Middle-income baby boomers have spent the past few years battening down the hatches for futures they expect will be uncertain but turbulent. In the process, their definitions of what retirement looks like have changed dramatically. A new poll sponsored by Bankers Life and Casualty Co. provides a detailed look at the changing financial profile of people born between 1946 and 1964, with household incomes ranging from $25,000 to $75,000 a year.
It's no secret that the middle class has been under enormous financial stress. The value of this study, "Middle-Income Boomers, Financial Security and the New Retirement," is in the detailed portrait it provides of specific boomer actions and attitudes. See how your own outlook compares with its findings.
Before the recession and market declines, Americans seemed to be on a debt-financed spending spree, often using their home equity as a piggy bank. No more. Since the downturn, middle-income boomers have sharply curtailed discretionary spending on most leisure-time items. Here are the percentages of respondents saying they are now spending less on:
Going out to restaurants: 63 percent
Vacations: 62 percent
Movies: 62 percent
Clothes and shoes: 60 percent
Gifts for birthdays and holidays: 58 percent
Electronics and tech gadgets: 56 percent
Hobbies: 55 percent
Cable television: 26 percent
Nearly 3 of every 4 boomers say they've been forced to rethink their retirement date. Of these, nearly 80 percent (that's more than half of all middle-income boomers) said they would delay retirement—by an average of five years—and 14 percent said they feel they can never retire. Retirement used to be linked with a person's age. "Today, more than ever, a new number has emerged in its place—the amount of one's personal savings," the study said. "On the new road to retirement, Americans can now retire only when they feel they can afford to do so."
The survey found that middle-income boomers had increased their contributions in employer retirement programs but still felt they would come up short in having enough money to retire. "Uncovered healthcare expenses (80 percent), inflation (79 percent) and living longer than their money lasts (71 percent) are the top three financial concerns that middle-income boomers have about retirement."
Asked what they expected their retirements to be like, boomers projected huge differences between their experiences and their perceptions of how previous generations had fared in retirement. In financial terms, at least, the Silent Generation had nothing to squawk about because it retired with pensions and other sources of guaranteed income.
Tuesday, May 24, 2011
Tuesday, May 10, 2011
6 Ways to Plan for Your Later Years
Coming to terms with the realities of your later years can be one of the toughest challenges of aging. America is geared to youth and even acknowledging the inevitability of aging may be considered a form of cultural disloyalty.
So let's accept and applaud that 80 can be the new 60, that millions of baby boomers will reinvent themselves during their 60s and 70s, and that stereotypes about being old in America will be tossed out in favor of more positive images of vibrant old age.
[See 10 Bargain Retirement Spots.]
Even so, we will still get old. After all, isn't that the goal of today's enhanced emphasis on taking better care of ourselves? To age successfully, however, we also will need to contemplate important aspects of our later years, up to and including plans for our death.
The Longevity Project, a current book on traits of people who have lived long and successful lives, notes that conscientious people are favored to live long and well. One reason is that they do not leave things to chance. They tackle future needs today. Having plans in place, they are more prepared and less stressed about what their futures may hold. Such an approach does not, of course, guarantee successful aging. But it sure raises the odds.
Here are some of the key planning needs that nearly everyone will face as they age and retire. Some are practical and financial; others are very subjective but no less important. In every case, the sooner you begin to build these plans, the better off you'll be in the future. How many of these life "boxes" have you checked off?
Achieve retirement self-sufficiency. Generating the largest possible retirement income often seems to be the only financial goal of retirement planning. But it's really just a very visible element of a more complex set of calculations, many of which are emotional, not financial. The goal of all this work is to produce self-sufficiency in retirement. We don't want to worry about making ends meet every month, and we certainly don't want to be a burden on our families. Reaching self-sufficiency is a process that should begin well before you turn 65. It often can require some very difficult and perhaps uncomfortable admissions about how much money you will have to live on in retirement. While we're balancing future expenses and income, we're also adjusting our dreams to reflect the reality of our likely future circumstances. It is hard work, but ignoring it doesn't make it easier or lead to better outcomes.
[See 3 Steps to Turn Nest Eggs Into Retiree Income.]
Do worst-case planning. Unless you're really wealthy, there are adverse life events that can devastate your finances. Take suitable precautions. For example, I just bought an additional life insurance policy that will be in force until I'm 80 years old. Its sole purpose is to help my wife (and me) sleep better at night knowing she will have an extra cushion if something happens to me. For the same reason—sleeping well at night—we're also going to strengthen our long-term care insurance, adding to our coverage limits (particularly for in-home care) and also getting what's called a state "partnership" policy. Under this policy, if one of us requires extensive care—most likely for Alzheimer's—we would seek Medicaid coverage after exhausting our insurance policy benefits and, most likely, a good portion of our wealth. If this happened, we would not have to deplete our assets totally to qualify for Medicaid. Instead, we'd be able to shield an amount equal to the total of our private insurance benefit payments. In our case, we are fortunate to be able to afford to divert our current income into these insurance payments. But we're also willing to reduce current consumption to do so. You may have your own worse-case planning to do.
[See Don't Take Life Insurance Payouts for Granted.]
Decide where to live. Most people want to age in place in their homes. If this applies to you, take a careful and hard look around your house and imagine how well it would suit you if you were in a wheelchair. That's the reality you need to consider. Further, is your home in a supportive neighborhood? Once you no longer can drive, how would you get out to shops and doctors' offices? If, instead, you opt for a seniors-only retirement community, what's your geographic preference and why? What kind of community can you afford?
Keep solid records. If you died tomorrow, how hard would it be for your loved ones to get access to your key legal documents (will, trusts, and the like) and financial accounts? Do you even have the basic legal documents drawn up? You should have multiple copies of key documents plus account information (and online access passwords). Increasingly, these are going to be computer files. Keep one set on your home computer, and back it up either on an external hard drive or on a "cloud" computing back-up service. Provide access information to the appropriate family members. Then—and this is much easier said than done—regularly update these files so they are always current.
Consider your legacy. There is no common yardstick to use in measuring the impact we've had on the world during our lives. Most likely, however, you have your own yardstick. What does it tell you? How do you measure up to your own standards? Are there things you still believe you should be doing to satisfy your expectations? Believe me, this is not something you want to wait to do until your final days. Maybe a frank look in the mirror will cause you to make some major changes in your life. Maybe it will reaffirm you've been on the right path all along.
Determine your final wishes. Social scientists who have studied people in their final days report how helpful it is when a person has made the key decisions about the end of their life well in advance. Often, people are not able to make sound decisions as they near death. They often have physical and mental impairments that make such work impossible. Their families may have to make these calls for them, adding a lot of stress to what is already a difficult situation. So, would you like to die at home, in a hospital, or perhaps in a hospice facility (you probably can have hospice at home or in a hospital setting as well)? Have you executed the proper documents providing your spouse or a family member with the authority to make medical decisions should you become incapacitated? Does this person know your preferences for end-of-life care? Do you want to be buried or cremated, or perhaps donate your body to science? Is there a final resting place you have in mind? Who's going to provide an obituary to your hometown newspaper, and what do you want it to say? Setting aside time to make these decisions will hardly rank among your happiest memories. But you will be providing your family an invaluable gift—allowing them to focus on the loving aspects of your life, not the hassles of wondering how you'd like things handled when you die.
So let's accept and applaud that 80 can be the new 60, that millions of baby boomers will reinvent themselves during their 60s and 70s, and that stereotypes about being old in America will be tossed out in favor of more positive images of vibrant old age.
[See 10 Bargain Retirement Spots.]
Even so, we will still get old. After all, isn't that the goal of today's enhanced emphasis on taking better care of ourselves? To age successfully, however, we also will need to contemplate important aspects of our later years, up to and including plans for our death.
The Longevity Project, a current book on traits of people who have lived long and successful lives, notes that conscientious people are favored to live long and well. One reason is that they do not leave things to chance. They tackle future needs today. Having plans in place, they are more prepared and less stressed about what their futures may hold. Such an approach does not, of course, guarantee successful aging. But it sure raises the odds.
Here are some of the key planning needs that nearly everyone will face as they age and retire. Some are practical and financial; others are very subjective but no less important. In every case, the sooner you begin to build these plans, the better off you'll be in the future. How many of these life "boxes" have you checked off?
Achieve retirement self-sufficiency. Generating the largest possible retirement income often seems to be the only financial goal of retirement planning. But it's really just a very visible element of a more complex set of calculations, many of which are emotional, not financial. The goal of all this work is to produce self-sufficiency in retirement. We don't want to worry about making ends meet every month, and we certainly don't want to be a burden on our families. Reaching self-sufficiency is a process that should begin well before you turn 65. It often can require some very difficult and perhaps uncomfortable admissions about how much money you will have to live on in retirement. While we're balancing future expenses and income, we're also adjusting our dreams to reflect the reality of our likely future circumstances. It is hard work, but ignoring it doesn't make it easier or lead to better outcomes.
[See 3 Steps to Turn Nest Eggs Into Retiree Income.]
Do worst-case planning. Unless you're really wealthy, there are adverse life events that can devastate your finances. Take suitable precautions. For example, I just bought an additional life insurance policy that will be in force until I'm 80 years old. Its sole purpose is to help my wife (and me) sleep better at night knowing she will have an extra cushion if something happens to me. For the same reason—sleeping well at night—we're also going to strengthen our long-term care insurance, adding to our coverage limits (particularly for in-home care) and also getting what's called a state "partnership" policy. Under this policy, if one of us requires extensive care—most likely for Alzheimer's—we would seek Medicaid coverage after exhausting our insurance policy benefits and, most likely, a good portion of our wealth. If this happened, we would not have to deplete our assets totally to qualify for Medicaid. Instead, we'd be able to shield an amount equal to the total of our private insurance benefit payments. In our case, we are fortunate to be able to afford to divert our current income into these insurance payments. But we're also willing to reduce current consumption to do so. You may have your own worse-case planning to do.
[See Don't Take Life Insurance Payouts for Granted.]
Decide where to live. Most people want to age in place in their homes. If this applies to you, take a careful and hard look around your house and imagine how well it would suit you if you were in a wheelchair. That's the reality you need to consider. Further, is your home in a supportive neighborhood? Once you no longer can drive, how would you get out to shops and doctors' offices? If, instead, you opt for a seniors-only retirement community, what's your geographic preference and why? What kind of community can you afford?
Keep solid records. If you died tomorrow, how hard would it be for your loved ones to get access to your key legal documents (will, trusts, and the like) and financial accounts? Do you even have the basic legal documents drawn up? You should have multiple copies of key documents plus account information (and online access passwords). Increasingly, these are going to be computer files. Keep one set on your home computer, and back it up either on an external hard drive or on a "cloud" computing back-up service. Provide access information to the appropriate family members. Then—and this is much easier said than done—regularly update these files so they are always current.
Consider your legacy. There is no common yardstick to use in measuring the impact we've had on the world during our lives. Most likely, however, you have your own yardstick. What does it tell you? How do you measure up to your own standards? Are there things you still believe you should be doing to satisfy your expectations? Believe me, this is not something you want to wait to do until your final days. Maybe a frank look in the mirror will cause you to make some major changes in your life. Maybe it will reaffirm you've been on the right path all along.
Determine your final wishes. Social scientists who have studied people in their final days report how helpful it is when a person has made the key decisions about the end of their life well in advance. Often, people are not able to make sound decisions as they near death. They often have physical and mental impairments that make such work impossible. Their families may have to make these calls for them, adding a lot of stress to what is already a difficult situation. So, would you like to die at home, in a hospital, or perhaps in a hospice facility (you probably can have hospice at home or in a hospital setting as well)? Have you executed the proper documents providing your spouse or a family member with the authority to make medical decisions should you become incapacitated? Does this person know your preferences for end-of-life care? Do you want to be buried or cremated, or perhaps donate your body to science? Is there a final resting place you have in mind? Who's going to provide an obituary to your hometown newspaper, and what do you want it to say? Setting aside time to make these decisions will hardly rank among your happiest memories. But you will be providing your family an invaluable gift—allowing them to focus on the loving aspects of your life, not the hassles of wondering how you'd like things handled when you die.
Tuesday, May 3, 2011
Tax Tips Offered
No one wants to think about taxes following the April 18 deadline. But experts suggest that preparing now could make next year that much easier.
"Planning for taxes is just good financial strategy," said Michael Devine, an Internal Revenue Service spokesman. "If you had trouble this year, that should tell you that you need some sort of filing system."
Keeping track of receipts and any other tax records can be as simple as putting everything in a box, drawer or file folder. Anything that might possibly be a deduction should be placed in that spot throughout 2011 and questioned later.
From a marriage or divorce to moving expenses and new windows or appliances, all of these things could be important come tax season.
"There are more things you can do ahead of time than after the fact," said Charles Schwichtenberg, a certified public accountant with Sumner Carter Hardy & Schwichtenberg.
Mr. Schwichtenberg stresses the importance of communication with whoever is preparing your taxes. More often than not, those tax professionals can provide vital answers to questions about life changes or big purchases through the year.
"Just thinking occasionally about how this will affect your taxes next year might help you plan legally to reduce tax liability," Mr. Devine said.
Another idea to consider before next year deals with withholdings. According to the IRS, if an individual paid in more taxes than expected or received a large refund, he or she may want to complete a new Form W-4 withholding statement with their employer.
"If you only think about taxes in April, then you might miss out on the ability to save some money," Mr. Devine said.
There may be an alternative to record-keeping, too. Mr. Schwichtenberg said there are many applications for smart phones to keep track of mileage using the internal global positioning system, as well as an app to store pictures of receipts and working lunches.
"(Mileage) is something that we see people having a tendency to be lackadaisical about," he said. The apps can help with that. There are also apps to keep track of non-cash donations.
"The bottom line is that there are apps out there to keep record-keeping easier," he said. "I think as we go forward, we're going to see more of that."
"Planning for taxes is just good financial strategy," said Michael Devine, an Internal Revenue Service spokesman. "If you had trouble this year, that should tell you that you need some sort of filing system."
Keeping track of receipts and any other tax records can be as simple as putting everything in a box, drawer or file folder. Anything that might possibly be a deduction should be placed in that spot throughout 2011 and questioned later.
From a marriage or divorce to moving expenses and new windows or appliances, all of these things could be important come tax season.
"There are more things you can do ahead of time than after the fact," said Charles Schwichtenberg, a certified public accountant with Sumner Carter Hardy & Schwichtenberg.
Mr. Schwichtenberg stresses the importance of communication with whoever is preparing your taxes. More often than not, those tax professionals can provide vital answers to questions about life changes or big purchases through the year.
"Just thinking occasionally about how this will affect your taxes next year might help you plan legally to reduce tax liability," Mr. Devine said.
Another idea to consider before next year deals with withholdings. According to the IRS, if an individual paid in more taxes than expected or received a large refund, he or she may want to complete a new Form W-4 withholding statement with their employer.
"If you only think about taxes in April, then you might miss out on the ability to save some money," Mr. Devine said.
There may be an alternative to record-keeping, too. Mr. Schwichtenberg said there are many applications for smart phones to keep track of mileage using the internal global positioning system, as well as an app to store pictures of receipts and working lunches.
"(Mileage) is something that we see people having a tendency to be lackadaisical about," he said. The apps can help with that. There are also apps to keep track of non-cash donations.
"The bottom line is that there are apps out there to keep record-keeping easier," he said. "I think as we go forward, we're going to see more of that."
Tuesday, March 1, 2011
Parents Taking Due Credits Save Thousands in Taxes
Consumers seek coupons for $25 deals on everything from massages to restaurants, but what about tax deals?
Parents who pay attention to their tax return can often recover thousands of dollars for everything from raising children to sending them to day care or college. Yet taxpayers leave billions of unclaimed credits on the table, according to federal figures.
Maybe it's a lack of knowledge. Maybe it's intimidation from the rules and regulations that come in tax forms and publications. But tax software such as TurboTax or TaxAct, which are free on the IRS site (freefile.irs.gov) for people with an adjusted gross income of $58,000 or less and available in stores for others, will help you hunt for the credits that fit your situation and do the number crunching for you.
Whether you do taxes on paper or online, watch for these potential deals. And take advantage of them because many could be reduced in a couple of years as short-term tax laws expire. Here are ways to save money:
CHILD TAX CREDIT: Parents can cut their tax bill by as much as $1,000 a child, up to a total of $3,000. Children must be under age 17, and there are income requirements to meet. The credit starts to phase out when married couples' incomes top $110,000 and single parents' exceed $75,000. But parents still might qualify for some limited credit with incomes up to $130,000 for couples and $95,000 if single, said William Massey, a tax analyst with Thomson Reuters. Typically, this credit reduces your regular taxes, but for some low-income families it is possible to get some money back from the government even if their income is too low to pay taxes.
Use Publication 972 and Form 8812 to qualify for a refund that exceeds what you owe in taxes.
EARNED INCOME TAX CREDIT: This credit is intended to help people who work but earn little. The amount of the credit is influenced by the number of children you have. For example, a couple with three children could have an income up to $48,362 and qualify, but a single person with no children would have to have an income under $13,460. The maximum credit with three children is $5,666, but if you are childless, it's $457. To find out if you are eligible, use the table in IRS Publication 596.
SENDING KIDS TO COLLEGE: The American Opportunity Tax Credit can take some of the sting out of paying college tuition and fees. You can get a credit of up to $2,500 per student per year for each of four years for college. To get the full benefit, income for a couple must be no more than $160,000; for singles, $80,000. But some credit is available for couples with income up to $180,000, or $90,000 for singles. The rules are covered in Publication 970.
Keep in mind that recent tax changes allow you to use the credit for each year of a four-year education up to the end of the 2010 tax year. Previously, the Hope Credit for college applied only to the first two years.
Massey notes that parents may be able to claim the credit if a grandparent pays a student's college costs directly to the college. In addition, if a student borrowed with student loans, either they or their parents can deduct the interest payments they make on the loans.
ADOPTED CHILD: Recent tax changes have enhanced the credits available to parents who adopt children, said Mark Luscombe, a tax analyst for CCH. Parents can receive a credit for up to $13,170 for expenses, such as legal fees, incurred while adopting a child. In some cases, travel costs may also be covered if the adoption was done away from home. Parents adopting special needs children may be able to get the full $13,170 credit even if they did not spend that much. Use Form 8839.
CHILD CARE EXPENSES: If you pay someone to care for a child under age 13 while you work, you can get a credit for up to 35 percent of the costs up to $3,000 per child or $6,000 for two children. This can cover care in your home as long as it's not provided by a spouse or one of your other children. The benefit can also extend to facilities such as day camps but not overnight camps. See Publication 503.
INSURING THE KIDS: If you were self-employed in 2010 and bought health insurance for yourself and your family, you will be able to deduct the premiums you paid for children under 27, even if you don't claim the child as a dependent, said Massey. This is a result of health care overhaul. Dates matter, however. Massey notes the deduction is possible only for the portion paid from March 30 to the end of 2010.
Parents who pay attention to their tax return can often recover thousands of dollars for everything from raising children to sending them to day care or college. Yet taxpayers leave billions of unclaimed credits on the table, according to federal figures.
Maybe it's a lack of knowledge. Maybe it's intimidation from the rules and regulations that come in tax forms and publications. But tax software such as TurboTax or TaxAct, which are free on the IRS site (freefile.irs.gov) for people with an adjusted gross income of $58,000 or less and available in stores for others, will help you hunt for the credits that fit your situation and do the number crunching for you.
Whether you do taxes on paper or online, watch for these potential deals. And take advantage of them because many could be reduced in a couple of years as short-term tax laws expire. Here are ways to save money:
CHILD TAX CREDIT: Parents can cut their tax bill by as much as $1,000 a child, up to a total of $3,000. Children must be under age 17, and there are income requirements to meet. The credit starts to phase out when married couples' incomes top $110,000 and single parents' exceed $75,000. But parents still might qualify for some limited credit with incomes up to $130,000 for couples and $95,000 if single, said William Massey, a tax analyst with Thomson Reuters. Typically, this credit reduces your regular taxes, but for some low-income families it is possible to get some money back from the government even if their income is too low to pay taxes.
Use Publication 972 and Form 8812 to qualify for a refund that exceeds what you owe in taxes.
EARNED INCOME TAX CREDIT: This credit is intended to help people who work but earn little. The amount of the credit is influenced by the number of children you have. For example, a couple with three children could have an income up to $48,362 and qualify, but a single person with no children would have to have an income under $13,460. The maximum credit with three children is $5,666, but if you are childless, it's $457. To find out if you are eligible, use the table in IRS Publication 596.
SENDING KIDS TO COLLEGE: The American Opportunity Tax Credit can take some of the sting out of paying college tuition and fees. You can get a credit of up to $2,500 per student per year for each of four years for college. To get the full benefit, income for a couple must be no more than $160,000; for singles, $80,000. But some credit is available for couples with income up to $180,000, or $90,000 for singles. The rules are covered in Publication 970.
Keep in mind that recent tax changes allow you to use the credit for each year of a four-year education up to the end of the 2010 tax year. Previously, the Hope Credit for college applied only to the first two years.
Massey notes that parents may be able to claim the credit if a grandparent pays a student's college costs directly to the college. In addition, if a student borrowed with student loans, either they or their parents can deduct the interest payments they make on the loans.
ADOPTED CHILD: Recent tax changes have enhanced the credits available to parents who adopt children, said Mark Luscombe, a tax analyst for CCH. Parents can receive a credit for up to $13,170 for expenses, such as legal fees, incurred while adopting a child. In some cases, travel costs may also be covered if the adoption was done away from home. Parents adopting special needs children may be able to get the full $13,170 credit even if they did not spend that much. Use Form 8839.
CHILD CARE EXPENSES: If you pay someone to care for a child under age 13 while you work, you can get a credit for up to 35 percent of the costs up to $3,000 per child or $6,000 for two children. This can cover care in your home as long as it's not provided by a spouse or one of your other children. The benefit can also extend to facilities such as day camps but not overnight camps. See Publication 503.
INSURING THE KIDS: If you were self-employed in 2010 and bought health insurance for yourself and your family, you will be able to deduct the premiums you paid for children under 27, even if you don't claim the child as a dependent, said Massey. This is a result of health care overhaul. Dates matter, however. Massey notes the deduction is possible only for the portion paid from March 30 to the end of 2010.
Saturday, February 26, 2011
New 1099 Reporting Requirements for Landlords
Congress in 2010 expanded the information return reporting requirements contained in Code Sec. 6041. Generally, Code Sec. 6041 requires payments of $600 or more to a single recipient in the course of a trade or business to be reported by the payor to the IRS and the payee, usually on Form 1099-MISC. There are exceptions to the general reporting requirements but these exceptions begin to disappear in 2011.
One of these disappearing exceptions to the reporting requirements involves landlords. The Small Business Jobs Act of 2010 (2010 Jobs Act) (P.L. 111-240) amended the definition of trade or business to include renting real property. Before 2011, most landlords were not subject to the reporting requirements because renting real property was not considered to be a trade or business. Under the new version of Code Sec. 6041, real property rental is now considered a trade or business but only for purposes of the reporting requirements.
There are some exceptions to the general rule requiring landlords to report payments of $600 or more made in the course of renting real property. The first exception is for those who receive substantially all of their rental income from the temporary rental of their primary residence. The second exception is for individuals who receive "minimal" rental income, which amount will be determined by regulation. Similarly, the third exception applies to individuals receiving rental income if compliance with the reporting requirements would cause hardship. What constitutes hardship will also be defined by future regulations.
Like all returns, Forms 1099 must accurately identify the payor and the payee, as well as the total amount paid. Accurate identification includes the name, address and taxpayer identification number (TIN) of the payor and payee. The telephone number of the payee is also required.
It is the payor's obligation to request this information from the payee and Form W-9 may be used for this purpose. A landlord should request that Form W-9 be completed before making any payments to the payee because, if the payee fails or refuses to provide the correct taxpayer identification number, the payor is usually required to collect backup withholding from any payments due to the payee. The payor may be liable for a penalty for failure to backup withhold so withholding the correct amount from the payee is crucial. Also, a $50 penalty is imposed on a payee who fails to provide a correct TIN upon request.
Since landlords have not, until now, been "engaged in a trade or business," the reporting requirements create a problem. According to the instructions for Form 1099, sole proprietors and others, like landlords, who are not otherwise required to have an employer identification number (EIN) should use their Social Security number (SSN) for reporting purposes. Moreover, the instructions state that the filer's name and TIN should be consisted with the name and TIN used on the filer's other returns. This opens up the opportunity for identity theft.
Fortunately, landlords have a few options to protect themselves. The landlord can organize a separate company or LLC to perform management services for the property, including making payments to contractors. As the payor, the management company or LLC would be responsible for reporting any payments on Form 1099 and could use its own EIN, thus shielding the landlord's SSN. Another option is for the landlord to hire an employee. A spouse or child could be hired and an EIN obtained in order to report the wages of the new hire. This EIN could then be used on Form 1099, again shielding the landlord's SSN. Or, the landlord may be able to place the real property in a trust and use the trust's EIN for reporting purposes.
The deadline for providing Forms 1099 to payees is January 31 of the year following the year of payment. The deadline for filing the returns with the IRS is February 28 of the year following the year of payment. There is an extended deadline, March 31, when the returns are filed electronically.
The 2010 Jobs Act also increased the penalties for failing to file Forms 1099 with the IRS, for filing Forms 1099 late and for failing to provide copies of Forms 1099 to the payee. The increased penalties apply to information returns required to be filed after December 31, 2010.
One of these disappearing exceptions to the reporting requirements involves landlords. The Small Business Jobs Act of 2010 (2010 Jobs Act) (P.L. 111-240) amended the definition of trade or business to include renting real property. Before 2011, most landlords were not subject to the reporting requirements because renting real property was not considered to be a trade or business. Under the new version of Code Sec. 6041, real property rental is now considered a trade or business but only for purposes of the reporting requirements.
There are some exceptions to the general rule requiring landlords to report payments of $600 or more made in the course of renting real property. The first exception is for those who receive substantially all of their rental income from the temporary rental of their primary residence. The second exception is for individuals who receive "minimal" rental income, which amount will be determined by regulation. Similarly, the third exception applies to individuals receiving rental income if compliance with the reporting requirements would cause hardship. What constitutes hardship will also be defined by future regulations.
Like all returns, Forms 1099 must accurately identify the payor and the payee, as well as the total amount paid. Accurate identification includes the name, address and taxpayer identification number (TIN) of the payor and payee. The telephone number of the payee is also required.
It is the payor's obligation to request this information from the payee and Form W-9 may be used for this purpose. A landlord should request that Form W-9 be completed before making any payments to the payee because, if the payee fails or refuses to provide the correct taxpayer identification number, the payor is usually required to collect backup withholding from any payments due to the payee. The payor may be liable for a penalty for failure to backup withhold so withholding the correct amount from the payee is crucial. Also, a $50 penalty is imposed on a payee who fails to provide a correct TIN upon request.
Since landlords have not, until now, been "engaged in a trade or business," the reporting requirements create a problem. According to the instructions for Form 1099, sole proprietors and others, like landlords, who are not otherwise required to have an employer identification number (EIN) should use their Social Security number (SSN) for reporting purposes. Moreover, the instructions state that the filer's name and TIN should be consisted with the name and TIN used on the filer's other returns. This opens up the opportunity for identity theft.
Fortunately, landlords have a few options to protect themselves. The landlord can organize a separate company or LLC to perform management services for the property, including making payments to contractors. As the payor, the management company or LLC would be responsible for reporting any payments on Form 1099 and could use its own EIN, thus shielding the landlord's SSN. Another option is for the landlord to hire an employee. A spouse or child could be hired and an EIN obtained in order to report the wages of the new hire. This EIN could then be used on Form 1099, again shielding the landlord's SSN. Or, the landlord may be able to place the real property in a trust and use the trust's EIN for reporting purposes.
The deadline for providing Forms 1099 to payees is January 31 of the year following the year of payment. The deadline for filing the returns with the IRS is February 28 of the year following the year of payment. There is an extended deadline, March 31, when the returns are filed electronically.
The 2010 Jobs Act also increased the penalties for failing to file Forms 1099 with the IRS, for filing Forms 1099 late and for failing to provide copies of Forms 1099 to the payee. The increased penalties apply to information returns required to be filed after December 31, 2010.
Wednesday, February 23, 2011
Tax Tips for Contractors
The flurry of recent tax legislation and the lingering effects of the economic downturn make this tax planning environment one of the most challenging in recent memory. Contractors need to do what they can to improve cash flow by effectively managing their tax burdens and leveraging any available new tax incentives.
Tax planning over the next two years will require thoughtful and nimble analysis.
In order to help contractors with their planning, Grant Thornton LLP’s Construction group has developed eight tax tips for contractors. Below is a sampling of some of the things construction contractors should keep in mind:
1)Double bonus depreciation — full expensing! Lawmakers have extended and doubled bonus depreciation, allowing full expensing for many assets placed into service through 2011. Property qualifying for bonus depreciation that is placed in service after Sept. 8, 2010, and through the end of 2011 will be eligible for full 100% expensing.
2)Review deferred compensation plans. Most contractors are struggling to remain profitable in this difficult environment. If your company cannot afford large bonuses to retain key employees, now is the time to revisit alternative compensation arrangements.
3)Certain S corporations should consider taking gains in 2011. If you converted to S corporation status in 2004 or 2005, consider sales of “gain” property in 2011. Special provisions enacted over the last two years provide a reduced seven-year period for sales that take place in 2009 or 2010 and a five-year period for sales of property during 2011.
4)Take full advantage of capital asset expensing deductions. Rules originally intended for small businesses were significantly expanded to allow contractors to expense up to $500,000 of 2010 fixed asset costs, provided less than $2 million of assets were placed in service throughout the year. Unlike bonus depreciation, this applies to new or used assets.
5)Maximize Section 199 deductions. The Section 199 domestic production activities deduction is a unique tax incentive available to most contractors. This incentive allows taxpayers to deduct 9% of qualifying production activities, which includes the construction or substantial renovation of domestic real property.
Tax planning over the next two years will require thoughtful and nimble analysis.
In order to help contractors with their planning, Grant Thornton LLP’s Construction group has developed eight tax tips for contractors. Below is a sampling of some of the things construction contractors should keep in mind:
1)Double bonus depreciation — full expensing! Lawmakers have extended and doubled bonus depreciation, allowing full expensing for many assets placed into service through 2011. Property qualifying for bonus depreciation that is placed in service after Sept. 8, 2010, and through the end of 2011 will be eligible for full 100% expensing.
2)Review deferred compensation plans. Most contractors are struggling to remain profitable in this difficult environment. If your company cannot afford large bonuses to retain key employees, now is the time to revisit alternative compensation arrangements.
3)Certain S corporations should consider taking gains in 2011. If you converted to S corporation status in 2004 or 2005, consider sales of “gain” property in 2011. Special provisions enacted over the last two years provide a reduced seven-year period for sales that take place in 2009 or 2010 and a five-year period for sales of property during 2011.
4)Take full advantage of capital asset expensing deductions. Rules originally intended for small businesses were significantly expanded to allow contractors to expense up to $500,000 of 2010 fixed asset costs, provided less than $2 million of assets were placed in service throughout the year. Unlike bonus depreciation, this applies to new or used assets.
5)Maximize Section 199 deductions. The Section 199 domestic production activities deduction is a unique tax incentive available to most contractors. This incentive allows taxpayers to deduct 9% of qualifying production activities, which includes the construction or substantial renovation of domestic real property.
Tuesday, February 15, 2011
Small Biz to Congress: Deep-Six the 1099 Expansion
Small-business owners enumerate the costs that will come with more tax reporting.
The expansion of Form 1099 reporting requirements that lawmakers buried in the health-care reform bill has caused no shortage of anxiety among business owners and executives, many of whom already feel buried in paperwork. Following the Senate's vote last week to repeal the measure and President Obama's indirect endorsement of a repeal in his January State of the Union address, the House Committee on Small Business held a hearing this week to let executives air their concerns. Not surprisingly, the testimony universally encouraged Congress to drop the new requirements, and quickly.
Currently, a business must provide a 1099 form to the Internal Revenue Service for any services it receives from an unincorporated firm, such as a partnership. Last March the Patient Protection and Affordable Care Act broadened the requirement so that a business would have to file the form for every vendor it uses, regardless of incorporation status, both for services and goods that exceed $600 in a year. The measure, scheduled to take effect January 1, 2012, was intended to generate additional tax revenue to help fund health-care reform.
Business owners have complained that tracking all corporate purchases to determine when to file would be an overwhelming and expensive job, not to mention collecting hundreds of tax identification numbers from vendors. For example, "the simple task of tracking fuel purchases from multiple gas stations . . . is not as simple as collecting receipts," testified Mike Kegley, a Kentucky-based builder who appeared at the committee hearing on behalf of the National Association of Home Builders. Instead, "businesses must determine the taxpayer identification numbers for each gas station, as they are likely owned by different franchise owners. Many businesses will be forced to hire additional staff to comply, and few home builders are in the position to do that."
Kegley said his bookkeeper estimated that his company would likely spend at least $9,000 in the first year the new rules take effect, not including software costs, and at least $1,900 per year after that.
John "Mark" Eagleton, a restaurant franchisee in Colorado who testified on behalf of the National Restaurant Association, noted that the new rules mean he would have to file forms for the fresh lettuce he buys each day at the local grocery store, as well as his miscellaneous purchases at dollar stores, among the other 200 to 300 vendors he deals with, since those purchases typically exceed $600 in a year. The 1099 expansion "may seem like a simple edict, but it could put me out if business," said Eagleton, whose restaurant was slightly cash-flow negative last year after debt payments.
While repeal of the 1099 expansion looks like a distinct possibility, the main obstacle right now is money. "The budget has been based on this additional revenue coming into the coffers, so the argument right now is, 'If we repeal and don't bring in this additional revenue, what are we going to do to offset it?'" says James Guarino, a partner with Boston-based tax and accounting firm Moody, Famiglietti & Andronico.
Some relief has already come in the form of the IRS agreeing to exempt any credit-card transactions from the requirement. However, that's not enough, business owners say, since not all purchases can be made, or accepted, with a credit card.
Still, there's good reason to hope. Congress "may drag [the repeal] out," says Guarino, "but I sense that one way or another it's going to get passed."
The expansion of Form 1099 reporting requirements that lawmakers buried in the health-care reform bill has caused no shortage of anxiety among business owners and executives, many of whom already feel buried in paperwork. Following the Senate's vote last week to repeal the measure and President Obama's indirect endorsement of a repeal in his January State of the Union address, the House Committee on Small Business held a hearing this week to let executives air their concerns. Not surprisingly, the testimony universally encouraged Congress to drop the new requirements, and quickly.
Currently, a business must provide a 1099 form to the Internal Revenue Service for any services it receives from an unincorporated firm, such as a partnership. Last March the Patient Protection and Affordable Care Act broadened the requirement so that a business would have to file the form for every vendor it uses, regardless of incorporation status, both for services and goods that exceed $600 in a year. The measure, scheduled to take effect January 1, 2012, was intended to generate additional tax revenue to help fund health-care reform.
Business owners have complained that tracking all corporate purchases to determine when to file would be an overwhelming and expensive job, not to mention collecting hundreds of tax identification numbers from vendors. For example, "the simple task of tracking fuel purchases from multiple gas stations . . . is not as simple as collecting receipts," testified Mike Kegley, a Kentucky-based builder who appeared at the committee hearing on behalf of the National Association of Home Builders. Instead, "businesses must determine the taxpayer identification numbers for each gas station, as they are likely owned by different franchise owners. Many businesses will be forced to hire additional staff to comply, and few home builders are in the position to do that."
Kegley said his bookkeeper estimated that his company would likely spend at least $9,000 in the first year the new rules take effect, not including software costs, and at least $1,900 per year after that.
John "Mark" Eagleton, a restaurant franchisee in Colorado who testified on behalf of the National Restaurant Association, noted that the new rules mean he would have to file forms for the fresh lettuce he buys each day at the local grocery store, as well as his miscellaneous purchases at dollar stores, among the other 200 to 300 vendors he deals with, since those purchases typically exceed $600 in a year. The 1099 expansion "may seem like a simple edict, but it could put me out if business," said Eagleton, whose restaurant was slightly cash-flow negative last year after debt payments.
While repeal of the 1099 expansion looks like a distinct possibility, the main obstacle right now is money. "The budget has been based on this additional revenue coming into the coffers, so the argument right now is, 'If we repeal and don't bring in this additional revenue, what are we going to do to offset it?'" says James Guarino, a partner with Boston-based tax and accounting firm Moody, Famiglietti & Andronico.
Some relief has already come in the form of the IRS agreeing to exempt any credit-card transactions from the requirement. However, that's not enough, business owners say, since not all purchases can be made, or accepted, with a credit card.
Still, there's good reason to hope. Congress "may drag [the repeal] out," says Guarino, "but I sense that one way or another it's going to get passed."
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