Tax Topic Brochures
This section is a compilation of our client information brochures. These brochures cover frequently encountered tax and financial issues. There are many topics to choose from, and you will find valuable and useful information for under each one. Whether you're looking for tax planning tips, planning out your child's education, or in the process of selling your home, you can find all the answers here.



Small Business Guide

Small Business Guide Keep Your Small Business Advantage

While your know-how is certain to make an important difference in your business' success, you're no doubt well aware that producing a winning combination for a smooth-running operation depends on many other factors as well.

High on the list of considerations for your business should be creating the ability to meet criteria imposed by Uncle Sam and the Internal Revenue Service. To help you avoid headaches that can go with trying to meet tax law requirements, this brochure highlights pitfalls to be aware of and provides some tips on how to overcome them.

"Material Participation" in Your Business:

"Material participation" has become a major issue for business people since Congress passed rules regarding "passive activities" in the late '80s. To show material participation, you as the owner must demonstrate that your activity in your business is continuous and substantial. The IRS has established several "tests" for measuring material participation. An owner who can't pass any one of the tests will most likely be considered just a passive investor in a company. Since deductible losses from passive activities can be limited to the amount of income from such activities, showing material participation in your business becomes doubly important.

If you work full-time in your business, you will have no trouble showing you materially participate. However, if you're an employee at another job and operate your business on a part-time basis, you need to make sure you pass one of the material participation tests. One way you can do this is to show that you spend 500 or more hours during the year running your business.

You can establish material participation in other ways too-e.g., based on your past years' involvement or how your work time compares with others working in the business (including employees).

Your Profit Motive:

The IRS sometimes questions profit motive of a business owner if an activity consistently shows tax losses. This is common with activities that lend themselves to personal enjoyment or hobby such as horse/dog breeding, arts and crafts, etc. You should be prepared to show that you entered your business with the intent to make a profit and that you are taking measures to realize that intent. How do you show profit motive? At least in part by establishing that you have expertise in your field and you are using businesslike practices in carrying on operations.

Your Record Keeping Routine

The Record keeping System:

Give priority to establishing good record keeping practices for your business. Record keeping goes much farther than actual check writing, depositing income, keeping receipts, etc. Also involved are the choices you must make about accounting methods, dealing with inventory (if any) and other assets, complying with regulatory and tax requirements, and computerization. You will probably find taking care of all these details time-consuming and frustrating to say the least; many of the choices you have to make may require help from a financial or accounting professional.

When keeping your business records, though, try to follow a few basic "rules":


From the very outset have a separate bank account for your business in which you deposit only business gross receipts and from which you write checks for business expenses.


Keep bank statements and supporting documents so you can trace your bank deposits, including those that aren't income (e.g., loan documents for loan proceeds deposited, insurance reimbursement, etc.)

If possible, pay all expenses by check. They should be supported with sales slips, invoices and any other available documents of explanation. The income and expenses should be recorded in an orderly manner (either by hand or on computer) so that the backup can be readily available if and when needed.

Sometimes you can log your expenses in a timely manner so you don't have to keep receipts. Before you adopt a logging system though, it's best to check with your tax advisor because the rules for logs are quite strict.


This includes personal income tax returns, sales tax returns, payroll returns, W-2s and 1099s filed for employees and other hired labor, etc.

Length of Time to Keep Records:

From a federal tax standpoint (some states may be different), you should retain books and records of your business for three years after the due date of your income tax return. There are some sections of the tax law where the statute of limitations is longer than three years, however. Because of these, it's wise to keep records at least six years. When it comes to the records that support cost basis of property, equipment or any item that you are depreciating, keep records for at least three years beyond the life shown on the depreciation schedule in your tax return.

Capital Expenses vs. Other Costs:

Costs of assets that will be used in your business for more than a year, the costs of getting started in your business, and the costs of improvements that add to the value of assets are "capital" expenditures. For tax purposes, these expenses are usually deducted over a number of years. Operating expenses, i.e., advertising, office supplies, etc., are currently deductible. Try to keep records for capital expenses separate from those for the general operating expenses.

Expensing Normally Depreciable Costs:

Under some circumstances, the costs of depreciable business assets can be deducted all in one year on your tax return (up to a yearly maximum). While this can be a real advantage, taxwise, it also has a negative side - if you dispose of the assets before the end of their normal depreciable life, you may have to "recapture" (i.e., report additional income for) some of the costs you expensed. Be sure to check with your tax advisor before you dispose of assets you previously expensed.

Automobile Expenses:

Many business people are uncertain about what car expenses they can deduct. Those expenses you have for traveling between business locations are deductible. However, COMMUTING expenses, i.e., the car costs of going between your home and your office each day, aren't deductible. But when you travel to TEMPORARY locations away from your regular business location, you can deduct the costs of those trips regardless of the distance. Be sure to keep good records of your business driving by logging for each trip: where your went, your business purpose for going there, who you met with, and the number of business miles you traveled.

You will only be able to deduct expenses for the business portion of your car expense. However, you can choose one of two ways to do this: (1) You can deduct your expenses using actual cost of gas, oil, insurance, repairs, depreciation, etc., or (2) You can multiply your business miles by a standard mileage rate to figure your expense (this rate varies from year-to-year).

"Ordinary and Necessary Expenses":

The tax law only allows you to deduct expenses that are "ordinary" and "necessary" for your business. Taxpayers and IRS auditors often dispute over the meaning of these two terms. Their definitions are somewhat general:

An "ordinary" expense is one which is common and accepted in your type of business. On the other hand, a "necessary" expense is one that is helpful and appropriate in your business; it does not have to be indispensable.

By doing all you can to make certain that your expenses are ordinary, necessary, not overly lavish and are backed up with a good paper trail, you will have a headstart on every year's tax return!

Other Issues

ndependents vs. Employees:

If you hire workers in your business, they will either be classed as independent contractors or employees. The employee-independent contractor issue has been a touchy one between business owners and the IRS for years so think about this issue carefully when you classify workers. The amount of control you have over the job done determines worker status - the more control you have the more likely it is that a worker is an employee. Then you have to deal with employment taxes, withholding, payroll tax returns and W-2 filing.

A Pension Plan:

Maintaining a pension plan offers you an excellent way to defer income from your business and plan for your retirement. One good option is a Keogh plan. Different plans have different rules about contributions, reporting, coverage, etc. Be sure to consult with your plan administrator so that you meet the specific requirements and limitations.

Estimated Tax Payments:

If your business is unincorporated, the income you earn from it is reported on your individual tax return and is subject to income and self-employment tax. Since no withholding is usually taken from self-employed income, you may need to pay estimated taxes to avoid getting hit with a penalty. Your tax advisor should be able to help you compute the amount you need to pay to ensure that no penalty is assessed. The usual due dates for estimates are April 15, June 15, September 15, and January 15.  However, if a due date falls on a Saturday, Sunday or holiday, the due date will be the next business day.

Keeping Your Tax Records

Keeping Your Tax Records When it comes to your taxes, good records are the best protection you can have if the government decides to audit your returns. But just as important as your effective record keeping are the measures you take to make certain that your records are kept safe. While it may cause a chuckle to picture a mythical taxpayer confessing to an IRS auditor that tax records were destroyed by the family pet, it probably wouldn’t be nearly as funny to give a similar response in a real audit of your own.

The Advantage of Good Records:

• A good set of records can help you cut your taxes. Detailed records reduce the chance that you will overlook deductible expenses when your tax return is prepared. After all, how many people remember the exact details of their expenditures months after the fact? Nothing is more frustrating than knowing you incurred deductions yet not being able to prove them. The ultimate consequence of poor record keeping is enforced payment of more tax than the law requires.

• Explicit records provide the best assurance of a favorable outcome if you are audited. Oral testimony alone is seldom enough to prove the deductions you claim on your tax return—auditors want to see a paper trail of receipts, logs, etc.

• When you’re missing adequate backup records, it can cost a great deal in time and effort to get duplicates. The unfortunate fact is that many businesses balk at hunting down receipts for past sales (you can’t really blame them since it raises their expenses). Your ongoing record keeping effort is your best remedy to counteract this problem.

• Good records help others who might have to handle your financial affairs in an emergency — e.g., an illness. The better your records are, the easier it could be for someone else to temporarily “step into your shoes” to handle your monetary transactions.

Tracking Income

How you track your income is largely dependent on the type of income you are receiving. For certain kinds of income, you will receive statements from the income payers to tell you the amount. These statements are called “information returns” by the IRS. Examples include:

Type of Income Type of Information Return
Stock Sales
Real Property Sales
Miscellaneous Income
(e.g., rent, prizes, non-employee payments)
Gambling Winnings
Unemployment Comp
Tax Refund
Canceled Debts  
Form W-2
Form 1099-R
Form 1099-INT
Form 1099-DIV
Form 1099-B
Form 1099-S
Form 1099-MISC

Form W-2G
Form 1099-G
Form 1099-G
Form 1099-A, Form 1099-C 

Be sure to keep information returns you receive in a safe place so that the amounts reported on them can be shown accurately on your tax return. Payers must submit the data to the government as well as to you. The IRS will compare what they have received with your return to see that your reporting and their data match. If there’s a mismatch, you will get a letter asking ‘Why?’ or assessing additional tax. Since the IRS may misinterpret return reporting, check carefully before paying any extra tax they try to assess!

Income from Other Sources

Income not traceable to information returns also needs to be reported on your tax return. It could include such items as:

• Receipts from a self-employed business,
• Rental income,
• Interest income on a personal loan.

Taxpayers who receive income from sources like these have a more complicated job in tracking it. It’s recommended that you record it in a separate ledger or through a computer spreadsheet program. In addition, you may want to deposit the funds in a separate bank account earmarked for that income alone.

Getting Organized

No one method is the only way to maintain your records. What’s important is to develop a system that is the most convenient and comprehensive for your situation, and then to stick to it. The IRS estimates that a taxpayer who files a 1040 return with itemized deductions, dividend or interest income, and some stock sales will spend about eight hours doing record keeping For a more complex return, such as one with rental properties or self-employment income, add at least another three to six hours. The following suggestions may help you organize your records, and also reduce the time you spend doing so.

Decide first if you will maintain your records manually or by computer.

• Bookkeeping software
- Some taxpayers, even though they aren’t operating a business, choose computerized “bookkeeping” software that uses their check register data to track their income and expenses by category. Monthly and yearly reports conveniently recap the income and expenses, especially if the accounts (income and expense categories) are consistent with how the information is reported for tax purposes.

• Spreadsheet method - In lieu of purchasing bookkeeping software, a spreadsheet file (for example, in Excel) may be set up where you record your yearly income and expenses by tax return category. If you normally itemize your deductions, set up a separate sheet for each of the major deduction categories – medical, taxes, contributions, etc. – as found on Schedule A . For medical expenses, for example, record each expense by provider ’s name, type, date, amount paid, and payment method. Note medically related auto mileage at the same time. At year’s end, sort income and expenses of the same type together to get a yearly total. For income items, a cross-check from the spreadsheet to the 1099 forms for all bank interest or other income sources is an accurate way to verify that all needed 1099s have been received. If your tax advisor gives you a “tax organizer” to help you prepare for your appointment , you can quickly transfer the totals from your spreadsheet to the organizer, or, instead, you can provide your advisor with a copy of the spreadsheet.

• Manual lists - If you keep track of your records manually, the same type of system applies as for a spreadsheet, except you’ll set up a paper sheet for each category of income and expense that you normally have on your tax return. Write each payment you receive or expense you incur on the applicable list. At the end of the year, each list is ready to be totaled. If you make your entries no less frequently than monthly, you’ll find that the overall time you spend will be less, and the accuracy of the information will be greater, than if you wait until just before your tax appointment to put together the year’s lists.

Methods for retaining source documents - In addition to your lists of income and expenses, the receipts, canceled checks, credit card slips, income statements, etc., that back up the amounts need to be retained in case your tax return is audited. This is true whether you computerize or manually summarize your data. Choose from the following methods the one, or combination of methods, that suits you best:

• Envelopes
– Using several blank envelopes, write the tax year and names of the income and expense categories that correspond to your spreadsheet or manual list of accounts. After you’ve recorded an item on your list, insert the corresponding receipt, canceled check, etc., into the envelope. By storing the source documents by category throughout the year, instead of throwing all of them in a box to get to “later,” you’ll not only save time but considerable frustration if you must search for a particular item. There is also less likelihood that a receipt or other document will be lost. Store the envelopes in a larger master envelope or box.

• File folders
– Some taxpayers prefer to use file folders labeled by income and expense categories. These work well for manually maintained records, as the lists can go right in the folders along with the substantiating receipts, checks, credit card slips, etc. Small-sized receipts should be taped or stapled to a letter-sized sheet of paper to prevent them from falling out of the folder.

• Binders
– A binder, set up with dividers labeled by income and expense categories, is also useful for keeping your lists and paper records. three-hole plastic sheet protectors are convenient for keeping source documents together by category in the binder(s). Binders are especially useful for filing monthly or quarterly brokerage or bank account statements.

Start now – If you aren’t already in the habit of keeping your records organized and maintaining them contemporaneously, start now! The effort will be worth it in time saved when you prepare for your next tax return preparation appointment. And most likely your records will be more accurate than they’ve ever been before.

Knowing When to Discard Records

Taxpayers often question how long records must be kept and how long the IRS has to audit a return after it is filed. ANSWER: It all depends on the circumstances! In many cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. The reason for this is that the IRS provides state taxing authorities with federal audit results. The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments.

In addition to lengthened state statutes clouding the record keeping issue, the federal three-year rule has a number of exceptions:

• The assessment period is extended to six years instead of three if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return.

• The IRS can assess additional tax with no time limit if a taxpayer: (a) doesn’t file a return; (b) files a false or fraudulent return in order to evade tax, or (c) deliberately tries to evade tax in any other manner.

• The IRS gets an unlimited time to assess additional tax when a taxpayer files an unsigned return.

If no exception applies to you, for Federal purposes, you can probably discard most of your tax records that are more than three years old; add a year or so to that if you live in a state with a longer statute.

Sue filed her 2008 tax return before the due date of April 15, 2009. She will be able to safely dispose of most of her records after April 15, 2012. On the other hand, Don filed his 2008 return on June 2, 2009. He needs to keep his records at least until June 2, 2012. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday the due date becomes the next business day.

Important note:
Even if you discard backup records, never throw away your file copy of any tax return (including W- 2 s ). Often, the return itself provides data that can be used in future return calculations or to prove amounts related to property transactions, social security benefits, etc.

Records to Keep Longer than Three Years

You should keep certain records for longer than three years. These records include:

• Stock acquisition data
. If you own stock in a corporation, keep the purchase records for at least four years after the year you sell the stock. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.

• Stock and mutual fund statements where you reinvest dividends
. Many taxpayers use the dividends they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to basis in the property and reduce gain when it is finally sold. Keep statements at least four years after final sale.

• Tangible property purchase and improvement records.
Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.

Home Ownership - Your Best Tax Shelter

Home Ownership - Your Best Tax Shelter Homeowners Receive Big Tax Breaks

Home ownership can provide you with several important tax benefits…

• Deductions for real estate taxes and home mortgage interest, and

•  Gain exclusion if you meet certain occupancy and holding period requirements.

In fact, tax breaks are probably one of the biggest reasons you decided to buy your home in the first place. Unfortunately, some homeowners lose getting the most from their home’s tax advantages because they aren’t aware that certain limits apply. The purpose of this brochure is to highlight how you as a homeowner can best keep your home’s favorable tax edge.

• If you meet certain qualifications and purchase a home in 2009 or 2010, you may qualify for the Homebuyers' Tax Credit.  Call this office for more information.

Your Home's Basis

The amount of the gain exclusion permitted under current tax law tends to make most taxpayers forget about keeping track of their home improvements. Don’t forget, inflation will take its toll, and in a few years the exclusion limits may not be as significant as they are today or the law may change again. In either case, it may be appropriate to keep a record of the improvements on your home.

Once you buy a home, you need to begin keeping records related to your home’s “ basis,” i.e., the amount you have spent on the property. If you acquired your home through purchase, your basis is what you paid for it originally, including purchase expenses PLUS improvement costs you incur while you own it. Keeping track of basis is extremely important in order to accurately report gain or loss if you decide to sell.

For the purpose of computing basis, it’s important to distinguish between “improvements” and repairs; only improvement costs add to your basis. Minor repairs like replacing faucet washers, painting a bedroom or patching a hole in the roof don’t need to be tracked. In general, improvements are of a more permanent nature than repairs. They enhance the value of your home and are likely to last more than one year. If you make the same improvement more than once, only the most recent improvement adds to your basis.

You should log costs of items like the following in a home improvement record (be sure you keep your backup receipts and canceled checks):

Room additions
New driveway
Sprinkler system
Exterior lighting
Storm windows/doors
Central vacuum
Central air
Filtration system
Wiring upgrade
Soft water system
Built-in appliances
Bathroom upgrade
Wall-to-wall carpet
Retaining wall
Swimming pool
Satellite dish
Security system
Heating system
Light fixtures
Water heater
Kitchen upgrade

Whenever there’s doubt about whether an expenditure qualifies as an improvement, make a note of it in your record anyway. That way, the ultimate decision of qualification can be made later when (and if) you decide to sell.

Deductions Related to Your Home

Certainly not all costs related to your home are deductible. For example, unless you use your home for business (e.g., you have an office in your home), costs for insurance, repairs, utility costs, condo fees, etc., aren’t deductible.

However, you generally will be able to deduct:


Keep in mind, however, that home mortgage interest deductions can be limited. Generally, you can deduct the interest from mortgages up to $1 million dollars on a combination of your first and second homes, provided they were the original loans. As the principal on these loans is paid down, the reduced loan amount becomes the new limitation. If you were to later refinance the home for more the remaining balance on the original loan, the excess would have be used for home improvements or qualify under the provisions that allow a taxpayer to borrow up to $100,000 in home equity. If not, a portion of the interest would not be deductible.

The additional $100,000 of home equity can be borrowed from the primary residence and a second home. When used wisely, the $100,000 equity loan can be used to finance other purchases where the interest expense would normally not be deductible. An example of this would be a personal vehicle.

Equity debt interest is not deductible for Alternative Minimum Tax (AMT) purposes, so taxpayers who are taxed by the Alternative Minimum Tax (AMT) should consider carefully whether or not to incur home equity debt.

Because of the current strict home mortgage deduction limits and the complicated tax rules associated with this tax deduction, be sure to review any home financing plans with your tax advisor before finalizing loan deals.

Loan Points:

A question often comes up about the deduction for points on a home loan. Points are another name for prepaid interest – they may be called loan origination fees or some similar term. One point equals 1% of the loan amount. When points are paid for services a lender provides to set up a loan, the points aren’t deductible. However, when the points are paid as a charge for the use of money, the following rules apply:

• As a general rule, points are only deductible over the life of a loan. Say, for example, you paid $3,000 in points on a 30-year refinance loan. Your tax deduction would be limited to $100 a year ($3,000/30 years). If you decided to pay your loan off early, say after 15 years, you could write off the balance of the points ($1,500) in that year.

• An exception to the general rules lets you deduct in full, points you pay in connection with obtaining a mortgage to purchase, construct or improve your main home.

• Seller-paid points can even be deducted by a home buyer, but the amount deducted reduces the home’s basis.

Reporting Gains/Losses

Exclusion of Gain:

When you sell your principal home at a gain, you can exclude all (or a portion) of the gain if you meet certain occupancy and holding period requirements. To qualify for this exclusion, you must have owned and occupied the residence for two out of the five year period that ends on the date of the sale.  If you meet those qualifications and are filing a joint return with your spouse, you may exclude up to $500,000 ($250,000 for a single individual) of gain from the sale.

A partial exclusion may be allowed even if the two-of-five year ownership and occupancy tests aren't met if the sale is due to a job-related move, health, or certain unforeseen circumstances.  If you do not qualify for the full or partial exclusion, there is no deferral privilege and the gain not eligible for exclusion is fully taxable.

NOTE: A second home, such as a mountain cabin or lake cottage, doesn’t qualify for the exclusion of gain.

Previously Postponed Gain:

Under prior tax law (generally pre-98), gain from the sale of a principal residence could be deferred into your replacement residence. Those gains were accumulated from home to home as long as each replacement home cost more than the adjusted selling price (i.e., sales price less expenses of sale and pre-sale “ fix-up” costs) of the previous home. Although gain deferral from a principal residence is no longer permitted under current law, the gains deferred under prior law into a home currently being sold must be accounted for.

Sales at a Loss:

Losses from the sales of business or investment properties are normally tax-deductible. However, a loss from the sale of your main home is considered personal in nature and therefore, unless the law changes, it is not allowed as a deduction. This rule also applies to second homes.

Reporting the Sale:

You will no longer need to report the sale of your main home on your tax return unless you have a gain and at least part of it is taxable - i.e., if the gain is greater than your allowed exclusion, the sale is reportable.  Otherwise, if the gain is totally offset by the exclusion, the sale should not be shown on your tax return.  However, to be certain that no reporting is required, you should provide your tax advisor with the sales documents, cost basis information, etc., to evaluate your situation.  You may receive Form 1099-S showing the gross proceeds from the sale, although settlement agents (escrow companies) are no longer required to issue a Form 1099-S for most sales of main homes.  If you do receive a Form 1099-S, let your tax advisor review it and determine if it is necessary to report the sale.

Exclusion Qualifications

Under prior law. . .
(generally pre-98), individuals were entitled to a once-in-a-lifetime exclusion of gain from the sale of their principal residence. To qualify for that exclusion, the taxpayer or spouse must have reached the age of 55 prior to the sale and they must have resided in the home for three of the prior five years. Having exercised that exclusion does not bar a taxpayer from qualifying for the current law exclusion.

Under current law… there is no age requirement associated with the exclusion. The period of time the home must be owned and occupied as a principal residence has been reduced to two out of the past five years. In addition, the exclusion amount has been raised to $500,000 for couples filing jointly and $250,000 for other individuals. The once-in-a-lifetime limitation has been deleted, thus permitting taxpayers to exclude a gain every two years if they meet all of the other conditions.

CAUTION: Prior law included a provision for the deferral of gain allowing taxpayers to avoid taxation on a gain that was not excludable if their replacement residence met certain qualifications. The new law contains no deferral provisions, thus any gain not excludable is immediately taxable.

FIVE-YEAR HOLDING PERIOD: If you originally acquired the home you intend to sell by means of a tax-deferred exchange (sometimes referred to as a 1031 exchange), the required ownership period to qualify for the home sale exclusion becomes five years as opposed to the normal two years.

- If the home was previously used as other than your main home (non-qualified use), for example, as a second home or a rental, and converted to your personal residence after December 31, 2008, the portion of the prorated gain attributable to the non-qualified use will not qualify for the home gain exclusion.

SPECIAL MILITARY RULES: Generally, the five-year qualification period for the 2-out-of-5-year use test can be suspended for up to 10 years for persons on qualified extended duty in the U.S. Armed Services or the Foreign Service. Please call this office for more details.

Tax Planning and Your Home

The information outlined here is only a brief overview of the tax rules involving home ownership. Since the rules are complicated, if you’re thinking of buying or selling your home, or refinancing a home loan, it’s best to discuss the plans with your tax advisor to interpret closing documents and to make absolutely certain the transaction meets the necessary qualifications.

Household Employees and Your Taxes

Household Employees and Your Taxes Employment Tax Responsibilities for Employers of Household Workers

Household employees are workers you hire for “ domestic services,” i.e., those services performed in and about your home. Duties of cooks, butlers, housekeepers, governesses ,maids, valets, babysitters, caretakers, gardeners, janitors, or personal chauffeurs all can qualify as “domestic services.”

Not everyone you hire for work at your home is considered a household employee, though. For example, a self-employed gardener may take care of your lawn and several others in your neighborhood, providing all his own tools and job assistants and setting his own work schedule. That gardener probably won’t be considered your household employee because he is running an independent operation over which you have no “say-so.”

You see, a worker at your home becomes an employee when you control what work that person is to do AND how and when the work is to be done. If you qualify as a household employer, you may have to pay certain federal payroll taxes, including social security and Medicare taxes and unemployment taxes. You withhold some of these taxes from your employee’s wages; others you must pay from your own funds. (Some states require certain taxes too, so be sure to check with the state employment department in your area.)

Taxes You Withhold from Wages

Social Security and Medicare Taxes:

If you pay cash wages in excess of a specified threshold amount during the year to a given employee, you must withhold social security and Medicare taxes from the employee’s wages. This threshold amount ($1,700 in 2009 and 2010) will vary from year to year and applies to each separate household employee you hire.

Example: This year, Jane hired Louise, a housekeeper, and Rose, a babysitter. She withheld social security and Medicare taxes from their wages. Over the course of the entire year, however, she paid Louise only $500 and Rose $800. Since neither worker’s yearly wage equaled the threshold amount, Jane owes no social security or Medicare tax for them. That being the case, she must repay to the workers the taxes she already had withheld from their wages.

Federal Income Tax:

Household employees may also ask you to withhold income tax from their wages; you aren’t required to agree to the request. If you choose to withhold, however, you must collect the income tax from the employee’s wages (the IRS publishes tables to let you know how much to withhold) and you pay the amount withheld to the government.

Additional Taxes You Must Pay

Employer’s Share of Social Security and Medicare Taxes:

As an employer, you must match the amount of social security and Medicare tax you withhold from your employee’s wages. For instance, if you withheld $50 in social security from your housekeeper’s wages, you would be required to pay to the government $100 (the $50 withheld from your employee, plus another $50 from your own funds).

Federal Unemployment Tax (FUTA):

You are also responsible for FUTA taxes if you paid a total of $1,000 (2009 threshold amount, call this office for other years) or more in household employee wages during any calendar quarter of the current year or the previous year. FUTA tax isn’t a withholding tax but is paid by you alone on behalf of your employees. (Certain states also assess unemployment taxes – check with the appropriate agency in your area.)

Paying the Tax

You report and pay the required payroll taxes for your household employees along with your regular individual income tax return. Schedule H, Household Employment Taxes, is used to figure the amount of the tax that you owe.

Reporting Wages to Employees

You need to give your household employees Form W- 2 ,Wage and Tax Statement, to report wages and tax withholding for the year. The W-2 is due to the employee by Jan. 31 of the year following the year in which you paid the wages . You must also file a copy of the W-2 with the Social Security Administration (usually by the end of February).

To accurately prepare W-2s, you need certain information from your employee, including his/her name, address, and social security number. So that you have all the necessary information available for timely filing, you may want to have your workers fill out Form W-9, Request for Taxpayer Identification Number and Certification, when you hire them. That way you will have data on file to complete W-2s when the time comes.

Other Paperwork Chores

Form SS-4:

If you have household employees, you will need to obtain an employer identification number for yourself. This number is not the same as your Social Security Number. You get the number by filling out and mailing Form SS-4, Application for Employer Identification Number, to the IRS (it's also possible to have the number assigned by telephone – the SS-4 instructions explain how to do this).

Employee Form W–4:

If you agree to withhold income tax for an employee, ask him/her to complete Form W-4, Employee’s Withholding Allowance Certificate. The information on this form will help you determine the correct amount of income tax to withhold.

Payroll Journal:

You should record in a journal each payday the wages and withholding of household employees. Set up a separate record for each employee with room for the following information:

  • Payment date
  • Check number
  • Gross wages (before withholding
  • Social security tax withheld
  • Medicare tax withheld
  • Federal withholding, if any
  • State withholding amounts (establish a column for each separate kind of tax withheld)

For computer users, an inexpensive payroll program may simplify the record keeping job.

Keep employment tax records for at least four years after the later of: the due date of the return on which you report the taxes, or the date you pay the taxes.

If You Have Other Employees

If, in addition to your household employees, you have employees in a sole proprietorship, you can choose whether to pay the employment taxes of your household workers with your personal tax return or along with your business payroll returns. If you choose the latter option, you file W-2s for you household employees along with those of all your business employees.

Have You Forgotten Anything?

Here’s a quick checklist of issues you should make sure you have considered when you hire and pay household employees:

  • Legality of worker’s employment in the United States
  • Applicability of state employment taxes and state return filing requirements
  • Applicability of withholding social security and Medicare taxes
  • Income tax withholding agreements with employees
  • Record keeping system
  • Employer identification number application
  • W-2 filing with employees and Social Security Administration
  • Return filing and payment deadlines

Are the Payroll Taxes you Pay Deductible?

In most cases, the payroll taxes you pay in connection with your household workers’ wages are not deductible on your individual tax return. The IRS considers these taxes, and the wages on which they are based, to be personal, nondeductible expenses. However, there are a couple of circumstances when you may be eligible for a tax benefit for the payroll taxes you pay:

  • Child Care Credit – If you are eligible to claim a Child or Dependent Care Credit based on wages you pay a household employee who cares for your child, other dependent, or spouse, the payroll taxes you pay on the wages are counted as part of your eligible expenses when figuring the credit.
  • Medical Care Providers – The wages and associated payroll taxes you pay to a household worker who provides nursing services for you, your spouse, or your dependent are medical expenses that may be deductible on your return if you itemize your deductions. (Note that the same expense can’t be used both as a medical deduction and for the Dependent Care Credit.

In these two situations, the payroll taxes that you include are the FUTA tax, state unemployment tax, and your portion of the Social Security and Medicare taxes that you have actually paid during your tax year. For example, if you paid FUTA tax in January for medically deductible wages that you paid to a nurse in the prior year, you would include the FUTA tax as part of your medical expenses on your current year return (return for the year in which the FUTA tax was actually paid). (The wages paid in the prior year are deductible on your prior year return.) Do not include the Social Security and Medicare taxes, federal and state income taxes, or other state or local taxes you’ve withheld from the employee’s wages, since these amounts are already part of the gross wages for which you are claiming the credit or deduction.

Charitable Giving & Your Taxes

Charitable Giving & Your Taxes Your Charitable Gifts Make a Difference for Others AND for Your Taxes

When you give away cash or goods to qualified nonprofit organizations, you will probably be able to take a tax deduction as partial reward for your generosity. However, the IRS rules for deducting charitable contributions aren’t as simple as many people might think. For example, deduction limits can apply, and certain gifts require timely written acknowledgment from the recipient organizations.

Qualified Charitable Organizations

In order for donations to be deductible, it must be given to a “qualified U.S. organization.” Not all nonprofit organizations qualify, but the IRS regularly publishes a list of the ones that do. In general, the qualifying groups can be categorized as:

• governmental bodies;

• nonprofit groups organized for religious, educational, scientific, or literary purposes;

• war veterans’ groups;

• fraternal societies and lodges; and

• certain nonprofit cemetery companies.

Typical examples of qualified organizations include churches, nonprofit hospitals, colleges and universities, school booster clubs, libraries, public parks and recreation facilities, etc.

When gifts are made to fraternal organizations and lodges, only the part of the gift that those organizations give away to other qualified charities is deductible. In addition, gifts to a cemetery company can’t be deducted if they are earmarked for the care of a specific cemetery lot.

Limits on Charitable Deductions

In general, deductions for charitable gifts are limited to 50% of a taxpayer's adjusted gross income. However, depending on the kind of organization and the type of property being given, that limit can dip as low as 20%. And if the individual's income is high enough, the partial benefit of his or her charitable deductions can be lost due to an overall limit the IRS imposes on itemized deductions.

Gifts That Return a Benefit to You

If a taxpayer is audited on his or her contributions, the IRS looks to see whether voluntary donations were made intentionally or whether it was just payment for services provided by a charitable organization. For example, payments to a parochial school for a child’s tuition or to a church for a family wedding give the taxpayer a benefit and don’t qualify as contributions. Payments to charities for raffle tickets, lotteries, or bingo also fall in this category and aren’t deductible - with these one is really purchasing the chance to win that new TV, trip to Hawaii, etc.

In certain situations, only a partial benefit may be received for what is given. In that case, one can generally deduct the amount of the gift that is over and above the value of what is received. Say you paid $50 to attend a fundraising dinner at your church.The church determines that the value of the dinner and program is $15. Your deductible charitable contribution is $35, i.e., the amount of your payment that exceeds $15.

Giving Your Time

Although you may volunteer many hours working for a charitable organization, the value of your time is not deductible. However, if you incur expenses (e.g., travel costs to and from the charity’s location) related to volunteer work, those costs are deductible. Other out-of-pocket costs incurred on behalf of the charity may be deductible as well.

Travel Away From Home For Charity

A charitable deduction can be taken for travel expenses (including meals and lodging) incurred while performing services for a charity in an out-of-town location. However, two important criteria need to be met in order to get this deduction:

1 . You must perform services for the organization in an official capacity while you’re away from home.

2 . No “significant element of personal pleasure” must be connected with the travel. Does this mean your trip can’t be enjoyable? No, but it does mean that the primary purpose of your travel must be related to your charitable duties and not be a personal vacation.

Non-Cash Donations

Donations don’t always have to be in cash. One can also deduct the “fair market value” (FMV) of donated items like used clothing, furniture, and appliances (FMV is the price goods are likely to sell for on the open market).

Condition of Contributed Items:

The condition of the contributed item is important, because except as noted below, tax law does not permit a charitable contribution for clothing or household items unless the contributed items are in "good used condition" or "better." 

They also do not allow a deduction for items with minimal monetary value, such as used socks or undergarments.

There is a provision that permits a deduction for clothing and household goods that are not in good used condition or better.  Under this provision, a deduction can be taken if (1) the amount claimed as a deduction is greater than $500, and (2) the taxpayer includes with the taxpayer's return a qualified appraisal with respect to the property.

Household items include furniture, furnishings, electronics, appliances, linens, and other similar items.  Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the definition of household items for this purpose.

Large Donations:

There are other rules that apply to certain types of non-cash contributions including limitations, appraisal requirements, deduction recapture, etc.  Therefore, when contemplating an unusual or substantial non-cash contribution, it is appropriate to consult with this office.

Valuing Your Donation:

Perhaps the most difficult part of making noncash donations is determining the value of the goods being given away. The decision about value is left to you and, unfortunately, there aren’t any cast-in-concrete formulas to give you the “right” answer.

Here are a few general guidelines that may help:

• Consider the condition of each item being given away. Compare the style of your donation with current styles. Outdated and/or damaged property may have little or no market value. Categorize each item being given by its condition (e.g., poor, good, excellent, new, etc.)

• Do a little detective work to find out what the item you are donating would sell for in the current market. A visit to the local thrift shop, a quick glance through newspaper classified ads, or a stop at a neighborhood garage sale should provide you with a pretty good idea of the prices of goods like yours.

• If your donation includes equipment or machinery, consult with publications of commercial firms or trade organizations to find out your property’s value. Many of these organizations regularly publish information about going sales prices for cars, boats, airplanes, etc. Caution: When donating used vehicles to charity, special rules apply. See paragraph on "Donating Vehicles to Charity."

Your research will probably show that most used merchandise has a value that is considerably less than your property’s original cost!

However, some items you give away may have actually gone up in value (e.g., antiques, jewelry, or artwork). To determine the value of these, hire a qualified appraiser. Regardless of whether the value of a donated item has gone up or down, if its current value is more than $5,000, a professional appraisal is mandatory (exception: most publicly-traded securities do not require an appraisal). Check with your tax advisor about the details that must be included in the appraisal and the IRS-required form.

Donating Used Vehicles to Charity:

Congress has imposed some tough rules that substantially limits the deduction for a car donation.  If the deduction exceeds $500, the deduction will generally be limited to the gross proceeds from the charity's sale of the vehicle.  In addition, a written acknowledgement from the charity is required and must contain the name of the donor, donor's tax ID number and the vehicle identification number (or similar number) of the vehicle.  The IRS provides form 1098-C for this purpose.  There is an exception to these rules for donated vehicles that the charity retains for its own use "to substantially further the organization's regularly conducted activities."  Please call this office for more information.

Record of Noncash Donations:

Keep a list of the donated items and include a description of the property, its cost and FMV, how you determined the FMV, and when and how it was acquired. If the property has appreciated in value, be sure to get an appraiser’s report (since special rules apply to appreciated property, check with your tax advisor before you make your contribution). Request a receipt at the time of the donation and make sure it includes the date and the organization's name and address.

If the value of donated items is $250 more, in addition to the information noted above, a written acknowledgement from the organization must state whether the charity provided any goods or services in return for the gift, and if so, a good faith estimate of the value of the goods and services provided.  You must have written acknowledgement by the date you file your return or the extended due date of the return, whichever date is earlier.

Record keeping for Cash Donations

For monetary (cash, check) gifts, regardless of the amount, you should have a canceled check (bank record) or a written communication from the donee showing:

• The name of the donee organization,

• The date of the contribution, and

• The amount of the contribution.

The record keeping requirements may not be satisfied by maintaining other written records.  This means that unless the charitable organization provides a written communication, cash donations put into a "Christmas kettle," church collection plate, and pass-the-hat collections at youth sporting events will not be deductible.  Donations by debit or credit card can be substantiated by bank records.

hile many organizations may take the responsibility of providing a receipt, the tax law actually places this responsibility of getting acknowledgment on the gift donor. “This provision does not impose an information requirement upon charities; rather it places the responsibility upon taxpayers who claim an itemized deduction of $250 or more to request (and maintain in their records) substantiation from the charity.”

The charity’s acknowledgment must contain the following:

• The amount of money and a description of the value of other property, if any, contributed.

• Whether the charity provided any goods or services in return for the gift.

• A description and reasonable estimate of the value of the goods or services provided.

Keep More Of What You Make

Saving Money to Ensure Your Future

The Smiths are college graduates with two healthy children, good jobs, a home worth about $160,000 and two relatively new cars. To the casual observer, they’re doing well. Yet anyone taking a close-up view would find a few flaws in their situation, especially when it comes to their finances . . .

You see, the Smiths have:

  • Virtually no savings;

  • Retirement plans available through employers but with contributions at a bare minimum;

  • A portfolio of several hundred shares of stock bought as a result of a tip from a friend - the investment has gone sour; and

  • Large debts on their home, cars and credit cards.

Obviously, Mr. and Mrs. Smith could benefit from a course in financial fitness. Their greatest need is to take a long, objective look at their financial picture AND make some rather radical adjustments!

Unfortunately, the hypothetical Smiths aren’t a lot different from many Americans today. Statistics indicate that a large number are saving less than 5 percent of their disposable household income, far less than citizens in other countries. For example, Canadians and Germans save about 10 and 12 percent respectively.* In addition, American workers (similar to the Smiths) aren’t taking full advantage of their employer’s retirement plans, most making pension contributions of only about $2,700 each year.

Perhaps most ominous, however, is the amount of personal debt Americans have been incurring. Statistics show that there has been a $256 billion increase in consumer spending in recent years. And 44% of it is being paid for using installment plans!

Improve Your Own Financial Future

The Smith scenario and previously cited statistics paint a gloomy picture, but there are steps you and your family can take to prevent similar results. Achievement of financial security comes from adjusting your current financial picture in light of future goals. Far from being easy, the whole process requires a good amount of self sacrifice and more than a few trade-offs along the way.

Check Your Spending Habits

The only way to objectively view your finances is to set down on paper what you’re currently spending. No one enjoys this job, but it’s necessary if you’re serious about a plan to ensure financial well-being.

Keep a log of what you spend your money on for a while (account for every cent, including all cash, check and credit purchases). Write down everything from house payments to dinners out, grocery purchases, haircuts, parking fees, entertainment expenses, doctor visits, etc. Try to list each item by category - e.g., amounts spent on movies out, video rentals, and cable TV could all be listed under a category called Entertainment Costs.

At the end of the period, total each expense category and get ready for a huge surprise - you’ll probably find that those “ little” extra miscellaneous items have made a sizable dent in your pocketbook. After you examine the totals carefully, you’ll begin to see a trend. It’s then that you need to ask yourself, “Where can I cut down?”

Once you have a feel for the expense side of the ledger, concentrate on your income - salaries, pensions and annuities, interest, dividends,etc.

Total everything you received for a given period (e.g., a month, a quarter, or a year) and subtract from it the grand total of all your expenditures for that same period. If your answer is positive, you’ve done all right - there’s a profit. If your answer is negative, you could be faced with a problem.

Debt Could Be the Culprit

One reason many people can’t seem to get ahead financially is that they have a lot of debt - mortgages, credit cards, etc. And it’s difficult to reduce debt unless spending habits change. Probably the best place to start cutting back is with the credit cards. Most people have a huge pile of them (the average is nine for most Americans).

Credit card spending is expensive. Assume, for example, that the balance on your Megabank card is $1,000 on which you’re charged an annual interest rate of 20 percent. If you pay the minimum $20 per month on your account, your total yearly payments will be $240 ($20 x 12). Yet by the end of one year, you will have only reduced your debt balance by $44, as shown in the following chart:


And what if you have eight other credit cards with balances similar to the Megabank card? You see how easy it is for debt to escalate?

To get and keep the upperhand on all that plastic, you may need to:

1. Quit making purchases by credit card. If the cash isn’t available,don’t make the purchase.

2. Carry only one card for emergencies and get rid of those with the highest balances.

3. Begin the search for a credit card with a low interest rate - there are some available, but it may take a little detective work to find them.

4. See if you can consolidate your credit card debt into the card carrying the lowest interest rate.

5. Start making the largest payment you can each month to pay off the debt. Once you’ve established an amount, keep at it EVERY month. You will be able to get it paid off faster than you think if you work at it consistently!

Home Equity - Savior or Trap?

Your home equity is a tempting source for money. Just keep in mind that you will never own the home if you continuously tap into that equity. Your reasons for using the equity may be legitimate, but were they necessary and paid back in a timely manner?

Using home equity loans is an often touted means of avoiding higher interest rates on consumer loans for automobiles, major appliances, etc. It also provides a way to convert nondeductible consumer interest to deductible interest, since the interest on home equity debt (up to $100,000) is deductible as home mortgage interest.This is a good strategy if you plan to pay off the equity debt in the same period of time the consumer debt would have been paid off. Trap#1: People tend to roll their equity debt into their long-term home debt and end up paying on that consumer purchase for years, long after the car or appliance has been carried off to the recycle yard. Trap#2: Interest on equity debt is not deductible for Alternative Minimum Tax (AMT) purposes. Thus, if you are being taxed by the AMT, your benefit from the equity debt interest deduction will be reduced or eliminated.

Savior: If used wisely, a home equity loan can provide you with a fresh start. If you are heavily burdened with consumer debt and have sufficient equity in your home, you can consolidate your debts into a new home loan and substantially reduce your monthly outlay. With the extra monthly cash from the reduced debt, begin saving for future cash purchases, children’s education and retirement. Trap: After restructuring your debt, you continue to run up additional consumer debt and could potentially overextend yourself again.The cycle repeats itself and leaves you with no equity in your home and a heavy mortgage debt at retirement.

Saving For the Future

After you’ve taken stock of your inflow and outgo and instituted measures to reduce debts, the next step is to begin developing a savings plan. Here again, consistency is the key. For instance, look at what happens when you put away $25 a week at an annual compounded interest rate of only 5 percent:


10 years
20 years
30 years

Ending Balance


In addition to regular savings, if you participate in a retirement plan, either through an employer or your own self-employed plan, begin using it to the fullest. Contribute as much as you can! After all, most pension plans allow you to build savings and defer paying taxes on income until you begin making withdrawals. It’s hard to find a better deal than this anywhere.

Review Your Strategy and Adjust For Changes

Remember, you need to continually review the savings strategy you establish in light of your overall goals - someday you will retire, in 20 years the children will be going to college, eventually you may want a bigger house, etc. Your strategy shouldn’t simply take into account those KNOWNs; your plan must create a cushion to handle the UNKNOWNs as well.

Change is a certainty, and because of this, no plan for meeting financial objectives can remain static. As you go along, you’ll no doubt have to do a little “adjusting” here and there. Events like marriage, divorce, birth, death, retirement, job relocation, etc., can all complicate and force reevaluation of your original plan. Because of all the technicalities involved, you’ll probably want some outside help. It’s advisable to consult professional tax, legal and financial advisors before embarking on or changing your course of action.

* According to statistics from the Organization for Economic Cooperation and Development

Planning, The Key To Your Financial Future

Planning, The Key To Your Financial Future Planning Ahead for Your Finances

With the number of savings strategies being publicized these days, you’d think that planning ahead for retirement would be a fairly simple job. To the contrary, however, many investors are finding themselves uncertain that they will be able to find a strategy that will allow them to build adequately to meet long-term financial goals.

In the “good old days” the picture seemed simpler - people ended their 30-year career with assurance that a pension and social security were waiting to provide them with a fairly comfortable retirement. Contrast this with today, when people are faced with reports of a wobbly future for the social security system and pessimistic stories about the stability of retirement plans (both privately funded and employer-sponsored plans).

Planning for your financial future doesn’t have to be surrounded by mystery and perplexity. Accepting the planning challenge with realistic expectations and taking an overall long-term approach to finding investment solutions can help you immensely as you move toward attaining financial goals. This brochure highlights a few of the general principles and strategies which have traditionally been the foundation of sound financial planning; they are designed to help you weather the ups and downs of a changing economic climate.

Building Blocks of Financial Planning

Start Saving –– the Sooner the Better!

Start investing and earning interest on your money as early in life as possible - the results are amazing. The classic example is the 25-year old who invests $250 a month in an account at 8.5%, compounded monthly. By the time that 25-year old reaches age 65, savings have mounted up to a million dollars! The key to that savings success was “regularity,” investment of a specific amount on a specific schedule. Such discipline was rewarded with a good-sized nest egg!

But don’t make the mistake of not beginning a savings program just because you’re already over age 25. Start one no matter what your stage is in life, and you’ll be pleasantly surprised to see how your efforts can pay off after a just a few years of compound interest. It’s never too late to start saving!

Watch Your Investment Mix

Planning involves finding the right blend of investment choices - a concept called “asset allocation.” Your blend should depend not only on the financial goals you have chosen but on your stage of life and your tolerance for risk. For example, a young person just starting out may consider investing a large portion of funds aggressively to get a higher return. As that person reaches retirement age, however, he/she would probably want to shift a bigger portion to something that offers greater security, like bonds or government-insured savings.

Always Diversify

Diversification can help keep your portfolio on an even keel. It means spreading your investments over a broad range of investment media. Diversifying is wise no matter how much you invest - it adds balance to a portfolio by opening up the opportunity for stability for a gain in one market to counteract a downturn in another.

Remember Inflation Will Take a Toll

Plan your investment strategy with inflation in mind. Even when the inflation rate is low, it causes savings to lose purchasing power over a period of time.When you factor inflation into some so-called “safe” investments (which are usually low - yield), you may find that, over the long haul, the ones you thought were doing all right are really costing you more than you’re gaining on them.

Consider Taxes

Don’t forget tax planning as you look at investment strategies. Most invested funds will eventually lead to payment of taxes - e.g., those tax-deferred annuities, IRAs, etc., will eventually be withdrawn and become taxable. But even a small amount of planning can help you find every legal way possible to lower Uncle Sam’s bite from your hard-earned money!

What's Your Risk Tolerance?

It’s a fact of life that some investments are much more risky than others. When you begin your financial planning, you need to come to terms with your risk comfort level. Naturally, you don’t want your investments to keep you awake nights while you worry about what ’s going to happen to them tomorrow. If you’re worried about risk, your goal should be finding that “comfort zone” that will allow growth without a high degree of volatility.

Some people, for example, aren’t comfortable with stock funds where values can fluctuate quite widely in the short-term - yet these funds may offer a good deal of potential for growth over time.

The Plan Should Be Adjustable

Changing circumstances are also a certainty! Your financial plan may need to be adjusted somewhat when your situation is changed by events like:

• Marriage;
• Divorce;
• A birth or death in the family;
• A job change;
• Entry into a new business;
• A home purchase or sale; or
• Retirement.

Beware of locking up funds permanently - leave room in any plan for some flexibility that allows you to maneuver and switch investment vehicles if necessary.

Long-Range Planning Can Help Meet Future Needs

There are certain areas in tax and financial planning where long-term planning can make a significant contribution to your future financial well-being.

Consider the following areas:

College Educational Funds for Your Children - There are tax-favored plans that allow you to fund a child’s future education. Keep in mind that the benefits are greatest for those who plan early in the child’s life.

Planning for Your Retirement - With a variety of different retirement plans available, it is important to find the right one for you. There are many factors to consider. Will the plan give you a tax deduction? Is it tax-free or will it impact other income when you reach retirement? Early planning can maximize your tax benefits now and minimize your taxable income at retirement.

Gift and Estate Planning - Passing your wealth on to your heirs while minimizing the government’s take is an important long-range planning issue for everyone.

Selling Real Estate - To minimize your tax liability when selling real estate, pre-planning can employ a variety of strategies such as tax-free exchanges, installment sales and home gain exclusion.

Business Exit Strategies - Whether you are retiring, passing a business on to family members, or just moving on to other ventures, long-range planning is needed to insure the transaction is smooth, orderly and meets your financial expectations.

Give Your Plan a Regular Tune-Up

For a financial plan to accomplish what you intend, it needs attention and care. Checking up on investment performance goes hand-in-hand with the flexibility issue raised by changing circumstances. Regardless of whether circumstances have changed, the plan needs regular “health” check-ups every few months to make sure it’s on track.

Getting Help with Financial Planning

With all the intricacies of financial markets, you may want to consider getting advice from a professional before launching out on a plan. The professionals in our office are well-qualified to help. We’re trained to help find answers to questions like:

Is there a best way to look for high returns on your investments?

How can you manage risk?

How should you divide your portfolio between stocks, bonds, and cash savings?

What are the best ways to handle inflation?

Is there any way to reduce taxes on investment income?

How long should you stick with a particular investment?

Please don’t hesitate to call with your own questions and to find out about the many services we offer!

Planning Your IRA Strategy

Planning Your IRA Strategy Your IRA Contribution Options

For years, individuals have been able to set up personal retirement plans called individual retirement accounts (IRAs). Nearly everyone who receives “compensation,” either as an employee or as a self-employed individual, can contribute to an IRA. You can choose from a variety of different types; some give you a tax deduction,while others don’t. This brochure highlights in general terms the IRA options available under current law and points out some of the advantages of each. For more details about which IRAs fit best with your specific situation, please call this office.

Setting up an IRA:

To select the best type of IRA to meet your current income level and your long-term investment goals generally requires the advice of a professional. You are strongly advised to seek the advice of this office before selecting a specific type of IRA and the investment vehicle for your IRA. Although others, not fully cognizant of your current tax planning objectives or your long-range financial and estate planning needs will be eager to assist you, prudent planning may be more appropriate.

Types of Investments:

Examples of typical IRA investment vehicles include insurance annuities, stocks, bonds, mutual funds and cash (in savings institutions).

Definition of Compensation:

You can open an IRA only if you receive “compensation.” Compensation includes wages, salaries, tips, professional fees, commissions, self-employment income and alimony. Compensation does not include rental income, interest or dividend income, pensions or annuities, deferred compensation, or amounts you exclude from income.

IRA Penalties

Remember that various penalties can apply to most IRAs. When you contribute more than the IRA limits allow, withdraw from the account too early, or don’t take sufficient distributions when required, penalties can apply. Under certain circumstances, penalties can be avoided for premature IRA withdrawals. Exceptions apply, for example, when withdrawal is due to disability, for paying certain first-time home purchase expenses, and for paying educational costs. Be sure to check with this office concerning the exact rules on penalties to ensure against receiving unwelcome “ surprises” when you file your tax return.

Traditional IRAs

With a Traditional IRA , if you’re under age 70-1/2, you can contribute up to the annual limit to your IRA account. However, if your taxable compensation is less than the annual limit in a given year, your contribution will be limited to the amount of your compensation.

Traditional IRA contributions are generally deductible on your tax return. However, one can designate that they be nondeductible. If this choice is made, you build up a basis in your IRA so that when you begin to withdraw from the account, part of each withdrawal is nontaxable. However, the choice not to deduct an IRA contribution should be made with caution in light of your particular tax situation.

If you’re married, file jointly, and your spouse has little or no compensation, a Traditional IRA may be set up as a spousal IRA, allowing your spouse to make IRA contributions based upon your compensation. However, neither spouse can deposit more than the annual limit to his/her individual account.

Participation in Other Plans:

One complication of Traditional IRAs affects taxpayers who actively participate in other pension plans - e.g., an employer plan, a Keogh or SEP, etc. When you are covered by another pension plan, your IRA deduction “phases out” (i.e., gradually reduces to zero) depending on your filing status and your income level. Phase out begins at income levels according to the following schedule:

Threshold Level
Tax Year
2011 &
Subsequent Years

*The Single threshold applies to taxpayers other than those filing joint, except Married Separate taxpayers who have a threshold of $ -0- .

If a taxpayer's income exceeds the above thresholds by less than $10,000 ($20,000 for joint filers), his or her IRA deduction will be limited; if it exceeds the threshold by $10,000 ($20,000 for joint filers), there is no IRA deduction. 

Break for Spouse of an Active Participant:

The limits on deductible IRA contributions do not apply to the spouse of an active participant. Instead, the maximum deductible IRA contributions for an individual who is not an active participant but whose spouse is an active participant, is phased out for the nonactive individual if the couple’s combined AGI is within the phase-out range for the year.

Nonactive Participant Spouse
Phase-Out Range
166,000 - 176,000
167,000 - 177,000
2011 and later years
Inflation adjusted

Example: In 2010, the wife is an active participant in a retirement plan, but her husband is not. The couple’s combined AGI is $200,000. Neither spouse can take an IRA deduction, because their AGI is over $177,000.

But assume the couple’s combined AGI was only $125,000. Since the husband isn’t an active participant in another plan, he can make a deductible IRA contribution. However, his wife can’t make one, because their combined AGI is over the threshold for joint filers (see chart for annual threshold amount).

Due Date for Making Traditional IRA Contributions:

Traditional IRA contributions (whether deductible or nondeductible) must be made by the due date (without extensions) of the return for the year to which they apply.

Roth IRAs

You may be able to open a Roth IRA, a type of IRA that allows only nondeductible contributions. Distributions from these IRAs, including earnings on them, are tax-free if a holding period and other requirements are met. Like the Traditional IRA, annual contributions are limited to the smaller of your compensation or the annual limit. However, if you have other IRAs - for example, a Traditional IRA - your combined annual contributions to all of them (including the Roth IRAs) can’t be more than the annual contribution limit. Roth IRAs allow contributions even after you turn age 70-1/2, and spousal Roth IRAs are also allowed. The due date for making your contributions to a Roth IRA is the same as for Traditional IRAs.

Contributions to Roth IRAs phase out if income is within the phase-out range for the year.  The phase out applies regardless of whether the taxpayer (or spouse, if married) is an active participant in another plan.


For tax years through 2009, Traditional IRAs may be rolled over or converted to Roth IRAs by taxpayers whose AGI isn’t more than $100,000 in the rollover year. Married separate taxpayers can’t roll or convert a regular IRA to a Roth IRA.  For tax years after 2009, the AGI limitation for conversions has been eliminated, and married separate taxpayers are allowed to make conversions.  When you roll over or convert to a Roth IRA, you must pay tax on the income from the Traditional IRA that would have been taxed if you had not converted it to a Roth IRA.  Amounts converted in 2010 that otherwise would be includible in income for 2010 will be included one-half each in income for 2011 and 2012, unless the taxpayer elects to include the rollover amount in 2010’s return.

Comparing Results of Traditional and Roth IRAs:

Determining whether a Traditional IRA or a Roth IRA best suits for you depends upon your unique circumstances, both now and in the future. You are encouraged to seek assistance from your tax or financial advisor to assist you with this decision.

Deemed IRAs

Where a "qualified employer plan" elects to allow employees to make voluntary employee contributions into a separate account or annuity in a "qualified employer plan," it will be considered a “Deemed IRA.” Deemed IRAs are treated in the same manner as an individual retirement account or annuity. This gives the employees participating in their employer’s qualified plan the option to designate their voluntary contribution into a separate Traditional or Roth IRA.

However, all of the normal IRA income and AGI limitations will apply to "Deemed IRA" contributions. This can create problems if an individual also contributes to a Regular IRA and the combination of the Regular IRA and the Deemed IRA exceed the annual limitation. Another trap exists when a taxpayer designates the Deemed IRA as a Roth IRA and later discovers their income disqualifies them from having a Roth IRA. If you are not sure of the implications of Deemed IRA designations for your specific circumstances, consult with your tax or financial advisor.

Annual Contribution Limits

The IRA contribution annual limit is slowly increasing over the years. In addition, taxpayers age 50 and older are allowed to make "catch-up" contributions allowing them larger contributions in their later years to fund their approaching retirement needs. The table below illustrates the annual contribution limit applicable to each year by age.

Contribution Limits
2011 and after
Under Age 50
Inflation Adjusted
Age 50 and Over
Inflation Adjusted


Saver’s Credit:

The Retirement Savings Contribution Credit, frequently referred to as the Saver’s Credit,was established to encourage low to moderate income taxpayers to put funds away for their retirement.

Up to $2,000 per taxpayer of contributions to an IRA (Traditional or Roth) or other retirement plans, such as a 401(k), may be eligible for a nonrefundable tax credit that ranges from 10% to 50% of the contribution, depending on the taxpayer’s income. The maximum credit per person is $1,000. The contribution amount on which the credit is based is reduced if the taxpayer (or spouse if filing jointly) received a taxable retirement plan distribution for the year for which the credit is claimed (including up to the return due date in the following year) or in the prior two years. If modified AGI exceeds $27,750(1) (single), $55,500(1) (married joint) or $41,625(1) (head of household), no credit is allowed. An individual who is under age 18, a full-time student, or a dependent of someone else is ineligible. The credit is in addition to any deduction allowed for traditional IRA contributions.

(1) These rates are inflation adjusted annually and the rates shown are for 2010.

"Education IRAs":

Now referred to as Coverdell Education Savings Accounts (CESA), the CESA is really a nondeductible education savings account, not an IRA. The investment earnings from these accounts accrue and are withdrawn tax-free, provided the proceeds are used to pay qualified education expenses of the beneficiary. These accounts first became available in 1998, and nondeductible contributions of up to $500 were permitted per year for the benefit of the designated beneficiary. Beginning in 2002, the allowable nondeductible contribution increased to $2,000 per year per beneficiary. Contributions are only allowed for designated beneficiaries under the age of 18.

The annual contribution limit is gradually reduced if the contributing taxpayer’s “modified AGI ” is within the phase-out range and eliminated for taxpayers above the range. The phase-out limits for married taxpayers are $190,000 - $220,000 and at $95,000 - $110,000 for single taxpayers. If the AGI limits the contribution, the funds can be gifted to someone else whose contribution would not be AGI limited, even the beneficiary.

Tax Breaks for Higher Education

Tax Breaks for Higher Education Over the years, Congress has continued to enhance tax breaks for students and their parents.  These tax benefits provide taxpayers with a large number of options for tax-favored financing of their education and the education of their family members.  This brochure highlights the various education benefits included within the U.S. income tax system.
  • Coverdell Education Savings Account
  • Qualified State Tuition Program
  • Hope Scholarship Program (American Opportunity Credit in 2009 & 2010)
  • Lifetime Learning Credit
  • Penalty-Free IRA Withdrawals for Education Purposes
  • Deduction for Education Loan Interest
  • Tax-Free Savings Bond Interest

Student aid is available from the Department of Education for students of limited means.The aid can include educational grants such as a “Pell”grant or various types of student and parent educational loans.  Planning and saving for future education can limit or eliminate potential student aid, because these resources will be taken into consideration at the time the need for student aid is determined.

Understanding the tax terms: You will encounter several tax terms in this brochure that may be unfamiliar to you. Understanding their full meaning will help give you a better picture of the limits, qualifications and restrictions that apply to the benefits for education.

Phase Out: Instead of just eliminating certain deductions and credits, the tax law often decreases them gradually to zero (“phases them out”) over a specific income range. For example, say a hypothetical $1,000 deduction is allowed, but “phases out” when a taxpayer’s “modified adjusted gross income (AGI)” is between $40,000 and $60,000. A taxpayer with a modified AGI of $40,000 or less will be allowed the full $1,000 deduction, while the taxpayer with a modified AGI of $60,000 or more would get no deduction. For modified AGIs between $40,000 and $60,000, the taxpayer would be allowed a pro-rated deduction amount.

Regular AGI and Modified AGI: AGI is the abbreviation for “adjusted gross income.” “Regular AGI” is the total of all income, allowable losses and adjustments before subtracting itemized or standard deductions and personal exemptions. However, several tax benefits described in this brochure are limited or not available to taxpayers whose so-called “modified AGI ” is too high. Generally, the modified AGI for educational benefits adds back certain income from foreign, U.S. Possession and Puerto Rican sources that is excluded from income.

Qualified Educational Institutions: These institutions are generally accredited, post-secondary educational institutions that offer credit toward a bachelor’s degree, an associate’s degree, or some other recognized post-secondary credential. Certain proprietary institutions and post-secondary vocational institutions also qualify if they are eligible to participate in Department of Education student aid programs.

Coverdell Education Savings Account

Although originally referred to as an Education IRA, the Coverdell Education Savings Account is really a nondeductible education savings account. The investment earnings from this account accrue and are withdrawn tax-free. The proceeds are used to pay qualified education expenses of the account beneficiary.

These accounts first became available in 1998, and nondeductible contributions of up to $500 were permitted per year for the benefit of the designated beneficiary.  Beginning in 2002, the allowable nondeductible contribution has been increased to $2,000 per year per beneficiary.  Contributions are only allowed for designated beneficiaries under the age of 18.

The annual contribution limit is gradually reduced if the contributing taxpayer’s “modified AGI” is within the phase-out range and eliminated for taxpayers above the range. Since 2002, the phase-out range for married taxpayers filing jointly has been $190,000 - $220,000 and $95,000 - $110,000 for single taxpayers. These phase-out ranges are subject to change, please call this office to verify the current phase-out levels.

Anyone is allowed to make the contribution, provided the total contribution for the under 18 beneficiary does not exceed the annual contribution limit and the contributing taxpayer’s AGI is within limits. If the AGI limits the contribution, the funds can be gifted to someone else whose contribution would not be AGI-limited, even the beneficiary.

Distributions from the Coverdell Education Savings Account are tax-and penalty-free (including interest on the account) if they are used to pay for qualified education expenses of the designated beneficiary or a member of the beneficiary’s family.

The definition of qualified education expenses includes elementary or secondary education, kindergarten through grade 12.
Because of the phase-out provision for contributions, taxpayers cannot always be sure they can contribute to the accounts.  Recognizing this problem, the tax law permits Coverdell contributions to be made after the close of the tax year for which the contribution is being made and before the April 15 filing due date for that year.  (Note: if the April 15 due date falls on a Saturday, Sunday or holiday, the due date is the next business day.)

Additional rules apply for dealing with rollovers, changes in designated beneficiaries, death of taxpayer or beneficiary, excess contributions, special needs beneficiaries and unauthorized use of distributions.

Qualified State Tuition Programs

A qualified state tuition program is one generally set up by a state or state instrumentality that lets individuals make contributions to an account established for a designated beneficiary’s higher education.

Unlike the Coverdell Education Savings Account, there is no limit on the annual contributions to Qualified State Tuition programs.  However, contributions to these plans are considered gifts to the beneficiary, making the annual gift exclusion amount the practical annual limit per contributor. The long-standing annual gift exclusion amount of $10,000 is now inflation-adjusted ($13,000 for 2009); please call this office for the limit for other years. A special rule allows a donor who makes total contributions exceeding the annual gift limit to elect to take the contributions into account ratably over a five-year period, starting with the year of the contribution. This allows a donor to contribute as much as $50,000 adjusted for inflation ($75,000 for 2009) in one year, while avoiding the gift tax implications. The donor must file a gift tax return for the year of the contribution, and a five-year election must be made on the return. Care should be exercised in determining the total contributed to any individual’s account to avoid nonqualified distributions if the amount exceeds the educational needs.

Virtually all of the high population states now have these programs, which are professionally managed and tailor the investments and risk potential to the potential student’s current age. Individuals are not restricted to using the program established in their home state but instead can pick and choose among the programs of any of the states that have established programs.

The benefit of these programs was significantly enhanced for years after 2003 when the distributions of earnings from the programs can be excluded from income if used for qualified expenses.This is a big change from prior rules where the earnings from the accounts were taxable to the beneficiary when withdrawn. This puts the Qualified State Tuition Programs on par with Coverdell Education Savings Accounts, but without the annual contribution limit. Additional rules apply for designated beneficiaries,death of taxpayer or beneficiary, and unauthorized use of distributions.

Penalty-Free IRA Withdrawals

Generally, when funds are withdrawn from an IRA before a taxpayer reaches age 59-1/2, a 10% early withdrawal penalty applies to the distribution. However, penalty-free IRA withdrawals are permitted if the funds are used to pay qualified higher education expenses. The withdrawals will still be subject to regular income tax.

Qualified “higher education expenses” include tuition at a qualified educational institution, as well as related room, board, fees, books, supplies, and equipment. The expenses can be for the taxpayer, his or her spouse, or taxpayer’s or spouse’s children and grandchildren.

Deduction For Interest

Generally, taxpayers can only deduct home mortgage interest, investment interest, and business interest. However, interest paid on student loans used to pay tuition, room and board and related expenses for qualified higher education is deductible even if the taxpayer uses the standard deduction. The amount annually deductible is limited to $2,500. (This limitation has been in effect for several years but can change). 

Note: Student loan interest is not limited to government student loans and could be home equity loans, credit card debt, etc., provided the debt was incurred solely to pay qualified higher education expenses.

The annual deduction begins to phase out when modified AGI reaches the threshold amount and is fully phased out when the modified AGI reaches the top of the phase-out range. The phase-out ranges are inflation adjusted in $5,000 increments. For example, the 2009 and 2010 ranges are between $60,000 and $75,000 for single taxpayers and between $120,000 and $150,000 for joint return filers. Please call this office for other years' phase-out levels.

Educational Tax Credits

The law provides for two nonrefundable tax credits, the Hope Scholarship and the Lifetime Learning Credits, as explained on the following panel. Both credits will reduce a taxpayer’s tax liability dollar for dollar until the tax reaches zero. Any credit in excess of the tax liability is lost. The credit is not allowed for taxpayers who file married separate returns.

The credits are elective, and the taxpayer must choose between the two credits for each student. In general, most taxpayers will find it more beneficial to take the Hope Scholarship Credit in the first two years of the student’s education and the Lifetime Learning Credit after the first two years.

The allowable credits phase out when a taxpayer’s modified AGI reaches the threshold amount and is fully phased out when the modified AGI reaches the top of the phase-out range. These phase-out levels are annually adjusted for inflation. The phase-out amounts for 2008 are between $50,000 and $60,000 for unmarried taxpayers and twice those amounts for jointly filing couples. Please call this office for the current phase-out levels after 2008.

Hope Scholarship Credit

(For 2009 and 2010, the Hope Credit does not apply.  Instead, the more liberal American Opportunity Credit applies.  See American Opportunity Credit later.)

The Hope Scholarship Credit is an inflation-adjusted credit of up to $1,500 ($1,800 beginning in 2008) per student per year, covering the first two years of post-secondary education. The credit is 100% of the first $1,000 ($1,200 beginning in 2008) of qualifying expenses plus 50% of the next $1,000 ($1,100 in 2008).

Example: In 2008, a taxpayer's child is in the first year of college, attending on a full-time basis. The tuition is $1,500, which is paid during the year by the taxpayer; there is no reimbursement or other tax benefit claimed for the tuition expense. The taxpayer is entitled to a tax credit of $1,350 (100% of the first $1,200 plus 50% of balance) for the tax year.

American Opportunity Tax Credit

The American Opportunity Tax Credit replaces the Hope Credit for 2009 and 2010.  It provides a credit for four years (as opposed to the first two years for the Hope credit) of college expenses, and the maximum credit per student increases to $2,500 per year.  The credit will be based on 100% of the first $2,000, and 25% of the next $2,000, of tuition, fees and course material (including books) expenses paid during the tax year.  40% of the credit is refundable, provided the taxpayer is not: (1) a child under the age of 18 or (2) under the age of 24, a full-time student and is not self-supporting.  For higher-income taxpayers, this credit begins to phase out for AGI in excess of $80,000 ($160,000 for married couples filing jointly), a significant increase from the previous phase-out thresholds noted previously.  This enhanced credit can be used to offset the alternative minimum tax in both 2009 and 2010.

Lifetime Learning Credit

The Lifetime Learning Credit is a credit of up to 20% of the first $10,000 of qualifying educational expenses for: (1) undergraduate, graduate, or certificate level courses for a student attending classes on at least a halftime basis; or (2) any course at an eligible institution to acquire or improve job skills of the student (no attendance time requirements).

Example: A taxpayer has two children attending college on a full-time basis. The taxpayer pays qualified tuition expenses for the two children in the amount of $12,000, and there is no reimbursement or other tax benefit claimed for the tuition expense. The taxpayer is entitled to a tax credit of $2,000 (20% of the first $10,000) for the tax year.

Qualifying expenses
...for these credits include tuition and fees but not expenses for room, board, books and nonacademic fees such as student activity, athletic, insurance, etc.  Also excluded are expenses for courses that involve sports, games, or hobbies that are not part of a degree program.  Expenses qualifying for the credit must be reduced by tax-free scholarships or fellowships and other tax-free educational benefits.

Qualifying students...must attend a qualified educational institution (one that is eligible to participate in U.S. Dept. of Education student aid programs).  The student must be the taxpayer, his or her spouse, or someone who is a dependent of the taxpayer.  In addition, in the case of the Hope Scholarship Credit, the student must have no federal or state felony drug convictions for the academic period to which the credit would apply.

Savings Bond Interest Exclusion

Interest earned on U.S. savings bonds is, by Federal law, excludable from taxation for state income tax purposes but taxable on the federal return. However, for certain savings bonds, an individual can even exclude the interest on the Federal return. To qualify for this Federal exclusion, the bonds must be Series EE U.S. savings bonds issued after 1989, or a series I Bond and the bond proceeds must be used to pay higher education expenses.

Other qualifications... The bond purchaser must be age 24 or over and must be the sole owner of the bond (or, if married, joint owner with a spouse). Bonds purchased by others (except the spouse) or purchased by the taxpayer and placed in another’s name do not qualify for the exclusion.

Redemption of bonds... When the bonds are redeemed, the interest earned is excludable from income to the extent the proceeds are used to pay qualified higher education expenses for the taxpayer, spouse, or any dependent of the taxpayer. Such expenses include tuition and fees but not room and board or courses involving sports, etc., that aren’t part of a degree program.

Phase out... Like so many of the other educational benefits described earlier in this brochure, the interest exclusion phases out when modified AGI is between certain inflation-adjusted limits. For 2009, the phase out occurs between $69,950 and $84,950 for single taxpayers and between $104,900 and $134,900 for married taxpayers filing joint returns. For phase-out levels for other years, please call this office.

Above-the Line Education Deduction

A deduction from gross income of up to a maximum of $4,000 is allowable for higher education tuition expenses (same definition as for the education credits).  This deduction is phased out for higher-earning taxpayers and is not allowed in years when education credits are claimed.  This deduction was scheduled to expire several times and each time Congress extended it.  At the time this brochure was printed, the deduction had been extended through 2009.  For years after 2009, please call this office for further information.

Tax-Advantaged College Savings

Tax-Advantaged College Savings Overview

Section 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member ’s college education, while you maintain control of the funds. The earnings from these accounts grow tax-deferred and are tax-free if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 plans are an excellent vehicle for college funding.

Types of Plans

Section 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities.

College Savings Plans – These allow you to contribute after-tax dollars that are invested in some sort of savings vehicle. Many of these plans offer more aggressive investments when a child is quite young, which will then be transferred to more conservative investments as the child gets closer to college age. As with any investment, there are no guarantees of growth, and the plans are subject to the normal investment risks, even though state governments sponsor them. A big plus for these plans is that they are not geared towards in-state schools but are meant to be applied to whichever school your child chooses to attend.

Prepaid Tuition Plans – As the name implies, a Prepaid Tuition Plan allows parents to pay for college education at today’s tuition rates. By locking in your tuition payments, worries about the increase of tuition costs in the future can be set aside. This gives the assurance that the child will have the money to attend college when that time comes. These plans sound very attractive; however, most of these plans guarantee that you will be covered only if your child chooses to go to a public in-state college or university. Therefore, if your child decides to attend an out-of-state school, you won’t be fully covered, simply because these plans are not meant to fund the higher costs of private or out-of-state education. The 2001 Tax Act expanded the definition of prepaid tuition programs by allowing private institutions to set up and maintain these plans starting in 2002. Distributions from private tuition plans are now eligible for tax-free treatment.


If you make sacrifices to save for a child’s college education, you certainly want to make sure those savings end up being used for college and not some other purpose. 529 Plans allow you to keep control of the account. If you save money for college in a UGMA or UTMA (the name depends on the state in which you live and are essentially custodial accounts, set up for minors), the account becomes the child's property once he or she reaches the age of maturity - usually 18 or 21 and you lose control. Unlike UGMA/UTMAs, Section 529 plans are not irrevocable gifts and you retain control. Control stays in the hands of the adult responsible for the account. Generally, this is the same person who contributed the money, but it doesn't have to be the case. Someone else, for example a grandparent, could make the donation but name the child’s parent as the account owner. Money does not come out of the account without permission from the account owner. If the designated beneficiary of the plan decides not to go to school, then the account owner can simply change the beneficiary to someone else in the family.

Tax Benefits

There is no federal tax deduction for making contributions, but taxes on the earnings within a 529 plan are not only tax-deferred while they are held in the account, but are tax-free when withdrawn to pay for qualified education expenses. This allows you to accumulate money for college at a much faster rate than you can in an account where you had to pay tax on the investment gains and earnings. In the example below,


compare the growth of $10,000 accumulating tax-free (the green line) to the same $10,000 after taxes (the black line). To be tax-free when withdrawn, the funds must be used to pay for qualified college expenses such as tuition, room and board, books, supplies, and equipment. The more time you have until your child needs the money for college, the more significant this tax-free compounding becomes.

How Much Can Be Contributed?

Unlike the Coverdell Education Savings Accounts that limit the annual contribution to $2,000, Sec 529 Plans allow you to put away larger amounts of money. There are no income or age limitations for the Sec 529 Plans. The maximum amount that can be contributed per beneficiary is based on the projected cost of a college education and will vary between state plans. Some states base their maximum on an in-state four-year education, while others use the cost of the most expensive schools in the U.S., including graduate studies. Most have limits in excess of $200,000. Generally, once an account reaches that level, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow.

Contributions to a 529 college savings plan must, by Federal law, be made in cash and always consist of after-tax money. Most programs also have a minimum contribution that is within everyone’s budget. Many have payroll or automatic withdrawal programs.


If the earnings from the 529 Plan are withdrawn and not used for higher-education expenses, the earnings withdrawn will be subject to both regular taxes and a 10% penalty. Before you become concerned, refer back to Figure #1. Had you not utilized the tax deferral benefits of the Sec 529 Plan, you would have accumulated significantly less in the account, which will generally more than offset the 10% penalty. You can avoid penalties by making a tax and penalty-free rollover from one 529 Plan to another, and remember that you are able to change beneficiaries to a 529 Plan without penalty.

Impact on Financial Aid

Predicting financial aid eligibility is no easy task, since it’s based on a myriad of factors, including income, the age of the parents, and the methodology used. A question that always arises when discussing the benefits of saving for college is the impact those savings will have on future financial aid. Investing in a college savings plan could affect your financial aid eligibility but are typically viewed as a parental asset, rather than a child’s , and that means that a financial aid officer would count only a small portion of the assets toward the financial aid eligibility.

However, don't let the fear of hurting your child's eligibility for financial aid deter you from developing a sound savings strategy. Keep in mind that a lot of financial aid comes in the form of student loans, which means you'll save yourself (or your child) some money by planning ahead.

Gift and Estate Considerations

Contributions to Section 529 Plans are considered completed gifts and are subject to the gift tax rules. Under these rules, individuals can annually give away (gift) up to the annual limit to another individual (double for a married couple) without triggering gift taxes or reducing their lifetime gift and inheritance exclusion. The long-standing annual gift exclusion amount of $10,000 ($13,000 in 2009 and 2010) is now inflation-adjusted. Please call this office for the current limit.

In addition, individuals are allowed to make five years’ worth of gifts to a Section 529 Plan in one year. That means an individual could contribute $50,000 ($65,000 in 2009 and 2010) and a couple $110,000 ($130,000 in 2009 and 2010). However, no additional gift could be given to the beneficiary of the Section 529 Plan for that entire five-year period. The gift would reduce the donor’s estate by the full amount of the gift by the end of the five-year period. Should the donor die before the five-year period elapses, any amount in excess of the allowable annual exemptions would revert back to the donor’s estate. Note: A gift tax return must be filed for the year of the contribution if it exceeds the annual gift tax exclusion claiming this special exemption.

Section 529 Plans are increasingly being promoted as an estate-planning device for wealthy grandparents, since making a large contribution to a 529 Plan reduces your taxable estate much quicker than the current annual gift exclusion. But while the assets leave your estate, they don't leave your control.

Please Note: Transfers and change of beneficiaries can trigger gift and generation-skipping taxes if not planned correctly. If you are contemplating a change in beneficiary or transferring an account to another beneficiary, you are cautioned to call this office in advance.We can plan the change or transfer in such a way to avoid or minimize any potential gift or generation-skipping taxes.

Plan Sponsors

Section 529 Plans are state-sponsored programs. You are actually investing in a program authorized by the Federal government and run by the various states. To attract their own residents, some states offer tax deductions for contributions, while others will disregard the account balances when calculating state financial aid. It is important to understand that you are not limited to establishing a plan with your resident state. You should investigate the various state plans available and evaluate their performance, expenses, and investment options before making your selection.

Getting Started

Evaluating the various plans available, selecting one that meets your needs, and deciding on the amount of money to contribute to the fund can be time-consuming and complex. If you need professional assistance, please call this office.

Frequently Asked Questions

Must the student attend a college in the state that sponsors the selected plan?

A – No, you can utilize the plan of any state regardless of your state residency, and the student can attend virtually any college, graduate school, and even certain vocational schools anywhere in the country.

Q – I am used to selecting my own investments. Can I direct the investments for the plan?

A – No, Section 529 Plans do not allow you to self-direct the investments. Each plan has its own investment strategy generally based upon the child’s age. Some allow you to select certain investment options.

Q – If I wish to move the funds to a different plan, may I do so?

A – Yes , you are allowed a penalty-free rollover once a year from one plan to another. However, some states will penalize you if you move the plan to another state

Selling Your Home

Selling Your Home Federal tax laws allow each individual taxpayer to exclude up to $250,000 of gain from the sale of his/her main home, if he/she meets certain ownership and occupancy requirements. (A married couple that meets the qualifications can exclude up to $500,000.) If an individual/ couple is unable to exclude all or part of the gain, then the gain is taxable as a capital gain in the year of sale.

Exclusion Qualifications

Unless they meet the reduced exclusion qualifications,taxpayers must meet the ownership and use tests in order to qualify for exclusion of gain.This means that during the five-year period ending on the date of the sale, taxpayers must have:

1) Owned the home for at least two years (if a joint return only one spouse need meet the ownership test), and

2) Except for short temporary absences, lived in (used) the home as their main home for at least two years.

The required two years of ownership and use during the five-year period ending on the date of the sale do not have to be continuous. Taxpayers meet the tests if they can show that they owned and lived in the property as their main home for either 24 full months or 730 days during the five-year period ending on the date of sale. Also see ownership-use exceptions elsewhere in this brochure.

Temporary Absence: Generally, a temporary absence would be for illness, education, business, vacation, military service, etc. for less than one year, and the taxpayer intends to return to the home, and continues to maintain the home in anticipation of such return.

Land: Generally, if a taxpayer sells the land on which his/her main home is located, but not the house itself, the taxpayer cannot exclude any gain from the sale of the land. However, the home sale exclusion will apply to vacant land sold or exchanged if the taxpayer owned or used the land as part of the principal residence, provided the disposition of the dwelling unit occurs within two years before or after the disposition of the vacant land, the land was adjacent to land containing the dwelling unit and the land sale or exchange otherwise satisfies the home gain exclusion requirements. Only one maximum exclusion amount applies to the combined sales/exchanges of both the home and the vacant land.

Ownership and Use Exceptions

Use Test After Divorce – In divorce situations,the terms of the divorce or separation document often allow one spouse to use the jointly-owned home for an extended period of time,then to sell the home and split the proceeds with the former spouse.When this happens,the spouse who does not occupy the home will no longer meet the use test and would be barred from excluding the gain except for a special rule for divorced couples. Under this special exemption,that spouse is considered to have used the property as his or her main home during any period they owned it.

Disability – Individuals who have become physically or mentally unable to care for themselves are considered to have used their home during any period that they own the home and live in a licensed facility, including a nursing home that cares for individuals with the taxpayer’s condition. However, to qualify for this exception, the individual must have owned and lived in his or her home for at least one year. This exception does not apply to the ownership test.

Irrevocable Trust Is Owner – Some taxpayers use revocable (living) trusts as an alternative to having their property transferred by will. A home owned in the name of a revocable trust is treated as being owned by the taxpayers for purposes of the ownership test, and such ownership does not jeopardize the ownership test for claiming the exclusion. However, when the first spouse dies, two things occur. The decedent’s trust becomes irrevocable and the portion of the home inherited receives a new basis. If all or part of the home is placed in the decedent’s (bypass) trust, the IRS has ruled that to the extent a home is owned by an irrevocable trust, it is not owned by the surviving spouse, even if the surviving spouse continues to reside in the home. As a result, the portion of the home owned by the irrevocable trust would not qualify for the exclusion.

Death of Spouse Before Sale – If your spouse died before the date of sale and you do not meet the ownership and use tests yourself, you are considered to have owned and lived in the property as your main home during any period of time when your deceased spouse owned and lived in it as a main home.

Home Transferred in Divorce – If the home was transferred to you by your spouse,or former spouse, incident to divorce, and you do not meet the ownership test, you are considered to have owned it during any period of time when your spouse,or former spouse, owned it.

Home Destroyed or Condemned – If you were able to defer gain from a prior home to your current home because it was destroyed or condemned, you can add the time you owned and lived in that previous home when figuring the ownership and use tests for the current home.

Maximum Exclusion

A taxpayer who meets the ownership and occupancy tests can exclude the entire gain on the sale of his/her main home up to $250,000,provided gain has not been excluded on a sale of another home within two years of the sale of the current home.The maximum exclusion amount is $500,000 if all the following are true:

a) The taxpayers are married and file a joint return for the year.
b) Either the taxpayer or the taxpayer’s spouse meets the ownership test.
c) Both the taxpayer and taxpayer’s spouse meet the use test.
d) During the two-year period ending on the date of the sale,neither the taxpayer nor the taxpayer’s spouse excluded gain from the sale of another home.

Two-Year Period Between Sales

Unless taxpayers qualify for the reduced exclusion, they can only exercise the exclusion once every two years. Therefore, taxpayers cannot exclude the gain on the sale of their home, if during the two-year period ending on the date of the sale, they sold another home at a gain and excluded all or part of that gain.

Home Acquired by Tax-Deferred Exchange

If the home was originally acquired via a Sec 1031 tax-free exchange, the home must be owned for a minimum of five years before a home-sale gain exclusion can be utilized, provided the taxpayer also meets the 2-year use test.

Reduced Exclusion

A taxpayer who does not qualify for the full exclusion may still qualify to exclude a reduced amount if the taxpayer(s) did not meet the ownership and use tests, or the exclusion was disallowed because of the once every two-year rule, but sold the home due to:

a) A change in place of employment;
b) Health; or
c) Unforeseen circumstances,to the extent provided in IRS regulations.

Amount of Reduced Exclusion – If qualified, the reduced exclusion is determined on an individual basis, and in the case of married taxpayers, the individually computed amounts are combined for the joint exclusion. To determine the reduced exclusion,multiply $250,000 (maximum exclusion amount) by a fraction whose denominator is 730 and numerator is the shorter of:

(1) The number of days during the five-year period just prior to the current sale that the property was owned and used by the taxpayer as his/her principal residence;or

(2) The number of days between that sale and the current sale, if a home was sold just prior to the current sale and the exclusion applied to that sale.

More Than One Home

If a taxpayer has more than one home,the taxpayer can only exclude gain from the sale of the taxpayer’s main home,even if the other home meets the two-out-of-five-year ownership and use test.

Main Home: The property that the taxpayer uses the majority of the time during a year will ordinarily be considered the taxpayer’s main home or principal residence. A taxpayer’s main home can be a house, houseboat, mobile home, cooperative apartment, or condominium. 

In addition to the taxpayer’s use of the property, the home sale regulations list relevant factors in determining a taxpayer's principal residence which include, but are not limited to: the taxpayer's place of employment; the principal place of abode of the taxpayer's family members; the address listed on the taxpayer's Federal and state tax returns, driver's license, automobile registration and voter registration card; the taxpayer's mailing address for bills and correspondence; the location of the taxpayer's banks; and the location of religious organizations and recreational clubs with which the taxpayer is affiliated.

Example: Figure #1 illustrates a situation where a taxpayer has two homes,both of which meet the ownership test.The taxpayer also meets the occupancy test,since the taxpayer has lived in both homes more than two years of the prior five-year period. However, only the New York home qualifies, since the taxpayer lived in the New York home the majority of the time in all five preceding years, thus qualifying it as the taxpayer’s main home.

Gain or Loss on Sale

A taxpayer's main home and other homes are considered personal-use property. Gains from personal-use property are generally taxable, but losses from personal-use property are not deductible. Therefore, if you sell your home at a loss,the loss is not deductible.

On the other hand, if you sell a home for a gain and the gain is more than your allowable exclusion, or you do not qualify for the main home exclusion, then the gain from the home sale becomes taxable as a capital gain in the year of sale.

Determining Gain or Loss

The gain or loss from the sale of a home is the sales price less the sum of (1) the costs of selling the home and (2) the basis. Basis is a technical term used in taxes that generally represents the original cost plus the costs of improvements to the home. That is why it is so important to maintain records and keep track of your home’s cost and subsequent improvements. In the tax business, this is referred to tracking your basis.The exclusion amount may seem like a lot right now, but after a few years of inflation, you may discover it is not enough to offset the potential gain.

Other Factors Affecting Basis – There are numerous tax situations that can affect a home’s basis.The following are those most frequently encountered:

  • Deferred Gain – Prior to May 7, 1997, home sale rules allowed taxpayers to avoid paying on home sale gains by deferring the gain into their replacement home. If you deferred gain under those rules,the deferred gain reduces the replacement home’s basis.
  • Casualty Loss – Usually, a casualty loss resulting from damages to a home, taken as a tax deduction, will reduce a home’s basis.
  • Depreciation – Generally, depreciation resulting from the business use of a home may also reduce the basis (see “Business Use of Your Home” below).
  • Inherited Home – If a home is inherited, the portion inherited will have a new basis that is usually the fair market value of the home on the date of the decedent’s death. This is frequently referred to as a step-up (or step-down) in basis. If you inherited the home you are about to sell, please call this office for further details and clarification.

Business Use of the Home

Depreciation – The tax law assumes business assets will decline in value due to obsolescence and wear and tear. Therefore, taxpayers are allowed to take an annual deduction called depreciation, which represents the decline in value.

If the value increases instead, then upon its sale, any gain attributable to the depreciation is generally taxed at rates higher than the gain would otherwise be taxed.

In addition, the home sale exclusion does not apply to any depreciation taken on the home after May 6, 1997. This means that even if the gain is less than the allowable exclusion, the portion that represents depreciation after May 6, 1997 will still be taxable and generally at a higher rate than the other portion.

Mixed-Use or Separate Property? When a home that was used entirely or partially for business is sold, the home gain exclusion may be limited, and some portion of the business deduction for depreciation may be taxable. How much of the gain is taxable, and the amount of gain that is subject to the gain exclusion, depends if the business portion was part of the dwelling unit (mixed-use property) or whether it was a separate structure.

  • Mixed-Use Property: When the business use was within the same dwelling unit, no allocation of gain is required between the business portion and the personal (home) use portion. However, any depreciation attributable to periods after May 6,1997, would be taxable to the extent of any gain. Allowable depreciation reduces the basis of the home.

    Jake,a single taxpayer, sells his home for $300,000. He had originally purchased the home for $65,000 and added a room, which cost $20,000, giving him a cost basis of $85,000. He also had a business office in the home for which the allowable depreciation before May 7,1997, was $2,500 and after May 6,1997, was $3,000. The cost of selling the home was $27,000. He meets all of the qualifications for a home sale gain exclusion of up to $250,000.

    Sale Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000
    Less Sales Expenses . . . . . . . . . . . . . . . . . . . . . . .<27,000>
    Cost Basis . . . . . . . . . . . . . . . . . . . .85,000
    Allowable depreciation . . . . . . . . . .<5,500>
    Tax Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .<79,500>
    Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .193,500
    Home Sale Exclusion . . . . . . . . . . . . . . . . . . . . . . .<250,000>
    Net Gain (losses not allowed – not less than zero) . . . 0
    Taxable Amount (depreciation after 5/6/97) . . . . . . . 3,000

  • Separate Property: If the business use was within a separate structure, such as a guesthouse or detached garage, the tax treatment will depend upon whether the separate structure itself meets the exclusion qualification requirements. Generally, if a home office in a separate structure does not meet the ownership and use tests, the home gain exclusion will not apply to the gain attributable to the office portion. Please call this office for assistance.

Rental Converted to a Home

The sale of residential rental property is governed by an entirely different set of tax rules than those applying to an individual’s main home. However, had the home also been used as the taxpayer’s main home either before or after being used as a rental, then it can still qualify for the home sale exclusion if it meets the ownership and use tests.This can provide a significant tax benefit for individuals who carefully plan their sales. As with the home office, the rental’s depreciation is not subject to exclusion, and all or part may be taxable to the extent of the sale profit (gain).

However, if the home was previously used as other than a taxpayer’s main home (non-qualified use), for example, as a second home or a rental, and converted to a personal residence after December 31, 2008, the portion of the pro-rated gain attributable to the non-qualified use will not qualify for the home gain exclusion.

Taxpayers contemplating such tax strategy, should consult with this office in advance to verify qualifications and determine the tax implications including depreciation recapture.

Special Considerations

Separate Returns – If you and your spouse sell a jointly-owned home and file separate returns, each of you should figure your own gain or loss according to your ownership interest in the home.

Joint Owners Not Married – If you own a home jointly with other joint owner(s), other than your spouse, each of you would apply the rules discussed in this brochure to your individual ownership.

Other Dispositions – Foreclosures, repossessions, and exchanges of
your home are generally treated as sales.

Using Your Home Equity

Using Your Home Equity An individual’s home is one of his/her most valuable assets, if not the most valuable. Over time, the home’s mortgage will be paid down and the home will increase in value, providing a substantial amount of equity.

Homeowners frequently look to the equity in their home as a
source of ready cash to use for other purposes, such as purchasing vehicles, funding college educations, paying off credit card debts, etc. This may provide a tax benefit, because unlike a car loan, credit card debt, etc., home mortgage interest is normally tax deductible. But not always! Don’t become trapped by the limitations imposed by the tax laws on deducting home mortgage interest.

At first glance, the rules regarding deducting home mortgage interest may seem quite uncomplicated. But there are a number of frequently encountered situations that can limit a taxpayer ’s home mortgage interest deduction. This brochure gives an overview of the more commonly encountered situations and hopefully provides you with sufficient awareness to recognize a potential problem so that you may seek professional assistance when the need arises.

Tax Law and Terminology

Understanding the laws relating to deducting home mortgage interest requires an understanding of the terminology used in tax law and regulations and the limitations imposed.

  • Acquisition Debt - is generally the mortgage debt incurred to acquire, construct, or improve a taxpayer’s "qualified residence" and is one that is secured by that residence. Deductible home mortgage interest is limited to the interest on the first $1 million(1) dollars of such debt. (Note: There is an exception for mortgages that exceed the $1 million limit and were acquired before Oct. 14, 1987, which is not covered in this brochure.)
  • Home Equity Debt – is any debt, other than acquisition debt, secured by the taxpayer’s "qualified residence" to the extent the debt does not exceed the fair market value of the residence reduced by the acquisition indebtedness. Deductible interest on home equity debt is limited to the interest on $100,000( 2 ) of such indebtedness.
  • Qualified Residence – means the taxpayer’s principal residence and a second residence selected by the taxpayer.
  • Second Residence – To qualify as a second residence, a property must be a residence that generally includes sleeping, cooking, and toileting facilities. Therefore, houses, condominiums, motor homes, boats, and house trailers can be treated as residences.
  • Residence Under Construction – A residence under construction may be treated as a qualified residence the final 24 months before the property is ready for occupancy.
  • AMT Adjustments – Only interest on acquisition debt is deductible against the Alternative Minimum Tax (AMT). Therefore, interest on home equity indebtedness would not be deductible against the AMT. In addition, AMT rules generally do not allow interest on unconventional residences such as boats or mobile homes used on a transient basis.

    (1) $500,000 for married individuals filing separately
    (2) $50,000 for married individuals filing separately

Deducting Home Interest

Generally, when a taxpayer finances a home for less than $1,000,000(1), the interest on that loan would be fully deductible as part of the taxpayer’s itemized deductions. The taxpayer can also deduct interest on home equity debt up to $100,000(2), provided the total of the acquisition and home equity debt do not exceed the fair market value (FMV) of the home. If it does, the interest on the home equity loan will be limited to that paid on the difference between the FMV and acquisition indebtedness.  Sounds simple, but keep in mind the acquisition debt is not a fixed amount, since it continually declines over time.  Figure #1 illustrates how the acquisition debt declines over the life of a loan.

CAUTION - Original Home Purchase – When initially acquiring a home which is financed for more than $1 million, the first $1 million is treated as acquisition debt and the interest paid on $1 million of that debt is deductible as home mortgage interest.  Any excess debt over the $1 million cannot be treated as equity debt, since the entire loan was used for the acquisition of the home and by definition is acquisition debt.

(1) $500,000 for married individuals filing separately
(2) $50,000 for married individuals filing separately


Implications of Refinancing

Suppose after several years, the prevailing interest rates for home loans decline, and the taxpayer decides to refinance the acquisition debt to take advantage of lower interest rates and at the same time take out an additional $100,000 for a home improvement? As illustrated in Figure #2, as long as the additional cash is used for home improvements, the term of the original loan can be extended and all the debt within the white and red shaded areas continues to be allowable acquisition debt with the interest on that debt fully deductible as home mortgage interest. 

Suppose in another example, illustrated in Figure #3, the taxpayer decides to refinance and increase the loan by $150,000, but does not use any of the additional loan proceeds for home improvements.  In this case, the original acquisition debt term is extended and retains its character as acquisition debt (blue shaded area). The prorated interest on this portion of the debt continues to be deductible against both the regular tax and the AMT.  The next $100,000 of the additional proceeds qualifies as home equity debt (green shaded area).  The prorated interest on this portion of the debt continues to be deductible against the regular tax, but not the AMT.  The balance of the debt (red shaded area) does not qualify as either acquisition debt or equity debt and the prorated interest on this portion of the debt is not deductible either as acquisition debt interest or equity interest.  However, if the use of this portion of the debt can be traced to another deductible purpose, the interest may be deductible elsewhere on the tax return.

Increasing Acquisition Debt

Although acquisition debt will generally decline over time as the debt is paid off, it is possible for the debt to increase. The definition of acquisition debt is debt incurred to acquire, construct or improve a taxpayer’s "qualified residence." Therefore, if a taxpayer borrows money to improve a home, that debt would be classified as acquisition debt and would add to the balance of any other acquisition debt still in existence.

Currently, there is no official government explanation of the type or degree of work required for a substantial improvement. Presumably, the "improvement-versus-repair" rules would be relevant in determining whether there was a substantial improvement for purposes of the acquisition indebtedness rule. 

A Source of Ready Cash

Home equity is a ready source of cash for purposes other than housing, and since consumer debt is not deductible as an itemized deduction, home equity has become a means to make consumer purchases and have the interest on debt for those purchases tax deductible as home mortgage interest.

The key is that the loan must be secured by the home. Take for example, purchasing a new car. Say the new car costs $25,000 and the trade-in is worth $5,000. That leaves a $20,000 loan. Assuming a rate of 8%, the interest paid over the term of the loan would be $4,333. If you finance the car through a home equity loan, the interest would be deductible, and assuming a combined federal and state tax bracket of 25% , a homeowner would save $1,083 by having the tax deduction.

In addition to consumer purchases, home equity is frequently used for college expenses, paying off credit card debts, emergency medical expenses, etc. But always remember, the loan must be secured by the home, and if the total debt exceeds combined acquisition debt and equity debt limits, the excess is not deductible as home mortgage interest but may be deductible somewhere else on your tax return if the use of the loan proceeds can be traced to another deductible use.

Home Loans for Business

Frequently, homeowners may wish to borrow money from their home equity in order to meet a business need. This commonly occurs because banks are more willing to make secured home loans than they are to make business loans, and generally, home loans have a lower interest rate and a longer term. However, an interest deduction will generally provide greater benefit if deducted against the business rather than as an itemized deduction.

The question frequently arises whether the home mortgage interest can be allocated between the business and home in proportion to the amount of debt allocated between home and business purposes. Although tax law includes provisions to allocate interest, the provision does not apply to home mortgage interest. Basically, if the mortgage is secured by the home, then it must be deducted as home mortgage interest and cannot be allocated.

There is, however, a special election that allows home debt to be treated as if it were not secured by the home. If that election is made, then the interest can be allocated to its proper use, except that none of the interest can be allocated to the home since it is no longer secured by the home. If the homeowner refinanced the existing acquisition debt and took cash for the business and used the election, then the part allocatable to the home would not be deductible. On the other hand, if the second mortgage was taken on the home and all of the proceeds used for business, then the election could be used since the entire amount of the interest would be allocated to the business activity.

Home Construction

A home under construction may be treated as a qualified residence for a period of up to 24 months, provided the home becomes a qualified residence as of the time it is ready for occupancy. In addition, the 24-month period may begin any time after construction begins. This means that if the construction takes more than 24 months, the final 24 months before the property is ready for occupancy can be used.

Watch Out for AMT

The Alternative Minimum Tax (AMT) is another way of computing tax liability that is required to be used if it is greater than the regular method. Congress originally conceived the AMT as a means of extracting a minimum tax from high income taxpayers who have significant items of tax shelter and/or tax-favored deductions. Since the AMT was conceived, inflation has driven up income and deductions so that more individuals are becoming subject to the AMT.

When computing the AMT, acquisition debt interest is allowed as a deduction. However, home equity debt interest is not. Neither is the interest on debt for unconventional homes such as boats and motor homes,even if they are the primary residence of the taxpayer.

Therefore, if you are subject to the AMT, you need to make every attempt to avoid any debt other than the acquisition debt.

Required Minimum IRA Distributions

Required Minimum IRA Distributions Overview

The most recent IRS regulations substantially simplify rules for required minimum distributions (RMD) from IRAs.
  • There are new life expectancy tables that allow smaller distributions to be taken over a longer period.

  • The calculation of the RMD has been simplified by eliminating certain variables.

  • Rules regarding separate accounts with different beneficiaries have been clarified.
  • Some flexibility is now available to change beneficiaries and split accounts, allowing the heirs to retain more of the tax-deferred income for a longer period of time.

Beginning Date Requirements

IRA owners must take at least a minimum amount from their IRA each year, starting with the year they reach age 70 1/2.

If a taxpayer fails to take a distribution in the year they reach 70 1/2, they can avoid a penalty by taking that distribution no later than April 1 of the following year. However, that means the IRA owner must take two distributions in the following year, one for the year in which they reached age 70 1/2 and one for the current year.

If an IRA owner dies after reaching age 70 1/2, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date.

Multiple IRA Accounts

For purposes of determining the minimum distribution, all Traditional IRA accounts owned by an individual are treated as one, and the minimum distribution can be taken from any combination of the accounts. If the owner chooses not to take the minimum distribution from each account, it is not uncommon for IRA trustees to require written certification that the owner took the minimum distribution from other accounts.

Determining the Distribution

The minimum amount that must be withdrawn in a particular year is the total value of all IRA accounts divided by the number of years the IRA owner is expected to live.


  • Determining Total Value: The total value is based on the sum of the value of all the owner’s accounts at the end of the business day on Dec. 31 of the PRIOR year. Generally, IRA account trustees will provide this information on the year-end statements or on IRS Form 5498.

  • Determining the Distribution Period: The IRS provides two tables for use in determining the IRA owner’s life expectancy (referred to as "distribution period" by the IRS). Generally, IRA owners will use the "Uniform Lifetime Table" to determine their "distribution period." If the IRA owner’s spouse is the sole beneficiary (on all the IRA accounts), the Joint and Last Survivor Table may be used. However, the Uniform Lifetime Table will always produce the smallest minimum distribution, unless the spouse is more than 10 years younger than the IRA account owner. Example: The IRA owner is 75 and from the "Uniform Lifetime Table," the owner’s life expectancy is 22.9 years.

  • Determining Age: Use the owner’s oldest attained age for the year of the distribution.

Example: Suppose an IRA owner takes a distribution in February, when the owner’s age is 74, but later in November, he turns 75. For purposes of determining the owner’s life expectancy, the oldest attained age for the year, 75, would be used in computing the minimum distribution. The same rule is used for the spouse beneficiary, if applicable.

Example: The IRA account owner is age 75 and the owner’s spouse, who is the sole beneficiary of the accounts, is age 72. Since the spouse is less than 10 years younger than the IRA account owner, the Uniform Lifetime Table will produce the smallest required distribution. From the table, we determine the owner’s life expectancy to be 22.9. The owner has three IRA accounts with a combined value of $87,000 at the end of the prior year. The minimum distribution is $3,799 ($87,000 / 22.9).

Timing of the Distribution

The minimum distribution computation determines the amount that must be withdrawn during the calendar year. The distributions can be taken all at once, sporadically, or in a series of installments (monthly, quarterly, etc.), as long as the total distributions for the year are at least the minimum required amount.

Amounts that must be distributed (required distributions) during a particular year are not eligible for rollover treatment.

Maximum Distribution

There is no maximum limit on distributions from a Traditional IRA, and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.

Underdistribution Penalty

Distributions that are less than the required minimum distribution for the year are subject to a 50% excise tax (excess accumulation penalty) for that year on the amount not distributed as required.

Example: The owner’s required minimum distribution for the calendar year was $10,000, but the owner only withdrew $4,000. The excess accumulation penalty is $3,000, computed as follows: 50% of ($10,000 - $4,000).

If the failure to withdraw the minimum amount or part of the minimum amount was due to reasonable error, and the owner has taken, or is taking, steps to remedy the insufficient distribution, the owner can request that the penalty be excused. However, the penalty must first be assessed and then refunded by the IRS if the request is approved.

Not Required to File

Even though the IRA owner is not required to file a tax return, they are still subject to the minimum required distribution rules and could be liable for the underdistribution penalty even if no income tax would have been due on the underdistribution.

Death of the IRA Owner

If the IRA owner dies on or after the required distribution beginning date, a distribution must be made in the year of death, as if the IRA owner had lived the entire year. If the distribution is after the owner’s death, the minimum amount must be distributed to a beneficiary.

Beneficiary Distributions

When an IRA owner dies after beginning the required distributions, and the beneficiary is an individual, the beneficiary must begin taking distributions the year after the IRA owner’s death as follows:

Spouse as Sole Beneficiary: The IRS permits a sole beneficiary spouse far more options than it does other beneficiates. When the spouse is the sole beneficiary, the spouse has the following options:

  • Convert the IRA to his/her own account, thereby delaying additional distributions until he/she reaches age 70 1/2.

  • Or, if already age 701/2, convert the IRA to his/her own account and begin taking RMD based on his/her attained age using the Uniform Distribution Table.

  • Treat the IRA as if it were his/her own, frequently referred to as recharacterizing the IRA to a "Beneficial IRA" and naming new beneficiaries. The spouse must begin taking minimum distributions in the year following the owner’s death based on his/her life expectancy using the Single Life Table. Distributions from Beneficial IRAs are not subject to the premature distribution penalties. Later, after he/she are no longer subject to the premature distribution penalty, the IRA can be converted as his/her own and he/she can choose to stop taking distributions until age 70 1/2.

The choice depends on the surviving spouse’s financial needs and goals and in most cases requires careful planning.

Caution: The sole beneficiary requirement is not met if the beneficiary is a trust, even if the spouse is the sole beneficiary of the trust.

Life Expectancy Tables

The following tables are taken from the IRS regulations and are used to determine life expectancy for purposes of determining the Required Minimum Distribution from Traditional IRA accounts (Reg 1.401(a)(9)-5). All of the tables illustrated have been abbreviated to fit this brochure. For ages not shown, please consult this office.

Other Individual Beneficiaries: If the beneficiary or beneficiaries include individuals other than the spouse, then the first required distribution is the calendar year following the year of the IRA owner’s death. Using the Single Life Table, the post-death distribution period used to determine the RMD is the longer of:

1.The remaining life expectancy of the deceased IRA owner using the deceased’s attained age in the year of death and subtracting one for each subsequent year after the date of death.

2.The remaining life expectancy of the IRA beneficiary using the beneficiaries’ attained age in the year of death and subtracting one for each subsequent year after the date of death.

The beneficiaries’ remaining life expectancy is determined using the oldest beneficiary’s age as of their birthday in the calendar year immediately following the IRA owner’s death OR for those accounts that were separated by the end of the year after the year after death, the age of each beneficiary. Where the beneficiaries include the spouse, account separation must be completed by Sept. 30 instead of year-end to take advantage of the spouse sole beneficiary provisions.

Five-Year Option: A beneficiary who is an individual may be able to elect to take the entire account by the end of the fifth year, following the year of the owner’s death. If this election is made, no distribution is required for any year before that fifth year.

The above rules apply only to distributions where the beneficiaries are all individuals and occur after the IRA owner has begun or is required to begin minimum IRA distributions. For distribution options for nonindividual beneficiaries or for distribution options where the IRA owner dies prior to beginning the required minimum distributions, please call this office.

Planning Can Minimize the Tax

Advance planning can, in many cases, minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise where a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any tax.

**These rules are mostly suspended for 2009. Please call the office for details.

Making Estimated Tax Payments

Making Estimated Tax Payments Why Pay Estimates?

The tax system is intended to be a “pay-as-you-go” system, and the only way to prepay taxes is through withholding and estimated taxes. Generally, payroll comes to mind when we think about withholding, but withholding is also available through a variety of other means, including pension income and Social Security payments. However, there are a multitude of income sources that generally do not have withholding, such as self-employment, interest, dividends, rents, gains from stock sales, alimony etc. Estimated tax payments provide a means of prepaying one’s taxes on these kinds of income.

However, the use of estimated tax vouchers is not limited to taxpayers with income not subject to withholding. A variety of situations might arise that warrant the use of estimated taxes, such as taxpayers who are paid by commissions or who receive bonuses that distort their income. Frequently, a married couple with substantial income may also rely on estimated taxes to supplement its wage withholding.

Are Estimates Mandatory?

No, it is not mandatory for you to make estimated tax payments. However, if you end up owing money when you file your tax return, then you might be subject to the underpayment of estimated tax penalty. Unless you meet one of the exceptions explained later, this penalty could apply even if all of your income sources are subject to withholding.

What is the Penalty?

It is a nondeductible interest penalty computed on a quarterly basis. The interest rate varies from year to year based on the prevailing interest rates. Over the past few years, the rates have varied between 5% and 9%.

Estimate Due Dates

Payments are due on the 15th day after the end of the quarter, giving a taxpayer 15 days to compute their tax liability for the quarter. The tax quarters are not all the same duration.

– The first quarter is three months (Jan–Mar),
– the second quarter is two months (Apr–May),
– the third quarter is three months (June–Aug), and
– the final quarter is four months (Sep–Dec).

Note: If a due date falls on a Saturday, Sunday, or holiday, the due date will be the next business day. The reason the due dates are on the 15th is to give taxpayers time to compute their tax liability for the quarter.

The due dates are:

If paid all at once, the due date is April 15.

If paid in installments, the due dates are:

– First payment: April 15 of the tax year
– Second payment: June 15 of the tax year
– Third payment: Sept. 15 of the tax year
– Fourth payment: Jan. 15 of the following year; or if the tax return is filed by Jan. 31 of the following year and the entire balance is paid with the return, the Jan. 15 payment may be skipped.

The payment in January of the following year confuses some taxpayers who attempt to take credit for payment in the following year since that was the year in which it was paid. If you miss a payment due date, you should make the payment as soon as possible!

Farmers and Fishermen Exception - With at least two thirds of their gross income for the prior year or the current year from farming or fishing, they may:

– Pay all of their estimated tax by Jan. 15 (fourth quarter due date); or
– File their tax return on or before March 1 and pay the total tax due.

How to Avoid the Penalty

There are a number of exceptions to the underpayment of estimated tax penalty, which can help you plan your estimated payments, avoid the penalty and minimize the advance payments.

No Tax Liability In Prior Year - A taxpayer is exempt from the underpayment of estimated tax penalty if they had no tax liability in the prior year and they were a U.S. citizen or resident for the whole year. For this rule to apply, the tax year must have included all 12 months of the year.

De Minimis Exception -Taxpayers can owe up to $1,000 on their tax return without penalty.

Current Year Exception - If a taxpayer’s withholding and estimated tax payments are equal to 90% or more of the current year’s tax liability, then there is no penalty.

Prior Year Exception - The underpayment can also be avoided by prepaying through withholding and estimated tax payments an amount equal to 100% or more of the prior year’s tax liability. Caution: See High Income Taxpayers below.

Prior Year Exception for High Income Taxpayers - For taxpayers with gross incomes (AGI) in excess of $150,000 ($75,000 for married taxpayers filing separately), the prepayments must total 110% of the prior year’s tax. This penalty exception is frequently used by taxpayers as means of determining a safe harbor estimate for the current tax year.

Annualized Income Exception - A complicated exception can help you avoid the underpayment of estimated tax penalty if you have large changes in income, deductions, additional taxes, or credits that require you to start making or adjusting estimated tax payments.

The payment amounts will vary based on your income, deductions, additional taxes, and credits for the months ending before each payment due date. As a result, this method may allow you to skip or lower the amount due for one or more payments.

Farmers and Fishermen Exception - If at least two thirds of the taxpayer’s gross income for the prior year or the current year is from farming or fishing, the taxpayer’s required annual payment is the smaller of:

– 66 2/3 % (.6667) of the total tax for the year, or
– 100% of the total tax shown on the prior year, provided the prior year was for a full 12 months.

Determining the Amount to Pay

Individuals generally pay estimates in even quarterly amounts utilizing one of the underpayment exceptions or by pre-estimating their taxes for the year. However, payments can be adjusted quarterly, allowing payments to be skipped or stopped if there are fluctuations in income to warrant the adjustment.

How the payments are made is dependent upon a number of factors:

Increasing Income - When a taxpayer’s income is increasing and their tax liability will be greater than the year before, the estimates can be based on one of the “Prior Year Exception” methods (either 100% or 110% of the prior year’s tax), thereby minimizing the payments and ensuring the underpayment of estimated tax penalty will not apply. Using this approach will require the taxpayer to pay any balance by the April filing due date. This method is especially attractive to taxpayers with substantial increases in income and allows them to delay paying a substantial portion of the increase in tax until the filing due date.

Decreasing Income - When a taxpayer’s income decreases and their tax liability will be less, they probably will not want to make payments based on the “Prior Year Exceptions” since that would require them to overpay their estimated taxes. To avoid penalties, they will need to prepay 90% of their liability (current year exception) for the year or have a balance due not exceeding $1,000 (de minimis exception).

Fluctuating Income - Where a taxpayer’s income fluctuates significantly in different quarters of the year, they may not have the cash available to make even payments and will need to base their estimates on the income received during each quarter. These individuals can avoid a penalty by using the “Annualized Income Exception.” This requires the taxpayer to project their annual income and resulting tax based upon the income they have received through the current quarter. They prorate the annual tax through the current quarter and pay the prorated amount less the amount previously paid for the year.

Withholding Plus Estimates - Frequently, prepayments consist of both withholding and estimated payments. While estimated tax payments are in the control of the taxpayer, withholding is not and may fluctuate during the year. As a result, the withholding may be less than the amount needed to meet one of the exceptions. The exceptions to the penalty provide no latitude for unforeseen withholding changes.

Allocating Estimates Between Spouses and Ex-Spouses

If you and your spouse are married on the last day of the tax year but file separate returns, the following rules are used to determine who gets credit for the estimated tax payments:

If you and your spouse made separate estimated tax payments for the tax year, you can only take credit for your own payments.

If you made joint estimated tax payments:

Can Agree - If you and your spouse (or ex-spouse) can agree upon an allocation of the payments, then you may allocate them in any manner you wish, provided that the allocated total is the same as the jointly paid amounts for the year.

Cannot Agree - If you and your spouse (or ex-spouse) cannot agree upon an allocation, then you must divide the payments in proportion to each spouse’s individual tax as shown on your separate returns for the tax year.

Example: You and your spouse (or ex-spouse) made joint estimated tax payments totaling $3,000. You file separate returns and cannot agree on how to divide estimates. Your separate tax liability is $4,000, and your spouse’s is $1,000.

Your share = 4,000/5,000 x 3,000 = $2,400
Spouse’s share = 1,000/5000 x 3,000 = $ 600

Divorced Taxpayers—If the taxpayers made joint estimated tax payments for the year and were divorced during the year, either spouse can claim all the payments or they each can claim part of them. If the taxpayers cannot agree on how to divide the payments, they must divide them in proportion to each spouse’s individual tax as shown on their separate returns for the year.

How and Where to Make Payments

Payments should be accompanied by an IRS payment voucher. These vouchers, one for each quarterly payment, are included with the IRS Form 1040-ES. Each voucher includes the payment due date and areas for the taxpayers’ name, SSN, address, and the amount of the payment.

The voucher and your check payment should be mailed to the address for your specified geographical area. The addresses change frequently and are included on the voucher instructions.

The payments are actually being sent to what is referred to as a lockbox. The lockboxes are generally operated by bank personnel who credit your account by Social Security Number and deposit the funds into the U.S. Treasury.

When making out your check payment, be sure to write the words “Estimated Tax,” the tax year, and your SSN in the notation area of your check. This way if your check and the payment voucher become separated, the funds can still be properly credited to your account.

Name Change

If you had a name change and made estimated tax payments using your old name, attach a brief statement to the front of your tax return indicating:

  • When you made the payments;
  • The amount of each payment;
  • The IRS address to which you sent the payments;
  • Your name when you made the payments; and
  • Your social security number.

The statement should cover payments you made jointly with your spouse as well as any you made separately.

Tips On Filing Your Tax Return

Tips On Filing Your Tax Return Deadline for Filing Your Return

Generally, individual tax returns are due on the 15th day of the fourth month after the close of your tax year. Since virtually all individual taxpayers file on a calendar year, the due date for most individual taxpayers is April 15. That is the due date for both filing your return and paying any balance-due taxes. If the April 15 due date falls on a Saturday, Sunday or legal holiday, the due date is delayed until the next business day. Most states have the same due date, although some give additional time.

U.S. citizen and U.S. resident taxpayers who are out of the country on the April due date may qualify for an automatic two-month extension to file their return and pay any federal income tax that is due.This applies if they are living outside of the United States and Puerto Rico and their main place of business or post of duty is outside the United States and Puerto Rico, or they are in military or naval service on duty outside the United States and Puerto Rico.

The deadlines for filing and paying, if there is a tax due, is extended for 180 days after the latter of the last day a military taxpayer was in a combat zone/qualified hazardous duty area, or the last day of any continuous qualified hospitalization for injury from service in the combat zone/qualified hazardous duty area. In addition to the 180 days,the deadline is also extended by the number of days that were left for the individual to take action with the IRS when they entered a combat zone/qualified hazardous duty area.

Proof of Filing

If a paper return is being filed, it is considered filed on time if it is properly addressed, has sufficient postage and is postmarked by the due date. It may be appropriate to obtain a proof of mailing if there is a balance due on the return, since both the late filing penalty and the late payment penalty are based on the amount of the balance due.This is especially important if the amount of balance due is sizable and the returns are mailed close to the due date. If the return is sent by registered mail, the date of the registration is the postmark date.The registration is evidence that the return was delivered. If sent by certified mail and the receipt is postmarked by a postal employee, the date on the receipt is the postmark date.The postmarked certified mail receipt is evidence that the return was delivered. Note:A private postage meter date is not considered to be valid proof of mailing.

In addition to filing returns with the U.S. Postal Service, the IRS has designated several private delivery services that taxpayers can use to send their returns to the IRS. The postmark date for these services is generally the date the private delivery service records the date in its database or marks on the mailing label.The private delivery service will explain how to get written proof of this date.

Reasons for Extensions

There are valid reasons for not filing a tax return on time, and there is no stigma associated with doing so. The following are typical reasons that taxpayers file an extension:

• Waiting for a K-1 Distribution Form from a partnership or estate.

• Need additional time to fund certain self-employed retirement plans.

• Taxpayer suffered a casualty and the tax documents were lost.

• Taxpayer or spouse is ill.

• Taxpayer or spouse is deceased.

These are by no means the only valid reasons for an extension,but are shown as examples.

If You Need Additional Time

If you need additional time to file your return, the IRS provides two forms of extensions. CAUTION: It is important to note that these are extensions of time to file your return, not an extension to pay your tax liability. Even if you file for and are granted an extension of time to file, interest and late payment penalties (discussed later) will apply to any balance due on the return from the original April due date.

Automatic Six-Month Extension – This extension gives you until October 16 to file your return.  If you expect to owe, estimate how much and include an extension payment.  If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date.

It is not a good idea to delay filing your return because you owe taxes.  The late filing penalty is 5% per month (maximum 25%) and can be substantial.  It is generally better practice to file the return without payment and avoid the late filing penalty.  We can also establish an installment agreement which allows you to pay your taxes over a period of up to 60 months.

Interest on the Balance Due 

An extension does not extend the time taxpayers have to pay their tax liability. Therefore, if money is owed on a return that is filed after the original April due date, the taxpayer will be liable for interest on any unpaid balance. The interest charge continues to run until the tax is paid. Even if there is a good reason for not paying on time, the interest will still be assessed.The first extension request includes the ability to include a payment toward the estimated tax liability.

Late Penalties

In addition to interest, a taxpayer can also be liable for a late filing penalty and a late payment penalty. Having a valid extension will avoid the late filing penalty, but not the late payment penalty.

• Late Filing Penalty
– A penalty is usually charged if the tax return is filed after the due date and the taxpayer has not filed a valid extension or the extension due date has passed.The penalty is 5% of the balance-due tax for each month (or part of a month) the return is late.

– Maximum Penalty – The maximum penalty imposed is 25%.

– Minimum Penalty – If your return is more than 60 days late, the minimum penalty is $100 or the balance of the tax due on your return, whichever is smaller.

This penalty can be avoided by filing the appropriate extension or extensions and then filing the return by the extended due date.

• Late Payment Penalty
– The penalty is generally 1/2% of the balance-due tax not paid by the regular due date. It is charged for each month or part of a month the tax is unpaid.The maximum penalty is 25%. Taxpayers are considered to have "reasonable cause" for the period covered by an automatic extension if at least 90% of their actual tax liability is paid before the regular due date of their return through withholding or estimated tax payments, or with the automatic extension.

Reasonable Cause – The IRS will not assess the late filing penalty or late payment penalty if you can show reasonable cause for not paying on time. To demonstrate reasonable cause, a taxpayer must show they used ordinary business care and prudence in preparing and filing their returns and nevertheless were unable to meet the due date.

To request the penalties be abated, a statement is attached to the finished tax return fully explaining the reason.

What If You Can't Pay the Balance Due?

If a taxpayer is unable to pay the balance due, the IRS offers two possible solutions: pay by credit card or establish a payment plan.

Pay by Credit Card – Taxpayers can generally pay part or all of their tax liability by using a credit card. The payment is not made through the government directly, but rather through a third party service designated by the IRS. Unlike merchants, the IRS will not pay the discount to the credit card companies. Instead, the taxpayer is charged a fee that is roughly 3% of the tax due.

Establish an Installment Payment Plan – Generally, if the amount owed does not exceed $25,000 and the taxpayer is able to pay it within a five-year period, the taxpayer will qualify for an installment agreement. The IRS charges a small fee for setting the agreement and will continue to charge interest on the unpaid balance. The late payment penalty will also apply, but will be reduced to half the regular amount if the taxpayer qualifies. To be approved for an installment plan, a taxpayer must agree to make full and timely payments, file all future tax returns on time, and pay all future tax balances when due. Any refund from future years will be applied to the outstanding balance. If a taxpayer defaults on the terms of the agreement, the IRS has the option of taking enforcement actions to collect the entire amount owed.

Who Can File an Extension?

In addition to the taxpayer, Attorneys, CPAs, and Enrolled Agents can file an extension for a taxpayer without a power of attorney. Also,anyone with a valid power of attorney, who is in a close personal or business relationship with the taxpayer, can file an extension for the taxpayer.

Options for Receiving Refunds

If you are entitled to a refund and do not have other outstanding liabilities for prior year taxes, past due child support or student loan payments, you have the following options for payment of your refund amount:

Direct Deposit - The refund is deposited into your specified savings or checking account.  This process is much faster than having your refund issued by check.  Beginning with 2006 returns, taxpayers who use direct deposit for their federal refunds will be able to divide their refunds and make deposits into a maximum of three different financial accounts.

Issued a Check - If a direct deposit is not specified, then the refund amount will be paid by check.

Applied to Subsequent Year - Any portion of your refund can be applied to next year's estimated taxes and the balance paid to you by check or direct deposit.

E-filing Your Tax Returns

E-filing Your Tax Returns Basics of E-filing

When e-filing (electronic filing) was first introduced, only the less complicated tax returns qualified. This led to the general public’s perception that e-filing was for short forms with refunds. Since then, e-filing has matured to the point that even the most complicated returns can be electronically filed. It also offers the following advantages to taxpayers:

• A refund can be received much faster.

• The risk of a check being lost or stolen is minimized.

• The IRS (and state, if applicable) no longer needs to keypunch your tax return data, avoiding input errors at the government centers.

• Proof of filing is provided.

• There is no longer the expense of mailing returns.

• If money is owed, a taxpayer can still file early and delay payment until the last minute.

• A complete paper copy of your tax return is still provided.

In short, e-filing simply replaces the paper-filed return with a return that is electronically filed. There is no sacrifice on your part in quality or service provided by this firm.

Authorizing Transmittal

Before your return(s) can be electronically transmitted, you must first provide our firm with written authorization. You will need to sign one of two authorization forms, which will be provided to you after your return has been completed and reviewed and is ready to be filed.

• Form 8879 – Except in unusual circumstances, Form 8879 will be used. It is used when all forms and schedules on your tax return are acceptable for electronic transmission and provides for an electronic signature (as explained below). To use Form 8879, the taxpayer must be at least 16 years of age.

Form 8453 – Occasionally, your return will include a form or schedule that is not acceptable for electronic filing and that particular form must be paper filed. This is usually encountered when one or more of the forms being transmitted requires an original manual signature. When this is the case, Form 8453 is used to provide the authorization. Once the acceptable forms of your return have been electronically filed, the forms that must be paper filed are mailed by your tax professional to the IRS with Form 8453 within three business days of receiving IRS acknowledgment that the return has been accepted.

Your Electronic Signature

Paper-filed tax returns must be signed by the taxpayer or both taxpayers in the case of a joint return. When all forms and schedules of your return are electronically transmitted (see Form 8879 above), a physical signature is not possible. Instead, your Personal Identification Number (PIN) is used as your electronic signature. You and your spouse, if filing a joint return, establish your individual PIN at the time you sign the authorization for your return to be electronically transmitted. The PIN can be any randomly selected five digit number without zeros and is only used to tie your physical signature on the authorization to the transmitted return. There is no need on your part to record or remember the number and you can use a different number each time you file.

Options for Receiving Refunds

If you are entitled to a refund and do not have other outstanding liabilities for prior year taxes, past due child support or student loan payments, you have the following options for payment of your refund amount:

Direct Deposit – The refund is generally deposited into your specified savings or checking account within five business days after the return has been electronically transmitted.  Beginning with 2006 returns, taxpayers who use direct deposit for their federal refunds will be able to divide their refunds and make deposits into a maximum of three different financial accounts.

Issued a Check – If a direct deposit account is not specified, then the refund amount will be paid by a check. This is generally issued within 14 business days after e-filing is completed.

Applied to Subsequent Year – Any portion of your refund can be applied to next year’s estimated taxes and the balance paid to you by check or direct deposit.

Options for Paying a Balance Due

If a balance is due on your return, the return can be electronically filed and the balance due on your tax liability can be paid using the following options:

Check Payment – A payment voucher will be provided with which you can make a payment at any time up to the unextended due date of the return (generally April 15) without incurring late payment penalties.

Direct Debit (Electronic Withdrawal) – You can pay by direct debit at the time the return is filed or specify any date up to and including the last day for filing returns (generally April 15) for an electronic withdrawal from your bank account.

Example: Your return could be e-filed in March and you can specify that the debit be made on April 10 (or any other day on or before the return due date). You do not have to remember to do anything at a later time.

CAUTION! Taxpayers should first check with their financial institutions to verify that such payments can be made.

In addition to your tax return balance due, direct debit can be used to make extension payments and certain estimated payments.

Lack of Funds – Even if you do not have the funds available to pay what you owe, you must still file your return on time to avoid certain late penalties. Should this be your situation, we can file an application for an installment payment plan.

Selecting a Bank Account

Are you hesitant about utilizing the automatic deposit or direct debit option because you are concerned about providing the IRS with your account numbers? Keep in mind, the IRS already has most of that information except for non-interest bearing accounts, provided to them from the banks via the annual filing of 1099s.

Generally, deposits and debits can be made to National and State Banks, Savings and Loan Associations, Mutual Savings Banks, and Credit Unions within the United States. Account types include savings, checking, share draft, money market accounts, etc. Refunds may not be direct deposited to credit card accounts.

CAUTION! Some financial institutions do not permit the deposit of joint refunds into individual accounts.

The following bank or financial institution account information is required to utilize the direct deposit or debit:

(1) Bank’s Nine Digit Routing Number (RTN)
(2) Account Number
(3) Type of Account (Checking or Savings)

Proof of Filing

When your e-filed return has been accepted, the IRS provides your tax professional with a confirmation of filing on Form 9325 which includes the date accepted and the Declaration Control Number (DCN) assigned to your return.

Extensions for Additional Time to File

If you need additional time to file your return, the IRS provides two forms of extensions, both of which can be filed electronically. Use Form 8878 to provide your tax professional with authorization to e-file these extensions. This form functions much like Form 8879 which authorizes the e-filing of your tax return and utilizes electronic (PIN) signatures.

CAUTI0N! It is important to understand that these are extensions of time to file your return, not an extension to pay your tax liability. Even if you file for and are granted an extension of time to file, interest and late payment penalties will apply to any balance due on the return from the original April due date.

Automatic Six-Month Extension – This extension gives you until October 16 to file your return.  If you expect to owe, estimate how much and include an extension payment.  If you owe taxes when you do file your extended tax return, you will be liable for both the late payment penalty and interest from the due date.

It is not a good idea to delay filing your return because you owe taxes.  The late filing penalty is 5% per month (maximum 25%) and can be substantial.  It is generally better practice to file the return without payment and avoid the late filing penalty.  We can also establish an installment agreement which allows you to pay your taxes over a period of up to 60 months.

Interest on the Balance Due

An extension does not extend the time taxpayers have to pay their tax liabilities. Therefore, if money is owed on a return that is filed after the original April due date, the taxpayer will be liable for interest on any unpaid balance. The interest charge continues to run until the tax is paid. Even if there is a good reason for not paying on time, the interest will still be assessed. The first extension request includes the ability to include a payment toward the estimated tax liability.

Late Penalties

In addition to interest, a taxpayer may also be liable for a late filing penalty and a late payment penalty. Having a valid extension will avoid the late filing penalty, but not the late payment penalty.

Late Filing Penalty – A penalty is usually charged if the tax return is filed after the due date and the taxpayer has not filed a valid extension or the extension due date has passed. The penalty is 5% of the balance-due tax for each month (or part of a month) the return is late.

Maximum Penalty – The maximum penalty imposed is 25%.

Minimum Penalty – If your return is more than 60 days late, the minimum penalty is $100 or the balance of the tax due on your return, whichever is smaller.

This penalty can be avoided by filing the appropriate extension or extensions and then filing the return by the extended due date.

Late Payment Penalty – The penalty is generally 1/2% of the balance-due tax not paid by the regular due date. It is charged for each month or part of a month the tax is unpaid. The maximum penalty is 25%. Taxpayers are considered to have "reasonable cause" for the period covered by an automatic extension if at least 90% of their actual tax liability is paid before the regular due date of their return through withholding or estimated tax payments, or with the automatic extension.

Reasonable Cause

The IRS will not assess the late filing penalty or late payment penalty if you can show reasonable cause for not paying on time. To demonstrate reasonable cause, taxpayers must show they used ordinary business care and prudence in preparing and filing their returns and nevertheless were unable to meet the due date. To request the penalties be abated, a statement is attached to the finished tax return fully explaining the reason.

What If You Can't Pay the Balance Due?

If a taxpayer is unable to pay the balance due, the IRS offers two possible solutions:

Pay by Credit Card – Taxpayers can generally pay part or all of their tax liability by using a credit card. The payment is not made through the government directly, but rather through a third party service designated by the IRS. Unlike merchants, the IRS will not pay the discount to the credit card companies. Instead, the taxpayer is charged a fee that is roughly 2.5% of the tax due.

Establish an Installment Payment Plan – Generally, if the amount owed does not exceed $25,000 and the taxpayer is able to pay it within a five-year period, the taxpayer will qualify for an installment agreement. The IRS charges a small fee for setting up the agreement and will continue to charge interest on the unpaid balance. The late payment penalty will also apply, but will be reduced to half the regular amount if the taxpayer qualifies. To be approved for an installment plan, a taxpayer must agree to make full and timely payments, file all future tax returns on time, and pay all future tax balances when due. Any refund from future years will be applied to the outstanding balance. If a taxpayer defaults on the terms of the agreement, the IRS has the option of taking enforcement actions to collect the entire amount owed.

State E-file

Virtually all states now offer e-filing in a cooperative tax filing program with the IRS. If acceptable for filing, the state return will also be e-filed.

Disaster Casualty Losses

Disaster Casualty Losses A disaster loss is actually a casualty loss that occurs in a geographic area that the President of the United States declares eligible for Federal disaster assistance. Disaster losses are also eligible for special tax benefits, which are discussed in this brochure.

What is a Casualty Loss?

A casualty loss occurs when there is property damage from a sudden, unanticipated event. Some examples of qualifying events are: hurricanes, earthquakes, tornadoes, floods, storms, fire and volcanic eruptions.

Why are Disaster Losses Different?

Taxpayers within a declared disaster area may elect to claim their loss:
  • In the year it occurs, or
  • On the preceding year’s return.

Example: A taxpayer in the 2004 Florida hurricane disaster area can claim a casualty loss either on their return for the year of the loss or on their return for the previous year. If the previous year’s return has already been filed, as is generally the case, it can be amended by filing a Form 1040X.

When to take the loss depends upon a number of factors and should be carefully analyzed to determine which year is the most beneficial for the taxpayer.

  • The tax brackets for each year – Each year should be carefully examined as to which will provide the greatest overall tax advantage without wasting other tax benefits.

  • The need for immediate cash – The primary purpose of the special rules allowing the casualty loss to be claimed on the prior year’s return is to provide taxpayer access to a tax refund without the need to wait – often many months - to file their return for the year of the loss.

  • Self-employment tax – Self-employed taxpayers will also need to consider whether to take a business casualty loss that affects inventory in the current or prior year since the loss can offset self-employment tax as well as income taxes.

  • Whether the loss will be used up – If the casualty loss is not fully used up in the year it is first deducted, it can create what is called a net operating loss (NOL). An NOL can be taken back to prior years or carried forward to future years and used as a deduction on the carryback or carryforward returns. Care should be taken to analyze the benefit from the potential loss carryback versus carrying the loss forward.

Values the Loss is Based Upon

Generally, the deductible loss is the lesser of:

  • The cost or adjusted basis(1) or
  • The decrease in fair market value(2) (FMV)

For each item lost in the casualty. Once the loss is determined for each individual item, then those amounts are added together to determine the total loss for the casualty event.

For real property, the loss is figured on the whole property (buildings, plants, trees, etc.), not item-by-item.

(1) Generally, the measure of a taxpayer’s basis in a property is its cost. When property is inherited, received as a gift, or acquired in a nontaxable exchange, the basis will be determined in some other manner. Certain events can take place after acquiring the property that can increase or decrease the basis; thus the term “adjusted basis”. Examples would be improvements to the property, depreciation and casualty loss deductions.

(2) Fair market value (FMV) is the price that a willing seller would accept from a willing buyer when the seller does not need to sell nor must the buyer purchase and both are aware of all the relevant facts.

Business or Personal Casualty

Those that are business casualty losses are fully deductible without limitations. Personal casualty losses, on the other hand, are first reduced:

  • by $100 for each event, and
  • then the total of all events for the year is reduced by 10% of the taxpayer’s annual income (Adjusted Gross Income).

In addition, for personal casualty losses, deductions must be itemized in order to take advantage of the loss.

Example: Claiming A Personal Loss – The taxpayer’s principal residence was damaged in a flood. The damage amounted to $12,000 and the taxpayer had no flood insurance. His AGI for the year was $57,000. His casualty loss for the year is determined as follows:

Casualty loss
$ 12,000
“Per-event” amount
< 100>
10% of 2003 AGI
< 5,700>
Casualty loss
$ 6,200

Had the flooded area been declared a disaster area by the President, the taxpayer could elect to take the casualty in the prior tax year.

Figuring a Loss

To determine the deduction for a casualty or theft loss, figure out the loss first.

Amount of loss: Figure the amount of the loss using the following steps.

1) Determine the adjusted basis in the property before the casualty or theft.

2) Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft.

3) Subtract any insurance proceeds or other reimbursement received (or expect to receive) from the smaller of the amounts determined in (1) and (2).

Gain From Reimbursement

It is possible to incur a gain from a casualty event. If a taxpayer’s reimbursement is more than the adjusted basis in the property, there is a gain. This is true even if the decrease in the FMV of the property is smaller than the adjusted basis. If there is a gain, taxes may have to be paid on it, or reporting the gain may be postponed (as discussed later). If the gain is from a taxpayer’s primary residence and the taxpayer(s) have owned and used the residence as the main home for 2 out of the prior 5 years, the taxpayer can exclude $250,000 ($500,000 on a joint return) of gain.

Example: Assume an individual purchased his home for $50,000 fifteen years ago and the home is destroyed by a hurricane. The insurance company decides the home is a total loss and pays the single homeowner $200,000 as the settlement for the loss. He decides not to rebuild and sells the lot where the house once stood for $40,000. If the taxpayer elects to use his $250,000 home gain exclusion to offset the gain from the casualty, he would have no taxable gain.

Insurance proceeds
Lot sale proceeds
Total sale proceeds
Home cost (basis)
< 50,000>
Home gain
Home sale exclusion
Taxable Gain

If the taxpayer in this example decides to rebuild or replace his home, he could postpone the gain as outlined below.

Replacement Period for Postponed Gains

  • Generally - To postpone reporting gain, a taxpayer must buy replacement property within a specified period of time. The replacement period begins on the date the property was damaged, destroyed, or stolen. The replacement period ends 2 years after the close of the first tax year in which any part of the gain is realized.

  • Main Home - For a main home (or its contents) located in a Presidentially declared disaster area, the replacement period ends 4 years after the close of the first tax year in which any part of the gain is realized.

When to Report Gains and Losses

If a taxpayer receives insurance proceeds or other reimbursement that is more than the adjusted basis in the destroyed or stolen property, there is a gain from the casualty. This gain must be included in income in the year the reimbursement is received, unless the taxpayer chooses to postpone reporting the gain.

Home Destroyed is Still Treated as a Home

A taxpayer may be able to continue treating their home as a qualified home even after it is destroyed in a casualty. This means the taxpayer can continue to deduct the mortgage interest subject to the normal limits. However, the taxpayer must do one of the following within a reasonable period of time after the home is destroyed:

1) Rebuild the destroyed home and move into it, or

2) Sell the land on which the home was located.

This rule applies whether the home is the main home or a second home that the taxpayer treats as a qualified home.

Reimbursement for Living Expenses

An exclusion from income is allowed for insurance proceeds received for a temporary increase in living expenses due to a casualty loss of a principal home. The exclusion amount is limited to the increased “actual” reasonable and necessary living expenses as compared to the “normal” living expenses that would be incurred by the taxpayer. Living expenses include temporary housing, utilities, meals, transportation and miscellaneous items like laundry, etc. For this purpose, mortgage interest is not considered a living expense.

Example – Reimbursement Of Living Expenses - When fire damaged their home, the taxpayers moved to a motel for a short time and then moved to a rented house. They stayed at the rental for about one month while they were having their home repaired. They incurred the following expenses during this period, compared to their normal household expenditures:

Description of
Normal Living
Increase or Decrease Due to Casualty
Motel costs
Laundry and cleaning
Transportation costs
$ 900
$ 0

$ 900



The taxpayers were reimbursed for the actual living expenses ($2,990) from the insurance company. Of that amount, $1,975 (the increase in living expenses) is excludable from their income.

Proving Casualty Losses

Taxpayers will need to show evidence of the cost of the lost property and evidence of the amount of the loss. It is helpful to have photos of the property before and after, notes describing the property that was damaged, appraisals and news clips describing the event. Blue Book values can be helpful in casualties that involve cars.

A qualified appraiser should be used to determine FMV of real property and scheduled personal property.

Insurance Proceeds in a Disaster Area

A taxpayer whose principal residence (or its contents) is damaged in a disaster can qualify for special tax treatment regarding certain insurance proceeds received as a result of the casualty. To qualify, the locale of the residence must be in a Presidential-declared disaster area. The rules stipulate that no gain is recognized on the receipt of insurance proceeds for personal property that was part of the residence contents, if such property was not scheduled under the insurance policy (property such as jewelry which is covered by a rider under the insurance policy).

Other insurance proceeds received for the residence or its contents may be treated as a common pool of funds. If those funds are used to purchase property similar to the property lost, a taxpayer will need to recognize the gain only to the extent that the pool is more than the cost of the replacement property. The replacement period for the damaged or lost property in a disaster area is four years after the close of the first taxable year in which any part of the gain on the involuntary conversion is realized.

These rules are extended to renters as well. Renters who receive insurance proceeds related to disaster damage to their property in a rented principal residence also qualify for the disaster loss relief.

Other “reimbursement”: Although insurance is the most common form of reimbursement for casualties, other types of “reimbursement” also can reduce the amount of loss.

These include:

  • Federal disaster loan forgiveness.
  • Repairs made to rental property by a lessee.
  • Damages received in court settlement (after legal fees and expenses).
  • Repairs, etc., by relief agencies.
  • Grants, gifts, or other payments designated to repair or replace property. However, if there are no conditions attached to the funds, they are not considered reimbursement.

Filing Extensions & Penalty Waivers

The IRS will extend the due date for filing and paying taxes and waive related penalties (late filing and payment) for a taxpayer in a Presidential-declared disaster zone. The IRS must also abate assessment of underpayment interest for the period of the extension. Generally, the IRS will issue a news release shortly after the disaster designation has been issued outlining the extension and waiver periods.

Rental Real Estate as an Investment<code>

Rental Real Estate as an Investment A popular form of long-term investment is real estate rentals. Rentals can fall into several varieties, of which real estate rentals is the most common. This material will explain some of the tax ramifications of renting real estate, both residential and commercial.

One of the biggest benefits of owning rental property is that the tenants, over time, buy the property for you. In addition, if structured properly, the allowable depreciation deduction will shelter the rental income. Another historical benefit of real estate rentals is capital appreciation.

Before acquiring a rental property, consider the following:

  • After-tax cash flow,
  • Potential for long- or short-term appreciation,
  • Property condition (with an eye on when you might get stuck with a large repair bill),
  • Debt reduction,
  • Type of tenants,
  • Potential for rent increases or re-zoning, and
  • Whether there is community rent control, etc.

Although most of the considerations are subjective, the after-tax cash flow can be estimated fairly easily.

Operating Expenses

For tax purposes, you will figure your profit or loss each year from operating the rental property. Generally, you can deduct all expenses incurred to operate the rental. The following are potential operating expenses that are deductible:

  • Advertising
  • Cleaning & maintenance
  • Bank charges – if a separate account is maintained.
  • Insurance – fire, casualty and liability
  • Utilities – gas, electricity, water, cable, etc.
  • Services (1) – yard care, pool service, pest control, etc.
  • Rental commissions
  • Property management fees
  • Mortgage interest – on debt to acquire or improve the rental.
  • Property taxes
  • Repairs – see repairs vs. improvements below.
  • Local transportation expenses
  • Homeowners or association dues
  • Tax return preparation fees
  • Depreciation allowance – see depreciation below.

(1) If any individual or company providing these services is paid $600 or more during the year, you are required to issue them a 1099MISC.

Repairs vs. Improvements

When figuring your profit or loss from operating the rental property each year, you can deduct the cost of repairs to the rental property. However, any improvements that were made must be depreciated over the improvement’s useful life. How do you distinguish a repair from an improvement?

  • Repairs - A repair keeps your property in good operating condition and does not materially add to the value of your property or substantially prolong its life.
  • Improvements – An improvement will add to the value of the property, prolong its useful life, or adapt it to new uses. If you make an improvement to a property, the cost of the improvement must be capitalized.

Depreciating Rental Property

“Depreciation” is an accounting term for writing off the wear and tear on an asset that has a useful life of more than one year and costs over $100. Generally, rental real estate improvements must be depreciated over a period of 39 years. However, there are exceptions for residential rental real estate, which is depreciated over 27.5 years and most personal property such as furniture, equipment, etc., which is depreciable over 5 or 7 years. There are additional special rules applying to land rentals, leasehold improvements and restaurants.

Passive Loss Limitations

Rental real estate income is business income but is not subject to Social Security taxes. Real estate rentals are also considered passive activities. Generally, passive activity losses are only deductible to the extent of passive activity income. However, there are two exceptions to that rule:

(1) Active Participation - If you “actively participate” in the residential rental activity, you may be able to deduct a loss of up to $25,000 ($12,500 if you're married, file separately, and live apart from your spouse for the entire year—but if you're married, file separately and don't live apart from your spouse for the entire year, you're not eligible for this break at all) against ordinary (nonpassive) income, such as your wages or investment income. You actively participate in the rental activity if you make key management decisions or arrange for others to provide services. Active participation does not require regular, continuous and substantial involvement with the property. But in order to satisfy the active participation test, you (together with your spouse) must own at least 10% of the rental property. Ownership as a limited partner does not count. If your adjusted gross income (AGI) is above $100,000, the $25,000 allowance amount is reduced by one-half the excess over $100,000. (If you're married, file separately and are eligible for the break, the $12,500 allowance amount is reduced by one-half the excess over $50,000.) Under this rule, if the AGI is $150,000 or more ($75,000 or more for eligible married taxpayers who file separately), the allowance is reduced to zero. For these purposes, AGI is modified to some extent, e.g., you ignore taxable Social Security income and the Individual Retirement Account (IRA) deduction, and

(2) Real Estate Professional Exception - If you qualify as a “real estate professional” (which requires the performance of substantial services in real property trades or businesses), your rental real estate activities are not automatically treated as passive, and so losses from those activities can be deducted against earned income, interest, dividends, etc., if you materially participate in the activities.

Any losses not allowed under these two exceptions are not lost but suspended, and carried forward indefinitely to tax years in which your passive activities generate enough income to absorb the losses.

Special Situations

There are a number of special circumstances involving the rental of real estate.

  • First, Last and Security Deposits – Generally, landlords require a new tenant to pay the first and last month’s rent in advance along with a security deposit. The IRS says that advance rent payments are income in the year received. However, security deposits you plan to return to your tenant at the end of the lease are not income. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, then the amount kept is income for that year.
  • Renting Part of Property - If you rent part of your property, you must divide certain expenses between the part used for rental purposes and the part used for personal purposes, as though you actually had two separate pieces of property. You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest and real estate taxes, as rental expenses. You can also deduct as a rental expense other expenses that are normally nondeductible personal expenses, such as utilities and home repairs. You do not have to divide the expenses that belong only to the rental part of your property.

    Generally, the most frequently-used methods of allocating expenses between personal and rental use are:
    (1) based on the number of rooms in the home, and
    (2) based on the square footage of the home. You can use any reasonable method for dividing the expense.
  • Separating Improvements from Land - Not all of the cost of acquiring real estate is depreciable. Specifically, the cost of the land is not depreciable and must be separated from the improvements.
  • Renting to a Relative – Special rules may apply when renting a home or apartment to a relative. If you rent a home to a relative who: (1) uses it as his or her principal residence (that is, not just as a second or vacation home) for the year, and (2) it is rented at a fair rental value (not at a discount), then no limitations apply. You simply treat it like any other rental property. However, if it is rented to a relative below fair rental value, all of the expenses, except mortgage interest and property taxes, are considered personal expenses and therefore not deductible.
  • Vacation Home Rental – There are special tax consequences when you rent out your vacation home for part of the year. The tax treatment depends on how many days it is rented and your level of personal use. Personal use includes vacation use by your relatives (even if you charge them market rate rent) and use by non-relatives if a market rate rent is not charged.

    When determining the personal-use days, do not include days when you are performing repairs or fixing up the property.

Selling, Exchanging or Converting the Rental

Buying, operating and selling a rental property can have profound tax ramifications.  Rental property, if owned for longer than a year or if inherited, will qualify for long-term capital gains when sold. This means any gain is taxed at a maximum of 15% with one exception. The exception is recaptured depreciation which, depending upon your tax bracket, can be taxed up to 25%. When it comes time to cash in on a rental investment, there are a number of options available to the owner:

  • Outright Sale – When a rental property is sold outright, the entire gain will be taxable in the year of sale.
  • Installment Sale – If the seller carries back a note (mortgage) for all or part of the buyer’s purchase price, the seller qualifies for installment sale treatment, which in effect spreads the taxation of the gain over the life of the note.
  • Convert to Personal Use – The rental can be converted to personal use of the taxpayer and any gain deferred until the property is ultimately sold. 
  • Tax-Deferred Exchange – A tax-deferred exchange can be used as a means of avoiding immediate taxation on the gain from a rental property by deferring the gain into a replacement property.

    Business or Investment Use Requirement - To qualify for a Sec 1031 exchange, the properties exchanged must both be held for business or investment use.

    Like-Kind Requirement - The properties exchanged must be like-kind (similar in nature, but not necessarily of the same quality). Real estate must be exchanged for real estate (improved or unimproved qualifies).

    Caution: Sometimes real estate is held in a partnership or other entity. Generally, an entity ownership does not qualify as like-kind. Although, tenant-in-common interests (sometimes referred to as TICS), if structured properly, can.

    Property Acquired with Intent to Exchange - If a taxpayer acquires (or constructs) property solely for the purpose of exchanging it for like-kind property, the IRS says that the taxpayer doesn't hold the property for productive use in a trade or business or for investment, and as to the taxpayer, the exchange doesn't qualify for non-recognition treatment under Code Sec. 1031.

    Simultaneous or Delayed - The exchange can be simultaneous or delayed. If delayed, the property received in the exchange must be identified within 45 days after the property given is transferred. No matter how many properties are given up in an exchange, a taxpayer is allowed to designate a maximum of either:

    (a) Three replacement properties regardless of FMV, or

    (b) Any number of properties, as long as the total FMV isn’t more than 200% of the total FMV of all properties given up.

    If a taxpayer identifies replacement properties over these limits, he/she is treated as if none were identified. A taxpayer can, however, revoke an identification at any time before the end of the 45-day time period.

    The receipt of the new property must be completed before the EARLIER of:

    (1) 180 days after the transfer of the property given, OR
    (2) The due date (including extensions) of the return for the year in which the property given was transferred.

    Qualified Intermediary – Generally, to qualify for a delayed Sec 1031 exchange, a qualified intermediary is engaged to hold the funds from the sale until the replacement purchase is made. It is important to understand that the taxpayer cannot take possession of the proceeds from the sale and then buy another property. If that happens, the event does not qualify for exchange and is immediately taxable.

    Reverse Exchanges – It is possible to structure a reverse exchange that complies with the Section 1031 delayed exchange requirements. However, it requires that the replacement property be purchased first, by the intermediary, without the benefits of the proceeds from the property given up in the exchange. Thus, only taxpayers with the cash financial resources can accomplish reverse exchanges.

    Tax-deferred exchanges can be very tricky and should not be entered into without first analyzing the tax aspects.

Alternative Minimum Tax Strategies

Alternative Minimum Tax Strategies The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with large write-offs and tax-sheltered investments pay at least a minimum tax. To accomplish this, Congress created a second (alternative) tax computation that adds back to income certain tax preferences and eliminates some deductions. Taxpayers then compute their tax both ways and pay the higher of the two taxes. When it originated back in the '70s, the AMT impacted just a few, very wealthy, individuals. However, unlike the regular tax computation, the AMT is not fully adjusted for inflation and years of inflation have driven everyone's income up to where the number of taxpayers being affected by the AMT is increasing.

Anticipating when the AMT will affect you is difficult, because it is usually the result of a combination of circumstances. Although it is not always possible to avoid the AMT, it is sometimes possible to minimize this punitive tax by taking certain steps. Therefore, it is important for a taxpayer to have a basic understanding of the circumstances that can create an AMT.

The AMT includes a myriad of adjustments and preference items and full or partial disallowances of certain deductions that are otherwise perfectly legal and allowed in figuring the regular income tax. There are far too many to discuss, especially those that are rarely encountered by the average taxpayer. There are, however, certain AMT issues that frequently affect taxpayers. They are listed below with comparisons to the regular tax computation, along with actions that might be taken to mitigate the effects of the AMT.

Personal Exemptions

Every taxpayer, spouse and dependent included on a taxpayer's tax return generates an exemption deduction for regular tax purposes. For AMT purposes, the exemption deduction is not allowed at all. When two individuals can possibly claim the exemption, such as in the case of a multiple support agreement between children supporting elderly parents, care should be taken to ensure the exemption is not claimed by one who is subject to the AMT.

Standard Deduction

For regular tax purposes, a taxpayer can choose between using the standard deduction or itemizing deductions. For AMT purposes, this creates sort of a dilemma for those who don't have enough to itemize for regular tax purposes but do have substantial itemized deductions that can be used to offset the AMT. However, taxpayers can elect to itemize even if the deductions are less than the standard deduction.

Itemized Deductions

The itemized deductions allowed for the AMT are far more restrictive than those allowed for regular tax purposes. The following is a comparison of the two:

• Medical Deductions - For regular tax purposes, the medical expenses are first reduced by 71/2% of the taxpayer's Adjusted Gross Income (AGI), and only the excess can be included in the itemized deductions. For AMT purposes, the expenses must be reduced by 10% of the AGI. When possible, attempt to defer medical expenses to a year not taxed by the AMT.

• Taxes - For regular tax purposes and as part of the itemized deductions, taxpayers are allowed to deduct certain taxes they pay, including home and investment real estate taxes, state income tax, personal property tax, foreign taxes, etc. For AMT purposes, none of these taxes are deductible. When the AMT is anticipated, it might be beneficial to accelerate tax payments in the prior year or defer them to the subsequent year. This would include paying the fourth quarter state estimated tax installment after the end of the year. Taking a credit for foreign income taxes is generally more beneficial than taking it as an itemized deduction anyway, and if being taxed by the AMT, taking the credit is the only way to achieve any benefit. Taxpayers can annually elect to capitalize rather than deduct property taxes on unimproved and non-productive real estate.

• Home Mortgage Interest - Generally, for regular tax purposes, a deduction is allowed for interest paid on home acquisition debt and home equity debt within certain debt limits. For AMT purposes, however, only home acquisition debt interest is deductible. Many taxpayers have incurred equity debt on their homes to pay off credit cards, purchase cars, etc., in the belief that the equity debt interest is deductible. If the taxpayer is subject to the AMT, the equity debt interest is not deductible. When borrowing money against a home for business, investment, or higher education expenses, it is generally good practice to take out single purpose second loans or lines of credit. This allows the loan to be treated as unsecured by the home and then to trace the interest to a deductible purpose unaffected by the AMT. Home mortgage interest and the AMT is a complex issue. Please call this office for assistance.

Nonconventional Home Mortgage - For AMT purposes, interest from debt to acquire a nonconventional home such as a motor home, boat, etc., is not deductible for AMT purposes. The only recourse is to avoid or minimize this type of debt.

Charitable Contributions - The deduction for charitable contributions is the same for regular tax and for AMT.

Miscellaneous Itemized Deductions - For regular tax purposes, miscellaneous deductions are broken down into two categories. The first category includes such items as gambling losses to the extent of gambling winnings and some other infrequently encountered deductions. This category is allowed as a deduction for both regular and AMT purposes. The other category includes expenses such as investment expenses, union dues, employment-related expenses, certain legal fees, etc., which are allowed for regular tax purposes after being reduced by 2% of the taxpayer's AGI. For AMT purposes, the deductions in this category are not allowed at all. If one anticipates being taxed by the AMT, attempt to defer payment of expenses in this category to another year. If a significant amount of expense is incurred for a taxpayer's employment, if possible, have the employer reimburse the expenses, even if it requires a pay reduction.

Nontaxable Interest from Private Activity Bonds

Generally, for both regular tax and AMT purposes, income from municipal bonds are tax-free. However, interest from certain municipal bonds used to support private enterprises (referred to as Private Activity Bonds) is taxable for AMT purposes. If subject to the AMT, consider not investing in Private Activity Bonds if it makes investment sense.

Statutory Stock Options (Incentive Stock Options) also referred to as ISOs

When this type of option is exercised, there is no income for regular tax purposes. However, the bargain element (difference between grant price and exercise price) produces preference income for AMT purposes in the year the option is exercised. The tax benefit of ISOs for regular tax purposes results when the stock acquired by exercising the option has been held the requisite time before it is sold, allowing gains to be taxed at the more favorable long-term capital gains rates. However, if one is being taxed by the AMT, the bargain element is taxable in the year of exercise which generally mitigates the regular tax benefits. If possible and when the investment considerations allow it, exercising ISOs in small blocks of stock may allow a taxpayer to avoid the AMT and take advantage of the long-term capital gains benefit. Otherwise, it may be better strategy to avoid the AMT preference issues altogether by selling the stock in the year of exercise. This is a complex area of tax law; please call this office for further details.

Depletion Allowance

For both regular tax and AMT purposes, the tax law allows taxpayers to deduct an allowance for depleting (using up) an asset such as interest in an oil well. However, once the total depletion on the asset exceeds a taxpayer's investment in the property (basis), the depletion allowance is only allowed for regular tax purposes and not for AMT, thus creating AMT preference income.

Excess Depreciation

Generally, for regular tax purposes, equipment that a taxpayer acquires for use in business is depreciated (deducted over several years) using the 200% declining balance method. For AMT tax purposes, the equipment cannot be depreciated faster than the 150% declining balance method. The difference between these two methods of depreciation creates the AMT preference income. If a taxpayer is habitually taxed by the AMT method, it might be appropriate to always use the 150% declining balance method and thereby avoid the preference income. In addition, the Sec. 179 expense deduction is allowable in full for both the regular tax and the AMT. It might be appropriate to utilize the Sec. 179 deduction rather than depreciating the asset at all if other considerations will allow it.

Other AMT Adjustments

There are several additional AMT issues, including adjustments in the gain or loss from the sale of assets due to differences in regular tax and AMT basis created by different depreciation rates and preference income, intangible drilling costs, sale of small business stock, passive losses, passive farm losses, research and experimental expenditures, circulation costs and mining development and exploration costs, that are rarely encountered by taxpayers and are not discussed in this brochure. Please call this office for further details if such issues are encountered.

Computing The AMT

In computing the Alternative Minimum Tax, a substantial exemption amount is allowed against the AMT taxable amount based upon filing status. The exemption amounts are adjusted for inflation and subject to temporary adjustments by Congress. In addition, the exemption amount phases out as the taxpayer's AMT taxable income increases. Illustrated in the next column are the exemption amounts for 2009. Please call this office for amounts applicable to any other year.


Filing Status

Exemption Amount

Income Where Exemption Is Totally Phased Out
Married Filing Jointly
Married Filing Separate

Where the rates for regular tax are in six tiers (10%, 15%, 25%, 28%, 33% and 35%), the AMT rates only have two tiers (26% and 28%).


AMT Taxable Income
Tax Rate
0 - 175,000(1)
0ver 175,000(1)

(1) $87,500 for married taxpayers filing separately

The following example illustrates the impact from typically encountered regular tax and AMT tax computations. In this example, Joe and Susan have three children and are filing a joint return. For the year, they have wages, some interest income, and deductions consisting of taxes, home acquisition debt interest, home equity debt interest and charitable contributions. Joe also exercised an ISO option which gave him a preference income for the year of $50,000.


ISO Preference Income
Interest Income
Acquisition Debt Interest
Equity Debt Interest

Increase due to AMT

(1) Exemption amounts used are for 2009. These amounts are subject to inflation adjustments and temporary increases. Call for amounts applicable to other years.

Even without the ISO Preference being added, Joe and Susan would have been subject to the AMT by virtue of AMT itemized deduction adjustments. The AMT taxable without the ISO preference income is $61,645, resulting in an AMT tax of $16,028, a $972 increase over the regular tax.

Other AMT Issues

Taxation of Net Long-Term Capital Gains - Net long-term capital gains are generally taxed at the same rate for AMT as they are for regular tax.

AMT Tax Credit - When certain preferences create an Alternative Minimum Tax (like the incentive stock option did in our example above), an AMT Tax Credit is also created. It can be used in subsequent years to reduce the regular tax. This credit is equal to the difference of the AMT computer with and without the preference income. Using the previous example, the AMT with the preference income was $29,028. Without the preference income, it was $16,028 and resulted in an AMT Tax Credit of approximately $13,000. Since this credit reduces the regular tax in future years, it will be of no use in years where the taxpayer is subject to the AMT.

State Tax Refund - If a taxpayer is taxed by the AMt and then in a subsequent year has a state tax refund, that refund is not taxable for regular tax purposes to the extent it provided no tax benefit in the computation year.

Call For Assistance

The issues relating to the AMT are complex. Although this brochure provides a general understanding of the adjustment and preferences that create the AMT, please call this office for assistance before taking steps that may possibly create AMT issues. This includes the refinancing of a home mortgage, which often creates equity debt interest not deductible for AMT, exercising incentive stock options, prepaying taxes, or taking other AMT-sensitive actions discussed in this brochure.

Energy-Efficient Vehicle Credits

Energy-Efficient Vehicle Credits The high price of fuel these days is causing an increasing number of taxpayers to look for ways to ease the strain on their pocketbooks. Congress is also looking for ways to reduce fuel consumption to counter the negative effects on the U.S. economy and reduce our dependence on foreign sources of fossil fuels.

If you have been considering purchasing a new car or truck with environmental and fuel efficient technologies, Congress has provided significant incentives that should help offset some of the higher purchase costs of many of these types of vehicles.

The incentives are in the form of tax credits for the purchase of new hybrid, fuel cell, advanced lean burn and alternative power vehicles. The amount of the credits vary based on a number of factors, including type of vehicle, vehicle weight class and fuel economy.

Generally, the credit for purchasing these alternative power vehicles is allowed to the vehicle owner, including the lessor of a leased vehicle. It is only allowed in the year the vehicle is placed in service, and the vehicle must be used predominantly in the U.S. to qualify for the credit. No credit is allowable for the portion of the cost of any property taken into account under Code Sec. 179, the expensing provision.

The portion of the credit attributable to vehicles of a character subject to an allowance for depreciation is treated as a portion of the general business credit; the remainder of the credit is allowable to the extent of the excess of the regular tax or alternative minimum tax (AMT) (reduced by certain other credits).  Thus, the credit is allowed against the AMT.  For years prior to to 2009, the credit did not offset the AMT.

Here is a rundown of these credits.

Qualified Hybrid Vehicles

A qualified hybrid vehicle is a motor vehicle that draws propulsion energy from onboard sources of stored energy, which include both an internal combustion engine or heat engine using combustible fuel and a rechargeable energy storage system (such as batteries).

Automobiles or light trucks - For an automobile or light truck (vehicles weighing 8,500 pounds or less), the amount of credit for the purchase of a hybrid vehicle is the sum of two components primarily based on the vehicle’s fuel efficiency compared with the 2002 standards. These components of the credit are:

(1) A fuel economy credit amount of $400 to $2,400. This credit amount is based on the amount that the vehicle exceeds the Model Year City Fuel Economy (MYCFE) rating expressed as an increased percentage of the 2002 MYCFE rating:

Increased Fuel Economy Percent (%)
125 to 149
150 to 174
175 to 199
200 to 224
225 to 249
250 or more

(2) A fuel economy credit of $250 to $1,000. The conservation credit amount is determined based on the vehicle's "lifetime fuel savings" and is as follows:

Lifetime Fuel Savings (in gallons of gas)
At least 1,200 but less than 1,800
$ 250
At least 1,800 but less than 2,400
$ 500
At least 2,400 but less than 3,000
$ 750
At least 3,000

These two credits (the increased fuel economy and the lifetime fuel savings) are added together to form the hybrid vehicle credit, which can total as much as $3,400.

To qualify for the credit, the vehicle must have a maximum available power from the rechargeable energy storage system of at least 4% and meet or exceed certain EPA emissions standards.

Larger vehicles (Over 8,500 pounds) - For larger hybrid motor vehicles, the rules are significantly more complicated and you should call our office for details.

Fuel Cell Vehicles

A qualified fuel cell vehicle is a motor vehicle that is propelled by power derived from cells that convert chemical energy directly into electricity by combining oxygen with hydrogen fuel stored onboard the vehicle. The amount of credit for the purchase of a fuel cell vehicle is determined by a base credit that depends on the weight class of the vehicle and, for automobiles or light trucks, an additional credit amount that depends on the rated fuel economy of the vehicle compared to a base fuel economy.

Automobiles or light trucks – For an automobile or light truck (vehicles weighing 8,500 pounds or less), the base credit amount is $8,000 plus a fuel economy credit amount that ranges from $1,000 to $4,000, depending on the vehicle's rated fuel economy.

Larger vehicles (Over 8,500 pounds) - For larger fuel cell motor vehicles, the credit ranges from $10,000 to a maximum of $40,000, based upon the gross vehicle weight rating.

Alternative Fuel Vehicles

Qualified alternative fuel motor vehicles operate only on qualifying alternative fuels and can't be operated on gasoline or diesel (except to the extent gasoline or diesel fuel is part of a qualified mixed fuel). The credit for the purchase of a new alternative fuel vehicle is 50% of the vehicle's incremental cost. The vehicle’s incremental cost is the excess of the manufacturer's suggested retail price for the vehicle over the suggested retail price for a gasoline or diesel fuel motor vehicle of the same model, but not to exceed a limit based upon the vehicle’s weight. If the vehicle also meets certain emissions standards, the percentage is increased to 80%.

Alternative fuels are compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen and any liquid fuel that is at least 85% methanol. Certain mixed fuel vehicles, that is, vehicles that use a combination of an alternative fuel and a petroleum-based fuel, are eligible for a reduced credit.

Automobiles or light trucks – For vehicles with a gross vehicle weight rating of 8,500 pounds or less, the maximum incremental cost to compute the credit is $5,000. Thus, the credit maximum would be $2,500 (50% of $5,000) or $4,000 (80% of $5,000) for the vehicles that also meet the emissions standards.

Larger vehicles (Over 8,500 pounds) - For larger vehicles, the credit ranges from $5,000 to a maximum of $32,000, based upon the gross vehicle weight rating.

Advanced Lean Burn Technology Motor Vehicles

This credit only applies to passenger automobiles or light trucks with an internal combustion engine. The credit is in part based on the amount the vehicle exceeds city fuel economy standards and in part on the lifetime fuel savings of the vehicle. To qualify, the vehicle must:

• Be designed to operate primarily using more air than is necessary for complete combustion of the fuel,

• Use direct injection,

• Achieve at least 125% of the 2002 model year city fuel economy, and

• Meet certain other specified conditions.

The amount of the credit is the sum of: (1) an amount for fuel efficiency of between $400 and $2,400, and (2) an amount for conservation of between $250 and $1,000.

Hybrid, Fuel Cell and Lean Burn Vehicle Phase-Outs

Credit Sunset Dates:
The new alternative motor vehicle credit won't apply to any property purchased after:

• December 31, 2014 for a qualified fuel cell motor vehicle,

• December 31, 2010 for an advanced lean burn technology motor vehicle or for a qualified hybrid motor vehicle that is a passenger automobile or light truck or for a qualified alternative fuel motor vehicle, and

• December 31, 2009 for a qualified hybrid motor vehicle that is other than a passenger automobile or light truck.

60,000 Vehicle Limit: For both hybrid and lean burn vehicle credits, the maximum credit is only available up to the end of the first calendar quarter in which the manufacturer records its sale of the 60,000th hybrid or lean burn vehicle.  After that, only 50% of the credit is allowed for the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold and then only 25% in the fourth and fifth calendar quarters and none after the fifth quarter.

Plug-in Electric Vehicles
There are two separate credits for qualified plug-in electric vehicles - one to provide a tax credit for the purchase of electric cars, and another to provide credit for low-speed or two- or three-wheeled vehicles commonly referred to as neighborhood vehicles.  The following is a summary of the requirements for both credits.

Four-Wheeled Electric Vehicle Credit -  For qualified plug-in electric drive motor vehicles placed in service in 2009, the credit is the sum of $2,500, plus an additional $417 for each kilowatt hour of traction battery capacity in excess of four kilowatt hours.  The credit applies to any four-wheeled electric vehicle, and the maximum credit is based on the vehicle's gross vehicle weight rating (GVWR); see table below.

Gross Vehicle Weight Rating (GVWR)
Max Credit
No more than 10,000 pounds
$ 7,500
More than 10,000 pounds but no more than 14,000 pounds
More than 14,000 pounds but no more than 26,000 pounds
More than 26,000 pounds

For new qualified plug-in electric drive motor vehicles placed in service after 2009, the weight-based limitation on the maximum credit is removed, and the credit is made up of a base amount of $2,500 plus, for a vehicle drawing propulsion energy from a battery with at least 5 kilowatt hours of capacity, $417, plus $417 per kilowatt hour of capacity in excess of 5 kilowatt hours.  This credit is subject to a gradual phase-out once a manufacturer has sold 200,000 vehicles.  The phase-out process is similar to the 60,000 vehicle credit phase-out that applies to fuel-efficient vehicles. 

Low-Speed, Motorcycle & Three-Wheeled Vehicle Credit - This credit is equal to 10% of the cost with a maximum credit of $2,500 per vehicle.  Qualifying vehicles include electric drive low-speed vehicles, motorcycles, and three-wheeled vehicles purchased after February 17, 2009 and before 2012.  This credit is not allowed if the vehicle also qualifies for the four-wheeled electric vehicle credit.

A qualifying vehicle must be either a:

• Low-speed vehicle that is propelled to a significant extent by a rechargeable battery with a capacity of at least 4 kilowatt hours.  This would include low-speed, four-wheeled vehicles manufactured primarily for use on public streets, roads and highways (neighborhood electric vehicles) which may also qualify for the four-wheeled vehicle credit.  In that case, this credit will not apply to that vehicle.

• Two- or three-wheeled vehicle that is propelled to a significant extent by a rechargeable battery with a capacity of at least 2.5 kilowatt hours.

Off-Road Vehicles & Golf Carts - Vehicles manufactured primarily for off-road use, such as for use on a golf course, do not qualify for either credit.

Purchased or Leased – For both credits, the qualified vehicle may be either purchased or leased by the taxpayer (but not for resale).  Original use of the vehicle must begin with the taxpayer.

Business Use and AMT Treatment – The business treatment and AMT deductibility is the same as for the fuel efficient vehicle credit.

Final Word

One final word: tell the salesperson quoting tax advantages or savings during the sales presentation that you need to check with your tax advisor first to verify the tax benefits before signing on the dotted line.  Be sure to contact us so we can determine the benefits based on your particular tax situation.  And remember, even though the vehicle credit is available for purchases through 2010 (see credit sunset dates), don't be premature or wait too long to make your energy-property purchases.  As the old cliche goes...timing is everything, and it is especially true when it comes to taking advantage of these vehicle energy tax credits.

It's Tax Time! Plan Ahead For Your Appointment

It's Tax Time! Plan Ahead For Your Appointment Are You Ready?

If you’re like most taxpayers, you find yourself with an ominous stack of “ homework” around TAX TIME! Unfortunately, the job of pulling together the records for your tax appointment is never easy, but the effort usually pays off when it comes to the extra tax you save! When you arrive at your appointment fully prepared, you’ll have more time to:

• Consider every possible legal deduction;

• Better evaluate your options for reporting income and deductions to choose those best suited to your situation;

• Explore current law changes that affect your tax status;

• Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives

The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but later-year returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your tax.

For example, the law allows choices in transactions like:

Sales of property. . . .

If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time, as you receive payments from the buyer.

Depreciation . . . .

You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the cost over a number of years, or in certain cases, you can deduct them all in one year.

Where to Begin?

Ideally, preparation for your tax appointment should begin in January of the tax year you’re working with. Right after the new year, set up a safe storage location - a file drawer, a cupboard, a safe, etc. As you receive pertinent records, file them right away, before they’re forgotten or lost. By making the practice a habit, you’ll find your job a lot easier when your actual appointment date rolls around.

Other general suggestions to consider for your appointment preparation include . . .

• Segregate your records according to income and expense categories. For instance, file medical expense receipts in an envelope or folder, interest payments in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, make certain you fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully to be sure you don’t miss important data - organizers are designed to remind you of transactions you may miss otherwise.)

• Keep your annual income statements separate from your other documents (e.g.,W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s!

• Write down questions you may have so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to the income for the current year. For instance, a dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale.

• Make certain that you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions for returns filed without them.

• Compare deductions from last year with your records for this year. Did you forget anything?

• Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy Even for Details

To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address, social security number(s), and occupation(s) on last year’s return. Note any changes for this year. Although your telephone number isn’t required on your return, current home and work numbers are always helpful should questions occur during return preparation.

Marital Status Change

If your marital status changed during the year, if you lived apart from your spouse, or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce, or property settlement agreements, if any, to your appointment.


If you have qualifying dependents, you will need to provide the following for each:

• First and last name
• Social security number
• Birth date
• Number of months living in your home
• Their income amount (both taxable and nontaxable)

If you have dependent children over age 18, note how long they were full-time students during the year.

To qualify as your dependent, an individual must pass several strict dependency tests. If you think a person qualifies as your dependent (but you aren’t sure), tally the amounts you provided toward his/her support vs. the amounts he/she provided. This will simplify making a final decision about whether you really qualify for the dependency deduction.

Some Transactions Deserve Special Treatment

Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions:

Sales of Stock or Other Property:

All sales of stocks, bonds, securities, real estate, and any other type of property need to be reported on your return, even if you had no profit or loss. List each sale, and have the purchase and sale documents available for each transaction. Purchase date , sale date, cost, and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.

Gifted or Inherited Property:

If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the date of the decedent’s death and the property’s value at that time. You may be able to find this information on estate tax returns or in probate documents.

Reinvested Dividends:

You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends.

Sale of Home:

The tax law provides special breaks for home sale gains, and you may be able to exclude all (or a part) of a gain on a home if you meet certain ownership, occupancy, and holding period requirements. If you file a joint return with your spouse and your gain from the sale of the home exceeds $500,000 ($250,000 for other individuals), record the amounts you spent on improvements to the property. Remember too, possible exclusion of gain applies only to a primary residence, and the amount of improvements made to other homes is required regardless of the gain amount. Be sure to bring a copy of the sale documents (usually the closing escrow statement) with you to the appointment.

Car Expenses:

Where you have used one or more automobiles for business, list the expenses of each separately. The government requires that you provide your total mileage, business miles, and commuting miles for each car on your return, so be prepared to have them available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether the reimbursement is included in your W- 2 .

Charitable Donations:

Make a list of property donations, including acquisition dates, cost, and value at the time you gave them away. Make sure you have either bank records substantiating donations or receipts from the charitable organizations for donations of either cash or property! In addition, you need to obtain, in a timely manner, written acknowledgement from the charity of any contribution of $250 or more.

Coverdell Education Savings Accounts - Planning Ahead For Your Child's Education

Coverdell Education Savings Accounts - Planning Ahead For Your Child's Education Overview of Coverdell Education Savings Accounts

These accounts, originally referred to as Education IRAs, became available in 1998 and subsequent years. These accounts are nondeductible education savings accounts. The investment earnings from a Coverdell account accrue and are withdrawn tax-free, provided the proceeds are used to pay qualified education expenses of the account beneficiary.

Annual Contributions

When these accounts first became available, the nondeductible contributions were limited to $500 per year for the benefit of the designated beneficiary. Beginning in the year 2002, the allowable nondeductible contribution has been increased to $2,000 per year per beneficiary. Contributions are only allowed for designated beneficiaries under the age of 18.


Contributions that CANNOT be made:
  • Those that aren’t made in cash;
  • Those that are made after the account holder reaches age 18 (special needs students discussed later), or
  • Those that exceed the annual contribution limit (except for rollovers)

Timing of the Contributions

Under the original rules, the contributions to these accounts must have been made before the end of the tax year. This presented problems for taxpayers with modified AGIs close to the phase out limitation. Recognizing the problems created by the requirement to make the contribution prior to the close of the tax year, Congress changed that requirement as part of the 2001 act. Thus, for tax years after 2001, contributions to a Coverdell account for a tax year can be made by April 15 of the following tax year.

Projecting the Account Growth

The table below allows you to predict the growth of an account over various periods and at selected investment rates.



Example of how to use the table:

Assume contributions of $1,500 are made each year for 14 years to the account and the account is earning 8%. From the table, the growth factor for 14 years at 8% is 24.215. To determine the value of the account at the end of the 14-year period, multiply the factor times the annual contribution of $1,500. In this example, the account value would be $36,322.50.

Who Can Make Contributions?

Contributions to Coverdell Education Savings Accounts can be made by any individual, i n inclouding the beneficiary, if the “modified adjusted gross income (AGI)” of the contributor is less than the statutory phase out limit. The annual contribution per beneficiary is available in full only to an individual contributor with a modified AGI below a certain phase out limit. For tax years after 2001, corporations and other entities (including tax-exempt organizations) will be permitted to make contributions to these accounts, regardless of the amount of the income of the corporation or entity during the year of the contribution.

Phase Out Limits

The annual contribution per beneficiary is available in full only to an individual contributor with a modified AGI below the phase out limits.


Phase Out Range
2002 & After
Married Taxpayers
Filing Jointly
$160,000– $220,000
All Others
$95,000 – $110,000

“Modified AGI” is figured by adding back to regular AGI any income the contributor excluded under the foreign provisions (e.g., foreign earned income or income from U.S. possessions). The contribution limit is phased out ratably for contributors with modified AGIs between the lower and top modified AGI levels. No contributions are allowed once the Coverdell account beneficiary reaches age 18.

If you think you will be limited in making contributions because of your AGI level, one option might be gifting the funds for the contribution to either the beneficiary or someone else whose modified AGI is low enough to allow the contribution on behalf of the beneficiary.

A 6% excise tax applies to excess contributions - i.e., any contribution over the annual limit. Contributions in 2002 or later years may be made to both a Coverdell Savings Account and a Qualified Tuition Plan for the same beneficiary without penalty. The excise tax also isn’t charged if:

  • The contribution is withdrawn before the due date (including extensions) of the contributor’s income tax return; or
  • The contribution is a rollover.

Qualified Education Expenses

If a beneficiary’s “qualified education expenses” in a year equal or exceed total Coverdell account distributions for the year, the distributions are 100% excluded from the beneficiary’s gross income. “Qualified education expenses” are limited to expenses for school or higher education and generally include tuition, fees, books, supplies, equipment and certain room and board expenses. The term “school” for this definition includes any school that provides elementary or secondary education (kindergarten through 12th grade, as determined under state law).

“Qualified elementary and secondary education expenses” are defined as follows:

(a) Expenses for tuition, fees, academic tutoring, special needs services in the case of a “special needs beneficiary,” books, supplies, and other equipment, which are incurred in connection with the enrollment or attendance of the designated beneficiary of an education IRA’s trust as an elementary or secondary school student at a public, private, or religious school.

(b) Expenses for room and board, uniforms, transportation, and supplementary items and services (including extended day programs), which are required or provided by a public, private, or religious school in connection with the enrollment or attendance of the designated beneficiary at the school.

(c) Expenses for the purchase of any computer technology or equipment or for Internet access and related services if the technology, equipment, or services are to be used by the beneficiary and the beneficiary's family during any of the years that the beneficiary is in school. This will not include expenses for computer software designed for sports, games, or hobbies unless the software is educational in nature.

Distributions Used to Pay Qualified Expenses

Distributions are generally taxed under rules similar to those for annuities. They are made up of principal (under all circumstances excludable from gross income) and earnings (which may or may not be excludable from income).

If the beneficiary uses the entire distributions to pay qualified expenses, the distribution is completely tax-exempt. However, when all or part of the distribution is used for other than qualified expenses, then a portion of the earnings is taxable.

Example: The account for Will Jones contains $10,508, of which $7,000 is from contributions to the account and $3,508 is due to earnings.Will withdraws $6,000 from the account and uses $5,000 for qualified educational expenses and $1,000 for a downpayment on a car. Under the annuity rules, 66.62% ($7,000/$10,508) of the distribution is treated as principal. This equals $3,997 ($6,000 x .6662). Will can exclude this from his taxable income.

The balance, $ 2,003, must be allocated to earnings, and it is potentially taxable to Will depending on his use of the funds. In this case, he used 16.67% ($1,000/$6,000) of the distribution for unqualified purposes (the car purchase). Therefore, Will must pay tax on 16.67% of the earnings, $334 ($2,003 x .1667).

Delayed Distribution

Even though contributions to the account are not permitted past the age of 18, the funds can remain in the account and continue to accrue investment earnings up to the mandatory distribution age (prior to age 30). The longer the income accrues tax-free in the account, the greater the benefit derived by the recipient. To maximize the tax-free income, one would want to delay the distribution as long as possible and still be able to utilize all of the funds to pay qualified education expenses. Use the table below to predict growth after the education account beneficiary turns 18.

Investment Rate of Return (Annually)



Table assumes the Coverdell Education Savings Account is not immediately utilized and allowed to continue to accumulate during the period in which no contributions are allowed and up to the age at which mandatory distribution or qualified rollover is required.

Distributions at Death of Beneficiary

If the designated beneficiary of an account dies, the account balance must be distributed within 30 days after the death to his/her estate.

Distribution Requirements When Beneficiary Reaches Age 30

Account funds must be withdrawn or rolled over to another qualified Coverdell account before the beneficiary reaches age 30. Distributions that aren’t withdrawn or rolled over are taxable and subject to penalties.

Like IRA accounts, the Coverdell Education Savings Accounts can be rolled over once a year, and they can be transferred at will for the benefit of the same beneficiary. The rollover must be within 60 days of the original distribution. The accounts can also be rolled over or transferred to another qualified member of the taxpayer's family who meet the age requirements.

Penalties For Distributions When Not Used For Education

A 10% withdrawal penalty applies to the taxable portion of all distributions unless they are:

  • Made after death of the designated beneficiary;
  • Due to the beneficiary’s disability;
  • Made on account of a tax-free scholarship or other payment to the extent the amount of the distribution isn’t more than the amount of the tax-free payment; or
  • Excess contributions (over the annual maximum) and the excess is returned, along with income attributable to it, by the due date of the contributor’s income tax return. The net income is included in the distributee’s income in the year of the contribution.

Other Requirements

  • Can’t invest in life insurance contracts.
  • The Coverdell account assets can’t be commingled except in common trust or investment funds.
  • The trustee must be a bank or another person who will administer the trust as required (to the IRS’ satisfaction)

Roth IRA - Is It For You?

Roth IRA - Is It For You? Traditional IRAs are familiar to most taxpayers, providing a
relatively simple method of saving for retirement AND deferring taxes in the process. But one drawback of the Traditional IRA is
that once withdrawals from them begin, distributed earnings and contributions that were tax-deductible get taxed. In contrast, a Roth IRA allows no tax deduction of contributions. However, it does allow tax-free accumulation on the account so that at retirement ALL distributions from a Roth IRA are tax-free, both contributions and earnings. Naturally, to get this tax-free treatment, certain conditions must be met.

Lump Sum Accumulation

$1 Rolled Over “X” Years


Example: A rollover contribution of $30,000 left to accumulate for 25 years at 6% will be worth $128,757 ($30,000 x 4.2919) at the end of the period.

IRA Growth with $1,000 Annual Contribution

For larger contributions, extrapolate the results. Example:contribute $3,000 annually, simply triple the table results.

95,026 121,030
154,762 212,744
767,092 1,358,230

Example: $2,000 annually contributed to an IRA earning 6% per annum would have a value of $109,730 (54,865 x 2) after 25 years. Based on the two examples above, a taxpayer who rolled $30,000 into an IRA and then continued to contribute $2,000 a year to that IRA would have $238,487 in the IRA account at the end of 25 years.

How Much Can You Contribute?

As with a Traditional IRA, to be eligible for a contribution to a Roth IRA, you (or your spouse, if you aren’t employed or self-employed) must have taxable compensation like wages, earnings from a self-employed business, or alimony. The IRA contribution annual limit is slowly increasing over the years. In addition, taxpayers age 50 and older are allowed to make "catch-up" contributions, allowing them larger contributions in their later years to fund their approaching retirement needs. The table below illustrates the annual contribution limit applicable to each year by age.

Contribution Limits
Through 2001
2002 through 2004
2006 through 2007
2008 through 2010
2011 and after
Under Age 50
Inflation Adjusted
Age 50 and Over
Inflation Adjusted

In addition, taxpayers age 50 and older are allowed to make "catch-up" contributions, allowing them larger contributions in their later years to fund their approaching retirement needs. The table illustrates the annual contribution limit applicable to each year by age.

The annual limit applies to all of your IRA contributions in a given year. So, you can contribute to a Traditional IRA and a Roth IRA as long as the combined total does not exceed the annual IRA limits and you meet all of the other requirements.

Your income level can limit your Roth contributions. Contributions are gradually reduced (i.e., phased out) for married joint taxpayers with adjusted gross income (AGI) between $167,000 and $177,000.They are reduced for other taxpayers when the AGI is between $105,000 and $120,000. The contributions of married separate taxpayers who lived together at anytime during the year are reduced when the AGI is between $0 and $10,000.  The amounts indicated are for 2010.  Call this office for the rates for other years.

With Traditional IRAs, contributions cannot be made once you turn age 70-1/2. However, there is no such age limit for making contributions to Roth accounts.

Handling Roth IRA Distributions

Generally, distributions from a Roth IRA (unless due to a conversion from a Traditional IRA) are treated as coming first from contributions (principal) on which you have already paid the tax. Therefore, any distribution to the extent of the principal is tax-free. Distributions of earnings are also tax-free (qualified distributions) if:

They are not made within the five-year tax period beginning with the first tax year in which you contributed to the Roth account, AND

They meet one of the following conditions:

  • They are made after you reach age 59-1/2; OR
  • They are made after your death; OR
  • They are made on account of you becoming disabled; OR
  • They are made so that you can pay up to $10,000 in expenses as a first-time homebuyer.

Another big advantage of Roth IRAs over Traditional IRAs is that the former is not subject to the minimum required distribution rules at age 70-1/2. This means that if you don’t need to utilize your Roth IRA for retirement, you can leave it untapped for heirs (who would also get deferral on withdrawals, but would be subject to certain required distribution rules that apply to beneficiaries).

Conversions of Traditional IRAs to Roth Accounts

Because of the tax-free nature of Roth accounts, Congress has provided taxable rollover provisions that allow you to convert your Traditional IRAs to Roth accounts. Once you convert, all future earnings in the new Roth account accumulate tax-free. The catch is that the tax on the Traditional IRA must be paid in the year the conversion is made to the Roth. Whether it is beneficial to elect this taxable rollover depends on a number of variables.

After 2009, a Traditional-to-Roth IRA conversion can be made by anyone regardless of filing status or income.  Prior to 2010, the conversion option is available to anyone, except married taxpayers filing separately, but only if a taxpayer's AGI is $100,000 or less. 

A special rule applies to conversions made in 2010 allowing a taxpayer to elect to pay the conversion tax all in 2010, or include one-half of the conversion income in 2011 and the other half in 2012.

Paying the Tax on Conversion

The taxability of a Traditional IRA to Roth IRA conversion depends on whether or not nondeductible contributions were made to your Traditional IRA. If you did, your Traditional IRA includes amounts that have already been taxed. These post-tax contributions don’t get taxed again when converting to the Roth. However, you must pay the tax on any interest the Traditional IRA earned plus on contributions deducted prior to conversion.

Effects of Paying the Tax on a Roth Conversion from IRA Funds

The tax on a Roth conversion may be paid either from other funds or from the IRA funds being converted. However, if the taxpayer chooses to pay from the IRA funds, those funds will not be considered part of the rollover. Therefore, they will be subject to early withdrawal penalties if you are under 59-1/2 at the time of the withdrawal.

Payment of the tax from the IRA funds can severely limit the benefit of a conversion to a Roth by eroding the capital that can be invested. For example, in a conversion of a $50,000 IRA to a Roth and paying the tax from the conventional withdrawal, only $29,429 (amount left in the IRA after paying taxes and penalties) actually would get invested in the Roth account. The result, shown below in after-tax dollars, assumes a 6% interest rate and an accumulation period of 25 years.

Of Accumulation
(After Tax)
Rollover Amount

Time Limits on Holding Converted Roth Accounts

When a Traditional IRA is converted to a Roth account, the converted amount must be held in the Roth IRA for at least five years; otherwise a penalty may apply. Any converted amount withdrawn before the end of the five-year period, to the extent it was included in income due to the conversion, is subject to a 10% early withdrawal penalty even if you have reached age 59-1/2. After the five-year period has been satisfied, the 10% penalty still applies to distributions of earnings if you have not attained the age of 59-1/2 or an exception applies.

Any withdrawal made from a Roth IRA containing converted amounts before the five-year holding period ends are treated as coming FIRST from amounts that were included in income due to the conversion.

Impact of Conversions on Other Tax Consequences

When considering whether or not to convert to a Roth IRA, carefully consider how the move will increase your taxable income in the conversion year. The increase could have drastic effects on other tax consequences. For instance, the increase may:

  • Limit the Hope and Lifetime Learning Credits allowed for higher education expenses;
  • Cause more of your social security income to be taxed;
  • Limit your losses on rental real estate; and
  • Mean some of your itemized deductions will be phased out.

The income “catch” for Roth conversions can be averted with appropriate tax planning.That’s why it’s important to consult with your tax advisor before making a final Roth investment decision. Only by looking at your entire tax picture will you really be able to decide whether the Roth option is best for you.

Factors That Favor Your Conversion to a Roth

  • Your Traditional IRA has been open for a relatively short time.
  • A large part of your Traditional IRA comes from nondeductible contributions.
  • Roth accounts don’t require distribution at age 70-1/2.
  • You have other funds from which to pay the tax on the conversion.

Factors That Don't Favor Your Conversion to a Roth

  • You may need to withdraw from the Roth account before meeting the five-year holding period.
  • You have a short time until retirement and you expect to make withdrawals soon.
  • You expect to be in a lower tax bracket when you withdraw from your IRA.
  • You do not have other funds with which to pay the tax on the conversions.

Saver's Credit

The Retirement Savings Contribution Credit, frequently referred to as the Saver’s Credit, was established to encourage low- to moderate-income taxpayers to put funds away for their retirement.

Up to $2,000 per taxpayer of contributions to an IRA (traditional or Roth) or other retirement plans, such as a 401(k), may be eligible for a nonrefundable tax credit that ranges from 10% to 50% of the contribution, depending on the taxpayer’s income. The maximum credit per person is $1,000.The contribution amount on which the credit is based is reduced if the taxpayer (or spouse if filing jointly) received a taxable retirement plan distribution for the year for which the credit is claimed (including up to the return due date in the following year) or in the prior two years. If the modified AGI exceeds $27,750 (single), $55,500 (married joint) or $41,625 (head of household), no credit is allowed.  The amounts indicated are for 2010.  Call this office for the rates for other years. An individual who is under age 18, a full-time student, or a dependent of someone else is ineligible. The credit is in addition to any deduction allowed for traditional IRA contributions.

Tax Considerations for Retirees

Tax Considerations for Retirees If you’re retired or near retirement, you’ve probably already done the homework to ensure you’re ready financially. But hopefully your research has not left out the tax ramifications that the transition to retirement usually brings. Every retiree needs an awareness of the possible tax traps they may encounter as their income shifts from reliance on wages or self-employment income to retirement-based pensions, investment income, etc. Lifestyle changes can also pose tax questions - e.g., a home sale and move to a new location. This brochure highlights tax pitfalls retirees should be on the lookout for and offers a few pointers for overcoming them.

Social Security Benefits


If you haven’t yet retired but are trying to predict your retirement cash flow, be sure to request an Earnings and Benefit Statement from the Social Security Administration (SSA). It’s simple to do - just call the SSA at the number listed in your local telephone directory; ask for Form SSA-7004. Fill out the form, return it to the SSA, and they will send you a projection of the benefits you can expect to receive when you retire. You can also obtain this information online at


If you’re already receiving social security, try to avoid traps like these that could cause you to pay some of it back:

1 . The SSA limits earnings (i.e., wages, commissions, etc.) of retirees who are under the age of 65. If you earn too much during this period, you may lose a portion (possibly all) of your social security. If you think you would like to continue working, it’s wise to make a comparison of how loss of benefits in the short-run may affect possible increases in benefits in the future (i.e., because work continuation allows extra contributions to the social security system).

2. The amount of income tax you pay on your social security will depend on your filing status (married, single, etc.) and the level of your income. Be sure to take advantage of tax planning, particularly if you expect fluctuations in your income from year-to-year–planning ahead may help level the ups and downs and cut the amount of your social security that becomes taxable.

3. Watch your investment choices. Tax-free interest from investments like municipal bonds, for example, can increase the amount of your social security income that is taxable. Here again, tax planning is a key factor that can help keep a larger portion of the benefits in your pocket instead of Uncle Sam’s.

IRA Accounts

Premature Distributions:

If you are under age 59 1/2, be extremely careful about drawing money from your IRA. A federal penalty of 10% applies to certain premature distributions; some states also assess a penalty. However, there are safe methods of withdrawing IRA funds before age 59 1/2. For example, withdrawals of substantially equal periodic payments based on your life expectancy (or the lives of you and a beneficiary) may prevent the IRS from assessing the penalty.

Minimum Distributions:

You will only be able to contribute to an IRA as long as you receive compensation and you are under age 70 1/2. At age 70 1/2, you must begin taking at least minimum distributions from your account*; otherwise the IRS can assess a penalty. Your minimum required distribution (MRD) is determined by using a factor based on your age from an IRS table called the “MDIB Annuity Table.” If your spouse is your beneficiary and is at least 10 years younger, you may use the Joint Life & Last Survivor Table instead. To determine the minimum distribution amount, divide the balance of your IRA account on Dec. 31 of the prior year by the factor from the appropriate annuity table. If you have multiple IRA accounts, they are all treated as one for the purposes of this computation.

Note: Required minimum distributions (RMD) are suspended for the 2009 tax year.  However, this does not include RMD for 2008 that were deferred until 2009.

Choosing A Beneficiary:

A beneficiary is someone you choose to receive your IRA in the event of your death. You may choose your spouse, your child(ren , a friend, etc. Choosing a beneficiary also plays a big part in how the IRA is distributed at your death. Be sure to consider the choice carefully before making a final decision.

Pension Plan Distributions

At retirement, you may be faced with many decisions about your pension plan (either employer-provided or your own self-employed plan). Any number of options are usually available for these payouts, among them:

An Annuity:

An annuity provides a regular income over a period of time; it is generally paid in monthly installments. However, the term over which an annuity is paid varies, depending on how you choose to have payments made. For example, your employer will probably ask if you want your pension paid over a 10-year period, over your lifetime, over the combined lives of you and your beneficiary, etc.

When you receive an annuity from a plan to which you made contributions that have already been taxed, a part of each annuity payment you receive is nontaxable. This is called your “investment in the contract.” When you have an investment in the contract, special calculations are necessary to determine how much of your annuity will be taxable.

Lump Sum Distribution:

You may be eligible for a special tax computation called “averaging” if you were born before 1936 and receive the entire balance in your retirement plan within one tax year. Such payments are referred to as lump sum distributions and generally qualify for 10-year averaging. Consideration must be given to whether it is better to utilize this special averaging, which requires the tax to be paid up front, or to roll your distribution into an IRA.

Net Unrealized Appreciation:

Some retirees get pension distributions in the form of company stock that has appreciated in value while it remained in the pension plan - this is termed “net unrealized appreciation.” Stock distributions can create special tax problems. If you receive one, it’s a good idea to check with your tax advisor about the best way to handle it.


A rollover occurs when you get a distribution from one qualified retirement plan and you redeposit all (or part) of it into another qualified plan within 60 days. The part you redeposit is not taxed until you begin to withdraw from the new plan.

Be watchful for two problems that occur with rollovers:

1. The nontaxable part of a distribution, such as the after-tax contributions, may be rolled to another qualified plan (under strict procedures) or to a traditional IRA. If only part of a distribution that includes both taxable and nontaxable amounts is rolled over, the amount rolled over is treated as coming from the taxable part of the distribution. Before making this type of rollover, you should confer with your tax advisor.

2. Distributions made directly to you can be subject to income tax withholding (usually 20%). This means that the actual distribution received will be less than 100% of the taxable amount. Rolling over just the amount received often leads to an unwelcome surprise at tax preparation time - i.e., the withheld amount becomes taxable. If tax was withheld, you can still accomplish a tax-free rollover by making up the difference of the withholding with funds from other sources and then wait until you file your tax return to get the withholding back.

Sale of Home/Moving

Sale of Home:

You may choose to sell your home and move to some other area once you retire. Remember, however, if you meet certain conditions, the law allows you to exclude all or part of your gain. Be sure to check before finalizing a sale to make sure you meet the necessary qualifications.


Expenses for moving generally aren’t deductible unless you plan to work full-time at your new location for at least one year after the move (two years if you’re self-employed). Thus, if you plan full-time retirement in the new location, moving expense will usually be nondeductible.

Estimated Taxes

We have a “ pay-as-you-go” tax system in the U.S. This means that the IRS requires you to prepay tax on income as you earn it; if you don’t prepay enough, you could owe an underpayment penalty. Computing tax projections ahead of time can help you find ways to avoid the penalty.

Generally, you will have two options for meeting the pay-as-you-go requirement:

• If you get a pension, ask the payer to withhold income tax on your behalf (in the same manner an employer withholds for an employee); or

• Make estimated tax payments on a quarterly basis. Sometimes it is difficult to determine the correct amount of the estimated tax payments in order to avoid the underpayment penalty. The IRS generally requires safe harbor estimate amounts equal to 90% of the current years’ tax liability or 100% of the prior year’s tax. The 100% safe harbor increases to 110% for taxpayers with incomes in excess of $150,000 ($75,000 for married taxpayers filing separately).

Either of these methods is acceptable to the IRS.

Tax Planning

Because this brochure contains only a brief overview of retirement tax considerations and the rules are fairly complicated, you many want more in-depth planning based on your specific situation. This office would be pleased to assist you in any way possible. Please don’t hesitate to call for an appointment and to find out more about the services available.

Client Disclosure and Consent


You may have some concern about the confidentiality of the information you provide to this firm. It is the firm’s policy to keep your personal and business matters confidential to the extent permitted by law.

Client Information, Privacy Policies and Notice Regarding Advisor-Client Privileged Communications

The Federal Trade Commission regulations require tax preparation firms to provide an annual statement of firm privacy policies. Here is the firm’s policy:

All the information that you provide is treated with the utmost confidentiality. Your personal information will only be shared with members of our firm who need to know this information in order to complete the work you have hired this firm to do. Your personal information will not be disclosed to anyone outside this firm without your express written permission to do so, or unless the firm is legally required to do so. For example, if a mortgage lender contacts this office for a copy of your return or information about it, you will be asked to provide written permission prior to this firm responding to that request.

You should also be aware that anything you divulge during the interview for the preparation of your tax return is confidential, but not protected from the IRS. Privileged communications (those that are protected from IRS authority to compel our testimony) are limited to noncriminal tax advice on matters before the IRS or noncriminal tax proceedings in federal courts. Although this firm considers any information you provide as confidential, return preparation engagements are not covered by advisor-client privilege.

If you feel the nature of any subject matter to be discussed requires protected communications, please raise that issue so that your possible need to consult with an attorney for legal advice can be discussed.

Referrals are Welcome

Referrals are the cornerstone of any service business. This firm, like other professional service firms, relies on satisfied clients as the primary source of new business. Your referrals are both welcome and most sincerely appreciated! Since your referrals are generally individuals you are well acquainted with, you can be assured that your personal, financial and tax data will not be shared with them.

An Expression of Confidence

When you refer clients here, you are expressing your faith and confidence in the services this firm has and will continue to provide to you. You may have business associates who need professional tax assistance or family and friends who struggle to do their own taxes every year. No matter whom you refer, be assured that their individual tax needs will be looked after in the same professional manner you have been.

Thank you for allowing this firm to be of service.