The Entitlement Dilemma: Some interesting numbers

October 31, 2010

* According to the Census Bureau, nearly half of Americans live in a household in which someone receives government benefits.

* 45% of U.S. households pay no income tax, up from 39% five years ago. Half of those don’t earn enough to pay income tax, and the rest use credits and deductions that eliminate their tax liability. Most of these households still pay social security and Medicare payroll taxes.

* 13% of all U.S. households pay neither income tax nor payroll taxes.

* An estimated 47.4 million people are covered by Medicare today. Projections indicate that by 2030, that number will grow to 80.4 million.

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Don’t forget: Distributions from retirement plans are required again

October 29, 2010

Required minimum distributions from retirement plans are back for 2010. After a one-year hiatus, taxpayers age 70½ and older (and those who inherited a retirement account) are again required to take taxable annual distributions. 2010 distributions must be taken by December 31 or a 50% penalty could apply.

If you turn 70½ this year, you could wait until April 1, 2011, to take your first distribution. In deciding, consider the likelihood of higher tax rates next year and the fact that a delay means you’ll have two taxable distributions for 2011.

Don’t leave your decision until the last minute. Your plan trustee will need time to execute your instructions. For assistance in reviewing your options and the tax consequences, give us a call.

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Look into this new 2010 tax credit for your small business

October 26, 2010

When small business owners think about the recent health care reform, they may be thinking only of its long-term implications. But the legislation actually provides an immediate tax break for qualified small businesses and nonprofit organizations. Beginning this year, the “Patient Protection and Affordable Care Act” offers a tax credit of up to 35% of employer-paid health care costs. Does your business qualify? The answer lies in a little math. 

* First, you must have fewer than 25 full-time employees. Keep in mind that owners and their family members who draw a salary are not counted in the total. Neither are seasonal employees working 120 days or less per year. The term “full-time employee” is actually a bit of a misnomer; the IRS is really counting full-time equivalents, or FTEs. To figure your FTEs, add up the annual hours you paid to non-owner, nonseasonal employees (full-time or part-time) and divide by 2,080. If the result is less than 25, you’re ready to move to the next step.

* Next calculate your employees’ average wages. Just as in the calculation of full-time workers, you don’t count wages paid to owners, family members, or seasonal workers. After subtracting out the above pay, divide the net figure by the number of FTEs above, and if the result is less than $50,000, you are still in the running for the credit.

* To meet requirement number three, your business must cover at least 50% of the cost of employees’ health insurance. For 2010, you need only pay 50% or more of the single coverage premium even if the employee is enrolled in a family plan. Next year this special rule goes away.

From now through the year 2013, the maximum tax credit is 35% of the employer’s share of the premiums. But only businesses with 10 or fewer full-time employees and average wages of $25,000 or less actually get this rate. The percentage drops as the number of employees or the average pay increases. Another little wrinkle: Beginning in 2014, the maximum credit rises to 50%, but the tax break becomes available only to those businesses that purchase their health insurance through a state exchange. And even then, you can only claim the credit for two years.

Nonprofit organizations that meet the same qualifications mentioned above can receive a maximum credit this year of 25%.

If you’re a small business owner, look into this tax perk as soon as possible. For help in running the numbers, just give us a call.

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Pay yourself reasonable wages

October 22, 2010

 

What rule do you follow if there are no rules to follow?

As the owner of an S corporation trying to determine a reasonable salary to pay yourself, the question is important – and difficult to answer. The reason: At present, there are no specific regulations, safe-harbor provisions, or minimum wage requirements defining what amount of compensation is “reasonable” for S corporation shareholder-employees.

As a result, when times are tough, the lack of hard and fast rules could tempt you to forego paying yourself a salary and instead take money from your corporation in other ways, such as distributions or loans. Yet that approach might be costly.

Why? While these methods can be legitimate, without the presence of a reasonable salary, it’s possible for distributions and loans that you pay yourself from your S corporation to be reclassified as wages. If that happens, you could end up owing interest and penalties in addition to payroll taxes.

Here are two general guidelines for setting your salary.

* How much you pay key employees. Wages and other amounts you pay unrelated, non-owner staff can indicate a starting point for your own compensation.

* The average salary for your profession or industry. Information from government wage surveys and online benchmarking tools offer compensation trends and information.

Congress is considering new rules concerning certain professional services and the salary paid by S corporations. Give us a call to review your situation.

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A review course on education tax credits

October 19, 2010

As the fall semester starts up, so do questions about education tax credits. The interest is natural - credits are valuable tax breaks, because you can subtract them directly from the income tax you owe.

So what education credits can you claim on your 2010 federal income tax return? The Hope Scholarship/American Opportunity Credit and the Lifetime Learning Credit are available this year, and, as you may already know, have many similarities.

For instance, to be eligible for these credits, the qualified out-of-pocket education expenses you pay in 2010 must be for academic periods that begin this year or in the first three months of 2011. Tuition and fees are qualified education expenses for purposes of claiming the credits, while room and board are not.

How do the credits differ? One difference is the maximum available amount. Generally, you can claim up to $2,500 per eligible student when you qualify for the Hope Scholarship/American Opportunity Credit, while the most you can claim for the Lifetime Learning Credit is $2,000.

Another difference is the adjusted gross income level at which the credits begin to shrink. For 2010, the phase-out for the Hope Scholarship/American Opportunity Credit starts at $80,000 when you’re single ($160,000 for married filing jointly). For the Lifetime Learning Credit, the phase-out begins at $50,000 for singles ($100,000 when you’re married filing jointly).

Call for more information. We have a complete list of education tax benefits, including qualified savings bond interest, student loan deductions, and withdrawals from IRAs and college savings plans.

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Build America bonds: Some important facts

October 15, 2010

When you think of municipal bonds you probably also think of tax-exempt interest income. But did you know some municipal bonds generate taxable income?

Build America bonds, created in 2009 as part of the stimulus bill, are an example of this type of municipal bond. Like other muni’s, build America bonds are issued by state and local governments to fund construction projects.

However, because the federal government offers tax credits for build America bonds, the interest you receive is taxable. 

Why invest in a taxable municipal bond? The idea is that the federal tax credit reduces the cost of the bond to the state or local government, which in turn can increase the interest rate. In addition, when you buy bonds issued by the state where you live, the interest is generally free from state income tax.

How does the credit work? The municipality issuing the bond can choose to receive the credit itself. These “direct payment” bonds are similar to regular taxable bonds. You get your interest payment in cash and report it on your income tax return. 

Alternatively, the municipality can issue “tax credit” bonds. When you invest in this kind of build America bond, you apply for a credit on your federal income tax return of 35% of the net interest you receive. Both the interest and the credit are included in your gross income. 

The credit reduces your tax liability dollar for dollar and can be applied against the alternative minimum tax. You can carry any unused amount to future returns. 

Depending on your tax bracket, build America bonds may be a sensible addition to your portfolio. Please call if you would like more information.

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New law raises insurance coverage on bank accounts

October 12, 2010

For years, bank accounts were FDIC-insured up to $100,000. Then during the recent financial crisis, the insurance limit was increased to $250,000. But this increase was only temporary; it was scheduled to drop back to $100,000 in 2014.

The good news is that the financial reform law just signed permanently sets the FDIC insurance limit at $250,000 per account, per depositor, per bank. The $250,000 coverage applies for each of four categories of ownership: individual, joint, retirement, and trust accounts.

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IRS increases correspondence audits

October 8, 2010

As part of its plans to increase audit coverage, the IRS will be doing more correspondence audits – notices mailed to taxpayers that typically focus on a single item on the tax return. Correspondence exams can be as simple as asking about a tax return data discrepancy or requesting a missing form. But the IRS is also using these audits to focus on other issues, such as employee business expenses, the earned income credit, charitable deductions, and the tax credit for buying a home.

If you receive an IRS notice, don’t ignore it. Let your tax advisor know about it right away. The problem can be resolved in less time and with less fuss if an experienced professional is involved right from the beginning.

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Small business jobs bill becomes law

October 5, 2010

A new law signed on September 27 will give small businesses some tax breaks and assistance in getting loans. The law provides a $30 billion fund to encourage community banks to lend to small companies. It extends 50% bonus depreciation for new business equipment purchased in 2010 and increases first-year expensing of new and used equipment purchased in 2010 and 2011 to $500,000. The 2010 deduction for business start-up expenses doubles to $10,000, and self-employed individuals are allowed to deduct the cost of health insurance for themselves and their families in calculating self-employment taxes. For more information, give us a call.

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