A New Twist for Home Sales

With the advent of the home sale gain exclusion back in the 1990s, taxpayers have been using that provision of the law in a popular strategy to exclude gain, not just from their primary residence but from rentals and second homes as well.  

They do that by moving into and making the rental or second home their primary residence for two years, then selling it and excluding the gain, up to $250,000 ($500,000 for joint filers). 

To qualify for the exclusion, each taxpayer must own and occupy the home as his primary residence for two of the five years prior to the sale and not utilize the exclusion in the two years immediately preceding the sale.  Thus, with careful planning, taxpayers could employ this technique on multiple properties.

Apparently, this strategy became too popular, and Congress included a provision in the recently enacted Housing Assistance Act of 2008 to curtail gain exclusion attributable to periods of ownership when the property was not the taxpayer’s primary residence.  The new law accomplishes this by prorating the home sale gain between qualified and nonqualifed use periods and allowing the home gain exclusion to apply only to gain from qualified periods.

The law does provide a taxpayer with a beneficial definition of nonqualified use.  A period of nonqualified use means any period during which the property is not used by the taxpayer or the taxpayer's spouse or former spouse as a principal residence, except as noted below.  For purposes of determining periods of nonqualified use, do not include any period:

o Before January 1, 2009;

o After the last date the property is used as the principal residence of the taxpayer or spouse (regardless of use during that period); and

o Not to exceed two years that the taxpayer is temporarily absent by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances.

If your planning strategies include employing multiple sales, each qualifying for the home sale exclusion, you should carefully analyze the impact of this new law on your plans.  Please call this office if you have any questions.

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Tax Benefit to Aid First-Time Homebuyers

Now may be a good time to purchase a home as a lot of good deals are awaiting those with a down payment to facilitate a purchase.  If you are a first-time homebuyer, you can benefit from a limited-time tax break designed to help first-time homebuyers afford the down payment on a home.  

For home purchases made after April 8, 2008 and before July 1, 2009, a first-time homebuyer (the definition is very liberal) can receive a refundable tax credit equal to 10% of the purchase price of the home, but capped at $7,500 ($3,750 for married taxpayers filing separately).

Here are the details of this novel first-time homebuyer credit.  Keep in mind, however, this credit is only available for a limited time. The credit: 

• Applies to home purchases after April 8, 2008, and before July 1, 2009.

• Reduces a taxpayer's tax bill or increases his or her refund, dollar for dollar.

• Is fully refundable, meaning that the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax that they owe.

However, the credit operates much like an interest-free loan, because it must be repaid over a 15-year period. So, for example, an eligible taxpayer who buys a home today and properly claims the maximum available credit of $7,500 on his or her 2008 federal income tax return must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on his or her 2010 return.

CAUTION: Taxpayers are cautioned that this credit is a loan, and except under some special circumstances noted in this article, must be repaid.  You should not take this credit if you will be unable to meet the repayment requirements in the future.  The repayment is subject to the same penalties and interest and collection procedures as any other income tax when not paid on time.  In addition, your withholding or estimated payments may need to be adjusted to avoid the underpayment penalty.

Definition of a First-Time Homebuyer - A taxpayer is considered a first-time homebuyer if he or she (or spouse, if married) had no present ownership interest in a principal residence in the U.S. during the 3-year period before the purchase of the home to which the credit applies. If the individual is married, neither the individual nor his or her spouse may have had a present ownership interest in a principal residence during that three-year period, even if they file as married taxpayers filing separately. Ownership of a home outside the U.S. during the three-year period will not disqualify the taxpayer.

When to Claim the Credit - If you make an eligible purchase in 2008, you claim the first-time homebuyer credit on your 2008 tax return. For an eligible purchase in 2009, you can choose to claim the credit on either your 2008 (or amended 2008 return) or 2009 return.

Homes that Qualify - Only the purchase of a main home located in the U.S. qualifies.  Vacation homes and rental properties are not eligible. You must buy the home after April 8, 2008, and before July 1, 2009. For a home that is to be constructed, the purchase date is the first date that the home is occupied.

Amount of the Credit - The credit is 10 percent of the purchase price of the home, with a maximum available credit of $7,500 for either a single taxpayer or a married couple filing jointly. The limit is $3,750 for a married person filing a separate return. Unmarried taxpayers who purchase a home together are eligible to share the credit under an as-yet-to-be announced formula to be determined by the IRS.  In most cases, the full credit will be available for homes costing $75,000 or more. Whatever the size of the credit a taxpayer receives, the credit must be repaid over a 15-year period.

Income Limits – The purpose of the credit is to assist lower-income individuals in acquiring their own home. Thus, the credit is reduced or eliminated for higher-income taxpayers. The credit is phased out based on the modified adjusted gross income (MAGI). MAGI is a taxpayer's adjusted gross income plus various amounts excluded from income-for example, certain foreign income. For a married couple filing a joint return, the phase-out range is $150,000 to $170,000. For other taxpayers, the phase-out range is $75,000 to $95,000.  This means the full credit is available for married couples filing a joint return whose MAGI is $150,000 or less and for other taxpayers whose MAGI is $75,000 or less.  No credit is allowed for married joint filers with MAGI of $170,000 or more and for other taxpayers with MAGI of $95,000 or more. If your MAGI falls within the phase-out range, a partial credit will be allowed.

Who Cannot Take the Credit – In addition to the other qualifications and limitations discussed above, a taxpayer cannot take the credit if:

• The home is purchased from a close relative. This includes a spouse, parent, grandparent, child or grandchild.

• The home is no longer used as the main home.

• The home is sold before the end of the year in which it was purchased.

• The taxpayer is a nonresident alien.

• The taxpayer is, or was, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year.

• The home financing comes from tax-exempt mortgage revenue bonds.

How and When is the Credit Repaid - The first-time homebuyer credit is similar to a 15-year interest-free loan. Normally, it is repaid in 15 equal annual installments beginning with the second tax year after the year the credit is claimed. The repayment amount is included as an additional tax on the taxpayer's income tax return for that year. For example, if you properly claim a $7,500 first-time homebuyer credit on your 2008 return, you will begin paying it back on your 2010 tax return. Normally, $500 will be due each year from 2010 to 2024.

You may need to adjust your withholding or make quarterly estimated tax payments to ensure you are not under-withheld.

However, some exceptions apply to the repayment rule. They include:

• Taxpayer’s Death - If the taxpayer dies, any remaining annual installments are not due. If  the taxpayer filed a joint return and dies, his or her surviving spouse would be required to repay his or her half of the remaining repayment amount.

• Ceases Being the Main Home - If the home is no longer used as the main home, all remaining annual installments become due on the return for the year that happens. This includes situations where the main home becomes a vacation home or is converted to business or rental property. There are special rules for involuntary conversions.  

• Home Sold - If the home is sold, all remaining annual installments become due on the return for the year of sale. The repayment is limited to the amount of gain on the sale, if the home is sold to an unrelated taxpayer. If there is no gain or if there is a loss on the sale, the remaining annual installments may be reduced or even eliminated. For example, you purchase a home for $200,000 and claim the credit of $7,500.  Assume that you make no improvements on the home and sell it for $195,000 after repaying $500 of the credit.  You would measure your gain or loss for purposes of the accelerated credit recapture from $193,000 (the original cost of $200,000 less the $7,500 credit plus the $500 repayment).  In this case, you would have a gain of $2,000 on the sale ($195,000 - $193,000).   Thus, you would be liable for repaying only $2,000 of the credit when the home is sold.  Had the home sold for $193,000 or less, no repayment would be required.

• Divorce - If the home is transferred to a spouse or to a former spouse as part of a divorce settlement, that person is responsible for making all subsequent installment payments.

• Involuntary Conversion - If the home is involuntarily converted (e.g., it is destroyed in a storm), and the taxpayer buys a new principal residence within a two-year period beginning on the date of the disposition or the date the home ceases to be the principal residence, the accelerated recapture rule does not apply.  However, the regular recapture rule applies to the replacement principal residence during the recapture period in the same way as if the replacement principal residence were the converted residence. 

In addition to the credit, the tax law also allows first-time homebuyers to make a penalty-free withdrawal of up to $10,000 from their IRAs for the purchase of a home.  Married couples can each withdraw up to $10,000 from their separate IRA accounts for this purpose.  Although the withdrawal is penalty-free, it is still taxable so you should consider carefully the tax ramifications and the impact on your future retirement before invading your IRA accounts. 

It is probably appropriate to consult with this office in advance of a home purchase where you or family members are contemplating on utilizing the new credit or withdrawing from an IRA.    

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Home Energy Credits

Tax legislation passed in 2008 reinstated and expanded the residential energy improvement credit for only 2009 (this credit was last available in 2007) and extended and expanded the tax credit for residential solar and fuel cell equipment through 2016.  This gives taxpayers who want to “go green” a chance to offset some of the cost of going green with tax credits.  

These are two distinctly different credits with different requirements and limitations.  Because of these limitations, there are circumstances where a taxpayer may not benefit from the credits.  The following is an overview of these credits, but before entering into a contractual arrangement to install any of these energy items, please contact this office first to verify what the tax benefit might be.

• Tax Credit for Residential Energy Improvements - Energy improvements to a principal residence located in the United States and placed in service during 2009 qualify for the residential energy improvements credit. This credit also was available in tax years 2006 and 2007, but not for 2008.  Generally, the credit is the cost (up to certain limits) for qualifying heat pumps, boilers, water heaters and fans meeting specific energy efficient standards certified by the manufacturer.

In addition, a taxpayer may qualify for a credit of 10% of the cost of qualifying insulation, exterior windows including skylights, exterior doors, metal roofs coated with heat-reduction pigments and asphalt roofing with appropriate cooling granules. 

However, the total lifetime credit is limited to $500, of which no more than $200 can be for window components, $50 for an advanced main air circulating fan, $150 for a qualified furnace or hot water boiler, or $300 for any qualified central air conditioner, heat pump, or water heater. Installation expenses do not count as part of the cost for determining the credit.

• Tax Credit for Residential Solar and Fuel Cell Equipment –

o Residential solar equipment - For property placed in service before the end of 2016, a credit is allowed for 30% of the cost of qualifying solar water heaters, up to $2,000 per year, and a credit subject to the same limits also applies for photovoltaic (electricity-generating) solar panels but the $2,000 per year limit no longer applies after 2008.  The foregoing applies to the taxpayer’s first or second homes.

o Fuel cell equipment - In addition, a credit of 30% of the cost is allowed for fuel cell property, up to a maximum credit of $500 for each half-kilowatt of capacity installed per year on the taxpayer’s principal residence.

o Wind & Geothermal energy equipment - A 30%-of-cost credit is allowed for qualified systems placed into service before 2016. The credit is limited to $500 for each half-kilowatt of capacity (maximum $4,000 for wind turbines and $2,000 for geothermal heat pumps).

Labor costs for onsite installation and for piping and wiring connections are qualifying costs for these credits.  However, the credits do not apply to equipment used to heat swimming pools or hot tubs. 

Credit Limitations – Although these credits can be used to offset both the regular tax and AMT, they are non-refundable personal credits that can only reduce a taxpayer’s tax to zero, and any remaining balance is not refundable. If the amount of the credit for the residential energy efficient property credit (i.e., the credit for residential solar and fuel cell equipment and wind/geothermal energy equipment) exceeds the taxpayer’s tax after subtracting other nonrefundable personal credits, the excess can be carried to the next tax year and is added to that year’s allowable credit.

Check with this office first to verify the tax benefits before signing on with a contractor or salesperson.  That way your tax benefits can be determined based on your particular tax situation before you obligate yourself. 

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How to Keep Customers Coming Back

Building value in a business has a direct correlation with the value you generate through your most important asset–your customers. These are the customers you have now and the ones you will have in the future.

What can you do to keep these client relationships intact, and how can you turn them into active referral sources?

Leading businesses have figured out how to use client retention marketing techniques to keep their customers longer, while growing them into bigger customers, generating more word-of-mouth referrals and providing a highly-efficient service. By making these techniques part of your long-term business strategy, you are taking the first step towards keeping your clients for life.

When talking about growth and building long-term business models, so many businesses forget to focus on their current audience before moving on to acquire new customers. Just think about your own experiences after buying a new product or trying a new service and the support that follows. Today’s bottom line culture has definitely lost sight of client retention and appreciation. After a bad experience, what are the chances that you refer that company? Will you leave at the first opportunity? These are the things to consider and avoid. With a little effort, there are many ways to guarantee a positive customer experience.

Don’t Drop the Ball After the Sale!

How many of you say “thank you” after a sale? Do you have a systematic program that includes regular follow-up contacts to make sure everything is going smoothly? Or are the customers just passed off to a call center to fend for themselves? The period after the sale of a new product or service will reinforce the buyer’s beliefs about your company and service. This is the beginning of whether they become your greatest ambassadors or detractors. Exceeding their expectations post-sale gives people a positive reason to talk about your products and services. An example would be to develop a three-contact, follow-up program over a six-week period. The first communication should be more of a “thank you” and “we are here if you need us” contact. The second and third follow-up could be more educational, like case studies.

Communicate to Your Current Buyers on a Regular Basis

It is by educating and maintaining contact with your audience that your business will reach its greatest heights. It is recommended that you communicate with your core audience at least six times a year. Depending on your market, monthly contact is generally preferred.  But make it something valuable. Either with special offers or educational material that could be used to improve the way your product or service is used.  Examples of ongoing client retention marketing include client newsletters, direct mail coupon offers, white papers, webinars, membership clubs and customer service follow-up calls.

Why Talking Points Are So Important in Client Retention

Why is it that some politicians are so accomplished at breaking down complex issues into simple words or sentences? Why are these politicians usually elected? By developing your own set of talking points about your product or service and repeatedly using them in your client retention programs, you enforce your brand message. It is more likely that your customer base will repeat this message to their peers. What do you think of when you hear Apple® Computers? Since the word “computer” was removed from their company name, they have effectively repositioned themselves as a lifestyle provider of electronics. They have taken products that are sold as commodities by their competitors and effectively created the leading brand in their space. More importantly, their products sell at a premium. Think of using some of that magic on your own products or services. Develop talking points and use them repeatedly. When you are tired of using them, your message is just starting to make its impact.

Make it Personal and Market by Name

A lot has been written about personalizing your marketing communications. Without listing the results of different studies, let’s just use some common sense. You are much more driven to respond to being called out by name in marketing communications. Better yet, by targeting the message and the sales pitch to the historical purchases of a buyer, you will yield much higher response rates than a “one message fits all” approach.  Variable printing and e-mail technology make it easier than you think to personalize.

By focusing first on your customer and client retention, you are on your way to implementing marketing programs that empower your customers to share their positive experiences. It is by addressing your current customers first that will create a positive voice and word-of-mouth testimonials. Businesses can work hard to deliver customer experiences that are beyond their expectations, but it is by listening to your customers and the fostering of influential ambassadors that your business will generate positive buzz about the good qualities of your product or service.

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Is Your Hobby a For-Profit Endeavor?

The tax treatment for a hobby is substantially different than it is for a business, which sometimes makes it difficult to distinguish one from the other.  The IRS provides appropriate guidelines when determining whether an activity is engaged in for profit, such as a business or investment activity, or is engaged in as a hobby.

Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit.  IRC 183 is sometimes referred to as the “hobby loss rule.”

This article provides information that is helpful in determining if an activity qualifies as an activity engaged in for profit and what limitations apply if the activity was not engaged in for profit.

Is your hobby really an activity engaged in for profit?  In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income.  Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.

The following factors, although not all-inclusive, may help you determine whether your activity is an activity engaged in for profit or a hobby:

• Does the time and effort put into the activity indicate an intention to make a profit?

• Do you depend on income from the activity?

• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?

• Have you changed methods of operation to improve profitability?

• Do you have the knowledge needed to carry on the activity as a successful business?

• Have you made a profit in similar activities in the past?

• Does the activity make a profit in some years?

• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).

If an activity is not for profit, losses from that activity may not be used to offset other income.  An activity produces a loss when related expenses exceed income.  The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts and S corporations. It does not apply to corporations other than S corporations.

Hobby deductions - If it is determined that your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Deductions for hobby activities are claimed as itemized deductions on Schedule A and must be taken in the following order and only to the extent stated in each of three categories:

• Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.

• Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.

• Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

If you have questions related to your specific business or hobby circumstances, please give this office a call. 

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How to Improve Your Credit Score

There are myriad important numbers in your financial world, but few as critical as your credit score. This FICO number, ranging from 0-850, can affect your ability to buy a house or car, get a credit card or other loan, or even get a job sometimes.

FICO scores are based on your credit reports. Credit agencies track credit history and sell it to parties who are interested in your credit-worthiness. Credit reports consist of four elements:

• Personal information (compiled from credit applications)

• Credit history (details of your credit relationships)

• Credit report inquiries (entered anytime someone views your record)

• Public records (judgments from government sources, like liens)

Three agencies track credit scores: Equifax, Experian, and TransUnion. You're entitled to a free report once every 12 months; the best place to get this is AnnualCreditReport (www.annualcreditreport.com). The report can provide you with a lot of information, including the following:

• Who has been making inquiries about your credit;

• Any errors that need to be corrected;

• If you are a victim of identity theft; and

• What your chances are of getting a loan.

A bad credit report doesn't have to follow you forever. Even bankruptcies generally drop off after seven years. If your score is less than optimal, you can improve it. Stick with your program and you'll increase your chances of--eventually--getting into that top 5%, or even 1%.

• Report mistakes immediately to the appropriate credit agency. Do this in writing, and document it well.

• Pay everything on time. Even one late payment on a credit card can lower your credit score.

• Budget your credit card payments. They should be as much a part of your budget as your mortgage and food.

• Don't let balances on your revolving credit accounts--like credit cards--get too high. Having a high credit debt-credit limit ratio can lower your credit score.

• Neither close your unused accounts nor open new accounts to affect your credit score. That trick doesn't always work.

• Pay off the cards with the highest interest rate first. No matter what the balance, you should always pay any extra you have on the card that's costing the most. Pay minimums on the rest. When you have that top card paid off, continue the process with the second in line. and so on. Whenever you can, pay more.

• Keep an emergency reserve so that you can always pay at least minimums on time. Don't be intimidated by this. If you can't save thousands of dollars, at least squirrel away a few hundred earmarked for this occasion. Skip a couple lattes and CDs every paycheck and bank it.

• Ask your credit card issuer for a lower rate. This actually works sometimes, so it is worth a try. Credit card interest is simply lost money.

• Use your credit cards occasionally and carefully. Show that you can borrow money and pay it back responsibly.

• Don't be a deadbeat. The credit bureau can't gauge your ability to pay a debt back if you don't ever borrow any.

• Try to maintain a stable job and residence. Lenders are more interested in people who show stability in their personal lives.

• Avoid--like the plague--collection agencies and judgments against you. When you've satisfied a lien, be sure to check that the lien has been released and report that to the three reporting agencies if necessary.

What happens if your credit is really in shreds? Double your determination and keep following your program. If you can't get a traditional credit card, get a secured credit card, where you make a cash deposit and can charge up to that limit. Pay it off faithfully, and you'll probably eventually get credit again.

In the meantime, save as much as you can so you don't trash your credit again. Consider asking someone to co-sign a small loan so that you can prove you're worthy of credit.

Shop for your credit cards like you shop for groceries and clothing to find the best deal. Bankrate.com (www.bankrate.com) is a good place to do that. That's a good site for finding the best deals on other financial products, too, like mortgages and other loans.

Improving your credit score will likely take time and some sacrifice on your part. But it's worth it and will save you money eventually -- the higher the FICO score, the better your chance of credit and loans, and the lower your interest rate may be. So keep plugging towards the payoff.

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Auction Income May Be Taxable

Although most taxpayers want to pay their fair share of taxes, being unaware of what may be taxable or not can lead to the underreporting of taxable income. 

Many people don’t realize that the income earned from auctions and consignment sales, such as e-bay sales, warehouse sales and, in some cases, even garage sales, may be taxable.  This article is intended to help taxpayers better understand what income should be reported and the related deductions that may apply.  

What is Taxable?

All income from auctions, traditional or online, and consignment sales is generally taxable unless certain exceptions are met.  This income is usually considered either “business” or “ordinary” income.  In certain circumstances, such income can qualify for capital gain treatment.  There are also some exceptions where income can be excluded from taxable income.

Business income resulting from an auction or consignment sale is subject to the same taxes as the income of any other retail or service business.  That may include income tax, self-employment tax, employment tax, or excise tax.  A retail or service business owner must include this income in his or her business income.

A person must report a gain from a sale whether he or she operates a business or not.  A reportable gain is the income above the original cost or basis of the item.  These gains may be business income or capital gains.

Income resulting from auctions akin to an occasional garage or yard sale is generally not required to be reported.  Generally, most household garage sales result in selling items at a price less than the original cost and therefore leaves no profit to report.  Losses from the sale of personal-use items are not deductible.  However, there are exceptions.  If a garage sale (including online sales) turns into a business with recurring sales and purchasing of items for resale, it may be considered an online auction business.

Some people sell a product or service online as a hobby.  This income generally must be reported and deductible expenses are limited.  The deductions cannot total more than the income reported and can only be taken if deductions are itemized on Form 1040, Schedule A, Itemized Deductions.

What is a Deductible Expense?

Traditional or online auction and consignment sellers in the business to make a profit can generally deduct expenses that are both ordinary and necessary.  An “ordinary” expense is one that is common and accepted for that trade or business.  A “necessary” expense is one that is helpful and appropriate for a trade or business.  Verifiable auction and consignment fees and commissions are examples of allowable business expenses.

Expenses related to personal, living, or family matters are generally not deductible.  For expenses that are partly personal and business-related, only the business portion of the expense is deductible.

If a business is operated out of a home, expenses may be deducted for the business use of the home if the regular and exclusive use requirements are met.  Generally, when a person meets the qualifications for an office-in-the-home, he or she can deduct prorated home expenses, which generally include mortgage interest, insurance, utilities, repairs and depreciation.  However, the home use deductions are limited to the income from the business.

If you have questions related to income from auction or assignment sales, please call this office.

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Saver's Credit Can Help You Save for Retirement

Low- and moderate-income workers can take steps to save for retirement and earn a special tax credit. 

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to traditional or Roth Individual Retirement Arrangements (IRAs), SIMPLE-IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

2008 Credit Still Available for IRA Contributions – Unlike other workplace retirement plans, IRA contributions can be set up and funded after the end of the year.  Thus, eligible workers still have time to make qualifying IRA contributions and get the saver’s credit on their 2008 tax return. People have until April 15, 2009 to set up a new IRA or add money to an existing IRA and still get credit for 2008. 

Taxpayers with 401(k), 403(b), 457 and Government Thrift plans who were unable to set aside money for 2008 may want to schedule their 2009 contributions soon, so that their employer can begin withholding them in January.

The saver’s credit can be claimed by:

• Married couples filing jointly with incomes up to $53,000 in 2008 or $55,500 in 2009;

• Heads of Household with incomes up to $39,750 in 2008 or $41,625 in 2009; and

• Married individuals filing separately and singles with incomes up to $26,500 in 2008 or $27,750 in 2009.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000 ($2,000 for married couples), taxpayers are cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.

In tax-year 2006, the most recent year for which complete figures are available, saver’s credits totaling almost $900 million were claimed on nearly 5.2 million individual income tax returns.  Saver’s credits claimed on these returns averaged $213 for joint filers, $149 for heads of household and $128 for single filers.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement.  For example, most workers may deduct their contributions to a traditional IRA.  Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

• Eligible taxpayers must be at least 18 years of age.

• Anyone claimed as a dependent on someone else’s return cannot take the credit.

• A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

• Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2008, this rule applies to distributions received after 2005 and before the due date (including extensions) of the 2008 return. 

Started in 2002 as a temporary provision, the saver’s credit has since been made a permanent part of the tax code.

If you have questions on how this tax benefit might apply to your situation, please give this office a call.

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Some Extension Due Dates Earlier for 2009

The extended due dates for returns of calendar year trusts and estates (1041), partnerships (1065), and certain other returns that generate form K-1s have historically been the same as for individual returns (1040).   Since these returns generally include information that is required to complete the individual returns of beneficiaries or partners, having the same extended due dates does not always give the beneficiary or the partner the ability to timely meet their filing obligation.  This can lead to a variety of penalties on the individual 1040 returns. 

New IRS regulations designed to ease this problem have shortened the extended due date for 1041 and 1065 returns by one month.  Thus, beginning in 2009, the extension period for these returns has been reduced to five months (was six months), while the extension period for individual 1040 returns remains at six months.  This provides the 1040 filer with one additional month to complete and file individual 1040 returns.

The change will be effective for extension requests for returns due on or after January 1, 2009 and applies to any business entity filing any of the following forms:

• Form 1065 (U.S. Return of Partnership Income);

• Form 1041 (U.S. Income Tax Return for Estates and Trusts);

• Form 8804 (Annual Return for Partnership Withholding Tax)

The IRS is eliminating the same-day deadline for these returns and 1040 returns, which causes needless hardship and puts the individual taxpayer in an awkward position.  Thus, under the new rule, a calendar year partnership’s or trust’s extended return will be due on September 15, while the partner’s or beneficiary’s extended individual return will be due on October 15.

If you feel you are unable to have the information needed to file the income tax return of a trust, estate, or partnership return on time, please contact this office to arrange for filing of extensions for both the pass-through return and your individual return.  Please keep in mind that the extension is an extension to file but not an extension to pay.  Thus, the late payment penalty and interest will apply to any balance due on the individual return that is not paid by the original due date.  Therefore, it is important to complete the returns as quickly as possible when on extension.

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Home-Handicapped Modifications

Generally, home improvements are not deductible except to offset home gain when the home is sold.  But a medical expense deduction may be claimed when a medically-necessary home improvement is made, such as a lift or elevator for a handicapped person or a therapy spa for an arthritis sufferer.  The cost of such an expense is deductible as a medical expense to the extent it exceeds any resulting increase in the value of the property. 

For example, if a qualifying improvement costing $5,000 increases the value of a home by $2,000, the medical expense is $3,000.  The full cost of certain improvements can be included as medical expenses, because they are considered not to increase the home’s value. 

Examples of these types of improvements include constructing entrance or exit ramps for the home; widening entrance/exit doorways, hallways and interior doorways; installing railings and support bars; and lowering or modifying kitchen cabinets.  Note, however, that medical expenses can be claimed on Schedule A, Form 1040, only to the extent that they exceed 7.5% of the taxpayer’s adjusted gross income (AGI) (10% if taxed by the AMT).  

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Minimize Your Exposure to Fraud

Do you know how to detect and protect yourself from fraud? Most of us want to naively believe it will never happen to us. In reality, fraud impacts small and mid-size businesses far more often than large corporations. Why? Smaller businesses tend to take fewer precautionary measures to prevent fraudulent behavior. Also, fraud is often perpetrated by a family member, long time employee, or friend that’s been given too much freedom with too few controls. However, you must not be naïve when it comes to your business. Fraud is very much a reality that can happen in your business. In this article we’ll discuss how fraud happens, how to identify if fraud is happening, and what to do if you discover fraud has happened. We’ll also discuss some measures that you can take within QuickBooks to limit your exposure.

Why does fraud happen?

A combination of three aspects usually set the stage for fraud:

Opportunity: Companies often unknowingly present opportunities for fraud. In particular, small businesses are more prone to these because it’s harder to separate duties when you have a small staff.

Pressure: Personal pressures can put people over the edge and cause irrational thinking. Someone you know may be under duress due to medical and/or financial issues, or any of a number of other personal situations that influence their judgment.

Rationalization: The perpetrator believes they can rationalize their behavior, i.e. they need the money more then the company, the company won’t ever notice, or other insidious thoughts. Indeed, fraud often starts as a “loan”, with the perpetrator fully intending to “pay it back”.

Fraudsters will go to extreme measures to cover their tracks. Many small business owners believe it could never happen to them, as their employees are like family. However, it is critical that you separate your thoughts with regard to what happens at work versus what happens outside the four walls of your business. No business is 100% safe.

What are five popular types of fraud?

1. Claiming additional payroll hours or falsifying an employee.
2. Stealing merchandise or cash.
3. Giving unauthorized discounts to friends and family.
4. Selling private business information to outsiders.
5. Exaggerating on expense reports.

Although it’s often enticing to delegate tasks to subordinates, you should keep a hand in as many of your business practices as you can, even if it’s on a random basis. Fortunately there are some simple ways you can do so:

Payroll: Hand-deliver the paychecks, and use this as an opportunity to thank your employees for their work. This will help identify any “false” employees, as well as foster good will among your team. Further, a process for tracking hours will help to minimize extra hours appearing on anyone’s time card. You might have a manager sign off on subordinate’s time sheets, or install a modern time clock that uses swipe cards or biometric identification.

Theft of cash or merchandise: Separate duties to the extent possible. Ideally those who receive money should be different than those who that generate invoices. You should also try to separate inventory duties, and implement checks and balances for purchase orders, receiving and invoicing. Don’t rule out video surveillance of warehouse areas, even if it feels like “Big Brother.”

Unauthorized discounts: Track discounts given to customers. In QuickBooks:

a. Choose Reports, Sales, and then Sales By Item Detail.
b.  Click the Modify Report button, and then click the Filters tab.
c. As shown in Figure 1, choose Items from the Choose Filter List.
d. Select Multiple Items from the Item list, and then choose all discount and bad debt items.
e. Click OK twice to view your report. If you find this report helpful, click the Memorize button and assign a benign name, such as Accounting Review.

Figure 2 demonstrates another filtering technique for the Sales by Item report. Clear the Item filter, and specify Amount, and then >=0. This will display any negative or zero amounts listed on a customer invoice, as well as credit memo items. It may seem counterintuitive to look for amounts that are greater than or equal to zero, but in accounting jargon, invoice amounts should always be credits to an account, which means they’ll be less than zero. Negative items or discounts on an invoice post to your books post as debits, or positive amounts, which will be greater than zero.
 


Figure 1: You can filter the Sales by Item report to track discounts and other write-offs.
 


Figure 2: It’s also helpful to search for amounts that are equal to or greater than zero.

Selling private information: This is particularly difficult to guard against. One level of defense to require employees to sign confidentiality agreements at the time of hire that discuss what the company considers confidential and the consequences of violating said agreement. Computer systems and paper work should also be protected with passwords, lock and key and whatever other measures may be warranted to minimize unnecessary access.

In QuickBooks, choose Company, Users, and then Set Up Users and Roles to assign unique log in names and passwords. As shown in Figure 3, QuickBooks offers predefined roles that automatically limit access to specified areas, but you can easily tweak a user’s role to meet their exact needs. You should also require users to change their passwords periodically, and whenever possible, have your IT specialist restrict access to the folder where your QuickBooks data resides. However, do be aware that anyone can purchase a password recovery tool for $45 from www.lostpassword.com.
 


Figure 3: Use passwords in QuickBooks to limit employee access on a need-to-know basis.

Expense Reports: Always require receipts on all reports for reimbursement with no exceptions. You should also establish guidelines so that employees know when to seek approval so that they avoid the risk of unreimbursed expenses.

Unfortunately there’s no magic cloak that you can place over your business to protect it from fraud. Your best defense is to limit opportunities and remain vigilant. Fraud perpetrators have seemingly limitless imagination, so be sure that you’re always keeping a hand on the tiller of your business.

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