Wednesday, April 14, 2010

In the News: CNN Money

Just got back from the CNN studios to film a segment called, How to Avoid a Tax Audit.

It was a great experience being on CNNMoney and I definitely look forward to more of these!

D-Day is tomorrow...are you ready?

Watch: How to Avoid a Tax Audit

Tuesday, April 13, 2010

NBC 9News in Denver - Tax Tips before D-Day

It's been awhile since my last post -- I've been busy doing a ton of media and of course, working to help my clients meet their deadline on April 15!

Just wanted to share the interview I did yesterday with 9News at NBC in Denver.

Standing up to the tax man

Here's a link to the video clip.

April Tax Tip

Personal tax returns are due this year on April 15, 2010. Here are some last minute tips to check and see if they apply to your return:

Fund your retirement accounts. You have up to April 15, 2010, to fund many different plans, and a SEP plan can be funded up to the due date for the tax return, including extensions (so you may have up to October 15, 2010, to fund this type of plan). This remains one of the best tax strategies, and it is even better now that there are higher contributions permitted depending upon the type of plan and your age.

Don’t forget about the tax deductions for state and local sales taxes. If you live in a State that does not impose an income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming), you are permitted to deduct sales taxes paid in lieu of claiming a tax deduction for State and local income taxes. If you live in one of the states which does impose an income tax, you still may benefit from this if the amount of sales taxes paid was higher than the amount of income taxes paid (or if you purchased a car, boat or other big ticket item, it may pay to calculate this both ways).

Don’t forget to claim any credits for children, including child care costs. There are income limitations here but it never hurts to ask.

Don’t forget to claim any loan origination or other discount fees associated with a loan refinance.

Don’t miss thecollege education expenses. There are several different ways to claim these expenses, including the HOPE Credit, Lifetime Learning Credit and the qualified tuition expense deduction. There are different rules for eligibility for each of these college-related expenses.

Watch your prior years’ losses so no amounts that can be carried forward to 2010 and future years are missed. This is especially true for taxpayers who have real estate losses, along with capital losses from stocks and other sales of capital assets.

Make sure you verify any Forms 1099 you receive for 2009, as the IRS estimates that up to 10% of these common forms from brokers, banks and businesses contain errors. Also, if you sold any mutual funds in 2009 and previously had your dividends reinvested, make sure you include these reinvested dividends in your cost basis.

Finally, make sure that you did not overpay your Social Security (FICA) taxes in 2009. If you switched jobs in 2009, this is very common. The maximum you were required to pay in 2009 was $6,622- if your total amounts paid for FICA exceeded this amount, you may be entitled to a larger refund this year.

Sunday, April 4, 2010

Q&A: Roth IRA and Joint Tax Returns

Question: I am planning on converting my regular IRA to a Roth this year and so is my husband. I want to report all of the conversion in 2010 and pay the taxes while my husband wants to spread out the tax payments over two years. What can we do as we file a joint tax return?

Allison B., Cambridge, MA

Answer: For married couples who file a joint tax return, you do have some options. First, the tax laws allow you and your husband to each convert the IRAs in 2010 and elect different tax treatment. Thus, it is possible for both to convert in 2010 and the husband (in this case) can elect to defer the taxes while the wife can elect to have all taxes paid for 2010. There are some different reasons why you may want to make either of these elections- it may be better to pay the taxes for 2010 because you believe (as do I) that tax rates will be increasing in 2011 (and thus by deferring you will end up paying more in taxes than paying the tax bill in 2010). However, some taxpayers may want to defer the taxes to take advantage of a rule that allows the taxes to be paid in 2011 and 2012 (with or without tax rate increases).

In addition, there is another rule present in these cases: each individual must be consistent in his or her tax treatments with respect to the conversions. For instance, if the husband has 3 different Traditional IRAs that he wants to convert to Roth IRAs, he must use the same tax treatment on all three IRAs. This means that if he elects to defer the taxes, he can do so but must do so for all three of his IRAs that he is converting. He is NOT permitted to pay taxes on one in 2010 and defer the other two until 2011 and 2012.

Thus, it is fine for each spouse to choose a different method of paying the taxes due on a Roth conversion as long as each spouse is consistent with his or her own tax treatment of these conversions.

Friday, April 2, 2010

New Health Legislation and Tax

As you are no doubt aware, Congress has recently passed a comprehensive overhaul of the U.S. health care system. Whether one agrees with the merits of this legislation is irrelevant for purposes of this article, as there are numerous tax ramifications associated with this legislation that will be discussed herein.

Initially, it is important to note that this is one of the more complex pieces of legislation that we have seen and it contains numerous tax provisions, many of which do not take effect for several years. Here is a tax synopsis of the legislation:

2010. Small businesses (25 employees or less and no more than $50,000 in average annual wages) would receive a tax credit up to 35% of the cost of health insurance for employees as long as the business pays at least 50% of the health insurance premium costs. In addition, the adoption credit has been increased by $1,000 and it now becomes refundable.

2011. Individuals who spend money from a health care savings account on ineligible items will face an extra 20% tax on the amounts spent. In addition, only prescription drugs and insulin will now be eligible for reimbursement. This WILL affect medical reimbursement plans, as over-the-counter medicine and medical items such as bandages would no longer be covered (or be reimbursable). All amounts paid for health insurance will be required to be reported on the employee’s W-2 for this year. Finally, a new employee benefit cafeteria plan will be introduced that eases restrictions to allow small businesses to provide tax-free benefits to their employees.

2012. Forms 1099 will be required for ANY payment of $600 or more made to any corporation or other business entity in addition to payments made to individuals.

2013. Individuals can now contribute a maximum of $2,500 per year on flexible health care spending accounts (the limit until 2013 is $5,000 per year). In addition, the threshold for deducting medical expenses on Schedule A goes from 7.5% of income to 10% of income (for those taxpayers who are under 65 years old- if you are 65 or older, the threshold will remain at 7.5%). Finally, individuals who earn over $200,000 (or married couples who earn over $250,000- another example of the Congressional “marriage penalty”) will see their Medicare taxes (a part of Employment and/or Self-Employment taxes) will increase from 1.45% to 2.35%. In addition, an extra tax of 3.8% will be imposed on unearned income (i.e. interest, dividends, royalties, rents, passive income, capital gains, etc.). This is called the Unearned Income Medicare Contribution.

2014. January 1, 2014, is the first date that all Americans must have health insurance or face potential fines up to 1% of their taxable household income. There are exemptions in place for those who cannot afford the insurance. Tax credits would also begin for those individuals who earn $43,420 or less (single) or $88,200 for a family of four. This is also the first year that large employers (over 50 employees) must fund health insurance or be faced with excise tax penalties. Small employers (25 or less employees) can also begin to obtain a 50% tax credit for the amounts of the health care insurance contributions the business makes.

2015. Penalties will increase for those who do not have health insurance to a potential 2.5% of household taxable income.

2016. The penalties for the failure to carry health insurance are now indexed for inflation.

2017. This is the first year that an excise tax (40%- and this is a non-deductible tax) applies to health insurance policies that cost more than $10,200 for a single employee and $27,500 for family coverage.

Thursday, April 1, 2010

April: Greetings from the IRS

Business owners making an automobile purchase in 2010 will get less in tax benefits from the purchase than in 2009. This is the case because the bonus depreciation has lapsed and as of this writing Congress has yet to reinstate it. Thus, for 2010, the maximum first year deduction (not including Section 179 for vehicles that weigh in excess of 6,000 pounds) is $3,060, down from $10,960 in 2009.

The IRS has finally agreed to grant relief to taxpayers who have attempted a like-kind (1031) exchange but had the exchange fail due to the bankruptcy or receivership of the Qualified Intermediary (thus preventing the sale transaction from closing). Prior to IRS Revenue Procedure 2010-14, the taxpayer was out of luck in these situations and simply lost the tax benefits of the exchange. Now, a 1031 exchange can still work its magic from a tax perspective if a Qualified Intermediary is bankrupt if the taxpayer satisfied the following requirements: he or she must have transferred the relinquished property to the Qualified Intermediary properly and properly and timely identified the replacement property. In addition, the taxpayer must not have received any funds from the Qualified Intermediary with respect to the relinquished property and did not complete the exchange solely due to the bankruptcy or receivership situation of the Qualified Intermediary. There are a number of complicated calculations that must be performed here (better left for your tax return preparer!) but this revenue procedure is welcome news for those who have been victims of a bankrupt Qualified Intermediary. These new rules apply only to those exchanges in which the Qualified Intermediary defaulted on or after January 1, 2009.

The IRS has ruled that a company that hires a nanny to watch the owners’ children will have the nanny be treated as an employee of the business. While this may sound like good news in that the business will get a tax deduction for the wages, it will also need to pay employment taxes and will also make all corporate fringe benefits available to the nanny. This is simply another good reason why you want to keep your business and personal financial matters separate from each other.

The IRS and Department of Justice have completed a series of successful criminal prosecutions associated with tax fraud. Several tax preparers were caught, including those who were claiming tax withholdings on fictitious Forms W-2, identity theft issues (and using the information to claim tax refunds before the actual folks filed their tax returns), abuse of the homeowners tax credit and many other scams involving false credits and deductions. Given that we are in the middle of Tax Season 2010, it is important that you, as the taxpayer, review your tax preparer’s work very carefully before you sign the return. It is up to you to ask questions if you do not understand your tax return!