tax rules apply to gifts to minors under age 19 and minors under age 14.

-- Unearned income exceeding $950 (the 2009 amount) of a minor who is under 19 years of age (and college students who are under 24 years of age) will generally be taxed at the highest marginal rate of his or her parents under the "kiddie tax" rules.

-- Income from property given to a minor who is 14 years old or older will be taxed at the minor's marginal income tax rate.

-- If a minor's gift is in trust, there is a 15 percent tax rate on the first $2,300 (the 2009 amount) each year that grows in the trust.

Estate tax

The tax on your estate is determined at the time of your death. Making gifts over your lifetime is often overlooked and undervalued as a means of reducing your estate tax. When you make gifts of money or property during your life the net result is a smaller estate and a smaller tax. Also, when you give a gift of property to a minor, which later increases in value, your estate will not be taxed on this increase in value.

Annual exclusion

In general, you can give away up to $13,000 in 2009 to anyone (including minors) during the year, tax-free. You and your spouse, together, can also give up to $26,000, tax-free, in 2009, to each donee.

UGMA/UTMA accounts

Under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), annual gifts can be made by individuals to a custodial account.

Tax-free gifts can be made under the UGMA. In 2009, each taxpayer can transfer up to $13,000--and each married couple can transfer up to $26,000--to a custodial account. Some of the earnings will receive tax exemption while some or all of the earnings will receive taxation at the minor's tax rate. One drawback to UGMA accounts, however, is that the gifts are irrevocable. Another drawback is that if a student applies for financial aid, UGMA accounts may be deemed assets of the student that are part of the student's contribution toward his or her educational expenses.

UGMA and UTMA accounts have another downside that many parents dislike. When the minor reaches 18 or 21 years of age (depending upon state law), the child can generally do whatever he or she wants with the custodial account money. (That's why some individuals prefer "Crummey" trusts, which are discussed below.)

UTMA accounts operate very similarly to UGMA accounts. However, UTMA accounts let individuals make property gifts to their children that are tax-free.

Trusts

If you use property that does not produce income (such as a life insurance policy) to fund a minor's trust, this can have bad tax consequences. The IRS could assert that the true value of the gift cannot be determined, causing unavailability of the annual exclusion.

With a "Crummey" trust, your gift can stay in trust for as long as you desire without giving up the annual exclusion. However, contributions to a "Crummey" trust do not qualify for the annual exclusion unless the beneficiary receives notification that the contributions were made and is given a limited time (usually 30 days) to withdraw the contribution.

It is understood that the beneficiary will not withdraw the money or property. However, such an understanding should not be written because the IRS will use any evidence to say that the beneficiary had no withdrawal power.

If you are planning to make some gifts to your children or other minors, contact the office for additional guidance so we can make sure you get the best tax breaks possible.

No use worrying. More than five million people every year have problems getting their refund checks so your situation is not uncommon. Nevertheless, you should be aware of the rules, and the steps to take if your refund doesn't arrive.

Average wait time

The IRS suggests that you allow for "the normal processing time" before inquiring about your refund. The IRS's "normal processing time" is approximately:

• Paper returns: 6 weeks
• E-filed returns: 3 weeks
• Amended returns: 12 weeks
• Business returns: 6 weeks

IRS website "Where's my refund?" tool

The IRS now has a tool on its website called "Where's my refund?" which generally allows you to access information about your refund 72 hours after the IRS acknowledges receipt of your e-filed return, or three to four weeks after mailing a paper return. The "Where's my refund?" tool can be accessed at www.irs.gov.

To get out information about your refund on the IRS's website, you will need to provide the following information from your return:

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

 Start a refund trace

If you have not received your refund within 28 days from the original IRS mailing date shown on Where's My Refund?, you can start a refund trace online.

Getting a replacement check

If you or your representative contacts the IRS, the IRS will determine if your refund check has been cashed. If the original check has not been cashed, a replacement check will be issued. If it has been cashed, get ready for a long wait as the IRS processes a replacement check.

The IRS will send you a photocopy of the cashed check and endorsement with a claim form. After you send it back, the IRS will investigate. Sometimes, it takes the IRS as long as one year to complete its investigation, before it cuts you a replacement check.

A bigger problem

Another problem may come to the fore when the IRS is contacted about the refund. It might tell you that it never received your tax return in the first place. Here's where some quick action is important.

First, you are required to show that you filed your return on time. That's a situation when a post-office or express mail receipt really comes in handy. Second, get another, signed copy off to the IRS as quickly as possible to prevent additional penalties and interest in case the IRS really can prove that you didn't file in the first place.

Minimize the risks

When filing your return, you can choose to have your refund directly deposited into a bank account. If you file a paper return, you can request direct deposit by giving your bank account and routing numbers on your return. If you e-file, you could also request direct deposit. All these alternatives to receiving a paper check minimize the chances of your refund getting lost or misplaced.

If you've moved since filing your return, it's possible that the IRS sent your refund check to the wrong address. If it is returned to the IRS, a refund will not be reissued until you notify the IRS of your new address. You have to use a special IRS form.

IRS may have a reason

You may not have received your refund because the IRS believes that you aren't entitled to one. Refund claims are reviewed -usually only in a cursory manner-- by an IRS service center or district office. Odds are, however, that unless your refund is completely out of line with your income and payments, the IRS will send you a check unless it spots a mathematical error through its data-entry processing. It will only be later, if and when you are audited, that the IRS might challenge the size of your refund on its merits.

IRS liability

If the IRS sends the refund check to the wrong address, it is still liable for the refund because it has not paid "the claimant." It is also still liable for the refund if it pays the check on a forged endorsement. Direct deposit refunds that are misdirected to the wrong account through no fault of your own are treated the same as lost or stolen refund checks.

The IRS can take back refunds that were paid by mistake. In an erroneous refund action, the IRS generally has the burden of proving that the refund was a mistake. Nevertheless, although you may be in the right and eventually get your refund, it may take you up to a year to collect. One consolation: if payment of a refund takes more than 45 days, the IRS must pay interest on it.

If you are still worrying about your refund check, please give this office a call. We can track down your refund and seek to resolve any problem that the IRS may believe has developed.

Throughout all of our lives, we have been told that if we don't want to work all of our life, we must plan ahead and save for retirement. We have also been urged to seek professional guidance to help plan our estates so that we can ensure that our loved ones will get the most out of the assets we have accumulated during our lifetime, with the least amount possible going to pay estate taxes.  What many of us likely have not thought about is how these two financial goals -- retirement and estate planning -- work together. 

Throughout all of our lives, we have been told that if we don't want to work all of our life, we must plan ahead and save for retirement. We have also been urged to seek professional guidance to help plan our estates so that we can ensure that our loved ones will get the most out of the assets we have accumulated during our lifetime, with the least amount possible going to pay estate taxes. What many of us likely have not thought about is how these two financial goals -- retirement and estate planning -- work together.

Retirement plan assets are part of taxable estate

When we begin to think about estate planning, one of the first things that we usually do is to take an inventory of what our current assets are and then we project into the future and try to estimate the assets we will have when we die. If you take a moment and think about this right now, aside from your residence, the most valuable asset you currently own (and that you will own at the time of death) is most likely to be your retirement savings (your IRAs, 401(k) accounts, and other employer-sponsored retirement plans). Looking at things from this perspective really drives home the importance of estate planning in connection with saving for retirement.

One of the reasons why we may not think about estate planning in connection with our retirement benefits is that we may have the false notion that these benefits are not part of our "estate" and therefore are not subject to estate tax. This is not true. All of your assets, regardless of the source are part of your estate and subject to estate tax (or, in other words, part of your taxable estate).This means that all of the issues that you may address with a lawyer or accountant or other financial professional regarding planning your estate will also need to be considered when planning for your retirement. When you sit down with a professional to help you plan your estate it is critical that you gather and provide as much information as possible regarding any and all retirement plans in which you participate-all IRAs, 401(k), and other plans sponsored by your employer.

Special issues involved with estate planning for retirement plan assets

Even though the funds that you have in your retirement plans are subject to the same estate planning rules and considerations as any other assets that are part of your estate, there are certain special or unique issues that come into play when you incorporate retirements savings into estate plans. Decisions made with respect to these issues may also have income tax consequences as well as estate tax repercussions. Some of the most important of these issues are:

•  Whether to elect for survivor benefits to be paid to a spouse (sometimes referred to as a joint and survivor annuity);

• Whether you should choose or designate a beneficiary with respect to your interest in an IRA or another retirement plan;

•  The tax differences to beneficiaries who receive benefits on your death but before you have begun to receive pay-out of your benefits and those beneficiaries who begin receiving benefits after retirement payments to you have commenced; and

• Benefits that may be subject to both income tax and estate tax (and are sometimes provided an income tax deduction due to the double taxation)

You must plan carefully to ensure that you get the best possible results regardless of the estate tax rules that are in effect. As you consider becoming more involved in estate and/or retirement planning, please contact the office for additional guidance.

How much am I really worth? This is a question that has run through most of our minds at one time or another. However, if you aren't an accountant or mathematician, it may seem like an impossible number to figure out. The good news is that, using a simple step format, you can compute your net worth in no time at all.

How much am I really worth? This is a question that has run through most of our minds at one time or another. However, if you aren't an accountant or mathematician, it may seem like an impossible number to figure out. The good news is that, using a simple step format, you can compute your net worth in no time at all.

Step 1: Gather the necessary documents.

You will need to gather certain documents together in order to have all the ammunition you will need to tackle your net worth calculation. This information is not much different than the information that you would normally gather in anticipation of applying for a home loan, preparing your taxes or getting a property insurance policy. Here's what you'll need the most recent version of:

• Bank statements from all checking and savings accounts (including CDs);
• Statements from your securities broker for all securities owned including retirement accounts;
• Mortgage statements (including home equity loans & lines of credit);
• Credit card statements;
• Student loan statements;
• Loan statements for cars, boats and other personal property

In addition, you will need to have a pretty good idea of the current market value of the following assets you own: real estate, stocks and bonds, jewelry, art & other collectibles, cars, computers, furniture and other major household items, as well as any other substantial personal assets. Current market values can be obtained via a call to your local real estate agent, the stock market and classified ad pages in your newspaper, or qualified appraisers. If you own your own business or hold an interest in a partnership or trust, the current values of these will also need to be gathered.

Step 2: Add together all of your assets.

Your "assets" are items and property that you own or hold title to. They include:

• Current balances in your bank accounts;
• Current market value of any real estate you own;
• Current market value of stocks, bonds & other securities you own;
• Current market value of certain personal articles such as jewelry, art & other collectibles, cars, computers, furniture and other major household items, and any other miscellaneous personal items;
• Amounts owed to you by others (personal loans)
• Current cash value of life insurance policies;
• Current market value of IRAs and self-employed retirement plans;
• Current market value of vested equity in company retirement accounts;
• Current market value of business interests

Step 3: Add together all of your liabilities.

Your "liabilities" are the debts that you owe and are many times connected to the acquisition or leveraging of your assets. They can include:

• Amounts owed on real estate you own;
• Amount owed on credit cards, lines of credit, etc...;
• Amounts owed on student loans;
• Amounts owed to others (personal loans);
• Business loans that you have personally guaranteed;

Step 4: Subtract your liabilities from your assets.

Almost done -- this is the easy part. Take the total of all of your assets and subtract the total of all of your liabilities. The result is your net worth.

Hopefully, once you've done the calculation, you will arrive at a positive number, which means that your assets exceed your debts and you have a positive net worth. However, if you end up with a negative number, it may indicate that your debts exceed your assets and that you have a negative net worth. If the net worth you arrive at differs substantially from the "gut feeling" you have about your financial position, take the time to carefully review your calculation -- it may be that you simply made a calculation error or overlooked some assets that you hold.

Evaluating your outcome

If you ended up with a positive net worth, congratulations! You've probably made some good investment and/or money management decisions in your past. However, keep in mind that your net worth is an ever-changing number that reacts to economic conditions, as well as actions taken by you. It makes sense to periodically revisit this net worth calculation and make the necessary adjustments to ensure that you stay on the right financial track.

If you arrived at a negative net worth, now may be the time to evaluate your holdings and debts to decide what can be done to correct this situation. Are you holding assets that are worth less than you owe on them? Is your consumer debt a large portion of your liabilities? There are many different reasons why you may show a negative net worth, many of which can be corrected to get your financial health restored.

Calculating and understanding how your net worth reflects your current financial position can help you make decisions regarding the effectiveness of your investment and money management strategies. If you need additional assistance during the process of determining your net worth or deciding what actions you can take to improve it, please contact the office for additional guidance.

In addition to direct giving during their lifetimes, many people look at how they can incorporate charitable giving in their estate plans. While many options are available, one plan that allows you help charities and preserve and grow assets for your beneficiaries at the same time is a charitable lead annuity trust.

In addition to direct giving during their lifetimes, many people look at how they can incorporate charitable giving in their estate plans. While many options are available, one plan that allows you help charities and preserve and grow assets for your beneficiaries at the same time is a charitable lead annuity trust.

Fixed payments to charity

When you set up a charitable lead annuity trust (or CLAT, for short), the intention is for the assets of the trust, and the income they generate, to ultimately one day pass to one or more non-charitable beneficiaries, for example, your children. Before then, however, you may want one or more charities to receive some of the funds. Under a typical CLAT, the charity receives a fixed payout for a pre-determined number of years or, in some cases, for the lives of specified persons. The payments to the charity remain the same regardless of how the trust performs and no minimum payment is required. In most cases, the rules do not allow your beneficiaries to receive anything from the trust until the trust ends.

Individuals who can be used as the measuring lives would be restricted to the donor's life, the life of the donor's spouse, or a lineal ancestor of the beneficiaries. The IRS did this to prevent abuse of CLATs. Some people have tried to artificially inflate the tax benefits of CLATs by using unrelated individuals, such as those who were seriously ill and were expected to die prematurely, as the measuring lives.

Tax benefits

When the trust ends, the assets of the trust and the income earned by the trust pass to your beneficiaries tax-free. That is a potentially huge savings of federal estate and gift taxes. The top federal estate and gift tax rate in 2009 is 45 percent. If the original trust assets were passed directly to your heirs, taxes could reduce significantly your bequest. Placing the assets in a CLAT helps to preserve - and more importantly - grow them. The estate tax is fixed when the CLAT is created and not when the assets pass to your beneficiaries.

Generally, income paid to the charity is subject to tax by the owner of the trust. However, careful planning, such as funding the trust with tax-exempt bonds, can reduce or eliminate any tax liability on the part of the owner.

Timing the creation of a CLAT

CLATS need not be set-up after you die. You can fund a CLAT today and see the benefit of your gift as a charity makes good use of it. However, if you want to create a CLAT during your life, keep in mind that you will not be able to use assets in the trust.

A CLAT -- created either before or after your death -- can continue your legacy of giving to your favorite charities, while yielding overall tax savings for you and your family. Please contact the office if you have any questions on how a CLAT, or another variety of charitable trust, might work for you.

Q:The holidays are approaching and I would like to consider giving gifts of appreciation to my employees. What kinds of gifts can I give my employees that they would not have to declare as income on their tax returns? I also would like to make sure my company would be able to deduct the costs of these gifts.

A:First of all, anything given in the business setting is presumed, until proven otherwise, not to be a gift (e.g., is taxable income) -- that is, you are either rewarding an employee for work done or providing an incentive in which he or she will be inclined to do more work in the future. However, the Tax Code and related IRS regulations still allow many gifts to remain tax-free to the employee while being tax deductible to the business. Here is a short list of the rules:

$25 gift rule

A business may deduct up to $25 in gifts given to each recipient during any given year. However, you can't get around this limit by giving to each family member of the intended recipient: they all share in one $25 limit. Items clearly of an advertising nature such as promotional items do not count as long as the item costs $4 or less.

No dollar limit exists on a deduction if the gift is given to a corporation or a partnership. The cost of gifts such as baseball tickets that will be used by an unidentified group of employees also qualifies for the unlimited deduction. However, once again, if the gift is intended eventually to go to a particular individual shareholder or partner, the deduction is limited to $25.

Separate "de minimis" rules

A "de minimis" fringe benefit from employer to employee is considered to be made tax-free to the employee. "De minimis" fringe benefits are not restricted by the $25 per recipient limit otherwise applicable outside of the employer-employee context. However, de minimis fringe benefits must be small "within reason." Typical de minimis gifts include holiday gifts such as a turkey or ham, the occasional company picnic, occasional use of the photocopy machine, occasional supper money, or flowers sent to a sick employee.

The general guidelines for de minimis fringe benefits are:

• the value of the gift must be nominal,
• accounting for all such gifts would be administratively nitpicking,
• the gifts are only occasional, and
• they are given "to promote health, good will, contentment, or efficiency" of employees.

Unfortunately, "gifts of nominal value" exclude such perks as use of a company lodge, season theater tickets, or country club dues. These cannot be given tax-free to an employee. But they do include occasional theater or sports tickets or group meals.

What's more, fringe benefits such as the use of an on-premise athletic facility or subsidized cafeteria are specifically included under IRS rules as de minimis fringe benefits. The traditional gold retirement watch -- or similar gift-- to commemorate a long period of employment is also treated as de minimis. However, cash or items readily convertible into cash, such as gift certificates, are taxable, no matter what the amount.

Q: When it comes to investing, I've always played pretty "mainstream" - investing in mutual funds and governments bonds. However, I've heard people talking about tax-sheltered annuities. Is this something I should consider to round out my investments while saving some additional taxes?

Q: When it comes to investing, I've always played pretty "mainstream" - investing in mutual funds and governments bonds. However, I've heard people talking about tax-sheltered annuities. Is this something I should consider to round out my investments while saving some additional taxes?

A: A "tax-sheltered annuity" can mean different things to different people. As used by tax professionals, a tax-sheltered annuity (TSA) is a specific type of qualified retirement plan available only to employees of certain tax-exempt charitable, religious and educational organizations, and to self-employed ministers. Under these TSA plans, a tax isn't imposed when the annuity is purchased, but is deferred until payments are received after retirement. Contribution limits, coverage and nondiscrimination restrictions and required distribution rules generally follow those imposed on regular qualified retirement plans.

Annuities that are not used within the context of a tax-qualified retirement plan can nevertheless provide a useful investment vehicle with tax advantages. Annuities for these tax purposes include all periodic payments resulting from the systematic liquidation of a principal sum, including amounts received pursuant to an annuity contract, as well as amounts received from a life insurance policy if received during the life of the insured.

The portion of an annuity payment that is excludable from gross income is based on an exclusion ratio, which is determined by dividing the investment in the contract by the expected return. The annuity payment is multiplied by the exclusion ratio to determine the portion excluded from gross income. The excess is included in gross income. The excluded amount is limited to the investment in the contract.

Private annuities involving the transfer of property to either a charitable institution, a family member, or a corporation or business controlled by the annuitant or his family are taxable as annuities, but under slightly different rules. If the value of the property transferred exceeds the present value of the annuity, the excess is treated as an immediate gift. The excess of the present value of the annuity over the basis of the property is considered capital gain, realized as payments are received. The excess of the expected return from the annuity over the present value is the interest element, taxable as ordinary income ratably over the term of the annuity.

A charitable gift annuity is an annuity that a charitable organization agrees to pay in exchange for a contribution of property. If property is contributed to a charitable organization in exchange for an annuity, the excess of the property's fair market value over the present value of the annuity is a charitable contribution. No deduction is allowed if the present value of the annuity exceeds the amount contributed in exchange for the annuity

Legitimate charitable gift annuities should be distinguished from potentially abusive arrangements under which the donor transfers funds to the charity for the purpose of having the charity pay premiums on a life insurance policy or annuity which will primarily provide benefits for the donor's family. These types of transactions (also called "personal benefit contracts" have been specifically disapproved under the Code and IRS guidelines)

There are many, many ways to invest your savings (including tax-sheltered annuities), all with potentially very different tax ramifications. Before you make substantial changes to your investment portfolio, please contact the office for additional assistance with determining the possible tax effects.

Dual-income families are commonplace these days, however, some couples are discovering that their second income may not be worth the added aggravation and effort. After taking into consideration daycare expenses, commuting expenses, the countless take-out meals, and additional clothing costs, many are surprised at how much (or how little) of that second income is actually hitting their bank account.

Dual-income families are commonplace these days, however, some couples are discovering that their second income may not be worth the added aggravation and effort. After taking into consideration daycare expenses, commuting expenses, the countless take-out meals, and additional clothing costs, many are surprised at how much (or how little) of that second income is actually hitting their bank account.

Before you and your spouse head off for yet another hectic workweek, it may be worth your time to take a few moments to do a few simple calculations. After assessing what expenditures are necessary in order for both parents to work outside of the home, many couples quickly realize that their second income is essentially paying for the second person to be working.

Crunch the numbers. To determine whether your second income is worth the energy, you will need to calculate the estimated value of the second income. First determine how much the second income brings in after taxes. Then subtract expenses incurred due to the second person working, such as dry cleaning expenses, childcare bills, transportation costs, housecleaning services, landscaping services, and outside dining expenses. The result will be the estimated value of the second person working.

Consider the long-term. Even if your result turns out to be small, you may find that having the second person working will be beneficial to the household in the long run. However, don't forget to consider that, by losing the second income, you may also be losing future retirement benefits and social security earnings.

Take a "dry run". Before reducing down to one income, try living on the person's income you intend to keep for six months, stashing the other income into an emergency savings account. If you are able to do this, chances are you will be able to endure for the long haul.

Many different factors can affect a family's decision to have both parents work - including the fulfillment each parent may get from working regardless of whether their income is adding significantly to the household. However, if trying to make ends meet is the major reason, it may pay off to spend some time analyzing the real net benefit from that second income. If you need any assistance while determining if both spouses should work or not, please feel free to contact the office.