This is my third posting of a daily tax tip about Traditional IRAs. An IRA can be a good vehicle not only to save taxes, but also to save for retirement. With Traditional IRAs, taxability of income is delayed to future years, normally when one retires.
Traditionally it has been assumed that the tax rates will be lower in the future, especially upon retirement. However, with the significant increase in the national debt, many tax professionals are beginning to question if that is still a valid assumption; taxes could increase in the future. The Taxpayer, with consultation with his/her CPA, should develop a philosophy on this and if it is determined that tax rates will increase in the future, a strategy of speeding up the taxability of income. Please feel free to call me if you have any questions.
Traditional IRAs
(1) Contribution Limit for 2009:
(a) Under Age 50: $5,000
(b) Age 50 to 70 1/2: $6,000
(c) If Taxpayer is an Active Participant, the contributions are phased out at Modified AGI:
Single: $55,000 to $65,000
Married Filling Joint [Each spouse if both participating – See (d) bellow)]: $89,000 - $109,000
Married Filling Joint [With one participating – See (d) bellow)]: $166,0000 to $176,000
Head of Household: $89,000 to 109,000
Married Filling Separate: $0.00 to $10,000
Delta Amount: Single $10,000 / Married $20,000
Formula: [(“Delta Amt” – “AGI over threshold”)/”Delta Amt”] X Maximum
(d) Definition of Active Participant: When the Taxpayer or his/her spouse is participating in one of the following:
Qualified Annuity Plan
Tax-Sheltered Annuity
Simplified Employee Pension (SEP)
Government or Tax Exempt Origination Plan [special rule exempt members of the Armed Forces Reserves and Volunteer Firefighters]
(e) Definition of Modified AGI: AGI [Line 37 on 1040] added back
Saving Bond Proceeds
Adoption Expense
Student Loan Interest Deduction
Higher Education Expense
Foreign Tax Deduction
(f) Victimized Employees Can contribute additional $3,000
Victimized employee is -- the Employer matching of the 401(k) was in Employers stock and the Employer either filed bankruptcy or was indicted
(g) Contributions to be made by 4-15-2009
(h) Taxpayers who where in combat has 3 years to make the contribution
(2) Spousal IRA
(a) A spouse who has lower income or none can deduct the full amount of an IRA deduction using the other spouse income
Saturday, January 16, 2010
Thursday, January 14, 2010
2009 Tax Strategy II – When is an Expense Deductable
This is my second posting of a daily tax tip about when is an expense deductable for taxes. Please feel free to call me if you have any questions.
When is an Expense Deductable
I was recently asked if parents could take a partial deduction for Property Taxes paid by their daughter and son-in-law. The parents sold their home and moved in with their children and paid for an addition to the home in which they lived.
The parents are not allowed to deduct the property taxes because of two general rules that dictate when a Taxpayer is allowed to take a tax deduction:
(1) The expenditure must be in payment of a legal obligation of the taxpayer or the Taxpayer must have benefited from or consumed the expenditure
(2) The Taxpayer must make the payment of the expenditure himself/herself.
So in this case a tax deduction for property taxes is not allowed because the parents:
(1) Were not legally required to pay the property taxes; and
(2) They did not pay the tax directly
Another example: In order to take a medical deduction the person receiving the services is the only person that can take the deduction, PROVIDING the person paid for the medical expense. The only exception is in case of dependents of the Taxpayer.
To help with your 2009 US taxes, I will post a daily tax tip on my Blog from now until April 15.
When is an Expense Deductable
I was recently asked if parents could take a partial deduction for Property Taxes paid by their daughter and son-in-law. The parents sold their home and moved in with their children and paid for an addition to the home in which they lived.
The parents are not allowed to deduct the property taxes because of two general rules that dictate when a Taxpayer is allowed to take a tax deduction:
(1) The expenditure must be in payment of a legal obligation of the taxpayer or the Taxpayer must have benefited from or consumed the expenditure
(2) The Taxpayer must make the payment of the expenditure himself/herself.
So in this case a tax deduction for property taxes is not allowed because the parents:
(1) Were not legally required to pay the property taxes; and
(2) They did not pay the tax directly
Another example: In order to take a medical deduction the person receiving the services is the only person that can take the deduction, PROVIDING the person paid for the medical expense. The only exception is in case of dependents of the Taxpayer.
To help with your 2009 US taxes, I will post a daily tax tip on my Blog from now until April 15.
Wednesday, January 13, 2010
2009 Tax Strategy I - Sales Tax and State Tax Refund
With the beginning of 2010, it is time to start thinking about our 2009 taxes, as painful as that might be. To help out, I am going to be posting a daily tax tip from now until April 15. Please feel free to call me if you have any questions.
Sales Tax and State Tax Refund
Under the tax benefit rule, the recovery of an amount deducted or credited in an earlier tax year is included in a taxpayer's income in the current (recovery) year, except to the extent the deduction or credit didn't reduce federal income tax (or alternative minimum tax). (IRC §111(a))
For tax years 2004 through 2007, a taxpayer has the option to deduct as an itemized deduction either the state (and local) income tax paid during the year or state and local sales tax. On first examination would assume that (1) if the client chooses to deduct state income tax and subsequently receives a refund from the state, then that refund is taxable. However, (2) if they choose to deduct sales tax instead of state income tax and receive a state refund for that year that refund is not taxable! Actually, the IRS has taken a much more liberal approach to this issue. Their position is that for purposes of the tax benefit rule the amount of refund includable in income is limited to the excess of the tax the taxpayer chose to deduct over the tax they did not choose to deduct.
Example – Assume the taxpayer can choose an $11,000 state income tax deduction or a $10,000 state general sales tax deduction. Since the state income tax deduction is the largest, he chooses to deduct the state income tax. In the subsequent, he receives a $2,500 state income tax refund. Using the IRS’s more liberal approach the tax benefit derived from by deducting the $11,000 state income tax was only $1,000 more than, if the $10,000 sales tax deduction was used. Thus, the benefit from only $1,000 of the state tax deduction and as a result only $1,000 of the $2,500 refund is taxable the next year.
Strategy – In order to benefit from the IRS’ liberal tax benefit rule position you must be able to compute the difference between sales tax deduction and state tax deduction. Thus it is important (when there is a state tax refund and the state tax deduction exceeds the sales tax deduction) to determine the allowable sales tax deduction for the client and record it in your file. Otherwise, there is no way of computing the tax benefit rule. Be Sure To Look Back – And take advantage of this tax benefit rule.
Sales Tax and State Tax Refund
Under the tax benefit rule, the recovery of an amount deducted or credited in an earlier tax year is included in a taxpayer's income in the current (recovery) year, except to the extent the deduction or credit didn't reduce federal income tax (or alternative minimum tax). (IRC §111(a))
For tax years 2004 through 2007, a taxpayer has the option to deduct as an itemized deduction either the state (and local) income tax paid during the year or state and local sales tax. On first examination would assume that (1) if the client chooses to deduct state income tax and subsequently receives a refund from the state, then that refund is taxable. However, (2) if they choose to deduct sales tax instead of state income tax and receive a state refund for that year that refund is not taxable! Actually, the IRS has taken a much more liberal approach to this issue. Their position is that for purposes of the tax benefit rule the amount of refund includable in income is limited to the excess of the tax the taxpayer chose to deduct over the tax they did not choose to deduct.
Example – Assume the taxpayer can choose an $11,000 state income tax deduction or a $10,000 state general sales tax deduction. Since the state income tax deduction is the largest, he chooses to deduct the state income tax. In the subsequent, he receives a $2,500 state income tax refund. Using the IRS’s more liberal approach the tax benefit derived from by deducting the $11,000 state income tax was only $1,000 more than, if the $10,000 sales tax deduction was used. Thus, the benefit from only $1,000 of the state tax deduction and as a result only $1,000 of the $2,500 refund is taxable the next year.
Strategy – In order to benefit from the IRS’ liberal tax benefit rule position you must be able to compute the difference between sales tax deduction and state tax deduction. Thus it is important (when there is a state tax refund and the state tax deduction exceeds the sales tax deduction) to determine the allowable sales tax deduction for the client and record it in your file. Otherwise, there is no way of computing the tax benefit rule. Be Sure To Look Back – And take advantage of this tax benefit rule.
Monday, November 23, 2009
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.
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.
Thursday, October 29, 2009
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
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
Saturday, October 10, 2009
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]
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]
Thursday, October 1, 2009
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.
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