Tax Power™ U.S. Tax & Business Advisory Services and Solutions
Black Friday is not just for holiday shopping. It is the time when everyone should be thinking about your tax situation for the year and if there is anything that can be done to lower your income tax bill for the year, thus increasing your refund or lowering tax amounts owed when you file your tax return. In a nutshell, the best advice I can give is to 1) know what tax laws and rules affect you and how your tax liability may be minimized, and 2) if you don’t have a dedicated tax professional at your side, now may be the time to find one instead of waiting for the middle of tax season. New tax laws: So far since the beginning of the new millennium, we have seen more major tax measures passed (9) than in the past three decades, with several more changes on the horizon for the coming years. Although tax simplification seemed to have been the buzz word for the 1990s, income tax today is actually more complex than ever. Unfortunately, the advent of home tax preparation software and free on-line filing has extended a sense of false comfort leading many to believe that they no longer needed a competent, year round dedicated personal tax professional to assist them at a time when needed most.
Incompetent and unscrupulous tax preparers: In an effort to mitigate many of the problems encountered through the use of non professional part time or seasonal tax return preparers, the IRS and many states now require tax professionals to register as tax return preparers, E-file providers or electronic return originators. It has recently been announced that IRS agents will be visiting tax preparers who may be suspect as regards preparing fraudulent returns claiming Earned Income Credits. Because of the complexities in the tax laws, Treasury Regulations and IRS administration everyone today should seek the assistance of tax professionals who possess years of training and experience, especially someone who is available after April 15. Yet I am amazed that even those with complex sophisticated tax returns, such as American expatriates working overseas seek tax assistance from seasonal tax preparers who are not dedicated tax professionals.
General Tax Information- Believe it or not, taxes are often the largest single “line item” in any personal or business budget. An average middle income family who owns a home can easily see their disposable income reduced by 55% once they add up income, sales, real estate, excise, and other taxes including state and local taxes that are disguised as fees so they can raise revenues but not be declared unconstitutional or discriminatory taxes. So like it or not, the government is your partner whether you are an employee or self employed. The key is knowing the basics of what taxes you pay, why and how to minimize the tax burden thus increasing your disposable income. On the local side, it pays to get to know your local elected representatives and officials and stay on top of local budgets, especially school spending. But I am focused here more on income tax. Knowing the tax rules for the year can help you time the purchase of things that you would otherwise purchase anyway, but by doing it in the correct year it can save hundreds or thousands of tax dollars. Accordingly, the tax realized benefit actually reduces the total cost (ex. Qualifying energy saving devices) or can increase your return (ex. Depositing money in a qualified IRA). So whether you are an employee or self employed (or a small business owner) it is vital that you have a general understanding of how taxes work and how they impact your life. Today the tax rules and the manner in which they are administered by federal, state and local administrators is changing rapidly. This is why I spend as much time as I do keeping the Tax Power website updated for new information so that my clients stay up to date and can call me if they see anything that may affect them. As our clients are either residents of various U.S. states and foreign countries most of the information reported by us is federal tax related, however many state taxes are similar to federal as far as the nature of what is taxable income, deductions, etc. Foresight is 20/20: In the world of income taxation knowing what changes will be effective in the coming year(s) is sometimes almost as important as knowing the rules for the present year. Thus if tax rates are expected to increase in the future, it may be wise to accelerate payment of income to the current year when rates are lower. Alternatively, if a deduction will be phased out or eliminated in future years, immediate action may be prudent. One example is the $8,000 first time home buyer credit. If you are planning to make a first time home purchase now may be the time to do it as the tax break has been slightly extended. Similarly, last year’s credit was actually an interest free $7,500 loan which had to be paid back to the government. So postponing the purchase to 2008 was the wiser tax move.
Personal Minimum Retirement Distributions: Although those over 70 ½ years of age are normally required to take minimum distributions from their retirement accounts or face a penalty, this has been waived for 2009. Also, heirs to inherited IRAs can skip the 2009 annual withdrawal without penalty.
401(k), 403(b) and 457 Plan Contributions: The maximum contribution has been increased to $16,500 for 2009 and those born before 1960 can up this by an additional $5,500 to $22,000. Plan contributions are based up to $245,000 salary for 2009. So if you have extra money and will realize a tax benefit by increasing your contribution now would be the time to do it. Remember, however, that when the money is withdrawn it is fully taxed at whatever rate you are in at the time. You should also consider state tax rules regarding the taxability of retirement plan distributions depending on were you will be resident when you retire. The rules for IRAs and Roth IRAs remain the same, with limits remaining at $5,000 plus an additional $1,000 for anyone born in 1959 or before.
Converting a second home to a principal residence after 2008 can be more expensive as some of the gain when the home is sold will now be ineligible for the full $500,000 capital gain exclusion.
Educational Tax Benefits: The phase out for the two educational tax credits has been increased, now beginning at $100,000 for married filing joint tax returns and $50,000 for single filers. Also the student loan interest deduction phase out income limit has been increased to $120,000 of AGI for married persons and $60,000 for single filers.
The Worker, Homeownership and Business Assistance Act of 2009 (HR 3348)
Home Buyer Credits effective November 7, 2006: The $8,000 refundable First Time Home Buyer Credit has now been extended to first time buyers who enter into contract by April 30, 2010 and close by June 30. A qualifying first time home buyer need only not to have owned a home used as their primary residence during the previous three years.
A new refundable credit has been added to encourage existing homeowners to sell and purchase a new home. For those who don’t mind moving this is a pretty good deal. A qualifying married couple who has used the existing home as their primary residence for at least five consecutive years (ending on the date of purchase of the new home) out of an 8 year period.
There are some new requirements that must be met, however. Anyone who is a dependent of another taxpayer is not eligible for the credit and the purchaser must be at least 18 years of age on the purchase date. Also, no credit is available for homes purchased for more than $800,000.
Remember that the credit is limited to 10% of the purchase price up to the maximum credit available. However the income limits have been raised to singles with modified adjusted gross income (MAGI) of $125,000 ($250,000 for joint filers). Beyond that the credits are subject to phase out between $125k and $145k for singles and $225k to $245k for joint filers. Those with higher incomes do not qualify. For homes purchased prior to November 7 the old MAGIs remain in place.
Members of the Armed forces and certain federal employees serving outside the U.S. have a one year extension to buy by April 30, 2011 and settle by June 30, 2011.
Those who qualify for the credit for purchases made after November 6 can accelerate their refunds. Credits for home purchases made in 2009 can be claimed by amending their 2008 tax returns for the refund. Credits for purchases made in 2010 can be claimed on their 2009 tax returns. Pre Nov. 6 purchasers should use the existing Form 5405 to calculate the credit on their tax returns. Post November 6 purchasers need use the new revised Form 5405. Taxpayers claiming the credit may not file their returns electronically but must “paper” file.
Other Provisions of HR 3548
Unemployment benefits have been extended for an additional 14 weeks in all 50 states (20 weeks for states with an unemployment rate of at least 8%).
For employers, the FUTA surcharge of .2% is extended through June 30, 2011.
NOL Carry back: Businesses, regardless of size, can now carry back business taxable losses up to five years. There is no limit on the amount of loss carried back four years however losses carried back to the fifth year prior are limited to 50%. This provision is not available to businesses that received TARP funds. Losses for either 2008 or 2009 can be carried back, but not both.
Mandatory E-filing: Tax preparers who file more than 10 tax returns are required to E-File. Be certain that your tax professional is qualified by the IRS as an E-File provider. Also NYS filers should be aware that Governor Patterson has announced a penalty for filing a paper return.
Penalty Increases: S Corporations and partnerships that do not file a timely return now must pay penalties of $195/month for each shareholder.
Sales Taxes on NEW car purchases in 2009 are added as an additional deduction for both those who claim the standard deduction as well as those who deduct state income taxes instead of sales tax. So if you purchased a NEW car in 2009 be sure to have the purchase contract at tax time.
AMT: Those who pay AMT may either see a tax benefit or a tax bite! If you deduct state income tax the additional New auto purchase sales tax is NOT an add back for AMT. But if you are in a low state income bracket (as many retirees are) or live in a low or no income tax state (such as Florida) the additional New car sales tax deduction must be added back in determining your minimum tax.
SBA loans: Small businesses that qualify for assistance under the special stimulus program because they are at risk of defaulting on loans may be able to borrow up to $35,000 from a lender to help make payments on business loans. The SBA will pay the interest on the loans and the repayment of the SBA loan will be deferred for up to 12 months. HOWEVER, I recently read a news report that insufficient funds were allocated to this special SBA program and the SBA has run out of money. Stay tuned for new developments.
ENERGY SAVING IMPROVEMENTS: IF you are planning to make energy saving improvements to your home DO SO BEFORE 12/31/2009! You can take a non refundable credit for 30% of the cost of high efficiency home heating and air conditioning systems, water heaters and biomass stoves placed in service in 2009. The tax break is capped at $1,500. Although the credits extend through 2010 making installing the devises now can accelerate your tax savings.
Installing additional alternative energy equipment can also save you money for 2009. Providing the equipment qualifies (you can rely on the manufacturer’s certification) or visit www.kipplinger.com for details on qualifying products. The credit is 30% of the full cost of energy efficient solar electric systems, fuel cells, solar hot water heaters, geothermal heat pumps and wind turbines. But the credit is limited to $500 per ½ kilowatt of power capacity.
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