Client Alert

The IRS is warning taxpayers to be on the alert for e-mails and phone calls which claim to come from the IRS or other federal agencies and which mention their tax refund or economic stimulus payment. These are almost certainly a scam whose purpose is to obtain personal and financial information — such as name, Social Security number, bank account and credit card or even PIN numbers — from taxpayers, which can be used by the scammers to commit identity theft. The e-mails and calls usually state that the IRS needs the information to process a refund or stimulus payment or deposit it into the taxpayer's bank account. The e-mails often contain links or attachments to what appears to be the IRS Web site or an IRS “refund application form.” However genuine in appearance, these phonies are designed to elicit the information the scammers are looking for. Be aware that the IRS does not send taxpayers e-mails about their tax accounts.

Will the Tax Changes Affect You?

In addition to the budget proposal released by the President on February 1st, there are a number of other bills that are keeping lawmakers on Capital Hill busy. With all the changes being proposed, do you know if and how you will be affected? The FY 2011 Budget Proposal

In summary, President Obama’s 10-year, $3.8 trillion budget proposal would provide: tax breaks for middle-income families and small businesses, tax increases for upper-income individuals and corporations, international tax rules reform, an end to tax preferences for large oil and gas companies and closing of corporate loopholes.

For Individuals

For lower- and middle-income individuals, the president proposes to make permanent the Bush-era tax cuts that are scheduled to expire at the end of this year. He’s also proposed to, among other things, extend the Making Work Pay Credit, increase the Child and Dependent Care Tax Credit, increase the child care tax credit, and extend the Savers Credit.

For individuals earning over $200,000 per year and families earning over $250,000 per year the budget would reinstate the 39.6 percent tax rate for ordinary income, and 20 percent for capital gains and qualified dividends, limit the itemized deductions, allow the 2001 and 2003 tax cuts to expire and modify the estate and gift tax valuation discount rules.

For Businesses

To ease the tax burden on small businesses, the administration would extend the increased section 179 expensing limit on qualified property and eliminate the capital gains tax on investment in small business stock. Other proposals include making permanent the research credit, extending temporary bonus depreciation and extending and modifying the New Markets Tax Credit. The administration would also extend for two years a number of temporary business tax incentives such as the subpart F exception for active financing income and the lookthrough exception for controlled foreign corporations and 15-year depreciation for qualified leasehold improvements and qualified restaurant property.

Senate Approves Bill to Fix Small Business Tax Penalty

The Senate recently passed the Small Business Penalty Fairness Act of 2009. This measure prevents small businesses from incurring tax penalties aimed at large corporations and wealthy individuals investing in tax shelters. The bill requires the IRS to assess penalties for failure to disclose such investments in proportion to the benefits received and ensure small businesses do not suffer excessive fines. The measure revises Code Sec. 6707A to set the penalty for failure to disclose reportable transactions to the IRS at 75 percent of the tax benefit received.

The Senate Jobs Bill

A scaled-down jobs creation package, The Hiring Incentives to Restore Employment (HIRE) Act, was proposed on February 11. A quick summary of some of the tax incentives for employers follows.

Employers who hire displaced workers would be exempt from paying payroll tax on wages for new hires beginning after the date of enactment and ending on December 31, 2010.

Increase for employers the current-year general business credit (section 38(b)).

Extension of the increased small-business expensing limits under section 179 to 2010.

Check back for more on the Jobs Bill as it makes it way through Senate in the coming weeks.

2009 Year-End Tax Planning

With the end of the year rapidly approaching, now is the time to consider what you can do to take maximum advantage of current tax law to reduce your overall tax burden. Considering the current economic volatility and future expected rise in tax rates, there are a number of opportunities to consider which may significantly benefit your wealth-preservation efforts. Here are some of the recent tax law changes and a few general year-end strategies for your consideration. For Individuals:

• Roth IRA Conversions: Starting January 1, 2010, there is no longer an income limitation for converting an IRA to a Roth IRA. Also, for 2010 only, taxpayers have the option of splitting the tax burden associated with the conversion between 2011 and 2012. However, if income tax rates rise in 2011, as many observers expect them to, it might be advantageous to pay the tax at the 2010 rates instead of in later years.
• First-Time Home Buyer Credit Extended: You've probably already heard about the First-Time Home Buyer Credit which gives a tax credit of $8,000 towards the purchase of your home if you don't already own one. The extension bill (which extended the program through April 30, 2010) also included a provision for some current homeowners to be eligible for a $6,500 credit on the purchase of a new home.
• Sales Tax Deduction for Auto Purchase: Set to expire at the end of this year is the ability to deduct sales tax paid on the purchase of a new motor vehicle. This deduction is in addition to the state income tax deduction you probably already claim. This is also a deduction for alternative minimum tax (AMT)!
• Deduct "Madoff" Losses: If you lost money in a Ponzi-like scheme, the IRS has issued taxpayer-favorable rules regarding how to deduct those losses. Specifically, they can be treated as ordinary losses instead of capital losses, and aren't subject to the 10% of AGI limitation associated with most theft losses.
• Energy-Saving Home Improvements: The 30% credit for installing solar panels and solar water heaters has been extended through 2016, with the maximum credit increasing substantially beginning in 2009. Additionally, the $1,500 lifetime credit for energy-saving upgrades to a principal residence, including windows, doors, skylights, roofs, insulation systems, water heaters and central air conditioners, has been reinstated, and increased, for 2009 and 2010. This credit is can also be used against alternative minimum tax (AMT)!
• High-Income Tax Relief in 2010: For 2010 only, individuals with adjusted gross income (AGI) over $166,800 will no longer have their itemized deductions or personal exemptions phased out. Note that these changes will not affect the AMT calculations.
• NOL Carryback Extended and Expanded: The ability to carry back a business net operating loss (NOL) five years instead of the usual two has been extended again for 2009 NOL's, and has been expanded to include all businesses.

For Businesses:

• NOL Carryback Extended and Expanded: The ability to carry back a business net operating loss (NOL) five years instead of the usual two has been extended again for 2009 NOL's, and has been expanded to include all businesses.
• Immediate Deduction for Capital Assets: The limit on the amount of tangible business assets (not including land or buildings) eligible for immediate expensing remains at $250,000 through the end of 2009.
• 50% First-Year Bonus Depreciation: In addition to the above, businesses may take 50% first-year bonus depreciation on "original use" tangible business assets purchased in 2009.
• Depreciable Lives: The shorter 15-year recovery period for leasehold improvements and qualified restaurant property is effective through the end of 2009.

Year-End Tax Planning Strategies:

• As mentioned earlier, income tax rates are generally expected to rise over the next few years. While many observers do not expect the rates to change until after 2010, it may actually be tax-efficient to accelerate income and defer deductions this year.
• Unless Congress acts, after 2010 dividends will be taxed as ordinary income (instead of the capital gains tax rates they get now), and capital gains tax rates are also expected to rise to pre-2003 levels. Please keep that in mind as you analyze your investment holdings.
• Potential rate changes are also pertinent to owners of closely-held corporations or S-corporations with accumulated earnings and profits. It may be beneficial to pay yourself dividends now while the rates are still low.
• Consider using year-end bonuses with catch-up withholding to reduce corporate taxable income and to avoid underpayment penalties on insufficient withholdings and estimated payments during the year.
• Businesses should consider buying new assets before the end of the year in order to take advantage of the additional first-year deductions which are set to expire after 2009.
• Evaluate retirement plan opportunities, such as a SEP-IRA, 401(k) or defined benefit pension plan, to defer taxes. In many cases, contributions after year-end can still count as current year deductions; however, new 401(k) and profit-sharing plans still need to be set up before year-end. Even if you or your spouse are covered by your employer's plan, you may still be eligible to contribute to a self-funded retirement plan.
• Bunching certain itemized deductions into a single year may provide a deduction that ordinarily would have been lost. This is especially true for medical expenses and miscellaneous itemized deductions.
• Consider using up the remainder of your $13,000 annual gift exclusion (per giver, per receiver) before year-end.
• Donating appreciated stock allows you to deduct the full market value of the stock while avoiding tax on capital gains.
• If you purchased a home in California in the last few years, you may be able to reduce your property tax bill by disputing your home's assessed value as determined under Prop. 13.
• If you are over 70 and don't need all of your IRA (or Roth IRA) money to live on, you and your spouse (if you have separate IRA's) can each donate up to $100,000 directly to a charity, tax-free. Note that this option is set to expire after 2009.
• Net capital losses can offset ordinary income by up to $3,000. Consider realizing enough losses to exceed capital gains by $3,000, then purchasing the same stock no earlier than 31 days after the sale, thereby realizing a $3,000 deduction while preserving your investment portfolio.
• If you, like many others, realized significant capital losses last year remember that those losses carry forward to offset future gains. If you are in a better position now, remember that you can realize capital gains to the extent of the losses that carried forward from prior years and pay no tax on this year's gains.
• Paying expenses with a credit card allows you to take a deduction this year while delaying the payment until next year.
• Depending on your particular situation, you may want to consider deferring a debt-cancellation event until 2010

Estate Tax Planning Strategies:

• Consider using up the remainder of your $13,000 annual gift exclusion (per giver, per receiver) before year-end.
• There are a number of techniques available to reduce overall taxes by taking advantage of historically-low market conditions and interest rates. The current market conditions offer unique opportunities to save estate tax in the future.
• There is talk in Congress of eliminating the practice of discounting the transfer value of minority interests in closely-held businesses. If you hold equity in a closely-held business and were planning on gifting portions of your interest in the business, it may be beneficial to speed up the timeframe of your planned gifting.

The key to successful tax planning is considering the overall impact of various strategies on both the current and subsequent years as you weigh your options. The tax professionals at Ghirardo CPA can help you determine which of these and many other strategies are optimal for your specific situation. Remember to include your investment advisor in any investment-related decision you may make. Please contact our office as soon as possible so that we can begin planning to reduce your taxes.

Changes to the California Use Tax

A recent law change requires many businesses that do not currently hold a seller’s permit to register with the BOE (Board of Equilization), and report and pay, by April 15, any use tax due from purchases made in the preceding year. Taxpayers who must register will be required to file a Form BOE-401-A, State, Local, and District Sales and Use Tax Return, or a BOE-401-EZ, Short Form — Sales and Use Tax Return, even if they owe zero tax.

Who must register A qualified purchaser that must register with the BOE is a business that:

• Is not required to hold a seller’s permit with the BOE;
• Is not required to be registered, and is not otherwise registered with the BOE;
• Is not a holder of a use tax direct payment permit; and
• Receives at least $100,000 in gross receipts per year from business operations.

The new law applies to purchases made during the 2009 calendar year. Returns to report use tax on 2009 untaxed purchases are due on April 15, 2010.

Because of the quick start date, some businesses may not have kept track of their purchases that were subject to use tax and may have a difficult time determining their correct use tax liability.

Registering

The BOE will begin sending letters to taxpayers, informing them of the new registration requirement, over the next few months.

They are reviewing IRS data from 2007 returns, and they will send letters to taxpayers with at least $100,000 in business gross receipts who are not already registered with BOE, and do not hold a seller’s permit.

The taxpayers will be asked to verify their contact information, and then the BOE will register them. Once taxpayers are registered, the BOE will send them an account number and log-in information so that they can e-file their returns.

If the taxpayers do not respond to the letter, the BOE will register them automatically. Taxpayers that no longer meet the registration requirements should report that when they receive the letter.

After taxpayers are registered, the BOE will ask them to verify that they reported and paid their use tax for 2007 and 2008. The BOE is likely to waive any penalties on unpaid use tax, but taxpayers will be required to pay interest.

Registered taxpayers will also be required to file a use tax return for 2009 and later years, even if they do not owe any tax.

Penalties

The legislation does not provide for any specific additional penalty for not registering. There is also no penalty for failure to file a use tax return if there is no tax due. However, there is a penalty if those taxpayers fail to file returns and pay their use tax.

Taxpayers who fail to properly pay their use tax will be subject to a penalty of 10% of the tax owed plus interest.

Gross receipts test

All businesses with operations in California that receive at least $100,000 in gross receipts from business operations worldwide will be required to register with the BOE.

Gross receipts from business operations are defined as “all receipts” of the business operation. Gross receipts include all income, whether the income is from in-state or out-of-state operations.

This means that many tax professionals will be required to register, even if they are not required to pay any use tax. Furthermore, taxpayers who are required to register with the BOE will not be permitted to report and pay their use tax on their FTB returns (such as Forms 540, 100, or 100S). These taxpayers will be required to file a separate use tax return with the BOE.*

Click here for registration forms and other answers to frequently asked questions from the BOE website.

*Spidell's California Taxes On-Line.

IRS Issues Guidance on 2009 Required Minimum Distribution Waiver

The Internal Revenue Service has provided guidance for retirement plan administrators, plan participants and retirees regarding recent legislation affecting required minimum distributions. The Worker, Retiree and Employer Recovery Act of 2008 waives required minimum distributions for 2009 from certain retirement plans. Generally, a required minimum distribution is the smallest annual amount that must be withdrawn from an IRA or an employer’s plan beginning with the year the account owner reaches age 70 1/2. The 2008 law waives required minimum distributions for 2009 for IRAs and defined contribution plans (such as 401(k)s) and allows certain amounts distributed as 2009 required minimum distributions to be rolled over into an IRA or another retirement plan.

Notice 2009-82 provides relief for people who have already received a 2009 required minimum distribution this year. Individuals generally have until the later of November 30, 2009, or 60 days after the date the distribution was received, to roll over the distribution. read more...

The notice also provides guidance for retirement plan sponsors. It contains two sample plan amendments that plan sponsors may adopt or use to amend their plans to either stop or continue 2009 required minimum distributions. Both sample amendments provide that participants and beneficiaries can choose to receive or not to receive 2009 required minimum distributions. Also, both sample amendments allow the employer to offer direct rollover options of certain 2009 required minimum distributions.

Plan sponsors may need to tailor the sample amendment to their plan’s particular terms and administration procedures and must adopt the amendment no later than the last day of the first plan year beginning on or after January 1, 2011 (January 1, 2012 for governmental plans).

September is College Savings Month

With actual and proposed changes to the popular 529 Savings Plans, make sure you have all the latest information! One change allows families saving for college to use 529 plans to pay for a student’s computer-related technology needs. The new American Opportunity Credit allows more parents and students to use a federal education credit to pay part of the cost of college. For a more comprehensive look at the different programs available, please visit our website or contact your Ghirardo CPA representative.