This article does a good job highlighting some of the problems you may encounter if you purchase real estate within a corporation:

Source

7 Reasons to Keep Real Estate Out of your Corporation

By Dawn Winstead, CPA, CFP®

One of the most important decisions you will make when investing in real estate is what type of entity should hold the assets. Many investors use corporations to hold their real estate because of the liability protection. However, holding real estate in a corporation is a big mistake for tax purposes.

Here are just a few reasons you should think twice about holding your real estate in a corporation:

1. Double taxation for C corporations. When you sell appreciated assets in a C corporation you will be hit by double taxation on the gain. The company will pay tax on the gain when the property is sold, and then the shareholders will pay tax on the proceeds once they are distributed out.
2. Franchise tax (certain states). As your real estate appreciates, so will the yearly tax.
3. No favorable capital gains rates for C corporations. The 15% favorable capital gains tax rate available to individuals is not available to C corporations. Therefore, any gain on real estate sales will be taxed at the company’s regular tax rate. Currently, the highest rate for C corporations is 35%.
4. No basis step-up for beneficiaries. When you own assets individually or through a partnership, your family may inherit the assets at their fair market value when you die. They can then sell the assets with minimal gain. However, if they inherit the stock of your corporation, there is no “step-up” in basis for the real estate. The shares of stock will be passed on at fair market value, but not the real estate. It is more difficult to sell the stock of a company than it would be to sell just the real estate it holds.
5. Loss limitations with an S corporation. S corporation shareholders do not receive debt basis for loans made by a third party to their corporation like partners in partnerships do. The only way the shareholders can acquire debt basis is to personally make loans to the company. Since basis (both stock and debt) determines the taxation of distributions and the deductibility of losses, not receiving basis from third party debt is a major disadvantage for S corporations holding real estate. S corporations cannot refinance their properties and distribute the proceeds to the shareholders tax-free unless the shareholders have sufficient basis.
6. Built-in Gains Tax (BIG). When a C corporation that owns appreciated assets converts to an S corporation and then sells those assets at a gain within 10 years of the conversion, the corporation will be charged the BIG tax at 35%. The calculation of the tax is quite complicated and can be affected by other things, including the corporation’s taxable income.
7. Personal Holding Company Tax (PHC). A C corporation with rental income may be charged the PHC tax if it does not make regular dividend distributions to its shareholders. The PHC tax is at a 15% rate and it is computed in addition to the company’s regular income tax.

If you are planning on making a real estate investment, extra care should be taken to decide upon what the appropriate entity structure should be. Typically the ideal entity to hold real estate will be a Limited Liability Company.

Corporate Income Tax Rates--2010, 2009, 2008, 2007, 2006, 2005

       Taxable income over     Not over      Tax rate

         $         0        $    50,000        15%
              50,000             75,000        25%
              75,000            100,000        34%
             100,000            335,000        39%
             335,000         10,000,000        34%
          10,000,000         15,000,000        35%
          15,000,000         18,333,333        38%
          18,333,333         ..........        35%

Source

With the wild fluctuation in gas prices comes fluctuation in the IRS approved mileage reimbursement rate. For 2010, the rates that are approved are:

• 50 cents per mile for business,
• 16.5 cents per mile for moving, and
  
• 16.5 cents per mile for medical trips.

That is a drop from 2009's rate of 55 cents per mile.
Source

If you are self-employed, you may or may not be aware of how many retirement plan options are available to you. This webpage does a good job of summarizing those choices and some of the pros and cons of each. Some plans are easier and cheaper to administer, while others offer a much larger tax deduction. Let me know if you have any questions or if I can help you in getting one of these plans set up for you and your company.

If you already have a corporation, you may be considering whether it should be changed from and S to a C or a C to an S. This is not an easy decision or one that should be undertaken lightly, becuase the tax consequences to your change could be great. This site does a fair job of outlining the differences between an S and a C corporation and why you might want to switch from one to the other.

Just know that switching from a C to an S does not avoid taxation on any retained earnings you have already earned or assets that have appreciated but not sold. There is a 10 year waiting period for selling any assets (including receivables and goodwill) held by a C that has converted to an S. The BIG tax (Built in Gains) goes away after 10 years, but if you are considering converting from a C to an S you would be wise to have an appriasal done of your business just in case you need to sell an asset before the 10 year time limit expires.

If you were considering converting your traditional IRA (or Simple or SEP IRA) to a Roth IRA for the future tax benefits, you may want to check out this tool over at Vangaurd.com

The recent Stimulus legislation extended the generous depreciation limits we have been enjoying.

The Home Office deduction is becoming more and more popular these days with new work situations and more people turning to self-employment.

To see if you qualify for the home office deduction, here are the IRS guideline.

• your principal place of business (if you work from home, this one is usually easy to accomplish) or
  
• a place that you meet your customers, clients or patients as a part of your normal course of business or
• you have a separate structure that you use in connection with your business.
  

Your deduction is limited to income from your business (any excess is carried forward).

The allocation percentage is based on the square footage of your office space to the square footage of your entire home.

The kinds of expenses you can deduct would be mortgage interest, property taxes, HOA dues, utilities, pest control, home insurance, and maintenance and repairs on your home.

[Source]

As an employer, one of your responsibilities is to verify the accuracy of the social security number your employees provide to you. If there is an error in the number you use, it could cause headaches later down the road when the reports you file are returned for correction.

"Employers can now verify employee Social Security numbers for wage reporting purposes using an automated Telephone Number Employer Verification(TNEV) service 24 hours a day, 7 days a week. TNEV allows registered users to verify up to 10 employee names and SSNs at one time - without having to speak to a Social Security representative."

http://www.socialsecurity.gov/employer/w2news/documents/TNEV.pdf

[Source]

As you no doubt heard, Congress extended the Home Buyers Credit and expanded it to cover even more people. Here are the details to see if you qualify...

[Quoted from Here]

First-time home buyers still get a credit of as much as 10% of the purchase price, up to a maximum $8,000. "First-time" means people, including both partners of a married couple, who haven't owned a principal residence for three years before the purchase. So if you have never owned a home, but your wife has recently, then you don't qualify.

All taxpayers who claim a credit must use the home as a principal residence for the next three consecutive years.

Under the new law, as under the old, 2009 home buyers may claim the credit on either their 2008 or 2009 returns, and 2010 buyers may claim the credit on either their 2009 or 2010 returns.

Taxpayers do not qualify for a credit if they buy from a lineal ancestor or descendent, including parents or grandparents and children or grandchildren. Also, it can't be from their spouse or the spouse's lineal relatives.

To take advantage of the tax credits, a buyer must have a contract in place before May 1, 2010, and the deal must close before July 1, 2010. No further extension is expected.

The price of the house is now capped. For purchases made after Nov. 6, no credit is available for any home costing more than $800,000.

There is now a tax credit for repeat buyers as well as for first-time buyers. Taxpayers who have lived in one residence for five consecutive years of the past eight can now qualify for a tax credit of as much as 10% of the purchase price, up to a maximum $6,500, of a new principal residence. The new home does not have to cost more than the old one. [so you can't buy a second home or a rental property to qualify]

Income limits for people who qualify for a tax credit are far more generous than under the previous law. For single filers, the credits now phase out between $125,000 and $145,000 of modified adjusted gross income; for married couples, the range is $225,000 to $245,000. For most people, modified adjusted gross income will be the same as adjusted gross income.

The new law contains anti-abuse measures designed to stem fraud, which became a problem with the previous home-buyer tax credit. Most buyers must be 18 or older, and no taxpayer may take a credit if he or she is claimed as a dependent on someone else's return. Taxpayers taking the credit will also have to furnish proof of purchase. According to Robert Dietz of the National Association of Home Builders, this will usually be a HUD-1 form.

Q: If I buy a new home and live in it, do I also have to sell my old one in order to take advantage of the credit?

This is unclear. The law appears to allow repeat buyers to retain their old home, for which no tax credit was given, while claiming a credit for the new one. What is clear is that if you buy a new home using the credit, you must use it as your principal residence.

Q: Is it possible to qualify for a credit if I am building a home on a lot I already own?

Yes, according to the National Association of Home Builders. The purchase date is usually considered to be the date of first occupancy, so you would need to move in before July 1, 2010.

Note: This credit has been abused greatly, and most professionals are expecting a very high audit rate of those who claim this credit. That doesn't mean don't claim it, after all they are giving away money here, but make sure you qualify (and double check the rest of your return while you're at it).

The IRS has made the deduction of S Corp Officer Health insurance premiums like walking a maze. The officer must include the premiums in their wages (reported on their W-2). Then the corporation deducts this as officer fringe benefit/compensation. So far, we have a wash (especially if there is only one shareholder).

Now the officer can deduct the premiums paid on their personal return as an above the line deduction, just like any self-employed person.

While I understand the reasoning behind this, the IRS could have just ruled it a wash and saved a lot of time and payroll headache and we arrive at the same bottom line. But that would make too much sense I guess.

Be sure to note the other requirements about whose name the policy should be in and that the company needs to either pay the premium directly or reimburse the shareholder.

Link
Link 2

As an employer you likely want to reward those employees that have been loyal to you over a long period of time or have made some other noteworthy acheivement. Unfortunately, if you give a gift or check to an employee it will be considered compensation (and therefore taxable) unless it meats one of the IRS's exceptions. Those are:

1. De minimis fringe benefits. Awards qualify as de minimis fringe benefits and may be excluded from recipients' incomes if they are:

• given occasionally;
• non-cash; and
• nominal in value.

Examples: plaques, certificates of achievement, mentions in internal newsletters.

2. Length-of-service awards. That gold watch, for example, can be pricier, but may not be given for fewer than five years of service.

3. Safety achievement awards. These awards are tangible, but must be limited to 10% of eligible employees a year. Managers can't receive these awards.

Other things to note regarding awards: "Length-of-service and safety achievement awards come with some additional strings. First, these awards must be part of a meaningful ceremony. Meaningful is flexible. Second, the maximum that any one employee can receive tax-free depends on whether you have a written plan that doesn't discriminate in favor of upper management. If you do, you may exclude up to $1,600 a year from an employee's pay. The average cost per recipient of all awards in a year can't exceed $400. If you don't have a plan, you may exclude only up to $400 from an employee's pay."

Link

If you are selling mutual funds, you will likely calculate your stock basis on the average cost basis (that is what many fund companies report the basis to you at).

That option is not available for individual stocks though. The IRS assumes you will use FIFO (first in first out) unless you make the written election to use specific identification. FIFO means that the first shares you bought will be the first sold. In an appreciating market, this likely means that you will face a gain on the sale of the stock. By specifically identifying the shares sold, you may be able to defer some of the tax gain until you later sell the remaining shares.

In order to specifically ID the shares sold, you need to communicate to your broker something like "Sell the 1,000 shares that I originally purchased on February 16th." Or you could even say "Sell 1,000 shares of that I originally bought for $5 a share." Be sure to do this before the sale occurs. Then next big step is to follow up with your broker becuase you need a confirmation from them in writing for your files showing that they received your request and followed it.

For more info...Link

While the rate remains the same (7.75%), the breakdown between state and county will change effective October 1, 2009. So be careful when completing your Nov. 15th sales tax returns of this change.

Wake County residents will pay the state rate of 5.75% and the county rate of 2%.

Link

If you are facing a tax bill on money your spouse didn't claim and you had no knowledge of on your joint return, you may qualify for innocent spouse relief. It is not easy, but here are some steps to try to find relief from your spouse's (or ex-spouse's) tax bills.

Link

The IRS has held that stock received from an insurance company during a demutualization has no cost basis and if you take the cash, the proceeds are 100% capital gain.

A recent court case has told them their position is wrong, but the details about what your basis in the stock is is still cloudy. Some point to the amount (or a percentage of) the premiums you have paid over the years. Others point to the IPO price as a good value of what the stock ownership was valued at. We'll wait and see how this one plays out.

You may have received these kind of proceeds from Met Life or Prudential, two popular insurance companies that went through his many years ago. If you are still holding the stock, then you will want to stay up to date on this issue.

[Link]

With each new year, many aspects of the IRS tax code is adjusted for inflation. Inflation is very low right now, and for the first time since I can remember many of tax code amounts are holding steady from 2009 to 2010.

The FICA max remains steady at 106,800. [Link]

401K maximum contribution amount remains at 16,500 and the catch-up max remains at 5,500 [Link]

IRA Contribution limits remain at 5,000 and 1,000 for catch-up participants. [Link]

If you are over 70 1/2 then you are required to take distributions from your traditional IRA. In 2009 the IRS waived this requirement due to the economic hardships that many are facing. If you have already taken your RMD and you didn't want to, you can roll it over to a new IRA account so that it doesn't face taxation.

"Individuals generally have until the later of Nov. 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution. "

Link

Some basic rules for housing allowances for ministers:

• The housing allowance must be officially designated before the compensation is received and the declaration should come from the payer, not the recipient.
• The housing allowance is not including in gross wages on the W-2 or 1099, but it should be noted in box 12 of the W-2 or an additional statement accompanying the 1099. The reason is because this income is subject to self-employment tax.
• Housing allowances are not subject to income tax, but they are subject to self-employment tax.
• Note that if you are exempt from social security taxes, then housing allowances are free from any taxation.
  

Educational expenses are usually deductible, but how you should deduct them is another matter that is more difficult.

If the education maintains or improves your skills in your current job or it is required by your employer to keep your salary, status, or job, then you can deduct them as a business expense (Either on your corporate return, Sch. C, or Sch. A as a misc. itemized deduction).

If the education is to meet the minimum educational requirements to qualify for a trade or business, or if it is part of a program of study to qualify for a new trade or business, then it can't be deducted as a business expense. Instead it should be deducted with the tuition and fees deduction or the various tuition credits. Note that only tuition and fees qualify for these deductions though.

Link

Documenting your travel and mileage expenses can be a real task, but it needs to be a priority if you want to be able to take the deduction on your tax return.

The IRS says that deduction documentation needs to be: "Documentary evidence ordinarily will be considered adequate if it shows the amount, date, place, and essential character of the expense." They also add that it needs to be updated in a timely manner, and they suggest weekly. Developing this list at the end of the year is not acceptable according to IRS standards.

So buy a small notebook or print off this sample mileage record log that you can use [Link] and keep it in your car. That way you can write down the miles as they happen and it won't get away from you.

Keep in mind that this chore is much less painful than an IRS audit would be.

If you receive payments from a disability insurance policy, odds are that is not taxable to you. Since you didn't deduct the premiums that you have been paying over the years, the benefits are not taxable (similar to life insurance policies).

However, if the policy was provided through your workplace and your employer has been paying (and deducting) those premium payments through the years, then the benefits would be taxable to you. So this would be the exception to the rule.

Note that if you have a policy where some of the policy is paid by your employer and some is paid by you with after-tax money, then you could exclude a portion of the benefits from taxation based on the ratio of who paid the premiums.

Most new small businesses want the self employment tax benefits of an S Corporation. They are still faced with a choice becuase an LLC can be taxed as an S Corporation. So the choice of forming an LLC or a corporation can be a difficult one.

Both structures offer great liability protection over your personal assets.

One benefit that I have read about is that LLC's offer greater protection of your business assets if you have a personal liability problem (an auto accident, someone falls at your house and sues you personally). It would be a travesty to lose your business ownership due to a personal liability suit. [Source]

LLC's also have lower administrative requirements, like keeping annual board meeting minutes and electing officers. While not difficult to do, if you neglect this practice for your corporation then the courts could disallow your corporate structure and that would expose you to liability and loss.

LLC's do have a greater price tag in NC. Starting them up is the same ($125 to the Secretary of State), but maintaining them is not equal. LLC's pay an annual fee of $200, while corporations pay an annual fee of $60. Consider that extra fee like an insurance policy that gives you the above mentioned protections.

There is a reason that many people are organizing LLC's rather than corporations these days, but these are just a few of the considerations when starting a new business. Be sure to call and discuss this with me before making a move, as well as with your attorney.

Disclaimer: I am not an attorney and you should not rely simply on the above information when making your decision about organizing your business. These are just things you should consider and discuss further with you attorney so that you make the best choice.

The IRS is apparently trying to add online access to your tax records. It comes at a hefty price tag, and for now it is just a faint promise. It would be a great tool if they could create this access without any security issues. Hey, the banks do it with equally sensitive information, so why can't the IRS? I'll admit I have some doubts and concerns.

But the lure of not spending large amounts of time on hold to speak to an IRS representative so that they can mail or fax an account transcript is very appealing. This move would make communication between the IRS and taxpapers/preparers so much easier, and would free up the phone lines for more complex issues than ordering a transcript.

Source

We are all way to familiar with sales taxes, but what exactly is a use tax?

The state of NC would love for you to be better informed of your use tax responsibilities. If you buy something outside of NC and bring it/ship it here for use, then you are liable for use tax. It is the same rate as the sales tax, and submitted in the same way.

If you are a business you would submit the use tax when you submit your sales tax due each month. If you are an individual the state of NC has made it easy for you to submit your use tax on your personal tax return. You can either use a table to estimate your use tax liability (based on your income level), or you can report actual out of state purchases.

This is becoming more and more of an issue for states as they lose more money to out of state retailers with an online presence like Amazon. But don't think that just becuase Amazon doesn't charge sales tax on your purchase that you are off the hook. According to the law, responsibility for paying the use tax on that purchase lies with you, the purchaser.

Article
Sales and Use Tax Home - NCDOR

Two new schedules in one year! So much for tax code simplification I guess.

First it was Schedule L, and now we have the introduction of Schedule M. It will be used to help taxpayers know if they qualify for making work pay and retiree credits.

If you are paying your tax preparer by the page (Jackson Hewitt, HR Block, Liberty), beware. These groups must be lobbying congress to add additional schedules to pad their bottom line.

The good news if you are a client...I charge by the hour and not by the page, and the computer fills out forms like these effortlessly.

Link

People are suffering from layoffs and tighter budgets due to the downturn in the economy. The state of NC decided that a tax hike in sales tax, income tax, and various other "fees" was just what we needed in order to get everything back on track. Everything in their arena that is.

Today the NC state sales tax rate goes from 6.75 to 7.75% here in wake county.

The general assembly and governor also signed an "income tax surcharge" into effect. A very creative way of saying tax hike.

This is supposedly a "temporary" measure. The extra cent charged on every $1 in purchases expires July 1, 2011, while the income tax increase expires at the close of 2010. Don't hold your breath.

Link 1
Link 2

This can be a tricky question if you own a business and acquired an asset in some other way than by just purchasing it. This website is helpful and offers answers to many of the scenarios that business owners encounter. Link

If so, there are many tax considerations that will impact how you want to structure the sale. The Buyer and Seller have very different interests when it comes to the tax law, so make sure you understand the offers and how it will effect you personally. This article is a good introduction to the topic.

Link

If you have made some income on the side the IRS will require you to report it. The question is how much can you claim as expenses. If the activity is a hobby, then you can claim expenses up to the income, but not to the point of giving you a loss. If the activity is a bona fide business, then you can claim all of your legitimate business expenses and take a loss on your tax return. This article helps explain the differences in a hobby and a business according to the IRS.

Link

If you have an auto, boat, or airplane that you no longer want and choose to donate it to a charity, be sure to follow these guidelines.

The charity needs to provide you with either a 1098-C [see a copy here] or a written contemporaneous acknowledgment of the contribution which states:

• The donor
• The taxpayers social security number
• The charities federal ID number
• The vehicle ID number
• A description of the vehicle
• A good faith estimate of the value of any goods or services provided by the charity in exchange for the vehicle, or if none then a statement that only intangible religious benefits were received.
• If the charity sells the vehicle, the sale must be at arm’s length, and the sales price must be listed. Your donation will be limited to the amount of sales proceeds unless it is was sold at a discount to further the purpose of the charity.
  
• If the charity keeps the vehicle for use, the letter must state the use and time frame the charity will use the vehicle and that the vehicle will not be transferred before the use is completed. Your donation will be the fair market value.

If the donation is greater than $5000, you will need to have a qualified appraisal done on the vehicle. This appraisal will be attached to your return when you claim the donation.

Keep in mind that donated vehicles are an area that the IRS has cracked down on because of abuse, and that claiming this deduction will increase your chance of being audited. This shouldn’t discourage you from taking the deduction, but just encourage you to make sure you do everything by the books.

Be careful that your car meets the cash for clunkers standards. Apparently the EPA adjusted their numbers at the last minute and some cars that qualified before do not meet the standards now.

Link

If you've wanted to open a Roth IRA because of the long term tax benefits but have been told no by the IRS because of your income levels, then there is a limited time opportunity for you. You can make a non-deductible traditional IRA contribution in 2009, and convert it to a Roth IRA in 2010. This is a back-door method that is available in 2010 only. You will owe tax on the growth in the traditional IRA when you make the conversion. The conversion of the original contribution amount ($5000) will be tax free since it was nondeductible to begin with. For more info, click here.

If you claim the standard deduction because it requires less documentation and paperwork, the IRS has something to say to you. They are adding a new form for those who take the standard deduction, but who also claim some of the optional additional deductions like real estate taxes. This will likely apply to those who have a small or no mortgage interest deduction, but do own a home (retired individuals generally). So much for tax code simplification I guess.

Link

This is not a popular deduction, and few people probably realize it is even an option. But if you have a casualty loss then you can write that off, even if it is a personal asset (like a car or home). [Usually personal losses are not allowed and only business losses can be deducted, but this is the exception].

Your loss has to be the complete or partial destruction of property resulting from a sudden, unexpected and unusual identifiable event. This rules out natural wear and tear (like the need for a new roof after 20 years or an AC unit after 10). However, if the damage is the result of:

• Fires, either started by, for example, an electrical short or a lightning strike;

• Storms, such as tornadoes, ice, hurricanes and the like;

• Floods or, in some cases, droughts; and

• Burglary or theft
  

• Earthquakes and mudslides.

then you probably have a loss that you can claim.

You have to reduce your claim by any insurance money your receive. The claim is also limited in other ways by the IRS formulas, basically making it worth your time and effort to only claim large casualties.

More info here and here.

Most people are familiar with the sales tax holiday for school supplies and clothing that his coming up Aug 7-9. It can be a chance to save 6.75% on that new computer you need or those new shoes you've been eying.

But did you know NC also has a sales tax holiday coming up in November? That's right, another tax amnesty is coming up Nov 7-9 on energy star qualified products. So if you need a new "Clothes
washer, freezer, refrigerator, central air conditioner, room air conditioner, airsource heat pump, geothermal heat pump, ceiling fan, dehumidifier, or programmable thermostat" then this is just for you. Note that these have to be purchased for personal (not business) use. More details can be found here.

On July 24th the final phase of the federal minimum wage increase went into effect. That makes the current minimum wage in NC $7.25. To read more about this change, as well as some of the exceptions to this rule, you can go here, or here.

The Obama Administration is proposing a change to the FAFSA process (for federal financial aid for college students). Instead of having to pull your tax records out of a file [or calling your tax preparer to get a copy :) ], you may have the option of importing your needed tax info from the IRS database. It seems like this would improve accuracy and cut down on confusion as well. It may raise some privacy concerns, so we will see where this goes.
Source

I hope none of you ever need this advice, but if you find yourself in the middle of a divorce situation there are tax issues to consider. This article highlights eight of the issues and their consequences.
Link

A draft copy of the newest form 1040 has been released.

Link

The general rule is that if you withdraw traditional IRA funds before age 59 1/2 then you will pay a 10% penalty on the early withdrawal (plus regular US and state income taxes). For every rule there are exceptions, and if you meet one of these exceptions you can avoid the 10% penalty (but not the income taxes).

Exceptions:
1. Permanent Disability
2. Death of the IRA Owner
3. For Medical expenses that are greater than 7.5% of your adjusted gross income.
4. To help pay for a first-time home purchase ($10,000 max)
5. To pay higher education (college) costs for you, a spouse, a child, or a grandchild.
6. To pay back taxes to the IRS after a levy has been placed against the IRA
7. To pay medical ins. premiums after losing your job (and being on unemployment for 12 weeks)
8. As part of substantially equal periodic payments based on your life expectancy.
9. Ordered by a domestic relations court (divorce settlement).

Keep in mind that you can always take the original contributions from a Roth IRA out without penalties or taxation (see here why I love the Roth so much).

When times are tight, and you need the cash, you may be tempted to raid your 401K funds to make ends meet. Or it may be that you've been laid off (or you company has ceased to exist) and they need to distribute your funds. Here are your options for a 401K, as well as the tax implications of each.

Still Employed - Hardship Withdrawals
"While you are employed by the company that offers a 401(k), you usually have
an opportunity to access savings under certain hardship conditions. The
drawback however, is that qualifying for this provision can be difficult. Just as
the IRS has its list of qualifying financial hardships (medical expenses or
disability), individual plans often do as well. That means you must qualify under
both sets of rules, which may be more difficult. Another drawback of a hardship withdrawal before age 59 ½, is the 10% penalty on whatever you’ve withdrawn. The withdrawal is also taxed as income. Taxes and penalties can make a hardship withdrawal expensive."

Still Employed - Non-Hardship Withdrawals
"Not every plan allows non-hardship withdrawals. If yours does, you have an
opportunity to take money out of your account and redistribute it as you see fit.
Generally the best bet is to roll the amount into an IRA. That way you avoid taxes,
and you have a larger range of investment options, usually with lower
administrative fees. Rollovers made directly to the owner of the 401(k) must be
reinvested in a qualified plan within 60 days or be faced with a 10% penalty."

Still Employed - Loans
"If you’re in a bind, a 401k loan may be your only remaining option. A loan from your
401(k) allows you to borrow against your savings. Some use restrictions similar
to those for hardship withdrawals. The loan must be paid back, usually within
five years, and loans cannot be rolled over into an IRA. However, if you leave a
company and still have an outstanding 401(k) loan, you’re oftentimes required
to pay it back in a short amount of time, usually one to two months."

No Longer Employed with the Company - Lump Sum Withdrawal
"If you are under 59 1/2 then you will face a 10% early withdrawal penalty as well as federal and state income taxes. So you will likely lose 40% or more to the government by going down this path. The IRS mandates that 20% of the withdrawal be withheld from the payment (but this is clearly not enough to cover the tax bill, so don't spend it all).
If you are over 59 1/2 then the penalties won't apply, but you will still have to report all the withdrawals as income, which could push you into a higher income tax bracket if the retirement savings are substantial.

No Longer Employed with the Company - Rollover to IRA
This is probably the ideal option in most cases because it will avoid taxation on the withdrawal. The ideal scenario is a direct rollover between the two trustees, where you never touch the money. Once the money is in the IRA, you have a few withdrawal options depending on what you age is.

Source 1
Source 2

The Cash for Clunkers Law was passed today by the Senate, giving consumers the green light to trade in their old gas guzzler for a newer model. The official website is here. You can also read more about the bill here.

IRS Installment Agreement
For more info on these, you can read here. In order to apply fill out IRS Form 9465, Installment Agreement Request. They will want the balance paid off in 3 years max. You will owe penalties and interest.

IRS Partial Payment Installment Agreement
Similar to a regular Installment Agreement (above) except the payments do not pay off the tax debt in full. After the terms of the Installment Agreement are fulfilled, the remainder of the IRS Tax Debt is forgiven. Although requesting a Partial Payment Installment Agreement with the IRS is easier than submitting an Offer in Compromise, it’s still tricky. First, you need to write a letter stating your request for a Partial Payment Installment Agreement and submit it to the IRS along with IRS Form 9465 and IRS Form 433-A.

Borrowing from a bank or credit card
If you have the option of borrowing from a bank to pay off your tax debt, this will give you the best rates. Penalties and Interest assessed by the IRS on Tax Debts are a lot higher than a typical loan from the bank. A typical Bank Loan, if you can get one, is around 6.5% interest versus Penalties and Interest on an IRS Debt which is usually 8% compounded daily. A Credit card will most likely have a much higher rate and should be seen as a much later option.

Offers in Compromise
Read more here about this possible but unlikely solution to settle with the IRS on a lower amount.

Source

If you are relatively healthy and self employed, then the HSA is the medical plan for you.

It combines a high deductible medical insurance plan with a savings account that offers tax benefits. When you go to the doctor (which is rarely since you are a healthy person), then you pay the brunt of the doctor bill. You save considerably on your monthly insurance premiums becuase of your high deductible.

Ideally you would put the savings from your lower insurance premiums into your Health Savings Account. This is just a cash savings account that has been designated for Health savings. It must be designated as a HSA when it is opened. Contributions to this account are tax deductible on the first page of your tax return, which is a good thing, just trust me. You can contribute as much as 3,000 if you are single and 5,950 if you are a family plan. Money in the account continues to be available (unlike a flex account at work) even if it is not used.

For more info on HSA's, here is a link.

If you have had debt forgiven/cancelled by a credit card company or other creditor, then you have likely learned this rule the hard way...the IRS declares that you have received income and owe them some tax. They look at it as if the creditor paid you the money and then you used it to pay off the loan. So unless it meets one of the following exceptions, you must declare the forgiven debt on your tax return. The exceptions:

• Bankruptcy
  
• Insolvency, which means basically that your total debts are more than the fair market value of your total assets
• Certain farm debts
• Non-recourse loans, which are loans for which the lender cannot pursue you personally in case of default
  
• Forgiveness of Qualified Principal Residence Indebtedness (this is a newer exception that was part of the stimulus bill)

For more info read this article

The general rule is that if ten years have passed since the IRS first discovered your tax debt then they can't collect the debt from you anymore. (Good luck making it that long without being levied or garnished). It becomes illegal for the IRS to contact you regarding the debt 10 years after they determine you owe it.

That is the general rule, but here are the exceptions that extend the 10 years:

• Filing An Offer in Compromise
• Being in litigation with the IRS
• Request a Collection Due Process Hearing
• Federal Lawsuit: If the IRS sues you the statutes can be extended
• Signing a Waiver: Signing a waiver might be required for things like setting up an Installment Agreement with the IRS.
• Ch. 7 or Ch. 13 Bankruptcy

For more details about this you can read here...

If you drive an older car that gets poor gas milage, a proposed new law (which has not passed yet - so don't take action until it does) could offer a voucher toward the purchase of a slightly more efficient car. Think of it as an auto industry stimulus payment that may also benefit you. More details and full listing of the proposed rules are found here.

If you are a user of Microsoft Money you might want to consider switching to Quicken (or another program like mint.com). That is because Microsoft is phasing out their Money program. Here are more details about how you can ease the transition from Money to Quicken.

If student loans are eating up your budget, you should look into the new income based repayment program. It caps the monthly payments based on your income levels and could even lead to some of your debt being forgiven. They have created a video that helps explain the program and have more details here.

Most people realize that their payments to a day care facility qualify them for the child care credit on their tax return. But you may not realize that payments to send you kid to a day camp (not overnight camps) also qualify for the credit, so be sure to save your receipt. So enjoy your summer break, and enjoy the break you get from the IRS for sending your kid to summer camp!

More info...

Here is an article about the difficulties and procedures of declaring financial hardship with the IRS.

When you hire a new employee, be sure to have them complete all the necessary payroll paperwork.

Form W-4
Form NC-4
Form I-9

You don't submit these to the government but should keep them on file indefinitely. However, the following form does need to be submitted to NC.

NC New Hires Notification Form or Online

If you have independent contractors, be sure to get a form W-9 from them (before you pay them a dime). Aside from making it much easier to issue them a 1099, it also helps establish that they were a contractor and not an employee. You should also strongly consider having them complete an independent contractor agreement (example).

In considering whether someone is an independent contractor or an employee, the IRS has put together a list of 20 questions that will help you make that determination.

In order to make home ownership even more accessible to first time buyers, the IRS has changed the rules on the $8000 tax credit to make it available at closing if you use the right lender. So now you don't have to wait until your file your return to get the $8000.

More info...

You can deduct IRA losses that you may have realized recently from the stock market dive. They are not capital losses, but limited miscellaneous itemized deductions. That means they must exceed 2% of your income and you need to be someone who would already itemize on your return. However, with the level of losses that many people have seen, this threshold may not be too hard to reach.

It would be hard to have a deductible loss in a Traditional IRA, because most people make tax-deductible contributions to their traditional IRA and have no basis. No basis means you have no loss according to IRS rules.

A Roth IRA is different because you are making after-tax contributions. That means that if you account is worth less today than the sum of all your prior contributions, you have a tax deductible loss. You would need to liquidate the account in order to take the loss (no partial liquidations).

Keep in mind that once the money is withdrawn from the account, you can only put it back in at the rate of 5,000 a year.

To read more...

I realize that most families are just trying to get by in this economy, but when you are choosing a retirement vehicle to invest in I would encourage you to look to the Roth IRA. Take advantage of whatever match your company will offer through their 401K or other plan, but then try to max out your Roth IRA. I know this plan isn't perfect for everyone, but it will be perfect for the majority.

Why do I love the Roth so much... flexibility and tax free withdrawals. You can virtually use your Roth as a savings account, taking the contributions back out if you ever need them without facing penalties and taxes (there is a five year rule before withdrawing contributions). Try that on any other retirement account. Actually, don't try it, just trust me that you don't want to do it.

Want more reasons to love the Roth?

Those with high cash investments can rest a little easier. The FDIC and NCUA Insurance levels of $250,000 were extended another few years and will now expire December 31, 2013.

Also, keep in mind that most banks have enrolled in the TAGP plan which offers unlimited insurance to non-interest bearing accounts (checking accounts - see footnote one). Unless you are a business you shouldn't have too much cash laying around in a noninterest bearing account though.

For more info...

Congress has made the tuition credits much more generous in 2009, making the credits 100% of the tuition and fees you pay (up from 50% in prior years). It also extended the time that you can take the more generous credit from just your first two years of college, to the first four years.

More Details:

• The Credit is known as the American Opportunity Tax Credit
• It can offer as much as $2,500 in credits to qualified households
• It is available in 2009 and 2010
• The student cannot be beyond the first four years of postsecondary education (so if you already have been to college or gotten a degree and are returning for a second degree you don't qualify - take the lifetime learning credit).
• You get a dollar-for-dollar reduction in your federal tax bill equal to 100 percent of the first $2,000 in "qualified tuition and related expenses" and 25 percent of the next $2,000.
• The credit phases out for incomes between $80,000 and $90,000, and between $160,000 and $180,000 for joint filers.
  
• If a parent's income is above the phase-out range, but the dependent student's income is not, the credit can be claimed on the student's federal tax return provided the parent agrees to forego the dependency exemption.
  
• It is partially refundable - those in lower-income brackets could receive up to 40 percent of the credit as a refund.
• While the Hope and Lifetime Learning Credit only include tuition and fees, this new American Opportunity Credit also includes course materials (i.e. books).
  

Source

This is hardly incentive to go out and buy a new car, but if you were in the market for a new car anyway don't forget to take advantage of this new deduction.

"The stimulus plan allows a sales tax deduction when you nab a new auto, as long as it costs $49,500 or less and was purchased on or after February 17, 2009. Claim it even if you don't itemize, as long as your income is under $135,000 if you're single; $260,000 for couples."

How much this will save you depends on what tax bracket you are in and what the sales tax rate on new cars is in your area.

Source

When you owe the IRS more than you can pay, you often have the option of setting up a payment plan. They will want you to pay as much as you can now, and then look at your situation to see what you can afford to pay each month. Ideally they want the debt paid off within a year, or three years max. Here is an article with more advice on installment agreements.

For 2009 and 2010 the IRS is once again offering tax credits for energy efficient home improvements. You can get up to $1,500 in credits for qualifying purchases (the old limit a few year ago was $500). Note that only the equipment qualifies for the credit, and not the installation, so you may want to structure your contract accordingly. Be sure to save all documentation that certifies that the purchase meets the energy efficiency requirements. Things that may qualify are insulation, windows, doors, air conditioners, heating units, solar panels, and water heaters.

For more info...

The current deal on home buying that is offered through the US tax code is unprecedented. Not many will qualify because of prior ownership restrictions, but if you haven't owned a home (and your spouse hasn't owned a home) in the past two years, then the IRS would like to make your downpayment of $8,000. I wish I had that option a few years ago on my first home!

Read More...

If you get an email from the IRS, just delete it. I have never, I repeat never, received an email from the IRS and neither have any of my clients. Even after responding to an IRS notice, they will only work through mail and telephone calls. This is a huge scam and a dangerous phishing scheme to get your personal information. So be safe, and just delete the email.

You don't want to be caught in one of these:

1. Phishing

Phishing is when scam artists attempt to trick you into revealing financial information via Email. The Emails usually look official (see my previous post), but they're not. The IRS states that they NEVER initiate unsolicited e-mail contact with taxpayers about tax issues.

2. Hiding Income Offshore

This IRS has announced that they intend to aggressively pursue taxpayers and promoters involved in abusive offshore transactions. Don't expect to evade taxes by hiding income in offshore banks or by using offshore debit/credit cards or wire transfers.

3. Filing False or Misleading Forms

Don't use use false forms or file false or misleading information.

4. Abuse of Charitable Organizations and Deductions

Donating items to the Goodwill? Don't claim two old sweaters you donated are valued at $2,000. Basically, the IRS is keeping a close eye on non-cash donations to charitable organizations. If something looks fishy, they'll investigate.

5. Return Preparer Fraud

Be careful when choosing a Return Preparer. Some Return Preparers promote providing large refunds, but they don't tell you that they intend to take a big portion of your refund AND charge inflated fees to do it.

6. Frivolous Arguments

Quit the excuses. You have to pay your taxes, no matter what. Certain promoters encourage frivolous, unreasonable, and unfounded claims to avoid paying taxes owed. But if your file a tax return based on any of those positions, you could be subject to a $5,000 penalty.

7. False Claims for Refund and Requests for Abatement

The IRS states that many promoters are encouraging people to use Form 843, Claim for Refund and Request for Abatement, even though they have not previously filed tax returns or it does not apply to them. Participate in this scam, and you're committing Fraud. Don't request abatement of assessed tax without good reason.

8. Abusive Retirement Plans

The IRS announced that they're looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs and as transactions that are not properly reported as early distributions.

9. Disguised Corporate Ownership

Some people form corporations in certain states so they can disguise ownership of the business and/or financial activity. This allows them to underreport income, and make false. But the The IRS is cracking down on corporations this year, and they're working with state authorities to bring these businesses into compliance.

10. Zero Wages

Don't file phony wage or income related information return. People are using Form 4852 (Substitute Form W-2) or a "corrected' Form 1099 to reduce taxable income to zero.

11. Misuse of Trusts

According to the IRS, unscrupulous promoters have urged taxpayers to transfer assets into trusts. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from the IRS.

12. Fuel Tax Credit Scams

The IRS is receiving unreasonable claims for the fuel tax credit. People like farmers, that use fuel for off-highway business purposes, may be eligible for the credit. But you can't claim it if you simply use your car to get back and forth to work. Since fraud involving this credit is considered a frivolous tax claim, you run the risk of a $5,000 penalty if you're caught.

This is an area where you want to tread carefully and really toe the line, but it can offer a good tax deduction. The key here is being reasonable in your compensation amounts. Can a 3 year old really earn $5,000 a year? Come on people. But a teenager can do valid work around the office and get paid for it. This shifts the income from your tax return to theirs. I can almost guarantee that your kids tax bracket is lower than yours. It could also qualify them for contributions to a Roth IRA (which might not be a bad college funding choice!).

As an added benefit, if you file as a Schedule C self employed business you can avoid payroll taxes on the payments to these kids. (Sorry corporate filers, you have to pay social security and unemployment taxes on your kids pay just like everyone else pay).

To read more...

Hoping to get the IRS off your back for pennies on the dollar. Good luck. I haven't seen it happen yet, but if you are in dire straits and can convince the IRS you don't have the funds, you might be able to pull it off. Here is an article with more details about Offers in Compromise with the IRS. Here is another with even more details and harsh truths.
For helpful tips on jumping through all the hoops, here is an article to consult.

As if taxing social security wasn't bad enough, the IRS also taxes unemployment benefits. So they send you the payment each month, and then ask for a portion of it back at the end of the year. Only a politician could come up with this scheme, where they get all the glory of writing the checks, and then someone else (the IRS) has to be the bad guy and collect a portion of it back.

Here is an article about a small amount of relief for unemployment recipients to try to help relieve some of their tax burden (a few hundred dollars maybe). Gee. Thanks Uncle Sam.

Most people's favorite deduction on their tax return is the business meals and entertainment deduction. The IRS knows this, and knows how frequently it is abused as well. They have put some restrictions on this deduction that you need to heed in order to avoid an audit. Here is a good article detailing how and when you can take this meal write off. However, I think she interprets the "convenience of the employer" clause more leniently that I would.

If you find yourself in the situation of owing money to the IRS and also to business creditors, credit card companies, or others, it can be difficult to know which to pay first when cash is limited. It may seem smartest to pay off the business creditors first so that you can keep your doors open, or to pay your mortgage first so that you keep your house. Here is an article that explains why paying the IRS first is usually your best move, because they will get their due one way or another, and paying it up front is the least painful method.

The IRS has the power to levy on your assets when you fall behind in your tax payments. Hopefully it will never come to that, but if you find yourself in this situation, this article offers some good pointers. The number one rule is don't ignore the letters the IRS sends, this problem is not going to just go away. The sooner your respond, the more options you have available.

From ClarkHoward.com

"Some 54 million Americans will be receiving $250 stimulus checks from the federal government over the next 7 weeks.
The Making Work Pay tax credit will apply to recipients of Social Security, Supplemental Security Income, Railroad Retirement and Veteran's benefits.
If you don't receive your check in a timely manner, the government says to wait until July before calling to find out what's going on. "

Note that you don't have to do anything to receive the check. If you qualify, the government will send it to you automatically.

Not all 529 Plans are the same. North Carolina's received good (not great) grades from Clark Howard in his recent evaluation of all the state's plans. The added benefit of the NC plan is that you get a deduction on your NC tax return for any contributions you make.

Link

The IRS is clamping down on charitable contribution deductions and has been doing so for the past few years. I guess they finally caught on the fact that people were generally rounding up their contributions and hoping no one would ever ask for documentation. Well documentation is required now, so be sure to grab that receipt from whenever you head over to Goodwill and a check is better than cash at the offering plate (at least for IRS documentation purposes). Here is an article that further elaborates on the stricter documentation requirements.

If there is one number you want to double check on your return before you submit it, it's the routing and checking account numbers on your tax return. Once the IRS sends out the money, it will be very hard to get it back if it gets into the wrong hands.

Source

Considering buying a rental property with your IRA funds? Better think twice before you create a taxation headache. Just because you own an investment in your IRA (a nontaxable account) doesn't mean you will always escape taxation. If it is a business activity then it is considered unfair for you to compete with those who have to pay taxes on their business income. To level the playing field, your business profits are subject to UBIT (Unrelated Business Income Tax), a tax originally targeted an nonprofits who were operating outside of their exempt purposes. While rental properties are specifically exempted from UBIT, you could still face UDFI if you finance part of the purchase price of the rental property with debt.

See this article about how the IRS reaches further to tax the untaxable.

Here are a few of the things to consider when reporting your self employment income. You can report the income on Schedule C rather than a corporate tax return. Yes, you will save some money with tax preparation and legal fees because it isn't as much paperwork, but you might be shooting yourself in the foot. Geater liability, increased audit risk, and higher self employment taxes are all real issues you may face if you cut this corner. For more info, don't hesitate to contact me.

This is not the law yet, but a proposed law worth checking out...
Clark Howard.com states "Washington, D.C. is set to take a cue from Europe in adopting its own version of a "cash for guzzlers" program. The central idea is to allow people to take an old, nearly worthless car and receive a cash bounty of up to $4,500 toward buying a new fuel-efficient vehicle. Under the proposed system, the full amount of the voucher would phase in based on the miles per gallon your next car purchase gets. Say you start from a baseline of 18 mpg on your current vehicle and get a new car that gets 22 mpg. Then you'd get a $3,500 voucher. You're only eligible for the full $4,500 voucher if your next purchase gives you at least 10 mpg more than your old vehicle. There will be a separate program for SUVs (you'll need a 5 mpg increase to qualify); one for light-duty trucks (2 mpg increase); and one for work trucks. The latter is a real reversal in policy; small business was previously given tax subsidies to buy the most fuel-inefficient trucks it could!"