What's New in Financial Strategies – December 2010

Check gift cards carefully before you give

For years, gift cards have been a popular way to solve the problem of what to give at holiday time. But too often the cards had expiration dates, inactivity fees, and other restrictions that cut into the joy of giving.

New rules enacted last year will eliminate some of the issues consumers have had with gift cards. Under the Credit Card Accountability, Responsibility and Disclosure Act (CARD Act), gift cards purchased after August 22, 2010, cannot have expiration dates of less than five years. Inactivity fees can't be charged unless the card hasn't been used for at least 12 months.

But its still advisable to check the details on any gift card you're thinking of buying. Watch for fees charged just to purchase the card, inactivity fees, and outdated disclosure information about the card. Also be aware that if the retailer whose card you buy goes bankrupt, the gift card is likely to be worthless.

As with any purchase, the key to getting your money's worth is knowing exactly what you're getting before you buy.

Is it time to refinance your home mortgage?

Mortgage interest rates are at historic lows. According to the Mortgage Bankers Association, the average interest rate for 30-year, fixed-rate mortgages dropped to 4.25% in September, 2010, and the average rate for 15-year mortgages fell to 3.73%. These are the lowest rates in almost 50 years.

If you're currently paying mortgage interest at a higher rate, you may be tempted to refinance your existing mortgage, even if you already refinanced once or twice before. But should you do it? The decision may not be as simple as it first seems.

Comparing interest rates is not enough. Here are some other factors to consider before you refinance.

* Compare apples to apples. Always request a good-faith cost estimate from any lender. This report should disclose all the fees and closing costs, such as points, credit report fees, inspection fees, private mortgage insurance, and appraisal fees. Use this information to evaluate competing loan proposals.

* Calculate your breakeven period. This is the length of time it takes you to recover the costs a lender typically charges to refinance your mortgage. To do this, divide your refinancing costs by your monthly savings (your current loan payment minus your new loan payment). If you plan on selling your home in the near future, refinancing may not save you money because it usually takes several years to recover refinancing costs through a lower monthly payment.

* Check for prepayment penalties. Before you pay off your existing loan, check for an early payment penalty clause. Your note agreement will spell out the exact terms of the prepayment penalty, if any, or you can check with your lender. A prepayment penalty will lengthen your breakeven period.

* Analyze the loan term. To save interest, avoid stretching out your total loan period when you refinance. Let's say you've been paying for ten years on a 30-year loan. If you take out a new loan with a 30-year term, you will increase your total payoff period to 40 years. Instead, consider making your new loan term coincide with the remaining term of your old loan (in this example, 20 years).

Another alternative is to continue making the same monthly payment toward your new 30-year loan. If you do that, you'll pay off your loan in a shorter period of time. This could save you a substantial amount of interest.

* Take taxes into account. In evaluating a refinancing, don't overlook the potential tax deductions.

* Loan points. Most lenders charge points, also known as a loan origination fee, on home loans. If you itemize deductions on your tax return, you can generally deduct points paid on a refinancing, but not all in the first year. Instead you must spread your deduction pro rata over the life of the new mortgage. To qualify, paying points must be an established practice in your area, and the amount paid can't be more than what is normally charged in the area.

If you've refinanced in the past, you could be eligible for another deduction. When you pay off a prior refinancing, you can immediately deduct any remaining points from the previous mortgage.

If you refinance to get a lower interest rate or shorter loan term and also to tap your equity to make improvements to your home, points attributable to the home improvement portion can be deducted immediately. Any remaining points must be deducted pro rata over the loan's term.

* Other deductions. If the lender charges a prepayment penalty for paying off the previous loan early, you can generally deduct the amount paid. Most other closing costs, such as appraisal or title insurance fees, are not deductible. However, you should bring your loan documents to your tax appointment because there could be additional deductions.

Other factors may also come into play. For instance, after you refinance, you may have to adjust your tax withholding or estimated tax payments to reflect a lower interest deduction. And lenders now require more detailed financial information and documentation. We can help you with the paperwork and with making the best choices in your particular circumstances.

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website http://www.cpasllp.com/ for more details.

New/Smart Business – December 2010

New 1099 reporting rules may be repealed

The recent health care reform legislation included a new reporting requirement for businesses. Beginning in 2012, a Form 1099 must be filed with the IRS for payments of $600 or more made to corporations. Previous law required such reporting only for amounts of $600 or more paid to unincorporated businesses.

"The Small Business Jobs Act of 2010" added another reporting requirement, this one to take effect January 1, 2011. Landlords will be required to file Form 1099s with the IRS for payments of $600 or more made for rental property expenses.

Responding to the complaints from businesses that these new reporting requirements would be very burdensome, Senate Finance Committee Chairman Max Baucus has announced legislation that would repeal both of these provisions.

Stay tuned to see if repeal will actually happen. If it doesn't, get your business ready for these new requirements.

What's New in Taxes – December 2010

Save energy and taxes: An IRS reminder

The IRS recently issued a bulletin reminding taxpayers that making energy-saving improvements to their homes before the end of the year can lower their taxes for 2010.

The credit allows you to claim up to 30% of the cost of energy-efficient windows, doors, certain roofs, high-efficiency heating and air conditioning systems, water heaters, and other energy-saving improvements to your principal residence. The maximum credit for amounts spent in 2009 and 2010 is $1,500.

A second energy credit is available to encourage investment in alternative energy equipment such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property.

The IRS cautions homeowners to check the manufacturer's tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer's website or with the product packaging. Not all energy-efficient improvements qualify for the tax credits. The manufacturer's certification is different from the Department of Energy's Energy Star label, and not all Energy Star labeled products qualify for the tax credits.

How to deal with an audit notice

The number of IRS audits has doubled over the past ten years. Coupled with the new informational filing requirements for businesses, your chances of an IRS audit notification are not insignificant. If the IRS should come calling, here are some things to consider.

First, be aware that the IRS can contact you either by mail or phone. The majority of audits take the form of a mailed notice requesting certain information. These are often easily handled, but don't automatically assume that you know what the IRS wants. The best first step is to contact our office and provide us with a copy of the notice. It's critical to reply to the request by the deadline shown on the notice. For added safety, respond using certified mail.

However, the IRS might first notify you of an audit by phone. Phone notifications are on the rise, and, unfortunately, scam artists are taking advantage of this fact. The call you receive might not be from the IRS at all, but instead from an imposter hoping to gain access to your personal information.

If it is truly the IRS on the line, be aware that the agent will carefully document every word you say and perhaps use those words against you. To protect yourself, simply take down the agent's name and contact information, and tell the agent that your professional representative will be following up with him or her. Don't engage in idle chitchat or answer any questions, even innocent-sounding ones.

Later on, the audit might result in a personal visit to your home or business to allow the agent to gather more information. These audits are referred to as field audits. You could also be summoned to the agent's office. In either case, never go it alone. Keep us and/or your attorney abreast of all developments. And never just ignore a notice - that could make matters much worse.

Your best defense against an audit might be to take steps to minimize your risks. Maintain complete and accurate records. Save important tax receipts for seven years. And stay familiar with the latest tax rules.

The odds of an IRS audit might be rising, but knowing what to do, and who to contact first can make the experience less stressful. Our office stands ready to assist you should the IRS ever call your number.

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website http://www.cpasllp.com/ for more details.

Major Tax Deadlines – December 2010

* December 15 - Fourth estimated tax payment for 2010 is due for calendar-year corporations.

* December 31 - Last day to set up a Keogh retirement plan for 2010. Deductible contributions for 2010 can be made any time up to the filing deadline for your 2010 return.

* December 31 - Deadline to complete 2010 tax-free gifts of up to $13,000 per recipient.

* December 31 - Deadline for paying expenses you want to be able to deduct on your 2010 income tax return.

NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.

Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.

* Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.

* Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website www.cpasllp.com for more details.

Major Tax Deadlines – November 2010

During November: It's wise to estimate your 2010 income tax liability and review your options for minimizing your 2010 taxes. Call us if you would like to schedule a tax-planning session.

NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.

Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.

* Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.

* Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website www.cpasllp.com for more details.

What's New in Taxes – November 2010

New restrictions on health accounts

This year a tax advantaged health account (such as a flexible spending account, health reimbursement account, health savings account, or medical savings account) can be used to purchase aspirin, flu medications, allergy pills, cold medicines, and other over-the-counter medications.

Effective January 1, 2011, funds from these accounts can no longer be used to purchase over-the-counter drugs unless the taxpayer has a prescription for them. Insulin is an exception and will still be eligible for tax-free reimbursement without a doctor's prescription.

Adopting a child provides tax benefits

Are you giving some thought to adopting a child? Since the adoption process can be a costly one, the federal government provides some significant financial assistance with the adoption tax credit.

Here are some of the basic rules.

* It's important to remember that we are talking about a tax credit and not a tax deduction. The adoption tax credit is even more valuable since it can reduce your actual tax liability by up to $13,170 for 2010. Any unused credit can be carried forward five years. The adoption credit can also offset the alternative minimum tax.

* Qualifying expenses include agency adoption fees, attorney fees, court costs, and adoption-related travel expenses.

* Nonqualifying expenses include fees to a surrogate mother.

* The adoption credit is subject to phase-out provisions. For 2010, the credit begins to phase out once modified adjusted gross income reaches $182,520, and the credit is completely eliminated at modified adjusted gross income of $222,520.

* The timing of the credit depends on the nature and the progress of the adoption. For domestic adoptions, if the adoption is not finalized by the end of the year, the credit is computed in the second year. For foreign adoptions, the credit is not computed until the year the adoption is finalized.

* Special needs adoptions can be eligible for the maximum credit even if actual expenses are less.

* Some employers provide adoption financial assistance. These proceeds can generally be excluded from taxable income, but the reimbursed expenses can't also be used to figure the adoption tax credit.

Please call us if you are considering adoption. We can help assess your eligibility for the tax credit, help estimate the available tax assistance for your adoption, and develop a procedure for documenting your expenses.

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website www.cpasllp.com for more details.

New/Smart Business – November 2010

W-2 reporting of health costs optional for 2011

The IRS and the Treasury are giving employers additional time to adjust payroll systems and procedures to meet the requirement to include the cost of employer-sponsored health coverage on employees' W-2 forms. This reporting requirement was mandated in the 2010 health care reform legislation and was scheduled to take effect with the issuance of W-2 forms for 2011.

Reporting the cost of coverage will be optional for Forms W-2 issued for 2011. Employers who fail to report the cost of health coverage for their employees will not be subject to penalties. The IRS notice included a reminder that the reporting requirement is for informational purposes only. The amount reported on an employee's W-2 is not taxable income to the employee.

It's time for year-end business tax planning

You've guided your business through a tough economic climate and kept it profitable. Now it's time to turn your attention to tax planning so you can keep those profits in your pocket.

Here are three 2010 tax-cutting moves to consider.

* Section 179 deduction. If you purchased business equipment or vehicles - or intend to before year end - increased Section 179 expensing can help your cash flow.

Section 179 provides a write-off of up to $500,000 of the cost of new or used assets placed in service during your 2010 tax year. The amount you can deduct is limited when annual asset purchases exceed $2 million.

* Bonus depreciation. In addition to Section 179, you can claim bonus depreciation, which gives you a deduction of up to 50% of the cost of new assets. Used assets don't qualify.

When you buy equipment eligible for both tax breaks, you first reduce the initial basis by the amount of Section 179 deduction claimed, then apply the bonus percentage to the balance. Any remaining cost is expensed over the asset's life.

Bonus depreciation is scheduled to expire December 31, 2010.

* Health insurance. To establish your deduction, have your S corporation reimburse you for medical, dental, and certain long-term care insurance premiums that you paid out-of-pocket. Be sure your S corporation issues a 2010 Form W-2 "Wage and Tax Statement" that includes the premiums.

Other year-end planning includes taking advantage of credits for energy-efficient building improvements, making sure you qualify for the home office deduction, and scheduling corporate distributions. Please contact our office for guidance soon in order to maximize your tax savings for 2010.

What's New in Financial Strategies – November 2010

Recession changed the way we live

According to 2009 census statistics, the recession that began in late 2007 has had a major impact on the way we live and the choices we make. What the data shows:

* The percentage of Americans living in poverty rose from 13.2% in 2008 to 14.3% in 2009.

* Median household income fell 2.9% from $51,726 in 2008 to $50,221 in 2009.

* For the first time since the government began gathering this data, the percentage of women 18 and older who are married fell below 50%. The percentage of adults in the 25 to 34 age group who have never married increased from 34.5% in 2000 to 46.3% in 2009. Analysts suggest that lack of jobs and economic uncertainty may be responsible, at least in part, for these changes.

* More families are getting by with just one car. The number of homes that have more than one car dropped, and the percentage of workers who worked from home increased from 3.9% to 4.3%.

* The percentage of people getting a college or advanced degree increased 27.9% in 2009, possibly another effect of the recession as people couldn't find jobs and chose to add to their job skills with additional education.

What the financial overhaul law means for you

So what's all the fuss over the new "Wall Street Reform Act"? The headline-grabbing law raised quite a furor on Wall Street, but what does it mean for you and me? Here is how the law will affect ordinary folk.

The biggest news associated with the "Reform Act" is the creation of a new federal agency, the Consumer Financial Protection Bureau. The mandate of the Bureau is to create and enforce regulations that will protect consumers of financial products much as the government now regulates safe practices for products such as vehicles and food. Areas of enforcement will include credit and debit cards, mortgages, and student loans.

Financial institutions will be required to clearly state the terms of consumer loans and follow strict guidelines designed to ensure that borrowers get a loan they can afford. Deceptive practices, such as hidden interest rate increases, will be illegal. Surprisingly, one important consumer financial product was left untouched. Car loans will not be regulated by the new agency, so "buyer beware" continues when borrowing for a car.

How you use your credit or debit card might also change. Bank overdraft fees will no longer be automatically assessed on debit card transactions. Instead, banks are required to give their customers a choice of accepting overdraft protection - along with the fee charged when overdrawn - or to allow their debit card to be rejected by the retailer when there are insufficient funds in the buyer's account.

Also, the fee that credit card companies charge retailers to process customer charges will be limited by the Federal Reserve, which might trickle down to savings for consumers on their purchases. On the flip side, retailers have the option to require a minimum debit card charge of up to ten dollars, and colleges can set a maximum charge limit for tuition payments.

Many of the changes in the law are directed to banks' financial health, hopefully making your bank stronger and safer. The FDIC insurance limit has now been permanently increased to $250,000. Financial institutions must restrict their investment in hedge funds and private equity products. And banks will have to increase their capital reserves, with no institution allowed to become so large that it represents more than 10 percent of the banking market.

Many of the law's practical implications have yet to be worked out. So, stay tuned for more changes to come. If you have any questions or concerns about this and other financial legislation, please call our office.

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website www.cpasllp.com for more details.

Major Tax Deadlines – October 2010

* October 1 - Generally, the deadline for self-employeds and small businesses to establish a SIMPLE retirement plan for 2010.

* October 15 - Deadline for filing 2009 individual tax returns on automatic extension of the April 15 filing deadline.

    

* October 15 - If you converted a regular IRA to a Roth IRA in 2009 and now want to switch back to a regular IRA, you have until October 15, 2010, to do so without penalty.

    

* October 15 - Extended deadline for 2007, 2008, and 2009 returns required of nonprofit organizations.

 

NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from business to business.

Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.

* Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.

* Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website www.cpasllp.com for more details.

New Business – October 2010

Congress passes Small Business Act

Small businesses get some tax breaks in a new law just passed by Congress. The Small Business Jobs Act of 2010 extends 50% bonus depreciation for new equipment purchased during 2010. It increases for 2010 and 2011 the first-year expensing limit for new and used business equipment purchases to $500,000, and raises the phase-out limit on expensing to $2 million.

The law increases the deduction for business start-up expenses in 2010 from $5,000 to $10,000. The deduction phases out after expenditures exceed $60,000; that's up from the prior phase-out threshold of $50,000.

For 2010, self-employed taxpayers will be able to deduct the cost of their health insurance in computing self-employment taxes.

The new law also provides a $30 billion fund to encourage community banks to lend to small businesses.

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website www.cpasllp.com for more details.

What's New in Taxes – October 2010

IRS increases correspondence audits

As part of its plans to increase audit coverage, the IRS will be doing more correspondence audits - notices mailed to taxpayers that typically focus on a single item on the tax return. Correspondence exams can be as simple as asking about a tax return data discrepancy or requesting a missing form. But the IRS is also using these audits to focus on other issues, such as employee business expenses, the earned income credit, charitable deductions, and the tax credit for buying a home.

If you receive an IRS notice, don't ignore it. Let your tax advisor know about it right away. The problem can be resolved in less time and with less fuss if an experienced professional is involved right from the beginning.

Gambling winnings and losses can affect your tax bill

From time to time, some of you are lucky enough to win a shilling or two at your local casino, the track, or your state lottery. How will that gambling income impact your taxes?

All gambling winnings are taxable. This is true for cash winnings and for the fair market value of any non-cash prizes you might win (e.g., a car, vacation, etc.). Depending on your other income and the amount of your winnings, your federal tax on such winnings can go as high as 35%. You don't receive any capital gains rate break for gambling winnings, nor is there any income averaging to help lower your tax bill.

However, you are entitled to a tax deduction for gambling losses. These are taken as an itemized deduction and your losses can't exceed your winnings. In other words, if you report no gambling income, you can't report gambling losses. When you gamble and lose, you must keep documentary evidence of your losses (canceled checks, credit card charges, losing tickets, ATM receipts, etc.). Many casinos keep track of your wins and losses for electronic games if you belong to their player clubs.

But gambling deductions might not be all that beneficial. You can't simply "net out" your winnings and losses. Instead you must report your entire winnings as income, and use your losses as itemized deductions. In many cases (especially for older taxpayers with little income other than social security benefits, and with very few itemized deductions), the losses might not be tax beneficial. If you take the standard deduction rather than itemizing deductions, you will receive no tax benefit whatsoever. However, the winnings could have a significant impact on your income and may cause you to pay additional taxes (such as making some of your social security benefits taxable when they otherwise wouldn't be).

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website www.cpasllp.com for more details.

What's New in Financial Strategies – October 2010

New law raises insurance coverage on bank accounts

For years, bank accounts were FDIC-insured up to $100,000. Then during the recent financial crisis, the insurance limit was increased to $250,000. But this increase was only temporary; it was scheduled to drop back to $100,000 in 2014.

The good news is that the financial reform law just signed permanently sets the FDIC insurance limit at $250,000 per depositor, per bank. The $250,000 coverage applies for each of four categories of ownership: individual, joint, retirement, and trust accounts.

Keep score of your finances with a personal balance sheet

The recent economic downturn hit Americans' net worth hard. "Net worth" is the value of assets (such as homes, bank accounts, and investments) minus debts (such as mortgages, loans, and credit cards). According to the Federal Reserve, Americans' net worth hit a low of $48.3 trillion during the recent recession, but has since risen 13% to about $55 trillion.

Do you know your current net worth? Do you know how much your net worth is changing from year to year?

We all want to enter retirement with a comfortable nest egg, owning more than we owe. A good way to chart your progress toward that goal is to prepare a personal balance sheet at least every year. That will give you a score card to measure how you're doing. A balance sheet shows your assets and your liabilities. Think of them as what you own and what you owe. The difference between them is your net worth.

Here's a quick guide.

* Pick a date such as the end of the year or the end of a quarter when you'll have statements available for your financial accounts.

* Start by listing all your financial assets. Include bank accounts, balances in IRAs and retirement plans, stock and bond investments, etc.

* The next step is the least precise. You must assign a value to your nonfinancial assets, such as house, car, and personal belongings. Don't get hung up at this stage.

For most purposes, it's not essential that you find an exact value. Using the same approach from year to year is more important.

* To value your house, look at classified ads for comparable properties, or talk to a friendly real estate agent. Another approach is to use the assessed value shown on your property tax statement. This is generally less than market value, but yearly changes should reflect changes in the local property market.

* For personal property, just make a reasonable estimate. Hold that constant each year unless you make any major purchases.

* Liabilities are next. List your mortgage balance and all loans. Include credit card debt, car and boat loans, student loans, and any other debt.

* Total up your assets and liabilities. The difference between the two totals is an estimate of your net worth. Hopefully it shows an increase from the previous year.

If your net worth is not increasing, use your balance sheet to see where you're falling short. Look for ways to boost the growth of your assets, or set a budget to reduce your liabilities. Your personal balance sheet is more than just a good financial score card. It can be a valuable planning tool, too.

For more information on tax deadlines that apply to you or your business, contact our office by phone at 408-879-9990 or by email at cpa@cpasllp.com. You can also visit our website www.cpasllp.com for more details.