services about us careers client resources contact
Client Resources

Articles Archive

IRS Warns of Pervasive Telephone Scam
October 2013

WASHINGTON — The Internal Revenue Service today warned consumers about a sophisticated phone scam targeting taxpayers, including recent immigrants, throughout the country.

Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

“This scam has hit taxpayers in nearly every state in the country.  We want to educate taxpayers so they can help protect themselves.  Rest assured, we do not and will not ask for credit card numbers over the phone, nor request a pre-paid debit card or wire transfer,” says IRS Acting Commissioner Danny Werfel. “If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don’t pay immediately, that is a sign that it really isn’t the IRS calling.” Werfel noted that the first IRS contact with taxpayers on a tax issue is likely to occur via mail.

Other characteristics of this scam include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

  • If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.
  • If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.
  • If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at  Please add "IRS Telephone Scam" to the comments of your complaint.

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.

The IRS encourages taxpayers to be vigilant against phone and email scams that use the IRS as a lure. The IRS does not initiate contact with taxpayers by email to request personal or financial information.  This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts. Recipients should not open any attachments or click on any links contained in the message. Instead, forward the e-mail to

More information on how to report phishing scams involving the IRS is available on the genuine IRS website,

Health-Care Reform: Looking Back and Ahead
April 2013

Three years ago, on March 23, 2010, President Obama signed the Affordable Care Act (ACA) into law. While several substantial provisions don't take effect until 2014, many of the Act's requirements already have been implemented, including:

  • Insurance policies must allow young adults up to age 26 to remain covered on their parent's health insurance.
  • Insurers cannot deny coverage to children due to their health status, nor can companies exclude children's coverage for pre-existing conditions.
  • Lifetime coverage limits have been eliminated from private insurance policies.
  • State-based health insurance Exchanges intended to provide a marketplace for individuals and small businesses to compare and shop for affordable health insurance are scheduled to be implemented by October 1, 2013.
  • Insurance policies must provide an easy-to-read description of plan benefits, including what's covered, policy limits, coverage exclusions, and cost-sharing provisions.
  • Medical loss ratio and rate review requirements mandate that insurers spend 80% to 85% of premiums on direct medical care instead of on profits, marketing, or administrative costs. Insurers failing to meet the loss ratio requirements must pay a rebate to consumers.
  • The ACA provides federal funds for states to implement plans that expand Medicaid long-term care services to include home and community-based settings, instead of just institutions.
  • The ACA provides funding to the National Health Service Corps, which provides loan repayments to medical students and others in exchange for service in low-income underserved communities.
  • Medicare and private insurance plans that haven't been grandfathered must provide certain preventive benefits with no patient cost-sharing, including immunizations and preventive tests.
  • Through rebates, subsidies, and mandated manufacturers' discounts, the ACA reduces the amount that Part D Medicare drug benefit enrollees are required to pay for prescriptions falling in the donut hole.

Major provisions coming in 2014

Several important provisions of the ACA are due to take effect in 2014, such as:

  • U.S. citizens and legal residents must have qualifying health coverage (subject to certain exemptions) or face a penalty.
  • Employers with more than 50 full-time equivalent employees are required to offer affordable coverage or pay a fee.
  • Premium and cost-sharing subsidies that reduce the cost of insurance are available to individuals and families based on income.
  • Policies (other than grandfathered individual plans) are prohibited from imposing pre-existing condition exclusions, and must guarantee issue of coverage to anyone who applies regardless of their health status. Also, health insurance can't be rescinded due to a change in health status, but only for fraud or intentional misrepresentation.
  • Policies (except grandfathered individual plans) cannot impose annual dollar limits on the value of coverage.
  • Individual and small group plans (except grandfathered individual plans), including those offered inside and outside of insurance Exchanges, must offer a comprehensive package of items and services known as essential health benefits. Also, nongrandfathered plans in the individual and small business market must be categorized based on the percentage of the total average cost of benefits the insurance plan covers, so consumers can determine how much the plan covers and how much of the medical expense is the consumer's responsibility. Bronze plans cover 60% of the covered expenses, Silver plans cover 70%, Gold plans cover 80%, and Platinum plans cover 90% of covered expenses.
2013 Tax Rate Tables

For most taxpayers, ordinary income tax rates in 2013 will remain about the same as 2012. A key exception is individuals with taxable income exceeding $400,000 for single filers or $450,000 for married couples filing jointly, who are now subject to a top marginal rate of 39.6 percent. 

You can view or download the tax tables in MSWord format here.

An Overview of the 2012 American Taxpayer Relief Act
January 2013

After weeks, indeed months of proposals and counter-proposals, seemingly endless negotiations and down-to-the-wire drama, Congress has passed legislation to avert the tax side of the so-called “fiscal cliff.”  The American Taxpayer Relief Act, which Congress passed and President Obama signed into law in January 2013,  permanently extends the Bush-era tax cuts for lower and moderate income taxpayers, permanently “patches” the alternative minimum tax (AMT), provides for a permanent 40 percent federal estate tax rate, renews many individual, business and energy tax extenders, and more. In one immediately noticeable effect, the American Taxpayer Relief Act does not extend the 2012 employee-side payroll tax holiday.

The American Taxpayer Relief Act is intended to bring some certainty to the Tax Code. At the same time, it sets stage for comprehensive tax reform, possibly in 2013. Moreover, it creates important planning opportunities for taxpayers, which we can discuss in detail.

Unlike the two-year extension of the Bush-era tax cuts enacted in 2010, the debate in 2012 took place in a very different political and economic climate. If Congress did nothing, tax rates were scheduled to increase for all taxpayers at all income levels after 2012. President Obama made it clear that he would veto any bill that extended the Bush-era tax cuts for higher income individuals. The President’s veto threat gained weight after his re-election. Both the White House and the GOP realized that going over the fiscal cliff would jeopardize the economic recovery, and the American Taxpayer Relief Act is, for the moment, their best compromise.

Tax rates. The American Taxpayer Relief Act extends permanently the Bush-era income tax rates for all taxpayers except for taxpayers with taxable income above certain thresholds:
$400,000 for single individuals, $450,000 for married couples filing joint returns, and $425,000 for heads of households. For 2013 and beyond, the federal income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent. In comparison, the top rate before 2013 was 35 percent. The IRS is expected to issue revised income tax withholding tables to reflect the 2013 rates as quickly as possible and provide guidance to employers and self-employed individuals.

Additionally, the new law revives the Pease limitation on itemized deductions and personal exemption phaseout (PEP) after 2012 for higher income individuals but at revised thresholds. The new thresholds for being subject to both the Pease limitation and PEP after 2012 are $300,000 for married couples and surviving spouses, $275,000 for heads of households, $250,000 for unmarried taxpayers; and $150,000 for married couples filing separate returns.

Capital gains. The taxpayer-friendly Bush-era capital gains and dividend tax rates are modified by the American Taxpayer Relief Act. Generally, the new law increases the top rate for qualified capital gains and dividends to 20 percent (the Bush-era top rate was 15 percent). The 20 percent rate will apply to the extent that a taxpayer’s income exceeds the $400,000/$425,000/$450,000 thresholds discussed above. The 15 percent Bush-era tax rate will continue to apply to all other taxpayers (in some cases zero percent for qualified taxpayers within the 15-percent-or-lower income tax bracket).

Payroll tax cut. The employee-side payroll tax holiday is not extended. Before 2013, the employee-share of OASDI taxes was reduced by two percentage points from 6.2 percent to 4.2 percent up the Social Security wage base (with a similar tax break for self-employed individuals). For 2013, two percent reduction is no longer available and the employee-share of OASDI taxes reverts to 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent. In 2012, the payroll tax holiday could save a taxpayer up to $2,202 (taxpayers earning at or above the Social Security wage base for 2012). As a result of the expiration of the payroll tax holiday, everyone who receives a paycheck or self-employment income will see an increase in taxes in 2013.

AMT. In recent years, Congress routinely “patched” the AMT to prevent its encroachment on middle income taxpayers. The American Taxpayer Relief Act patches permanently the AMT by giving taxpayers higher exemption amounts and other targeted relief. This relief is available beginning in 2012 and going forward. The permanent patch is expected to provide some certainty to planning for the AMT. No single factor automatically triggers AMT liability but some common factors are itemized deductions for state and local income taxes; itemized deductions for miscellaneous expenditures, itemized deductions on home equity loan interest (not including interest on a loan to build, buy or improve a residence); and changes in income from installment sales. Our office can help you gauge if you may be liable for the AMT in 2013 or future years.

Child tax credit and related incentives. The popular $1,000 child tax credit was scheduled to revert to $500 per qualifying child after 2012. Additional enhancements to the child tax credit also were scheduled to expire after 2012. The American Taxpayer Relief Act makes permanent the $1,000 child tax credit. Most of the Bush-era enhancements are also made permanent or extended. Along with the child tax credit, the new law makes permanent the enhanced adoption credit/and income exclusion; the enhanced child and dependent care credit and the Bush-era credit for employer-provided child care facilities and services.

Education incentives. A number of popular education tax incentives are extended or made permanent by the American Taxpayer Relief Act. The American Opportunity Tax Credit (an enhanced version of the Hope education credit) is extended through 2017. Enhancements to Coverdell education savings accounts, such as the $2,000 maximum contribution, are made permanent. The student loan interest deduction is made more attractive by the permanent suspension of its 60-month rules (which had been scheduled to return after 2012). The new law also extends permanently the exclusion from income and employment taxes of employer-provided education assistance up to $5,250 and the exclusion from income for certain military scholarship programs. Additionally, the above-the-line higher education tuition deduction is extended through 2013 as is the teachers’ classroom expense deduction.

Charitable giving. Congress has long used the tax laws to encourage charitable giving. The American Taxpayer Relief Act extends a popular charitable giving incentive through 2013: tax-free IRA distributions to charity by individuals age 70 ½ and older up to maximum of $100,000 for qualified taxpayer per year. A special transition rule allows individuals to recharacterize distributions made in January 2013 as made on December 31, 2012. The new law also extends for businesses the enhanced deduction for charitable contributions of food inventory.

Federal estate tax. Few issues have complicated family wealth planning in recent years as has the federal estate tax. Recent laws have changed the maximum estate tax rate multiple times. Most recently, the 2010 Taxpayer Relief Act set the maximum estate tax rate at 35 percent with an inflation-adjusted exclusion of $5 million for estates of decedents dying before 2013. Effective January 1, 2013, the maximum federal estate tax will rise to 40 percent, but will continue to apply an inflation-adjusted exclusion of $5 million. The new law also makes permanent portability between spouses and some Bush-era technical enhancements to the estate tax.

The business tax incentives in the new law, while not receiving as much press as the individual tax provisions, are valuable. Two very popular incentives, bonus depreciation and small business expensing, are extended as are many business tax “extenders.”

Bonus depreciation/small business expensing. The new law renews 50 percent bonus depreciation through 2013 (2014 in the case of certain longer period production property and transportation property). Code Sec. 179 small business expensing is also extended through 2013 with a generous $500,000 expensing allowance and a $2 million investment limit. Without the new law, the expensing allowance was scheduled to plummet to $25,000 with a $200,000 investment limit.

Small business stock. To encourage investment in small businesses, the tax laws in recent years have allowed noncorporate taxpayers to exclude a percentage of the gain realized from the sale or exchange of small business stock held for more than five years. The American Taxpayer Relief Act extends the 100 percent exclusion from the sale or exchange of small business stock through 2013.

Tax extenders. A host of business tax incentives are extended through 2013. These include:
Research tax credit
Work Opportunity Tax Credit
New Markets Tax Credit
Employer wage credit for military reservists
Tax incentives for empowerment zones
Indian employment credit
Railroad track maintenance credit
Subpart F exceptions for active financing income
Look through rules for related controlled foreign corporation payments

For individuals and businesses, the new law extends some energy tax incentives. The Code Sec. 25C, which rewards homeowners who make energy efficient improvements, with a tax credit is extended through 2013. Businesses benefit from the extension of the Code Sec. 45 production tax credit for wind energy, credits for biofuels, credits for energy-efficient appliances, and many more.

Looking ahead
The negotiations and passage of the new law are likely a dress rehearsal for comprehensive tax reform during President Obama’s second term. Both the President and the GOP have called for making the Tax Code more simple and fair for individuals and businesses. The many proposals for tax reform include consolidation of the current individual income tax brackets, repeal of the AMT, moving the U.S. from a worldwide to territorial system of taxation, and a reduction in the corporate tax rate. Congress and the Obama administration also must tackle sequestration, which the American Taxpayer Relief Act delayed for two months. All this and more is expected to keep federal tax policy in the news in 2013. Our office will keep you posted of developments.

If you have any questions about the American Taxpayer Relief Act, please contact us. We can schedule an appointment to discuss how the changes in the new law may be able to maximize your tax savings.

U.S. Engaging w/more than 50 Jurisdictions to Curtail Offshore Tax Evasion
November 2012

The U.S. Department of the Treasury has announced that it is engaged with more than 50 countries and jurisdictions around the world to improve international tax compliance and implement the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA).

Enacted by Congress in 2010, these provisions target noncompliance by U.S. taxpayers using foreign accounts.  Under these provisions, a withholding agent must deduct and withhold a tax equal to 30% of any withholdable payment, made to a foreign financial institution (FFI) that does not meet certain requirements. To avoid this 30% withholding requirement, a FFI must either enter into a FFI Agreement with IRS and satisfy its requirements or satisfy one of several alternatives. A participating FFI must also withhold on certain types of payments.

This summer, Treasury published a model intergovernmental agreement for implementing FATCA and announced the development of a second model agreement. These models serve as the basis for concluding bilateral agreements with interested jurisdictions.

The Treasury Department has already concluded a bilateral agreement with the United Kingdom. Additional jurisdictions with which Treasury is in the process of finalizing an intergovernmental agreement and with which Treasury hopes to conclude negotiations by year end include: France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, Isle of Man, Jersey, Mexico, the Netherlands, and Norway.

Jurisdictions with which Treasury is actively engaged in a dialogue towards concluding an intergovernmental agreement include: Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore, and Sweden. Treasury expects to be able to conclude negotiations with several of these jurisdictions by year end.

The jurisdictions with which Treasury is working to explore options for intergovernmental engagement include: Bermuda, Brazil, the British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Sint Maarten, Slovenia, and South Africa.

The Treasury Department will continue its outreach to interested jurisdictions that wish to consider an intergovernmental approach to implementing FATCA, including participation in a meeting hosted by the Qatar Central Bank in early December to provide information about FATCA and the intergovernmental agreements to invited senior government officials and financial institutions in the Gulf Cooperation Council.

The Treasury Department and the IRS will finalize the regulations implementing FATCA in the near term. Updates and further information on FATCA can be found by visiting the Treasury FATCA page at

The "Fiscal Cliff"
September 2012

What is the "fiscal cliff"? It's the term being used by many to describe the unique combination of tax increases and spending cuts scheduled to go into effect on January 1, 2013. The ominous term reflects the belief by some that, taken together, higher taxes and decreased spending at the levels prescribed have the potential to derail the economy. Whether we do indeed step off the cliff at the end of the year, and what exactly that will mean for the economy, depends on several factors.

Will expiring tax breaks be extended?

With the "Bush tax cuts" (extended for an additional two years by legislation passed in 2010) set to sunset at the end of 2012, federal income tax rates will jump up in 2013. We'll go from six federal tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%). The maximum rate that applies to long-term capital gains will generally increase from 15% to 20%. And while the current lower long-term capital gain tax rates now apply to qualifying dividends, starting in 2013, dividends will once again be taxed as ordinary income.

Additionally, the temporary 2% reduction in the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax, in place for the last two years, also expires at the end of 2012. And, lower alternative minimum tax (AMT) exemption amounts (the AMT-related provisions actually expired at the end of 2011) mean that there will be a dramatic increase in the number of individuals subject to AMT when they file their 2012 federal income tax returns in 2013.

Other breaks go away in 2013 as well.

  • Estate and gift tax provisions will change significantly (reverting to 2001 rules). For example, the amount that can generally be excluded from estate and gift tax drops from $5.12 million in 2012 to $1 million in 2013, and the top tax rate increases from 35% to 55%.
  • Itemized deductions and dependency exemptions will once again be phased out for individuals with high adjusted gross incomes (AGIs).
  • The earned income tax credit, the child tax credit, and the American Opportunity (Hope) tax credit all revert to old, lower limits and less generous rules.
  • Individuals will no longer be able to deduct student loan interest after the first 60 months of repayment.

There continues to be discussion about extending expiring provisions. The impasse, however, centers on whether tax breaks get extended for all, or only for individuals earning $200,000 or less (households earning $250,000 or less). Many expect there to be little chance of resolution until after the November election.

Will new taxes take effect in 2013?

Beginning in 2013, the hospital insurance (HI) portion of the payroll tax--commonly referred to as the Medicare portion--increases by 0.9% for individuals with wages exceeding $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).

Also beginning in 2013, a new 3.8% Medicare contribution tax is imposed on the unearned income of high-income individuals. This tax applies to some or all of the net investment income of individuals with modified adjusted gross income that exceeds $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).

Both of these new taxes were created by the health-care reform legislation passed in 2010--recently upheld as constitutional by the U.S. Supreme Court--and it would seem unlikely that anything will prevent them from taking effect.

Will mandatory spending cuts be implemented?

The failure of the deficit reduction supercommittee to reach agreement back in November 2011 automatically triggered $1.2 trillion in broad-based spending cuts over a multiyear period beginning in 2013 (the formal term for this is "automatic sequestration"). The cuts are to be split evenly between defense spending and nondefense spending. Although Social Security, Medicaid, and Medicare benefits are exempt, and cuts to Medicare provider payments cannot be more than 2%, most discretionary programs including education, transportation, and energy programs will be subject to the automatic cuts.

New legislation is required to avoid the automatic cuts. But while it's difficult to find anyone who believes the across-the-board cuts are a good idea, there's no consensus on how to prevent them. Like the expiring tax breaks, the direction the dialogue takes will likely depend on the results of the November election.

What's the worst-case scenario?

Many fear that the combination of tax increases and spending cuts will have severe negative economic consequences. According to a report issued by the nonpartisan Congressional Budget Office (Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013, May 2012), taken as a whole, the tax increases and spending reductions will reduce the federal budget deficit by 5.1% of gross domestic product (GDP) between calendar years 2012 and 2013. The Congressional Budget Office projects that under these fiscal conditions, the economy would contract during the first half of 2013 (i.e., we would likely experience a recession).

It's impossible to predict exactly how all of this will play out. One thing is for sure, though: the "fiscal cliff" figures to feature prominently in the national dialogue between now and November.

The Supreme Court Has Upheld Obamacare, Now What?
July 2012

The landmark U.S. Supreme Court decision on June 28th, upheld President Obama's signature legislation- the Patient Protection and Affordable Care Act. The Court held that the individual mandate was permissible as a tax, and several health-care related elements of the legislation that are already in effect will continue given the Courts decision and several new provisions will come into existence as early as January 1st, 2013.

Certain tax provisions that may impact you are:

Medicare tax on investment income (Sec. 1411): Imposes a tax on individuals equal to 3.8% of the lesser of the individual's net investment income for the year or the amount the individual's modified AGI exceeds a threshold amount. (Effective 2013.)

Premium-assistance credit (Sec. 36B): Refundable tax credits that eligible taxpayers can use to help cover the cost of health insurance premiums for individuals and families who purchase health insurance through a state health benefit exchange. (Effective 2014.)

Small business tax credit (Sec. 45R): Small businesses—defined as businesses with 25 or fewer employees and average annual wages of $50,000 or less—would be eligible for a credit of up to 50% of nonelective contributions the business makes on behalf of their employees for insurance premiums. (Effective 2010.)

Reporting requirements (Sec. 6055): Requires insurers (including employers who self-insure) that provide minimum essential coverage to any individual during a calendar year to report certain health insurance coverage information to both the covered individual and to the IRS. (Effective 2014.)

Medical care itemized deduction threshold (Sec. 213): Threshold for the itemized deduction for unreimbursed medical expenses is increased from 7.5% of adjusted gross income (AGI) to 10% of AGI for regular income tax purposes. (Effective 2013 generally, 2017 for certain taxpayers.)

Cafeteria plans (Sec. 125): A qualified health plan offered through a health insurance exchange is a qualified benefit under a cafeteria plan of a qualified employer. (Effective 2014.)

Additional hospital insurance tax on high-income taxpayers (Sec. 3101): Employee portion of the Medicare hospital insurance tax part of FICA is increased by 0.9% on wages that exceed a threshold amount. (Effective 2013.)

Employer responsibility (Sec. 4980H): An "applicable large employer" that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60%, is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee. (Effective 2014.)

Fees on health plans (Sec. 4375): Fee is imposed on each specified health insurance policy. (Effective Oct. 2012.)

Excise tax on high-cost employer plans (Sec. 4980I): Excise tax on coverage providers if the aggregate value of employer-sponsored health insurance coverage for an employee (including, for purposes of the provision, any former employee, surviving spouse, and any other primary insured individual) exceeds a threshold amount. (Effective 2018.)

Tax on health savings account (HSA) distributions (Sec. 223): Additional tax on distributions from an HSA or an Archer medical savings account (MSA) that are not used for qualified medical expenses is increased to 20% of the disbursed amount. (Effective 2011.)

Health flexible spending arrangements (FSAs) (Sec. 125(i)): Maximum amount available for reimbursement of incurred medical expenses under a health FSA for a plan year (or other 12-month coverage period) must not exceed $2,500. (Effective 2013.)

SIMPLE cafeteria plans for small business (Sec. 125): An eligible small employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan. (Effective 2011.)

Expansion of adoption credit, adoption-assistance programs: Maximum adoption credit was increased and, for adoption-assistance programs, the maximum exclusion was increased. (Effective 2010; scheduled to expire at end of 2012.)

Information reporting (Sec. 6051(a)(14)): Requires employers to disclose on each employee's annual Form W-2 the value of the employee's health insurance coverage sponsored by the employer. (Effective 2012.)

Return information disclosure (Sec. 6103): Allows the IRS, upon written request of the secretary of Health and Human Services, to disclose certain taxpayer return information if the taxpayer's income is relevant in determining the amount of the tax credit or cost-sharing reduction, or eligibility for participation in the specified state health subsidy programs. (Effective March 2010.)

Excise tax on medical device manufacturers (Sec. 4191): Tax equal to 2.3% of the sale price is imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of the device. (Effective 2013.)

Deductions for federal subsidies for retiree prescription plans (Sec. 139A): Eliminates the rule that the exclusion for subsidy payments is not taken into account for purposes of determining whether a deduction is allowable for retiree prescription drug expenses. (Effective 2013.)

Adult dependent insurance coverage: Changes the definition of "dependent" for purposes of Sec. 105(b) (excluding from income amounts received under a health insurance plan) to include amounts expended for the medical care of any child of the taxpayer who has not yet reached age 27. The same change is made in Sec. 162(l)(1) for purposes of the self-employed health insurance deduction, in Sec. 501(c)(9) for purposes of benefits provided to members of a VEBA, and in Sec. 401(h) for benefits for retirees. (Effective 2010.)

Time for payment of corporate estimated taxes for 2014: For corporations with assets of at least $1 billion (determined as of the end of the preceding tax year), estimated tax payments due in July, August, or September 2014 were increased.

If you make over $200,000 annually, you may be subject to a 3.8% Medicare surtax on net investment income, effectively raising your marginal income tax rate. You will also be subject to a 0.9% increase in income taxes. An affected taxpayer in the 39.6% bracket — the highest bracket in 2013 — will have a 43.4% marginal rate. Contact us now, we can help you understand what these tax increases means for you and how to plan for them. 

Speculating on the Future of the Federal Estate Tax
July 2012

What is the future of the federal estate tax? All we know for sure is that no one knows anything; it's all speculation. So, let's take a look at what could happen.

A quick history lesson
An alphabet soup of tax laws (EGTRRA, JGTRRA, TIPRA, and the others, 13 in total), enacted between 2001 and 2010, created and extended many tax benefits, commonly known as the Bush tax cuts. Provisions affecting estate tax law included a reduction of the top gift, estate, and generation-skipping transfer (GST) tax rates, and an increase in the tax exemptions.

Some of the Bush tax cuts, including the estate tax changes, will "sunset" in 2013. That means they will expire and the tax laws will revert to what they were before 2001, unless Congress extends them again or enacts other legislation.

Current estate tax law

  • The top federal gift and estate tax rate in 2012 is 35%. This top rate is scheduled to increase to 55% with a 5% surcharge on estates that exceed $10 million, but do not exceed $17.184 million.
  • The federal GST tax (this is an additional tax on all property or asset transfers you make during your life and at your death to persons who are two or more generations below you, such as grandchildren and grand nieces) is imposed at a 35% tax rate in 2012. This rate increases to 55% in 2013.
  • Generally, the federal gift and estate tax exemption equivalent amount in 2012 is $5.12 million. This exemption amount decreases to $1 million in 2013.
  • The federal GST tax exemption in 2012 is $5.12 million. This amount will decrease to $1 million, indexed for inflation (estimated so far to be $1.36 million).
  • The federal annual gift tax exclusion is $13,000 in 2012 (this figure will likely increase in future years). Each taxpayer is entitled to this exclusion, so married couples can gift up to $26,000 federal gift tax free. This exclusion applies to an unlimited number of beneficiaries. This exclusion does not sunset; it is permanent.

Portability of exemption in 2011 and 2012 only
The last piece of legislation introduced a new concept: portability of the gift and estate tax exemption. That means the estate of the first spouse to die can transfer to the surviving spouse any portion of the exemption that is not used.

In 2012, Husband has an estate valued at $3 million, and Wife has an estate valued at $9 million. Husband dies in 2012, and believing that Wife was well provided for, leaves his entire estate to the couples' children. His estate uses $3 million of the available $5.12 million exemption so that his entire estate can be transferred to the children free from federal estate tax. Husband's estate transfers the $2.12 million exemption amount that is left over ($5.12 million minus $3 million equals $2.12 million) to Wife. Wife now has an exemption amount of $7.24 million ($5.12 million plus $2.12 million equals $7.24 million). Now, say that Wife dies later in 2012. Wife's estate of $9 million is transferred to her heirs. The $7.24 million passes free from federal estate tax and $1.76 million is subject to federal estate tax. If the exemption had not been portable, Wife's estate would have passed $5.12 million estate tax free and $3.88 million would have been subject to federal estate tax. An additional $2.12 million passes tax free with portability. This is assuming no other variables, and no other estate tax strategies (such as a credit shelter trust) in place to reduce the tax further.

Portability is effective for the tax years 2011 and 2012 only. It will not be available to estates in 2013 and thereafter, unless Congress extends this provision or enacts other legislation.

What could happen

  • Congress could extend all or some of the current provisions for another set time frame (probably two years), so the estate tax laws explained above would remain in effect (i.e., 35% top tax rate, $5.12 million exemption (plus any adjustment due to inflation), and portability of the federal gift and estate tax exemption).
  • Congress could allow all or some of the provisions that sunset to expire. That means the estate tax laws in effect in 2001 will apply (i.e., 55% top tax rate, $1 million exemption (as indexed for inflation), and no portability).
  • Congress could pass a compromise bill that would put the figures close to the middle, setting the top tax rate at 45% and the exemption amount at $3.5 million. Whether portability will expire or be extended is up in the air.
  • Congress could reform the estate tax laws.
  • Congress could repeal the estate tax altogether.


Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Keeping Market Volatility in Perspective
December 20, 2011

When markets are volatile, sticking to a long-term investing strategy can be a challenge. To keep the ups and downs in perspective, it might help to look at past market cycles to see how recent market action compares.

Bears versus bulls

Corrections of 10% or more and bear markets of at least 20% are a regular occurrence. Since 1929, there have been 18 previous 20%-plus bear markets (not including 2011 market action). Losses on the S&P 500 in those markets ranged from almost 21% in 1948-1949 to 83% during 1930-1932; the average loss for all 18 bears was 37%.*

However, since 1929, the average bull market has tended to last almost twice as long as the average bear, and has produced average gains of about 79%.* Individual bull market gains have ranged from 21.4% at the end of 2001 to the nearly 302% increase registered during the 1990s.* The worst annual loss--47%--occurred in 1931, but the all-time best annual return--a capital appreciation gain of just under 47%--happened just two years later in 1933.**

Points of reference

This year has seen extreme volatility, with weeks and even days when swings of several hundred points in both directions on the Dow seemed to become commonplace. In the first week of August alone, 2 of the Dow's 11 best days in history alternated with 2 of its 11 worst daily point losses ever.***

While by no means normal, the highs and lows are hardly unprecedented. Even though the 634-point drop on August 8 felt historic, it didn't begin to match the real record-holders. The single biggest daily decline occurred in September 2008, when the Dow fell 778 points. The biggest percentage drop was October 1987's "Black Monday," when the Dow fell almost 23%; that makes the Dow's 5.5% loss on August 8 of this year seem relatively tame by comparison. And August 8 was followed by the Dow's 10th best day ever, with a gain of 430 points. While that upward movement may seem exceptional, the Dow's best day ever came during the dark days of October 2008, when a 936-point move up on October 13 represented a gain of more than 11% in a single day.***

Stocks versus bonds

The last decade has been a challenging one for stocks. Between 2001 and 2010, the S&P 500 had an average annual total return of just 1.4%, while the equivalent figure for Treasury bonds was 6.6%.**** For much of that time, interest rates were falling, helping bonds to outperform stocks. However, interest rates are now at record lows, and rising rates could change the relative performance of stocks and bonds.

Many experts predict that the global economic recovery will continue to create an uncertain investing environment in coming years, with both strong rallies and strong downdrafts. While there may be ongoing volatility in the markets that needs to be monitored, it's important to keep things in perspective; your ability to meet your long-term goals could be affected if you change your overall game plan with every new headline.

Past performance is no guarantee of future results. Market indices listed are unmanaged and are not available for direct investment. All investing involves risk, including the risk of loss of principal, and there can be no guarantee that any investment strategy will be successful. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The Standard & Poor's 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.

DATA SOURCES: *Bull and bear market time frames, gains/losses: all calculations based on data from the Stock Trader's Almanac 2011 for the Standard & Poor's 500.

**1931 and 1933 annual stock returns: based on Ibbotson SBBI data for capital appreciation of S&P 500.

***Based on data from the Stock Trader's Almanac 2011 .

**** 10-year rolling stock returns: based on Ibbotson SBBI data for annual total returns between 2001 and 2010 of S&P 500 and an index of U.S. Treasury bonds with an approximate 20-year maturity.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Estate Planning - Advantages of The 2010 Tax Act Expires 01/01/2013
August 7, 2011

On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”). The enactment of this legislation provides unprecedented estate planning opportunities for 2011 and 2012.

The most notable change under the Act is that the exemption amount for gifts and generation-skipping transfers is now the same as for estates, $5 million per individual ($10 million for a married couple). The Act also reduced the marginal estate, gift and GST tax rates to 35%. For the next two years, the estate, gift, and GST exemptions are reunified at $5 million.

With the applicable gift tax exclusion increased from $1 million in 2010 to $5 million in 2011 and 2012, there is an extremely attractive option available where one can gift a significant amounts of wealth during his/her life time in 2011 and 2012. A couple that now has a combined exemption of $10 million is able to gift up to $10 million if no previous taxable gifts were made.

One potential drawback on gifting is basis. With a gift, the donee generally takes the same basis as the donor. With an inheritance, the heir generally receives the inherited property with a stepped up or stepped down basis. This is one of many considerations that need to be taken into account with this new gifting opportunity.

The additional amount of gift exemption amount also opens up new opportunities for dynasty trust planning, family limited partnerships and grantor retained annuity trusts (GRATs).  For example, a gift of $10 million to a trust for the benefit of children and their descendants can be exempted from both gift and GST taxes.

Estate plans should be updated in light of the new reunified $5 million exemption equivalent (basic exclusion amount) for estate and gift taxation. Because the Act is structured to end on January 1, 2013, it is important for you to review your estate plan to determine whether any updates are needed. If Congress does not act to change the law before 2013, the unified credit amount for gift and estate taxes will revert back to $1 million per individual, while the GST exemption will return to $1.3 million per individual. A maximum marginal rate of 55% will apply to all types of transfers.

Even if your assets are under $5 million, it is still prudent to visit the issue of estate planning. Many states, including Washington State, have their own estate tax regimes. Washington State’s estate exemption is $2 million. This means a person that passes away in 2012 with $3 million of estate will be exempt from federal estate tax, but will be subject to Washington’s estate tax. With careful planning, Washington estate tax can be avoided or minimized.

Please contact us if you would like to discuss estate planning opportunities.

2010 Tax Relief Enacted
December 29, 2010

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 TRA”) was enacted on December 17, 2010. The legislation postpones certain sunset provisions under The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) relating to federal individual income-tax rates (commonly referred to as the Bush-era tax cuts). The Act contains numerous business-related provisions, such as incentives for businesses to invest in machinery and equipment, as well as several other tax breaks for individuals.

Much of the new law simply retains favorable tax rules that applied in prior years. It includes a temporary extension of favorable dividend and long term capital gains rates, as well as estate-tax relief. The Act also provides a two-year AMT “patch”, and a two percentage point reduction in employee paid payroll taxes (and self employment tax) for 2011. Following is a summary of the Act’s key provisions.

Individual-taxpayers Provisions

  • The 2010 TRA retains the more favorable 2010 individual marginal tax rates for 2011 and 2012: 10%, 15%, 25%, 28%, 33% and 35%. The 2011 rates were scheduled to be 15%, 28%, 31%, 36%, and 39.6%.
  • Marriage penalty relief is extended through 2012.
  • Favorable tax rates (15% for most taxpayers, 0% for those in the 10% or 15% tax brackets) on net capital gains are extended for two years, though 2012.
  • Qualified dividends continue to be subject to the same maximum rates as net capital gains through 2012.
  • The Act extends the 100% capital gain exclusion for qualified small business stock (QSBS) through 2011.
  • For 2011 only, employees will pay a 4.2% (instead of 6.2%) Social Security Tax on wages up to $106,800. Similarly, the new law reduces the tax rate for the Social Security portion of self employment tax on self employment net earnings up to $106,800.
  • The Act delays the sunset provisions relating to the limitation on itemized deductions and personal exemptions for certain higher income taxpayers for two years, through 2012.
  • The maximum available credits for both the Child Tax Credit and Dependent Care Credit are extended through December 31, 2012.
  • The American Opportunity Tax Credit (formerly the Hope Credit) is extended for 2011 and 2012.
  • The maximum per beneficiary contribution limitation of $2,000 for Coverdell Education Savings Accounts (ESAs) is extended through 2012.
  • The above-the-line qualified tuition deduction is retroactively reinstated and extended for 2010 and 2011.
  • The $2,500-a-year limitation for deducting higher education student loan interest (including higher income phase out limits) is extended through 2012.
  • The 2010 TRA retroactively applies (to 2010 and extends through 2011) an “AMT patch,” raising the exemption amounts before an individual is subject to AMT.
  • The favorable changes made by prior law to the adoption credit, which is available to individuals who adopt an eligible child, are extended through 2012.
  • The Act retroactively extends the election for taxpayers to claim an itemized deduction for state and local general sales tax, instead of a deduction for state and local income taxes, through 2011.
  • Certain energy credits are extended for nonbusiness energy property placed in service by December 31, 2011, although credit rates, dollar and lifetime limits revert to prior, less favorable levels.
  • The Act retroactively reinstates and extends the deduction available to K–12 teachers (and certain other educators) for eligible out of pocket expenses for supplies and equipment for 2010, and through 2011.
  • The tax-free treatment (up to $100,000 a year) of IRA charitable distributions by persons age 70½ or older is retroactively reinstated and extended for 2010 and 2011.

Provisions Affecting Business Taxpayers

The 2010 TRA includes several tax incentives aimed at spurring business investment in machinery, equipment, and other assets.

  • The new law generally allows businesses to deduct 100% of the cost of qualified property acquired and placed in service after September 8, 2010, and before January 1, 2012 (conditions apply). Note that the new law does not place a dollar limit on the amount of qualified property eligible for the 100% write-off.
  • The new law allows businesses to make an election to write off 50% of the cost of qualified property placed in service during 2012 (and 2013 for certain longer lived and transportation property).
  • The new law sets the dollar limitation on property eligible for the Section 179 expensing election at $125,000, as indexed for inflation, for the 2012 tax year. The $125,000 limit will be reduced dollar for dollar as the cost of Section 179-eligible property placed in service during the 2012 tax year exceeds $500,000, as indexed for inflation.
  • Various business credits have been extended by the Act, including the research credit, Work-opportunity credit, differential wage credit, and the credit for employer provided child care.
  • The penalty tax rate applicable to accumulated earnings will be 15% (instead of 20%) for tax years beginning before 2013.
  • The Act retroactively extends for 2010 and 2011 the rules permitting a C corporation to claim an enhanced deduction for contributions of computers and book inventories to public schools.
  • Under the Act, employers may continue to provide employees up to $5,250 of educational assistance free of federal income tax through 2012.
  • The Act also contains provisions relating to enhanced income tax free benefits from an employer’s adoption-assistance program.

Estate-, Gift-, and GST-tax Provisions

For 2010, 2011, and 2012, the 2010 TRA provides a more favorable tax rate and exemption amount than those previously scheduled to go into effect for 2011 and beyond.

  • The Act reduces the impact of estate and gift taxes in 2011 and 2012 by increasing the exemption amount to $5 million (subject to a potential inflation adjustment in 2012) and reducing the top gift- and estate-tax rate to 35%.
  • Due to the $5 million exemption, the estate- and gift-tax rate in 2011 and 2012 is effectively a flat 35%.
  • The Act also subjects the estates of individuals who died in 2010 to estate tax (with a $5 million exemption amount and a 35% rate) unless the estate’s executor elects to have certain “carryover basis” rules apply.
  • The new law allows a deceased spouse’s executor to elect to transfer any unused estate-tax exemption to the surviving spouse. This provision is effective for 2011 and 2012.
  • The Act reinstated the GST tax, effective for 2010, and set the exemption to equal the $5 million estate- and gift-tax exemption amount for 2010, 2011, and 2012 (subject to inflation adjustment in 2012). Note that the applicable GST-tax rate for 2010 is 0%, effectively keeping the repeal of the GST tax in place. In 2011 and later, the GST-tax rate returns to the highest federal estate-tax rate.

We can help you determine how the new law affects you.

2010 Small Business Jobs Act
September 30, 2010

The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for small business, paid for with various revenue raisers. Here's a brief overview of the tax changes in the new law.

Tax breaks and incentives
Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Jobs Act law, taxpayers could expense up to $250,000 of qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000.

The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

100% exclusion of gain from the sale of small business stock for qualifying stock acquired after date of enactment and before Jan. 1, 2011. Before the 2009 Recovery Act, individuals could exclude 50% of their gain on the sale of qualified small business stock (QSBS) held for at least five years (60% for certain empowerment zone businesses). To qualify, QSBS must meet a number of conditions (e.g., it must be stock of a corporation that has gross assets that don't exceed $50 million, and the corporation must meet active business requirements). Under the 2009 Recovery Act, the percentage exclusion for gain on QSBS sold by an individual was increased to 75% for stock acquired after Feb. 17, 2009 and before Jan. 1, 2011. Under the new law, the amount of the exclusion is temporarily increased yet again, to 100% of the gain from the sale of qualifying small business stock that is acquired in 2010 after date of enactment and held for more than five years. In addition, the new law eliminates the alternative minimum tax (AMT) preference item attributable for that sale.

General business credits of eligible small businesses for 2010 allowed to be carried back five years. Generally, a business's unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under the new law, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years. Eligible small businesses consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

General business credits of eligible small businesses in 2010 aren't subject to AMT. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.

S corporation holding period. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years following its conversion or face a business-level tax imposed on the built-in gain at the highest corporate rate of 35%. This holding period is reduced where the 7th tax year in the holding period preceded the tax year beginning in 2009 or 2010. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.

Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property).

Special rule for long-term contract accounting. The new law provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.

Boosted deduction for start-up expenditures. The new law allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.

Limitation on penalty for failure to disclose certain reportable transactions (including listed transactions) on a return. The new law limits the penalty to 75% of the decrease in tax resulting from the transaction. The minimum penalty is $10,000 for corporations and $5,000 for individuals (for failure to report a listed transaction, the maximum penalty is $200,000 and $100,000, respectively). These changes are retroactively effective to penalties assessed after Dec. 31, 2006.

Deductibility of health insurance for the purpose of calculating self-employment tax. The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.

Cell phones removed from listed property category. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

Offsets (revenue raisers)
Information reporting required for rental property expense payments. For payments made after Dec. 31, 2010, the new law requires persons receiving rental income from real property to file information returns with IRS and service providers reporting payments of $600 or more during the tax year for rental property expenses. Exceptions are provided for individuals renting their principal residences on a temporary basis (including active members of the military), taxpayers whose rental income doesn't exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs).

Increased information return penalties. Effective for information returns required to be filed after Dec. 31, 2010.

Application of continuous levy to tax liabilities of certain federal contractors. For levies issued after date of enactment, the new law allows IRS to issue levies before a collection due process (CDP) hearing on Federal tax liabilities of Federal contractors (taxpayers would have an opportunity for a CDP hearing within a reasonable time after a levy is issued).

Allow participants in governmental 457 plans to treat elective deferrals as Roth contributions. For tax years beginning after Dec. 31, 2010, the new law will allow retirement savings plans sponsored by state and local governments (governmental 457(b) plans) to include designated Roth accounts. Contributions to Roth accounts are made on an after-tax basis, but distributions of both principal and earnings are generally tax-free.

Allow rollovers from elective deferral plans to designated Roth accounts. The new law allows 401(k), 403(b), and governmental 457(b) plans to permit participants to roll their pre-tax account balances into a designated Roth account. The amount of the rollover will be includible in taxable income except to the extent it is the return of after-tax contributions. If the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. Plans will be able to allow these rollovers immediately as of date of enactment.

Crude tall oil (a waste by-product of the paper manufacturing process) is excluded from eligibility for the cellulosic biofuel producer credit. The new law limits eligibility for the tax credit to fuels that are not highly corrosive (i.e., with an acid number of 25 or less), effective for fuels sold or used after Dec. 31, 2009.

Nonqualified annuity contracts. The new law permits holders of nonqualified annuities (annuity contracts held outside of a qualified retirement plan or IRA) to elect to receive part of the contract in the form of a stream of annuity payments, leaving the remainder of the contract to accumulate income on a tax-deferred basis.

Guarantee fees. Amounts received directly or indirectly for guarantees of indebtedness of a U.S. payor issued after date of enactment are sourced, like interest, in the U.S. As a result, amounts paid by U.S. taxpayers to foreign persons will generally be subject to U.S. withholding tax.

Please keep in mind that these are only the highlights of the most important changes in the new law. If you would like more details about any aspect of the new legislation, please do not hesitate to contact us.
Summary of the New Financial Reform Law
July 30, 2010

The financial reform bill recently signed into law is an attempt to address some of the problems that contributed to the 2008 financial crisis. The legislation, officially known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, is considered the most wide-ranging overhaul of the U.S. financial system since the aftermath of the Great Depression. Because the problems it addresses are complex, the legislation itself is complex; much of the real impact will be felt only after regulations are developed to implement the law's provisions. Also, some provisions, such as those dealing with lending practices, will have a direct impact on individuals and investors; others will primarily affect the ways in which Wall Street functions. This is only a brief summary of some key provisions; consult your financial professional to see how these changes may affect you.

Credit and lending practices are revised

The Act requires originators of residential mortgages to disclose any conflicts of interest and compare costs and benefits of mortgages offered to a potential borrower. Lenders also will be required to verify whether, based on income, credit history, and other data, a borrower has a reasonable ability to repay a loan plus its associated taxes, insurance, and other costs. This could mean that self-employed people and others whose income is undocumented or irregular will need better documentation to qualify for a loan.

Lenders will no longer be able to give loan officers financial incentives that induce them to steer customers to a mortgage with a higher interest rate simply to increase their own commission. Their ability to impose prepayment penalties when a borrower repays a loan early also will be more limited, and a holder of a hybrid adjustable rate mortgage must receive notice of any change in the interest rate six months in advance.

Lenders are prohibited from refinancing an existing mortgage unless the new mortgage offers a net benefit to the borrower, and they may not coerce or induce an appraiser to make a faulty appraisal of a property's value. Loan applicants must receive a copy of the appraisal on the property no later than three days prior to the closing.

High-cost mortgages are subject to special regulations. Any balloon payments on high-cost mortgages cannot be more than twice as large as the average of earlier payments, and a borrower must receive qualified counseling on the advisability of a high-cost mortgage before credit can be extended.

Homeowners who are unable to make mortgage payments as a result of losing their jobs or because of a medical condition may now qualify for up to $50,000 in assistance loaned through HUD's existing Emergency Mortgage Assistance Fund.

Increased protection of bank deposits becomes permanent

During the financial crisis, the Federal Deposit Insurance Corp. (FDIC) temporarily increased from $100,000 to $250,000 the amount it will insure on deposit accounts in FDIC-insured banks. The $250,000 limit is now permanent

Greater transparency and accountability for investments and related services

Institutional investors' inability to determine the amount of global financial exposure to derivatives--investments based on the value of other investments--contributed to the panic at the height of the financial crisis. Over-the-counter derivatives must now be traded on a public exchange, and trades must be cleared through a registered clearinghouse. Nonstandard derivatives can still be traded privately, but must be reported to a central authority in order to increase regulators' ability to monitor the overall level of activity.

Hedge funds and private-equity advisors will be required to register with the Securities and Exchange Commission (SEC) and disclose to the commission information such as investment positions and the amount of leverage involved. Also, the $1 million minimum net worth required to be an accredited investor eligible to invest in such funds will no longer include a principal residence, and that $1 million threshold will be reviewed every four years.

Credit rating firms, which were criticized for being too lax in their evaluations of securities based on subprime mortgages, will be subject to oversight by the SEC, which can fine those that issue too many faulty ratings over time. Also, investors will now have the right to sue an agency for issuing ratings it knew or should have known were flawed.

Shareholders of public companies will have the right to a nonbinding vote on compensation for the company's executives. Also, protections for people reporting securities law violations have been enhanced. Whistle-blowers with information that leads to monetary sanctions of more than $1 million will be eligible for 10 percent to 30 percent of the funds collected from the offender; if an employer retaliates, a whistle-blower can sue without waiting until administrative remedies have been exhausted.

An Investor Advocate office will be established within the SEC to help individual investors resolve significant problems and to promote investor interests.

Risky banking practices are addressed

Banks will be required to hold additional capital to cover potential losses, and some securities are no longer acceptable as vehicles for capital reserves held by large banks. Banks also will be required to retain at least 5 percent of a loan on their books if the loan is sold and/or repackaged with other loans and securitized. (However, some relatively low-risk mortgages, such as fully documented loans with a fixed interest rate, are exempted.)

Banks also will be more limited in their ability to engage in proprietary trading in their own accounts, which could represent a conflict of interest with their responsibility to their clients. They also will have to set up separate operations to handle their most risky derivative trades, such as swaps. A bank will not be permitted to invest more than 3 percent of its core capital in hedge funds and private equity, but it may still organize and offer them as long as certain conditions are met.

A Consumer Financial Protection Bureau overseen by the Federal Reserve will be created to regulate consumer financial products and services.

Systemic risk will be monitored, and liquidation of large banks will be overseen

A new Financial Stability Oversight Council is charged with assessing and managing risks that could threaten the entire U.S. financial system. Also, the FDIC will manage the liquidation of a bank whose failure the Treasury Secretary determines would disrupt the stability of the nation's financial system. That will include firing corporate management responsible for the failure and prohibiting any payments to shareholders until all other claims are paid. The FDIC may borrow from an Orderly Liquidation Fund to pay for a liquidation, but those costs must be replenished not from taxpayer funds but from claims on the bank and, if necessary, assessments on large financial institutions. The Act does not permit the Federal Reserve or the FDIC to lend to or provide a guarantee for individual or insolvent companies or banks, but both may lend funds to provide liquidity.

Hire Act's Tax Incentives to Businesses
June 1, 2010
The “Hiring Incentives to Restore Employment Act of 2010” (The HIRE Act) was signed into law earlier this year. It provides tax benefits to businesses that hire and retain unemployed workers in 2010. Since the law’s enactment, the IRS has issued guidance as to how the new law affects employers. Here is a summary.

Payroll Tax Holiday

A key element of the HIRE Act is a payroll tax holiday relating to Social Security taxes:

  • The HIRE Act relieves employers of the obligation to pay their share of Social Security (i.e., OASDI) employment taxes on qualifying wages paid to certain newly hired employees if the law’s requirements are met.
  • An employer’s potential maximum tax benefit is $6,621: 6.2% of the employee’s wages up to $106,800 — the maximum amount of wages subject to Social Security taxes (in 2010).
  • Workers hired after February 3, 2010, and before January 1, 2011, are eligible for the payroll tax forgiveness if certain conditions are met.
  • However, only wages paid after March 18 qualify to receive the exemption for payroll taxes.
  • The new employee cannot be a replacement for a former employee unless the former employee was terminated for cause or left voluntarily. Following a layoff, when business activity picks up again, the payroll tax exemption may apply with respect to the hiring of a new employee by the employer
  • Employers must obtain signed affidavits (Form W-11 or its equivalent) from the workers certifying that they have not been employed for more than 40 hours during the 60-day period ending on the date employment began.
  • No minimum weekly hour work requirement for new employees must be met in order for an employer to be eligible for the payroll tax break.
  • There is no limit on the total amount of payroll tax an employer may be forgiven.
  • The payroll tax break doesn’t reduce payroll taxes paid during the first calendar quarter of 2010. Instead, the tax reduction is treated as a payment against the employer’s second quarter Social Security tax liability.
  • In addition to income taxes, employers are still required to withhold the employee’s 6.2% share of Social Security taxes.
  • The reduced tax withholding will have no bearing on an employee’s future Social Security benefits.
  • The employee’s and the employer’s share of Medicare taxes (1.45% each — on all wages) continues to apply.
  • For workers that are otherwise eligible for the Work Opportunity Tax Credit (WOTC), the employer must select between the WOTC or the Social Security payroll tax reduction benefit under the HIRE Act; both cannot be claimed.

Retention Credit

The HIRE Act also offers employers a tax credit for retaining the workers they hire.

  • The amount of the tax credit that the employer may generally claim for each newly hired workers retained for at least 52 weeks is equal to the lesser of:

    • $1,000, or
    • 6.2% of wages paid to the retained worker during the 52-week period.
  • Accordingly, the credit for a retained worker will be $1,000 if the retained employee’s wages during the 52-consecutive-week period exceeds a little over $16,000.
  • The credit is only applicable to the extent the amount of wages paid to the employee during the last 26 weeks of the 52-week period is at least 80% of the amount paid during the first 26 weeks of the period.
  • The tax credit under the HIRE Act is claimed in the tax year in which the employee first satisfies the requirement of working 52 consecutive weeks for the employer.
  • The employee cannot be a relative of the employer in order for either tax benefit to be claimed.

Sec. 179 Expensing

The HIRE Act also extends the 2009 enhanced expensing rules for small businesses under IRC Section 179 for tax years beginning in 2010. Under the expensing rules, qualifying businesses have the option to currently deduct the cost of business machinery and equipment, rather than depreciating it over a number of years.

  • The HIRE Act provides that, for tax years beginning in 2010, a business may expense up to a maximum amount of $250,000.
  • The expensing election amount begins to phase out when a business purchases expensing-eligible assets in excess of $800,000.

  • These limits are in keeping with expensing levels in 2008 and 2009, which had expired.

  • Prior to the HIRE Act’s enactment, expensing limits for 2010 were $134,000 of qualifying assets, with a phaseout beginning in excess of $530,000 of qualifying assets.
  • The election applies to most non-real estate assets

If we can be of assistance to you in applying the HIRE Act’s provisions to your business, let us know.

Health Care Reform Becomes Law
April 21, 2010

The Patient Protection and Affordable Care Act (the “Act”, as amended) was recently signed into law. The Act will affect nearly every individual and business in the U.S.

The Act generally requires most individuals to have at least a minimum level of essential health care coverage (or imposes penalties on individuals who fail to do so). Under the new law, lower income individuals (with income up to 400% of the poverty level) may be entitled to receive tax credits and cost-sharing reductions to help pay for the coverage.

Employer Responsibilities

The Act also contains numerous provisions affecting employers.

Employer Shared Responsibility. While the Act does not require employers to provide minimum essential health coverage to employees, it encourages them to do so by offering penalties and incentives.

Employer Penalty. The new law exacts a penalty on larger employers (at least 50 full-time or full-time equivalent employees during the prior year) who fail to provide adequate coverage. If the employer doesn’t offer minimum essential coverage to employees and at least one employee receives a premium tax credit or cost-sharing reduction, it will be assessed a penalty of $2,000 per full-time employee per year. The Act excludes the first 30 employees from the penalty.

For those employers offering coverage where the coverage is “unaffordable” or where the coverage has an “actuarial value” of less than 60% of the cost of benefits, a penalty will apply if at least one employee receives a premium tax credit or cost-sharing reduction. The penalty is the lesser of $3,000 for each employee receiving the credit or reduction or $2,000 multiplied times the total number of full-time employees. Employers with fewer than 50 full-time employees are exempt from the penalty assessment.

SHOP Exchanges. The Act creates state-based exchanges (known as Small Business Health Options Program, or “SHOP”, Exchanges) through which small businesses (up to 100 full-time employees) can buy health care insurance coverage for employees (and possibly save money by doing so).

Small Employer Tax Credit. The Act offers small employers (generally those with no more than 25 full time employees and paying average annual wages of no more than $50,000 per employee) that purchase health insurance coverage for employees a sliding-scale income-tax credit to help them pay for the plan.

Free Choice Vouchers. Employers that offer coverage to their employees will be required to provide a “Free Choice Voucher” to certain employees whose income is not more than 400% of the federal poverty level under specified circumstances. The voucher is generally equal to an amount the employer would have paid to cover the employee under the employer’s plan.

Grandfathered Coverage. The Act allows personal or employer-provided health benefit coverage existing at the time of enactment to stay in place under a “grandfather” provision. The Act considers the grandfathered coverage to meet the law’s individual coverage mandate, if certain requirements are met.

Medicare Tax Increases

The Act imposes Medicare tax increases on higher income taxpayers.

Additional Medicare Tax on Earnings. Individual taxpayers who earn more than $200,000 a year, married taxpayers filing jointly who earn more than $250,000, and married taxpayers filing separately who earn more than $125,000 will have to pay an additional Medicare tax equal to .9% of their wages over the relevant threshold amount for their filing status. Self-employed individuals will be liable for an additional tax of .9% on self-employment income over certain thresholds. The additional self-employment tax is not deductible.

Surtax on Investment Income. A 3.8% surtax will be imposed on the investment income of higher income individuals, estates, and trusts. For individuals, the tax is equal to 3.8% of the lesser of (1) net investment income for the year or (2) the amount by which modified adjusted gross income exceeds the annual threshold amounts specified above for the additional Medicare tax on earnings. The thresholds are not inflation-adjusted. The 3.8% surtax does not apply to qualified retirement plan and individual retirement account distributions.

For More Information

The new law contains many more provisions that may affect you and your business. The good news is that, while some provisions of the Act take effect in 2010, most of the employer provisions go into effect later this decade. We would be happy to consult with you on what the new law means to you — today and tomorrow. Please let us know if we can be of assistance.

The Sandwich Generation: Juggling Family Responsibilities
April 14, 2010

At a time when your career is reaching a peak and you are looking ahead to your own retirement, you may find yourself in the position of having to help your children with college expenses while at the same time looking after the needs of your aging parents. Squeezed in the middle, you've joined the ranks of the "sandwich generation."

What challenges will you face?

Your parents faced some of the same challenges that you may be facing now: adjusting to a new life as empty nesters and getting reacquainted with each other as a couple. However, life has grown even more complicated in recent years. Here are some of the things you can expect to face as a member of the sandwich generation today:

  • Your parents may need assistance as they become older. Higher living standards mean an increased life expectancy, and you may need to help your parents prepare adequately for the future.
  • If your family is small and widely dispersed, you may end up as the primary caregiver for your parents.
  • If you've delayed having children so that you could focus on your career first, your children may be starting college at the same time as your parents become dependent on you for support.
  • You may be facing the challenges of "boomerang children" who have returned home after a divorce or a job loss.
  • Like many individuals, you may be incurring debt at an unprecedented rate, facing pension shortfalls, and wondering about the future of Social Security.

What can you do to prepare for the future?

Holding down a job and raising a family in today's world is hard enough without having to worry about keeping the three-headed monster of college, retirement, and concerns about elderly parents at bay. But if you take some time now to determine your goals and work on a flexible plan, you'll save much stress--and expense--in years to come. Planning ahead gives you the chance to take the wishes of the entire family into account and to reduce future disagreements with your siblings over the care of your parents.

Here are some ways you can prepare now for the issues you may face in the future:

  • Start saving for the soaring cost of college as soon as possible.
  • Work hard to control your debt. Installment debts (car payments, credit cards, personal loans, college loans, etc.) should account for no more than 20 percent of your take-home pay.
  • Review your financial goals regularly, and make any changes to your financial plan that are necessary to accommodate an unexpected event, such as a career change or the illness of a parent.
  • Invest in your own future by putting as much as you can into a retirement plan, where your savings (which may be matched by your employer) grow tax deferred until you retire.
  • Encourage realistic expectations among your children; their desire to attend an expensive college will add to your stress if you can't afford it.
  • Talk to your parents about the provisions they've made for the future. Do they have long-term care insurance? Adequate retirement income? Learn the whereabouts of all their documents and get a list of the professionals and friends they rely on for advice and support.

Caring for your parents

Much depends on whether a parent is living with you or out of town. If your parent lives a distance away, you have the responsibility of monitoring his or her welfare from afar. Daily phone calls can be time consuming, and having to rely on your parent's support network may be frustrating. Travel to your parent's home may be expensive, and you may worry about being away from family. To reduce your stress, try to involve your siblings (if you have any) in looking after Mom or Dad, too. If your parent's needs are great enough, you may also want to consider hiring a professional geriatric care manager who can help oversee your parent's care and direct you to the community resources your parent needs.

Eventually, though, you may decide that your parent needs to move in with you. If this happens, keep the following points in mind:

  • Share all your expectations in advance; a parent will want to feel part of your household and may be happy to take on some responsibilities.
  • Bear in mind that your parent needs a separate room and phone for space and privacy.
  • Contact local, civic, and religious organizations to find out about programs that will involve your parent in the community.
  • Try to work with other family members and get them to help out, perhaps by providing temporary care for your parent if you must take a much-needed break.
  • Be sympathetic and supportive of your children--they're trying to adjust, too. Tell them honestly about the pros and cons of having a grandparent in the house. Ask them to take responsibility for certain chores, but don't require them to be the caregivers.

Considering the needs of your children

Your children may be feeling the effects of your situation more than you think, especially if they are teenagers. At a time when they are most in need of your patience and attention, you may be preoccupied with your parents and how to look after them.

Here are some things to keep in mind as you try to balance your family's needs:

  • Explain fully what changes may come about as you begin caring for your parent. Usually, children only need their questions and concerns to be addressed before making the adjustment.
  • Discuss college plans with your children. They may have to settle for less than they wanted, or at least take a job to help meet costs.
  • Avoid dipping into your retirement savings to pay for college. Your children can repay loans with their future salaries; your pension will be the only income you have.
  • If you have boomerang children at home, make sure all your expectations have been shared with them, too. Don't be afraid to discuss a target date for their departure.
  • Don't neglect your own family when taking care of a parent. Even though your parent may have more pressing needs, your first duty is to your children who depend on you for everything.

Most importantly, take care of yourself. Get enough rest and relaxation every evening, and stay involved with your friends and interests. Finally, keep lines of communication open with your spouse, parents, children, and siblings. This may be especially important for the smooth running of your multi-generation family, resulting in a workable and healthy home environment.

Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources.

President Signs Housing Stimulus Law
August 14, 2008
On July 30, 2008, the Housing Assistance Tax Act of 2008 (the “Act”) became law. The Act provides more than $15 billion in tax incentives intended to help bolster the housing industry — and some revenue offsets to help pay for them.

The Law’s Major Provisions
The new law contains numerous provisions affecting individuals, state and local governments, and companies engaged in the housing industry. Among the principal provisions that may affect you or your business:

Tax Credit for First-time Home Buyers. For homes purchased after April 8, 2008, through June 30, 2009, the law allows up to a $7,500 tax credit for first-time home buyers purchasing a principal residence. However, the credit must be repaid to the government in equal installments over 15 years, beginning with the second tax year after the tax year of purchase. The full credit is limited to buyers with modified adjusted gross income of $75,000 or less ($150,000 or less for married couples filing jointly). A credit phase-out applies for taxpayers with income over the limit.

Standard Real Property Tax Deduction. For 2008 only, a taxpayer who does not itemize deductions may claim an additional standard deduction of up to $500 ($1,000 for joint filers) for state and local real property taxes paid. This provision will especially benefit taxpayers who have paid off their home mortgages and no longer have enough deductions to justify itemization.

AMT Limits for Certain Items Repealed. The alternative minimum tax (AMT) limitations on the low-income housing tax credit and the housing rehabilitation tax credit are repealed for buildings placed in service and for housing rehabilitation expenditures after 2007. Interest on certain tax-exempt housing bonds will be exempt from the AMT.

Low-income Housing Credit Cap Increased. The volume cap for low-income housing tax credits is increased for 2008 and 2009, and states have greater flexibility in how to use those bonds efficiently.

Credit Card Information Reporting Rules. A new requirement is imposed on credit card companies and other electronic payment processors. Starting after 2010, these entities will have to report the value of a merchant’s sales to the IRS if those sales exceed $20,000 per year and the merchant has a volume of more than 200 sales annually.

Exclusion for Gain on Certain Residences Disallowed. Gains on the sale of certain residences — including vacation homes and rental properties that are converted into primary residences and then sold — will no longer qualify for the full $250,000 ($500,000 for joint filers) capital gain tax exclusion on sale of a principal residence. In general, the exclusion will not apply to the portion of the gain allocable to the time the residence was not used as a principal residence. This provision is effective for sales and exchanges occurring after December 31, 2008.

If you think you will be affected by any of these provisions of the Act or want to learn more, contact us for additional information. We stand ready to help you in your tax planning.

How Financial Analysis Can Help Your Business
July 29, 2008
How do you use your company’s financial statements? In many cases, owners and managers find that the insights they gain from their financial statements can improve their company’s profitability, cash flow, and value.

One important tool that can help sort out the data you need is “ratio analysis.” Ratio analysis looks at the relationships between key numbers on a company’s financial statements. After the ratios are calculated, they can be compared to industry standards — and the company’s past results, projections, and goals — to highlight trends and identify strengths and weaknesses.

The hypothetical situations that follow illustrate how ratio analysis can give you valuable feedback.

Do Higher Sales Mean Higher Profits?
The recent increases in Company X’s sales figures have been impressive. But the owners aren’t certain that the additional revenues are being translated into profits. Net profit margin measures the proportion of each sales dollar that represents a profit, after taking into account all expenses. So, if Company X’s margins aren’t holding up during growth periods, a hard examination of overhead expenses may be in order.

Are We Getting Paid?
Company Y extends credit to the majority of its customers. So the firm keeps a close watch on outstanding accounts so that slow-payers can be contacted. From a broader perspective, knowing the company’s average collection period would be useful. In general, the faster Company Y can collect money from its customers, the better its cash flow will be. But Company Y’s management should also be aware that, if credit and collection policies are too restrictive, potential customers may decide to take their business elsewhere.

Is Inventory Being Managed Efficiently?
Company Z has several product lines. Inventory turnover measures the speed at which inventories are sold. A slow turnover ratio relative to industry standards may indicate that stock levels are excessive. The excess money tied up in inventories could be used for other purposes. Or it could be that inventories simply aren’t moving, and that could lead to cash problems. In contrast, a high turnover ratio is usually a good sign — unless quantities aren’t sufficient to fulfill customer orders in a timely way.

These are just some examples of ratios that may be meaningful to you. If you’d like to learn more, contact our firm today.

Summary of the 2008 Economic Stimulus Act
February 14, 2008
In an effort to head off a major economic slowdown, the Administration and Congress agreed on a package of tax provisions intended to stimulate the economy. The Economic Stimulus Act of 2008 (“Act”) provides benefits to both individuals and businesses.

Below, we highlight the Act’s provisions and illustrate how they might apply to your personal and business situations. Of course, before acting on anything you read here, you should consult with us.

Rebate for Individuals
Each qualifying individual will receive a tax credit in the form of a “recovery rebate” check to be received generally in 2008. Some taxpayers will receive a credit for some of or the entire rebate amount on their 2008 tax returns (filed in 2009).

The rebate has two components: (1) a base amount generally dependent on filing status and income-tax liability and (2) an increase in the child tax credit.

Base Amount.— The minimum base rebate amount is $300 ($600 for married couples filing jointly). Very generally, a person will be entitled to this amount if he/she has at least $1 of federal income-tax liability or $3,000 in qualifying income. “Qualifying income” means the sum of earned income, veterans’ disability payments (including payments to survivors of disabled veterans), and Social Security benefits. So, those who do not pay taxes but have these other sources of income could be eligible for a rebate check.

The maximum base rebate amount is $600 ($1,200 for joint filers). The amount of the rebate will be equal to the lesser of the individual’s tax liability or 10% of the first $6,000 of taxable income ($12,000 for joint filers).

Example: A married couple is retired and living on Social Security benefits only. They pay no income tax on their joint return. The couple would be entitled to a $600 rebate check.

Example: A single individual has a taxable income of $25,000 and pays income tax of $500. The rebate amount is $500 — the lesser of her tax ($500) or 10% of $6,000 ($600).

Example: A married couple files a joint return showing $50,000 in taxable income and a tax of $10,000. The couple would receive a base rebate of $1,200 (10% of the first $12,000 of taxable income).

In determining taxable income for eligibility and rebate purposes, taxpayers generally must use 2007 income as reported on their 2007 tax return, filed in 2008. If a person isn’t eligible for a rebate check based on 2007 income (for example, where the individual was someone else’s dependent for 2007), but becomes eligible during 2008, then the IRS won’t send that person a rebate check. However, the individual will be able to claim a credit when he files his 2008 return.

Child Credit Amount.— If an individual receives at least $1 of the base rebate and has qualifying children under age 17, that individual will receive an additional child tax credit of $300 per child, which will be included in the rebate check. This amount is a refundable credit, so the recipient receives this extra amount even if the amount of the recipient’s 2007 income tax is less than the total child tax credit.

Example: A married couple files jointly with three qualifying children. Their taxable income is $45,000 and their income tax is $5,000. The amount of the total rebate check for the couple would be $1,200 (base amount) plus $900 (three times $300 as additional child tax credit), for a total of $2,100.

Recovery Rebate Phase Out.— The rebate amount (including both the base credit and the additional child tax credit) is phased out at a rate of 5% of adjusted gross income (AGI) over $75,000 ($150,000 for joint filers).

Example: A married couple filing a joint return has two qualifying children and $160,000 of AGI. The maximum rebate of $1,800 (i.e., $1,200 base credit plus $600 additional child tax credit) is reduced by $500 (5% of the $10,000 AGI in excess of $150,000), so the couple’s rebate is $1,300.

Therefore, most higher-income individuals’ rebate amounts will be reduced or eliminated. There is no specific amount of AGI at which the credit is fully phased out, since that amount will depend on the specific family situation of the taxpayer.

Valid ID Requirement.— No rebate amount is allowed to an individual if he/she doesn’t include on the tax return a valid identification number (that is, a Social Security number). Both joint return filers must provide their own numbers. If a child tax credit amount is claimed for a qualifying child, the child’s Social Security number must be included on the return.

Increase in Section 179 Expensing
One provision intended to stimulate business spending is an increase in the limits applicable to the so-called “Section 179 expensing election” for the 2008 tax year.

Under Section 179 of the tax law, a taxpayer may elect to deduct, up to a dollar limit, the cost of qualifying property placed in service during the tax year. So, a taxpayer could elect to write off the cost of a purchase all at once instead of depreciating it over time. Generally, qualifying property includes tangible personal property, like equipment, vehicles, machinery, etc. Certain off-the-shelf computer software can qualify as well.

The dollar amount of purchases that qualify for the expensing election is phased out dollar-for-dollar as the value of the taxpayer’s investment in qualified property exceeds a certain amount. In addition, the amount that can be expensed cannot exceed the taxpayer’s taxable income from the business for the year.

The new law raises both the expensing limit and the investment limit. For property placed in service in tax years beginning in 2008, the Act increases the pre-law $128,000 expensing limit to $250,000. The overall investment limit increases from $510,000 to $800,000. Neither new amount is to be indexed for inflation.

Example: ABC Company, having taxable income of $300,000 in 2008, purchases and places in service new equipment worth $220,000 during the year. Under the Act, the full $220,000 purchase price of the equipment can be deducted for 2008 tax purposes.

Example: XYZ Corporation places in service new equipment worth $850,000 in 2008. The business’ taxable income is $1 million. The maximum Section 179 expensing election that XYZ can make is $200,000 (i.e., $250,000 maximum expensing election less $50,000 phase-out ($850,000 purchases less $800,000 investment limitation)). Note the remainder of the purchased equipment may be eligible for deduction under the regular depreciation rules (as amended by the Act — see below).

Due to these increases, most small businesses and some medium-sized businesses may be able to claim a full deduction for the cost of business equipment and machinery placed in service this year.

Bonus First-year Depreciation
In addition to the limit increases in the Section 179 expensing election, the Act provides a second incentive for the purchase of business-related assets.

For property placed in service after December 31, 2007, and acquired after that date and before January 1, 2009, the taxpayer will be entitled to an additional depreciation deduction equal to 50% of the adjusted basis of the qualifying property (generally, new business property other than real estate). The adjusted basis of the property is then reduced by this bonus depreciation when computing regular depreciation on the property.

Example: M Corp., a calendar-year company, bought and placed in service $1 million of depreciable machinery with a five-year life under the tax law’s depreciation rules. Under the pre-2008 Act law, the first-year depreciation on the machinery would have been $200,000 (20%). Under the Act, M Corp. may deduct first-year depreciation of $600,000 (i.e., 50% of $1 million bonus depreciation ($500,000) plus 20% of the remaining $500,000 adjusted basis ($100,000)).

A taxpayer may “elect out” of the bonus first-year depreciation allowance for one or more classes of property for the tax year.

Several other requirements pertain to this provision and applying it to a specific situation can be tricky. See us for additional details.

Doing Business In An Economic Slowdown
February 4, 2008

Whether the U.S. is in an official recession or not, it is clear that the economy is not as robust as everyone would hope. And the prospects for a quick recovery are not very encouraging.

There are a number of steps that business owners and executives can take to successfully deal with an economic downturn. Here are some strategies to help your business weather the storm.

Know What is Going on Around You. Keep aware of economic developments in your region that affect your business directly. Are your suppliers and customers feeling the pinch of a tight economy? What impact will that have on you?

Take Lessons from the Past. If you have been in business a while, you probably have gone through economic slowdowns before. What warning signs of a downturn did you see back then? What, in retrospect, would you have done differently back then to address the slowdown’s impact on your business?

Know Your Business’ Situation. Economic slowdowns don’t affect all regions of the country, or all businesses within a region, the same way. Understanding how your business fits into the local or regional economy and how your industry is being affected are keys to helping you understand what the downturn will mean to you.

Cash is King. This old saying is especially true in a downturn. If you expect your business will be affected, having cash to pay your suppliers and your other obligations will ensure you can remain in business and be prepared to succeed in the prosperous times to come. This can be accomplished by carefully monitoring your cash flow and taking steps (speeding up collections, for example) that can put more cash in your coffers.

Develop a Contingency Plan. What if your business is hit hard by the stagnant economy? Having contingency plans for a variety of possible scenarios is important. Determine at what point you might have to defer capital expenditures, lay off employees, or sell assets in the event a dire scenario becomes reality.

Trim Expenses. This is a no-brainer, but figuring which expenses to cut and in what order is a valuable exercise. You don’t want to institute widespread cuts now that might restrict your business’ options when the economy recovers unless you really need to.

Purchase Intelligently. Use smart strategies such as bunching your orders (to get larger discounts or free shipping), negotiating longer term, lower fixed price deals (remember, your suppliers might be hurting, too), taking discounts, and avoiding late charges.

Monitor the Credit You Offer. Extending credit may be an important aspect of your doing business. But extending credit to customers indiscriminately can result in heavy losses due to bad debts. Screening new customers’ credit-worthiness is always important, but especially in a slowdown. And don’t hesitate to look at existing customers’ payment histories and decide if you are willing to extend further credit to them.

Take Advantage of Your Strengths. A business downturn can represent opportunities as well, especially for businesses that are on a very sound financial footing. For example:

  • Consider replacing equipment or buying new technology. Many manufacturers and dealers will be more than willing to sell on very favorable terms.
  • Upgrade your staff by adding talented people who may have been let go by a competitor in a cost-cutting move.
  • Look for acquisition or merger candidates. Hard economic times may make a competitor available at a very favorable price.

These are just some of the ways your business can prepare for — and survive — an economic downturn. Our professionals can sit down with you and discuss your planning strategies for difficult economic times. Contact us for more information.

Alternative Minimum Tax Relief Available for 2007

The alternative minimum tax (AMT) has received a lot of press over the past few months. The AMT was originally enacted as an alternate tax system to ensure that higher-income taxpayers with large deductions, credits, or “preferences” pay a minimum amount of tax. However, over the years, the AMT has also affected many middle-income taxpayers. A major reason: The AMT tax brackets and exemptions have not kept pace with inflation.

So, in recent years, many people who were never supposed to be taxed under the AMT have been caught in its net. To provide some relief, prior tax legislation had temporarily increased the AMT exemption amounts available to individuals. But that relief expired after 2006. So, for 2007 and beyond, the “old” exemption amounts applied — meaning many more middle-income taxpayers were now exposed to the AMT.

New Legislation

Late in December 2007, Congress passed the Tax Increase Prevention Act of 2007, which restored and increased the temporary AMT exemptions. Below is a table showing the exemption amounts for 2006, what they were scheduled to be in 2007, and what the new law raised them to for 2007.

Tax Filing Status


2007 (before new law)

2007 (after new law)

Unmarried Filers




Joint Filers




Married Filing Separately




Exemption amounts are phased out when AMT income exceeds certain levels, depending on filing status.

However, this “patch” is not permanent. It applies only for one year. So, the AMT exemptions are scheduled to return to the “old” levels (e.g., $33,750 for unmarried filers) for 2008 and beyond.

In addition, the new law extended through 2007 another expired AMT provision that allows those claiming certain personal tax credits (e.g., the dependent care credit and the HOPE Scholarship and Lifetime Learning Credits) to use them to offset both regular tax and AMT. So, a taxpayer may claim the eligible tax credits up to the amount of the regular income tax plus AMT.

We’re Here to Help

While the new law gives taxpayers a reprieve, figuring the alternative minimum tax remains tricky. Our firm can help you determine if you are subject to AMT. Contact us today.

2008 Inflation Increases May Impact Employers  
December 7, 2007

Every year, inflation adjustments are made to many of the federal tax law limits on retirement plan contributions and benefits. In addition, the new year also sees changes to limits applicable to Social Security. Here is a rundown of what does — and what does not — change for 2008.

What Doesn’t Change

No inflation adjustments were made to the following items:

Elective Deferrals. The annual dollar limit on employee elective deferrals to 401(k) salary deferral plans, 403(b) annuities, and governmental 457 plans remains $15,500 for 2008.

SIMPLE Plans. The maximum amount an employee may defer under a SIMPLE retirement plan remains $10,500 for 2008.

Catch-up Contributions. Additional “catch-up” contributions may be made to certain retirement plans by participants age 50 or older. The annual dollar limit for catch-up contributions to a 401(k), 403(b), or governmental 457 plan remains $5,000 in 2008. For SIMPLE plans, the limit remains $2,500.

What Does Change

The following inflation-related changes to the retirement plan limits go into effect starting January 1, 2008.

Defined Contribution Annual Addition Limit. The limit on “annual additions” (that is, employee contributions, employer contributions, and forfeitures) that may be made to a plan participant’s account in a defined contribution plan (such as a 401(k) plan or a profit sharing plan) increases from $45,000 to $46,000. Thus, more money can be added to a participant’s plan account in 2008.

Annual Compensation Limit. The maximum amount of annual compensation that can be used in computing retirement plan contributions or benefits for a participant rises from $225,000 to $230,000.

Highly Compensated Employee Definition. A qualified plan may not discriminate in favor of “highly compensated employees.” The dollar limit used in defining a highly compensated employee increases from $100,000 to $105,000 for 2008.

Key Employee Definition. Another nondiscrimination rule provides that “top heavy” plans (generally, those in which more than a specified percentage of plan assets are in the accounts of “key employees”) meet special requirements. The definition of “key employee” includes a compensation amount above which an employee is considered “key.” That amount increases from $145,000 to $150,000 a year.

ESOP Five-year Distribution Period Qualification. Generally, a participant in an Employee Stock Ownership Plan (ESOP) who separates from service can spread distribution of the account balance up to five years. To the extent the balance exceeds a certain dollar amount — $935,000 in 2008, up from $915,000 — the participant might have additional time for distribution. The distribution period is extended by one year for each $185,000 (up from $180,000), or a fraction of that amount, by which the account balance exceeds $935,000.

Defined Benefit Limit. The limit on the annual benefit to be funded under a defined benefit pension plan rises from $180,000 to $185,000.

Social Security Tax-related Increase

The FICA tax (essentially, the combination of Social Security tax and Medicare tax) is imposed at a rate of 7.65% each for employers and employees (6.2% for Social Security tax, 1.45% for Medicare tax). For self-employed persons, the FICA tax is doubled to 15.3%. The Social Security portion is imposed on a limited “wage base” amount, adjusted each year based on average U.S. total wages. The Medicaid tax component is imposed on the full amount of wages paid.

For 2008, the Social Security Administration has increased the Social Security wage base to $102,000, up from $97,500 in 2007.

What does this mean to employers and employees? On wages of $102,000 or more, the employer and employee will each pay $279 more in Social Security tax ($6,324 versus $6,045) in 2008 than in 2007.

The self-employed worker with at least $102,000 in net self-employment earnings will pay $558 more as the Social Security tax portion — $12,648 in 2008 versus $12,090 in 2007.

Talk to Us

For more information about these changes and how they may affect your business, please contact one of our knowledgeable professionals. We’re here to help.

Year-End Tax Traps For Investors
November 12, 2007

As year end approaches, investors should be aware of two potential tax traps that could affect their 2007 federal tax bills.

Watch Your Capital Gains and Losses

With the stock market’s dramatic ups and downs this year, many investors have been left with a mix of unrealized capital gains and losses on their investments. Ignoring the unrealized gains and losses in your portfolio could result in your paying more taxes than you need to, especially if you realized gains and losses on investment sales earlier in the year.

First, some background: In general, capital gains on assets that you have held for more than one year are treated as long-term gains, subject to a maximum 15% capital gains tax rate. Some long-term gains (on collectibles, for example) are taxed at higher rates. Short-term capital gains — gains on assets held one year or less — are taxed as ordinary income.

Capital losses typically offset capital gains (long- and short-term) dollar-for-dollar. Plus, excess capital losses over capital gains reduce ordinary income (taxable at up to a 35% federal rate) by up to $3,000 in losses ($1,500 for married taxpayers filing separately). (Note that the rules are complex and professional guidance is essential, especially if you have combinations of short-term gains and losses and long-term gains and losses, or gains or losses on real estate, art, or other collectibles.)

Now take, for example, a 35%-bracket taxpayer (we’ll call him Lou) who, earlier this year, realized long-term capital gains of $25,000 on stocks he sold. As year end approaches, Lou is sitting on investments with unrealized short-term capital gains of $30,000 and unrealized capital losses of $28,000. Lou has several options from a tax perspective, including:

  • Offset the gains. Lou could sell some of the investments on which he has unrealized losses and offset the $25,000 of capital gains on the investments he sold earlier in the year. By doing so, Lou could avoid paying some or all of the capital gains tax on those earlier gains.
  • Offset ordinary income. Lou could instead sell all of the investments on which he has losses and not only offset his earlier gains, but also offset $3,000 of his ordinary income.
  • Delay the sale and pay the tax. Since Lou’s earlier gains were of the favorable long-term variety, Lou may want to hold off on selling his losers until next year. This would allow Lou to take advantage of the relatively low long-term capital gains rate in 2007, while using his unrealized losses to offset any later gains (perhaps those short-term gains) on other investments he holds. (And, who knows, maybe some of those current losers will end up in the winner’s circle, given some time.)

On the other hand, if Lou had realized capital losses earlier in the year, he might want to look at selling a few of his winners and using the earlier losses to offset his gains.

While tax considerations are only one factor to weigh when deciding to sell an investment, careful tax planning can help you make the most of your capital gains and losses. It is easy to make a misstep in this area, resulting in lost tax-savings opportunities.

Be Aware of Year-end Fund Distributions

During late November and December, many mutual funds make distributions to shareholders. Some commentators believe that fund distributions for 2007 may be especially large, since many funds locked in large gains earlier in 2007 and some funds no longer have on their books large losses from the early 2000s, which they used to offset their gains in recent years. Many international funds have had significant gains, together with a high rate of turnover of investments. Some funds have forecast distributions of 10% or more of fund assets.

These distributions can result in a tax pitfall for unsuspecting investors. By investing in a fund right before a distribution, you may be buying an additional immediate tax liability. Any taxable distribution for 2007 will generally have to be reported by you on your 2007 tax return, even if you held the fund for only a few weeks or days. You, in effect, will have a potential tax liability for the part of the purchase price of the fund you get back in the form of the distribution.

Therefore, it is a wise move to do your research before buying a fund (or adding more money to an existing position) before year-end. Fund information, such as the distribution payment date and the potential capital gains exposure, is available — usually on the fund’s website or through one of the mutual fund research services.

If you need guidance about the tax impact of your investments — or any other tax matter — talk to us. We stand ready to review your specific situation with you and help you develop a strategy that meets your needs. Contact us today.

Random IRS Tax Return Audits to Begin
October 5, 2007

Random IRS Tax Return Audits To Begin

Tax audit. Those two words can strike fear in the heart of almost any taxpayer.

Most taxpayers feel that, because they report every dollar of income they receive and claim only those losses, deductions and credits that can be substantiated, they are immune to an IRS examination of their returns. That may not be the case.

This fall, the IRS has begun a wave of random audits. The goal is to obtain information to update formulas the government uses in determining which income-tax returns to audit in the future.

Closing the Tax Gap

This random audit program is part of a campaign to close the “tax gap” — the difference between what the government collects in taxes each year and what it should be collecting. Estimates of the tax gap range as high as $290 billion a year.

Scope of the Audit

In the early 1990s, these data-gathering audits were seen as being overly intrusive. Reports of the IRS challenging nearly every item on a tax return were common and the IRS often required substantiation for almost every claim made (such as demanding to see a marriage certificate to verify a couple is eligible to file a joint return and requesting the birth certificates of those claimed as dependents).

In recent years, though, the IRS has taken a somewhat less-aggressive approach to the random audit program. And, while, according to the IRS, the new program “will probably cover more ground than a regular audit,” it likely will not be as intrusive as the random audits of the early 1990s.

What to Do If You Are Audited

So, what should you do if your return is one of the estimated 13,000 returns for the 2006 tax year that the IRS will be examining in this first round of random audits? It’s possible you won’t even be aware of the audit. The IRS may be able to verify all the information it is looking for by computer-matching what was claimed against what was reported by your employer, financial institutions, and others. In other cases, taxpayers will be able to comply with the IRS’s requests by mail.

However, it is likely that most of the returns selected for the random audits will require in-person meetings with IRS examiners. In those cases, the tax issues raised can be very complex, even if the taxpayer filed a “simple” tax return.

Should you receive a communication from the IRS regarding an examination of your return, we recommend that you contact us immediately. We can help you determine the scope of the audit and whether our professional assistance will be required.

Year End Tax Planning Strategies for 2007
September 24, 2007

Although there are only a couple months left in 2007, you still have time to save income taxes for this year. The federal tax law provides many opportunities for taxpayers to cut their tax bills. All you need to do is identify the right planning strategies for you and then implement them.

See Where You Stand Income-wise

Take out your last pay stub and see how much income you’ve earned this year. Take a look, too, at your savings and investment statements and any other paperwork showing how much investment income you have earned. Then, estimate how much more salary, interest, dividends, and other income you might expect for this year. Add up the totals to see how your estimated 2007 income compares to last year’s total income. Use that comparison to estimate how much more or less income you are likely to have this year.

Itemized Deduction Planning

If you expect to itemize your deductions on your tax return, think about paying deductible expenses before the end of the year to lower your 2007 taxes.

Deductible Interest. Consider making your January 2008 mortgage payment (which includes December’s interest) in late December 2007, so that the interest will be deductible on your 2007 return.

Charitable Contributions. If you are planning to make a charitable donation in early 2008, consider a 2007 year-end donation instead. Contributions charged on your credit card in 2007 count as 2007 deductions, even if you don’t receive or pay the credit card bill until 2008.

Note that, for contributions made in tax years beginning after August 17, 2006, you can’t deductany contribution of cash, a check, or other monetary gift unless you maintain as a record of the contribution a bank record or a written communication from the charity showing its name, plus the date and amount of the contribution.

Medical and Miscellaneous Itemized Expenses. Your deductions are limited to the amounts that exceed 7.5% of adjusted gross income for medical expenses and 2% of adjusted gross income for miscellaneous expenses. Bunching two years of your or your family’s unreimbursed medical or miscellaneous itemized expenses (such as certain job-related expenses and investment expenses) into one year may allow you to surpass the deduction floors and help you gain a deduction for part of your expenses.

Taxes. If you pay quarterly estimated state income taxes, consider paying your last 2007 estimate before December 31, so that it will be deductible on this year’s tax return.

Employees who have state income taxes withheld from their pay may wish to increase the amount withheld from their remaining 2007 paychecks to cover any projected underpayment.

If you are a high earner facing a limitation on your itemized deductions or if you expect to be in a much higher tax bracket in 2008, accelerating deductions into 2007 may not be your best move. In addition, if you claim high deductions in 2007, you may be subject to the alternative minimum tax. See us for more details and to develop an appropriate strategy for your specific situation.

Tax Deferral Ideas

Review your opportunities to push taxable income into a later tax year. Deferral strategies are especially effective if you expect to be in the same or a lower tax bracket in the year in which you will be reporting the income on your tax return. Any of these strategies may help cut your 2007 tax bill:

  • Ask your employer to defer paying your 2007 year-end bonus until early 2008.
  • Maximize 2007 contributions to any tax-deferred retirement savings plan in which you participate, such as a 401(k) plan or a 403(b) tax-sheltered annuity.
  • If you are self-employed and use the cash method of accounting for income-tax purposes, time late 2007 customer billings so that payment won’t be received until 2008.

If you are self-employed and do not already have a tax-deferred retirement plan, you might consider starting one before year-end. Options to examine include a so-called “solo 401(k)” plan, a Simplified Employee Pension (SEP) plan, or a SIMPLE 401(k) plan. We would be happy to discuss the advantages and restrictions of each type.

Business Tax Breaks

Be sure to take full advantage of the business growth incentives that the tax law gives you.

Included among these provisions is the ability to write off up to $125,000 of the cost of qualifying business assets in the year of purchase (rather than depreciating the assets over time). And, if your business is involved in manufacturing or other “production activities” (which include such diverse activities as qualified property leasing, U.S. construction and architectural services, and qualified movie or TV film production), your company may be entitled to a deduction for a percentage of its business income from those activities. See us to learn about the requirements you need to meet to take advantage of these tax breaks.

Investment Strategies

If you have investments with paper losses and you are thinking about selling any of your poor performers before the end of the year, remember that capital losses offset the capital gains you may have realized. And any net loss is deductible against up to $3,000 of ordinary income per year.

Consider selling appreciated stock or other investments on which you have “paper gains” before year-end to absorb any capital losses that exceed $3,000 per year. If this is not desirable, any unused capital losses for 2007 may be carried forward for deduction in future years, subject to limitations.

Remember, too, that the maximum tax rate on 2007 qualifying dividends and net long-term capital gains is 15%. Ordinary income tax rates range as high as 35%.

Be aware, though, that taxes are just one factor to consider in making an investment decision. Please contact us for help evaluating the tax effect of any proposed transaction.

Expiring Provisions

A couple of beneficial income-tax breaks are scheduled to expire at the end of 2007. If you qualify, you might want to consider taking them.

IRA Distribution to Charity. An income exclusion is allowed for otherwise taxable distributions of up to $100,000 a year paid to a qualified charity from a traditional (or Roth) IRA. The IRA owner must be at least 70½ years old.

Residential Energy Credit. A tax credit may be claimed for residential energy efficient property placed in service before 2008. The credits range from 30% (up to $2,000) for qualified photovoltaic property or solar water heating property to as much as a $500 credit for lesser energy efficiency measures.

We Stand Ready

Our tax professionals are ready to provide you with personal and business year-end tax planning assistance. Call us for an appointment to review your specific situation.

The general information in this publication is not intended to be nor should it be treated as tax advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, you should seek advice from your tax advisor based on your particular circumstances before acting on any information presented.

IRS Reminder to Employers: Keep Good Records!
July 25, 2007
The IRSperiodically signals which areas its auditors will be focusing on inthe future by issuing “reminders” to taxpayers. While there isno guarantee the government will be concentrating on any one issuein future audits, it is a good idea to take notice when the IRSissues these reminders.

Recently, in the IRS e-News for Small Businesses, the Revenue Service warned employers that it is their responsibility to keep accurate, up-to-date business records. The IRS noted that employment tax records must be maintained for at least four years after the later of the due date of the tax for the return period to which the records relate or the date the tax is paid. These records should include the following information:

  • Employer identification number (EIN)
  • Amountsand dates of all wage, annuity, and pension payments;
  • Amounts of tips reported;
  • The fair market value of in-kind wages paid;
  • Names, addresses, Social Security numbers, and occupations of employees and recipients;
  • Employee copies of Forms W-2 that were returned as undeliverable;
  • Dates of employment;
  • Periods for which employees and recipients were paid while absent due to sickness or injury, and the amount and weekly rate of payments made to them by the employer or third-party payers;
  • Copies of employees’ and recipients’ income-tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V);
  • Dates and amounts of tax deposits;
  • Copies of returns filed;
  • Documentation for allocated tips; and
  • Documentation for fringe benefits provided, including appropriate substantiation.

The penalties for noncompliance can be harsh. A willful failure to keep required records is a misdemeanor punishable by a fine of up to $25,000 ($100,000 for corporations) and/or imprisonment for up to one year.

We Can Help

Our firmstands ready to assist you in reviewing your current recordkeepingprocess to make sure it complies with the law and determining what,if any, changes you should make. Let us know if our professionalstaff can be of assistance to your business.

New Law Includes Business/Personal Tax Changes
June 19, 2007

A portion of a supplemental spending and minimum wage bill recently signed into law included several tax provisions that may have an impact on you and your business. The Small Business and Work Opportunity Tax Act of 2007 contains $4.8 billion in small business tax breaks — but also includes $4.4billion in revenue raisers.

Tax-cutting Provisions

Among the tax-saving opportunities presented by the newtax law are the following items.

Section 179 Expensing Deduction. Under Section 179 of the tax law, business taxpayers may choose to deduct immediately the cost of certain business-related asset purchases, rather than depreciate that cost over time. The deduction is limited to a specified annual amount, and the deduction phasesout once annual asset purchases reach a specified level.

The new law increases both the maximum annual expensing amount and the threshold phaseout amount. For tax years beginning in 2007, the practical impact of these changes is to increase the annual expensing limitation from $112,000 to $125,000 and to increase the phaseout amount from $450,000 to $500,000. Also, the law indexes the increased amounts for inflation in tax years beginning in a calendar year after 2007 and before 2011. The Section 179 changes are effective for tax years beginning after December 31,2006, and before January 1, 2011.

Work Opportunity Tax Credit. The Work Opportunity Tax Credit (WOTC) may be claimed by employers who hire disadvantaged workers who fall within certain eligible targeted groups. The WOTC is extended 44 months through August 31, 2011, for most targeted groups, effectivefor individuals who begin work for the employer after May 25, 2007.

The new law also relaxes the requirements for, and renames, the WOTC targeted group called “high-risk youths,” expands the WOTC to cover “Ticket to Work” plan participants, and enhances the WOTC for employing certain disabled veterans, effective for individuals who begin workfor the employer after May 25, 2007.

Alternative Minimum Tax (AMT). The new law does not overhaul the AMT as many had hoped. However, the new law does make clear that the WOTC and the FICA tip credit (typically claimed by restaurants and other food and beverage establishments whose employees earn tips) can offset 100% of AMT liability, effective for WOTCs and FICA tip credits determined in tax years beginning after December 31, 2006, and tocarrybacks of those credits.

Spousal Joint Ventures. Absent a special tax law provision, an unincorporated business owned by a husband and wife could be required to file a tax return as a partnership. Effective for tax years beginning after December 31, 2006, the new law says that, where a qualified joint venture is conducted by a husband and wife who file a joint return for the tax year, the joint venture is not treated as a partnershipfor tax purposes, if the spouses so elect.

S Corporations. Several provisions affecting Subchapter S corporations are found in the new law. For instance, capital gains from the sale or exchange of stock are no longer included in the definition of “passive investment income.” Other provisions include an overhaul of the treatment of the sale of an interest in a qualified Subchapter S subsidiary and the elimination of all earnings and profits attributable to pre-1983years.

Revenue Enhancements

There are some significant tax increases in the new law. Most are administrative in nature, but one in particular willhave an impact on many individual taxpayers.

Kiddie Tax. In general, the revenue code imposes taxes on a young child’s unearned income in excess of $1,700 at the child’s parents’ tax rate. This provision (called the “kiddie tax”) is intended to limit the tax-reduction strategy where parents transfer income-producing assets to a young child so that the income generated will be taxedat the child’s presumably lower tax rate.

A 2006 tax law increased the age at which the kiddie tax applies, from under age 14 to under age 18. Now, the new law modifies that change so that the kiddie tax applies generally to children under 19 years old, effective for tax years beginning after May 25, 2007 (the 2008 tax year, for calendar-year taxpayers). More importantly for many taxpayers, the law will alsoapply the kiddie tax if the child:

  • Is over age 18 (but under age 24) and
  • Is a full-time student and
  • Has earned income that does not exceed one half of the student’s total support.


With the business tax changes and the new kiddie tax rules, your tax planning may need a tune-up. Why not contact us today to find out more about how the new tax law may affect your situation.

Retirement Plan Changes Go Into Effect For 2007
November 11, 2006 (added March, 2007)
If your business sponsors a defined-contribution retirement plan (such as a 401(k) or profit sharing plan) for its employees, then you want to be aware of several significant changes that will go into effect for the 2007 plan year. Most result from provisions contained in the Pension Protection Act of 2006, enacted last August. Now is the time to review your plan with an eye toward making sure it will be incompliance for 2007. Here are the main items to consider.

AcceleratedVesting for Employer Contributions

Employer nonelective contributions, such as profit sharing contributions, must become nonforfeitable (“vested”) faster than under previous law. These contributions must vest using either the minimum three-year cliff or six-year graduated vesting schedules that already apply to any employer matching contributions. If your plan’s vesting schedule for all employer contributions doesn’t currently satisfy the newrequirement, then your plan document will have to be amended.


Many plans allow participating employees to direct their own investments and provide for a “default” investment in the event a participant does not make an investment choice. The 2006 pension law provided new requirements for default investments. Among those new rules: new guidelines for determining which investments qualify as default investments and a notification to participants prior to each plan year that explains their right to direct plan investments and, absent such a direction,the default investment in which their accounts will be invested.

Investments in Publicly TradedEmployer Securities

If your plan calls for investments of employee contributions in your company’s publicly traded securities, new rules require that participants must be allowed to diversify those investments into other plan investments. Where employer securities were bought with employer contributions, the participant must be allowed to diversify the investments after the participant has completed three years of service. This requirement for employer contributions is phased in over three years, but the phase-in does not apply to participants age 55 andolder with at least three years of service. Other exceptions apply.

Investment Advice

Many retirement plans are (or are considering) offering investment advice to plan participants. The new law offers fiduciary liability protection, in the form of a prohibited transaction exemption, to employers and other plan fiduciaries who make such advice available by providing requirements for how and by whom the advice is given. In general, the advice must be given by a “fiduciary adviser” through the use of a certified computer model or under a fee-leveling arrangement. Disclosures of all fees and affiliations of the fiduciary adviser must be provided to participants at the time of the advice and regularly afterwards. If all rules are met, the plan fiduciaries are not responsible for the specific advice given, but remain liable for choosing andmonitoring the advice giver.

Expansion of HardshipWithdrawals

Plans may allow hardship withdrawals to a plan participant based on the hardship of the participant’s designated beneficiary, whether or not the beneficiary is a spouse or dependent of the participant. Withdrawals can thus be made due to the hardship or unforeseeable financial emergency of a grandchild, parent, or domestic partner. The change is not mandatory but, if the plan sponsor chooses to make it, theplan document must be amended.

Rollovers of Distributions

Participants may make direct rollovers of after-tax contributions to any retirement plan (from a 401(k) plan to a 403(b) annuity, for example). If your plan will accept these rollovers, it will have to separately account for theafter-tax amounts.

In addition, a non-spouse beneficiary of a decedent’s plan account (or IRA) may roll overthe inherited amount directly to her or his own IRA.

Benefit Statements

New rules regarding benefit statements apply for 2007. In general, plan sponsors must providebenefit statements:

  • Quarterly to participants who direct their own investments and
  • Annually for all other participants.

Special requirements apply to the content of statements for participant-directed plans. Statements maybe delivered in electronic format.

New Plan Dollar Limits

For 2007, several dollar limitations forretirement plans have been adjusted for inflation. Among them:

  • The annual limit on elective deferrals to 401(k) plans increases to $15,500 (up from $15,000 in 2006).
  • The cap on the amount of annual compensation that may be taken into account in determining contributions and benefits is $225,000 (up from $220,000).
  • The 2007 limit on “annual additions” to a defined contribution plan account (employer contributions, employee contributions, and forfeitures) is $45,000 (up from $44,000).


The 2006 pension law made numerous changes that will affect your plan in 2007 and beyond. As a plan sponsor, you should review your plan document and your plan’s operation each year to determine whether new laws or regulations might have an impact on your retirement plan. If you would like ourassistance in that review, please let us know.

The Pension Protection Act of 2006 - A Summary
August 17, 2006
After much debate, the Pension Protection Act of 2006 has become law. The new law contains many significant changes to the federal laws governing traditional defined benefit pension plans, as well as defined contribution plans (such as 401(k) salary deferral plans and profit sharing plans) and Individual Retirement Accounts. The Act will have an impact on almost every employer sponsoring a retirement plan and every employee participating in a plan. 

The new law also contains provisions that change some important rules for income-tax charitable contribution deductions and exempt charitable organizations.

This summary is intended to familiarize you with the new law. However, since many of the changes are complex, you’ll want professional guidance before acting on any of the law’s provisions. 

Defined Benefit Plans 
The Pension Protection Act (the “Act”) overhauls the rules affecting defined benefit pension plans. The changes are generally effective for the 2008 plan year (with some exceptions). The new law:
  • Reforms funding requirements for single- and multiemployer plans
  • Increasesthe tax deduction limits for defined benefit plan sponsors, undercertain conditions.
  • Changes therules for calculating lump-sum distributions from defined benefit plans.
  • Providesspecial funding relief for specific industries, including airlines.
  • Restrictsbenefit payouts with respect to underfunded plans and imposessignificant tax penalties on executives whose employers set aside orreserve assets in a nonqualified deferred compensation plan when theemployer’s defined benefit plan is considered to be“at risk” or theplan sponsor is in bankruptcy.
The Act also affects so called “cash-balance plans” and other hybrid retirement plans. For example, the Act imposes requirements on conversions of defined benefit plans to hybrid plans, generally effective for conversions occurring after June 29, 2005.

Pension Rules’ “Sunset” Reversed
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) overhauled many retirement plan and IRA rules. Many of the changes were set to expire after 2010, while at least one was due to “sunset” (expire) at the end of 2006. Under the Act, the EGTRRA provisions relating to retirement plans and IRAs become permanent.

Section 529 Plans
Certain changes made in EGTRRA regarding the tax treatment of qualified tuition programs (so-called “529 plans”) were scheduled to “sunset” after 2010, including the provision that qualified withdrawals from qualified tuition accounts are exempt from income tax. The Act makes these changes permanent.

Other Pension Provisions
  • Automatic enrollment. For plan years beginning on or after January 1, 2008, the Act provides several incentives for sponsoring employers to adopt automatic enrollment in their 401(k) plans. 
  • Investment advice.The Act permits retirement plan service providers who offer investmentsto the plan (“fiduciary advisers”) to recommendtheir own funds withoutviolating fiduciary rules, if certain requirements are met. The newrules are generally applicable beginning in 2007.
  • New participant disclosure rules.  Amongseveral changes: Defined contribution plans must provide benefitstatements at least quarterly to participants who can direct their owninvestments and annually to participants who cannot. Specialrequirements apply to the content of the statements forparticipant-directed plans. The new requirements generally go intoeffect for plan years beginning after 2006.
  • DB(k) Plans.For plan years beginning in 2010 and later, an “eligiblecombined plan”will allow 401(k) deferrals to be made to a defined benefit pensionplan. Several requirements apply.
  • Direct rollovers.Starting in 2008, participants will be able to make direct rollovers ofdistributions from their qualified plans (e.g., 401(k) plans), 403(b)tax-sheltered annuity plans, and governmental 457 deferred compensationplans to Roth IRAs. The conversion will be taxable, but all futureearnings on the Roth IRA will be tax free, if all requirements are met.
  • Inherited benefits.Beginning in 2007, non-spouse beneficiaries of a decedent’sbalance ina qualified plan (such as a 401(k) plan) may roll over the inheritedamounts to their own IRAs. Previously, only surviving spouses could dothis. 
  • In-service distributions.For distributions in plan years beginning after 2006, defined benefitplans can make in-service distributions to participants age 62 or olderseeking to phase into retirement.
  • After-tax amounts.Beginning in 2007, the portability of after-tax retirement plancontributions is expanded. The new law allows direct rollovers ofafter-tax contributions between different types of employer plans (froma 401(k) plan to a 403(b) tax-sheltered annuity, for instance).
  • Tax refunds to IRAs.Starting in 2007, taxpayers can have all or part of their federalincome-tax refunds directly deposited into an IRA, within applicablelimits.
  • Saver’s Credit.The income limits applicable to the Saver’s Credit (a taxcredit forlower-income individuals who save for retirement) will be adjusted forinflation. The law also makes the credit permanent.
  • IRA income limits.The income-related limits that apply to deductible contributions totraditional IRAs and after-tax contributions to Roth IRAs are madesubject to inflation indexing.
  • Hardship withdrawals.Hardship withdrawals will be permitted for hardships of a person who isa participant’s beneficiary under the plan, even if thatbeneficiary isnot a spouse or dependent.  Similarrules will apply to unforeseeable financial emergencies forbeneficiaries of 457(b)/409A deferred compensation arrangements.

Charitable Contribution Provisions
The new law also makes several changes applicable to charitable contribution deductions and charitable organizations, including:
  • An income-tax exclusion for otherwise taxable distributions of up to $100,000 paid to a qualified charity from a traditional IRA or Roth IRA, provided the IRA owner is at least 70½. This change would apply for 2006 and 2007.
  • Anincrease — from 30% to 50% of a taxpayer’s“contribution base”(modified adjusted gross income) — in the charitablecontributiondeduction limit for qualified conservation contributions. The deductionlimit rises to 100% of the contribution base for eligible farmers andranchers who specify that the donated land remain available foragriculture or livestock production. This change also would apply for2006 and 2007.
  • Effectivefor contributions made after August 17, 2006, disallowance ofdeductions for charitable contributions of clothing and household itemsthat are not in good used (or better) condition. 
  • Arequirement that monetary contributions of any amount made after 2006be supported with a bank record or a receipt from the charitableorganization showing (1) the name of the charity, (2) the contributiondate, and (3) the contribution amount.
  • Atightening of the rules governing charitable donations of partialinterests in tangible personal property (artwork, for example). Amongthe new rules: The charity would have to receive complete ownership ofthe item within ten years or at the death of the donor, whicheveroccurs first. This rule is effective for contributions made afterAugust 17, 2006.
  • Thedoubling of excise taxes applicable to certain prohibited activities bycharities, social welfare organizations, private foundations, andmanagers of tax-exempt organizations.

The Pension Protection Act of 2006 is one of the most significant pension laws passed during the last 30 years. It is designed to preserve the pensions of millions of American workers and to make it easier for employees to contribute to, invest in, and transfer their retirement savings plan accounts. It will also require sponsoring employers to meet more requirements. From a charitable-giving perspective, the law provides new opportunities — and responsibilities.

If you have questions about how the new law applies to your business or personal situation, please let us know. 
Outsourcing Payroll Duties?
March 22, 2006


There are many benefits to outsourcing a business’ payroll and related tax duties to a third-party payroll service. Outsourcing can help ensure that filing deadlines are met and all tax deposit requirements are satisfied. It can streamline your business operations, reduce your overhead, and generally remove one more burdensome task from your management’s plate.

Certainly, having a third-party payroll service administer your payroll and employment taxes and report and deposit those taxes with federal and state authorities can reduce your workload. Remember, however, that employers outsourcing some or all of their payroll tax duties remain responsible for meeting all reporting deadlines and paying all taxes and penalties owed.

A Case in Point

Pediatric Affiliates (PA), a professional corporation, hired a small third-party payroll service to handle PA’s payroll administration and tax needs. However, the founder of the payroll service embezzled the tax payments PA and other firms had transferred to the service and filed tax forms with the IRS that understated the tax liability. Eventually, the IRS discovered the underpayments.

When the IRS sent PA tax deficiency notices, PA argued that it was not liable for past-due payroll taxes or any interest because the founder of the payroll service had embezzled the tax payments PA had made to the service. However, a federal court found that PA remained liable for the payroll taxes and interest. PA’s reliance on the payroll service and the service’s failure to pay the taxes did not amount to “reasonable cause” for failure to pay the taxes.

Employer Responsibilities

If you outsource your payroll tax responsibilities, you need to know that:

  • The employer is ultimately liable for the payment of tax liabilities. Even if the employer pays the third-party service an amount to make the deposit, the employer is still on the hook if the service fails to make the payment.
  • The employer is responsible for all taxes, penalties, and interest, even if the penalties and interest are the result of a failure to timely pay by the third party.
  • The employer (or responsible officers) may also be held personally liable for certain unpaid payroll taxes.
  • IRS correspondence is sent to the address of record, so the IRS “strongly suggests” an employer keep its address as the address of record. That way, the employer will be sure to be timely informed of tax matters affecting its business.
  • The payroll service should be asked if it has a fiduciary bond that would protect the employer in the event of default.
  • Employers should ask the payroll service to enroll in and use the IRS’s free Electronic Federal Tax Payment System (EFTPS) so the employer can confirm payments made on its behalf (by phone or over the Internet).

We Can Help

Many employers outsource their payroll administration and tax duties with excellent results. To protect themselves, however, employers should choose and monitor their payroll services carefully. The failure of a payroll service to properly act on an employer’s behalf will not excuse the employer of liability for payroll taxes, interest, or penalties.

Our CPA firm can provide you an added level of comfort in your business’ outsourcing decision making. Our professional staff can examine your business’ payroll situation and make recommendations concerning whether outsourcing would benefit you and, if so, help you implement an outsourcing solution. If you already outsource, we can help you develop safeguards to ensure that your payroll tax obligations are being met.

For more information about how we can help you evaluate payroll outsourcing, please contact us.

Making Year-end Gifts to Family Members
December 6, 2005

When we discuss year-end gifts, we don’t mean the tie you give to Uncle Al or the toys you give to your nephews and nieces as holiday presents. We’re talking about significant gifts, such as helping a child put a down payment on a home or start a business, or paying a grandchild’s college tuition or a relative’s medical expenses. Under these circumstances, making gifts to family members can help save federal gift and estate taxes and, in some situations, overall family income taxes.

Why Year End?

First, it is a natural time for gift giving. More pragmatically, it is a time when you may already have a good take on your financial standing for the year and know how much you can afford to give.

Gift-tax Benefits

In 2005, the first $11,000 of gifts you make to an individual are excluded from federal gift tax due to the gift-tax annual exclusion. (The exclusion rises to $12,000 in 2006.) If you are married, and your spouse agrees, the first $22,000 of gifts ($24,000, in 2006) made to an individual are gift-tax-free. Plus, you can use the gift-tax annual exclusion for as many people as you want.

Example: Shirley has three children and seven grandchildren. If Shirley desires, she can make gifts of up to $11,000 to each of her children and grandchildren (a total of $110,000) without paying any federal gift tax on her gifts.

Note that the gift-tax annual exclusion is a “use-it-or-lose-it” proposition. You cannot carry over any unused exclusion to a later year.

Estate-tax Benefits

Use of the annual exclusion can also result in federal estate-tax savings. While the estate-tax law provides an exemption from tax for assets totaling up to $1.5 million (in 2005), when you add up the value of your home, investment accounts, retirement benefits, life insurance, and other items, that $1.5 million exemption can be used up relatively quickly.

Making annual exclusion gifts helps you preserve your estate-tax exemption while still removing assets from your taxable estate. The money or other property given away plus any post-gift growth in value will not be included in your estate for estate-tax purposes. Therefore, the annual exclusion gifts and future investment appreciation on those amounts escape both gift and estate taxation.

Example: Going back to Shirley, assume she gives the full $110,000 to her children and grandchildren in 2005. Over the next five years, that money is invested and grows to $200,000. If Shirley then dies, the full $200,000 is excluded from her estate for tax purposes.

Income-tax Benefits

In some situations, gifts can save overall family income taxes. By making a gift of income-producing assets to a family member, you can “shift” income from your high income-tax bracket to the recipient’s lower bracket. If the recipient is a child under 14, however, be careful of the “kiddie tax.” Generally, with the kiddie tax, at least some of the investment income of a child under age 14 is taxed at the parent’s marginal tax rate, not the child’s. Check with us for more information.

Gifts of appreciated capital gains property can also result in significant tax reductions.

Example: Mary and Jake own stock worth $22,000 that has appreciated significantly over the years they’ve owned it. If Mary and Jake sold the stock today, they would pay a long-term capital gains tax of 15% on their $15,000 gain (i.e., $2,250 in tax). But, if they give their college-bound child the stock and then have the child sell it and use the proceeds for tuition, Mary and Jake gain significant tax benefits. The gift of the stock qualifies for the gift-tax annual exclusion, if they “split”the gift. The gain on the sale of the stock is taxed to the child at her 5% rate (i.e., $750 in tax), not at Mary and Jake’s 15% rate. Thus, the net proceeds of the sale are $1,500 greater, providing more money for tuition payments.

Tuition and Medical Gifts

Under the tax law, if you make a direct payment for another person's tuition or medical expenses, the gift is excluded from gift taxes. So, if you pay your grandchild's college tuition directly to the college on the student’s behalf, that amount will not be a taxable gift, even if it exceeds the annual exclusion amount. Similarly, if you pay an elderly parent’s medical expenses directly to the medical care provider, the payment is not subject to gift tax.

Be aware, though, that gifts made to a qualified tuition program (a “Section 529 plan”) or to a Coverdell Education Savings Account do not qualify for the tuition exclusion. But such gifts could qualify for the gift-tax annual exclusion and, under the tax law, you would be allowed to elect to spread the contributions made in a single year over five years for annual exclusion purposes.

Act Now

If you are thinking about making year-end gifts, now is the time to act. If you would like additional information about the benefits of an annual gift-giving program as part of your estate- or income-tax planning, come talk to us. We’d be pleased to tell you more.

Renting out your vacation home? Understand the tax rules.
May 11, 2005

Owners of vacation homes often try to offset some of the homes' costs by renting them out part of the year. If you're planning to rent out your vacation home this year, you should consider the federal income-tax implications. Doing so can help you make the most of the available tax breaks.

Rental Rule Basics
If you personally use your vacation home for even one day during the year, that use triggers the tax law's vacation home deduction limits. The potential tax benefits of renting a vacation home depend on the nature of the personal use and some specific time limits imposed by the tax law and IRS regulations. If all requirements are met, you may be able to claim at least some of your rental expenses.

Investment Property. If you personally use your vacation home no more than 14 days a year or 10% of the total number of days it is actually rented out, whichever is greater, the property is considered to be investment property. Expenses you can't normally deduct for a personal residence -- depreciation, utilities, repairs, etc. -- are fully tax deductible to the extent of the percentage of the total expenses attributable to the time the property was rented during the year. Real estate taxes are deductible, as is mortgage interest attributable to the rental use. Any excess of your rental expenses over your rental income is considered a deductible loss for income-tax purposes.

However, the tax law's "passive activity" rules apply. That means you may use your real estate rental losses only to offset other passive activity income unless you "actively participate" in managing the rental property. Then, you can apply up to $25,000 in rental losses annually against regular income. (The $25,000 deduction is phased out starting when your adjusted gross income reaches $100,000.) Active participation means regular and substantial involvement, such as approving tenants, arranging repairs, and deciding on lease terms. Accumulated nondeductible passive losses are allowed when the property is disposed of.

Example: Donna owns a vacation home that she rents out 200 days this year. She personally uses the property for 15 days. Since that is less than 10% of the rental use, the property is considered an investment property. Suppose Donna's expenses attributable to the rental period exceed her rental income by $5,000. Donna may deduct the $5,000 passive activity loss only if she meets the tax law's income and active participation requirements.

Personal Residence. If your personal use exceeds the 14-day/10% of rental days threshold, the vacation home is treated as a personal residence. The amount you can deduct for rental expenses such as utilities and maintenance is limited to the rental income minus the sum of (1) deductions attributable to rental use that are otherwise allowable whether or not the home is rented (for instance, qualifying mortgage interest and real estate taxes) and (2) deductions allocable to the rental activity but which aren't allocated to the home itself (advertising costs, for example). While you cannot claim a loss, any disallowed excess rental expenses may be carried forward to a future tax year when there is sufficient rental income.

Example: Using the above scenario, suppose instead that this year Donna spends 21 days at her vacation home and rents it out for 200 days. Thus, Donna exceeded the 14-day/10% limit personal use limit because 21 days was more than 10% of the rental use during the year. Assuming that her $5,000 rental loss includes $3,000 paid for mortgage interest and taxes attributable to the rental period and no rental expenses that aren't attributable to the use of the home, her disallowed loss is $2,000. She can carry over the disallowed loss and use it against the next year's rental income.

Personal Use. When you use a vacation home for your personal pleasure, that use counts as personal use for purposes of the 14-day/10% limit.

Be careful, though. Whenever you or a family member use the property -- even if you're just letting a relative stay overnight -- it counts as a personal-use day.  However, time spent fixing up or cleaning your vacation home doesn't count as personal use if that's your primary reason for being there, even if you bring the whole family along.

Tax-free Rental Income

You may be eligible for a tax break if you rent out your vacation home for 14 days or less during the year, because you currently do not have to report the rental income on your tax return. But you cannot claim any deductions for maintenance, utilities, or depreciation either.

This break is not limited to vacation homes. If you own a principal residence in a prime vacation spot or popular event venue, renting your home to someone for less than 15 days during the year entitles you to enjoy the rental income tax free.

Tax Advice Is Essential

Before taking any steps toward renting a vacation residence, talk to us first. The vacation home tax rules are complicated, and our professionals can show you the best way to take advantage of the tax law's provisions. Give us a call today.