Tax Deductions: How Much $$$ Are They Saving You?

Taxpayers frequently ask what benefit is derived from a tax deduction. Unfortunately, there is no straightforward answer. The reason why the benefit cannot be determined simply is because some deductions are above-the-line, others must be itemized, some must exceed a threshold amount before being deductible, and certain ones are not deductible for alternative minimum tax purposes, while business deductions can offset both income and self-employment tax. In other words, there are many factors to consider, and the tax benefits differ for each individual, depending upon his or her situation.

For most non-business deductions, the savings are based upon your tax bracket. For example, if you are in the 25% tax bracket, a $1,000 deduction would save you $250 in taxes. However, if taxable income is close to transitioning into the next-lower tax bracket, the benefit will be less. You also need to consider whether the particular deduction is allowed on your state return and what your state tax bracket is to determine the total tax savings.

Some deductions such as IRA and self-employed retirement plan contributions, alimony, student loan interest, moving expenses, etc., are adjustments to income or what we call “above-the-line” deductions. These deductions provide a dollar-for-dollar benefit. Deductions that fall into the itemized category must exceed the standard deduction for your filing status before any benefit is derived. In addition, the medical deductions are reduced by 7.5% of your AGI (income), and the miscellaneous deductions are reduced by 2% of your AGI. For taxpayers subject to the alternative minimum tax, the medical adjustment raises to 10%, while the deductions for taxes, home equity interest, and the miscellaneous deductions above the 2%-of-AGI floor are not allowed at all.

The most beneficial deductions, business deductions, fall into two categories: employee business expenses, which are treated as miscellaneous itemized deductions subject to the limitations described previously, and self-employed business expenses that offset both income tax and, depending upon the circumstances, self-employment tax. For 2008, the self-employment tax rate is 12.4% of the first $102,000 of income subject to SE tax plus 2.9% for the Medicare tax with no cap. For self-employed businesses with less than $102,000 of net income, the effective SE tax rate is 15.3%. Thus, for small businesses with profits of less than $102,000, the benefit derived from deductions generally will include the taxpayer’s tax bracket plus 15.3%. For example, for a taxpayer in the 25% tax bracket, the benefit could be as much as 38.3% (25% 15.3%) of the deduction. If the deduction were $2,000, the tax savings could be as much as $766 - and even more when the taxpayer’s state income tax bracket is included.

If you are planning an expenditure and expect the tax deductions to help cover the cost, please give us a call in advance to ensure that the tax benefit is what you anticipate it to be.

Bill Would Extend COBRA Coverage by Six Months

The Extended COBRA Continuation Protection Act of 2009 (H.R. 3930) has been introduced to extend by six months the maximum COBRA continuation coverage period. See www.dcemploymentlawupdate.com/2009/10/articles/employee-benefits/bill-would-extend-cobra-coverage-by-six-months/

WHAT IS COBRA?
COBRA stands for Consolidated Omnibus Budget Reconciliation Act. It was passed by congress in 1986 which amended the Employee Retirement Income Security Act (ERISA), the Internal Revenue Code and the Public Health Service Act to provide continuation of group health coverage that otherwise would be terminated do to the of employment. It covers former employees and retirees as well as their spouses and dependent children. It provides the right to temporary continuation of health coverage at group rates. The coverage is extended to18 months for the person whose employment ended [in some cases 36 months in the case of death or divorce]. The coverage for COBRA participants is usually more expensive than health coverage for active employees, since usually the employer formerly paid a part of the premium. It is ordinarily less expensive, though, than individual health coverage. This can be a burden for the person who unexpectedly loss employment for it creates an unexpected financial burden; they not only loose income but health care expenses increase due to the former employee paying the former employer’s share of health insurance.

The American Reinvestment and Recovery Act [ARRA] passed in February 2009 gave relief to employees who lost their job as a result on the recession from September 1, 2008 to December 31, 2009. It gave eligible individuals a 65% subsidy on the COBRA premiums. The Federal government through a tax credit on the payroll tax returns would reimburse the former employers.

WHEN WILL IT END?
The subsidy as part of ARRA is to end on December 31, 2009. However, the Extended COBRA Continuation Protection Act of 2009 would extend COBRA benefits in three ways. First, the bill would extend from 9 to 15 months the total allowable time an unemployed worker can receive COBRA premium assistance. Second, the bill extends this assistance to individuals who are involuntarily terminated between January 1 and June 30, 2010. Third, it would extend eligibility for traditional COBRA coverage an additional 6 months, from 18 to 24 months, for individuals terminated at the beginning of the economic recession in 2008. No extended COBRA premium assistance or extended COBRA benefits would extend beyond December 31, 2010.

HOW DOES THIS AFFCT EMPLOYES/EMPLOYERS?
This will be a tremendous assistance to employees who lost their job as the result of the recession. With more people, being added to the unemployment rolls and more people applying for extended unemployment benefits, extending the subsidy and including people who lost employment after December 31, 2008 can make a big difference in their health and the health of their families.

This should have no impact on most employers for they reduce by the amount of the subsidy the payroll tax liability on the quarterly payroll tax returns and payroll tax deposits during the quarter.

ANYTHING EMPLOYEES SHOULD DO BEFORE THE END OF THE YEAR?
The only thing employees should do is to stay in contact with the COBRA administer. For many companies that is a company hired specifically for administrating COBRA premiums and not the HR department of the company. The employee should automatically get communications from the administrator, but it is a good practice for the employee to be proactive and find out who the COBRA administrator is. Giving them a call is a good way to make sure the employee does not “fall in-between the cracks”

Contact me for more information or visit me on the web at www.TheJohnEllisCompany.com

UPDATE OF TAX AND BENEFIT BILLS MOVEING THOUGH CONGRESS

FIRST TIME HOME BUYER CREDIT
Currently the $8,000 tax credit will expire on November 30, 2009. Congress is expected to extend the expiration date to January 31, 2010 and there will not be a requirement for the sale to be completed, just a signed contract. There is extra relief for members of the Armed Forces who are not able to take the credit because of extended duty overseas; they have until the end of 2010. There are amendments to include people who are not first time home buyers and increase the credit to $15,000, but not expected to pass

MEDICARE PART B PREMIUMS
The increase in higher Medicare Part B premiums is expected to be blocked by Congress. In addition an extra payment to beneficiaries is expected be OK’d this fall of $150 to $250 per beneficiary.

UNEMPLOYMENT BENEFITS
It appears an extension of unemployment benefits for 13 weeks is a done deal. This will help those who have had been unemployed more then 12 months. However to pay for this an additional 0.2% Federal unemployment surtax on employers will be extended for one year through 2010.

OTHER INCOME TAX BREAKS TO BE EXTENDED
Research and Development Tax Credit, write-offs for state sales tax, college tuition, and teachers’ classroom supplies and tax-free IRA payouts to charity are expected to be extended through 2010

INCOME TAX BREAKS TO RE REPEALED
Waver of mandatory payouts from IRAs and plans for people over 70 ½ and the repeal of the estate tax. Currently the estate tax is to disappear in 2010 and Congress is expected to keep it. However, the $3.5 million exemption for 2009 will be kept as well as the estate tax rate of 45%.

AMT EXEMPTIONS
AMT exemptions are expected to be raised so they will not revert to pre-2001 levels.

For more information, call John Ellis CPA at The John Ellis Company [310-426-2101]

APPLYING TO BE AN EXEMPT ORGANIZATION WILL COST MORE NEXT YEAR.

Applications to the IRS postmarked January 3, 2010 or later will require a $400 fee in lieu of the current fee of $300 if gross receipts are $10,000 or less. If gross receipts are over $10,000 the fee charged by the IRS will be $850, up from $750. However if the application is made over the internet, the fee will be only $200, regardless of size. The IRS new Web based system is NOT yet up and running but they say it will be sometime in 2010.

COURT RULES AGANST CONCERT PIANIST

A district court ruled that a concert pianist cannot deduct the cost of fancy clothing that she wore while performing. She shopped at high-end stores for special gowns, dresses, shoes and jewelry to wear only at concerts and deducted the cost as business expenses. She did not wear the items outside of the concert hall. The court disallowed the deduction because other people wear similar clothing in other settings [Tilman, D.C., N.Y.]

8 Tips for Taxpayers Who Owe Money to the IRS

The vast majority of Americans get a tax refund from the IRS each spring, but what do you do if you are one of those who received a tax bill? Here are eight tips for taxpayers who owe money to the IRS.

If you get a bill this summer for late taxes, you are expected to promptly pay the tax owed including any additional penalties and interest. If you are unable to pay the amount due, it is often in your best interest to get a loan to pay the bill in full rather than to make installment payments to the IRS.

You can also pay the bill with your credit card. To pay by credit card contact either Official Payments Corporation at 800-2PAYTAX (also www.officialpayments.com) or Link2Gov at 888-PAY-1040 (also www.pay1040.com).

The interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the Internal Revenue Code.

You can also pay the balance owed by electronic funds transfer, check, money order, cashier's check or cash. To pay using electronic funds transfer you can take advantage of the Electronic Federal Tax Payment System by calling 800-555-4477 or 800-945-8400 or online at www.eftps.gov.

An installment agreement may be requested if you cannot pay the liability in full. This is an agreement between you and the IRS for the collection of the amount due in monthly installment payments. To be eligible for an installment agreement, you must first file all returns that are required and be current with estimated tax payments.

If you owe $25,000 or less in combined tax, penalties and interest, you can request an installment agreement using the web-based application called Online Payment Agreement found at IRS.gov.

You can also complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill in the envelope that you have received from the IRS. The IRS will inform you usually within 30 days whether your request is approved, denied, or if additional information is needed. If the amount you owe is $25,000 or less, provide the monthly amount you wish to pay with your request. At a minimum, the monthly amount you will be allowed to pay without completing a Collection Information Statement, Form 433, is an amount that will full pay the total balance owed within 60 months.

You may still qualify for an installment agreement if you owe more than $25,000, but a Form 433F, Collection Information Statement, is required to be completed before an installment agreement can be considered. If your balance is over $25,000, consider your financial situation and propose the highest amount possible, as that is how the IRS will arrive at your payment amount based upon your financial information.

If an agreement is approved, a one-time user fee will be charged. The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account. For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged, and is automatically figured based on your income.

For more information about installment agreements and other payment options call us at 310-426-2101 or visit the IRS Web site at IRS.gov.

Clean Energy Equipment Tax Credits Ending Soon

The Sept. 16 deadline is nearing for submitting a preliminary application for the federal government’s Section 48C tax credit program for manufacturers of clean energy equipment.

The American Reinvestment and Recovery Act authorizes the Treasury Department to award $2.3 billion in tax credits for qualified investments in advanced energy projects to support new, expanded or re-equipped domestic manufacturing facilities. The $2.3 billion will be distributed via a new program that provides an investment tax credit of 30 percent for manufacturers of particular types of energy equipment and materials.

The credits will support an estimated $7.7 billion in total capital investments in new renewable and advanced energy-manufacturing projects. The tax credit will apply to manufacturing facilities that support generation and conservation, but not the energy generation projects themselves, which are being supported by separate tax incentive programs.

For more information call John Ellis CPA at The John Ellis Company [310-426-2101]

New Credit Card Scam

This article was posted on snopes.com

This [fraud] is pretty slick since they provide YOU with all the information, except the one piece they want.

The callers do not ask for your card number; they already have it... One of our employees was called on Wednesday from 'VISA', and I was called on Thursday from 'Master Card'.. The scam works like this:

"This is (name), and I'm calling from the Security and Fraud Department at VISA. My Badge number is 12460. Your card has been flagged for an unusual purchase pattern, and I'm calling to verify. This would be on your VISA card which was issued by (name of bank). Did you purchase an Anti-Telemarketing Device for $497.99 from a Marketing company based in ?"

When you say 'No', the caller continues with,

"Then we will be issuing a credit to your account. This is a company we have been watching and the charges range from $297 to $497, just under the $500 purchase pattern that flags most cards. Before your next statement, the credit will be sent to (gives you your address), is that correct?"

You say 'yes'. The caller continues:

"I will be starting a Fraud investigation. If you have any questions, you should call the 1- 800 number listed on the back of your card (1-800 -VISA) and ask for Security. You will need to refer to this Control Number. The caller then gives you a 6 digit number. 'Do you need me to read it again?"

Here's the IMPORTANT part on how the scam works.

The caller then says, 'I need to verify you are in possession of your card'. He'll ask you to 'turn your card over and look for some numbers'. There are 7 numbers; the first 4 are part of your card number, the next 3 are the security Numbers that verify you are the possessor of the card. These are the numbers you sometimes use to make Internet purchases to prove you have the card. The caller will ask you to read the 3 numbers to him. After you tell the caller the 3 numbers, he'll say, 'That is correct, I just needed to verify that the card has not been lost or stolen, and that you still have your card. Do you have any other questions?' After you say No, the caller then thanks you and states, 'Don't hesitate to call back if you do, and hangs up.

You actually say very little, and they never ask for or tell you the Card number.. But after we were called on Wednesday, we called back within 20 minutes to ask a question.. Are we glad we did! The REAL VISA Security Department told us it was a scam and in the last 15 minutes a new purchase of $497.99 was charged to our card.

Long story - short - we made a real fraud report and closed the VISA account. VISA is reissuing us a new number. What the scammers want is the 3-digit PIN number on the back of the card Don't give it to them. Instead, tell them you'll call VISA or Master card directly for verification of their conversation. The real VISA told us that they will never ask for anything on the card as they already know the information since they issued the card! If you give the scammers your 3 Digit PIN Number, you think you're receiving a credit. However, by the time you get your statement you'll see charges for purchases you didn't make, and by then it's almost too late and/or more difficult to actually file a fraud report.

What makes this more remarkable is that on Thursday, I got a call from a 'Jason Richardson of Master Card' with a word-for-word repeat of the VISA scam. This time I didn't let him finish. I hung up! We filed a police report, as instructed by VISA. The police said they are taking several of these reports daily! They also urged us to tell everybody we know that this scam is happening.

“Making Work Pay” Tax Credit

In 2009 and 2010, the "Making Work Pay" provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.

Note: This tax credit is calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

For people who receive a paycheck and are subject to withholding, the credit is typically handled by their employers through automated withholding changes. These changes needed to begin by April 1, 2009 and may result in an increase in take-home pay. The amount of the credit will be computed on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return. It is not necessary to submit a Form W-4 to get the automatic withholding change. However, an employee with multiple jobs or married couples whose combined incomes place them in a higher tax bracket may choose to submit a revised W-4 to ensure enough withholding is held to cover the tax for his or her combined income.

If you have questions about the Making Work Pay provision, these questions and answers might help.

Making Work Pay Questions and Answers: General Issues

Question: What is the Making Work Pay Credit?
Answer: In tax years 2009 and 2010, the Making Work Pay provision will provide a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns.

Question: How will taxpayers get this credit?
Answer: For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes to be made in early spring 2009. These changes may result in an increase in the amount of take-home pay. The amount of the credit will be reported on the 2009 income tax return. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return filed in 2010.

Question: How will the self-employed (those who do not receive Social Security, Veterans Affairs or Railroad Retirement Board income) claim this credit?
Answer: Self-employed taxpayers can claim the Making Work Pay credit on their 2009 return filed in 2010. Self-employed individuals should evaluate their expected income tax liability and determine whether they want to make any adjustments in their estimated tax payments.

Question: Can private pensioners (those who do not receive Social Security, Veterans Affairs or Railroad Retirement Board income) claim this credit?
Answer: Private pension recipients are not eligible for the Making Work Pay credit unless they have earned income. However, because the new withholding tables reduce the taxes withheld from all taxpayers, pension recipients may not have enough tax withheld from their pension benefits to cover their tax liability on those payments. The IRS recommends that pension recipients evaluate their expected tax liability for the year and consider whether they need to make estimated tax payments or adjust their withholding on Form W-4P, Withholding Certificate for Pension or Annuity Payments.

Question: Are employees required to have a valid Social Security number (SSN) to be eligible for the Making Work Pay tax credit?
Answer: Yes, eligibility for this credit is conditioned upon providing a valid SSN.

Question: If a taxpayer is eligible for more of a credit, how can it be claimed?
Answer: The modified tables take the anticipated credit into account through reduced withholding. However, the Making Work Pay credit will be reported on all filed 2009 income tax returns, along with the taxpayer’s withheld income tax. Taxpayers receiving less than the full amount of the anticipated credit through reduced withholding will still be entitled to the full credit on their return.

Making Work Pay Questions and Answers: Form W-4

Question: Do I need to change my W-4?
Answer: Generally, for people who receive a paycheck, the credit will typically be handled by their employers through automated withholding changes. A Form W-4, Employee Withholding Allowance Certificate, will not need to be submitted for the automatic withholding change. An employee with multiple jobs or married couples whose combined income place them in a higher tax bracket may elect to submit a revised W-4 to ensure enough withholding is held to cover the tax for his/her combined income. IRS Publication 919, How Do I Adjust My Tax Withholding?, provides additional guidance for tax withholding.

Question: Should employees who are nonresident aliens or who can be claimed as a dependent on someone else's return ask for additional withholding on line 6 of the Form W-4?
Answer: Because nonresident aliens and those who can be claimed as dependents on someone else’s income tax return are not eligible for the Making Work Pay Credit, the new withholding tables may cause them to be underwithheld. These taxpayers need to evaluate their expected tax liability for the year and determine if they need to either make appropriate estimated tax payments or adjust their withholding on Form W-4. However, Publication 15-T, New Wage Withholding and Advanced Earned Income Credit Payment Tables (for wages paid through December 2009), does include additional amounts to be added to the pay of nonresident aliens to figure their income tax withholding.

Question: Will employers be required to determine if employees received the maximum credit and discontinue any further related withholding tax reductions?
Answer: Employers are not required to make determinations with regard to an employee’s eligibility for the Making Work Pay credit. Withholding should be made consistent with the employee's filed W-4 and the newly modified withholding tables.

New Recovery Package - Questions and Answers

Taxpayers, like you, have many questions related to the American Recovery and Reinvestment Act of 2009, especially since the legislation was enacted while many taxpayers are working to file their 2008 tax returns. How will this new legislation affect you? Here are a few questions and answers to help guide you.

Could the new law affect 2008 tax returns?
Generally, no. The new law does not have any major impact for the vast majority of individuals preparing their 2008 tax returns due April 15. Instead, these changes will largely impact 2009 tax returns filed next year, in 2010. Taxpayers should continue to prepare their 2008 tax returns as they normally would.

Note: There are a few limited areas in the law that could impact 2008 tax returns. For some small businesses, changes in the net operating loss provisions could affect 2008 tax returns. For first-time homebuyers, there is an expanded credit available on 2008 tax returns.

Does this new recovery program have any impact on the recovery rebate credit for 2008 tax returns being filed now?
No. But the IRS reminds taxpayers and tax preparers to make sure they properly determine eligibility for the recovery rebate credit before they file their 2008 federal tax returns.

COBRA health insurance subsidies now available

Employers and health plans have until Saturday to notify laid-off employees of COBRA health insurance subsidies now available under the federal stimulus plan.

With unemployment at historic highs, the U.S. government has authorized $25 billion to help an estimated 7 million laid-off workers retain health coverage. The subsidies pay 65 percent of COBRA premiums and apply to those laid off between Sept. 1, 2008, through Dec. 31 this year.

On average, the typical family pays $1,069 a month to continue employer- sponsored health coverage, according to Families USA, a health advocacy group based in Washington, D.C.

For many, the cost is prohibitive, the group said, leaving millions of Americans uninsured.

Those involuntarily unemployed since Sept. 1, 2008, are eligible for the 65 percent subsidies even if they declined COBRA coverage when they first lost their jobs.

Company health plans are required by the American Recovery and Reinvestment Act, signed into law in February, to notify workers of their second chance to enroll in COBRA. If they haven't been notified, workers should contact their former employer or health plan provider.

The U.S. Labor Department has a telephone hotline, (866) 444-3272, to answer COBRA questions. Or go to www.dol.gov/COBRA.

- Bobby Caina Calvan of the The Sacramento Bee [Friday, April 17, 2009]

Beware of Tax Consequences of a Job Loss

Given the current economic conditions, you may be faced with tax questions surrounding a job loss and unemployment issues.
Here's some answers:

What if I receive unemployment compensation?
Unemployment compensation you received under the unemployment compensation laws of the United States or of a state must be included in your income. It is taxable income. If you received unemployment compensation, you should receive Form 1099-G showing the amount you were paid and any federal income tax you elected to have withheld.
Note: The American Recovery and Reinvestment Act will temporarily change the taxation of unemployment benefits for the 2009 tax year only. Under the new economic stimulus law, the first $2,400 of unemployment benefits received in 2009 will not be subject to federal taxes. The exemption will be reflected on tax returns filed in 2010.

What if I lose my job?
The loss of a job may create new tax issues. Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time also are taxable. You should ensure that enough taxes are withheld from these payments or make estimated tax payments to avoid a big bill at tax time. Public assistance and food stamps are not taxable. The IRS has updated a helpful publication which lists a number of job-loss related tax issues.

What if I am searching for a job?
You may be able to deduct certain expenses you incur while looking for a new job, even if you do not get a new job. Expenses may include travel, resume and outplacement agency fees. Moving costs for a new job at least 50 miles away from your home may also be deductible.

What if my employer goes out of business or in bankruptcy?
Your employer must provide you with a 2008 W-2 Form showing your wages and withholdings by January 31, 2009. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fails to provide you with a Form W-2, contact the IRS and I can help by providing you with a substitute Form W-2. If your employer is liquidating your 401(k) plan, you have 60 days to roll it over to another qualified retirement plan or IRA.

If you have experienced a job loss and have questions, please call call me at 310-426-2101. You need to be prepare for the tax consequences.