Tax Increases Are Coming Unless Congress Takes Action

Normally, one would think that Congress would have to take some action to increase taxes. However, it is quite the opposite for 2011. If Congress fails to take action, there will be a tax increase affecting just about everyone in every tax category. In order to skirt a Senate rule that requires 60 votes to pass a bill that increases the deficit beyond a ten-year window, Congress passed the Bush tax cuts in 2001 and 2003 with most provisions designed to sunset this year.

Despite President Obama’s vow of no new taxes for individuals earning less than $200,000 and families earning less than $250,000, stopping these tax increases from taking place will require Congressional action. However, not only are we in an election year - when most of our politicians tend to steer away from tax-related discussions before voting day - Congress is looking for ways to make up some of the budget deficit, and many legislators consider extending the current laws to be too costly. So, we may not see any action on tax increases or extensions until late in November, if then.

To put this all in perspective, the following is a list of some of the automatic tax changes that have already taken place in 2010 or will take place in 2011 and subsequent years as a result of expiring or new tax laws.

Those Affecting 2010:

o Non-Itemizers Real Property Tax Deduction - The $500 ($1,000 for joint filers) property tax deduction for non-itemizers expired after 2009. This most likely will impact lower-income taxpayers, or those whose homes are mortgage-free and have no home interest expense, and who are unable to itemize their deductions. For taxpayers in the 15% tax bracket, this equates to a $75 tax increase (or $150 for joint filers).

o Sales Tax in Lieu of State Income Tax - The option to deduct sales tax in lieu of state income tax as an itemized deduction on a taxpayer's Schedule A expired after 2009. Although this will impact taxpayers with low state income taxes and those that purchased vehicles, boats or airplanes, it will have the greatest impact on taxpayers in states where there is no state income tax and thus no state income tax deduction to take in place of the expiring sales tax deduction.

o Farm Losses - For tax years beginning after 2009, the Farm Act limits the farming loss of a taxpayer, other than a C corporation, for any tax year in which any applicable subsidies are received. The losses are limited to the greater of (a) $300,000 ($150,000 for a married person filing separately), or (b) the taxpayer's total net farm income for the prior five tax years.

o Alternative Minimum Tax - Way back in 2001, Congress increased the AMT exemption to keep middle-class taxpayers from being caught up in this punitive tax and have been inflation adjusting and extending it on an annual basis in recent years. However, they seem reluctant to adjust it for 2010. If they do not, the exemption will return to $45,000 for joint filers (down from $70,950 in 2009) and $33,750 (down from $46,700 in 2009) for unmarried individuals. This will generally snare middle-income taxpayers, and the tax bite can range upwards to several thousand dollars.

o Teacher's Classroom Supplies Deduction - The $250 above-the-line deduction for teacher classroom supplies expired after 2009.

o Above-the-Line Education Deduction - The up-to-$4,000 above-the-line deduction for education expenses (tuition and fees) expired after 2009.

Those Affecting 2011:

o Tax Rates - As part of the Bush era tax cuts, the marginal tax rates (they increase with taxable income) were reduced to 10, 15, 25, 28 and 33 percent. These rates are set to return to their original levels of 15, 28, 31, 36 and 39.6 percent. The 10% and 15% brackets will be replaced with a single 15% bracket. This results in an increase for everyone. Those in the previously lowest bracket (10%) will see a tax increase of approximately 5%, while others will see increases ranging approximately from 2% to 6%. In addition, an expanded 15% bracket for a married couple filing a joint return has applied for several years as relief for the "marriage penalty." This will not apply as of 2011. Instead, the top of the 15% bracket for joint returns will be about 167% of the end point for single returns rather than the 200% it has been.

o Capital Gains Rates - Also, as part of the Bush era cuts, the capital gains rates were substantially reduced, but will return to their old levels of 10% for anyone in the 15% regular tax bracket and 20% for all others. That is up from 0% and 15% in 2010. This will impact investors, business owners and home owners when they sell a capital asset.

o Qualified Dividends - Generally, qualified dividend income is dividend income from stock held for 60 days or longer before the ex-dividend date. These dividends, for a number of years, have been taxed at capital gains rates (0% - 15%). However, the law providing these beneficial rates expires at the end of 2010 and all dividend income will be taxed at ordinary income rates (15% to 39.6%). This will generally impact investors holding income stocks and mutual funds. These individuals will see an overall tax increase greater than just the general 2% to 6% rise noted above.

o Earned Income Credit - This refundable credit currently has four categories of low-income working taxpayers, with the credit increasing as the number of children increase, up to three or more. In 2011, the "three or more children" category will go away, and taxpayers with three or more children will have to use the two or more category. This can reduce the credit for low-income taxpayers with three or more children by up to about $600.

o Child Credit - The tax law provides a tax credit for each of a taxpayer's children under the age of 17. This credit will drop to $500 (was $1,000 in 2010) per child. Since this credit phases out for higher-income taxpayers, it will generally impact lower-income taxpayers.

o American Opportunity Education Credit (AOEC) - This credit took the place of the Hope Education credit in 2009 and 2010. Where the Hope Credit is non-refundable (can only offset one's income tax liability), the AOEC was 40% refundable, and where the Hope Credit is for only the first two years of post-secondary education expenses, the AOEC allowed a credit for the first four years of post-secondary education expenses. In addition, prior to 2009, the Hope credit was limited to a maximum of $1,800 per student but the AOEC maximum was $2,500 per student. If the AOEC is not extended, low-income taxpayers will lose out on the refundable feature of the AOEC and those students in their third and fourth year of post-secondary education. Middle-income taxpayers will also be affected, because the point at which the credit phases out due to income limitations was 60% higher under the AOEC than under the Hope credit rules. Higher-income taxpayers are generally not affected since both credits are phased out for higher-income taxpayers.

o Employer Education Assistance - Employers are allowed to provide up to $5,250 of tax-free educational benefits. This provision expires and is no longer available after 2010. The net effect of this expiring benefit is based on the student's tax bracket. For example, if the student's employer provided the full $5,250 of benefits, and the student is in the 28% tax bracket, the loss of the tax-free benefit would equate to a $1,470 tax increase.

o Business Expense Deduction - Sec 179 of the tax code allows taxpayers to expense rather than depreciate certain tangible business assets and equipment in the year of purchase. For 2011, the amount that can be written off in a tax year will be $25,000, down from $250,000. This will generally impact mid-size businesses that are planning substantial equipment purchases in excess of $25,000 in the near future.

o Standard Deduction - In 2010, the standard deduction of taxpayers filing married joint status is twice the amount of someone filing under the single status. Beginning in 2011, the so-called marriage penalty is back: joint filers' standard deduction will be only 167% (instead of 200%) of the single amount. For a married couple in the 28% bracket, the result is additional tax of about $525.

o Phase-Out of Personal Exemptions - For years before 2006, the personal exemptions were phased out for high-income taxpayers. Then, in 2006 through 2010, that phase-out was gradually reduced to where there is no phase-out in 2010. However, the reduction will no longer apply after 2010, and, in 2011, the phase-out reverts to the rules in effect before 2006. This only impacts high-income taxpayers. Although the phase-out threshold income amounts for 2011 are not currently available, they will be approximately $250,000 for a married couple, $210,000 for head of household and $170,000 for single individuals. The loss of each exemption for a high-income taxpayer in the 36% tax bracket will result in an additional tax of approximately $1,300. Thus, a family of four would see an increase of $5,200.

o Phase-Out of Itemized Deductions - At the same time that the exemption phase-out was being reduced (see immediately preceding item), the phase-out of itemized deductions for high-income taxpayers was also being reduced. Thus, for 2011, the high-income taxpayer's itemized deduction phase-out returns. The phase-out impacts all deductions other than medical, investment interest, casualty and gambling losses. The deductions are phased out by an amount equal to 3% of the taxpayer's AGI in excess of the AGI phase-out threshold, but not more than 80% of the deductions can be phased out. The phase-out threshold for most individuals will be approximately $170,000, which is significantly less than the exemption phase-out amount for married joint or head of household filers. The tax impact on an affected taxpayer will be 28% to 39.6% of the lost deductions.

o Coverdell Accounts - The contribution limit to Coverdell education savings accounts will be reduced from $2,000 per year to $500, tax-free distributions will no longer be allowed for elementary and secondary education (only post-secondary education), education credits will not be allowed in the same year as a Coverdell distribution, and contributions cannot be made to a Coverdell account and a Sec 529 plan in the same year.

o Home Energy Improvement Credit - The $1,500 credit for making improvements that increase the energy efficiency of a taxpayer's home expires after 2010.

o Hybrid & Lean Burn Credits - Most manufacturers have reached the 60,000 unit maximum after which the credit is reduced or no longer allowed. As a result, this credit will have very limited application in 2011.

o Health Savings Accounts - The penalty for a nonqualified distribution from an HSA has been increased from 10% to 20% and distribution for over-the-counter medication is no longer a qualified distribution.

o Making Work Pay Credit - Expires after 2010. This refundable credit of $800 for joint filers and $400 for unmarried individuals phases out for higher-income taxpayers so the loss of the credit impacts middle- to low-income taxpayers.

o Higher Education Interest Deduction - This deduction will phase-out for joint filing taxpayers beginning at an AGI of $60,000 (down from $120,000 in 2010). The phase-out for an unmarried taxpayer remains the same. In addition, the deduction is limited to interest paid on the first 60 months (was previously unlimited) in which interest payments are required. This will impact higher-income joint filers and taxpayers who have already exceeded the 60-month limitation.

o Estate Tax - The estate tax, which was eliminated for 2010, returns in 2011 with an exemption of $1 million dollars (down from $3.5 million in 2009), and a maximum tax rate of 55%, up from 45%.

On top of all these changes, there are the Health Care provisions that are taking effect in 2013, including the following: increasing the medical deduction floor to 10% for most individuals (up from 7.5%), adding a 3.8% unearned income surtax to high-income taxpayers, and tacking on an additional .9% to the current 1.45% hospitalization insurance (HI) portions of the FICA withholding (or the SE tax in case of self-employed individuals). The surtax and additional HI withholding apply to incomes in excess of $250,000 for married joint filers, $125,000 for married individuals filing separately and $200,000 for others.

It is anticipated that Congress will extend certain provisions and perhaps limit high-income taxpayers from benefiting from those extended provisions. We will advise you when changes are made.

If you have questions related to any of these issues or would like to set up a planning appointment, please give this office a call.

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Does the IRS Owe You Money?

If you have not filed a prior year tax return and are due a refund, you should consider filing the return to claim that refund. If you are missing a refund for a previously filed tax return, you should check the status of your refund and confirm your current address.

Unclaimed Refunds

Some people may have had taxes withheld from their wages but were not required to file a tax return because they had too little income. Others may not have had any tax withheld but would be eligible for the refundable Earned Income Tax Credit.

• To collect this money, a return must be filed with the IRS no later than three years from the due date of the return.
  
  
• If no return is filed to claim the refund within three years, the money becomes the property of the U.S. Treasury.
  
  
• There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

Undeliverable Refunds

Were you expecting a refund check but never received it?

• Refund checks are mailed to your last known address. Checks are returned to the IRS if you move without notifying the IRS or the U.S. Postal Service.
  
  
• You may be able to update your address with the IRS on the “Where’s My Refund?” feature available on IRS.gov. You will be prompted to provide an updated address if there is an undeliverable check outstanding within the last 12 months. If you do not have access to the Internet, please call this office for assistance.
  
  
• You can also ensure the IRS has your correct address by filing Form 8822, Change of Address.  

If you need assistance in filing past due returns or tracing a refund, please call this office.

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Tax Tips for Military Personnel

Because military personnel have obligations that can impact their tax situation, they are entitled to special tax breaks.  Here are a number of benefits that apply.

o Moving Expenses - If you are a member of the Armed Forces on active duty and move because of a permanent change of station, you can deduct the reasonable unreimbursed expenses of moving yourself and members of your household. You are not subject to the 50-mile distance test or 39 weeks employment test that civilians are subject to for taking a moving deduction.  Reasonable expenses include shipping, moving van, truck rental, travel expenses (not meals), packing, insurance and storage en route, moving pets, utility connect and disconnect charges.

o Combat Pay - If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, all of the military pay that is received for military service that month is not taxable.  For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.

o Home Mortgage Interest & Taxes - A military taxpayer can deduct mortgage interest and real estate taxes on their tax return as an itemized deduction, even if they are paid with nontaxable military housing allowance pay.

o Home Sale Gain Exclusion - In order to claim the home gain exclusion, a taxpayer must generally own and use the home for 2 of the prior 5 years.  A military taxpayer may choose to suspend the 5-year look back period for up to 10 years when on qualified official extended duty.

o Extension of Deadlines - The time for taking care of certain tax matters can be postponed. The deadline for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS is automatically extended for qualifying members of the military.

o Uniform Cost and Upkeep - If military regulations prohibit you from wearing certain uniforms when off duty, the cost and upkeep of those uniforms can be deducted, but you must reduce your expenses by any allowance or reimbursement that is received.

o Joint Returns - Generally, joint returns must be signed by both spouses.  However, when one spouse may not be available due to military duty, a power of attorney may be used to file a joint return.

o Travel to Reserve Duty - If you are a member of the US Armed Forces Reserves, you can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties.

o ROTC Students - Subsistence allowances paid to ROTC students participating in advanced training are not taxable.  However, active duty pay – such as pay received during summer advanced camp – is taxable.

o Transitioning Back to Civilian Life - You may be able to deduct some costs that are incurred while looking for a new job.  Expenses may include travel, resume preparation fees, and outplacement agency fees.  Moving expenses may be deductible if your move is closely related to the start of work at a new job location, and you meet certain tests.

If you or your spouse have questions about any of the above, or have questions related to your designated state of residence for state tax filing purposes, please give this office a call.

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Tax Tips for New Business Owners

If you are planning to open a new business, there are a number of tax and accounting issues you need to be aware of.  The following are some of the more commonly encountered issues a new business owner needs to cope with.

1. Entity Selection – First, you must decide what type of business entity you are going to establish. The type of business entity will determine which tax form you have to file. The most common types of businesses are the sole proprietorship, partnership, corporation, S corporation and limited liability company. This office can assist you in making that determination and setting up the chosen entity. Depending on the type of entity you choose, you may also need the services of an attorney to complete legal documents required to establish the business.

2. Taxes – The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.  This office can assist you with the filings required for whichever business entity you select.

3. EIN – An Employer Identification Number (EIN) is generally used to identify a business entity. If you organize your business as a partnership or corporation, you will need an EIN. If you operate as a sole proprietorship, you will also need an EIN if you have employees or a Keogh pension plan. This office can assist you in determining your need for an EIN and help you obtain one.

4. Local Business License – Depending upon the community in which your business is located, you may also be required to obtain a business tax permit (which is sometimes referred to as a business license).  This office can help you determine the need for one and assist with filing the application.

5. Sales Tax Permit – If the new business has retail sales, you will need to obtain a sales tax permit and periodically remit the sales tax collected from the sales.  This office can assist you with obtaining the permit and setting up the payments. Even if you won’t be operating a retail sales business, you may need to register with the state for use tax purposes. Again, this office can help you with that registration if it is required.

6. Payroll – If you have employees, you will have to withhold and remit payroll taxes to the federal, state and sometimes local governments.  We can help you set up your payroll system and register with the appropriate governmental agencies.

7. Information Reporting – If you make payments totaling $600 or more for the year to individuals who are not your employees, you will be required to issue a 1099-MISC to that individual shortly after the end of the year.  This requires obtaining the individual’s name, SSN, and address prior to paying them for the first time.  This requirement is extended to payments you make to corporations in 2012.  This office can help you establish a procedure for collecting the required information and preparing the required filings after the close of the year.

8. Recordkeeping System – Establishing a good recordkeeping system right away can save a lot of grief in the future.  This office can assist you in selecting and setting up a recordkeeping system suited to your business.

9. Accounting Method - Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

In closing, it is always easier and less expensive to set things up correctly in the first place than it is to fix the mistakes later.  Even if you plan to accomplish some of the tasks listed above yourself, we highly recommend you consult with this office to ensure you are doing what is needed correctly and on time.  There may also be other issues not included above that also need to be dealt with when setting up your particular business.  

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Go Back to School With the Educational Tools of QuickBooks

We know. When you first cracked your copy of QuickBooks, you wanted to dive in and start generating invoices. Fortunately, QuickBooks is intuitive enough that you were able to do just that. And its help system is so robust that you were able to get procedural questions answered quickly and easily.

But there’s a lot to be said for backing up a bit and taking advantage of the myriad educational tools that QuickBooks offers. Even if you’ve been using the program for months, you may want to explore them. You’ll not only save time with the help system, but you may find better ways of performing tasks.

Learn By Watching

The QuickBooks Learning Center, one of the first things you saw when you installed the program, is always available by clicking Help | Learning Center Tutorials. It consists of numerous multimedia tutorials and links to additional help. As shown in Figure 1, the tutorials are worth a look before you take on a thorny topic like Payroll.



Figure 1: QuickBooks’ myriad tutorials help you absorb the basics of processes like Payroll.

Though you can use QuickBooks’ functions entirely from the menus, the program’s home page is built to guide you through core accounting processes. If you’re very new to QuickBooks and/or accounting, you can use the Coach function to better understand the flow. Click on Show Coach Tips in the vertical pane to the right of the main screen.

As shown in Figure 2, you’ll see a small “i” next to some icons. Click on one, like the one next to Purchase Orders. Related icons light up, and numbers representing their logical order appear next to them. Mouse over one of the icons to read a brief description of the function. When you’re done, click Hide Coach Tips to make them disappear.



Figure 2: QuickBooks’ Coach tool lays out the workflow for primary accounting processes.

Other Support Options

No matter how much you study and prepare, you may still run into situations where you need an expert’s hand. We can be a real resource here as we have the expertise to walk you through installation and setup, processes that are critical to your effective ongoing relationship with QuickBooks. And we can also pitch in when you’re facing other daunting accounting hurdles.

Another option for expert help is Intuit. The company offers a support plan that may or may not be in your budget, but it’s certainly something to consider if you anticipate needing to have frequent questions answered. The best value is the Annual Support Plan ($349 for first year; $299 thereafter). You get 24x7 phone support, data backup and recovery services, and learning tools only available with the Support Plan.

Intuit also hosts an in-depth online support presence. Click Help | Support to get to the main page as shown in Figure 3. Installation, troubleshooting (with guides to error messages), company and data file management, general procedures–they’re all covered there. You can search the support database or browse by topic. These and other resources are available within QuickBooks’ embedded browser (you must have Internet access to reach it, as with many other features of the program – click Help | Internet Connection Setup if you’re not already set up).



Figure 3: Intuit’s online support for QuickBooks can help when you’re stumped.

Interactive Help

If you haven’t yet visited QuickBooks’ interactive forum, you should. Click on the Live Community tab at the top of the far right vertical pane if it’s not already displayed (the pane toggles between it and Help). As shown in Figure 4, you can enter questions here and get answers from other users and/or Intuit pros.



Figure 4: Intuit included interaction in its QuickBooks palette of help tools. Live Community features questions from users and accompanying answers from users and Intuit pros.

For the expanded Intuit community, click on the Visit the Intuit Community link at the bottom of the Live Community pane.

Of course, don’t forget the core of QuickBooks’ help scheme: the Help pane.  You can get a lot of your questions answered here. This pane constantly changes to display content relative to the current screen. This content provides explanations of concepts as well as step-by-step instructions.

So don’t throw up your hands in defeat when what you’re attempting in QuickBooks isn’t working. Remember how much help is available from Intuit, QuickBooks itself, and experts like us. Some additional schooling may just be in order.

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