Tarlow & Co., C.P.A.s

Dear Valued Client,

With the end of the year quickly approaching, this is the perfect time for a year-end tax planning consultation. You don't want to overlook important tax strategies that could minimize your tax liability.

If you would like more information on any of the topics discussed here, please call this office for an appointment.

Sincerely,

Tarlow & Co., C.P.A.'S

Important Facts about the Child and Dependent Care Credit

If you paid someone to care for a child, spouse, or dependent, you may be able to reduce your tax by claiming the Child and Dependent Care Credit on your federal income tax return. Below are the top ten things you need to know about claiming a credit for child and dependent care expenses.

1. The care must have been provided for one or more qualifying persons. A qualifying person is your dependent child under age 13. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.

2. The care must have been provided so you, and your spouse if you are married, could work or look for work.

3. You, and your spouse if you are married, must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student or they were physically or mentally unable to care for themselves.

4. The payments for care cannot be paid to your spouse, or to someone you can claim as your dependent on your return, or to your child who is under age 19, even if he or she is not your dependent. You must identify the care provider on your tax return.

5. Your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.

6. The qualifying person must have lived with you for more than half of the year.

7. The credit can be up to 35 percent of your qualifying expenses, depending upon your income.

8. You may use up to $3,000 of the expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals.

9. The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from your income.

10. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax. Call this office for additional information related to household employees.

For more information on how the child and dependent care credit might apply to your specific tax situation, please give this office a call.

Facts about the Making Work Pay Tax Credit

Working taxpayers may be eligible for the Making Work Pay tax credit, a significant tax provision of the American Recovery and Reinvestment Act of 2009. This tax credit means more take-home pay for millions of American workers. Here are five things every taxpayer should know about the Making Work Pay tax credit:

1. The credit, which is available for tax years 2009 and 2010, equals 6.2 percent of a taxpayer’s earned income. The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers. Most wage earners have been enjoying a boost in their paychecks from this credit since April. Because the government tinkered with the withholding tables as a means of getting the credit into taxpayer’s hands as early as possible, there is the possibility that the withholding amount of certain taxpayers may have been inappropriately adjusted, which may cause problems at tax time…see #3 below.

2. Eligible self-employed taxpayers can also benefit from the credit by evaluating their expected income tax liability. If eligible, self-employed taxpayers can make the appropriate adjustments to the amounts of their upcoming estimated tax payments in September and January.

3. Taxpayers who fall into any of the following groups should review their tax withholding to ensure enough tax is being withheld. Those who should pay particular attention to their withholding include:

• Married couples with two incomes;

• Individuals with multiple jobs;

• Self-employed individuals who are also employed by someone else;

• Dependents;

• Pensioners;

• Social Security recipients who also work; and

• Workers without valid Social Security numbers.

Having too little tax withheld could result in potentially smaller refunds or a small balance due rather than an expected refund. There is also a remote chance that you could be subject to underpayment penalties if you were paying a safe harbor estimate and the reduction in withholding drops you below the safe harbor withholding amount.

4. The Making Work Pay tax credit is either phased out or unavailable for higher-income taxpayers. The phase out begins at $75,000 for single taxpayers and $150,000 for couples filing a joint return.

For those who believe their current withholding is not right for their specific situation, it may be appropriate for you to have this office project your tax and withholding for the year and any refund or tax due amount. At the same time, we can review your situation for any possible tax-saving moves between now and the end of the year. Please call for an appointment.

Is Your Business Prepared for an Influenza Outbreak?

A recent Harvard Study revealed that many American businesses are unprepared in the event of a flu outbreak and cannot sustain normal operations with lengthy employee absences. How would your business operations be affected by an outbreak of H1N1?

Small businesses are especially susceptible to the negative economic impacts of a flu pandemic. An estimated 25 percent of businesses do not reopen following a major disaster, according to the Institute for Business and Home Safety. Planning from the outset is essential and can help offset business losses and protect your business and your employees if an outbreak occurs.

The benefits of planning include the following:
• Minimizes disruption to business activities
• Protects employees’ health and safety
• Limits the negative impact to the community, economy and society

An influenza season is rapidly approaching along with the new threat of the H1N1 outbreak. While no one can predict the severity of the return of H1N1 this season, and given that small businesses are the nation's largest employers, the SBA and the Department of Homeland Security have teamed up to release an Influenza Preparedness Guide for Small Businesses to help plan for a 2009 H1N1 flu outbreak.

This guide includes tips to help business owners keep themselves and their business healthy, provides answers to frequently asked questions, and offers a lot of valuable information. You are encouraged to download the guide and prepare your company for the worst case scenario.

Year-End Planning for Capital Purchases

Increased business spending for durable goods and capital items indicates that businesses are beginning to loosen their purse strings. From a tax standpoint, this is also a good time to consider capital purchases thanks to some extraordinary tax benefits available through the end of the year. If your business is considering expansion or capital purchases, now may be the time to act—because without Congressional action, which is unlikely due to increasing Federal budget woes, the following business benefits will no longer be available after the close of 2009.

• Bonus Depreciation - Under the first-year bonus depreciation rules, taxpayers may generally claim an additional first-year depreciation deduction equal to 50% of the cost of qualified property placed in service in 2009. This bonus depreciation deduction is allowed for both regular tax and AMT purposes. Qualified property includes equipment and machinery that is purchased new and placed into service before the end of the year.

• Luxury Auto Limitations – Generally, vehicles weighing 6,000 pounds or less are classified as luxury vehicles, and the first-year depreciation is 20% of the cost of the vehicle but limited to a maximum of $2,960 ($3,060 for light trucks), regardless of the cost of the vehicle. However, for 2009, and at the taxpayer’s election, that maximum is increased to $10,960 ($11,060 for light trucks). This increase is attributable to the bonus depreciation allowable for 2009.

• Enhanced Expensing (Sec. 179) - For equipment and machinery placed in service in 2009, the maximum expensing allowance is $250,000; it phases out when the cost of eligible property placed in service during the year exceeds $800,000. Barring any change by Congress, the $250,000 and $800,000 amounts will reduce to $125,000 and $500,000 in 2010, and drastically decline to $25,000 and $200,000 in 2011.

• Quick Write-Offs for Most New Farming Machinery and Equipment – Those engaged in a farming business have the opportunity to depreciate qualifying new farming machinery and equipment over a 5-year period, instead of over the generally applicable 7 years. To qualify, the original use of the property must have begun with the taxpayer after December 31, 2008, and before January 1, 2010. Grain bins, cotton ginning assets, and fences or other land improvements are not eligible for the 5-year write-off period.

Generally, farming machinery and equipment also qualifies for the increased expensing and bonus depreciation deductions previously discussed, providing extraordinarily large tax write-offs for 2009.

• 15-Year Write-Off for Leasehold Improvements – Qualified leasehold improvements, restaurant improvements, and retail improvements completed and placed into service before January 1, 2010 may be written off over 15 years instead of the usual 39 years. This more than doubles the annual write-off for these improvements.

The options for writing off capital expenditures in 2009 make it possible to customize the write-off for virtually all businesses through careful pre-year-end planning. So whether you wish merely to optimize the write-off for capital purchases already made, or you wish to plan additional purchases to take advantage of the special 2009 tax write-offs, give this office a call. Together we can strategize to maximize your benefits and minimize your tax liability.

Mortgage Interest Used to Uncover Non-Filers and Income Underreporters!

The Inspector General for Tax Administration recently completed a study that revealed a large number of individuals are paying a significant amount of mortgage interest, and either are not filing tax returns or are filing tax returns reporting income that is not sufficient to cover their mortgage obligations and basic living expenses. The considerable difference between income and expenditures on these returns raises serious questions about whether additional income should have been reported.

The study evaluated two statistically valid samples of 100 individuals with $20,000 or more of mortgage interest reported by lenders in 2005.

In the first sample, the study found 219,593 individuals with $20,000 or more of mortgage interest without a corresponding tax return. Out of those individuals, 100 were randomly selected for review and from that group, 21 individuals appeared to have a liability of as much as $284,924 in taxes and penalties. Comparing those results to the entire 219,593 individuals identified, the study estimated that there were 46,115 non-filers who collectively may owe $625 million in delinquent taxes, penalties and interest for TY 2005.

In the second sample, the study matched the taxpayer identification numbers on the Mortgage Interest reported by the lenders (Forms 1098) to the accounts in the IRS Individual Return Transaction File and identified 245,535 individuals who reported less adjusted gross income on the returns they filed for TY 2005 than the amount of mortgage interest reflected on their Forms 1098. After randomly selecting 100 of the 245,535 individual returns for review, the study identified 37 individuals who may have underreported their income because their mortgage interest and basic living expenses appear to exceed their income and may owe $326,251 in additional taxes, penalties and interest. That project totals $801 million in additional taxes, penalties and interest for TY 2005 for the entire sample.

Estate Tax in Limbo

Currently, the estates of individuals dying in 2009 are subject to estate tax on the value of their estate that exceeds $3.5 million with rates as high as 45%. However, in 2010, based on a law change made over eight years ago, the estate tax is being repealed so that there will be no tax on any portion of the estates of individuals dying in 2010. Congress has been ignoring this issue for some time and if lawmakers continue to do nothing, the estate tax will disappear next year before re-emerging in 2011 at the older, higher rate of 55% (and lower exemption of $1 million). This is exceedingly unlikely for a variety of reasons, not the least of which is the mischief that could come from exploiting the generous gift tax exemption scheduled to come into effect in 2010.

There have been a number of proposals put forth including making the 2009 estate tax exemption permanent and indexing it for inflation in the future. Another proposal would cap the estate tax rate at 35% with a $5 million exemption. Watch for legislation late in the year or in 2010.

In the meantime, individuals should continue to write wills and develop estate plans to ensure that their assets will pass as they desire and that special needs of particular heirs will be properly addressed. This is so even if there is a good chance of survival until a year when estate tax won't be owed because of the exemption or repeal. Individuals who may have an estate larger than the $3.5 million exemption amount that applies in 2009—or the $1 million amount that is currently scheduled to apply for 2011 (when the estate tax is set to be restored one year after it is repealed)—might consider making annual exclusion gifts each year. The gift tax annual exclusion (periodically adjusted for inflation) allows you to give $13,000 to an unlimited number of donees each year without paying gift tax. By doing this, you remove the gift amounts from your estate and save estate tax. In addition, you remove the post-transfer growth in the gifts from your estate.

Please give this office a call if you need information on how these rules may affect your (and your spouse’s, if applicable) estate planning.

Tips for Taxpayers Starting a New Business

Anyone starting a new business should be aware of their federal tax responsibilities. Here are several things you should know if you plan on opening a new business this year.

1. First, you must decide what type of business entity you are going to establish. The type your business takes will determine which tax form has to be filed. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.

2. The type of business you operate determines what taxes must be paid and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.

3. An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Please call this office to determine whether your business needs an EIN and assistance in obtaining one if it does.

4. Good records will help ensure the successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in will affect the type of records that will have to be kept for federal tax purposes. If you need assistance or guidance in setting up your business records, please give this office a call.

5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.

6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, income is generally reported in the tax year it is received and expenses are deducted in the tax year it is paid. Under an accrual method, income is generally reported in the tax year it was earned, if not yet received, and expenses are deducted in the tax year it is incurred.

If you are contemplating starting a business or if you already have an existing one, please call this office if you need assistance with your accounting, bookkeeping, payroll or sales tax reporting, or other federal and state compliance issues.

Deadline for Disclosing Hidden Offshore Accounts Extended

The Internal Revenue Service has announced a final one-time extension of the deadline for special voluntary disclosures by taxpayers with unreported income from hidden offshore accounts. These taxpayers now have until October 15, 2009.

Under special provisions issued in March, taxpayers with these hidden accounts originally had until September 23, 2009 to come forward. Those taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties, where applicable, and possible criminal prosecution.

IRS officials decided to extend this deadline to allow tax practitioners and attorneys additional time to assist taxpayers with these hidden accounts, and prepare the necessary paperwork to qualify for the special penalty provisions.

For additional information please give this office a call.

What to Do If You Haven't Filed a Prior Year's Return

The failure to file a federal tax return can be costly — whether you end up owing more or missing out on a refund.

There are several reasons taxpayers don’t file their taxes. Perhaps you didn’t know you were required to file. Maybe, you just kept putting it off and simply forgot. Whatever the reason, it’s best to file your return as soon as possible. If you need help, even with a late return, the IRS is ready to assist you.

Here are some things to consider:

• Failure to File Penalty - If you owe taxes, a delay in filing may result in a "failure to file" penalty, also known as the “late filing” penalty and interest charges. The longer you delay, the larger these charges grow.

• Losing Your Refund - There is no penalty for failure to file if you are due a refund. However, you cannot obtain a refund without filing a tax return. If you wait too long to file, you may risk losing the refund altogether. The federal deadline for claiming refunds is three years after the return due date. For example, the last day for claiming a federal refund for your 2004 tax return will be April 15, 2008.

• EITC - Individuals who are entitled to the Earned Income Tax Credit must file their return to claim the credit even if they are not otherwise required to file.

Whether or not you must file a tax return will depend upon a number of factors, including your filing status, age and gross income. Please call for assistance.

Customize QuickBooks Forms for a More Professional Look

One of the many ways that QuickBooks makes your life easier is its ability to create business forms for all of the financial transactions your company produces. You simply fill in the blanks or choose data from drop-down lists, and QuickBooks generates a document you can e-mail or send. Only problem is, sometimes the pre-formatted default forms don’t include all the fields you need. Further, they look rather, well, plain. This being October, you might want to add a Halloween-centric logo, for example. Fortunately, QuickBooks is flexible. Using simple tools, you can modify the prefab forms that are included with the program to add a logo or other graphics and indicate which fields you would like to have appear.

Made to order
To get started, click Lists/Templates. (In Simple Start, open a new invoice and click Customize/Manage Templates.) The window shown in Figure 1 opens. As you can see, QuickBooks already provides multiple versions of some forms. Take a look at these before you do any modifying to see if one will meet your needs.

Figure 1: The list of QuickBooks forms templates gives you many pre-formatted options.

Select a template you want to start from, like the Intuit Service Invoice. Click the arrow in the Templates box, and a list of command options drops down. Click on Edit Template. The Basic Customization window opens, as shown in Figure 2.

Figure 2: The Basic Customization window allows you to alter existing form designs.

Customizing templates
Templates are designed for use with Intuit’s preprinted forms. So if you want to make additional changes, you’ll have to make a copy of the form before doing so (which may or may not work with Intuit’s forms). Click Manage Templates, and then click the Copy button. The program creates a modifiable copy of the template, which you can rename by replacing the text in the Template Name box. Click OK. As you make changes on the left side of the window, you’ll see those modification reflected in the graphical representation of your invoice on the right.

Make it personal
Probably the easiest thing you can do to jazz up your invoice is to add a logo. This is simple. Click the box next to Use logo. The Select Image window opens. Browse to the image you want and select it, then click Open. The image appears with your contact information at the top of the page.

Add interest with color
Next up is your choice of color schemes, should you want to use one. Click the arrow below Select Color Scheme. You’ll see several options here. Select the one you want, and then click Apply Color Scheme. If you don’t like the fonts supplied with the template, you can easily change those, too. Under the Change Font For option, select the field type you want to modify and click Change Font. Select the desired font and any effects you want in the window that opens and click OK.

Further customization options
Additional changes can be tricky. To add your phone number, for example, click the box next to Phone Number. You’ll have to use the Layout Designer to make this modification. To do so, click the Layout Designer button. You’ll see a window similar to the one in Figure 3. If you’ve never used a layout design tool, you’ll have to work with this a bit. You’ll need to grab the phone number and position it where it should be. Then click Properties and Font (and/or Color). Make the necessary changes and click OK.

Figure 3: The Layout Designers allows you to make more complex adjustments to your forms.

Click the Add button to insert text boxes, data fields, and images, and Copy and Remove to use those functions. Click OK when you’re happy with your changes. This will take you back out to the Basic Customization window, where you can modify your invoice further. For example, you can click the Print Status Stamp box to have QuickBooks stamp your invoices with words like “PAID.” Click the Additional Customization button to make other changes, as shown in Figure 4. By checking and unchecking default boxes under each tab, you can continue to change the appearance of your invoice.

Figure 4: The Additional Customization window gives your finer control over the format of your forms.

Enhance your business with custom forms
You may be able to use QuickBooks invoices right out of the box. But even if you can, it’s a good idea to freshen up the boilerplate forms and add your company’s own personal touch to them. In these tight economic times, you should take any actions you can—small as they may be—to present a professional, personalized front to your customers. QuickBooks provides the tools to help you do just that.

2009 RMD Previously Taken Can Be Rolled Over Through November

Normally, taxpayers age 70½ and older have to take required minimum distributions (RMD) from qualified pension plans and IRAs (excluding Roth IRAs). Because of the collapse of the stock market that began in 2008, the government decided to suspend the RMD requirement for 2009 to allow individuals’ pension accounts and IRAs to recover.

However, many retirees received “unnecessary” distributions due to automated computer program distributions from financial institutions or took distributions not understanding the suspension of the requirement for 2009. Even though the funds could have been rolled into an IRA within 60 days, the IRS feels there is enough confusion over the suspended RMD rules to provide special relief for those who took a distribution and wished they had not.

As a result, the IRS has extended the normal 60-day rollover period to the end of November 2009 for any RMD taken earlier in 2009, and no reason is required. However, no more than one distribution from an IRA in 2009 will be eligible for this rollover relief.

If you took a 2009 RMD earlier this year, this provides a unique year-end planning opportunity. It may or may not be in your best interest to roll it over based on your particular tax circumstances and bracket. Please call this office for assistance.