1. Prepay Your Expenses, Using the Safe Harbor
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?
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.
Wednesday, November 24, 2010
Monday, November 22, 2010
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
Thursday, November 18, 2010
Make some tax moves now that could lower what you'll owe Uncle Sam on your 2010 income tax return. Here are five easy ones.
1. Sell appreciated assets
The long-term capital gains tax rates are at historic lows. There's a chance they soon could be at least a few, and possible many, percentage points higher. So you'll owe the Internal Revenue Service less if by Dec. 31, you sell stock and other assets that have appreciated and that you've owned for more than a year.
If you're in the 25 percent tax rate bracket or higher, your long-term capital gains rate is just 15 percent. If you're in the 15 percent income tax bracket or lower, you won't owe any capital gains taxes.
2. Give to your favorite charity
The holidays are the traditional time for giving. When it comes to taxes, giving to a nonprofit also could be a money-saving gift to yourself. If you itemize your deductions, you can claim your charitable donations, both of cash or goods.
Loading up on such deductible expenses is a particularly good move for taxpayers who are on the cusp of being able to itemize but aren't quite there, says Stacie Clifford Kitts, CPA and partner at Katherman Kitts & Co. in Irvine, Calif.
Higher-income individuals in particular should consider ramping up their generosity in 2010. The law limiting the total amount of itemized deductions that wealthier taxpayers can claim has been in the tax code for more than 20 years. But under the Bush tax cuts, this reduction in deductions was gradually phased out. In 2010, and this year only (at least for now), there is no itemized deduction limit for anyone. So everyone, regardless of how much they make, gets to claim all of their itemized deductions on their Schedule A.
Giving generously to a qualified charity will give you maximum bang for your tax deduction dollar. Remember, though, that increasing deductions could cost you if you end up owing under the alternative minimum tax.
3. Convert to Roth retirement accounts
Every year's a good year to add to your nest egg, but 2010 offers special tax options if you want to convert a traditional IRA to a Roth IRA. Anyone can move traditional funds into a Roth account now that the $100,000 income threshold is gone. However, taxes still will be due on any converted money that was not previously taxed.
But if you make the traditional-to-Roth IRA switch by Dec. 31, you can defer payment of the associated taxes until you file your 2011 and 2012 tax returns.
A similar situation applies to some workplace 401(k) account owners. If you have considerable funds in a 401(k) plan and want to convert some or all of your account to a designated Roth 401(k), you can now do so, says Pauline Dana-Bashian, an attorney with Pension Parameters Financial Services in New York City. As with the Roth IRA conversion, the resulting 401(k) taxes can be deferred until 2011 and 2012.
4. Embrace energy efficiency
Thanks to the last stimulus package, some relatively simple energy-efficient home improvements could help cut your utility and IRS bills. Replacing windows, doors, and heating and air conditioning systems, as well as installing new insulation, could net you a $1,500 tax credit on your 2010 tax bill. This means if you owe the IRS $2,000, your bill is trimmed to just $500. Note, however, that if you claimed the full credit on your 2009 return, you don't get it again this tax year.
Don't limit your energy savings to your house. Some hybrid vehicles could get you another federal tax credit. True, because of the way the program phased out popular alternative fuel autos, the pickings are a bit slim. But there still are some hybrid vehicles that can save you some 2010 tax dollars as long as you buy an eligible vehicle by the end of the year.
5. Adjust your withholding
Do you intentionally get a big refund each filing season? Quit that! You're providing Uncle Sam an interest-free loan of your money.
Give your payroll administrator a new W-4 now so that your payroll withholding is more closely in line with your future IRS bill. It could even give you a few extra dollars at the end of the year to spend on holiday gifts.
If you're facing the opposite issue -- owing the IRS a lot -- adjusting your withholding now can help, too. By making a change in allowances or even adding specific extra dollar amounts to be withheld through the rest of the year, you can ensure that you won't face a possible underpayment penalty when you file your 2010 return.
By Kay Bell • Bankrate.com
Wednesday, November 17, 2010
IRS Seeks to Return $164.6 Million in Undelivered Checks to Taxpayers; Recommends E-file and Direct Deposit to Eliminate Future Delivery Problems
“We want to make sure taxpayers get the money owed to them,” said IRS Commissioner Doug Shulman. “If you think you are missing a refund, the sooner you update your address information, the quicker you can get your money.”
A taxpayer only needs to update his or her address once for the IRS to send out all checks due. Undelivered refund checks average $1,471 this year, compared to $1,148 last year. Some taxpayers are due more than one check.
The average dollar amount for returned refunds rose by just over 28 percent this year, possibly due to recent changes in tax law which introduced new credits or expanded existing credits, such as the Earned Income Tax Credit.
If a refund check is returned to the IRS as undelivered, taxpayers can generally update their addresses with the “ Where’s My Refund?” tool on IRS.gov. The tool also enables taxpayers to check the status of their refunds. A taxpayer must submit his or her Social Security number, filing status and amount of refund shown on their 2009 return. The tool will provide the status of their refund and, in some cases, instructions on how to resolve delivery problems.
Taxpayers checking on a refund over the phone will receive instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.
While only a small percentage of checks mailed out by the IRS are returned as undelivered, taxpayers can put an end to lost, stolen or undelivered checks by choosing direct deposit when they file either paper or electronic returns. Taxpayers can receive refunds directly into their bank, split a tax refund into two or three financial accounts or even buy a savings bond.
The IRS also recommends that taxpayers file their tax returns electronically, because e-file eliminates the risk of lost paper returns. E-file also reduces errors on tax returns and speeds up refunds. E-file combined with direct deposit is the best option for taxpayers; it’s easy, fast and safe.
The public should be aware that the IRS does not contact taxpayers by e-mail to alert them of pending refunds and that such messages are common identity theft scams. The agency urges taxpayers not to release any personal information, reply, open any attachments or click on any links to avoid malicious code that will infect their computers. The best way for an individual to verify if she or he has a pending refund is going directly to IRS.gov and using the “ Where’s My Refund?” tool.
Tuesday, November 16, 2010
Sunday, November 14, 2010
Friday, November 12, 2010
The 31-year-old pro basketball player sued the IRS for sending him a tax bill of $87,000 for 2007, according to Forbes.com. The bill included $9,000 in interest.
Odom claimed $9.3 million in adjusted gross income that year, and has more recently signed a multi-year deal with the Lakers for up to $33 million. He also earns income from his own line of clothing and endorsements of Samsung mobile phones.
The IRS informed Odom in a note accompanying the bill, “We have disallowed some of the expenses you claimed as business expenses because it was determined they were personal expenses and not deductible.”
Odom has not hired a tax attorney and wrote his own response to the IRS. He objected to the tax bill, noting, “The fines imposed by the team and the NBA are not imposed for the violation of any government law and are therefore not specifically excluded.”
Odom also characterized the player fines as an “ordinary and necessary employee business expense.”
By WebCPA Staff
Thursday, November 11, 2010
The elective deferral (contribution) limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government’s Thrift Savings Plan remains unchanged at $16,500.
The catch-up contribution limit under those plans for those aged 50 and over remains unchanged at $5,500.
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000.
The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to 179,000 for married couples filing jointly, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.
The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $56,500 for married couples filing jointly, up from $55,500 in 2010; $42,375 for heads of household, up from $41,625; and $28,250 for married individuals filing separately and for singles, up from $27,750.
Below are details on both the unchanged and adjusted limitations.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
The limitations that are adjusted by reference to Section 415(d) generally will remain unchanged for 2011. This is because the cost-of-living index for the quarter ended Sept. 30, 2010, while greater than the cost-of-living index for the quarter ended Sept. 30, 2009, is less than the cost-of-living index for the quarter ended Sept. 30, 2008, and, following the procedures under the Social Security Act for adjusting benefit amounts, any decline in the applicable index cannot result in a reduced limitation. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) will be $16,500 for 2011, which is the same amount as for 2009 and 2010. This limitation affects elective deferrals to Section 401(k) plans, Section 403(b) plans, and the federal government’s Thrift Savings Plan.
Effective Jan. 1, 2011, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) remains unchanged at $195,000. Pursuant to section 1.415(d)-1(a)(2)(ii) of the Income Tax Regulations, the adjustment to the limitation under a defined benefit plan under section 415(b)(1)(B) is determined using a special rule that takes into account that the cost-of-living indexes for the quarter ended Sept. 30, 2009, and for the quarter ended Sept. 30, 2010, were both less than the cost-of-living index for the quarter ended Sept. 30, 2008, and that the cost-of-living index for the quarter ended Sept. 30, 2010, is greater than the cost-of-living index for the quarter ended Sept. 30, 2009. For a participant who separated from service before Jan. 1, 2010, the participant’s limitation under a defined benefit plan under section 415(b)(1)(B) is unchanged (i.e., the adjustment factor is 1.0000). For a participant who separated from service during 2010, the limitation under a defined benefit plan under Section 415(b)(1)(B) for 2011 is computed by multiplying the participant's 2010 compensation limitation by 1.0118 in order to reflect changes in the cost-of-living index from the quarter ended Sept. 30, 2009, to the quarter ended Sept. 30, 2010.
The limitation for defined contribution plans under Section 415(c)(1)(A) remains unchanged for 2011 at $49,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2011 are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $16,500.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) remains unchanged at $245,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $160,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period remains unchanged at $985,000, while the dollar amount used to determine the lengthening of the 5 year distribution period remains unchanged at $195,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $110,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, remains unchanged at $360,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $16,500.
The compensation amounts under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes remains unchanged at $95,000. The compensation amount under Section 1.61 21(f)(5)(iii) remains unchanged at $195,000.
The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2011 are as follows:
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $33,500 to $34,000; the limitation under Section 25B(b)(1)(B) is increased from $36,000 to $36,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $55,500 to $56,500.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $25,125 to $25,500; the limitation under Section 25B(b)(1)(B) is increased from $27,000 to $27,375; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $41,625 to $42,375.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $16,750 to $17,000; the limitation under Section 25B(b)(1)(B) is increased from $18,000 to $18,250; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $27,750 to $28,250.
The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,000.
The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $89,000 to $90,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) remains unchanged at $56,000. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $167,000 to $169,000.
The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $167,000 to $169,000. The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $105,000 to $107,000.
The dollar amount under Section 430(c)(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under section 430(c)(2)(D) has been made is increased from $1,000,000 to $1,014,000.
Wednesday, November 10, 2010
Tuesday, November 9, 2010
Expanded Recovery Act Tax Credits Help Homeowners Winterize their Homes, Save Energy; Check Tax Credit Certification Before You Buy, IRS Advises
Last year’s Recovery Act expanded two home energy tax credits: the nonbusiness energy property credit and the residential energy efficient property credit.
Nonbusiness Energy Property Credit
This credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items does not count.
By spending as little as $5,000 before the end of the year on eligible energy-saving improvements, a homeowner can save as much as $1,500 on his or her 2010 federal income tax return. Due to limits based on tax liability, amounts spent on eligible energy-saving improvements in 2009, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. These tax savings are on top of any energy savings that may result.
Residential Energy Efficient Property Credit
Homeowners going green should also check out a second tax credit designed to spur investment in alternative energy equipment. The residential energy efficient property credit equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Generally, labor costs are included when figuring this credit. Also, except for fuel cell property, no cap exists on the amount of credit available.
Not all energy-efficient improvements qualify for these tax credits. For that reason, homeowners should check the manufacturer’s tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer’s website or with the product packaging. Normally, a homeowner can rely on this certification.
The IRS cautions that the manufacturer’s certification is different from the Department of Energy’s Energy Star label, and not all Energy Star labeled products qualify for the tax credits.
Eligible homeowners can claim both of these credits when they file their 2010 federal income tax return. Because these are credits, not deductions, they increase a taxpayer’s refund or reduce the tax owed. An eligible taxpayer can claim these credits, regardless of whether he or she itemizes deductions on Schedule A . Use Form 5695, Residential Energy Credits, to figure and claim these credits.