First $2,400 of Unemployment Benefits Tax-Free for 2009

During March, close to six million people were receiving unemployment benefits; thanks to the relief provided by the American Recovery and Reinvestment Act, the first $2,400 of these unemployed workers’ unemployment insurance was exempt from tax.  

Unemployment compensation recipients should take this special tax break into account as they plan their tax withholding and quarterly estimated tax payments for the year.  This change offers a helping hand to millions of Americans who are out of work and struggling to make ends meet.

Under the American Recovery and Reinvestment Act enacted in February, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when filing their tax return next year.  For a married couple, the exclusion applies to each spouse, separately.  Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits received.

The new law doesn’t affect the tax returns for 2008, so unemployment benefits received in 2008 and prior years remain fully taxable.

Unemployed workers can choose to have income tax withheld from their unemployment benefit payments.  Withholding on these payments is voluntary.  However, choosing this option may help avoid a surprise year-end tax bill or a possible penalty for having paid too little tax during the year.  Those who choose this option will have a flat 10% tax withheld from their benefits.

Unemployed workers who expect to receive more than $2,400 in benefits this year should consider having tax withheld from their benefit payments in excess of that amount.  Those unemployed workers who have already chosen to have tax taken out of their benefits should consider the $2,400 exclusion in determining whether to continue to have tax withheld.

You can use Form W-4V, Voluntary Withholding Request, or the equivalent form provided by the payer to request withholding to begin or end.  If you have questions or need assistance in determining your withholding or adjusting estimated amounts for the year, be sure to call this office.

---

Watch Out For Your Withholding Adjustment!

As part of the tax law passed in February, many taxpayers will be entitled to the new “Making Work Pay” credit.  Even though this credit will be calculated in the 2009 tax return, the federal income tax withholding tables used by employers have been adjusted to reflect this new credit in an effort to get the money into working taxpayers’ hands right away.

However, there is a potential hazard.  Since the adjustment is based upon each individual’s earned income from a particular employer, it does not make allowances for multiple job incomes, spousal income, or other forms of income.

The result could cause a taxpayer’s withholding to be reduced inappropriately, which may substantially reduce his or her refund at the end of the year or, worse yet, cause an unexpected tax due.

You are cautioned to check your federal tax withholding on your paystub before and after the change.  Determine the amount of the withholding reduction for each paycheck, and then based on the number of paychecks for the year with the reduced withholding amount, determine the amount of the reduction for the year.  If you hold multiple jobs or have a spouse who also works, determine the total reduction for all of the paychecks. 

Now compare this with the allowable credit, which is 6.2% of your earned income or a maximum of $400 for a single individual and $800 for joint filers.  The credit phases out for higher-income taxpayers, so you may not even be entitled to the maximum credit.  The phase-out is 2% of the taxpayer’s modified adjusted gross income in excess of $75,000 ($150,000 for joint filers) and is totally phased out at $95,000 ($190,000 for joint filers).  

So, if your withholding adjustment exceeds the credit, that excess will reduce the refund amount or add to the tax due when the 2009 tax return is prepared.  If you feel the adjustment is excessive for your circumstances and would like this office to run an analysis and/or help you make an adjustment, please call to make an appointment.

---

New Estimated Tax Rules Give Small Business Owners a Break

Taxpayers, including small business owners, are required to prepay their taxes for the year through withholding or by making estimated tax payments.  Due to the lack of a withholding source, small business owners are most frequently affected by this requirement.

When a taxpayer fails to prepay enough, he or she can be subject to a nondeductible penalty for underpayment of estimated taxes.  The problem for small business owners is that they cannot always accurately predict their profits for the year, especially in this troubled economy.  This leaves them with only two options: (1) determine their profits through each quarter and base their estimated tax on those profits projected through the end of year, or (2) base their estimates on one of the available safe harbor estimates. 

Although there are several exceptions that can avoid or mitigate the imposition of underpayment of estimated tax penalties, only the ones based on the prior year’s tax liability provide safe harbor payments.  Prior to the passage of the “American Recovery and Reinvestment Act of 2009” last February, there were only two “safe harbor” payment amounts, both predicated on the taxpayer’s AGI for the year – 100% of the prior year’s tax liability if the taxpayer’s AGI for the prior year is $150,000 or less or 110% of the prior year’s tax liability if the taxpayer’s prior year AGI is over $150,000.  This left many taxpayers with only the option of paying 110% of the prior year’s tax.

Thanks to the new tax law, many small business taxpayers can now base their safe harbor estimates on 90% of the prior year’s tax.  This provides them with a substantial reduction in the amount that needs to be prepaid, and possibly avoids substantial overpayments at a time when money is tight for most small business owners.  However, like all things taxable, there are qualifications and limitations associated with this new safe-harbor.   First, at least 50% of the prior year’s gross income must be attributable to a small trade or business (one, that on average, employs no more than 500 people), and second, the taxpayer’s AGI must be less than $500,000 ($250,000 if married filing separately) on the prior year’s return. 

Each installment payment must be equal to 25 percent of the safe-harbor amount, whether it is based on 90%, 100% or 110% of the preceding year’s tax. Failing to pay the required installment amount, or paying it late, could void the safe harbor provision, and expose the taxpayer to the underpayment of estimated tax penalty.

There are special rules for farmers and fishermen that allow them to pay their entire estimated tax by January 15 of the subsequent year or file their return and pay their total tax liability by March 1 of the subsequent year. 

If you need help with your estimated payments or wish to adjust them, please contact this office. 

---

IRS Tips on Preparing for a Disaster

Part of being prepared is having a plan in place in case of a disaster.  It only makes good sense for taxpayers to safeguard their records.  Some simple steps can help taxpayers and businesses protect financial and tax records in case of a disaster.  Consider the following tips:

1. Recordkeeping - Take advantage of paperless recordkeeping for financial and tax records.  Many people receive bank statements and documents by e-mail.  This method is an outstanding way to secure financial records.  Important tax records such as W-2s, tax returns and other paper documents can be scanned into an electronic format.  They can be copied to a ‘key’ or ‘jump drive’ periodically, so the electronic records can be kept in a safe place.

When choosing a place to keep your important records, convenience to your home should not be your primary concern.  Remember that if a disaster strikes your home, it is likely to affect other facilities nearby, making a quick retrieval of your records difficult and maybe even impossible.  A number of companies provide online file storage services or you can have a friend or relative in another state hold on to CDs or other forms of back up.

2. Document Valuables and Business Equipment - The IRS provides disaster loss workbooks for individuals (Publication 584) and businesses (Publication 584B) that can help you compile a room-by-room list of your belongings or business equipment.  This will help you recall and substantiate the market value of items for insurance and casualty loss claims.

Another option is to photograph or videotape the contents of your home and/or business, especially items of greater value.  Store the photos with a friend or family member who lives away from the geographic area at risk.

3. Check on Fiduciary Bonds - Employers who use payroll service providers should ask the provider if they have a fiduciary bond in place.  The bond could protect the employer in the event of default by the payroll service provider.

4. Continuity of Operations for Businesses - How quickly your company can get back to business after a disaster often depends on the emergency planning done today.  Start planning now to improve the likelihood that your company will survive and recover.  Review your emergency plans annually.  Just as your business changes over time, so does your preparedness needs.  When you hire new employees or if there changes to how your company functions, you should update your plans and inform your people of the new changes.

There are real benefits to being prepared for disasters.  The following preparedness strategies are common to all disasters.  You need to plan only once, and your plan can be applied to all types of hazards.

• Get informed about hazards and emergencies and learn what to do for specific hazards.

• Develop an emergency plan.

• Learn where to seek shelter from all types of hazards.

• Back up your computer data systems regularly.

• Decide how you will communicate with employees, customers and others.

• Use cell phones, walkie-talkies, or other devices that do not rely on electricity as a back up to your telecommunications system.

• Collect and assemble a disaster supplies kit.  Include a portable generator.

• Identify the community warning systems and evacuation routes.

• Include required information from community and school plans.

• Practice and maintain your plan.

5. Update Emergency Plans - Emergency plans should be reviewed annually. Individual taxpayers should make sure that they are saving documents, such as W-2s, home closing statements and insurance records.  Make sure that you have a means of receiving severe weather information; if you have a NOAA Weather Radio, put fresh batteries in it.  Also be prepared to handle threatening weather if it approaches.

If you need help figuring out what records need to be maintained and for how long, please call this office.  For those that have already suffered a casualty or disaster loss, be sure to contact this office for assistance in documenting and reporting the loss and taking advantage of the tax benefits associated with casualty and disaster losses.

---

What Are Your Chances of Being Examined?

The IRS recently announced that a total of 1,391,581 individual income tax returns were audited during FY 2008 (October 1, 2007 through September 30, 2008) out of a total of 137.8 million individual returns that were filed in the previous year.  This works out to 1.0% of all individual returns filed (about the same as the audit rate for the preceding year).  Even the national average is about 1% that includes large numbers of returns where the income is easily verifiable and the deductions not complicated.  However, once your return includes more complicated items, the odds quickly increase.  The following are examples taken from the IRS report.

•  Returns with Earned Income Tax Credit – The earned income credit provides low-income taxpayers and taxpayers with children with a refundable credit that rewards them for working.  Because the credit is refundable, it is treated like withholding and any amount that exceeds a taxpayer’s income is included in their refund for the year.  Those that benefit the most from this credit are taxpayers with children who can receive a credit as high as $4,713 (2007 amount).  Because of the dollar size of the credit, there has been a significant amount of abuse in claiming the credit, partly because it is complicated to understand and partly due to larceny among taxpayers.  Since the IRS is able to track dependents and earnings (W-2 and 1099) by using their computer, they can quickly identify those suspected of claiming more EIC than they are entitled to and audits most of them by computer-generated correspondence. 

• Non-Business Returns without EIC – This group includes what most would describe as your average run-of-the-mill tax returns using standard or itemized deductions but without EIC or any business schedules attached.  As you can see from the numbers, the IRS also relies heavily on their computer matching skills to target candidates to be audits.  The IRS has become very efficient at this over the years by using their computer to identify unreported income, overstated deductions, unreported sales transactions, etc.  For example, the IRS computer is able to track wages, other compensation, investment income, pension income, partnership and
S-corporation income, alimony, mortgage interest, tax refunds, security sales, dependents, and other items enabling them to easily identify unreported income.  Also note that those most heavily audited are the returns with employee business expenses (Form 2106) and Schedule E, which includes K-1s from partnerships and
S-corporations.

• Business Returns Without EIC – Once you attach a business schedule (self-employed businesses (Schedule C) and rental property (Schedule E)) to an individual return, the audit rates take a significant jump.  These returns become more complicated, and small business owners are historically poor recordkeepers, which make them a high value target for audit.  Notice also that the correspondence audit count drops significantly for these types of audits and most are face-to-face with IRS audit personnel, especially at the higher-income levels.  

• High-Income Taxpayer Returns – High-income taxpayers are also a more frequent target for audit, simply because they are in a much higher tax bracket and resulting adjustments yield a higher percentage of tax.  Higher-income taxpayers are also the ones more likely to get involved with tax shelters.  Notice that the higher the income, the greater the audit rate.

• Non-Farm Corporations – Corporations are generally selected or audited based upon the total assets of the corporation and increase in frequency as the value of the assets increase.  Notice also that correspondence audits represent a very small portion with the IRS relying mostly on office audits.

If you receive an audit notice or correspondence inquiry from the IRS or state tax agency, contact this office immediately.  Experience and having an in-depth knowledge of taxes and IRS procedures is important when it comes to responding to IRS inquiries.  Procrastination can also complicate matters that are generally easy to resolve, so please call as soon as possible.

---

"Kiddie Tax" No Longer Just For Kiddies

Years ago, it was the practice of many taxpayers to put investments in their children’s names to lessen the tax bite by having the investment’s income taxed at the child’s rate instead of the parent’s higher rate.  This tactic became so prevalent that Congress stepped in and passed laws that caused most of a child’s investment income to be taxed at the parent’s top marginal tax rate, thereby curtailing the benefit of that strategy.  Because this provision originally applied to children under the age of 14, it was coined the “Kiddie Tax.”

Another favorite tax strategy was to gift appreciated investments, such as stock, to children.  The child would then sell the stock after he or she were no longer subject to the Kiddie Tax and pay a lower tax on the gains.  Beginning in 2003, this strategy further benefited from the gradual reduction of the capital gains (CG) tax rates through the year 2010.  However, with the CG rates dropping to 5% in 2006 and 2007 and then to zero in 2008 through 2010 for taxpayers in the 15% or less marginal tax bracket, Congress took steps to also curtail this strategy by gradually increasing the age at which a child is subject to the “Kiddie Tax” provisions.

The Kiddie Tax now applies to children under the age of 19 AND full-time students under the age of 24.  A child is generally subject to the Kiddie Tax regardless of whether or not he or she qualifies as a dependent of the parents, unless neither parent is alive on the last day of the child’s tax year, he or she is married and files a joint return, or the child is over the age of 18 and is self-supporting (earned income exceeds one-half the amount of his or her support). 

For 2009, the Kiddie Tax rules only apply if the child’s investment income for the year exceeds $1,900.  Unfortunately, the definition of “investment” income for purposes of these rules includes all income other than “earned” income.  Earned income is income from the child’s personal services, such as W-2 income or self-employed income.  In addition, under the Kiddie Tax rules, the child is not allowed a deduction for the personal exemption ($3,650 for 2009), and the standard deduction ($5,700 for 2009) is only allowed to the extent the child has “earned” income.

For more specific information regarding your particular circumstances, please give this office a call.

---

Are You Retired and Considering Going Back To Work?

With the nation’s economy in turmoil, many retired taxpayers are thinking about going back to work to either supplement their retirement income or to rebuild their retirement savings.  If this applies to you, there are some tax issues you need to be aware of. 

Even though you may already be retired and drawing Social Security benefits, you will still be required to pay FICA and Medicare tax through your employer’s payroll withholding (amounts to 7.65% of your earnings).  If you have self-employment income, you will have to pay both the employer’s and employee’s share totaling 15.3%.

If you are thinking about building your retirement savings back up by making tax-deductible retirement contributions, you should be aware that upon reaching age 70½, a taxpayer can no longer make contributions to a traditional IRA account.  If you are under age 70½, you can make deductible traditional IRA contributions up to $6,000 ($5,000 if under age 50).  However, if you are an active participant in another pension plan (being retired and receiving distributions from a retirement plan is not considered being an active participant), the deductibility of the IRA contributions phases out for adjusted gross incomes (AGIs) between $55,000 and $65,000 ($89,000 and $109,000 for married filers).  Employer-deferred compensation plans, such as 401(k) plans, still allow deductible contributions even after 70½.  Self-employed individuals can contribute to deductible Keogh and SEP plans without age restrictions.

Required minimum distributions (applicable to taxpayers who have reached age 70½) have been suspended for 2009, so that taxpayers do not have to withdraw from pension plans that have dropped in worth because of declining investment values.  This hopefully permits the accounts to regain some of their lost value before distribution must be made again in 2010.  However, the decision to skip the 2009 distribution should be made carefully based on individual circumstances, since the distribution could be brought into income with little or no tax for lower-income individuals.  On the other hand, retirees in higher tax brackets can benefit from skipping the 2009 distribution.  If you are returning work, the additional income may provide enough current cash flow to enable you to skip the required minimum distribution for 2009.

Social Security benefits can be tax-free, 50% taxable, or 85% taxable based on the taxpayer’s other income.  Thus, your decision to resume working may, in fact, increase the tax on your SS benefits. 

Generally, Social Security (SS) benefits are not taxable until the AGI (without Social Security income) plus 50% of the Social Security income, tax-exempt interest income, and certain other infrequently encountered additions exceed a specific threshold.  The threshold is $32,000 for married taxpayers filing jointly, zero for married taxpayers filing separately, and $25,000 for all others.  As the income increases, the 50% becomes 85%.  Taxpayers in this transition range are generally in the 15% tax rate, and each additional $1 of income could cause as much as $.85 of SS benefits to become taxable.  This effectively raises the overall tax rate from 15% to 27.75% (15 (.85 x 15)).     

Even though going back to work seems simple enough, it can have some significant and often overlooked tax consequences.  If you are considering going back to work and need to decide whether or not to take the 2009 RMD or make retirement contributions for 2009, you are encouraged to seek assistance from this office to develop an appropriate tax-beneficial plan. 

---

Home Modifications for Disabilities

Many disabled homeowners find it necessary to modify their homes to accommodate their disability.  The question is whether or not those modifications can provide any tax benefit.

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 it is a medically-necessary home modification.  The modification expense is deductible as a medical expense to the extent it exceeds any resulting increase in the value of the property.  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 only to the extent that they exceed 7.5% of the taxpayer’s adjusted gross income (AGI) (10% if taxed by the AMT).  

---

Losses on Qualified Tuition Plan Accounts

Are you one of the many who have been contributing to a Sec. 529 Qualified Tuition plan for a child or grandchild and recently closed it out?  If you received less than what was originally contributed, you are probably wondering if you can take a tax loss.  

A contributor who has a loss from investing in a qualified tuition program (QTP) can take the loss on his or her tax return, but only when all amounts from that account have been distributed and the total distributions are less than the contributor's unrecovered basis.  Basis is the amount of the contributions. The loss is claimed as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit.  

---

Home Office Loss When Home is Sold

If you recently sold or lost a home that included a home office, you may be wondering if you can deduct a loss related to the home sale.  

As unfair as it may sound, for tax purposes, the loss on the sale of personal use property is not deductible.  However, gains are taxable.  So, if your home had not been used for business purposes, you would not have a loss deduction.  If your home is used partly for business and the business portion is within the same structure (mixed-use property), then it is still treated as personal use property when sold.  Therefore, no loss is allowed.  However, if the business portion is in a separate structure, then the sale is treated partly as personal use (no loss allowed) and partly as business (losses allowed).  Let’s say you were using a separate guest house for business; the loss on that part of the sale would be allowed, just as the gain would be taxed without the benefit of the home gain exclusion had it been a gain.

---

Disposing of Business Assets

In this current economic climate, some small business owners are faced with shutting down their businesses.  What happens to the equipment that has been depreciated?  Some may choose to keep the equipment for his or her personal use, while others may dispose of it.    

If you plan on keeping the equipment, you are taking it out of service and there generally will be no tax consequences at that time.  However, if you had originally expensed the equipment under Sec. 179, this could result in a recapture of some of that write-off as additional income on your business schedule. 

If you decide to sell an item, then you will have to report a gain or loss based upon the remaining undepreciated basis.  On the other hand, if you scrap an item, the sales price is zero.  Another route would be to contribute an item to charity.  This gives you a charitable deduction equal to the remaining undepreciated basis. The deduction would be claimed as an itemized deduction, not a business expense.

---

Getting Things Done Fast with QuickBooks Keyboard Tricks

You're accustomed to using your mouse to navigate your way through QuickBooks, but you may not realize that there are faster ways to get your work done in QuickBooks. Typically your hands are already on the keyboard, so take advantage of the shortcuts built into the application to save you time. Using this technique might also help minimize wear-and-tear on your wrists. In this article we'll explore a variety of ways that you can quickly carry out tasks in QuickBooks.

Shortcut #1: Edit fields in a flash

Typically you use the Tab key to move between fields, but it might be more efficient to change the setting and use the Enter key instead. To do so, choose Edit, Preferences, and then General. Select Pressing Enter Moves Between Fields, as shown in Figure 1. Keep in mind that if you change this setting, you'll have to either press Ctrl-Enter to save a record, or navigate to the Save & New button and then press the Enter. While setting that option, make sure to also choose Automatically Open Drop-Down Lists When Typing. This will allow you to type the first couple letters of a list item, and then use the arrow keys and Enter key to choose the desired item.



Figure 1: You can set QuickBooks to use the Enter key to move between fields.

Sometimes you may need to make revisions in within a field, such as a description. You can navigate from word to word within a field by using Ctrl-Left Arrow or Ctrl-Right Arrow. You can also press the End key to jump to the end of a field, or the Home key to jump to the beginning.

Most other shortcut keys that you'll use with fields are contained on the Edit menu, as shown in Figure 2.



Figure 2: The Edit menu contains a veritable treasure trove of keyboard shortcuts.

Shortcut #2: Speed up everyday tasks

Press Ctrl-W to display the Write Checks window, or Ctrl-I to display the Invoice window. Within a transaction window, press Ctrl-N to create a new transaction, or Ctrl-P to print. Ctrl-Q allows you to create a QuickReport on a selected transaction or list item. Ctrl-J will display the Customer Center, although for some reason the Vendor and Employee centers don't currently warrant their own keyboard shortcuts. As you work in QuickBooks, you may encounter a stack of open transaction, list, and report windows, as shown in Figure 3—simply press Esc repeatedly to clear the decks.



Figure 3: Overrun with QuickBooks windows? Press the Esc key as needed to close extraneous windows.

Shortcut #3: Try these Register tricks

Press Ctrl-R to display the Use Register window, and then press Alt-Down Arrow to display the full list. If you simply press the Down Arrow, then your cursor will jump to the OK button. Within a register, press Ctrl-PgUp to move to the first previous month in the register, or Ctrl-PgDn to move to the next month in the register. Press Ctrl-O to copy an entire transaction within a register, and then press Ctrl-V to paste a duplicate of copy. Or, press Ctrl-E to edit a transaction in the register. Conversely, Ctrl-D allows you to delete transactions.

You can also press Ctrl-G for certain transfer transactions to view the register of the corresponding account. QuickBooks doesn't maintain a register for income and expense accounts, but you can use this to follow transfers between bank accounts, for instance. Similarly, you can press Ctrl-H on certain transactions to view their transaction history, as shown in Figure 4, or press Ctrl-Y to display a transaction journal. This is a report that shows you the debits and credits that comprise the transaction, as shown in Figure 5.



Figure 4: Press Ctrl-H within a register to view transaction history.



Figure 5: The Transaction Journal displays the debits and credits that make up a transaction.

Shortcut #5: Level your lists

Only two lists have their own shortcuts: Ctrl-A for the Chart of Accounts, and Ctrl-T for the Memorized Transaction List. You can use Ctrl-PgUp and Ctrl-PgDn to navigate to the top or bottom of a list. Press Ctrl-E to edit a record within a list, or Ctrl-P to print the entire list. As with transactions, Ctrl-D will delete a list item—you'll receive the warning shown in Figure 6 if you attempt to delete an account that has a balance, though.



Figure 6: Accounts with open balances cannot be deleted.

Shortcut #5: Make a date

Incremental dates (and check or invoice numbers, too) can be moved up or down by pressing the and – keys. Even better, laptop users can press the = key, instead of Shift-Equal to access the sign. Navigate forward and backward in time by keeping these three words in mind: week, month, and year. Press W to move back one week, or K to move forward one week. Do the same with M or H and Y or R to move forward or back one month or year at a time. Within a date field, press Alt-Down Arrow to display the calendar without having to click with your mouse. Other date tricks you may find helpful are pressing [ or ] (the square bracket keys) to move to the same date in the previous or next week, or ; and ' (the semicolon and apostrophe keys) to move to the same date in the previous or next month. If all of these date tricks are making your head spin, just press T in a date field to return to today's date.

Shortcut #6: Customize your start-up

Usually QuickBooks automatically opens the last company that you accessed, but it won't do so if you hold down the Ctrl key while you open QuickBooks. Also, if you share a computer with a coworker that frequently leaves many windows open, hold down the Alt key while you open QuickBooks to start with a clean desktop. You can also press the F2 key to display a dizzying array of data about your QuickBooks company, as shown in Figure 7.



Figure 7: Press F2 to display a wide array of technical details regarding your QuickBooks company.

---