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Detailed Federal Employment Tax Audits to Begin in November There is an old proverb, the age and source of which I do not know, that states, "a word to the wise is sufficient". No words more accurately describe the reaction small business employers should have to the news that the Internal Revenue Service will initiate a nationwide, intensive audit program know as a National Research Program (NRP). The goal of the IRS National Research Program is to collect data that will help the IRS “improve its compliance programs and better use its resources.” As a result, this NRP study involving employment taxes (Form 941 and Form 940) is currently under development. During the project, the IRS will conduct detailed employment tax examinations of certain taxpayers with the program beginning in November. In fact, the selection process for an NRP audit has already begun. The Service reiterated that is based “on a statistical sample and it does not necessarily mean that an employer has incorrectly filed a return.” The program is scheduled to last for three years and “could easily encompass 2,000 tax examinations during each of the three years. Although the IRS may look at any line on an employment tax return during the examination, it will primarily focus on the following issues: (1) worker classification (employee vs. independent contractor) (2) fringe benefits (3) officer's compensation (4) reimbursed expenses (ascertaining whether accountable plans meet the needed requirements). The IRS is now expected to do more of these random employment tax audits than it first planned: About 6,000 exams will be done over three years vs. the 4,500 originally scheduled. And, the Service is getting plenty of potential leads especially in the area of misclassified workers. In the last year alone, “tens of thousands” of Form 8919 (which is used by taxpayers who insist that they are being incorrectly treated as independent contractors) have been filed with the IRS by workers claiming that they do not self employment tax on their earnings.
2009
could be better than you think,
especially from a tax standpoint. On February 17, 2009, the President signed the American Recovery and Reinvestment Act to stimulate the economy. This stimulus package is packed with tax savings that will affect a large portion of American taxpayers. How will you be affected? Are you a worker? The
Making Work Pay Credit was
designed to give workers a payroll tax credit of 6.2% of earned
income with a cap of $400 per person on the 2009 and 2010 tax
returns. Workers must not be dependents or non-resident
aliens and have income under $75,000 ($150,000 MFJ) to qualify for
a tax credit. The credit phases-out at adjusted gross income
of $95,000 ($190,000 MFJ). Instead
of sending lump-sum payments to taxpayers who work, the
withholding tables were adjusted on March 17 to trickle the
savings out to the recipients. You may have already noticed
that your monthly paycheck is about $40 larger, enabling you to
buy a few more items at the grocery story. When you file
your 2009 tax return, you will get a $400 tax credit which will
have already been paid to you with reduced withholding (net tax
effect zero). A
potential problem exists if you have more than one job or your
income tops the $75,000 ($150,000 MFJ) phase-out limit. You
could be short on withholding. You might want to change your
withholding on one job by dropping a dependent to compensate. Are
you Self-Employed? The
Stimulus package also included an extension of the enhanced
depreciation rules that were in effect in 2008. I f you are more
than 50% self-employed and making estimated payments, your
estimated taxes paid need only be 90% of your 2008 tax to avoid
penalty. Are you a retiree, a veteran, or disabled? The
$400 Making Work Pay payroll
tax credit only applies to the employed and self-employed, but you
were not omitted. If you receive Social Security or
disability, you will get a $250 one time payment during 2009 as a
stimulus. If you are a government retiree who does not get Social Security, you will get a one time refundable credit on your 2009 tax return. You
may have noticed that your pension has been withholding less due
to the Making Work Pay payroll
tax credit. If you are not employed, you do not qualify for
the $400 credit. It would be wise to get the withholding
increased again to avoid being under-withheld. The IRS has
new tables you can elect to use. You may be both employed and collecting Social Security. If this is the case, your $400 payroll tax credit will have to be reduced by the $250 you receive as a one time payment. Are you thinking of buying your first home? The
First Time Homebuyer Credit is really quite a deal. You can
take a tax credit of up to $8,000 or 10% of the purchase of your
new home (purchased between December 31, 2008 and December 1,
2009) on your 2009 tax return. If
you extended your 2008 tax return, you can include credit for a
home purchased in 2009 and get your cash infusion even sooner. If
you have already filed your 2008 tax return, you have the option
of amending it for the First Homebuyer Credit. Good
news: For homes purchased in 2009, the credit does not have
to be repaid unless you dispose of the home within 36 months. You
qualify for the full credit if you (or your spouse, if married)
have not owned a main home for at least 3 years and your income is
under $75,000 ($150,000 MFJ). The credit is totally phased
out at $95,000 ($170,000 MFJ). Are you thinking of buying a new Vehicle? You
can now deduct state and local sales or excise tax on the purchase
of a new vehicle up to $49,500. This can be a passenger
auto, light truck less than 8500#, motorcycle, or motor home, and
you need to be the first owner. To qualify for the full
deduction, your income needs to be under $125,000 ($250,000 MFJ). You
can take advantage of this deduction even if you do not itemize
your deductions. The deduction is not limited to just one
vehicle. Also,
the Alternative Motor Vehicle Credit was expanded to include a
plug-in conversion credit. You can get a tax credit of 10%
of the cost up to $40,000 if you qualify. Are you unemployed? Unemployment
is normally fully taxable, but the Stimulus bill exempts the first
$2,400 from Federal tax. Also, if you were involuntarily
terminated, and eligible for Cobra, you may qualify to pay only
35% of the premium. You may have to pay some of this subsidy
back if your income exceeds $125,000 ($250,000 MFJ). Are you paying college tuition for yourself of your dependent? The
American Opportunity Tax Credit modifies the Hope Credit for
higher education. For 2009 and beyond the credit is
increased to $2,500 (100% of the first $2,000 plus 25% of the
second $2,000) for tuition, fees, and course materials paid in the
first 4 years of a degree program. To
qualify for the full credit, your income needs to be under $80,000
($160,000 MFJ). The credit is phased-out at $90,000
($180,000 MFJ). In the past, the credit could only reduce
your tax to zero. It is now 40% refundable if you owe no
income tax. If you’re not in a degree program, the Lifetime Learning credit still exists as it was in 2008. You can now tap your 529 plan for new items: computer equipment, internet access, and related services. Are you a middle-income taxpayer? You are temporarily in luck. Once again, Congress “patched” the dreaded Alternative Minimum Tax (AMT) so you most likely will not be affected. They also eliminated the possibility of AMT taxing private activity bond income and affecting personal non-refundable credits for children, education, and energy. Are you a low income family? If
your income is under $45,295 and you have 2 or more children, you
may qualify for the Earned Income Credit. If you have 3 or
more children, your Earned Income Credit could max out as high as
$5,656. Also more low income taxpayers will qualify for the
refundable Child Tax Credit. Are you a Homeowner? The
Energy Credit is back for 2009 and 2010. Congress scrapped
the old Energy Credit and replaced it with one that is more
lucrative. You can now get a credit for 30% of your
expenditure with a maximum credit of $1,500. The
following building components must meet the 2009 International
Energy Conservation Code or Energy Star requirements to qualify:
Insulation
Exterior windows and skylights
Exterior doors
Metal or asphalt roof designed to reduce heat loss. The
following also qualify for the credit:
Electric heat pumps
Central Air Conditioning
Natural gas, propane, or oil water heater
Biomass fuel stove
Furnace/boiler The
following energy efficient property qualifies for a 30% credit
with no limit:
Solar heating
Geothermal heat pumps
Qualified fuel cell property
Small wind energy property. This
is just a brief description of the major tax provisions in the
Stimulus Act that affect the personal tax return. These
provisions were designed to stimulate the economy by putting more
spendable dollars into the hands of the American taxpayer. Required Minimum Distributions Suspended For 2009 The
Worker, Retiree and Employer Recovery Act of 2008 (the 2008 Recovery
Act) contains a tax law change that will give older taxpayers some
much needed financial flexibility as they struggle to manage their
finances during this difficult economic time. Designed to help
alleviate the financial burden facing seniors who have seen their
retirement savings shrink dramatically, the new provision allows
senior citizens to keep money in retirement accounts that they are
typically required by law to withdraw once they reach age 70½.
Here’s a brief summary of this new provision: As
you know, the tax laws generally require individuals with retirement
accounts to make withdrawals based on the size of their account and
their age every year after they reach age 70½. Failure to make a
required withdrawal can result in a penalty of 50% of the amount not
withdrawn. The
new provision waives the minimum distribution requirement for 2009.
This means you can leave the amounts in your account without
suffering the 50% penalty. This waiver applies to IRAs and
defined-contribution plans, including distributions from 401(k),
403(b), and state-sponsored 457(b) accounts and is available to
everyone regardless of their total retirement account balances.
However, the waiver is only for amounts otherwise required to be
distributed for the 2009 tax year. If you or your spouse turned age
70 ½ in 2008 and are planning to delay your 2008 distribution until
4/1/09 (the date the law requires that your first required
distribution be made), this distribution must still be made. It is
considered a 2008 distribution even though it is being made in 2009.
Also, unless Congress extends this waiver, distributions will again
be required after 2009. Suspending the mandatory distribution requirement for 2009 will allow retirees to keep the money in their account if they choose, and possibly recover some of their losses. However, please keep in mind that this is only a summary of this new provision. If you would like to discuss this matter further, please do not hesitate to call. Tax Deductions For Heavy SUVs & Trucks As
you may have heard,
businesses can claim substantial deductions for heavy (over 6,000
pounds gross
vehicle weight) SUVs, trucks, and other vehicles used primarily
(over 50% of the time) in the business. For
heavy SUVs, the business can deduct up to $25,000 of the SUV’s
cost in the year it is purchased. Also, the rules that limit the
amount of annual depreciation allowed on passenger automobiles do
not apply to heavy SUVs. This means that 50% of the remaining cost
of the heavy SUV can be written off as bonus depreciation in the
year it is purchased and the balance is then written off over five
years. All
this can add up to a substantial
first-year deduction. For example, the maximum first-year
depreciation deduction for a $45,000 heavy SUV placed in
service during 2008 and used 100% for business will generally be
$37,000 [$25,000 expense deduction + $10,000 bonus depreciation
deduction + $2,000 MACRS deduction]. The maximum first-year
depreciation deduction for a $45,000 passenger auto placed in
service during 2008 and used 100% for business will only be $10,960. A
heavy SUV is a passenger vehicle with an enclosed body that’s
built on a truck chassis that has a gross vehicle
weight rating—the manufacturer’s maximum weight rating when
loaded to capacity—above 6,000 and less than 14,001 pounds.
However, a vehicle that otherwise meets this definition is not
classified as an SUV if: ·
It is equipped with a
cargo area of at least six feet in interior length. The cargo area
cannot be readily accessible directly from the passenger
compartment, but it can be either open or enclosed by a cab. Many
pickups with full-size cargo beds will qualify for this exception,
but “quad cabs” and “extended cabs” with shorter cargo beds
may not qualify. So, when you go to the dealership, be sure to pack
a tape measure. ·
It can seat more than nine
passengers behind the driver’s seat, such as hotel shuttle vans. ·
It has an integral
enclosure that fully encloses the driver’s compartment and load
carrying device, does not have seating behind the driver’s seat,
and has no body section protruding more than 30 inches ahead of the
leading edge of the windshield, such as delivery vans. For
these heavy non-SUVs, the full expensing deduction ($250,000 for
2008) is available. This means that businesses
will often be able to write off the full cost of the vehicle in the
year it is purchased. To
claim these deductions, you must establish through contemporaneous
records (such as, a mileage log) that you
use the vehicle over 50% of the time for business. If your business
usage later falls below 51%, a portion of the deductions previously
claimed will need to be recaptured and reported as ordinary income
in that year. As
you can see, the deductions for purchasing a heavy SUV (or non-SUV)
for use primarily in your business can be substantial. Attached is a
list of vehicles (SUVs and non-SUVs) qualifying
for larger deductions. Vehicles with GVWRs Above 6,000 Pounds[1]
Home
Foreclosure - Thorny Tax Issues
Mortgage
Bankers Association Says 1 Million U.S. Homes Are In Foreclosure.
Tax Laws Don't
Offer Encouragement or Clear Answers.
Sub-prime loans,
weak economy, downward spiral of home prices. Place the blame
where you like - it remains a real and very serious problem. I
wish I could tell you the tax implications are simple - they are not.
Homeowners
Only. The
rules for homeowners are discussed here. You'll need to call me if you
risk the loss of a rental, or a business or investment property.
$250,000 In
Loans, But Value of $200,000. I'll
use these numbers for this discussion.
If A
Property is Lost there
are two different tax issues to consider. Whether lender
forecloses, or you agree to "deed back" the property, or
your realtor finds a buyer and lender agrees to accept a "short
sale", we still have:
1)
Disposition (or sale). The
home is no longer yours. You have a "sale" or
"disposition" to report on your tax return. But, the
"sale price" depends on the type of loan. Tax law
divides loans into "non-recourse" and "recourse".
If your loan is non-recourse your lender has recourse only to the
property, and tax law says you report the sale as if you sold for the
loan balance of $250,000. On the other hand, if the loan is
considered a recourse loan, the sale is reported at $200,000, the true
sale value. How can you know which it is? There's the rub.
Often we're not sure. Some states consider your original loan to
buy the property to be non-recourse. For other states or other
loans the answer is not clear. Many real estate attorneys
hesitate to answer, saying "I don't do tax work."
Fortunately, tax on the sale is rarely an issue. Loss on your
home is not deductible, and gain is excluded in most cases. The
real problem lies with the possibility that you now have:
2) Income
From Relief Of Debt. If
we report a "sale" for $200,000, what about the missing
$50,000? Lender often does not pursue the money, and cancels the
debt. This may be TAXABLE INCOME! You owed the money fair
and square. Now you don't. That's income. You've lost the
home, and face extra income tax! With very low income, there
might not be tax. Beyond this, there are only 3 ways to escape tax on
debt relief income:
a)
Bankruptcy. Filing for bankruptcy is a serious step.
Nonetheless, any debt forgiven in a bankruptcy is not taxed.
Seek counsel from someone else here.
b)
Insolvency. We must calculate your "net
worth". You are insolvent by $50,000 on the loan in question.
We must look at everything else. If your liabilities exceed
assets in other areas by, say $35,000, you may exclude $35,000 of
the debt relief. The calculation looks at ALL assets and
liabilities. Everything you own, including retirement accounts,
insurance, personal possessions - all must be counted! This is a
tough job.
c) New
Law. For 2007, 2008, and 2009 you may exclude income
from debt relief on any loan(s) considered to be "Acquisition
Indebtedness". That's a loan you used to "buy, build
or substantially improve" your primary residence. If that
$250,000 loan is the "original " loan, we're home free. But,
if you re-financed (or took a second mortgage, or home equity loan) we
must know the balance of the original loan at the time, plus the
amount of any extra borrowing that went directly for more
improvements. Suppose the original loan was at $215,000, and
none of the new borrowing was spent for the home. The
$50,000 that was canceled is $15,000 of the original loan, plus
$35,000. Only $15,000 may be excluded, and you will owe tax on
the other $35,000.
IRS
Audits Mortgages Over $1 Million
Not many folks have
mortgages over $1 million. For those who do, there is a limit on
their interest deductions. IRS is beginning to enforce those
limits.
The Rule.
Until
1987 we had no limits on home mortgage interest. Today you may
deduct mortgage interest on loans to buy or improve your main home and
on a second personal-use residence. But, there is a
"cap" on the size of the loans. Interest on
loans over $1 million is NOT deductible. The only exception
allows "equity" borrowing of up to an additional $100,000.
However, the "cap" never allows loans totaling more
than $1.1 million. There are other rules, but look how easy it
is for IRS to spot this one.
IRS
Enforcement. Until
the past year or so, IRS paid little attention to mortgage deductions.
When the "caps" were invented in 1987 very few Americans had
loans of this size. Today, homes costing over $1 million are not
so rare. Consider the IRS viewpoint. These loans are easy to
spot. The money collected at the audit can be large. So
--- let's conduct some audits!
Deciding who to
audit is easy. If mortgage interest rates are generally in the
range of 5% to 7%, all we need do is calculate the interest on $1
million. It works out to $50,000 - $70,000 annually.
Suppose IRS spots a tax return with $100,000 of mortgage interest.
It's a sure bet they'll gain some tax revenue. This taxpayer is
deducting $30,000 - $50,000 too much interest. The tax on this
"adjustment" depends upon tax brackets, but this is not
likely to be a low-income filer!
IRS is currently
auditing returns for 2006. However, when they find an adjustment that
might be a repetitive error, they invoke the Statute of Limitations.
This allows them to review the 3 most recent returns for the same
error. A nice piece of change for a couple of hours' work!
Tips
For You
Youngster
Had A Summer Job? If
yours had that first summer job you may have some questions.
Will this change my own taxes? Will my youngster be taxed, too?
Some facts, plus a couple of suggestions.
If the child won't
reach age 19 in 2008 you still have a dependent. The youngster
may be taxed, but the tax is likely zero. The first $5,450 of
"earned" income is tax-free. The youngster needs to
file a return if there is withholding, and it is likely there will be
a refund.
Think about that
refund. Why not try some financial training with your youngster!
A refund is always appealing, but suggest the youngster open a Roth
IRA. Not a large account, say $200 or so taken from the refund.
You just might start a valuable savings habit!
Moving
MIGHT Be Deductible.
Most folks think
you may deduct costs whenever you move. Not so simple.
Your move needs to be connected to your work. The tax system
looks at you as a producer, not a person. The
rules look at the situation where you work.
Step 1. You
must change jobs, take a new job, or be transferred by employer.
Step 2. The
new place of work must be at least 50 miles farther from the
old home than the old job. See the logic? The new work
makes for a longer commute. Effectively, you were forced
to move.
Step 3. The
new work must be more or less "permanent". We test this by
asking if you worked in the new location for at least 39 weeks during
the first 52 weeks after your move. A transfer by employer is an
exception to this test. If you're self-employed, you must
maintain the business for 1 1/2 years during the 2 years following the
move.
Expenses.
If
you pass the tests, you may deduct the entire cost of moving you, your
family, and all possessions to the new location. Include any
costs to pack and prepare materials, special shipping costs,
insurance, truck rentals, and the like. You may also claim costs
for temporary storage at the time of the move.
Medical
Expense Tune-Up.
First, I hope you never
do have sufficient medical expenses to get tax deductions.
If you do have large expenses, though, I want you to get full value
from the deductions. You must itemize deductions to claim
medical expenses, and your costs count only to the extent they exceed
7.5% of your income. Again, I hope it never happens in your
family.
Medical costs
include all care of mind and body. We think of doctors,
certainly. Add to the list all dental care, eye care, even
psychological counseling. Count the cost of tests and diagnostic
procedures. Any costs of a hospital stay count.
You may include the
cost of any health insurance. This also includes smaller
policies for eye or dental care, or that little cancer policy.
With drugs, only
prescriptions count. Self-prescribed items, or food supplements
do not. Usually "over-the-counter" items won't
qualify.
Non-traditional
care depends on whether your state requires a license for the
practitioner. Acupressure, acupuncture, therapeutic massage and
physical therapy require licenses in most states.
The list goes on
and on. Call me if you have other expenses. I can help decide
whether they count.
ENERGY TAX CREDITS If widely fluctuating energy costs and environmental concerns have you looking for ways to go green, here are some tips on how going green can cut energy costs and reap tax saving energy credits. Better yet—all of these tax credits are available against Alternative Minimum Tax (AMT) this year and none of them are subject to any annoying phase out limits designed to prevent higher income taxpayers from benefiting from them. So, just about everyone should be eligible to take advantage of these tax saving credits. Making Energy Efficient Improvements to Your Home A great way to cut energy costs and save up to $1,500 in federal income taxes is to make certain energy efficiency improvements to your home. You just need to be sure to pick the right product. The credit (which is called the nonbusiness energy property credit) you’re entitled to equals 30% of what you pay for (a) qualified energy efficiency improvements (such as, certain energy efficient insulation, windows, doors and roofs), and (b) qualified residential energy property (such as, certain energy efficient heat pumps, hot water heaters or boilers, and advanced main air circulating fans) on your principal residence (no vacation homes). Expenditures made from subsidized energy financing can qualify for the credit if they otherwise meet the requirements for those credits. However, there is a $1,500 cap on aggregate credits claimed in 2009 and 2010 for all types of eligible expenditures. In other words, the $1,500 cap applies to the aggregate amount of credits claimed in both years combined. A good place to start your search for products that qualify for this credit is at www.energystar/taxcredits where you’ll find a table listing requirements for various products. Then, to ensure the product satisfies the required energy saving conditions for the nonbusiness energy credit, be sure to check the product package materials or manufacturer website before making the purchase. According to the IRS, you can rely on the manufacturer’s written certification statement, which is typically included with the product package materials or on the manufacturer’s website. You just need to keep a copy of this certification as part of your tax records. Purchasing a Hybrid Vehicle If you are considering a hybrid vehicle purchase in 2009, the hybrid vehicle credit of up to $3,400 may be enough to get you going. Thanks to the Stimulus Act, the really good news for 2009 purchases is that the credit is now allowed against AMT. Top this with the fact that the credit has no AGI phase-out limit and you’ve got a whole new ballgame. But, you need to be careful—the amount of credit available depends on the hybrid you buy and some of the most popular models are no longer eligible for the credit. Also, only purchases of new (not used) vehicles qualify. The actual credit allowed varies by vehicle. Furthermore, the credit is phased out once a manufacturer sells 60,000 hybrid vehicles. Lexus, Toyota, and Honda all hit this mark in previous years, so no 2009 purchase of their hybrids qualifies for a credit. Ford and Mercury hit this mark in the last quarter of 2008. This means the full credit will be allowed for purchases of their hybrids through 3/31/09, 50% of the credit will be allowed for purchases made from 4/1/09–9/30/09, and 25% of the credit will be available for purchases made from 10/1/09–3/31/10. So, if you’re interested in a Ford or Mercury hybrid, you’ll want to make the purchase before 10/1/09 to get 50% (rather than 25%) of the credit. Using the Solar, Wind, Geothermal or Fuel Cell Energy to Power Your Home Although the costs of qualifying expenditures tend to be pretty steep, if you install solar, wind, geothermal, or fuel cell energy saving equipment in 2009, you may be able to take advantage of the residential energy efficient property (REEP) credit. The REEP credit equals 30% of expenditures to install: (1) qualified solar water heating equipment, (2) qualified small wind energy equipment, (3) qualified geothermal heat pumps, (4) qualified solar electricity generation equipment, and (5) qualified fuel cell equipment (up to $1,000 per kilowatt hour). Expenditures made from subsidized energy financing can qualify for the REEP credit if they otherwise meet the requirements for those credits. The credit only applies to equipment you place in service in your U.S. residence, and it cannot be claimed for equipment used to heat a swimming pool or hot tub. The credit for fuel cell equipment is only available for your principal residence; however, the two solar credits apply to any residence (including vacation homes). As with the nonbusiness energy property credit, a good place to start your search is at www.energystar.gov/taxcredits . Then, be sure the product satisfies the required energy saving conditions for the REEP credit, be sure to check the product package materials or manufacturer website before making the purchase. According to the IRS, you can rely on the manufacturer’s written certification statement, which is typically included with the product package materials or on the manufacturer’s website. You just need to keep a copy of this certification as part of your tax records. Conclusion As you can see, there are some pretty nice tax savings to be had from making certain energy saving and environmentally friendly expenditures in 2009. If you have any questions or need any assistance, please give us a call.
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