Deferring Income, Accelerating Deductions

In most years, we typically tout the strategy of “deferring income and accelerating deductions” as a sure-fire way to plan for taxes. However, this strategy may not be the way to go for 2009, 2010 and 2011.

The reason it is usually a good one is that it is often better to pay less taxes today and use the money we saved on taxes to invest. But now we must factor in one more big unknown: what will the tax rates be in the very near future?

Most economists are predicting that long-term capital gains rates (now 15%) will increase to 20-25%, qualified dividends (now taxed at 15%) will be taxed as ordinary income, and that the top tax rate for individuals (now 35%) will increase to a minimum of 39.6%. Therefore, if you think these estimates are likely to be accurate, you may want to incur capital gains in 2009 to accelerate the taxes and pay the taxes at a lower overall rate.

If you decide to use this strategy, make sure you consider the time value of money and other investment decisions in lieu of the tax issues. In addition, you must try to determine what your likely tax bracket will be for 2010 as opposed to 2009.

It may make sense for you to accelerate income (or delay expense deductions) to 2009 from 2010 if:

(1) You expect to be in a higher tax bracket in 2010

(2) You are planning on getting married in 2010 (and may suffer from the “marriage penalty” tax hit)

(3) You will start to receive Social Security benefits in 2010 (and don’t want to have any more of these benefits taxed than is necessary)

(4) You plan on converting your traditional IRA to a Roth IRA and will thus have more income in 2010; and/or (5) you expect to be eligible for a tax credit in 2010 and there are income phase outs requiring you to keep your income as low as possible for 2010.

Finally, given the current state of the economy, many taxpayers have had debt-canceling acts in 2009. Please be sure to review any debt cancellation tax forms (1099) you may receive in early 2010 as there are likely to many mistakes in these. Given that much debt cancellation results in taxable income, this could be a costly mistake.

December Tax Tip

The taxable wage base for Social Security taxes (FICA) stays the same in 2010 as it was in 2009 ($106,800). While wages did go up in 2009 (however modestly), consumer prices went down.

Thus, the taxes on your earned income will stay the same because there will be NO benefit increases for Social Security recipients, the first time since they went into effect in 1975. The benefits are based upon the Consumer Price Index, which went down in value from 2008 (and thus no cost of living increases).

Year End Tax Planning Moves For 2009 (Part 2)

- Make tax-free gifts of up to $13,000 per recipient per year. You can do the same in early 2010 (it stays the same at $13,000 in 2010). You do not get a tax deduction for this but it does permit the gift to work for 2009. By using proper tax planning, you may be able to gift away appreciated securities to your children and have them sell the securities, thus enabling the family to pay a lower overall capital gains tax rate in 2009 or 2010 (but watch the tricky “kiddie” tax rules).

- If you bought a new home and paid mortgage insurance, the premiums are deductible in 2009 (and may not be after 2010) if your AGI is $110,000 per year or lower.

- Use up Flexible Spending Accounts, including medical accounts that may be in a “use it or lose it” status. If this is the case, purchase eyeglasses, medications, make dentist appointments, etc. to absorb the excess funds. The IRS does now permit plans to establish a 2 1/2 month extension into 2010 to use up the 2009 funds.

- Be aware that the “kiddie tax” provisions have recently changed and now apply to all children up to the age of 18 (from the prior age 14 limitations). This means that income from your children may be taxed at your higher tax bracket. To avoid this, check the investments in the child’s account and make sure that they do not produce enough current income to make this a “negative” from a tax perspective.

- Maximize the sales tax deductions. This is especially valuable in the seven states without an income tax. Rather than use IRS tables, you are permitted to use actual receipts. You also have some planning opportunities if you purchased a big-ticket item such as a vehicle or boat in 2009. Also, consider making the big-ticket purchase in 2009 to accelerate the Schedule A deduction.

- If you have large gambling winnings, you can take a trip to gamble and claim the (likely) losses as an itemized tax deduction. While we do not encourage our clients to gamble for tax reasons, this may be one instance in which you can get a reduction in the amount of taxes owed for 2009. Please be aware that you must itemize your deductions on Schedule A before you can claim these losses.

- Buy Business Assets. Businesses get a 50% bonus depreciation for assets placed into service before December 31, 2009. With proper planning and potential use of Section 179 as well, 2009 is an excellent year (from a tax perspective) to add new assets to your business operations.

- Open up and fund an IRA before year end (or at least before April 15, 2010). The types of IRAs vary and offer different current and future tax benefits depending upon the type. However, all taxpayers who have earned income in 2009 are eligible to establish one of these very favorable retirement plans and it should be a part of all taxpayers’ current year tax strategies. You can fund these accounts up to your earned income or the maximum contribution amounts ($5,000 per year for an IRA– plus an extra $1,000 if you are over age 50), whichever is less.

- Establish a Keogh plan for your business. The plan must be established on or before December 31, 2009, to be effective for 2009. You can fund the plan (if established by 12/31/09) up to the due date of the tax return.

- Hire family members home for the holidays. If you have a child in college and also operate a home-based or small business, why not hire the child to perform services for the business and claim an end-of-the-year tax deduction for any compensation paid? This also has the added benefit of shifting income to someone in a (presumably) lower tax bracket.

- Pre-pay/”bunch” expenses, including some medical expenses (to increase the amounts you can deduct after the 7.5% floor on Schedule A has been reached) and miscellaneous itemized deductions subject to the 2% floor. Please be aware that prepaying any state taxes, including income and/or property, may help with the tax deductions but may have an adverse impact on the AMT you may eventually owe. If you believe that AMT may be an issue for you, we strongly recommend that you consult with your tax professional to see if any tax planning can assist you.

New Tax Act Passed

Congress has passed numerous tax changes in the “Worker, Homeownership and Business Assistance Act of 2009.” The following is a summary of the more prominent points of this comprehensive legislation:

- Businesses can carry back any losses from 2009 for 3, 4 or 5 years instead of the normal two-year carry back term. This should help businesses with cash flow issues. Most businesses will qualify for these new provisions. You still retain the option of waiving the carry back term and electing instead to carry the loss forward. This law currently does NOT apply to losses for 2010 but rather only for 2008 and 2009 losses. In addition, there is a 50% income limitation for losses being carried back to the fifth year. This means that the carry back loss cannot exceed 50% of the income reported in the fifth carry back year. Changes were also made to the Alternative Minimum Tax laws on these carry- back provisions to prevent the AMT from taking away what the regular tax laws now permit.

- The Act increases the amount of penalties for S corporations and partnerships which file late to $195 per partner/owner per month, up to a maximum of 12 months. This is an increase from $89 per owner per month. This provision is expected to raise over $1.1 Billion to the tax revenues.

- The first-time homebuyer provisions have been extended to May 1, 2010 (from November 30, 2009). A “first-time homebuyer” is one who had no ownership interest in a primary residence for at least three years prior to the closing on the new purchase. This is available to taxpayers with an adjusted gross income under $145,000 (single) and $245,000 (married filing joint). In addition, the taxpayer must be at least 18 years old, cannot be claimed as a dependent of another in the year of the purchase, cannot acquire the property from a related person, and must attach a copy of the closing settlement statements to the tax return in which the credit is being claimed. Finally, there are expanded rules for members of the military concerning timing and qualifications. For service members, the May 1, 2010, deadline is extended to April 30, 2011.

- There is a new provision for “long-time residents” and the purchase of a new primary residence. If you have lived in the same principal residence for at least five consecutive years out of the eight years before the new residence purchase, you will qualify. The maximum credit for this provision is $6,500 and there are no income phase-outs on this except that the home must cost less than $800,000 in order to qualify.

- The Federal Unemployment Tax Act (FUTA) rate of 6.2% has been extended for an additional one year. This amount was supposed to revert to 6% but Congress left the 0.2% surcharge in place for one additional year.

Year End Tax Planning Moves For 2009 (Part 1)

It is that time of the year again and here is our annual reminder for some last-minute tax planning tips that may save you money come April 15, 2010:

- Make charitable contributions by December 31, 2009, to obtain the tax deduction for 2009. Remember that you must back up all cash contributions (including those by check and credit cards) with a receipt or bank record showing the name of the charity, the date of the contribution and the amount. For credit card donations, these are valid as long as they are charged to the card before 12/31/09 (i.e. you can pay them in 2010 and get a 2009 deduction).

- Buy an automobile. There are special tax deductions for automobiles if they are bought and placed into service on or before December 31, 2009. For business owners, there is a maximum first-year deduction of $10,960 in 2009 (this will go down to $2,960 in 2010). Individuals may also be able to deduct the sales taxes on the vehicle as well (up to a purchase price of $49,500– there are income phase outs as usual on this tax deduction).

- Offset capital gains and losses. You are permitted to sell stocks that are money losers for you to offset other capital gains you may have for the year. If you have a capital loss carry forward (available if you sold stocks at a loss in previous years but could not use all of the losses due to the $3,000 annual deduction limit), you can sell stocks at a gain and perhaps pay no taxes if you have sufficient losses to use up.

- Utilize residential energy tax credits. If you buy certain energy-saving windows, insulation, doors, etc. and put them into use before December 31, 2009, you may save up to an aggregate of $1,500 in taxes via this energy credit.

- Pay discretionary business expenses by December 31, 2009, to get the tax deductions in 2009. The same applies to delaying the reporting of income for cash-basis taxpayers (by delaying the collection of $ from customers until 2010, you also delay the reporting and payment of taxes until 2010).

- Convert your Regular IRA to a Roth IRA (if you later determine that this was a mistake, you have until October 15, 2010, to recharacterize the conversion and change it back).

Additional Tax Caps for 2010

The IRS has released the final numbers for 2010 on many tax items. Here is a listing of many relevant caps for 2010:

Nanny Tax: If the amount you pay any given worker for domestic help in your home is less than $1,700, you will not owe any Social Security taxes.

Gifting Limit: $13,000 per person per year (same as 2009).

SEP/401(k) contributions: the maximum remains at $49,000. The annual salary limitations remain at $245,000 (for which 20% of this amount is $49,000, or the cap on the maximum annual contribution).

SIMPLE plan contributions: $11,500

Elective Deferrals (for a retirement plan) is $16,500 (the same as in 2009).

Catch-up contributions: For individuals aged 50 or more in 2010, you can make an additional contribution of $5,500 for 401(k) based retirement plans. For IRA plans, the amount is $1,000 in excess of the normal contribution limits.

Tax Court Rules on Roth IRA Tax Planning

The Tax Court, in Taproot Administrative Services, Inc. v. Commissioner, 133 TC 9 (2009), has ruled that a Roth IRA is NOT an eligible shareholder for an S corporation.

An S corporation, as opposed to a C corporation, taxes its earnings on the shareholder(s) tax returns and is not typically assessed tax at the corporate level. In this case, the sole shareholder of the corporation was a Roth IRA. The IRS issued a notice revoking the S status of the corporation (and thus changing it to a C corporation) due to the “fact” that a Roth IRA cannot be an eligible shareholder (and thus none of the earnings of the S corporation would ever be taxed with this entity set-up). To be an eligible shareholder requires the shareholder to be an individual (US resident), estates, certain trusts and certain exempt organizations. This was a case of first impression with the Court.

The Court noted at the outset that there were no rules which specifically prohibited a Roth IRA from being a shareholder in an S corporation. While there are current regulations to prohibit this (Regulation § 1.1361-1(h)(1)(vii)), there were none back in 2003 (the year at issue in this case). The court relied upon a older IRS Revenue Ruling (passed in 1992) which prohibited a traditional IRA shareholder to be a shareholder in an S corporation as primary authority for ruling against the taxpayer in this case. The rationale of this older Revenue Ruling was basically that an S corporation cannot have any shareholders that are not taxed currently on any profits of the business. In fact, all shareholders, including the eligible trusts previously mentioned, had this attribute.

A Roth IRA, by definition, is not currently taxed on any of its income and, in fact, is never taxed on its income. The court reviewed the facts and Congressional intention to rule that it would not permit a Roth IRA account to be the owner of shares in an S corporation.

October Tax Tip

Taxpayers who wish to utilize the mark-to-market election for their trading activities need to make this election no later than April 15, 2010, to be valid for the 2010 tax year.

It is made by attaching an election statement to your 2009 tax return. If you are filing later than this date with an extension, be sure to attach the statement to the extension so that this election is not missed for 2010 taxes. Many active stock traders come out ahead in taxes by making this election.

Unemployment Tax Breaks

With rising unemployment showing no signs of ending anytime soon, the following will discuss some of the current tax breaks for those who find themselves looking for new employment.

Unemployment Benefits

While these benefits normally equate to taxable income, for 2009 the first $2,400 of unemployment benefits are not taxable.

Job-Hunting Expenses

The costs associated with seeking employment can be deductible, as long as you are looking for employment in the same type of trade or business. These are NOT deductible for first-time job seekers. Deductible expenses include employment agency fees, advertisements, resume costs, job counseling and referral services, postage, travel expenses and automobile costs.

Moving Expenses

If you need to move to obtain employment, the costs associated with the move may be tax deductible. These expenses include travel (but NOT meals) and the costs of moving household goods and personal effects. For purposes of this tax deduction, you must change job sites, move at least 50 miles (computed by calculating the miles from the old house to the new job, which must be at least 50 miles more than the distance from the old house to the old job) and actually work at the new location for at least 39 weeks in the 12 months following the move. For those who are self-employed, the time is doubled to 78 weeks in 24 months.

Education credits

If you need additional education, there are tax credits available to cover some or all of the costs associated with the tuition and related expenses.

Retirement Plan Distributions

You may be able to avoid an early withdrawal penalty (10% in addition to income taxes due) if you tap into retirement plan savings to assist until new employment is found. This issue can be quite complex and many plans differ on what is permitted, so it is usually best to consult with your specific plan to see what is permitted.

Health Insurance

You are permitted to extend your health insurance for up to 18 months under the COBRA program (for yourself and family coverage). Please note, however, that you may be responsible for paying for some of the premiums here.

Tax Court Results

A recent Bankruptcy Court decision emphasizes the need for compliance with all IRA rules to avoid nasty surprises.

In In re: Willis (Bankruptcy Court FL 2009), Mr. Willis lost his IRA protection from creditors because he engaged in a “prohibited transaction” with his IRA. Specifically, Mr. Willis took a loan from his IRA and used it for personal reasons. This act was a prohibited transaction and by doing so he was unable to protect his IRA assets from creditors, which would have been the case had he not engaged in a prohibited transaction. This case again demonstrates the need for all taxpayers with self-directed IRAs to make sure they understand the tax laws before engaging in any IRA transactions.

The Tax Court also issued a decision against a taxpayer in Ortega v. Commissioner, T.C. Summary Opinion 2009-120.

In Ortega, the taxpayer was a psychologist and was employed in a State of Nebraska prison to provide mental health counseling. She had a Bachelor’s degree, along with a Master’s degree, in clinical psychology. She also began taking courses for her Doctorate degree and eventually was awarded this degree.

At issue in the Tax Court was her deduction of tuition and other fees for her doctoral degree.

The IRS argued, and the Court agreed, that these expenses were not tax deductible because the new degree qualified her for a new career. Thus, the Court rejected her claim that they were deductible because she worked as a mental health counselor both before and after the doctoral degree and thus the educational expenses did not qualify her for a new career but were a continuation of her previous career. The Court noted that she could not be a licensed psychologist without the doctoral degree and thus the education did qualify her for a new career. This case is a good lesson in the rules for educational expenses: they are NOT deductible if the education is

(1) Needed to meet the minimum job requirements (thus ruling out a bachelor’s degree)

(2) If the education is used to fulfill general education aspirations or other personal needs or

(3) Is part of an educational program to qualify the student in a new trade or business. For example, a law degree is NOT tax deductible because it prepares a student for a new career (and they could not have this career without a law degree). However a Master of Law degree would potentially be deductible because it does not prepare for a new career (they are already a lawyer) but simply adds to the professional degrees.

Another case, Rosemann v. Commissioner, T.C. Memo 2009-185, deals with worker classification issues. In this case, Mr. Rosemann was employed as an outside sales representative for a business in which he was paid both a base salary and commissions.

He worked out of his home and car and was required to work at least 40 hours per week. He received life and health insurance, retirement benefits, along with three weeks of vacation, for his efforts. He also used a company car for his sales calls, although he also used his own vehicle for some company business for which he was not reimbursed. He was paid via a W-2 and not a Form 1099. The Form W-2 did not list him as a “Statutory employee” (a “statutory employee” is permitted to claim business expenses on a Schedule C and is treated as a business).

On his tax returns, he listed himself as a “statutory employee,” which was advantageous because it allowed him to deduct all of his business expenses on a Schedule C as opposed to claiming them as “unreimbursed employee business expenses” on Schedule A (for which there was a 2% limitation and other potential phase outs of these deductions). The IRS challenged this tax reporting and the Tax Court agreed Mr. Rosemann was an employee and NOT entitled to claim his expenses on Schedule C. The court noted that there are eight (8) factors in determining if a worker is a common-law employee or not:

(1) The degree of control exercised

(2) Which party invests in the facilities used by the worker

(3) Opportunity for profit or loss

(4) Right to fire

(5) Employment benefits

(6) The permanency of the relationship

(7) The type of work (i.e. is it performed within the regular line of business for the employer?); and

(8) The parties’ beliefs.

The court found that all factors weighed in favor of employee status and thus ruled in favor of the IRS. By so doing, the Court moved all expenses from Schedule C to Schedule A and then disallowed all automobile expenses due to the fact that Mr. Rosemann did not maintain an automobile mileage log and thus couldn’t substantiate how much of his personal automobile was used for business purposes. The court did decline to impose a penalty on most of the adjustments but did penalize him (an accuracy-related penalty) for not keeping proper records to support the automobile use.

IRA Conversions

If you converted your regular IRA to a Roth IRA in 2008, you have until October 15, 2009, to undo the change for tax purposes. There are two common reasons for why you would want to do this:

(1) If your Adjusted Gross Income was over $100,000, you were not eligible to make this conversion

(2) If you were eligible to make the conversion but the value of the Roth has fallen since making the conversion (a somewhat likely event), you can undo the conversion and eliminate the need to pay taxes on the conversion amount.

You can then wait 30 days (the minimum time) and then make another conversion to the Roth, this time with a lower value and hence a lower tax bill.

If you have already filed your 2008 tax return and did not make the switch back to a regular IRA and now want to make this switch, all is not lost. You can file an amended tax return (Form 1040X) and undo the tax treatment on the Roth IRA Conversion. You may want to handle the re-characterization first and then wait 30 days, make the conversion and then file the amended tax return, as there still could be a tax bill due on the conversion (just a smaller tax bill).

Please also remember that all taxpayers, regardless of income, can convert their regular IRAs to a Roth IRA beginning in 2010. This is one of the better tax plans for those who have been previously ineligible.

Tax Court Rules Against Real Estate Investor

In a recent decision (Woody v. Commissioner, TC Memo 2009-93), the US Tax Court has held that a real estate investor was not “in business” when he incurred expenses and thus could not claim his expenses as “ordinary and necessary” business expenses. In February 2004, Mr. Woody began to investigate the local real estate market so he could begin to accumulate properties for investment or rental purposes. He began to market his services, had business cards printed and began to actively promote his business (and had a business plan in place). In addition, he took a few courses to increase his real estate skills. He made multiple offers on properties in 2004 but failed to actually acquire any properties during this year (he did have one contract in place that was cancelled after the inspection revealed many defects). He claimed more than $23,000 of expenses for 2004. The IRS subsequently examined his return for 2004 and denied all expenses, asserting that the expenses were not tax deductible because Mr. Woody was not in business.

The Tax Court noted that there are three factors to decide if an expense is a business expense for tax purposes:

(1) Did the taxpayer intend to make a profit?

(2) Was the taxpayer regularly engaged in the business activities?

(3) Whether or not the activity actually commenced

Mr. Woody satisfied the first two factors and the IRS conceded that he had sufficient records to prove the expenses were in fact actually incurred. Thus, the only issue was whether or not Mr. Woody had actually began his business. The Tax Court ruled that he had not and denied the deductions, stating that the deductions were at most “start-up” expenses for which elections and amortizations came into play. The Court stated that the business did not begin before Mr. Woody acquired his first rental property, rejecting Mr. Woody’s argument that the business began when the first contract was accepted (even though he did not close due to the defects).

There is not much more that Mr. Woody could do in this case. He maintained excellent records, had a business plan and basically did everything that a business advisor would recommend in getting his business started. However, as we have stated many times in the past, until the business becomes a “going concern,” the expenses are not currently deductible but instead become “start-up” expenses.

Q&A - Summer Job and IRA Contributions

Question

My 16 year old son is working this summer and I wondered if he can contribute to an IRA?

Michael L., Des Moines, Iowa

Answer

Michael, your son is in luck, as he can contribute up to $5,000, or the amount of his earnings, whichever is less, to an IRA in 2009. You can even gift this amount to him, although this will count against the $13,000 annual gift amounts.

If a 16 year old contributes $5,000 to his Roth IRA (the most attractive IRA for younger workers) this year, it would be worth about $137,000 when he turns 65 and $193,000 at age 70, assuming an annual rate of return of 7% per year. You can imagine if he does this for the first ten years of his working career. He will retire a millionaire (whatever that may be worth when he retires)!

A Roth IRA is tax free when withdrawn and the funds can also be used for other purchases, such as a first home. In addition, these funds can be placed into a self-directed IRA to provide more flexibility in terms of available investment vehicles.

Q&A - Separate bank accounts for business and personal

Question


I do not have a separate bank account for my business. Is this necessary and does the IRS require it?

Linda, Denver, Colorado

Answer


It is not necessary to have a separate bank account (and no, the IRS does not formally require it) but it is STRONGLY RECOMMENDED that you separate your personal and business financial lives.

First, having a separate bank account is one factor in your favor should the IRS ever audit your business and try to disallow any losses you may have claimed (as not being business related). The most important factor is the manner (how) in which you operate your business. If you do not have a separate bank account, how serious do you think the IRS will be in concluding that you had an intent to make a profit at your business?

By keeping accurate records, maintaining a separate bank account and telephone number for your business, getting a tax ID number for the business, and always trying to make a profit, you will satisfy the IRS’ rules and regulations concerning your profit motive and will be able to claim any results on your tax return.

In addition, having a separate bank account is a very good idea from an asset protection perspective and keeping your business separate and distinct from your personal assets.:

July Greetings from the IRS

The IRS has issued additional guidance for victims of Ponzi schemes (not only those victims of the Madoff schemes but at least two dozen other schemes the IRS has recently identified). The IRS is trying to be sympathetic to those taxpayers who lost money in scams in which there was never any real economic or legitimate investment activities. For additional guidance on this, please see Revenue Procedure 2009-20, available at www.irs.gov.

The IRS has indicated that any rebates received from current tax legislation (including a potential bill to pay taxpayers to remove old cars and buy new ones– known as the “Cash for Clunkers” bill) will NOT be taxable to the recipient.

The annual contribution caps for Health Savings Account for 2009 will be increased to $6,150 (for family coverage) and $3,050 for self-only coverage. The minimum policy deductibles will also rise to $2,400 for families and $1,200 for singles.

IRS has ruled that the first-time homebuyer tax credit (up to $8,000) can be used for a down payment. The FHA will allow lenders to provide a bridge loan in the amount of the tax credit and buyers can repay the lender when the tax refund arrives. This is another avenue of potential relief to encourage home purchases and assist the depressed real estate market.

The IRS will begin doing employment tax audits in November 2009 and will be increasing the number of audits due to the many new leads it has received from workers unhappy with their independent contractor status. At least 6000 companies with potential employees will be audited. The IRS will be focusing on worker classification, treatment of fringe benefits (i.e. are they taxable?) and expense reimbursement plans and recordkeeping.

The IRS is moving forward with its plan to regulate tax return preparers who aren’t already licensed. Thus, any preparers who are not Attorneys, CPAs or Enrolled Agents would need to meet certain minimum education, training and continuing education requirements before they would be permitted to prepare tax returns for a fee. Congress would need to approve the final plan before it is implemented and the IRS is modeling its plan on the one used by the State of Oregon.

Finally, the IRS is considering easing its rules on cell phones used by businesses. As we have previously discussed, cell phones are considered to be “listed property” and thus time logs need to be kept to determine how much of the phone is used for business purposes (with personal use not tax deductible). Some ideas include a flat percentage (25% is being considered) to use for personal calls or some sampling methods. The IRS will decide how to proceed after September 4, 2009.

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Conventions and Seminars – How to Deduct

So you are heading to Las Vegas or Hawaii to attend a seminar or convention for your business. Of course, you also want to have some fun while you are there (all work and no play makes one a dull person!). Here are some tips to keep in mind so that you can claim a valid tax deduction while still enjoying the perks associated with this type of business travel (shows, sightseeing, gambling, recreation, beaches, fishing, etc.):

- Save as much information from the seminar or convention as you possibly can. For instance, make sure you keep a copy of the itinerary, program handouts, registration forms, course materials, business cards and any other information specific to the seminar or convention. This will assist if the IRS questions how or why this event was related to your business (i.e. why this was a “business” expense and not “personal”).

- Keep copies of all receipts, including those for your hotel (required no matter what the cost), meals, entertainment and the fees associated directly with the seminar (for registration, specific programs, books/tapes purchased, etc.). It is critical that you keep these, along with proof of payment (cash, check, credit card) so that you can prove that you really incurred the expenses. While receipts are not required for some travel expenses under $75, I still recommend that you obtain them if at all possible, as it makes these issues in an audit much easier to resolve.

- Make sure that you can prove how the seminar/convention helped your business. For instance, nearly any seminar on taxes, marketing, client satisfaction and the like can be deducted. Do not try to claim a business tax deduction for lifestyle or investment seminars unless that is also your specific business.

- Ensure that the seminar or convention is held in the “North American” area– this includes all of the U.S., the Caribbean, Mexico, Canada and Central America. It is much more difficult to claim valid tax deductions if the seminar is held outside of this geographic area.

- Make sure that you spend more than half of the day on “business” at the seminar or convention. This means that you should, at a minimum, spend at least 4 hours and 1 minute per day attending the event. Do not go to a seminar and then not participate and expect to be able to claim a valid business deduction. You will still have much time for socializing or sightseeing but you must work a bit in order to claim the favorable tax deductions.

President Obama’s Tax Plan Takes Shape

Much talk has been heard lately about the new tax hikes in the 2010-11 Federal budget. Here are the new proposals in a nutshell:

- The top tax rates will increase to 36% and 39.6%.

- The upper limit on the 28% tax bracket will increase about $20,000 (to $230,000 for married couples and $190,000 for single filers). This will result in a small tax decrease (about $1,000) for upper income taxpayers, but will not be enough to offset the tax increases.

- The tax on capital gains will rise from 15% to 20% for taxpayers in the two top tax brackets.

- A continued phase out of some itemized deductions and exemptions for those in the top two tax brackets (this was set to expire in 2010).

- Tax breaks for those in lower brackets for education and payroll tax credits will be made permanent (this was set to expire in 2011).

- New reporting requirements on the issuance of Forms 1099 would now include corporations (currently exempt) and landlords who pay contractors (such as plumbers) for services rendered.

- Continuing the estate tax exemption of $3.5 Million (this was set to go down to $1 Million in 2011).

- All small business stock sales would be exempt from capital gains and AMT if held more than 5 years

June: Greetings From the IRS

The IRS will begin to examine employment tax returns beginning this fall and will start with a sample size of 4,500. These audits will focus on worker classification rules (employee vs. independent contractor), along with wages for S corporation shareholders, fringe benefits and executive compensation (“reasonable compensation”) issues.

If you are retired, you should have received a check from the IRS in May for $250. This check represents a retirees’ stimulus payment and applies to those on Social Security, Railroad Retirement, veterans pension or SSI.

The IRS has announced that it is reducing the penalties associated with offshore accounts and the failure to report all earnings in the past. These reductions apply only if you come forward before the IRS notifies you of a potential problem. In order to take advantage of this offer, you must contact the IRS and enter into an agreement with the IRS to adjust your taxes (as needed) for the previous six years. If you do this, the maximum penalty will be an accuracy-related penalty, along with a penalty of 20% of the highest amount in the foreign bank account during these years. The 20% amount may be reduced to 5% if the taxpayer did not open the account, there was no activity on the account and all taxes have been paid regarding the account. These penalties, while potentially high, are still much less than a potential civil (or criminal) fraud situation. See IRS Document 2009-10280.

The IRS has corrected a previous announcement that audits of millionaires are on the rise by stating that they actually decreased in 2008. Previously, the IRS reported that had a 9.25% increase in the number of audits for those taxpayers making more than $1 Million per year. It turns out that this was actually a decrease. Oops!

If you use your credit card to pay your IRS tax bill, you are now permitted to claim a tax deduction for the processing fee the IRS charges to accept the payment. It can be claimed as a miscellaneous itemized deduction on Schedule A (subject to the 2% floor for miscellaneous deductions).

The IRS has privately ruled that a like-kind exchange under Section 1031 of the Internal Revenue Code will fail if the intermediary goes bankrupt. Even though this was not the seller’s fault, if the exchange is not completed within 180 days due to the bankruptcy, the sale will be considered a taxable event and will not qualify for tax deferral.

Continuing with like-kind exchanges, the IRS has also decided that certain intangible assets, such as trademarks, trade names, and customer-based intangibles that can be separated from goodwill, will now qualify for tax deferral under Section 1031.

The IRS has provided updated depreciation and leasing tables for 2009 (Revenue Procedure 2009-24). Any leased vehicle worth in excess of $18,500 will be subject to a “lease inclusion” amount that must be added back into taxable income. These amounts attempt to provide a way to equalize the tax advantages between leasing and purchasing a vehicle.

Finally, the IRS is now reviewing many refund claims from taxpayers claiming the first-time homebuyers credit, as nearly 10% of those claiming this credit have been determined to be not eligible.

June Tax Tip

If you are selling stocks or other securities to claim the tax loss, remember the wash sale rules. These rules require you to wait for more than 30 days before you buy back the stock or you will lose the loss deduction.

The wash sale rule does not apply to mutual funds as long as you buy a completely different fund (it can be similar as long as it is not the same). Also, these rules do not apply to gains (you can repurchase the same stock as long as you have a gain).

Q&A - New Car and Tax Deductions

Question


I am purchasing two new cars this year and want to take advantage of the new tax deductions for sales taxes paid. What are the rules for claiming these deductions?

Ben P., Omaha, NE

Answer


In order to claim any sales tax deductions, the car must be purchased after February 16, 2009, and before January 1, 2010, in order to qualify. In addition, only the sales tax on the first $49,500 of the cost of the vehicle is actually tax deductible.

The IRS has very recently issued guidance that indicates that the cap will apply to each car purchased and not to all cars purchased in one year. This is a nice break for taxpayers, as if you buy two cars and each costs less than $49,500, all of the sales taxes paid will be deductible. There are some special rules for this tax break:

- If you itemize your deductions on Schedule A, you can claim these taxes paid in the “taxes” section.

- If you do not itemize your deductions, you can still claim this deduction by adding the sales taxes paid to your overall standard tax deduction.

Finally, like many other favorable tax breaks, this one also has income phase outs. These start for married couples who earn over $250,000 and single filers who earn over $125,000.

States and Taxes - Changing your state tax base

There are major tax differences from state to state, varying from no state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) to those with limited taxes (New Hampshire and Tennessee tax only interest and dividends) to low (Illinois and Pennsylvania tax at 3% or so) to very high (California, Vermont and Rhode Island are all over 9%).

As such, many taxpayers wish to move out of high tax states and into states with little or no state income taxes (the differences can result in a savings of thousands of dollars per year). Please be aware, however, that the IRS tax return will look the same in the new state, as federal tax law applies to all 50 states.

Here are a few tips if you are looking to change your state tax base:

- Sell current personal residence and move.

- File state tax returns for new state showing residency there. Also, use new state’s address on returns filed with IRS.

- Change drivers licenses and voters registration cards to new state. In addition, register all vehicles in the new state to establish a nexus to this state.

- Change bank accounts to a branch in new state.

- Execute a new will or living trust using new state as current state of residence.

Q&A - Business Expenses and Tax Deductions

Question


My accountant recently told me that I could not deduct my expenses to a business convention in Las Vegas because I spent one of the days there doing personal sightseeing and only conducted business for two days while I was there. I think I can deduct the expenses. Please help, as this will cost me a lot of money.

Tom T., Seattle, WA

Answer


Tom– you are in luck, as all of your travel expenses are deductible, with the exception of any amounts you spent while sightseeing (these are personal expenses and are not deductible).

All of your travel expenses (airfare, hotel, meals/entertainment, seminar/convention fees, and local transportation would be deductible, but not the gasoline or meals for your sightseeing activities).

The basic rule is that your trip must be primarily for business (attending the convention was the main purpose and not sightseeing), and you must spend more time for business than pleasure on your trip. For purposes of determining how much time is business related, your travel each way counts as business days.

In addition, you should spend at least four hours each day while you are at the convention doing business in order to make these days count as business days. If you satisfy these rules, there is no reason why you cannot claim your travel expenses.

Just the FAQ'S - What is an IRS levy?

The IRS has levied my bank account and garnished my wages.  What should I do?

An IRS levy is a collection method the IRS uses to seize or take your property to satisfy your outstanding tax bill. The IRS CAN and WILL do this. Before the IRS can seize your property, they must do the following:

- They must assess the tax against you first. This means that the amounts owing to
the IRS are not currently under dispute.

- They must issue a notice and demand for payment.

- You must refuse to pay the assessment within 10 days of the notice and demand.

- The IRS must send you a Notice of Levy.

- You must refuse to pay the tax liability within 30 days of the Final Notice of
Intent to Levy. 

Bank levies are a one time levy where the money in your account will be seized on the day of the levy only. However, the IRS can file subsequent levies. 

Wage garnishments can be very embarrassing to you and can be devastating depending on the amount of the garnishment. The garnishment will stay in place until the tax is paid or the garnishment is released.
 
A Tax Lien can also be filed by the IRS. The IRS will usually automatically file a Tax Lien if you owe $25,000 or more. The Tax Lien is not an actual collection method, but a notice to other creditors that the IRS has an interest in property you own. The Tax Lien will usually affect your credit report. The Lien will not be removed until the tax is paid.

Relief from both levies and garnishments are available.  However, you must act quickly! For more information, please contact me at www.estillandlong.com

Just the FAQ'S - IRS Notice

I received a notice from the IRS. What should I do?

The IRS may be sending you a notice for many reasons. They may be asking for payment on a tax liability that has not been paid. They may be requesting additional information from you to verify a tax return you sent in. The IRS has a matching program and if the information you file on your return does not match the information they have on file for you, you will likely be questioned about the discrepancy. They may be sending you a notice that you are being audited. In any case, do not ignore the notice.

Just the FAQ'S - Notice of Assessment

I paid my tax bill late, and the IRS later sent a notice assessing large amounts of penalties and interest.  Is there anything I can do about this?

If you need more time to file your tax return, then you can file Form 4868, which will extend the due date of your return for six months (individual returns only). However, the extension for  filing your taxes is NOT an extension for paying your taxes. If you owe taxes, you must pay the tax due in full by the due date of the return, or the IRS will assess interest and penalties on the balance.

In certain circumstances, taxpayers can ask for a penalty abatement. This is where you ask for a waiver of the penalties based on what is called “reasonable cause” such as an illness or other event which prevented you from paying and/or filing on time. The IRS will waive penalties in some cases. The IRS will never abate interest unless they have made an administrative error.

Just the FAQ'S - Unfiled Tax Returns

I have not filed my tax returns in several years, what do I do?


If you have a filing requirement, then you should file your returns as soon as you can. If you do not file a return, then the IRS can file what is called a Substitute for Return (“SFR”) for you.

The IRS will use information they have on file under your social security number (such as W-2 and 1099 information) and file the return for you. Of course, when they do this, you do not get credit for many deductions that are applicable. Therefore, you are almost always better off filing the return yourself.