The increase in and expansion of the Medicare tax commenced January 1, 2013. The increase in the Medicare tax, as required under healthcare reform, has two significant components. The first component is an increase in the Medicare tax rate by 0.9%. This increase will be imposed on wages and self-employment income in excess of $200,000 for single persons and in excess of $250,000 for married couples filing jointly. The second component applies a new 3.8% Medicare tax to “Net Investment Income” when modified adjusted gross income is in excess of the $200,000 and $250,000 threshold amounts for single and married couples, respectively. Previously Medicare taxes only applied to wages and self-employment income and never to investment income.

There are lots of discussions coming out of Washington about simplifying the tax code. While, this sounds wonderful, the realities are the opposite. Beginning January 1, 2013 the tax code became significantly more complicated with these new taxes. The federal tax code already required taxpayers to go through two layers of tax computation, the regular income tax and the Alternative Minimum Tax. Calculating the Medicare tax on net investment income is an entirely new calculation that will be required by taxpayers. The IRS's proposed regulations related to this new tax exceed 140 pages. Include state income tax regimes, and many taxpayers will now have to calculate their income tax obligation under four separate regimes to determine their annual income tax liability. This certainly does not sound simple to me.

Some thoughts on the increase in the Medicare tax rate to wages:

• The highest marginal Medicare tax rate will be 2.35%, or 3.8% for self-employed persons.

• For married couples, wages are combined to determine if the additional surcharge is applied. For example, if a husband makes $175,000 and a wife makes $100,000, the additional Medicare surcharge will apply to $25,000 of the wages.

• Employers are required to withhold the additional 0.9% from an employee’s payroll when said employee’s salary exceeds $200,000. The employer does not have to determine wages earned by the employee’s spouse or from other jobs that the employee may have. As such, the tax witholdings will not likely match the amount of tax due. This may require taxpayers to make estimated tax payments.

• There is no additional payroll tax being assessed against the employer. All of the additional Medicare taxes under the law are paid by the employee.

• The new Medicare tax will not be reduced by one-half for self-employed persons.

• The wage thresholds of $200,000 and $250,000 are not inflation adjusted. As such, this law will apply to more and more taxpayers over the years.

• The tax revenue generated by the tax will be sent to the general fund, not to the Medicare trust fund.

Some thoughts on the application of 3.8% Medicare tax that applies to net investment income:

• The tax applies to the lesser of the taxpayer's net investment income or the excess of the taxpayers modified adjusted gross income over the threshold of $200,000 and $250,000, respectively. As an example, if a taxpayer has wages of $300,000 and interest income of $10,000, the Medicare tax will apply to the $10,000 of investment income.

• Net investment income includes income from interest, dividends, royalties, rents , annuities, income from a business that is a passive activity.

• Gains from the sale of property are included in the calculation of net investment income, unless the property was held by the taxpayer in a business where he or she materially participated. As such, capital gains from a brokerage account will likely be subject to the Medicare tax, but capital gains from the sale of a small business that you owned would not be subject to the Medicare tax.

• One of the few exceptions to the Medicare tax on net investment income will be on S-Corporation income, where the taxpayer has “active” participation. It appears that the IRS is taking the position that these earnings will NOT be included in the calculation of net investment income. Consequently, they will escape both self-employment taxes as well as the Medicare tax on net investment income. (Note this is not the S corporation owners wages, but the profits / dividends allocated to the partner on the form K-1.)

• Tax free municipal bond interest will not be included in the calculation of net investment income. With the new maximum tax rate at 39.6% and the additional 3.8% Medicare charge on top of that, these instruments have even greater benefits to high income tax payers.

• Income from all types of traditional tax qualified retirement plans will not be included in the calculation of net investment income and thus not be subject to the tax.

As it currently stands, much of the regulations from the IRS are still in draft format. So the rule writing process is still fluid. Additionally, there will be positions taken by the IRS that will be challenged in the court systems.

Small business owners have many concerns, not least of which is retirement benefits for themselves and their employees. Many employers offer a 401(k) plan to their employees to help address retirement needs. While many small business owners take advantage of the deferred compensation available to them under the 401(k) plan, there are ways to increase the benefit and value of these plans.

While employee contributions are limited to $17,500 for 2013, the annual tax deferral limit is $51,000 ($56,500 for those over age 50). The tax deferral limit is the maximum amount that can be contributed to an individuals 401(k) account in a single year, it combines both the employee’s contribution as well as the employer’s contribution. As an example, a small business owner might contribute the full $17,500 deferral available to herself in a year under the 401(k) rules. In addition, the business makes a profit sharing contribution of $33,500 to the owners account, for a maximum contribution to the business owner of $51,000. This is obviously a tidy sum to receive.

For small business owners looking to maximize their savings and minimize their taxes, utilizing a profit sharing option in a 401(k) plan can be a very good decision. Here are some of the benefits for small business owners:

- Employee contributions to the plan are not taxed by the federal and most state governments until they are distributed (usually at retirement age).

- Employer profit sharing contributions are an allowable business deduction. Contributions to the plan are not taxed until they are distributed.

- The small business owner can defer up to $51,000 to his / her 401(k) account in a single year. Significantly more than if they just maximize the $17,500 employee contribution limit.

- Flexibility – The profit sharing contribution is discretionary and can vary by year. If the business has a difficult year, the profit sharing contribution can be reduced.

- Attract employees – A well designed and funded profit sharing plan can help attract great employees.

- Administration and costs are generally low.

There are several different types of profit sharing plans. The one I see the most is called a New Comparability Plan. A new comparability plan is a profit sharing plan that divides employees into groups. A simple division between groups might be an owner group and a non-owner group. Each group receives a profit sharing contribution match based on a percentage of compensation. However, the match percentage for each group does not have to be the same. As such, profit sharing contributions can be allocated significantly in favor of the small business owner.

As an example, the non-owner group might receive a contribution based on 1.5% of their salary and the owner group might receive a contribution based on 4.5% of their salary. If there is one employee in the non-owner group and their compensation is $40,000, the company will make a profit sharing contribution of $600 to the non-owner. If the owner’s compensation is $100,000, the company makes a profit sharing contribution of $4,500. So for a total cost of $5,100,which is fully tax deductible, the owner will receive $4,500 into her account. The goal for a small business owner might be to reach the annual tax deferral limit of $51,000 in a given year. Deferring this amount of income annually will save significant tax dollars and should create significant long term wealth for the small business owners.

There are some restrictions, including discrimination testing. However, most of these restrictions can be overcome by contributing 5% to the employees’ accounts, then the small business owner should be able to defer the full $51,000 for herself. Additionally, you will need to engage someone experienced in creating these types of plans, which has an administration cost. However, for many small business owners, the tax benefits can be substantial.

The tax code is ever evolving and 2013 will be no different for taxpayers. The following are some key facts and changes to the tax code for the upcoming year:

• There are seven income brackets; 10%, 15%, 25%, 28%, 33%, 35% and 39.6% individual tax rates for 2013.

• Standard deductions were increased to $12,200 for those married filing jointly, $8,950 for those filing as head of household, and $6,100 for those filing as single.

• The personal exemption amount has been raised to $3,900.

• The top estate tax rate is 40% with a estate tax exemption of $5.25 million.

• Section 179 deduction is up to $500,000 for capital assets acquired in 2013.

• 50% bonus depreciation is allowed for qualified assets placed in service through the end of 2013.

• An individual can contribute up to $17,500 to their 401(k) plan for 2013.

• The tax on capital gains and qualified dividends is 0% for those in the 15% income tax bracket or below, 15% for those in the 25%, 28% 33% and 35% income tax brackets and 20% for those in the 39.6% bracket.

• Required minimum distributions must begin in the year a participant turns 70 1/2.

• The IRA contribution limit increased to $5,500 or $6,500 if the participant is 50 or older.

• The social security taxable wage limit was increased to $113,700 this year from $110,100 for last year. Also changed, retirees under full retirement age now can earn up to $15,120 without losing benefits.

• The employee OASDI (Social Security) tax rate reverted back to 6.2%. Also, the OASDI tax rate under SECA (self-employment tax) reverted back to at 12.4% .

• Mileage rates for business and medical were increased to $0.565 and $0.24 respectively. The mileage rate for charity remains the same at $0.14.

For those of you who forgot a Valentine’s Day present for their significant other, I have taken care of it for you. I prepared a reference guide, the 2013 Tax Facts at a Glance, which highlights important tax rates and deductions for businesses and individuals. (If you want a laminated copy for your loved one, shoot me an email with your address and I can mail you one. I have about 50 leftovers.)

Governor Patrick has come out with a series of proposed tax increases. These increases will cover a wide spectrum of the Massachusetts tax base. There are some offsets, mostly the reduction on the state sales tax to 4.5% and an increase to the . However, the overall effect would increase the overall tax burden of residence and businesses of the Commonwealth by about $2 billion. Here are the tax increase proposals that will impact most tax payers in the Commonwealth.

Individual Tax Increases:

Individual income tax rate – The Governor proposed a 19% increase in the Massachusetts individual income tax rate from 5.25% to 6.25%.

Cigarette excise tax - Increase the state tax on cigarettes from $2.51 to $3.51 per pack, a 40% increase. This would raise $166 million per year. The increase also applies to smokeless tobacco products. Sales tax will continue to be assessed on the excise tax.

Expand sales tax – This one has been on the Governor’s agenda for a couple of years. He is proposing to expand the sales tax to apply to candy and soda. According to estimates, this would raise $53 million of additional sales tax.

Expand bottle redemption to bottled water and sports drinks – This is a tax although the Governor might not call it one. Since many residents discard their bottles without receiving their deposit back, it is effectively a tax. Yes, one can choose to return the bottles and cans, but only if they have nothing better to do on a Saturday afternoon, plus what is the cost of the gasoline to get to and from the bottle redemption center. In my hometown and most towns throughout the Commonwealth, there is curbside recycling. Most water bottles are recycled in this manner.

Raise gasoline tax – This adds a half cent to the gas tax and increases it annually by inflation. The crafty thing about this is that it allows the tax on gasoline to increase in perpetuity without any further votes by legislators. There is a reason this tax has not been raised for 20 something years, it is generally unpopular and legislators do not want to vote on it.

Raise tolls – This proposal would raise turnpike tunnel and bridge tolls by 5% every two years. See above on automatic increases without legislative votes needed. In addition, the Governor has requested tolls be reinstated on the Western part of the Turnpike.

Increase registry fees by 10% every five years. See above regarding automatic tax increases .

Elimination of Tax Deductions: There are 45 deductions or exemptions proposed for elimination by the Governor, each is effectively a tax increase. Here are the ones that will impact the most Massachusetts taxpayers. (Note – in cases where I have suggested the potential tax increase, it is assuming the higher proposed income tax rate of 6.25%. There would also be some potential offset to this by increasing the standard deduction, which has also been proposed.)

Repeal of exemption on capital gains on home sales – This one can really hit some people hard. Currently, Massachusetts conforms with the federal tax law in exempting up to $500,000 in capital gains on the sale of one’s primary residence. Governor Patrick has proposed eliminating this exemption. If you have been in a home for say 30 years or more, and your home has increased substantially in value, you could effectively see a new $30K tax liability on your home ($500K multiplied by the new proposed tax rate of 6.25%).

Social security and public pension deduction - Currently each taxpayer is allowed a deduction of up to $2,000 for payments made to Social Security or to a public pension plan. This has been proposed for elimination. For a dual income household, this would increase their Massachusetts income taxes by up to $250. Does any think it is unfair that the state is taxing monies that are being impounded by the federal government as Social Security taxes?

Dependents under age 12 – The current law allows for a deduction of $3,600 for each dependent in a household under the age of 12, to a maximum of two dependents, or $7,200. The Governor has proposed to eliminate this deduction. This will impact about 500,000 tax filers. A family with two qualifying dependents will pay up to $450 of additional taxes to the state.

Childcare expense deduction – Currently taxpayers are allowed a deduction of up to a maximum of $9,600 for employment related child care expenses, i.e. day care expenses. This is proposed for elimination. Additional Massachusetts income tax on families with two or more children in daycare would be up to $600.

Personal exemption – The parents of full time students 19 years and older currently receive a $1,000 deduction so long as that student is considered a dependent. The Governor has proposed elimination of this deduction. The increased state income tax per family would be $62.50 for each qualifying dependent.

Tuition deduction – Currently taxpayers can deduct tuition payments made toward a two or four year degree, to the extent those payments exceed 25% of adjusted gross income. This is proposed for elimination and will impact an estimated 255,000 taxpayers.

Employer education programs – Certain employers reimburse employees for undergraduate and graduate education tuition. Massachusetts currently allows up to $5,250 of this on a tax free basis to the recipient. The Governor has proposed eliminating this exemption such that all tuition reimbursements will be taxable to the employee. The Governor often talks about investing in education, but wants to tax tuition reimbursement made to employees looking to invest in themselves.

MBTA Passes – Currently employers can provide MBTA passes to employees and pay for parking and certain other commuting expenses without this being reported as income to their employees. The Governor has proposed that these benefits will be reported as income to the employees.

Group life insurance – Certain employers in Massachusetts provide group life insurance benefits to their employees. Under current law, the value of this benefit is not taxed to the recipient. The Governor has proposed that these benefits be taxable income to the employee. My suspicion is that some employers might start eliminating group insurance benefits, commuting reimbursements and employer education programs. This suspicion is not so much for the taxability issue, but because they will have the additional administrative burden of reporting these benefits on an employees’ W-2.

Health Savings Accounts - Currently individuals can deduct payments of $3,100, $6,250 for families, on payments made to a health savings account. The Governor has proposed eliminating this tax deduction. This would could cost a family up to $391 in additional state taxes.

Commuter deduction – The state currently allows a deduction up to $750 for Mass Turnpike tolls or MBTA monthly passes. This has been proposed for elimination and could cost some up to $47 in additional taxes. So someone on the Mass Turnpike corridor that commutes to Boston pays a significant amount in tolls, which is effectively a tax for which no deduction will be allowed.

Corporate tax increases:
There are various tax increases proposed on corporations. All are a bit complicated, but will raise about $500 million in additional tax revenue. One of the proposals expands the sales tax to customized computer software. This will generate some $265 million of additional tax revenue. Also, the Governor proposed repealing the FAS 109 deduction, which would bring in $76 million per year. There is also a proposal to change the apportionment rule relating to services, which would raise $35 million. Finally, a limit on the film credit will raise an estimated $40 million.

The recently passed American Taxpayer Relief Act of 2012 and the health care reform law which was passed back in March 2010 have various tax increases on upper income earners. These tax increases are all effective in the 2013 tax year. The five major tax increases are an increase in the Medicare tax by 0.9%, applying a 3.8% Medicare levy to net investment income, reinstatement of phase outs for itemized deductions and personal exemptions, an increase of the dividend and capital gains rate to 20%, and an increase to the top income tax bracket to 39.6%.

To add confusion, many of these additional new tax schemes become effective at different income levels. The following graph.pdf and discussion lays out the tax and the income level which it kicks in.

0.9% Medicare surtax on wages – This is a product of the healthcare reform law. It increases the Medicare tax imposed on wages by 0.9%. It applies to wages in excess of $250,000 for married couples. It applies to wages in excess of $200,000 for single filers. One should note that this applies to wages and not other forms of income. (Unfortunately, most other forms of income are addressed in the next bullet.)

3.8% Medicare tax applied to net income – Medicare taxes have historically only been assessed against wages. Effective January 1, 2013, Medicare taxes will now apply to one’s net investment income at a rate of 3.8%. Investment income includes: interest, dividends, capital gains, rental income, royalty income, and passive activity businesses. The tax is assessed on joint filers with a modified adjusted gross income (MAGI) over $250,000. For single filers it is assessed with a MAGI over $200,000.

Phase out of itemized deductions and personal exemptions – The phase out rules have been reinstated. For a married couple, these rules reduce the amount of otherwise allowable itemized deductions by 3% of adjusted gross income (AGI) in excess of $300,000. As an example, if a married couple has AGI of $400,000 they will lose $3,000 of their otherwise allowable itemized deductions. For single taxpayers the phase out rules become effective on AGI in excess of $250,000.

Personally exemptions are also subject to phase out rules beginning in the tax year 2013. Under these rules, the exemption that can be taken by a married couple is reduced by 2 percent for each $2,500 in which AGI exceeds $300,000. As an example, if a married couple earns $325,000, their exemption would be reduced by 20 percent. At $425,000, their personal exemptions is fully phased out and the couple receives no benefit. For a single person, the phase out of exemptions kick in at $250,000.

Increase in qualifying dividend and capital gains tax rate – Qualifying dividends and capital gains will be taxed at a rate of 20% on income in excess of $450,000 for joint filers, $400,000 for single filers. This is an increase from the previous 15% tax rate previously applied to this income. Combine this increase with the 3.8% Medicare tax on net investment income noted above, and certain upper income earners might see a 59% increase on taxes relating to this type of income; from 15% to 23.8%.

Increase in the federal income tax rate – As often discussed, an increased top federal income tax bracket of 39.6% has been added. This will apply to taxable income earned in excess of $450,000 for married couples and $400,000 for single filers.

Governor Patrick is also looking to increase the Massachusetts income tax to 6.25%, and reduce a series of tax deductions. This is still to be determined, but you can be sure that state tax increases are on the horizon.

Yesterday, the US House of Representatives passed the “American Taxpayer Relief Act of 2012”, which is set to be signed by the President shortly. The bill’s volume of tax extensions is pretty extreme. It extends nine individual tax breaks, 31 business tax breaks, 12 energy tax breaks, as well as partially extending the current tax brackets. Much has already been written about the bill’s impact on individual tax rates. So here are the items most pertinent to Massachusetts businesses and small business owners:

Business Tax Extenders

Section 301 - Extension and modification of research credit – The research credit has been extended for two years, retroactively to January 1, 2012 and through December 31, 2013.

Section 308 – Extension of wage credit for employers who are active duty members of the uniformed services – This tax credit is provided to small business that provide wage payments to active duty members of the armed services. This credit has been extended through December 31, 2013.

Section 309 – Extension of work opportunity tax credit – The work opportunity tax credit is available to business that pay wages to a targeted group. The credit is available for wages paid in the first and second year of employment. There are various targeted groups, but the largest pool are qualified veterans of the armed services. This has been extended through December 31, 2013.

Section 311 - Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements - This creates a 15 year depreciation life for certain property. It has been extended for two years, retroactively from January 1, 2012 through December 31, 2013.

Section 315 – Section 179 increased expensing limitation – Businesses can deduct the cost of equipment placed in service under what is known as Section 179 deduction. This deduction was set at $139,000 in 2012 and $25,000 in 2013. This has been retroactively increased to $500,000 for 2012 and set at $500,000 for 2013. It is scheduled to revert to $25,000 in 2014.

Section 324 – Extension of temporary exclusion of 100 percent of gain on certain small business stock – Under certain rules, 100% of the capital gain on the sale of small business stock can be excluded from income. Various rules apply, but the stock needs to be held for more than five years. This has been extended for stock acquired in 2013.

Section 326 - Extension of reduction in S-Corporation recognition period for built in gains tax – For businesses that convert to an S corporation, the conversion is not a taxable event. However, following this conversion, the entity must hold the assets for ten years to avoid a tax on any built in gains at the time of conversion. This period has been reduced to five years for sales that occur in either 2012 or 2013.

Section 331 - Extension and modification of bonus depreciation – Bonus depreciation of 50% has been extended through the end of 2013.

Other Pertinent Sections

Section 101 - Permanent extension and modification of the 2001 Bush tax cuts – Amongst other things, this sets the estate tax rate at 40% for individual estates greater than $5 million. The gift tax exemption is also set at $5 million.

Section 102 - Permanent extension and modification of the 2003 Bush tax cuts - It extends the 15% capital gains rates, with an increase to 20% for upper income earners.

Section 103 – Extends of the 2009 Tax Relief – This extends for a period of 5 years the American Opportunity Tax Credit. This is a $2,500 tax credit on qualifying college tuition payments.

Section 104 – Permanent Alternative Minimum Tax (AMT) Relief – This permanently increases the AMT exemption to $78,750 from $45,000, then indexes the exemption to inflation. This is retroactive to the 2012 tax year. The increase in the exemption prevents many from falling under the AMT.

By John Napolitano, Financial Planning Association of Massachusetts

John Napolitano is president of the Financial Planning Association of Massachusetts and chief executive of US Wealth Management. He will be hosting a live Boston.com chat on Friday, Nov. 9 at 3 p.m.

We all eventually clean out a closet or basement, and find things that you forgot about and deem useful or valuable. From a financial perspective, the same process may also yield unexpected treasures. Living proof of this is your home state's unclaimed property list. In my home state of Massachusetts, it is estimated that one in 10 residents has unclaimed property.

FULL ENTRY

Taxes and health care in the SAME entry?! I promise I'll make this quick and easy -- while saving you some cash in the process. While you're wading through all those forms during your annual health care open enrollment, make sure to look for information on flexible spending accounts. At their core, these accounts let your employer take money from your account before taxes that you can then put toward some medical costs, such as co-pays.

Think of it as a forced savings that is worth more than if you just put the money in a locked box under your bed.

FULL ENTRY

The tax code is ever evolving and 2012 will be no different for taxpayers. The following are some key facts and changes to the tax code for the upcoming year:

• The 10%, 15%, 25%, 28%, 33% and 35% individual and trust tax rates will remain in effect until December 31, 2012.

• Standard deductions were increased to $11,900 for individuals that are married filing jointly, $8,700 for individuals filing as head of household, and $5,950 for individuals filing as single.

• The personal exemption amount has been raised to $3,800.

• The estate tax top rate is 35% with a gift tax exemption of $5 million.

• Section 179 deduction increased to $560,000 for capital assets acquired in 2012.

• 50% bonus depreciation is allowed for qualified assets placed in service in 2012.

• The tax on capital gains and qualified dividends is 0% for the 15% income tax bracket or below and 15% for the 25% income tax bracket or above.

• Required minimum distributions must begin in the year a participant turns 70 1/2.

• The IRA contribution limit remains at $5,000 or $6,000 if the participant is 50 or older.

• The social security taxable wage limit was increased to $110,100 this year from $106,800 for last year. Also changed, retirees under full retirement age now can earn up to $14,640 without losing benefits.

• The employee OASDI (Social Security) tax rate remains at 4.2% through February 29, 2012 (although this is likely to be extended through December 31, 2012.) Also, the OASDI tax rate under SECA (self-employment tax) remains at 10.4% (again through February 29, 2012, and subject to extension.)

• Mileage rates for business and medical were increased to $0.555 and $0.23 respectively. The mileage rate for charity remains the same at $0.14.

For those of you without a Valentine’s Day present for their significant other, I have taken care of it for you. I prepared a reference guide for 2012, Tax Facts at a Glance, which highlights important tax rates and deductions for businesses and individuals.

As you know, the volume of annual changes to the tax code is increasing. This trend looks like it will continue for the foreseeable future. As you start to receive your 1099’s, W-2’s K-1’s etc, and think about preparing your 2011 Form 1040, here are a few changes that you may want to keep in mind:

Reduced self-employment tax – For 2011 self employment tax relating to Social Security dropped from 12.4 percent to 10.4 percent. The ceiling on Social Security self-employment tax is $106,800 of self-employment income for 2011. The Medicare component remains at 2.9 percent with no ceiling. There is a corresponding effect to this change. Typically, self employed folks deduct half of their self-employment tax on page 1 of the 1040. The 2011 calculation will multiply your SE tax by 57.51 percent (up to a certain threshold). The effect of the calculation is such that your self-employment deduction should be the same deduction that you would received without the tax cut.

Health insurance – Self-employed folks are no longer able to deduct costs of health insurance on Schedule SE. While the self-employed will be paying self-employment tax on these expenses, they probably won’t be paying federal income tax on them. Health insurance is usually still deductible on the line 29 of the 1040.

Residential energy efficiency improvements – There has been a drastic reduction in tax credits available for qualified energy efficient home improvements. The federal tax credit now stands at a maximum lifetime credit of $500. In 2010 the maximum was $1,500. Any credits taken in earlier years are subtracted from the $500 limit.

Roth IRA conversion – If you converted an IRA to a Roth IRA in 2010, you had the option of deferring the income and reporting half of it in 2011 and half of it in 2012. For those of you who exercised this option, half of that income must now be reported on either line 15b or 16b your 1040.

Capital transactions – Capital gains and losses must now be reported on Form 8949 and the totals are reported on Schedule D. This schedule provides additional information to the IRS regarding the transaction.

Foreign financial assets – If you own foreign financial assets, you may need to disclose these assets to the IRS on Form 8938.

If you are looking for a professional tax preparer to help you file your tax return this year, here are some tips from the IRS about things to look for from those professionals. Keep in mind that even if you pay someone else to prepare your return, you are legally responsible for what is on your return. Therefore, you should choose your preparer carefully.

* You should make sure that preparer signs the return and notes their Preparer Tax Identification Number (PTIN). Paid preparers are required by law to sign the return and indicate their PTIN on the returns they prepare.

* Check the preparer’s qualifications. Ask if the preparer is affiliated with a professional organization and attends continuing education classes. The IRS is in the process of implementing new regulations for tax preparers who are not an enrolled agent, CPA, or attorney. These regulations require paid preparers to satisfy minimum competency standards.

* Determine if the preparer’s credentials meet your needs or if your state mandates licensing or registration requirements for paid preparers. For example, if you own rental real estate or have a small business that you claim on Schedule C of your personal tax return, you will want to make sure that the preparer is able to prepare your return with those circumstances.

* Check on the preparer’s history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents.

* Ask about their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers. Also, always make sure any refund due is sent to you or deposited into an account in your name. Under no circumstances should all or part of your refund be directly deposited into a preparer’s bank account.

*Ask if they offer electronic filing. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return. More than 1 billion individual tax returns have been safely and securely processed since the debut of electronic filing in 1990. Make sure your preparer offers IRS e-file.

* Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer before and after the return has been filed in case questions arise.

* Provide all records and receipts needed to prepare your return. Reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items. Do not use a preparer who is willing to electronically file your return before you receive your Form W-2 using your last pay stub. This is against IRS e-file rules.

* Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form. Do not sign your return in pencil.

* Review the entire return before signing it. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

* Make sure you get a copy of your return from the preparer. They are required to provide on to you.

* Avoid preparers who claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should derive substantially similar numbers.

* Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 from www.irs.gov or order by mail at 800-TAX-FORM (800-829-3676).

The Saver’s Credit is a tax credit that provides an added benefit for low to moderate-income workers who save for retirement. The saver’s credit will offset part of the first $2,000 that workers contribute to their IRAs or 401(k) plans (as well as other similar employer-sponsored retirement plan. This credit is also known as the Retirement Savings Contributions Credit.

The maximum credit that a single taxpayer can receive is $1,000. Married taxpayers can receive a maximum credit of $2,000. This credit is refundable which means that it can increase your refund or reduce your tax owed. The actual amount of the credit is based on the taxpayer’s filing status, adjusted gross income, tax liability, and amount contributed to qualifying retirement plans.

The Saver’s Credit supplements other tax benefits typically available for those who make retirement contributions such as the ability to deduct IRA contributions and make pre-tax 401(k) or 403(b) contributions.

The Saver’s Credit can be claimed by:
* Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012;
* Heads of Household with incomes up to $42,375 in 2011 or $43,125 in 2012; and
* Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012.

Additional requirements to be eligible for this credit include:
* Eligible taxpayers must be at least 18 years of age.
* Anyone claimed as a dependent on someone else’s return cannot take the credit.
* A student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during the year is considered a student.
* Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2011, this rule applies to distributions received after 2008 and before the due date, including extensions, of the 2011 return. Form 8880 and its instructions have details on making this computation.

In order to claim this credit for 2011, you will need to make your qualifying IRA contribution by April 17, 2012 or make your contribution to your employer sponsored retirement plan (e.g., 401(k), 403(b), 457 Plan, and Thrift Savings Plan) by December 31, 2011.

For more information about the Saver’s Credit visit the IRS’ web site at http://www.irs.gov/newsroom/article/0,,id=107686,00.html

If you are planning on purchasing a mutual fund before the end of the year, be sure to check when the mutual fund will make its distributions. Mutual funds are required to pay out any gains and income to its shareholders at least annually. If they don’t pay those out before the end of the year, they will be subject to taxes on those gains and income.

The “record date” is the date when the mutual fund distributes it gains and income to shareholders. When a mutual fund makes a distribution the share price of the mutual fund drops by an amount equal to the amount per share that is distributed. The shareholder is required to pay taxes on the amount of the distribution that they receive.

If you purchase the fund before the record date, your purchase price includes the gain or income that is yet to be distributed. When it is distributed, the share price of the fund will drop to account for the distribution and your tax liability will increase because you have to pay taxes on the distribution received.

In other words, the fund’s gains and income are included in the price per share that you pay when you purchase the fund (if you buy if before the fund’s record date). Once the gains and income are distributed – on the record date, the fund’s share price will drop by an amount equal to the gains and income distributed. In effect, you are receiving some of your purchase price back in the form of gains and income from the mutual fund. However, the gains and income that you received are taxable. In effect, you’ve purchased a tax liability.

If, on the other hand, you purchase the fund after the record date, the effect of the distribution (i.e., the reduction in the mutual fund’s share price) will already be built into your purchase price. And, since the distribution was made before you owned the fund, you won’t have any distribution to pay taxes on.

On Monday, the White House sent a bill to Congress entitled the “American Jobs Act of 2011”. The bill is some 155 pages long and the White House estimates that it will cost the US Treasury some $447 billion. The White House also proposed some not so serious ways to pay for the bill (discussed below). The bill includes two significant tax cuts and other stimulus spending. The following outlines some of the significant tax items that I saw by perusing through the bill:

Tax Cuts:

Section 101 - Payroll tax cut for employees, employers and the self-employed: The proposed bill extends and reduces the amount of Social Security taxes paid by employees from the normal 6.2 percent to 3.1 percent. The proposed bill would also cut an employers’ portion of Social Security payroll taxes in half, from 6.2 percent to 3.1 percent. This reduction in payroll tax would be eligible for the fist $5 million in payroll paid by an employer. This reduction in payroll taxes is for 2012 only and ends effective January 1, 2013. It appears that self-employment taxes would also be cut in half for sole proprietors and partners.

Section 102 - Tax credit for increasing payroll: Companies will receive a tax credit for any payroll taxes paid for hiring additional employees or for increasing the pay of existing employees. For example, a company has total annual payroll expenses of $2 million. During the subsequent year, they increase wages and hire additional employees, such that their annual payroll increases to $2.4 million. The company will receive a tax credit for any Social Security payroll taxes paid on the additional $400,000 in payroll. This provision is in effect for the period October 1, 2011 through December 31, 2012. This tax credit applies to $50 million of payroll increases. Total estimated cost of Section 101 and 102 is estimated at $240 billion according to the White House.

Section 111 – Extension of bonus depreciation: Companies are allowed to depreciate 100 percent of assets acquired in 2011. The bill proposes to extend the bonus depreciation rules by one year, through 2012. Total estimated cost to the Treasury is $5 billion.

Section 201 – Veterans tax credit: Employers are offered a tax credit for hiring returning veterans. The tax credit is up to $5,600 for hiring a veteran that have been unemployed for six months. For soldiers returning home with service connected disabilities, the tax credit is up to $9,600.

Tax Increases:

The President’s proposal includes numerous tax increases to offset the costs of the bill. These are not serious proposals. Congress has already rejected most of these proposals during last years negotiations over extending the Bush tax cuts and more recently during the debt increase. Congress never really gave the tax increases much thought, so they are not worth much of your time in consideration. Briefly, here are the proposals:

Subtitle A - Limit certain itemized deductions: For families with income over $250,000, the bill will cap the value of an itemized deduction at 28 cents for each dollar deducted. Under current law, itemized deductions can be worth up to 35 cents for every dollar deducted. It appears that this does not apply to interest expense (although I am not 100% sure). Thus, it will primarily target charitable contributions.

Subtitle B - Carried interest: Certain income earned by hedge funds and investment partnerships is treated as capital gain income, which is currently taxed at 15 percent. The President has proposed treating this as ordinary income, which is currently taxed at 35 percent.

Subtitle C - Corporate jets: Corporate jets will be subject to longer depreciation life (seven years) than is currently allowed (five years). The White House estimates this would increase taxes by $300 million per year. A pretty nominal amount for the US Treasury.

Subtitle D - Oil and gas industry: The proposal would reduce credits and allowances used by the oil and tax industry in determining its taxable income.

Subtitle E – Foreign tax payers: The proposal changes the rules on taxation of foreign income.

Subtitle F – Increased target for Joint Select Committee on deficit reduction: This is the saddest part of the proposal. It tells the new Joint Select Committee increase their ten year deficit reduction from $1,500,000,000,000 to $1,950,000,000,000. So the President tells us his bill is paid for and then tells the Joint Select Committee to find a way to pay for it. As I noted, this is not a serious proposal, but an election talking point. Some parts might pass, but most will not get through Congress.

In 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act (HIRE). One year hence and unemployment still in excess of 9 percent, I am not sure that the law is living up to its name. Nevertheless, one of the provisions of the HIRE Act relates to additional reporting and disclosures for US taxpayers with interest in certain foreign assets in excess of $50,000.

The federal government and US Treasury have a strong desire to close the “tax gap”. The tax gap is the difference between taxpayers should have paid and what is actually paid. Much of the tax gap is willful tax evasion by taxpayers. The remainder is primarily caused by incorrect tax filings due to the complexity of the tax code. Some estimate that the tax gap exceeds $300 billion per year. Obviously, closing this gap is good solution in Washington (and probably for all honest US taxpayers).

The HIRE Act is attempting to close the tax gap on those with financial accounts in foreign jurisdictions. It does this by requiring taxpayers to report their foreign financial holdings. This disclosure will be completed as part of one’s individual tax filing.

Section 6038D of the HIRE Act requires the following foreign financial assets to be disclosed as part of the taxpayers individual tax filing:

(1) Any financial account maintained by a foreign financial institution

(2) Any of the following assets which are not held in an account maintained by a financial institution:
- any stock or security issued by a person other than a United States person,
- any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person, and
- any interest in a foreign entity.

The law specifies that the following is to be disclosed regarding these foreign assets:

(1) Foreign bank accounts - The name and address of the financial institution in which such account is maintained and the number of such account.

(2) Foreign stocks and other securities - the name and address of the issuer and such information as is necessary to identify the class or issue of which such stock or security is a part.

(3) Other foreign instrument, contracts, or interests – The name and address of the issuers or counterparties, and such information as is necessary to identify the instrument, contract, or interest.

(4) For the aforementioned items, the law requires disclosure of the maximum value of the asset during the taxable year.

US tax law has always required income to be reported for foreign assets. So you might think that someone not reporting income on these foreign assets in the past will continue their noncompliance. However, the HIRE Act has other provisions that are strong arming foreign institutions to disclose the assets of US taxpayers to the IRS. As such, the IRS may become aware of these assets regardless of your disclosure. Needless to say, failure to comply contains significant penalties.

The IRS recently issued a draft Form 8938. This is the form in which the IRS will collect the data. It is currently out for comment now. The disclosures are onerous, but I do not believe it is appropriate to blame the IRS on this one. They are merely following the law that Congress and the President enacted. The real issue is that these rules seem to create a presumption that those with foreign assets are evading taxes. In reality, most of the account owners are merely living abroad or have lived abroad in the past. The vast majority are complying with the tax law. So the significant minority evading taxes create a massive disclosure for the significant majority complying with the law.

Part of Congress’ annual duties seems to be to change the laws relating to bonus depreciation. Under the Tax Relief Act of 2010, Congress updated, extended and changed the rules yet again. Yesterday, I received a good article on the most recent set of changes from Steven Beaucaire, MST, CCSP of Bedford Cost Segregation LLC. I thought this summarized the new rules and some of the issues quite well and will share it with you:

“Congress passed the Tax Relief Act of 2010 extending bonus depreciation and instituting the new 100% bonus rate for eligible property. Unfortunately, the legislation raised almost as many questions as it gave answers. In light of the confusion the IRS issued Revenue Procedure (Rev. Proc.) 2011-26 in March in an attempt to clarify some of the issues raised by taxpayers. Unfortunately this Rev. Proc. turned out to contain errors and create even more confusion. Despite this, most of the basic rules still apply. Let's review this before we get into the above.

In general taxpayers who placed-in-service "qualifying property" after September 8, 2010 and before December 31, 2011 can get 100% bonus depreciation for these assets. Not wanting to waste a good set of regulations, the old bonus depreciation regulations will apply until the IRS issues a new set. As it was before, bonus depreciation is mandatory unless the taxpayer elects out of it. The election out can be by class of asset or for all qualifying assets in a company. The basic rules are as follows:

1. The original use of the property must begin with the current taxpayer.

2. Used property cannot qualify, although current improvements to that property may qualify.

3. The property must be purchased and placed in service from January 1, 2008 through December 31, 2012. The "written binding contract" (WBC) rules do apply to the placed-in-service dates. In other words, if the property is purchased or constructed pursuant to a WBC dated before January 1, 2008, it is not eligible for bonus depreciation. However, if the WBC is before September 8, 2010 and the property is placed-in-service after September 8, 2010, it is eligible for 50% bonus depreciation with one exception, discussed below.

4. The property must have a General Depreciation System (GDS) life of 20 years or less.

The confusion started with property that might otherwise qualify for 100% bonus depreciation except for the fact that a written binding contract (WBC) was signed prior to September 8, 2010. Initially, some believed that as long as the WBC was after December 31, 2007, you could get 100% bonus depreciation (based on a Joint Committee report reference). Another school of thought believed that the WBC rules as developed by the Internal Revenue Service in Regs. 1.168(k)-1(b)(4) must be applied, as Regulations trump a Committee Report.

In Rev. Proc. 2011-26 the Internal Revenue Service took the position that Regs. 1.168(k)-1 must be applied not the Joint Committee reference. In other words the WBC rules apply to all dates including September 8, 2010. Included in the WBC rules is the 10% rule. In this, one determines whether greater than 10% of the hard costs were incurred before September 8, 2010. If the expenditures constituted more than 10% of the hard costs, the taxpayer was limited to 50% bonus depreciation, even if placed-in-service in 2011. If the expenditures were less than 10%, then all property was deemed to be placed-in-service after September 8, 2010 and could get 100% bonus depreciation if otherwise eligible.

Rev. Proc. 2011-26 also shed light on the ability of taxpayers to use a component election in segregating assets into 50% eligibility and 100% eligibility. If the WBC was signed before September 8, 2010, the taxpayer can elect to identify components of the larger asset where they were acquired or self-constructed after September 8, 2010. They can elect to take 100% depreciation on these assets. This is an election and a statement must be attached to the tax return however.

This summarizes what we know thus far as we are waiting for the IRS to enlighten us on the issues within Rev. Proc. 2011-26. This Rev. Proc. was recently put out for public comment so the IRS will not answer any question pertaining to this document. Bedford is aware of a few issues that will hopefully be addressed. A couple of examples include the related party exception and component election. We will have to wait for the IRS to issue clarification to their Rev. Proc.”

My family and I will be moving to Orlando, Florida as I have accepted new job there. We will be spending approximately $8,200 to move our belongings and cars to our new home. Are these expenses deductible?

Florida residency. The aspiration of many a Massachusetts native, including myself, but currently unattainable due to anchors holding them to the area. Cabana wear, sunny days and no state income tax are desirable living conditions for many.

Anyway, it appears that your expenditures will be deductible. If you move due to a change in your job or business location, or because you started a new job or business, you are typically able to deduct your reasonable moving expenses. To qualify for the moving expense deduction, you must satisfy two tests. Under the first test, the "distance test", your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. If you had no previous workplace, your new job location must be at least 50 miles from your old home.

The second test is the "time test". If you are an employee, you must work full-time for at least 39 weeks during the first 12 months immediately following your arrival in the general area of your new job location. If you are self-employed, you must work full time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months immediately following your arrival in the general area of your new work location. There are exceptions to the time test in case of death, disability and involuntary separation, among other things. Check the IRS website for these details and exceptions.

Assuming you pass these two tests, you can deduct the costs of moving your household goods and personal effects. Additionally, traveling and lodging costs are deductible. Expenses incurred for meals are not deductible.

Posturing over deficit reduction is in full swing in Washington these days. Some are looking for tax increases to reduce the deficit, some are looking for spending reductions, and others would like to see a combination of both. My bet is that nothing substantial occurs and the problem is postponed until sometime after the election. This seems to be the way all serious things are handled in Washington.

One tax increase that was floated by the White House’s deficit reduction commission, and further supported by the White House this week, is the elimination of last-in-first-out (LIFO) accounting for company inventories. LIFO allows companies to value the cost of goods sold from their inventory to be based on their most recent cost. Items that remain unsold in inventory are valued using their older cost. Consequently, in an inflationary market, the expense is based on the higher cost item. Higher expense means lower profits and lower taxes. LIFO defers this income and the taxes thereon. Only when inventory levels decline or reach zero is this income ultimately recognized.

The American Institute of Certified Public Accountants did a study in 2008 and found that approximately one third of US businesses are using LIFO to value inventories. The Joint Committee on Taxation estimates that eliminating the use of LIFO for these companies will generate approximately $70 billion of revenue over 10 years.

Many business groups, including the US Chamber of Congress, are opposed to the elimination of LIFO. Manufacturers are particularly opposed to its repeal. The manufacturing industry often has higher levels of inventory compared to other industries and thus receive significant benefits under the LIFO rules. The White House argues that Big Oil will be the biggest loser as they too benefit from LIFO with their large inventories of fuel stock.

In 2008, the Massachusetts Department of Revenue clarified existing tax law in Directive 08-3. Under this Directive, self-employed individuals are denied a deduction for Massachusetts income tax purposes for contributions into a 401(k) plan. The law seems to discriminate against the self-employed business owner, as all other classes of employees are allowed a deduction for contributions to a 401(k) plan. Additionally, employees at not-for profits and in the government sector receive a deduction for contributions to similar deferred compensation plans such as a 403(b) plan.

Here is how it works. The business owner / self-employed individual that provides the job, provides an employee benefit package that includes a 401(k) plan, in many cases provides matching contributions for the employees’ and pays for the administrative costs of a 401(k) plan is denied a tax benefit for their personal contribution to the plan. However, the employee, that is a recipient of all these benefits, receives a tax benefit in the form of a tax deduction. This makes no sense and does not provide a level playing field that is often the goal of good tax policy.

Fortunately, something might be done about this. State Senator Brian Joyce filed Senate Bill S01468 “An Act relative to contributions to 401(k) by self-employed persons”, which would allow self-employed individuals a deduction for their 401(k) contribution. On May 5th, the Joint Committee on Revenue will hold a hearing and on the docket will be a discussion of this bill. Senator Gale Candaras (gale@galecandaras.org) and Representative Jay Kaufman (Jay.Kaufman@mahouse.gov) chair the meeting. Small business owners might want to reach out to them or their trade organizations to support the bill.

US Businesses can now breathe a big sigh of relief. On Tuesday, the US Senate passed legislation to repeal the expanded 1099 information tax return requirements which were part of last years health care legislation as well as the 1099 reporting requirements for individual taxpayers that receive rental income. The US House of Representatives had already passed the same bill on March 3rd, so it now will go to the President for his signature.

The repeal addresses two pieces of legislation that were enacted in 2010, the Patient Protection and Affordable Care Act (PPACA) and the Small Business Jobs Act. Under PPACA, businesses would be required to send a 1099 to virtually all vendors in which purchases exceeded $600. The Small Business Job Act further expanded 1099 reporting, by subjecting small landlords to send 1099 (previously individual landlords were exempt from 1099 reporting).

Nearly all business organizations supported the repeal efforts as costs of compliance were expected to be significant. Both Senator Scott Brown and Senator John Kerry voted for the repeal. The entire Massachusetts Congressional delegation voted against the repeal. It is expected that the President will sign the bill into law.

If you are one of the many who need assistance with preparing your 2010 tax return, the IRS is hosting an open house tomorrow to help you with your questions. On Saturday, March 26, approximately 100 IRS offices around the country will be open from 9 a.m. to 2 p.m. (local time) to provide on-site assistance to taxpayers. The IRS has estimated that more that 35,000 taxpayers utilized their services at similar events last year and that 95 percent of those taxpayer’s issues were resolved.

There will be at least one IRS office open in each state. A list of the IRS offices open in each state can be found here (http://www.irs.gov/localcontacts/article/0,,id=220631,00.html).

During these open houses, the IRS will be able to assist taxpayers with their questions about a variety tax related issues including preparing their returns, refunds, and tax payments.

What is the difference between a tax credit and a tax deduction? Which one is more valuable?

A tax credit reduces your tax liability dollar for dollar whereas a tax deduction reduces the amount of your taxable income - which is used to calculate your tax liability. Tax credits are generally more valuable because they reduce your tax liability by one dollar for every dollar of the credit. Tax deductions, on the other hand, reduce your tax liability by your tax rate for every dollar of the deduction.

For example, let’s say your tax rate is 25%, a $500 tax credit will reduce your tax liability by $500 and thereby saving you $500. A $500 tax deduction will reduce your taxable income by $500 but will only reduce your tax liability by $125 (i.e., $500 x 25%).

Another advantage that some tax credits have is that they can be refundable. If the tax credit were a refundable credit, you would receive a tax refund if the credit exceeds the amount of your tax liability. If the credit is not refundable, you would not be able to reduce their tax liability below zero (even if the amount of the credit exceeds your tax liability).

Businesses are sitting on significant amounts of cash these days and everyone is seeking opportunities to put some of this cash to work. Companies might consider taking advantage of the new bonus depreciation rules and “The Energy Policy Act”. The installation of high energy efficient lighting systems, combined with these tax programs, could provide commercial property owners a very reasonable return on their investment. Here are a couple of thoughts:

Indoor lighting systems:
The Energy Policy Act provides an immediate tax deduction for the cost of improvements to commercial property designed to save energy through heating, cooling, water heating and interior light systems. These deductions are available for systems placed in service through December 31, 2013.

One particular aspect of this system may make a good investment for businesses; updating interior lighting to an energy efficient system. This upgrade would typically be depreciated over a 27 or 39 year life. However, under the Energy Policy Act, much of the system update can be depreciated using accelerated methods in the current year. The installation of light emitting diode (LED) lighting would typically qualify for the deduction under this program. The Energy Policy Act allows for a deduction of up to $0.60 per square foot for qualifying improvements. To qualify the project must be certified by a licensed professional to reduce lighting power density by 25 – 40 percent (50 percent if a warehouse) compared to industry benchmarks. The rules are a bit cumbersome, so I recommend reviewing this guide for complete details and talking to both a CPA and a qualified engineer.

Outdoor lighting systems:
The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provides businesses with 100 percent bonus depreciation for certain capital investments placed in service between September 8, 2010 and December 31, 2011.

Outdoor lighting systems, which typically involve illuminating parking lots, are another area in which businesses might be able to find a good return on their investment. For the first time, installing outdoor energy efficient LED lighting qualifies for a 100% deduction under the new bonus depreciation rules.

In addition to the immediate tax deductions noted above, installing LED lighting will have other financial benefits.

a.) Reduced energy consumption: LED lighting is up to two times more efficient than compact florescent lighting and four times more efficient than incandescent lighting. Thus, installing LED lighting should help you cut your utility expense significantly.

b.) Long term maintenance: LED lights can last for up to 25 – 30 years under normal use before replacement is required. Compare this to incandescent bulbs which last for approximately 1,000 hours and compact fluorescents which last about 8,000 hours. Replacing light bulbs using lifts or buckets with expensive labor will almost be eliminated. This can greatly decrease maintenance costs on commercial properties.

The Energy Cost Savings Council estimates that energy-efficient lighting projects generate an average 45% return on investment, and repay themselves in just 2.2 years. However, upwards of 80% of commercial buildings still operate on lighting systems installed before 1986. That kind of return certainly beats short term interest rate.

It appears that the 1099 train wreck may not get to leave the station. On March 3, 2011, The House of Representatives passed the Small Business Paperwork Mandate Elimination Act of 2011. This legislation would repeal the expanded 1099 reporting requirements mandated in last years healthcare legislation and also repeals the new 1099 reporting requirements on landlords of small rental properties.

The Patient Protection and Affordable Care Act (a.k.a. Obamacare) greatly increased the 1099 reporting requirements on businesses and other entities. Under the Obamacare rules, all businesses, tax-exempt organizations, and federal, state and local government entities will be required to issue Forms 1099 to vendors from whom they purchase goods totaling $600 or more during a calendar year. Thus, starting in 2012, a business would need to disclose to the federal government almost all payments made during the year on Forms 1099. Think Big Brother on steroids. A separate bill passed last year further increased 1099 reporting requirements. The Small Business Jobs Act requires that individuals who receive rental income (i.e. small landlords) are subject to 1099 reporting requirements. Both of these provisions would be repealed by the bill.

As an example. My job requires me to travel quite a bit and in those travels I frequent Panera Bread. I may go 25 times per year with an average bill of $6.00. This only gets me to $150. However, other employees in the office may also frequent Panera in their travels. We now need a tracking mechanism for the 100 or more trips to Panera in a year by all the employees, collect the necessary information and potentially send Panera a 1099 at year end. What would be the cost of tracking all these payments to this single vendor? What would be the significance? Certainly the US Government is not concerned that Panera is evading taxes by underreporting cash receipts and even if it were, this mechanism would do nothing to catch it. So a large cost and burden is inflicted on businesses, and the results are useless.

The business community, including the US Chamber of Commerce, is almost universally opposed to the paperwork nightmare that will ensue, whereas, the Massachusetts Congressional delegation is almost universally in favor of the expanded 1099 rules. Of the 112 House votes against the repeal, nine of those nays came from Massachusetts. Mr. Lynch, Mr. Markey, Ms. Tsongas, Mr. Neal, Mr. Olver, Mr. Frank, Mr. Capuano, Mr. McGovern and Mr. Tierney all voted against the repeal. I suspect Mr. Tierney’s paperwork for his business ventures will be impeccable.

The bill now goes to the Senate which has already passed its own version of 1099 repeal. There are differences between the House and Senate version, primarily in how to pay for the bill. These differences will have to be worked out before a bill can be sent to the President. The President has indicated he is solidly on the fence. He supports the 1099 repeal, but not how to pay for it. Definitely maybe.

The following are some of the important tax changes for small businesses that are in effect for 2011:

Health insurance deduction reduces self employment tax - Self-employed taxpayers who pay their own health insurance costs can now reduce their net earnings from self-employment by these costs. Previously, the self-employed health insurance deduction was allowed only for income tax purposes.

Health care tax credit - This tax credit is available to small employers that pay at least half of the premiums for single health insurance coverage for their employees. Small businesses can claim the credit for 2010 through 2013 and for any two years after that.

The maximum credit goes to smaller employers - those with 10 or fewer full-time equivalent (FTE) employees - paying annual average wages of $25,000 or less. The credit is completely phased out for employers that have 25 or more FTEs or that pay average wages of $50,000 or more per year.

Higher expensing/depreciation limits - For tax years beginning in 2010 and 2011, small businesses can expense up to $500,000 of the first $2 million of certain business property placed in service during the year.

In general, businesses can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property, after the relevant section in the Internal Revenue Code.

Depreciation limits on vehicles - The total depreciation deduction (including the section 179 expense deduction and the 50 or 100 percent bonus depreciation) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2010 is increased to $11,060. The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2010 is increased to $11,160.

50% or 100% Bonus depreciation- Businesses that acquire and place qualified property into service after Sept. 8, 2010 can now claim a depreciation allowance of 100 percent of the cost of the property. The property must be placed in service before Jan. 1, 2012 (Jan. 14, 2013 in the case of certain longer-lived and transportation property). Businesses that acquire qualified property during 2010 on or before Sept. 8, 2010 can claim a depreciation allowance of 50 percent of the cost of the property. Bonus depreciation is in addition to Section 179 deductions noted above.

I prepared a reference guide for 2011, Tax Facts at a Glance, which highlights important tax rates and deductions for businesses and individuals.

Last week I received this estate tax and planning brief from Brett Kaufman. He is an attorney at Schlossberg, LLC in Braintree. I thought it was well written and covered the recent developments in the estate tax law and new planning opportunites. With Brett's permission, I have reprinted it here:

"On December 17, 2010, President Obama signed into law, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Tax Relief Act”), settling some major questions about the federal estate, gift, and generation-skipping transfer tax law until December 31, 2012.

The Tax Relief Act makes the following changes to the federal estate and gift tax system:

- Estate Tax. The estate tax has returned with a larger exemption of $5 million and a lower tax rate of 35%.

- Gift Tax. The estate and gift tax exemption now are reunified, so that everyone now has a lifetime gift exclusion amount of $5 million per person and a 35% gift tax rate for gifts over $5 million.

- Exemption Portability Between Spouses: The Act provides for "portability" between spouses resulting in a maximum exemption of $10 million ($5 million per spouse) for a married couple. Portability allows a surviving spouse to elect to take advantage of the unused portion of the estate tax exemption of his or her predeceased spouse, thereby providing the surviving spouse with a larger exemption amount on their death. However, such portability is assured only for two years and the availability of this portable exemption amount requires an election to be made on a timely filed federal estate tax return.

- Generation Skipping Tax (GST). For transfers made in 2011, the GST exemption is $5 million, indexed for inflation beginning in 2012. The GST tax rate for 2011 and 2012 will be at a 35% tax rate.

- Option for 2010 Deaths. The Act gives estates the option to elect not to come under the returned estate tax. It gives those estates the option to elect to apply (1) the estate tax based on the new 35 percent top rate and $5 million exemption, with stepped-up basis (which eliminates the Massachusetts basis uncertainty) or (2) no estate tax and modified carryover basis rules. Any election would be revocable only with the consent of the IRS.

- Estate Planning Valuation Discounting Vehicles. The Act does not limit any existing estate planning discounting vehicles such as Grantor Retained Annuity Trusts (GRATs), Family Limited Partnerships (FLPs), which had been originally proposed by Congress.

Unfortunately, the changes effectuated by the Tax Relief Act are a temporary fix since they will be effective for only two years. Unless Congress takes further action within the next two years, at the end of 2012 there will be a reinstatement in 2013 of pre-2001 rates (55% for estates and lifetime gifts) and exemptions ($1 million for estate and gift taxes, and approximately $1.35 million for GST taxes). We expect that this problem will become a major issue in the 2012 presidential election.

Coincidentally, Massachusetts has revised its probate laws by recently adopting the Uniform Probate Code (“MAUPC”) resulting in major changes to guardianships, estates and trust laws. The provisions of the new probate code concerning guardianships and conservatorships became effective on July 1, 2009; however, the rest of the provisions of the code covering estates and trusts will become effective on July 1, 2011.

The Tax Relief Act creates several new planning opportunities that may only be available for the next two years. Therefore, we urge you to review your current estate plan and consider the following options before it is too late:

1. Take Advantage of the New Increased Gift Tax Exemption. You should consider making larger gifts in 2011 and 2012 due to the increase in the gift tax exemption to $5,000,000 in 2011 and the continuation of the 35% tax rate. Since the Tax Relief Act is temporary and only in effect for two years, it may be that the additional $4,000,000 lifetime exemption amount will only be available in 2011 and 2012. Therefore, you should begin to consider how to take advantage of this potential “use it or lose it” opportunity. In addition to this limited opportunity to transfer a significant amount of wealth tax-free it is still important to remember that you can still take advantage of the $13,000 per person per year gift tax annual exclusion for 2011 and 2012. Also, gifts of tuition payments and payment of medical expenses (if paid directly to the institutions) are still tax-free and can be made at any time. Predictions are that the largest transfer of wealth in our history will occur over the next two years.

2. New Massachusetts Planning Opportunity. Massachusetts estate tax returns are required and taxes paid only if the decedent’s estate has a value greater than $1 million at death (subject to lifetime gifts explained below). Although the $1 million is referred to as an exemption, it is not a true exemption but really only a filing threshold to file a Massachusetts estate tax return. For example, if your estate at death was valued at $1,000,001 you would end up being taxed on the total value of the estate and not just $1 over the exemption amount. This tax treatment did not change because of the Tax Relief Act nor is it likely to change in the near future.

Because Massachusetts has no gift tax, a lifetime gift (no matter the size) does not create a Massachusetts gift tax. There is a catch to this in that any lifetime gifts will reduce the Massachusetts $1 million exemption amount solely for the purposes of determining if a Massachusetts estate tax return will be required to be filed. However, even with this reduction in the exemption amount, lifetime gifting can still result in huge estate tax savings for Massachusetts. For example, assume a person has a $900,000 estate at death. If the person had made $1,500,000 of taxable gifts during his lifetime, the Filing Threshold would be reduced to zero because more than $1,000,000 was gifted during his lifetime. Therefore, a Massachusetts estate tax return would need to be filed regardless of the amount of assets owned at the time of death. The estate would still be a $900,000 estate and the Massachusetts estate tax owed would be $27,600 (the Massachusetts estate tax on a $900,000 estate). If lifetime gifts had not been made, the taxable estate would have been $2,400,000 ($900,000 estate at death plus $1,500,000 of gifts), and the Massachusetts estate tax would have been $130,800 (the Massachusetts estate tax on a $2,400,000 estate). The lifetime gifts resulted in $103,200 of Massachusetts estate tax savings.

The Massachusetts estate tax savings are even greater with larger lifetime gifts. Therefore, large lifetime gifts will not eliminate your Massachusetts estate tax but will result in significant Massachusetts estate tax savings at no gift tax cost.

It is important to keep in mind that, although the federal estate tax law has changed, the Massachusetts estate tax law has not. Therefore, those of you who are not Florida residents, planning for a Massachusetts estate tax is still necessary.

3. Portability - Unused Exemption Amount. The Tax Relief Act creates a new concept of estate and gift tax exclusion amount called portability. Portability means that spouses, under certain circumstances, can share their unused $5 million estate and gift tax exclusion amount with each other. This portability allows spouses to effectively use a combined $10 million exemption. Again, portability only exists for the next two years and after that it is anyone’s guess. In prior years, a person's unused exclusion amount was not transferable to his or her surviving spouse. Starting in 2011, portability allows a surviving spouse to elect to use any exclusion unused by his or her deceased spouse in addition to his or her own $5 million exclusion. For example, if a husband dies in 2011, having made $2 million in lifetime gifts and leaving his entire $8 million estate to his wife, no tax is due at the husband's death, and an election is made on his estate tax return to allow his wife to use his $3 million unused estate tax exclusion. The wife's available exclusion amount is thereby increased to $8 million (her $5 million plus her husband's unused $3 million). Regardless of the size of the estate, an estate tax return for the decedent must be filed in order to make this election. There is no portability for any unused GST exemption.

This does not mean that we recommend our clients do away with the credit shelter/bypass trusts previously included in their estate plan. We still recommend that married couples continue to structure their estate plans to take full advantage of their estate and gift tax exemptions by using their credit shelter/bypass trusts and splitting ownership of their assets between themselves, there are several reasons for this:

- Appreciation of assets placed in the credit shelter/bypass trusts will escape estate taxation in the survivor’s estate;

- Creditor protection for credit shelter/bypass trusts and marital trust beneficiaries is achieved;

- Massachusetts does not recognize portability and credit shelter/bypass trusts will preserve the $1,000,000 Massachusetts estate tax exemption amount (this translates to a $99,400 estate tax savings for a married couple with a combined estate of $2 million);

- The GST tax exemption is not portable;

- Portability is dependent on the executor making an election to pass the remaining exemption amount to the surviving spouse and filing a timely estate tax return, that may not have otherwise been required. It could slip through the “cracks”.

4. Use of Existing Gifting Techniques. Presently, conditions for gifting have never been better in modern times. Under the new law we have a $5 million unified estate, gift, and generation skipping exemption (indexed for inflation) and a 35% combined estate, gift and GST tax rate. Add to that, historically low federal interest rates, relatively low asset values and no legislation at this time restricting the use of various effective wealth transfer tools, such as the Grantor Retained Annuity Trusts (GRATs), Family Limited Partnerships (FLPs), Intentionally Defective Grantor Trusts (IDGTs), Generation Skipping Tax Trusts for Grandchildren and/or valuation discounts on family controlled enterprises. This means that these gifting techniques will not only continue to be highly effective planning tools but now will be even further enhanced due to the increased exemption amounts.

5. Charitable Planning. The charitable remainder trust (CRT), continues to be a valuable estate planning tool, especially in the current state of uncertainty. The CRT is generally used as an income tax planning vehicle, permits you to transfer appreciated property to a tax-exempt trust, which in turn sells the property and reinvests the proceeds and pays you an annuity or unitrust amount each year thereafter. This strategy also provides an estate tax deduction for the remainder interest passing to the charity when the trust ends.

6. Life Insurance. The Tax Relief Act does not change the role of life insurance in your estate plan. There are still many important reasons for life insurance other than just being used to pay potential federal estate taxes. For example, life insurance will still be needed to fund business buy-sell agreements; to serve as an income replacement for a spouse or dependents of a family’s sole wage earner; as a means of leveraging annual exclusion gifts and providing liquidity to pay state estate taxes such as Massachusetts. Therefore, you should be careful about canceling or reducing your existing life insurance coverage. For any clients that own a significant amount of life insurance, an irrevocable life insurance trust (ILIT) still remains an important planning technique to exclude life insurance proceeds from your gross estate. Remember, we do not know where we are two years from now and you might not be insurable then.

7. Non-Tax Reasons for Estate Planning. There are still many non-tax reasons why you should have your estate plan periodically reviewed and updated. At a minimum, you need to have documents in place that adequately address the following issues:

- Your circumstances have changed;

- If you become physically or mentally incapacitated during your lifetime, who will take care of your personal and health needs? Who will manage your assets?

- Who will receive your property at your death?

- Who will be in charge of your affairs after your death?

- Does your estate plan address how to handle property that will be inherited by beneficiaries that may have spending problems, special needs, substance abuse problems, divorce issue or just too young to receive a significant amount of property? Protecting beneficiaries in these situations will remain an important estate planning goal.

Our RecommendationThe new developments in the estate, gift and GST tax and Massachusetts probate laws present an opportune time to consider and possibly take advantage of some of these valuable estate planning techniques that may not be as favorable in the future.

IRS CIRCULAR 230 NOTICE:

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding U.S. tax penalties. "

The following are some of the important tax rates and changes that are in effect for 2011:

- The 10%, 15%, 25%, 28%, 33% and 35% individual and trust tax rates have been extended for 2 years through December 31, 2012.

- The estate tax top rate is 35% with an exemption amount of $5 million.

- The gift tax exemption and generation-skipping transfer tax exemption amount are both $5 million.

- The capital gains tax is 0% for the 15% income tax bracket or below and 15% for the 25% income tax bracket or above.

- The waiver for required minimum distributions has been reversed. Required minimum distributions must begin in the year a participant turns 70 1/2.

- The IRA contribution limit remains at $5,000 or $6,000 if the participant is 50 or older.

- The social security taxable wage limit remains at $106,800. Also unchanged, retirees under full retirement age can earn up to $14,160 without losing benefits.

- The employee OASDI (Social Security) tax rate was reduced to 4.2% from 6.2%. Similarly, the OASDI tax rate under SECA (self-employment tax) has been reduced to 10.4% from 12.4%.

- Mileage rates for business and medical were increased to $0.51 and $0.19 respectively. The mileage rate for charity remains the same at $0.14.

I completed a more comprehensive "2011 Tax Facts at a Glance", which gives detailed rates statistics and tables for 2011 tax issues. It is available here to download as a reference tool.

Millions of taxpayers looking to file their 2010 tax return early this year will need to wait until mid-February to start filing them with the IRS. In particular, the IRS will not be accepting returns for those who itemize deductions or those who claim deductions for teacher’s supplies or college tuition until they have had a chance to update their systems to incorporate the 2010 tax law changes passed late last year.

Unfortunately, there isn’t much that can be done to reduce this delay if you were planning on filing your return early. However, you can take steps to minimize the chances of your return being further delayed once it is filed. Here are a few tips on how to reduce some common filing errors.

* Be sure to check the social security numbers for all of the taxpayers and dependents listed on your return.

* Review your return for common mistakes such as mathematical errors and transposition errors.

* Double check that the taxpayer ID numbers listed on the W-2’s and 1099s that you receive match your social security number.

* Don’t forget to sign and date your return if you are not e-filing your return.

* Be sure to attach copies of your W-2 forms (and your 1099 forms as necessary).

* Be sure to keep a copy of your signed return before mailing it to the IRS. While this will not necessarily reduce the time it takes to process your tax return, it can save you a lot of time if your return gets lost and the IRS needs another copy. It can also save you a lot of headaches if you get audited or if the IRS has questions about your original filing.

A new year brings about a renewed vigor for many people to better their financial situation. If you want to start the year off with a bang for your financial buck, then make your 2011 IRA contribution now.

Many people wait until the end of the year, or even until they pay their income taxes in April of the following year, to make IRA contributions. But making a contribution now means your money has more time to grow. You get an extra year of tax-deferred (or in the case of a Roth IRA, tax-free) growth.

So if you have the cash and you know you are qualified to make a contribution, go ahead and fund your IRA or Roth IRA now. Even if you haven’t earned enough income to match the contribution yet you can do so, as long as you know you’ll earn it by the end of the year.

If you can’t make the whole contribution now (the maximum is $5,000, with an extra $1000 allowed for those age 50 or older by the end of the year) at least get started. Contribute what you can now and add more later. Or set up direct deposit from your paycheck or bank account so you don’t have to think about it later in the year.

On December 13, 2010 I processed my IRA required minimum distribution. At that time the law did not allow for a direct charitable contribution from my IRA. On December 17, 2010 the Tax Relief / Job Creation Act was signed, which allows the direct charitable distribution. Is this provision retroactive? What can be done for people who already took their IRA distributions before December 17, 2010 who used part of the distribution to make a charitable contribution?

Unfortunately, the Internal Revenue Service has issued a statement noting the law does not allow taxpayers to return payouts taken last year in order to make a direct charitable contribution from their Individual Retirement Accounts.

This provision allows taxpayers that are 70 ½ years or older to donate up to $100,000 directly from their IRA to a charity. The donation counts as a required minimum distribution. This donation is not counted as income for the taxpayer nor does the taxpayer claim it as a deduction. The tax provision had expired on December 31, 2009. However, Congress included a provision in the Tax Relief / Job Creation Act of 2010 to extend this benefit to taxpayers. Congress allowed taxpayers until January 31, 2011 to make the 2010 donation due to the late timing.

The IRS has stated that the law is written such that the re-contribution of assets to one’s IRA and a subsequent direct donation to charity is not allowed. Since this is law, the IRS does not have the authority to allow such a transaction.

Before the new tax laws were recently signed into effect, there was a lot of talk from President Obama and others about how taxes should only be raised but only for the "rich." According to Obama, "rich" was a married couple earning $250,000 per year or more.

However, all it would take to trip this barrier is two married professionals each earning $125,000. If you are in your 40s or so, this is not an outrageously high salary. And while there are plenty of people who would love to be making this kind of money, if you do earn $125,000 or more, you might not feel very "rich". After you pay the mortgage on a house in the suburbs and pay for a car or two and maybe some college tuition, there might not be much left over. So, what exactly might be considered rich?

According to the IRS, if your adjusted gross income (AGI) was $67,280 or more, you were in the top 25 percent of all taxpayers. If your AGI was $113,799 or higher, you were in the top 10 percent of taxpayers. How high was the AGI of the top 5% of taxpayers? Anything higher than $159,619. And what did it take to find yourself in the top 1 percent of all taxpayers? That was reserved for people with AGIs of $380,354 or higher.

The IRS announced last week that several key tax provisions for 2011 will increase to adjust for inflation. These provisions were either modified or extended as part of the new Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that President Obama signed on December 17. These new amounts will affect taxpayers on their 2011 tax returns (which are filed in 2012).

The specific changes will be are as follows:

* The personal and dependent exemption amount per person will increase to $3,700.

* The standard deduction amounts will increase to:
• $11,600 for married couples filing a joint return
• $5,800 for singles and married individuals filing separately
• $8,500 for heads of household

- The additional standard deduction for blind people and senior citizens will increase to:
• $1,150 for married individuals, and
• $1,450 for singles and heads of household.

- The maximum earned income tax credit (EITC) will increase to $5,751 and the maximum income limit for the EITC will increase to $49,078.

- The modified adjusted gross income phase-out for the Lifetime Learning Credit begins at $102,000 for joint filers and $51,000 for singles and heads of household.

Although the 2011 tax tables have not yet been released, tax-bracket thresholds will increase for each filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket for a married couple filing a joint return will increase by $1,000 to $69,000.

Last week, the President signed into law the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. The bill’s total cost to the US Treasury is $858 billion. Individual taxpayers will receive the bulk of the benefit as the bill targets some $700 billion in tax breaks toward them. The following is a summary of certain tax provisions in this bill:

Extension of Rates – Individual tax rates had been scheduled to increase from their current rates of 10, 15, 25, 28, 33 and 35 percent to 15, 28, 31, 36 and 39.6% in 2011. The current rates have been extended for 2011 and 2012.

Alternative Minimum Tax – The bill contains a two year patch for the AMT. This is retroactive to January 1, 2010, thus reducing the AMT burden for tax years 2010 and 2011.

Payroll Tax Credit – For 2011 only, the bill reduces the employee’s portion of Social Security (FICA) taxes from 6.2% to 4.2%. Someone earning the maximum amount subject to Social Security tax ($106,800) will see their FICA tax reduced by $2,136. Married couples with both husband and wife working and earning the maximum can see double the benefit. Self-employed persons currently pay 12.4% in FICA taxes; this will be reduced to 10.4%.

Investment Income – Long term capital gains and dividends are currently taxed at a maximum rate of 15%. This act extends these rates for 2011 and 2012 as they had been set to expire.

Itemized Deduction and Personal Exemption Limitation – Both itemized deductions and personal exemptions will not be subject to phase out in 2010, 2011 and 2012.

Bonus Depreciation – Bonus depreciation for qualifying investments made after September 8, 2010 through December 31, 2011 will be eligible for 100% bonus depreciation. Property placed in service in 2012 will be eligible for 50% bonus depreciation. Bonus depreciation is generally not limited to use by smaller businesses or capped at dollar levels.

Research Tax Credit – The research tax credit had expired as of December 31, 2009. This has been extended for 2010 and 2011.

Estate Tax – For 2011 and 2012, the maximum estate tax rate is 35% with an exemption amount of $5 million.

Marriage Penalty – The so called “marriage penalty” was scheduled to return in 2011. This bill extends relief from the marriage penalty by increasing the standard deduction for married couples and increasing the size of rate brackets. This extension is for 2011 and 2012.

Certain small businesses may not know it, but they could be eligible to receive a federal tax credit in 2010, provided they paid a portion of their employees’ health insurance premiums. One of the sections of the Patient Protection and Affordable Care Act (a.k.a. Healthcare Reform) provides this tax credit to businesses with less than 25 full time employees and with average wages less than $50,000. The credit is quite generous, and can be as high as 35 percent of the health insurance cost incurred by the employer.

In tax law, there are often complicated calculations and regulations, and this is no exception. Nevertheless, here is a brief summary of how the tax credit works and who will be eligible: (Also, my discussion only addresses for profit businesses. Not for profit businesses are also eligible, with slightly different regulations.)

Number of employees – The business must have fewer than 25 full time equivalent employees (FTE). A fulltime equivalent is an employee that works 2,080 hours in a year, or 40 hours per week over 52 weeks. For part time employees, you must calculate their full time equivalent. This is done by taking the number of hours worked by the employee and dividing it by 2,080 hours. So if you have two employees that each worked 1,040 hours, then each would be half of an FTE. Combined they would equal one FTE as they worked 2,080 hours. As you can see, even if you have more than 25 employees, you may qualify if some of those employees are part time in nature. It is the definition of full time equivalents that is relevant.

Average annual wages – The average compensation of each full time equivalent employee must be less than $50,000. This is determined by the total wages paid divided by the number of full time equivalent employees. The business owners’ salary and any relatives are not included in this calculation.

Qualifying costs – Health insurance premiums paid by the employer for the tax year under a qualifying arrangement are used to determine the amount of your credit. IRS Notice 2010-82 provides detailed guidance for meeting the qualifying arrangement requirement. Generally speaking, to receive the credit, the employer must pay a uniform percentage (not less than 50 percent) of the health insurance premium for each employee enrolled in the health insurance plan. Only the portion paid by the employer is a qualifying expense. The portion paid by the employee for health care coverage is not a qualifying expense. Lots of rules and exceptions around this, so please review the IRS regulations.

Phase out – The maximum credit of 35 percent of qualifying costs is available to employers with less 10 FTE’s and paying less than $25,000 in average annual wages. The credit percentage declines as the number of FTE’s and / or average wages increase. It is totally phased out for employers with 25 or more FTE’s or with average annual wages of $50,000 or more.

Type of credit – This will be treated as a general business credit for employers. Consequently, it is not refundable if the business has no tax liability, but will be eligible to be carried forward and used against future years tax liabilities.

You shouls also review IRS Notice 2010-82 to determine your eligibility. If you have any questions regarding the credit, feel free to submit it in the bottom right side of this webpage or shoot me an email at jmichaeldowney@yahoo.com.

Many individuals joined in on November 27, 2010 to support Small Business Saturday. Some 85 percent of working adults in Massachusetts are employed by small businesses. It is no doubt that we need these small businesses to lead the state and the nation out of the economic downturn and lower the unemployment rate. It is reasonable to expect that our elected leaders would try to nurture these businesses to help the difficult employment situation.

However, reason does not always rule the day. Last year, the Department of Revenue issued a directive that can only be characterized as discriminatory against small business owners. Massachusetts Directive 08-3 states the following: “partners and self-employed individuals are denied any deduction for contributions to their 401(k) plan”. It is noted that this directive is an interpretation of the existing Massachusetts general law. So both the Department of Revenue and the Legislature share blame in this.

Here is how it works. A small business owner maintains (at his cost) a 401(k) plan for his / her employees. In many cases, the owner even provides a matching contribution to the employees’ account. The employees contribute to the 401(k) plan and receive a deduction for Massachusetts income tax purposes. However, the owner that provides the job, provides a matching contribution, and pays for the costs of the plan is not allowed a comparable deduction.

All other classes of workers including; state employees, those working at a not-for profit, those working at large businesses, even the Governor himself are allowed a tax deferred deduction for retirement savings. The only one exempt from this tax benefit are the self-employed / small business owner. If there is a rationale argument for this, I am waiting to hear it.

The Massachusetts Commission Against Discrimination defines discrimination as follows: “Discrimination is unfair treatment because of an individual's membership in a particular group.” It certainly would appear that the self-employed are being unfairly treated as compared to other workers.

The tax code says a lot about the way the government treats the various interests in the state. Looking at this, one can only assume that Massachusetts does not look very favorably toward small business owners, regardless of the lip service afforded them.

While much talk has come out of Congress in recent months about the need to support small businesses, their actions do not always match the rhetoric. The Small Business Jobs Act, which was passed less than two months ago, creates a new IRS reporting requirement for small landlords. Starting in 2011 (just over a month away), individuals that receive rental income (landlords) will be required to issue Forms 1099 to service providers for whom they pay $600 or more during the year. Copies of the 1099’s are to be submitted to the IRS.

For payments made in 2012, the law expands further. The 1099 reporting requirement will not just cover the purchase of services, it will also cover the purchases of goods and property. This second expansion of 1099 reporting is the result of the Patient Protection and Affordable Care Act, a.k.a. Obamacare.

Landlords of one, two and three unit dwellings will be those most impacted by this legislation. These folks are the smallest business owners in the country and also one of the most numerous.

As a rule of thumb, it will take property owners about 30 minutes to gather the necessary information and prepare each 1099. Most will have to prepare between 10 and 40 1099’s in 2011. In 2012, the number of 1099’s to be sent will likely double due to the expansion of property as a reportable transaction. Each landlord can expect to incur between 10 and 40 hours of 1099 compliance paperwork in 2012. At $40 per hour, this will cost each property owner between $400 and $1,600 per annum.

Sending 1099’s will force a significant cost of tax compliance away from the Internal Revenue Service and on to property owners / small businesses. This is not to say that compliance does not need to be incurred, it just does not seem that business owners should incur the cost of an overly complex tax code.

The American Recovery and Reinvestment Act of 2009 expanded two energy tax credits that allow homeowners to make energy saving home improvements and receive a tax credit for those improvements. The two credits are the non-business energy property credit and the residential energy efficient property credit.

In addition to reducing your overall energy costs, these credits will reduce the amount of your tax liability or increase your refund. Taxpayers can claim these credits on there 2010 tax return even if they do not itemize deductions on Schedule A. Here’s how each of the credits work.

Non-business Energy Property Credit:
This credit allows homeowners to receive a tax credit of up to 30 percent of what they spend on eligible energy-saving improvements (including labor) for certain high-efficiency heating and air conditioning systems, water heaters, and biomass burning stoves. Energy-efficient windows, skylights, and doors also qualify for the credit. The total tax credit received for 2009 and 2010 cannot exceed $1,500.

Residential Energy Efficient Property Credit:
This credit provides a tax credit for alternative energy equipment. Similar to the non-business Energy Property Credit, homeowners can receive up to 30 percent of the amount spent on residential energy efficient property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. However, unlike the first credit, there is no maximum limit on the dollar amount of this credit except for the limit on fuel cell property.

Keep in mind that not all energy-efficient improvements qualify for these tax credits. The IRS cautions homeowners to check the manufacturer’s tax credit certification statement before purchasing or installing any of these products and improvements. The tax credit certification statement is not the same as the Department of Energy’s Energy Star label. While many Energy Star products will provide you with an overall savings on your energy consumption, not all Energy Star products are eligible for these tax credits.

For more information on these credits visit the IRS’ web site at http://www.irs.gov/newsroom/article/0,,id=206875,00.html

If I own stock in a company that files for bankruptcy, can I claim a loss on my income taxes without selling the stock?

In order to take a tax deduction for a security that has lost its value without having to sell first, the security must be considered entirely worthless. A company's stock does not necessarily become entirely worthless if they file for bankruptcy. Under Federal bankruptcy laws a company can file for Chapter 7 or Chapter 11 bankruptcy. If a company files under Chapter 7, it means that the company ceases to operate and goes out of business. The company's assets will be sold and the proceeds generated from that liquidation will be used to pay back the company's creditors and investors. If the company files under Chapter 11 it continues to operate on a daily basis and tries to reorganize its business with the goal of eventually emerging from bankruptcy as a profitable company.

A company's stock may continue to have value and trade on a public stock exchange even though it is in bankruptcy. Stocks that do not meet the requirements to be listed (and thus traded) on one of the major exchanges like the NYSE or the NASDAQ, may trade on other public exchanges like the OTC or the Pink Sheets. Generally, if the company's stock retains some value the only way to capture the loss and receive a tax deduction is to sell the stock and record the capital loss based on the cost basis of the shares you sold.

If stockholders do not receive any value for the shares they own and the stock loses all of its value (i.e., is deemed worthless) as a result of the bankruptcy, the stockholder may be able to take a tax deduction for any losses incurred when the stock became worthless. In this case, the stockholder would not necessarily need to sell the stock to have it considered worthless.

One thing to keep in mind is that even if a company emerges from bankruptcy as a viable business, the value of the company's stock held by investors prior to the bankruptcy may be deemed worthless. This often occurs as part of a company's reorganization plan if the existing common stock is canceled and new shares are issued after the company emerges from bankruptcy. Secured and unsecured creditors, such as bond holders, usually receive some of the new shares of stock as repayment of the company’s debts. Stockholders usually don’t receive any repayment until the secured and unsecured creditors are repaid in full.

For more information about how to determine if your security is worthless (for purposes of the IRS) visit the IRS web site at http://www.irs.gov/publications/p550/ch04.html#en_US_publink100010315

What is the Alternative Minimum Tax and will I have to pay it?

The Alternative Minimum Tax (AMT) can be confusing, even to many who are well educated. Estimating whether or not you will be subject to the AMT is not as straight forward as one may think. The alternative minimum tax or AMT is an additional federal tax system that taxpayers are subject to. Taxpayers must calculate their federal tax under the regular income tax system (using the regular tax rates) as well as under the AMT system (using the higher AMT tax rates). The amount that they must pay is the higher of the two calculations.

Here's some background on the AMT. The AMT was originally setup in 1969 to ensure that high income earners did not avoid paying federal taxes because of loopholes in the tax system. The target that year was 155 people. Today, many people with incomes well below the original targets are being caught by the AMT, mainly because the AMT was never adjusted for inflation. Some government estimates suggest that close to 30 million people could be subject to the AMT within the next 10 years if there aren’t any changes to the current laws. Several years ago Congress increased the exemption amount of the AMT so that many taxpayers would not be subject to the tax but that increase expired at the end of 2009. Unless Congress acts before the end of this year, the current AMT rules are estimated to effect millions of taxpayers for 2010.

Unfortunately, it is difficult to determine if you will be subject to the AMT without going through the tax calculation itself. In general, the AMT is calculated by taking your regular tax liability and adding back several adjustments and preference items to arrive get your AMT income. After subtracting your AMT exemptions from your AMT income, your AMT tax liability is calculated using the AMT tax rates. If your AMT tax liability exceeds your regular tax liability, you will owe the AMT amount. Otherwise you owe your regular tax amount.

The key to the AMT calculation is the adjustments and preference items that are added back or disallowed. The adjustments and preference items include things that are common to many taxpayers, including those who don’t have high six figure salaries. For example, AMT preference items include personal and dependent exemptions, state and local taxes, certain mortgage and home equity loan interest, a portion or your deductible medical expense, and most miscellaneous expense deductions.

Due to lack of any changes to the current laws, complexity of the calculation, and nature of the adjustments made to compute the AMT, it is becoming more and more likely that those with incomes under $100,000 dollars will be caught by the AMT. Unfortunately, there isn’t a single guideline that I could give you to answer your question.

If you are interested in trying to estimate your potential AMT exposure, visit the IRS’ website where they have a section devoted to providing assistance to individuals about the AMT. Here’s the link: http://www.irs.gov/pub/irs-pdf/f6251.pdf

A few weeks ago I was completing my estimated federal tax payment for the quarter. To do this, I estimated our 2010 taxable income, and determine the amount that will be due to Uncle Sam. Each quarter I have to pay a portion of this to the US Treasury. Estimating our 2010 tax is done relatively easy with a software program. I noticed that our 2010 estimated federal income tax included over $2,000 relating to the Alternative Minimum Tax (AMT). My wife and I had never been hit with the AMT in the past. Surely there was some mistake. I looked to the IRS website and noticed that the AMT “patch”, that is usually passed annually, has not yet been extended to 2010.

Last week, Congress adjourned and will not be returning to Washington until mid to late November for a brief session. With so much talk from all the Washington legislators about not raising taxes on the middle class, where is the discussion about passing an AMT “patch” for 2010? The Congressional Budget Office estimates that some 27 million additional people will fall subject to the AMT in 2010 as compared to 4.5 million subject to its reach in 2009. These 22.5 million households will pay an average $3,900 for the AMT. According to the CBO, virtually all married couples making over $100,000 will be subject to the AMT in 2010.

A large plurality in Congress agrees that the patch should be passed for 2010. However, that does not mean anything will get done. Inaction and finger pointing rules the day and who would have thought that the repeal of the estate tax would still not be legislated upon? In my situation, I am unsure of whether to pay an additional $500 in taxes this quarter. Do I pay now and get a refund from Uncle Sam on April 15, 2011 (if the AMT patch is passed)? Or do I assume the patch will be passed, not pay the $500, and expose myself to interest and penalties if my assumption is wrong. This is the problem with temporary fixes. They leave taxpayers with uncertainty, which have real dollar impacts on household budgets.

For taxpayers who requested a 6-month extension to file their 2009 tax return, the October 15th deadline is fast approaching. October 15th is the last day to file your individual 2009 tax return unless you qualify under certain circumstance for additional extensions. Military personnel serving in Iraq, Afghanistan, or other combat zones or taxpayers who have been affected by recent natural disasters may qualify for additional extensions to file their returns. IRS publication 3 – Armed Forces’ Tax Guide outlines the extensions available for military personnel and their families (http://www.irs.gov/pub/irs-pdf/p3.pdf). For those affect by recent natural disasters, the IRS provides a summary of the tax relief offered to those victims on their web site at http://www.irs.gov/newsroom/article/0,,id=108362,00.html.

Keep in mind that unless otherwise stated, extensions for additional time to file your return, do not typically mean that you have additional time to pay your tax liability. Taxpayers are usually expected to pay their tax liability by the original due date of their return, which for most taxpayers is April 15. Failure to pay your taxes by the due date often results in additional penalties and interest charged.

If you do not qualify for any additional extensions and you miss the Oct. 15 deadline, you should make every effort to file your return as soon as possible to avoid late filing penalties. If know that you will not be able to file your return on time or if you experience financial or other hardships that make paying your taxes difficult, contact the IRS’s taxpayer assistance resources to work out a plan to minimize or avoid additional penalties and interest charges. A list of each state’s IRS taxpayer assistance centers are listed here http://www.irs.gov/localcontacts/index.html.

Taxpayers filing by Oct. 15 are encouraged by the IRS to e-file their returns to reduce the potential errors and expedite the filing process associated with filing paper returns. The e-file and Free File Programs are only available until Oct. 15.

As we approach the end of the year, it is a good idea to double check your federal and state tax withholdings to make sure that are not having too much or too little being withheld from your paycheck. If you have too much withheld, your refund may end up being larger when you file your tax return but you are effectively giving the government an interest free loan until the money is refunded to you. If you do not withhold enough taxes, you may end up with a larger than expected tax payment as well as potential penalties for the underpayment of taxes. With three months left in the year, you should have plenty of time to adjust your current withholdings to make the appropriate changes.

The IRS has a calculator on their web site to help taxpayers compute the proper withholdings (http://www.irs.gov/individuals/article/0,,id=96196,00.html). If you do need to make any adjustments, you generally have two options: 1) you can submit a new Form W-4 (Withholding Allowance Certificate) to your employer, or 2) you can adjust your quarterly tax payments. For more information on how to calculate the proper amount of withholdings and how to make any adjustments, review IRS Publication 919 (How Do I Adjust My Withholding?) http://www.irs.gov/pub/irs-pdf/p919.pdf.

In general you should check your withholdings if you experienced any changes in:
- Lifestyle - e.g., marriage, divorce, birth or adoption of a child, retirement;
- Wages - e.g., starting or stopping a job;
- Taxable income not subject to withholdings - e.g., interest income, dividend income, self employment income;
- Tax adjustments - e.g., IRA deductions, alimony expense deductions;
- Itemized deductions - e.g., medical expenses, charitable contributions; or
- Tax credits - e.g., education credits, child tax credits, earned income credit.

According to the IRS those who fall into the following categories should pay particular attention to their withholdings to make sure that you are withholding enough:
- Married couples with two incomes,
- Individuals with multiple jobs,
- Dependents,
- Some Social Security recipients who work,
- Workers who do not have valid Social Security numbers, and
- Retirees who receive pension payments may also need to check their federal withholding.

On Monday, President Obama signed into law HR 5297, the Small Business Jobs Act of 2010. The law includes a series of temporary tax deductions for businesses of all sizes. The bill also includes provisions, which the government hopes will offset some of the costs of the bill. The following is a summary of certain provisions of this legislation:

Bonus depreciation – The use of bonus depreciation had expired on December 31, 2009. This provision has been extended through the end of 2010. The use of bonus depreciation is not restricted to the size of the business. This is a real benefit for larger businesses as small businesses can use the other tax preference provisions (i.e. Code Section 179).

Section 179 deduction – Businesses that purchase qualifying property may elect to expense these items in the year of purchase. Section 179 provisions for 2010 had been set at $250,000. This has been increased to $500,000 and will be available to taxpayers in both 2010 and 2011.

Qualified small business stock – This provision excludes certain small business stock sales from capital gains tax. My understanding is that this exclusion only qualifies if the entity involved is a C-Corporation. C-Corporations are not typically the entity of choice for many small business, so I am not sure this will have a significant impact.

Health insurance deduction – Premiums paid for health insurance by many small business owners have not been a deduction in determining ones self-employment tax. This is no longer the case in 2010, but will return again in 2011.

Start-up costs – Current rules limit the amount a start-up costs that can be deducted to $5,000. This limit is doubled to $10,000 for 2010. The limit reverts to $5,000 in 2011.

Drawback: Expanded 1099 reporting for landlords - Unfortunately, individuals that receive rental income will now be required to file 1099 forms for certain service providers. This provision continues a trend of additional compliance reporting for businesses. This requirement is permanent and does not expire.

My company pays $1,200 per month for my health care benefits. I was told that this will be real income and taxed as such in 2011. Is this true?

Since the health care reform bill was enacted this question has come up often. In fact, the rumor that your health insurance will now be taxable is not true.

It is true that beginning next year employers will report the amount that they pay for your health insurance on your W-2. Employer-paid health insurance will be a line item, just like other line items you may be familiar with such as the amount you contribute to your 401(k). However this amount will not be included in taxable income. The figure is there for reporting purposes only to the IRS.

So rest easy, your will not be taxed on your company-paid health insurance.

I converted my traditional IRA to a Roth IRA. Subsequently, I recharacterized it back to a traditional IRA due to a drop in market value. Do I have any Massachusetts tax liability?

The Massachusetts Department of Revenue (DOR) distributed “Tax Information Release (TIR) 10-8: Conversion of a Traditional IRA to a Roth IRA in 2010”. This was issued to address the significant number of IRA conversions occurring this year.

The TIR states that Massachusetts generally follows the federal rollover provisions with certain exceptions that are identified in the TIR. (The exceptions primarily relate to nondeductible IRA contributions and do not relate to recharacterizations. I will assume that you have taken a deduction in the past for all your contributions to your IRA.) The TIR specifically states:

“…any amount included as income for federal tax purposes under said section 408A by reason of such distribution shall be included in gross income” (for Massachusetts tax purposes).

Since the TIR is silent on the recharacterizations and does not identify them as an exception / adjustment, it appears that you would recognize the same amount of income on your Massachusetts return as your federal return. I suggest you read the TIR and go over your specific details with your tax preparer as I am not fully aware of your financial / tax situation and not sure if there are other exceptions / rules that could impact your situation.

Similar to prior out-reach initiatives to provide assistance to taxpayers, the IRS will be hosting a nationwide open house on Saturday, September 25 to help taxpayers resolve their outstanding tax issues. The open house is available to all taxpayers however; the IRS will have additional resources available for veterans and those with disabilities. The IRS has partnered with the National Disability Institute (NDI), Vets First, Department of Veterans Affairs, National Council on Independent Living and the American Legion to help provide additional assistance for veterans and disabled persons.

The IRS offers the following information about the open houses:
- IRS staff will be available on site or by telephone to help taxpayers work through issues and leave with solutions.

- One hundred offices, at least one in every state, will be open from 9 a.m. to 2 p.m. local time.

- In many locations, the IRS will partner with organizations that serve veterans and the disabled to offer additional help and information to people in these communities.

- IRS locations will be equipped to handle issues involving notices and payments, return preparation, audits and a variety of other issues.

- Taxpayers requiring special services, such as interpretation for the deaf or hard of hearing, should check local listings and call the local IRS Office/Taxpayer Assistance Center ahead of time to schedule an appointment.

- A complete list of IRS offices open on Saturday, Sept. 25 is available at http://www.irs.gov/localcontacts/article/0,,id=220631,00.html.

There were two major tax cutting bills that were enacted during President Bush’s administration. They were the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). These two pieces of legislation are often referred to as the “Bush Tax Cuts”. The bills included across the board tax relief for American taxpayers. Many of the tax cuts included in these bills had expiration dates of December 31, 2010. There is much debate in Washington over which, if any, of these provisions should be extended to the future.

There is no debate that the two pieces of legislation provided tax relief for most every American taxpayer. The following is a summary of significant provisions that are set to expire at the end of this year:

Tax brackets: EGTRRA created a new series of lower tax brackets; 10%, 15%, 25%, 28%, 33% and 35%. These lower tax brackets will be replaced with the following higher tax rates 15%, 28%, 31%, 36% and 39.6%. For example, if you are currently in the 10% bracket, your tax rate will increase by half to 15%. Unless Congress and the President act, these new higher rates will impact every US taxpayer.

Marriage penalty: Anyone who remembers political debates of the 1990’s surely remembers discussions regarding the marriage penalty. In many cases, if a man and woman got married, their tax bill filing a joint return was more than their combined tax bill if they each filed single returns. The Bush Tax Cuts had several provisions which provided relief from this so called penalty. This included a standard deduction for a married filing joint couple to be double that of a single filer. In addition, tax rates for married filers were adjusted to reduce the penalty. Much of the relief provided in EGTRRA and JGTRRA will expire in 2011.

Child tax credit: The child tax credit is currently $1,000. This will fall to $500 in 2011. Also, the number of families eligible to receive the credit will decline significantly.

Qualified dividends: The tax rate for qualified dividends is a maximum of 15%. Starting in 2011, dividends will be subject to ordinary income tax rates ranging between 15% and 39.6%.

Capital gains: The top tax rate on capital gains will increase from 15% to 20%.

Estate tax: For 2010 the estate tax has been repealed. However, it returns in 2011 with an exemption level of $1 million and top tax bracket of 55%.

Phase-outs: The Bush Tax Cuts eliminated the phase-outs of the personal exemption and for itemized deductions. These phase-outs return in 2011.

The Tax Foundation estimated that the median family of four saved about $2,200 in federal taxes each year that the Bush Tax Cuts were in place. Much of this savings will vanish if these tax provisions are allowed to expire.

During the past several months many taxpayers received notices from the IRS regarding adjustments to their 2009 tax returns. Many of these notices were for adjustments related to the Making Work Pay tax credit. This credit is a refundable tax credit for working taxpayers for 2009 and 2010 that was enacted into law as part of The American Recovery and Reinvestment Act of 2009 (“ARRA”). It provides a tax credit of as much as $400 for individuals and $800 for married taxpayers who file joint returns.

The credit equals 6.2 percent of the taxpayer’s earned income and is refunded throughout 2009 and 2010. The refund will not be paid out as a single lump-sum amount. Instead, it is handled automatically through your employer as a function of your payroll tax withholdings. Therefore, you should not have to do anything to receive this credit if you are not self employed or if your employer normally handles your payroll tax withholdings. Those who qualify for the credit should have seen an increase in their after-tax pay checks shortly after the credit was implemented last year.

Taxpayers who are self-employed or who do not have taxes withheld by their employer should adjust their estimated tax payments or remember to claim the credit on their 2009 and 2010 tax returns. Many of the notices mentioned above apply to those who forgot to adjust their estimated tax payments or forgot to claim the credit on their 2009 tax return.

This credit begins to phase out if your modified adjusted gross income (MAGI) exceeds $75,000 ($150,000 if you are married and file a joint return). If your MAGI exceeds $95,000 ($190,000 for married filing jointly) you will not qualify for this credit.

For more information on the Making Work Pay tax credit, visit the IRS’ web site at: http://www.irs.gov/newsroom/article/0,,id=204447,00.html.

We are considering installing two new windows in our home. The cost of the windows is over $1,000 and the cost of the installation is about $400. Will we be eligible for a tax credit?

Assuming the windows meet the energy efficiency requirements of the law, you should be eligible for a tax credit. The American Recovery and Reinvestment Act of 2009 provided energy conservation incentives. The incentives are primarily distributed in the form of tax credits. The tax credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. However, there are other eligibility requirements to consider:

• The windows must be installed on your principal residence. New construction and rental properties do not qualify.

• For property placed in service after February 17, 2009, in addition to meeting the prescriptive criteria for such component established by the IECC, the property must have a U-factor of 0.30 or less and a solar heat gain coefficient (SHGC) of 0.30 or less.

• The credit only applies to the cost of the window. Cost for preparation and installation do not qualify when calculating the credit.

• The energy efficiency tax credit is technically "non-refundable" which means at the end of the year, you can't get back more in credits than you paid to the government in taxes throughout the year. If you are unable to claim the entire 30% of your purchase for the above products in one year, you can carry forward the unclaimed portion to future years.

• There are no income limitations to be eligible for the tax credit.

In your situation, it appears that you will be eligible for a tax credit of approximately $300. This is 30 percent of the price of the window with no credit being generated by the cost of the installation. To obtain the tax credit, you will need to complete form 5695 and attach it to your 2010 individual income tax return.

In addition to energy-efficient windows, the cost of energy-efficient skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit.
For more information, see also the Energy Star web page.

Under the American Recovery and Reinvestment Act of 2009, the tax credit for making energy efficient home improvements was increased and extended. The new law allows homeowners to receive a credit of up to 30 percent for qualified energy efficient home improvements through 2009 and 2010. The credit is limited to $1,500 for 2009 and 2010 combined.

Here are some key points from the IRS to consider about the tax credit if you are planning on making energy efficient improvements:

* The credit applies to improvements such as adding insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.

* To qualify as “energy efficient” for purposes of this tax credit, products generally must meet higher standards than the standards for the credit that was available in 2007.

* Manufacturers must certify that their products meet new standards and they must provide a written statement to the taxpayer such as with the packaging of the product or in a printable format on the manufacturers’ web site.

* Qualifying improvements must be placed into service after December 31, 2008, and before January 1, 2011.

* The improvements must be made to the taxpayer’s principal residence located in the United States.

* To claim the credit, attach Form 5695, Residential Energy Credits to either the 2009 or 2010 tax return. Taxpayers must claim the credit on the tax return for the year that the improvements are made. Form 5695 is available at http://www.irs.gov/pub/irs-pdf/f5695.pdf.

For more information about this tax credit, visit the IRS web site at http://www.irs.gov/newsroom/article/0,,id=211307,00.html.

After being absent last year, the state sales tax holiday in Massachusetts is back for 2010. This weekend, on August 14th and 15th, consumers who purchase items that cost less than $2,500 will not have to pay the 6.25% MA sales tax on those purchases. However, certain rules apply. Here are a few of the major ones:

1) Motor vehicles, motorboats, meals, telecommunications services, gas, steam, electricity, tobacco products do not qualify for the state sales tax exemption.

2) Single items whose purchase price exceeds $2,500 do not qualify for the state sales tax exemption. Single items which exceed the $2,500 limit will be taxed on the entire purchase price not just the amount above the $2,500.

3) There is no limit to the amount of items that can qualify on a single receipt as long as the purchase price of each item is below $2,500. For example, you can purchase 3 items each costing $1,000 on the same receipt and all three items will be exempt from state sales tax.

For more information about the MA sales tax holiday and the specific rules, click here.

Keep in mind that, as with most sales tax holidays, saving 5% - 10% on a big ticket purchase is a great way to save money on items that you were already planning on purchasing. It is not necessarily a good reason to go out and purchase a big ticket item just because you can save on the sales tax. Especially since many retailers already offer 5% - 10% savings on a regular basis through their weekly sales offers.

If you don't live or shop in Massachusetts, many other states also have sales tax holidays. Here is a link to a summary of holidays by state for 2010. http://www.taxadmin.org/fta/rate/sales_holiday.html

What is the current status of the estate tax? Will it change in 2010?

The US federal estate tax has been repealed for 2010. However, the repeal is only slated for those that pass away this year. The estate tax is scheduled to return in 2011. To further the burden of those dying in 2011, the estate tax will be reset to the rates in effect on January 1, 2001. This means estates in excess of $1 million will be taxed, starting at a rate of 41 percent. The maximum effective federal estate tax rate scheduled in 2011 is 55 percent.

In addition, Massachusetts also assesses an estate tax. Massachusetts is equally as greedy in its desire to obtain from the dead. (There is no repeal in Massachusetts in 2010, regardless of the outcome of the federal estate tax debate.) Massachusetts top effective estate tax rate is 16 percent. Thus, with poor planning, it is possible for an estate to reach a combined tax rate over 60 percent. Fortunately, there are many estate tax planning techniques that can reduce the taxable value of ones estate. An easy fix to avoid the Massachusetts estate tax is to claim Florida residency, i.e. Rose Kennedy. Florida has no estate tax.

Congress has discussed a retroactive change to the 2010 repeal of the estate tax (meaning the estate tax will be assessed on those that pass away in 2010). Most of the talk revolves around an estate exemption between $3.5 million and $5 million and a top tax rate of between 30 and 40 percent. It seems to me that Congress will pass some kind of legislation this year that falls within these parameters and these rates will become permanent.

Correction: The original version of this blog post had the incorrect minimum value of an estate that will have its tax rates reset in 2011. The combined rate that an estate could be taxed at with poor planning was also overstated.

Since 2003, individual taxpayers in the United States have had the good fortune of relatively low tax rates on dividend income. The federal tax rate on qualifying dividends is currently between 0 percent and 15 percent for individuals. The tax rate increases as the person’s taxable income increases. However, on December 31, 2010, these lower tax rates are set to expire.

Starting in 2011, there will no longer be lower tax rates for qualifying dividends. Instead income earned on dividends will be taxed at the same rate as other ordinary income. Those earning less money and paying no income tax in 2010 on dividends will pay 15 percent in 2011. Those earning more money and in the upper tax brackets will see an increase in their tax rate from 15 percent to 39.6 percent. Starting January 1, 2013, the federal income tax rate on dividends is scheduled to increase again to 43.4 percent. This latest increase is a result of the recently passed healthcare “reform” legislation.

In addition to the federal tax, Massachusetts has a flat personal tax rate of 5.3 percent. (This is the highest flat personal tax rate in the country.) Indivduals in Massachusetts can expect to pay between 20.3 percent and 48.7 percent in taxes on dividends in 2011, cumulative of federal and state tariffs. This will be a significant increase for all taxpayers, regardless of the amount of income earned.

There is discussion at the federal level to extend the reduced dividend tax rate beyond 2010. However, the reduced rates will be drastically scaled back and only apply to lower income earners. On the Massachusetts legislative front, just last April several Representatives attempted to increase the dividend tax rate from 5.3 percent to 12 percent. This did not pass, however the attempt and consideration should not be underestimated. The Governor certainly did not want to sign his fourth significant tax increase in four years during an election year. After the election though, anything is possible. Governor Patrick has already alluded being open to more tax increases (see his comments and attempts to increase the gasoline tax.)

The IRS has set up several resources for those affected by the Gulf Oil Spill. These resources are designed to provide affected taxpayers (including individuals and businesses) with assistance for payments received for lost wages, damages, and physical and emotional injuries. In addition, the IRS will assist with questions related to casualty loss deductions and economic hardships as a result of the oil spill. Below is a list of some of the resources available to date:

1) On July 17, 2010, the IRS will be holding a Gulf Coast Assistance Day in seven cities on the Gulf Coast to help taxpayers resolve tax issues related to the disaster. There will be seven locations across four states including:
- Mobile, Alabama
- Panama City, Florida
- Pensacola, Florida
- New Orleans, Louisiana
- Houma, Louisiana,
- Baton Rouge, Louisiana
- Gulfport, Mississippi

Specific times and locations in each of the cities noted above have not been announced yet but will be available soon at the IRS web site at http://www.irs.gov/newsroom/article/0,,id=224887,00.html.

2) The IRS established a toll-free telephone number for affected taxpayers to call for assistance. Taxpayers who have questions or need assistance should call the IRS at 866-562-5227. IRS agents are available on weekdays between 7am and 10pm, local time.

3) The IRS has a web site with answers to specific tax questions related to the oil spill. This web site can be found at http://www.irs.gov/newsroom/article/0,,id=224886,00.html. Be sure to check this site from time to time as it gets updated with additional questions and answers that become available.

4) In addition to the resources noted above from the IRS, individuals and businesses can get various types of assistance from the federal government’s Disaster Assistance web site (http://www.disasterassistance.gov/disasterinformation/deepwater.html). This site provides access to various types of assistance including how to file claims with BP.

For more information about the oil spill and the resources available visit the following web sites:
www.IRS.gov
www.DisasterAssistance.gov
www.whitehouse.gov/deepwater-bp-oil-spill

On July 2, 2010 President Obama signed The Homebuyer Assistance and Improvement Act of 2010 to extend the deadline for taxpayers to close on their home purchase in order to qualify for the First-Time Homebuyer Tax Credit. The deadline to close on a qualifying home purchase is now September 30, 2010. Prior to the passage of this law, taxpayers had to close by June 30, 2010. Keep in mind that the original date to enter into a binding contract was April 30, 2010 and did not change with this extension.

Below are five facts from the IRS about the First-Time Homebuyer Credit and how to claim it.

* If you entered into a binding contract on or before April 30, 2010 to buy a principal residence located in the United States you must close on the home on or before September 30, 2010.

* To be considered a first-time homebuyer, you and your spouse – if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase.

* To be considered a long-time resident homebuyer, your settlement date must be after November 6, 2009 and you and your spouse – if you are married – must have lived in the same principal residence for any consecutive five-year period during the eight-year period that ended on the date the new home is purchased.

* The maximum credit for a first-time homebuyer is $8,000. The maximum credit for a long-time resident homebuyer is $6,500.

* To claim the credit you must file a paper return and attach Form 5405, First Time Homebuyer Credit, along with all required documentation, including a copy of the binding contract. New homebuyers must attach a copy of the properly executed settlement statement used to complete the purchase.

For more information about this tax credit, visit the IRS’ web site at http://www.irs.gov/newsroom/article/0,,id=204671,00.html

As the school year comes to an end, many students are turning to summer jobs as a way to help earn income during their summer break from school. Here are some tax tips for those with summer jobs:

1) Be sure to complete a new Form W-4 when you start a new job. The form helps your employer determine how much tax should be withheld from your paycheck. It can also be used to claim complete exemption from withholding any taxes. Form W-4’s that were filled out for 2009 have expired so you will need a new one for 2010. If you have multiple jobs, you will need to make sure that each employer is withholding the appropriate amount to cover your anticipated total tax liability. The IRS has a withholding calculator to help you determine the correct amount to withhold. (http://www.irs.gov/individuals/article/0,,id=96196,00.html)

2) Income you receive for certain types of work may be considered self-employment income and thus, potentially subject to self-employment taxes. For example, income received from odd jobs such as babysitting and lawn mowing may be considered self-employment income. If your net income from self employment is $400 or more you will be subject to self-employment tax.

3) If you are a newspaper carrier or distributor, special tax rules apply. If you provide these types of services you will need to determine if you are considered a direct seller. Direct sellers are considered self employed for federal tax purposes and therefore potentially subject to self employment taxes. According to the IRS, you are a direct seller if you meet all of the following criteria:
* You are in the business of delivering newspapers.

* All your pay for these services directly relates to sales rather than to the number of hours worked.

* You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

In general, newspaper carriers and distributor who are under age 18 are not subject to self employment taxes.

4) Be sure to report all tip income that you receive. Tips that you receive are taxable income and subject to federal income tax. Therefore, you need to report it.

5) If you are a ROTC student who participates in advanced training and you receive an allowance, the allowance is not taxable. However, active duty pay is taxable. Be sure to double check with your employer if you think this situation applies to you.

What prevents someone from making a contribution to a Roth IRA? I am single, my AGI (Adjusted Gross Income) for 2009 was under $100,000, and I have a 40lk plan from my job. When I did my taxes using one of the tax preparation software programs, it told me that I wasn't eligible for a Roth IRA. Last night, while watching a financial planning show, a viewer was told to max out her 401K and max out her Roth IRA. What gives?

The eligibility requirements to contribute to a Roth IRA for 2009 for a person whose tax filing status is single or head-of-household are as follows:
- You must have earned income equal to at least the amount of your contribution, and
- Your Modified Adjusted Gross Income (MAGI) cannot exceed $120,000.
- Keep in mind that your participation in an employer’s 401(k) plan does not impact your eligibility to contribute to a Roth IRA.

Based on the information in your question it is difficult to know if you were eligible to make a Roth IRA contribution for 2009 or not. Your eligibility to contribute to a Roth IRA is based on your MAGI and not your AGI. Therefore, you should double check that your Modified Adjusted Gross Income (MAGI), and not your Adjusted Gross Income (AGI), is below $120,000.

To calculate your MAGI, you need to start with your AGI and add back the following items:
- Traditional IRA contributions that were deducted.
- Student loan interest amounts deducted.
- Tuition and fees deducted.
- Domestic production activities deducted.
- Foreign income or housing costs excluded on Form 2555.
- Foreign housing deduction taken on Form 2555.
- Savings bond interest excluded on Form 8815.
- Adoption benefits from an employer excluded on Form 8839.

For step by step directions on calculating your MAGI, the IRS provides a worksheet on page 16 of Publication 590 (http://www.irs.gov/pub/irs-pdf/p590.pdf).

Roth IRA contributions for 2009 were due by the April 15, 2010 (unless you live in an area where the IRS extended the individual tax filing deadline). If, after calculating your MAGI, you are eligible to make a Roth IRA contribution for 2009 based on the criteria noted above, you should contact the IRS to see if they will allow you to make the contribution for 2009 since the normal deadline has passed. Be prepared to explain the specifics of your situation and reason for your request.

The April 15th tax filing deadline has come and gone, however, many taxpayers may still be dealing with extensions, tax notices, tax payments, and other tax related issues. On Saturday, June 5, 2010, from 9:00am to 2:00pm, the IRS will be holding open houses at approximately 200 IRS offices around the country to help taxpayers answer questions, offer solutions, and assist taxpayers with their specific issues. There will be at least one IRS office open in each state. A list of the IRS offices open in each state can be found here (http://www.irs.gov/localcontacts/article/0,,id=220631,00.html).

According to the IRS, IRS locations will be equipped to handle issues involving notices and payments, return preparation, audits and a variety of other issues. In addition, someone who has received a notice seeking additional information can speak with an IRS employee to get a clear explanation of what is necessary to satisfy the request. A taxpayer who cannot pay a tax balance due can discuss with an IRS professional whether an installment agreement is appropriate and, if so, fill out the paperwork then and there. Assistance with offers-in-compromise — an agreement between a taxpayer and the IRS that settles the taxpayer’s debt for less than the full amount owed — will also be available. Likewise, a taxpayer struggling to complete a certain IRS form or schedule can work directly with IRS staff to get the job done.

One of the provisions of the Affordable Care Act, signed into law by President Obama in March, provides certain small businesses and tax-exempt organizations with a health care tax credit. This tax credit is intended to encourage small employers to offer health insurance coverage to their lower income employees. The credit is effective for 2010 and, generally, applies to small businesses and tax-exempt organizations that pay for at least 50 percent of single health insurance coverage for their employees.

For 2010 through 2013, eligible small business employers can receive a maximum credit of 35 percent of the premiums that it pays and tax-exempt organizations can receive a maximum credit of 25 percent. Eligible small business employers and small tax-exempt employers are defined as those with 10 or fewer full-time equivalent (FTE) employees where the employer pays annual average wages of $25,000 or less. Businesses with more than 10 FTE employees or who pay more than an annual average of $25,000 in wages can still qualify for part of the credit as long as they do not have more than 25 FTE employees or pay more than $50,000 in annual average wages.

The maximum amount of the credit increases to 50 percent for small business employers and 35 percent for tax-exempt employers beginning on January 1, 2014. The IRS provides the following examples of how the credit works:

Example 1: Auto Repair Shop with 10 Employees Gets $24,500 Credit for 2010 Main Street Mechanic:

• Employees: 10
• Wages: $250,000 total, or $25,000 per worker
• Employee Health Care Costs: $70,000

2010 Tax Credit: $24,500 (35% credit)
2014 Tax Credit: $35,000 (50% credit)

Example 2: Restaurant with 40 Part-Time Employees Gets $28,000 Credit for 2010 Downtown Diner:

• Employees: 40 half-time employees (the equivalent of 20 full-time workers)
• Wages: $500,000 total, or $25,000 per full-time equivalent worker
• Employee Health Care Costs: $240,000

2010 Tax Credit: $28,000 (35% credit with phase-out)
2014 Tax Credit: $40,000 (50% credit with phase-out)

Example 3: Foster Care Non-Profit with 9 Employees Gets $18,000 Credit for 2010 First Street Family Services.org:

• Employees: 9
• Wages: $198,000 total, or $22,000 per worker
• Employee Health Care Costs: $72,000

2010 Tax Credit: $18,000 (25% credit)
2014 Tax Credit: $25,200 (35% credit)

For more information on the small business health care tax credit, visit the IRS web site at http://www.irs.gov/newsroom/article/0,,id=220809,00.html.

Ninety percent of the 21 million US businesses are family owned. Yet only thirty percent of family run companies today succeed into the second generation, and only 15 percent survive into the third (Source SBA.gov). The reason for this significant failure is obvious; these businesses lack an orderly succession plan.

Family run businesses have struggled through the recent recession. For many, sales and cash flows have declined. The inability of many small businesses to get adequate bank financing has exacerbated the problem. However, some families businesses are taking advantage of this recession by executing their succession plan.

There are several reasons that the recession is a prime time to execute your succession plan. They are as follows:

Business valuations are low – A business generating less income is worth less money. The reduction in value makes it much more tax efficient to move these assets out of one’s estate and into the hands of the next generation. Just a few years ago the same transfer may have cost the business owner a significant amount of taxes.

Commercial real estate valuations are low - If your business also owns real estate, these assets also have likely declined in value. If this is the case, this may be a good time to transfer these assets to your heirs.

Tax rates are low – The maximum capital gains rate is 15% in 2010. This rate is increasing to 20% in 2011. With the federal government operating a $1.6 trillion deficit, do not expect rates to be this low anytime in the next generation. You may consider taking advantage of this now.

There are many strategies and techniques used to execute a succession plan. If you are in need of developing a succession plan for your family business, please see the following “Business Succession – A Ten Step Checklist”.

Business owners are obviously distracted by economic issues, but please do not miss out on this opportunity to align you business for the future and to reduce your taxable estate. If you have any questions, please submit them on the bottom right side of this webpage.

If you're one of the taxpayers who live in the counties affected by the tax deadline extension in Massachusetts, then Tuesday, May 11 is your tax-filing deadline.

If you have yet to file and have some last-minute tax questions, the join us at 1:45 p.m. as Steven Elliott, senior tax manager at Janover, LLC will be here to chat. Steven will answer any question you have on taxes or any personal finance-related questions you may have.

Flexible Spending Accounts, or FSAs, have become very popular over the years because they allow you to pay for a wide range of out of pocket health care expenses using pre-tax dollars.  Using pre-tax dollars instead of after-tax dollars is like getting a discount equal to your marginal tax rate.  However, recent changes may make the plans less desirable.

First the big change: starting in 2013, the most that you will be able to contribute to these plans will be just $2,500.  At the current time, much higher limits are permitted.  The limits were changed because lawmakers felt that consumers would not need to pay as much for healthcare expenses given that new and more affordable healthcare options were thought to be on the horizon.  Plus, the money that the government would save with a lower limit could be used to offset the cost of the new healthcare package.

Second, the items that had been deemed "acceptable expenses" is changing somewhat dramatically.  Deductibles, co-pays, orthodontia and eyeglasses will still continue to be covered but many of the expenses incurred for over the counter medications like allergy medicine, pain relievers, vitamins, contact lense solutions, etc will now be denied unless you have been directed by a doctor to use them.  This change goes into effect on January 1, 2011 so be sure to plan your 2011 flexible spending contribution very carefully.

At the end of the day, however, even these substantive changes will probably only adversely impact a small number of individuals and families.  A recent study by the consulting firm Mercer Health and Benefits reports that alhtough 85 percent of companies with 500 or more employees offer flexible spending accounts for healthcare expenses, only 27 percent of eligible employees use them and when they do use them, the average annual amount contributed is about $1,400.

 

 

In order to be treated as a business for IRS purposes, and legitimately deduct expenses, a profit motive must be present (even though you may have experienced a loss.) This profit motive separates a business from a hobby, which is an activity engaged in purely for self-satisfaction and one you would continue even if the activity were unprofitable. The best way to demonstrate that your business is profit-motivated is to show a profit in at least three of the preceding five years. If not, the IRS may review the following factors to confirm you truly have a profit motive:

Do you keep a separate bank account and have a set of books?

Do you have a name for your business and a business license?

Do you use a separate area in your home to conduct the work, and also have a separate phone line?

Do you have a business plan and advertise, market or promote your business?

Do you spend time each day or week on your business and are making a reasonable effort to make a profit the way other people do in this business?

Do you have a track record of past profitable ventures and have you had a profit in any previous years?

Does the activity make a profit in some years?

Do you have a reasonable level of expertise in this area?

Do you depend on income from the activity to live on?

If, in fact, your "business" is a hobby, losses are generally deductible only to the extent of the income produced by the hobby. Of course, every dollar of hobby income is reportable on your tax return. But expenses associated with the hobby are only deductible if you itemize, and even then the deduction must exceed more than 2 percent of your adjusted gross income. Although the IRS is not limited in the kind of businesses that it can challenge as being hobbies, businesses that look like traditional hobbies (such as "gentlemen farming" and craft businesses run from the home) generally face a greater chance of IRS scrutiny than other types of businesses. For more information see IRS Publication 535.

Starting in 2010, the federal government has new rules that encourage converting a traditional IRA to a Roth IRA. This has been discussed ad nauseam throughout the financial media. However, one important consideration not usually discussed is the impact a conversion has on your state taxes. Here in Massachusetts converting a traditional IRA to a Roth IRA will also be subject to state income taxes. As such, the cost of this levy should also be considered.

Massachusetts tax law does not allow a deduction for contributions to a traditional Individual Retirement Account. (Why would Massachusetts want to allow a deduction and encourage something as frivolous as retirement savings?) If you convert your IRA account to a Roth IRA, the portion of your IRA account relating to contributions previously taxed in Massachusetts will not be subject to state income tax. However, untaxed contributions as well as any accumulated earnings and appreciation in your IRA will be subject to the 5.3% Massachusetts income tax. Under the federal guidelines, you will be allowed to pay any tax on this conversion in the current year, or defer it and pay half in 2011 and half in 2012. This two year payment option has also been adopted in Massachusetts.

Here are two examples as provided by the Massachusetts DOR:

"A taxpayer eligible to make a 2010 rollover, has a $20,000 traditional IRA, which is comprised of $10,000 of contributions that were deducted for federal purposes but subject to Massachusetts tax, and $10,000 of accumulated earnings or appreciation. If the taxpayer rolls over the traditional IRA into a Roth IRA, the entire $20,000 would be included in federal gross income in the taxable year beginning in 2010. However, the taxpayer may elect to defer the inclusion in federal gross income ratably over the two succeeding taxable years: $10,000 for the taxable year beginning in 2011 and $10,000 for the taxable year beginning in 2012.

Section 2(a)((3)(A) of chapter 62 provides that only the portion of the rollover previously not subject to Massachusetts taxation, in this case, the $10,000 of earnings and appreciation, will be included in Massachusetts gross income in 2010. If the taxpayer elected to defer payment of federal income tax, the taxpayer must also defer the inclusion in Massachusetts gross income ratably over the two succeeding taxable years: $5,000 for the taxable year beginning in 2011 and $5,000 for the taxable year beginning in 2012."

In my case, much of my IRA account is a rollover from a 401(k) account. I did receive a deduction in Massachusetts for these contributions. As such, if I chose to convert to a Roth IRA, the entire amount of the conversion will be subject to Massachusetts income tax of 5.3 percent. This is a big consideration. If you are planning on moving to a no income tax state upon retirement, i.e. Florida or New Hampshire, you may not be subject to state income taxes upon drawing of the IRA accounts. Consequently, a conversion may subject you to Massachusetts income tax now where as not converting you may not be subject to state income taxes at all.

In recent years, Health Savings Accounts, or HSAs, have become more and more popular.  But what exactly are they and what are the benefits of having one? 

HSAs are IRA-like accounts that are used in conjunction with high deductible health care plans.  (A high deductible health care plan has a deductible of at least $1,150 for singles and $2,300 for families.)  If you have a high deductible health plan,  you are eligible to contribute to an HSA.  The contribution limits are $3,050 for individuals, $6,150 for families and $7,150 for people who are 55 or older and signing up for a family plan.  Money contributed to the account is tax deductible, earnings on the invested funds are tax deferred and withdrawals are tax-free if they are used to pay for qualified medical expenses. 

Typically, someone would sign up for a high deductible health care plan and simultaneously make either a lump sum contribution to the HSA or sign up for monthly deposits.  Money deposited into the HSA can be used to meet any medical deductibles and expenses you might have throughout the year. 

With any luck, your medical expenses will be low and you won't need to spend all the money that accumulates in your HSA.  Funds left in the HSA can stay there for years.  In fact, many people establish HSAs with the intent to never use the funds in the account.  In this situation, contributors plan to  pay any and all medical expenses out of pocket.  This allows them to accumulate substantial assets within the HSA.   If money is left in the account for years or even decades, you could have a nice retirement nest-egg in place.  And once you turn age 65, you can take withdrawals from the account without any penalty.  (Ordinary income taxes would still be due but there would be no penalties.)  If you use HSAs in this manner, it is like being able to make a double contribution to an IRA.  One other point to note:  money invested in HSAs is generally invested in low yielding money market accounts but there is nothing preventing you from investing your HSA funds in equities and really building up the account over time. 

When choosing an HSA custodian, be sure to shop around as fees can vary dramatically.  For example, some custodians charge monthly maintenance fees while others do not.  Also, if you do decide to open an HSA, be sure to keep meticulous records.  One of the neat aspects of HSAs is that you are not required to submit reimbursements in the year expenses were incurred.  So, you could pay some expenses out of pocket for a while and then decide to seek reimbursement in later years.  As long as you are keeping good records, this would be no problem.

Tax refunds are always nice, but if you are getting money back every year you're being really nice to Uncle Sam – loaning him money for free. Why not make some adjustments and make that money work for you?

Sometimes unusual events can result in a large tax refund; perhaps you sold some securities at a loss, had a baby or put money into an IRA for the first time. It takes some work to try to estimate our tax bill exactly and adjust withholding during the year and it is not always worth it for a one-time event. But if you find you're consistently getting a tax refund you should consider taking steps to adjust payments to reduce it. Why give your money to the IRS to hold interest-free for you? You could put that money to good use yourself.

First of all, review your withholding status with your employer. You should be declaring either married or single, depending on your status, and some number of dependents. Dependents include yourself, your spouse and your children or other legal dependents. If you are claiming less dependents than you really have then too much tax may be withheld. You can use the IRS withholding calculator to help you figure it out.

Even if your withholding status is correct, your tax situation may cause you to owe less taxes than a typical wage earner of your status. For instance you may have high medical expenses or a lot of mortgage interest and property taxes that result in higher than typical itemized deductions. In this case you should adjust your withholding (increase the number of dependents) so that less tax is taken out. Don't try to adjust it to match your refund exactly, but try to get it in the vicinity. If you find that your tax bill is usually very low or nothing, consider having no federal taxes withheld at all (and perhaps paying a little at tax-time.) Click here to go to the IRS website for more help.

Now, with your extra take-home pay you can increase your 401(k) or IRA contributions. That way you can boost your savings without feeling any difference in your pocketbook.

Some people like their big refunds, and use that money to pay for a vacation or pay off debt. Financial planners will tell you it's not a good spending habit. It is better to save regularly then to loan your money interest-free for a year and wait for the refund.

With the April 15 tax filing deadline quickly approaching, here are ten last minute tax filing tip from the IRS. (Taxpayers in the following seven counties in Massachusetts have until May 11 to file their federal and Massachusetts tax returns due to the flooding last month: Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk and Worcester Counties.)

1) File Electronically - Consider filing your tax return electronically instead of using paper forms. If you file electronically and choose to have your tax refund deposited directly into your bank account, you will have your money in as few as 10 days. Virtually everyone can prepare a return and electronically file it for free. For the second year, the IRS and its partners are offering the option of Free File Fillable Forms.

2) Check the Identification Numbers - When filing a paper return carefully check the identification numbers - usually Social Security numbers - for each person listed. This includes you, your spouse, dependents and persons listed in relation to claims for the Child and Dependent Care Credit or Earned Income Tax Credit. Missing, incorrect or illegible Social Security numbers can delay or reduce a tax refund.

3) Double-Check Your Figures - If you are filing a paper return, you should double-check that you have correctly figured the refund or balance due.

4) Check the Tax Tables - If you are filing using the Free File Fillable Forms or a paper return you should double-check that you have used the right figure from the tax table.

5) Sign your form - You must sign and date your return. Both spouses must sign a joint return, even if only one had income. Anyone paid to prepare a return must also sign it.

6) Mailing Your Return - Use the coded envelope included with your tax package to mail your return. If you did not receive an envelope, check the section called "Where Do You File?" in the tax instruction booklet.

7) Mailing a Payment - People sending a payment should make the check out to "United States Treasury" and should enclose it with, but not attach it to the tax return or the Form 1040-V, Payment Voucher, if used. The check should include the Social Security number of the person listed first on the return, daytime phone number, the tax year and the type of form filed.

8) Electronic Payments - Electronic payment options are convenient, safe and secure methods for paying taxes. You can authorize an electronic funds withdrawal, or use a credit or a debit card. For more information on electronic payment options, visit IRS.gov.

9) Extension to File - By the April due date, you should either file a return or request an extension of time to file. Remember, the extension of time to file is not an extension of time to pay.

10) IRS.gov - Forms and publications and helpful information on a variety of tax subjects are available around the clock at IRS.gov. You can also check the status of your refund after you file your return by clicking on Where's My Refund?.

For many taxpayers, the dreaded Tax Day is just two days away. For those in seven Massachusetts counties affected by recent flooding, Tax Day has been extended. Either way, the deadline is approaching. Are you stuck? You're in luck.

Accountant, Managing Your Money blogger, and member of the Massachusetts Society of Certified Public Accountants Jamie Downey will be here at 1 p.m. today to take all of your tax questions.

For many years I have been hearing about the “federal tax gap”.  The tax gap is what the federal government believes should be paid in taxes versus what is actually paid in taxes.  The tax gap is estimated to be approximately $350 billion annually.  The tax gap comes primarily from three areas of noncompliance with the tax law: under reporting of taxable income (by under reporting revenue or over reporting expenses), underpayment of taxes, or non-filing of returns.  A significant majority of the tax gap is created by those that under report their taxable income. 

 

The federal government is running a $1.6 trillion deficit in the current fiscal year.  Additionally, the new healthcare entitlement program will create huge cash drains on the federal budget in future years.  To help close the tax gap and fund this deficit spending, the federal government has expanded informational reporting requirements of businesses. Under current tax law, if a business makes payments in excess of $600 to a person or a business over the course of a year, it must file Form 1099 to report those payments. One copy of the form is sent to the IRS, and another copy is sent to the person to whom you made the payments.  Payments made to a corporation and payments made in exchange for merchandise are not required to be reported on a 1099. 

 

Tucked away in just 23 lines of Section 9006 of the Healthcare reform bill be a dramatic change in the 1099 reporting requirements.  No longer will corporations or payments for merchandise be exempt 1099 reporting.  This new law is effective January 1, 2012.  A large majority of payments made by a business will now be reported on a 1099.  This reporting requirement will have a two pronged effect on those that under report their taxable income.  First, most of a business’ revenue will now be reported to the IRS, so understating large amounts of revenue will be more difficult.  Secondly, a business will be less likely to overstate its expenses as it will need to report where those expenses were paid. 

 

There is no doubt this will be an administrative nightmare for many businesses in the first year or two.  Taxpayer identification numbers need to be collected for all vendors.  Have a large business related meal at a restaurant, this will need to be reported on a 1099.  Spend a week in a hotel in Waco Texas, you will need to send a 1099. 

 

I do not believe the IRS will not be able to match these payments dollar for dollar to a tax return as there are too many variables involved.  However, it will prevent wholesale abuse by taxpayers and force more people into compliance knowing the IRS will have more information at their disposal. 

 

What is a Spousal IRA and what are the rules around making contributions to it?

A spousal IRA is not a special type of IRA account. Rather, it is a term used to describe how a person can make an IRA contribution to their spouse's IRA account even if that spouse has little or no taxable income. If you and your spouse meet the conditions outlined below, you are allowed to contribute to his or her traditional or Roth IRA account.

In order to make a "spousal IRA" contribution you must satisfy all of the following criteria for the year in which you are making the IRA contribution:

- You must be married to your spouse at the end of the tax year;
- You must file a joint federal income tax return for the tax year;
- You must have taxable compensation for the tax year; and
- Your taxable compensation (for the tax year) must exceed your spouse's taxable compensation for that year.

If you and your spouse satisfy the criteria noted above and your spouse is younger that age 70.5, you can contribute to your spouse's traditional IRA. In addition, some or all of those contributions may be tax deductible. If your spouse is over the age 70.5 you cannot contribute to a traditional IRA for your spouse because contributions to traditional IRAs are not allowed after the account owner reaches age 70.5.

If you and your spouse meet the "spousal IRA" criteria above as well as the criteria to contribute to a Roth IRA, you can make a non-deductible contribution to your spouse's Roth IRA.

The amount that you are allowed to contribute for your spouse is based on your tax filing status, and the taxable compensation each of you receive. For the 2009 tax year, if you and your spouse file a joint tax return and your taxable compensation is higher than that of your spouse's, the contribution to your spouse's IRA is limited to the lesser of the following two amounts:

1) $5,000 ($6,000 if your spouse is age 50 or older), or
2) The total compensation included in the gross income of both you and your spouse for the year, reduced by your spouse's IRA contribution for the year to a traditional IRA AND any contributions for the year to a Roth IRA on behalf of your spouse.

Therefore the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $10,000 ($11,000 if only one of you is age 50 or older or $12,000 if both of you are age 50 or older).

Here's an example from IRS Publication 590:
Kristin, a full-time student with no taxable compensation, marries Carl during the year. Neither was age 50 by the end of 2009. For the year, Carl has taxable compensation of $30,000. He plans to contribute (and deduct) $5,000 to a traditional IRA. If he and Kristin file a joint return, each can contribute $5,000 to a traditional IRA. This is because Kristin, who has no compensation, can add Carl's compensation, reduced by the amount of his IRA contribution, ($30,000 - $5,000 = $25,000) to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. In her case, $5,000 is her contribution limit, because $5,000 is less than $25,000 (her compensation for purposes of figuring her contribution limit).

For more information about a spousal IRA review IRS Publication 590 at http://www.irs.gov/publications/p590/ch01.html#en_US_publink1000230412

As a result of the severe storms and flooding in Massachusetts since March 12, the IRS is postponing the April 15 deadline for filing your federal income tax returns until May 11. In addition, to postponing the filing due date, taxpayers in the disaster area will have until May 11 to make their income tax payments and 2009 IRA contributions.

This tax relief applies to taxpayers who reside in or have a business in the Massachusetts counties declared as federal disaster areas. President Obama declared the following Massachusetts counties as federal disaster areas: Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk and Worcester counties.

The IRS should be able to automatically identify the affected taxpayers in these areas, however, if you receive a penalty notice for filing your return or making your payment during the postponement period, you should contact the IRS at 1-866-562-5227 for an abatement.

(Editor's Note: Since this article was written, the deadline for Massachusetts state taxes has also been been extended to May 11 for residents of the same affected counties. Click here to read more about the state tax deadline extension.)

For more information about the specific tax relief being provided, visit the IRS' web site at http://www.irs.gov/newsroom/article/0,,id=220830,00.html

Since we are deep into "tax season" this is a good time to remind those people who bought new cars in 2009 to be sure to claim the deduction for the sales tax that was paid on the purchase.  The deduction is available to anyone who purchased a new car, motor home, motorcycle or truck after February 16, 2009.  The deduction is limited to the tax paid on up to $49,500 of the purchase price (if you bought a car costing $60,000, only the taxes paid on the first $49,500 would be deductible).

As with most tax breaks, income limits do apply.  Single filers can claim the deduction if their income is $125,000 or less.  Married filers can claim it if their income is $250,000 or less.  A partial deduction is allowed for single filers earning between $125,000 and $135,000 and joint filers earning between $250,000 and $260,000.

One of the nice things about this deduction is that you can claim it even if you don't itemize your deductions.

How is unemployment compensation taxed? I received unemployment compensation in 2009 and heard that it may be tax free.

Unemployment compensation is normally subject to federal income taxes. However, the American Recovery and Reinvestment Act of 2009 (ARRA), allows every taxpayer who received unemployment compensation in 2009 to exclude $2,400 of that compensation from federal income tax. This applies to each person. Therefore, for married couples, each spouse can exclude $2,400 of their 2009 unemployment compensation. Unemployment compensation received in 2009, above the first $2,400 is taxable.

If you received unemployment compensation in 2009, you should have received a Form 1099-G showing the amount of compensation received and the amount of any federal taxes withheld from that compensation. Be sure to include this 1099-G when completing your 2009 tax return to account for the $2,400 exclusion. For more information, see IRS Publication 525 on Taxable and Nontaxable Income. (http://www.irs.gov/pub/irs-pdf/p525.pdf)

The $2,400 exclusion does not apply to unemployment compensation received prior to 2008 and after 2009. For more information on the ARRA, visit the IRS web site at http://www.irs.gov/newsroom/article/0,,id=204335,00.html

Q. I live in Massachusetts but work in another state one or two days per month -- what are my tax obligations?

The answer to this question may surprise you -- anyone who lives in one state but travels to another state to conduct business activities likely owes state income taxes in the state to which they traveled.  If you did business in ten states last year, you could be on the hook for filing eleven state income tax returns this year.

According to a recent New York Times article, these tax laws have been in effect for decades but they generally weren't actively enforced.  In the past, only very highly compensated individuals (think professional athletes playing games -- "conducting business" -- in other states) had to worry about income tax obligations in other states.  Now, everybody has to worry because revenue department personnel from many states are looking for ways to increase revenues and they want to collect all the taxes they are possibly entitled to.

So how does this work?  If you traveled to another state for business meetings once per month, that state could tax you 12/250th of your annual income.  (The calculation assumes 250 working days per year.)  On the bright side, you can deduct the income taxes paid to the other state.  However, you would still bear the burden of preparing multiple state tax returns.  If you traveled to 15 different states, you might be required to file 16 state income tax returns. 

And finding people who work in many states is now easier than ever.  The NY Times article discusses a case where an auditor saw that an employee had been reimbursed by his firm for a trip to California but had not paid income taxes in the state of California. 

On a practical basis, it doesn't appear that individuals who made a single (or very limited) business trip(s) have to worry about these policies, but if you are a highly compensated professional and you travel on business frequently, you should consult a tax preparer to learn more about how these rules might apply to you.

 

Whatever your thoughts are on the health care legislation that has passed, everyone has to agree that it is expensive. The Congressional Budget Office estimates that the legislation will cost $950 billion over a ten-year period.

Health care reform comes in two pieces of legislation, The Patient Protection and Affordability Act (the Original Bill) which was signed into law by the President yesterday and the HR 4872 Health Care and Education Affordability Reconciliation Act of 2010 (the Amendment) which passed the House and is expected become law in the near future. To offset the costs of government's increased role in health care, there are several tax increases being imposed (or as politicians like to say "revenue provisions"). Here are a few, but certainly not all, of the more significant "revenue provisions" that I saw while looking through the texts' of the legislation:

Section 1002 of the Amendment – Individual responsibility: Starting in 2014 everyone will be required to maintain health insurance. If you go without insurance, you will be subject to a tax of $695 per year.

Section 1003 of the Amendment – Emploer responsibility: Large companies will be required to provide health insurance as a benefit to its employees. Companies that do not provide this benefit will be imposed a tax of $2,000 a year per employee.

Section 1401 of the Amendment – High cost plan excise tax: Starting in 2018, high cost health insurance plans will be subject to a tax. Plans for single persons that cost in excess of $10,200 and family plans that cost in excess of $27,500 are in this sections crosshairs. The excise tax rate on incremental costs will be 40 percent. In an attempt to appease union dissent, this tax will not be assessed on the individual but will be assessed on the insurance company providing the plan. Ultimately, the costs will still be burdened by the purchaser.

Section 1402 of the Amendment – Medicare tax: Medicare tax will now be assessed on investment income for families making in excess of $250,000 and for singles making over $200,000. Investment income includes interest, dividends, capital gains, rental income and royalties. In the past, Medicare taxes had been assessed on wages only. Earn one dollar of investment income while you are over the threshold limits and you will incur this tax. This tax will commence January 1, 2013.

Section 9015 of the Original Bill – Medicare tax: In addition to the expansion of Medicare tax on investment income as noted in Section 1402 above, the Medicare tax rate has also increased. This tax increases by a third, from 2.9 percent to 3.8 percent.

Section 1404 of the Amendment – Brand name pharmaceuticals: Starting in 2011, the pharmaceutical industry will be subject to a $2.5 billion annual excise tax. The annual excise tax increases in subsequent years, rising to $4.2 billion in 2018. The tax is assessed based on a companies market share and is non-deductible for federal tax purposes.

Section 1405 of the Amendment – Excise tax on medical device manufacturers: Sales of medical devices will be subject to a 2.9 percent national sales tax. This will apply to sales occurring after December 31, 2012.

Section 1406 of the Amendment – Health insurance providers: Starting in 2014, the health insurance industry will be subject to an $8.0 billion annual excise tax. The excise tax increases to $11.3 billion annually for 2015, 2016, and 2017. The excise tax increases to $14.3 billion in 2018 and rises by inflation thereafter. The tax is assessed based on a companies market share and is non-deductible for federal tax purposes. Does anyone think this will create inflation in the health insurance premiums?

Section 9013 of the Original Bill - Modification of itemized deduction for medical expenses: For those incurring significant medical costs, your ability to deduct these expenses will be decreased. This legislation increases the adjusted gross income threshold for claiming an itemized deduction from 7.5 percent to 10 percent.

Section 10907 of the Original Bill - Excise tax on indoor tanning services: This is a sales tax of ten percent assessed on your trip to the tanning salon. This tax begins July 1, 2010.

Are you a small business owner who is having trouble navigating your taxes? Accountant and Managing Your Money blogger Jamie Downey may be able to help steer you in the right direction. Join us at 1 p.m. today as Jamie takes your tax questions.

If you are a senior paying Medicare premiums and you are considering doing a Roth conversion, you need to be aware that a large conversion can result in dramatically higher Medicare Part B premiums.  That is because Medicare Part B premiums vary according to your income.  Retirees with higher incomes pay higher Medicare premiums than people with lower incomes. 

The higher Medicare premiums are imposed on single filers who have an Adjusted Gross Income (AGI) of $85,000 and married filers with an AGI greater than $170,000.  The premiums reach their maximum for single filers with AGIs over $214,000 and married filers with AGIs over $428,000.

Those may sound like relatively high income limits but if you are single and convert a $200,000 IRA this year, you could see a huge increase in your Medicare premiums.  It is possible for Medicare premiums to increase by as much as $3,000 a year.  A married couple could see increases of $6,000 per year. 

Finally, remember that a Roth conversion can also have the negative impact of increasing the amount of your Social Security benefits that are taxable.

Emerging from the health care reform legislation is a new expansion of the Medicare tax. This is in addition to the various other tax increases included in the legislation. Since the inception of Medicare, taxes have been assessed on wage earners to fund the program. The current Medicare tax rate is 2.9 percent for all wages earned. Under the proposed health care legislation, this Medicare tax will now expand and be assessed on investment income. Investment income includes dividends, interest, rental income and capital gains. Initially, it will be targeted at families with adjusted gross income (AGI) over $250,000 and single individuals with AGI's over $200,000. Earn one dollar in excess of $250,000 and you will be assessed this tax on each dollar of investment income.

With many of the "Bush" tax cuts set to expire at the end of this year, there are going to be serious changes in the tax code. Dividends are currently taxed at a maximum rate of 15 percent. Starting next year this will increase to a maximum rate of 39.6 percent. Should this new legislation pass, the maximum tax rate on dividends will increase to 42.5 percent. Add on Massachusetts state tax of 5.3 percent and the maximum effective tax rate on dividends will be 47.8 percent. States such as California will have a tax rate over 50 percent. This is a pretty big swing from the 2009 tax rate.

Even those that are not in the upper brackets will feel the effects of this tax as companies will be less likely to pay dividends. While it may not seem outrageous to charge this level of tax on dividends, one must understand that dividends are already taxed at the corporate level, thus are subject to double taxation. Let's consider a corporation that is subject to the maximum federal corporate tax rate of 35 percent and the Massachusetts corporate tax rate of 9.5 percent. This creates a combined effective rate of approximately 45 percent. For each $1,000,000 of profit that the corporation earns, it will pay approximately $445,000 in federal and state taxes. Assume the corporation then chooses to pay the remaining $555,000 in a dividend. This dividend will then be taxed as income to the individual recipient. If the individual is assessed at the maximum tax rate of 47.8 percent, this will yield another $265,000 in taxes paid. Of the original $1,000,000 of income earned, only $290,000 will reach the shareholder after taxes paid. This creates a marginal effective tax rate of 71 percent for corporate earnings.

There is no doubt that dividend payouts will decline as a result of these levels of taxation. What is the incentive to earn money for shareholders if seven out of ten dollars will go to pay taxes? Maybe Governor Patrick told President Obama about the wonders that double taxation is doing to the Massachusetts economy. Last year the Governor enacted a sales tax on the existing excise tax for various addictive products, i.e. alcohol and tobacco.

The Wall Street Journal reported that this tax will raise $183.6 billion over ten years. Furthermore, 86 percent of the revenue generated from this tax will fall on 1.2 million tax payers. This amounts to $132,000 per capita tax increase on those 1.2 million families. Coupled with the expiring tax deductions this year and other increases Mr. Obama is proposing on high wage earners and you have an all out assault on a small number of persons.

I have to ask why the Massachusetts delegation (with the exception of Senator Brown) is so in favor of this legislation. Massachusetts already has mandated health care. Recent reports note that 97 percent of our citizens are covered by health insurance. Furthermore, as a state we will pay a disproportionate amount of the new taxes under this bill. Massachusetts citizens earn more money than the national average. As a percentage of taxpayers, Massachusetts has approximately 50 percent more families with an AGI over $250,000 than the national average. Massachusetts citizens will not see any tangible change in benefits. However, we will certainly feel the burden of the increased taxes in this legislation.

Whether this legislation passes or not, Medicare will continue to hemorrhage cash for the foreseeable future. This can only result in future tax increases. The biggest concern to the expansion of the Medicare tax is that the genie will be out of the bottle. Over time, you can be sure that the $250,000 threshold for implementing this tax will be lowered and ensnare more tax payers.

I bought a new-construction home, unaware of the new "long-time" homeowner provision, and we passed on 11-6-2009 (date of HUD form), but did not move in until the following Monday. Do I still qualify for the tax credit, as I am receiving conflicting opinions? The tax form instructions for the credit seem to indicate I still qualify as long as I move in after the 6th.

On November 6, 2009, new legislation was passed to extend and expand the First-Time Homebuyers credit originally established under the American Recovery and Reinvestment Act of 2009. One of the provisions of the new law allows existing homeowners to receive a tax credit if they purchase a new principal residence to replace their current principal residence. This "long-time resident" tax credit allows taxpayers who have owned and used in their home for five consecutive years out of the last eight years, to receive up to a $6,500 tax credit for the purchase of a new principal residence.

Based on the situation described in your question, I would generally agree that you should be able to qualify for the long-time homeowners credit as long as you meet all of the other requirements for the credit. According to the IRS' guidance for home purchases made in 2009, "a residence which is constructed by the taxpayer is treated as purchased on the date the taxpayer first occupies the residence". The instructions for the tax form used to claim the credit (Form 5405) seem to further support this interpretation by indicating that you should use the date you first occupied your newly constructed home as your date of purchase.

Keep in mind that there are potential conflicting interpretations because your settlement statement (i.e., your HUD-1 Form) is dated before the effective date of the new tax credit provisions. According to the instructions for Form 5405, "if you are claiming the credit for a newly constructed home and you do not have an executed settlement statement, attach a copy of your certificate of occupancy showing your name, the property address, and the date of the certificate". In your situation, I would recommend filing your tax return with both, your settlement statement and a copy of your certificate of occupancy.

Ultimately, I think that there is enough ambiguity in how the new law applies to your situation that you should consult with a CPA or professional tax advisor for their interpretation and recommendations.

If you spent this past rainy weekend visiting open houses looking for a new home, you might want to step up the search.  The reason is that we are fast approaching the deadline for the expiration of the Home Buyers Tax Credit.  In order to qualify for the credit, you must have a signed purchase and sale contract in place by April 30.  That gives you about 6 weeks to find a possible property.  (In addition, the sale must close by June 30th.)  This credit has been extended before but it doesn't appear likely that it will be extended again.

The credit is equal to 10 percent  of the purchase price of the home and first time home buyers (those who have not owned a home in the past three years) can qualify for up to an $8,000 credit.  People who already own homes (and have lived in them for 5 out of the past 8 years) can get a credit of up to $6,500 if they purchase a replacement home.

The full credit is available to single filers with Modified Adjusted Gross Income (MAGI) up to $125,000 and $225,000 for joint filers.  Partial credits are available for single filers earning between $125,000 and $145,000 and married filers earning between $225,000 and $245,000.  Single filers earning more than $145,000 and married filers earning more than $245,000 are not eligible for the credit.

Finally, if you make a qualifying purchase in 2010, you have the option of claiming your credit on either your 2009 or your 2010 return.  You will also need to file Form 5405 with your return and you wont be able to file your return electronically because you need to provide documents that prove you are eligible for the credit.

My son is a graduate student in Boston for 2009 and has W-2 wages. He's lived there all year. I understand that he's considered a resident for tax purposes. He is no longer a dependent of anyone else. Does he also get to take advantage of the Rental Deduction?

Based on the information in your question, your son should be able to take a deduction for the rent he has paid for his principal residence as long as his rent was not paid by a third party (such as a parent or other relative) and his principal residence is in Massachusetts.

The deduction is for 50 percent of the rent he paid, up to $3,000. Keep in mind that this deduction is based on the actual amount rent paid by the taxpayer. Therefore, if he had a roommate and they shared the rent expense, each taxpayer would be able to deduct the amount that they each paid.

For purposes of this deduction, the Massachusetts Department of Revenue (MA DOR) does not consider the following as a Principal residence:

• an apartment or house of a student or faculty member who has a principal residence elsewhere;
• apartment or house of a nonresident who has a legal residence in another state or country;
• apartment for a person on a temporary assignment in Massachusetts;
• dorm room;
• a hotel, motel, or rooming house occupancy where no rental agreement exists;
• a nursing home or a retirement home for the elderly where no rental agreement exists;
• a vacation home.

In addition, deductible rent payments are defined as amounts paid specifically as rent. You may include amounts paid for utilities, furnishing and parking if the landlord includes them as part of your rent payment and does not make a separate charge for these items. Rent payments do not include condominium fees, separately stated amounts paid for utilities, furnishing, parking. Advance payments such as security deposits, last month's rent, etc. are not considered rent payment until they are actually applied towards your rent.

For more information visit the MA DOR web site at http://www.mass.gov/?pageID=dorconstituent&L=2&L0=Home&L1=Individuals+and+Families&sid=Ador

Spring is just 10 days away. It's a good time to clear out the garage and the basement — and your financial files too. One important aspect of being in control of your finances is being organized. When your documents are organized it means you can find what you need quickly, are more likely to pay your bills on time and are less likely to be caught by surprise by an expense. You know what you have and where it is.

Here are some tips for organizing and better managing your paperwork:

1. If you don't have a shredder, buy a good cross-cut model. Never toss documents into the trash barrel. Shred everything with personal information.

FULL ENTRY

We've talked about many of the finer points on paying the taxes due on a Roth Conversion in 2010.  One of the special aspects of converting in 2010 is that you can opt to defer the taxes that would be due and report half the income in 2011 and the other half in 2012.  Despite the fact that tax rates are expected to rise in 2011 and 2012, many people will want to defer the payment of the conversion taxes.  But, did you know that if you elect to defer the payment for one Roth conversion, that election applies to any and all conversions you make that year?  That is, you can't convert two different IRAs and elect a different tax treatment for each conversion.  However, in a somewhat surprising twist, couples who each do a Roth conversion can elect different tax treatments.  For example, the husband could elect to defer the taxes while the wife may chose to pay the taxes in 2010.

 

The federal government and Massachusetts government are in desperate need of money. The federal budget deficit is estimated at $1.6 trillion this fiscal year. Here in Massachusetts, the state is trying to close a $2.75 billion budget gap. Increasing taxes in an election year is a political taboo. However, the government also employs less overt strategies to increase tax revenues. One strategy being used by both the US and Massachusetts government is to increase tax enforcement. The most typical tax enforcement activity is an audit by either the Internal Revenue Service (IRS) or the Massachusetts Department of Revenue (DOR).

Last June, the Massachusetts Legislature and Governor Patrick added $17.3 million to the Department of Revenue’s budget for increased audit and enforcement. Additionally, President Obama’s 2010 budget added $400 million, to IRS enforcement activities.

The IRS uses a computer scoring system to determine who gets audited. The computer examines tax return inputs and determines the likelihood of a tax error. Each return is assigned a score. Those with the higher score are more likely to be selected for audit. While the specific factors to trigger an audit are kept secret, the following factors will increase your likelihood of being audited.

Tax return abnormalities – The IRS computers will examine your return and search for abnormalities. These abnormalities include high deductions as compared to your reported income. Reporting less income on your tax return than has been reported on W-2's, 1099’s, etc. (this will certainly bring about a letter from the IRS requesting more information). Reported income that is lower than others in your profession will increase the likelihood of an audit. Large variations in income from year to year might also trigger an audit.

High wage earners – Those that earn over $100,000 per year are five times more likely to be audited. The IRS knows that larger assessments are likely to come from those with more income.

Round numbers – A tax return with a lot of round numbers, i.e. a $1,000 capital gain, or $1,500 in real estate taxes look suspicious. It can be indicative of someone “guessing” at numbers and will increase the likelihood of IRS scrutiny.

High charitable contributions – The IRS believes charitable deductions are a significant abuse by tax payers. In recent years, increased donation reporting by charities has been proposed to cut down on the abuse. The IRS will scrutinize tax returns with charitable deductions that are significantly higher than others in their income range.

Business owners – The self-employed are more likely to be audited. Should your business show continuous losses over the years, the IRS may determine that your business is actually a “hobby” and deny your deduction.

Home office – Those that take a home office deduction will definitely increase the likelihood of IRS scrutiny.

Cash industries – Those employed in cash intensive industries are more likely to come under audit. Cash intensive industries include food service, salons and taxis.

The unlucky few – the IRS also conducts a small number of random audits. These audits are not necessarily triggered by tax return indicators. In 2007, the IRS completed approximately 13,000 random audits.

Today, the Hiring Incentive to Restore Employment Act (HIRE), H.R.2847 was passed by the Senate in a 70-28 vote. There are three significant tax incentives for employers included in this bill. They are as follows:

Hiring Tax Incentives – Social Security requires employers to pay 6.2 percent payroll tax on employee wages. This tax ends once an employee receives $106,800 in wages. This is in addition to the 6.2 percent paid by employees for a combined total of 12.4 percent. Medicare adds another 2.9 percent combined tax to the employer and the employee. The proposed legislation would exempt employers from paying their portion of Social Security tax of 6.2 percent on qualified employees who start employment after February 3, 2010 and before January 1, 2011. A qualified employee is defined as someone that has not been employed for more than 40 hours during the 60 days prior to commencement of employment. The new employee cannot replace a currently employed person (unless the current employee quit voluntarily or is terminated for cause.) This could potentially save employers up to $6,622 in payroll taxes ($106,800 x 6.2 percent) for each new hire. It should be noted that employers would concurrently lose their tax deduction for these payroll taxes, which could create a partial increase in income taxes.

Employee Retention Credit - Employers that hire a "qualified employee" and keep them employed for one year will be eligible for a $1,000 tax credit. This is in addition to the reduced payroll taxes paid for the employee. This credit would be available for each qualified employee hired. This credit would be taken on the employer's 2011 tax return.

Capital Expensing - In 2009, the tax code allowed small and mid-size businesses to take a tax deduction for capital purchases up to $250,000. This is often referred to as a Section 179 deduction. Under current legislation, this deduction declines to $125,000 in 2010. The Senate's bill would extend last years provisions and allow for up to $250,000 in capital expenditures to be treated as a deduction in 2010.

While this legislation has passed in the Senate, it still needs to be reconciled to the House's version of the jobs bill which was passed in December.

If you execute a Roth conversion in 2010 you will have the option of declaring half of the amount converted as income in 2011 and the other half in 2012.  This may sound like a good deal, but most people expect the tax rates to increase by 2011 so paying the taxes owed in 2010 might be a better idea.

Assuming you pursue this option, how can you be sure that you don't incur any penalties when your taxes come due on April 15, 2011?  You actually have several options.

First, no matter how much you convert, you can get by penalty-free with the IRS as long as you have paid 100 percent of the tax you owed last year.  If your adjusted gross income exceeds $150,000 per year, you would need to pay 110 percent of the tax you owed last year.

Alternatively, you could elect to pay 90 percent of the tax that you expect to owe in 2010.  If you select this option, you can have the extra taxes withheld from your paycheck so you can spread the tax pain over the whole year.

Finally, you could also elect to make estimated tax payments.  These payments would be due on April 15, June 15, September 15 and January 15th.

Whichever method you select, it is important that you be able to pay the taxes due on the Roth conversion with money you have in a separate taxable account.  If you have to use some of the money in your IRA to pay the taxes due on the Roth conversion, you are losing much of the benefit of a conversion and should likely revisit whether a conversion is the best move for you. 

The weak job market is forcing a new career path for many. Many on the unemployment roles are shedding the traditional career path and striking out on their own as independent contractors, a.k.a. freelancers. Wikipedia defines a freelancer as "somebody who is self-employed and is not committed to a particular employer longterm. Freelancers may charge by the day, hour, or page or on a per-project basis." Many will undoubtedly enjoy this new career while others will miss the structure of working for a single employer.

The most important key to success will be the ability to find customers and deliver value to them. However, this is just step one in the equation and does not guarantee success. If you are thinking about becoming an independent contractor, here are seven additional things to consider for success:

Continuing education – To be successful as an independent contractor, you need to provide as much value as possible to your customers. The only way to do this is to continue your education in your field. Ideally you want to be considered a leader. I do not mean that you have to go back and pay for overpriced, dubious classes at a university. My experience is the return on this kind of education is poor. Education can come at a much less expensive price and in areas which you want to focus. I can not stress enough that people should read for at least a half hour everyday to learn more about their skills and craft. One hour a day and you will receive twice the return. Getting books at the library or buying them on Amazon costs next to nothing financially and the payoff will be huge. The real investment is the time and most people don't do it. If you commit to this level of continuing your education, you will be much more successful than your peers.

Budget – Another key to success in going solo is having a financial budget. As an independent contractor you will no longer receive a regular paycheck. More than likely your weekly income will fluctuate, especially in the early years. Some weeks you will be paid very well for your efforts, and some weeks you will not have any income at all. Financial discipline is needed to deal with this type of fiscal uncertainty. You have to make sure the weeks you are paid well can also carry you through the weeks that you have limited income. Set up an annual budget. Determine what you need for living expenses as well as business related expenses.

Estimated taxes – Over the years, I have run into many independent contractors that get in hot water over failure to pay their taxes. As an independent contractor, you will no longer being paying your taxes involuntarily through payroll withholdings. Instead, you are required to remit payment of taxes every quarter to the IRS and state. This is more complex than it sounds as it requires you to accurately estimate your taxable income for the year. From this you pay your estimated taxes. Pay too little and you may be subject to penalties from the government. Another thing to mention; as an independent contractor your Social Security taxes will effectively double to 15.3 percent. As an employee of a company the employer pays for half of your Social Security tax. As an independent contractor, you will be required to pay the full freight on this tax. Work with your tax advisor to set up estimated tax payments and ensure that you do not have to pay a huge sum of money on April 15th.

Location - The thought of getting out of bed, turning on the coffee maker and working in one's pajamas at the dining room table sounds appealing. For most it will not be feasible. On the rare occasion I try to work from home, it is usually spent side tracked with my daughter and constant trips to the refrigerator. The home office is not conducive to my personality or my current living situation. For those of you in the same boat, you may need to rent a small office outside the home. Additionally, having an office lends you credibility. Rightly or wrongly, potential customers are not likely to be impressed by your home office. It is like getting an email from a business and they are using an AOL as their primary work email. It lacks credibility, which is required when you are seeking new customers.

Network – I do not mean going to networking events, which in my experience are usually a waste of time. What you want to do is find a community of other independent contractors to communicate with and assist. In this community, you can share successes, failures, marketing proposals, office space, overhead and most importantly sales leads. If an engagement is too big for one person to handle, he can bring in others from his / her community to help complete it. Having a good community to work with will be highly important to your success.

Health insurance – One thing you need to consider in your new endeavor is how you will obtain health insurance. Here in Massachusetts you are required to carry it, so skimping is not an option. A plan for a single person runs around $7,000 per year and a plan for a family is over $14,000. It is a lot of dough. If your most recent job paid $75,000 and you received health insurance for the family as well, you will now need to have over $90,000 to have a comparable financial income.

Bookkeeping – Now that you have started your own business you want to learn some basics about bookkeeping. Bookkeeping will help you determine the financial success of your business. Furthermore, you will need this to prepare your tax return.

If you have any other thoughts or questions, please submit them on the right side of this webpage.

Inheriting a Roth IRA is a great thing because all the distributions that you take will be tax free.  And, if you are lucky enough to inherit a Roth IRA when you are young, you could have decades and decades of tax free withdrawals ahead of you.  You may even find that the total of all the distributions you take over your lifetime exceed the initial value of the account many times over.  That is why it is important to try to take only the required minimum distributions (RMDs) from an inherited IRA if at all possible.

However, if you must take distributions faster than the schedule required for RMDs, you need to be aware of the 5 year rule.  Beneficiaries can withdraw the earnings portion of a Roth IRA tax free, but only if the account has been opened for at least 5 years.  So, if the person who left you the Roth IRA opened the Roth recently and died soon after, you may have to wait a few years to avoid taxation. 

Here is an example: if you inherit a Roth that was opened on May 1, 2007, the account was considered to be opened as of January 1, 2007.  To avoid paying taxes on the earnings portion of the Roth once you inherit it, you must not take out the earnings until after January 1, 2012.

This doesn't mean that you cant take any withdrawals before that date -- you are always free to withdraw the contributions to a Roth tax free.  It is only the earnings portion that has a waiting period and the other nice thing about Roths is that any withdrawal you do take is assumed to come from the contributions first.  Earnings are assumed to be withdrawn last.

If you inherit the Roth IRA from your spouse, you can elect to treat the account as if it were your own.  If you elect to treat it as your own, however, you may not be able to withdraw earnings free of tax until you reach age 59 and a half.

 

 

With unemployment still hovering around ten percent and an election year underway, both federal and state leaders have recently been embracing small businesses.  According to the Small Business Administration, small businesses have generated 64 percent of all new jobs over the last 15 years.  Unless these small businesses start hiring employees, the elected leaders themselves will be on the unemployment roles later this year.

 

Earlier this week, Governor Patrick came out in favor of increasing the availability of credit to small businesses and trying to reign in health insurance costs.  While these items are important, he may also consider looking at some issues in the Massachusetts tax code that have changed under his watch to the detriment of small businesses.

 

Last year, the Department of Revenue issued a directive that can only be characterized as discriminatory against small business owners.  Massachusetts Directive 08-3 states the following: “partners and self-employed individuals are denied any deduction for contributions to their 401(k) plan”.  This directive came from the Governor’s appointed Commissioner of Revenue. 

 

Here is how it works.  A small business owner maintains (at his cost) a 401(k) plan for his / her employees.  In many cases, the owner even provides a matching contribution to the employees’ account.  The employees contribute to the 401(k) plan and receive a deduction in Massachusetts.  However, the owner that provides the job, provides a matching contribution, and pays for the costs of the plan is not allowed a comparable deduction. 

 

All other classes of workers including; state employees, those working at a not-for profit, those working at large businesses, even the Governor himself are allowed a tax deferred deduction for retirement savings.  The only one exempt from this tax benefit are the self-employed / small business owner.  The Massachusetts Commission Against Discrimination's webpage defines discrimination as follows: “Discrimination is unfair treatment because of an individual's membership in a particular group.”  It certainly would appear that the self-employed are being unfairly treated as compared to other workers.    

 

The tax code says a lot about the way the government treats the various interests in the state.  Looking at this, one can only assume that Massachusetts does not look very favorably toward small business owners, regardless of the lip service given them.

Last year the IRS conducted a study of the tax preparation industry to see if there needs to be greater oversight and regulation of the industry. The study revealed that "more than 80 percent of American households use a tax preparer or tax software to help them prepare and file their taxes" and that there needs to be higher standards for tax preparers. Based on the results of their study, the IRS has proposed several measures aimed at providing taxpayers with a higher level of protection and service.

Although the proposed regulations are not expected to be fully implemented for several years the IRS has started to roll out some changes for this year's tax filing season. The efforts currently being implemented include:

• Sending letters to approximately 10,000 tax preparers across the country highlighting areas where errors are often found including business income and expenses (Schedule C), itemized deductions (Schedule A), the Earned Income Tax Credit and the First Time Homebuyer Credit;
  
• Having IRS Agents visit preparers to ensure that the preparers are assisting their clients appropriately and to address compliance and education issues; and
• Implementing additional tools to investigate and detect non-compliance such as having IRS agents pose as clients.

Additional proposed regulations which are expected go into effect in future tax years include:

• Requiring paid tax return preparers to register with the IRS,
• Requiring competency tests for all paid tax preparers (except attorneys, Certified Public Accountants, and enrolled agents),
• Requiring ongoing continuing professional education for all paid tax preparers,
• Extending the IRS' ethics rules that currently apply to attorneys, Certified Public Accountants, and enrolled agents to all paid preparers.

While these proposed rules should provide more protection for taxpayers, you should still be careful when having some else prepare your return. The IRS offers the following tips on what to look for when choosing a tax preparer:

• Be wary of tax preparers who claim they can obtain larger refunds than others.
• Avoid tax preparers who base their fees on a percentage of the refund.
• Use a reputable tax professional who signs the tax return and provides you with a copy.
• Consider whether the individual or firm will be around months or years after the return has been filed to answer questions about the preparation of the tax return.
• Check the person's credentials. Only attorneys, CPAs, and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
• Find out if the return preparer is affiliated with a professional organization that provides its members with continuing education and other resources and holds them to a code of ethics.

If you check out the White House's budget webpage, you may be a bit confused. In large letters it states "A new era of responsibility - the 2011 budget." However, the subsequent budget calls for $1.6 trillion in deficit spending next year. It certainly confused me and seemed a bit paradoxical.

The details of the budget are a bit ominous. It projects unemployment to remain at 10 percent this year, decrease to 9.2 percent in 2011 and further decrease to 8.2 percent in 2012. Furthermore, significant budget deficits are outlined for the foreseeable future.

The budget includes both tax cuts to certain groups and tax increases to certain groups. However, to deal with the bulging deficits, the tax increases greatly outweigh the tax cuts. The tax increases on upper income families alone is approximately $1 trillion over a ten year period. Here are some of the detailed tax proposals in the budget:

Bush-era tax cuts - Most of the tax cuts implemented under the Bush administration are set to expire at the end of this year. President Obama's proposal is to extend the tax cuts to those earning under $250,000 ($200,000 if single). For those earning over these amounts, he proposes to let the tax cuts expire. The most significant impact of these expiring tax cuts would be an increase in the 33 and 35 percent individual tax brackets. These would increase to 36 percent and 39.6 percent, respectively.

Limiting tax deductions - Another tax increase that will impact higher income families is to limit the benefit of itemized deductions, such as mortgage interest, state taxes and charitable contributions. This would reduce the effectiveness of an itemized deduction by about 25 percent.

Increase the capital gains rate - For those earning over $250,000, Obama proposes an increase in the capital gains rate from 15 to 20 percent.

Bank tax - A tax on banks of $90 billion over the next ten years is proposed. This tax is to pay primarily for the direct bailouts of General Motors and Chrysler, not to mention the indirect bailouts, i.e., cash for clunkers and deductibility of automobile sales tax.

Oil, gas, and coal tax - These companies will be exempted from a manufacturing tax break available to other comparable companies. This will raise taxes on this group nearly $40 billion over the next decade.

Investment managers - The budget proposes to change the way private equity and other money managers are taxed. Those folks will see an increase of $24 billion in taxes over the next decade.

Make work pay - Obama proposes to extend this tax break of up to $800 per year for families.

Purchase of capital assets - Obama has proposed to extend through 2010 a benefit to small businesses that purchase equipment.

On January 22, 2010, President Obama signed a bill into law that established special rules for charitable donations made towards the Haitian relief efforts. The new law allows individuals who make qualified charitable donations to Haitian relief efforts, the ability to deduct those donations on their 2009 tax return. Under the normal rules, charitable donations are deductible in the tax year that they are made. This law allows individuals to choose to deduct their 2010 donations in 2009 or 2010.

In order to take the deduction in 2009, the charitable donations must be made:

• After January 11, 2010 and before March 1, 2010,
• Specifically for the relief of those in the areas affected by the earthquake in Haiti on January 12, 2010,
• In cash (as opposed to property), and
• To qualified charities as defined by the IRS. (Note: donations to foreign organizations are not usually deductible according to the IRS' guidelines for charitable contributions.)

In addition, the rules under this law are only available to those who itemize their deductions on Form 1040, Schedule A. If you take the Standard Deduction on your federal tax return you would not be allowed to take advantage of these special rules.

Keep in mind that other than having the ability to deduct these qualified charitable donations in 2009, all of the other IRS rules and limitations for charitable contributions still apply.

If you meet the criteria for taking this deduction, be sure to keep the necessary documentation of your donation such as receipts and cancelled checks. If you made donations via text messaging, the IRS will allow you to use your phone bill as supporting documentation if the phone bill has the name of the donee organization, the date of the donation and the amount of the donation.

The IRS encourages everyone to electronically file their taxes.  There are several benefits to e-filing: If you use tax software to complete your e-file return (instead of calculating the numbers yourself) your return is likely to be more accurate.  Software also helps guide you through all the possible credits and deductions you may be eligible for, helping ensure that you pay no more than you owe to the IRS.  With e-file you will get your refund, if you're due one, much faster.

The IRS offers free e-file on their website.  Anyone can access their Free File Fillable Forms, which are electronic versions of all of the IRS forms, and use these to complete the tax return and file electronically.  The IRS also offers software that takes you step-by-step through completing a return to taxpayers who's adjusted gross income was $57,000 or less in 2009.  You can choose one of the software programs yourself or go through a list of questions that helps you select the right one.  You can file federal and state returns, as well as file for an extension.  All of the programs do the math for you and check for errors.  Check it out here.

I am a small business owner who started a consulting practice in early 2009. Which IRS forms should I use to file my business tax return?

The income tax form that you will need to file for your business depends on the business entity that you established when you started your consulting practice. The business entities available for those starting a business are sole proprietorship, general or limited partnership, C corporation, S corporation, limited liability company (LLC), and limited liability partnership (LLP). Once you have determined the type of business entity you have, you can follow the IRS' guidelines on how to report your business income and expenses.

While there are many tax and non-tax issues to consider when choosing a business entity, here is a general summary of the income tax filing requirements for each type of entity.

A sole proprietorship does not need to file a separate tax return. The sole proprietorship's business activities (i.e., the income and expenses of the business) are reported on Schedule C or Schedule C-EZ (Profit or Loss from Business) of the owner's individual income tax return (Form 1040). Any net income that is shown on Schedule C is taxed as ordinary income on the owner's tax return and any net loss reduces the owner's ordinary income.

Income from partnerships and LLCs are passed through to the individual partners of the partnership or to the members of the LLC and taxed at the individual level. Partnerships and most LLCs do not need to file an income tax return. However, these entities are required to file an annual information return (Form 1065) providing the IRS with information on the business activities of the partnership or LLC.

Corporations and their owners/shareholders are required to file separate income tax returns (Forms 1120 and Form 1120S). For tax purposes, there are two types of corporations: C corporations and S corporations. Income generated by a C corporation is subject to taxation at the corporate level and the individual level. Pre-tax income is taxed at the corporate level and dividends paid to shareholders are taxed at the individual level.

An S corporation is a corporation that has made a special election to allow it to be treated as a corporation for legal purposes but a pass-through entity (like a partnership) for income tax purposes. The income from an S corporation is passed through to the individual shareholders of the corporation and taxed at the individual level. However, an S corporation is required to file a separate tax return (Form 1120S).

For more information about tax filings for small businesses visit the IRS' web site at http://www.irs.gov/businesses/small/article/0,,id=134947,00.html.

I have $9,400 in my IRA. What would my penalty and taxes be if I withdraw early?

While I don't have enough information about your specific circumstances to determine your tax liability, here are the rules that apply to the early withdrawal of funds from a Traditional IRA.

Withdrawals or distributions from a Traditional IRA generally consist of several components including deductible contributions, non-deductible contributions, investment earnings (including interest and dividends), and pre-tax and after-tax funds (if your IRA includes assets rolled over from an employer sponsored plan). The portion of your withdrawal/distribution that represents deductible contributions, investment earnings, or pre-tax funds are typically subject to federal and state income taxes because those amounts were not previously taxed. The portion of your withdrawal that represents non-deductible contributions or after-tax funds is not usually subject to federal or state income taxes.

The early withdrawal penalty, also called the Premature Distribution Rule, is a 10 percent federal tax that is applied to withdrawals made before age 59.5. This tax applies to the amount of your withdrawal that is subject to federal income taxes. Keep in mind that the Premature Distribution Penalty is a federal tax. Some states may also impose their own early distribution penalty for IRA withdrawals made before a certain age.

There are exceptions to the penalty under the Premature Distribution Rule. If you meet any of the following exceptions you may not have to pay the 10 percent penalty.

• You are using the withdrawal to pay for
• unreimbursed medical expenses in excess of 7.5 percent of your adjusted gross income, or
• health insurance premiums for you, your spouse, or your dependents during a year in which you collected unemployment benefits for more than 12 consecutive weeks, or
• qualified higher education expenses for you, your spouse, your children or grandchildren, or your spouse's children or grandchildren, or
• first-time homebuyer expenses of yourself, your spouse, your children, your grandchildren, or an ancestor of your spouse or you ($10,000 lifetime limit), or
• unpaid federal income tax liability levied by the IRS;
• Your withdrawal is a qualified reservist distribution;
• You make a qualifying, nontaxable rollover or direct trustee-to-trustee transfer;
• Your beneficiary or your estate is receiving the funds from your IRA after your death (regardless of your or your beneficiary's age or your age at the time of your death);
• You are receiving the funds due to your qualifying disability;
• You are taking the withdrawal in the form of an annuity known as "substantially equal periodic payments".

Many of these exceptions apply to specific circumstances. Therefore, you should consult a tax adviser or review the specific rules from the IRS if you believe that any of these exceptions apply to your situation.

Regarding the IRS rule on when a dependent college student is required to file a federal tax return: Could you explain the reason for the first part (unearned income > $950)? It seems irrelevant. Doesn't the third part (gross income > earned income + $300) effectively set the unearned income limit to $300? This would be triggered even at zero earned income, right? Or am I missing something?

I can understand how it may seem like you are limited to $300 of unearned income in the scenario that you mentioned but there is another important part to the gross income test that you need to consider. The gross income test states that a dependent is required to file a tax return if his/her gross income exceeds the higher of $950 or his/her earned income plus $300. By allowing a dependent?s gross income to be the higher of the two numbers, a dependent with $0 earned income can have as much as $950 of unearned income before triggering the filing requirement under this rule.

(Note that the filing requirements that I am describing in this blog posting apply to single dependents that are under the age of 65 and are not blind. The filing requirements for those dependent individuals are different).

The general rule for whether or not a dependent needs to file a tax return consists of three parts which I will call the unearned income test, the earned income test, and the gross income test. For the 2009 tax year, a dependent is required to file a tax return if:

• Their unearned income is greater than $950 (the unearned income test), or
  
• Their earned income is greater than $5,700 (the earned income test), or
• Their gross income is greater than the higher of $950 or their earned income plus $300 (the gross income test).
  

Earned income generally includes wages, tips, and taxable scholarships. Unearned income generally includes taxable interest, dividends, capital gain distributions, and taxable social security benefits. Gross income is the total of earned and unearned income.

An easy way to think about these filing requirements for dependents is as follows:

• If a dependent has unearned income of $300 or less, he/she will need to file a return if their gross income exceeds $5,700.
• If a dependent has unearned income of more than $300, he/she you will need to file a tax return if their gross income exceeds $950.

For more information on these rules as well as those for other dependents visit the IRS? web site for Publication 929 at http://www.irs.gov/publications/p929/ar02.html.

I just found out that I owe over $7,000 on my 2008 taxes. What should I do?

Generally, if you have completed your federal or state tax return and have determined that you owe additional taxes, you should pay it in full before the due date for that tax year. For the 2008 tax year, the deadline for paying your individual income taxes was April 15, 2009. While extensions are usually available for filing your tax return, they are generally, not available for paying your tax liability.

On rare occasions the IRS may grant a 6-month extension to, both, pay your tax liability and file your tax return, However, you must apply for this before the regular tax filing due date which, for 2008, was April 15, 2009. In certain cases, if you are a U.S. citizen and you live outside of the U.S. or your are in the military serving outside of the U.S., you may qualify for an extension to pay your tax liability.

If you are unable to pay the amount owed by the due date of that payment, you should still file your tax return and pay as much as you can. The interest and penalties assessed for not filing your return or not paying you tax liability on time can be significant. The failure-to-file penalty can range from 15 percent to 75 percent and the failure-to-pay penalty can range from 5 percent to 25 percent of the unpaid balance.

If you are unable to completely pay off the balance owed, you should contact the IRS (or you state tax authority if you cannot pay your state tax liability) as soon as possible to work out additional payment options or more flexible payment terms. The IRS and state taxing authorities may allow you to setup an installment agreement which would allow you to pay off your taxes over time rather than as a single lump sum. When you contact the IRS or state tax authority, be sure to explain any financial hardships, such as job loss or medical illnesses that may have contributed to your inability to pay. During the past year the IRS has announced additional assistance for taxpayers who experience financial hardships.

A little over three years ago, my wife made the wisest decision in her life: she married me.  I must admit, this event also worked out pretty well for me.  However, subsequent to our nuptials, I no longer qualified to fund my Roth IRA (my wife is a highly compensated public school teacher).  This all came to an end yesterday when I funded what is known as a “back-door” Roth IRA.

 

A few years ago, President Bush signed the “Tax Increase Prevention and Reconciliation Act of 2005”.  One of the beautiful parts of this legislation was the ability for anyone to convert a Traditional IRA to a Roth IRA.  This clause of the legislation became effective starting January 1, 2010. 

 

Yesterday I executed the “back-door” Roth IRA strategy.  This eliminates the income limitations and allows almost anyone the ability to fund a Roth IRA.  While I had known about this process, it sounded as though it was a bit convoluted and would take some time.  In the end, neither of these concerns had any justification.  I had an existing account at T. Rowe Price and completed the process online.  The entire process took me less than 15 minutes. 

 

Here is how the process works:

 

Step One: Fund a Traditional IRA.  Almost anyone under the age of 70 ½ can fund a Traditional IRA.  There are income limits on these being deductible. But we don’t want to make a deductible contribution anyway.  You can put $5,000 into the Traditional IRA per annum ($6,000 if you are 50 or older.)  If you act now, you can fund for both the 2009 and 2010 tax years.  Consequently, my wife and I could fund up to $10,000 each.  Total elapsed time to complete: four minutes.  (As a side note, does anyone else notice the age discrimination that is widespread throughout the tax code?  Why should those over 70 ½ be shut out from this process?)

 

Step Two: Convert the Traditional IRA to a Roth IRA.  I had to fill out a form and submit it to T. Rowe Price.  I just answered a couple basic questions and presto, the Traditional IRA that I had funded on Tuesday is now a Roth IRA.  I will not have any tax consequences, as I already paid taxes on the funds in the account (I am not taking a deduction for this.)  Total elapsed time to complete: ten minutes.

 

If you have been shut out of the Roth IRA in recent years due to the income limitations, you are back in business.  A married couple can fund $20,000 into a Roth almost immediately.  This is exciting stuff (at least for an accountant).  Any questions or concerns, feel free to submit a question in the bottom right of this webpage or shoot me an email.

 

This process is very effective if you have no other existing IRA accounts.  If you have other existing IRA accounts, you should discuss this with your tax professional to determine other possible tax implications of the conversion.

Do you buy or sell individual stocks?  If yes, you should know that Congress is considering imposing a tax of 0.25 percent on each and every one of your transactions.  Estimates of the revenue that would be generated from taxing these transactions exceeds $10B per year.

Proponents of the tax say that the average investor won't be impacted by the tax because the first $100,000 in transactions will be exempt and mutual fund trades won't be subject to the tax.  However, what do mutual fund managers buy?  Individual stocks of course, and the fund managers would be subject to the tax.  This would make mutual funds more expensive and those costs would very definitely be borne by the average investor. 

Lawmakers are quick to point out that the tax would not be imposed on an investor's trades within retirement plans and 529 plans, but if the underlying funds in these plans are taxed, the tax eventually "floats" back to the investor. 

The tax will also be imposed on options, futures contracts and swaps although the rate on these instruments would be 0.20 percent.  Interestingly, the tax does not apply to individual bonds.

This tax is a truly horrible idea and investors shouldn't be misled by the proponents of the tax who say that only day traders and Wall Street fat cats will be impacted.

Volunteering your time for charitable work is a worthwhile and commendable effort. But don't overlook some tax advantages too.

While your time spent working on behalf of a charitable organization is not tax-deductible, your travel expenses are. On your 2009 tax return you may deduct the miles you spent driving to and fro, or on behalf of, your volunteer duties at 14 cents per mile. This rate stays the same for 2010. Keep a log of your mileage as proof for the IRS. You can do this by keeping a mileage log in your car (available at Staples for a couple of bucks) or jot it down on your calendar after every trip.

In addition to mileage, uniforms necessary solely for your volunteer job, and meals and lodging are deductible (if the majority of the trip was spent on the volunteer effort - expenses for personal vacation or recreation, while part of the trip, are not deductible.)

The organization for which you volunteer must be a religious organization, federal, state or local government, non-profit organization, public park or recreation facility or public charity. War veterans' groups qualify too. More information is available in IRS Publication 526.

Although April 15th is several months away, here are some tips that will help you to reduce the amount of time and stress typically associated with preparing and filing your tax return.

1) Start gathering your tax related documents and information now. Be sure to include any receipts, canceled checks, credit card statements, and other documentation necessary to report your income and claim your deductions.

2) Keep an eye out for tax documents in the mail. Documents such as W-2s, Form 1099s, mortgage statements, as well as bank account and investment account statements for 2009 should start to arrive in early to mid-January. Be sure to look out for these and other tax related documents in the mail. If you are only receiving electronic statements from your financial service providers be sure to check your e-mails for these documents.

3) Consider e-filing your Federal and State tax returns. This can reduce the amount of errors as well as the amount of time it takes to receive your money if you are due a refund.

4) Consider direct deposit. If you are entitled to a refund, you can have it deposited directly into your bank account. Regardless of whether of not you choose to e-file your return, this can reduce the amount of time it takes to receive your refund because you will not have to wait for a paper check.

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Last week Martha Coakley said she did not benefit by the "Bush" tax cuts.  Is this possible?  Is it true that only the wealthy benefited from these tax cuts?

 

There were two significant tax reductions implemented during the Bush administration in 2001 and in 2003.  Many of the provisions of these bills will expire on December 31, 2010.  The most overreaching of the tax cuts reduced tax rates for all brackets, and this benefited all tax filers.  For example the 15 percent tax bracket was reduced to 10 percent and the 39.6 percent tax rate fell to 35 percent.  Also, much of the marriage penalty was eliminated, child tax credits were increased, dividend rates declined and estate taxes declined. 

 

Since all federal tax filers were benefactors of these tax cuts, Mrs. Coakley also reaped some of their rewards.  Mrs. Coakley has not released her income tax returns.  However, we can look at her filings with the Federal Election Commission and make a few assumptions to estimate her taxable income in 2009 and compare this to what she would have paid in federal taxes in 2001, prior to the most sweeping of President Bush’s tax cuts. 

 

Mrs. Coakley, as Attorney General will make approximately $135,000 in 2009.  (It should be noted that her taxable income does not include the amount of pension benefit earned in 2009.  This benefit alone is probably in excess of $30,000 per year.)  The amount of her husband’s pension is not disclosed in her filing with the Federal Election Commission.  However, he was the Chief of Police in Cambridge.  I will conservatively estimate his annual pension at $85,000 per year (it is likely quite a bit higher than this).  I assume that they have approximately $5,000 in other taxable income based on the $200,000 in other liquid assets owned by the couple.  This brings their gross income to $225,000.  It appears that their home is home is paid off, so they have no mortgage deduction.  They have no children or college tuition deductions.  They will have state income taxes, real estate taxes and charitable donations to deduct.  This will likely be the bulk of their deductions.  Additionally, they will be eligible for individual exemptions.  I will estimate their total deductions at $23,000.  This could be a little high or a little low, but is probably right in the wheelhouse. 

 

This leaves Mrs. Coakley’s and her husband’s taxable income at $202,000 for 2009.  Based on the 2009 federal tax table, Mrs. Coakley would have federal income taxes of $44,823.50 on this amount of taxable income.  Based on the 2001 federal tax table, Mrs. Coakley’s $202,000 of taxable income would have yielded an income tax liability of $54,457.50.  In 2009 Mrs. Coakley saved almost $10,000 in federal taxes due to the Bush tax cuts.  Her highest marginal tax rate declined from 35.5% to 28 percent.  Furthermore, she has received comparable benefits in prior years and will also receive a similar tax reduction for 2010, the year the tax cuts expire.  We can estimate that she has saved probably over $50,000 in federal taxes due to the “Bush” tax cuts in effect from 2001 through 2010. 

 

Mrs. Coakley subsequently noted that it was only the wealthiest one percent of Americans that benefited from the Bush tax cuts.  In looking at the most recent IRS statistics available (tax year 2005), only 2.654 percent of all tax returns reported adjusted gross income over $200,000 – Mrs. Coakley’s adjusted gross income was approximately $225,000.  These statistics do not include the millions of Americans that do not file a tax return as their income levels are below the filing requirements.  This puts Mrs. Coakley right near the top one percent of Americans wage earners, and in actuality one of the top benefactors of the tax cuts she recently derided. 

 

If you are writing a check for a last-minute tax-deductible item, make sure you mail the check before December 31st.  You can claim a deduction as long as you write the check in 2009, even if it is not cashed until 2010.

 On the other hand, charges that you make with a store retail credit care are only deductible if the bill is paid in 2009.  However charges on a bank credit card are deductible in the tax year that the goods are charged.

Last night I spent a little time looking at the health care reform legisilation that passed the Senate, a.k.a H.R. 3590 Patient Protection and Affordable Care Act.  I did this since I know that neither John Kerry nor unelected Senator Paul Kirk have read the bill.  While it would take days to read the entire bill, my cursory review of the legislation identified at least 19 tax increases. 

 

Just an FYI to Mr. Kerry and unelected Sen. Kirk, we already have a universal health insurance law here in Massachusetts.  As I read it, this legislation will provide no additional health insurance coverage to the residents here in Massachusetts, only additional taxes.  But I digress. 

 

The following are some of the highlights of the tax increases included in the bill:

 

Section 1501 - Requirement to maintain minimum essential coverage - Individuals will be required to maintain health insurance.  Those that do not will be assessed an annual tax penalty of $750.  The tax penalty is scheduled to escalate in subsequent years.  Consequently, Massachusetts residents that do not maintain health insurance will be assessed a tax at both the state and federal level. 

 

Section 9001 – Excise tax on high cost employer-sponsored health coverage – This provision levies an excise tax of 40 percent for any health coverage plan that is costs over $8,500 per year for single coverage and $23,000 per year for family coverage.   Since this was protested vigorously by unions and public employees, the Senate caved and granted a massive concession.  The tax is not levied on the individual receiving the tax free benefit, but is levied on the insurance company or plan administrators that provide the employee the benefit.  How absurd is that? 

 

Section 9008 - Imposition of annual fee on branded prescription pharmaceutical manufacturers and importers - This piece of the legislation imposes a $2.3 billion excise tax on the pharmaceutical industry.  The tax is allocated across the industry and is based on market share, not on income.  This tax starts immediately and is non-deductible for the corporation being taxed.   These companies will still be required to pay their federal income taxes.

 

Section 9009 - Imposition of annual fee on medical device manufacturers and importers - This section imposes a $2 billion excise tax on the medical device industry.   The fee is allocated across the industry based on market share, not on income.  This tax starts immediately and is non-deductible for the corporation being taxed.  

 

Section 9010 - Imposition of annual fee on health insurance providers - Another excise tax.  This one is assessed on the health insurance industry in the amount of $6.7 billion per annum and is also based on market share. How can the imposition of $11 billion in excise taxes (section 9008, 9009 and 9010) on the health care industry reduce costs to consumers?  Does anyone else suspect these companies will have to pass these costs over to consumers?

 

Section 9013 - Modification of itemized deduction for medical expenses – For those incurring significant medical costs, your ability to deduct these expenses will be decreased.  This legislation increases the adjusted gross income threshold for claiming an itemized deduction from 7.5 percent to 10 percent.  

 

Section 9015 - Additional hospital insurance tax on high-income taxpayers – This increases the Medicare tax on wages by 0.50 percent on individuals making in excess of $200,000 and married couples making over $250,000.  This will be effective starting January 1, 2013.  (As a side note, individual income taxes are already scheduled to increase in 2011, with the highest rate already increasing by 4.6 percent. This will be in addition to the tax increase as outlined here in Section 9015.)

 

Section 9017 - Excise tax on elective cosmetic medical procedures - The bill imposes an excise tax of 5 percent for any voluntary cosmetic procedures. 

 

The bill is now off to reconciliation and it may take some time for an agreement.  Fortunately, if elected, we know Mrs. Coakley will not vote for the bill.  She has made it clear that her only concern is that the bill ensures federally funded abortion coverage for all.  (Apparently, abortion is a noble cause worthy of her leadership.)  

 

Mr. Kerry’s yes vote is secured.  He has never paid any Medicare taxes.  Furthermore, the only additional taxes I see that he and his family will incur is the excise tax for voluntary cosmetic surgery.

My daughter is a full time student here in Illinois, where we live. This past year she had a summer job and made approximately $3,000. She will be 20 years old in the next month. At what point will she not receive a full refund?

All individuals filing their federal income tax return receive what is called a “standard deduction”. This deduction is available to your daughter and will offset her taxable wages. The standard deduction for 2009 is $5,700. So your daughter has to make at least $5,700 before she will pay any federal income taxes.

The second thing an individual filer has at their disposal is the “personal exemption”. The personal exemption is available as a further deduction against one’s taxable income. The personal exemption for 2009 is $3,650. There is a bit of a catch though. If your daughter is a dependent, then you the parent can take the personal exemption as a deduction. Alternatively, if your daughter is not a dependent, she can utilize the personal exemption on her return. However, both of you can not take an exemption for your daughter. Typically parents use the personal exemption for students in college as they receive more of a benefit for the deduction. If you are not considering your daughter as a dependent and she is taking the personal exemption, then she can earn up to $9,350 (the sum of the standard deduction and the personal exemption) in taxable wages in 2009 before she pays any federal income taxes.

This does not address Social Security and Medicare taxes. For the most part, there are no deductions for Social Security or Medicare related taxes. Consequently, your daughter will not likely receive a refund on the Social Security or Medicare taxes withheld. (There are some college related job programs in which Social Security taxes are not required. However, I assume that this is not the case for your daughter.)

Also, I have not addressed state income taxes. Since the Democratic government in Illinois is as corrupt as it is here in Massachusetts, your daughter will also have to deal with state income taxes. I am not well versed on the Illinois tax code, but I believe that your daughter will not receive any standard deduction (as they do not do not exist in Illinois). Your daughter should be eligible for the $2,000 personal exemption if she claimed it on her federal tax return. This should still leave her with about $1,000 of state taxable income. (If you claimed her as a dependent, then she will not receive the exemption and will be subject to tax on the full amount of her taxable wages – as always, some exceptions to this rule.) Either way, it appears your daughter will be subject to state income taxes.

If a stock I bought is now worthless, can I deduct it?

Yes, but the rules for taking the deduction can be complicated. In order for a stock to be considered worthless, it must have no market value. This usually occurs when a company ceases its operations or liquidates its assets. Bankruptcy is not necessarily an indicator of whether or not a stock is worthless because the company’s stock may still be trading or the company may still be operating.

Stocks that are considered worthless are deemed to have been sold on Dec 31 of the year in which it became worthless. This “sale” creates a short-term or long-term capital loss based on how long you have held the stock. The loss should be included in Schedule D of Form 1040 and treated like other capital gains and losses from the sale of securities in your portfolio for that year.

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The end of the year is now approaching and with the calendar’s change to 2010, we will also see a series of changes in federal tax laws. Certain tax deductions and benefits available to millions of Americans will no longer be available next year. Additionally, there are many changes to the rate structures, exemptions, phase outs etc. The following is a summary of some of the most important tax law changes to occur in 2010:

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Last week, Congress made some significant changes to the first-time homebuyers tax credit. The changes will benefit many homebuyers but Congress did tighten up a few of the existing rules. Here are the key changes:

* Extended through April 30, 2010 – The Nov. 30 deadline has been extended through April 30, 2010. This means that you must have purchased a home by April 30, 2010 and must close on that purchase by June 30, 2010.

* Higher Income Limits – Prior to these changes the tax credit phase-out range was a Modified Adjusted Gross Income (MAGI) of $75,000 - $95,000 (for single taxpayers) and $150,000 - $170,000 (for married taxpayers). Under the new legislation, the MAGI ranges change to $125,000 - $145,000 (for single taxpayers) and $225,000 - $245,000 (for married taxpayers).

* Expansion of the tax credit – The credit is not limited to first-time homebuyers any more. Homebuyers who have owned a home for 5 of the last 8 years can qualify for a tax credit of as much $6,500. The 5 years of ownership must be consecutive years and the home must be the buyer’s principal residence. The credit is available for purchases made after Nov. 6, 2009 and before May 1, 2010.

* Home purchased for more than $800,000 after Nov. 6, 2009 do not qualify for either the $8,000 or the $6,500 tax credits. Also, homes purchased from in-laws after Nov. 6, 2009 do not qualify for either credit.

* Dependents of taxpayers under the age of 18 do not qualify for the tax credits.

* These credits are still refundable and can be claimed on your amended 2008 tax return (for 2009 purchases) or your 2009 tax return (for 2010 purchases). Buyers will also be required to submit a copy of their settlement statement to claim the tax credit.

I have an income property our daughter rents from us. I wanted to sell it to her last year but was told that she was excluded from the tax credit because she is immediate family. Is this still the case under the new housing tax credit law?

The first time home buyer credit was extended last week. Furthermore, as discussed in the Managing Your Money section of boston.com last week, the bill was expanded to include those people that already own a home. However, the new law does not adjust the rules relating to sales to related parties. Under both the original law and the extended law, sales of properties between related parties are not eligible for the housing tax credit. So, if you sell the property to your daughter, she will not be able to claim the $8,000 credit.

Flexible Spending Accounts (FSA) are a great way to reduce your taxes but you can lose money if you don’t spend it before the end of the year. FSAs allow you to set aside money on a pre-tax basis for deductible medical expenses that are not covered by your health insurance plan. However, any funds left in your FSA account are forfeited if not spent by the end of the coverage period which is typically Dec. 31. Some plans will allow you to get reimbursed for expenses incurred after Dec. 31 but it depends on your particular plan so be sure to check with your employer.

FSAs are employer-sponsored accounts that allow employees to make pre-tax contributions. The contributions can be used by the employee to pay for out-of-pocket medical expenses (i.e., deductible medical expenses that are not covered by the employee’s health insurance plan). Employee contributions in a FSA are “use-it-or-lose-it” meaning that the employee needs to spend the money in the account before the coverage period ends otherwise the unused funds will be forfeited. The coverage period depends on your employer’s specific plan however, many plans follow the calendar year.

If your coverage period ends on Dec 31 and you have not used all of the funds in your FSA here are some medical expenses that are typically covered.

* Deductibles and co-pays for medical and dental visits and treatments.
* Medical expenses for dental treatments including fees paid to dentists for X-rays, fillings, braces, extractions, dentures, etc. Generally, teeth whitening expenses are not deductible medical expenses.
* Fees for acupuncture or chiropractic treatments.
* Medical expenses for an inpatient's treatment at a therapeutic center for alcohol addiction. This includes meals and lodging provided by the center during treatment.
* Fees for ambulance services.
* Medical expenses for breast reconstruction surgery following a mastectomy for cancer.
* Medical expenses for special equipment installed in a home, or for improvements, if their main purpose is medical care for you, your spouse, or your dependent.
* Contact lenses needed for medical reasons and the cost of equipment and materials required for using contact lenses, such as saline solution and enzyme cleaner. You can also include expenses for eyeglasses and laser eye surgery or radial keratotomy.
* Medical expenses for in-patient care at a hospital or similar institution if a principal reason for being there is to receive medical care. This includes amounts paid for meals and lodging.
* Insurance premiums you pay for policies that cover medical care.
* Medical expenses for psychiatric care and psychoanalysis.
For more information about deductible medical expenses, visit the IRS’ web site and review Publication 502. http://www.irs.gov/publications/p502/ar02.html#en_US_publink100014786

With 2009 coming to a close, I am now meeting with clients, looking at their projected financial results for the year and considering some ideas to minimize their taxes. All businesses should do some tax planning right now and consider some tax avoidance (as opposed to tax evasion) strategies. Here are a couple of ideas:

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Congress is currently working on legislation to extent the first-time homebuyer tax credit. In order to be eligible for the current credit, prospective buyers need to purchase and close on a home by Nov. 30. Under the proposed bill, the deadline is expected to be extended into 2010. The details of the extension are currently being worked on and a vote is expected as early as this week -- some say that a vote may occur today. Therefore, you may have some breathing room with your closing if you already purchased a home and are trying to beat the Nov 30 deadline. If you are a prospective first-time homebuyer who missed the opportunity to take advantage of the current credit, you may have a second chance.

In addition to the extension, Congress is said to be working on a bill to expand the current tax credit to prospective homebuyers who already own a home. Under this proposal, existing homeowners who purchase a home after this bill is enacted may receive a tax credit of as much as $6,500 dollars. This would apply to prospective purchasers who have owned a home for 5 of the last 8 years.

Although we will not know the exact details of these proposed bills until Congress completes their work, we do know that they need to act quickly if they expect to extend the current credit before it expires. Stay tuned...

My wife and I are in the process of starting our own consulting business. What is the appropriate tax treatment for the expenses that we incur to start the business?

Expenses that you incur from the genesis of your business until you begin operations are considered start-up costs. This is typically the planning stage of your business, prior to any revenue actually coming in the door. (A clear example might be a retail store. You are probably an active trade or business on the day customers can come through your store front.) These costs incurred to create a trade or business and might include the following:

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At the end of last year, President Bush signed a law waiving the required minimum distributions (RMDs) for 2009 from IRAs and employer sponsored defined contribution plans such as 401(k) plans, 403(b) plans, 457(b) plans and profit sharing plans. Despite the passage of the law before the end of the year, many IRA owners and plan participants ended up receiving their 2009 RMD because IRA custodians and plan administrators did not have enough information on how to comply with the new law.

Although RMDs are not generally eligible to be rolled over, the new law provides individuals (who received their 2009 RMD) with the ability to roll their 2009 RMD over into an IRA or other eligible retirement plan. Rollovers usually need to be accomplished within 60 days. However, many individuals failed to meet this deadline because of the confusion and lack of information surrounding the new law.

Recently, the IRS has issued a notice (IRS Notice 2009-82) providing additional time for individuals who received their 2009 RMD and failed to complete the rollover within the 60-day period. Under the notice, IRA owners, plan participants, and spouse beneficiaries have until November 30, 2009 to complete the rollover.

Keep in mind that this waiver does not apply to RMDs received in 2009 for 2008. In addition, the waiver does not change the one-rollover-per-year rule which only allows an IRA account owner one (non-direct) rollover per year from each IRA account.

For more information about this IRS notice, visit the IRS web site at http://www.irs.gov/pub/irs-drop/n-09-82.pdf

Have you been thinking about starting your own business, but don't know where to start? Or have you already started your own business, but need some advice on how to take it to the next level?

Accountant and Managing Your Money blogger Jamie Downey, who specializes in the area of small businesses, will be here on Tuesday, Oct. 13, at 1 p.m. to take all of your questions about the world of small business.

Does the $8,000 first time tax credit have any income restrictions, and when does the offer end. I have heard two dates, Nov 30th and Dec 30th, what is the real deal. Under contract or closed?

In order to be eligible for the $8,000 First-Time Homebuyers Tax Credit for purchases made in 2009, your modified adjusted gross income (MAGI) cannot exceed $95,000 dollars if you are a single taxpayer and $170,000 if you are married filing jointly. If your MAGI is between $75,000 and $95,000 dollars for single taxpayers or between $150,000 dollars and $170,000 dollars for married taxpayers filing jointly, you would be eligible for a portion of the total credit based on the actual amount of your MAGI.

First-time homebuyers have until December 1, 2009 to purchase and close on a home to qualify for this credit. Therefore, if you signed a contract to purchase a home but do not close before Dec. 1, you would not qualify for the credit.

Visit the IRS’ web site at http://www.irs.gov/newsroom/article/0,,id=204671,00.html for more information about the First-Time Homebuyer Tax Credit.

With so much talk about taxes being raised at the federal level, it is refreshing to hear that there is proposed legislature to provide some tax relief to small business. Some of the key provisions in the Small Business Tax Relief Act of 2009 are the following:

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Can a tax credit from the IRS result in a tax refund?

In short, it depends on the type of credit it is. If the tax credit is a refundable credit, you would receive a tax refund if the credit exceeds the amount of your tax liability. If the credit is not refundable, you would not be able to reduce their tax liability below zero (even if the amount of the credit exceeds your tax liability).

Keep in mind that a tax credit is different from a tax deduction. A tax credit reduces your tax liability dollar for dollar whereas a tax deduction reduces the amount of your taxable income which is used to calculate your tax liability.

Here are some common refundable and non-refundable tax credits:

Refundable Tax Credits
Earned Income Tax Credit
Credit for Estimate Tax Payments
Credit for Excess Social Security Taxes Withheld
Credit for Taxes Withheld from Salaries and Wages
First-Time Homebuyer Credit
Making Work Pay Tax Credit
Health Coverage Tax Credit
Additional Child Tax Credit (partially refundable)
Alternative Minimum Tax (AMT) Credit (partially refundable)

Non-Refundable Tax Credits
Adoption Expense Tax Credit
Child and Dependent Care Tax Credit
Credit for the Elderly and Disabled
Credit for Qualified Alternative Fuel Vehicles
Hybrid Vehicle Credit
Tax credits for energy-saving home improvements
Hope Scholarship Tax Credit (American Opportunity Credit)
Lifetime Learning Tax Credit
Retirement Saver’s Tax Credit
Foreign Tax Credit
Child Tax Credit (generally not refundable)

I recently determined that I have underreported income on my tax returns going back to 2004. The amounts are not that significant, about $4,500 per year. I would like to correct this problem. Do I need to amend all my tax returns going back to 2004? Can you help me determine what to do?

Your honesty should be commended. My anecdotal evidence indicates that people only want to amend their tax returns when their error has resulted in them paying too much tax on their return, not paying too little.

For most instances, the statute of limitations on a federal tax filing is three years. As such, the Internal Revenue Service can assess additional tax on a taxpayer for a period of three years after the tax return has been filed. This would mean that you would file an amended tax return for the tax years 2008, 2007 and 2006. Assuming that you filed your tax return for 2005 by the filing deadline of April 15, 2006, the statute of limitations has already expired on this tax year and you would not amend this tax return. (However, if you extended the tax return that year and did not file the return until the deadline of October 15, 2006, you may still consider amending your 2005 tax year as the statute of limitations is open for another two months.)

As is always the case there are some exceptions to this rule. If the amount of gross income you failed to report to the IRS is in excess of 25% of the amount of gross income stated in the tax return filed with the IRS, then the statute of limitations is extended to six years. For your case, if your gross income was approximately $18,000, there is a possibility that you would also need to amend your 2005 and 2004 tax returns.

Also, the statute of limitation does not apply in the case of a fraudulent tax return filed with the IRS with the intent to evade any tax. The IRS would have to prove that this was the intent. Since you are trying to rectify this problem, it is pretty clear that your intent was not to evade taxes.

It is important to understand the starting date for running the statute of limitations is the day you file the tax return. For those who fail to file a tax return, the clock on the statute does not begin and thus the IRS can open tax years much further back in time.

I have a savings account to house tax money. I claim exempt on a lot of paychecks. Is it okay to owe money come tax time if you pay it in full? Is there a cap on how much you can owe on tax returns before you get any fees?

In theory, this sounds like a good idea for taxpayers because it allows them to hold onto the income taxes they owe until April 15th, when they file their return. This, in turn, would allow them to earn interest on those dollars before paying the IRS. Unfortunately, our income tax system is designed as a pay-as-you-go system. This means that taxpayers are required to pay tax on their income as it is earned. Most people who have taxes automatically withheld from their paychecks accomplish this requirement without having to make additional tax payments. However, if you do not have enough withheld or you earn a significant amount of income where taxes are not automatically withheld (e.g., income from investments, alimony, self employment income) you may need to make additional estimated tax payments to meet the requirements.

Estimated tax payments need to be made at least quarterly. There are specific due dates each quarter (April 15, June 15, September 15, and Jan 15). If you do not have enough withheld or paid in through estimated payments each quarter, you may still be assessed an underpayment penalty.

To avoid an underpayment penalty, the IRS requires that you pay 90 percent of your tax liability for the current year or 100 percent of your tax liability from the previous year through your withholdings or estimated tax payments. If your adjusted gross income is above $150,000 dollars, the IRS requires that you pay 90 percent of your tax liability for the current year or 110 percent of your tax liability from the previous year.

The two exceptions to this rule are (1) if your tax liability for the current year is less than $1,000 dollars (after credit for withheld taxes); or (2) if you are a US citizen or US resident who did not have a tax liability for the tax previous year (assuming the previous tax year comprised of 12 months).

While there isn’t a specific dollar amount on how much you can owe before an underpayment penalty applies, I would recommend that you calculate your estimated tax liability for the current year. This will serve you well in two ways. First, it will provide you with an estimate of how much you will owe versus how much you have already saved. Second, it will help you determine if you have underpaid your taxes to date and allow you to make adjustments to reduce or eliminate the penalty before the end of the tax year. The IRS provides a worksheet with instructions on how to calculate your estimated taxes (http://www.irs.gov/pub/irs-pdf/f1040es.pdf). If you need assistance with this calculation or with the settlement of any penalties, I would recommend speaking with a CPA or qualified tax professional.The IRS also provides various form of free taxpayer assistance. For more information visit the IRS' web site at http://www.irs.gov/newsroom/article/0,,id=165646,00.html

In 2008, Governor Patrick signed into law a bill that drastically changes the way many corporations will file their 2009 Massachusetts tax returns. In the past, Massachusetts viewed subsidiaries or affiliated corporations as separate entities for tax purposes. Those that did business in the state were required to file a Massachusetts tax return. However, starting in 2009, this practice has been eliminated and the state now requires “combined reporting”.

Under this new method, affiliated corporations with 50 percent or greater common ownership will be required to file a unitary combined tax return. In this system, the income of all corporations in the group (including those not doing business in the state) is aggregated. Transactions between these entities, or intercompany transactions, are eliminated. The total income of the group (or unit) is then allocated to the state based apportionment factors.

A unitary group will include all corporations under common ownership that are engaged in a “unitary” business. Corporations are considered under common ownership if more than 50% of their voting stock is controlled by the same beneficial owners. A unitary business is defined broadly to include two or more corporations whose business activities are interrelated and result in mutual benefit or a sharing of value between the corporations. As you would expect, the law specifies the Legislature’s intent that the term “unitary” be construed to the broadest extent permissible under the U.S. Constitution.

The bill was entitled “An Act Relative to Tax Fairness and Business Competitiveness”. This may be a misnomer since the reason for this change was to extract more taxes from businesses. Not many people would consider increasing corporate taxes something that will make Massachusetts more business competitive. However, under the new reporting structure, it is estimated that Massachusetts will extract some $400 million in additional corporate taxes annually.

In addition to increasing the tax burden, implementation and compliance of combined reporting will be a challenge. The Department of Revenue is in charge of issuing the regulations needed to implement combined reporting. More regulations will be issued in coming months to help companies implement these rules.

When it comes to state taxes, I often feel like Moby Dick's Captain Ahab and the state of Massachusetts is my white whale. So when the Governor and Legislature recently increased taxes that will soak the average Massachusetts household by some $384 dollars, I became disheartened. The list of tax increases is quite extensive, including the sales tax (25%), alcohol, meals, satellite television, as well as potential increases in local meals and hotel taxes. (BTW – Have you ever noticed that politicians in favor of tax increases now refer to them as “diversifying the revenue base”? In the old days they would refer to them as “closing loopholes”.)

Obviously, $384 dollars is a significant amount of money for any family. In difficult economic times, it can be disastrous. To combat these increases, I am looking for ways to offset my expenditures to the state. The easy solution of buying things online or in New Hampshire to avoid sales tax is not necessarily legal, nor is it supportive of other Massachusetts residents and businesses. While I do not condone this activity, there are certainly many that will pursue this course of action. However, I came up with a few areas that I could at least cut back some of my costs paid to Massachusetts without directly hurting the businesses here in the state. Here they are:

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What should you do if you discover an error in your 2008 tax return?

According to the IRS, you do not need to file an amended return if you discover a math error or if you fail to include a form or schedule – such as a W-2. The IRS usually corrects math errors and requests missing forms in the normal course of reviewing your return. However, you should file an amended return if any of the following items are reported incorrectly on your original return:

* Your filing status
* Your dependents
* Your total income
* Your deductions or credits

In certain situations, you may have the opportunity to amend your return to claim a tax credit sooner than you may have otherwise. For example, you may also elect to amend your 2008 return if you are eligible to claim the new first-time homebuyer credit for a qualified 2009 home purchase. The amended return will allow you to claim the homebuyer credit on your 2008 return without waiting until next year to claim it on your 2009 return.

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In June I attended a college graduation party. I was chatting with the graduate and he told me that only 18 percent of his graduating class had full time jobs. An ABC News survey, pretty much confirmed this statistic. Although we are in the middle of a recession, one has to wonder if the college system in the US is still based on a 20th century model. I would think that after investing upwards of $200,000, college graduates would have been taught some skills that are more valued by employers. Success in the 21st century will still go to knowledge workers, but what skills are the colleges teaching if 80 percent of the students can not find jobs? This statistic will obviously change as the economy improves, but it just seems that alternatives to quality education can come at a much better value, i.e. internet, books, lectures on DVD, audio programs etc.

The costs of college education are compounded, as much of the cost must be paid in after tax dollars. (You will probably need to earn in the neighborhood of $325,000 in wages to pay $200,000 in college costs.) The federal government has provided some relief in recent years and new rules in 2009 are the most generous yet. There are now three different options, one of which is brand new for this year. The following gives a brief outline of each:

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I've heard about the tax credit for child care expenses but can the cost of summer camps be included towards that credit?

The Child and Dependent Care tax credit is available to those who are working or looking for work and must pay for the care of their children, spouse, or dependents (i.e., a qualifying person). The qualifying person can be a child under age 13 or a spouse or dependent who cannot care for himself or herself. The credit can be up to 35 percent of your qualifying expenses depending on your income. The qualifying expenses can be incurred at any point during the year including during the summer months when children are out of school. Here are a few other types of expenses and how the IRS views them for purposes of this credit:

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I bought my home in January 2009 but do not have taxable income. How can I claim my credit?

The first-time homebuyer credit that was enacted as part of the Housing and Economic Recovery Act of 2008 does not have a minimum income limit. Therefore, those who qualify for the tax credit may file for it even if they do not have any taxable income. This tax credit is a refundable credit which means that the credit can lower your tax liability below zero and result in a refund if the credit exceeds your tax liability.

For example, if your tax liability before the credit is $5,000 dollars and the refundable tax credit is $8,000 dollars, your tax liability will be a negative $3,000 dollars ($5,000 - $8,000 = -$3,000). In your case, if you do not have any taxable income and your tax liability is zero, you should be eligible for a refund of the entire credit.

In order to claim the credit you will need to file a tax return and IRS Form 5405. Form 5405 (First Time Homebuyer Credit) should be filed with your 2008 or 2009 tax return depending on when you purchased the home. If you purchased your home in 2008, you should file for the credit on your 2008 tax return. If you purchased you home in 2009, you can file for the credit on your 2008 or 2009 tax return. If necessary, you can file an amended 2008 tax return to claim this credit.

For more information about this credit, visit the IRS’ web site at: http://www.irs.gov/newsroom/article/0,,id=204671,00.html

Yesterday, with significant fanfare and reporters present, Governor Patrick signed into law a stimulus bill for the New Hampshire Retailers Association and e-commerce websites. By increasing the Massachusetts sales tax by 25 percent, both Mr. Patrick and the legislature have enacted the equivalent of the Northern Massachusetts Uncompetitive Act. This ensures that those retail vacancies, that are already abundant, will continue to rise (consequently local real estate rolls and real estate tax revenues will decline).

Fortunately New Hampshire retailers and Amazon.com will continue to thrive under this legislation. Unfortunate as it is for Massachusetts retailers, consumers will search out these lower taxed havens. No need to send jobs to China when we can send them right over the border to New Hampshire.

Let’s look at some of the tax increases and other highlights of the bill enacted yesterday by the Governor Patrick:

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As I noted in a previous post, the American Recovery and Reinvestment Act (the stimulus bill) provided little relief or stimuli to small businesses. This is a source of frustration to me since I work with small businesses and can see their positive impact on the economy and their employees. These entrepreneurial types can actually grow the economy and the job base.

At least Congress and the Administration tipped their hat in the direction of small businesses when it comes to capital purchases. Under the tax rules, businesses that acquire fixed assets take depreciation expense for the value of that asset over a period of several years. (Fixed assets include things such as office equipment, machinery, vehicles etc.) Consequently, businesses can experience significant cash drain in the year of purchase. They incur the cash outlay for the fixed asset and are also burdened with increased income taxes (since the corresponding depreciation expense must be taken over several years as opposed to in the current year). The stimulus bill has extended some laws that were set to expire that try to avert this kind of cash drain on small businesses and encourage them to invest in fixed assets. Here are the details of these provisions:

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As discussed in this blog a few times before, the American Recovery and Reinvestment Act (ARRA) passed earlier this year, provides a tax deduction for the purchase of a new qualified vehicle. The Treasury announced last week that this incentive now applies to all states – including those that do not impose a sales or excise tax. This includes Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon.

Purchasers of a new qualified vehicle in the states mentioned above can now take an above-the-line tax deduction for fees and other taxes that are imposed by the state or local government. These fees and other taxes must be based on the vehicle's sales price or as a per unit fee in order to qualify for the deduction.

All of the other provisions of this incentive are the same for all states including:
* New vehicles include cars, light trucks, motor homes, or motorcycles.
* The deduction is only available for purchases made on or after February 17, 2009 and before January 1, 2010.
* The deduction is limited to the sales tax, excise taxes, or fees paid on vehicles with a maximum purchase price of $49,500 dollars.
* If you are married and you file a joint tax return have, the deduction gets phased-out once your modified adjusted gross income (MAGI) reaches $250,000 dollars and is completely gone if your MAGI is more than $260,000 dollars. For all other taxpayers, the phase-out range is a MAGI of $125,000 dollars to $135,000 dollars.
* The deduction is available whether or not you itemize your deduction on your tax return.
* The deduction must be taken on your 2009 tax return (which is filed in 2010).

On June 9, 2010, the US House of Representatives passed the Sutton Fleet Modernization bill, a.k.a the “cash for clunkers” act. The idea behind the legislation is to get older and less efficient vehicles off the road as well as stimulate automobile sales. This is done in the form of a significant US Government subsidy to the purchaser of a new car or truck. The bill is being endorsed by the automobile manufacturers, the United Auto Workers and the National Automobile Dealers Association. Here is how the legislation would work:

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On May 11, the Obama administration outlined its budget and tax proposals for the coming fiscal year. The federal deficit is currently estimated at over $1.8 trillion for fiscal year 2010. Obviously the federal government can not sustain these kinds of deficits. As such, tax increases are on the horizon.

The tax proposals look to increase taxes by approximately $1.1 trillion over the next ten years. The following is a list of some of the more significant tax increases that will hit individuals and businesses if these proposals are enacted:

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I own GM stock. If the company goes bankrupt can I claim a loss on my income taxes or do I have to sell it now for pennies to claim that loss?

In order to take a tax deduction for a worthless security without having to sell first, the security must be considered entirely worthless. A company's stock does not necessarily become entirely worthless if they file for bankruptcy. Under Federal bankruptcy laws a company can file for Chapter 7 or Chapter 11 bankruptcy. If a company files under Chapter 7, it means that the company ceases to operate and goes out of business. The company's assets will be sold and the proceeds generated from that liquidation will be used to pay back the company's creditors and investors. If the company files under Chapter 11, which is what GM is expected to do today, it means that the company continues to operate on a daily basis and tries to reorganize its business with the goal of eventually emerging from bankruptcy as a profitable company.

A company's stock may continue to have value and trade on a public stock exchange even though it is in bankruptcy. Stocks that do not meet the requirements to be listed (and thus traded) on one of the major exchanges like the NYSE or the NASDAQ, may trade on other public exchanges like the OTC or the Pink Sheets. Generally, if the company's stock retains some value the only way to capture the loss and receive a tax deduction is to sell the stock and record the capital loss based on the cost basis of the shares you sold.

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The ability for individuals to generate wealth hinges on their ability to save money as well as earn a decent return on that investment. Most financial advisors believe that saving ten percent per year should be adequate to create long term wealth and a comfortable retirement. The Massachusetts Senate last week passed a bill which will make it more difficult for individuals to execute that plan. The bill will increase taxes by $1.003 billion on residents of the state, which in turn will drain the financial coffers a little more from all of us residents.

A $1 billion dollar tax increase will increase taxes on the average Massachusetts household by $384 (approximately 2.6 million households). If you did not think the average $9,023 that your household was already paying in taxes to the state of Massachusetts was significant (source: Taxpayer Foundation), it will be increasing by 4.3 percent. These numbers do not include local real estate taxes.

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Every tax credit that is introduced is either refundable, partially refundable or non-refundable. What does "refundable" mean?

A refundable credit is a tax credit that can reduce the amount of tax you owe to less than zero. In other words, it can result in a refund where there was not one to begin with. As an example, the newly created $8000 first-time homebuyers tax credit is refundable. If your federal income tax bill without this credit is $6,000, and you qualify for the credit, $8,000 would be deducted from the amount you owe. You would end up with a $2,000 refund.

A non-refundable credit cannot reduce your tax bill to less than zero. The Hope and Lifetime Learning credits are good examples of this. For instance if your tax bill is $1,000 and you qualify for a $1,800 Hope Credit, your tax bill would be reduced to $0 and you would not owe any taxes, but you would not get a refund.

Some tax credits are partially refundable, such as the child tax credit. Taxpayers with income below a threshhold receive a larger credit than those above the threshold.

I thought you were also excluded from the first-time homebuyer credit if you bought your house from a family member, is this the case? My wife and I are about to purchase a house from her parents, is there a way for us to get the credit?

Unfortunately, you are correct. The first-time buyer credit enacted in 2008 and expanded in 2009 does not apply if you purchase your home from a related party. According the IRS, a related party includes spouses, family members (e.g., siblings, half-siblings, etc.), ancestors (e.g., parents, grandparents, etc.) and lineal descendants (e.g., children, grandchildren, etc). For purposes of this credit, step-relatives are not considered a related party since they are not ancestors or lineal descendants.

Based on the information in your question, you and your wife would not be eligible for this tax credit.

For more information about the first-time homebuyers tax credit and how the IRS defines a related party visit the following links:

http://www.irs.gov/newsroom/article/0,,id=206291,00.html
http://www.irs.gov/publications/p544/ch02.html#en_US_publink100072497

Homeowners can now get large tax credits for energy efficiency improvements made to their home. On February 17, 2009, President Obama enacted “The American Recovery and Reinvestment Act”. This legislation made significant changes and increases to the residential energy tax credit programs available from the federal government.

The tax credits are available for improvements performed from January 1, 2009 through December 31, 2010. The taxpayer receives a credit for 30% of the cost, with a maximum combined credit in 2009 and 2010 of $1,500, on the following items:

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The Roth IRA has many benefits, especially for families with larger estates. However, due to income limitations, many are disqualified from accessing a Roth IRA. Back in 2006, President Bush signed into law a new set of rules for Roth IRA conversions that occur in 2010. For many people, this may be the tax planning event of a lifetime. All taxpayers can take advantage of the Roth IRA of these new rules. Here is how:

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I am a 76 year old retired widow. I have both a traditional IRA and a Roth IRA. Can I convert some funds from the traditional IRA to the Roth IRA, pay income tax now (if any), and then have the presently devalued stocks perhaps grow tax-free in the Roth as well as receive the other benefits of the Roth IRA?

There are a couple of requirements for you to be eligible to convert amounts from your traditional IRA to your Roth IRA. They are as follows:

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Can I use a long-term capital loss carryover to offset a short-term capital gain?

In short, yes, you can offset a short-term term capital gain with a long-term capital loss carryover. However, you do need to offset the long-term loss carryover against any long-term gains before you can offset any short-term capital gains. The process of offsetting gains and losses can be confusing. Here is a step-by-step guide on grouping and offsetting different types of capital gains and losses.

Step 1: Determine which gains and losses are considered short-term vs. long-term. Short-terms gains and losses are those where your holding period (i.e., the amount of time you held the asset before selling or exchanging it) is equal to 1 year or less. Long-term gains and losses are those where your holding period is more than 1 year.

Step 2: Offset your short-term gains against your short-term losses. Be sure to include any short-term losses carried over from prior tax years. This will result in your “net short-term gain or loss”.

Step 3: Long-term capital gains tax rates vary based on the asset sold and your marginal income tax rate. For example, the long-term capital gains rate for stocks is different than for collectibles. Generally, the rate for stocks and other securities will either be zero or 15 percent (depending on your income tax bracket) whereas the rate for collectibles is 28 percent. You need to group your long-term capital gains and losses according to the capital gains rate that applies to that asset.

Once you have classified your long-term gains and losses by the appropriate long-term capital gains rate, you should offset the gains and losses within those groups. In other words, offset your long-term gains and losses within the 15 percent tax bracket, then the long-term gains and losses within the 25 percent bracket, etc. Do this for each group but don’t forget to include any long-term loss carryovers from prior tax years. This will result in a “net long-term gain or loss” for each capital gains tax rate.

The final step in calculating your overall net long-term gain or loss is to offset the “net long-term gain or loss” for each capital gains tax rate against each other. Use the losses in the lower tax bracket to offset the gains in the higher tax brackets first.

Step 4: Once you have calculated a net short-term gain or loss and a net long-term gain or loss, you can offset these against each other using the following rules:

Rule 1: If you have, both, a net short-term loss and a net long-term loss, you can take $3,000 dollars of the loss on your tax return and carryover additional losses to the next tax year.

Rule 2: If you have, both, a net short-term gain and a net long-term gain, the short-gains will be taxed at ordinary income tax rate and the long-term gains will be taxed at their appropriate long-term capital gains rate.

Rule 3: Any other combination of short and long-term gains and losses (not mentioned in Rules 1 and 2) should be offset against each other using your short-term loss to offset the higher long-term gains first. If this results in a gain, you will pay taxes at the appropriate short-term or long-term capital gains rates. If the result is a loss, you can take up to $3,000 dollars of the loss on your tax return and carry the remaining amount to the following year.

For more information about capital gains tax rates, visit the IRS’ web site at http://www.irs.gov/newsroom/article/0,,id=106799,00.html

I purchased $6,400 in Fannie Mae stock that is now worth about $100. I thought Fannie Mae was financially sound based on comments by my Congressman Barney Frank who said right before its collapse “These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis." This was my mistake and one I have to deal with. What, if any deduction can I take on my tax return for this loss?

Investment property that you own is considered a capital asset. When you sell a capital asset, you incur a capital gain or loss based on the difference between the amount you received when you sold the asset and your cost basis (typically the amount you paid for the asset). In your case, once you actually sell the stock, you will have incurred a capital loss of approximately $6,300.

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As many of you know, the estate tax is supposed to be eliminated beginning January 1, 2010. This elimination is in effect for only one year, however, and in 2011, the estate tax is scheduled to return -- and return in a big way. In 2011, estates greater than $1M could be subject to taxation. (As a point of reference, in 2009, estates greater than $3.5M are potentially subject to taxation.)

Nobody really expects that the one year suspension of estate taxes will actually happen. Most people expect that at some point this year Congress will set a relatively high estate tax limit and then increase that limit in subsequent years to account for inflation. The big question is --what might that limit be? Numbers between $3.5M and $5M have been in the press for months.

It's beginning to look like the limit might be the $3.5M that is in effect this year, but with one really important change. The change would be that if one spouse doesn't use his or her $3.5M exemption, the surviving spouse could "carry over" the unused amount. That means that a married couple could avoid taxation on up to $7M without having to have expensive and complicated trusts drafted. In addition, couples wouldn't have to go through the arduous process of re-titling their assets to be sure that each spouse held assets worth $3.5M.

When will the new exemption amount be announced or voted on? That is still unclear but keep an eye on a bill introduced by Senator Max Baucas, the top tax writer in the Senate. Something will have to be decided by the end of this year and hopefully it will be this summer or early fall so people can begin to plan accordingly.

My accountant e-filed my daughter's return at the end of March and mine on the same day. I got my refund about a week later. To this day we have not seen hers. She filed a short form. How can I find out if it has been sent out or if the check has been cashed?

Filing electronically has many benefits, not the least of which is the promise of a quick turnaround by the IRS - normally within 3 weeks of the acknowledgement date vs. 6 weeks for paper returns. Regardless of whether you file on line or by mail, the IRS website can help you track your refund. Information about your return is available 72 hours after you receive an electronic acknowledgement of receipt of your return (if you filed on line) or about 3-4 weeks after mailing your paper return.

Start by going to the official IRS website, www.irs.gov. Click on "Where's my refund?" on the lefthand side of the homepage. This will take you to an area where you will put in your personal information, including the amount of refund you are expecting. Once entered, you will be given the status of your return. You can also check the status by calling the IRS Refund Hotline at 800-829-1954.

Even though you got your refund already, you'll need to give your daughter's return more time before assuming it's been lost or otherwise delayed. The IRS recommends waiting 28 days, and if you haven't received it by then you can start a refund trace online (through the "Where's my refund?" page.)

Can you tell me at what point does a teenager and high school/college student who earns income working part-time file income tax return even if he or she is listed as a dependent on parent's return? Is there a income threshold or "dependency" issue as to when to file? Thanks!

Children who are claimed as a dependent on their parent’s tax return are required to file a federal tax return for 2008 if the child:

1) has over $900 dollars of unearned income (includes items such as taxable interest, dividends, investment income, etc.),
2) has over $5,450 dollars of earned income (includes items such as wages, tips, self-employment income, taxable scholarships, fellowship grants, etc.), or
3) has a combined unearned and earned income that exceeds the larger of $900 dollars or their earned income (up to $5,150 dollars) plus $300 dollars.

The limits above increase by $1,350 dollars if the dependent child is blind. The above dollar limits also assume that the dependent is not married. There are different requirements for dependents that are married or over the age of 65.

Your state’s filing requirements may be different. Here in Massachusetts, the filing requirements are determined based on a person’s residency and gross income. In general, residents and part-year residents who have earned or accrued more than $8,000 dollars of gross income from Massachusetts sources need to file a return. Nonresidents need to file if their Massachusetts gross income exceeds either the $8,000 dollar threshold or their prorated personal exemption, whichever is less.

Massachusetts taxpayers with low income may qualify for No Tax Status (NTS) or a Limited Income Credit (LIC) which will reduce or eliminate any tax liability. However, you will still need to file a Massachusetts tax return to qualify for the NTS or LIC.

In general, even if your child’s income limits do not meet the requirements noted above, it may be a good idea to file a return for your child to get a refund of any federal or state income tax withheld.

For more information about federal filing requirements, visit the IRS’ web site at http://www.irs.gov/individuals/

For Massachusetts filing requirements, visit the MA Department of Revenue’s web site at http://www.mass.gov

I am considering the purchase of a two family home and renting both units. I am pretty handy and believe I can improve the property and increase its value. With interests rates this low, the monthly rent will almost cover the mortgage payment and all the expenses, although it will probably incur a cash flow loss in the first year or two. Can I deduct these losses on my tax return?

It seems to be a good time to invest in rental real estate. Home values are depressed and interest rates are at 50 year lows. These definitely seem to be the proper ingredients for a successful venture.

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Yesterday, my wife and I were performing a spring cleaning of our closet. The closet was overflowing with clothes and it was time to purge some of the items that were no longer being worn. For items in decent condition, we set them aside to be dropped in a charity bin for used clothes. The remainder went in the trash.

After about an hour of purging, I became reunited with an old friend from my youth; my Van Halen concert t-shirt from 1984. My wife immediately told me to trash it. I refused, but after some severe arm twisting, I relented. My only condition was that it had to go to the charity bin. To trash it would be comparable to throwing away a Picasso. Plus, I argued to her, the t-shirt was worth at least $25 as a collector’s item, and we may be able to get a tax deduction for it. She laughed and kept on working. Subsequently, she uncovered one of her old Bon Jovi concert t-shirts. We had the same conversation in reverse order.

After years of abuse by tax payers, the IRS is getting serious about charitable deductions. Generally, you are allowed to deduct from your income contributions of cash or property to a qualifying charity. If you donate property, you generally can deduct the fair market value of the property at the time you donate it. However, determining the fair market value is not always easy. My wife and I clearly had a difference of opinion on the value of my Van Halen shirt. So here are some of the rules for how much you can deduct for your charitable contribution(s):

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My husband passed away in July 2008. I would now like to sell the home that we lived in and move into a small apartment or condominium. I expect the gain on the sale of the home to be approximately $400,000. How much of this gain will be taxable?

The sale of one’s primary residence gets beneficial treatment under the current tax law. Single filers can exclude from taxable income up to $250,000 of capital gain and married filers can exclude up to $500,000 of capital gain. This is clearly one of the most significant tax breaks afforded by the IRS. A surviving spouse such as you can receive the full $500,000 exclusion. However, there are a few requirements that you must meet.

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In these difficult economic times, the Internal Revenue Service and hundreds of its community partners want to go the extra mile to assist taxpayers. On Saturday, March 21, 2009, approximately 250 IRS Taxpayer Assistance Centers and hundreds of community free tax help sites nationwide will open their doors to assist people. People who earn $42,000 or less are eligible for free tax return preparation at either the IRS TACs or the community partner sites.

Super Saturday also is an opportunity for people, regardless of income, who may have a tax issue or who may be unable to pay their tax bill to visit an IRS TAC. The IRS can work with people to set up payment option plans that will prevent even greater penalties and interest. The IRS is committed to doing what it can to help financially distressed taxpayers who have played by the rules.

To find the location closest to you, visit http://www.irs.gov/individuals/article/0,,id=204165,00.html?portlet=7 and click on the state in which you live to see a list of locations in various cities. Below the chart are the items you need to bring if you are having your tax return prepared.

NOTE: The VITA Program offers free tax help to low- to moderate-income (generally $42,000 and below) people who cannot prepare their own tax returns.

People who want their tax returns prepared should bring the following information:
* Valid driver’s license or photo identification (self and spouse, if applicable)
* Social Security cards for all persons listed on the return
* Dates of birth for all persons listed on the return
* All income statements: Forms W-2, 1099, Social Security, unemployment, or other benefits statements, self-employment records and any documents showing taxes withheld
* Dependent child care information: payee’s name, address and Social Security Number or Taxpayer Identification Number.
* Proof of account at financial institution for direct debit or deposit (i.e. cancelled/voided check or bank statement)
* Prior year tax return (if available)
* Any other pertinent documents or papers

Source: Internal Revenue Service

The recently passed Emergency Economic Stabilization Act extended more than 30 tax provisions that were set to expire and also created a series of new tax breaks with expiration dates. Additionally, many of the tax laws signed by ex-President Bush also included expiration dates. While an ever evolving tax code does not create simplicity, it does create the opportunity to reduce your tax burden.

In order to minimize your taxes in future years, you should be aware of the various provisions that are set to expire and take advantage as best you can. In 2009 and 2010 there are at least 113 tax provisions that are set to expire. While many of these provisions get extended by Congress year after year, next year may be different. There is no doubt the US Treasury needs additional revenue and Congress may let many of these provisions expire. Here is a list of some of the more significant provisions for businesses and individuals that are set to expire over the next two years:

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My daughter is a full time student in Boston. We claim her as a dependent in California. She made a little over $11,000 (all in Boston) in 2008. What tax form should she be using and what residency status does she claim?

Based on the information in your question, I'm assuming your daughter's domicile or legal residence is California. If so, she will likely need to file a federal tax return, a Massachusetts tax return, and a California tax return. For federal purposes, she will need to file Form 1040 because her earned income (i.e., income from working such as salaries and wages) in 2008 was over $5,450 dollars. [As a side note, I made the assumption that the $11,000 dollars was earned income. If the $11,000 is from unearned income (i.e., interest, dividends, etc.), your daughter would still need to file a return for federal tax purposes because her unearned income exceeded the $900 threshold for federal purposes.]

For state tax purposes, your daughter will need to file a Massachusetts income tax return because her income from Massachusetts sources exceeded the $8,000 threshold. The form that she will need to file will depend on her residency status. If your daughter’s domicile (i.e., legal residence) is not Massachusetts, she may still be considered a full-time resident for MA income tax purposes depending on her “permanent place of abode” and whether or not she spent more then 183 days in Massachusetts during 2008. The MA Department of Revenue defines a “permanent place of abode” as a dwelling place continually maintained by a person, whether or not owned by such person, and will include a dwelling place owned or leased by a person's spouse. Generally, college dormitories or other similar temporary institutional settings are not considered a permanent place of abode in Massachusetts. However, off-campus apartments may be considered a permanent place of abode.

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With April 15th only about a month away, many Americans are now starting to contemplate the preparation of their tax returns. There are two alternatives for preparing your individual tax return; you can either do it yourself or you can have someone else do it for you. However, there are several options within each of these alternatives. Here is a look at your different options and some thoughts on each.

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Here are answers to some of the questions we've received about the First-Time Homebuyer's Tax Credit. Many questions can be answered by going to the IRS home page (www.irs.gov) and clicking on the link for the "Update on Recovery Tax Provisions for Individuals and Businesses." In addition you can download Form 5405 (First-Time Homebuyer Credit Form) and find details within the instructions for filing this form.

"If you own a mobile home and are purchasing a home are you eligible for the 8,000 credit.? I have heard that a mobile home is not considered a home per say." We've received many questions about mobile, or manufactured, homes. These homes qualify as a personal residence, as do houseboats, housetrailers, coops and condominiums. Therefore you will not qualify for the credit since you already own a home.

"I am divorced and live in the home my ex husband and I purchased in 97. In December 08 I refinanced this home and it is now solely in my name. I am planning to sell this home and purchase a new home this summer. Will I be considered a first time homeowner? " Unfortunately you will not be considered a first-time homebuyer, as you will have owned a home within the 36 months prior to the purchase of your new home this summer.

"On the "tax credit available for 1st time buyers" how would that work with a same-sex couple that is not legally married? can both claim the deduction on their 2009 taxes since they are co-signers or just 1 party?" You are eligible to share the credit and can allocate it using any reasonable manner. That means one of you can take the entire deduction if you so decide, or you can allocate it according to such methods as percentage of downpayment or percentage of ownership.

"Does the tax credit appy if the client is doing a construction loan?" Yes, construction loans qualify for the credit. You are treated as having purchased the home on the the date you first occupy it.

"Is the $8000.00 a credit over an above a refund. For example if someone were to get a $1500.00 refund from federal, would their total refund be $9500.00 with this new tax credit.?" You are correct. The credit is payable even if you do not owe tax.

My wife and I just prepared our 2008 tax return. To our dismay, we owe over $6,000 to the Internal Revenue Service and we do not have the money to pay this in full. I want to wait to file the tax return until we have the money to pay the full amount. My wife thinks we should file the tax return now and pay the balance due with our credit cards. What should we do?

Federal tax law requires all of us to file our tax return and settle our tax liability in full by April 15th. Failure to file your return or pay on time will trigger various interest and penalties. Although owing interest and penalties to the IRS sounds distressing, you can save significant amounts of money if you handle this properly. There are three assessments that the IRS can levy on you. They are summarized as follows:

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Passage of The American Recovery and Reinvestment Act of 2009 (“ARRA”) has left many with questions about the various tax deductions provided under that new law. A few days ago we provided some clarification about the first-time homebuyer’s credit. Today, I’ll provide some details about the Making Work Pay tax credit.

The Making Work Pay tax credit is a refundable tax credit for working taxpayers for 2009 and 2010. The credit will provide a tax credit of as much as $400 dollars for individuals and $800 dollars for married taxpayers who file joint returns. The credit will equal 6.2 percent of the taxpayer’s earned income and will be refunded throughout the rest of the year. The refund will not be paid out as a single lump-sum amount. For those who qualify for the credit, you should start to see an increase in your after-tax pay checks within the next couple of months as employers update the tax tables they use to calculate your income tax withholdings. The credit will need to be reported on taxpayer’s 2009 tax return (filed in 2010).

This credit begins to phase out if your modified adjusted gross income (MAGI) exceeds $75,000 dollars ($150,000 dollars if you are married and file a joint return). If your MAGI exceeds $95,000 dollars ($190,000 for married filing jointly) you will not qualify for this credit.

If you receive the $250 dollar payment under the provisions of the Economic Recovery Payment (for Social Security Recipients, Veterans and Railroad Retirees) your Making Work Pay tax credit may be reduced.

Taxpayers who are self-employed or who do not have taxes withheld by their employer can also claim the credit by adjusting their estimated tax payments and claiming the credit on their 2009 tax return.

The IRS is still in the process of working out the details of this tax credit and expects to publish them for employers in Publication 15 (Employer’s Tax Guide).

Regardless of your income, obtaining a significant amount of personal wealth is much easier than most people think. Although winning this week’s Mega Millions jackpot sounds enticing, it is not going to happen. The way to become wealthy is to continually set aside a small amount of money and let it grow. With the help of compounding interest, one is almost guaranteed to become a millionaire using this method. The reason most of us do not succeed using this method of generating wealth is that it takes years and persistent sacrifice. Instead we want instant wealth, something which is very difficult to obtain.

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In the past week this blog has been inundated with questions about the revised First-Time Homebuyer Credit. Although the explanation of the credit seems simple enough, as always the devil is in the details. There are many individuals whose situations don’t fit neatly with the government’s description of the credit, and more clarification is needed.

The most frequently asked questions pertain to the definition of a first-time homebuyer. Examples of this type of question include:

* If one partner of a recently married couple has owned a condo within the past 3 yrs, and the other has not, are they able to take half the first-time home owner credit from the 2009 stimulus bill?

*If 2 single people buy a house together and one is a first-time home buyer can that person get the 1st time homebuyer credit?

*How about a couple, one of whom is a first-time home buyer, the other who purchased and owns a condo, purchased prior to marriage?

*If the son is a first time home buyer and purchased a house together with the father who owned property. Does the son still qualify for the $8,000 credit?

The definition of a first-time homebuyer, found through the National Association of Home Builders website, states:

"The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.

For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer."

You may find answers to more of your questions on a page dedicated to the First-Time Homebuyers Tax Credit at the NAHB website. We’ll continue to watch for more detail on the credit.

I'd like to know if the homeowner's energy credit still exists. I thought for 2008 the credit had ended but had heard for 2009 it was to be reinstated. I had energy-star-rated storm windows installed in my home in 2008. Can I take a credit for that year or might it be better to take it in 2009?

The Energy Tax Incentives Act of 2005 (“the Energy Act of 2005”) provided tax credits, deductions and incentives for individuals and businesses to encourage energy efficiency and conservation. While many of the provisions of the Energy Act of 2005 were effective in August of that year, the tax credits for consumers who make certain energy efficient home improvements were not effective until 2006 and 2007. These credits expired at the end of 2007 but were extended and modified under The Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. The extensions and modifications, however, do not apply to 2008. Therefore, the tax credits are not available for consumers who installed high-efficiency heating and cooling systems, water heaters, windows, doors, and insulation in 2008.

Unfortunately, it seems that you do not qualify for the tax credit. Based on the information in your question, you installed your windows in the year that the credit expired. In order to qualify for the tax credit in 2009, the IRS requires the improvement to have been placed in service in 2009. The IRS defines “placed in service” as the date in which the property is ready and available for use.

The Department of Energy and the Environmental Protection Agency provide a good summary of the energy efficiency tax credits on their Energy Star web site (http://www.energystar.gov/index.cfm?c=products.pr_tax_credits#c1).

For more information on how to apply for the Energy Star rebates or tax credit, visit the following Energy Star and IRS web sites.
- Energy Star rebates & credits: http://www.energystar.gov/index.cfm?c=windows_doors.pr_taxcredits

- IRS Form 5695 (Residential Energy Efficient Property Credit): http://www.irs.gov/pub/irs-pdf/f5695.pdf

How can I take advantage of the $8,000 tax credit Congress has made available to first time home buyers? Also, how and when will I receive this credit?

As part of the American Recovery and Reinvestment Act of 2009, a.k.a. the Stimulus Bill, first time home owners are now eligible for a tax credit of $8,000. The following summarizes the eligibility requirements of this credit:

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My husband received 100 shares of stock from his grandmother back in the 90s. The stock split, and a company spun off, and that company was acquired by a private Japanese company in 2007. The Japanese company paid cash for the stock, and we received this cash payment in December 2008. Now we have to declare capital gains on this cash. How on earth do we figure out those capital gains? I understand we're supposed to figure the difference between the sale price and the purchase price all the way back when the stock was purchased by his grandmother, but we have no way to get the initial purchase price. Can you help us figure this out?

The capital gain or loss on the sale of a stock is computed by taking the difference between the proceeds received from the sale and the tax basis of the stock. The tax basis of the stock is the original purchase price plus any associated costs to purchase the stock such as brokerage fees or transaction fees. The difficulty in your situation (as you have alluded to) is determining the tax basis for stock that may have been purchased years or decades ago before your husband received it. The tax basis for your husband’s stock will be determined based on how he received it from his grandmother. In general, if his grandmother gifted the stock to him, the tax basis will be the tax basis that she had before she gifted it or the fair market value of the stock on the date of the gift. If your husband inherited the stock from his grandmother, the tax basis will generally be the fair market value of the stock on the date of her death.

Let’s take a look at each of these situations in more detail starting with the easier of the two. If your husband inherited the stock from his grandmother, you can look up the historical stock price on his grandmother’s date of death and use that as the starting point for your tax basis. In general, inherited securities receive a “step-up” or “step-down” in basis to the value on the date of death so you won’t need to go all the way back to his grandmother’s original purchase date(s) to determine the tax basis. Once you’ve determined the date of death value you can make adjustments to the tax basis from that date forward to account for any capital changes that may have occurred since you inherited the stock. If there were no capital changes, the date-of-death value becomes your tax basis.

For tax purposes, capital changes are changes that the company goes through that effect the value of their stock price and your tax basis in that stock. Examples of capital changes include stock splits, stock redemptions, mergers and acquisitions, etc. There are several ways to find out what capital changes have occurred for a company and how they affected your stock. Some publicly traded companies provide details on their corporate web site. If the company is no longer publicly traded or the information is not available through their web site, the task becomes more difficult and will require more work to find the information you need. There are reference materials that track the capital changes of companies. These materials can be expensive and difficult to find but some libraries may have them. If you use a tax preparer to do your return, see if they have access to this information. I believe many of the larger CPA firms and tax law firms have them. Another source may be your or your grandmother’s broker. Brokers may have access to this type of information through their research departments but I don’t know how easy it is for their clients to access this information.

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On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009. It is one of the largest pieces of legislation in U.S. history with a total price tag of $787 billion. That is an additional $2,600 of per capita national debt for every man, women and child in the country. The Downey family’s share of this debt burden is $7,800 (there are three of us).

While the bill’s spending programs may bankrupt the U.S. Treasury and the U.S. taxpayer, there are some positives in the way of tax reductions. The following highlight some of the major tax deductions for individuals and businesses:

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I live in Massachusetts and worked in Rhode Island for 4 months. How does this impact my tax situation?

Wages are always treated as taxable income in the state where they are earned. So the income you earned in Rhode Island will be taxable wages to that state. Since you are not a resident of Rhode Island, they can not tax you on other income, such as interest, dividends and capital gains.

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What is the mileage rate for autos beginning Jan 1, 2009 ?

The IRS announced new standard mileage rates for 2009 in November 2008. The new rates are down from those in 2008 to reflect the general decline in gas prices. While the rates mentioned below are effective from January 1 through December 31, 2009, the IRS may change them for the second half of the year if gas prices increase as they did last year.

Keep in mind that these rates are optional standard mileage rates used to compute the deductible costs of operating a passenger automobile for business, charitable, medical, or moving expense purposes.

The rates are as follows:

Business use of auto: 55 cents per mile
Charitable use of auto: 14 cents per mile
Medical use of auto: 24 cents per mile
Moving expense deduction (for work-related moves into a new home): 24 cents per mile

For more information visit the IRS web site at http://www.irs.gov/newsroom/article/0,,id=200505,00.html

My wife and I moved from Rhode Island to Massachusetts in August of 2008. I worked in Massachusetts throughout the year while my wife changed jobs in August. The question I have is about doing our state taxes for Rhode Island and Massachusetts. What state tax forms / returns do I need to file and where will I receive a credit for state taxes paid?

Moving from one state to another during the year always adds a little complexity to your tax situation. To further complicate the matter, you worked in one state and lived in another state.

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I own a small business that I started in October 2008. Can I file my personal income tax separate from my business? My wife and I are the only owners and we have no employees.

Congratulations on starting your own business! The income tax form that you will need to file for your business depends on the business entity that you established when you started your business. You will need to review your business records to see what entity you formed and follow the IRS’ guidelines on how to report your business income.

As you can imagine, the tax filing requirements differ for each type of entity. The business entities available to those starting a business are sole proprietorship, general or limited partnership, C corporation, S corporation, limited liability company (LLC), and limited liability partnership (LLP). While there are many tax and non-tax issues to consider when choosing a business entity, here is a general summary of the income tax filing requirements for each entity.

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I started a small business in 2008 performing weight loss seminars and personal training for individuals. I earned about $18,000 in 2008 and have received various “1099 Miscellaneous” statements. How do I account for this income? Additionally, I incurred about $7,000 in expenses related to the business. Can I claim these as deductions?

Being self employed is very gratifying as you have a sense of controlling your own future. However, it does complicate your tax situation just a bit. Self employed individuals still need to complete their Form 1040. In addition to the 1040, they also need to file a Schedule C “Profit or Loss from Business”. The Schedule C is basically an income statement, where you report your revenues as well as your expenses of your business. The difference between these two is the profit earned by your business. The $11,000 in net profit earned last year by your business will carry from your Schedule C over to your 1040 as taxable income.

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"My mother bought a mutual fund in Jan. 2000 for $10,000. When she gifted it to me in Jan. 2003 it had a value of $7,000. I sold it in Feb. 2008 for $6,000. Is my cost basis $10,000 or $7,000?"

Your cost basis will depend on whether the gift was made while your mother was alive or at her death. A gift made during the donor's lifetime carries with it the date and purchase price of the donor. So in this case if your mother made a lifetime gift the date of purchase would be in Jan 2000 and the cost basis would be $10,000. However if the gift was made as an inheritance when your mother died, then the mutual fund receives a "step up in basis." This means that the purchase date becomes the date of Mom's death, and the cost would be the value of the mutual fund on that date.

To complicate things a little bit more, don't forget that any dividends, interest or capital gains that were distributed by the mutual fund and reinvested in more shares of the fund are added to the cost basis. Many investors forget to keep track of these reinvestments and therefore underestimate the true cost basis. If you haven't kept records yourself you can request a history of the activity in the fund through the fund company. That will show any additional purchases made through reinvested dividends and interest.

Who among us does not have questions about their federal or state income taxes? Fortunately there are several state services and not for profit agencies providing assistance to taxpayers. The Massachusetts Society of Certified Public Accounts (MSCPA) and State Treasurer Tim Cahill have teamed up to answer taxpayers’ questions and help educate them in these matters.

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It's a buyer's market for homebuyers, and first-time homebuyers have an even greater incentive to make a purchase. The IRS is offering a credit for homes purchased after April 8, 2008 and before July 1 2009. While called a "credit", it's really more like a long-term loan at zero percent interest.

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President-elect Obama has been meeting with Congress to put together a stimulus package. It appears that President-elect Obama is prepared to sign one of the largest pieces of legislation in his first days as President. The size of the stimulus would be enormous, probably between $775 billion and $1 trillion over two years. Furthermore, it would include a combination of governmental spending and tax cuts. Tax cuts would likely comprise some 40 percent of the total cost of the package, and benefit both individuals and businesses alike. Here are some of the tax breaks being proposed:

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In the December 12, 2008 Boston Globe business section there was a report on a bill in Congress amending the Pension Plan Act of 2006, which included an amendment to change the minimum required distribution (MRD) laws for individuals over the age of 70 1/2. Was this bill passed and the MRD altered?

On December 23, 2008 President Bush signed into law the "Worker, Retiree, and Employer Recovery Act of 2008". This bill waives the minimum required distribution from an Individual Retirement Account (IRA) or defined contribution plan. This waiver is temporary and is only effective for calendar year 2009.

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W.F. writes… My husband and I are very confused about AMT, what can we "make" and still avoid paying extra? I heard the cap was 100K for married couples, if you made over that then you would pay AMT which is higher tax?

Don’t feel bad, you are in good company. Many well educated people are also confused by the AMT. Estimating whether or not you will be subject to the AMT is not as straight forward as you may have hoped. The alternative minimum tax or AMT is an additional federal tax system that taxpayers are subject to. Taxpayers must calculate their federal tax under the regular income tax system (using the regular tax rates) as well as under the AMT system (using the higher AMT tax rates). The amount that they must pay is the higher of the two.

The AMT was originally setup in 1969 to ensure that high income earners did not avoid paying federal taxes because of loopholes in the tax system. The target that year was 155 people. Today, many people with incomes well below the original targets are being caught by the AMT mainly because the AMT was never adjusted for inflation. Some government estimates suggest that close to 30 million people could be subject to the AMT within the next 10 years if there aren’t any changes to the current laws.

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I’ve heard that it is better to donate property that has gone up in value rather than to sell it and donate the money received from the sale of that property. Why?

Donating property that has appreciated in value can provide you with a larger tax savings than selling the property first and then donating the proceeds from the sale. This is generally true because you will pay tax on the capital gain if you sell the property before donating it. The capital gains tax would reduce the tax benefit that you receive from the donation. If you donate the property directly you will receive the full tax benefit for the donation without the offsetting capital gains tax.

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In 1974, Congress enacted and President Ford signed into law the Employee Retirement Security Act (ERISA). Part of this legislation created the Individual Retirement Account, or the IRA. Currently, over 45 million Americans have IRA accounts with an estimated value of $3.1 trillion. While the IRA has helped millions of Americans in their retirement years, many do not appreciate the tax nightmare that can await the beneficiaries of these accounts. For those with significant estates, approximately 70 percent of the value of the IRA can be consumed by federal estate and income taxes. Additional state and local taxes may also be due. Adequate estate planning is required to ensure that this does not happen to you. Your IRA is useless to your family if the real beneficiary is Uncle Sam.

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Federal and state governments are pretty good at extracting revenues from their “customers” (in the form of taxation). Governments are expensive to run and tax laws have been designed to minimize individual tax avoidance strategies. However, with the calendar ready to close out 2008, there are still a few things you can do to cut your 2008 tax burden. Here are a few actionable items you may want to consider for the next month:

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I will probably make $200,000 dollars plus this year. I am 51 yrs old and I would like to convert my 401K which totals $80,000 to a Roth. How would that affect me tax wise?

The good news is that beginning in 2008, direct conversions from your 401(k) plan to a Roth IRA are permitted. Prior to 2008, individuals who wanted to convert their 401(k) or parts of their 401(k) accounts to a Roth IRA were required to follow a two step process. They would need to convert their 401(k) to a traditional IRA and then convert the traditional IRA to a Roth IRA. While the Pension Protection Act of 2006 eliminated this two step process, you will still need to meet certain criteria to qualify for a Roth IRA conversion. In addition, you will need to be sure that your employer’s 401(k) plan allows in-service distributions to withdraw funds to convert. Although the law allows the direct conversion, your 401(k) may not allow the withdrawal/distribution of your 401(k) assets (without a penalty) until you reach a certain age or until you discontinue working for that employer.

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For those of you in Massachusetts unfamiliar with the trappings of the Alternative Minimum Tax, or AMT, you better educate yourself. The number of taxpayers subject to the AMT is growing faster than the federal budget deficit. The Congressional Budget Office estimates that over 30 million taxpayers will be subject to the AMT in 2010. Furthermore, Massachusetts residents are much more likely than residents in other states to have to pay the AMT.

In 1969, the US Treasury became aware of approximately 155 high wealth families whose tax avoidance strategies were so effective that they were paying little or no federal income taxes. Their strategies were completely legal and in compliance with the then existing federal tax code. To target these families, Congress passed the AMT, and President Nixon signed it into law. The AMT is basically a parallel tax code with its own set of tax rates, deductions, exemptions and credits. You as a taxpayer are required to calculate your federal income taxes under the “regular” rules as well as under the AMT rules. The IRS requests that you pay the greater of the two.

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The Economic Stabilization Act of 2008, a.k.a. “the bailout bill”, was not just a bonanza for Wall Street firms. It also contained several provisions to benefit individual taxpayers. The following nine items are either new tax benefits for 2008 or extensions of previous benefits that were set to expire:

1. Alternative Minimum Tax - Each year, Congress and President Bush continue to "patch" the Alternative Minimum Tax (AMT), which typically affects wealthier taxpayers but increasingly affects the middle-class, and with good reason. The Internal Revenue Service estimates that without the current legislation, over 26 million Americans would be subject to the AMT. The new legislation increases the exemption for married couples to $69,950. For single taxpayers, the exemption is increased to $46,200.

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The recently passed Emergency Economic Stabilization Act of 2008 (or, as it is more commonly known,"The Bailout Bill") is a law authorizing the Secretary of the Treasury to spend $700B to purchase distressed assets from the nation's banks. The Act certainly has its supporters and opponents. Supporters believe the bill was necessary to save the US economy from another Depression. Opponents believe it only benefits Wall Street financial instutions that acted irresponsibly and out of greed.

However, the Act does contain a number of features that directly benefit the average American taxpayer. Here are some of the highlights:

The extension of a one year patch for the alternative minimum tax: the 2008 exemption is $46,200 for singles, $69,950 for married couples who file jointly and $34,975 for married couples who file separately.

A credit for energy saving home improvements: you can claim a 10% tax credit for installing skylights, new windows and doors, and new high efficiency furnaces, air conditioners and water heaters but you need to wait until 2009 to do this work in order to claim the credit.

An extension on the forgiveness of mortgage debt: through 2012, you can exclude from gross income the forgiveness/discharge of any mortgage debt. The limit is $2M or $1M if married and filing separately.

Teachers, counselors and other educators in K-12 schools can deduct up to $250 of personal expenses made for classroom supplies and materials. This deduction is an "above the line" deduction so you don't have to itemize to claim the deduction.

IRA owners can contribute up to $100,000 directly to a qualified charity without having to count the contribution as income. This benefit is available in both 2008 and 2009 but you must be age 70 1/2 or older to claim it.

Owners of plug-in electric vehicles are entitled to tax credits of $2,500 to $7,500. This credit will phase out once each manufacturer has sold 250,000 vehicles.

Many about-to-be retired people are surprised to learn that the benefits they receive from Social Security can be subject to taxes. Years ago, very few people saw their Social Security benefits taxed. However, today, a full third of all Social Security recipients are taxed and that number will grow to 43 percent in just 10 years.

The reason is that the income limits for taxation of benefits were established years ago and, like the alternative minimum tax (AMT) that so many of us get hit with, the limits were not indexed for inflation.

These days, if you are single and half of your Social Security benefit plus all the other income you have exceeds $25,000, up to half of the benefits are taxable. If half your Social Security benefit plus all other income exceeds $34,000, 85 percent of your benefits are taxable.

If you are married and half your Social Security benefit plus all other income is between $32,000 and $44,000, up to 50 percent of the benefits is taxable. If your income exceeds $44,000, 85 percent of your benefits are taxable.

The markets are down and new retirees are looking for the most tax efficient places to live because, all else being equal, living in a lower tax state can make your retirement assets last longer. According to the retirementliving.com website, the nation as a whole will pay 9.7 percent of its income in state and local taxes in 2008. However, in some states, you can expect to pay significantly more and in others, significantly less.

What are the most expensive states? New Jersey tops the list with its residents paying 11.8 percent of their income in state and local taxes. New York is right behind New Jersey at 11.7 percent and Connecticut wraps up the top 3 most expensive states at 11.1 percent.

If you really want to stretch your retirement dollar, you might want to consider a move to Alaska, where residents pay just 6.4 percent of their income in state and local taxes. Nevada is in second place at 6.6 percent. Wyoming residents pay 7.0 percent, Florida residents pay 7.4 percent, New Hampshire residents pay 7.6 percent and the other top ten states include South Dakota at 7.9 percent, Tennessee at 8.3 percent, Texas at 8.4 percent, Louisiana at 8.4 percent and Arizona at 8.5 percent.

The retirementliving.com website is a source of a lot of great information. Their state by state guide tells you the specifics of nearly every tax imaginable including: sales tax, gasoline tax, cigarette taxes, and personal income taxes. The site also includes information about the Homestead Exemptions available in each state. For paid subscribers, you can get reports on the top retirement cities and the newest and best active adult communities and senior living facilities.

At least once a month a client or friend will mention that they are thinking of donating their car to a favorite charity. Most think they can get a tax deduction equal to the book value of the car they are donating. They are wrong.

Three years ago, the rules pertaining to donations for cars changed dramatically. Before 2005, you could donate your car and take a tax deduction for it. The amount of the deduction was equal to the fair market value of the car at the time it was donated.

In 2005, the rules changed and now when you donate your car, you still get a tax deduction, but the amount of the deduction is equal to what the charity sells the car for. That can be significantly less than the fair market value. As with all tax rules, there are exceptions. One is that if the charity keeps your car and uses it, you are still able to deduct the car's fair market value. Also, you can deduct the car's fair market value instead of its ultimate sales price if the value is $500 or less. Before you donate your car, you might want to ask the organization if they will be keeping or selling your car. It could make a big difference to you at tax time.

Thanks to recent uptick in inflation (to 5.4 percent over the previous 12 months), several tax breaks will be even bigger in 2009. According to The Kiplinger Tax Letter, the annual gift tax exemption will rise to $13,000 per recipient in 2009. That is a $1,000 increase over the $12,000 exemption currently in place.

Also in 2009, the personal exemption also rises significantly to $3,650. That is up from $3,500 in 2008.

Finally, the standard deduction amount will also increase. For married filers, the 2009 amount will be $11,400. That amount is $500 higher than it was in 2008. For single filers, the new amount is $5,700 and for head of household filers, the standard deduction will be $8,350. If you are age 65 or older and married, you will get an additional $1,100.

Making full use of the annual gift tax exclusion is a great way to reduce a taxable estate. Here's an example: in 2009, a husband and wife can give each of their three children and their children's spouses $26,000. That totals $156,000 in tax free gifts. If the same couple also had three grandchildren, they could give each grandchild $26,000 or $78,000 in total. Between the couple's children, their spouses and the grandchildren, this couple could reduce their taxable estate by $234,000 per year. It is important to note that you are not limited to family members when making gifts. In theory, you could give $13,000 to as many people as you wanted.

What are the rules for converting a traditional IRA to a Roth IRA? Are there any strategies to avoid paying or reducing the immediate tax bite?

In order to convert a traditional IRA to a Roth IRA in 2008 or 2009, your modified adjusted gross income (MAGI) must not exceed $100,000.

These rules change in 2010 when the $100,000 limit is lifted and you will be able to do a conversion regardless of your income. Of course, any amount that you convert will be subject to income taxes. However, there is another "bonus" arriving in 2010 -- if you do a conversion in that year, it is assumed that you are not paying the taxes until you file your 2011 and 2012 returns. That means that actual payment will not occur until 2012 and 2013.

The surprising thing is that the government actually wants you to do it that way. If you want to pay the taxes due in the year of conversion, you need to specifically elect that treatment on your tax return. While it might seem that the government is being especially nice, many suspect an ulterior motive -- higher tax rates are expected to be in effect in those years. So, it just might make sense to do the conversion in 2010 and pay the taxes right away. If you think you might do a conversion in 2010, it might be a good idea to start saving money to cover the tax bill.

The market has been very volatile lately and most long term investors are experiencing a "negative" 2008. The Standard & Poor's 500 Index is down approximately 15 percent year-to-date and the financial news seems pretty dismal at times. However, there is one bright spot -- tax loss harvesting opportunities are plentiful.

Basically, if you sell individual stocks or mutual funds for less than you paid for them, you will recognize a loss and you can subtract the loss from gains you might have somewhere else in your portfolio. If you don't have any other gains, the losses are still valuable because they can be used to offset up to $3,000 in ordinary income and the balance can be carried over to future years. (It might seem obvious, but we are talking about gains and losses in your taxable accounts, not your IRAs.)

As with most things in life, there is one "catch" and that catch is known as the wash sale rule. Under the wash sale rule, the IRS will deny your tax break if you have purchased the same (or a substantially identical) security in the 30 calendar days before or after the sale. The rules on what constitutes a substantially identical security are not always very clear, so if you want to make a "replacement" purchase within 30 days, it is probably best to consult your tax advisor or financial advisor. Also, it is important to note that if you do have a wash sale, the disallowed loss is not lost forever. Instead, your disallowed loss is added to the basis of the replacement security.

Tax loss harvesting really can be well worth your effort. If you are in the 33 percent tax bracket and you have a $3,000 loss that you can use to reduce your ordinary income, you will save almost $1,000 in taxes. However, there is a popular saying in our field: "don't let the tax tail wag the dog." In simple terms, this means that you shouldn't go crazy selling investments simply to capture a loss. A buy and hold strategy is still the best for most investors. You should simply be aware that if you find yourself holding an investment that no longer has a place in your portfolio, there may be some tax advantages to selling it.