Capital Gains on the Sale of Rental Property

Can you sell rental property and reinvest into rental property without paying capital gains tax? No. If you sell the rental property, the transaction is not a tax-free exchange. However, rental property can be exchanged for other rental property that is of like-kind nature. This is called a Section 1031 Exchange. Capital gain realized from such an exchange is deferred until such time as the property is sold.

401(k) Loan Distribution

It is important to be aware of the tax consequences of an outstanding 401(k) plan loan balance if you are planning to leave your employer. If your loan is not paid off by your termination date, you cannot rollover your plan proceeds to an IRA or another 401(k) without repaying your loan. Your employer will reduce or offset your vested 401(k) plan by the unpaid balance of your loan. The offset is considered a distribution. You will be required to include this amount in your gross income on Form 1040. Thus, you will pay income tax on the amount of the distribution. If you are younger than age 59½, you will be also pay a 10% penalty to the IRS on the early distribution.

Amended Returns

If you forgot to claim a big deduction or discovered another oversight on an income tax return you recently sent to the IRS, you can fix the problem by filing IRS Form 1040X, "Amended U.S. Individual Income Tax Return."

As a general rule, you have up to three years from the due date of a return to file an amended return. To find out more about amending your tax returns, please refer to our article "To Amend or Not to Amend."

Beware of IRS e-mail Scam

Identity thieves posing as the Internal Revenue Service are sending spam e-mails promising government economic stimulus packages. It prompts the user to download the attachment and fill in their personal information for the IRS to send their check.

Always use best security practices when reviewing your e-mail and do not open any e-mail attachments from unknown senders.

Check It Out—Carefully!

Taxpayers are reminded that you should never sign a blank tax form. Before you sign your completed return, make sure you understand each entry and have checked each entry for accuracy. Remember: No matter who prepares your tax return, you are legally responsible for its contents.

Congress Passes AMT Patch for 2008

Congress included an Alternative Minimum Tax (AMT) patch as part of the Emergency Economic Stabilization Act of 2008. This move by Congress saved 20 million middle-income Americans from being hit with AMT in 2008. If they had not passed this patch, the IRS would have collected an additional $61.8 billion in taxes for the 2008 tax year. The AMT exemption amounts are now $69,950 for married couples filing jointly; $46,200 for single taxpayers and heads of household; and $34,975 for married couples filing separately.

The patch is only for tax year 2008; hopefully Congress will finally decide to find a more permanent solution beginning with the 2009 tax year.

Etymology of Boot

"Boot" comes from Old English and is defined as an advantage, compensation; something to equalize a trade; additional money or property received to make up the difference in an exchange or business investment.

Under Internal Revenue Code Section 1031, no tax liability results from an exchange solely of like-kind property used in a business or trade or held for investment. If the exchange includes boot, however, the boot will be treated as ordinary income.

For more information on §1031, like-kind exchanges, and the treatment of boot, read "§1031—Tax Deferred Exchanges of Like-Kind Property."

Extended Tax Returns

An extension only extends the time to file your return, not to pay the tax. A good faith estimate of tax due should be paid with the extension on April 15th for individual tax returns or March 15th for corporate returns. Individual returns (Form 1040) may be extended until October 15th; calendar year corporations (Form 1120 or 1120S) may be extended until September 15th.

For Those Taxpayers Not Qualifying For The 2007 Stimulus Payment

If you did not qualify for the Stimulus Payment based on your 2007 return, but your tax situation will change in 2008, it is possible you can qualify for a special benefit on your 2008 return. For those who did not qualify for a payment this year or those who received a reduced amount, the 2008 tax instructions will include a worksheet to help you determine if you can obtain a benefit when you file your 2008 tax returns. If you received a reduced amount you will need to retain the letter the IRS sends you this year as a record of the amount you received in 2008.

Free Tax Preparation Help

Consider not using an IRS Taxpayer Assistance Center if you are looking for free help to prepare your 2008 tax return. According to a report by the inspector general's office, IRS employees incorrectly prepared 83% of tax returns prepared in a test, in which Treasury Department auditors played the role of taxpayers seeking assistance.

Most communities have a number of sites offering free help during the tax-filing season. These sites include community centers, senior centers, libraries, and even the local grocery store. Usually the tax preparers at these sites are seasoned tax preparers and/or C.P.A.s donating their time to the community. It appears that they may be a better "bet" than going to your local IRS site.

Haven't Filed Last Year's Return? You Need to Do it Now

The failure to file can be costly—whether you owed more or should have received a refund. If you owe taxes for last year, both "failure to file" penalties and "failure to pay" penalties may be added on to the amount you owe. These penalties are computed on a monthly basis and added to the amount you owe. This could increase your indebtedness to the IRS by as much as 50%.

If, on the other hand, you were due a refund, you cannot receive the refund if you do not file. There is no penalty for failure to file if you are due a refund, but you must file and claim the refund within three years of the original return due date

How Long Should You keep Tax Records?

In general, keep tax records for at least three years after filing your return. However, certain types of documents, such as escrow statements from home purchases and sales or cost documentation for long-term investments, should be kept longer.

June Brides—Use your Correct Name

Taxpayers must provide correct names and identification numbers to claim personal exemptions, or earned income tax credits on their tax return. Taxpayers who change their last name upon marrying should notify the Social Security Administration (SSA), and should update their Social Security Card so the number matches the new name. Form SS-5, Application for a Social Security Card, is available at the SSA web site (www.ssa.gov), or by calling 1-800-772-1213.

Need a Copy of Your Tax Return Info?

You have two easy and convenient options for getting copies of your federal tax return information—tax return transcripts and tax account transcripts—by phone or by mail.

Request transcripts by calling 1-800-829-1040, or order by mail using IRS Form 4506. You can find the IRS Form 4506 at:

http://www.irs.gov/pub/irs-pdf/f4506.pdf

The IRS does not charge a fee for transcripts, which are available for the current and three prior calendar years. Allow two weeks for delivery. There is a fee for a request for a copy of a tax return.

Need an IRS Form or Publication?

The fastest and easiest way to get a copy of almost any tax form is to access it from the online tax forms and publications available on the Digital Daily at www.irs.gov. (Taxpayers must find this method easy since the Digital Daily receives over 1 billion hits per year. It received tens of millions on April 15th alone!)

Of course, there are several other fast and easy options to obtain tax forms and publications:

• Tax Fax Service at 703-368-9694,
• Tax Products CD-ROM,
• Local libraries and Post Offices,
• Local IRS offices.

New IRS E-mail Scams

The IRS has warned taxpayers to be on the lookout for a new e-mail scam involving the Electronic Federal Tax Payment System (EFTPS), which is a method taxpayers can use to pay their taxes online and over the phone.

Typically, a scam e-mail comes from a fictitious organization called the "IRS Antifraud Commission," and claims someone has enrolled the taxpayer’s credit card in EFTPS and tried to pay taxes with it. The e-mail claims there has been fraud attempts involving the taxpayer’s account. The e-mail deceives people into disclosing personal and financial information to "recover blocked funds."

If you are the recipient of any suspicious e-mails claiming to be from the IRS, the IRS asks that you send copies of the e-mails to them so they can investigate. Visit their web site at www.irs.gov, enter the term "phishing" in the search box, and open the article titled "How to Protect Yourself from Suspicious E-mails." The article contains instructions to follow if you receive a suspicious e-mail.

Overcharging Penalties

The IRS is overcharging many taxpayers for interest on unpaid taxes. By law, interest and penalties must stop accruing 18 months after filing unless the IRS has already sent a bill for extra tax that states why tax is due. This applies only in the case of individuals who filed their returns on time. This provision was added in 1998 to protect taxpayers against IRS delays.

Pay Your Federal Income Taxes Electronically

Taxpayers can now enroll and pay all federal income taxes through a secure web site.

Until recently, the Electronic Federal Tax Payment System, (EFTPS), has been a service that businesses and individuals use to pay all their federal taxes electronically via the phone or personal computer software 24 hours a day, seven days a week. Now taxpayers can pay via the Internet.

If you are not currently using EFTPS, please visit www.eftps.gov for enrollment information, or call 1-800-945-8400 or 1-800-555-4477. Once enrolled, it takes two to four weeks to validate the information. Enroll today, and in the near future you can use EFTPS.

Paying Your Taxes

If you write the IRS a check for back taxes, make sure you say how much is to be applied. The IRS will follow written instructions when allocating your check between the tax, penalty and interest for the tax years at issue. Designating a payment to be for back taxes stops the interest from running on that portion of the tax bill. If you do not instruct the IRS how to apply your payment, the Service is free to allocate the payment to its advantage, not yours. The IRS will no longer credit undesignated funds to the oldest tax year as an automatic rule.

Planning for Net Operating Losses

Even if 2008 will be an unprofitable year for a taxpayer’s business, year-end tax planning is necessary since a loss can be turned into an advantage by using it to recover taxes paid in prior or future years. This is made possible by carryback and carryforward provisions, which permit a 2008 net operating loss (NOL) to be taken as an additional deduction for the two preceding years and the 20 following years, with special exceptions for NOLs arising from casualty or theft losses, presidentially declared disaster areas and farming losses. Please contact your tax planner for more information.

Publication 17

Publication 17, Your Federal Income Tax, is a comprehensive tax guide the IRS publishes each year. Use it to find out what's new for your 2008 tax return and what to look forward to in 2009.

It also includes information on other critical issues such as how to file an individual tax return, what to include as income and whether you should take the standard deduction or itemize. It covers your federal income tax from A-Z.

And the best part about Pub. 17—it's free.

Scam Uses E-mail to Target Taxpayers

There is a new e-mail scam attempting to trick taxpayers into revealing personal information, such as, Social Security numbers, bank and credit card numbers and passwords, and driver license information.

Generally, the scheme advises potential victims that they are under investigation for tax fraud and liable for prosecution. The e-mail directs the recipients to an official looking web site that instructs the unwary to enter detailed personal financial information to dispute the charges.

With this information, criminals can empty bank accounts and max out credit cards electronically, and even apply for new loans and credit cards in the victims' names. The IRS does not use e-mail to contact taxpayers. All IRS letters must include a contact name and phone number.

Tax Filing for 2009 Brides

If you are a 2009 bride and have not changed your name with the Social Security Administration, you have only until December 31st to take care of this. If you do not change your name in time, you will have to file your tax return in the name that appears on your social security card, and not in your new married name.

Tax Payments by Credit Card

The IRS has expanded the credit card program to include installment payments and extension-related payments. Any one of the four major credit cards may now be used: VISA, MasterCard, American Express or Discover Card.

Tax Planning Advice is Deductible

As an attorney, tax-related professional fees are deductible. As an accountant, tax preparation fees are deductible. As an author, expenses related to your books and other tax writings are deductible. If you're self-employed, tax preparation fees can be deducted as business expenses, potentially reducing not only your income tax but your Social Security and Medicare taxes as well.

Tax Freedom Day

Tax Freedom Day will arrive on April 23rd this year, the 113th day of 2008 (ignoring Leap Day). That means Americans will work nearly four months of the year before they have earned enough money to pay this year's tax obligations at the federal, state and local levels.

Americans will work longer to pay for government (113 days) than they will for food, clothing and housing combined (108 days). In fact, Americans will work longer to afford federal taxes alone (74 days) than they will to afford housing (60 days). As a group, Americans will also work longer to pay state and local taxes than they will pay for food.

- Gerald Prante, Senior Economist and Scott Hodge, President, Tax Foundation

Tax Scam Alert

The IRS has alerted taxpayers regarding 12 common tax scams. The illegal schemes include: special tax refunds for African-Americans; instructing employers not to withhold federal income or employment taxes from wages; "secrets" to avoid paying taxes; paying income tax in order to win a purported prize; and teaching taxpayers that the payment of taxes is voluntary.

In addition, taxpayers should be wary of: Social Security tax refund schemes; purported refunds for borrowing Social Security numbers or using a phony Form W-2; sharing dependents to qualify for the earned income tax credit; impostors coming to taxpayers' homes to collect tax; sham trusts; improper home-based businesses; and claiming the disabled access credit for the purchase of pay phones.

U.S. Savings Bonds—No Interest?

When was the last time you looked at the U.S. savings bond you received as a gift many years ago, or the bonds you bought when your first child was born to help pay for college costs? Apparently, the answer for a lot of Americans is "not in a long time." The U.S. Treasury says that out there somewhere—in safe deposit boxes, filing cabinets and the bottoms of desk drawers—are some 25 million bonds worth $9.4 billion that have matured and are no longer earning interest.

Watch For 1099-DIVs

As companies are becoming more conscience of saving postage and paper, your Form 1099-DIV reporting dividend earnings will come attached to a dividend payment instead of being issued by itself at the end of the year. Be mindful to save these Forms 1099-DIV in the tax folder that you should have created to file all pertinent tax documents for the year. Keeping all your tax information in one place will prevent you from having to scramble around later to find it for your tax preparer!

We just thought you would like to know:

• The Gettysburg Address contains 269 words, the Holy Bible has 773,000 words, and the U.S. Federal Tax Code has more than 7,000,000 words.
• The most basic form is the 1040EZ, which has more than 33 pages of instructions.
• American taxpayers spend $200,000,000,000 and 5,400,000,000 hours working to comply with federal taxes each year—more than it takes to produce every car, truck, and van in the United States.
• The IRS sends out 8,000,000,000 pages of forms and instructions each year, enough to circle the earth 28 times. Nearly 300,000 trees are cut down yearly to produce the paper for all of the IRS forms and instructions.

Where April 15th Came From

Ever wonder where "April 15th" came from? If you are interested, Steve Forbes, in The Wall Street Journal reviewed the "The Great Tax Wars," written by Steven R. Weisman, which chronicles the long drive of income tax in America. Forbes states that "Weisman brings a dry subject to vibrant life by putting the tax debate in the political and social atmosphere of its time and by focusing on the often colorful individuals who made this history happen."

Where's My Refund?

Each year more than 95,000 taxpayers’ refund checks are marked undeliverable and returned to the IRS. Taxpayers who have moved or changed their addresses need to file a Change of Address Form 8822 with the IRS. Form 8822 will inform the IRS of your new address. Failure to file this form can lead to a delay in receiving refunds, if at all. Taxpayers can check the status of their refunds by logging on to the IRS web site, www.irs.gov, and following the "Where is My Refund?" link, or by calling 1-800-829-1040.

Your Personal Credit Score Affects Your Loan Interest Rates

Do you know your personal credit score? Many of us have no clue. Your credit score affects so many aspects of your life. Insurance companies, employers, lenders and many others use your credit score to determine if they will do business with you.

Your credit score is a number based on the information in your credit file that shows how likely you are to repay a loan in a timely manner—the higher your score, the less risk you represent. The credit score that lenders use is called a FICO^® score. Your FICO score helps a lender determine whether you qualify for a loan and what interest rate you will be charged. To see how different credit scores affect loan interest rates visit myFICO at: http://www.myfico.com

Income

Capital Gains Tax Rates Reduced

For tax years 2008-2010, the maximum tax rate on net capital gains (i.e., net long-term capital gains reduced by any net short-term capital losses) has been reduced from 20% to 15% (and from 10% to 0% for taxpayers in the 10% and 15% tax rate brackets) for property sold or otherwise disposed of. The reduced rate applies for both the regular tax and the Alternative Minimum Tax. The higher rates that apply to unrecaptured section 1250, collectibles and section 1202 gains have not changed.

Early Withdrawal of Savings Penalty

If you have to withdraw from a time deposit account before maturity (a CD for example), you may be faced with an early withdrawal penalty. This amount is actually forgone interest (and possibly principal) and is deductible from gross income in the year the money is withdrawn from the account. The early withdrawal penalty will be reported on your year-end 1099 from the financial institution and will offset your interest income for the year.

Filing Requirements for Children

A dependent child, under the age of 17, must generally file a return if the child has:

• Earned income greater than $5,450;
• Unearned income only that is more than $900 (for 2008), or
• Gross income was more than the larger of:
  • $900, or
  • Earned income (up to $5,150 plus $300).

Matching Information—Check Your K-1s!

The IRS has launched an enhanced compliance effort directed toward matching information reported on Schedule K-1s (the forms you get from partnerships, S Corporations, and trusts) and individual 1040s. Why? Because of the phenomenal growth of S Corps and Partnerships. Make sure your information from your K-1 matches what you report on your 1040.

Missing 1099s

Many companies now provide information for 1099s through their Internet web sites. If you have a missing 1099, you might be able to obtain the necessary information through your computer.

Social Security Benefits

Those who continue to work after age 65 have a choice: They can begin receiving Social Security benefits at their full retirement age, or delay the start of benefits and receive an increase in Social Security benefits for each year that they delay. Their benefit will increase automatically by a certain percentage from the time they reach full retirement age until they begin receiving their benefits, or until they reach age 70. The percentage varies depending on their birth year.

For example, if you were born in 1943 or later, the Social Security Administration will add 8% per year to your benefit for each year that you delay your Social Security beyond your full retirement age. For more information, visit www.ssa.gov.

Social Security Earnings

Earnings ceiling for Social Security below full retirement age is $14,160 for 2009 ($13,560 for 2008). There is no limit on earnings beginning the month an individual attains full retirement age.

Social Security Wage Base for 2009

The Social Security Administration just announced the Social Security wage base will be increasing by 4.7% for 2009. This will bring the wage base to $106,800 for 2009 from $102,000 in 2008.

What this means is taxpayers who make $106,800 or more will pay an additional $298 in Social Security taxes.

For additional information on the Social Security tax, please read "Social Security: 'The Tax'" in Henssler University.

State Taxable Interest

The interest earned on a state tax refund is taxable income on your tax return in the year you receive the refund and the interest. This rule is separate from the principle applied to the taxation of interest on state and local bonds, which are usually, tax exempt.

Student Filing Requirements

Students who can be claimed on their parents return, who have no more than $5,450 in earned income or $900 in unearned income and had no tax liability in 2008 may not be required to have federal withholding tax taken out of their paychecks.

What To Do If You Have Not Received A Form W-2

Employers must furnish your W-2 no later than January 31st of each year. If you do not receive your W-2, contact your employer. Allow a reasonable amount of time for your employer to re-mail or to issue the W-2.

If you still do not receive your W-2 by February 15th, contact the IRS for assistance at 1-800-829-1040. When you call, have the following information:

• The employer's name, address, employer's identification number (if known), and telephone number;
• Your name, address, Social Security number, and telephone number, and
• An estimate of the wages you earned, the federal income tax withheld, and the dates you began and ended employment.

If you misplaced your W-2, contact your employer. Your employer is allowed to charge you a fee for providing you with a new W-2.

You must file your tax return on time, even if you do not receive your W-2. If you cannot get a W-2 by your tax-filing deadline, you may use Form 4852, "Substitute for Form W-2, Wage and Tax Statement," but it will delay any refund due while the information is verified.

Planning & Consulting

There may be a way to tap your 401(k) account early without being burned by the 10% penalty. Company plans can permit employees to borrow from their accounts. Basically, you can borrow no more than half of your account, up to a maximum loan of $50,000. Additionally, the loan must be repaid within five years, unless the money is used to buy a principal residence. If you use the money to buy a house, you can take longer to pay it back. Although the law permits such loan provisions, it is up to your company whether you can borrow from the plan.

Advice for Newlyweds

Getting married during the summer could put you on "Cloud Nine," but there are some practical things you should attend to when the honeymoon is over and you get your feet back on the ground:

• Report any legal name changes to the Social Security Administration, so your name and Social Security number will match when you file your next tax return.
• Report an address change to the U.S. Postal Service—they will forward your mail and let the IRS know your new address.
• Consider whether you will file joint or separate returns.
• If you are buying a home, find out which expenses may be deductible and which are not.

Capital Gains on the Sale of Rental Property

Can you sell rental property and reinvest into rental property without paying capital gains tax? No. If you sell the rental property, the transaction is not a tax-free exchange. However, rental property can be exchanged for other rental property that is of like-kind nature. This is called a Section 1031 Exchange. Capital gain realized from such an exchange is deferred until such time as the property is sold.

Cashing in Your IRA to Buy a Home

IRAs can be tapped penalty free to purchase a first home, BUT only $10,000 is exempt from the penalty, as a taxpayer learned after cashing out her $15,000 IRA and using the money for a down payment. Since she was not age 59½ when the payout was made, she owes a 10% penalty on the $5,000 excess, according to the Tax court (Tussey, TC sum. Op. 2003-47).

Divorced Women May Need to Notify the Social Security Administration

Divorced women who reassume a previous name are required to contact the Social Security Administration (SSA) to advise them of the name change. A mismatched name and Social Security number can result in delays in processing returns, increased tax bills or reduced refunds.

Change your name by filing Form SS-5 at a local SSA office. The form is also available at the SSA web site, www.ssa.gov. It usually takes two weeks to have the change verified.

Electing Gift Splitting

For 2009, you may gift up to $13,000 in assets or property to as many individuals as you wish and not be required to file a gift tax return. If any gift to an individual exceeds this annual exclusion amount, a gift tax return must be filed. You and your spouse may give up to $26,000 to an individual. However, if the husband writes a check for $26,000, you will need to file Form 709 to elect to split the gift. Previously, you had the option to file the simpler Form 709-A if the only reason you were filing a gift tax return was to elect gift splitting. Form 709-A is now obsolete, and Form 709 must be filed instead.

Estimated Taxes

When you make your estimated tax payments, do not forget to include an estimate of taxes on any household employment taxes you may owe for a nanny or other domestic worker that you employ in your household.

Exception to Late Payment

The IRS waives the late payment penalty if the balance due is less than 10 percent of the total tax liability, and the balance due is paid with the return by October 15th, the extended due date granted on Form 4868. But, interest still accrues at a rate of about 6 or 7 percent.

Expecting a Bundle of Joy?

If you are looking forward to the joyous occasion of having a child, do not forget to add your tax adviser to your list of people to receive an announcement. Tax planning needs to include your anticipated bundles of joy. Be sure your tax adviser knows you will have a new tax deduction.

Faster Refunds Through Direct Deposit

Want a faster refund? The IRS says that more taxpayers are choosing direct deposit as the way to get their federal tax refunds. The payment is more secure because there is no check to get lost. In addition, it is more convenient as there is no extra trip to the bank to deposit a check. To request direct deposit, follow the instructions for "Refund" on your tax return or inform your tax preparer.

A word of caution: Some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted. Also, make sure you give the correct nine-digit routing number for your financial institution, and the correct account number when using direct deposit. Wrong numbers can cause your refund to be misdirected or delayed.

You can now split your federal refund in up to three accounts. The applicable accounts include:

• Regular passbook savings or checking accounts;
• Brokerage accounts;
• IRAs;
• Health Savings Accounts (HSAs);
• Archer MSAs;
• Coverdell Education Savings Accounts, and/or
• Individual Development Accounts (IDAs).

For more information about direct deposit of your tax refund, check the instructions on your tax form. This and other helpful tips are available in IRS Publication 17, "Your Federal Income Tax." To get a copy, visit the "Forms and Publications" section of the IRS web site, www.irs.gov, or call toll free 1-800-TAX-FORM (1-800-829-3676) to order a free copy.

Getting Ready for Tax Season

2009 is here! You need to start gathering your income and deductions together to file your 2008 tax return! Form 1099s for interest and dividends payments are in the process of being mailed. To make it easier on yourself, you should start saving all of your tax documents in one place, such as a folder or shoe box. Trust us; you will thank yourself for doing this when it is time to file your return. For more information on what details you need to be gathering, please refer to our article in Henssler University, "Taxes—On the Right Track."

Gift Tax Exclusion

The annual gift tax exclusion for 2009 is $13,000. Paying for someone else's school or medical bills does not count toward this limit. However, if you pay for someone's education or medical bills, be sure to make those payments directly to the school or medical service provider. To learn more about gift tax returns that must be filed, please refer to our article "Gift Tax Returns" in Henssler University.

Gifting

Even though there is no gift tax on transfers between spouses, the property you give your spouse is still subject to the estate tax imposed on his or her estate, until 2010.

Gifting

Gifting money or property to another is a valuable tax planning strategy to reduce your taxable estate. Generally, the following are not taxable gifts:

• Gifts that are not more than the annual exclusion for the calendar year ($13,000 per recipient in 2009 and $12,000 per recipient for 2008);
• Tuition or medical expenses paid directly to the educational institution or health care provider for another person;
• Gifts to your spouse, and/or
• Gifts to a political organization for its use.

For more information on this topic, please refer to our article in Henssler University, "Using the Gift Tax Exclusion and Income Tax Planning."

Health Savings Accounts—What's New For 2009?

For 2009, Health Savings Accounts (HSA) contributions will be limited to $5,950 if you have family coverage and $3,000 for self-only coverage.

In addition, IRA funds and funds left in flex plans can each be rolled over into an HSA in a onetime transfer. Although IRA funds that are rolled over are limited to the maximum HSA contribution limit, this provision allows you to pay medical bills, while saving you from taxes and a 10% penalty on early payouts. Flex plan rollovers are also limited to the maximum HSA contribution limit.

Household Nanny Tax

As a general rule, you do not have to withhold or pay social security taxes, or file payroll tax returns for any household employee unless you pay him or her $1,700 or more in 2009. This amount is indexed for inflation each year and has increased from $1,600 for 2008.

Keep Your Money In Your Pocket!

Taxpayers who receive large tax refunds should consider adjusting their withholding amounts with their employers. Instead of waiting until the end of the year to receive a big refund, the taxpayer should complete a new W-4, give it to their employer, and have less withholding tax taken from their paycheck. If income or employment circumstances change, the taxpayer might need to revise their W-4 at that time.

Living Apart—Taxing Social Security

Living Apart: The tax court insists that to "live apart" (for purposes of determining the taxability of Social Security benefits) taxpayers and spouses must actually live in separate residences. A couple, who maintain separate bedrooms but live in the same residence, do not "live apart" as determined by the tax court.

Marriage Penalty Tax

Several tax credits carry the potential for a "marriage penalty." A "marriage penalty" increases the tax liability of a married couple relative to the tax burden of two single taxpayers with identical total income. The tax credits that could penalize married couples are the child credit, adoption credit, and the child and dependent care credit.

Spend Wisely to Itemize Deductions

If you do not have enough deductions to itemize, consider bunching. By delaying or accelerating your eligible expenses, you may be able to itemize every other year. You can control the timing of payments, such as medical-related costs, real estate and personal property taxes, charitable contributions, and work-related expenses.

Tax Filing and Payments

File your taxes -- even if you can't pay the balance. The penalty for "not filing" is much greater (5% per month for the first 5 months) than the penalty for "not paying" (0.5% per month).

Taxpayer Numbers

Make sure taxpayer identification numbers and names for dependents match IRS or SSA records. This means each full name on your tax return should match the Social Security card exactly for that person.

Taxpayers Can Now Split Their Refunds

Taxpayers have the option to have their income tax refund deposited in up to three accounts. These accounts can be held at three different U.S. financial institutions and can be checking or savings accounts.

Form 8888, Direct Deposit of Refund, is the new form taxpayers will use to designate how they want their refund deposited. This option is available for both paper and electronic filers. Taxpayers can still use the direct deposit line on Form 1040 if they wish to have their refund deposited into only one account.

Third Party Designee with IRS

Form 1040 contains a box for taxpayers to select a third-party designee (the preparer of your tax return), who can communicate directly with the Internal Revenue Service to answer questions concerning the processing of your return, the status of any refund or payment, and respond to IRS notices you may receive. If you check this box, you do not have to complete form 2848 (Power of Attorney) for your tax preparer to discuss your tax return with the IRS.

Wash Sales

Wash sales are sales of stock or securities in which losses are realized but not recognized because the seller acquires substantially identical stock or securities within 30 days before or after the sale. Disallowed losses are reflected in basis of acquired stock. Nonrecognition applies only to losses; gains are recognized in full.

When to Fund Your IRA or SEP

Although you can wait until April 15th to make your IRA or SEP contribution for retirement, the sooner you make the contribution the richer you will be at retirement. The extra interest earned can be substantial—thanks to the wonders of compound interest! The sooner the better! Check with your financial advisor or C.P.A. for more information on calculating the additional earnings.

Withholding Penalty

Take one last look at your tax withholdings! Did you pay in at least 100% of last year's tax liability (or 110%, if you made over $150,000 last year) or an estimated 90% of this year's tax? If not, to avoid any underpayment penalties, you may want to increase your federal tax withholding from your last few paychecks. Your withholding is considered withheld evenly all year even if withheld from the last paycheck of the year.

Tax Credits & Deductions

In August 2006, the IRS announced that military reservists, who have been called to active duty between the period of September 11, 2001 and December 31, 2007, will be exempt from early distribution taxes associated with their retirement plans. Such plans include Roth and Traditional IRAs, 401(k)s, 403(b)s, and tax-sheltered annuities.

Normally, anyone under the age of 59½ who takes a distribution from a retirement account pays a 10% early distribution penalty. With this newly enacted law, this will no longer be the case for certain military reservists. This tax benefit will also be applied retroactively; eligible reservists who have already paid the 10% penalty can claim a refund by using Form 1040X to amend their return for the year in which the retirement distribution was received.

Be Careful: Unamortized Points are not Always Fully Deductible in the Year Mortgages are Refinanced!

When a loan is refinanced with the same lender, the IRS now holds that points paid on the original loan are a part of the refinancing. The unamortized balance of the original points must be added to any newly paid points and the total amortized over the life of the refinanced loan.

Can I claim the child tax credit even though my ex-spouse has custody of our child?

You are not required to be the custodial parent of your child to claim the child tax credit, but you must be able to claim the child as a dependent on your tax return. To claim the child tax credit, the following must all be true:

• You are allowed to claim the child as a dependent on your tax return;
• The child is under age 17 on December 31st of the year, and
• The child is your child, grandchild, stepchild or adopted child.

The credit is phased out for married couples whose combined adjusted gross income tops $110,000, and for single people whose adjusted gross income is above $75,000. For additional information regarding the child tax credit please refer to our article "Child Tax Credit" in Henssler University.

Can't Find That Receipt, But Know You Paid It?

Do not cheat yourself of the deduction just because you cannot find the receipt. Although it is very important to keep all of your receipts, the IRS may sometimes allow you to use a reasonable estimate—as long as you have exhibited good record keeping by maintaining the majority of your receipts for various expenses, and are only estimating on a few expenses.  Exercise good judgment and document the use of your approximation. Keep your documentation with your current year tax record keeping.

Car Donations

As a reminder, The American Jobs Creation Act of 2004 altered the rules for the amount of deduction that can be claimed for used motor vehicles, boats and planes that are donated after December 31, 2004. Starting with the 2005 returns, if the claimed value of the donated motor vehicle, boat or plane exceeds $500 and the item is sold by the charitable organization, the taxpayer is limited to the gross proceeds from the sale. The charitable organization must provide the amount of the gross proceeds to the donor within 30 days of the sale. If the vehicle is not sold by the charitable organization, the organization must provide the intended use and duration of use to the donor within 30 days of the contribution, and the donor may deduct the vehicle's market value.

Certified Lean-Burn Technology Vehicles Qualify for Tax Credit

In October 2008, the IRS added certain advanced lean-burn technology vehicles to the list of vehicles that qualify for the alternative motor vehicle tax credit. Previously, only hybrid, fuel cell and alternative fuel vehicles qualified for the credit. Advanced lean-burn vehicles generally run on diesel fuel and consist of passenger cars or light trucks with an internal combustion engine designed to operate primarily using more air than is necessary for complete combustion of the fuel.  The vehicles must also incorporate direct fuel injection technology and achieve at least 125% of the 2002 model year city fuel economy rating. Be aware, the credit is subject to a phase-out.  Please see our article in Henssler University, "The New Alternative Motor Vehicle Tax Credit" for details concerning how the phase-out works. 

 

Currently, the list of qualifying lean-burn technology vehicles and their credit amounts are:

• 2009 Volkswagen Jetta 2.0L TDI Sedan manual or automatic—$1,300
• 2009 Volkswagen Jetta 2.0L TDI SportWagen manual or automatic—$1,300
• Mercedes GL 320 Blue TEC—$1,800
• Mercedes R 320 Blue TEC—$1,550
• Mercedes ML 320 Blue TEC—$90

Charitable Contributions

If you buy a ticket to a fundraiser and later find you're unable to attend, return the ticket to the charity before the event. If you do, you'll be eligible to write off the full cost of the ticket as a charitable contribution. Be careful to get a receipt for your records.

Charitable Expense Deduction

Transportation or other travel expenses are allowed as a deduction when incurred in the performance of services on behalf of a charitable organization. You may deduct the standard mileage rate of 14 cents per mile for use of an automobile in lieu of a deduction on actual expenses. Using the standard mileage rate method, you may still deduct your actual expenses for parking fees and tolls.

Child Tax Credit

Currently, taxpayers who have qualifying dependent children under age 17 on the last day of the calendar year are eligible for a "Child Tax Credit." The qualifying child must be the taxpayer's son, daughter, stepchild or eligible foster child. The credit for 2008 is $1,000, and is subject to income phaseout rules: $110,000 for married filing jointly, $55,000 for married filing separately and $75,000 for single, head of household or qualifying widow(er).

Child Tax Credit

Taxpayers with a credit amount more than their tax could get a refund of the difference, up to 15% of the amount by which their 2008 taxable earned income exceeds $8,500.

Club Dues

Generally, you cannot deduct dues paid to social, athletic, sporting, airline, hotel and luncheon clubs. The IRS views these organizations as providers of entertainment for their members. In contrast, dues paid to professional associations, trade associations, and public service groups may be deductible if you paid the dues for a business purpose and the organization's purpose is not entertainment.

Deducting Interest on a Home Equity Loan

When you tap into your home equity with a loan or set up a line of credit for $100,000 or less, the interest is almost always tax deductible. There are three things you should consider if you want to borrow on your home equity:

• Your home is collateral for any home equity borrowing. If you fail to make the payments, you could lose your home.
• You can deduct the interest on your home equity loan only if the total debt on your home, including the home equity loan, does not exceed the fair market value of the home.
• Unless you use the loan proceeds to buy, build or improve your home, the interest on the loan is not deductible for purposes of the alternative minimum tax.

Deducting Refinance Points

If you previously refinanced your home and sell it this year, do not forget to deduct the remainder of any points you paid when you refinanced. All remaining unamortized points may be deducted on Schedule A as an itemized deduction in the year of sale.

Dependent Children

A parent who has custody of a child is generally entitled to the dependency exemption. Entitlement to the dependency exemption is essential for claiming the lifetime learning or HOPE education credits. However, a written agreement that allocates the exemption to the noncustodial parent who provides more than one-half the child's support is allowed.

For more information about the requirements to claim a dependent, please read "Personal Exemptions and Dependents" in Henssler University.

Dependent Deductions

The standard deduction for a taxpayer who is claimed as a dependent may not exceed $900 or the sum of $300 and the individual's earned income.

Donating to a Student Scholarship Organization

Georgia taxpayers who donate to a Student Scholarship Organization may be eligible to receive a tax credit on their state return. The tax credit is limited to $2,500, married filing jointly and $1,000, single. Donations must be preapproved by the Georgia Department of Revenue, as there is a statewide annual limit on this credit.

Contributions must be made within 30 days of approval, or by the end of the calendar year in which the approval was obtained, whichever comes first. Additionally, the received approval form must be included with the Georgia tax return when filed; therefore, no electronic filing.

For assistance with the approval process, contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.

Donations

Remember, you are not limited to only donating cash. You can donate non-cash items, including clothes, kitchen appliances, or even your old car! Be sure to keep a list of all the items you donate and their fair market value. Before making any large non-cash donations, you should consult your tax consultant to ensure that you have the necessary documentation to substantiate your gift.

Driver Education: Receive Up to a $150 Tax Credit

As summer is approaching, you may want to consider signing your teenager up for driver's education courses. Keep in mind, the state of Georgia allows taxpayers to take up to a $150 Driver Education tax credit. This credit can be taken for the amount paid for a dependent minor child to successfully complete a driver's education course at a private driver training school licensed by the Department of Public Safety.

This credit is offered only once per dependent minor child, regardless of how many times he or she has taken the course. The credit is also limited to the amount of the taxpayer's income tax liability, which means it is not a refundable credit.

For details regarding which schools are licensed by the Department of Public Safety, please visit the following web site: http://www.dds.ga.gov/Training. Click on the "Approved Driver Education Schools" link.

Give for Good Measure

As the end of the year quickly approaches, remember that your gifts to qualified tax-exempt organizations may be used to reduce your taxes. You can include credit card charges and payments by check in the year they are given to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.

Have You Kicked a Bad Habit?

In tax deductible medical expenses you can include amounts you have paid for a program to stop smoking. However, you cannot include amounts you have paid for drugs that do not require a prescription, such as nicotine gum or patches, that are designed to help stop smoking.

You can also include in your medical expenses the amounts you have paid for an inpatient treatment at a therapeutic center for alcohol or drug addiction. This includes meals and lodging provided by the center during treatment.

Home Improvement Loans

Points paid on a loan to improve your principal residence are fully deductible in the year paid.

Home Office Deductions

Do you telecommute? With the expansion of computers and communications, working from home has become more and more popular. Working from home can provide you with tax opportunities that were not available while working at an office. Check with your tax adviser concerning expenses related exclusively to your home office.

Job-Hunting Expenses

If you are between jobs, it pays to save your receipts for job-hunting expenses. These expenses are deductible as a miscellaneous itemized expense if they were incurred to locate a new job in the same line of work. For example, phone bills, resume advice and travel expenses may all be deductible. For more details about job hunting expenses and other types of itemized deductions, read "Itemizing Deductions—What You Can and Cannot Deduct" in Henssler University. You can also read IRS Publication 529 for additional details.

Keep Track of your Contributions

As you give to schools or other charitable organizations, be sure you keep track of your receipts. These donations can add up giving you a nice deduction if you itemize on your tax return.

Landscaping Costs—A Home Office Deduction?

Yes, landscaping costs can be deducted if a house is used for business, such as one with a qualifying home office. The deductible portion of the costs is the percentage of the house that's actually used for business purposes. This applies to lawn care, landscaping, driveway repair, etc.

Make Those Deductions Count

Do not fall into a Backdoor Tax Trap! Did you know that you could meet all the technical requirements to take advantage of itemized deductions and still lose out? This is how: You received that end-of-year bonus, and your income level was just pushed too high. So you think with the bonus, you'll pay the house payment early and give more to charity. Depending on your combined income, you might want to shift those deductions until next year if your income is lower.

The income level to take advantage of ALL your itemized deductions is to make below $159,950 in 2008. If your income is higher, your deductions begin to PHASE OUT. The decrease in your deductions could be up to 80%.

Can you see how your taxes were just raised by coming in the back door—by lowering your deductions? You might consult with your C.P.A. to perhaps shift the deductions to the years more beneficial to you.

Make Your Deductions Count!

The key to taking a deduction this year is PAYING for it before December 31st. I know this is sometimes easier said than done, especially with holiday expenses. A few ways to help slide those expenses on this year's tax return are:

• Pay by credit card before December 31st. You get the deduction the day you charge the deductible expense. Then pay off the credit card when the bill comes in January.
• Pay by check, dating the check before December 31st but do not mail it until January 1st. This meets the payment requirement and gives you a record in case you are called to prove the deduction and gives you a few days until that next paycheck.
• Take out a short-term bank loan. You will have to pay the interest but this may be worth taking the deduction in December. If it's a business deduction, then the interest is deductible on the next year's tax return.

Make Those Deductions Count!

Donate your old cell phones for a charitable tax deduction this year. By donating your spare mobile phone to participating charities, you accomplish an environmentally and socially responsible good deed. The added benefit is a tax deduction for the value of your phone. Choose the charity of your choice at the link below:

www.collectivegood.com/donate_phone.htm

Margin Interest Deduction

Do not forget "Margin Interest" as a deduction on your schedule A. This is a deduction on line 13 of Schedule A to the extent you have investment income. In some cases, if you are unable to use all of the deduction in one year, it can be carried forward to future years.

Mortgage Interest

Home mortgage interest, deductible on Form 1040, may be limited. The total acquisition debt of your home may not exceed $1 million, and the total amount of your home equity debt may not exceed $100,000. These amounts are halved for those married but filing separately. Interest attributable to the amount of debt that is equal to or under the limits is fully deductible, while interest on the debt over the limits is now "nondeductible" personal interest.

Moving Expenses: When and What Can I Deduct?

In order to take a tax deduction for moving related expenses, the move must be a result of a new job, or an existing job that is now at a new location. You must also meet both of the following requirements:

• Distance Test: Your new workplace must be at least 50 miles further from your former home than your old workplace was to your former home.
• Time Test: You must work full-time at least 39 weeks during the 12 months immediately after you move. If you are self-employed, you have an additional requirement: you must work full-time for a total of 78 weeks during the first 24 months after you move.

Members of the armed forces are not required to meet these tests.

If you meet the requirements listed above, deductible expenses include, but are not limited to: the cost of packing, crating and transporting your household goods; costs incurred to connect/disconnect utilities; costs of shipping your car and household pets to the new location; storage expenses, and travel expenses (including lodging, but not meals).

New Requirements for Charitable Contributions

Be careful when making cash contributions to charities! As a result of the Pension Protection Act of 2006, the rules for substantiating charitable contributions are tightening. In order to deduct your charitable contributions (cash, check or other monetary gift), you must be able to substantiate these gifts with a bank record or written communication from the charity. This applies to all contributions, no matter how big or small. The documentation you keep for your records needs to have the amount and date of the contribution. For more information about what documentation is most appropriate, you should contact your tax adviser.

Non-Deductible Contributions

You cannot deduct contributions made to specific individuals, political organizations and candidates; the value of your time or services; and the cost of raffles, bingo, or other games of chance.

Recordkeeping Requirements for Non-Cash Donations

A new tax bill was put in place during 2006 cracking down on the documentation of non-cash contributions. Beginning August 17, 2006, you must keep a detailed list of EVERY item you donate to Goodwill or any other charity. You are no longer permitted to assign a monetary amount to a bag of donated items. In addition, the items you donate must be in "good" used condition or better to qualify for a deduction. Your documentation must include notation of any items in excellent condition vs. good condition, as well as note if any item is new and has never been used.

In the event of an IRS audit, the IRS only uses Goodwill and Salvation Army as guidelines for valuation amounts. To help you assign the correct fair market value to your donated items, we have listed links to both Goodwill's and the Salvation Army's donation valuation guides. They are located at:

• Salvation Army Donation Guide
• Goodwill Donation Guide

Make sure you are keeping a list of all the goods you are donating in order to maximize your itemized deductions!

Refinancing

Some refinancing charges may be deductible on your tax return. Points paid for an original home mortgage are fully deductible in the year they are paid. Points paid to refinance a home mortgage should be deducted over the life of the loan. However, points associated with home improvements may be fully deductible. Always provide your tax consultant with a copy of your settlement (closing) statement so the appropriate deductions will not be missed on your tax return for that year.  For more information on the deductibility of points, please read "Mortgage Refinance Fees that are Deductible" located in Henssler University. 

Retirement Contribution Credit

Effective for tax year 2008, a nonrefundable tax credit is available for certain taxpayers who make contributions to their qualified retirement plans or IRAs. The credit, up to $1,000, is allowed for taxpayers with adjusted gross income of $26,500 or less ($53,000 for joint filers, $39,750 for head of household).

Seven Facts about the New Sales Tax Deduction for Vehicle Purchases

Taxpayers who purchase a qualified motor vehicle this year may be entitled to a special tax deduction on their 2009 Federal Tax Return. Here are seven things you should know about this deduction:

1. State and local sales taxes paid on up to $49,500 of the purchase price of qualifying vehicles are deductible.
2. Qualified motor vehicles generally include new (not used) cars, light trucks, motor homes and motorcycles.
3. Purchase must occur after February 16, 2009 and before January 1, 2010.
4. This deduction can be taken whether you use the standard deduction or itemized.
5. You will claim this deduction when filing your 2009 federal tax return next year.
6. The amount of the deduction is phased out, if your modified AGI is between $125,000 and $135,000 for individuals, and between $250,000 and $260,000 for joint filers.
7. The deduction may not be taken on your 2008 tax return.

For more information, contact your Tax Consultant or The Henssler Financial Group Tax & Accounting Division at 770-428-4025.

State Income Tax Deductions for the Self-employed

Self-employed individuals should be aware that state income tax laws could differ from federal laws. Be sure to consult with a tax advisor knowledgeable in the state income tax laws for the state in which you reside. For your information, the State of Georgia does accept these deductions.

Student Loan Deduction

Up to $2,500 in interest paid last year on college loans will be eligible for the student loan deduction on 2008 returns. But, watch those income levels—the key to qualifying for the deduction is to hold down adjusted gross income. The deduction starts to phase out for married couples with adjusted gross income above $145,000 and at $70,000 for single persons.

Summer Day Camp

Many working parents must arrange for care of their young children during school summer vacation. A popular solution—with favorable tax consequences, according to the IRS—is a day camp program. Unlike overnight camps, the cost of day camp counts as an expense toward the child and dependent care credit. Of course, even if your child care provider is a sitter at your home, you'll get some tax benefit if you qualify for the credit.

The credit is calculated up to $3,000 of expenses; $6,000 for two or more children. The credit rate ranges from 20% to 35% of expenses, depending on your income. The 35% rate applies if your income is under $15,000; the 20% rate, if your income is more than $43,000. For more information regarding child care tax breaks, please read "Child Care Tax Breaks" in Henssler University.

Tax Deduction Tips

If you have loaned money and now are unable to collect the amount owed to you, you may be able to claim a deduction for a bad debt. There is a distinction between nonbusiness bad debts and business debts, and the rules are different for each. You may deduct the nonbusiness bad debt in the year in which the debt is deemed to be totally worthless and uncollectible. Contact your C.P.A. For information about uncollectible debts and their deductibility.

Tax Planning and Legal Advice is Deductible

You may  typically deduct legal expenses you incur when attempting to produce or collect taxable income or that you pay in connection with the determination, collection or refund of any tax.  You may also deduct legal expenses that are:

• related to either doing or keeping your job;
• for tax advice related to a divorce if the bill specifies how much is for tax advice and it is determined in a reasonable way, and
• to collect taxable alimony.

You may also deduct tax preparation fees in the year you pay them.  For example, on your 2008 tax return you may deduct fees paid in 2008 for preparing your 2007 return.  These fees include the cost of tax preparation software programs and tax publications.  They also include any fees you paid for e-filing your return.

If you are self-employed, tax preparation and legal fees may be deducted as business expenses, potentially reducing not only your income tax but your Social Security and Medicare taxes as well.

Teachers' Classroom Expense Deduction

The Job Creation and Worker Assistance Act of 2002 created a deduction from gross income (AGI) for elementary or secondary education teachers and other eligible educators, including principals, counselors and aides. Educators can deduct up to $250 for non-reimbursed expenses paid or incurred for books and other supplies used in the classroom. This has been extended through 2009.

Uniform Definition of a Qualifying Child

Beginning in 2005, the IRS eliminated the differences in the definition of a "qualifying child" that previously existed for several tax benefits. The definition of a qualifying child is now uniformly applied to the dependency exemption, head of household filing status, Earned Income Tax Credit, Child Tax Credit and Credit for Child and Dependent Care Expenses.

Vacation Properties With Average Rentals of Less Than Seven Days

Losses from vacation properties that qualify as rental properties but have an average customer-use period of seven days or less do not qualify for the special $25,000 rental real estate loss allowance under the passive loss rules. This type activity is treated as a trade or business, and the owner's ability to claim a loss without restrictions depends on whether he or she materially participates in the management of the property. Because vacation property rentals are typically managed by third-party management companies, an owner will normally not be able to qualify as a material participant in the activity.

General Interest

Expense Threshold Increases for Small Business Filers

The IRS announced that many small-business owners may have become eligible to use the abbreviated Schedule C-EZ instead of the longer Schedule C when reporting business profit and loss. The deductible business expense threshold for filing Schedule C-EZ of the Form 1040 has doubled to $5,000 from $2,500. This change allows an additional 500,000 small businesses to file the C-EZ rather than Schedule C.

Extension Due Dates Change for Certain Entities

The Internal Revenue Service announced a change in the extended due date on certain business returns to help individuals better meet their filing obligations. This change, which reduces the extension period from six to five months, should ease the burden on taxpayers who must report information from Schedules K-1 and similar documents on their individual tax returns.

The change will be effective for extension requests with respect to tax returns due on or after January 1, 2009. The change applies to business entities that file the following returns and forms, and have a tax year ending on or after September 30, 2008:

• Form 1065 – U.S. Return of Partnership Income
• Form 1041 – U.S. Income Tax Return for Estates & Trusts
• Form 8804 – Annual Return for Partnership Withholding Tax

This regulation does not change the process for requesting an extension of time to file, nor does it affect extensions of time to file other types of business returns, such as S-corporations.

Processing Payroll Tax Returns

Federal and state government agencies require monthly, quarterly and annual filing of payroll tax returns. The returns recap the payroll issued by businesses to employees and the payroll tax deposits. Failure to file timely payroll tax returns will result in penalties and interest charges.

Tax Credits & Deductions

If you have business travel expenses but can't find your receipts, don't panic. The IRS allows you to take your deductions based on a per diem method. The per diem method travel allowances determine your deduction for meals and expenses while you are out of town on business. Call your C.P.A. for the per diem rates for the cities to which you travel. In some situations, allowable deduction under the per diem method may actually be higher than the actual expense! If so, take it.

How to Deduct Business Auto Expenses

If you use your car for work—either in your own business or as an employee of a company—you may be eligible to deduct some of your car-related expenses. There are two methods to choose from to deduct your business vehicle expenses:

Standard Mileage Rate
For 2009, you are allowed to deduct 55 cents per business mile traveled (for 2008, 50.5 cents for January 1 - June 30; 58.5 cents for July 1 - December 31). If you choose this method, you must keep a mileage log recording your business mileage.

Actual Car Expenses
These include depreciation, licenses, gas, oil, tolls, insurance, garage rent, parking fees, registration fees, repairs and tires.

We recommend that you keep a record of both your mileage and actual car expenses. At the end of the year, figure your deduction using both methods to determine which yields a larger deduction. There are restrictions that apply to any changes in methods used. In addition, it is very important to remember that if you wish to depreciate your car, you must do so the first year the vehicle is placed in service.

Make Your Deductions Count! In This Case, Business Tax Deductions

Keep the IRS "rules" in mind when you are giving a gift to an employee, client or vendor.

An employee can receive a gift of "relatively small value" (the Tax Court uses the $25 limit) and it is not reported on their W-2. Christmas turkeys and other holiday distributions of nominal value are treated as tax-free gifts instead of taxable compensation. If your employer gives you cash, gift certificates or similar items that are readily convertible to cash, the items are considered additional compensation, regardless of the amount.

Business gifts given to customers, vendors or other business related parties are subject to an annual $25 limitation. To be deductible, it must be an "ordinary and necessary business expense," meaning you can demonstrate that it maintains or improves customer goodwill and have a reasonable expectation of a financial return.

New Small Business Retirement Plan Tax Credit

Changes made by Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Job Creation and Worker Assistance Act of 2002 (JCWA) enable employers to make larger contributions to retirement plans on behalf of employees and to make larger deductions for these contributions. In addition, EGTRRA enacted a tax credit that permits small businesses to take up to 50% of "start-up" expenses of up to $1,000 incurred to establish a company retirement plan. The credit can be taken for almost any kind of retirement plan and any expenses that are considered ordinary and necessary to the establishment of a plan, including paying for employees' investment education. The maximum credit amount is $500 (50% of $1,000 of expenses) for each of the plan's first three years.

Self-Employed Health Insurance

The self-employed can deduct up to 100% of medical premiums for 2008. However, this special deduction cannot be claimed by self-employed persons who are eligible to participate in a health plan that is subsidized by either their employer or spouse's employer. The deduction cannot exceed earned income derived from self-employment.

Travel Business Deductions

Keep those receipts! You may be able to deduct unreimbursed business expenses if you must conduct business away from your tax home. The cost of transportation, lodging, laundry, dry cleaning and telephone expenses are some of the deductible expenses. In addition, dry cleaning and laundry expenses are deductible for the first dry cleaning and laundry bill when you get home. Generally, meals are only 50% deductible. However, certain individuals who work in the transportation industry, such as interstate truck drivers and airline pilots, are allowed to deduct 65% of their meal expense. If you would like more information on business travel deductions, read "Trips That Mix Business with Pleasure" in Henssler University.

 

Planning & Consulting

There is a point in every small business where a decision has to be made about hiring new workers. Once you have reached the decision to hire someone new, you need to consider whether to hire an independent contractor or an employee. This is an important business decision, and should be made with careful consideration. Making the right choice can save your business money, but making the wrong choice can be very costly.

Employing Children

Parents who conduct business as a sole proprietor or partnership may find substantial tax savings if they can employ their children. This will almost always result in income being shifted from a higher-bracket taxpayer, i.e., the parent, to a lower-bracket taxpayer, i.e., the child. Earned income is not subject to the "kiddie tax." However, it should be noted that once a child, who is employed by his parents, exceeds age 18, his wages must be subjected to Social Security taxes. For more information on employing your children, refer to our article in Henssler University: "Attention Small-Business Owners: Hiring Family Members Could Possibly Save You Tax Dollars."

Like-Kind Exchanges

If you are contemplating selling a business or investment property and investing in another business or investment property, you should consider what is commonly called a 1031 exchange. The property you own is exchanged for the property you want to acquire with the possibility of no gain or loss recognition. Sound complicated? Not with the use of an intermediary specialized in handling these types of transactions and provided that the properties are of the same nature or character, even though they may differ in grade or quality.

Unfortunately section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness and certain other assets.

For more information about 1031 exchanges, read the following articles in Henssler University: "§1031—Tax Deferred Exchanges of Like-Kind Property" and "Like-Kind Exchanges or 1031 Exchanges."

Who Should Issue Form 1099-MISC?

Your trade or business may be required to issue a Form 1099-MISC for certain types of income paid to others. The general rule is if your business pays an unincorporated entity $600 or more annually for services, rents, etc., the total amount paid should be reported on Form 1099-MISC. If your trade or business pays $600 or more annually for the rental of real estate, machinery or farm grazing land, the amount paid to each entity should be reported in Box 1 of the 1099. Rent for real estate paid to a real estate agent is not required to be reported on a 1099.

If the following four conditions are met, generally you must issue a 1099 for non-employee compensation:

• The payment was made to someone who is not your employee;
• The payment was made for services in the course of your trade or business;
• The payment was made to an individual, partnership, estate, or in some cases a corporation, and
• You made payments of at least $600 during the year.

Some examples of non-employee compensation are:

• Professional service fees, such as attorneys' fees (including those paid to corporations), accountants and architects;
• Payments for services such as office cleaning, auto maintenance and repair, computer repairs, etc., or
• Fees or commissions paid to non-employees, including independent contractors, or travel reimbursements for which the non-employee did not account to the payer.

Copy B of the 1099 statement is required to be mailed to recipients (the payee) with a postmark no later than February 15, 2009. Form 1096 Annual Summary and Transmittal of U.S. Information Returns and Copy A of the 1099s should be sent to the IRS and postmarked no later than February 28, 2009.

Year-End Planning

You need to check your records to make sure you have updated addresses and social security numbers for all the employees and independent contractors you paid during 2008. Gathering and organizing this information now can save you from stress and worry later.

2008 Required Minimum Distributions

The U.S. Treasury is considering delaying the date by which many Americans age 70½ and older must take their Required Minimum Distribution (RMD) from their retirement accounts and perhaps a reduction in the withdrawal amount. The amount that is required every year is based on the market value of the account at the end of the previous year (i.e., December 31, 2007 for 2008). Because of the current state of the market, millions of Americans are being forced to withdraw larger than anticipated amounts from already depleted retirement accounts. A delay by the Treasury would give Congress more time to decide if legislative action needs to be taken to alter the RMD mandates in place for 2008. While nothing has been decided yet, if you have not already taken your RMD for 2008, it may be a good idea to hold off for a little while longer to see what changes, if any, come into play. Please contact your tax planner for more information.

Avoiding IRA Early Withdrawal Penalties

There are several ways to avoid the 10% penalty on premature withdrawals from IRAs:

• Take out substantial equal payments from your IRAs; Take out up to $10,000 to help in "first time" home buying, or
• Pay large medical expenses or health insurance premiums—the excess over the filer's 7½% adjusted gross income.

Early Distributions From Retirement Plans

Any payment that you receive from your IRA or qualified retirement plan before you reach age 59½ is normally called an "early" or "premature" distribution. As such, these funds are subject to an additional 10% tax. However, there are a number of exceptions to the age 59½ rule that you should investigate if you must make such a withdrawal. Some of these exceptions apply only to IRAs, some only to qualified retirement plans, and some of the rules apply to both. For more details on the exceptions to the early withdrawal penalty, read "Exceptions to the 10% Early Distribution Penalty" located in Henssler University. In addition, the following IRS publications have details: 575-Pensions and Annuities; and 590-Individual Retirement Arrangements (IRAs).

Do I Take It Now or Later?

The problem with taking your retirement account in a single payment or lump sum is that you will have to pay taxes on it right away. That is why for most people with money in a company plan, the best strategy is to take a lump sum payment and roll it into an IRA, where it can continue to grow tax-deferred in a mixture of stocks and bonds. That way, you have the money in your control to invest as conservatively or aggressively as you want. If you have it in an account at a mutual fund or brokerage firm, once you are ready to start taking payments, you can request systematic withdrawals so the bulk of your funds can stay invested while you spend only what you need each year. If you have a traditional IRA, you pay income tax only on the part you withdraw. With the Roth IRA, withdrawals after age 59 1/2 are tax-free.

IRA Charitable Rollover

In October 2008, Congress extended the IRA charitable rollover provision to 2008 and 2009. This allows taxpayers age 70½ and older in 2008 and 2009 to make qualified charitable distributions (up to $100,000 each year) tax-free from their IRA accounts.  The distribution must be made directly from the IRA account to the charity.  Remember, because this distribution will not be included in your federal taxable income, it will not be deductible as a charitable donation, but it will count toward your required minimum distribution for the year.   

IRA Contributions Can Be Made Until Tax Filing Deadline

If you have not contributed funds to an Individual Retirement Arrangement (IRA) for tax year 2008, or if you have contributed less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 15, 2009 due date for filing your tax return for 2008, not including extensions.

IRA Catch-up Contributions

Taxpayers who have reached age 50 can make additional catch-up contributions to their 401(k) plans, SEPs, SIMPLE plans, 403(b) plans, and exempt organization and state or local governmental plans. This provision is intended to aid women nearing retirement age, who may be behind in saving for their retirement because of interruptions in their careers.

IRA Deductions

Since 1998, a change in the tax law allows an individual to take a full deduction for a contribution to an IRA, regardless of whether their spouse is covered under a retirement plan at work. The entire contribution is fully deductible for a spouse provided the couple's adjusted gross income is less than $150,000.

IRA Mandatory Withdrawals

The IRS has issued tables for mandatory payouts from IRAs. The payout is even lower (the distributions are allowed to be spread over more years) since Congress told the IRS to update the tables to reflect the fact that people are living longer. The table is available in "IRS Publication 590" on the IRS web site at www.irs.gov; search within Forms and Publications. For more details regarding Required Minimum Distributions, please read our article "Life Expectancy Tables to Determine Required Minimum Distributions IRAs and Retirement Accounts" in Henssler University.

IRA Rollovers

Rollovers now are permitted to be made with after-tax contributions to qualified plans or IRA's. If the rollover is from one qualified plan to another, it must be made by means of direct transfer. In order to make a rollover of after-tax contributions, the plan must be set up to provide separate accounting for such contributions and the earnings on the after-tax contributions.

Pension Plan Benefit Limit

Effective January 1, 2009, the benefit limit for pension plans is increased from $185,000 to $195,000. The annual compensation limit is increased from $230,000 to $245,000.

Retirement Contribution Tax Credit

The retirement contribution tax credit can save qualified taxpayers up to $1,000 for single filers or up to $2,000, if married filing jointly and each spouse makes retirement plan contributions in 2008. Be sure to check the requirements to find out if this new credit can save you money.For additional information, read our C.P.A. Insight Article titled: "Retirement Savings Contribution Credit."

Roth IRA

The maximum amount of tax favored contributions to IRAs and Roth IRAs will increase to $5,000 in 2009, then will be adjusted for inflation. Individuals who have reached the age of 50 will be permitted to made additional "catch-up contributions" to their IRA's.

Roth IRA and Retirement Plans

You can still participate in your retirement plan at work AND make contributions to a Roth IRA. One does not negate the other.

Roth IRA Contributions

401(k) plans and 403(b) annuities may allow participants to elect to have all or a portion of their elective deferrals to the plan designated as after-tax "Roth contributions." The individual's Roth contributions are subject to the annual limit on elective deferrals and is reduced by the amount of the individual's other elective deferrals. The Roth account contributions must be reported on the individual's form W-2.

Social Security Benefits

Persons who continue to work after age 65 have a choice: You can begin receiving Social Security benefits at your full retirement age, or delay the start of benefits and receive an increase in Social Security benefits for each year you delay. Your benefit will increase automatically by a certain percentage from the time you reach full retirement age until you begin receiving your benefits, or until you reach age 70. The percentage varies depending on your birth year.

For example, if you were born in 1943 or later, the Social Security Administration will add 8% per year to your benefit for each year that you delay your Social Security beyond your full retirement age. For more information, visit www.ssa.gov.

The Roth 401(k)

Created by the Economic Growth and Tax Relief Reconciliation Act of 2001, the Roth 401(k) is a new retirement-savings option available to investors. Beginning January 1, 2006, employers have the choice to offer this plan, which is similar to the traditional 401(k) plan. With the Roth 401(k), participants will not receive a tax deduction for the contributions, but they will be able to withdraw proceeds tax free. The maximum contribution for 2009 is set at $16,500, annually, for people under age 50, and $22,000, annually, for those ages 50 and older. Unlike the Roth IRA, one of the greatest benefits about this new plan is there are no income limitations to restrict investors from participating. However, unlike a Roth IRA, participants will be subject to required minimum distributions at age 70½.

Note: you may not save $16,500 in a traditional 401(k) and another $16,500 in a Roth 401(k). The maximum contribution is $16,500 annually. You should consult with your tax adviser as to which method should be most beneficial to you and your tax situation.

Employee Educational Assistance

The exclusion for employer-provided educational assistance will be extended to graduate level education and made permanent. This exclusion gives employers a tax incentive to add to an educational assistance plan of fringe benefits that may be offered to employees.

Gifting Education

You can pay for someone's tuition (undergraduate, graduate, medical school, etc.) and not be subject to the gift tax rules, as long as you pay the tuition directly to the educational institution.

Higher Education Deduction

The new tax law introduced an above-the-line deduction for qualified higher education expenses. For 2008, a single person with AGI less than $65,000 ($130,000 for married filing jointly) will be entitled to a deduction of up to $4,000 annually. If your AGI is larger than $65,000 ($130,000 for married filing jointly) but not more than $80,000 ($160,000 for married filing jointly), your maximum tuition and fees deduction will be $2,000. No tuition and fees deduction will be allowed if your AGI is more than $80,000 ($160,000).

Maximum Lifetime Learning Credit

The maximum lifetime learning credit remains at $2,000 for 2008. The credit is available for education beyond the second year of college. The Credit is 20% of the first $10,000 of tuition for the taxpayer, a spouse or dependent. Income limitations have increased: Phaseout for marrieds now begins at $96,000 and $48,000 for singles.

Savings Bond Interest Income Exclusion

Accrued interest on Series EE U.S. Savings bonds that you redeem and use to pay for qualified higher education expenses for yourself, spouse, or a dependent is excluded from income. Higher education expenses include tuition and fees. The exclusion is subject to an income phase-out if your adjusted gross income exceeds a specified level (in 2008, the joint return phase-out begins with AGI at $100,650). The exclusion is not available if you are married and file separately. You may also use the proceeds to fund a qualified tuition program.

Student Loan Interest Deduction

You may be able to deduct up to $2,500 for the interest you paid on a qualified student loan. Also, if your student loan is canceled, you may not have to include any amount in income. Go to http://www.irs.gov/pub/irs-pdf/p970.pdf to read Publication 970, Tax Benefits for Education, for additional information.The deduction is claimed as an adjustment to income so you do not need to itemize your deductions on Schedule A.

You cannot claim the deductions if:

• Another taxpayer claims an exemption for you as a dependent,
• Your filing status is married filing separately, or
• You are not legally obligated to make payments on the loan.

Student Loans

Now may be the time to consolidate your student loans if you have not done so in the past. You may be able to lock in a new fixed rate in the 3 to 4 percent range that will hold for the life of the loan. New graduates who are still in the six-month grace period may be able to lock in as low as 3.25 percent. By law, there are no costs associated with consolidating federal student loans or credit checks. The only rule is that you cannot currently be in default or more than 60 days late on your outstanding federal education loans.

Tuition Deduction

The deduction for higher education expenses might be available to taxpayers who do not qualify for the Hope and lifetime learning credits because their adjusted gross income exceeds the phase-out thresholds. In 2008, the credits are completely phased out if the taxpayer's modified adjusted gross income exceeds $52,000 or $105,000 for joint filers; however, the maximum $4,000 deduction is available for taxpayers with adjusted gross income up to $65,000 or $130,000 for joint filers.