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AFFORDABLE CARE ACT CHANGES

Under the Affordable Care Act, there are new reporting requirements for the employer to report the cost of coverage under an employer-sponsored group health plan. For years after 2011, employers generally are required to report the cost of health benefits provided on the Form W-2. All employers that provide “applicable employer-sponsored coverage” under a group health plan are subject to the reporting requirement.

The IRS Notices 2011-28 and 2012-9 provide transitional relief from the reporting requirements for the following:

    • Small employers(employers filing fewer than 250 Forms W-2 for the previous calendar year);
    • Self-insured plans of employers not subject to COBRA continuation coverage or similar requirements
    • Multiemployer plans;
    • HRAs;
    • Stand-alone dental and vision plans;
    • Employers furnishing W-2s to employees who terminate before the end of the calendar year and request a W-2 before the end of that calendar year

In the above situations, the new Form W-2 reporting requirements will not apply until the IRS publishes guidance giving at least six months advance notice of any change to the transition relief. The new Form W-2 reporting requirement is effective for taxable years beginning after 2012(the2012 W-2 due in January 2013).

If your business does not qualify for one of the exceptions above, then you must comply with the new W-2 reporting requirements. I have attached a chart from the IRS website which reviews the reporting requirements for Box 12, Code DD, and has no impact on the requirements to report these items elsewhere. For example; while contributions to Health Savings Arrangements (HSA) are not to be reported in Box 12, Code DD, certain HSA contributions are reported in Box 12, Code W.

Please contact our office if you wish to discuss how the new reporting requirements effect you individually. We will be happy to answer any question you might have.

TAX LAW CHANGES FOR EMPLOYERS

  • Employers Hiring Tax Incentives
    • Qualified new hire:
      • Must sign affidavit on new IRS Form W-11 under penalties of perjury that he qualifies as a new hire…has not worked a total of 40 hours over 60 days prior to hire date.
      • Begins work for a qualified employer which is not a governmental entity (exclusive of a public higher education institute).
      • Not employed to replace another employee of employer unless such employee separated for cause or voluntarily quits work.
      • Is not a related party.
    • Applies to all new hires that began work after 2/3/10 and before 1/01/11, whether full time or part time.
    • Benefit to employer….does not pay 6.2% social security tax for wages paid to qualifying employee beginning 3/19/10 and ending 12/31/10.
    • If employee qualifies for New Hire Credit and Work Opportunity Tax Credit, employer has election to claim only one credit, not both.
  • Business credit for retention of new hire for one year,
    • Employer may claim a general business income tax credit equal or lesser than $1,000 or 6.2% of wages for each qualified new hire who:
      • Is employed on any date during tax year after 3/18/10.
      • Continues to be employed for a period not less than 52 consecutive weeks.
      • Receives wages during last 26 weeks of such period that are at least 80% of such wages during first 26 weeks.
    • Prospective planning points:
      • Prospective employee who is out of work and looking for a job needs to work only 40 hours during 60 day period prior to begin working.
      • Prospective employee should find out if employee qualifies for Work Opportunity Tax Credit, which may provide a better tax credit to employer and needs to be certified at time hired.
      • The credit may be claimed on a return for calendar year 2011 or any fiscal year ending 3/31/11 or later.
  • Employer tax credit for company paid health related insurance,
    • Small businesses who pay for 50% or more of the cost of health related premiums (i.e. – health insurance as well as dental, vision, long-term care, etc) qualify for a tax credit for 2010.
    • The credit ranges from 9% for company with 15 or less employees and average wages of $35,000 to 35% for a company with 10 or fewer employees and average of $25,000. For tax exempt organizations, the credit is limited to 25%
    • The 35% credit percentage decreases rapidly for employers with more employees and higher average wages.
    • Insurance premiums paid for owners and related parties do not qualify for the credit.

PROPER PLANNING OF INVESTMENTS IN START-UP BUSINESSES MAY ELIMINATE TAX ON GAINS – CINCINNATI CAPITAL GAINS TAX

Proper Planning of Investments In Start-Up Businesses May Eliminate Tax on Gains.

Investors in new start-up businesses should consider the benefits of a provision in the Small Business Jobs act of 2010 which eliminates the tax on gains on the sale of Qualified Small Business (QSB) stock issued between September 27, 2010 and December 31, 2010 and held for more than 5 years.

The act modifies Section 1202, which is a tax provision intended to stimulate cash flow into new start-up companies by reducing the taxes on future gains. The provision was originally enacted in 1993 and excluded 50% of gains on Qualified Small business Stock. The exclusion was increased to 75% for stock acquired after February 17, 2009 and was increased to 100% for stock issued between September 27, 2010 and December 31, 2010.

Qualified Small Business Stock Defined

Qualified Small Business Stock is common or preferred stock which meets the following requirements:

    • Is stock in a domestic C corporation.
    • Is acquired by the investor at original issue. The original issuance requirement is designed to encourage inflows of new capital into businesses. The stock may be acquired through the exercise of an option, warrant, or conversion of convertible debt.
    • Is acquired in exchange for money, property (except stock) or services.
    • The corporation has aggregate gross assets of less than $50 million or less at all times prior to date of issue.
    • At least 80% of the value of the corporation’s assets is used in the active conduct of one or more qualified trades or businesses.

A Qualified Trade or Business means any business other than:

    • Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more employees.
    • Banking, insurance, financing, leasing, investing or similar business.
    • Any farming business (including raising or harvesting trees).
    • Any mining or mineral extraction business.
    • Any business of operating a hotel, motel, restaurant or similar business.

The amount of gain that can be excluded from gross income under Section 1202 for any particular corporation over a taxpayer’s lifetime is limited to the greater of $10,000,000 or 10 times the adjusted basis of the stock.

In order to take full advantage of this provision investors should acquire the shares in a QSB before December 31, 2010. On January 1, 2011the exclusion percentage goes down to 75%. Likewise holders of convertible debt or vested options in a QSB should consider exercising before year end.

In addition entrepreneurs seeking financing prior to January 1, 2011 should consider operating as a C corporation in order that investors may take advantage of this provision.

TAX-SAVING TIPS

NEW IRS 199A REGULATIONS BENEFIT OUT-OF-FAVOR SERVICE BUSINESSES

If you operate an out-of-favor business (known in the law as a “specified service trade or business”) and your taxable income is more than $207,500 (single) or $415,000 (married, filing jointly), your Section 199A deduction is easy to compute. It’s zero.

This out-of-favor specified service trade or business group includes any trade or business

    • involving the performance of services in the fields of health, law, consulting, athletics, financial services, and brokerage services; or
    • where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners; or
    • that involves the performance of services that consist of investing and investment management trading or dealing in securities, partnership interests, or commodities. For this purpose, a security and a commodity have the meanings provided in the rules for the mark-to-market accounting method for dealers in securities [Internal Revenue Code Sections 475(c)(2) and 475(e)(2), respectively].

If you were not in one of the named groups above, you likely worried about being in a reputation or skill out-of-favor specified service business. If you were worried, you joined a large group of worried businesses, because many businesses depend on reputation and/or skill for success.

For example, the National Association of Realtors believed real estate agents fell into this out-of-favor category.

But don’t worry, be happy. The IRS has come to the rescue by regulating the draconian reputation and/or skill provision down to almost nothing. The reputation and/or skill out-of-favor specified service business includes you if you

    • receive fees, compensation, or other income for endorsing products or services;
    • license or receive fees, compensation, or other income for the use of your image, likeness, name, signature, voice, trademark, or any other symbols associated with your identity; or
    • receive fees, compensation, or other income for appearing at an event or on radio, television, or another media format.

Example. Harry is a well-known chef and the sole owner of multiple restaurants, each of which is a single-member LLC—disregarded tax entities that are taxed as proprietorships. Due to Harry’s skill and reputation as a chef, he receives an endorsement fee of $500,000 for the use of his name on a line of cooking utensils and cookware.

Results. Harry’s restaurant business is not an out-of-favor business, but his endorsement fee is an out-of-favor specified service business.

If you have questions about how the law will treat your business income for the new Section 199A 20 percent tax deduction, please give us a call, and we’ll examine your situation.

Does Your Rental Qualify for a 199A Deduction?

The IRS, in its new proposed Section 199A regulations, defines when a rental property qualifies for the 20 percent tax deduction under new tax code Section 199A.

One part of the good news on this clarification is that it does not require that we learn any new regulations or rules. Existing rules govern. The existing rules require that you know when your rental is a tax law–defined rental business and when it is not. For the new 20 percent tax deduction under Section 199A, you want rentals that the tax law deems businesses.

You may find the idea of a rental property as a business strange because you report the rental on Schedule E of your Form 1040. But you will be happy to know that Schedule E rentals are often businesses for purposes of not only the Section 199A tax deduction but also additional tax code sections, giving you even juicier tax benefits.

Under the proposed regulations, you have two ways for the IRS to treat your rental activity as a business for the Section 199A deduction:

  1. The rental property qualifies as a trade or business under tax code Section 162.
  2. You rent the property to a “commonly controlled” trade or business.

Your rental qualifying as a Section 162 trade or business gets you other important tax benefits:

    • Tax-favored Section 1231 treatment
    • Business use of an office in your home (and, if it’s treated as a principal office, related business deductions for traveling to and from your rental properties)
    • Business (versus investment) treatment of meetings, seminars, and conventions

If your rental activity doesn’t qualify as a Section 162 trade or business, it will qualify for the 20 percent Section 199A tax deduction if you rent it to a commonly controlled trade or business.

How to Find Your Section 199A Deduction with Multiple Businesses

If at all possible, you want to qualify for the 20 percent tax deduction offered by new tax code Section 199A to proprietorships, partnerships, and S corporations (pass-through entities).

Basic Rules—Below the Threshold

If your taxable income is equal to or below the threshold of $315,000 (married, filing jointly) or $157,500 (single), follow the three steps below to determine your Section 199A tax deduction with multiple businesses or activities.

Step 1. Determine your qualified business income 20 percent deduction amount for each trade or business separately.

Step 2. Add together the amounts from Step 1, and also add 20 percent of

    • real estate investment trust (REIT) dividends and
    • qualified publicly traded partnership income.

This is your “combined qualified business income amount.”

Step 3. Your Section 199A deduction is the lesser of

    • your combined qualified business income amount or
    • 20 percent of your taxable income (after subtracting net capital gains).

Above the Threshold—Aggregation Not Elected

If you do not elect aggregation and you have taxable income above $207,500 (or $415,000 on a joint return), you apply the following additions to the above rules:

    • If you have an out-of-favor specified service business, its qualified business income amount is $0 because you are above the taxable income threshold.
    • For your in-favor businesses, you apply the wage and qualified property limitation on a business-by-business basis to determine your qualified business income amount.

The wage and property limitations work like this: for each business, you find the lesser of

  1. 20 percent of the qualified business income for that business, or
  2. the greater of (a) 50 percent of the W-2 wages with respect to that business or (b) the sum of 25 percent of W-2 wages with respect to that business plus 2.5 percent of the unadjusted basis immediately after acquisition of qualified property with respect to that business.

If You Are in the Phase-In/Phase-Out Zone

If you have taxable income between $157,500 and $207,500 (or $315,000 and $415,000 joint), then apply the phase-in protocol.

If You Have Losses

If one of your businesses has negative qualified business income (a loss) in a tax year, then you allocate that negative qualified business income pro rata to the other businesses with positive qualified business income. You allocate the loss only. You do not allocate wages and property amounts from the business with the loss to the other trades or businesses.

If your overall qualified business income for the tax year is negative, your Section 199A deduction is zero for the year. In this situation, you carry forward the negative amount to the next tax year.

Aggregation of Businesses—Qualification

The Section 199A regulations allow you to aggregate businesses so that you have only one Section 199A calculation using the combined qualified business income, wage, and qualified property amounts.

To aggregate businesses for Section 199A purposes, you must show that

    • you or a group of people, directly or indirectly, owns 50 percent or more of each business for a majority of the taxable year;
    • you report all items attributable to each business on returns with the same taxable year, not considering short taxable years;
    • none of the businesses to be aggregated is an out-of-favor, specified service business; and
    • your businesses satisfy at least two of the following three factors based on the facts and circumstances:
      1. The businesses provide products and services that are the same or are customarily offered together.
      2. The businesses share facilities or share significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources.
      3. The businesses operate in coordination with or in reliance upon one or more of the businesses in the aggregated group (for example, supply chain inter dependencies).

HELP EMPLOYEES COVER MEDICAL EXPENSES WITH A QSEHRA

If you are a small employer (fewer than 50 employees), you should consider the qualified small-employer health reimbursement account (QSEHRA) as a good way to help your employees with their medical expenses.

If the QSEHRA is indeed going to be your plan of choice, then you have three good reasons to get that QSEHRA plan in place on or before October 2, 2018. First, this avoids penalties. Second, your employees will have the time they need to select health insurance. Third, you will have your plan in place on January 1, 2019, when you need it.

One very attractive aspect of the QSEHRA is that it can reimburse individually purchased insurance without your suffering the $100-a-day per-employee penalty. The second and perhaps most attractive aspect of the QSEHRA is that you know your costs per employee. The costs are fixed—by you.

Eligible employer. To be an eligible employer, you must have fewer than 50 eligible employees and not offer group health or a flexible spending arrangement to any employee. For the QSEHRA, group health includes excepted benefit plans such as vision and dental, so don’t offer them either.

Eligible employees. All employees are eligible employees, but the QSEHRA may exclude

    • employees who have not completed 90 days of service with you,
    • employees who have not attained age 25 before the beginning of the plan year,
    • part-time or seasonal employees,
    • employees covered by a collective bargaining agreement if health benefits were the subject of good-faith bargaining, and
    • employees who are non-resident aliens with no earned income from sources within the United States.

Dollar limits. Tax law indexes the dollar limits for inflation. The 2018 limits are $5,050 for self-only coverage and $10,250 for family coverage. For part-year coverage, you prorate the limit to reflect the number of months the QSEHRA covers the individual

2012 EXPIRING INCENTIVES

2012 began with great uncertainty over federal tax policy and now, with the end of the year approaching, that uncertainty appears to be far from any long-term resolution. A host of reduced tax rates, credits, deductions, and other incentives (collectively called the “Bush-era” tax cuts) are scheduled to expire after December 31, 2012. To further complicate planning, over 50 tax extenders are up for renewal, either having expired at the end of 2011 or scheduled to expire after 2012. At the same time, the federal government will be under sequestration, which imposes across-the-board spending cuts after 2012. The combination of all these events has many referring to 2013 as “Taxmeggedon.”

EXPIRING TAX INCENTIVES

Effective January 1, 2013, the individual income tax rates, without further Congressional action, are scheduled to increase across-the-board, with the highest rate jumping from 35 percent to 39.6 percent. The current 10 percent rate will expire and marriage penalty relief will sunset. Additionally, the current tax-favorable capital gains and dividends tax rates (15 percent for taxpayers in the 25 percent bracket rate and above and zero percent for all other taxpayers) are scheduled to expire.

Higher income taxpayers will also be subject to revived limitations on itemized deductions and their personal exemptions. The child tax credit, one of the most popular incentives in the Tax Code, will be cut in half. Millions of taxpayers would be liable for the alternative minimum tax (AMT) because of expiration of the AMT “patch.” Countless other incentives for individuals would either disappear or be substantially reduced after 2012. While a divided Congress may indeed act to prevent some or all of these tax increases, a year-end planning strategy that protects against “worst-case” situations may be especially wise to consider this year.

TAX RELIEF ACT – CINCINNATI TAX PLANNING TIPS

Congress has approved and the President quickly signed a multi-billion dollar tax cut package, the Tax Relief, Unemployment Insurance Re authorization and Job Creation Act of 2010 (2010 Tax Relief Act) (H.R. 4853).  The new law follows through on the framework agreed to on December 6 by President Obama and GOP leaders in Congress.  The 2010 Tax Relief Act extends the Bush-era individual and capital gains/ dividend tax cuts for all taxpayers for two years.

The bill provides the following major changes:

  1. A patch to the Alternative Minimum Tax (AMT) so that 21 million taxpayers will not be subject to AMT for 2009.
  2. A one year 2% payroll tax cut for the employee’s portion of Social Security taxes on a wage base of up to $106,800.  Self-employed individuals will pay 10.4% in Social Security taxes on self-employment income up to the threshold of $106,800, which is also a 2% rate reduction.
  3. For business owners, the 100% bonus depreciation has been extended through 2011 and the 50% bonus depreciation now applies for 2012.

The top Federal estate tax rate beginning January 1, 2011 will be 35% and an individual will be able to transfer $5,000,000 to his heirs free from Federal estate tax.  This change will expire on December 31, 2012.  On January 1, 2013, the estate rate will go to 55% and the amount exempt from estate tax will decrease from $5,000,000 to $1,000,000.

The tax law changes are numerous and taxpayers should seek professional assistance in the preparation of their 2010 tax returns.  Beware, of “off the shelf” tax software for 2010 tax returns, which may not include these December 2010 tax changes.

For a detailed 11 page tax briefing on the new tax law by CCH a Wolters Kluwer business, go to www.cchgroup.com, click on the link for “Latest Tax Legislation Updates” and click on the December 17, 2010 updates. There is also a comprehensive on line copy of the 2012/2013 Tax Planning Guide.  The tax planning guide provides tax planning tips for individuals and business owners.  To find answers to your estate tax and elder law questions go to law.tv where William E. Hesch is the estate planning attorney who provides answers to your questions.

TAX PLANNING PART I – CINCINNATI ESTATE TAX EXEMPTION

Home Buyer Tax Credits

The National Association of Home Builders has set up a website to find answers to your questions about the $8,000 tax credit for first time home buyers and $6,500 tax credit for qualified repeat home buyers.

The “new” tax credit is available for qualified purchases with a binding sales contract in place on or before 4/30/2010 and closed by 6/30/2010.  For qualified military, Foreign Service or employees of the intelligence community, these dates are extended one year.

For sales occurring after November 6, 2009, the new law establishes higher income limits for the $8,000 tax credit of $125,000 for single taxpayers and $225,000 for married couples filing joint returns.

Dependency Exemption for Divorced or Separated Parents

If a taxpayer is a noncustodial parent and wants to claim a child as a dependent  then he or she must be sure to attach IRS Form 8332, Release/Revocation of Release of Claim to  Exemption for Child by Custodial Parent. This new rule is effective for  all divorce decrees entered into after July 2, 2008.  This new IRS regulation is first effective for 2009 tax returns and was not required in 2008 and prior years.  In 2008 and prior years non-custodial parents could attach relevant pages of the divorce decree to their tax return to claim a dependency exemption.

There is an exception to the new rule.  If the divorce decree was executed prior to July 2, 2008 and the decree constitutes a statement  substantially similar to Form 8832 under the requirements in effect at the time the decree was executed, then the non-custodial parent can attach relevant pages of the divorce decree to their tax return to qualify for the dependency exemption.

The IRS statute identifies three requirements to be met in order for the non-custodial parent to claim the dependency exemption.

The divorce decree must provide:

1. The exemption is available without regard to any conditions, such as payment of support.

2. The custodial parent will not claim the exemption and

3. The years in which the non-custodial parent can claim the deduction.

If the years are not identified in the decree, or if the decree requires the non custodial parent to pay child support to claim the exemption, then the exemption is not available to the non-custodial parent.

TAX PLANNING PART II

Higher Education Costs

The deduction for higher education costs expires at the end of 2009.  In addition the American Opportunity Credit replaces the Hope Credit with an increase in the maximum tax credit from $1,800 to $2,500 for 2009 and 2010.  Income phase-out levels are raised to $160,000 of adjusted gross income (AGI) for joint filers and $80,000 of AGI for single filers.  Also new is the change to make 40% of the tax credit refundable which should enable lower income taxpayers to get a tax refund for 2009 and 2010.

Depreciation Limits

Business owners need to review whether to accelerate into 2009 the purchase equipment that under Sec. 179 was planned to be purchased in 2010. The 50% bonus depreciation and higher limits under Sec. 179 to expense equipment purchased up to $250,000 will expire at the end of 2009.

Sales Tax Deduction for Purchased Vehicles

The deduction for sales tax paid on a new vehicle purchased (up to $49,500) will expire at the end of 2009. Taxpayers may elect to take the deduction as an addition to the standard deduction, as an additional itemized deduction along with the deduction for state and local taxes or as part of the deduction for state and local taxes.  The rules need to be reviewed carefully so that there is no double deduction and to determine whether the vehicle sales tax is deductible for Alternative Minimum Tax (AMT) purposes.  The deduction is phased out for taxpayers whose modified AGI is $135,000 or more for single filers and $260,000 or more for joint filers.

Making Work Pay Refundable Tax Credit

This provision provides a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns in 2009 and 2010.  Through automated withholding changes that began this spring, most individuals with earned income that is subject to withholding received an increase in their paychecks.  Pensioners do not qualify for this credit unless they have earned income.  However, the new withholding tables apply to all taxpayers, including pensioners. Pensioners and other taxpayers (including those who have more than one job and whose earnings in those jobs are subject to withholding) need to determine if enough tax is being withheld.  If necessary, adjustments to withholding can be made by filing FORM W-4P, Withholding Certificate for Pension or Annuity Payments.  More information on this credit can be found in News Release 2009-13 and Publication 15-T.

Roth IRA  New Rules for 2010

The conversion of a traditional IRA to a Roth IRA, previously only available to those with modified adjusted gross income of less than $100,000, will be available in 2010.They are enabling anyone to make the rollover, and they’re allowing you to pay tax on the rollover in two installments. If you do the rollover in January 2010, you can pay the tax in 2012 and 2013 (on the 2011 and 2012 returns). The government determined that when you convert, it means they get more tax revenue.  Since most people don’t like to pay up front, the government gives a tax break to encourage taxpayers to do it.  The decision to do it or not will be a major question for CPAs to deal with this coming tax season.  Upper-income taxpayers should consider making nondeductible IRA contributions for 2009 up to April 15, 2010, and that way the client can convert the funds from a nondeductible traditional IRA to a Roth IRA. It’s a way to put them in line to take greater advantage of the Roth IRA.

Health Savings Accounts

The HSA is a tax-deductible savings account that may be funded by employees, employers or both.  It must be coupled with a Health Insurance Plan that requires the insured to first pay a deductible (the amount of money which the insured party must pay) before the insurance company’s coverage begins.  This is called a “High Deductible or Catastrophic” Health Plan.  The policy can be in the form of a HMO, PPO or indemnity plan, as long as it meets the HDHP requirements.  The deductible amount has a minimum and maximum which is determined by the Internal Revenue Service (IRS) each year. The 2009 amounts are $3,050 for single and $6,150 for family coverage. The beauty of the HSA is that unused funds may be rolled over year after year and employers may offer HSAs as an alternative to traditional health plans by paying into the accounts as well.  Everyone may participate in an HSA, including people who have no earned income.  There is no age limit for withdrawals from the account, as compared to the Traditional IRA which requires minimum distributions at age 70½.

The established HSA account can be funded as often as the holder desires, up to the maximum annual amount allowed by law.  It is most effective if the holder contributes a regular amount into the account and then uses it to pay for doctor visits, prescriptions and other medical care.  These accounts may have a nominal monthly cost and earn interest.  The preferred tax treatment of the HSA comes with some conditions.  There are forms to be filed with the tax returns and employers with plans will include information on the employee W-2s.  As long as the account is held and used for medical costs, it is not taxable to the account holder.  Use for nonmedical reasons prior to age 65 may be subject to penalties.  Taxpayers should retain all receipts as proof that spending is approved healthcare costs. Other restrictions may apply.

NOL – 5 Year Carry Back for Business – Extended 1 Year (2008 – 2009)

The new NOL carryback provision benefits businesses experiencing financial difficulty by expanding their ability to use net operating losses attributable to 2008 or 2009.  Taxpayers can elect to carry back a 2008 or 2009 NOL for three, four, or five years, instead of the normal two years.  The tax advantage of the extended carryback period is tempered by a limitation of the NOL amount that can offset income from the fifth tax year proceeding the loss year. Under the new law, the amount of any NOL that can be carried back to that fifth out year cannot exceed 50 percent of the taxpayer’s taxable income for such a fifth year. Taxpayers can make the election under the new law for only one year, either for 2008 NOLs or 2009 NOLs, but not for both.  Qualifying small businesses (those with $15 million or less in gross receipts) that  have elected the five-year carryback for 2008 NOLs under the 2009 Recovery Act, under which no 50 percent limitation is imposed for the fifth carryback year, are allowed to elect a five-year carryback of their 2009 NOLs under the new law as well.

Taxpayers that qualify for the extended carryback period for applicable NOLs must make an affirmative election to use the longer carryback period. An election to use a four or five-year carryback period for an applicable loss from operations must be made by the due date, including extensions, for filing the return for the taxpayer’s last tax year beginning in 2009. Once an election is made, it cannot be revoked.

Standard Mileage  Rates

2009                        2010

Business miles driven                                 55 cents                  50 cents

Medical or moving miles                            24 cents                  16.5 cents

Charitable miles                                          14 cents                  14 cents

Maximize Retirement Plan Contributions for 2009

Maximizing your retirement plan contribution is the easiest way to defer income. Maximum contribution for 2009 are $16,500 for 401(k), $11,500 for SIMPLE plan if you are under age 50 by December 31, 2009.  If your will be 50 years old by the end of 2009 tax minimum limits are increased by $2,500 for SIMPLE  and $5,500 for each of the §401(k), §403(b), and §457 government plan.  If you attain age 70½  in 2009, you are not required to take the minimum distribution by April 1, 2010 for IRAs or defined contribution plans §401(k), §403 (a) and (b) annuity plans, and §457(b) plan.  This will help keep your AGI low as your taxable income will not have to absorb a distribution from your retirement account.

No Repeal of Federal Estate Tax for 2010

Congress has extended the $3,500,000 lifetime exclusion for estate purposes for one year, through 12/31/2010.  The federal estate tax which had been scheduled to be  repealed effective 1/1/2010 has been reinstated for 2010 at the same rates and exemptions currently in place for 2009.

TAX RULES RELATING TO DEBT DISCHARGED IN CONNECTION WITH YOUR HOME – CINCINNATI ESTATE

Cincinnati Estate Tax Rules Relating to Debt Discharged in Connection With Your Personal Residence

The Mortgage Forgiveness Debt Relief Act of 2007 and subsequent amendments allow taxpayers to exclude up to $2 million of income from the discharge of indebtedness as a result of debt discharge on their principal residence. This applies to debt forgiven in calendar years 2007 through 2012. This applies to foreclosures as well as short sales, so it is not required that the taxpayers stay in the home until the foreclosure.

The amount of cancellation of debt income on recourse loans is the amount of debt immediately prior to the cancellation minus the fair market value of the property (there is never any cancellation of debt on non-recourse loans). The cancellation of debt income is excluded from gross income by filing Form 982 with the taxpayer’s tax return for the year of discharge.

If the taxpayers stay in the same principal residence as part of a loan modification, they must reduce their basis in the home (but not below zero) by the amount of cancellation of debt income excluded. If the taxpayers no longer own the residence there are no basis adjustments required.

There may also be a gain on the foreclosure. The gain is the excess of the fair market value of the residence over the taxpayer’s basis (purchase price plus cost of major improvements) in the residence. If the property was owned and used as a personal residence for any two of the last five years prior to the date of foreclosure the taxpayers may exclude up to $500,000 ($250,000 if filing separate)of the gain from income. Any loss on the foreclosure of a personal residence is not deducted.

In conclusion The Mortgage Forgiveness Debt Relief Act of 2007 provides that taxpayers will not have to include any cancellation of debt income unless the amount of debt forgiven is over $2 million.

TAX SAVINGS TIPS – CINCINNATI CAPITAL GAINS TAX

  • Pay itemized deductions before December 31, 2010 to save 2010 taxes:
    1. 2010 income taxes
    2. 2010 real estate taxes
    3. January, 2011 mortgage payment
    4. Charitable donations – donate appreciated stock to your charities and deduct the fair market value of the stock and no tax is due on the appreciation of the stock
  • If you are in the 10% or 15% tax brackets consider selling stocks with long term capital gain.  The gains are tax-free up to your 25% tax bracket.  The 25% tax bracket begins at $68,000 for married joint returns and $34,000 for single filers.
  • If you will owe Alternative Minimum Tax for 2010, then defer paying taxes owed at year end to 2011 as well as most miscellaneous deductions.

 

  • Business owners using the cash method of accounting for tax purposes can shift income and expenses between 2010 and 2011 by delaying or accelerating receipt of income or payment of expenses.

 

  • If a business owner needs to purchase a car or equipment within the next 6-12 months, then the purchase should be completed by December 31, 2010 to claim the IRS Section 179 expensing deduction and new asset purchases qualify for the special 50% bonus depreciation deduction.  Certain limitations apply.