CPA Rockvile

Electronic filing of tax returns has become so popular that the Internal Revenue Service will no longer automatically mail a traditional paper form.  “We’re finding that more and more people are choosing to e-file, and the number of paper returns is going down,” said IRS spokesman Anthony Burke.  He told CNN Tuesday that the agency last year mailed the old-style set of paper forms, tables and instructions to just eight percent of the nation’s taxpayers.  Burke said 96 million taxpayers this year have filed electronically, with another 20 million filing through professional tax preparers.  The IRS hopes to save $10 million a year by not automatically mailing the materials.

Those who prefer hardcopy documents can still find them at libraries, post offices and walk-in IRS offices around the country.  After Jan. 1, they can request a mailing through the IRS toll-free number, 800-829-3676.  The materials will also be available to download and print out from the IRS website: www.irs.gov.

Some people may not miss the annual ritual of opening their mailbox and finding the dreaded reminder of tax time.  Burke said the IRS “won’t produce the package any more,” as the agency transitions to providing software and other support for electronic filing.  Instead, in the next few weeks, those who filed traditional paperwork last year will get a simple postcard from the IRS, with instructions on how to obtain the documents needed to file a tax return.

More companies are offering health savings accounts,in which you can stash cash to cover your medical bills.  Here’s what you need to know before signing up.

1. Your employer is more likely to offer this option:  When you get your open-enrollment packet  you may see something new on the benefits menu.  Companies are increasingly offering a health insurance package that includes a high-deductible policy plus a tax-advantaged health savings account (HSA) in which you can stash cash to cover your medical bills.  The appeal for you is lower premiums, typically 10% to 40% less than those of a traditional plan.  Employers, meanwhile, like this plan because it gives you an economic stake in your own wellness.

2. These plans look cheap:  While you’ll save on premiums over a traditional plan, the deductible (at least $1,200 for individuals; $2,400 for families) is a lot higher.  You’ll foot every dollar of your bills, excluding, usually, preventive care up to that amount.

Enter the HSA:  To cover costs, you can put pretax money in one, up to $3,050 for individuals in 2011, $6,150 for families, plus $1,000 more if you’re 55 or older.  Your employer may also contribute.  Withdrawals for medical bills are tax-free.  Unused dough rolls over year to year, growing without being taxed.

3. Some people may save money by choosing a high-deductible plan.  Young and healthy people, for example, can fare better because they pay low premiums and don’t use much care.  If you have a particularly costly medical condition, such as cancer, you too may benefit.  Once you hit the plans’ out-of-pocket maximum, no more than $5,950 for individuals, $11,900 for families – you pay nothing.  Comparatively, in traditional plans you’ll never stop owing co-pays.

4. Run the numbers for yourself.  The deductible, and coverage after the deductible, in these plans varies widely.  So you’ll want to do the math to see if enrolling will be worth your while.  Your company may provide a calculator to show how you’d fare in this plan, versus other options, based on last year’s health costs.  But if not, ask your insurer for a breakdown of your 2010 expenses, and add up how much you’d have paid under each plan.  Pay close attention to prescription costs.  In a high-deductible plan, drugs typically aren’t covered before the deductible.

5. An HSA can double as a retirement account:  If you have cash to pay health bills out of pocket, you might use an HSA to supplement your nest egg.   Even in retirement, you can tap the funds tax-free for medical needs.  And starting at 65, you can withdraw penalty-free for any reason, though you’ll owe income taxes.  You choose how the account is invested.  If you’re saving it for retirement, go with low-cost mutual funds.  (Don’t like your employer’s options?  You can go elsewhere — access Vanguard funds via hsaadministrators.info)  But if you’ll use the money for current health costs, a savings account is the right bet.

September 23 marks the six-month anniversary of health reform.  It’s also the date when several key insurance changes come into effect.  Here’s what you need to know about how your insurance is affected.

If you get insurance through your boss:  People who are insured through work won’t notice immediate changes to their health plans until their plan renews, which is tied to companies’ open enrollment periods.  Health plans offered through large employers usually get renewed on Jan. 1.  But the mandates could kick in sooner for health plans sold to new entities or individuals after Sept. 23.

Here are some key changes coming into effect:

Coverage expansion for adult dependents until age 26.  Employers will have to provide coverage for dependents of workers who don’t have access to other employer-based health care coverage until the age of  26.  Some states already mandate this coverage until age 28 or 29.  This new provision, however, could also push companies to look for ways to restrict the number of new people added to their health plans.

Children can no longer be denied coverage for pre-existing conditions:  Insurance plans can’t deny coverage due to a pre-existing condition to children under age 19.  For adults, the same provision goes into effect in 2014.

Prohibit insurers from rescinding coverage:  It’s illegal for insurers to drop a customer when they become sick or search for an error on a customer’s insurance application and then deny payment for service when the person gets sick.

Free Preventive Care:  All new plans must cover certain preventive services such as mammograms and colonoscopies without charging a deductible, co-pay or coinsurance.  If individuals keep their existing plans or if a group plan doesn’t make major changes, the provisions won’t kick in until the plans get changed.

No lifetime limits on coverage:  Insurers no longer can impose lifetime dollar limits on essential benefits, like hospital stays or expensive treatments.

Unrestricted doctor choice:  Plans must allow pediatricians and obstetrician/gynecologists to get primary care physician status.  This eliminates the requirement for patients to get prior-authorization from their insurer or a doctor’s referral to see a pediatrician or OB/GYN.

Level charges for emergency services:  Insurers must remove prior authorizations for ER services.  Also, insurers can’t charge higher co-payments or co-insurance for out-of-network ER providers.

Patient-friendly appeals process:  Insurers will have to establish new internal and external appeals processes for claims.  This means that while a claim is under appeal, your insurer has to continue to pay your claims, and continue paying for subsequent treatment, until the matter is resolved.

Small business impact:  The changes that kick in on Sept. 23 also apply to small businesses with 50 employees or more that already offered insurance coverage prior to reform.  Companies that didn’t offer coverage pre-reform and have no more than 25 workers will be given incentives such as tax credits and grants to encourage them to offer insurance coverage.  The government estimates that 4 million small businesses will be eligible for health insurance tax credits.  These include a credit of up to 35% of the premiums employers pay on worker plans.  For small non-profit companies, the credit is up to a 25%.  Also, the 35% maximum credit is given to employers with 10 or fewer full-time employees.

If you buy insurance yourself:  For consumers who buy health insurance directly from insurers, some of the same key changes go into effect this month.  Most importantly, insurers can’t drop you when you get sick or because you made a mistake on your coverage application.  Insurers also can’t set annual or lifetime limits.

If you have children under age 26, you can insure them if your policy allows for dependent coverage.  Individual plans can’t deny or exclude coverage to any child under age 19 for pre-existing conditions.

If you’re a senior citizen:  If you have Medicare prescription drug coverage and are affected by the donut hole, this year you will get a one-time tax-free $250 rebate to help pay for prescriptions.  The prescription drug coverage gap that develops when Medicare stops paying for drug coverage and patients can’t afford to pay for drugs out-of-pocket is called the “donut hole.”  In 2011, if high prescription drug costs put you in the donut hole, you’ll get a 50% discount on covered brand-name drugs while you’re in the donut hole.  Also in 2011, Medicare will cover certain preventive services without charging you Medicare Part B (coverage for doctors’ services, outpatient care, home health services) coinsurance or deductible.

Uncertainty on Capitol Hill is making everyone’s life miserable. Congress’ inability to to make a decision on what to do about the expiring Bush tax cuts means that we probably won’t know what will happen to next year’s tax rates until after the November elections.  Sigh.

President Obama wants to keep current tax breaks in effect for lower and middle income taxpayers, but favors reinstituting higher rates for the wealthiest 3% of Americans.  Ironically, while the Obama plan would raise taxes on the highest income earners, some pretty well off taxpayers would enjoy a 5% rate cut on some of their income.  That’s because the 28% bracket would have to be expanded to accommodate the president’s definition of middle class.  So some income now hit with the 33% rate would drop into the 28% bracket.

Congressional Republicans argue that current tax rates should be extended for everyone, noting that many of the taxpayers targeted for tax hikes are small-business owners and that higher taxes on them could derail the economic recovery.  Extending the current tax rates for all taxpayers, however, would cost $3.3 trillion over the next 10 years, compared with $2.2 trillion if they were extended for all but the rich, according to the Pew Economic Policy Group.

The more time Congress spends arguing over what to do about the Bush tax cuts, the more likely it is that lawmakers will ultimately extend current rates for everyone for a year or two to buy more time to work on more permanent tax reform.  But anything could happen during a likely post-election session. If political gridlock sets in, the Bush tax cuts could actually expire on schedule on Dec. 31, and everyone’s taxes would go up in 2011.

Normally, it makes sense to reduce your income and increase deductions as a way to hold down your tax bill for the current year.  And that’s what you should continue to do if Congress extends current tax rates for your income level.  But if your tax rates will increase in 2011, it may make more sense to reverse those strategies.  If that is the case, consider accelerating any discretionary income, such as a year end bonus or income from exercising nonqualified stock options, into the current year, when tax rates are lower.  And to the extent that you have control over itemized deductions, such as when you make charitable contributions, you might want to push a donation into January, when it will deliver a bigger tax savings.

Usually, investors focus on harvesting losses before the end of the year to offset profits and the tax bill that goes along with them.  That is a viable strategy if maximum long-term capital gains rates remain at the current 15% level.  But if Obama gets his way, the top capital gains rate would rise to 20% for upper income taxpayers. The same goes if the tax cuts expire.

Regardless of whether your tax bracket remains the same or increases next year, adding to your tax-deferred retirement savings before the end of this year is a good way to reduce your 2010 tax bill and boost your future nest egg.  You can contribute up to $16,500 to your 401(k) or similar employer-based plan in 2010, and if you are 50 or older, you can kick in an extra $5,500.  You have until April 15, 2011, to contribute to an IRA for 2010.  On the flip side, some taxpayers may want to bite the bullet now and convert some or all of their traditional IRAs to a Roth IRA, paying taxes at current rates on the converted amount and locking in tax-free withdrawals for the future, when rates may be even higher.  Note that if you convert to a Roth in 2010, you can also choose to split the taxable income between your 2011 and 2012 returns and pay whatever tax rates are in effect at that time.

Even if Congress extends the current tax rules for another year or two, most financial experts believe that higher taxes to tame rising budget deficits are inevitable.  And that could change the way Americans save and invest their money in the long run.  You don’t need to make these decisions by year-end, but it’s never too early to begin thinking about strategies for coping in a higher tax world.

Without congressional action this year, everyone will feel the pain of higher income taxes in 2011.  The lowest 10% tax bracket would disappear, meaning everyone would pay higher rates on more of their income.  The marriage penalty that forced some dual-income couples to pay more tax on their combined income than they would have owed if they had remained single would be reinstated.  The end of the Bush tax cuts would also cut the child tax credit in half, from $1,000 to $500 per child.

Higher-income taxpayers would face bigger tax bills as rates increase and as limits on itemized deductions and personal exemptions, which disappeared in 2010, come back into play.  In addition to increased capital gains rates, qualified dividends would revert to being taxed at ordinary income rates as high as 39.6%.  A more immediate problem is what will happen to the alternative minimum tax and a host of other expired tax breaks, such as a choice between deducting either state sales taxes or state income taxes, which will affect the 2010 tax returns that Americans file next spring.  The AMT disallows personal exemptions and many of the deductions that taxpayers count on to reduce their tax bill.  Without an annual fix to raise the AMT exemption level, an estimated 25 million Americans will be hit by the alternative minimum tax in 2010, compared with five million last year. But it is expected that Congress will muster the votes to patch the AMT for 2010, as it has each of the past several years, and revive the expired tax breaks, too.

Prior to the recession, people simply looked for a house, any house, to buy.  Later on, buyers were hesitant just thinking about buying.  Now, they seem to be on a quest for perfection at the perfect price.  Perfection seeking buyers are turning the battered real estate market upside-down.  Agents are saying that this is leading to last-minute demands for multiple concessions, bruised feelings on all sides and many more collapsed deals than usual.

It is a complete reversal of roles from the boom, when competing buyers were sometimes reduced to writing heartfelt letters saying how much they loved the house and how they promised to eternally worship the memory of the previous owners.  Nowadays days, it is the buyers who are coldly seeking the absolute best deal while the sellers are left in emotional turmoil.

It was largely expected that the housing market would suffer at least a temporary hangover after the government’s $8,000 tax credit expired in April, but not necessarily this much.  In some places, sales dropped more than 20 percent from May 2009, when the worst of the financial crisis had subsided.  Builders have been affected too.  The Commerce Department has stated that the construction of new homes in May dropped 17.2 percent from April, which is significantly lower than forecast.  Permits for future construction dropped 10 percent, suggesting a sluggish summer.  Even the lowest home mortgage rates in decades are not doing much to promote deals.  The Mortgage Bankers Association has said that applications for loans to buy houses were down by a third compared with last year.

Against such a backdrop of misery, buyers are empowered — and are taking full advantage of their position.  Buyers, of course, say they are merely being smart.  In some cases, however, agents have said that sellers literally cannot afford to make concessions.  Another $10,000 will push them underwater, which means they will have to arrange the sale through the bank.  Even when a sale can be worked out, it is not uncommon for everyone to walk away feeling more aggravated than excited.

BP’s new strategy to clean up its image and the Gulf Coast is to hand the job from its British CEO, who has been widely criticized for his inappropriate comments and yachting amid the crisis, to one of its top-ranking Americans.  Bob Dudley is no stranger to tough situations;  he protected the company’s interests in rough dealing in Russia even after he was barred from the country.  Most importantly though, he is a fresh face for the oil giant as it attempts to fix the spill and protect its future.  Dudley will take over as BP’s point man on the spill response, reporting to Hayward.  Company officials have variously put the time frame at anywhere from immediately until after the spill is plugged, which doesn’t appear to likely happen until August.

Hayward’s gaffes include saying, “I’d like my life back,” and most recently enjoying a yacht race off the coast of England on Saturday while oil spill relief workers sweated it out.  BP officials, however, say the switch is intended to allow Hayward to focus on running the company, rather than an attempt to bounce back from bad publicity. Analysts say Dudley’s job will involve nothing short of rehabilitating the environment, compensating everyone who has suffered a loss and generally salvaging BP’s global image.

Dudley has plenty of experience protecting BP’s interests under great pressure.  As chief of TNK-BP, a joint venture with a consortium of Russian billionaires, he steered the firm through a series of politically explosive disputes that saw one employee charged with espionage, the company’s offices raided by Russian intelligence, an investor boycott and a barrage of tax and labor investigations.  At one point, there was a huge effort put forth to remove him from office, but Dudley clung on until 2008, at one point running the company from abroad after Russian authorities barred him from the country.  Despite fears that BP’s partners would expropriate the British company’s share of the venture, BP has managed to keep its cut of TNK-BP’s multibillion-dollar profits.

Dudley also has shown a steady hand in his limited public appearances since the April 20 oil rig explosion that killed 11 workers and triggered the Gulf spill.  He was the one tapped to make the rounds of the Sunday morning shows at the end of May when BP’s latest bid to stanch the flow fell short.  “We failed to wrestle this beast to the ground,” he said matter-of-factly.  A week later, he struck a conciliatory note as he toured the Louisiana coast with Gov. Bobby Jindal, saying he was frustrated and saddened by what he saw.  He was there to promise that BP would fund state efforts to build sand berms to protect barrier islands from the oil.  “We understand the importance of this,” he said.  “We are deeply sorry.”

Industry insiders such as former Shell Oil president John Hofmeister have argued that BP from the start should have made an American the public face of its spill recovery efforts.  “I’ve been saying for weeks that Tony Hayward ought to pass this over to his top American executive,” Hofmeister said Sunday.  “He has completely competent people in the U.S. that can represent him in every instance.”  Hofmeister said Dudley has been involved in the Gulf oil spill recovery effort from the start, and he expects no changes in BP’s approach once he takes over.  “I think this is just a natural step for him to be exclusively focused on this aftermath,” he said.

President Barack Obama has said he would fire Hayward if he could, and many Gulf Coast residents have had their fill of him as well.  Craig Bielkiewicz, a fisherman who’s unemployed as a result of the spill, said as long as BP foots the bill for the cleanup, it’s better that Hayward just stay away.  “As long as he foots the bill and does what he says he’s going to do, then we don’t need him,” he said.  “All we need is for him to back off and let us do what we need to do.”

Dear BP:  Let the workers do their jobs and keep signing the checks.  Stop wasting your  money on PR campaigns; your image is in the tank for the time being.  Let’s work on the real problem at hand: the oil leak.

Much of the recent legislative action in Washington has been focused on health and financial reforms.  But another bill dealing with tax issues appears to be in the works as well.  It is expected to be enacted sometime in the next week.  The American Jobs and Closing Tax Loopholes Act will provide one year extensions to a number of tax rules that expired at the end of last year.  The extenders will be made retroactive to the beginning of 2010.  Some of the more notable extensions include:

Property Taxes – The additional standard deduction on real property taxes, $500 for individual filers and $1000 for couples, will be extended.  This is for use by people who don’t itemize their deductions.

Higher Education Deduction – Up to $4000 of qualified higher education tuition and related expenses could be taken as above-the-line deductions.  There are income limitations on who may take this deduction and it’s not available if the expenses are deductible under any other tax program.

Teacher Classroom Supplies Deduction – Up to $250 in out-of-pocket spending on qualifying classroom supplies may be taken as an above-the-line deduction.  On top of that, teachers who itemize their taxes may be able to deduct qualifying expenses that exceed $250 by classifying them as employment related miscellaneous itemized deductions.

Hybrid Vehicles – An alternative motor vehicle credit will continue to be available for hybrid vehicles.  Separate credits are available for cars and light trucks, and for medium and heavy trucks.

Energy Efficient Windows – The bill will modify the terms of the tax credits for energy efficient windows to reflect regional climate differences.

Disaster Relief – A number of programs will be extended to help taxpayers affected by federally declared disasters, including higher allowable loss limits for deductions and a five year carry-back provision for net operating losses.  This could prove to be very important with the hurricane season meteorologists are predicting.

Starting a business can help you save money on your taxes.  However, beyond choosing what business to go into, you also have to decide on the best form for your business: a sole proprietorship, an S corporation, a C-Corp, or a limited-liability company (LLC).  Speaking with a financial planner or CPA specializing in small businesses may help you make the best choice;  your choice will have a major impact on your taxes.  If you have children and your business is unincorportated, hire them – it will have great tax benefits.  You can deduct what you pay them, thus shifting income from your tax bracket to theirs.  Since wages are earned income, the “kiddie tax” does not apply.  And, if the child is under age 18, he or she does not have to pay Social Security tax on the earnings.

Starting a business can be quite costly; make sure you watch start up costs when starting your business.  Generally, the costs of starting up a new business must be amortized, meaning, deducted over years in the future.  But you can deduct up to $5,000 of start-up costs in the year you incur them, which is when the tax savings may be the most helpful to you.

If you choose to do your new business’ taxes on your own, make sure you don’t fall into the trap of filing certain costs as hobby costs rather than for-profit business.  If you want to file deductions as hobby costs, you still have to report any earnings as income, but there are restrictions on deducting expenses and you can’t deduct a loss.  To avoid this problem, run your activity in a business-like manner, including having a separate bank account and having business cards printed.

If you run your own businesses, you ten to have a lot of flexibility at year-end.  To push the receipt of income into the following year , delay mailing bills to clients until late in December that payment is received after December 31.  Or, pay business expenses before January 1 to lock in deductions.

If you decide to run your business out of your home, don’t be afraid to use that deduction.  You just have to use part of your home regularly and exclusively for your business, you can qualify to deduct as home-office expenses some costs that are otherwise considered personal expenses, including part of your utility bills, insurance premiums and home maintenance costs.  Some home-business operators steer away from these breaks for fear of an audit.  But if you deserve them, claim them.

If you feel comfortable starting the business and filing all the taxes on your own, make sure you take advantage of all your possible deductions.  If you are at a loss as to what form of business will work best for you, don’t want to be bothered with the financial planning or taxes with regard to the business, hire a respected business planner and/or CPA.  Either way, starting a business can save you money.

If you managed to claim every possible tax break on your 2009 return, give yourself a hand.  That’s no reason to stop there though;  there is so much more you can be doing to rack even bigger savings throughout the year with the help of thoughtful tax planning.  For example, if you got a big tax refund this year, it means that you’re having too much tax taken out of your paycheck every payday.  You can file a new W-4 form with your employer to ensure that you get more of your money when you earn it.

If you plan on making charitable contributions in 2010, put away your checkbook. Consider giving appreciated stocks or mutual fund shares that you’ve owned for more than one year instead of cash.  Your charitable contribution deduction is the fair market value of the securities on the date of gift, not the amount  you paid for the asset, and you will never have to pay tax on the profit.  Don’t donate stocks or fund shares that lost money though.  You will be better off, in the long run, selling the asset, claiming the loss on your taxes, and then donating the cash to charity.  You get to use it as two deductions then.

Also, if you plan on doing charitable work, keep track of what you spend while you are doing it.  Whether it be stamps to mail letters, ingredients to make food for the homeless, or even the number of miles you drive for the charity work, it is all deductible as a charitable contribution.  The total can be added into your charitable deductions next year, cutting your tax bill even more.

*With regard to charitable donations/contributions, make sure you keep careful records of them for your CPA so you can qualify for the full deduction amount without any red flags being raised.