Saturday, November 6, 2010

Estate Tax, part 8

Now that 2010 is almost over, it seems that there is virtually no chance that the Estate Tax will be changed for this year. (Nothing is impossible, but it does not seem likely.)

There is no estate tax for 2010, but if heirs sell assets they inherit, they could incur a capital gains tax. This is because inherited assets will be valued at their original cost (or other basis) value rather than at the fair market value as of the date of death. However, for most people this will be offset by a $1.3 million step-up in value (up to fair market value) available per estate. Assets inherited by a spouse get an additional $3 million step-up in valuation.

The estate tax for 2011 is yet to be determined. It is scheduled to revert back to 2001 law, but Congress will most likely change that, as no one wants 2001 to come back.

Friday, November 5, 2010

Year-end Planning

Tax planning for the end of 2010 is a bit more difficult this year, because Congress has still not decided what the tax rates will be for 2011. This could be important for some people who can choose to accelerate income or deductions into 2010, or defer them until 2011. Kiplinger is still predicting that the 2010 tax rates will be carried over to 2011. That may be a workable assupmtion for many people, but nothing is certain until it actually happens.

Some of the current tax provisions may be worth reminders. One particularly nice one for those who can benefit from it is that long term capital gains for people in the 10% and 15% brackets are not taxed at all. That's right, 0% tax. The 0% rate applies up to $34,000 of taxable income for single people and $68,000 for married filing jointly.

Just to recap the Standard Deductions for 2010, they are:
$5,700 for Single
$8,400 for Head of Household
$11,400 for Married Filing Jointly
For people 65 and over:
$7,100 for Single
$9,800 for Head of Household
$12,500 for Mariied Filing Jointly


For year-end planning for your individaul situation, contact your tax professional!

Tuesday, October 5, 2010

Whack your self-employment tax

For businesses in Hyannis, Centerville, Provincetown or anywhere on Cape Cod, one of the most deadly killers of small sole-proprietorships that I have seen is the Self-Employment tax. It is the equivalent of the FICA (AKA Social Security) tax that is deducted on an employee’s paycheck. But the rate for the Self-Employment tax is twice that of FICA. And since a sole proprietor does not receive a regular paycheck, the pain is not spread out in easy to digest small time periods. Sole Proprietors must send quarterly checks directly to the IRS, often in very large amounts. If they get behind—something that often happens—they can find themselves facing crippling tax bills at tax preparation time in April.

There are some strategies available to (a) provide for paying the tax by carefully setting aside funds, or (b) reduce the tax through the use of special tax breaks.

One tax provision that often works well for the reduction of Self-Employment tax (depending on the type of business and its own particular circumstances) is known as the Section 179 expense option. This allows a business that purchases a large item of machinery or equipment to write off, in many cases, the entire purchase price of the equipment in the year of purchase. This can be done even if the equipment is financed with a multi-year loan. The result can be that the business’s profit is partly or completely eliminated for tax purposes, the sole proprietor pays little or no tax, and he still has cash he needs to operate and to live.

This strategy can be a trap in itself if it is not done carefully. You can’t buy a big piece of equipment with a big loan attached unless you actually need it and it will actually enable you to make more profits in the future. Over-use of this strategy can get you into a situation in which you are over-expanded, have equipment you can’t use and you can’t make the loan payments.

However, there are many cases in which this strategy makes sense, and for 2010 and 2011, this tax break has been expanded to help stimulate the economy.

For the many construction and landscaping contractors on the Cape, medium-duty or heavy vehicles are often much needed, and they can often qualify for some of these tax write-offs. Be sure to consult your tax professional before acting!

Monday, September 20, 2010

Small Business Tax Breaks

Almost all of the biggest businesses on Cape Cod are small enough to fit into the "small business" category for tax purposes.

The limit on expensing machinery and equipment (instead of depreciating it) will be raised to $500,000 for 2010 and 2011. (The limit for vehicles over 6,000 pounds Gross Vehicle Weight is a $25,000 expense write-off, plus additional "bonus" and regular depreciation.) Any business that buys $2 million or less in such assets will be able to get the full benefit of this break. It will be phased out for businesses that buy more than $2 million worth of equipment.

Similarly, $250,000 in renovations for restaurants and retail stores can be written off, including improvements landlords make for retail tenants.

A welcome tax break for self-employed people: This year they will be able to deduct health insurance premiums on schedule C. Thus they will reduce self-employment tax (the deadliest killer of sole proprietorships).

Wednesday, August 4, 2010

Sales Tax Holiday

Massachusetts sales tax holiday weekend: Aug 14-15, 2010.

Thursday, July 29, 2010

Nothing new + my manifesto

Congress is not getting anything done on tax legislation, despite the pressing need to come up with something for 2011. Most politicians want the Bush tax cuts to stay in place for everybody except the "wealthy," but even some Democrats are now saying that raising taxes for anybody, including the "wealthy," in the midst of a recession, would be bad for the economy. If Congress does nothing, everyone's taxes will rise because of the automatic expiration date of 12/31/10 written into the bush tax cut law.

Philosophically speaking, the President and many Democrats seem to believe that "rich" people are not playing "by the rules." Their evidence for this seems to be simply that some people have more money than others. This seems to be held as an offense against social justice.

The President has never specified exactly to what extent he believes wealth should be redistributed, but there seems to be little doubt that he believes this is an important goal. This is not something new and subversive in America, since the fact is that our entire income tax structure has some grounding in the idea that some people just have too much, and some of it should be taken away.

Is this the best approach to the goal "to promote the general welfare," set forth in the preamble to the Constitution? In my opinion, it is not.

1. The fact that some people have more money than others is just a natural fact that flows from the natural differences amongst individuals. The statement in the Declaration of Independence that "all men are created equal" is just a statement of what happened at the beginning, not a statement of how everything should turn out in the end. We should all start out the same at the starting line, and in America we have tried hard to create that condition. What happens after that is up to the individual.

2. The fact that some people have more money than others does not make those who have money automatically bad. Similarly, the fact that there have been some bad people who acquired wealth illegally does not mean that ALL people who acquire wealth are not playing "by the rules." Furthermore, there are plenty of laws that can be enforced against those who do obtain wealth illegally or actually unfairly.

3. Americans, statistically, give more money to charity than any other people in the world. They want to help. Many of the richest give huge sums.

4. The economy is not a zero sum-game. If some people get more, it DOES NOT FOLLOW that necessarily others get less. On the contrary, the EXACT OPPOSITE can happen. Because of the GROWTH factor, EVERYONE GETS MORE!!!!!!!! If a business grows, provides needed goods or services and creates jobs, everyone benefits. If "everyone" includes the owner of the business, well, that is the fulfillment of the American Dream for him.

5. To expect everyone to end up with the same amount or even remotely similar amounts is unnatural and artificial. It is a nice thought, but to try to force that outcome gums up the whole works.

6. To take money away from key people in the economy (those in positions to enhance economic growth) and from productive businesses is DESTRUCTIVE to the economy.

7. To take money away from people who make a lot because they are highly skilled and do work that is of major benefit to the society as a whole (e.g., doctors, engineers and such) is DESTRUCTIVE to the society at large.

8. Rich people are as imperfect as everyone else. They can be obnoxious or caught up in the trappings of their wealth. This is not nice, but it is not a crime. They should get religion or something, but taking money away from them is not the answer.

9. If we stop punishing productive people and businesses by taking resources away from them, the scariest thing about it would be how fast we will grow. (And of course sometimes we would go too fast and have a crash. Then we would start this debate all over again.)

10. There would be plenty of money to care for those unable to care for themselves. The flow of money to charity would be immense.

11. The government is NOT the best entity to help those who need help. It just creates jobs for politicians and bureaucrats.

Wednesday, July 14, 2010

More 1099's

Congress is considering legislation that would require landlords to issue 1099's beginning in 2011. The 1099 rules as they currently exist do not apply to landlords.

Pending legislation

The US Senate is close to passing a bill that contains a number of tax breaks for small businesses.
1. Self-employed people would be able to deduct medical insurance for themselves and their family on Schedule C for 2010.
2. Businesses could write off (instead of depreciating) up to $500,000 in machinery, equipment and similar fixed assets placed in service in 2010 and/or 2011.
3. The 50% depreciation bonus that was in effect for 2009 would be extended through 2010.
4. Expanded tax breaks on sale of small business stock.
5. And a few other provisions.

Thursday, July 1, 2010

Estate tax stuck in Congress

There is still no guarantee that Congress won't reinstate the estate tax retroactive to January 1, 2010. As discussed in previous posts of this blog, the estate tax (AKA death tax) was completely phased out this year, due to a law passed in 2001. The House has passed a bill that re-instates it with a 45% tax rate on everything above $3.5 million. But it is stuck in the Senate. Most senators want a higher exemption level and a lower tax rate. (Maybe that's because most of them will have estates worth more than $3.5 million?) This matter has also been pushed back by a number of other things on the Senate's agenda. If nothing is done, the estate tax will revert back to its 2001 level: a top tax rate of 55% and an exemption of only $1 million. Probably the vast majority of Senators and Congressmen have potential estate worth more than $1 million (just guessing here), so the odds are good that something will be in place for 2011. At least that's the conventional wisdom.

Homebuyer credit extension passed

The House approved the extension mentioned in the previous post (June 22), and the President is expected to sign it in a few days. The deadline is extended to September 30.

Tuesday, June 22, 2010

Homebuyer credit extension

For those who met the deadline of April 30, 2010, to enter into a contract a buy a new home, the deadline to close the deal is almost here: June 30, 2010. There have been some instances of paperwork delays that could cause some people to miss the deadline. As a remedy, there is a bill going through Congress now to extend the deadline by another three months. The Senate approved it, and the House of Representatives is expected to act on it soon.

Tanning Tax

A 10% tax on indoor tanning services goes into effect on July 1, 2010. So, hurry up and get your pre-summer tanning done!

Sunday, June 20, 2010

Small Non-Profits

The IRS now has a filing requirement for small non-profit organizations which previously were not required to file returns. It is called form 990-N. It is simple and can even be filed by e-mail. Organizations that are required to file and do not do so for three consecutive years will have their exempt status revoked. The IRS web site has more information at www.irs.gov/eo.

Saturday, May 8, 2010

Health insurance credit for employers

The IRS recently sent out postcards to employers who might qualify for a new credit established by the new health care law. It is a credit worth up to 35% of health insurance premiums paid by employers who have less than 25 “full time equivalent” employees and pay an average of less than $50,000 per year to each employee.

The full 35% credit will be realized only by employers with less than 10 “full time equivalent” employees who are paid an average of less than $25,000 per year. The credit is gradually reduced above that level.

“Full time equivalent” means that you have to divide the total hours worked during the year by part-timers by the number of hours they would have worked if they were full time. (The simplest example is that is you have two employees who each work 20 hours per week all year, you have one full time equivalent employee.)

The average wages are determined by dividing the total wages by the number of full time equivalent employees.

To qualify, the employer must pay at least 50% of covered employees’ health insurance premiums, if they have coverage as a single individual. If they are on a family plan, the employer only has to pay the amount equal to 50% of the single plan.

The credit has a number of other complicated rules, as you may have guessed.

The credit is taken on the employer’s annual income tax return. For example, a sole proprietor will take the credit on form 1040. For a corporation that files form 1120, the credit will be taken on that form.

Tax-exempt organizations can also claim the credit. For them, it is a refundable credit (subject to certain limitations).

For employers other than non-profits, the credit is not refundable; it can only reduce the income tax down to zero.

Wednesday, March 24, 2010

Estate Tax, part 6

There is some concern that changing the estate tax rules in the middle of the year might be unconstitutional. One proposal that tries to deal with this problem is to give estates a choice of using either the 2009 rules or the 2010 rules.
The 2010 rules, headlined by an absence of any estate tax, are not as simple as they sound. Assets inherited under the rules in place until the end of 2009 become valued at fair market value as of the date of death (or an optional alternative date). Assets inherited under the 2010 rules would keep the same value they had when the decedent owned them. Thus there could be huge capital gains if the heir sells the assets. There is an exemption of $1.3 million in gains for such cases, plus an additional $3 million exemption for surviving spouses.
The Senate may be tied up for a while longer in fighting over changes to the health care bill that just passed. That could further delay action on the estate tax.

Monday, February 22, 2010

Estate Tax, part 5

Basically, there is nothing new yet on this. Republicans in the Senate want to raise the exemption to $5 million and lower the tax rate to 35%. Maybe they will get to work on this after they finish the work they are doing now on other taxes (see previous post).

Tax changes

The Senate just passed a bill that contains some tax reductions. The headline items are mainly for small businesses. One provision calls for a tax break for businesses that hire new people during 2010. Restoring the expanded write-offs for purchases of new equipment is also part of the bill.
There were a number of tax breaks that expired at the end of 2009. Most of these are being restored in this new tax bill. For example, the option to distribute money from an IRA directly to a charity without paying tax on the distribution--an option that expired this year--is to be restored. Credits for college tuition--valid in 2009 but dead so far in 2010--are also targeted for revival. The House will still have to act on the bill to make it law.

Saturday, January 30, 2010

First-Time Homebuyer Credit

Taxpayers claiming this credit will not be able to e-file this year.
Legislative changes in November 2009 expanded and extended the credit and also added documentation requirements for claiming the credit. For homes purchased after November 6, 2009 a copy of a properly executed settlement statement is required to be attached to the return. Due to increased compliance checks by the IRS, it is highly recommended that a copy of a properly executed settlement statement be attached to all returns claiming the credit, regardless of the date of purchase. Proper documentation will help to expedite the processing of the return when attached on any claim for the credit.


Form 5405 (to claim the credit) is not eligible for e-file. The IRS will not begin processing paper filed Forms 5405 until mid-February.

Learn more about the First-Time Homebuyer Credit by going to: https://www.irs.gov/newsroom/article/0,,id=204671,00.html

Tuesday, January 19, 2010

Municipal Bonds rates up

An interesting side-effect of the financial crisis is that interest rates on municipal bonds are now about the same as the rates for US Treasury bonds. Usually muni rates are lower than Treasury rates. High-income investors accept the lower rates because muni interest is exempt from Federal income tax. Currently, however, many investors are concerned about the safety of municipal bonds, because many of the state and local governments that issue them are having serious budget problems. Also, bond-insurance companies have been hit hard by the crisis, adding further stress to the market. Higher demand for Treasuries and lower demand for munis has lowered the market rates on the former and raised them on the latter.
One would think this situation would eventually return to normal, but there is a new development in this mix. There is a Federal subsidy available to state and local governments that issue taxable bonds. The feds will pay 35% of the interest that the states and locals are on the hook for. This subsidy is scheduled to expire at the end of this year, but it could be extended, because it appears by some calculations to be more efficient than having a tax exemption for muni bonds. If it became permanent, it could change the market for municipal bonds permanently, according to The Economist, an international weekly news and economics magazine.
Does this mean that muni rates will stay high? It could mean that, but theories to project investment values don't always work out. Investors will need to watch carefully and be mindful of the elevated risk.

Tuesday, January 12, 2010

Estate Tax, part 4

The Estate Tax was allowed to expire, an outcome that was set in motion by a law passed in 2001. So, at the moment there is no “death tax.” However, Congress plans to resurrect it, probably retroactive to January 1, 2010. The only reason they let it expire was that they were too busy arguing about health care.
In 2009 the estate tax exemption was $3.5 million, with a 45% tax on everything above that amount. Guesstimates are that the new law will have an exemption of between $3.5 million and $5 million.
Stay tuned for further developments.

Section 179 and Bonus Depreciation

A tax provision that many small businesses take advantage of every year is the ability to write off in full the purchase of machinery and equipment (including heavy vehicles) instead of depreciating it. This is known to accountants as the Section 179 deduction.
The limit for this write-off had been temporarily increased to $250,000 for 2008 and 2009, but because Congress was preoccupied with health care at the end of last year, the limit automatically reverted back to $134,000 for 2010.
Congress can still take action to restore the higher limit, and many analysts predict that they will do so. And there is a good chance that they will make the remedy retroactive to January 1.
Another depreciation break that expired at the end of 2009 was a 50% bonus—an option to write off half of certain new machinery and equipment in the year of purchase. That too has a strong chance of being revived. If it is restored, it can be used on top of the expense deduction described above, such as for purchases over the $134,000 (or $250,000) limit.