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Here are some tax tips for individuals:
A PERMANENT $250K TO $500K EVERY TWO YEARS FOR YOUR OWN HOME
- This is a permanent tax break. The 1031 exchange is a temporary break, you will pay the piper on a 1031 exchange when you finally cash out 10 to 30 years from now.
- Home office. Convert personal expenses to business expenses with a proper business that is not a hobby, and using the specific rules for home office. This can get you $3,000 to $8,000 in deductions per year.
ANOTHER PERMANENT TAX BREAK IS THE ROTH IRA.
The ROTH IRA is best for young people who can build their retirement over at least 10 years, and hopefully 20 years and more.
- With the new TIPRA Act signed by President Bush May 17, 2006, high income taxpayers can sock away $1,000,000 in their SELF DIRECTED IRA, and buy properties with that money, and have a PERMANENT CAPITAL GAINS BREAK. No tax at all, except the upfront tax.
- From 2006 to 2010, you can use the ROTH 401(k). After 2011 it will be no more. You can sock away $15,000 times 5 years ($75,000) and have that build to retirement to $500,000 or whatever, with no tax due at retirement. Again, there is no tax break up front, the giant tax break is at the end.
- Kids can build their ROTH IRA by working for their parents from age 7 to 21. Just from these 15 years, it will build to $4,600,000 at their age 65, based on the average stock market return of 11% minus a 3% inflation rate.
- Your ROTH IRA can be converted to a SELF DIRECTED ROTH IRA, and purchase real estate. Imagine having the leverage of real estate to compound your returns! Imagine owning real estate and never having to pay capital gains again! There are of course caveats. The IRS generally does not want highly leveraged real estate, you must fund all expenses for future years through the Self Directed IRA. So if there are cash losses, they are funded by your Self Directed IRA. Email or call our office if you have a ROTH with at least $200,000 you may want to use this way to multiply your returns.
Here are some of the more important new federal tax developments:
2009 Recovery Act
In February, Congress passed a nearly $800 billion economic stimulus package with significant tax incentives for individuals and businesses. Many of the incentives are temporary so taxpayers need to be proactive this year not to miss them. The Economic Recovery and Reinvestment Act of 2009 (2009 Recovery Act) gives individuals an extended and enhanced first-time homebuyer tax credit, a new Making Work Pay credit, a new vehicle sales and excise tax deduction, improved energy efficiency tax breaks, and more. The 2009 Recovery Act gives businesses extended bonus depreciation and Code Sec. 179 expensing, many expanded energy tax incentives and an expanded net operating loss carryback for small businesses. Since President Obama signed the 2009 Recovery Act into law on February 17, the IRS has issued guidance on many of the tax incentives.
Making Work Pay Credit
Effective April 1, 2009, employers have started withholding at reduced rates to reflect the Making Work Pay credit. The credit is automatic and many individuals will see an immediate increase in their take home pay. However, married couples whose combined incomes place them in a higher tax bracket and individuals with more than one job may want to submit a revised Form W-4 to their employers to ensure that enough withholding is held. Our office can help you determine if you should submit a revised Form W-4 to your employer.
Economic Recovery Payments
The 2009 Recovery Act authorizes one-time payments of $250 to individuals receiving Social Security benefits, disabled veterans and others on fixed incomes. The Social Security Administration, which will be sending the bulk of the one-time payments, has announced it will start making the one-time payments by mail and direct deposit in May 2009.
Help for Taxpayers
IRS Commissioner Douglas Shulman announced in January that the agency will be sensitive to taxpayers stung by the recession. The IRS will consider suspending collection actions, granting short-term extensions of time to pay, allowing taxpayers to miss a payment under an installment agreement, and revisiting offers-in-compromise to help distressed taxpayers. The IRS chief has also said that help will only be given to taxpayers who ask and taxpayers must have a history of compliance.
Net Operating Losses
The 2009 Recovery Act allows an eligible small business to carry back its 2008 net operating loss (NOL) for three, four or five years. For fiscal year taxpayers, this applies to the NOL for the tax year either beginning or ending in 2008. To qualify for the new carryback provision, a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL. The IRS issued guidance on the new carryback in March and reminded taxpayers about some special elections to take advantage of the new provision.
Offshore Accounts
In March, the IRS invited individuals and businesses to disclose unreported assets in foreign bank accounts. In exchange for full disclosure by taxpayers not already under investigation, the IRS will agree not to criminally prosecute tax evaders. Taxpayers must pay all back taxes plus interest and penalties, although the IRS will waive the 75 percent fraud penalty.
Cost-Sharing Arrangements
At year-end 2008, the IRS issued temporary regulations making some taxpayer-friendly changes to the cost-sharing arrangement rules under Code Sec. 482. A cost-sharing arrangement is an agreement where the parties share the costs of developing one or more intangibles in proportion to their shares of the reasonably anticipated benefits from their individual exploitation of the interests in the intangibles assigned to them under the arrangement. The IRS has identified the transfer of intangibles outside the U.S. as an area of potentially high noncompliance with the tax laws.
First-Time Homebuyer Credit
The first-time homebuyer credit gives eligible individuals as much as $8,000 when they purchase a residence. The $8,000 refundable credit is only available for purchases between January 1, 2009 and December 1, 2009. In a taxpayer-friendly move, the IRS announced that individuals who purchase a home in 2009 may claim the $8,000 credit on their 2008 returns. If the home is purchased after April 15, 2009, a taxpayer may request an extension to file or file an amended return to claim the credit. Alternatively, they can wait to claim the credit when they file their 2009 returns in 2010. The IRS also announced liberal rules for allocating the credit among unmarried taxpayers.
President Obama's Budget Proposals
President Obama proposed a $3.5 trillion fiscal year (FY) 2010 federal budget in February. The president proposed several tax incentives targeted to middle-income individuals, including a permanent Making Work Pay credit and a long-term alternative minimum tax (AMT) patch. Higher-income individuals, however, would pay more if Congress agrees to allow tax cuts enacted in 2001 to expire. The president has indicated that increased taxes on higher-income individuals will pay for health care reform. More details about the president's budget proposals are expected to be released in May.
COBRA
The 2009 Recovery Act provides a special subsidy to help individuals pay for COBRA continuation coverage. Eligible individuals pay only 35 percent of their COBRA premiums and the remaining 65 percent is reimbursed to the employer or other coverage provider through a payroll tax credit. Additionally, an individual generally must have been involuntarily terminated from employment between September 1, 2008 and December 31, 2009 and fall within certain income limitations. A limited retroactive window is also available. The IRS posted information about the COBRA subsidy on its website in March and issued guidance in April.
Unemployment Benefits
Individuals receiving unemployment benefits in 2009 can exclude the first $2,400 from their incomes. The IRS reminded taxpayers about the exclusion (which, unlike other tax incentives has no income limitations) in March. The exclusion is only available for 2009. Individuals who are receiving unemployment compensation can elect to have income tax withheld. Our office can help you determine if withholding will be beneficial for you.
Broker Basis Reporting
In 2008, Congress passed the Emergency Economic Stabilization Act which, among other things, requires mandatory broker basis reporting. Brokers must report the adjusted basis of publicly-traded securities when reporting sales transactions and indicate whether gain is long-term or short-term. Reporting will be effective for stock acquired in 2011, mutual funds acquired in 2012, and other securities acquired in 2013. The IRS announced in February that it was developing guidance on broker basis reporting and requested comments from interested parties.
Automatic Enrollment
The Obama Administration is touting automatic enrollment in 401(k)s and similar plans as an effective way to encourage workers to save for retirement. In February, the IRS issued final regulations to facilitate automatic enrollment in 401(k)s, 403(b) tax sheltered annuities and 457(b) government deferred compensation plans.
Private Tax Collection
Several years ago, the IRS hired private collection agencies to handle certain collection cases. The move was immediately controversial. Supporters argued that these were cases that the IRS would otherwise not be working. Opponents argued that IRS employees and not private entities should be contacting taxpayers about their tax debts. In March, the IRS announced that it was ending the private collection initiative. The IRS collected about $70 million from the program over two years.
Ponzi Scams
Ponzi and similar scams have victimized taxpayers for years. Recently, a prominent investment advisor pleaded guilty to a massive Ponzi scheme involving securities fraud, money laundering and mail and wire fraud. The IRS released guidance in March clarifying the tax treatment of fraudulent investment scams. Among other things, the investor may be entitled to an ordinary theft loss rather than just a capital loss.
Saver's Credit
Many of your employees should be made aware of a significant benefit that will reward them immediately for saving for retirement. The Saver's Credit (also known as the retirement savings contribution credit) is available to encourage lower- and middle-income taxpayers to contribute to an employer-sponsored retirement plan or to an IRA.
The amount of the Saver's Credit is based on the contributions the individual makes and his or her credit rate. The maximum contribution taken into account is $1,000 ($2,000 for married couples filing jointly). The credit rate can reach as high as 50 percent depending on adjusted gross income. An individual's filing status also impacts the credit rate.
The credit rates are as follows:
- There is a 50 percent credit rate for married taxpayers filing jointly with income up to $33,000; for heads of household with income up to $24,750; and for single individuals with income up to $16,500.
- There is a 20 percent credit rate for married taxpayers filing jointly with income of $33,000-$36,000; heads of household with income of $24,750-$27,000; and single individuals with income of $16,500-$18,000.
- There is a 10 percent credit rate for married taxpayers filing jointly with income of $36,000-$55,500; heads of household with income of $27,005-$41,625; and single individuals with income of $18,000-$27,750.
Taxpayers must be a minimum of 18 years old and not be claimed on someone else's return as a dependent. A student generally cannot take the credit. Additionally, the Saver's Credit supplements other tax benefits for retirement. Consequently, some individuals may not get the full benefit of the credit.
Social Security Earnings Limit
The economic downturn has forced many retired individuals back into the workforce. In addition to earning a salary, these individuals may also be receiving Social Security benefits. Depending on the individual's age, benefits may be reduced and included in the recipient's gross income.
Taxpayers at and above full retirement age can continue to earn unlimited amounts without any reduction in Social Security benefits. Full-retirement age was 65 for many years. However, beginning with people born in 1938 or later, that age will gradually increase until it reaches 67 for people born after 1959.
Individuals under full retirement age have their Social Security benefits reduced if they earn over an exemption amount. For those reaching full retirement age in 2009, $1 will be withheld for every $3 in earnings above $37,680.
A portion of Social Security benefits is included in the gross income of a recipient whose total income exceeds applicable base and adjusted base amounts. The base amounts and adjusted base amounts vary with the filing status of the recipient. For example, single individuals have a base amount of $25,000 and an adjusted base amount of $34,000. Married couples filing jointly have a single combined base amount of $32,000 and a single combined adjusted base amount of $44,000.
Since income tax is not withheld on Social Security, you may need to pay estimated tax. Our office can help you determine if you should pay estimated tax. Additionally, even though Social Security benefit payments are not automatically subject to withholding, a taxpayer may request to have federal income tax withheld from them.
Income Tax Planning - The Kiddie Tax
In recent years, Congress has made many changes to the so-called "kiddie tax." Effective for 2009 and later years , the "kiddie tax" applies to the unearned income of children who are under 19 (under 24 if a student). When a qualified child has unearned income in excess of a certain amount and does not file a joint return, the kiddie tax may be applied to that income at the parents' tax rate instead of the child's tax rate.
Congress created the kiddie tax to prevent abuses. It is designed to lessen the effectiveness of intra-family transfers of income-producing property, which shift income produced from such property from the parents' high marginal tax rate to the child's generally lower tax bracket, thereby reducing a family's overall income tax liability.
The kiddie tax applies when one of the child's parents is alive at the close of the tax year; the child does not file a joint return for the tax year, and the child is in one of three categories. The categories are: (1) the child has not attained the age of 18 by the close of the tax year; (2) the child has not attained the age of 19 by the close of the tax year, and the child's earned income is less than one-half of the child's support for the year; or (3) the child is a student who has not attained the age of 24 by the close of the tax year, and the child's earned income is less than one-half of the child's support for the year. The kiddie tax rules do not apply to a child who is married. Generally, the parent whose taxable income is taken into account is the custodial parent if the parents are divorced or otherwise not married; if the parents are married but are filing separate returns, the return of the parent with the greater taxable income must be used.
Let's take a look at an example. Harry is 13 years old and his father is alive. In 2009, he has $3,000 in unearned income, no earned income, and no itemized deductions. Harry's basic standard deduction is $950, which is applied against his unearned income, reducing it to $2,050. The next $950 of unearned income is taxed at Harry's individual tax rate. The remaining amount of his unearned income is subject to the kiddie tax and is taxed at his father's rate. The age cap on the kiddie tax allows you to plan in several ways. You may want to set up a gift-giving program. You may also want to wait to transfer property that will produce the most income only starting after the year in which the child reaches 19 (or 24). An investment in raw land with appreciation potential is one example. Some parents buy Series EE bonds for the child and have the child elect to defer tax on the interest as it accrues. Another idea is to buy cash-value life insurance. Inside build-up from the policy generally will accumulate tax-free.
You will also need to take into account any alternative minimum tax (AMT) liability. The source of the unearned income also is an important factor. One more thing: do not forget that the kiddie tax applies only to unearned income. If you run your own business, you may get some modest savings if your child can legitimately be hired to work in the business.
Of course, careful planning and attention to detail are necessary, not only to achieve the intended tax consequences but also to ensure that any action fits in with your overall financial and family goals. Please do not hesitate to call if you would like to explore in greater detail the changes to the kiddie tax rules and any of these or other tax-saving ideas.
Special Tax Break for Purchasers of New Vehicles
Congress wants you to purchase a new car or truck to help revive the U.S. economy. To encourage new vehicle sales, the American Recovery and Reinvestment Act of 2009 provides a deduction for state and local sales and use taxes. However, the deduction is temporary so you will need to purchase a new vehicle this year to take advantage of the tax savings.
The temporary deduction can be claimed by taxpayers regardless of whether they itemize their deductions or take the standard deduction. Taxpayers who itemize deductions and deduct state and local income taxes can also deduct the new car purchase above-the-line. Taxpayers who deduct state and local general sales taxes as an itemized deduction cannot "double-dip" and take the above-the-line deduction for new car sale taxes. While loosely described -- even by the IRS -- as above-the-line, technically, the new deduction is an increase in the standard deduction. As such, it does not reduce adjusted gross income, which is used to limit certain other deductions.
Taxpayers can deduct state and local sales and use taxes paid on the first $49,500 of the purchase price of the new vehicle. . In addition to cars, SUVs, light trucks, motorcycles, and mobile homes qualify as new vehicles. Leased vehicles do not qualify for the deduction. Used vehicles also do not qualify for the deduction. New hybrid vehicles, on the other hand, may entitle you not only to the new vehicle sales tax deduction but also to an alternative motor vehicle tax credit.
