Itemizing Your Standard Deduction

You would think a standard deduction would be a fixed amount. Well, for 2009, that’s not the case! In addition to the long-standing additions for being age 65 and over and being blind, you can also add on certain items for 2009 that normally would be deductible only to those who itemize their deductions. Don’t think that this article is only applicable to taxpayers using the standard deduction; some who would normally itemize may find it to their advantage to use the standard deduction plus the special add-ons in 2009.

So how is the standard deduction for 2009 determined? We start off with the basic standard amount, which is $11,400 for joint filers, $8,350 for those filing head-of-household and $5,700 for all others. To that, you would add the age and blind extra amounts, which are $1,100 each for joint filers and $1,400 for others. For example, a married couple both age 65 or over and one blind would qualify for an extra amount of $3,300 ($1,100 x 3). The following items that would normally require itemizing would be added to that total:

• Real Property Tax – Limited to $1,000 for joint filers and $500 to others.

• New Vehicle Sales Tax – Limited to the tax on the first $49,500 of each new vehicle purchased from February 17, 2009 through December 31, 2009 and subject to phase-out for higher-income taxpayers.

• Disaster Casualty Losses – Defined as a casualty loss related to a federally declared disaster. 

Continuing our previous example, if the couple had $2,400 of new car sales tax and real property taxes of $1,500, their total standard deduction for the year would be computed as follows:



An added complexity is the Alternative Minimum Tax, which does not allow the standard deduction with the exception of the qualified motor vehicle sales tax and disaster casualty loss deductions.

To determine whether to itemize or take the enhanced standard deduction requires computing both and using the better result. This office will do that automatically if you provide the necessary information. 

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Know the Rules Before You Break Open Your Retirement Piggy Bank

You may be looking for sources of cash to weather the current economic climate and your retirement piggy bank may be a tempting source.  However, if you are under age 59½ and plan to withdraw money from your retirement account, you will likely pay both income tax and a 10% early distribution tax on any previously untaxed money that is taken out. Withdrawals by a taxpayer from a Simple IRA before he or she is age 59½ and during the “two-year period” may be subject to a 25% additional early distribution tax instead of 10%.  The two-year period is measured from the first day that contributions are deposited.  These penalty rates are what you would pay on your federal return; your state may also charge an early withdrawal penalty in addition to regular state income tax.

So, before making any withdrawals, carefully consider the resulting decrease in your retirement savings and the increase in tax and penalties before withdrawing from an IRA or other retirement plan, including 401(k) plans, 403(b) tax-sheltered annuity plans, and self-employed retirement plans.

There are a number of exceptions to the 10% early distribution tax depending on whether the money is taken from an IRA or a retirement plan.  The following are some that may apply to your situation:

• Withdrawals from any retirement plan to pay medical expenses - Amounts withdrawn to pay unreimbursed medical expenses that would be deductible on Schedule A during the year and that exceed 7.5% of your AGI are exempt from penalty.  This is true even if you do not itemize. 

• Withdrawals from any retirement plan as a result of a disability – You are considered disabled if you can furnish proof that you cannot perform any substantial gainful activity because of a physical or mental condition.  A physician must certify your condition.

• IRA withdrawals by unemployed individuals to pay medical insurance premiums - The amount that is exempt from penalty cannot be more than the amount you paid during the year for medical insurance for yourself, spouse, and dependents.

• IRA withdrawals to pay higher education expenses - Withdrawals made during the year for qualified higher education expenses for yourself, spouse or children or grandchildren are exempt from the early withdrawal penalty.

• IRA withdrawals to buy, build or rebuild a first home - Generally, you are a first-time homebuyer for this exception if you had no present interest in a main home during the two-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild.  If you are married, your spouse must also meet this no-ownership requirement.  This exception applies to the first $10,000 of withdrawals used for this purpose.  If married, both you and your spouse can withdraw up to $10,000 penalty-free from your respective IRA accounts.

• IRA withdrawals annuitized over your lifetime – To qualify, the withdrawals must continue, unchanged, for a minimum of 5 years and after you reach age 59½. 

• Employer retirement plans withdrawals – To qualify, you must have separated from service and be age 55 or older in that year (age 50 for qualified public service employees such as police and firefighters); or elect to receive the money in substantially equal periodic payments after separation from service.

The information provided above is an overview of the penalty exceptions and there may be additional conditions that are not listed and must be met to qualify for a particular exception.  You are encouraged to contact this office before tapping into your retirement funds for uses other than retirement.  Distributions are most often subject to both tax and penalties which can take a significant bite out of the distribution.  However, with carefully planned distributions, both the tax and penalties can be minimized.  Please call for assistance.

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Converting a Rental to a Home

A $250,000 ($500,000 for joint filers) exclusion is available to offset the gain from the sale of a taxpayer’s principal residence. This exclusion can be used repeatedly, provided the eligibility requirements are met, but generally not more than once every two years.

This often tempts owners of rental properties to sell their current home—their principal residence—to utilize the exclusion, and then occupy one of their rental properties until the requirements are met to be eligible for the exclusion again.  If the taxpayer owned multiple rentals, the same process could be applied to each property, allowing the individual to benefit from the exclusion numerous times.

When the rental is not a place in which the taxpayer would want to live during the qualification period, the rental can be swapped through a tax-deferred exchange for a more suitable one, which the property owner must rent out for a reasonable period of time before occupying it to meet the exclusion qualifications. These types of transactions became so popular that Congress passed two laws to make it more difficult to achieve this tax-saving strategy.

Generally, to qualify for the gain exclusion, a taxpayer must own and use the home as a primary residence for two of the five years prior to the sale. However, if the home was acquired by means of a tax-deferred exchange, Congress increased the ownership requirement from two years to five years, thereby requiring the taxpayer to wait five years before being able to qualify for the home sale gain exclusion for the exchanged property. 

Beginning in 2009, Congress added yet another roadblock to this strategy by making the gain attributable to nonqualified periods nonexcludable. “Nonqualified use” is when the home isn’t used as the taxpayer’s principal residence. Luckily, this restriction was not implemented right away. Instead, it was phased in by only counting periods of nonqualified use beginning in 2009, and grandfathered in periods before 2009 as qualified use. However, over time, this new law will diminish the benefits from this strategy.

Keep in mind that even when a home qualifies for the home gain exclusion, the gain attributable to the depreciation allowable after May 5, 1997 on the home, and prior rental in case of an exchange, is not excludable and will be taxable.

Although these laws have complicated the benefits of converting a rental property to a primary residence prior to sale, with careful planning the strategy is still a viable one and can provide shelter from rental gains. Please call this office for more information.

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Taking Your Business Home

The economic downturn has many businesses struggling to stay afloat. With so much at stake, some owners have moved their businesses into their homes to save money. If you are considering this option, then you need to be aware of the rules that apply when deducting home office expenses.

Generally, a self-employed individual will qualify for a home office deduction if the office is a place where the taxpayer meets with customers, patients or clients, or is used on an exclusive and regular basis for administrative or management activities of his or her trade or business, and there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities of the business. Even if a taxpayer conducts administrative activities at a fixed location outside the home, he or she is still eligible to claim a deduction as long as the administrative activities conducted at the outside location aren’t substantial. Space in the home used to store inventory for a wholesale or retail business also qualifies as business use of the home.

Deductible home office expenses fall under two basic categories: direct and indirect expenses. Expenses that are directly attributable to the home office, such as painting the office, repairs to the office space, etc., are 100% deductible to the business. The second category is indirect expenses that are attributable to the entire home, for which only a fraction of the total amount is allocated to the home. These include home mortgage interest, property taxes, insurance, certain utilities and depreciation. If the home is rented, substitute rent paid for interest, taxes and depreciation. The fraction used to allocate business portions of the indirect expenses is determined by dividing the business use square footage by the total square footage of the home.

The home office deduction is, however, limited to the gross income of the business derived from the use of the home for that business, and where the gross income is less than the expenses, certain expenses can be carried forward for the same trade or business in the subsequent years but cannot be used against a positive income from another business. Carryover never includes home interest, taxes and casualty losses because they are allowed without regard to the gross income limitation.

If the self-employed taxpayer owns the home, there is a negative aspect to the home office deduction that can create unexpected consequences when the home is sold. First, the allowable home office depreciation is never excludable under the $250,000 ($500,000 for joint filers) exclusion of gain for primary residences and will end up being recaptured as taxable income upon sale. Worse yet, if the office is located in a separate structure, then the home sale is treated as two sales, the sale of the home portion and a sale of the office portion. Any gain from the office portion would not qualify for the home gain exclusion and would be taxable.

For example, a married couple sells a home that includes a home office in a separate structure that is 20% of the total home square footage. The home, originally costing $150,000, is sold for $500,000. If the home office had never been claimed, or if the office had not been in a separate structure, the entire home gain, except recaptured depreciation, could be excluded from income. However, in this case, $70,000 (20% of the gain) becomes taxable income. (For this example, to keep it simple, we haven’t taken into account improvements, selling costs, or depreciation.)

If you would like to learn more about how the business use of your home might affect your taxes, please give this office a call.

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Tax Tips for Recently Married Taxpayers

If you, like many others during the summer months, have gotten married or plan to get married in the near future, here are some post-marriage tips to help you avoid stress at tax time.

1. Notify the Social Security Administration - Report any name change to the Social Security Administration, so your name and SSN will match when filing your next tax return.  Informing the SSA of a name change is quite simple.  File a Form SS-5, Application for a Social Security card at your local SSA office.  The form is available on SSA’s web site at www.socialsecurity.gov, by calling 800-772-1213 or at local offices. 

2. Notify the IRS - If you have a new address, you should notify the IRS by sending Form 8822, Change of Address.  You may download Form 8822 from the IRS website at IRS.gov or order it by calling 800–TAX–FORM (800–829–3676). 

3. Notify the U.S. Postal Service - You should also notify the U.S. Postal Service when you move so it can forward any IRS or state correspondence.

4. Notify Your Employer - Report any name and address changes to your employer(s) to ensure receipt of your Form W-2, Wage and Tax Statement after the end of the year. 

5. Check Your Withholding and Estimated Tax Payments - If both you and your new spouse work, your combined income may place you in a higher tax bracket and you may have an unpleasant surprise come tax season next year.  On the other hand, if only one works, filing jointly with your new spouse can provide a significant tax benefit enabling you to reduce your withholding or estimated payments.  Either way, it may be appropriate to estimate your income tax for 2009 and make any required adjustments as soon as possible. 
 
If you need assistance projecting your joint 2009 taxes and adjusting your withholding or other prepayments, please give this office a call.

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Six Tips for Unemployed Taxpayers

If you have, unfortunately, joined the many individuals who are unemployed due to the current economic downturn, there are a number of tax provisions available in 2009 that you may find helpful in weathering a difficult period.

Unemployment Compensation – Partially Tax-Free – Although some states don’t tax unemployment compensation, it is taxable income for federal purposes. However, for 2009, there is no federal income tax on the first $2,400 of unemployment benefits; the balance is taxable. For a married couple, the exclusion applies to each spouse individually. Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits he or she receives.

COBRA Continuation Premium Subsidy – If you were eligible for COBRA medical insurance continuation with your prior employer between September 1, 2008 and December 31, 2009, you are probably qualified for the tax-free premium subsidy equal to 65% of the cost of the insurance for a period of up to nine months. The former employer pays the subsidy but is reimbursed by the government. This benefit is not available if your adjusted gross income for the year is over $145,000 ($290,000 married joint filers). If you think you might qualify, contact your former employer.

Costs of Seeking New Employment – The costs incurred while seeking new employment are generally deductible as a miscellaneous itemized deduction. These include the cost of preparing, reproducing and mailing resumes; employment agency fees; travel expenses including auto travel at 55¢ per mile, airfare, out-of-town lodging and 50% of meals; long distance telephone charges; etc. The expenses must be for searching for a new job in the same field as was your previous employment.

Certain Penalty-Free Pension Withdrawals Permitted – Although all pension withdrawals are generally taxable, the early withdrawal penalties can be avoided when the withdrawals are to pay:

• Unreimbursed Medical Expenses – Amounts you withdraw from any qualified plan to pay unreimbursed medical expenses that would be deductible on Schedule A during the year and that exceed 7.5% of the taxpayer’s AGI are exempt from penalty. This is true even if you don’t itemize your deductions.

• Medical Insurance – This exception allows you, if qualified, to make penalty-free withdrawals from your IRA to pay for medical insurance for yourself, your spouse and dependents. To qualify for this exception, you or your spouse must have lost your job; received unemployment compensation for 12 consecutive weeks; made withdrawals during the year the unemployment was received or in the following year; and made the withdrawals no later than 60 days after being re-employed.

• Higher Education Expenses – Withdrawals made from an IRA during the year for qualified higher education expenses for yourself, spouse, children or grandchildren are exempt from the early withdrawal penalty.

Home Sale Exclusion – Generally, to qualify for exclusion of gain, a taxpayer must own and use the home as his or her primary residence for two of the prior five years. However, where you are forced to sell the home because of a job-related move, you can no longer afford to maintain it, or you are eligible for unemployment benefits, you can qualify for a partial prorated exclusion without meeting the two-year qualification period.

Gifts – If you are receiving assistance from a family member in the form of a gift, you should be aware that the gift is not taxable income to you, nor is it deductible by your benefactor. However, the person making the gift may need to file a Gift Tax Return, if he or she gives you more than $13,000 during 2009. The giver can gain some tax benefit by gifting appreciated property, thereby transferring the tax liability for the gain to you at—hopefully—a lower tax rate. For example, a parent makes a gift to his child of appreciated stock. If the parent sells the stock and gives the child the cash, the parent must also pay the income tax on the gain. On the other hand, if the parent gives the stock to the child, who then sells it, the child will be taxed on the gain. Call this office if you are considering such a strategy.

If you would like to discuss any of the tax provisions mentioned here, please contact this office for an appointment.

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Small Business Filing Deadline Looms for Special Refund Claims

Time is running out for many small businesses wishing to take advantage of the expanded business loss carryback option included in this year’s recovery law.  Eligible individuals have until October 15 to choose this expanded carryback option.  Eligible calendar-year corporations have until September 15.

This carryback provision offers small businesses that lost money in 2008 an excellent way to quickly get some much needed cash if they were profitable in previous years. This option is only available for a limited time, so small businesses should consider it carefully and act before it’s too late.

Under law enacted in February, many small businesses that had expenses exceeding their income for 2008 can choose to carry the resulting loss back for up to five years, instead of the usual two.  This means that a business that had a net operating loss (NOL) in 2008 could carry that loss as far back as tax-year 2003, rather than the usual 2006.  Not only could this mean a special tax refund, but the refund could be larger, because the loss is being spread over as many as five tax years, rather than just two.

This option may be particularly helpful to any eligible small business with a large loss in 2008.  A small business that chooses this option can benefit by:

• Offsetting the loss against income earned in up to five prior tax years;

• Getting a refund of taxes paid up to five years ago; and

• Using up part or all of the loss now, rather than waiting to claim it on future tax returns.

Eligible taxpayers can choose to carryback an NOL arising in a taxable year beginning or ending in 2008 for three, four or five years instead of two.  The option is available for an eligible small business (ESB) that has no more than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL.  This choice may be made for only one tax year.

Most taxpayers still have time to choose this special carryback and get a refund. A calendar-year corporation that qualifies as an ESB must file a claim by September 15, 2009.  For individuals, the deadline is October 15, 2009.  This includes a sole proprietor that qualifies as an ESB, an individual partner in a partnership that qualifies as an ESB, and a shareholder in an S corporation that qualifies as an ESB.  Deadlines vary for fiscal-year taxpayers, depending upon when their fiscal year ends and whether they are making the choice for the tax year that ends or begins in 2008.

Individuals can accelerate a refund by filing special carryback forms.  Normally, refunds are issued within 45 days.  If you have questions about how this provision might affect you, please call this office.

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Employing an Unemployed Veteran

If you are considering or have already hired an unemployed veteran, you may qualify for a special credit that the government has provided as an incentive to hire veterans.  Here is the rundown.

The credit is 40% of first-year wages (but not exceeding $6,000), for a maximum credit of $2,400 (.4 × $6,000).  A qualifying veteran is one who has been discharged or released from active duty in the Armed Forces at any time during the five-year period ending on the hiring date, and who receives unemployment compensation for no less than four weeks during the one-year period ending on the hiring date. The veteran must have served for more than 180 days or been released from service due to a service-connected disability.  You will need to obtain certification from your state workforce agency.

Please call if you have additional questions.

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Did You Overlook Something on a Prior Tax Return?

Occasionally, clients will realize that an item of income was overlooked, a deduction was not claimed, or that an amended tax document was received after the tax return was already filed.  Regardless of whether the oversight will result in more tax due or a refund, it should not be dismissed.  Failing to report an item of income will most certainly generate an IRS inquiry, which typically happens a year after the original return was filed and after the interest and penalties have built up.  On the other hand, if you have a refund coming, you certainly don’t want that to go by the wayside.  

The solution is to file an amended return as soon as the error or omission is discovered.  Amended returns can also be used to claim an overlooked credit; correct the filing status or the number of dependents; report an investment transaction that was omitted; submit delayed K-1s; or anything else that should have been reported on the original return.

If the overlooked item will result in a tax increase, penalties and interest can be mitigated by filing an amended return as soon as possible.  Procrastination leads to further complication once the IRS determines something is missing, so it is best to take care of the issues right away.

You may also elect to amend your 2008 return if you are eligible to claim the new first-time homebuyer credit of up to $8,000 for a qualified 2009 home purchase.  The amended tax return will allow you to claim the homebuyer credit on your 2008 return without waiting until next year to claim it on the 2009 return.

Generally, to claim a refund, an amended return must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later.

If any of the above applies to your situation, please give this office a call so that an amended tax return may be prepared for you.

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Does the IRS Owe You Money?

If you have not filed a prior year tax return and are due a refund, you should consider filing the return to claim it.  If you are missing a refund for a previously-filed tax return, you should contact the IRS to check on its status and confirm your current address.

Unclaimed Refunds - Some people may have had taxes withheld from their wages but were not required to file a tax return because of minimal income.  Others may not have had any tax withheld but would be eligible for the refundable Earned Income Tax Credit.

• To collect this money, a return must be filed with the IRS no later than three years from the due date of the return.

• If a return is not filed to claim the refund within three years, the money becomes the property of the U.S. Treasury.  

• There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

Undeliverable Refunds - Were you expecting a refund check but never received it?

• Refund checks are mailed to your last known address.  Checks are returned to the IRS if you move without notifying the IRS or the U.S. Postal Service.

• You may be able to update your address with the IRS on the “Where’s My Refund?” feature available on IRS.gov.  You will be prompted to provide an updated address if there is an undeliverable check outstanding within the last 12 months.

• You can also ensure the IRS has your correct address by filing Form 8822, Change of Address.  

If you are behind on your return filings or need assistance in tracking down a missing refund, please call this office for assistance.

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Partnership & Trust Extensions End September 15

If you have a calendar year 2008 partnership, estate or trust return on extension, don’t forget the extension for filing those returns ends on September 15, 2009.  In prior years, the extension was for six months (to October 15) but was reduced to five months beginning in 2009.  

Pass-through entities such as partnerships and fiduciaries (trusts, estates) pass their income, deductions, credits, etc., through to their investors, partners or beneficiaries, who in turn report the various items on their individual tax returns. Partnerships file Form 1065 and fiduciaries file Form 1041, with each partner or beneficiary receiving a Schedule K-1 from the entity that shows their share of the reportable items.

Prior to this change, all of the aforementioned entities could obtain an automatic extension to file their returns for the same length of time allowed to individuals.  This made it difficult for individuals to meet the filing deadline without estimating the pass-through information and then later filing an amended return when the actual data was received.

As a result, the IRS has reduced the automatic extension period for pass-through entities from six to five months, thus providing individual taxpayers with a month’s grace period to complete their individual returns.

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Settle Up Fast with Quickbooks' Bill Paying Tools

Some of the financial crystal ball-types are telling us there are signs that the recession may be drawing some of its last breaths. But those bills are still coming in, and you may have had a long, dry summer and less income that you can use to meet those business obligations.

The desktop versions of QuickBooks can help. They can’t magically make more money appear in your coffers, but they can help you manage your bills so you’re always aware of what’s coming up and don’t get any nasty surprises. This keeps both you and your vendors happy, and minimizes the chance of affecting your credit report adversely. You can also maximize cash flow by being hyper-aware of when each bill is due and timing them appropriately.

(These bill-paying tools are available in all QuickBooks versions above Simple Start.)

Enter first, then pay
Of course, you can mimic your old manual method of bill paying by simply using QuickBooks’ check-writing convention. But if you do this, you risk paying the bill twice.  If you follow the process shown in Figure 1 by entering and the then paying, you’ll ensure that you record the expense in the same period it occurred.

To start, click the Enter Bills or Vendors/Enter Bills icon. The Enter Bills dialog box opens as shown in Figure 2. If you received a bill, be sure that box in the upper right is checked, and that the Bill radio button is filled in.

Figure 1: You’ll find these icons on QuickBooks’ graphical flow chart.

Figure 2: The Enter Bills dialog box.

Next, click the arrow next to the Vendor line to select an existing vendor or add a new vendor. Change the date if necessary, and enter a reference number (this may avoid confusion later). Then, enter the amount due.

When you initially set up vendors, you either set up terms for each vendor or accepted the default. So the Terms field should already be filled in, and will generate the correct bill due date. Enter a descriptive memo in that field if you’d like.

Tip: Use the right-click menu when you’re entering bills to see more options.

Since this was an expense, you’ll want to record it as such. Make sure the Expenses tab is highlighted, and click in the Account field. Click the arrow that appears to drop down the list, and select the appropriate expense type. Fill in the rest of the field on the line, making sure to check the Billable box if this is something you can bill back to a customer. If the expense needs to be split into separate categories, create a new line and amount for each. Your bill now looks something like Figure 3.

Click the Items tab and fill out the fields there if your expense involves products. You must have Inventory turned on to do this. Click Save & Close or Save & New. QuickBooks now works in the background, increasing Accounts Payable and dropping the bill into several reports.

Figure 3: Make sure your completed bill entry screen is as complete as possible.

Paying your debts
When it’s time to pony up, click on the Pay Bills icon, or click Vendors/Pay Bills. You’ll see a screen similar to Figure 4. Check the radio button next to the correct preference to view all bills, or to limit the list to those on or before a specific date. Put a check mark next to the bill(s) you want to pay. The correct amount should fill in by default, but you can change this to make a partial payment.

If you want to view the bill, take a discount, or use credits, click on those buttons. Select a payment date, method (check or credit card), and toggle to the correct account if it’s not showing.

Figure 4: The Pay Bills dialog box. Make sit easy to finish the job.

Once you’ve paid a bill, your Accounts Payable and checkbook balances decrease, and the vendor balance and reports are updated. QuickBooks stamps a PAID watermark on the bill to avoid confusion later on.

Tip: To find bills you’ve already paid, go to the Vendor Center.

So stop stacking your bills on an old spindle and ruffling through them every day to see what’s due. You’ll find that there are numerous benefits to using QuickBooks’ bill-paying features, such as an improved credit rating, a dearth of past-due notices, and better cash flow.

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