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Bean Counter Tax Ideas:
IRA Charitable Contributions :
An individual is allowed an exclusion from gross income for
qualified charitable distributions of up to $100,000 from a traditional
individual retirement account (IRA) or a Roth IRA,
which would otherwise be included in income. Married individuals
filing jointly may exclude distributions up to $200,000
from income, $100,000 per individual IRA owner. The exclusion
is applicable to distributions made in tax years beginning
after December 31, 2005, and before January 1, 2010.
To qualify, the charitable distribution must be made directly
to a charity to which deductible contributions are made on or
after the taxpayer attains 70 ½ years of age. Such distributions
are not taken into account for charitable deduction purposes;
that is, the taxpayer cannot claim the contribution as an itemized
deduction. The distribution is required to be made by the
IRA trustee directly to a charitable organization as described in
Code Sec. 170(b)(1)(A).
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Child Tax Credit:
Taxpayers with at least one qualifying child under the age of 17 are allowed a child tax credit of $1,000 per child. The credit will phase out when the parent(s) income exceed certain limitations. If your “modified adjusted gross income” (MAGI) income level is below the following limitations, take a look at this credit.
$75.000 for single or head of household
$55,000 for married filing separately
$110,000 for married joint filers
The 2009 credit will phase out at the rate of $50 per $1,000 above the stated limitations for MAGI.
Therefore, the child credit will not be available to taxpayers with a MAGI exceeding the following:
$114,000 for single or head of household
$94,000 for married filing separately
$149,000 for married joint filers
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Review Your Estate Planning Documentation:
The 2009 Federal Estate Tax Exclusion for the current year is now $3.5 million dollars per individual. If your estate includes a “bypass trust” a review needs to be completed.
With proper planning, a couple can now leave $7 million dollars to their heirs without paying federal estate tax. The additional exemption amount will provide protection for most taxpayers. However, if the estate contains a “bypass trust”, look for the words in the documentation language that include the phrase “the maximum statutory exclusion”.
The trust grantor may have intended a different distribution mix for his estate .But the trust language will now instruct the executor to move up to 3.5 million estate value to the remaining spouse. It now becomes prudent to review your estate plan!
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IRS Reminds Taxpayers of Tax Relief
Available for COD Income Realized
in Mortgage Workouts:
The IRS has released a summertime tax tip addressing
the exclusion from income of cancellation of indebtedness
income (COD) income realized in mortgage
workouts (IRS Summertime Tax Tip 2009-09).
Taxpayers whose mortgage debt is completely or partially
forgiven at any time during 2007 through 2012
may be eligible for special tax relief, it points out.
The Mortgage Forgiveness Debt Relief Act of 2007
(P.L. 110-142) (2007 Mortgage Act) allows taxpayers
to exclude from tax up to $2 million ($1 million
for a married person filing a separate return) of
cancellation of debt income realized in a mortgage
workout on their principal residence. This exclusion
also applies to mortgage debt forgiven in connection
with a foreclosure.
To be eligible for relief, the debt must have been
used to buy, build or substantially improve the taxpayer’s
principal residence and must be secured by a
mortgage on that residence. Mortgage refinancing
are also eligible for the exclusion, up to the amount
of the original mortgage.
Debt incurred for second homes, rental property,
business property, credit cards or car loans does not
qualify for the relief under the 2007 Mortgage Act.
Other kinds of tax relief may be available, however.
Th e exclusion provided for in the 2007 Mortgage
Act may be claimed by filing Form 982, Reduction
of Tax Attributes Due to Discharge of Indebtedness,
with the taxpayer’s federal income tax return
for the year the debt was eliminated or cancelled.
Lenders are required to send borrowers whose debt
is reduced or eliminated a Form 1099-C, Cancellation
of Debt. This form must show the amount
of debt forgiven and the fair market value of any
property given up through foreclosure.
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Home Office Deductions for Self-Employed
If you are self-employed and work out of your home, there are selected rules you need to follow. The advantage of following the rules, you are able to deduct certain expenses related to your residence.
Expenditures related to the home office, include both direct and indirect cost. Direct expenses are for example cost of painting the office space, furniture and equipment added to the office space, paper supplies plus communication costs. Indirect costs include the cost to maintain the home office, home insurance and utilities costs. These costs would be allocated to the home office expense based upon square footage assigned to the office as compared to the total home square footage. The resultant percentage, multiplied by the total indirect expenses will increase your home office deduction. See IRS tax form 8829 Business Use of Your Home to implement this deduction.
Travel cost between your home office and the client’s location is fully deductable as transportation expense. Cost of computers and any other equipment used in your business becomes a deductable expense.
If inventory is part of your business, the space used to store the goods should be included in your space allocation calculation. That is, be sure to add the storage space attributable to the business. With proper planning, you will be able to benefit from the maximum deductions available to the business owner.
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Health Savings Accounts (HSA):
The Health Saving Account was established as part of the health care benefit program created by Congress. HSA accounts were created for the self-employed, small business owners and other employees who may not have access to a health insurance plan.
The current inflation adjustment plan for a high deductable plan limitation in the current year is $3,000. The 2010 annual amount will increase by $50.00 or $3,050 for the single individual. The Family plan rate for 2009 currently is $5,950. The new rate for 2010 will jump to $6,150.
The definition of a high deductible plan for the self-employed is one that has an annual deductable amount of $1,200 or more for a single individual. The family plan deductible requirement is $2,400.
The out of pocket expenses (including deductibles and copayments, but not premiums) do not exceed $5950 for the individual or $11,900 for the family plan.
Any amount distributed out of a HSA account should be used to pay for qualified medical expenses. Such payments are not subject to income tax. Therefore, payments for non qualified medical expenses are includable as income and subject to taxation plus a 10%penalty. Finally, one must be covered by a high deductible medical plan at the start of each month.
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Tax Incentives for Businesses
The American Recovery and Reinvestment Act of 2009 (ARRA) provides a number of tax incentives for businesses. Most of the tax incentives for businesses are found in Subtitle C of Division B, Title I of ARRA. In addition, some of the energy incentives, contained in Subtitle B, [and a subsidy for premiums for COBRA health continuation coverage in Title III of Division B,] provide tax relief for businesses.
Here is a summary of the key ARRA provisions, in numerical order, which may impact businesses, large and small:
TAX INCENTIVES FOR BUSINESS (SUBTITLE C)
50-Percent Special Depreciation Allowance/Bonus Depreciation (Section 1201) - The new law extends the 50-percent special depreciation allowance that was available for 2008 acquisitions to acquisitions of qualifying property in 2009. This provision enables businesses to deduct half the adjusted basis of qualifying property in the year it is placed in service. The extension applies to qualifying property placed in service in 2009 (2010 for long production period property and certain transportation property).
Acceleration of Certain Business Credits (Section 1201): Corporations that acquire eligible business property have an additional year to accelerate certain tax credits in lieu of a bonus depreciation deduction. The extension applies to eligible business property placed in service in 2009 (2010 for long production period property and certain transportation property).
Section 179 Expensing (Section 1202): During 2009, small businesses can elect to expense up to $250,000 of the cost of qualifying property under section 179. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sports utility vehicles. The $250,000 amount provided under the new law is reduced if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000.
Expanded Net Operating Loss Carryback (Section 1211): Many small businesses that had expenses exceeding their income for 2008 can choose to carry the loss back for up to five years, instead of the usual two years. For small businesses that were profitable in the past but lost money in 2008, this could mean a special tax refund. The option is available for a small business that has no more than an average of $15 million in gross receipts over a three-year period. This option is available for most eligible taxpayers for a limited time. A corporation that operates on a calendar-year basis, for example, must file a claim by Sept. 15, 2009. For eligible individuals, the deadline is Oct. 15, 2009.
Estimated Tax Requirement Modified (Section 1212): Many individual small business taxpayers may be able to defer until the end of the year paying a larger part of their 2009 tax obligation. For 2009, eligible individuals can make quarterly estimated tax payments equal to 90 percent of their 2009 tax or 90 percent of their 2008 tax, whichever is less. Individuals qualify if they received more than half of their gross income from their small business in 2008 and meet other requirements. For details, see Publication 505.
Discharge of Business Indebtedness (Section 1231): The act allows certain businesses that repurchase specific types of debt in 2009 and 2010 to pay taxes on cancellation of debt income over a five year period, starting with tax year 2014.
Exclusion of Gain on the Sale of Certain Small Business Stock (Section 1241): ARRA provides an extra incentive for investment in small businesses. The new law provides an increase in the Section 1202 exclusion from 50 percent (60 percent for enterprise zone qualified business entity stock) to 75 percent for any gain from the sale or exchange of qualified small business stock acquired after Feb. 17, 2009 and before Jan. 1, 2011, and held for more than five years. This provision is limited to individual investors and not available to corporations.
S-Corporation Built-in Gains Holding Period (Section 1251): For tax years beginning in either 2009 or 2010, the new law eliminates the corporate level tax on the built-in gains of an S-Corporation that converted from C-corporation status at least seven tax years before the current tax year.
COBRA PREMIUM ASSISTANCE (TITLE III)
COBRA: Health Insurance Continuation Subsidy (Section 3001): Under the new law, employees who were involuntarily terminated after Aug. 31, 2008 and before Jan. 1, 2010, and who elect COBRA health continuation coverage, are entitled to receive a 65 percent subsidy on their COBRA premiums. For periods of COBRA coverage beginning after Feb. 16, 2009, the involuntarily terminated employee must be treated as having paid the required COBRA premium if the individual pays 35 percent of the premium amount. The employer (or, in some cases, multiemployer health plan or insurer) may recover the other 65 percent by taking the subsidy amount as a credit on their quarterly employment tax return.
ENERGY INCENTIVES (SUBTITLE B)
Extension of Renewable Energy Production Tax Credit (Section 1101): The new law generally extends the “eligibility dates” of a tax credit for business facilities producing electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower and marine and hydrokinetic renewable energy. The new law extends the "placed in service date” for wind facilities to Dec. 31, 2012. For the other facilities, the placed-in-service date was extended from Dec. 31, 2010 (Dec. 31, 2011 in the case of marine and hydrokinetic renewable energy facilities) to Dec. 31, 2013.
Election of Investment Credit in Lieu of Production Credit (Section 1102): Businesses that place in service facilities that produce electricity from wind and some other renewable resources after Dec. 31, 2008 can choose either the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects or the production tax credit, which can provide a credit of up to 2.1 cents per kilowatt-hour for electricity produced from renewable sources. A business may not claim both credits for the same facility.
Repeal of Certain Limits on Business Credits for Renewable Energy Property (Section 1103): The new law repeals the $4,000 limit on the 30 percent tax credit for small wind energy property and the limitation on property financed by subsidized energy financing. The repeal applies to property placed in service after Dec. 31, 2008.
Coordination with Renewable Energy Grants (Section 1104): Business taxpayers also can apply for a grant instead of claiming either the energy investment tax credit or the renewable energy production tax credit for property placed in service in 2009 or 2010. In some cases, if construction begins in 2009 or 2010, the grant can be claimed for energy investment credit property placed in service through 2016, and for qualified renewable energy facilities, the grant is 30 percent of the investment in the facility and the property must be placed in service before 2014 (2013 for wind facilities).
New Clean Renewable Energy Bonds (Section 1111): Certain State utilities, governmental entities and cooperatives that initiate projects to generate electricity from renewable sources (for example wind and solar) can finance those projects through qualified tax credit bonds. The new law increases the amount of funds available to issue new clean renewable energy bonds from the one-time national limit of $800 million to $2.4 billion.
Temporary Increase in Credit for Alternative Fuel Vehicle Refueling Property (Section 1123): The new law modifies the credit rate and limit amounts for property placed in service in 2009 and 2010. Qualified property (other than property relating to hydrogen) is now eligible for a 50 percent credit, and the per-location limit increases to $50,000 for business property (increases to $2,000 for other/residential locations). Property relating to hydrogen keeps the 30 percent rate as before, but the per-business location limit rises to $200,000.
Increased Exclusion Amount for Commuter Transit Benefits and Transit Passes (Section 1151): The new law increased to $230 the monthly tax exclusion for employer-provided commuter transportation and transit pass benefits, effective from March through the end of 2009. Employers can generally deduct these qualified transportation fringe benefits as a business expense. These benefits are also excluded from an employee's wages for income tax and payroll tax purposes. Because of this exclusion from employee wages, the employer can reduce the amount paid in employment taxes.
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Recovery Tax Credits on YouTube, ITunes
WASHINGTON — The Internal Revenue Service today announced the availability of video and audio products to help taxpayers take full advantage of the 2009 tax provisions in the American Recovery and Reinvestment Act.
The IRS has launched a YouTube video site and an iTunes podcast site to better serve taxpayers.
People can visit the video site at www.youtube.com/irsvideos to view information about the Recovery, tax tips and how-to videos. These videos will be in English, Spanish, American Sign Language and other languages.
The YouTube focus will be on the provisions of the American Recovery and Reinvestment Act. Videos will highlight the $8,000 first-time homebuyer’s credit for those who purchase a house this year, the sales or excise tax deduction on new car purchases and the expanded credits for education and energy conservation.
The IRS YouTube channel will debut with seven Recovery videos in English and ASL and eight in Spanish. Also, included will be a video on using the IRS Withholding Calculator. Many workers received the Making Work Pay tax credit in April through their tax withholding at work. However, people who have more than one job or working spouses should especially check their withholding to ensure neither too much nor too little is being withheld. People can use the calculator to help determine if they should make adjustments.
People can visit the audio site at iTunes to listen to IRS podcasts about ARRA tax credits. People without an iTunes account can hear those same podcasts, in English and Spanish, on IRS.gov’s Multimedia Center.
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Identity Theft Scams
WASHINGTON — The Internal Revenue Service reminds consumers to avoid identity theft scams that use the IRS name, logo or Web site in an attempt to convince taxpayers that the scam is a genuine communication from the IRS. Scammers may use other federal agency names, such as the U.S. Department of the Treasury.
In an identity theft scam, a fraudster, often posing as a trusted government, financial or business institution or official, tries to trick a victim into revealing personal and financial information, such as credit card numbers and passwords, bank account numbers and passwords, Social Security numbers and more. Generally, identity thieves use someone’s personal data to steal his or her financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns.
The scams may take place through e-mail, fax or phone. When they take place via e-mail, they are called “phishing” scams.
The IRS does not discuss tax account matters with taxpayers by e-mail.
The IRS urges consumers to avoid falling for the following recent schemes:
Making Work Pay Refund
This phishing e-mail, which claims to come from the IRS, references the president and the Making Work Pay provision of the 2009 economic recovery law. It says that there is a refundable credit available to workers, consumers and retirees that can be paid into the recipient’s bank account if the recipient registers their account information with the IRS. The e-mail contains links to register the account and to claim the tax refund.
In reality, most taxpayers receive their Making Work Pay tax credit, which was designed for wage earners, in their paychecks as a result of decreased tax withholding, not as a lump sum distribution from a federal fund. Additionally, consumers and retirees who are not wage earners are not eligible for this tax credit.
Inherited Funds / Lottery Winnings / Cash Consignment
In this phishing scheme, recipients receive an e-mail claiming to come from the U.S. Department of the Treasury notifying them that they will receive millions of dollars in recovered funds or lottery winnings or cash consignment if they provide certain personal information, including phone numbers, via return e-mail. The e-mail may be just the first step in a multi-step scheme, in which the victim is later contacted by telephone or further e-mail and instructed to deposit taxes on the funds or winnings before they can receive any of it. Alternatively, they may be sent a phony check of the funds or winnings and told to deposit it but pay 10 percent in taxes or fees. Thinking that the check must have cleared the bank and is genuine, some people comply. However, the scammers, not the Treasury Department, will get the taxes or fees.
Form W-8BEN
In this scam, fraudsters modify a genuine IRS form, the W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to request detailed personal and financial information. This could include nationality, passport number, bank account and PIN numbers, spouse’s name and mother’s maiden name, or other personal or financial information or security measures for financial accounts. The scammers may use the genuine form number and name or may make up a new form number, such as W-4100B2.
They either e-mail or fax the form or letter. If only a letter, the letter itself contains the request for the personal and financial information. The letter, which claims to come from the IRS, states that the recipient will face additional taxes unless he or she quickly faxes the required information to the number provided by the scammer.
In reality, taxpayers file the genuine Form W-8BEN with their financial institutions, not with the IRS. Additionally, the genuine W-8BEN does not request the taxpayer’s passport number, bank account number, security or similar information.
Refund Scam
The bogus e-mail, which claims to come from the IRS, tells the recipient that he or she is eligible to receive a tax refund for a given amount. It instructs the recipient to click on a link contained in the e-mail to access and complete a form for the tax refund. The form requires the entry of personal and financial information. The refund scam is the most common one seen by the IRS. Several recent variations on this scam have claimed to come from the Exempt Organizations area of the IRS. Some others have included the name and purported signature of a genuine or a made-up IRS executive.
Taxpayers do not have to complete a special form to obtain a refund. Taxpayer refunds are based on the tax return they submit to the IRS.
How to Spot a Scam
Many e-mail scams are fairly sophisticated and hard to detect. However, there are signs to watch for, such as an e-mail that:
- Requests detailed or an unusual amount of personal and/or financial information, such as name, SSN, bank or credit card account numbers or security-related information, such as mother’s maiden name, either in the e-mail itself or on another site to which a link in the e-mail sends the recipient.
- Dangles bait to get the recipient to respond to the e-mail, such as mentioning a tax refund or offering to pay the recipient to participate in an IRS survey.
- Threatens a consequence for not responding to the e-mail, such as additional taxes or blocking access to the recipient’s funds.
- Gets the Internal Revenue Service or other federal agency names wrong.
- Uses incorrect grammar or odd phrasing (many of the e-mail scams originate overseas and are written by non-native English speakers).
- Uses a really long address in any link contained in the e-mail message or one that does not start with the actual IRS Web site address (www.irs.gov). To see the actual link address, or url, move the mouse over the link included in the text of the e-mail.
What to Do
The IRS does not initiate taxpayer contact via unsolicited e-mail or ask for personal identifying or financial information via e-mail. If you receive a suspicious e-mail claiming to come from the IRS, take the following steps:
- Do not open any attachments to the e-mail, in case they contain malicious code that will infect your computer.
- Do not click on any links, for the same reason. Also, be aware that the links often connect to a phony IRS Web site that appears authentic and then prompts the victim for personal identifiers, bank or credit card account numbers or PINs. The phony Web sites appear legitimate because the appearance and much of the content are directly copied from an actual page on the IRS Web site and then modified by the scammers for their own purposes.
- Contact the IRS at 1-800-829-1040 to determine whether the IRS is trying to contact you.
- Forward the suspicious e-mail or url address to the IRS mailbox phishing@irs.gov, then delete the e-mail from your inbox.
Genuine IRS Web site
The only genuine IRS Web site is IRS.gov. All IRS.gov Web page addresses begin with http://www.irs.gov/. Anyone wishing to access the IRS Web site should initiate contact by typing the IRS.gov address into their Internet address window, rather than clicking on a link in an e-mail.
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