Thursday, December 30, 2010

IRS to Verify Refunds for Nonresident Aliens

The Internal Revenue Service should take immediate action to strengthen its controls over the processing of refunds issued to nonresident aliens to prevent such individuals from receiving erroneous refunds, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, noted that failure to address the problem could result in significant losses to the federal government as the questionable refunds issued to nonresident aliens are high and the probability of recovering fraudulent refunds from nonresidents living outside the U.S. very low.

“If the IRS does not take immediate steps to improve its ability to verify refunds to nonresident aliens before the refunds are sent out of the United States, the problem could increase significantly,” warned TIGTA Inspector General J. Russell George in a statement. “TIGTA discussed the control weaknesses we identified with the IRS and it is working on actions to address them.”

Nonresident aliens who receive U.S. sources of income must report and pay taxes on that income and file the U.S. Nonresident Alien Income Tax Return (Form 1040NR) with the IRS. This income is also subject to income tax withholding. In 2009, the IRS processed approximately 598,000 Forms 1040NR for tax year 2008. The total taxes withheld on these returns amounted to more than $2.4 billion and refunds amounted to more than $712 million.

TIGTA performed an audit to determine whether IRS controls ensured that only eligible nonresident aliens receive refunds. TIGTA found that inaccurate and fraudulent Forms 1040NR were not detected during processing. As a result, TIGTA identified a significant number of control weaknesses in the processing of refunds claimed on Forms 1040NR. In some 40 cases of questionable refunds issued to nonresident aliens, the refunds were very high, totaling more than $2.3 million.

TIGTA made six recommendations to the IRS in its report, and the IRS agreed with all of those recommendations.

The public version of the report redacted some of those recommendations, but they included a recommendation that the commissioner of the IRS’s Large and Midsize Business Division should use the foreign country codes on Forms 1040NR to systemically verify that the correct rate of tax is applied according to the applicable tax treaty and should work with the IRS’s Forms and Publications function to clarify the instructions on what constitutes U.S source income in regard to income from multi-level marketing companies.

Wednesday, December 29, 2010

2 out of 5 Americans Feel Less Financially Secure

When asked to compare their financial situation to last year, 42 percent of Americans say they feel less secure now, according to a new Harris Poll.

The poll, of 2,331 adults surveyed online between Dec. 6 and 13, 2010, by Harris Interactive, found that about one-third (36 percent) feel just as secure while one in five (19 percent) say they now feel more secure.

Looking ahead, one-quarter of Americans (26 percent) say they expect the economy to get worse in the coming year while three in 10 (29 percent) expect it to get better and 45 percent say it will stay the same. Last month, 34 percent said they thought the economy would be getting better, 41 percent said it would stay the same, and 25 percent believed it would get worse.

In looking at the job market, just over one in three Americans (13 percent) rate the job market in their region of the country as good while three in five (63 percent) rate it as bad and one-quarter (24 percent) say it is neither good nor bad.

Looking ahead, one-quarter of U.S. adults (25 percent) say they expect the job market to be better over the next six months, one in five (22 percent) say it will be worse and over half (54 percent) believe it will remain the same.

Looking to what people may be doing with regard to their finances in the coming year, half of Americans (49 percent) say they will cut back on their household spending. Two in five say they will pay down their level of debt (41 percent) and save more in the year ahead (40 percent). One in five U.S. adults say they will get rid of one or more credit cards (22 percent) and save more for retirement (22 percent) while 13 percent say they will undertake home improvements that increase the value of their home.

Less than one in 10 say they will invest in less risky investments (8 percent), refinance their mortgage (6 percent) or take out a home equity line of credit (2 percent). And, one in five Americans (18 percent) say they do not expect to do anything differently financially in 2011.

Tuesday, December 28, 2010

Government Orders HSBC to Halt RALs for H&R Block

KANSAS CITY, MO - H&R Block shares fell Monday after it received notice from HSBC that the bank is immediately terminating refund anticipation loans and refund anticipation checks for Block as a result of a regulatory directive from the Office of the Comptroller of the Currency.

The two parties had signed a long-term contract under which HSBC would provide all of H&R Block’s refund anticipation loans and some of its refund anticipation checks. As a result of the order from banking regulators, HSBC told the tax prep giant Friday that it would no longer provide RALs or RACs to H&R Block clients. At the same time, HSBC’s exclusive right to provide such products has also ended, thereby enabling H&R Block to enter into other partnerships for financial products that were previously precluded.

The contract termination is the result of a directive from the OCC, HSBC’s banking supervisory agency, immediately prohibiting HSBC from offering any form of RALs. Shares of H&R Block were down about 8 percent in mid-morning trading on Monday.

H&R Block said it would continue to offer all its customers its traditional RACs that do not require any out-of-pocket costs by taxpayers at the time the tax return is filed. In addition, the company provides direct deposit accounts through its Emerald Card program that allow customers to avoid the delay and cost of paper checks and check-cashing charges through electronic transfers of tax refund proceeds.

H&R Block also provides various other programs to its tax preparation clients, such as its Emerald Advance revolving line of credit product that has been used by more than 4 million customers.

“As a result of the OCC’s decision, millions of taxpayers will be deprived of credit, or they will be forced to use higher-priced alternatives, without the slightest benefit to the solvency of HSBC or the banking system in general,” said H&R Block president and CEO Alan Bennett in a statement. “While we are very disappointed by this decision, we have been preparing for the loss of RALs, so we have several other financial products available and under development for this tax season. We are working around the clock to give our company and franchise teams the best tools we can to fill the void for our clients created by the OCC’s action. The OCC’s 11th hour timing will make it difficult for us to put alternative products in place at all of our locations in time for the early part of the 2011 tax season, but we will spare no effort to do so. Our clients, our tax preparers and our franchisees deserve nothing less.”

Block had filed suit against HSBC in October when the bank tried to end their arrangement, saying it could not provide funding for the RALs and RACs because the IRS had decided to stop providing a debt indicator next tax season that would say whether a taxpayer has liens outstanding, and that would make the loans too risky to provide (see H&R Block Sues HSBC over RALs). HSBC has been in the process of withdrawing from the RAL business since 2007 and Block is its only remaining customer. The two sides later entered discussions to settle the lawsuit (see Block in Talks with RAL Provider HSBC).

Prior to the OCC’s recent action, H&R Block and HSBC had reached agreement on a proposal that would have allowed HSBC to honor its contractual obligations to H&R Block during tax season 2011. Under the revised terms agreed upon by both parties, H&R Block would have in effect covered essentially all credit defaults experienced by HSBC, thereby making H&R Block’s credit rather than the taxpayer’s refund the ultimate source of repayment to HSBC. The proposed new terms would have made it nearly impossible for HSBC to suffer any financial losses, according to Block.

In addition, H&R Block agreed at its own expense to fund “Instant RALs” at a substantially reduced rate to consumers. The total cost to the consumer of a $1,500 Instant RAL under the proposed terms rejected by the OCC would have been $46, which is approximately 62 percent less expensive for consumers than the products being offered this year by competitors through a few banks that are regulated by the Federal Deposit Insurance Corporation that will apparently continue despite the OCC directive to HSBC.

At NFS, we can electronically file your tax return and have your refund direct deposited in as little as three days. Call me for details.

Monday, December 27, 2010

IRS Says Tax Season Will Be Delayed for Some

WASHINGTON DC - Following last week’s tax law changes, the Internal Revenue Service announced Thursday the upcoming tax season will start on time for most people, but taxpayers affected by three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns.

In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid- to late February to file as well.

The start of the 2011 filing season will begin in January for the majority of taxpayers. However, last week’s changes in the law mean that the IRS will need to reprogram its processing systems for three provisions that were extended in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17.

People claiming any of these three items — involving the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction as well as those taxpayers who itemize deductions on Form 1040 Schedule A — will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid- to late February.

“The majority of taxpayers will be able to fill out their tax returns and file them as they normally do,” said IRS Commissioner Doug Shulman. “We will do everything we can to minimize the impact of recent tax law changes on other taxpayers. The IRS will work through the holidays and into the New Year to get our systems reprogrammed and ensure taxpayers have a smooth tax season.”

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the late tax law changes. In the interim, people in the affected categories can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes.

The IRS urged taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax changes and ensure accurate tax returns.

Taxpayers will need to wait to file if they are within any of the following three categories:

• Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted Dec. 17, which primarily benefits people living in areas without state and local income taxes and is claimed on Schedule A, Line 5. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.

• Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students — covering up to $4,000 of tuition and fees paid to a post-secondary institution — is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.

• Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.

For those falling into any of these three categories, the delay affects both paper filers and electronic filers.

The IRS emphasized that e-file is the fastest, best way for those affected by the delay to get their refunds. Those who use tax-preparation software can easily download updates from their software provider. The IRS Free File program also will be updated.

As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure a smooth tax season.

Updated information will be posted on This will include an updated copy of Schedule A as well as updated state and local sales tax tables. Several other forms used by relatively few taxpayers are also affected by the recent changes, and more details are available on

In addition, the IRS reminds employers about the new withholding tables released Friday for 2011 (see IRS Issues Withholding Details for Payroll Tax Cut). Employers should implement the 2011 withholding tables as soon as possible, but not later than Jan. 31, 2011. The IRS also reminds employers that Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on before year’s end.

The IRS also provided a list of forms affected by the extender provisions.

If there is any confusion or if you have any questions as to whether you fall into one of the above categories for delayed filers, please do not hesitate to contact me at 800-560-4NFS or

Wednesday, December 22, 2010

Tuesday, December 21, 2010

Payroll Tax Cut to Boost Take-Home Pay for Most Workers; New Withholding Details Now Available

WASHINGTON ― The Internal Revenue Service today released instructions to help employers implement the 2011 cut in payroll taxes, along with new income-tax withholding tables that employers will use during 2011.

Millions of workers will see their take-home pay rise during 2011 because the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provides a two percentage point payroll tax cut for employees, reducing their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid. This reduced Social Security withholding will have no effect on the employee’s future Social Security benefits.

The new law also maintains the income-tax rates that have been in effect in recent years.

Employers should start using the new withholding tables and reducing the amount of Social Security tax withheld as soon as possible in 2011 but not later than Jan. 31, 2011. Notice 1036, released today, contains the percentage method income tax withholding tables, the lower Social Security withholding rate, and related information that most employers need to implement these changes. Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on in a few days.

The IRS recognizes that the late enactment of these changes makes it difficult for many employers to quickly update their withholding systems. For that reason, the agency asks employers to adjust their payroll systems as soon as possible, but not later than Jan. 31, 2011.

For any Social Security tax over withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2011.

Employers and payroll companies will handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form.

As always, however, the IRS urges workers to review their withholding every year and, if necessary, fill out a new W-4 and give it to their employer. For example, individuals and couples with multiple jobs, people who are having children, getting married, getting divorced or buying a home, and those who typically wind up with a balance due or large refund at the end of the year may want to consider submitting revised W-4 forms. Publication 919, How Do I Adjust My Tax Withholding?, provides more information to workers on making changes to their tax withholding. As always, if you need assistance with your withholdings, or any other tax & financial situation, please do not hesitate to contact me at 800-560-4NFS extension 14.

Monday, December 20, 2010

White House Plans to Scale Back Tax Cut Extension in 2012

Washington, D.C - Vice President Joe Biden indicated the Obama administration intends to limit the newly extended tax cuts when they come up again for renewal in 2012.

President Obama signed an extension of the Bush-era tax cut rates on Friday after the House passed the legislation Thursday night (see House Passes Extension of Bush Tax Cuts and Unemployment Rates). The legislation, which largely abided by a framework agreement that President Obama struck with Senate Minority Leader Mitch McConnell, R-Ken., earlier this month, extended the current income, dividend and capital gains tax rates for another two years, even for those making over $250,000 a year, along with setting the estate tax at 35 percent for estates over $5 million.

In return, Republican congressional leaders agreed to support some of the Obama administration’s priorities in the legislation, including a 13-month extension of unemployment benefits, and a 2 percentage point cut in Social Security payroll taxes for a year from 6.2 to 4.2 percent. The bill also provides extensions of the Child Tax Credit, the Earned Income Tax Credit, the American Opportunity Tax Credit for college tuition, the Research & Experimentation Credit, and a host of other tax extender items; a two-year patch to the alternative minimum tax; and 100 percent bonus depreciation expensing of business investments in plant and equipment for 2011 and 50 percent for 2012.

However, the Obama administration has long opposed extending the Bush tax cuts for those making over $250,000 a year. Biden made clear that the administration would oppose the extension of those rates beyond 2012, even in an election year, as well as the 35 percent estate tax rate. Speaking to NBC White House correspondent David Gregory on “Meet the Press” on Sunday, Biden said, “The one target for us in two years is no longer extending the upper-income tax credit for millionaires and billionaires, and scaling back what we had to do to get the compromise, the estate tax for the very wealthy.”

Asked whether he thought anybody in Congress would vote in an election year not to extend the tax cuts, Biden insisted they would as a result of the work of the bipartisan deficit commission, which recently gave its recommendations on ways to cut the federal budget deficit. “I think what'll be different is that we will have had the outcome of the deficit commission,” he said. “We will be able to make the case much more clearly that spending $700 billion over 10 years to extend tax cuts for people whose income averages well over a million dollars does not make sense.”

On Friday, McConnell and several other Republican legislators attended the White House signing ceremony for the tax cut extension, a rarity so far in the Obama administration, but also a signal that the Republican leadership in Congress may be willing to work with the administration on some issues where there is common ground.

At the signing ceremony, Biden jokingly referred to an earlier impromptu remark he had made during the signing ceremony for the health care reform bill, in which a microphone caught him mixing an expletive in with his enthusiastic comment.

“Ladies and gentlemen,” he said at Friday’s signing ceremony, “this is a — I wasn’t going to say, ‘a big deal,’ but an important deal. I can no longer say ‘big deal.’ Thank god, my mother wasn’t around.”

Biden commended McConnell and the other Republicans in attendance, including Rep. Dave Camp, R-Mich., who is expected to chair the tax-writing House Ways and Means Committee in January, for agreeing to work with the administration on the tax cut package.

“This package is a result of leaders from both sides coming together to act on behalf of the American people at a time they need it most,” he said. “I want to begin by applauding Senator Mitch McConnell, and the other Republican leaders, who like their Democratic counterparts who are here today, were willing to take issue with some of their own party and to do what was, in their view, necessary in order to move the country forward. That’s what the American people expect of all of us, especially in these times. And that’s what we’ve done here. It means accepting some things we don’t like in order to get the job done for Americans as needs to be done.”

Obama echoed Biden’s comment that the administration had settled for some provisions of the deal to which it was initially opposed. “Now, candidly speaking, there are some elements of this legislation that I don’t like,” he said. “There are some elements that members of my party don’t like. There are some elements that Republicans here today don’t like. That’s the nature of compromise — yielding on something each of us cares about to move forward on what all of us care about. And right now, what all of us care about is growing the American economy and creating jobs for the American people. Taken as a whole, that’s what this package of tax relief is going to do. It’s a good deal for the American people. This is progress. And that’s what they sent us here to achieve.”

By Michael Cohn
Accounting Today

Friday, December 17, 2010

Excuses, Excuses

Time to stop the excuses! Watch this fun web movie that features that little inner voice we all have that tells us to stop making excuses and start protecting what's most valuable to us - the future of our loved ones.

When you are finished watching the video, give me a call and we can chat about getting your life insurance plan set up TODAY.

800-560-4NFS x 14

House Passes Extension of Bush Tax Cuts and Unemployment Benefits

WASINGTON DC - The House approved an $858 billion extension of the Bush-era tax rates and unemployment benefits late Thursday night, a day after the Senate approved the bill, sending the bill to President Obama’s desk.

After procedural hurdles held up the vote for much of the day on Thursday, the House reconvened in the evening to settle the terms of the debate. Amid widespread dissatisfaction among House Democrats over the terms of the deal struck by President Obama and Republican congressional leaders, especially on setting the estate tax at a rate of 35 percent for estates over $5 million, they agreed to first hold a vote on an amendment by Rep. Earl Pomeroy, D-N.D., which would set the estate tax rate at 45 percent for inheritances over $3.5 million. That amendment was defeated by a vote of 233 to 194.

The House next proceeded to a vote on the bill passed by the Senate on Wednesday, and that passed by a vote of 277-148 (see Senate Passes Bush Tax Cut and Unemployment Extension).

The bill includes a two-year extension of the Bush-era income tax rates, including those for dividends and capital gains. It also extends emergency unemployment insurance for another 13 months. The bill would also lower Social Security payroll taxes by 2 percentage points from 6.2 percent to 4.2 percent for a year. Several lawmakers, however, criticized that provision, saying it would weaken the Social Security trust fund and pointing out that it would not be open to those government employees who do not pay Social Security withholding taxes.

The bill would also extend the Child Tax Credit, the Earned Income Tax Credit, and the American Opportunity Tax Credit for college tuition. It would also allow businesses to deduct 100 percent of investments in plant and equipment in the first year, and extend for two years the state and local sales tax deduction. In addition the bill would “patch” the AMT, extending Alternative Minimum Tax relief for two years to prevent the AMT from ensnaring millions more taxpayers. The bill also includes extensions of the Research and Experimentation Credit for businesses.

It also would extend a variety of popular tax breaks, including the ability of schoolteachers to expense purchases of school supplies. The bill also includes energy tax breaks for biodiesel fuel, ethanol and renewable energy sources.

During the debate earlier in the evening, many of the lawmakers expressed misgivings about the bill and its effect on the deficit, but said they felt the need to pass the legislation outweighed those concerns. Others could not bring themselves to support the bill and denounced the continuation of the Bush tax cuts for the wealthy, especially the exemption on estate taxes for inheritances below $5 million for individuals and $10 million for couples.

“I salute President Obama for getting in the bill what is in there,” said House Speaker Nancy Pelosi, D-Calif. “I am sorry for the price that has to be paid by our children and our grandchildren to the Chinese government to pay for the increase in the deficit that the Republicans insisted upon.”

Rep. Dave Camp, R-Mich., who is expected to chair the tax-writing House Ways and Means Committee in January when Republicans become the majority party in the House, complained that Democrats had not settled the question of the Bush tax cuts extension prior to the midterm elections.

“There is some explaining to do,” he said. “Why wasn’t this issue dealt with before the election? Why didn’t the majority bring a bill to the floor before the election? Now, as Americans face these tax increases, here we are just a few short days before the end of the year, and now because there is a bipartisan compromise that incidentally passed the Senate by 81-19 there is a recognition that this is no time to be playing games with our economy. The failure to block these tax increases would be a direct hit to families and small businesses and employers and further delay our economic recovery, and for those reasons I support this.”

Here is a sampling of other comments by lawmakers during the debate:

Rep. Danny Davis, D-Ill.: “I was at a meeting of CEDA, the organization in Chicago and Cook County that services low-income families, trying to figure out how to help my constituents get their homes heated because it might be snowing in Washington, but it’s cold in Chicago. The telephone rings and somebody said, ‘Could you take a call from the President?’ I said, ‘Which President?’ ‘Well, the President of the United States.’ I said, ‘Of course I’ll take it.’ I got on the phone and the President said to me, ‘Danny, we need to pass this bill and we need to pass it because, even though it’s cold, it’s going to get colder, and there are going to be people who don’t have any unemployment compensation benefits, and they can’t pay their heating bill. There are going to be people who want to send their kids to college, and without the tax credits for college tuition, they won’t be able to pay the tuition.’ I said, ‘Yeah, but Mr. President, what about those people way up at the top that’s getting all of this money?’ He said, ‘Well, there might be an opportunity to reduce that,’ and I’m looking forward to voting on the Pomeroy amendment, so that we can reduce some of that money that they’re going to keep in their pocket, put it into the Treasury so that we can help the poor people in Chicago who are cold and don’t have any heat.”

Rep. Linda Sanchez, D-Calif.: “Unemployed Americans desperately need their benefits extended, and I proudly voted to do so every time I’ve had the chance. This bill also contains tax cuts for hardworking families, tax cuts I voted for two weeks ago on this very floor. But this bill holds these good policies hostage to a giant handout to those who need help the least. It’s political bullying at its very worst, an affront to American working families waged by Republicans whose irresponsible decisions got us into this mess in the first place. This bill contains a radical change to the inheritance tax that will concentrate wealth and power in even fewer hands than it is now. In a country that prides itself on being a meritocracy and not an aristocracy, such a giveaway is irrational. It completely neuters our ability to invest in people and infrastructure. This bill contains tax breaks for those who make more than $250,000 a year, breaks that our country can ill afford when teachers are being laid off and libraries are being closed, when those who have been unemployed for the longest are losing their safety net and young men and women are still being asked to serve and die in Iraq and Afghanistan. The payroll tax cut is another bad idea. Not only does it make Social Security less secure, many public servants including California teachers won’t see any tax cut at all. Overall, this bill adds over a trillion dollars to the deficit while doing very, very little to create jobs, spur economic growth or invest in America’s future.”

Rep. Bobby Scott, D-Va.: “The two-year cost of the bill is about the same as the 10-year cost of the health care reform bill, and at least we paid for that. We need to make tough, unpopular choices to balance the budget. Obviously letting tax cuts expire would be unpopular, but when we ever decide to get serious about the deficit, we will find that the alternatives are even more unpopular because after today’s vote, the choices will necessarily include cuts to Social Security, Medicare, education and other popular programs. If we don’t have the political will to end the disastrous Bush-era tax cuts now, we certainly won’t have that political will during the middle of a presidential election. The job creation in this bill is paltry. It’s around $400,000 a job. We can do better than that.”

Rep. Peter DeFazio, D-Ore.: “What we’re about to do here today is extraordinary, and the impact will be felt by our kids and grandkids for the next 30 years. With one vote, we are going to increase the already projected record deficit for this year of $1.3 trillion to $1.7 trillion. Every penny of income foregone here tonight will be borrowed, much of it from China and some of it from our Social Security trust fund, for the first time in our history. For what? For continuing the failed economic policies of the last nine years. We’ve got these tax cuts in place today. How many jobs are they creating? But you tell me we can’t afford to invest. We can’t rebuild our nation’s crumbling infrastructure. We don’t have the money to do that. We know we can create real jobs there. We can increase the productivity of our nation. We can compete better worldwide if we invest in our infrastructure and our education system and our people, but no, we’re going to have debt-financed, consumption-driven recovery as people buy goods made in China and of course the $112 billion taken out of Social Security. And the Republicans have made it painfully clear tonight that the temporary cut in Social Security income is not temporary. They’ve said it time and time and time again. There is no such thing as a temporary tax cut. I hope the White House is listening. They’re about to spring the trap and next year they’ll say, ‘Oh, Mr. President, you’re going to raise taxes on every working American by making Social Security whole? You can’t do that. Oh, and by the way, we’re tired of subsidizing that program with money we’re borrowing.' That is a horrible, horrible step.”

Rep. Jeb Hensarling, R-Texas: “As I look at the legislation, it’s the classic challenge of is the glass half empty or half full. I for one have decided the glass to be half full. Mr. Speaker, clearly there are items in this legislation that I find not just empty, but frankly atrocious. Yes, there is tax pork in this legislation. There is unpaid-for extension of unemployment benefits. And Mr. Speaker, at some point I would hope the majority, soon to be minority, in this institution would realize we’ve got to concentrate on the paychecks, the paychecks. Americans want paychecks, not unemployment checks, and if we’re going to have them, they need to be paid for. And worst of all, yes, what’s happening to Social Security with the payroll tax without putting any fundamental reform on the table. And what I would say to my friends on the other side of the aisle is it is you who brought that to the table. Mr. Speaker, I made a pledge to my constituents. I told them I would fight any tax increases. I told them I would try to bring certainty to this economy because that’s what businesses need.”

Rep. Steve Cohen, D-Tenn.: “To the people who die, the richest in our nation, we give them, the Steinbrenners, who died with $1.1 billion, we’ll be giving them this year a $450 million free ride, and the differences in the taxes of 35 or 45 percent, $100 million. This is wrong and that’s why I oppose the bill.”

Rep. Patrick Tiberi, R-Ohio: “The road to prosperity is not through tax increases. The road to prosperity in America is not through class warfare.”

Rep. Steny Hoyer, D-Md.: “The President of the United States has a responsibility to all Americans, and like every President, he can’t get everything he wants. To that extent, he’s like us. We don’t get everything we want. This bill does not represent everything I want. … This bill, the President of the United States believes, and I believe, will have a positive effect on the economy, and I think we need that. … I am going to vote for this bill because I think it does help the economy, but we are paying too great a price for it. … Ladies and gentlemen, there probably is nobody on this floor who likes this bill, and therefore the judgment is, is it better than doing nothing. Some of the business groups believe it will help, and I hope they’re right. Not only do I hope they’re right, but I hope that if we pass this bill that they respond and create the jobs that we know they have the resources to do. This is a jobs bill, in my view, which is why I will vote for it. It could be a better jobs bill if we invested the money that we’re giving to the wealthiest in America in job growth. It is a bill that will help those who have been unemployed for week after week after week, and whose angst has grown and grown and grown.”

By Michael Cohn
Accounting Today

Thursday, December 16, 2010

Moves to make now that can help minimize how much taxes you pay

Q: What tax moves should investors make by the end of the year to minimize what Uncle Sam takes in taxes?

A: If you don't pay attention to the tax hit of your stock moves, you might be paying Uncle Sam too much.

There are several simple maneuvers you can make when it comes to you portfolio to make sure your tax hit is as small as possible.

The first step all investors should take is tax-loss harvesting. If there are some money-losing dogs in your portfolio, now's the time to start selling them. If you sell your losers, you can use those capital losses to offset any capital gains you might have had from selling winning stocks. It gets better. If your capital losses outstrip your capital gains, you can use those capital losses to reduce your ordinary income by up to $3,000 a year. And you can then carry those losses forward indefinitely until you exhaust them.

These capital losses are very lucrative already, but could be even more attractive depending on what Congress decides with tax rates and what happens with tax rates in the future, says Barbara Weltman, contributing editor to J.K. Lasser and author of 1001 Deductions and Tax Breaks.

Just be careful. When you sell a stock, you can't buy it back for more than 30 days or you risk triggering a so-called wash sale. If you buy a stock that you sold for a loss back, you may lose out of the capital loss deduction.

There is a dilemma with tax loss selling, too. What if you sell a stock for tax reasons, but still like the stock? It would be somewhat tragic if the stock you've been losing money on for so long rallied in December after you sold it for tax reasons.

There are ways to manage this situation and the wash sale rule, Weltman says. For instance, let's say you have a large loss in shares of a drugmaker, but you still like the pharmaceutical industry and don't want to be out of the market for more than 30 days. You might consider buying shares of a competitor in the drug industry you think also has good prospects. You can also purchase a stock index mutual fund or exchange-traded fund that owns the stock and hold that while you wait the 30 days.

By Matt Krantz
USA Today

Wednesday, December 15, 2010

Do You Know What a Forced Liquidation Can Do to the Value of Your Business? Check out NFS Business Briefs

Weirdest Tax Laws of 2010

From hot air balloons to bagels, 2010 proved to be yet another year in which states and municipalities passed some strange tax laws in a desperate bid to raise revenues and close their budget gaps.

The Tax & Accounting business of Thomson Reuters has compiled a sampling of some of the year’s quirkiest sales and use tax changes, emphasizing the importance of technology and expertise to help navigate the dynamic sales and use tax landscape.

A few of the “quirky” sales and use tax highlights of 2010 include:

• Candy without flour in Washington: In June, Washington State enacted legislation that made candy without flour taxable. According to a list published by the Washington Department of Revenue, “Rainbow Whirly Pops” and “Lemon Drops” were taxable, but “Twizzlers” and “Peppermint Bark Shortbread” remained exempt. However, because the law caused so much confusion, and after push-back from voters and large candy makers, Initiative 1107 was passed, repealing the tax on candy effective Dec. 2, 2010.

• Belt buckles in Texas: Every year before it is time to go back to school, several states allow for a tax holiday on school supplies and clothing, with several oddities seemingly infiltrating the exemptions. In Texas, belts are exempt, but belt buckles are not. Cowboy boots and hiking boots are also exempt, but rubber boots and climbing boots are taxable.

• Bagels in New York: In 2010, New York cracked down on its enforcement of the tax on prepared food, specifically targeting a New York staple: bagels. If you buy a whole bagel and take it home with you, it is exempt from tax. However, if you purchase that same bagel, but eat it at the bagel shop (even without cream cheese), bagel shops must charge sales tax on the purchase price. Apparently, the mere slicing of a bagel kicks your bagel purchase into a taxable transaction. As a result, New Yorkers are paying approximately 8 to 9 cents more per bagel.

• Cup lids in Colorado: Effective March 1, 2010, Colorado eliminated the exemption for non-essential food items and packaging provided with purchased food and beverage items. So, while cups are considered essential, lids are not.

• Hot air balloons in Kansas: On June 30, the Kansas Department of Revenue issued a private letter ruling discussing the taxability of hot air balloon rides. Kansas generally taxes sales of admissions to “any place providing amusement, entertainment or recreation services.” The question was not whether or not balloon rides are entertaining, but whether or not federal law pre-empts the imposition of state sales tax on sales of those rides. Under the Anti-Head Tax Act, 29 U.S.C. Section 40116, states and local jurisdictions are prohibited from imposing fees and charges on airlines and other airport users. The department determined that un-tethered balloon rides where the balloon is actually piloted somewhere “some distance downwind from the launching point” would be considered carrying passengers in air commerce and would be pre-empted by the law. However, state sales tax can be imposed on tethered balloon rides.

• Haunted houses in New York: According to TSB-A-10(11)S, admissions to haunted houses are subject to the New York sales tax.

By Accounting Today Staff

Tuesday, December 14, 2010

Bush Tax Cut Extension Advances in Senate

WASHINGTON DC - The Bush tax cut and unemployment benefit extension legislation passed a key procedural hurdle in the Senate on Monday, overcoming the 60-vote threshold needed to come up for a vote later in the week.

The measure advanced Monday evening by a vote of 83 to 15, with 45 Democrats and 37 Republicans voting to invoke cloture and cut off debate. A final vote on the legislation is expected on Tuesday in the Senate, and then it will be sent to the House.

The status of the $858 billion bill in the House is in question, however, as a majority of House Democrats voted in a resolution within their caucus last week to express their disapproval of the bill.

Many congressional Democrats are upset that President Obama struck a deal with Republican congressional leaders to extend the Bush-era tax rates for two years even for those earning over $250,000 a year, violating a campaign pledge. Another possible deal breaker is that the estate tax will be set at 35 percent, with a $5 million exemption for individuals, instead of the 55 percent rate for estates over $1 million that it was scheduled to return to at the beginning of next year. Democrats will try to introduce amendments to increase the estate tax and add other provisions, but Republicans have warned that they are not open to allowing many changes in the legislation.

The bill includes some provisions that are seen as favorable trade-offs by the Obama administration, including a 13-month extension of unemployment benefits and a 2 percent cut in the Social Security payroll tax for a year, lowering the rate from 6.2 percent to 4.2 percent.

The bill also extends the Research & Experimentation Credit, the Child Tax Credit, the Earned Income Tax Credit, and the American Opportunity Tax Credit for college tuition, along with patching the alternative minimum tax to prevent it from affecting millions more taxpayers. Obama has argued that it is necessary to pass the legislation to extend tax cuts for the middle class and avoid jeopardizing the economic recovery.
By Michael Cohn
Accounting Today

Monday, December 13, 2010

New IRS Payroll Tax Payment Requirements – Immediate Attention is Required

Effective January 1, 2011, businesses with a payroll tax deposit are required to make those payments by using the Electronic Federal Tax Payment System (EFTPS). If you are not currently enrolled in the EFTPS program you probably received a letter regarding this in the last week. A 10% penalty may be applied if EFTPS is not used in 2011.

We can answer any of your questions and help you set up the EFTPS program. Call us at 800-560-4NFS immediately. The approval process can take 4-6 weeks. We can initiate this on-line. We will need the following information – business name, address, EIN, bank name, routing #, account #, and authorized signer.

We have found that the EFTPS system works much better than the old system of depositing the payroll taxes at the bank – you can schedule payments from any computer with internet access. The only drawback is you cannot wait until the day the taxes are due to schedule a payment. You must schedule your payments by the day before the due date and the money is transferred from your checking account on the due date that you schedule.

We recommend that semi-weekly depositors schedule their payments the day the payroll is computed and that monthly depositors schedule their deposit when they run their first payroll of the following month. Schedule these payments in advance as we have found that those who wait until the deadline tend to miss deadlines and incur penalties.

Employers who have $2,500 or less in quarterly payroll tax liability and pay their liability when filing their tax returns (i.e. Forms 941 or 944) are the primary exception. Otherwise, employers and sole proprietors who file payroll tax returns must use the EFTPS System.

Do not procrastinate in initiating the application process or you will incur penalties in 2011.

Friday, December 10, 2010

Interest Rates Decrease for the First Quarter of 2011

WASHINGTON – The Internal Revenue Service today announced that interest rates for the calendar quarter beginning January 1, 2011, will decrease by one percentage point. The rates will be:

three (3) percent for overpayments [two (2) percent in the case of a corporation];

three (3) percent for underpayments;

five (5) percent for large corporate underpayments; and

zero and one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced today are computed from the federal short-term rate during October 2010 to take effect November 1, 2010, based on daily compounding.

Thursday, December 9, 2010

House Democrats Reject Tax Agreement, Blast Estate Tax Deal

WASHINGTON BUREAU -- House Democrats today passed a non-binding resolution rejecting a tax-cut package negotiated by Obama administration officials and congressional Republicans.

The House Democrats were especially critical of a provision in the agreement that would provide a $5 million per-person estate tax exemption.

The resolution passed by a voice vote, according to House Ways and Means Committee staffers.

Rep. Lloyd Doggett, D-Texas, said the resolution was adopted by a “very loud voice vote” and that he believes House Speaker Nancy Pelosi, D-San Francisco, will respect the views of the caucus.

The package, “in the form that it was negotiated, it is not acceptable to the House Democratic caucus,” Rep. Chris Van Hollen, D-Md., said. “It's as simple as that.”

The House Democrats’ action came as Senate Democrats weighed options for having the package come up for a vote there Monday.

Senate Democrats must resort to a parliamentary maneuver because tax measures are supposed to originate in the House.

The House Democratic Caucus is “very upset” about the package negotiated by the White House, and there is a push to not vote on the package, regardless of what the Senate does, Ways and Means staffers said.

The estate tax provision in the package would provide a $5 million exemption and a 35% tax maximum estate tax rate. The provision would expire in two years.

Democrats support a provision backed by Rep. Earl Pomeroy, D-N.D. That provision, passed in 2009, would set a $3.5 million exemption and a 45% maximum tax rate. Pomeroy was defeated for reelection last month.

Other package features opposed by House Democrats include payroll tax language, the Ways and Means staffers said.

After the caucus vote, Obama administration officials said they remain confident that “the major components” of the tax compromise will pass, according to White House representative Jen Psaki.

A Democratic advisor to the White House said that Senate Democrats “have several vehicles they can use” as the legislative base for the tax package, and that they are working on a plan to pass a tax bill and “then jam the House” with that legislation.

The White House-Republican tax package includes a 2-year extension of the Bush-era tax cuts. This extension could cost about $314 billion, according to the Congressional Research Service.

The Association for Advanced Life Underwriting (AALU), Falls Church, Va., has been active in estate tax negotiations.

“We continue to work with lawmakers to reiterate the importance of sustainable estate tax reform in the range of 2009 law, as well as the importance of reunifying the gift and estate tax levels as these important discussions move forward,” AALU President Nat Perlmutter says in a statement.

Year-End Options Available for Roth IRA Conversions

The 2010 Small Business Jobs Act, enacted on Sept. 27, 2010, provides a new opportunity for Roth 401(k) plan participants to convert their existing 401(k) plan balances into Roth 401(k)s.

“The Act also allows participants making the conversion in 2010 to spread the tax hit over a two-year period,” said Richard O’Donnell, a senior retirement plan analyst at the Tax & Accounting business of Thomson Reuters.

A Roth 401(k) plan has a “qualified Roth contribution program” that allows participants to make “designated Roth contributions” in lieu of all or some of the elective deferrals that they could otherwise make under a 401K plan. For example, if a participant defers $10,000 to his 401(k) plan that has a Roth program, he can elect to have some (or all) of his $10,000 deferral placed in the Roth portion of the plan. The downside is that amounts contributed to the Roth portion are not made on the pre-tax basis that typically applies to 401(k) contributions. The upside is that when the participant takes a distribution, those contributions, plus their associated earnings, are received free of federal income tax. So, the Roth 401(k) acts similar to a Roth IRA in that there is no tax advantage for contributions made to the plan, however, distributions from the plan are tax-free.

Some limits apply to Roth 401(k)s, for example, employer-matching contributions are not allocated to the Roth portion of a 401(k) plan. Further, once a deferral is contributed to the Roth portion of the plan, it must remain there. Unlike contributions made to regular Roth IRAs, there is no “recharacterization” provision to undo it. Therefore, a contribution to the Roth portion of a 401(k) plan is irrevocable.

O’Donnell notes that the 2010 Small Business Jobs Act provides new rules for Roth 401(k) plans that can provide plan participants with tax planning opportunities:

• The Act allows plan participants to convert in-service distributions from the non-Roth portion of their plan into Roth contributions. Participants who are eligible for an in-service distribution under their 401(k) plan (typically, once a participant reaches age 59 ½, or becomes disabled) can transfer qualifying, eligible rollover distributions to the Roth portion of the plan. Distributions that were not previously taxed will need to be included in taxable income. However, once distributed from the Roth portion of the 401(k) plan, these amounts and their earnings will be tax-free.

• This provision allows participants to “convert” their pre-tax employee deferrals and employer contributions into post-tax Roth contributions, without needing to take a distribution from the plan and then contribute that amount to a Roth IRA.

• However, amounts in a 401(k) plan account subject to distribution restrictions cannot be converted to Roth 401(k) contributions. Therefore, if a plan does not allow for in-service distributions or distributions before normal retirement age, Roth 401(k) conversions cannot be made.

• The 10 percent tax on early withdrawals (which generally applies to the taxable portion of a plan distribution made before the participant has reached age 59 ½, unless an exception applies) does not apply to distributions that are made as part of a Roth 401(k) conversion. However, “this relief comes with a caveat — a ‘recapture’ rule applies to distributions within a specified five-tax-year holding period,” said O’Donnell. “So, amounts contributed to the Roth portion of the 401(k) plan must remain there for five years to avoid this tax.”

• As an additional benefit, a participant may elect to spread the tax hit from the Roth contribution over two years for conversion distributions made in calendar year 2010. Under this provision, the participant includes one-half of the distribution that is subject to tax in income in 2011 and the other half in 2012. This defers taxes on the conversion and may lower the tax rate that would otherwise apply to the amount converted.

• This two-year tax-deferral tax must be accelerated, however, if the participant receives a distribution from the Roth portion of the 401(k) plan in 2010 or 2011. Acceleration is also required if the participant dies before 2012, unless a surviving spouse acquires the entire account and elects to continue the deferral.

• Instead of electing this two-year deferral, a participant may elect to include the entire taxable amount of the distribution in 2010 gross income. “This may be the best option for those who expect to be in higher tax brackets in 2011 and 2012,” said O’Donnell. Once made, a participant may not revoke this election after the due date, including extensions, of his 2010 federal income tax return.

Plan sponsors must amend their plans to permit Roth 401(k) conversions. However, sponsors have until the later of the last day of the year in which the amendment takes effect or December 31, 2011, to make the amendment for participants to take advantage of the tax deferral for 2010 conversions.

Tuesday, December 7, 2010

Obama Strikes Deal on Bush Tax Cuts and Unemployment

WASHINGTON, D.C. - President Obama announced a deal Monday evening to extend the Bush-era tax rates for two years, as well as other tax breaks and unemployment benefits, after Republican and Democratic congressional leaders forged a compromise in meetings with administration officials.

However, the deal to extend the Bush tax cuts even for those making more than $250,000 a year met with criticism from some Democrats who accused the president of giving in to Republican tactics and violating one of his campaign pledges.

House Democrats passed a bill last week to extend the income tax rates only for those making less than $250,000 a year, but the Senate failed last Saturday to pass two versions of the bill that would have extended the current tax rates for those making less than $250,000 or $1 million a year. Vice President Joe Biden plans to meet with members of the Senate Democratic caucus on Tuesday to sell the plan to them.

Obama argued that the deal was necessary to sustain the economic recovery. “Make no mistake,” he said. “Allowing taxes to go up on all Americans would have raised taxes by $3,000 for a typical American family. And that could cost our economy well over a million jobs.”

The deal would also extend unemployment benefits for 13 months for those whose benefits ran out at the end of last month or would have run out by the end of the year. An estimated 2 million people were expected to lose their emergency unemployment insurance benefits by the end of December.

Other elements of the deal would extend several other tax breaks that the administration believes are crucial to generating jobs, sustaining the economy, and making higher education more affordable.

“In exchange for a temporary extension of the tax cuts for the wealthiest Americans, we will be able to protect key tax cuts for working families — the Earned Income Tax Credit that helps families climb out of poverty; the Child Tax Credit that makes sure families don’t see their taxes jump up to $1,000 for every child; and the American Opportunity Tax Credit that ensures over 8 million students and their families don’t suddenly see the cost of college shooting up,” said Obama.

The Making Work Pay payroll tax cut, which was introduced with last year's economic stimulus bill, would be extended for another year under the deal, as well as bonus depreciation tax breaks that allow businesses to deduct the entire cost of purchasing equipment. "This agreement would also mean a 2 percent employee payroll tax cut for workers next year — a tax cut that economists across the political spectrum agree is one of the most powerful things we can do to create jobs and boost economic growth," said Obama. "And we will prevent — we will provide incentives for businesses to invest and create jobs by allowing them to completely write off their investments next year."

The agreement also encompasses the estate tax, which temporarily went to zero at the beginning of this year, but was scheduled to return in January at a rate of 55 percent for estates over $1 million. The tax rate will instead be capped at 35 percent for estates, with an exemption of $5 million for individuals and $10 million for couples.

The President said the tax cuts would help those who had been hit hardest by the recession, and whose taxes would otherwise go up while everybody else’s stayed the same. He also pointed out that the deal would help the unemployed.

“Under this agreement, unemployment insurance will also be extended for another 13 months, which will be welcome relief for 2 million Americans who are facing the prospect of having this lifeline yanked away from them right in the middle of the holiday season,” said Obama.

He noted that without a deal with Republican lawmakers, taxes would have gone up for everybody next year.

“What is abundantly clear to everyone in this town is that Republicans will block a permanent tax cut for the middle class unless they also get a permanent tax cut for the wealthiest Americans, regardless of the cost or impact on the deficit,” he said.

“We saw that in two different votes in the Senate that were taken this weekend,” Obama added. “And without a willingness to give on both sides, there’s no reason to believe that this stalemate won't continue well into next year. This would be a chilling prospect for the American people whose taxes are currently scheduled to go up on January 1st because of arrangements that were made back in 2001 and 2003 under the Bush tax cuts.”

Obama emphasized that he was not willing to let that happen. “I know there’s some people in my own party and in the other party who would rather prolong this battle, even if we can't reach a compromise,” he said. “But I'm not willing to let working families across this country become collateral damage for political warfare here in Washington. And I'm not willing to let our economy slip backwards just as we're pulling ourselves out of this devastating recession.”

Senate Minority Leader Mitch McConnell, R-Ken., gave his endorsement on the deal. “I appreciate the determined efforts of the President and Vice President in working with Republicans on a bipartisan plan to prevent a tax hike on any American and in creating incentives for economic growth,” he said in a statement. “Their efforts reflect a growing bipartisan belief that a new direction is needed if we are to revive the economy and help put millions of Americans back to work. Members of the Senate and House will review this bipartisan agreement, but I am optimistic that Democrats in Congress will show the same openness to preventing tax hikes the administration has already shown.”

However, some Senate Democrats felt that Obama gave in too quickly to Republican demands during the negotiations. “I don’t know if he caved,” Sen. Sherrod Brown, D-Ohio, told CNN. “I think he could have gotten a better agreement.”

By Michael Cohn
Accounting Today

Monday, December 6, 2010

Standard Mileage Rates for 2011

Instead of using the business portion of the actual expenses of operating a vehicle, the IRS permits taxpayers to use a standard mileage rate. IRS has issued new standard mileage rates effective for travel on or after January 1, 2011.

Business mileage rate is 51 cents per mile (up from the 50 cents per mile for 2010); 22 cents per mile is the depreciation component (down from 23 cents per mile for 2010).

Charitable rate is 14 cents per mile and is set by Congress therefore does not change until Congress makes such a change.

Medical and moving rate is 19 (up from the 16.5 cents per mile for 2010).

Friday, December 3, 2010

House Democrats Pass Middle-Class Tax Cut Package

House Democrats passed a tax cut package on Thursday aimed at extending the Bush-era tax cuts for taxpayers who earn below $250,000, but the prospects for passage in the Senate will depend on the deal worked out by a bipartisan group of four lawmakers and two Obama administration officials.

“Today the House took a critical step forward for hardworking middle-income families in need of economic certainty and security,” said House Ways and Means Committee Chairman Sander M. Levin, D-Mich., in a statement. “Republicans wanted to keep middle-income tax cuts hostage, to combine them with tax cuts for the wealthiest few, but today we freed millions of middle-income families from this hostage situation. This bill is about one thing – tax cuts for people and businesses struggling to rebuild in the wake of a recession. Provisions in this bill will lower taxes for every American taxpayer and small business to help them grow and create jobs. Today the House did the right thing and stood up for those families and businesses and I urge my colleagues in the Senate to follow suit and pass this tax relief immediately.”

However, Republican lawmakers dismissed the Democrats’ bill as a political stunt. “I'm trying to catch my breath so I don't refer to this maneuver going on today as chicken crap, all right?,” said House Minority Leader John Boehner, R-Ohio, during a press conference, according to the Associated Press.

The vote was 234-188, with 20 Democrats joining nearly every Republican in opposing the bill.

On Wednesday, Senate Minority Leader Mitch McConnell, R-Ken., delivered a letter from all 42 Senate Republicans to Senate Majority Leader Harry Reid, D-Nev., stating that they would not allow any other legislation to proceed until they have passed votes to protect every taxpayer from a tax hike and to continue funding government operations.

“We write to inform you that we will not agree to invoke cloture on the motion to proceed to any legislative item until the Senate has acted to fund the government and we have prevented the tax increase that is currently awaiting all American taxpayers,” they wrote.

The bill passed by House Democrats on Thursday addresses not only the expiring Bush income tax cuts, but also other issues such as a two-year patch to prevent the alternative minimum tax from spreading to another 25 million families, as well as capital gains and dividend taxes, the so-called “marriage penalty,” education tax credits, the adoption tax credit, employee tax credits for child care, enhanced small business expensing and other items.

Thursday, December 2, 2010

Estate and Gift Planning Update

Two quick updates as we head into December and the last month of the 2010 Estate Tax Repeal:

2011 Annual Gift Tax Exclusion to Remain the Same at $13,000. In 2010, the annual gift tax exclusion permits a taxpayer to gift $13,000 to any beneficiary, annually, even if the taxpayer has used up his or her $1 million lifetime gift exclusion. The 1997 Tax Reform Act tied the annual exclusion amount to increases in the CPI Index, and as a result, the annual exclusion has increased from $10,000 in 1997 to $13,000 currently. Due to a lack of significant inflation in 2010, the maximum gift tax annual exclusion in 2011 will remain at $13,000. This should also serve as a reminder that there is approximately one month left to take advantage of your 2010 annual exclusion gifts.

December AFRs even lower than historically low November AFRs. The December Applicable Federal Rates were just released, with the “7520 rate” falling to 1.8% from 2% in November. With such low rates, techniques such as GRATs and Sales to Grantor Trusts are even more attractive due to the low amount of interest that needs to be paid back to the taxpayer as a result of the transfers made by the taxpayer.

Wednesday, December 1, 2010

The Three C's of Health Insurance - NFS Financial Facts

Obama Meets with Congress on Bush Tax Cuts

WASHINGTON DC - President Obama met with congressional leaders on Tuesday to discuss the fate of the Bush tax cuts, along with other tax extender items and the extension of unemployment benefits.

“I’m happy with how the meeting went,” he said at a press conference.

He noted that the public wants the leaders to focus on jobs and confront long-term deficits instead of getting “locked up in the politics of Washington.”

He said that he and congressional leaders had a “new dialogue” that he hoped would begin that day to “break through the noise,” but added that things “need to get done” in the few weeks left before Congress leaves town for the holidays.

“We should work to make sure that taxes do not go up by thousands of dollars on hard-working middle-class families come January 1, which would be disastrous for those families but also could be crippling for the economy,” he said. “There was broad agreement that we need to work to get that resolved before the end of the year. Now, there are still differences about how to get there.”

He added that one of the points of disagreement was extending the tax cuts for the wealthiest Americans. “Republican leaders want to permanently extend tax cuts not only to middle-class families but also to some of the wealthiest Americans at the same time,” said Obama. “And here we disagree. I believe, and the other Democrats who were in the room believe, that this would add an additional $700 billion to our debt in the next 10 years. And I continue to believe that it would be unwise and unfair, particularly at a time when we’re contemplating deep budget cuts that require broad sacrifice.” But he added that the participants in the meeting agreed that there must be some sensible common ground.

Obama said he has appointed Treasury Secretary Tim Geithner and White House Budget Director Jack Lew to “break through this logjam,” and he asked the congressional leaders to appoint members to help with the negotiation process. That process is beginning right away, he added.

“We expect to get some answers back over the next couple of days about how we can accomplish our key goal, which is to make sure the economy continues to grow and we are putting people back to work,” he said. “And we also want to make sure that we're giving the middle class the peace of mind of knowing that their taxes will not be raised come January 1.”

Obama noted that he also discussed other issues with the congressional leaders, including preserving a number of other tax breaks for individuals and businesses that are helping with the economic recovery right now and that are set to expire at the end of the year. That includes a tax credit for college tuition, as well as the Making Work Pay tax credit — which Obama noted affected 95 percent of working families and that he initiated at the beginning of his presidency — as well as the HIRE Act tax cut, which is worth thousands of dollars for businesses that hire unemployed workers.

Obama noted that they had also discussed the new START treaty with Russia on reducing the two countries’ nuclear arsenals. “I reminded the room that this treaty has been vetted for seven months now; it’s gone through 18 hearings; it has support from senators of both parties; it has broad bipartisan support from national security advisors and Secretaries of Defense and Secretaries of State from previous administrations, both Democrat and Republican; and that it’s absolutely essential to our national security,” he said. “We need to get it done.”

Obama said they had also talked about the work of the bipartisan deficit reduction commission and the “difficult choices that will be required in order to get our fiscal house in order.”

“We discussed working together to keep the government running this year – and running in a fiscally responsible way,” he added. “And we discussed unemployment insurance, which expires today. I’ve asked that Congress act to extend this emergency relief without delay to folks who are facing tough times by no fault of their own.”

Obama admitted that none of these negotiations would be easy. “We have two parties for a reason,” he said. “There are real philosophical differences – deeply held principles to which each party holds. And although the atmosphere in today’s meeting was extremely civil, there’s no doubt that those differences are going to remain no matter how many meetings we have. And the truth is there’s always going to be a political incentive against working together, particularly in the current hyper-partisan climate. There are always those who argue that the best strategy is simply to try to defeat your opposition instead of working with them.”

He said that he held a private meeting without his staff present in which the congressional leaders said they would commit to working together to try to deal with the various problems without working “the Washington spin cycle.”

“They understand that these aren't times for us to be playing games,” he said. “As I told the leaders at the beginning of the meeting, the next election is two years away, and there will be plenty of time for campaigning. But right now we’re facing some very serious challenges. We share an obligation to meet them. And that will require choosing the best of our ideas over the worst of our politics.”

Obama added that he looked forward to holding additional meetings, including at Camp David, noting that Senate Majority Leader Harry Reid, D-Nev., told him he had never been invited to Camp David before. “So I told him, well, we're going to have to get them all up there sometime soon,” said Obama. “And I very much appreciate their presence today. I appreciate the tenor of the conversations. I think it will actually yield results before the end of the year, and I look forward to continuing this dialogue in the months ahead.”

Senate Minority Leader Mitch McConnell, R-Ken., said before the meeting he also thought the two sides could find agreement. “There’s no reason we shouldn’t be able to reach an agreement on taxes soon,” he said. “It’s unclear how long our friends across the aisle will continue to resist the message of the election and cling to the liberal wish list that got us a job-killing health care law, a `cap-and-trade’ national energy tax, an out-of-control spending spree, million more jobs lost, trillions more in debt, but not a single appropriations bill to fund the government or a bill to prevent the coming tax hikes.

"With just a few weeks left before the end of the year, they’re still clinging to the wrong priorities — instead of preventing a tax hike, they want to focus on immigration and Don’t Ask Don’t Tell — and, maybe, if there’s time left, see what they can do about jobs and the economy," McConnell added. "Indeed, their entire legislative plan for the rest of the lame duck session appears to be to focus on anything except jobs — which is astonishing when you consider the election we’ve just had. Republicans aren’t looking for a fight. We’re appealing to common-sense and a shared sense of responsibility for the millions of Americans who are looking to us to work together not on the priorities of the left, but on their priorities. And those priorities are clear. Together, we must focus on the things Americans want us to do — not on what government wants Americans to accept. There is still time to do the right thing. The voters want us to show that we heard them, and Republicans are ready to work with anyone who’s willing to do just that.”

House Minority Leader John Boehner, R-Ohio, who is expected to become Speaker of the House in January, gave his conditional support after the meeting, “It’s encouraging to see President Obama acknowledge that the American people want us to focus on creating jobs and cutting spending, but now it’s time to act,” Boehner said in a statement after the meeting. “If President Obama and Democratic leaders come up with a plan in the lame-duck session to cut spending and stop all the tax hikes, they can expect a positive response from Republicans. If the lame-duck Congress is unable or unwilling to act, the new House majority will in January.”

Boehner also noted that President Obama has asked congressional leaders of both parties to select lawmakers to meet with administration officials in the coming days regarding the looming tax hikes scheduled to take effect on January 1. Boehner announced that Ways and Means Committee Ranking Member Dave Camp, R-Mich., would be the House GOP designee in these discussions.

Boehner added, “We appreciate President Obama’s interest in having informal discussions on stopping all the tax hikes, and we hope these talks are productive. At the same time, this is no substitute for action. Republicans made a pledge to America to cut spending and permanently stop all the tax hikes, and that’s exactly what we’re fighting for.”

By Michael Cohn
Accounting Today

Tuesday, November 30, 2010

4 End-of-Year Tax Tips You Can Use Right Now

1. Prepay Your Expenses, Using the Safe Harbor

Safe harbors are great.

IRS Regulation 1.263(a)-4(f) contains a safe-harbor rule that allows cash-basis taxpayers to prepay qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS.

Safe-harbor prepayments you make for calendar year 2010 may not go into 2012. This makes sense, since you may prepay only 12 months of 2010 qualifying expenses under the safe-harbor rule. For a cash-basis taxpayer, qualifying expenses include lease payments on business vehicles, rent payments on offices and machinery, and business and malpractice insurance.

Example 1. Sam Krueger, a cash-basis taxpayer, pays office rent of $1,500 a month. Today, he pays 12 months' rent in advance. Mr. Krueger deducts $18,000 this year.

Example 2. Jim Ford dates and mails his $24,000 rent prepayment for 2011 on Friday, December 31, 2010. His landlord does not receive the payment in the mail until Tuesday, January 4, 2011. Here are the results:

Mr. Ford deducts $24,000 in 2010.

The landlord reports the income in 2011.

Mr. Ford gets what he wants--the deduction this year.

The landlord gets what he wants--next year's 12 months' rent in advance but taxable in the year he expected it to be taxable.

Had the landlord received the $24,000 rent in 2010, he would have paid taxes on the rent money in 2010.

Before sending a big rent check to the landlord, make sure the landlord understands the strategy. Otherwise, he might not deposit the rent check and, instead, return it to you. This could put a crimp in the strategy, since you operate on a cash basis.

Also, think proof. Remember, the burden of proof is on you. How do you prove that you mailed the check on December 31?

Answer: Send the check by certified or registered mail. The postal receipt shows the date it was mailed. The delivery receipt shows the date the landlord received the check.

2. Stop Collecting Income

This simple strategy is great for the cash-basis taxpayer and is rock-solid easy.

Want to pay less tax this year? Collect less income this year. How? Simply stop sending bills to your customers, clients, or patients until after December 31.

Example. Bill Bradley, a dentist, usually bills his patients and the insurance companies at the end of each week. During December, he does not send the bills. Instead, he accumulates the December bills and mails them the first week of January. Presto! He just avoided paying taxes on his December income by moving it to next year.

If Dr. Bradley invests his savings this year and then continues using this strategy and investing year after year, he can accumulate a significant new nest egg (realistically, tens of thousands of dollars), thanks solely to planning his cash receipts.

Dr. Bradley could combine this putting-off-his-cash-receipts strategy with a paying-his-bills-in-advance strategy to accumulate even more cash.

3. Buy Office Equipment

The overall 2010 limit on Section 179 expensing is $500,000. Qualifying items include personal property such as equipment, computers, desks, and chairs.

Lawmakers designed Section 179 expensing for the small business.

If you buy and place in service more than $2 million of qualifying Section 179 property during the year, you must reduce the $500,000 maximum benefit by one dollar for each dollar in excess of $2 million. If you are buying more than $500,000 in Section 179 assets, don't worry too much about the fact that you can't deduct all the assets in total. Remember, for 2010, you also have 50 percent bonus depreciation available.

Assuming you want deductions this year, the combination of Section 179 expensing and the newly reenacted 50 percent bonus depreciation makes this a very good year to buy Section 179 assets.

4. Pay Your Children for Business Chores

Did your under-age-18 children help you in your business this year? Did you pay them for their work?

You should.

Why? First, wages paid by the parent to the parent's under-age-18 child for work done in the parent's business are both deductible by the parent, and exempt from payroll taxes.

Thus, if you operate your business as a proprietorship or a single-member LLC, you face no payroll taxes on the W-2 wages you pay your under-age-18 child.

Second, your child can use the 2010 standard deduction to eliminate taxes on up to $5,700 in wages.

Third, your child can contribute up to $5,000 to a tax-deductible IRA and exclude that amount from taxable wages.

Example. Your child is age 14, and she has no earned income other than what she earns from you. You pay her $10,700 in fair market wages for work she actually does during the year. You deduct the $10,700 and pocket $4,280 because of your 40 percent tax bracket.

Your daughter collects the $10,700 and pays zero federal income taxes because the IRA deduction removes $5,000 from taxable income, and the standard deduction removes $5,700 from taxable income.

Your family unit has $4,280 in additional spendable cash.

Key point. To avoid payroll taxes, the wages paid by the parent to the child must be on a W-2. If you use a 1099, you destroy payroll tax benefits because your recipient child will pay self-employment taxes on the 1099 income.

Corporation. If a corporation does the hiring, both your corporation and your child face payroll taxes. This is not a deal breaker for the strategy, but it does reduce the net family benefit. It is also a negative when considering the corporation as a possible choice of business entity.

Planning note. The kiddie tax does not apply to the child's wages. The kiddie tax applies to unearned income, such as dividends, interest, rents, etc.

Monday, November 22, 2010

Wesley Snipes Goes to Jail

A federal judge has ordered actor Wesley Snipes to begin serving his three-year prison sentence on tax charges.

Snipes was convicted in February 2008 of three misdemeanor charges of failing to file his federal income tax returns for 1999, 2000 and 2001, but was acquitted of felony charges (see Snipes Sentenced to Three Years for Tax Charges). His attorneys appealed and asked for a new trial, arguing that the case should have been tried in New York, where Snipes lived, instead of Ocala, Fla. He remained free on bail pending the outcome of his appeal. However, an appeals court upheld the conviction in July (see Appeals Court Upholds Wesley Snipes Tax Conviction).

The actor’s attorneys then asked for a retrial, claiming “jury misconduct” after they received e-mails from two jurors who claimed that three other jurors told them during deliberations they had already made up their minds to convict the actor before his trial.

However, on Friday, U.S. District Court Judge William Terrell Hodges ruled that jurors were prohibited from testifying or offering an affidavit “about any matter that occurred during deliberations except for extraneous prejudicial information, outside influence, or a mistake in entering the verdict onto the verdict form.”

He ordered Snipes to begin serving his sentence. “The Defendant, Wesley Trent Snipes, is ordered and directed to surrender himself for execution of sentence upon receipt of notice from the United States Marshal or the Bureau of Prisons as to where, when and to whom he should report for that purpose,” he wrote.

Despite Snipes’ claim that he was tried before a prejudiced jury, the judge said the “Blade” actor had a fair trial. “The Defendant Snipes had a fair trial; he has had a full, fair, and thorough review of his conviction and sentence by the Court of Appeals; and he has had a full, fair, and thorough review of his present claims, during all of which he has remained at liberty. The time has come for the judgment to be enforced.”

Snipes was taken into custody over the weekend, TMZ reported, and was listed as “in transit” to a federal prison.

By Michael Cohn, Accounting Today