Have you reviewed your investments?

As year-end approaches, make time to review and, if necessary, rebalance your investment portfolio. The past two years have not been good ones for many investors, but there are some smart year-end moves you can make to reduce taxes connected with your investments.

* First, remember that any sales you make within your retirement accounts are free of tax. If you need to trade just to rebalance your portfolio, consider doing it in your IRA or 401(k) plan.

* If you’re selling investments to weed out poor performers, remember that losses can cut your tax bill.  You can use capital losses to offset taxable gains plus up to $3,000 of other income. If you still have losses left over, you can carry them forward to use in future years.

* You can often manage the size of your gain or loss when you decide to sell some, but not all, of a particular stock or mutual fund. To do this, you must have kept good records of the date and the price for each share purchase. By selling the highest cost shares first, you’ll minimize your taxable gain or maximize your loss. You must specify the particular shares you are selling at the time you sell.

* Be aware of the “wash sale” rules that prohibit taking a loss on the sale of an investment if you purchase the same or a substantially identical investment thirty days before or after the sale.  

* If you plan to buy or sell mutual fund shares close to year-end, take the fund’s year-end distribution into account as it may affect share price and your taxes.

Please contact us at 619-294-4286 or e-mail us at sleibold@sdbizadv.com if you would like to discuss year end tax planning connected to your investments.

Visit our website www.sdbizadv.com for more great information on various tax, financial, and business items to help you better manage your finances.

IRS Provides Compensation and Insurance Information for S Corp Shareholder-Employees

S corporations are one of the most popular choices of business entity. As a shareholder-employee of an S corporation, I am writing to remind you of some important rules governing compensation, health and accident insurance, and Schedule K-1 issues. The IRS recently highlighted these key issues on its web site.

When S corporation shareholders perform more than minor services for the corporation, and receive or are entitled to receive compensation in exchange, they are employees for federal employment tax purposes. Their compensation must be reported as wages for those purposes. Additionally, compensation to a shareholder-employee must be reasonable.

The IRS looks at the following factors when determining “reasonable” compensation: 

    * Training and experience;

    * Duties and responsibilities;

    * Time and effort devoted to the business;

    * Dividend history;

    * Payments to non-shareholder employees;

    * Timing and manner of paying bonuses to key people; and

    * What comparable businesses pay for similar services.

If your S corporation also pays health and accident insurance premiums on behalf of greater-than-two percent shareholder-employees, the S corporation may deduct the cost of health and accident insurance premiums paid on their behalf. A “greater-than-two-percent” shareholder employee for this purpose is a person who owns, or is considered as owning under constructive ownership rules, more than two-percent of the outstanding stock of the S corporation or stock possessing more than two percent of the total combined voting power of all the corporation’s stock. The S corporation reports the premium amounts as wages for income tax withholding purposes on the shareholder-employee’s Form W-2. However, these amounts are not subject to Social Security, Medicare or FUTA.

Finally, the IRS reminds S corporation shareholder-employees that the Schedule K-1 issued by the S corporation does not state the taxable amount of their distribution. The Schedule K-1 reflects the S corporation’s income, loss and deductions, which are allocated to the shareholder for the year.

If you have questions about the tax obligations of being an S corporation shareholder-employee, or any—and other— issues discussed in this letter, please contact our office by phone (619-294-4286), by e-mail – sleibold@sdbizadv.com, or visit our website at www.sdbizadv.com.

Five Facts about the Home Office Deduction

With technology making it easier than ever for people to operate a business out of their house, many taxpayers, entrepreneurs and small business people may be able to take a home office deduction when filing their 2009 federal tax return next year.

Here are five important things the IRS wants you to know about claiming the home office deduction. 

1.  Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• As your principal place of business, or
• As a place to meet or deal with patients, clients or customers in the normal course of your business, or
• In the case of a separate structure which is not attached to your home, it must be used in connection with your trade or business
• For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

2.  Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

3.  There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

4.  If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure your home office deduction. Report the deduction on line 30 of Schedule C, Form 1040.

 5. Different rules apply to claiming the home office deduction if you are an employee. For example, the regular and exclusive business use must be for the convenience of your employer.

For more information see IRS Publication 587, Business Use of Your Home, available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

If you have any questions home office deductions, please contact our office at (619) 294-4286 or visit our website at www.sdbizadv.com.

Thank you.

Two IRA Tax Breaks will end soon!

Two tax provisions that could affect you are scheduled to expire after December 31, 2009. Here’s a quick review.

* For 2009 only, you have the option of skipping your required minimum distribution (RMD) from traditional IRAs and certain other qualified pension plans. This suspension of the RMD rules applies to distributions you would have had to take because you’re over age 70½ or are the beneficiary of an inherited traditional or Roth IRA.

If you took a distribution earlier this year and would like now to reverse it, you have the later of 60 days from the distribution date or November 30, 2009, to roll the money back into a retirement plan.

* If you’re 70½ or older, you can make a 2009 donation of up to $100,000 directly from your IRA to a qualified charity without treating the donation as a taxable IRA distribution. Distributions from employer-sponsored retirement plans – including SIMPLE IRAs – are not eligible.

No charitable deduction is allowed for the donation unless nondeductible contributions are transferred.  In that case, a charitable contribution deduction may be allowed if you itemize deductions on your tax return.

Please contact us at 619-294-4286 or e-mail us at sleibold@sdbizadv.com if you would like to discuss these and other IRA actions to consider at year-end.

 

Visit our website www.sdbizadv.com for more great information on various tax, financial, and business items to help you better manage your finances.

 

Reporting Gambling Winnings

You may know when to hold ‘em and when to fold ‘em, but do you know how and when to report ‘em? Whether you are playing cards or the slots, it is important to know the rules about reporting gambling winnings and loses.

Here are seven things the IRS wants you to know about reporting what Lady Luck has sent your way.

1. All gambling winnings are fully taxable. Even if your total losses exceed your total winnings, the gross winnings must be reported as taxable income.

2. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, poker tournaments and casinos. It includes cash winnings as well as the fair market value of prizes, such as cars and trips.

3. A payer is required to issue you a Form W-2G if you receive certain gambling winnings or if you have gambling winnings subject to federal income tax withholding.

4. Even if a W-2G is not issued, all gambling winnings must be reported as taxable income. Therefore, you may be required to pay an estimated tax on the gambling winnings.

5. You must report your gambling winnings on page one of Form 1040.

6. If you itemize your deductions on Schedule A of Form 1040, you can deduct gambling losses you had during the year, but only up to the amount of your winnings. Your losses are not subject to the 2-percent of adjusted gross income limitation.

7. It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both winnings and losses.

Please give our office a call (619-294-4286) or visit our website www.sdbizadv.com and click on APPOINTMENTS if you would like more information on paying the estimated tax on your winnings, or on keeping the proper records to substantiate your losses.

Thank you.

Mortgage Debt Forgiveness

The IRS has posted tax facts for struggling homeowners as part of its Tax Tips series. These tax tips are designed to familiarize taxpayers with special relief that is available if their mortgage debt is partially or entirely forgiven.

Background. When a lender forgives any portion of a mortgage loan, cancellation of debt (COD) income generally results. The amount that is included for COD purposes is equal to the difference between the amount of the debt being cancelled and the amount used to satisfy the debt. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief.

Exclusion for Discharge of Qualified Principal Residence Indebtedness. Cancellation of debt income is excludable from income if it is incurred with respect to the taxpayer’s principal residence for debts forgiven after January 1, 2007 and before January 1, 2013. This exclusion of discharged qualified residence indebtedness is limited to $2 million ($1 million for married taxpayers filing separately).

Principal Residence. Your home must be owned and used by you as a principal residence for 2 years or more during a 5-year period to qualify as a principal residence. In addition, pertinent facts such as your place of employment and mailing address serve to support or refute whether a home is your principal residence.

Acquisition Indebtedness. Acquisition indebtedness must be secured by the principal residence, and incurred in the acquisition, construction, or substantial improvement of the residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only to the extent that the amount of refinancing does not exceed the debt being paid off.

Non-Qualifying Events. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax-relief provision. In addition, the exclusion is not available if the discharge of indebtedness is on account of services performed for the lender, or if the discharge is not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. 

Reporting Guidelines. If your mortgage debt is forgiven, you must apply the excluded amount to reduce the basis of your principal residence, but not below zero. Your lender should report the amount of debt forgiven and the fair market value of any property given up through foreclosure on Form 1099-C, Cancellation of Debt. The exclusion of part or all of your COD income should be reported on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) and attached to your Form 1040.

Exclusion for Home Affordable Modification Program (HAMP) Payments. HAMP is a key component of the U.S. Government’s Homeowner Affordability and Stability Plan, which helps at-risk homeowners modify their mortgages to avoid foreclosure. “Pay-for-Performance-Success-Payments” under HAMP reduce the principal balance on your mortgage, and are excludable from income if you make timely payments on your modified loan.

We would be happy to discuss your principal residence debt in order to maximize your tax relief. Please call our office (619-294-4286) at your earliest convenience to arrange an appointment or go to our website at www.sdbizadv.com and click on APPOINTMENTS.

Thank you.

Look ahead to change in Roth IRA rules

Taxpayers with adjusted gross incomes over $100,000 have had to sit on the sidelines when it comes to converting their traditional IRA to a Roth IRA. But a provision from a 2006 tax law goes into effect January 1, 2010, repealing the income limit for converting to a Roth.

 Why would you want to convert? A major attraction of Roth IRAs is that distributions are tax-free, provided you meet the age and holding period rules. And there are no required annual distributions once you reach age 70½. In contrast, you’ll generally pay tax at ordinary income rates on distributions from a traditional IRA.

With a Roth IRA, you can enjoy tax-free growth and distributions whenever you want throughout your retirement years, or you can leave the Roth for heirs to receive tax-free distributions.

 When a taxpayer converts a traditional deductible IRA to a Roth IRA, the amount converted is added to taxable income and is taxed at ordinary income rates. There is a special incentive to do a Roth conversion next year.

If you convert in 2010, you can report half of the income on your 2011 tax return and the remaining half on your 2012 tax return. If you choose, you can report all of the conversion income on your 2010 return.

 It’s important to weigh the pros and cons of a Roth conversion in your individual situation and to look at steps you can still take in 2009 to capitalize on the new rule. For a review of how you might benefit, give us a call now at 619-294-4286 and schedule a tax planning appointment.

The IRS launches major drive to inform taxpayers

The IRS is going all out to promote taxpayer awareness of the tax benefits in the “Recovery Act” passed earlier this year. The Service is using YouTube videos, iTunes podcasts, radio public service announcements, and informational flyers to remind both individual and business taxpayers about these tax breaks, many of which will expire soon.

 INDIVIDUALS. Among these limited-time tax benefits for individuals:

 * First-time homebuyer credit of up to $8,000 for homes purchased before December 1, 2009.

 * Expanded credit of up to $1,500 for energy-efficient home improvements done in 2009 and 2010.

 * Above-the-line 2009 deduction for state and local sales and excise taxes paid on up to $49,500 of the purchase price of a new car, light truck, motor home, or motorcycle.

 * American opportunity tax credit of up to $2,500 annually for qualifying higher education expenses for 2009 and 2010.

 BUSINESSES.  mong the tax breaks the IRS wants to remind businesses about:

 * The $250,000 limit for immediately expensing qualified new or used equipment purchases in 2009.

 * 50% bonus depreciation on purchases of new equipment,  software, and qualified leasehold improvements made in 2009.

 * Credit on employment tax returns for providing the 65% COBRA health insurance subsidy to former employees.

 * Lower requirement for estimated tax payments for those whose 2008 income is less than $500,000 and more than 50% of income is from a small business.

 For more information and planning assistance in using these and other available tax breaks, give us a call soon at 619-294-4286 or visit our website www.sdbizadv.com.

Use Tax Breaks to Offset College Expenses

The IRS has published facts about the tax deduction for tuition and fees that is available to help parents and students pay for post-secondary education. If you’re facing college expenses this fall, here’s what the IRS wants you to know.

* The deduction is up to $4,000 for single filers with adjusted gross income (AGI) of $65,000 or less and joint filers with an AGI of $130,000 or less. If   income exceeds these amounts, the deduction drops to a maximum of $2,000 for an AGI up to $80,000 for single filers and $160,000 for joint filers. No deduction is allowed over these income thresholds.

* The deduction is “above the line,” so you don’t have to itemize to benefit.

* You can’t take the deduction if your filing status is married filing separately.

* You can’t take the deduction if you are claimed, or can be claimed, as a dependent on someone else’s tax return.

* You can’t claim the deduction if you or anyone else claims the American Opportunity or lifetime learning credit for the same student in the same year.

* The deduction can’t be based on expenses paid with tax-free scholarship, fellowship, grant, or education savings account funds, tax-free savings bond interest, or employer-provided education assistance. This also applies to expenses paid with a tax-exempt distribution from a qualified tuition plan, except for expenses paid with the portion of the distribution that is a return of your contribution to the plan.

There are other tax breaks for college expenses, all with requirements and restrictions of their own. As you can see, the rules make planning necessary if you want to maximize your tax benefit for college costs. For help in identifying and utilizing the deductions and credits most beneficial in your situation, give us a call now.

New Car Tax Break Still Available!

The “cash for clunkers” program ended abruptly on Monday, August 24. The program, which provided up to $4,500 to those who traded in their old cars for more energy-efficient new ones, was so successful that the $3 billion in government funding was depleted long before the original November 1 deadline.

If you’re in the market for a new car, the IRS wants you to know there is still a tax break that may get you motivated to make your purchase this year.

Recent legislation provides an above-the-line tax deduction for the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motorcycle, or motor home. The IRS issued a clarification stating that other fees or taxes based on the vehicle’s sales price may be deductible in states that have no sales tax.

To qualify for the deduction on your 2009 tax return, the vehicle must have been purchased after February 16, 2009, and before January 1, 2010. The deduction is phased out for taxpayers whose adjusted gross income falls between $125,000 and $135,000 (single) or $250,000 and $260,000 (joint).

For more information or planning assistance, give us a call.