On December 19, 2014, President Obama signed into law The Tax Increase Prevention Act of 2014 (HR5771), which which temporarily extends over 50 expired incentives for individuals, businesses and energy through 2014.  The law also creates Achieving a Better Life Experience (ABLE) accounts set up for the benefit of persons with disabilities.  Extenders included in the legislation are the state and local sales tax deduction, IRA distributions to charity, and the above-the-line deduction for higher education.

Key provisions in the bill particularly impacting construction and real estate businesses include the extension of 50% bonus depreciation and qualified leasehold improvements for the 2014 tax year.  Under HR 5771, qualified leasehold improvement property will continue to be eligible for 50% bonus depreciation.  This property is defined in IRC 168(k)(3) as new improvements to an interior portion of a building that qualifies as nonresidential real property.  In addition, this treatment is available as long as the improvements are made by the lessor more than three years after the date the building was placed in service.

Notable exceptions to qualified leasehold improvement treatment include: elevators, escalators, structural components benefiting a common area, or the internal structural framework of the building.  For more information or to take advantage of the new legislation, please contact Eric L. Bach & Associates for a free consultation.

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.

More than 200,000 small nonprofit organizations are hours away from losing their tax-exempt status because they haven’t filed a new form with the Internal Revenue Service.  Congress required the form, called a 990-N, when it amended the tax code three years ago.  Groups that report $25,000 or less in income, excluding churches, and a fiscal year ending December 31, have until the end of the day today to meet the deadline.  Its very likely that these nonprofits are unaware of the Monday deadline, and they may not find out until January 1, 2011, when they’re notified they have to pay taxes on donations they thought were exempt.  It could take months for them to restore their nonprofit status as well.  Donors who give to the organizations that lose their status, however, will be able to receive tax deductions on gifts until January because the revocations will not be made public until then.  If you are running a small nonprofit organization, do your best to scramble and get your forms in by midnight tonight to ensure you maintain your status.  Contact a CPA if you are unable to get to the form yourself.

The aftermath of the real estate bubble bursting has many homeowners staying put and retaining their current properties.  If you are one of the many that has not been able to sell your house or are upside down in your mortgage you have two decent options: 1) You can seek the assistance of a realtor that specializes in short sales; or 2) you proactively protect your homes value.  The first thing you need to be aware of is your right to contest/appeal your property assessment.  It happens more often than you may think that states will overvalue your home, resulting in higher property taxes.  There is a catch though; lower property values compiled with foreclosures can bring the value of all properties in the entire neighborhood.  You have to determine if its in your best interest to pay lower taxes or maintain a higher estimated property value.

Another step you can take is to have your home appraised.  This will let you know two very important things: 1) if your property has increased or decreased in value since you purchased it; and 2) the report can help guide the changes needed to increase the value of your home.  Continuing to make marketable improvements in essential areas like bathrooms and kitchens can make dramatic increases to your property’s value.

Participation in community activism sounds a bit ridiculous, but staying involved can pay off in the long run.  Pay close attention to new zoning laws, proposed new developments, and the reputation of your neighborhood’s school district.  Call on your neighbors to help make sure the neighborhood does not deteriorate.  If an abandoned foreclosure is preventing other houses from selling at decent prices, take the initiative to step up and make it look decent.  The lower the properties around you sell for, the lower your property value will be.

And finally, make sure you watch out for new taxes.  Many state and local governments are struggling financially, so they may raise property property taxes to cover shortfalls even though property values are declining.  Pay close attention to these new tax hikes or ask your CPA to alert you when new taxes arise.

If the IRS decides to target you with an audit, what would you do?  Most people would just surrender, no matter how good a case they may have.  Taking on the government, to most,  sounds like the ultimate nightmare: costly, time consuming, and stressful.  But if you are ready for the challenge, there are some smart ways to fight back.  First, you should begin by hiring a smart, reputable tax preparer.  Not only will they know the tax codes backwards and forwards, but they will take over the bulk of the ever-exhausting fight with the IRS.  They will also help you to decide how far to take your fight.

If you haven’t started already, make sure you save all of your tax returns forever and supporting documents for at least 3 years.  The IRS only has 3 years to initiate an audit.  See, Paper Records: What to Keep, What to Toss.  It may seem like a nuisance, but all those papers are the most important documents for your case.  The more organized and less holes you have in your documentation, the better the chance you have at winning your appeal.

If you don’t want to go to the trouble of hiring a tax specialist, you should consider taking your case to the IRS Taxpayer Advocate Service (TAS).  This is an organization within the IRS that helps taxpayers resolve tax problems as well as advocate for changes within the system.  You may be eligible for this service if you have tried to resolve your problems through normal IRS channels and have gotten nowhere, or if you believe an IRS procedure is not working as it should.  This service is also available to those whose tax problems are causing financial hardships and they cannot afford to hire a specialist.

Most people who decide to truly have it out with the IRS file a petition with the US Tax Court.  If you choose this route, you generally do not need to pay the amount in dispute while your case is pending.  (This according to the court’s website: www.ustaxcourt.gov)  If the tax court decides that you do owe taxes or you come to a settlement about what you will owe, the interest on those taxes runs from their original due date until paid in full, unfortunately.  Your only other option is to have your case heard in Federal District Court, but the disputed amount generally needs to be paid in full and file a refund with the IRS before the case is filed.

Choosing which option is best for you ultimately is your decision, however, at least speaking with a tax specialist is always advisable.  Most first time consultations are free.

There are certain tax schemes that the IRS is really cracking down on now that you must be wary of.  Many people are filing extensions this year, meaning that their returns don’t have to actually be in until October 15, so taxes don’t just go away after the dreaded April 15 passes.  If you are one of those people filing extensions, then make sure you know these tidbits from the IRS.  Sketchy tax preparers are on the rise and will often advise you to take illegal deductions; make sure you hire a reputable and trusted CPA if you hire someone.  The IRS is also making a point of scrutinizing retirement accounts in search of taxpayers who enter transactions that allow them to exceed the contribution limit of the IRA.  Many of these transactions are put together by dubious financial advisers, so like accountants, you need make sure you only use reputable, certified financial planners.  Make sure you carefully look into who it is you are hiring and check on their certifications before entering into any business engagement with them.

With April 15th fast approaching, well, a mere 2 days away, I’m sure you are probably scrambling to finish up your taxes or running to your CPA in a panic with last minute documents.  Relax.  You can still file an extension if you are not prepared or are not fully aware of all the deductions you may be able to take.  For example, if you bought a new car, truck, motorcycle, or even a motor-home after February 16, 2009, you can deduct the sales tax you paid on up to $49,500 of the vehicle’s price.  You don’t need to itemize to take this special one year write-off either.  Also, if you traded in your junker to “Cash for Clunkers” to get that car, lucky you, that is another deduction.  I would advise, however, that you should speak to a tax expert if you are not willing to take the time to run the numbers to determine whether you should use this new provision or continue to itemize.

Most taxpayers don’t have enough out-of pocket medical expenses to meet the steep threshold for deducting them; but if you were out of work last year and had to pay for COBRA or other health insurance, there is a good chance that those costs may have put  you over the limit.  This may be especially important if your income fell too.  Make sure look at all of your medical bills when itemizing your deductions to see if you qualify.

There were 59 federally declared disasters in 2009.  If your house was damaged in one of them, and your homeowners insurance didn’t pick up the full bill, you have money coming back to you.  For 2009, there is no limit on what you can claim and you can retroactively apply any losses you can’t use to 2008 taxes.  Just have your accountant file amended returns to get your money quickly.

Also, if you made any energy efficient home improvements, the government thanks you by giving your more green for going green.  You can take a credit of 30% of what you spent on energy saving skylights, replacement windows,  water heaters, etc.  (Go to energystar.gov to see what qualifies)  But instead of the $500 cap that was previously on this benefit, you can take a combined $1500 for 2009 & 2010.  If you went green in a really big way, installing solar, wind, or geothermal energy in your house, you can cash in on the 30% credit with no upper limit.  If this credit exceeds your total tax bill, not to worry, you can apply the unused portion to next year’s return.

If you have any questions about any of these changes in deductions or need any help filing for an extension, contact a local CPA in Rockville to help you.  Just make sure you do so before the clock expires on April 15.

The estate tax has been an important source of federal revenue for nearly a century.  Many people, however, do not fully understand what the estate tax is.  The estate tax is a tax imposed on the transfer of the “taxable estate” of a deceased person, whether it be property, life insurance benefits, or financial sums, to a beneficiary. First, a “gross estate” value must be determined to include the value of all assets of the deceased person at time of death.  From there, you can speak to a CPA about all your possible deductions to try to eliminate as much of the estate tax as you can.  Of these possible deductions, the most important is the deduction for property passing to the surviving spouse because it can eliminate any federal estate tax for a married decedent.

Another thing to keep in mind is that many US states also impose their own estate or inheritance taxes.  Some states “piggyback” on the federal estate tax law, however, some operate independently of federal law, making it possible for an estate to be subject to state tax, while exempt from federal tax.  You can speak to your local CPA to find out which states impose their own taxes.