CPA Rockvile

Thanks to the Tax Relief Act passed in December, your 2010 taxes are a lot less complicated than they might have been, but there are a few changes that could trip you up.  Lawmakers’ agreement to extend the Bush-era tax cuts means many of the tax provisions you’ve come to know and love are still in place — and the Form 1040 is similar to last year.  But there’s bad news for some taxpayers…

For instance, in 2009 unemployed workers could exclude up to $2,400 of unemployment benefits from income; that provision did not get extended for 2010.  This was quite surprising to me, as well as many taxpayers I’m sure, considering the unemployment rate is still so high.

Other tax breaks are gone, too, such as the three extra standard deductions:  Real estate taxes, taxes on a new-car purchase, and disaster losses.  Still, other than the disappearance of Line 40b to claim those extra standard deductions, Form 1040 is essentially the same as last year.

For high-income filers, the new law extends through 2012 the Bush-era provision repealing the income limits on itemized deductions and personal exemptions.  Before, taxpayers above certain income levels lost part or all of their exemptions and itemized deductions.  Those limits were slowly phased out; 2010 is the first year they’re gone completely (separate income limits still apply on some deductions).  Plus, Congress extended the alternative-minimum-tax patch, preventing millions of taxpayers from losing access to a number of tax breaks under that parallel system.  The AMT exemption amount in 2010 for single filers is $47,450 and for married-filing-jointly filers it’s $72,450.

A big perk, for eligible families: The adoption credit is now refundable, and worth up to $13,170 in 2010 and 2011.  In 2012, it drops down to $12,170 and won’t be refundable.

Also thanks to the new law, people 70 1/2 or older can donate up to $100,000 to an eligible charity directly from their IRA, count it as a required minimum distribution, yet still avoid an income-tax hit on that money (but they can’t deduct it as a charitable donation).  And they get until Jan. 31 this year to make such a contribution for 2010.  The tax break is also available in 2011.

However, if in 2010 you took advantage of the ability to roll money from a traditional IRA to a Roth IRA, income limits on such transfers no longer exist;  but you can choose to pay the income tax on that conversion over two years, half in 2011 and half in 2012.  Or, you can include that income on your 2010 return.  If you want to pay the tax now (maybe you’re in a lower tax bracket in 2010 than you expect to be this year) be sure to check the appropriate box on Form 8606.

Are you eligible to claim the home-buyer tax credit on your 2010 return?  You won’t be able to e-file.  The IRS wants you to mail the information with your return.  The credit is worth up to $8,000 for first-time home buyers and $6,500 for long-time homeowners who lived in their home for more than five years.  If you claimed the credit in 2008 however, you are among the unfortunate group that must pay the credit back over the next 15 years — and 2010 is the year your first bill will arrive.

Also, if you claimed the home-buyer credit in 2008 or 2009 and then moved out of the house, you may have to pay back the credit.  Check out Form 5405 for the details.

But, bad news for homeowners who didn’t jump on the tax credit for energy-efficient home improvements, such as new doors and windows: That tax break got trimmed for 2011.  Still you can take it for 2010 if you made the eligible energy-efficient upgrades by the end of the year.

But, hey, if you are confused, not to worry, you get an extra weekend to sort it all out.  The tax deadline is April 18, thanks to a holiday in Washington on April 15.

Think things can be as easy as a simple flat tax?  Think again.  Legislators never seem to make things that easy – they complicate as many things as they can.  So, in an effort to give you a break from your boring taxes, here are a few of some of the most ridiculous taxes across the country.

Arkansas: Pet Grooming Tax

Among the services that the state subjects to the 6% sales tax are body piercing, gutter cleaning, and pet grooming.

California:  Ottoman Empire Victims’ Exemption

If you were persecuted between 1915 and 1923, you get a tax exemption.

Hawaii:  Tree Deduction

If your tree was approved by an arborist advisory committee and you get the right notarial stamp, you are eligible for a $3000 deduction.

Maryland: Oyster Break

Maryland offers what is called the aquaculture float credit, which is available to people who harvest oysters, but not any other shellfish.  Strange.  Why not crabs or mussels?

New Jersey: Helping Families

You get a break if you spend more than $35.64 on family leave insurance.

New York: Haunted House Tax

Musical comedies, operas, and chamber music are exempt from the sales tax.  But, not a Halloween show with music, if the admission charge exceeds 10 cents.  Why this discrimination against ghouls and goblins?

South Carolina: Aid For Deceased Deer

You get $50 off your taxes if your deer carcass helps the needy.  I guess if you hit a deer in South Carolina, just remember to bring it with you and donate it.

I’m sure at one point or another, we have all thought about deleting our social networking accounts, but this day in age, that is virtually impossible.  I’m sure everyone is well aware that Facebook has had its history of privacy scandals.  CEO Mark Zuckerberg is constantly trying to push what privacy means in the 21st century, but how available should we all be on the Internet?  Last week, Facebook announced on its Developers blog that it was making it possible for third-party applications to gain access to users’ mobile phone numbers and addresses.  By early Monday morning the Facebook team had dialed back the change until further notice.

Some of the privacy issues have been just too much for users, resulting in cancelled accounts.  But more and more organizations are joining the Facebook Connect network and incorporating the site’s development tools into their own.  It’s getting to the point where you’re at a disadvantage if you don’t have a Facebook account; you can use it to log in with the same username and password on more than two million sites; it’s not just for checking in on your cousin’s newest baby pictures.  So, here’s the trick: Go into  “Stealth” mode – be nearly invisible.  Nobody will be able to view your photographs, see your activity or where you’ve checked in except for existing friends — but still have an account to use around the web.

If you’re ready to move into Facebook stealth mode, follow these simple steps:

• Visit Facebook.com, log in to your profile and click “Account” in the top-right corner.  Choose “Privacy Settings”

• From the “Privacy Settings” page, click on “View Settings” to see who can search for you, send messages to your account, see your education and work settings and more. Change all of these drop-down menus to “‘Friends Only”

• Return to the “Privacy Settings” page and choose “Customize Settings” near the bottom of the page.  This new page will load a number of different privacy options, but you’ll want to click through each one and change the setting to “Only Me” so that nobody else can see your Facebook activity.

• Stay on the “Customize Settings” page and scroll down to “Things Others Share”:  Here, you’ll want to edit and disable settings so that your friends are unable to write on your wall, comment on posts and check you in to places.

• Return to the “Privacy Settings” page and, under “Apps and Websites” in the bottom-left corner, select “Edit Your Settings”:  This page shows all of the third-party websites and applications that you have given access to some of your Facebook information.  If you see anything on this list that you want to remove, just click to remove it from the list.

• Stay on the “Apps and Websites” page, scroll down to “Instant Personalization” and select “Edit Settings”:  Uncheck the box at the bottom of this page to block other websites from accessing your Facebook interests.  Select “Confirm” when a pop-up asks you if you’re sure you want to disable this option.

• Return to the “Apps and Websites” page, scroll down to “Public Search” and select “Edit Settings”:  To keep search engines from finding your Facebook profile, uncheck the box on this new screen.

It seems we will all get three extra days to file our taxes this year.  They’ll be due on Mon., April 18.  Why is this you may ask – It’s not that pesky processing delay the IRS keeps telling us about.  Instead, the extra days are as a result of Emancipation Day.  It is a little-known Washington, DC holiday that celebrates the freeing of slaves in the District.

The holiday actually falls on Saturday, April 16, but it is observed in D.C. on Friday, April 15.  That prompted the IRS to extend the tax filing deadline to April 18 this year.  Under the tax code, filing deadlines can’t fall on Saturdays, Sundays, or holidays.  The last time an extension was granted for this reason was in 2007.

This won’t have much effect on the processing delay though.  The delay, caused by Congress waiting until late December to pass new tax policies, simply means that the 50 million taxpayers who itemize their taxes on a Schedule A form can’t file until February.  However, the IRS estimates that less than 9 million taxpayers will end up being impacted by the delay, based on historical filing patterns.

Despite the availability and relative ease of using a professional tax preparer, an estimated 40% of Americans do their own taxes.  The typical do-it-yourself filer needs about 24 hours to complete the task, according to the IRS.

At home software is always a helpful tool to use, but no brand is GUARANTEED to be infallible.  Thus, it’s important for do-it-yourself filers to keep up as best they can with relevant changes to the tax code as a safeguard against errors in their tax prep software.  Here are the 4 most important changes you should know if you are the “do-it-yourselfer”:

1. Smaller Deductions for Business and Medical Mileage

You can’t write off the cost of a daily commute by car, but you can deduct other work-related mileage you’re not reimbursed for (which you have long since been able to do).   This year, for example, you’d get 50 cents a mile for driving from, say, DC to New York City and back for a trade show.  That’s five cents less per mile than you’d have gotten for the same trip in 2009.  The deduction for operating your car for medical reasons is 7.5 cents less than last year as well (16.5 cents per mile in 2010).   However, driving for charitable purposes is still deductible at 14 cents per mile, just like last year.

2. Better Limits on Deductions for Property Damage or Loss Due to Theft

For damaged or stolen property to be deductible, the loss amount must now only exceed $100, compared with $500 in 2009.  The “10% of AGI” rule still generally applies though.  (Remember, AGI <Adjusted Gross Income> is the sum of all your income – such as wages, interest and alimony received – minus certain adjustments, such as IRA contributions, student loan interest you’ve paid and moving expenses.)

3. Deduction for Taxes and Fees on New Motor Vehicle Purchases

Did you buy a new car, light truck, motor home or motorcycle between February 17 and December 31 of 2009?  If so, in 2010 you can deduct state, local, and excise taxes related to the purchase.  If your state has no sales tax, you can instead deduct other taxes or fees the purchase generated.  An interesting feature of this deduction is you can use it to increase your standard deduction or take it as a regular itemized deduction, whichever works out best for you.  (See your tax professional for more clarification).

There are a couple limitations to know about.  First, the deduction is only good on up to $49,500 of the purchase price.  Second, it’s phased out at certain levels of modified adjusted gross income (MAGI) – between $250,000 and $260,000 for joint filers and from $125,000 to $135,000 for other taxpayers.  (MAGI is your AGI plus certain deductions such as those for student loans, IRA contributions and higher education costs.)

4. Bigger Deductions for Long-Term Care (LTC) Insurance Premiums

IRS rules allow long term care insurance policy owners to deduct more of their premiums in 2010 than in 2009.  For example, those ages 51 to 60 can claim up to $1,230 in LTC insurance premiums this year, compared with $1,190 last year.  Similar increases have been approved for other age groups as well: 40 and under, 41-50, 61-70 and 71 or over.  At $330, the deduction is smallest for the 40-and-under age group.  It rises progressively to a maximum of $4,110 for those ages 71 or over.

To see what other potentially beneficial changes have been made, check out a list called “Tax Changes for Individuals” at the IRS website.

Who amongst you has not received your refund check??  Many of you could receive that check from the IRS — just before the holidays.  Wednesday, the IRS is expected to release the annual list of people whose refund checks were returned by the Postal Service as undeliverable.  Last year, the IRS had over $123 million in returned checks.  The list won’t be coming out until later today though.  Make sure to check if you are still waiting.

To access the IRS Website, where you can find your missing check, click HERE.

Despite the fact that we would all like to think that such a thing as free money exists, alas, it does not … unless, of course, you want to open a checking account.  Several banks have started offering cash just to get new customers in the door.  But hidden in the fine print, are fees and rules that will wipe out the supposed windfall.  Cash incentive offers have more than doubled over the last year.

For the banks, this is a calculated trade-off.  As they start lending again, banks need more cash from deposit accounts to help fund those car loans and mortgages.  So while a handout from a bank might feel like you’ve won the lottery, you’re actually handing over the real prize: your money.  Banks are targeting “good” would-be customers, who are likely to maintain high balances and use their debit cards frequently.  In turn, they hope new account-holders will raise banks revenues and apply for loans down the road.

But, if you are a savvy consumer, you already knew there’s no such thing as free money.  Expect to jump through serious hoops, just to qualify.  For starters, you don’t get the cash right away.  You first have to meet certain requirements, many aimed at simply getting more of your money: To get $300 at Citi, you’d have to open a Citigold interest checking account and deposit $1,000 by Nov. 18.  Then, you’ll have to maintain an average daily balance of $1,000 through the end of the month.  You’ll also have to sign up for three more Citi products – like a savings account, certificate of deposit or a credit card within two months of opening the account.  And when you finally get the money, expect a bill come tax time.  All of these cash bonuses will be taxed as regular income.  If you’re in the 25% tax bracket, that $300 award will drop to $225.

So here’s the rub –

Minimum Required Balance

Consumers who receive cash offers for a new account should watch out for minimum balance requirements, which more checking accounts require these days.  The average minimum balance requirement is $3,883 for a no-fee interest-bearing checking account, up 15% from last year, according to Bankrate.com.  That minimum falls to $249 on non-interest checking – still 34% higher than last year.  The average customer who falls below the threshold pays a fee as high as $13.  Look for accounts with zero minimum balance requirements.

Debit Card Rules

At Chase, consumers need just $25 to open Chase Checking and to get up to $125 cash bonus.  But account-holders will be charged $6 per month if they don’t buy something with their debit card five times each month or have at least one monthly direct deposit posted to their account.  For banks, this proves especially lucrative because they make money with interchange fees.

Overdraft Fees

Along with cash bonuses, new checking accounts come with a hard sell on overdraft coverage.  AVOID IT.  The fees kick in when a consumer withdraws more money from their checking account than they have.  As of August, new Federal Reserve rules prevent banks from automatically enrolling consumers in debit-card overdraft coverage, which permits purchases to go through even if the consumer doesn’t have enough money in their checking account, thereby allowing banks to collect their fee.  Now, customers who do nothing will have their overdraft purchases declined.

For many Americans, an income tax refund is a windfall.  But the amount of this refund is determined by the numbers that are generated from the previous year.  Therefore, the fourth quarter of the year is the time to start thinking about what can be done to maximize the amount that you can get back when you file your return in the spring.  Here are s few tips to help out as the year draws to a close:

1.) Charitable Donations: Filers who are on the edge of being able to itemize their deductions for the year should consider making a donation of either cash or property to a qualified charity before the year is out.  This can be especially beneficial if the filer has a piece of property of some value that he or she wishes to dispose of, such as an extra car or recreational vehicle.

2.) Retirement Plan Contributions: Those who need to reduce their taxable income for the year should make the maximum allowable contributions to their traditional, deductible retirement plans.  In some cases, such as small business owners and those who make the maximum allowable lump-sum contribution to their plans for the year, this deduction can be fairly large.  Although contributing to Roth accounts may be the best way to go for some, traditional plan contributions afford a current deduction that can make a huge difference in the amount of declarable income for many filers.  Even low-income taxpayers can claim the retirement savers’ credit for small contributions to their IRAs or employer-sponsored qualified plans.

3.) Organization: As basic as this sounds, good record keeping is essential to maximizing your tax deductions.  Make sure that you record every charitable contribution, every above-the-line deduction and anything else that can increase your income tax refund for the year.  Keep copies of all receipts and other documentation that proves your transactions, as the IRS now requires this in order to accept these deductions on every return.

4.) Miscellaneous Deductions: Many taxpayers may be surprised when they discover that certain kinds of expenses or losses can be deducted on their tax returns.  Ask your tax preparer what sorts of losses you can deduct.

5.) Capital Losses: This could be a good time to cut your losses in the market, if you are a short-term investor.  Swap out losing stocks or bonds for similar holdings that offer potential gains and realize the losses on your return.

You might think that the beginning of October is a bit early to start worrying about taking care of year-end business.  But with these three must-dos, getting an early start doesn’t just let you cross a chore off your list, it can actually put some extra money in your pocket.

1. Make the most of your retirement accounts.
Retirement savers have a lot to keep in mind at year-end.  Although you don’t have to make current-year contributions to IRAs until next April 15, there’s a laundry list of other tasks you have to take care of before December ends:

• Contributions to 401(k)s and other employer-sponsored retirement plans are due by Dec. 31.
• If you’re required to take mandatory distributions from your retirement accounts, either because you’re age 70 1/2 or older or because you have an inherited IRA, then you must do so by the end of the year.
• The opportunity to convert your traditional IRA to a Roth and take advantage of special 2010 rules that allow you to put off the tax impact until 2011 and 2012 goes away on Jan. 1.

These things are easy to forget about in the year-end rush.  There are big penalties for not taking required minimum distributions, but even more costly is the opportunity cost of not getting as much money as you can into your retirement accounts.

2. Taking tax losses.
If you’ve lost money on a stock, you can get a tax break by taking a capital loss on your tax return.  To do so, though, you must sell the stock by Dec. 31.  The reason you might want to do so early, though, is to get a jump on everyone else doing the same thing.  Another advantage is that if you want to take losses but still own the stock in the future, you have to wait 30 days after selling to buy it back.  If you sell now, you can buy back in November or December, just as latecomers are selling, hopefully pushing the price down to let you get in more cheaply.

3. Re-balance your portfolio.
If you haven’t done re-balancing in a while, you shouldn’t put it off any longer.  Whether it’s getting your stock/bond mix back to normal or adjusting your sector exposure, re-balancing makes sure you’re taking the right amount of risk.

For instance, say you have allocations to both financial stocks and real-estate investment trusts.  If you haven’t rebalanced, the value of your REITs is much higher than your financials, leaving you overly exposed if REITs reverse course and fall.  By re-balancing, you lock in some profits on your REITs while taking advantage of low prices to boost your financial exposure.  It’s not guaranteed to make you money, but over time, rebalancing has helped many people take advantage of the natural cycles within markets.

SO……. Do it today
Sure, you could wait on some of these things.  But why wait?  There is no time like the present.  By acting sooner than later, you can get a jump on your peers; and being first out of the gate may well mean more money in your pocket.

Much of the debate about whether to extend the Bush tax cuts has focused on big economic issues: how the decision might affect the fragile economy, the widening federal deficit, and hiring by small businesses.  As the political battle drags on, however, it has also veered into a more basic matter of fairness, whether people who earn $200,000 a year should be taxed at rates similar to those who make $5 million.

President Obama has proposed preserving the cuts for middle-class Americans and letting them expire for the top 2.5 percent of taxpayers –  individuals who make more than $200,000 a year and families whose income exceeds $250,000.  But others in Congress have questioned why ending what Mr. Obama frequently calls “tax cuts for millionaires and billionaires” should also raise taxes on families making $250,000. 

With the Senate unlikely to vote on the matter until after the midterm elections, some Democrats are pushing for a compromise that would leave the cuts in places for those higher up the income scale. 

One proposal is called a millionaires’ tax, which would create one or two additional tax brackets for the wealthiest Americans and eliminate the Bush tax cuts only for those who earn more than seven-figure incomes.  But Mr. Obama and Democratic leaders in Congress have thus far held firm to the dividing line of $200,000 for individuals and $250,000 for families.  And others warn that making the tax code more complicated often has the unintended consequence of encouraging taxpayers to circumvent the system.   

Most of the opposition to the plan has come from those who warn that ending the cuts, even on the wealthiest, would further weaken the struggling economy and harm small businesses.  But because the cuts will expire for everyone on Jan. 1 unless Congress takes action, lawmakers are virtually certain to revisit the issue in the “lame-duck session”.

With unemployment at 9.6 percent and the economy languishing, discussions about the financial pressures facing the wealthiest Americans can quickly devolve into shouting matches.

In some expensive sections of the country, many families with income levels near the $250,000 cutoff insist that they have more in common with middle-class Americans than millionaires or billionaires.  The dispute over what income level qualifies as rich is caused, in part, by the tendency of people to gauge their own wealth by comparing themselves to those closest to them. 

The fact that families making $250,000 are sometimes being invoked in the same terms as billionaires is a symptom of one of the paradoxes of the American tax system: at the same time that wealth has become far more concentrated in recent decades, the tax code has become far less precise in differentiating levels of affluence.

Today’s tax code not only has far lower rates than it had a half century ago, it has fewer brackets — just six.  President Obama’s plan would raise the top bracket (which affects income for individual filers who earn over $382,550) to 39.6 percent, from 35 percent.  It would also raise the second-highest bracket to 36 percent, from 33 percent.

Tax brackets at the upper end of the income scale were not always drawn so broadly.  In 1970, when someone earning $37,000 had the buying power of a $200,000 income today, there were 25 income brackets.  The taxpayer with $37,000 was taxed at the middle of the scale; 13 of the brackets charged higher rates to those with higher income.

Congress reduced the number of brackets in the 1980s in an effort to make the tax code simpler and to cut down on the abuse of shelters and deductions.  In the last 30 years, however, the percentage of total income earned by the top 1 percent of Americans has grown sharply — to 23.5 percent in 2007, from about 9 percent in 1979.  And the income share of the top 0.1 percent has grown even faster — to 6 percent in 2007 from 2 percent in 1988.

But it is unclear what, if anything, Congress will do to address the issue.  Republicans uniformly oppose letting any of the tax cuts expire.  Democrats have vowed to pass Obama’s plan after the elections.  But given that they are likely to lose seats, and possibly control of one or both houses of Congress — it is uncertain whether they will follow through, compromise or simply extend all the cuts for a limited period.