Pending legislation complicates year-end tax planning

As 2009 comes to a close, it’s a good time to review your year-end tax planning strategies. Many traditional strategies are still effective for this year but you need to keep in mind the impact of pending federal legislation. Congress is debating health care reform, a possible second stimulus bill, extending many temporary tax breaks, and more.
Health care reform

Lawmakers are searching for ways to fund health care reform. The House Ways and Means Committee proposed a surtax on higher-income taxpayers. The Senate Finance Committee would impose a tax on high-dollar health insurance plans. Both proposals are controversial and it is unclear at this time if either or none will be part of a final bill. We’ll keep you posted on developments.

More definite are new restrictions on health flexible spending arrangements (FSAs) and health savings accounts (HSAs). Lawmakers are expected to cap annual maximum contributions to health FSAs at $2,500 (there is no limit under current law, although an employer is free to impose a limit). Moreover, you would no longer be able to purchase over-the-counter medications with health FSA dollars; only medicines with prescriptions would qualify. Congress may also double the additional tax for HSA withdrawals before age 65 that are not used for qualified medical expenses. If you have a health FSA or HSA, please contact our office and we can discuss ways to maximize its benefit.

Second stimulus

Congress is expected to approve an extension of federal unemployment benefits before year-end and may also extend the $2,400 exclusion of those benefits from tax. That’s good news for individuals without employment. The bill would have even broader impact if lawmakers use it as a vehicle for a “second stimulus.”

One of the most likely incentives to be attached to an unemployment benefits bill is the first-time homebuyer credit, which expires after November 30, 2009. For many individuals, the window of opportunity for taking advantage of the credit has already passed because you must close on a new home before December 1, 2009 to qualify for the credit rather than just sign of contract of sale before that date.

Several bills are pending in Congress to extend the first-time homebuyer credit. One proposal would extend the credit through December 1, 2010 and raise it to $15,000 (the current cap is $8,000). Another bill would eliminate the rules that generally limit the credit to lower and moderate-income individuals. If you are considering a home purchase, please contact our office and we can discuss this valuable credit in more detail.

Other provisions that could be attached to an unemployment benefits bill include extending COBRA premium assistance, the American Opportunity Tax Credit for college tuition, and the state and local sales tax deduction for motor vehicle purchases. Congress is also considering a new tax credit to reward employers that create jobs. Several ideas have been floated. One proposal would provide a $3,000 tax credit for each qualified new job created in 2010. Even though there is support for extending these provisions, Congress will want to keep the cost of any bill as low as possible.

Extenders

Taxpayers are often surprised to learn that many popular tax breaks, such as the state and local sales tax deduction, are only temporary. Congress made them temporary so they would not permanently add to the federal budget deficit. Because they are so popular, however, Congress usually has extended them in the past. Some of the incentives, like the research tax credit, have been extended so many times that some taxpayers incorrectly believe they are permanent.

For year-end tax planning purposes, it’s important to remember when these tax breaks will expire. Many of them are scheduled to sunset after December 31, 2009, unless Congress extends them.

Here are some of the tax breaks for individuals that are scheduled to expire after December 31, 2009:

• Temporary tax relief to victims of all federally-declared disasters;
• State and local sales tax deduction;
• Teachers’ classroom expense deduction;
• Higher education tuition deduction;
• Non-itemizers state and local real property tax deduction; and
• Tax-free distributions from IRAs for charitable contributions.

Some of the incentives for businesses that are scheduled to expire after December 31, 2009 include:

• Code Sec. 179 small business expensing;
• Bonus depreciation;
• Expanded net operating loss carrybacks for small businesses;
• Enhanced recovery periods for qualified leasehold improvements and restaurant property;
• 15-year recovery period for qualified retail improvement property;
• Brownfields remediation expensing;
• Subpart F active financing and look-through exceptions;
• Deduction for corporate donations of computer equipment for educational purposes; and
• Special expensing rules for film and production costs;

Because these incentives are popular, there’s a high likelihood that Congress will extend many, if not all, of them. Congress could extend these provisions before year-end or wait until next year and make them retroactive to January 1, 2010. Our office will alert you of developments.

Please contact our office is you have any questions about pending federal tax legislation

How Do I? Net capital gains and losses for year-end tax planning?

In order to effectively plan your investment transactions, you have to understand how, under federal tax law, you need to net or “offset” capital gains and losses that you experience. Netting your capital gains and losses can help achieve lucrative tax savings benefits and should be part of your year end tax strategy if you sell capital assets that result in gains and losses in 2009.

Historic lows

The current, historically low capital gains tax rates for 2009 and 2010 are only temporary. The current maximum rate of 15 percent is scheduled to sunset after 2010, as will the zero percent rate for individuals in the 10 and 15 percent income tax brackets. For 2011 and thereafter, the maximum long-term capital gains rate of 15 percent reverts to 20 percent, and for taxpayers in the 10 and 15 percent tax brackets, the capital gains rate increases to 10 percent, unless Congress takes action to extend the lower rates.

The Obama administration has signaled support for maintaining the lower capital gains rates for all but higher-income taxpayers. The Obama administration has proposed to increase the tax rate to 20 percent for single individuals with incomes above $200,000. The tax rate would also increase to 20 percent for married couples filing jointly whose incomes exceed $250,000. The higher rates would apply to tax years beginning after December 31, 2010.

Caution. Although qualified dividends are also taxed at the long-term capital gain rate (a maximum 15 percent), you cannot treat them as long-term capital gains for purposes of netting capital gains and losses. They are taxed independently of that process.
Important holding periods

Capital gains are taxed at different rates depending on how long you have held the asset. Capital gains and losses are classified as long-term (you’ve held the property for more than 12 months) or short-term (you’ve held the property for 12 months or less), also depending on how long you hold the property before you sell it. Net capital gain is the amount by which your net long-term capital gain is more than your net short-term capital loss.

Note. Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.

Netting

Under the basic netting procedure, your total short-term capital gains and losses, and your total long-term capital gains and losses must be figured separately.

Note. Netting applies to all capital assets. There is no separate netting of stocks with stocks, for example. However, many individuals find that stocks are the only capital assets they have sold each year on a regular basis.

Your short-term capital losses (including short-term loss carryovers from a prior year) are applied first against your short-term capital gains (which would be taxed at ordinary income tax rates), if any.

If you have a net short-term loss at this point, it would then be applied against your net long-term gain. If you have a net short-term gain after netting against long-term losses, then your short-term gain is taxed at ordinary income tax rate. The netting process lets you offset your net long-term capital loss against any net short-term capital gain.

You can deduct from your ordinary income a net capital loss of up to $3,000. You can carry forward any unused net capital loss for an unlimited number of years until it is used up. Unlike a corporation, however, you generally cannot carry a capital loss back to an earlier year (although there are some specific exceptions).

Net short term capital gain (from assets held for 12 months or less) is taxed at the same rates as your ordinary income. Both long-term and short-term capital losses can always be used to offset capital gains, as well as up to $3,000 of ordinary income. However, an individual can only use $3,000 ($1,500 for married individuals filing separately) of net capital losses left after reducing capital gains by capital losses to off set ordinary income in any one year.

Moreover, if your net capital losses exceed the $3,000 deduction limit, you can deduct $3,000 of your losses against ordinary income and carry over the excess loss to the following year. The excess losses that are carried over can then be netted against capital gains in that year with any excess again deductible against ordinary income up to $3,000.

The $3,000 amount has not changed for many years. It is one of the few provisions in the Tax Code that is not indexed for inflation. Bills to increase the allowable amount have been introduced in Congress but so far none has come close to passage.

Example

In 2008, Mary had $30,000 of ordinary income, a net short-term capital loss of $2,000, and a net long-term capital loss of $3,000. Mary’s total capital loss deduction is $5,000. She can use $3,000 of her net losses to offset her ordinary income in 2008, and then carry over the remaining $2,000 of net capital losses to be used in 2009.

Caution. In selling securities, you also may have to contend with what’s known as the “wash sale” rule. This rule prevents you from realizing a capital loss if you engage in buy and sell transactions of “substantially identical” assets within 30 days of each other.

FAQ: Can I prepay mortgage interest and taxes to maximize 2009 deductions?

If you own a home, the interest you pay on your home mortgage may be one of your most valuable tax breaks available each year. The home mortgage interest deduction is a particularly important tax break in the early years of a home loan, when most of a homeowner’s payments each month go toward interest. In addition to home mortgage interest, two other valuable home-related deductions include the “points” (also known as loan origination fees or loan charges) associated with the loan as well as your property taxes.

To claim all of these deductions, however, you must itemize. In 2009, you might consider pre-paying a portion of your mortgage interest due in 2010, as well as possibly your real estate taxes, subject to certain limits. Prepaying your mortgage interest and real property taxes can be an effective year-end tax strategy, boosting the value of these tax deductions for 2009.

Mortgage interest and points

You may deduct “qualified residence interest” that you incur on up to $1 million that you borrowed to buy, build, or “substantially improve” your principal and/or a second residence, as long as the debt is secured by the home. You can also deduct interest paid on up to $100,000 of home equity debt incurred for any purpose. Moreover, you can generally deduct late fees and prepayment penalties incurred in connection with your mortgage debt.

Points. Points (also referred to as loan origination fees, loan discounts, discount points, or maximum loan charges) may also be deductible as interest. Points generally represent the cost of borrowing money (and can also include certain charges paid by the seller to a lender for the buyer’s mortgage). Points must generally be amortized over the life of the mortgage. However, you may deduct points in full in the year they are paid if:

– The loan is used to purchase or improve your principal residence;

– The loan is secured by the residence;

– The points did not exceed the points usually charged in the area where the loan was made; and

– The points were computed as a percent of the amount of the loan.

Mortgage interest deduction

Generally, home mortgage interest is claimed as an itemized deduction on your Form 1040, Schedule A (Itemized Deductions). You cannot deduct your mortgage interest if you use Form 1040A or Form 1040EZ, however. If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you will typically receive a Form 1098, Mortgage Interest Statement, or similar statement from your mortgage holder. This is the statement used for reporting mortgage interest received. Your mortgage lender is required to provide you, as well as the IRS, with a copy of the Form 1098 reporting the mortgage interest you paid during the year. You should typically receive the Form 1098 for mortgage interest you paid in 2009 by January 31, 2010.

Pre-paying your January 2010 mortgage interest in 2009

Mortgage interest that you owe for January 2010 is deductible in 2009 if paid in December (by December 31). Typically, home mortgage interest is paid in the month following its accrual. For instance, a January mortgage payment generally pays December’s interest. As such, if you pay your January 2010 mortgage interest payment by December 31, 2009, you can deduct your December interest in 2009 rather then in 2010.

Prepaying interest will not reduce the principal on your loan. Paying down the principal may be a better strategy than using the funds to prepay interest. You should also consider paying down debt for which the interest is not deductible (for example, credit card debt). Additionally, you’ll need to consider your other itemized deductions for 2009. Our office can help you explore the pros and cons of all these strategies.

To ensure that your prepaid January 2010 mortgage interest payment is reflected on your 2009 Form 1098, you will want to make the mortgage interest payment by mid-December 2009. If you make your mortgage interest payment after your lender’s 1098 is calculated, and sent to the IRS, you will have to compute the additional interest yourself and add it to the amount reported on your 1098. As a practical matter, too, some mortgage lenders have a policy, or even a clause in the mortgage note, not to accept any advance payment as a pre-payment. They will often balk at issuing a Form 1098 that states otherwise. Simply picking up the phone and confirming your bank’s policy before you move ahead with this strategy is often any easy solution to any uncertainty down the road.

Pre-paying property taxes

You may also want to consider prepaying property taxes. You may be able to prepay your 2010 property taxes by December 31, 2009 if property tax prepayment is allowed by your local tax assessor. You should contact your local property tax collector’s office to determine if prepayment is allowed. If your property taxes are collected in escrow by your mortgage lender, remember also that any prepayment of taxes to your lender is not considered a property tax payment for IRS purposes until the lender remits the payment to the property taxing authorities.

Real property taxes are generally claimed as an itemized deduction on Schedule A of your Form 1040. However, a temporary tax incentive for the 2009 tax year allows taxpayers who claim the standard deduction to also claim an additional standard deduction for property taxes, up to $500 individually and $1,000 for married couples filing a joint return.

November 2009 tax compliance calendar

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of November 2009.

November 4

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 28-30.

November 6

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 31-November 3.

November 10

Employees who work for tips. Employees who received $20 or more in tips during October must report them to their employer using Form 4070.

November 12

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 4-6.

November 16

Monthly depositors. Monthly depositors must deposit employment taxes for payments in October.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 7-10.

November 18

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 11-13.

November 20

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 14-17.

November 25

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 18-20.

November 30

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 21-24.

Year-end planning techniques can maximize tax savings

As the end of 2009 approaches, it is a good time to start year-end tax planning. Between now and December 31, 2009, there is time to put in place some tax saving strategies. Many of these strategies are familiar ones; others are tailored to these challenging economic times.

Individuals

One of the tried and tested year-end planning methods is income and expense shifting. Basically, you aim to smooth out taxable income between 2009 and 2010 by accelerating and postponing transactions that either produce income or yield deductible expenses. This technique works best if you can reasonably forecast your income and expense situation in the first few months of 2010.

One complicating factor this year is the recession. For many individuals, the end of 2009 is very different from the beginning of the year. Salaried workers and their spouses may have experienced a lay-off, furlough or reduction in hours at work. Self-employed individuals may be struggling with cash-flow problems. Many retired individuals are also having a hard time coping during the recession. Investment income is down and some retirees have re-entered the job market.

Fortunately, there are some provisions in the Tax Code that can help. For example, job hunting expenses may be deductible. The first $2,400 in unemployment benefits is tax-free. If you relocate to take a new job, moving expenses may also be deductible.

Besides employment, other life events have tax consequences. Marriage, divorce and children all impact your federal tax status. Some of the most overlooked tax incentives are targeted to children. If you paid someone to care for a child, spouse, or dependent, you may be able to reduce your tax by claiming the child and dependent care credit on your federal income tax return. This credit is separate from the child tax credit, which is $1,000 per qualifying child for 2009. There is also an adoption tax credit.  Many parents are using Coverdell Education Savings Accounts to put aside funds for a child’s schooling. Although the contributions are not tax-free, the distributions, if used for qualified education expenses, are tax-free. There is also an expanded education tax credit, the American Opportunity Tax Credit, which can help with college tuition costs.

For 2009, state and local sales taxes are also deductible (in lieu of state and local income taxes). This benefit may be especially valuable if you are planning a big-ticket purchase in the near future. Another popular tax incentive will expire before the end of 2009: the first-time homebuyer credit is set to expire after November 30, 2009. Several bills have been introduced in Congress to extend the credit another year. Our office will keep you posted on developments.

Wage-earners and pension recipients also need to plan for the Making Work Pay Credit. This payroll credit was enacted in early 2009. Employers and some pension plans are withholding less federal income tax. The impact of the Making Work Pay Credit varies significantly, depending on a taxpayer’s earned income, filing status and number of withholding allowances. The credit phases out for a single taxpayer who has modified adjusted gross income (AGI) between $75,000 and $95,000, and for married couples filing jointly whose modified AGI is between $150,000 and $190,000. Individuals with more than one job and married couples with two incomes may be surprised when they file their taxes in 2010 to discover that they are receiving a smaller refund or owe money.  If you have not yet adjusted your withholding for 2009, now is the time to act.

IRA conversions

A lot of folks are talking about IRA conversions. Starting in 2010, anyone can convert a traditional IRA to a Roth IRA regardless of their income and other current restrictions. You can choose to recognize income from the conversion in 2010 or average it out over 2011 and 2012. President Obama has proposed raising the top two individual marginal income tax rates after 2010. If you are considering an IRA conversion, you may want to do it next year and recognize the income in 2010. However, be cautious. The new IRA conversion rules are generous but not for everyone. Our office can help evaluate if an IRA conversion fits your savings strategy.

Small businesses

Small business expensing under Code Sec. 179 is at an all-time high this year ($250,000). The threshold for reducing the deduction is $800,000. The higher amounts are set to expire after 2009. Businesses that have been contemplating a purchase need to act soon if they want to take advantage of the more generous Code Sec. 179 expensing amount. The expensing amount will fall to $134,000 in 2010 unless Congress extends it.

Another business tax break - bonus depreciation - will also expire at the end of 2009. Fifty percent bonus depreciation is taken on top of the regular depreciation for the year the property is placed in service. Keep in mind that a larger current depreciation deduction results in smaller future deductions.

Many small business owners operate their businesses as sole proprietorships or partnerships. The expected increase in the top two marginal income tax rates after 2010 will also affect them. It is not too early to start planning for those anticipated rate hikes.

Small businesses should have a year-end retirement plan check-up. The Obama administration and the IRS recently announced some measures to encourage small businesses to offer a retirement plan or expand an existing plan. Our office can help you choose a retirement plan that is right for your small business.

Special considerations this year

Because of the recession, many individuals cannot meet their tax debts. The IRS is aware of how families are struggling and has promised to help. You may qualify for an installment agreement, which allows you to pay your taxes over time. The IRS might also accept an offer-in-compromise. Some individuals are uncomfortable by how the recession has impacted them. Don’t be. If you have unresolved debts with the IRS, let our office know now. We can work with the IRS on your behalf.

The same is true for small business owners. Frankly, the IRS is less sympathetic to business owners that fall behind in their tax obligations, especially payroll taxes, than with individuals. It may be tempting to skip a payroll tax deposit. This is a dangerous tactic and will result in severe penalties. Again, our office can help you work with the IRS.

As always, please contact our office if you have any questions about year-end tax planning. The earlier you get started, the better you can maximize your potential tax savings.

FAQ: What tax breaks are officially ending this year?

The end of the 2009 year will also spell the end of many tax breaks for both individuals and businesses. Some of these tax breaks are “temporary” credits and deductions that Congress typically extends for another year or two at the last moment. Other sunsetting provisions are relatively new, with no previous track record on their being extended. In either case, however, the unfamiliar economic climate in which our nation finds itself makes predicting whether Congress will find the funding necessary to extend any particular tax break this time around, beyond 2009, a matter of guesswork. The following is a list of important tax breaks expiring at the end of 2009.

A word to the wise: if you can take advantage of any tax break on this list before 2009 closes, do so. At this point, you cannot -and should not– count on having any of them available in 2010.

Homebuyer tax credit. The first-time homebuyer tax credit expires sooner rather than later in 2009. That is, the credit expires November 30 - the credit provision requires that the residence be “purchased” by November 30, with “purchase” defined as taking place when title passes and the full purchase price is paid (that is, at the “closing”) and not earlier when the contract of sale is executed and a down payment is escrowed. The credit is equal to 10 percent of the purchase price of a principal residence, up to $8,000. It applies to homes purchased after December 31, 2008, and before December 1, 2009.

Itemized state and local sales tax deduction. The ability to deduct state and local sales taxes in lieu of state and local income taxes is available until December 31, 2009, when the itemized state and local sales tax deduction expires.

Higher education tuition deduction. The higher education tuition deduction, permitting taxpayers to take an above-the-line deduction for qualified tuition and related expenses, will expire this year. The maximum deductible amount is $4,000 for taxpayers with adjusted gross income not exceeding $65,000 ($130,000 for joint filers). Taxpayers whose income exceeds that limit but does not exceed $80,000 ($160,000 for joint filers) may deduct up to $2,000 in qualified expenses.

Additional standard deduction for real property taxes. If you claim the standard deduction and also have real estate taxes, you can take an increased deduction ($500 for individuals and $1,000 for married couples filing jointly) for your real estate taxes. This tax break is scheduled to expire at the end of 2009.

Teachers’ classroom expense deduction. The $250 above-the-line deduction for qualified classroom expenses will expire at the end of 2009. The deduction benefits teachers and other educators, from teachers’ aides to school principals, who used their own out-of-pocket money to purchase qualified classroom supplies, such as notebooks, scissors, paper, pens, markers and books. As an above-the-line deduction, the $250 tax break is available to non-itemizers as well.

Bonus depreciation. For businesses, bonus depreciation and enhanced “section 179 expensing,” both designed to - temporarily - encourage business to make capital investments, are set to expire at the end of 2009. Bonus depreciation can be claimed for both regular tax and alternative minimum tax (AMT) liability unless the taxpayer makes an election out.

Enhanced Code Sec. 179 expensing. Enhanced “section 179 expensing,” is set to expire at the end of 2009 in addition to bonus depreciation, as mentioned above. Qualified taxpayers may deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture, and other qualifying property placed in service during 2009. The $250,000 amount is reduced if the cost of all Code Sec. 179 property placed in service by the taxpayer during the tax year exceeds $800,000.

Research and development credit. The research and development, or R&D credit, is set to expire at the end of 2009. The credit is available for businesses that increase their research expenses. The credit is 14 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding tax years.

COBRA subsidy. The COBRA premium assistance provided as part of the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) will not benefit individual involuntarily terminated from employment after December 31, 2009. The COBRA subsidy is only available to individuals involuntarily terminated from work between September 1, 2008 and December 31, 2009 The COBRA subsidy under the 2009 Recovery Act provides for individuals to pay only 35 percent of their COBRA premiums with employers paying the remaining 65 percent, for nine months.

Unemployment compensation. Although unemployment compensation is typically taxable income, the 2009 tax year provides a respite from taxability for up to $2,400 of unemployment income. However, the exclusion from taxable income for unemployment compensation is only available for 2009, and will expire at the end of the year unless Congress acts to extend this benefit.

Motor vehicle sales tax deduction. The deduction for sales tax paid on the purchase a new motor vehicle is available for vehicles purchased between February 17, 2009 and December 31, 2009. Taxpayers can deduct state and local sales and use taxes paid on the first $49,500 of the purchase price of the vehicle. The deduction can be taken whether or not the taxpayer itemizes deductions. However, if you deduct state and local general sales taxes as an itemized deduction, you cannot “double dip” and take the deduction for new car sales taxes.

AMT exemption amounts. For 2009, the AMT exemption amounts increased to $46,700 for individuals and $70,950 for married taxpayers filing jointly. However, these exemption amounts will decrease in 2010 to $33,750 for single taxpayers and $45,000 married taxpayers filing jointly.

Our office will continue to monitor the situation in Washington to be ready to advise you if any of the provisions set to expire at the end of 2009 are extended. With Congress busy with health care reform, the likelihood is that the fate of most if not all of the expiring provisions will remain uncertain for some time. In fact, some in Congress have been quietly discussing the possibility of not passing any extension until next year, and then making it retroactive to January 1. Stay tuned.

October 2009 tax compliance calendar

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of October 2009.

October 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 26-29.

October 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates September 30-October 2.

October 9

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 3-6.

October 13

Employees who work for tips. Employees who received $20 or more in tips during September must report them to their employer using Form 4070.

October 15

Monthly depositors. Monthly depositors must deposit employment taxes for payments in September.

Small business NOL election. Qualifying calendar-year unincorporated small businesses (and S corporation shareholders) with 2008 net operating losses (NOLs) must file an election by this date to carry back losses for up to five years, rather than the usual two years.

Offshore bank account information. Last day to request participation in the IRS’s offshore voluntary compliance initiative. Also, last date under IRS extension relief to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).

October 16

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 10-13.

October 21

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 14-16.

October 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 17-20.

October 28

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 21-23.

October 30

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 24-27.

New tax deadlines fast approaching for individuals and businesses

Tax deadlines have long broken out of the mold of being exclusively set at April 15 for individuals and March 15 for businesses, generally with no important dates falling in between. From September through November of this year, recent tax legislation and IRS programs have created a handful of important new deadlines that may be easy to miss without a list. Some old dates, too, have a few new wrinkles.

Here is a checklist of upcoming deadlines, designed to alert you to opportunities or that are time sensitive. Please call our office immediately if you identify any deadline that may apply to your situation. We can help you avoid missing out on tax incentives or being subject to penalties if forms are not filed on time.

September 15/ October 15: NOL carryback deadline

The 2009 Recovery Act allows eligible small businesses (with average gross receipts of $15 million or less over three years) to elect a longer carryback period — up to five years — for 2008 losses. A small business that wants to take advantage of the three, four or five-year carryback period for 2008 losses must file an election with the IRS to use the longer period. Taxpayers can make the election on an original return (Forms 1040, 1041, 1065, and 1120) or an amended return (Forms 1040X, 1045, 1120X, or 1139).

Calendar year businesses. The filing deadline is September 15, 2009 for a corporation on the calendar year. The deadline is October 15, 2009 for an individual on the calendar year. The October 15 deadline includes a sole proprietor that qualifies as an eligible small business, an individual partner in a partnership that qualifies as an eligible small business and a shareholder in an S corporation that qualifies as an eligible small business.
Fiscal year businesses. A corporation on a fiscal year that ends March 31, 2009 must make the carryback election by December 15, 2009. An individual on a fiscal year ending March 31, 2009 could make the election by January 15, 2010.

September 15: Individual estimated tax payments due

Individuals who are required to make quarterly estimated tax payments must make payments on September 15. Failure to pay estimated tax in a timely manner may result in the IRS’s assessment of penalties.

Thanks to another temporary relief provision in the 2009 Recovery Act, estimated tax payments of “qualified individuals” for tax years beginning in 2009 may be based on 90 percent of the individual’s prior year’s tax liability (rather than the usual 100 percent amount). An individual is a qualified individual if the adjusted gross income shown on the individual’s return for the preceding tax year is less than $500,000 and more than 50 percent of the gross income shown on the return for the preceding tax year is from a business which employed fewer than 500 employees on average during the calendar year that ends with or within the preceding tax year of the individual.

September 23: FBAR reporting deadline

Taxpayers maintaining any type of financial account in a foreign country are required to report this information to the U.S. government. Taxpayers must used Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (known as the “FBAR”), if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year. While the deadline each year is usually June 30 of the following year, most taxpayers this year have been given an extension to complete and file the FBAR until September 23, 2009 (some with only “signature authority” have longer). Also under an IRS offshore compliance initiative, US taxpayers who disclose their secret bank accounts by September 23, 2009, will be given special consideration for leniency from criminal prosecution.

October 15: Due date for individual tax returns filed under an extension

Individuals have until October 15 to file their individual federal income tax return for 2008, Form 1040, if they are filing on an extension. Not only will missing this deadline mean incurring a failure to file penalty and interest, but certain valuable tax elections can be made only on a timely filed return.

October 15: Deadline for undoing Roth conversion

If you converted from a traditional IRA to a Roth IRA in 2008, but for one reason or another want to undo the conversion, you have until October 15, 2009 to do that as well. Especially if the value of your investments in your IRA has dropped significantly since you converted from a traditional IRA to a Roth IRA, you may want to reconvert and then convert again at the lower value. This can save you from paying income tax on the amount by which your converted account has decreased.

Moreover, if you made a contribution to a traditional IRA or Roth IRA in 2008, but since determined that you should have contributed the money to the other type of account, you still can. If you act before October 15, 2009 you can recharacterize your IRA contribution.

Undoing your Roth IRA conversion, or a contribution to either account, must be made before October 15, 2009, and only if you have filed your 2008 return by April 15, 2009 (or, if you obtained a filing extension, by that extension due date). If you already filed your 2008 return, you will need to file an amended return for 2008.

November 26, 2009: Cancellation of indebtedness income deferral election

The 2009 Recovery Act gives businesses an election to defer cancellation of indebtedness income (COI) from the “reacquisition” or repurchase of debt in 2009 or 2010. The income is deferred until 2014 and only then must be reported ratably over five years, through 2018. An election will be treated by the IRS as effective if the taxpayer files an election with the taxpayer’s federal income tax return filed on or before September 16, 2009. However, an election that does not comply with section 4 of Rev. Proc. 2009-37 (involving election procedures) will not be effective unless the taxpayer on or before November 16, 2009, files an amended return for the taxable year of the election.

A taxpayer who filed an election by the original September 16, 2009 deadline can modify the election (for instance, to change the amount deferred) by filing an amended return by November 16, 2009 with a revised election.  

November 30, 2009: First-time homebuyer tax credit
The deadline for being entitled to the first-time homebuyer tax credit is fast approaching. The credit sunsets after November 30, 2009. The 2009 Recovery Act raised the maximum credit to $8,000 for 2009. Individuals have until November 30, 2009 to make a first-time home purchase that qualifies for the $8,000 credit. A “purchase” for this purpose takes place when title closes (that is, at the “closing”) and not when the contract of sale is signed. The credit is claimed on Form 5405, First-Time Homebuyer Credit.

Roth Conversions - Should you wait for 2010, if at all?

There are a number of advantages for starting a Roth IRA account, the most important being that all the investment earnings grow tax-free, and qualified distributions are tax-free. Additionally, you can continue to make contributions to your Roth after you turn 70 ½ and are not subject to the required minimum distribution rules. Currently, only individuals who have a modified adjusted gross income (AGI) of less than $100,000 and/or who do not file their return as “married filing separately” can convert their traditional IRA to a Roth.

However, beginning in 2010, everyone, no matter what their income level or filing status, will be able to have a Roth IRA. The question that remains to determine is when you should convert, if at all.

Spreading out your tax liability

A conversion is treated as a taxable distribution, but is not subject to the 10 percent early withdrawal penalty. However, taxpayers who convert to a Roth IRA in 2010 (and 2010, only) have the ability to pay taxes on the converted amount ratably over two years, in 2011 and 2012. Therefore, if you convert to a Roth in 2009, you must recognize the entire converted amount in income on your 2009 tax return.

Changes for 2010

In 2010, the $100,000 modified AGI cap that has prevented many individuals from converting from their traditional IRA to a Roth, is completely eliminated. Moreover, the filing status limitation will also be done away with, meaning that married couples filing separately will be able to convert to a Roth IRA as well. However, all other rules continue to apply, and any amount you convert to a Roth IRA will still be taxed as ordinary income at your marginal tax rate. The exception for 2010, of course is that you will have the choice of recognizing the conversion income in 2010 or averaging it over 2011 and 2012.

Example 1. You have $28,000 in a traditional IRA, which consists of deductible contributions and earnings. In 2010, you convert the entire amount to a Roth IRA. You do not take any distributions in 2010. As a result of the conversion, you have $28,000 in gross income. Unless you elect otherwise, $14,000 of the income is included in income in 2011 and $14,000 is included in income in 2012.

Example 2. On the other hand, if you currently meet the AGI and filing status requirements to convert to a Roth IRA (that is, your AGI for 2009 will be less than $100,000 and your filing status is not “married filing separately” you can also convert this year. But, you will recognize all the conversion income in 2009 instead of having it spread over two years. Therefore, if in the example above you convert the entire $28,000 to a Roth IRA in 2009, you will pay tax on the entire $28,000 conversion amount in 2009.

Taking advantage of lower tax rates

Currently, the income tax rates are at a historic low. But these rates are scheduled to revert to previously higher levels (and rise further for some taxpayers) after 2010. The Obama administration has proposed extending the lower individual marginal income tax rates but raising the two highest income tax brackets to 36- and 39.6-percent after 2010. This should be considered in your decision of when (and if) to convert to a Roth in 2010, or now in order to take advantage of the lower income tax rates, especially if you expect to be in one of the two highest income tax brackets after 2010.

Conversions in years after 2010 will be included in your income during the tax year in which you completed the conversion to a Roth IRA. While deferring tax is a traditional and beneficial part of tax planning, if you convert in 2010 the tax will be spread out ratably in 2011 and 2012, and therefore taxed at the rates in effect for 2011 and 2012 (which as mentioned could be higher for some taxpayers). Thus, if income tax rates go up, which they are anticipated to do, you may end up paying much more tax. Therefore, if you do not want to take this chance that your income rate will be higher in 2011 and 2012, you may want to elect to pay the full tax on the Roth conversion in your 2010 income tax return, at 2010 income tax rates.

So why would you accelerate a conversion? If you believe your IRA assets are currently valued on the low side, you might opt for a conversion if you are below the $100,000 AGI level for 2009. This reduces your tax liability on the conversion. Similarly, if you converted within the past year and the value of the assets has declined since then, you can elect to “undo” the conversion. Otherwise, you will have paid tax on the conversion when the assets were at a higher value.

Undoing the conversion later

If you convert to a Roth IRA, but later change your mind, you have until Oct. 15 of the year after the year of conversion to undue the transaction and go back to your traditional IRA. For example, if you convert in 2009, you will generally have until October 15, 2010 to recharacterize the transaction. However, to do this you must have filed your individual tax return by the normal filing deadline (April 15, generally) or if you obtained an extension, the extension due date.

For example, if the value of your Roth drastically declines after the conversion, and leaves you essentially with a Roth IRA value that is even less than the tax you paid to convert, this would be a good reason to undo the transaction. Recharacterizing the conversion would undo the tax consequences and therefore you’d get back the tax you paid on the larger amount that was converted to the Roth IRA.

Can you afford the conversion tax?

You will have to pay a conversion tax on the transaction, which can be a significant sum. In spite of all the advantages of a Roth IRA, a conversion is generally advisable if you can readily pay the tax generated in the year of the conversion. If the tax is paid out of a distribution from the converted IRA, that amount is also taxed; and if the distribution counts as an early withdrawal, it is also subject to an additional 10 percent penalty. For those planning to convert who may not already have the funds available, saving now in a regular bank or brokerage account to cover the amount of the tax in 2010 can return an unusually high yield if it enables a Roth IRA conversion in 2010 that might not otherwise take place.

Determining whether to convert to a Roth IRA can be a complicated decision to make, as it raises a host of tax and financial questions. Please call our offices if you have any questions about the Roth IRA conversion opportunity.

Using fringe benefits as an income substitute during the economic downturn

Many businesses are foregoing salary increases this year because of the economic downturn. How does a business find and retain employees, as well as keep up morale, in the face of this reality? The combined use of fringe benefits and the tax law can help. Some attractive fringe benefits may be provided tax-free to employees and at little cost to employers.

De minimis fringe benefits

A de minimis fringe benefit is any property or service whose value is so small or minimal that accounting for it would be administratively impracticable. Such benefits are excluded from an employee’s gross income. Examples of de minimis fringe benefits include:

Occasional overtime meals and meal money. To qualify as a tax-free de minimis fringe benefit, the meal or meal money must be provided to your employees so that they can extend their normal workday, thereby enabling them to work overtime. Such meals and meal money can only be provided occasionally. This means that they generally cannot be provided routinely, when overtime work is a common occurrence or are contractually mandated for overtime work. Occasional snacks may also qualify as a de minimis fringe benefit but if the snacks are provided daily, they would not qualify.

Occasional transportation. Transportation costs can also qualify as de minimis fringe benefits. Taxi-fare for an employee to return home after working late, for example, may be a de minimis fringe benefit. The transportation must be occasional.

Holiday gifts. Traditional holiday gifts, such as a Thanksgiving turkey, with a low fair market value can generally qualify as a de minimis fringe benefit. However, cash or a cash equivalent such as a gift certificate in lieu of the property, do not qualify. In fact, cash and cash equivalent fringe benefits, no matter how little, are never excludable as a de minimis fringe benefit, except for occasional meal money or transportation fare.

E-filing. Electronically filing an employee’s tax return, but not paying for someone to prepare the return, may qualify as a de minimus fringe benefit.

Telephone calls. An employer may treat the cost of local telephone calls made by employees as a de minimis fringe benefit.

Working condition fringe benefits

A working condition fringe benefit is any type of property or service provided to your employees to the extent that the cost of such property or services would have been deductible by the employee as a trade or business expense, depreciation expenses, or as if the employee paid for the property/services himself or herself. Working condition fringe benefits have special tax rules for employers and employees.

Vehicles. If an employer-provided vehicle is used 100 percent for business and the use is substantiated, use of the vehicle is considered a working condition fringe benefit. The value of use of the vehicle is not included in the employee’s wages. However, when an employer-provided vehicle is used by the employee for both personal and business purposes, an allocation between the two types must be made. The portion allocable to the employee’s personal use is generally taxable to the employee as a fringe benefit. The portion allocable to business use is generally considered a working condition fringe benefit and is excludable from the employee’s income. 

No additional cost services

If an employer-provided service does not cause the employer to incur any substantial additional costs, it may qualify as a “no additional cost service” and be excludible from the employee’s income. The service must be offered to customers in the employer’s ordinary course of business. Some of the most common examples are airline, rail and bus tickets and hotel and motel rooms provided at a reduced rate or at no cost to employees. This benefit can be offered to retired employees as well as active employees. There are special rules for highly-compensated employees.

If you are considering alternatives to salary compensation, and would like to know what your options are, please contact our office. We can discuss the tax benefits and drawbacks of providing your employees with various types of fringe benefits.