Tuesday, December 28, 2010

Tax Saving Suggestions from AICPA Tax VP

Extension of the Bush tax cuts gives Americans more options as they do year-end tax planning. Specifically, the bill extended the charitable IRA contribution and state and local sales tax deduction for 2010.

Because the tax rates are extended, deferring compensation is an option for taxpayers who have that flexibility. The choice of estate tax method is new. The bill extends earlier provisions for energy credits and extends the American Opportunity Credit. Edward Karl, vice president of taxation for the American Institute of Certified Public Accountants, and other members of the AICPA tax staff suggest taxpayers consider the tax saving ideas below to cut their tax bills.

Top Off Retirement Accounts
Taxpayers can boost their retirement savings in a tax-efficient manner by contributing up to $5,000 to an Individual Retirement Account or Roth IRA if they are under 50 or $6,000 if they are 50 or older.

Claim the Saver’s Credit
Lower-income taxpayers should remember to take the Saver’s Credit for contributions they made to an employer-sponsored retirement plan, such as a 401(k) plan, or individual retirement vehicles, such as a traditional or Roth IRA. Taxpayers get a credit for up to half of what they contribute, although the maximum credit is $1,000 or $2,000 for couples.

Convert a Traditional IRA to a Roth IRA
Taxpayers who convert a traditional IRA to a Roth IRA in 2010 do not have to pay the tax due on the conversion in 2010. They can decide in 2011 if they want to defer 50 percent of the income to 2011 and 50 percent to 2012. While taxpayers can delay the payment decision as late as Oct. 15, 2011, they have to pay the tax when their taxes are due in April of 2011.

Contribute to Charities Tax Free
The new law allows taxpayers who are 70 ½ or older to make contributions to charitable organizations directly from IRAs without paying tax on the amount contributed from the IRA. Taxpayers can make these contributions during January of 2011 and have them apply to their 2010 taxes. Each taxpayer can contribute up to $100,000 for 2010 and 2011. Contributions for 2010 can be made until the due date of the 2010 return, which is April 18 for most taxpayers filing federal tax returns.

Offset Education Costs
Among the tax rules that taxpayers can use to offset 2010 education costs are the following:

* The American Opportunity Credit offers eligible taxpayers up to $2,500 per student for qualifying 2010 tuition and expenses, including books and computer equipment. The American Opportunity Credit can be used by students for the first four years of post-secondary education expenses. Importantly, taxpayers who pay no taxes may qualify for a refund of up to $1,000. The new tax law extends the American Opportunity Credit through 2012.

* An “above-the-line” deduction offers eligible taxpayers as much as $2,500 for interest paid on student loans, even if they don’t itemize deductions. The new tax law extends this deduction and increases the phase-out range.

* Section 529 college savings plans give parents, grandparents and others a way to contribute after-tax dollars in order to have earnings and interest accumulate free of federal, and in some cases, state taxes. No federal income taxes are paid on withdrawals from the accounts.

Take Tax Credits for Energy-Efficient Home Improvements
Homeowners who installed certain energy-efficient heating and air conditioning systems, water heaters, doors and windows, insulation and roofs are eligible to receive a credit to help reduce the costs. Taxpayers who did not take advantage of the credit in 2010 have an opportunity to do so in 2011, under the new tax law. A credit is available for homeowners who invest in green energy equipment, too. Such equipment includes solar electric systems, solar hot water heaters, geothermal heat pumps and wind turbines.

Consider Deducting State and Local Sales Taxes
Taxpayers can choose to take an itemized deduction for state and local general sales taxes on their 2010 taxes instead of the itemized deduction for state and local income taxes. Taking a deduction for sales taxes can mean a lower tax bill for taxpayers who make such a major purchase as a motor vehicle during the year or who live in states that do not have an income tax. The new tax law extends this option through 2011.

Choose Best Estate Tax Method
Taxpayers, who inherited property in 2010 when no estate tax applies, get nine months under the new tax law to choose whether to use the new estate tax rules (35 percent top rate and $5 million exemption) or no estate tax with the estate’s assets generally being subject to the carryover basis rules. Carryover basis rules result in a transfer of the decedent’s adjusted basis (typically, the owner’s original purchase price) to the beneficiaries. Historically, the basis of an estate assets have been established using stepped-up basis rules, which consider basis to be the fair market value of the assets at the time of the owner’s death.

Defer Compensation
Since tax rates will remain at current levels for the next two years, taxpayers may want to consider deferring payments into 2011 from such compensation sources as pensions, retirement plans and stock options.

Friday, December 24, 2010

Tax Season Starts on Time for Most Taxpayers; Those Affected by Late Tax Breaks Can File in Mid- to Late February

WASHINGTON — Following last week’s tax law changes, the Internal Revenue Service announced today the upcoming tax season will start on time for most people, but taxpayers affected by three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns. In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid- to late February to file as well.

The start of the 2011 filing season will begin in January for the majority of taxpayers. However, last week’s changes in the law mean that the IRS will need to reprogram its processing systems for three provisions that were extended in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17.

People claiming any of these three items — involving the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction as well as those taxpayers who itemize deductions on Form 1040 Schedule A — will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid- to late February.

“The majority of taxpayers will be able to fill out their tax returns and file them as they normally do,” said IRS Commissioner Doug Shulman. “We will do everything we can to minimize the impact of recent tax law changes on other taxpayers. The IRS will work through the holidays and into the New Year to get our systems reprogrammed and ensure taxpayers have a smooth tax season.”

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the late tax law changes. In the interim, people in the affected categories can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes.

The IRS urged taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax changes and ensure accurate tax returns.

Taxpayers will need to wait to file if they are within any of the following three categories:

Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted Dec. 17, which primarily benefits people living in areas without state and local income taxes and is claimed on Schedule A, Line 5. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students — covering up to $4,000 of tuition and fees paid to a post-secondary institution — is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.
Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.
For those falling into any of these three categories, the delay affects both paper filers and electronic filers.

The IRS emphasized that e-file is the fastest, best way for those affected by the delay to get their refunds. Those who use tax-preparation software can easily download updates from their software provider. The IRS Free File program also will be updated.

As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure a smooth tax season.

Updated information will be posted on IRS.gov. This will include an updated copy of Schedule A as well as updated state and local sales tax tables. Several other forms used by relatively few taxpayers are also affected by the recent changes, and more details are available on IRS.gov.

In addition, the IRS reminds employers about the new withholding tables released Friday for 2011. Employers should implement the 2011 withholding tables as soon as possible, but not later than Jan. 31, 2011. The IRS also reminds employers that Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on IRS.gov before year’s end.

Related Item: Forms Affected By the Extender Provisions

Tuesday, December 21, 2010

Payroll Tax Cut to Boost Take-Home Pay for Most Workers; New Withholding Details Now Available on IRS.gov

IR-2010-124, Dec. 17, 2010
WASHINGTON ― The Internal Revenue Service today released instructions to help employers implement the 2011 cut in payroll taxes, along with new income-tax withholding tables that employers will use during 2011.
Millions of workers will see their take-home pay rise during 2011 because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides a two percentage point payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid. This reduced Social Security withholding will have no effect on the employee’s future Social Security benefits.
The new law also maintains the income-tax rates that have been in effect in recent years.
Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but not later than Jan. 31, 2011. Notice 1036, released today, contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes. Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on IRS.gov in a few days.
The IRS recognizes that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems. For that reason, the agency asks employers to adjust their payroll systems as soon as possible, but not later than Jan. 31, 2011.
For any Social Security tax over withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2011.
Employers and payroll companies will handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form.
As always, however, the IRS urges workers to review their withholding every year and, if necessary, fill out a new W-4 and give it to their employer. For example, individuals and couples with multiple jobs, people who are having children, getting married, getting divorced or buying a home, and those who typically wind up with a balance due or large refund at the end of the year may want to consider submitting revised W-4 forms. Publication 919, How Do I Adjust My Tax Withholding?, provides more information to workers on making changes to their tax withholding.

Tuesday, December 14, 2010

10 Things Small Business Owners Need to Know About Personal Guarantees

In today's tight credit markets, more and more banks are requiring personal guarantees from applicants for business loans. These personal guarantees are just like they sound -- they are a personal promise to pay the business loan.

This promise allows the bank to pursue the guarantor’s personal assets as an alternative source of repayment. 
At stake are all the assets a business owner has worked hard for years to accumulate, including his house, savings accounts, second home, cars, etc.
Because there are a lot of misconceptions out there, these 10 key points will help you understand what a personal guarantee is and how it works.
  1. What is a guarantor? A guarantor is anyone who signs a personal guarantee, pledging personally to repay someone else’s obligation.  This pledge can be secured or unsecured.
  2. When does a personal guarantee go into effect? A guarantee is in effect once a guarantor signs the agreement with the lender and remains in effect until the loan obligation is satisfied or the lender releases the guarantee. 
  3. Who is required to sign a personal guarantee? Typically, a guarantor is an individual or entity with a relationship to the business that is borrowing money. This can include, but is not limited to:  small-to-medium size business owners, real estate investors, partners and family members.
  4. What is a “joint and several liability” clause? This clause, found in many personal guarantee agreements, means a lender can pursue any one or all of the guarantors for the entire amount of the obligation. In other words, each guarantor is at risk for the full amount of the loan.  If a lender seeks repayment from only one guarantor, that person then would have to pursue repayment from the other partners.
  5. Does filing for bankruptcy prevent a lender from pursuing personal assets? No. The lender may still be able to seek personal assets subject to a bankruptcy filing.
  6. What about spouses? How are they impacted? If you are married, your spouse may have also signed a personal guarantee. In that case, should the business fail, your jointly owned possessions are on the line for the debt, as well as your spouse's assets and income.  If your spouse did not sign a personal guarantee, their individually owned assets are not impacted; however, your jointly owned assets may be subject to legal actions taken by the bank.
  7. What are your options for limiting risk concerning a personal guarantee?  You can: a). decide not to take out the loan and remove any risk regarding a personal guarantee; b). find a credit worthy individual acceptable to the lender to cosign the guarantee (there is usually a fee for this); c). put some type of limit on the guarantee (e.g. – place a cap on the guarantee that is less than the loan amount).  d). Sign the guarantee and then purchase Personal Guarantee Insurance.
  8. What if a business is incorporated? Doesn’t that protect the business owner/guarantor from a bank’s ability to pursue personal assets? No. If a business owner signed a personal guarantee, then the bank can absolutely pursue personal assets in order to repay the loan. 
  9. Are business owners concerned about the potential impact when a personal guarantee is called? Yes. According to independent research commissioned by Asterisk Financial Group, 75% of business owners with personal guarantees have calculated the personal financial cost if it was called by their lender. This means that most business owners know what the impact on their lifestyle would be in this worst-case scenario.
  10. What if I’ve exited the business? Am I still liable for the personal guarantee? Yes. The guarantee agreement remains enforceable until the obligation has been fully repaid or the bank releases a guarantor.  Typically, the bank only releases you from your personal guarantee obligation when the loan is paid off, even if you’ve sold the business and moved on.

Tuesday, December 7, 2010

50,000 Inmates Claim Tax Refunds, Report No Wages

December 1, 2010 (Associated Press) — WASHINGTON - A government investigator says nearly 50,000 prison inmates claimed more than $130 million in tax refunds this year without providing any wage information to the IRS.

A report by the Treasury Department's inspector general for tax administration stops short of saying the refunds were fraudulently claimed. It does, however, say the Internal Revenue Service should investigate further.
The report, scheduled for release on Thursday, is the latest in a series of audits looking at prison inmates claiming tax credits and other government payments.
The report noted that the IRS identified nearly 250,000 fraudulent tax returns during the 2010 filing season - a 50 percent increase over 2009 - preventing $1.48 billion in fraudulent refunds.

Tuesday, November 30, 2010

Smart Year-End Tax Moves for Investors

There are plenty of reasons for taxpayers to scream. Here it is, year-end tax-planning time, when investors must decide whether to take gains or harvest losses and make important retirement-account choices. Yet crucial questions remain—not only about next year's tax law but also about this year's.
If Congress doesn't pass an extension of the Bush-era tax rates for upper-income earners, the top rate on long-term capital gains will rise by one-third next year—an increase that is double the rise in rates on ordinary income. The rate on dividends, meanwhile, could nearly triple. And many taxpayers are still waiting for answers on the 2010 alternative minimum tax, the estate tax and the gift tax.
Adding to taxpayers' anxiety, two serious overhaul proposals were just announced in Washington—one from President Obama's deficit commission and the other from the independent Bipartisan Policy Center. While it is unlikely they would be enacted in current form, they take aim at many prized benefits, from the mortgage-interest deduction to low capital-gains rates. It's natural to fear that moves made now could prove useless later, or even backfire.
Given all the uncertainty, is your annual year-end tax-planning session worth the effort this year? Yes—in fact it is crucial, because it could be your last chance to take advantage of today's low rates.
Congress will address taxes in December, and may (or may not) clear up 2010 and 2011 issues before year-end. Advisers like Mark Nash of PricewaterhouseCoopers LLP in Dallas are urging clients to get ready to pounce once the law becomes clear. "We are making plans [for clients] now that can be executed quickly before the end of the year, or looking at moves—like Roth IRA conversions or installment-sale elections—that can be revised next year," he says.
Even if Congress merely extends current law, understanding "wash sale" rules, loss-harvesting and Roth IRA conversions now can pay off later.
That is because the window is closing on current investment tax rates, now at historic lows. Already, many investors face a substantial tax increase in 2013 passed by Congress as part of the health-care overhaul. Every financial and political analyst interviewed for this story expects taxes on investments to rise more than taxes on wages in coming years.
The good news? Investors have enviable flexibility when it comes to timing income and deducting losses—far more than wage earners. There's so much to say about investment tax planning that we're saving other year-end tips for next week.
Capital Gains and Losses
If Congress extends the Bush 2001-03 tax rates for couples earning more than $250,000 ($200,000 for singles), then the top rate on long-term capital gains (those held longer than a year) will remain 15% for a year or two. If lawmakers don't extend the current law, then on Jan. 1 the top rate on gains will rise to 20%.
Whatever the outcome, a new 3.8% tax on investment income takes effect in 2013 as a result of the health-care overhaul. It applies to income from rents, royalties, dividends, capital gains and interest (except municipal-bond interest) for nearly everyone with adjusted gross incomes over $250,000 ($200,000 for singles). (For details, see "How the New Wealth Taxes Will Hit You," June 12.)
What you can do. People with liquid investments should prepare to act quickly this year if the Bush cuts aren't extended, or later if they are. That means understanding some important details of current law.
• Loss harvesting. If you sell an investment at a loss, you can use up to $3,000 per year of the loss to offset ordinary income like wages and "carry forward" the rest to shelter future investment gains. (Note: These rules apply only to investments held in taxable accounts, not tax-sheltered retirement plans such as individual retirement accounts and 401(k) plans.) Short-term losses are those from investments held a year or less, and long-term losses are from those held longer.
The rules on overall gains and losses are intricate but give investors room to optimize results. "Smart investors pay close attention to the timing of gains and losses in order to minimize taxes," says independent tax analyst Robert Willens.
If tax rates rise next year, it may make sense to hold off taking losses until January, when their value will be greater. On the other hand, many investors still have losses they took during the terrible downturn of 2008. If they can take short-term gains this year, Mr. Willens suggests doing so to use some of those losses. This can often work with proper planning.
Why use the losses this year instead of next if tax rates are going up? Although the losses would in theory be more valuable next year, Mr. Willens and others usually advise using them as soon as possible, because the market could change and waiting too long could erode their value.
Here's an example. Susan has $40,000 of losses left from 2008. This year, she has $50,000 of potential gains: $30,000 is long-term and $20,000 is short-term. She wants to use her loss and is worried about the prospects of the stock with the short-term gain. So she sells all the stock with the $20,000 short-term gain and enough of the long-term holding to realize $17,000 of gain.
The result: $37,000 of short- and long-term gains are sheltered this year, with $3,000 of losses left to offset her wage income. Why save $3,000 of the loss to offset wages? Because ordinary income is taxed at much higher rates than long-term gains, it's a more lucrative offset.
• Understand the wash-sale rules. If you sell an investment at a loss, you don't get the loss if you also buy the same holding 30 days before or after the sale. What many don't know is that these rules apply only to losses, not to gains. In the above example, Susan was free to re-acquire the stock she sold right away at a higher cost basis, which will reduce her taxable gain in the future. As long as transaction costs are low, it often makes sense to "scrub" your gains if you have losses.
Mix and match. When reckoning gains and losses, remember that those on mutual funds and exchange-traded funds can offset gains from stocks, and vice versa.
Tax strategist Robert Gordon of Twenty-First Securities Corp. in New York notes that many taxable bonds have appreciated as interest rates have fallen. If an investor holds individual bonds with long-term gains, he suggests selling the bonds, in effect converting interest payments taxable at ordinary rates to long-term capital gains with a top rate of 15%. If the investor buys the bond back right away, he should elect to deduct the premium from the interest payments over the remaining life of the bond.
What if you are selling an entire business instead of a liquid investment? Many are pushing to finish deals before the end of the year, says Mr. Nash. Failing that, he says, some people with deals under way are selling the business to a trust before the end of the year to take advantage of the 15% rate, and letting the trust sell it next year. This is a complex move but could be useful this year for people selling substantial assets who have a buyer.
If lawmakers extend the Bush 2001-03 tax cuts for upper-end taxpayers, the top rate on dividends will remain 15%. If they don't, the top rate may stay linked with the one for capital gains and rise to 20% (as requested by the Obama budget), or dividends will once again be treated as ordinary income, with a top rate of 39.6%.
What you can do. Individual investors can do little. Those who control companies can have them pay dividends before the end of the year. Several public companies, including Wynn Resorts Ltd., Limited Brands Inc. and Progressive Corp., have paid special or extraordinary dividends recently, ahead of possible changes next year.
Stock Options and Restricted Shares
So-called nonqualified stock options and restricted stock are now the most common forms of executive stock compensation. Employees who receive either type usually owe ordinary income taxes and payroll taxes (FICA) on the stock's value at current market prices when they exercise the options or the restricted stock vests. If they continue to hold shares more than a year after that, appreciation is taxed at long-term capital-gains rates, without payroll taxes.
If the Bush tax cuts aren't extended for all, the top rate on ordinary income will rise to 39.6% from 35% and on capital gains to 20% from 15%. In addition, there is the new 3.8% tax on investment income (described above) coming in 2013. The 2013 tax also adds a 0.9% payroll tax to the wages of couples making over $250,000 ($200,000 for singles). It would apply to income recognized when options are exercised or restricted stock vests.
What you can do. Plan not only for this year but also the next two, with the 2013 taxes in view. There is a lot to consider: ordinary tax rates, capital gain rates and holding periods, plus the stock's current price and its future prospects.
Eddie Adkins, a benefits specialist with Grant Thornton LLP, says he sees savvy executives planning now to avoid the 2013 increases. Because it may be hard to come up with the cash required to acquire shares or pay taxes, many are doing "cashless" transactions in which some shares are sold in order to cover the costs of keeping others, he says.
One caveat: The wash-sale rules (described above) come into play here. A grant of options or restricted stock, or an option exercise, count as buying stock, so be careful not to harvest losses from the same stock within 30 days before or after.
Roth IRA Conversions
Roth IRAs are in many ways the gold standard of retirement accounts. Assets in them can grow and be paid out income-tax-free, and there are no mandatory distributions for the owner, as there are with regular IRAs. Tax-free Roth payouts don't count in calculations for alternative minimum tax, Social Security tax, Medicare premiums or the 3.8% investment income tax coming in 2013, at least for now.
This is the first year all taxpayers may convert other IRAs to Roth accounts regardless of their income. Many have jumped to do it, even though that means paying full income taxes on the transfer. Roth sponsors have experienced a surge, with Fidelity Investments and Vanguard Group reporting four to five times the number of conversions as of this time last year.
A key Roth boon is that people who convert can reverse the transaction as late as Oct. 15 of the following year. This has led some to put different asset classes into separate Roth accounts with plans to undo the ones that have lost value or grown less. (See Tax Report, Aug. 14.) For 2010 only, investors may also split the conversion income and report half in 2011 and half in 2012, paying taxes at then-current rates. If the Bush cuts are extended, taking advantage of the deferral could make sense.
What you can do. Remember that Roth conversions work best when the following are true: Your tax rate will be the same or higher in the future; asset values have been beaten down; you have outside money to pay the tax; and you can transfer assets without moving into a higher tax bracket. In some cases, a conversion that raises income may help you avoid the alternative minimum tax.
Even a small conversion will start an important five-year clock running. Once the five years is up, Roth payouts of both principal and earnings are tax-free for those over 59½; if not, only payouts of principal are tax-free until five years is up. A December conversion starts this clock running as of the previous January.
But January is often a good time to convert to a Roth IRA, because this leaves the longest possible time to undo the conversion: almost 22 months. Those who convert in January 2011 will have almost until the 2012 elections to decide whether to undo the transfer.
Many taxpayers fear that if they pay to convert, Congress will change the rules in the future. The issues are many, but at least one expert familiar with tax theory and history, Columbia University Law School Professor Michael Graetz, plans a partial Roth conversion early next year.
"Waiting until next year gives until October 2012 to undo the conversion, and we should know more about where Congress is heading," says Prof. Graetz.
For one group of taxpayers who want to save for retirement—those who don't have current IRAs—a Roth conversion is close to a no-brainer. These investors can open a "nondeductible" IRA, put in up to $5,000—$6,000 if they're at least 50—and immediately convert to a Roth IRA with little or no tax.
This strategy doesn't work well for those who already have large IRAs, unless they're converting all their accounts. That's because partial conversions have to be prorated among pretax and after-tax IRAs. PricewaterhouseCoopers's Mr. Nash notes that this move can work for executives who have earned too much to have a deductible IRA, and sometimes their spouses as well.

Tuesday, November 23, 2010

2010 Year-end Tax Planning — Time to ‘Kick It Up A Notch!’

We are reminded every day of the current uncertain tax environment. The more news our clients read, the more confused they become. I am constantly looking at prior tax laws trying to predict Congress’ next move. What advice should we give clients in these tough times?
Reading articles and going to conferences gives you all the raw material you need to construct good planning ideas for your clients. If you need planning strategies, you don’t have to look very far. Using these tax law strategies and adding creativity, objectivity and analytical skills have always been the strength of CPA tax planning. But as it stands now, that is not enough.
This year’s planning meetings will give us an opportunity to help clients with making decisions when clear vision does not exist. We have all seen some level of uncertain times, but this is the worst i that I have seen. See if any of the following situations sound familiar:
While speaking to clients about the Roth conversion, Charlie CPA was pointing out that his strategy was very sound mathematically. (This strategy has been adequately described in articles and webcast from the AICPA’s PFP and TAX divisions all year). Charlie found that while the basis of his recommendation was sound, clients were not jumping at the chance to convert. Charlie thought clients believed that “if it looks too good to be true, it probably is.” But he later discovered a different dynamic. He found two reasons they were hesitant to convert. First, some clients do not want to give the government money — no matter what. (Have you ever seen a client’s hand shake when writing a big tax check? Some of us have.) Second, some “do not trust government” when it comes to tax planning. Clients all rationalized this with “Congress will just take away the Roth benefits and I will lose.” 
This situation is becoming common. In a recent meeting with a business client, Sue CPA suggested accelerating income to take advantage of lower tax rates for dividends achieved in a strategic business restructuring. The client was presented with a well-thought-out strategy (using key assumptions) that would save money. Sue was certain this strategy was good for this client which had always implemented her strategies in the past. This year, the client was frozen with inaction due to the uncertainty and lack of trust in the current tax system. Most clients are “common sense wise” even if they may be “tax law illiterate.” Sue’s clients just didn’t feel right paying tax in advance of when it was absolutely required.
Lindsay CPA has been presenting planning options to clients related to the much-publicized Bush tax cuts and the possible (maybe probable?) higher tax rates in the coming years. When presented with a well-thought-out strategy to accelerate income into the current year, her clients are still reluctant to act. They are concerned about playing a “game” in which rules can change both before and after they make a decision. We often have clients ask, “Can the government really pass tax laws after I have implemented my tax strategy retroactively?” And the answer is “yes.” 
Estate and gift tax uncertainty may be the most egregious example of poor congressional tax policy. Clients have a right to know how to structure their affairs to reduce tax liability. I have found that this is not about avoiding paying tax. Many of my clients expect to pay some tax. I find they care more about not paying more tax than their neighbor! They want the tax rules to be fair, predictable and simple. Given the dramatic changes and uncertainty surrounding estate and gift tax laws, it’s easy to see why clients are reluctant to discuss planning.
What clients need from CPAs (in addition to well-thought-out strategies) is a “total analysis” and objective advice. Advice is the key word. Too often, CPAs lay out an outstanding analysis that concludes in two or three options and then ask clients to choose one. Clients usually don’t understand the tax law and look to CPAs for help to make tax decisions. Clients want this question answered: “What would you do if you were in my shoes?” And in the past, our analytical and logical skills showed us a clear path. Every situation is different, but CPAs are challenged, more than ever, to not just lay out options, but to also help clients make a decision. Client indecision is a decision and will often be the wrong decision. 
Be prepared to address questions on your client’s mind, such as: What are the possibilities for tax changes? Will I be better off taking income this year or in 2011? Should I do estate planning when so many unanswered questions loom? Will I be better off on the sidelines while the tax law becomes predictable? No one is in a better position than CPAs to show clients the tax action plan that is custom designed for them. 
More than ever it’s important to put yourself in your client’s situation. Consider their family situation. Think about their financial situation. What is their tolerance for planning strategies with no certainty of success? These issues allow you to custom design action steps for them.
If you tailor your recommendations to each client you will be able to take him or her from “options” to “action.” CPAs cannot guarantee the results of tax planning. What we can guarantee is the process we take to formulate our recommendations. Each recommendation should contain the following:
  • Analytical comparison of all options to formulate an objective list of solutions
  • Review of the client’s situation to check how the various solutions fit this client
  • Consideration of the client’s tolerance for taking risks to achieve above average results
I compare these times to the recent financial meltdown. Clients wanted answers and advisers did not have them. I was very impressed watching CPA peers, particularly those with the Personal Financial Specialist (PFS) credential, stand with their clients during those horrible times. They helped clients and each other make the tough decisions to survive. Many other advisers hid and did not answer the phone because they did not have answers.
CPAs have a unique opportunity to stand by our clients during this stressful time and help them make appropriate tax planning decisions. Clients appreciate and value CPAs’ objective advice and assistance. Time to step up year-end planning a notch (or two)! BAM!

Friday, November 19, 2010

More small businesses will be hiring


Small businesses the engine of job growth are preparing to pick-up the pace, according to McLean-based Capital One Financial Corp. Thirty percent of small businesses polled by Capital One in the third quarter plan to hire workers in the next six months, 4 percent more than in the bank\'s second-quarter survey. The majority of small businesses are still on the sidelines. Sixty-three percent said in the survey, they would not be adding employees in the next six months. Most businesses will hold the line on other spending in the half year ahead. Capital One said 66 percent of small businesses say they plan to keep business development and investment spending at current levels, while only 16 percent plan to increase their spending. Fifteen percent said the would decrease spending. The modest improvement in hiring plans is more significant when considering the small business community\'s outlook in the third quarter. Just 27 percent of small businesses in the survey expect that economic conditions for their business were improving in the third quarter, down from 32 percent in the second quarter, and 39 percent in the first.Slightly more than half (51 percent) of businesses in the survey said their firm s financial position had held steady relative to one year ago, while 30 percent felt their firm s financial position had improved. Eighteen percent reported that their financial position had worsened.The survey was conducted for Capital One by Braun Research of Princeton, N.J., which interviewed a nationally representative sample of 1,901 for-profit small businesses in the U.S. Samples were also taken in New York, New Jersey, Louisiana, Texas and the Washington, D.C., area.

Tuesday, November 16, 2010

What Is the Future Outlook for Small Business?

It’s that time of year when we begin looking ahead to the coming year. In fact, with 2010 drawing to a close (can you believe it?), it’s that time when business owners begin looking ahead to the coming decade. If you want to know what the next 10 years have in store, take a closer look at a new report from Intuit.
Intuit 2020 Report: 20 Trends That Will Shape the Next Decade builds on more than five years of research led by the Institute for the Future and Emergent Research. It is the first in a series of reports looking at key trends affecting consumers and businesses in the coming years. Subsequent reports will drill down into specific trends and industries, but the current report presents a broad overview.
What’s the takeaway? “The coming decade will be complex, volatile and uncertain, but it will also provide many new opportunities for small businesses and their customers in the United States and abroad,” the report notes. Here are some points I found especially interesting and that have big implications for the future of innovation:
Small businesses will get ever more specialized. Customers will increasingly seek customized products and services. The rise of innovations such as cloud computing, a flexible workforce and lower-cost manufacturing options will make it easier for small businesses to seek out product and service niches.
Startup will get easier and cheaper. In response to growing niche market opportunities, lower equipment costs and better technology, it will be easier than ever to launch a business without a big investment. This means more innovation, as new ideas can be tested without much risk – and startup companies will proliferate.
Big and small firms will join forces. Collaborative partnerships with big companies will increase, as small companies bring to the table innovative practices, market agility and intimate customer knowledge. What will big firms offer small businesses? Marketing and distribution power so that they can take their innovations to broader markets.
One prediction I’m not so sure I agree with: “The Web and mobile technologies will become the great equalizer of big and small, with customers no longer knowing – or even caring – about the size of the firm that provides their goods and services.” In a niche economy where personalization is sought after, will being a small company actually be an advantage? I think consumers may, in many cases, prefer to do business with small firms provided their needs are being met.
And here’s one innovation I particularly hope to see – and I think most busy business owners wish for as well: “The hardware and software we use on a daily basis will get smarter, helping people make everyday decisions and streamline complex tasks,” the report contends. That’s especially good news given that data will become even more critical to competitiveness. Information overload isn’t going away – so smart machines to help us deal with it will be very welcome.
Be sure to check out the full report. You can also find related materials at the Intuit website.
Editor’s Note: This article was previously published at OPENForum.com under the title: “What Does the Future Hold for Small Business?” It is republished here with permission.

Tuesday, November 2, 2010

IRS to Get Tougher on Sole Proprietor Audits

The Internal Revenue Service will be taking additional steps to check on whether sole proprietors are hiding sources of income during field audits.
A report by the Treasury Inspector General for Tax Administration found that IRS field examiners are generally effective in checking for unreported income during field audits of sole proprietors. However, the report recommended that the IRS could take further steps to determine if additional sources of income need to be reported.

While IRS field examiners generally check for unreported income, TIGTA found that the IRS could improve the accuracy of its preliminary cash transaction analyses by taking greater advantage of performance feedback mechanisms and ensuring that appropriate personal-living-expense data are being used. The preliminary cash transaction analysis involves little or no taxpayer burden, but uses tax return and personal expense data to determine whether the sole proprietor’s income and expenses are roughly equal.
“Tests for unreported income during IRS audits of sole proprietors are critical to the process of verifying that the correct amount of tax is reported,” said TIGTA Inspector General J. Russell George in a statement. “Our results indicate that sole proprietors may have avoided tax and interest assessments of over $8 million in fiscal year 2008.”

The IRS’s National Research Program estimated that unreported business income by sole proprietors accounted for $68 billion (or 20 percent) of the $345 billion tax gap. This is due in large part to resource constraints and the need to balance audit coverage across other segments of the tax return filing population, such as corporations and partnerships.

TIGTA recommended that the IRS issue guidance to group managers to provide specific written feedback to examiners on the adequacy of their tests for unreported income, and that the IRS reinforce the requirement and importance of using appropriate personal-living-expense data in preliminary cash transaction analyses. The IRS agreed with these recommendations and plans to take the appropriate corrective actions. 

Tuesday, October 26, 2010

Tax Planners Unsure What Moves to Make

October 18, 2010 (Detroit Free Press) — The beauty of year-end tax planning this year is that you don't have to feel badly about procrastinating.

What kind of moves should you be making to cut that tax bill? Who knows?
"I don't know what to do," said James Jenkins, president of Jenkins & Co., an accounting firm in Southfield, Mich. "Call 1-800-PSYCHIC; try that."
Or maybe just wait until after Election Day, Nov. 2, to see what difference that might make.
Why all the uncertainty? Because $4 trillion worth of Bush-era tax cuts expire at the end of this year if Congress does nothing. Some could be extended; others likely will not.
So you may be seeing higher tax rates on capital gains and dividends.
President Barack Obama has a plan that increases the top marginal tax rates to 36 percent and 39.6 percent - up from 33 percent and 35 percent. Obama also has long promised that he would not increase taxes for most married taxpayers with incomes below $250,000 and for single taxpayers with incomes below $200,000.
Yet much is yet to be debated.
"People are still taking a wait-and-see attitude on a lot of this," said Andy Zaleski, senior director of BDO USA in Troy, Mich. "This is really an uncertain time for individual taxpayers."
Plenty of accountants and taxpayers are frustrated because it's not clear what changes are ahead.
The old year-end theories-such as delaying a bonus into another tax year or making a slew of charitable contributions before Dec. 31 - might or might not be helpful this year.
For example, taxpayers who think their tax rate will be higher next year could actually want to delay making charitable contributions until 2011. But that's not a good strategy for those who expect their tax rate to remain unchanged in 2011, said Bob Scharin, senior tax analyst for Thomson Reuters in New York.
One big question mark for investors: Where are long-term capital gains rates headed?
Under current rules, most taxpayers pay 15 percent on capital gains if they've held the property for more than one year before selling. Some individuals even pay a 0 percent rate on long-term gains if they're in the 10 percent or 15 percent income tax brackets.
Capital gains and losses are classified as long-term or short-term. If you hold an asset or property one year or less, your capital gain or loss is short-term.
If nothing is done in Congress, the long-term capital gains rate would change in 2011 to 20 percent for most individuals on assets held up to five years. The rate would be 18 percent if the assets are held longer than five years.
And beginning in 2011, again if Congress makes no moves, the long-term capital gains rate would go up to 10 percent for assets held up to five years - not 0 percent - for individuals in the 10 percent and 15 percent income tax brackets. For assets held longer than five years by those taxpayers in lower brackets, the 2011 rate would be 8 percent.
Scharin said one move that makes sense now is for some individuals in lower tax brackets to sell before Dec. 31 if they'd qualify for that 0 percent long-term capital gains rate.
This strategy could apply to married taxpayers filing a joint return on taxable income of up to $68,000. For singles, the taxable income could be up to $34,000 in 2010 to qualify for that 0 percent capital gains rate.
Scharin noted the 0 percent capital gains rate applies only to the extent the individual's taxable income does not exceed the appropriate threshold.
For example, let's say a married couple has $50,000 of taxable income, aside from capital gains. Scharin said for 2010 they can qualify for the 0 percent rate on up to $18,000 of long-term capital gains. If they have $20,000 of such gains, $18,000 would qualify for the 0 percent rate and $2,000 is taxed at 15 percent.
Scharin said it can make sense for taxpayers to lock in that 0 percent now. But you'd want to make sure how much you're selling and what level of taxable income you'd have for 2010.
If the 0 percent rate stays in place next year - that is, if Congress extended this tax break - you'd still have avoided capital gains taxes for 2010 and you'd be able to have a chance to take additional tax-free gains in 2011.

Tuesday, October 19, 2010

Is the Online Information About Your Business Correct?

Check before you roll your eyes. A third of searchers say they give up when they can't easily find information -- and one in six say info about small businesses online is incorrect or confusing, says a new study.

Seven out of 10 consumers are more likely to use a local business if it has information available on a social media site, says a new study.
The annual study, called Local Search Usage Study: Bridging The Caps, From Search to Sales, is a joint effort of comScore and TMP Directional Marketing, a local search marketing firm. It includes an online survey of some 4,000 consumers, plus data gleaned from observing one million consumers who agreed to have their online searches monitored anonymously.
Having a page on Facebook is a start, but it's not a one-time effort: 81 percent of consumers using social media say it's important for businesses to respond to questions and complaints. And for the record, you do need to worry about reviews and ratings – 78 percent said they're important when deciding what to buy.
What else do you need to be doing with social media? Nearly four out of five (78 percent) of users want special offers, promotions, and information about events, 74 percent want regular posts about products, and 72 percent want posts about the company itself. (Wondering about posting those photos of the company office—or picnic? Two-thirds of those surveyed want to see them.)
If this all seems too daunting, the survey also suggests a simple starting place: make sure there is correct information about your business in as many places online as you can (Google, Yelp, Facebook, Twitter, etc.). Social networkers are 67 percent more likely to buy something than general searchers, but one in six searchers is frustrated by the lack of reliable information about small businesses on the Web – either it's not there at all, it's incorrect, or it's confusing or disorderly. One third of searchers give up on a business when they can't quickly find the information they're looking for.
Where are consumers looking first for local business information? Seventy percent of consumers go online first for local business information, up seven percentage points from last year. One third of the survey's respondents hit traditional search engines (up 2 percent from last year), 23 percent look to the old-fashioned yellow pages (yes, really – down 5 percent from last year, though), and 22 percent turn to Internet yellow pages (the survey includes sites such as Yelp in this category).
Then there's the 13 percent who search local sites, and 9 percent who search social networks (both up 1 percent from last year.) Keep in mind that most consumers reference multiple sources – these figures simply represent where a person looks first. It's also worth noting that, in the past, consumers were more likely to use the old-fashioned Yellow Pages to find a specific business; today, online searches are used when trying to find new businesses or products (or the best deals on those products).
Of the searches on local sites, far and away the winner was Google (Google Places) with 41 percent. Bing Maps placed second at 11 percent (up from 4 percent last year), and Yahoo! Local took 10 percent. Tied for fourth place, with 9 percent apiece: SuperPages, YP.com, and Yellowbook.com. Six percent of consumers used Mapquest, while Dexknows and Yelp each controlled roughly 1 percent of the market.

Tuesday, October 12, 2010

New Publication Highlights Major Accounting Developments of Past Year

October 4, 2010 (SmartPros) — With another SEC announcement on the use of IFRS in the US expected in 2011, PwC releases new edition of IFRS and US GAAP: Similarities and differences.

PwC US released an updated edition of its popular IFRS and US GAAP: Similarities and differences guide.  Its purpose is to improve companies’ understanding of the changes to, and major differences between, International Financial Reporting Standards (IFRS) and United States Generally Accepted Accounting Principles (US GAAP).
The 2009 edition was PwC’s most-downloaded publication.
Even without a set conversion timeline from the SEC, IFRS has been affecting US companies for some time — through business dealings with non-US customers and vendors, along with the use of IFRS for statutory purposes by some non-US subsidiaries.  In addition, US companies will experience an unprecedented change in accounting standards as key aspects of US GAAP and IFRS converge.
Amidst that backdrop, the 2010 edition of PwC's guide IFRS and US GAAP: Similarities and differences alerts companies to the timing and scope of changes that US GAAP/IFRS convergence, and the possible use of IFRS in the United States will bring about.  It also provides context, showing how convergence with, or adoption of, IFRS has ramifications far beyond companies' accounting departments.
“Regardless of SEC rulings or delays in the US adoption of IFRS, companies should educate themselves on this topic to prepare for the future of their businesses,” PwC's US Convergence & IFRS Leader Jim Kaiser said.  “Our guide helps companies navigate these issues, explaining the implications of US GAAP/IFRS differences in a comprehensive way. Similarities and differences is an important tool many companies rely on year after year,” Kaiser added.
The guide has been updated to reflect the major changes related to market conditions and accounting standards over the past year, with an overview of the new IFRS for Small and Medium-sized Entities standard. Further updates include:
  • Commentary and insight with respect to recent and proposed guidance, including developments pertaining to the overall convergence agenda;
  • Report on the US GAAP codification project;
  • More detailed analysis of current differences between the frameworks including an assessment of the impact embodied within the differences; and
  • Updates incorporating authoritative standards and interpretive guidance issued through June 30, 2010.
Guided by the 2010 edition of IFRS and US GAAP: Similarities and differences, both public and private organizations will gain a greater understanding of what their next steps should be to ensure they have allowed themselves sufficient time to prepare for transition.  For more on PwC's IFRS resources, visit www.pwc.com/USifrs.

Tuesday, October 5, 2010

Taxpayers Face Oct. 15 Deadlines

October 1, 2010 (SmartPros) — Oct. 15 is fast approaching and is a key deadline for millions of individual taxpayers who requested an extension to file their 2009 tax returns. It is also a crucial due date for thousands of small nonprofit organizations at risk of losing their tax-exempt status because they have not filed the required forms in the last three years.


“The Oct. 15 deadline is particularly important this year because it’s the last chance for many small charities to comply with the law under the one-time relief program the IRS announced in July,” said IRS Commissioner Doug Shulman. “And as always, it’s an important deadline for taxpayers who took an extension to file their returns.”

Don’t Miss Your 1040 Deadline
The IRS expects to receive as many as 10 million tax returns from taxpayers who used Form 4868 to request a six-month extension to file their returns. Some taxpayers can wait until after Oct. 15 to file, including those serving in Iraq, Afghanistan or other combat zone localities and people affected by recent natural disasters.

The IRS encourages taxpayers to e-file. E-file with direct deposit results in a faster refund than by using a paper return. Electronic returns also have fewer errors than paper returns. Oct. 15 is the last day to take advantage of e-file and the Free File program.

Free File is a fast, easy and free way to prepare and e-file federal taxes online. The Free File program provides free federal income tax preparation and electronic filing for eligible taxpayers through a partnership between the IRS and the Free File Alliance LLC, a group of private sector tax software companies.

File If You Are Tax Exempt
Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file the required returns for 2007, 2008 and 2009 can preserve their status by filing returns by Oct. 15 under the one-time relief program.

The IRS has posted on a special page of IRS.gov the names and last-known addresses of these at-risk organizations, along with guidance about how to come back into compliance. The organizations on the list have return due dates between May 17 and Oct. 15, 2010, but the IRS has no record that they filed the required returns for any of the past three years.

Two types of relief are available for small exempt organizations — a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice (e-Postcard) , and a voluntary compliance program (VCP) for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.

Small organizations required to file Form 990-N simply need to go to the IRS website, supply the eight information items called for on the form, and electronically file it by Oct. 15. That will bring them back into compliance.

Under the VCP, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by Oct. 15 and pay a compliance fee. Details about the VCP are on the IRS website, along with frequently asked questions.

Check Your Withholding
With little more than three months remaining in the calendar year, individual taxpayers are encouraged to double check their federal withholding now to make sure they are having enough taxes taken out of their pay.

“Now is a good time to make sure your employer is withholding the proper amount,” Shulman said. If you face a shortfall in your federal withholding, there is still time left in the year to make up the difference.”

The average refund for 2009 was $2,887, up 8 percent from 2008. Even though the Making Work Pay Tax Credit lowered tax withholding rates in 2009 and 2010 for millions of American households, some workers and retirees still need to take steps to be sure enough tax is being taken out of their checks.

Those who should pay particular attention to their withholding include:

• Married couples with two incomes
• Individuals with multiple jobs
• Dependents
• Some Social Security recipients who work and
• Workers who do not have valid Social Security numbers.

Retirees who receive pension payments may also need to check their federal withholding.
As was the case in 2009, taxpayers who wind up owing tax because too little was taken out of their paychecks during 2010, may qualify for special relief on a penalty that sometimes applies. Depending on their personal situation, some people could have less withheld from their paychecks than they need or want. Failure to adjust withholding could result in potentially smaller refunds or in limited instances may cause a taxpayer to owe tax rather than receive a refund next year.

The IRS withholding calculator on IRS.gov can help a taxpayer compute the proper tax withholding. Worksheets in Publication 919, How Do I Adjust My Withholding?, can also be used to do the calculation. If the result suggests an adjustment is necessary, the taxpayer should submit a new Form W-4, Withholding Allowance Certificate, to his or her employer, or adjust the amount of quarterly tax paid.

Tuesday, September 28, 2010

2011 Tax Changes At-a-Glance

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2011 Tax Changes At-a-Glance

A host of tax provisions enacted in 2001 and 2003--commonly referred to collectively as the "Bush tax cuts"--expire at the end of the year. While it's possible that new legislation could extend some or all of these expiring tax provisions, election-year politics make it difficult to predict what action, if any, Congress will take. With that in mind, here's what you need to know about the major changes that are scheduled for 2011.

Federal income tax brackets
Right now, there are six income tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. For 2010, these brackets apply to married couples filing joint federal income tax returns in the following manner.

2010 Income Tax Brackets--Married Filing Jointly

Taxable Income
Marginal Tax Rate
Not over $16,750
Over $16,750 to $68,000
Over $68,000 to $137,300
Over $137,300 to $209,250
Over $209,250 to $373,650
Over $373,650

As it stands now, there will be no 10% bracket for 2011, and the remaining bracket rates will return to their original 2001 levels: 15%, 28%, 31%, 36%, and 39.6%.

Marginal Tax Rate
For 2010, if you sell shares of stock that you've held for more than a year, any gain is a long-term capital gain, generally taxed at a maximum rate of 15%. If you're in the 10% or 15% marginal income tax bracket, however, you'll pay no federal tax on the long-term gain (a 0% tax rate applies). That means if you're a married couple filing a joint federal income tax return, and your taxable income is $68,000 or less, you pay no federal tax on the gain.

However, these rates expire at the end of 2010. Beginning in 2011, a 20% rate will generally apply to long-term capital gains. Individuals in the 15% tax bracket (remember, there won't be a 10% bracket in 2011) will pay the tax at a rate of 10%. Special rules (and slightly lower rates) will apply for qualifying property held for five years or more. Finally, while qualifying dividends are taxed in 2010 using the same capital gains tax rates described above (i.e., 15% and 0%), in 2011 they'll be taxed as ordinary income subject to the increased 2011 tax brackets.

The Estate Tax
There is currently no estate tax for 2010, and special rules are in place that govern the way basis is calculated for property passing upon death. The estate tax reappears in 2011, however, with a $1 million exclusion amount (meaning that up to $1 million of assets will be exempt from estate tax) and a top tax rate of 55%. To put that in context, for 2009, the top estate tax rate was 45%, and estates received an exclusion of $3.5 million.

Estate tax exclusion
$3.5 millionN/A$1 million
Top estate tax rate
45%No tax55%

Other Important Changes
Other changes for 2011 include:
  • Phaseout of itemized deductions and exemption amounts--Itemized deductions and personal exemption amounts will once again be phased out for higher-income individuals
  • The "marriage penalty" returns--Changes made to correct the federal income tax "marriage penalty" expire at the end of 2010, resulting in a reduced standard deduction amount and lower tax bracket thresholds (i.e., higher rates will apply at lower income levels) for married couples filing jointly in 2011
  • Tax credits get cut--The child tax credit will be reduced and both the Hope education tax credit and the earned income tax credit become less generous (the Making Work Pay tax credit also disappears)
  • Section 179 small business expensing--The increased IRC Section 179 expense limit ends (Section 179 allows small businesses to elect to expense the cost of qualifying property rather than recover the cost through depreciation deductions); the amount that a small business may expense will drop from $250,000 in 2010 to $25,000 in 2011

Tuesday, September 21, 2010

Recession officially ended in June 2009

Recession officially ended in June 2009
uncertain about the future.

The National Bureau of Economic Research, an independent group of economists, released a statement Monday saying economic data now clearly point to the economy turning higher last summer. That makes the 18-month recession that started in December 2007 the longest and deepest downturn for the U.S. economy since the Great Depression.
NEW YORK (CNNMoney.com) -- The Great Recession ended in June 2009, according to the body charged with dating when economic downturns begin and end.
But the news is little comfort to the millions of Americans still out of work, underwater on their mortgages or
Still, weaker economic data over the past few months have led to rising fears of a double-dip recession. The forecast of top economists surveyed recently by CNNMoney was that there is a 25% risk of a

In its statement, the NBER acknowledged the risk, but said "the committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007."
The NBER said it "did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity." Rather, it decided that June was when the economy hit bottom, and that it has been slowly but steadily growing since then.
"Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion," said the NBER.

"Obviously, for the millions of people who are still out of work, people who have seen their home values decline, people who are struggling to pay the bills day to day, [the recession is] still very real for them," he said.
Most economists have been saying for months that the recession likely ended in the summer of 2009.
"No, we are not still in a recession as some people have asserted," said Barry Ritholtz, CEO of Fusion IQ, a research firm based in New York. "No, it's not a depression. The wheel has turned, the trough is more than a year behind us. This is not a robust recovery, but the economy is now expanding, not contracting."
Ritholtz places the risk of a double-dip recession in the 20%-30% range. Some other economists have put the risk as high as 40%. One of those is Sung Won Sohn, economics professor at Cal State University Channel Islands. He said the NBER determination does nothing to reduce his fears of another recession looming around the corner.
"The primary reason is we don't have any cylinder powering the economy," he said. "It's hard to imagine where the strength comes from."
The NBER typically takes a long time to declare the start and end of recessions, waiting for all the economic data to be revised and finalized and making sure that any change in direction of the economy is long-lasting. It didn't declare that the recession started in December of 2007 until a year later.
0:00 /1:55Economists: Politics holding up economy
In addition to looking at gross domestic product, the broadest measure of the nation's economic health, the NBER also weighs employment, industrial production, income and sales for determining when the economy changes direction.
Gross domestic product has recovered to about 70% of its pre-recession level, said Lakshman Achuthan, managing director of Economic Cycle Research Institute and an expert in the dating of recessions. Other measures followed by economists, such as industrial production and sales, have also rebounded nicely, he said.

But he acknowledged that the rebound hasn't felt like a recovery to the typical American. He pointed to private sector employment -- only 9% of jobs lost during the recession have come back -- as an area of continued weakness.
That, and several other weakening indicators, are key factors in rising fears of a double dip.
Double-dip recessions are still relatively rare. The last one occurred in the United States when the 1980 recession was followed by another in 1981-82. The NBER waited until July 1981 to declare the end of the 1980 recession, which turned out to be the same month that it eventually determined the next recession had begun.

Speaking to a town hall meeting in Washington, President Obama said the announcement about the end of the recession is further proof that steps taken early in his administration, including the economic stimulus package, were the right ones. But he cautioned it does not mean that the economy has recovered.
within the next year, up from a 15% chance just six months ago.The housing recession isn't over

Tuesday, September 14, 2010

Some tax benefits for college costs expire at end of 2010

Some parents have big dreams about what they'll do when their children start college. They'll take a cruise, go back to school, maybe walk around the house with no clothes on. But unless your child has received a generous scholarship, mooning your neighbors may be all that you can afford to do.
You can take some of the sting out of college bills by taking advantage of the credits, deductions and other tax-advantaged programs Congress has enacted to make college more affordable. At the end of this year, though, some of those benefits are scheduled to expire. Here's a look at what's changing:
Tax credit
The American Opportunity Credit, included in last year's economic stimulus package, provides a tax credit of up to $2,500 per student in 2010. You can claim the credit for up to 100% of the first $2,000 in qualified college costs and 25% of the next $2,000. To get the full credit, you'll need to spend at least $4,000 on qualified expenses.
Forty percent of the credit is refundable, so a low-income family that doesn't owe federal taxes could receive a check from the government for up to $1,000.
In addition, the income limits on this credit are broader than limits on the Hope and Lifetime Learning Credits, which have been around since the Clinton administration. Married couples with modified adjusted gross income of up to $160,000 can claim the full credit.
The credit is scheduled to expire on Dec. 31. There's a good chance Congress will extend it, "but the question is when," says Mel Schwarz, partner at Grant Thornton in Washington, D.C. One possibility is that Congress will wait until next year to extend the tax credit and make it retroactive for 2011.

In any event, it makes sense to get the most out of the credit available for 2010. If you haven't already run up $4,000 in qualified expenses, here are some steps you can take before the end of the year:
•Prepay tuition. Many colleges send out tuition bills for the spring semester at the end of the year. If you pay the bill before Dec. 31, you can claim the credit for those expenses on your 2010 tax return, says Melissa Labant, tax technical manager for the American Institute of Certified Public Accountants.
•Buy next semester's textbooks. Textbooks and course materials are qualified expenses for the American Opportunity Credit. If your child knows what courses he or she is going to take in the spring, you can buy textbooks before Dec. 31 and claim the credit, says Gil Charney, tax researcher for H&R Block's Tax Institute.
You can't claim the credit for expenses paid with your 529 college savings plan, says John W. Roth, tax analyst for CCH, a publisher of tax reference books. Because 529 plans also receive special tax treatment — withdrawals are tax-free if they're used for educational purposes — that's considered double-dipping. Instead, use your 529 plan to pay for costs that aren't covered by the tax credit, such as room and board.
Coverdell accounts
Since 2002, Coverdell Education Savings Accounts have allowed families to save up to $2,000 a year in a portfolio of mutual funds or other investments. Contributions are after-tax, but withdrawals are tax-free as long as the money is used for qualified expenses. Along with college-related costs, the money can be used for tuition at a primary or secondary school.
Barring action by Congress, though, these accounts will become much less appealing after Dec. 31. Annual contributions will shrink to $500, and tuition for primary and secondary schools will no longer be a qualified expense, says Barbara Weltman, author of J.K. Lasser's 1001 Deductions and Tax Breaks. Even more significantly, a portion of withdrawals taken after Dec. 31 will be taxed, Weltman says. What to do before year's end if you have a Coverdell account:
•Roll it into a 529 college savings plan. As long as you roll the money directly into a 529 plan, you won't have to pay taxes on it. Withdrawals from 529 plans are tax-free as long as the money is used for qualified expenses.
•Spend the money. Under current law, you can use Coverdell funds to pay for a broad range of education expenses, including computers, school uniforms and tutoring. If you've got some money sitting around in a Coverdell account, "use it up," Weltman says. "That way, it's all going to be tax-free."