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.