Posted by nyletaylor on December 23, 2011
2011 Year-End Tax Planning for Individuals
source: BNA tax and accounting center
 
As 2011 winds down, there is still time to reduce your 2011 tax bill and plan ahead for 2012. This letter highlights several potential tax-saving opportunities for you to consider. I would be happy to meet with you to discuss specific strategies.
As a general reminder, there are several ways in which you can file an income tax return: married filing jointly, head of household, single, and married filing separately. A husband and wife may elect to file one return reporting their combined income, computing the tax liability using the tax tables or rate schedules for “Married Persons Filing Jointly.” If a married couple files separate returns, under certain situations they can amend and file jointly, but they cannot amend a jointly filed return and file separately. A joint return may be filed even though one spouse has neither gross income nor deductions. If one spouse dies during the year, the surviving spouse may file a joint return for the year in which his or her spouse died. Certain married persons who do not elect to file a joint return may be entitled to use the lower head of household tax rates. Generally, in order to qualify as a head of household, you must not be a resident alien, you must satisfy certain marital status requirements, and you must maintain a household for a qualifying child or any other person who is your dependent, if you are entitled to a dependency deduction for the taxable year for such person.
 
Basic Numbers You Need To Know
Because many tax benefits are tied to or limited by adjusted gross income (AGI)—IRA deductions, for example—a key aspect of tax planning is to estimate both your 2011 and 2012 AGI. Also, when considering whether to accelerate or defer income or deductions, you should be aware of the impact this action may have on your AGI and your ability to maximize itemized deductions that are tied to AGI. Your 2010 tax return and your 2011 pay stubs and other income- and deduction-related materials are a good starting point for estimating your AGI.
Another important number is your “tax bracket,” i.e., the rate at which your last dollar of income is taxed. The tax rates for 2011 are 10%, 15%, 25%, 28%, 31%, and 35%. Although tax brackets are indexed for inflation, if your income increases faster than the inflation adjustment, you may be pushed into a higher bracket. If so, your potential benefit from any tax-saving opportunity is increased (as is the cost of overlooking that opportunity).
 
IRA, Retirement Savings Rules for 2011
Tax-saving opportunities continue for retirement planning due to the availability of Roth IRAs, changes that make regular IRAs more attractive, and other retirement savings incentives.
Traditional IRAs: Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2011 is $5,000. For 2011, a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year, making the total limit $6,000 for these individuals. Individuals who are active participants in an employer pension plan also may make deductible contributions to an IRA, but their contributions are limited in amount depending on their AGI. For 2011, the AGI phase-out range for deductibility of IRA contributions is between $56,000 and $66,000 of modified AGI for single persons (including heads of households), and between $90,000 and $110,000 of modified AGI for married filing jointly. Above these ranges, no deduction is allowed.
In addition, an individual will not be considered an “active participant” in an employer plan simply because the individual’s spouse is an active participant for part of a plan year. Thus, you may be able to take the full deduction for an IRA contribution regardless of whether your spouse is covered by a plan at work, subject to a phase-out if your joint modified AGI is $169,000 to $179,000 for 2011. Above this range, no deduction is allowed.
 
Spousal IRA:
 If an individual files a joint return and has less compensation than his or her spouse, the IRA contribution is limited to the lesser of $5,000 for 2011 plus age 50 catch-up contributions, or the total compensation of both spouses reduced by the other spouse’s IRA contributions (traditional and Roth).
 
Roth IRA:
 This type of IRA permits nondeductible contributions of up to $5,000 a year. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after the first contribution and the individual has reached age 591/2. Distributions may be made earlier on account of the individual’s disability or death. The maximum contribution is phased out in 2011 for persons with an AGI above certain amounts: $169,000 to $179,000 for married filing jointly, and $107,000 to $122,000 for single taxpayers (including heads of households); and between $0 and $10,000 for married filing separately who lived with the spouse during the year.
 
Roth IRA Conversion Rule:
Funds in a traditional IRA (including SEPs and SIMPLE IRAs), §401(a) qualified retirement plan, §403(b) tax-sheltered annuity or §457 government plan may be rolled over into a Roth IRA. Such a rollover, however, is treated as a taxable event, and you will pay tax on the amount converted. No penalties will apply if all the requirements for such a transfer are satisfied.
In past years, a taxpayer’s AGI (whether married filing jointly or single) was limited to $100,000 to make such a conversion and the taxpayer must not be a married individual filing a separate return. The AGI limitation does not apply to conversions from a Roth designated account in a §401 or §403(b) plan. For 2011, the $100,000 income limit on Roth IRA conversions does not apply, and taxpayers will be able to make Roth IRA conversions without regard to their AGI. If you convert to a Roth IRA in 2011, the tax on the converted amount will have to be paid in the year of conversion. Also, if you already made a conversion earlier this year, you have the option of undoing the conversion. This is a useful strategy if the investments have gone down in value so that if you were to do the conversion now, your taxes would be lower. This is a complicated calculation and we should meet to determine what your best options are.
 
In addition, for 2011, if your §401(k) plan, §403(b) plan, or governmental §457(b) plan has a qualified designated Roth contribution program, a distribution to an employee (or a surviving spouse) from such account under the plan that is not a designated Roth account is permitted to be rolled over into a designated Roth account under the plan for the individual.
401(k) Contribution: The §401(k) elective deferral limit is $16,500 for 2011. If your §401(k) plan has been amended to allow for catch-up contributions for 2011 and you will be 50 years old by December 31, 2011, you may contribute an additional $5,500 to your §401(k) account, for a total maximum contribution of $22,000 ($16,500 in regular contributions plus $5,500 in catch-up contributions).
 
SIMPLE Plan Contribution:
The SIMPLE plan deferral limit is $11,500 for 2011. If your SIMPLE plan has been amended to allow for catch-up contributions for 2011 and you will be 50 years old by December 31, 2011, you may contribute an additional $2,500.
 
Catch-Up Contributions for Other Plans:
If you will be 50 years old by December 31, 2011, you may contribute an additional $5,500 to your §403(b) plan, SEP or eligible §457 government plan.
Saver’s Credit: A nonrefundable tax credit is available based on the qualified retirement savings contributions to an employer plan made by an eligible individual. For 2011, only taxpayers filing joint returns with AGI of $56,500 or less, head of household returns with AGI of $42,375 or less, or single returns (or separate returns filed by married taxpayers) with AGI of $28,250 or less, are eligible for the credit. The amount of the credit is equal to the applicable percentage (10% to 50%, based on filing status and AGI) of qualified retirement savings contributions up to $2,000.
Required Minimum Distributions: For 2011, taxpayers must take their required minimum distribution from IRAs or defined contribution plans (§401(k) plans, §403(a) and (b) annuity plans, and §457(b) plans that are maintained by a governmental employer).
 
Maximize Retirement Savings:
In many cases, employers will require you to set your 2012 retirement contribution levels before January 2012. If you did not elect the maximum 401(k) contribution for 2011, you can increase your amount for the remainder of 2011 to lower your AGI in order to take advantage of some of the tax breaks described above. In addition, maximizing your contribution is generally a good tax-saving move.
Deferring Income to 2012
 
If you expect your AGI to be higher in 2011 than in 2012, or if you anticipate being in the same or a higher tax bracket in 2011, you may benefit by deferring income into 2012. Deferring income will be advantageous so long as the deferral does not bump your income to the next bracket. Deferring income could be disadvantageous, however, if your deferred income is subject to §409A, thus making the income includible in gross income and subject to additional tax. Some ways to defer income include:
 
Delay Billing:
If you are self-employed and on the cash-basis, delay year-end billing to clients so that payments will not be received until 2012.
Interest and Dividends: Interest income earned on Treasury securities and bank certificates of deposit with maturities of one year or less is not includible in income until received. To defer interest income, consider buying short-term bonds or certificates that will not mature until next year. If you have control as to when dividends are paid, arrange to have them paid to you after the end of the year.
 
Accelerating Income into 2011
In limited circumstances, you may benefit by accelerating income into 2011. For example, you may anticipate being in a higher tax bracket in 2012, or perhaps you will need additional income in order to take advantage of an offsetting deduction or credit that will not be available to you in future tax years. Note, however, that accelerating income into 2011 will be disadvantageous if you expect to be in the same or lower tax bracket for 2012. In any event, before you decide to implement this strategy, we should “crunch the numbers.”
If accelerating income will be beneficial, here are some ways to accomplish this:
Accelerate Collection of Accounts Receivable: If you are self-employed and report income and expenses on a cash basis, issue bills and attempt collection before the end of 2011. Also see if some of your clients or customers might be willing to pay for January 2012 goods or services in advance. Any income received using these steps will shift income from 2012 to 2011.
Year-End Bonuses: If your employer generally pays year-end bonuses after the end of the current year, ask to have your bonus paid to you before the beginning of 2012.
Retirement Plan Distributions: If you are over age 591/2 and you participate in an employer retirement plan or have an IRA, consider making any taxable withdrawals before 2012.
You may also want to consider making a Roth IRA rollover distribution, as discussed above.
Deduction Planning
Individual Deductions
Deduction timing is also an important element of year-end tax planning. Deduction planning is complex, however, due to factors such as AGI levels and filing status. If you are a cash-method taxpayer, remember to keep the following in mind:
Deduction in Year Paid: An expense is only deductible in the year in which it is actually paid. Under this rule, if your tax rate is going to increase in 2012, it is a smart strategy to postpone deductions until 2012.
Payment by Check: Date checks before the end of the year and mail them before January 1, 2012.
Promise to Pay: A promise to pay or providing a note does not permit you to deduct the expense. But you can take a deduction if you pay with money borrowed from a third party. Hence, if you pay by credit card in 2011, you can take the deduction even though you won’t pay your credit card bill until 2012.
AGI Limits: For 2011, the overall limitation on itemized deductions is terminated. In addition, certain deductions may be claimed only if they exceed a percentage of AGI: 7.5% for medical expenses, 2% for miscellaneous itemized deductions, and 10% for casualty losses.
Standard Deduction Planning: Deduction planning is also affected by the standard deduction. For 2011 returns, the standard deduction is $11,600 for married taxpayers filing jointly, $5,800 for single taxpayers, $8,500 for heads of households, and $5,800 for married taxpayers filing separately. As you can see from the numbers, for 2011, the standard deduction for married taxpayers is twice the amount as that for single taxpayers. If your itemized deductions are relatively constant and are close to the standard deduction amount, you will obtain little or no benefit from itemizing your deductions each year. But simply taking the standard deduction each year means you lose the benefit of your itemized deductions. To maximize the benefits of both the standard deduction and itemized deductions, consider adjusting the timing of your deductible expenses so that they are higher in one year and lower in the following year. You can do this by paying in 2011 deductible expenses, such as mortgage interest due in January 2012.
Medical Expenses: Medical expenses, including amounts paid as health insurance premiums, are deductible only to the extent that they exceed 7.5% of AGI. Consider bunching medical expenses into years when your AGI is lower.
 
State Taxes: If you anticipate a state income tax liability for 2011 and plan to make an estimated payment, consider making the payment before the end of 2011. Note that in 2011, taxpayers may elect to deduct as an itemized deduction state and local sales taxes instead of state and local income taxes. This benefits taxpayers that reside in states without an income tax. This provision expires at the end of 2011, so you would want to take advantage of it now by making large purchases in 2011 rather than waiting until 2012.
 
Charitable Contributions: Consider making your charitable contributions at the end of the year. This will give you use of the money during the year and simultaneously permit you to claim a deduction for that year. You can use a credit card to charge donations in 2011 even though you will not pay the bill until 2012. A mere pledge to make a donation is not deductible, however, unless it is paid by the end of the year. Note, however, for claimed donations of cars, boats and airplanes of more than $500, the amount available as a deduction will significantly depend on what the charity does with the donated property, not just the fair market value of the donated property. If the organization sells the property without any significant intervening use or material improvement to the property, the amount of the charitable contribution deduction cannot exceed the gross proceeds received from the sale.
To avoid capital gains, you may want to consider giving appreciated property to charity.
Regarding charitable contributions please remember the following rules: (1) no deduction is allowed for charitable contributions of clothing and household items if such items are not in good used condition or better; (2) the IRS may deny a deduction for any item with minimal monetary value; and (3) the restrictions in (1) and (2) do not apply to the contribution of any single clothing or household item for which a deduction of $500 or more is claimed if the taxpayer includes a qualified appraisal with his or her return. Charitable contributions of money, regardless of the amount, will be denied a deduction, unless the donor maintains a cancelled check, bank record, or receipt from the donee organization showing the name of the donee organization, and the date and amount of the contribution.
A special provision gives taxpayers the ability to distribute tax-free to charity up to $100,000 from a traditional or Roth IRA maintained for an individual whose has reached age 701/2. Ordinarily, such distributions would be taxable to the individual, who would not be able to offset the income fully because of the percentage limitations on charitable contribution deductions. This provision expires at the end of 2011, so you would want to take advantage of it now.
 
Business Deductions
Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses and dependents as an above-the-line deduction, without regard to the 7.5% of AGI floor.
Equipment Purchases: If you are in business and purchase equipment, you may make a “Section 179 Election,” which allows you to expense (i.e., currently deduct) otherwise depreciable business property. For 2011, you may elect to expense up to $500,000 of equipment costs (with a phase-out for purchases in excess of $2,000,000) if the asset was placed in service during 2011. Also, certain real property can qualify for the expense deduction, but of the $500,000 limitation, only $250,000 can be attributed to qualified real property. Note that for assets placed in service in 2011, taxpayers can expense all of their business equipment purchases under a provision giving taxpayers 100% bonus depreciation, possibly negating the need for the §179 election.
In 2012, the dollar amounts for §179 expensing are scheduled to be $125,000 (with an inflation adjustment), with a phase-out amount of $500,000. Also, the allowance for real property does not apply for 2012.
In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2011. In general, under the “half-year convention,” you may deduct six months worth of depreciation for equipment that is placed in service on or before the last day of the tax year. (If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a “mid-quarter convention” applies, which lowers your depreciation deduction.) A popular strategy in recent years is to purchase a vehicle for business purposes that exceeds the depreciation limits set by statute (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the statutory dollar limit, $11,060 for 2011 (due to bonus depreciation rules); $11,260 in the case of vans and trucks (due to bonus depreciation rules). Therefore, the vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) the expensing amount is limited to $25,000.
NOL Carryback Period: If your business suffers net operating losses for 2011, you generally apply those losses against taxable income going back two tax years. Thus, for example, the loss could be used to reduce taxable income—and thus generate tax refunds—for tax years as far back as 2009. Certain “eligible losses” can be carried back three years; farming losses can be carried back five years.
Bonus Depreciation: Taxpayers can claim 100% bonus depreciation for assets placed in service in 2011. Bonus depreciation is also allowed for machinery and equipment used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials and qualified disaster assistance property. In 2012, the bonus depreciation amount is scheduled to be reduced to 50%.
 
Education and Child Tax Benefits
Child Tax Credit: A tax credit of $1,000 per qualifying child under the age of 17 is available on this year’s return. In order to qualify for 2011, the taxpayer must be allowed a dependency deduction for the qualifying child. Another qualifying determination is that the qualifying child must be younger than you. The credit is phased out at a rate of $50 for each $1,000 (or fraction of $1,000) of modified AGI exceeding the following amounts: $110,000 for married filing jointly; $55,000 for married filing separately; and $75,000 for all other taxpayers. A portion of the credit may be refundable. For 2011, the threshold earned income level to determine refundability is set by statute at $3,000.
 
Credit for Adoption Expenses: For 2011, the adoption credit limitation is $13,360 of aggregate expenditures for each child, except that the credit for an adoption of a child with special needs is deemed to be $13,360 regardless of the amount of expenses. The credit ratably phases out for taxpayers whose income is between $185,210 and $225,210. For 2011, the credit is refundable. For 2012, the credit is scheduled to become nonrefundable.
 
HOPE Credit and Lifetime Learning Credit: Back in 2009, significant changes were put in place for the HOPE, including a name change to the American Opportunity Tax Credit. These changes continue for 2011. The maximum credit for 2011 is $2,500 (100% on the first $2,000, plus 25% of the next $2,000) for qualified tuition and fees paid on behalf of a student (i.e., the taxpayer, the taxpayer’s spouse, or a dependent) who is enrolled on at least a half-time basis. The credit is available for the first four years of the student’s post-secondary education. For 2011, the credit is phased out at modified AGI levels between $160,000 and $180,000 for joint filers, and between $80,000 and $90,000 for other taxpayers. Forty percent of the credit is refundable, which means that you can receive up to $1,000 even if you owe no taxes. The term “qualified tuition and related expenses” includes expenditures for “course materials” (books, supplies, and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance). One way to take advantage of the credit for 2011 is to prepay the spring 2012′s tuition. In addition, if your child’s books for the spring semester are known, those can be bought and the costs qualify for the credit.
The Lifetime Learning credit maximum in 2011 is $2,000 (20% of qualified tuition and fees up to $10,000). A student need not be enrolled on at least a half-time basis so long as he or she is taking post-secondary classes to acquire or improve job skills. As with the HOPE (American Opportunity Tax Credit in 2011) credit, eligible students include the taxpayer, the taxpayer’s spouse, or a dependent. For 2011, the Lifetime Learning credit are phased out at modified AGI levels between $102,000 and $122,000 for joint filers, and between $51,000 and $61,000 for single taxpayers.
Coverdell Education Savings Account: For 2011, the aggregate annual contribution limit to a Coverdell education savings account is $2,000 per designated beneficiary of the account. This limit is phased out for individual contributors with modified AGI between $95,000 and $110,000 and joint filers with modified AGI between $190,000 and $220,000. The contributions to the account are nondeductible but the earnings grow tax-free.
Student Loan Interest: You may be eligible for an above-the-line deduction for student loan interest paid on any “qualified education loan.” The maximum deduction is $2,500. The deduction for 2011 is phased out at a modified AGI level between $120,000 and $150,000 for joint filers, and between $60,000 and $75,000 for individual taxpayers.
Kiddie Tax: For 2011, the kiddie tax applies to: (1) children under 18; (2) 18-year old children who have unearned income in excess of the threshold amount, do not file a joint return and who have earned income, if any, that does not exceed one-half of the amount of the child’s support; and (3) children between the ages of 19 and 23 and if, in addition to the above rules, they are full-time students. For 2011, the kiddie tax threshold amount is $1,900.
 
Energy Incentives
Residential Energy Efficient Property Credit: Until 2016, tax incentives are available to taxpayers who install certain energy efficient property, such as photovoltaic panels, solar water heating property, fuel cell property, small wind energy property and geothermal heat pumps. A credit is available for the expenditures incurred for such property up to a specific percentage, except that a cap applies for fuel cell property. The property purchased cannot be used to heat swimming pools or hot tubs. If you have made improvements to your home or plan to by the end of 2011, please contact me to discuss the amount of the credit you may qualify for.
Nonbusiness Energy Property Credit. For 2011, property qualifying for the nonbusiness energy property credit includes windows (including skylights), exterior doors, insulation, metal roofs, advanced main air circulating fans, natural gas, propane, or oil furnace or hot water boilers, and other energy efficient building property that meets certain energy standards. For 2011, the credit is 10% of the cost of the improvement(s) up to a maximum credit of $500 (therefore, if you took any credit prior to 2011, your total cannot exceed $500). The property must be installed by the end of 2011 to qualify. For 2011, only $200 of the credit can be applied to windows. Also, for 2011, the energy standards are relaxed. The credit expires at the end of 2011.
 
Business Credits
Small Employer Pension Plan Startup Cost Credit: For 2011, certain small business employers that did not have a pension plan for the preceding three years may claim a nonrefundable income tax credit for expenses of establishing and administering a new retirement plan for employees. The credit applies to 50% in qualified administrative and retirement-education expenses for each of the first three plan years. However, the maximum credit is $500 per year.
 
Employer-Provided Child Care Credit: For 2011, employers may claim a credit of up to $150,000 for supporting employee child care or child care resource and referral services. The credit is allowed for a percentage of “qualified child care expenditures” including for property to be used as part of a qualified child care facility, for operating costs of a qualified child care facility and for resource and referral expenditures.
Work Opportunity Credit: The work opportunity credit is an incentive provided to employers who hire individuals in groups whose members historically have had difficulty obtaining employment. This gives your business an expanded opportunity to employ new workers and be eligible for a tax credit against the wages paid. Wages paid after 2011 are not eligible for the credit.
Credit for Employee Health Insurance Expenses of Small Employers: For tax years beginning after 2009, eligible small employers are allowed a credit for certain expenditures to provide health insurance coverage for its employees. Generally, employers with 10 or fewer full-time equivalent employees (FTEs) and an average annual per-employee wage of $25,000 or less are eligible for the full credit. The credit amount begins to phase out for employers with either 11 FTEs or an average annual per-employee wage of more than $25,000. The credit is phased out completely for employers with 25 or more FTEs or an average annual per-employee wage of $50,000 or more. The credit amount is 35% of certain contributions made to purchase health insurance.
 
Investment Planning
The following rules apply for most capital assets in 2011:
• Capital gains on property held one year or less are taxed at an individual’s ordinary income tax rate.
• Capital gains on property held for more than one year are taxed at a maximum rate of 15% (0% if an individual is in the 10% or 15% marginal tax bracket).
Note that Congress did extend the reduced capital gains rates, through 2012.
Timing of Sales: You may want to time the sale of assets so as to have offsetting capital losses and gains. Capital losses may be fully deducted against capital gains and also may offset up to $3,000 of ordinary income ($1,500 for married filing separately). In general, when you take losses, you must first match your long-term losses against your long-term gains, and short-term losses against short-term gains. If there are any remaining losses, you may use them to offset any remaining long-term or short-term gains, or up to $3,000 (or $1,500) of ordinary income. When and whether to recognize such losses should be analyzed in light of the possible future changes in the capital gains rates applicable to your specific investments.
Dividends: Qualifying dividends received in 2011 are subject to rates similar to the capital gains rates. Therefore, qualifying dividends are taxed at a maximum rate of 15%. Qualifying dividends include dividends received from domestic and certain foreign corporations. Note that Congress did extend the reduced dividend rates through 2012.
Social Security: Depending on the recipient’s modified AGI and the amount of Social Security benefits, a percentage — up to 85% — of Social Security benefits may be taxed. To reduce that percentage, it may be beneficial to defer receipt of other retirement income. One way to do so is to elect to receive a lump sum distribution from a retirement plan and to rollover that distribution into an IRA. Alternatively, it may be beneficial to accelerate income so as to reduce the percentage of your Social Security taxed in 2012 and later years.
Other Tax Planning Opportunities: We also can discuss the potential benefits to you or your family members of other planning options available for 2011, including §529 qualified tuition programs.
Alternative Minimum Tax
For 2011, the alternative minimum tax exemption amounts will remain high enough to spare millions of taxpayers from the AMT effect. The exemption amounts in place for 2011 are: (1) $74,450 for married individuals filing jointly and for surviving spouses; (2) $48,450, for unmarried individuals other than surviving spouses; and (3) $37,225 for married individuals filing a separate return. Also, for 2011, nonrefundable personal credits can offset an individual’s regular and alternative minimum tax.
Some of the standard year-end planning ideas will not reduce tax liability if you are subject to the alternative minimum tax (AMT) because different rules apply. Because of the complexity of the AMT, it would be wise for us to analyze your AMT exposure.
If you have any questions, please do not hesitate to call. I would be happy to meet with you at your convenience to discuss the strategies outlined above. While we are getting very close to the end of the year, there is still time to implement these strategies to minimize your 2011 tax liability.
 

 

Posted in 2010 Tax Issues | Leave a comment

Job Hunting Expenses

Posted by nyletaylor on August 18, 2011
Posted in 2010 Tax Issues | Leave a comment

Tax breaks that weren’t extended by the 2010 Tax Relief Act probably are gone for good

Posted by nyletaylor on December 30, 2010

  By passing the 2010 Tax Relief Act the outgoing Congress gave a new lease on life to many tax breaks that would have disappeared after either 2009 or 2010. However, it left many tax provisions on the cutting room floor, with only a remote possibility that the incoming Congress will resuscitate them. Here’s a roundup of key provisions that were not extended by the 2010 Tax Relief Act and either expired for good at the end of 2009, or will expire at the end of this year:

Deferral and ratable inclusion for certain debt discharge income. Under Code Sec. 108(i), at the taxpayer’s election, debt discharge income from the reacquisition of a discounted applicable debt instrument by the taxpayer or a related party after 2008 and before 2011 may be deferred for up to five years, and then included in income ratably over five years.

 Exclusion for volunteer emergency medical responders. For tax years beginning before 2011, qualified State or local tax benefits (e.g., deduction or rebate of State or local income) and any qualified payment (provided by a State or political subdivision on account of the performance of services as a member of a qualified volunteer emergency response organization) is excluded from the gross income of members of qualified volunteer emergency response organizations. (Code Sec. 139B(a)) These amounts also aren’t subject to social security or unemployment tax, or withholding. (Code Sec. 3121(a)(23), Code Sec. 3306(b)(20), Code Sec. 3401(a)(23))

Qualified motor vehicle taxes. For purchases on or after Feb. 17, 2009 and before Jan. 1, 2010, an itemized deduction was allowed for qualified motor vehicle taxes. (Code Sec. 164(a)(6)) The deduction also was available to those claiming the standard deduction. (Code Sec. 63(c)(1)(E))

Real property tax deduction for nonitemizers. For tax years beginning in 2008 or 2009, taxpayers could take an additional standard deduction amount for state and local real property taxes, up to a maximum of $500 ($1,000 for marrieds filing jointly). (Code Sec. 63(c)(1)(C))

Partial exclusion for unemployment benefits. An up-to-$2,400 exclusion under Code Sec. 85(c) for unemployment compensation benefits applied only for 2009.

Specialized state and local bond provisions. None of these provisions was extended by the 2010 Tax Relief Act:

        Under Code Sec. 54AA, state and local governments, at their option, may issue Build America Bonds (BABs) as taxable governmental bonds with Federal subsidies for a portion of their borrowing costs. These bonds must be issued before Jan. 1, 2011.

·       Under Code Sec. 1400U-1 through Code Sec. 1400U-3, two types of “Recovery Zone Bonds” may be issued, including a type of BABs known as “Recovery Zone Economic Development Bonds” and a type of traditional tax-exempt bonds known as “Recovery Zone Facility Bonds.” These bonds also must be issued before Jan. 1, 2011.

·       Code Sec. 57(a)(5)(C)(vi) and Code Sec. 56(g)(4)(B)(iv), provide respectively that tax-exempt interest on private activity bonds issued after Dec. 31, 2008, and before Jan. 1, 2011, isn’t an item of tax preference for purposes of the Alternative Minimum Tax (AMT) and isn’t included in the corporate Adjusted Current Earnings (ACE) adjustment.

Specialized catchup contributions. For tax years beginning after Dec. 31, 2009, an individual may no longer deduct catch-up contributions of up to $3,000 each year to his IRA under Code Sec. 219(b)(5)(C) if he participated in a 401(k) plan of an employer (or controlling corporation) that was a debtor in bankruptcy proceedings and an indictment or conviction resulted from transactions related to the bankruptcy.

Alternative motor vehicle credit. These elements of the Code Sec. 30B alternative motor vehicle credit won’t be available for post-2010 purchases: the advance lean burn technology motor vehicle credit, the new qualified hybrid motor vehicle credit, and the new qualified alternative fuel motor vehicle credit. (Code Sec. 30B(k))

Disaster loss related tax rules for individuals. The following provisions were not extended by the 2010 Tax Relief Act:

·       The Code Sec. 63(c)(1)(D) additional standard deduction for federally declared disaster losses occurring before Jan. 1, 2010.

·       The waiver of the 10%-of-AGI limit, which applied for net disaster losses due to federally declared disasters occurring before Jan. 1, 2010. (Code Sec. 165(h)(3)(A))

·       The ability to claim additional personal exemptions for housing Midwestern disaster area displaced persons applied only for 2008 and 2009. (Secs. 702(a)(2) and (e)(1), Division C, of the Emergency Economic Stabilization Act of 2008 (EESA), P.L. 110-343))

Disaster loss related tax rules for businesses. The following business relief provisions applied for federally disasters declared after 2007 and before 2010:

·       Expensing of qualified disaster expenses (e.g., abatement of hazardous substances released as a result of a federally declared disaster) under Code Sec. 198A

RIA observation: Note, however, that Sec. 745(a) of the 2010 Tax Relief Act did extend the Code Sec. 198 election to expense qualified environmental remediation expenditures to include expenses paid or incurred before Jan. 1, 2012.

·       Five-year carryback of net operating losses attributable to federally declared disasters under Code Sec. 172(b)(1)(J)

·       Boosted expensing under Code Sec. 179(e)(1) for qualified disaster assistance property 

·       Bonus first-year depreciation for qualified disaster assistance property under Code Sec. 168(n)

RIA observation: Although disaster-related expensing and bonus first year depreciation are gone, all taxpayers can avail themselves of generous expensing and bonus depreciation provisions under the Small Business Jobs Act of 2010 (P.L. 111-240) (see RIA’s Complete Analysis of the Small Business Jobs Act of 2010 and RIA’s Complete Analysis of the 2010 Tax Relief Act both available online to Checkpoint subscribers).

Source:  Federal Tax Updates on Checkpoint Newsstand tab 12/30/2010 

Posted in 2010 Tax Issues | Leave a comment

Business standard mileage and other rates increase for 2011

Posted by nyletaylor on December 9, 2010


Rev Proc 2010-51, 2010-51 IRB , Notice 2010-88, 2010-51 IRB , IR 2010-119

In a new revenue procedure, IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 51¢ per mile for business travel after 2010. That’s 1¢ more than the 50¢ allowance for business mileage during 2010. Further, the 2011 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 19¢ per mile, 2.5¢ more per mile than the 16.5¢ for 2010. A separate Notice provides the amount taxpayers must use in calculating reductions to basis for depreciation taken under the business standard mileage rate and the maximum standard automobile cost that may be used in computing the allowance under a fixed and variable rate (FAVR) plan. The Notice also asks for comments on whether taxpayers should be permitted to use the business standard mileage rate for automobiles used in fleet operations.

Simplified deduction method. The mileage allowance deduction replaces separate deductions for lease payments (or depreciation if the car is purchased), maintenance, repairs, tires, gas, oil, insurance and license and registration fees. The taxpayer may, however, still claim separate deductions for parking fees and tolls connected to business driving. (Rev Proc 2010-51, Sec. 5.04)

The standard mileage rate may not be used for a purchased auto if:

  • it was previously depreciated using a method other than straight-line for its estimated useful life;
  • a Code Sec. 179 expensing deduction was claimed for the auto;
  • the taxpayer has claimed the additional first-year depreciation allowance; or
  • the taxpayer depreciated it using MACRS under Code Sec. 168.

Also, under current rules, the standard mileage rate can’t be used to compute the deductible expenses of five or more autos owned or leased by a taxpayer and used simultaneously (such as in fleet operations). (Rev Proc 2010-51, Sec. 4.05(1)) However, in Notice 2010-88, IRS has asked for public comments on whether the-five-or-fewer car limitation for the standard mileage rate should be retained.

Rural mail carriers who receive qualified reimbursements also can’t use the standard mileage rate. (Rev Proc 2010-51, Sec. 4.05(4))

A taxpayer who uses the mileage allowance method for an auto he owns may switch in a later year to deducting the business connected portion of actual expenses, so long as he depreciates it from that point on using straight line depreciation over the auto’s remaining life. The depreciation deductions would still be subject to the Code Sec. 280F dollar caps. (Rev Proc 2010-51, Sec. 4.05(3))

A taxpayer may use the mileage allowance method for a leased auto only if he uses that method (or a fixed and variable rate (FAVR) allowance method) for the entire lease period. (Rev Proc 2010-51, Sec. 4.05(2))

Other business mileage rate rules. For 2011, the depreciation component of the mileage rate is 22¢ per mile (was 23¢ per mile for 2010, 21¢ for 2009 and 2008, and 19¢ per mile for 2007). The depreciation component reduces the basis of the auto for gain or loss purposes. (Notice 2010-88, 2010-51 IRB)

Advantages of using standard mileage rate. For those taxpayers eligible to use it, the standard mileage rate offers the following advantages:

  • Mileage rate users need not keep a record of actual expenses, or retain receipts where required. A record of the time, place, business purpose and number of miles traveled suffices.
  • If an auto’s business expenses are deducted via the mileage rate, it is not subject to the Code Sec. 280F dollar caps or the special rules that apply if qualified business use does not exceed 50% of total use.
  • The mileage rate method may yield bigger deductions than the actual expense method for a thrifty, high-mileage model.

Disadvantages of mileage rate method. The mileage rate method may produce a smaller deduction than would be obtained by claiming actual business-connected operating expenses plus depreciation (or lease payments). Also, use of the mileage rate method prevents the taxpayer from claiming regular MACRS deductions (subject to the luxury auto dollar caps) for the auto in later years.

Other applications of mileage allowance method. Employers that require employees to supply their own autos may reimburse them at a rate that doesn’t exceed 51¢ per mile for employment-connected business mileage during 2011 (50¢ per mile for 2010), whether the autos are owned or leased. The reimbursement is treated as a tax-free accountable-plan reimbursement if the employee substantiates the time, place, business purpose, and mileage of each trip. (Rev Proc 2010-51, Sec. 2.08)

Other mileage rules for 2011. Employers may use a FAVR allowance method to reimburse employees who supply their own cars for business (whether the cars are leased or owned). For 2011, the standard auto cost used to compute the FAVR allowance cannot exceed $26,900 (down from $27,300 for 2010). For trucks or vans, the 2011 standard auto cost used to compute the FAVR allowance cannot exceed $28,200. (Notice 2010-88)

In addition, for 2011, the rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 19¢ per mile (16.5¢ per mile for 2010). The mileage rate for driving an auto for charitable use during 2011 will remain unchanged at 14¢ per mile (a statutory rate that’s not adjusted for inflation). (Notice 2010-88)

RIA Research References: For the optional mileage allowance, see FTC 2d/FIN ¶ L-1903; United States Tax Reporter ¶ 1624.157; TaxDesk ¶ 293,005.

Source:  Federal Tax Updates on Checkpoint Newsstand tab 12/6/2010

Posted in 2010 Tax Issues | Leave a comment

Don’t overlook tax breaks for grandparents

Posted by nyletaylor on November 12, 2010

 Recently-released IRS Publication 4694 highlights various tax breaks that may be available to an individual who is raising a grandchild. These include head of household filing status, exemption for the child, earned income credit (EIC), child tax credit (CTC), credit for child and dependent care expenses, credits or deductions for qualified education expense, and deductions for medical and dental expenses. Because it is increasingly common for practitioners to have clients in this situation, this Practice Alert explains the key details of these tax breaks, which are only briefly summarized in the IRS Publication. 

Head of household filing status. An individual who is considered unmarried and has a qualifying child may be eligible to use head of household as his or her filing status. It generally is more favorable than the single filing status. 

An unmarried taxpayer may qualify as a head of household by maintaining as his home a household that is the principal place of abode for more than half the year of a qualifying child of the taxpayer (as defined in Code Sec. 152(c), see below). (Code Sec. 2(b)(1)(A)(i)) However, the taxpayer won’t qualify as a head of household if the qualifying child is married at the close of the taxpayer’s tax year (Code Sec. 2(b)(1)(A)(i)(I) and isn’t a dependent of the taxpayer because he filed a joint return (Code Sec. 152(b)(2)), or because he isn’t a U.S. citizen or resident (Code Sec. 152(b)(3)), or both. (Code Sec. 2(b)(1)(A)(i)(II)) 

A “qualifying child” is an individual who: (1) bears a specified relationship to the taxpayer including being a grandchild of the taxpayer; (2) has the same principal place of abode as the taxpayer for more than one-half of that tax year; (3) hasn’t attained a specified age (see below); and (4) hasn’t provided over one-half of his or her own support for the calendar year in which the taxpayer’s tax year begins. (Code Sec. 152(c)) 

An individual meets the age requirement in (3), above, if he: 

·       hasn’t attained the age of 19 as of the close of the calendar year in which the tax year of the taxpayer begins; 

·       is a student who hasn’t attained the age of 24 as of the close of that calendar year; or 

·       is permanently and totally disabled at any time during the calendar year. (Code Sec. 152(c)) 

Exemption for the child. A grandparent who has a child living with him or him may be able to claim the child as a dependent and, if so, qualify for other tax breaks, as noted below.A taxpayer is entitled to a deduction equal to the exemption amount for each person who qualifies as his “dependent.” (Code Sec. 151(c)) A person generally qualifies as the taxpayer’s dependent if the person is the taxpayer’s qualifying child (see above) or qualifying relative. (Code Sec. 152(a))

Earned income credit. A grandparent who is working and has a qualifying child living with him or her may be able to take the EIC, even if the grandparent is 65 years of age or older. This could generate a refund even if the grandparent owes little or no tax.

An eligible individual (see below) is allowed an EIC equal to the credit percentage of earned income (up to an “earned income amount”) for the tax year. (Code Sec. 32(a)(1)) The EIC for a tax year (determined under IRS tables) can’t be more than the excess (if any) of (1) the credit percentage of the earned income amount, over (2) the phaseout percentage of AGI (or earned income, if greater) over a phaseout amount. (Code Sec. 32(a)(2))

An individual who has a “qualifying child” for the tax year is an eligible individual. (Code Sec. 32(c)(1)(A)(i)) A “qualifying child” for EIC purposes means a qualifying child of the taxpayer, as defined for the dependency exemption in Code Sec. 152(c) (see above), but without the requirement that the child not have provided more than half his own support. (Code Sec. 32(c)(3)(A))

Child tax credit. A grandparent who is raising a grandchild may be able to take the CTC and, under specific circumstances, the additional CTC. The latter may provide a refund even if no federal income taxes are owed.

For 2010, individuals may claim a maximum $1,000 CTC for each qualifying child (see above) the taxpayer can claim as a dependent. (Code Sec. 24(a)) The child must be under 17 and a U.S. citizen or resident alien. (Code Sec. 24(c))

The amount of the allowable credit is reduced (not below zero) by $50 for each $1,000 (or fraction thereof) of modified AGI (AGI increased by excluded foreign, possession, and Puerto Rico income) above: $110,000 for joint filers; $75,000 for unmarried individuals; and $55,000 for marrieds filing separately. (Code Sec. 24(b))

The CTC is refundable, but only to the extent of the greater of: (1) 15% of taxable earned income above $3,000 for 2010; or (2) for a taxpayer with three or more qualifying children, the excess of his social security taxes for the tax year over his earned income credit for the year. (Code Sec. 24(d)) IRS calls the amount of the CTC that’s refundable (on Form 8812) the “additional child tax credit.”

Credit for child and dependent care expenses. This credit may be available if a grandparent pays someone to care for a qualifying individual, i.e., a dependent under age 13, or his or her spouse or a dependent who is physically or mentally not able to care for himself or herself, while the grandparent works or looks for work. (Code Sec. 21(a))

The credit for 2010 is 35% of employment-related expenses for taxpayers with AGI of $15,000 or less. The percentage decreases by 1% for each $2,000 (or fraction thereof) of AGI over $15,000, but not below 20%. (Code Sec. 21(a)(1), Code Sec. 21(a)(2); Reg. § 1.21-1(a)) The maximum amount of employment-related expenses that may be used to compute the credit for 2010 is $3,000 for one qualifying individual, or $6,000 for two or more qualifying individuals. (Code Sec. 21(c); Reg. § 1.21-2(a)(1))

Qualified education expense. There are several tax breaks that may be available to a grandparent who pays his or her grandchild’s education costs. These include:

·       Education credits. An individual taxpayer may claim an income tax credit for the Hope scholarship tax credit (renamed the American opportunity tax credit (AOTC) for 2010) and the Lifetime Learning credit for higher education expenses at accredited post-secondary educational institutions paid for themselves, their spouses, and their dependents. The AOTC is available in 2010 for qualified expenses of the first four years of undergraduate education; the Lifetime Learning credit is available for qualified expenses of any post-high school education at “eligible educational institutions.” Both credits can’t be claimed in the same tax year for expenses of any one student, and it phases out for higher-income taxpayers. For tax years beginning in 2010, individuals may elect a personal, partially refundable tax credit equal to 100% of up to $2,000 of qualified higher-education tuition and related expenses plus 25% of the next $2,000 of expenses paid for education furnished to an eligible student in an academic period. (Code Sec. 25A(a)(1), Code Sec. 25A(i)(1)) Taxpayers may elect a Lifetime Learning credit equal to 20% of up to $10,000 of qualified tuition and related expenses paid during the tax year. The maximum credit is $2,000. (Code Sec. 25A(a)(2), Code Sec. 25A(c)(1)) Unlike the AOTC/Hope credit, which is available for the qualifying expenses of each qualifying student, the Lifetime Learning credit is available only per taxpayer.

·       Coverdell Education Savings Accounts (CESAs). Taxpayers can contribute up to $2,000 per year to CESAs in 2010, formerly called education IRAs, for beneficiaries under age 18 (and, in 2010, special needs beneficiaries of any age). The account is exempt from income tax, and distributions of earnings from CESAs are tax-free if used for qualified education expenses. (Code Sec. 530)

·       Qualified Tuition Programs (QTPs)—529 Plans. A person can make nondeductible cash contributions to a QTP/529 plan on behalf of a designated beneficiary. The earnings on the contributions build up tax-free, and distributions from a QTP are excludable to the extent used to pay for qualified higher education expenses. (Code Sec. 529)

·       Higher Education Exclusion for Savings Bond Income. Qualified U.S. savings bond income is excluded if redemption proceeds don’t exceed qualified higher education expenses. The exclusion phases out at higher levels of modified adjusted gross income. Qualified higher education expenses are tuition and fees required for the enrollment or attendance of taxpayer, taxpayer’s spouse or any dependent for whom taxpayer is allowed a dependency exemption, at an eligible educational institution, e.g., most colleges, junior colleges, nursing schools and vocational schools. (Code Sec. 135)

·       Above-the-Line Deduction for Higher-Education Expenses (before 2010). For tax years beginning before 2010, eligible individuals may deduct higher education expenses—i.e., “qualified tuition and related expenses” of the taxpayer, his spouse, or dependents—as an adjustment to gross income to arrive at adjusted gross income. (Code Sec. 222(a)) The higher education deduction can’t exceed: $4,000 for taxpayers whose modified AGI for the tax year doesn’t exceed $65,000 ($130,000 for a joint return); $2,000 for taxpayers whose modified AGI exceeds $65,000 ($130,000 for a joint return), but doesn’t exceed $80,000 ($160,000 for a joint return); and zero for other taxpayers. (Code Sec. 222)

·       Deduction for Interest on Qualified Education Loans. Qualifying individuals may claim an above-the-line deduction for up to $2,500 of interest paid on a qualified higher education loan, i.e., any debt incurred by the taxpayer solely to pay qualified higher education expenses that are: (1) incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the debt was incurred; (2) paid or incurred within a reasonable period of time before or after the debt is incurred; and (3) attributable to education furnished during a period when the recipient was an eligible student (as defined for the AOTC/Hope credit purposes, i.e., at least a half-time student). (Code Sec. 221)

Medical and dental expenses. An individual who itemizes can deduct the amount by which certain unreimbursed medical and dental expenses paid during the year for himself or herself, his or her spouse, and his or her dependents exceed 7.5% of his adjusted gross income. (Code Sec. 213)

Source:  Federal Tax Updates on Checkpoint Newsstand tab 11/12/2010 

Posted in 2010 Tax Issues | Leave a comment

Hobbies Beware!

Posted by nyletaylor on November 1, 2010
I had dinner with friends the other night, and the subject of hobbies came up.  I slipped in to our newsletter and grabbed an article I thought would answer their questions.

Here it is. If you (or someone you know) has a hobby, the information in this article will prove worthwhile.

Tax Law Obliterates Hobbies

Lawmakers hate taxpayers’ hobbies. They apply the most draconian of all taxes to hobbies. If you have a hobby or are thinking of a hobby, read this article before you take step one.

Let’s imagine that Congress hired you to make the most unfair and unjust income tax known to a U.S. taxpayer. How much tax would you assess? How would it work? Think about that tax. Make it as unfair as you can imagine.

Now, let’s compare your most unfair tax with an income tax that actually exists in U.S. tax law.

Get Ready to Cry

For purposes of this example, let’s assume that you and your spouse report more than $175,000 of taxable income before considering the taxable income and deductible expenses of your hobby. Next, let’s say that your hobby has a gross income of $500,000 and expenses of $550,000 for a loss of $50,000.

Here is what current tax law does to this hobby:

  • The $50,000 loss is not deductible under the general rule that deductible hobby expenses may not exceed hobby income.
  • The $500,000 gross hobby income goes above the line on your Form 1040.
  • $500,000 ($550,000 minus $50,000) in hobby expenses are deducted as miscellaneous itemized deductions where they can suffer a reduction equal to 2 percent of adjusted gross income. Gross income includes the $500,000 of gross hobby income.
  • For purposes of the alternative minimum tax (AMT), the law disallows the $500,000 in hobby expenses and taxes the $500,000 at the 28 percent AMT rate for a tax of $140,000.

You should have tears running down your cheeks, because you are paying $140,000 in federal income taxes on a $50,000 loss. Wow! Lose money, pay taxes. This is truly outrageous—and it’s true. Yikes.

Attack on the Mary Kay Lady

Jane Smith operates as a part-time Mary Kay lady. She has a gross income of $13,000 and deductible expenses of $18,000 for a net loss of $5,000. How much tax can she pay on her $5,000 loss?

John Smith, Jane’s husband, earns a really good living in his law practice. Because the Smiths have a home-equity mortgage and children, they pay the AMT without considering the Mary Kay activity; therefore, the Mary Kay activity loss triggers an additional AMT of $3,640.

Remember, Mrs. Smith lost $5,000 in her Mary Kay activity. This loss triggers an additional tax of $3,640 on the $13,000 of gross income (28 percent times $13,000). Mrs. Smith gets taxed on her gross Mary Kay income and receives the benefit of zero deductions. Mind-boggling, isn’t it?

Solutions

Avoid hobbies. Make all your activities businesses. Businesses deduct all their expenses, and business losses may be carried back and forward to generate more tax benefits.

If that’s not for you, then avoid hobbies that generate gross income. Note that we said “gross income.” Remember, for purposes of the AMT, you pay taxes on the gross and get zero benefit from your deductions.

Who Created This Problem

The Tax Reform Act of 1986 created the tax rules that apply the AMT to hobbies. You would think that someone during the last 23 years would have fixed this draconian tax. Not so.

How the Hobby Rules Work

Rule 1: Report gross income from the hobby above the line. As an individual, you report gross hobby income on line 21 of your IRS Form 1040.

In determining gross hobby income,

  • deduct the cost of goods sold as determined using generally accepted accounting principles; and
  • include all gains from the sale, exchange, or other disposition of property.

Rule 2: Order the hobby deductions. If deductions exceed income, then deductions are allowed only to the extent of gross income. In determining how the deductions are allowed, you need to follow the three steps below, in the order listed:

  • Deduct expenses such as mortgage interest and property taxes that would be allowed regardless of activity.
  • To the extent that gross hobby income remains after subtracting the deductions in step 1, deduct operating expenses that do not reduce the basis of assets, such as advertising, insurance, and wages.
  • To the extent that gross hobby income remains after applications of steps 1 and 2 above, deduct expenses that reduce the basis of assets, such as depreciation and amortization.

Rule 3: Treat hobby deductions as miscellaneous itemized deductions—a below-the-line deduction. The hobby deductions allowed in step 2 go to the miscellaneous itemized deduction “jailhouse,” where

  • if you don’t itemize your deductions, you get no tax benefit from your hobby deductions; or
  • if you do itemize your deductions, your hobby deductions join the category where tax law reduces deductions by 2 percent of adjusted gross income.

Rule 4: Apply the AMT. The AMT on the hobby deduction works like this: Disallow all the deductions and tax the gross income. In other words, the hobby deductions that you claimed for regular tax purposes turn into taxable AMT income when computing the AMT.

For most taxpayers, the AMT is a most unpleasant surprise.

Rules for Making the Activity a Business

You do not want any hobbies that generate income, because tax law can tax the income and give you zero deductions.

Solution. Make all income-generating activities businesses.

The IRS looks at nine business factors. We turned those nine factors into nine questions to which your correct answer should be either “yes” or “not applicable.” Here are the nine questions:

  • Do you carry on this activity in a businesslike manner with complete and accurate books and records?
  • Do you have expertise in this activity? If not, do you use outside experts or otherwise study the activity in a manner that indicates a profit motive?
  • Do you spend time on this activity? The more time you spend, the more this activity looks like a for-profit activity.
  • Do you expect appreciation in property values to produce the ultimate profits?
  • Have you had success doing this type of thing in the past?
  • Does your history of profits and losses with this activity show that you engaged in this activity for profit?
  • Does the profit you realize or hope to realize justify the losses incurred or expected?
  • Considering your other sources of income, do you need this activity to work for your well-being? (If you work at this full time and need this work to pay for your household, you pass the business test on this answer alone.)
  • Is your personal pleasure or recreation absent from this activity? (In other words, you are not golfing, fishing, horseback riding, woodworking, etc.)

Remember, “yes” answers increase your chances that the IRS will consider your activity a business. You don’t need nine “yes” answers. You might only need one. But you need to consider the tax ramifications of a hobby versus those of a business. The ultimate answer depends on your facts and circumstances.

*************************************

This article came from Tax Reduction Letter, which is designed for one-owner and husband-and-wife owned businesses. It’s purpose is to clarify taxes so that you get control of your money.

Sincerely,

W. Murray Bradford, CPA
Publisher
Tax Reduction Letter
www.bradfordtaxinstitute.com

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Posted in 2010 Tax Issues | Leave a comment

Not too early to review travel and entertainment expense

Posted by nyletaylor on October 19, 2010

Now may be a good time to evaluate the expenses you incur as an employee in connection with your work. While your employer may be reimbursing you for some of these expenses, there may be others for which you are bearing the cost yet not utilizing the tax benefit. Another possible source of deductible expenses could be from your self employment activities carried out in your home.  Through proper substantiation, and proper use of the space in your home,  it is possible that you may be able to obtain greater reimbursement or deduction  from your employer or from your self employment activities.  Alternatively, you may be entitled to deduct such expenses as miscellaneous itemized deductions.

In order to be reimbursed and/or deducted, trade or business expenses must be ordinary, necessary, and reasonable. They also must be properly substantiated. Examples of qualifying expenses include:

  • Travel, transportation, meal, or entertainment expenses
  • Safety equipment, small tools, or supplies
  • Uniforms required by your employer that are not suitable for everyday wear
  • Required protective clothing
  • Dues to professional organizations
  • Subscriptions to professional journals
  • Certain job hunting expenses
  • Certain expenses for the business use of your home
  • Computer costs
  • Work-related educational expenses

    • You may also benefit from a review of the business expenses related to the use of your home. If you qualify for the home office deduction, you may be able to deduct part of your home’s normal operating expenses, such as utilities and insurance. The tax-savings opportunities available to you are dependent not only on the type of work you do at home, but where in your home you perform it.

    The rules for deducting these expenses, as well as substantiating your deduction, vary according to the type of expense involved. It is important to retain all records and receipts that document the time, place, and business purpose of each expense. Please call our office at your earliest convenience to schedule an appointment.

    Posted in 2010 Tax Issues | Leave a comment

    Posted by nyletaylor on October 10, 2010

    The Small Business Jobs Act of 2010 contains all sorts of immediate boosts for business activity. Among the most interesting:

    • Tax free gain on investment in small business before year-end if held for at least 5 years (IRC Sec. 1202)

    • Up to $500,000 Sec. 179 deduction that does not phase-out until total annual additions to tangible personal property exceed $2 million

    • 5 year carryback of all general business credits generated in 2010, and exemption from AMT • Return of 50% bonus depreciation for assets placed in service before 2011

    • Relief from penalty for failing to disclose participation in listed transaction

    • Landlords required to issue Forms 1099S to service providers . . . plumbers, electricians, roofers, lawn boys, etc.

    • Cell phones no longer “Listed Property” requiring detailed recordkeeping.

    There are great opportunities to save taxes, but some are only available through December 31, 2010.

    Posted in 2010 Tax Issues | Leave a comment

    Welcome to my blog

    Posted by nyletaylor on October 3, 2010

    I hope that this will become a place that will be a source of information for you.  My intentions are to post free tax news and tips, links to information and resources to help you run your business, manage your finances, and be well informed.

    If you have a anything you would like me to post, email me at nyle@nyletaylorcpa.com and I will do my best to accommodate you.

    Posted in 2010 Tax Issues | Leave a comment