Monday, December 28, 2009

Small Business Tax Tips


Update Your Accounting: It's important as part of your year-end tax strategy to have a good understanding of your company's financial situation. Spend extra time ensuring your books are up-to-date and accurate. It won't hurt to plan time with your accountant for year-end advice, particular to your operations.

Purchase A SUV: While buying a big SUV may not be politically correct, the fact is these vehicles are very useful if you need to haul people and stuff around. They also have a big tax advantage for businesses. Specifically, new and pre-owned “heavy” SUVs used over 50% for business qualify for a first-year Section 179 depreciation write-off of $25,000. You then depreciate the rest of the SUV’s cost using the general rules, which include 50% first-year bonus depreciation for new (not used) SUVs.
To collect the $25,000 first-year deduction, you must buy an SUV with a manufacturer’s gross vehicle weight rating above 6,000 pounds. Only these heavy SUVs qualify for this deduction. First-year depreciation deductions for lighter SUVs, passenger cars and light trucks are much skimpier. You can usually find a vehicle’s gross vehicle weight ratings on a label on the inside edge of the driver’s side door where the hinges meet the frame.

Purchase Business Equipment And Software: There’s a much larger first-year Section 179 depreciation deduction for things that are not SUVs. The write-off which is equal to $250,000 is available for the cost of most new and used items of business equipment and software.
That includes computer systems, office furniture, machinery, and software that is put to use during tax years beginning in 2009.
The $250,000 Section 179 deduction privilege is also available for heavy pickups and vans whose wight is above 6,000 lbs that are not classified as SUVs under the tax law. These include the following:
* Pickups with a cargo area that is at least six feet in interior length. Most pickups with full-size cargo beds will meet this description.
* Closed load-carrying vehicles with no seating behind the driver’s seat and no body section protruding more than 30 inches ahead of the leading edge of the windshield. Delivery vans will qualify.
* Vehicles designed to seat more than nine passengers behind the driver’s seat. Shuttle vans and minibuses will qualify.

50% First Year Bonus Depreciation:Your business can also claim 50% first-year bonus depreciation for qualifying new (not used) equipment and software placed in service by December 31, 2009. New real estate land improvements (sidewalks, drainage systems, and so forth) and certain leasehold improvements qualify too (most other real estate costs do not). For a new asset that’s also eligible for the Section 179 depreciation write-off, the 50% bonus depreciation deduction is based on the cost remaining after the Section 179 deduction. Any cost remaining after claiming the Section 179 and 50% bonus depreciation deductions is depreciated under the normal tax rules.
Warning: The December 31, 2009 deadline for 50% first-year bonus depreciation applies whether your business’s tax year is based on the calendar year or not.

Monitor Your Income and Expenses: If you run your operation as a sole proprietorship, S corporation, LLC, or partnership, the net income generated by your business will be reported on your Form 1040 and taxed at your personal rates. The scheduled 2010 individual federal income tax rate brackets are virtually the same as this year’s, so they remain taxpayer-friendly. Therefore, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year still makes sense if you expect to be in the same or lower tax bracket next year. In that case, deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2009 until 2010. It could even cause some income to be taxed at a lower rate next year.
On the other hand, if your business is healthy, and you expect to be in a significantly higher tax bracket in 2010 (say 35% vs. 28%), take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2010. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.

Friday, December 25, 2009

Amazing Peace: A Christmas Poem



By Maya Angelou

Thunder rumbles in the mountain passes
And lightning rattles the eaves of our houses.
Flood waters await us in our avenues.

Snow falls upon snow, falls upon snow to avalanche
Over unprotected villages.
The sky slips low and grey and threatening.

We question ourselves.
What have we done to so affront nature?
We worry God.
Are you there? Are you there really?
Does the covenant you made with us still hold?

Into this climate of fear and apprehension, Christmas enters,
Streaming lights of joy, ringing bells of hope
And singing carols of forgiveness high up in the bright air.
The world is encouraged to come away from rancor,
Come the way of friendship.

It is the Glad Season.
Thunder ebbs to silence and lightning sleeps quietly in the corner.
Flood waters recede into memory.
Snow becomes a yielding cushion to aid us
As we make our way to higher ground.

Hope is born again in the faces of children
It rides on the shoulders of our aged as they walk into their sunsets.
Hope spreads around the earth.
Brightening all things,
Even hate which crouches breeding in dark corridors.

In our joy, we think we hear a whisper.
At first it is too soft.
Then only half heard.
We listen carefully as it gathers strength.
We hear a sweetness.
The word is Peace.
It is loud now. It is louder.
Louder than the explosion of bombs.

We tremble at the sound.
We are thrilled by its presence.
It is what we have hungered for.
Not just the absence of war.
But, true Peace.
A harmony of spirit, a comfort of courtesies.
Security for our beloveds and their beloveds.

We clap hands and welcome the Peace of Christmas.
We beckon this good season to wait a while with us.
We, Baptist and Buddhist, Methodist and Muslim, say come.
Peace.

Come and fill us and our world with your majesty.
We, the Jew and the Jainist, the Catholic and the Confucian,
implore you to stay awhile with us so we may learn by your shimmering light
how to look beyond complexion and see community.

It is Christmas time, a halting of hate time.
On this platform of peace, we can create a language
to translate ourselves to ourselves and to each other.
At this Holy Instant, we celebrate the Birth of Jesus Christ

Into the great religions of the world.
We jubilate the precious advent of trust.
We shout with glorious tongues the coming of hope.
All the earth’s tribes loosen their voices to celebrate the promise of
Peace.

We, Angels and Mortals, Believers and Nonbelievers,
Look heavenward and speak the word aloud.
Peace.

We look at our world and speak the word aloud.
Peace.

We look at each other, then into ourselves,
And we say without shyness or apology or hesitation:

Peace, My Brother.
Peace, My Sister.
Peace, My Soul

Wednesday, December 23, 2009

Charitable Deductions


Well it is the season for giving and during this time we spend most of our money purchasing gifts for our children, parents, and other loved ones. Lets remember that we can also give to the less fortunate and get a tax benefit at the same by making charitable donations by Dec 31. In order to deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A. The amount deduction may be limited according to certain rules. For instance, for 2009, the total of your charitable contributions and itemized deductions may be limited if your income is more than $166,800 ($83,400 if you are married filing separately).
Here is a list of reminders when making charitable donations.

  • Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2009 count for 2009. This is true even if the credit card bill isn’t paid until 2010. Also, checks count for 2009 as long as they are mailed in 2009 and clear, shortly thereafter.

  • Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.

  • For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2009 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.

  • For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value.

  • The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.

  • If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.

  • To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.

  • Special rules apply if you contributed taxidermy property, property subject to a debt, a fractional interest in a tangible personal property, a partial interest in property,
    A qualified conservation contribution, a future interest in tangible personal property, inventory from your business, and a patent or other intellectual property.

Wednesday, December 16, 2009

Tax Benefits For Job Seekers


Job search expenses can be deducted as miscellaneous itemized tax deductions if you look for a job in the same field at the same level as the one you left. The job search expenses are deductible even if you don't get the job.


You can deduct job-seeking expenses as long as the amount of all miscellaneous itemized tax deductions is more than 2% of your adjusted gross income (AGI). To figure your tax deduction, subtract 2% of your AGI from the total amount of these expenses. Job search expense deductions are also subject to the overall limitation on itemized deductions based on income threshold amounts.

To qualify, your job search must be for a job in your current, or most recent, trade or business and should be at a similar level of responsibility with duties similar to those of your most recent job.
  • If you haven't held a job in that trade or business for an extended length of time, your job search will be considered for a new trade or business, and your deductions may not be allowed.
  • If you held a college internship or valid job while in college and your search is for a job in the same trade or business, you will be able to deduct job search expenses.
  • If you're just out of school and had no paying jobs while in school that were related to your trade or business, your deductions won't be allowed.

You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year. Also, If your employer pays the fees directly to the employment agency and you are not responsible for them, you do not include them in your gross income.

You can deduct amounts you spend for preparing and mailing copies of a resume to prospective employers as long as you are looking for a new job in your present occupation. Cost for preparing resumes includes typing, printing, postage, long-distance charges, advertising, and photographs required for your resume.

If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.

If you are receiving unemployment compensation, these amounts are considered taxable income. You will receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld. If you did not elect to have any taxes withheld from your unemployment compensation you may be faced with an unexpected tax burden.

To minimize the pain felt by taxpayers who lost their jobs, the American Recovery and Reinvestment Act temporarily changed the taxation of unemployment benefits in 2009. The first $2,400 of unemployment benefits received in 2009 is tax free. Any amount over $2,400 will be subject to federal income tax. Individuals who receive unemployment benefits this year should check their withholding to ensure they are not having unnecessary tax withheld.

If you were employer either filed bankruptcy or went out of business here is some information you should know. Your employer must provide you with a Form W-2 showing your wages and withholdings by January 31 of the following year. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fails to provide you with a Form W-2 by February 15, contact the IRS in order to obtain a substitute Form W-2. If your employer is liquidating your 401(k) plan, you have 60 days to roll it over to another qualified retirement plan or IRA.

Monday, December 14, 2009

House Passes Tax Extenders Bill 2009





The U.S. House of Representatives voted to renew for one year 45 tax breaks due to expire December 31, including a sales tax deduction for people in states without income taxes, a property tax deduction for people who do not itemize, and the research and development credit.

Most Democrats voted to approve the measure, which includes tax increases on fund managers' income and a 30 percent withholding tax on foreign banks that fail to report information on American clients to tax authorities. Most Republicans who voted against the measure argued that tax increases would have a negative impact on new investment during the economic downturn.

If the Extenders Act of 2009 does not make it to the Senate floor for a vote before the end of the year, and the extensions expire, the tax breaks can be made retroactive, as has happened in previous years.

The Senate is not expected to approve the tax increases on fund managers. House Democrats have twice before voted to change the tax treatment of income paid on "carried interest" to compensation, which could be taxed at 35 percent, from capital gains income, which could be taxed at 15 percent, arguing that the income paid to fund managers is fee income and not just income on their 2 percent investment in their funds.

The 30 percent withholding tax on foreign banks that fail to report information on American clients to tax authorities comes as the Internal Revenue Service seeks to identify tax shelters for income earned abroad and pursue noncompliance.

Some of the key tax breaks extended in the House bill (HR 4213):

For individuals:



  • Deduction of state and local sales tax in states where there is no income tax
  • Additional standard deduction for state and local real property taxes for people who do not itemize
  • Above the line deduction for qualified tuition and related expenses
  • Deduction for certain expenses of elementary and secondary school teachers.

For businesses

  • Research credit.
  • Exceptions for active financing income
  • 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements
  • Employer wage credit for employees who are active duty members of the uniformed services
  • 5-year depreciation for farming business machinery and equipment.

Read more:

WebCPA

Wall Street Journal

Reuters









Wednesday, December 9, 2009

Year End Tax Moves


2009 was a rough year financially for many Americans. You could not turn on the news with out hearing about business closures, layoffs, foreclosures and bailouts. Lets be honest, between lost jobs, shrunken paychecks and disappearing bonuses it's been a time of more pain, less gain. But the year is not over and there are tax-savvy moves you can still make to pull some financial cheer out of an otherwise dreary 2009

  • Gather Your Stock Market Losses.

Almost everything you own and use for personal or investment purposes is a capital asset. Examples are your home, household furnishings, and stocks or bonds held in your personal account. When you sell a capital asset, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. Capital gains and losses are classified as long–term or short–term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed against ordinary income is $3,000. In what's often called tax loss harvesting, investors can sell assets that have generated large losses in after-tax accounts and use those losses to offset taxable income or even future gains. The losses can be used to offset capital gains as well as up to $3,000 of regular income each year. Any amount exceeding the $3,000 threshold can be carried forward to offset gains in the following year. IRS rules allow an investor to buy the asset back after 31 days — and still claim the tax loss.

  • Donate to a Charity

There are many people and organizations in need today, so it's a good time to review your charitable donations for the year. Donations can take the form of cash, electronics, cars, jewelry, paintings, stocks, real estate or clothing. Any donation of $250 or more requires a receipt as documentation. Property valued at more than $5,000 requires a written appraisal confirming its fair market value. There are also dollar limits: cash contributions cannot exceed 50% of adjusted gross income while property donations cannot top 30% of AGI. Contributions that exceed these limits can be carried over to the following tax year. President Obama has proposals on the table to put further limits on deductions for charitable contributions as a means of raising cash to cover the country's swelling deficit, stimulus package and health care reforms. So, taxpayers may want to max out their charitable contributions this year while limits are still generous.

  • Go For Energy Efficiency

Going green can offer a pretty nice payback at tax time. The IRS, through the federal stimulus package, is offering tax credits to individuals and businesses that make or use energy or energy-efficient products in 2009 and 2010. But you have to spend in 2009 to take the credit against this year's taxes. A homeowner buying energy-efficient windows, doors, water heaters or biomass stoves and those purchasing insulation, metal or reflective asphalt roofs and solar-energy systems can receive credits of 30% of the cost up to $1,500 in total. People purchasing geothermal heat pumps, solar panels and wind generators can get credits of 30% (up to $1,500) for each item through 2016. People buying plug-in hybrid electric cars can get tax credits of between $2,500 and $7,500.

Thursday, November 26, 2009

Happy Thanksgiving

Thanksgiving is a time for family and for reflection, a time to kick back and consider all the ways in which we, as Americans, have been blessed over the previous year

Wednesday, November 25, 2009

Get Your Guns Tax Free In South Carolina on Black Friday


South Carolina shoppers will get a second chance to buy tax-free guns.
The 48-hour tax break begins just after midnight the Friday after Thanksgiving.
Shoppers will pay no state or local sales taxes on handguns, rifles and shotguns, which can tally 9 percent. Taxes still apply to ammunition and accessories.

South Carolina had the nation's first tax holiday on guns last year, after legislators tacked it on to a tax break on energy-efficient appliances. But the state Supreme Court threw out that law in May because of an unrelated energy amendment. Lawmakers restored the tax break as a one-time event in the budget this year.

Louisiana followed this year with its own sales tax holiday for hunters in September. That break went further, applying to any item that can be used for hunting or fishing, including off-road vehicles, airboats, animal feed and ear plugs.

South Carolina is the only state to designate a tax-free weekend during two of the year's biggest shopping days. It is also one of the top five states that provide 85% of the illegal handguns recovered in New York City. Even without a tax holiday, South Carolina gun shops sold a half-million handguns in a 10-year period.

How much shoppers saved in the gun-friendly state last Thanksgiving weekend is unknown. State economic officials estimated it would cost the state about $15,000.

South Carolina's tax-free weekend for school supplies is in August.

Monday, November 23, 2009

American Opportunity Credit


Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American Opportunity Credit, to pay for college expenses.

The American Opportunity Credit is not available on the 2008 returns taxpayers are filing during 2009. The new credit modifies the existing Hope Credit for tax years 2009 and 2010, making the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits

Friday, November 20, 2009

Technology Expenses Now Eligible For A Special Tax Break


Parents who purchase computer technology for higher education purposes may be eligible for a special tax break. The American Recovery and Reinvestment Act of 2009 added computer equipment and technology to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan.

A qualified, nontaxable distribution from a 529 plan during 2009 or 2010 now includes the cost of the purchase of any computer technology, equipment or Internet access and related services. To qualify the beneficiary must use the technology, equipment or services while enrolled at an eligible educational institution.

Here are some things the IRS wants you to know about 529 plans.

  1. A 529 plan is an educational savings plan designed to provide tax-free earnings for the benefit of a student. Withdrawals must be used for qualified higher education expenses at an eligible educational institution.

  2. Qualified higher education expenses include tuition, reasonable costs of room and board, mandatory fees, computer technology, supplies and books.

  3. An eligible educational institution includes any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education.

  4. Contributions to a 529 plan cannot be more than the amount necessary to provide for a student’s qualified education expenses.

Monday, November 16, 2009

More FAQ on the First Time Home Buyers Tax Credit


1. Question: If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?

Answer: Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.

2. Question: Can you give me an example of how the partial tax credit is determined?

Answer: Just as an example, assume that a married couple has a modified adjusted gross income of $235,000. The applicable phaseout to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $138,000. The buyer’s income exceeds $125,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.

3. Question: How is this home buyer tax credit different from the tax credit that Congress enacted in early 2009?

Answer: The tax credit’s income limits were increased, the documentation requirements were tightened, and the program's deadlines were extended.

4. Question: How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?

Answer: You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns). No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase.

5. Question: What types of homes will qualify for the tax credit?

Answer: Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information.

6. Question: I read that the tax credit is “refundable.” What does that mean?

Answer: The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).

Friday, November 13, 2009

9 More FAQ on Repeat Home buyers Tax Credit

1. Question: I read that the tax credit is “refundable.” What does that mean?

Answer: The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.For example, if a qualified home buyer expected federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $6,500 home buyer tax credit. As a result, the taxpayer would receive a check for $5,500 ($6,500 minus the $1,000 owed).

2. Question: Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?

Answer: Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been “purchased” on the date the owner first occupies the house. In this situation, the date of first occupancy must be after November 6, 2009 and on or before April 30, 2010 (or by June 30, 2010, provided a binding sales contract was in force by April 30, 2010). In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date. Be sure to check with a tax advisor in cases where a HUD-1 form is not used at settlement to be sure you have sufficient documentation to attach to IRS Form 5405.

3. Question: Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?

Answer: Yes. The tax credit can be combined with an MRB home buyer program.

4. Question: I am not a U.S. citizen. Can I claim the tax credit?

Answer: Anyone who is not a nonresident alien (as defined by the IRS) and who has owned and resided in a principal residence in the United States for at least five consecutive years of the eight years prior to the purchase date can claim the tax credit if they meet the income limits. For married taxpayers, the law tests the home ownership history of both the home buyer and his/her spouse. The IRS provides a definition of “nonresident alien” in IRS Publication 519.

5. Question: Is a tax credit the same as a tax deduction?

Answer: No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $6,500 in income taxes and who receives an $6,500 tax credit would owe nothing to the IRS.A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $6,500 in income taxes. If the taxpayer receives a $6,500 deduction, the taxpayer’s tax liability would be reduced by $975 (15 percent of $6,500), or lowered from $6,500 to $5,525.

6. Question: Is there a way for a home buyer to access the money allowable to the credit sooner than waiting to file their 2009 or 2010 tax return?

Answer: Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the down payment.Buyers should adjust the withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding. Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.In addition, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. As a result, some state housing finance agencies have introduced programs that provide short-term second mortgage loans that may be used to fund a down payment. Prospective home buyers should check with their state housing finance agency to see if such a program is available in their community.

7. Question: HUD allows “monetization” of the tax credit. What does that mean?

Answer: It means that HUD will allow buyers using FHA-insured mortgages to apply their anticipated tax credit toward their home purchase immediately rather than waiting until they file their 2009 or 2010 income taxes to receive a refund. These funds may be used for certain downpayment and closing cost expenses.Under the guidelines announced by HUD, non-profits and FHA-approved lenders are allowed to give home buyers short-term loans. The guidelines also allow government agencies, such as state housing finance agencies, to facilitate home sales by providing longer term loans secured by second mortgages. Housing finance agencies and other government entities may also issue tax credit loans, which home buyers may use to satisfy the FHA 3.5 percent downpayment requirement.

8. Question: If I’m qualified for the tax credit and buy a home in 2009 (or 2010), can I apply the tax credit against my 2008 (or 2009) tax return?

Answer: Yes. The law allows taxpayers to choose (“elect”) to treat qualified home purchases in 2009 (or 2010) as if the purchase occurred on December 31, 2008 (or if in 2010, December 31, 2009). This means that the previous year’s income limit (MAGI) applies and the election accelerates when the credit can be claimed. A benefit of this election is that a home buyer in 2009 or 2010 will know their prior year MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.Taxpayers buying a home who wish to claim it on their prior year tax return, but who have already submitted their tax return to the IRS, may file an amended return claiming the tax credit using Form 1040X. You should consult with a tax professional to determine how to arrange this.

9. Question: For a home purchase in 2009 or 2010, can I choose whether to treat the purchase as occurring in the prior or present year, depending on in which year my credit amount is the largest?

Answer: Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in the present year and a larger credit would be available using the prior year MAGI amounts, then you can choose the year that yields the largest credit amount.

Monday, November 9, 2009

10 Frequently Asked Questions on the Repeat Home Buyers Credit


On November 6, 2009 President Obama signed into law an extension of the First Time Home Buyers Tax Credit and expands the Home Buyers Tax Credit to repeat home buyers.

1. Question: Who is eligible to claim the $6,500 tax credit?

Answer: Qualified move-up or repeat home buyers purchasing any kind of home are eligible to claim this credit.

2. Question: What is the definition of a move-up or repeat home buyer?

Answer: The law defines a tax credit qualified move-up home buyer (“long-time resident”) as a home owner who has owned and resided in a home for at least five consecutive years of the eight years prior to the purchase date. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. Repeat home buyers do not have to purchase a home that is more expensive than their previous home to qualify for the tax credit.

3. Question: How is the amount of the tax credit determined?

Answer: The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500. Purchases of homes priced above $800,000 are not eligible for the tax credit.

4. Question: Are there any income limits for claiming the tax credit?

Answer: Yes. The income limit for single taxpayers is $125,000 and $225,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) above those limits. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $145,000 for single taxpayers, $245,000 for married taxpayers filing a joint return and is reduced proportionally for taxpayers with MAGIs between these amounts.

5. Question What is “modified adjusted gross income”?

Answer: Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and the first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income.

6. Question: If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?

Answer: Possibly. It depends on your income. Partial credits of less than $6,500 are available for some taxpayers whose MAGI exceeds the phaseout limits.

7. Question Can you give me an example of how the partial tax credit is determined?

Answer: Just as an example, assume that a married couple has a modified adjusted gross income of $235,000. The applicable phaseout to qualify for the tax credit is $225,000, and the couple is $10,000 over this amount. Dividing $10,000 by the phaseout range of $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $6,500 by 0.5. The result is $3,250.Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $138,000. The buyer’s income exceeds $125,000 by $13,000. Dividing $13,000 by the phaseout range of $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $6,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,275.Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.

8. Question: How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008? How is this different than the rules established in early 2009?

Answer: The previous tax credits applied only to first-time home buyers and were for different amounts of money.

9. Question: How do I claim the tax credit? Do I need to complete a form or application? Are there documentation requirements?

Answer: You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on line 67 of the 1040 income tax form for 2009 returns (line 69 of the 1040 income tax form for 2008 returns).No other applications are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and repeat home buyer tests. Note that you cannot claim the credit on Form 5405 for an intended purchase for some future date; it must be a completed purchase. Home buyers must attach a copy of their HUD-1 settlement form (closing statement) to Form 5405 as proof of the completed home purchase.


10. Question What types of homes will qualify for the tax credit?

Answer: Any home that will be used as a principal residence will qualify for the credit, provided the home is purchased for a price less than or equal to $800,000. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.It is important to note that you cannot purchase a home from, among other family members, your ancestors (parents, grandparents, etc.), your lineal descendants (children, grandchildren, etc.) or your spouse or your spouse’s family members. Please consult with your tax advisor for more information.

Sunday, November 8, 2009

Frequently Asked Questions On the HomeBuyers Tax Credit


For anyone who purchased a house in 2009 and you may be confused about the Home buyers Tax Credit here is some valuable information.

1. Question: Who is eligible to claim the $8,000 tax credit?


Answer: First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and on or before April 30, 2010. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner. A limited exception exists for certain contract for deed purchases and installment sale purchases. However, the law also allows home sales occurring by June 30, 2010 to qualify, provided they are due to a binding sales contract in force on or before April 30, 2010.Persons who are claimed as dependents by other taxpayers or who are under age 18 are not qualified for the tax credit program.

2. Question: What is the definition of a first-time home buyer?


Answer: The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, IRS Notice 2009-12 allows unmarried joint purchasers to allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.


3. Question: How is the amount of the tax credit determined?


Answer: The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.


4. Question: Are there any income limits for claiming the tax credit?

Answer: Yes. For sales occurring after November 6, 2009, the income limit for single taxpayers is $125,000; the limit is $225,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $125,000 for single taxpayers and $225,000 for married taxpayers filing a joint return. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for single taxpayers with MAGI of more than $145,000 or $245,000 for married taxpayers filing a joint return and is reduced proportionally for taxpayers with MAGIs between these amounts.

5. Question: What is “modified adjusted gross income”?

Answer: Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine “adjusted gross income” or AGI. AGI is total income for a year minus certain deductions (known as “adjustments” or “above-the-line deductions”), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.To determine modified adjusted gross income (MAGI), add to AGI certain amounts of foreign-earned income.

6. Question: The income limits for claiming the tax credit were raised when the tax credit was extended. Are the higher limits retroactive?

Answer: No. The new income limits are only applicable to purchases occurring after November 6, 2009.The income limits for sales occurring on or after January 1, 2009 and on or before November 6, 2009 are $75,000 for single taxpayers and $150,000 for married couples filing jointly.

Wednesday, November 4, 2009

Winterize Your Home and Save On Taxes


You can now winterize your home by making energy saving improvements that will reduce your heating bills and save on taxes at the same time. When the government passed the American Reinvestment and Recovery Act (ARRA), it expanded the Nonbusiness Energy Property Credit and the Real Energy Efficient Property Credit.


The Nonbusiness Energy Property Credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items does not count. By spending as little as $5,000 before the end of the year on eligible energy-saving improvements, a homeowner can save as much as $1,500 on his or her 2009 federal income tax return. Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. These tax savings are on top of any energy savings that may result.


The residential energy efficient property credit equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property. Not all energy-efficient improvements qualify for these tax credits. For that reason, homeowners should check the manufacturer’s tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer’s website or with the product packaging. Normally, a homeowner can rely on this certification. The IRS cautions that the manufacturer’s certification is different from the Department of Energy’s Energy Star label, and not all Energy Star labeled products qualify for the tax credits.


Eligible homeowners can claim both of these credits when they file their 2009 federal income tax return. Because these are credits, not deductions, they increase a taxpayer’s refund or reduce the tax he or she owes. An eligible taxpayer can claim these credits, regardless of whether he or she itemizes deductions on Schedule A. Use Form 5695, Residential Energy Credits.

Monday, November 2, 2009

Tax Credits or Tax Deductions


A deduction is an expense or an amount of money which lowers your taxable income. It is subtracted "off-the-top" from the amount of money you made throughout the year otherwise known as your gross income. Once all deductions are subtracted from your gross income, you arrive at an amount known as your adjusted gross income, or AGI. Examples of deductions used to obtain your AGI include contributions to a traditional IRA, student loan interest that was paid during the year, tuition and expenses, alimony paid, and classroom-related costs for teachers. After you obtain your AGI, the standard or itemized deductions are subtracted from the AGI, yielding your taxable income. Taxable income determines the amount of tax that you owe.


Tax credits, on the other hand, are dollar-for-dollar reductions which are subtracted from your tax liability. Let’s say, for instance, that you qualify for a $100 tax credit. The government is, in essence, saying to you “We are giving you credit for having already paid $100 in tax." Therefore, $100 is subtracted directly from the amount of tax that you owe.


The following example illustrates the difference between the two. As earlier stated, a deduction shaves money off your taxable income, so the value depends on your tax bracket. If you're in the 25% bracket, a $1,000 deduction lowers your tax bill by $250. But a $1,000 credit lowers the bill by the full $1,000, no matter in which bracket you are.

Wednesday, October 28, 2009

Tax Related Provisions of The American Recovery and Reinvestment Act of 2009 Part 3




The following provisions in the American Recovery and Reinvestment Act of 2009 (ARRA) pertain to business.




Making Work Pay Tax Credit. Businesses should use the new withholding rates for their employees. For pension plan administrators, new optional withholding procedures are available to supplement the February withholding tables.

Work Opportunity tax credit. This newly-expanded credit adds returning veterans and "disconnected youth" to the list of new hires covered by the credit that businesses may claim. Certification by the state work force agency is required. In general, an unemployed veteran is a person discharged or released from the military during the five years preceding the hiring date who received unemployment benefits for at least four weeks during the one-year period ending on the hiring date. A “disconnected youth” is a person age 16 to 24 on the hiring date who has not been regularly employed or attending school and who meets other requirements. The WOTC offers tax savings to businesses that hire workers belonging to any of 12 targeted groups, including unemployed veterans and disconnected youth. The other 10 include people ages 18 to 39 living in designated communities in 43 states and the District of Columbia, Hurricane Katrina employees, recipients of various types of public assistance, and certain veterans, summer youth workers and ex-felons. The instructions for Form 8850 detail the requirements for each of these groups.

COBRA: Health Insurance Continuation Subsidy. The IRS has extensive guidance for employers, including an updated Form 941, as well as information for qualifying individuals. Workers who have lost their jobs may qualify for a 65 percent subsidy for COBRA continuation premiums for themselves and their families for up to nine months. Eligible workers will have to pay 35 percent of the premium to their former employers. To qualify, a worker must have been involuntarily separated between Sept. 1, 2008, and Dec. 31, 2009. Workers who lost their jobs between Sept. 1, 2008, and enactment, but failed to initially elect COBRA because it was unaffordable, get an additional 60 days to elect COBRA and receive the subsidy. This subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, do not qualify for the subsidy

Energy Efficiency and Renewable Energy Incentives. The ARRA provides the following incentives for businesses.
  • New Clean Renewable Energy Bonds (Section 1111): The new law increases the amount of funds available to issue new clean renewable energy bonds from the one-time national limit of $800 million to $2.4 billion
  • Qualified Energy Conservation Bonds (Section 1112): The new law increases the amount of funds available to issue qualified energy conservation bonds from the one-time national limit of $800 million to $3.2 billion
  • Extension of Renewable Energy Production Tax Credit (Section 1101): The new law generally extends the “eligibility dates” of a tax credit for facilities producing electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower and marine and hydrokinetic renewable energy.
  • Election of Investment Credit in Lieu of Production Credit (Section 1102): Businesses who place in service facilities that produce electricity from wind and some other renewable resources after Dec 31, 2008 can choose either the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects or the production tax credit, which can provide a credit of up to 2.1 cents per kilowatt-hour for electricity produced from renewable sources.
  • Repeal of Certain Limits on Business Credits for Renewable Energy Property (Section 1103): The new law repeals the $4,000 limit on the 30 percent tax credit for small wind energy property and the limitation on property financed by subsidized energy financing. The repeal applies to property placed in service after Dec. 31, 2008.
  • Coordination With Renewable Energy Grants (Section 1104): Business taxpayers also can apply for a grant instead of claiming either the energy investment tax credit or the renewable energy production tax credit for property placed in service in 2009 or 2010.
  • Temporary Increase in Credit for Alternative Fuel Vehicle Refueling Property (Section 1123): The new law modifies the credit rate and limit amounts for property placed in service in 2009 and 2010.

Net Operating Loss Carryback. Small businesses can offset losses by getting refunds on taxes paid up to five years ago. To accommodate the change in tax law, the IRS has updated Publication 536, as well as the instructions for Form 1045 and Form 1139, which small businesses will use to take advantage of the carryback provision. An expanded section 179 deduction and other business-related provisions, are now availabe.

Municipal Bond Programs. There are new ways to finance school construction, energy and other public projects.

Tuesday, October 6, 2009

Method Man Is Arrested For Tax Evasion


Method Man joins a list of other celebrities including New York Mets pitcher Jerry Koosman who have had financial problems paying their taxes. Method Man, whose real name is Clifford Smith, is a Grammy award winning rapper and the founding member of the hip hop group Wu-Tang Clan. Method Man could face up to four years in prison for failing to pay his taxes.
The 38-year-old rapper turned himself in to police in Staten Island, New York for arrest. Authorities say he failed to pay nearly 33,000 US dollars in taxes between 2004 and 2007 and is being charged with repeated failure to file a return and failure to pay taxes.



Monday, October 5, 2009

Tax Related Provisions of The American Recovery and Reinvestment Act of 2009 Part 2





The following provisions pertain to individuals.



Enhanced Credits for Tax Years 2009, The American Recovery and Reinvestment Act (ARRA) provides a temporary increase in the earned income tax credit (EITC) for taxpayers with three or more qualifying children. The maximum EITC for this new category is $5,657. ARRA also increases the beginning point of the phaseout range for the credit for all married couples filing a joint return, regardless of the number of children. These changes apply to 2009 and 2010 tax returns. The earned income tax credit is a refundable credit intended to help people who work but earn modest incomes.

In addition, under ARRA, more families will be eligible for the additional child tax credit because of a change to the way the credit is figured. Taxpayers who cannot take full advantage of the child tax credit because the credit is more than the taxes they owe may receive a payment for some or all of the credit not used to offset their taxes. It is a refundable credit, which means taxpayers may receive refunds even when they do not owe any tax.

ARRA reduces the minimum earned income amount used to calculate the additional child tax credit to $3,000. Before ARRA, the minimum earned income amount was set to rise to $12,550. Reducing the amount to $3,000 permits more taxpayers to use the additional child tax credit and increases the amount of the payments they may receive

Increased Transportation Subsidy. The ARRA also increases employer-provided benefits for transit and parking in 2009. The monthly tax exclusion for employer-provided commuter highway vehicle transportation and transit pass benefits increased to $230, effective from March through December 2009. Employees may exclude from income $230 per month in transit benefits and $230 per month in parking benefits –– up to a maximum of $460 per month. Employees may receive benefits for commuter transportation and transit passes and benefits for parking during the same month; they are not mutually exclusive.
These qualified transportation fringe benefits are excluded from an employee's gross income for income tax purposes and from an employee's wages for payroll tax purposes.

Up to $2,400 in Unemployment Benefits Tax Free in 2009. Under the American Recovery and Reinvestment Act (ARRA), the first $2,400 of unemployment benefits an individual receives in 2009 are tax free. This provision applies only to benefits received in 2009: Normally, unemployment benefits are taxable.

$250 for Social Security Recipients, Veterans and Railroad Retirees. The Economic Recovery Payment will be paid by the Social Security Administration, Department of Veterans Affairs and the Railroad Retirement Board. A one-time payment of $250 will be made in 2009 to:

  • Retirees, disabled individuals and Supplemental Security Income (SSI) recipients receiving benefits from the Social Security Administration.
  • Disabled veterans receiving benefits from the U.S. Department of Veterans Affairs.
  • Railroad Retirement beneficiaries.
The IRS will not make this payment, unlike last year's economic stimulus program. Individuals who may qualify for this year's economic recovery payment should contact their respective agency for more information.


Energy Efficiency and Renewable Energy Incentives. The ARRA provides several tax incentives for individuals to invest in energy efficient products. Here is a list of some of those incentives:

  • Residential Energy Property Credit.
  • Residential Energy Efficient Property Credit.
  • Plug-in Electric Drive Vehicle Credit.
  • Plug-In Electric Vehicle Credit.
  • Conversion Kits
  • Treatment of Alternative Motor Vehicle Credit as a Personal Credit Allowed Against AMT.

Health Coverage Tax Credit. The credit increases from 65 percent to 80 percent of qualified health insurance premiums, and more people are eligible.

Friday, September 25, 2009

Tax-Related Provisions of the American Recovery and Reinvestment Act of 2009



The American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted in February, 2009 by the 111th Congress. Based largely on proposals made by President Obama, ARRA was intended to furnish a stimulus package to the U.S. economy in the form of various measures having a value of approximately $787 billion. These measures include a variety of federal tax cuts, increases in unemployment benefits, and spending in the areas of health care, education, social welfare, and infrastructure projects.

I am going to look at some of the key provision that were enacted to help individuals.


First-Time Homebuyer Credit. This credit applies to first-time homebuyers who purchased their homes in 2008 or 2009. The credit:



  • Applies to purchases that close after April 8, 2008, and before Dec. 1, 2009.

  • Applies only to homes used as a taxpayer's principal residence.

  • Reduces a taxpayer's tax bill or increases his or her refund, dollar for dollar.

  • Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.

According to US News and World Report, existing home sales rose in July for the fourth time in as many months, something the market hasn't seen since 2004. Inventory totals are off their record levels of a year ago. And prices, while still declining sharply, are no longer in free fall. However, the looming expiration of a popular federal tax credit has some worried that the housing market may give back its recent gains, and the real estate and home building industries are pushing lawmakers to extend the incentive.


Making Work Pay Tax Credit. This tax credit means more take-home pay for many Americans. To make sure enough tax is withheld from their pay, taxpayers can use the IRS withholding calculator. The Making Work Pay tax credit, normally a maximum of $400 for working individuals and $800 for working married couples, is reduced by the amount of any Economic Recovery Payment ($250 per eligible recipient of Social Security, Supplemental Security Income, Railroad Retirement or Veteran's benefits) or Special Credit for Certain Government Retirees ($250 per eligible federal or state retiree) that you receive. If you are affected by this reduction, you should review your withholding to ensure that sufficient funds have been withheld to meet your tax obligation.

Money Back for New Vehicle Purchases. Taxpayers who buy certain new vehicles in 2009 can deduct the state and local sales taxes they paid or other taxes and fees they paid in states with no sales tax. ARRA permits taxpayers to take a deduction for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. The deduction is available on new vehicles purchased from Feb. 17, 2009, through Dec. 31, 2009. In states that don't have a sales tax, the law provides a deduction for other taxes or fees paid. This deduction is available whether or not a taxpayer itemizes deductions on Schedule A. Anyone who took advantage of the cash for clunkers program and purchased a new car should not forget this tax deduction.

Thursday, September 24, 2009

NY Mets Pitcher Jerry Koosman goes To Jail For Tax Evasion


A serious blemish on an otherwise outstanding life.” That’s what U.S. District Court Judge Barbara Crabb said recently when she sentenced former Mets pitcher Jerry Koosman, age 66, to prison for tax evasion. Her comments are not surprising when you consider that, unlike most celebrities who get caught not paying their fair share, Koosman not only pleaded guilty and apologized as well.
Read complete story at Accountingweb

Monday, August 31, 2009

Tax Deductions Incurred As A Result of Job Loss



As the jobless rate is expected to reach 9.5 for August and 10 percent by 2010 and you unfortunately find yourself among the 6.7 million individuals who have lost their jobs since the recession officially began in 2007, here is some information you should know about the tax effects of your job loss.

Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time are also taxable. You should ensure that enough taxes are withheld from these payments or make estimated payments. Under the American Recovery and Reinvestment Act (ARRA), the first $2,400 of unemployment benefits an individual receives in 2009 are tax free. This provision applies only to benefits received in 2009: Normally, unemployment benefits are taxable. Also, you may request that taxes be deducted from your unemployment benefits so that you do not wind up with an unexpected tax bill during tax time.

You can deduct certain expenses you have in looking for a new job in your present occupation, even if you do not get a new job. You cannot deduct these expenses if:

  • You are looking for a job in a new occupation,
  • There was a substantial break between the ending of your last job and your looking for a new one, or
  • You are looking for a job for the first time.
Employment and outplacement agency fees. You can deduct employment and outplacement agency fees you pay in looking for a new job in your present occupation.

Employer pays you back. If, in a later year, your employer pays you back for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.

Employer pays the employment agency. If your employer pays the fees directly to the employment agency and you are not responsible for them, you do not include them in your gross income. This one you do not have to worry about since fees paid to the employment agency are not disclosed.

Resume. You can deduct amounts you spend for preparing and mailing copies of a resume to prospective employers if you are looking for a new job in your present occupation. This includes the cost of typing, printing and mailing your resume.

Travel and transportation expenses. If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend in looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation while in the area.
You can choose to use the standard mileage rate to figure your car expenses. The 2008 rate for business use of a vehicle is 50½ cents per mile (58 ½ cents per mile after June 30, 2008).

Wednesday, August 12, 2009

How to Start A Limited Liability Corporation


A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC.



A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.


Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. In a pass through entity, the profits or losses of the business pass directly through to the owners' personal income tax returns, on their Form 1040. The LLC files a Form 1065, and then lists each member's taxable profit on Form K-1. In other words, the LLC itself does not file taxes. However, if the LLC has just one owner, it will be taxed as a sole proprietorship.

Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.

Additionally, there is a managing member, who also enjoys the rewards of limited liability and is typically the person responsible for managing the business. (However, if the LLC has just one owner, it will be taxed as a sole prprietorship.)


Advantages
  • Owners have limited personal liability for business debts even if they participate in management.

  • Profit and loss can be allocated differently than ownership interests.

  • IRS rules now allow Limited Liability Corporation (LLC) to choose between being taxed as partnership or corporation.

Disadvantges


  • More expensive to create than partnership or sole proprietorship

  • State laws for creating Limited Liability Corporation (LLC) may not reflect latest federal tax changes

For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies (PDF).





Sunday, August 2, 2009

How To Start A Business as a "S" Corporation



Suppose you can answer every personal tax problem that comes your way. Your friends and family call you to prepare their income tax returns because they are unhappy with their present tax return preparer. Word gets around that you are extremely good at taxes and soon their friends start calling you, and they’re willing to pay for your services. You figure if you do this a few evenings a`week, you could make a nice profit. After, doing some research into the different types of business structures, you decide that an "S" corporation would be the best type of business structure to operate under. The first reason why you chose a corporation is that you want protect your home, bank accounts and other personal assets against lawsuits made against the business. The second reason is that you don't want to be taxed at the corporate level and the shareholder level.

An S corporation is a regular corporation that has elected "S corporation" tax status. Forming an S corporation lets you enjoy the limited liability of a corporate shareholder but pay income taxes as if you were a sole proprietor or a partner.

An S corporation is a pass through entity. In a pass through entity all business profits "pass through" to the owners, who report them on their personal tax returns in the same matter as in sole proprietorships, partnerships, and LLCs. The corporation itself does not pay any income tax, although an S corporation with more than one owner must file an informational tax return, like a partnership or LLC, to report each shareholder's portion of the corporate income.

In order to create an S corporation, you must first create a regular corporation by filing articles of incorporation with your secretary of state's office. All shareholders must sign and file IRS Form 2553 in order to operate as a "S" corporation. The election should be made by

  • No more than two months and 15 days after the beginning of the tax year the election is to take effect, or
  • any time during the tax year preceding the tax year it is to take effect.
To qualify for S corporation status, the corporation must meet the following requirements:
  • Be a domestic corporation
  • Have only allowable shareholders including individuals, certain trust, and estates and
    may not include partnerships, corporations or non-resident alien shareholders
  • Have no more than 100 shareholders
  • Have one class of stock
  • Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.
If anyone of these requirements are not met the "S" corporation status will be revoked by the IRS. For example, if your company was operating as an "S" corp and added 10 new shareholders so that the total amount of shareholders now exceed 100, then the "S" corporation status can be revoked.

An "S" corporation owners are called shareholders, and each shareholder includes his or her share of the corporation's income or loss on his or her tax return using Form 1040 and Schedule E. If you do business as a "S" corporation, the corporation will need to complete Form 1120S for and a 1120 Schedule K-1 for each shareholder. The corporation will be liable for paying employment taxes if it hires employees, and certain excise taxes. Since the corporation is a seperate legal entity, the shareholder(owner) does not have to pay self employment taxes. Some of the forms you will need for employment taxes are Form 940, Form 941, Form 943, and Form 8109-B.


The advantages of doing business as a "S" corporation are:



  • Corporate losses can be passed through to the shareholders, and as a shareholder, you may be able to take the loss against income that appears on your personal return.
  • You can have the protection of limited personal liability without having to pay corporate taxes.
  • You can minimize self-employment tax and FICA tax.
The disadvantages of doing business as a "S" corporation are:


  • Numerous regulations and requirements must be upheld by an S Corporation.
  • Like a C Corporation, it can be costly to set up and follow corporate formalities.
  • Close scrutiny by the IRS of shareholder-employees, who must receive reasonable compensation.

Thursday, July 23, 2009

How To Start A Business: Partnerships

A partnership is a for-profit business association of two or more persons. Partners can include individuals, groups of individuals, companies, and corporations. Partnerships are highly adaptable in form and vary in complexity. Each partner shares directly in the organization's profits and shares control of the business operation. The consequence of this profit sharing is that partners are jointly and independently liable for the partnership's debts.


The business component of a partnership is defined broadly by state laws in accordance to the Uniform Partnership Act. These statutes establish the basic legal rules that apply to partnerships and will control many aspects of your partnership's life unless you set out different rules in a written partnership agreement. Don't be tempted to leave the terms of your partnership up to these state laws because they were designed as one-size-fits-all fallback rules in the absence of a written partnership agreement. If you are going to create a partnership agreement , some of the items that should be included in your agreement are:

  • Name of partnership.
  • Contributions to the partnership.
  • Allocation of profits, losses, and withdraws.
  • Partner's agency authority.
  • Partnership decision making.
  • Management duties.
  • Admitting new partners
  • Withdrawal or death of partners
A partnership must file an annual information return using Form 1065 to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return using Form 1040 and Schedule E. If you do business as a partnership, the the partnership will be liable for paying employment taxes if you hire employees, and certain excise taxes. Some of the forms you will need for employment taxes are Form 940, Form 941 and Form 8109-B.

For more information see Publication 541 or consult your accountant or tax attorney.


Partners are not employees and should not be issued a Form W-2's. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions. As a partner, some of the taxes you will be responsible for paying are self employment taxes and estimated taxes.

The advantages of operating a business as a partnership are:

  • You have a shared financial commitment.
  • You can pool together resources, expertise and strengths.
  • There are limited start up costs.
The disadvantages of operating a business as a partnership are:
  • Partners are personally liable business debts and liabilities.
  • There may be unequal commitment in terms of time and finances.
  • There may be personal disputes with the partners.
  • Partners may have different visions or goals for the business.

Sunday, July 19, 2009

Business Organization: Sole Proprietor


As the the economy continues to shed jobs, some unemployed people are turning this opportunity into a chance to start their own businesses and turn their passions into money making endeavour. In this series on "How To Start Your Own Business" I will examine the different types of business structures, the types of forms you will need to file for federal tax purposes, and the advantages and disadvantages of each business structure.


The first type of business structure I will discuss is the sole proprietorship. The sole proprietorship is the most common type of business structure chosen for small businesses. A sole proprietor is someone who owns an unincorporated business by himself or herself. The owner or proprietor is responsible for all business transactions and is personally liable for all debts and liabilities incurred by the company. The owner pays taxes on income from the business as part of his or her personal income tax. Normally this is done by filing Form 1040 and either a Schedule C or a Schedule CEZ. Sole proprietors need to comply with licensing requirements in the states in which they're doing business, as well as local regulations and zoning ordinances. Some of the other types of federal taxes you may be responsible for as a sole proprietor are self employment taxes, excise tax, and various other taxes if you hire employees.


Self Employment Tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. You will file your self employment taxes using Schedule SE along with your 1040 form.

Employment Taxes are paid only if you hire employees to work for your business. Some of the taxes you will be required to pay are:

  • Social Security and Medicare taxes.
  • Federal Income Witholding Taxes
  • Federal Unemployment (FUTA) Taxes.

For more information on employment taxes see Publication 15.

Excise Taxes are paid if you are involved in

  • Manufacture or sell certain products.
  • Operate certain kinds of businesses.
  • Use various kinds of equipment, facilities, or products.
  • Receive payment for certain services.
Advantages of a Sole Proprietorship
  • A sole proprietor has complete control and decision-making power over the business.
  • Sale or transfer can take place at the discretion of the sole proprietor.
  • No corporate tax payments.
  • It can also be less costly to start a business as a sole proprietor, which is attractive to many new business owners who often find it difficult to attract investors.
  • Minimal legal costs to forming a sole proprietorship.
  • Few formal business requirements.

Disadvantages of a Sole Proprietorship

  • The sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company.
  • All responsibilities and business decisions fall on the shoulders of the sole proprietor.
  • Investors won’t usually invest in sole proprietorships.

Wednesday, July 15, 2009

Tips On How To Start A Business


For a variety reasons, including economic, social, and technological, starting a new business is more popular than ever with entrepreneurs in the USA. Many successful corporations began as home businesses and were able to transform themselves into major corporations as they increased sales and expanded their operations. As a result of technological advances, anyone with a cell phone, a computer with a high speed connection, and an idea can start and run a successful business.

If you are starting a new business this summer, you should be aware of federal tax responsibilities. Here are the top seven things you should know if you are planning to open a new business this year.



  1. As a small business owner, you must decide what type of business organization you are going to use. The type of business organization you choose will determine the type of tax forms you will using in order to file taxes. The most common types of business entities are sole proprietorships, partnerships, limited liability corporations(LLC), C corporations and S corporations.

  2. The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.

  3. An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. You can apply for an EIN by using Form SS-4 or you can file online at http://www.irs.gov/, or you can aply by phone. This EIN is your permanent number and can be used immediately for most of your business needs, including opening a bank account, applying for business licenses, and filing a tax return by mail. However, no matter how you apply (phone, fax, mail, or online), it will take up to two weeks before your EIN becomes part of the IRS' permanent records. You must wait until this occurs before you can file an electronic return, make an electronic payment, or pass an IRS Taxpayer Identification Number matching program.

  4. Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.

  5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used. A calendar year ends on December 31 while a fiscal year ends on a date of your choosing. Governmental organizations normally use a fiscal year that ends on June 30 and begins on July 1.

  6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

  7. Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.