The IRS Wishes You a Happy Valentines Day

In December of 2009, Congress passed an extension of the Bush tax cuts. A number of the provisions impacted your 2010 tax return. It was mainly on Schedule A, itemized deductions, and education credits. Since the Act passed Congress so late in the year, the IRS needed time to integrate the changes into the tax processing system. They are now finished with that integration.

At last, most individual tax returns can be e-Filed with the IRS. This means that you can file your return and finally get your refund in a couple of weeks.

You may not have caught the news that the rate used to calculate Social Security withholding taxes from your employees has been reduced for 2011. It goes back up on January 1, 2012. The rate is now 4.2% rather than 6.2%. So, in effect, your employees are getting a raise and you are not paying for it. The Medicare tax rate has not changed.

The rate that a company contributes for Social Security taxes has not changed. It is still 6.2%. You should take this into account when you calculate the payment of taxes each month. You should multiply the gross payroll by 13.3% to calculate the Social Security and Medicare payment that you make.

You don’t need to worry about this if you are using a payroll service. They should take care of it.

The IRS is also changing the rules for paying the taxes. Starting January 1, 2011 you are required to pay the taxes using the Electronic Federal Tax Payment System (EFTPS). See my blog posted on December 21, 2011 for more details. http://www.thomstaxtalk.com

Health Insurance and Our S Corporation

Health insurance is a benefit that most companies offer. It is a great way to attract and keep good employees, and it provides some tax benefits as well. Even the share of the premiums that the employee pays can be treated as a pre-tax deduction and save the employee and the company significant money. What becomes a little more complicated is if you are the owner of an S Corporation and you participate in the health insurance program.

IRS regulations require that you report the company paid portion of health insurance as compensation for anyone who owns more than 2% of the company stock. This is the case for more than 99% of owners of S Corporations. Massachusetts also follows this rule.

Here is an example: Suppose your salary is $50,000 and you also paid $10,000 for your health insurance. (I know, you wish it were only $10,000.) Your W-2 should show federal taxable wages of $60,000. It also should show this amount as state wages in Massachusetts and probably others states as well. The Social Security and Medicare wages should only be $50,000. This add back to your income is not subject to Social Security or Medicare taxes.

You might be about to panic because you think you will be paying more in income taxes because of this adjustment. I have good news. It is true that you will report $60,000 on line 7 of your personal tax return. But you will get to deduct the $10,000 on line 29 of your return and thus pay tax only on the $50,000 of salary.

If it does not have any impact, why do it? Reason one: The IRS requires it. Why challenge them? Reason two: If you do not put the health insurance on your W-2, you will have to report it as income anyway and then you can deduct it as a medical expense on Schedule A of your return. Medical expenses are subject to a 7.5% of income floor and you may lose some or all of the deduction. It could cost as much as 40% of the cost of the health insurance in additional taxes. Now that’s a great reason to do it.

I’d be happy to talk with anyone who has any questions about this.

Where’s My Refund?

Right about now I get a lot of calls from clients who have not received their federal refunds. There is an easy way to find out where it is.

First, go to this link

https://sa2.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp

You will need to enter the following information

* Your Social Security Number (or Individual Taxpayer Identification Number)
* Your Filing Status
* The exact whole dollar amount of your refund

And VOILA you will get information on what is happening with your refund.

Just remember, if the IRS says they mailed the check last Friday, it probably means that it actually got to the post office next Friday. This is a great argument for having the IRS do a direct deposit your refund.

Convertin Your IRA to a Roth

A lot of clients have asked about converting regular IRAs to Roth IRAs. This is a complicated question.

Let’s start with the basics. You usually get to deduct the money you contribute to your regular IRA while there is no deduction for contributions to a Roth IRA. You pay taxes on the money you take out of your regular IRA. There may be some adjustments but the distributions are a taxable event. If you meet the requirements for a Roth IRA you do not pay tax on money you take out of it. So Roth distributions generally are tax-free.

You are allowed to convert a regular IRA to a Roth IRA. Here is the problem: you pay taxes on the amount you move from your regular IRA to a Roth IRA. You need to pay these taxes out of money that is not in the IRA. So if you have a $10,000 tax liability for making one of these conversions, it must come out of other investments or savings account. If you use the IRA money to pay the taxes you might end up paying some penalties and taxes.

Why do a conversion? You do not have to pay taxes on future earnings in the Roth IRA assuming you meet the requirements of having it in the account for five years and being over 59-1/2. There are some exceptions to these rules.

You are paying current taxes to save future taxes. If you left the money in the regular IRA you would eventually pay taxes on all the earnings when you withdrew it from the account. You do not pay these taxes on the Roth.

Here is the big problem. You can pay as much as 40% in taxes on the value of the IRA that you convert to a Roth. This happens if you are in a high tax bracket. Even if your income were about $100,000 you would pay about 33% in taxes on the conversion. That’s a lot of money.

I have analyzed this conversion for several clients. The results have consistently come in that doing the conversion does not result in significant savings for the client. After taxes were considered the clients would end up with the same amount of money whether or not they did the conversion.

The one kicker that investment advisors keep throwing on the table is that tax rates are probably going up so pay the taxes now. I have a problem with paying a lot of taxes now based on what Congress might do in the future.

A conversion like this could benefit a low-income taxpayer, perhaps someone who lost a job and had very low income this year but expects to re-enter the workforce soon. This could result in some future benefit. Analyze your situation carefully if you are thinking about doing this type of transaction.

If your business is organized as an S-Corporation and it pays for your health insurance you could have a problem.

A corporation that has elected to have its profits or losses passed through to its shareholders, rather than paying its taxes directly, is an S-Corporation. If your corporation pays for your health insurance, you are required to add the value of any company paid premiums to the gross wages on your W-2 form.

For example, if your wages are $100,000 and you pay health insurance premiums for yourself of $12,000 (you wish they were that low) your gross wages on the W-2 form should be $112,000. These premiums are not subject to Social Security or Medicare Taxes.

There is some good news. After going through these gyrations you are allowed to deduct the health insurance premiums on the face of your personal federal tax return and Massachusetts tax return. In effect, it does not cost any additional taxes when you follow these rules.

If it has no effect, why do it? First, it’s the law. Second, if you do not put the premiums on your W-2, you are not allowed to deduct them on your corporate tax return. Third, they become an itemized deduction on your personal return that is subject to a floor of 7.5% of your gross income. So you would not get the full benefit of deducting the health insurance premiums.

Please note that this applies only to 2% or more shareholders. It does not apply to any employee who is not an owner.

Please pay attention to this problem. The IRS is getting more and more active in reviewing these transactions and assessing penalties if you fail to follow them.

Charity for Haiti

Who says the government cannot move quickly?

Congress passed a new law that allows you to deduct the charitable contributions you make to Haiti relief in 2010 on your 2009 tax return. President Obama has signed the bill into law.

This means write the check now and get the tax benefit on the return you will file shortly.

File Free With the IRS

This is a repeat blog from a year ago. The only thing that changed was the dollar limitation.

Do you have a simple federal tax return to file? You can do it on-line free through the IRS. You qualify if you receive a W-2 from your employer, and have some interest and dividend income. You even can own a home and qualify. The major restriction is that all of your income must be below $57,000.

You can file your return through an IRS partner, or you can complete the tax forms found on the IRS Web site at http://www.irs.gov/app/picklist/list/formsInstructions.html This is a fast, easy, and free way to file your return. Would you like to have your refund in less than 3 weeks? You can have it deposited directly into your checking account. Have a personal check in front of you when you file your return so you have the numbers they require to take advantage of direct deposit. This system is appropriate only for uncomplicated returns.

This link to the IRS Web site can help you file your return.

http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=4

Massachusetts also offers a webfile alternative. Access it here

https://wfb.dor.state.ma.us/income/Default.aspx

If the link does not work. Please copy and paste it into your browser

The Estate Tax

2010 is a great year to die.

One of the Bush administration tax cuts enacted early in his presidency was a phase out of the Estate Tax. Each year the taxes collected by the estate tax was reduced as larger and larger estates were protected by a rising exemption. Well, this is the year of the final phase out.

What is the estate tax? It is a tax on the value of all your assets less any liabilities, such as your home mortgage, when you die. So if you have a house worth $400,000 and a mortgage of $100,000 (you wish), plus some investments worth $500,000, you have an estate worth $800,000. Check my math if you wish.

Once you figure out the value of your estate, you go to a chart and calculate what your estate tax will be. Someone dying in 2009 would need a net estate of $3,500,000 before they would pay any estate tax. (Don’t you wish you had an estate that large?)

2010 is the year that the estate tax goes completely away. So no matter what the size of your estate, there will be no estate tax on it. For anyone with a taxable estate, that is good news. For someone with an estate less than $3,500,000, it is bad news.

Let me explain. Up until 12/31/09, assets you inherited got a step up in tax basis. Supposed your grandfather paid $1 per share for 1000 shares of IBM stock back in 1955. It now sells for about $130 per share. So the stock that your grandfather bought for $1000 is worth $130,000. If your grandfather died on 12/31/09and you inherited his stock, your tax basis would be stepped up from $1 per share to $130 per share. So if you sold it for $140 per share you would only pay tax on $10,000 ($140 per share minus the ‘cost” of $130 per share times 1000 shares). Under current tax law your tax would be about $2000.

If he died on 1/1/10 your tax cost would be what he paid for it or $1 per share. So you would pay tax on a $139,000 gain if you sold it for $140 per share. The tax would be about $28,000. This is quite a difference.

Back in the middle of the Great Health Care Debate, Congress considered changing the law to freeze the Estate Tax at the 2009 level. The change got lost in the GHCD. I expect some sort of change to occur this year but who knows what form it will take. Watch this blog for updates.

Year End Tax Planning

The best motivation for planning your taxes is to legally minimize how much of your money goes to the IRS. Many years ago, Judge Landis of the U.S. Supreme Court declared that everyone has the right to legally minimize his or her taxes. To do this, you need to have an idea of what your income and deductions are now, and what you expect them to be next year. You must then move income and deductions in a way that minimizes what you pay in taxes this year. Sometimes it is worth paying taxes now in order to save even more in taxes next year.

However, ” take the money and run” is a valid alternative. In this case you worry about tomorrow tomorrow. You delay as much income as possible to next year and accelerate as many of your deductions as you can to this year. This way, you pay the least taxes possible.

Step One: Analyze your situation. Will you be paying taxes this year? If so what is your tax bracket? Are you in the 15% bracket or the 35% bracket? If you are in the lower tax bracket you will only get back $15 for every $100 you lay out for a deductible expense. If you are in the 35% bracket then the deduction gets more attractive.

Step Two: Determine where you think you will stand next year. Will you be in a higher or lower tax bracket? With the way the economy went in 2009, many people will have a better year in 2010.

Step Three: Set your goal. Do you want money now or later?

Delaying income is tough when you have a job, a house, and no other tax complications. You get your salary each week and it is hard to push it off to next year. It might happen if you get a year-end bonus that might get paid in 2010. Your interest income or dividends is paid on a set schedule, so you cannot postpone them to next year.

Here are some ways to legally delay income to next year:

· Weigh your options if you are thinking of selling some common stocks. If you have gains, you may want to wait until January to realize them. That way you are not liable for the taxes for a year. If you have losses, then take them this year. However, always make a good investment decision first. If it’s time to sell then don’t worry about the tax consequences.

· If you are self-employed you can delay billing your customers so that you receive the income next year rather than this year. Please note, if you receive the money this year, you are legally required to report it this year. Keeping a drawer full of checks that you get in December and then deposit in January is illegal. You should report all your income in the year you receive it.

Here are some ways to accelerate your expenses

· Pay your mortgage before Christmas. That way the bank will include the interest you normally would pay in January on their annual statement for this year, making it easier to deduct it.

· If you are making donations to your favorite charity, make them by the end of December, rather than in January. If you mail the check on December 31st, you can deduct it on your 2009 tax return.

· If you have a lot of junk, (oops, I mean valuable furniture and other items), you can consider donating them to charity and getting a tax deduction for it. You must get a receipt if it is worth more than $250, and you must provide additional information on your return if it is over $500. Really valuable items might require an appraisal. Be careful, the appraisal might cost more than the tax benefit of making the donation. Generally charities will not value the items for you. They will just say that you gave them seven bags of clothing.

· If you were looking for a job in 2009, keep track of your job search expenses. They can be used as itemized deductions to reduce your taxes. Some examples of these expenses would be the cost of printing your résumé, fees for help in your job search, or hiring a career coach to help your efforts. However, the total must be above 2% of your income to reduce your taxes.

· Often the biggest job search expense is the use of your automobile for your search. Keep track of the mileage for getting to the printer, going to various employment agencies or job fairs, and traveling to interviews. Write it all down to make sure you get the benefit of all the mileage.

· If you pay your real estate taxes yourself rather than through a bank’s escrow account, you can pay them in December rather than January. That way you can deduct them this year.

· Medical expenses must be more than 7.5% of your total income to be deductible. Look at your income and medical expenses and pay any outstanding medical bills this year if you are over this limit. If you are paying for your own health insurance, you should not have a problem exceeding this limit.

Here are some suggestions for the Self-Employed: (These only should be used if you have a good business purpose in spending the money. New “toys” like the newest fanciest computer, don’t make good financial sense.)

· You can write and mail the checks for your business expenses on December 31st and deduct them on your 2009 return. This includes expenses like rent or office supplies.

· Items you charge on a bank credit card can be deducted when they are purchased rather than when you pay the charge card bill. So those office supplies you bought in late December on your Visa card are deductible in 2009. If you charged it on your Staples card, then they are not deductible until you pay Staples. The theory is that Staples has not gotten their money yet so you cannot deduct it.

· Upgrade your equipment. This is only a good idea if it will help you run your business better, lower your future costs, or increase your revenue. Again, fancy toys don’t make financial sense.

Careful tax planning can help you keep some of your money at a time when every dollar counts.

If you pay the dreaded Alternative Minimum Tax (AMT), then you have to be careful what you move deductions from year to year. Generally it does not help you to pay your real estate or other deductible taxes or things like job search expenses in December if you are subject to the AMT. The AMT would take a several blogs to explain. I might tackle it in a future blog.

These are general ideas that can help reduce your taxes. If you plan to implement any of these suggestions, it is well worth it to consult a tax professional.

Non-Deductible IRAs

A friend recently asked me a question about non-deductible IRAs. She had been putting money into non-deductible IRAs for years and realized she had not reported the deposits to the IRS. Her question “What should I do?”

First, what are non-deductible IRAs?

If you have a job, you can put aside up to $5,000 into an IRA ($6,000 if you are over 50) or the amount of your compensation, whichever is lower. In other words, if you work part time and earn $2,000 then you can put up to $2000 into your IRA. (I’m sure Bill Gates earns more than $5,000 a year so he can put aside ONLY $5,000. Does anyone know if he is over 50?)

If you decide to put money into an IRA, you have to figure out if you can deduct it on your federal income tax return. The first question you need to answer is: “Do you participate in a retirement plan of some sort?” If so, there are income limits that determine whether or not you can deduct the IRA contribution. A married couple filing a joint return can deduct an IRA if their total income is less than $89,000. It cannot be deducted if their income exceeds $109,000. There is a phase-out of how much you can deduct between those two numbers. If your total income is $99,000, you can deduct up to $2,500.

The income-limits for single individuals are $55,000 and $65,000.

You have a non-deductible IRA if you contribute to an IRA, you are in a pension plan, and your total income exceeds $109,000 (if married) or $65,000 (if single).

So you put the money aside, but did not get any tax benefit.

Why would you do this? The investment earnings on the IRA are not taxed in the year they are earned. So you get to accumulate the earnings until you decide to withdraw money from your IRA, possibly when you are not working and in a lower tax bracket.

Eventually, you will withdraw money from the non-deductible IRA. You should pay tax only on the earnings, but not on the money you contributed because you did not get a tax benefit when you made the contribution.

There is a horrendous calculation you need to make when you withdraw money from the IRA. You must calculate the portion of the withdrawal that came from investment earnings and pay tax on it. You do not want to pay tax on the contributions you made. The various tax packages do a good job of making this calculation. Don’t try doing it on the back of an envelope.

This is where my friend’s question comes in. You are supposed to tell the IRS when you put money into a non-deductible IRA. You do this every year on Form 8606. Then each year you add the current year’s contribution to the total of the prior contributions and have all the information at your finger tips. She did not do this.

What she needs to do is go back and total up all the non-deductible contributions that she made. She should not include any income earned in the calculation and she should not include any contributions to ROTH IRAs. It is possible that she can get the information from her mutual fund company. Form 8606 should be completed when she does her 2009 tax return. Line 1 is for her 2009 non-deductible contributions. She should put the total of the non- deductible IRA contributions from all the prior years on Line 2 of that form. A total goes on line 3. Then, going forward, each year Form 8606 should be filed with her tax return.

The IRS will probably not question the change but be prepared to provide the calculation should they become interested. There is a potential annual $50 penalty for not filing Form 8606.

Where's My Refund?

You filed your return, set up the direct deposit and are watching your checking account for the arrival of your tax refund, but it has not arrived. What should you do? With the help of the Internet, it is easier than ever to find out what happened to your refund.
Here is a link to take you to the IRS Web site to find out what happened to your refund:

https://sa2.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp

You will need your social security number, filing status, and the amount of your refund. The IRS will quickly give you a status. If your refund has been waylaid somewhere, they will give you a phone number to call to find out what is happening.

Massachusetts has a similar program that requires you to register and set up a user name and password. The link for this service is:

https://wfb.dor.state.ma.us/WEBFILE/wsi/

New Car Tax Credit? (NOT)

(Thank you to Ruth for the question.)

There is a lot of confusion around the ‘New Car Tax Credit". The truth is, its not really a credit but an expanded deduction for the sales and excise taxes paid on a vehicle.
Here are the basics:

The vehicle must be a new.

It can be a car, light truck, motor home or motorcycle. There is a weight limit on the vehicle.

The vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010

You can deduct the sales and excise taxes paid on a new car for up to the first $49,500 of cost for the car.

You do not have to prepare a Schedule A Itemized Deductions to take advantage of this program. It is deductible on the first page of your 2009 tax return.

You lose the deduction if your income exceeds $135,000 if you are single and $260,000 if you file a joint tax return.

You can deduct it on your 2009 return and cannot take it on your 2008 tax return.

What is it worth? Not much. If you buy a $20,000 car and pay a 5% sales tax on it, you get to deduct $1000 from your income before you figure your taxes. For most people that translates into $250 cash in your pocket. Its better in your pocket than Uncle Sam’s but it does not seem like much of an incentive to go out and buy a new car.

There is not a lot of guidance from the IRS on this topic so things might change a little as the year passes. Here is a link to the IRS website where you will find essentially the same information as above.

http://www.irs.gov/newsroom/article/0,,id=205863,00.html?portlet=7

Why Did I Get a Retirement Tax Form if I’m Not Retired?

Why did that get that 1099-R form from my 401(k)? The 1099-R form reports distributions made from your 401(k), IRA, or other pension plan. This form is issued when money is withdrawn from your tax-deferred retirement account. Luckily, losing money in the stock market does not generate this form.

Hopefully, if you have withdrawn money from your retirement account, it is because you have retired. This is a taxable transaction. If you’ve lost your job and needed the money to pay day-to-day bills, you have to report the distribution as income and pay taxes on it. You also may pay a 10% penalty for withdrawing the money.

Switching trustees or investments are also reasons for receiving a 1099-R. Transferring money from one IRA to another or from your 401(k) to an IRA is not a taxable event. You do not have to pay tax when you transfer money in this fashion. This is when "Why did I get that retirement form?" becomes a very good question. IF I don’t have to pay tax, why is the IRS being told I took the money?

The reason they are being told is simple: the law requires that all distributions be reported to the IRS. If you take a good look at the 1099-R you should see that the IRS is also being told that it is not a taxable event. Box 7, Distribution Codes is the spot to look for on the form. A "G" in that box tells the IRS that you transferred money directly from your 401(k) to your IRA (or wherever you transferred money from and to). It also tells the IRS that you do not have to pay tax on the distribution

If you get one of these forms with a G in box 7, you report the gross distribution in box 15a or 16a on your 1040 form. You do not put anything is box 15b or 16b. By doing this you are telling the IRS that you know you got the form and that it is not taxable. This should eliminate any nasty letters from the IRS I mentioned in a previous posting

Fast Refund?

Are you familiar with the ads on the radio and TV about getting your federal tax refund fast -- sometimes in as little at three days? Is this a good deal? Let’s examine what these "refunds" actually are:

Suppose you have Company X prepare your return. They complete your tax return and then offer to get your refund to you in three days. Your first thought might be "Wow, that’s a down payment on a car!" and agree to the deal. You return three days later and your refund check is substantially less than you expected. What happened?

These fast refunds are not coming from the IRS. The company that prepared your return is actually lending you this money. They then get your refund when it comes from the IRS. The company is charging you a fee for making the loan, a separate fee for preparing your return, and could even be charging you interest.

The best idea is to say no to the offer. Have your refund direct deposited into your checking account by the IRS and the state. You will have your money in two to three weeks. You can then make that car down payment and probably have a little money left over.

Another good idea is to go to my blog at www.thomstaxtalk.com and look in the January archives. Check out the posting called File your return Free with the IRS. If you have a fairly simple return you can file it, get direct deposit of your refund, and pay no fees for the preparation of your return.

Writing the IRS

About 3% of taxpayers get a notice from the IRS each year. Luckily, it’s not the same 3% every year. What should you do when you receive a letter? First of all, don’t ignore it. That would be a big mistake. The IRS will not forget and will harass you forever.
Most of the time the IRS is asking you about a mistake they think you made on your tax return. Take a deep breath and read the letter. Then read it again because you freaked out just opening the envelope. Compare what they say to what is on your tax return (you did keep a copy of your tax return didn’t you).

If they are right, sign the notice and send them a check. If they are wrong, and they are 20% of the time, you need to explain why they are wrong.

If they are wrong and you write them back, here is what you DON’T say:

* Don’t tell then how stupid they are.
* Don’t explain all the circumstances around the transaction or error. (They really don’t care that Aunt Sarah is somehow involved.)
* Don’t apologize.
* Don’t address the envelope to the Infernal Revenue Service.

And here are some DO’s.

* Do type the letter. You want them to be able to read your response.
* Do keep the letter short, one page should be enough.
* Do stick to the facts.
* Do be polite.
* Do sign the letter.
* Do respond quickly
* Do thank them for their help, no matter how much it galls you.

Should you EFile your tax return?

Sending your tax return to the IRS via the Internet as an electronic file is called EFiling. You need special software to do this. It is available if you use one of the popular personal tax preparation products like Tax Cut or Turbo Tax. It is also available if you file directly through the IRS Web site. For more information see my blog called File Your Return for Free with the IRS.

Here are a number of good reasons to EFile your return:

1. You will get your refund faster
2, Your return will not get lost in the mail
3. It is safer than mailing your return
4. The IRS will have an accurate return. They can make a significant number of errors that result in letters going out to the taxpayer.
5. Your refund check will not get lost in the mail if you opt to direct deposit your refund

Should you opt to direct deposit your refund? Absolutely. You do this by providing your bank routing number and checking account number to the IRS when you EFile. The number one reason given for not choosing direct deposit is the fear of providing your checking account information to the IRS. Guess what? You give them the same information when you mail them a check. The IRS has strict guidelines dictating when they can legally take money out of your account. The situation would have to be pretty extreme for them to do this without warning you. Unless you are filing a fraudulent tax return, there are safeguards that should protect you.

File your return for Free with the IRS

This is a repeat blog from a year ago. The only thing that changed was the dollar limitation.

Do you have a simple federal tax return to file? You can do it on-line free through the IRS. You qualify if you receive a W-2 from your employer, and have some interest and dividend income. You even can own a home and qualify. The major restriction is that all of your income must be below $57,000.

You can file your return through an IRS partner, or you can complete the tax forms found on the IRS Web site http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=4. This is a fast, easy, and free way to file your return. Would you like to have your refund in less than 3 weeks? You can have it deposited directly into your checking account. Have a personal check in front of you when you file your return so you have the numbers they require to take advantage of direct deposit. This system is appropriate only for uncomplicated returns.

This link to the IRS Web site can help you file your return.

http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=4

Pension Distribution

You Do Not Have To take that Pension Distribution

If you have money in a pension or IRA and are age 70-1/2 or over you are required to take distributions every year so that you will withdraw all of your tax deferred money over your expected life. This is called a Required Minimum Distribution (RMD). Congress enacted a special rule for 2009 only that allows you to skip the RMD for 2009. This means that you do not have to take a distribution. This is a one-year provision only.

There is also a special rule for the year you turn 70-1/2. You may take the RMD up to April 1st of the following year. Thus, if you turned 70-1/2 in 2008 you must take the RMD for 2008 by April 1, 2009. The law mentioned above does not apply to the RMD for 2008. You still must take your 2008 distribution by April 1, 2009 but you may skip the 2009 distribution that should be taken by December 31, 2009

Confused? Comment on this blog with a question or try this IRS link to get more information

http://www.irs.gov/retirement/article/0,,id=96989,00.html

Buying Equipment for your Business

Do you buy a lot of equipment for your business? Equipment is any business purchase that should last more than one year. Paper, staples, boxes etc are supplies not equipment. Desks and machinery etc are equipment. Computers may be technologically obsolete when you first plug them in but they are considered equipment because they will physically last for several years.

The IRS requires you to deduct the cost of your equipment over 3 to 7 years rather than all at once. This is called depreciating the equipment. This can present a cash flow problem. You spend $35,000 for a nice fancy piece of equipment and then you get a tax deduction over 7 years. You pay $35,000 but only deduct $5,000 that year. It doesn’t seem fair does it?

There is a special provision in the tax code for small business. You can buy up to $125,000 ($250,000 in 2008) in equipment in a year and write it off in full that year. So in the case sited above the full $35,000 is deductible in the year you bought it. Then next year you can buy more equipment and expense it. That seems fair to me.

There are several hurdles your must clear to take this deduction. If you spend more than $800,000 on equipment in one year, you start to lose the right to expense your equipment that year. $800,000? That doesn’t sound like a small business to me. None of my clients have ever spent that much in one year.

You also cannot take this deduction when you buy real estate. You must depreciate business real estate like an office condominium over 39 years.

The various tax packages you can use to prepare your tax return will handle this very well. However, if you are in business, hiring a tax professional could be a great idea.