Put Financial Gifts on Your Holiday Shopping List
December 20, 2011
When planning gifts for children on your holiday list, you might want to think beyond the traditional retail offerings. Consider financial gifts that can bestow benefits for many years to come.
Some financial gift options you might consider:
* U.S. savings bonds. Savings bonds are used by many families to introduce children to the savings concept. I bonds are indexed for inflation and can provide relatively attractive rates of return.
* IRAs (regular or Roth). For 2011, you can contribute the lower of $5,000 or the earned income of the child. An early financial start can produce amazing benefits from compounded interest accumulated over several decades.
* Stocks or mutual funds. Equities are a good way to introduce a child to the investment world.
* Collectible stock certificates. Vibrant framed certificates are available for many companies. A Disney, Dream Works, or Coca-Cola stock certificate can provide a colorful reminder of the importance of investing for the future.
* Collectibles. Postage stamps or coin collection kits can provide years of enjoyment and form the basis for some life-long hobbies. An interesting gift idea is an official U.S. mint proof coin set for the year the child was born.
Please call us if you would like to review the tax issues related to any of these financial gift options, especially if you are considering a larger amount.
Five Year-End Tax Tips
December 15, 2011
* Early this month check the amount of 2011 tax you have prepaid through withholding and quarterly estimates. If you've underpaid, consider increasing your withholding before year-end. Withholding is considered to have been paid evenly throughout the year. This could prevent your being charged underpayment penalties for 2011.
* Avoid the marriage penalty. If a wedding or divorce is in your plans, be aware that your marital status as of December 31 determines your tax status for the whole year. Changing the dates of a year-end event may save taxes. Even though recent tax laws provided some relief from the marriage penalty, they did not eliminate it.
* Plan for losses. Check your basis in any S corporation in which you are a shareholder and where you expect a loss this year. Be sure you have sufficient basis to enable you to take the loss on your tax return.
* Use this year's annual gift tax exclusion. If you make annual gifts to family members or others, make sure you complete your gifts for 2011 by December 31.
* Squeeze in planned equipment purchases before December 31. Taxpayers must usually deduct the cost of business property over several years. A special election allows taxpayers to expense up to $500,000 of new and used property purchased and put into service in 2011. Also check into the 100% bonus depreciation allowance for new equipment purchases.
Property such as machinery, equipment, and furnishings qualify. Be careful with special rules that apply to automobiles and personal computers.
Please contact our office for more information.
President Obama Signs New Tax Law
December 6, 2011
On November 21, 2011, President Obama signed the "Three Percent Withholding Repeal and Job Creation Act" into law. This new law repeals three percent withholding on certain payments to government contractors. The law, H.R. 674, was amended to include the "Vow to Hire Heroes Act" which provides tax credits to employers who hire unemployed veterans.
The law creates the “Returning Heroes Tax Credit” and the “Wounded Warriors Tax Credit.” Employers may qualify for a credit of up to $5,600 for hiring a veteran who has been looking for employment for more than six months. A credit of up to $2,400 applies for veterans who have been unemployed for more than four weeks but less than six months. Employers who hire an unemployed veteran with service-connected disabilities who has been looking for work for more than six months may be eligible for a tax credit of up to $9,600.
The credits apply to new hires after November 21, 2011, through December 31, 2012. For more information about the new law, contact our office.
Investment Tax Tips
November 15, 2011
As year-end approaches, take a closer look at your investment portfolio. There may be some tax-saving strategies worth considering.
For example -
* Wash sales. Thinking of selling a security before December 31 to take advantage of a capital loss? To make sure the loss is deductible, refrain from buying a substantially identical security during the 61-day period that begins 30 days before you sell and ends 30 days after.
* Worthless stocks. For capital loss purposes, securities with no value are treated as if you sold them on the last day of the year. Your loss is generally the same as your cost.
If you want to deduct worthless securities on your 2011 return, you'll need to prove the security became worthless during the year and that it truly has no value. Not sure you can meet those requirements? Selling before year-end may be a better option.
* Stock donations. Giving appreciated stock to charity lets you avoid capital gains tax and claim a charitable deduction.
In order to deduct the donation on your 2011 return, the gift must be complete. For certificates you endorse and present directly, the date of mailing or other delivery is considered the date of the gift. When your broker or the issuing company handles the transaction, the gift is complete when the stock is titled to the charity.
Please call us for more guidance in your year-end tax review.
Consider making gifts before year-end
November 8, 2011
A lifetime gifting program might trim both your estate and income taxes. First, there's the annual exclusion for gifts. Currently, you can give $13,000 annually to any number of recipients without paying federal gift tax. Married couples can double this amount by gift-splitting; a gift of $26,000 from one spouse is treated as if it came half from each.
Gifts do more than help out children who need the money. They also reduce your estate so your estate will pay less estate tax upon your death. Apart from annual gift giving, you can currently transfer (during your lifetime or through your estate) a total of $5,000,000 with no estate or gift tax liability. On amounts above this threshold, you or your estate will be faced with taxes at the current top rate of $35%. So a consistent program of annual gift giving might create substantial tax savings.
Note that gifts to individuals do not entitle you to an income tax deduction. A gift isn't a charitable contribution. Conversely, a gift doesn't constitute taxable income to the recipient. Gifts of income-producing property may, however, reduce your taxable income. Once you've given the property away, the recipient, not you, receives the income it produces and pays any income tax due on it.
One advantage to annual gift giving is that it is relatively simple to do, especially if you're giving away cash. Another advantage is flexibility. You're not locked into anything; you can see how much you can afford to give away each year. You can give away anything - cash, stock, art, real estate. Valuation is the fair market value on the date of the gift. Subsequent appreciation, if any, belongs to the donee's estate, not yours.
Before you give away assets, be sure you will not need them yourself to provide income in later years. Consider the impact inflation will have on your resources.
Proper planning is essential in this area; get professional assistance before you do any gift giving. Contact our office if we can help.
Heed the rules for deducting charitable contributions.
November 3, 2011
Sticking to the rules when making charitable contributions can save tax dollars. Here are three tips.
* Recordkeeping is vital if you want to be able to deduct a contribution to charity.
What records do you need? For starters, to claim an itemized deduction, you're required to have support for all cash contributions, no matter what the amount. A bank statement, a copy of the cancelled check, or a credit card record will usually suffice for donations under $250. For donations of $250 or more, a statement from the charity is required, giving the charity's name, the date, the amount of your donation, and the value of goods and services received for the donation, if any. In the case of payroll donations, your pay stub or W-2 can back up your deduction.
The substantiation rules for noncash donations such as household items differ depending on the type of property and its value. For instance, you'll need a contemporaneous written acknowledgment from the charity for donations of $250 or more. As a general rule, "contemporaneous" means you receive the acknowledgment before you file your return or before the due date of your return, whichever is earlier.
* Make a gift from your IRA. The break allowing a transfer of up to $100,000 from your IRA to a qualified charity is available for 2011. To benefit, you must be over age 70½, and the contribution has to be a direct payment from your IRA to the charitable organization.
* Write down your vehicle mileage for charitable driving. Written records rule, whether you claim the standard mileage deduction of 14¢ a mile or actual expenses. Make sure your log or other paperwork includes the name of the charity, the date, and the miles you drove or the total cost you incurred.
Please call for advice on getting the most benefit from your donations, including appreciated property and out-of-pocket expenses.
Who should take advantage of the IRA charitable rollover?
October 25, 2011
Last year's tax law extended the "charitable IRA rollover" rule through the end of 2011. Taxpayers who are 70½ or older may make tax-free distributions of up to $100,000 directly to a charity from their IRA. The rollover fulfills the required minimum distribution (RMD) rule, and the rollover amount is not included in taxable income.
If you or someone in your family could qualify to make a charitable IRA rollover, should it be considered? Here are some of the situations in which this tax break could be beneficial.
* You have to take the RMD, but you don't need the money and you don't want to pay tax on the distribution.
* You want to give to charity, but you don't itemize deductions so any contribution you make would not be tax-deductible.
* You do itemize deductions, but your charitable contribution deduction would be affected by the 50% / 30% of AGI limit.
* Having to include your RMD in income would result in the phasing out of other deductions and credits based on adjusted gross income.
The charitable IRA rollover is a powerful tool for tax planning. But remember, as it now stands, this provision will expire December 31, 2011. Give us a call if you would like to analyze whether this option makes tax sense for you or a family member.
Are you watching what you eat at work? Though that may not seem like a tax question, how you account for meals can affect your business tax return.
One reason why: While you can generally deduct only half the cost of meals related to your business activities, the tax code includes specific exceptions that allow a deduction of 100% of what you spend on food and beverages in certain situations.
Here are three exceptions to the general rule.
* Meals provided to your employees on a social basis. That once-a-year holiday party qualifies for 100% deductibility as a "recreational, social, or similar activity," as long as it is primarily for the benefit of all your employees.
* Food with nominal cost. Do you supply bottled water, morning-meeting donuts or office snacks for your staff? "De minimis" employee benefits -- those small items your business pays for that are not considered taxable income to your employees -- are typically 100% deductible.
* Items available to the public. Food served at seminars, promotions, or a "new office warming" reception where you invite the public is 100% deductible.
Remember that you'll still need to keep detailed records to substantiate your deductions for meals and food served under these exceptions.
We'll be happy to help you review your expenses and set up a system to account for items that qualify for a more generous deduction.
File by October 17 to Avoid Penalties
October 10, 2011
Tick-tock. Time is almost up on that six-month extension you filed back in April to give yourself more time to complete your 2010 individual income tax return.
What happens if you fail to file your return by the extended due date? One consequence: Unless a disaster-relief exception applies or you have a valid reason, you may be charged penalties and interest.
For example, the penalty for filing your return after October 17, 2011, is 5% of the amount of your unpaid tax, per month, up to a maximum of 25%. After 60 days, a minimum penalty of the smaller of $135 or 100% of the tax due applies.
In addition, a late payment penalty of ½ of 1% of the tax due may apply for each month or part of a month that you fail to pay the tax due until you reach the full 25%. The two penalties interact and can be combined.
You'll also have to pay interest on the tax due. During 2011, the rate on underpayment of tax was 3% in the first quarter, 4% in the second and third quarters, and back to 3% in the fourth quarter. The interest is compounded daily and can be charged on penalties.
Since the penalty and interest are based on unpaid tax, neither applies when your return shows zero tax due. Filing a return is still a good idea, however. Why? The general rule limiting the IRS to a three-year period for assessing tax begins when you file. No return means no triggering of the statute of limitations.
Give us a call if you think you may miss a deadline. We can help keep penalties to a minimum.
IRS Issues Guidance on Bonus Depreciation
October 5, 2011
Under the "Tax Relief Act of 2010," you may be able to write off the entire cost of business property placed in service this year, thanks to 100% "bonus depreciation."
Prior to this law, a business was able to claim 50% bonus depreciation on qualified new (but not used) property placed in service in 2010. This included property with a cost recovery period of 20 years or less, most computer software, qualified leasehold improvement property, and certain water utility property. Bonus depreciation could be coordinated with Section 179 first-year expensing and regular depreciation deductions (subject to the annual limits).
The "Tax Relief Act," signed December 17, 2010, improved and extended the tax benefits. It allows a business to claim 100% bonus depreciation for qualified property placed in service from September 9, 2010, through December 31, 2011 (through 2012 for property with a cost recovery period of ten years or more and certain aircraft and transportation property). As the law currently stands, 50% bonus depreciation can be claimed for qualified property placed in service during 2012.
The "Tax Relief Act of 2010" did not change the definition of "qualified property"; it remains the same as it was before.
Recently, the IRS issued new guidance on using bonus depreciation. It focuses on the following areas:
* Depreciation step-down. You're allowed to "step down" from 100% bonus depreciation to 50% bonus depreciation this year if it suits your needs. For example, it may not be advantageous for a business to front-load its depreciation deductions to receive the maximum amount. The IRS guidance spells out the procedure for cutting back to 50% bonus depreciation.
* Company vehicles. The first-year depreciation deduction for "luxury cars" and other vehicles is enhanced by $8,000 due to the bonus depreciation rules.
Be aware that certain heavy-duty SUVs and other vehicles weighing more than 6,000 pounds are exempt from the luxury car limits. If purchased after September 8, 2010, and before January 1, 2012, they may qualify for 100% bonus depreciation.
* Qualified leasehold property. The IRS says that qualified restaurant and retail improvement properties may be eligible for 100% bonus depreciation under the definition of "qualified leasehold property."
* Component depreciation. A business may be able to deduct certain components of a business building over a faster cost recovery period than the usual 39-year period required for an entire building. The IRS ruling authorizes an election to use 100% bonus depreciation for qualified components of a self-constructed building.
Even with the recent IRS guidance, the depreciation rules remain very complicated. For assistance in applying the rules for maximum tax benefit to your business, contact our office.
SOME DEDUCTIONS CAN BE TAKEN EVEN IF YOU DON'T ITEMIZE
August 20, 2011
You’re probably familiar with the deduction choice you must make when you file your tax return. You either have enough deductions (such as mortgage interest, charitable contributions, and medical expenses) to itemize, or you take the standard deduction, a set amount that doesn’t require you to list specific deductible items.
What you may not be as familiar with are those deductions that you are allowed to take above the line; that is, deductions that you can take in addition to your itemized deductions or your standard deduction.
Here’s a quick rundown of above-the-line deductions you shouldn’t miss on your 2010 tax return.
• A deduction of up to $250 for classroom supplies purchased by teachers for use in their classrooms.
• A deduction of up to $2,500 for interest paid on student loans.
• A deduction of up to $2,000 or $4,000 for college tuition and fees, depending on your income level.
• A deduction of up to $5,000 for individual retirement account contributions if you’re under age 50. If you’re 50 or older, the
deduction limit is $6,000.
• A deduction for the expenses connected with a job-related move.
• A deduction for 50% of the self-employment tax and 100% of health insurance premiums paid if you are self-employed.
• A deduction for alimony paid. (Note that child support is not deductible.)
• A deduction for contributions to health savings accounts (HSAs).
Most of these deductions have qualification requirements or income limitations. Don’t overlook above-the-line tax deductions. An added benefit: These deductions decrease your adjusted gross income, an important number on your tax return. The lower your adjusted gross income, the more likely you are to qualify for credits and deductions subject to income thresholds. For details or assistance in finding all the deductions to which you’re entitled, contact our office.
TAX RULE CHANGES PAVE WAY FOR SMALL BUSINESS UPGRADES
August 1, 2011
Congress’s last minute tax rule changes might make this a prime year for your business to invest in two important assets: your equipment and your employees.
Businesses can now write off as much as $500,000 of qualified equipment (new or used) purchased and placed in service this year. Next year the cap drops to $125,000. The deduction is phased out for businesses with equipment purchases exceeding $2 million.
In addition, brand new equipment can qualify for 100% first-year bonus depreciation if placed in service before the end of the year (or before the end of 2012 for certain types of property). In 2012 the bonus first-year depreciation rate declines to 50%. And don’t forget, energy-saving purchases made this year might also score one of the extended energy tax breaks.
On the personnel side, some companies with fewer than 25 full-time employees can receive a tax credit of up to 35% of the cost to provide group health insurance. Employers of all sizes may deduct up to $5,250 of tax-free assistance per worker for qualified higher education expenses. And up to $230 per month of tax-free mass transit commuting cost reimbursements can be provided to each eligible employee.
Quality child care is always on the mind of your workforce, and you can get a 25% tax credit by providing child care facilities for your employees. Another 10% credit is allowed for eligible child care resource and referral services. The maximum credit is limited to $150,000.
If you are looking to expand your employee roster, a credit is available for hiring workers from approved target groups. This tax break is scheduled to end after this year.
Whether it is equipment or employees, 2011 may be the year to make significant upgrades to your business. For all the specifics, contact our office.
Conventional tax planning usually means postponing the payment of taxes as long as possible. But a perfect storm of historically low income tax rates and growing government deficits may turn that mantra upside down.
If you assume that tax rates will rise when the current slate of tax cuts expire after 2012, then it might make sense to hurry up and recognize more taxable income now. One way to do this is by selling appreciated stock this year or next while the long-term capital gain rates remain low. Keep in mind that you must own the stock for more than one year to qualify for long-term rates.
Also consider converting your traditional IRA, 401(k), or 403(b) to a Roth IRA. Although the conversion generates taxable income now, it might be less painful than in a couple of years. What’s more, if you are age 70½ or older, your traditional IRA can also be used this year to make direct charitable donations and offset your required minimum distribution.
You might also want to hurry up on some tax-advantaged spending. The phase-out rules for itemized deductions of higher earners were suspended through 2012. This opens the door for full utilization of your mortgage interest, real estate tax, and charitable donation deductions. An enhanced tax credit for higher education costs was also extended for two more years. The American Opportunity Credit lets you deduct as much as $2,500 from your tax bill for costs associated with all four years of college, not just the first two. Income limits apply.
And if you haven’t already done so, a credit still exists for home energy improvements. You can deduct up to 10% of qualified costs, for a maximum lifetime credit of $500.
Rushing to pay taxes now may seem unconventional, but such a strategy might just work this year. For help with your own unique tax situation, give our office a call.