Tax Tip #1
Many of you may be aware that the tax credit for first time homebuyers has been extended. There are some new twists that you may not be aware of.
First – the basics. To be considered a first time homebuyer you or your spouse must not have owned a primary residence for the last 3 years. There are income limits which you must be below to qualify. The credit is 10% of the purchase price for a maximum of $8000 and is a refundable tax credit.
To qualify you must be under contract by April 30th and close by June 30th. You can claim the credit in 2008, 2009 or 2010 depending on your purchase date.
The new provisions include – if you claim the credit on your 2009 tax return you will not be able to electronically file your return. You will be required to mail it in and attach a copy of your statement of sale to that return.
Second as of January 1st – NYS now has a program available to lend you interest free up to $8000 to be used for down payment money or to pay closing costs. The loan is then repaid when you get your federal tax credit refund. To qualify you must be using a State of New York Mortgage agency mortgage.
There is also now a credit for long time home owners of up to $6500 who are looking at purchasing a new home. To qualify you must have lived in your primary residence for 5 of the last 8 years.
To find out more information go to GerriHarrison.com and see the additional information that can be found in our online January newsletter. Please call Gerri Harrison Financial Services at 729-4144 if you need help in preparing your income tax return claiming the first time home buyers’ credit or the long time homeowner’s credit.
Tax Tip #2
Education credits have changed again. The American Opportunity Credit is available for up to four years of college education. The credit is a maximum of $2500. Phase-out ranges have increased so even if you did not qualify for the Hope or Lifetime Learning credits in the past you may qualify for the American Opportunity Credit. The credit can be claimed per eligible student.
The Lifetime Learning Credit is still available for those who do not qualify for the American Opportunity Credit. The tuition deduction is still available for those over the income limits to qualify for the credits.
Additional changes include – the American Opportunity Credit is partially refundable. If the credit exceeds your tax liability you can get cash back in your pocket. You can now include books and fees as part of your tuition costs. Room and board still cannot be counted.
The amount of the credit must be reduced by distributions from ESAs or 529 plans. It is important that you work with your tax advisor to ensure you get the most possible by coordinating the credits with educational savings plan distributions.
Currently the American Opportunity Credit is available only for 2009 and 2010.
If you are looking for more information go to GerriHarrison.com and find the expanded article found in our online January newsletter. Be sure to check out the Upromise link to find some additional ways to save for college costs. Whether your child is a newborn or headed off to school next year, Upromise can provide you with free money to use towards tuition costs.
Give Gerri Harrison Financial Services a call at 729-4144 if we can be of assistance in helping you prepare your tax return claiming education credits or help in determining the best ways to take advantage of the education credits and savings plan distributions.
Tax Tip # 3
The residential energy tax credit is back. This new credit is 30% of cost up to a maximum of $1500. There are no individual limits for different types of qualifying purchases like there were in 2006 and 2007 and you are eligible for this credit even if you previously took the $500 credit. The $1500 credit is currently available for 2009 and 2010. There are no income limitations so anyone can qualify for this credit.
Qualifying expenses include those for insulation, exterior doors and windows, furnaces and hot water heaters. Be aware that not all windows, doors and furnaces qualify. Make sure to get in writing from your installer that your purchase will qualify. For example a furnace must be a minimum of 95% efficiency rating to qualify. Replacing roofs only qualifies if you are adding a metal roof or reflexive asphalt shingles. Appliances do not qualify for this credit. The credit is only available for improvements done to your primary residence, not to rental or investment properties.
Additionally for solar, wind or geothermal expenditures it is a 30% credit without regard to the $1500 limitation. The solar, wind and geothermal credit is available until 2016.
The residential energy tax credit is a nonrefundable credit. If you do not use it all in the current year you can carry it forward to future years.
Look soon for an Appliance Rebate credit that is being discussed in Congress right now.
For a more indepth discussion of the Residential Energy tax credit go to GerriHarrison.com and review our January 2010 online newsletter. Or call 729-4144 and make an appointment today for help in preparing your income tax return with a residential energy tax credit.
Tax Tip #4
Are you behind in paying your federal and NYS income taxes? Not filing because you owe taxes that you cannot pay? The NYS amnesty program may be for you. Starting January 15th and running through March 15th NYS has an amnesty program in effect. This program allows you to pay your NYS tax liability and discount the penalties and interest that are due. Depending on how old the outstanding balance is the penalties and interest can be discounted as much as 80%. NYS mailed letters in January to all who they have on file that they believe may qualify for the program. If you did not receive a mailing and feel you may qualify for this program please visit the NYS website to find out additional information.
If you have not yet filed your returns you will need to do this first before NYS can determine if you qualify for the program. Call Gerri Harrison Financial Services and make an appointment today if you need help in preparing those back tax returns.
If you are behind in your income taxes, do not ignore notices you may be getting regarding outstanding balances. IRS and NYS will both work with you to set up payment arrangements. Both agencies generally look for the balances to be paid in full within 3 years although they do have the ability to go up to 5 years. Failure to respond to notices may result in bank accounts being frozen and money taken from them. Employers may be notified that they must garnishee your wages. If you cannot make payments due to unemployment you can call IRS or NYS and ask to be temporarily put in an uncollectible status. This will stop all attempts to collect the debt for up to a year. Be aware that penalties and interest will continue to accrue during that time.
If you need assistance in resolving IRS, NYS or any other state problems please call Gerri Harrison Financial Services at 607-729-4144 for an appointment.
Tax Tip #5
Have your done your Roth conversion yet? Special rules exist for the 2010 year regarding Roth conversions that make it a very attractive choice.
First – there is no longer a $100,000 adjusted gross income limitation for doing a Roth conversion. You can now do a Roth conversion regardless of your income level. This is huge for those individuals who are unable to make Roth IRA contributions because they are over the income limits.
If your traditional IRA is lower because of the past stock market drops it is an ideal time to convert before the value rises. The advantage of Roth IRA over a traditional IRA is that all the growth is tax-free if you meet the rules. For example, if you have a traditional IRA worth $50,000 today and you convert it you will pay $16000 in taxes assuming you are in the 25% federal and 7% NYS tax bracket. If that $50,000 then grows to $125,000 you will not pay tax on any of that $75,000 growth. If you stayed in the same 25% tax bracket, you would pay $40,000 in taxes on an account valued at $125,000.
And I have to ask, what do you think the chances are that tax rates are going to stay as low as they are right now based on the current government spending? If you are unemployed or underemployed your own tax rate may be lower than normal because of less income. If you cannot afford to pay the tax on converting 100% of your traditional IRA, consider converting part of it.
The $100,000 limit has permanently gone away so you could wait and convert later, but as the account value grows you will pay higher taxes on the conversion.
The real advantage of doing a Roth conversion during 2010 is that there is a special ruling if you convert your traditional IRA during 2010 you will pay ½ the tax when you file your 2011 tax return and ½ of the tax when you file your 2012 tax return. Normally when you do a Roth conversion you would have to pay all of the tax on the current year’s tax return. This special ruling gives you time to accumulate the money to pay the taxes.
What if you do not have a traditional IRA? If you have 401(k)s or 403(b)s with previous employers you probably have the ability to convert these to Roth IRAs.
Not sure if a Roth conversion is for you? Make an appointment and come in to see us. Gerri Harrison Financial Services can calculate what the tax would be if you did a Roth conversion and explain to you the pros and cons of doing a Roth conversion. Call 729-4144 and make your appointment today.
Tax Tip #6
For those of you who purchased new cars during 2009, you may have several opportunities available to you to save on your income taxes.
First – the sales tax deduction. If you itemize your deductions on Schedule A you can take a deduction for the sales tax paid on a new vehicle purchased after February 17, 2009. The deduction is limited to the sales tax paid on the car value up to $49,500. If you do not itemize on your tax return, you are still able to take the sales tax and add it to your standard deduction. You may find with the sales tax deduction however that you have enough to itemize even if you have not done so in the past.
Second – if you purchased a hybrid vehicle or an electric vehicle you may find yourself eligible for a tax credit. On the hybrid vehicles, only the first 60,000 vehicles of each model sold by a manufacturer qualify. Check the IRS website to see if your vehicle qualifies. You may be eligible for a partial credit if not the full credit. The maximum credit is $3000.
Plug- in electric vehicles are also eligible for a tax credit. There is no 60,000 limit for electric vehicles. To qualify the vehicle must have been purchased after February 17, 2009. There are credits available for full size vehicles and for the low speed, two wheel or three wheel vehicles. The maximum credit for full size vehicles is up to $15000 depending on the gross weight of the vehicle. The full size vehicle credit is available until January 2012. The maximum credit for the smaller vehicles is 10% of the cost of the vehicle or $2500 if purchased before January 1, 2010.
In addition to the new sales tax deduction and the tax credits, there are still the mileage deductions available for a vehicle. If you use your vehicle for business or job hunting purposes, you can take a deduction for 55 cents per mile. You can take a deduction of 24 cents per mile for each medical mile drive. You can take a deduction of 14 cents per mile for each charitable mile driven.
And so you know – starting in 2010 the business mileage rate has decreased to 50 cents per mile. The medical mileage rate drops to 16 ½ cents per mile. The charitable mileage rate remains at 14 cents.
If you need assistance in claiming the deductions or credits available for your vehicle on your 2009 income tax return please call Gerri Harrison Financial Services. Call 729-4144 for an appointment today.
Tax Tip #7
For those taxpayers who became unemployed during 2009 you need to be aware there are several tax benefits potentially available to you.
First – if you are collecting unemployment, the first $2400 collected is tax free. If both you and your spouse are unemployed, you can each take a $2400 reduction. You need to reduce the amount of benefits reflected on the tax statement that you receive in the mail.
If you are able to itemize your deductions, you can claim job hunting expenses as a miscellaneous deduction on Schedule A. You can include the costs of printing resumes and sending out resumes. As a job hunting cost, you can claim miles traveling to interviews and looking for work at a rate of 55 cents per mile. If you travel out of the area by plane, train or other means you can take the cost of the transportation in addition to hotel and meal costs while out of town. If you pay a fee to an employment agency to find you work, it is a deductible expense. The percentage of the cost of your Internet service and cell phone service used for job hunting are deductible items.
Miscellaneous deductions related to job hunting must exceed 2% of your adjusted gross income when combined with other miscellaneous deductions to be deductible.
Unemployment may also put in the position of being able to take a deduction for medical expenses. Medical expenses must exceed 7 ½ % of your adjusted gross income to be eligible. This does include the COBRA premiums or your own health insurance coverage premiums you may be paying. Additionally all the normal medical expenses such as co-pays, prescription costs, lab testing, specialists such as chiropractors or acupuncturists, costs related to dental and vision care, and hospital costs are deductible. The cost is deductible in the year that it is paid.
Due to a lower income you may find yourself eligible for some tax credits that you normally would not be able to take. The earned income credit and additional child tax credit are available for those with lower incomes. The retirement saver’s credit may be applicable if you were contributing to a retirement plan while working and are now below the income requirements.
If you need help in determining all the tax deductions and credits you may be eligible for as an unemployed taxpayer, please contact Gerri Harrison Financial Services for an appointment at 729-4144.
Tax Tip #8
With many in the position of not having enough income from employment or being unemployed we see more individuals starting their own small businesses to generate income. This can be a great way to create income if it is done properly. You need to be sure you are aware of what you are getting into prior to opening a business.
What type of business entity do you want to be – a sole proprietorship, a corporation, a partnership or an LLC? The taxes being paid are somewhat determined by the entity. If you are a sole-proprietorship you will be subject to self-employment taxes in addition to income taxes. A partnership does not pay income taxes; the income is passed through to the partners. As a corporation, you need to pay yourself a salary. This means having the required insurances, paying unemployment and Social Security taxes and filing payroll tax deposits and reports. LLCs can be taxed as a sole-proprietor, a partnership or a corporation.
There are different filing requirements for different business types. For example corporate tax returns are due on March 15th rather than April 15th for individuals and partnerships. You may need to make quarterly estimated tax payments towards your anticipated tax liability for either yourself personally or for your corporation. Depending on what your business is, you may be required to collect NYS sales tax and pay that into NYS. Be sure you know the rules and regulations regarding filing Form 1099s. The amount of tax paid can be different depending if the income is claimed as part of your personal return or as a separate corporate tax.
Taxpayers need to make sure to keep all required documentation for both income and expenses. Separate bank accounts need to be maintained from personal accounts. While books can be kept on paper or with a computer software program, they must accurately reflect business activity. Make sure you are aware of the rules regarding business deductions. You need to maintain a mileage log book for vehicle expenses. Office-in-the-home expenses have specific criteria they must meet before being deductible. Internet and cell phone costs must be prorated based on personal versus business use. Equipment, furniture and other items may need to be depreciated rather than written off all in one year. And there is so much more to consider.
Gerri Harrison Financial Services offers a free one hour consultation to those who are considering starting their own small business. We also offer small business consulting to existing businesses. Call 729-4144 and ask for your free one hour consultation today.
Tax Tip #9
Looking for ways to save on taxes? The type of investing you choose can cause you to pay more or less taxes, either now or in the future. Taxable, tax deferred and tax free all have different tax liabilities attached to them.
A taxable investment you currently pay taxes on. If you invest in stocks that pay dividends, you will pay taxes each year on those dividends whether you choose to receive them or to re-invest them. If you invest in taxes that have more growth than current income, you avoid taxation until those stocks are sold. For 2009 and 2010 however if you are in the 10 or 15% tax bracket, you have a 0% capital gains rate. You may want to consider selling stocks that you holding with capital gains. You can choose to re-buy the stocks if you like the investment. This will lock in a higher cost basis for less capital gains tax when you permanently sell the investment.
Tax deferral means that you currently do not have to pay taxes on the income, but will pay taxes in the future. Your traditional IRA, 401(k), 403(b), other retirement plans and annuities allow you to pay less in taxes currently. Putting $1000 into a retirement plan when you are in the 15% tax bracket currently saves you $150 in federal taxes. When you take that $1000 plus the earnings out of the retirement plan you will pay taxes at whatever your income tax rate is at the time.
Tax exempt or tax free means that taxes never need to be paid on the earnings. Government and municipal bonds generate tax free income due to special status in the tax law. Roth IRAs have tax free or tax exempt income if the requirements are met.
Which is better? That depends on the purpose of the money. Money put into retirement plans can be subject to penalties if the money is taken out before retirement age. If you are in a higher tax bracket now with the anticipation of being in a lower bracket later on, investments with current income should be avoided. Do you anticipate tax rates are going to go up? That might determine if you want current or future taxable income. Government and municipal bonds may be appropriate if you are in higher tax brackets where the benefit justifies the lower rate of return.
Need answers to your particular situation? Call Gerri Harrison Financial Services to review your current tax situation and investments. Call 729-4144 for an appointment today.
Tax Tip #10
I hear it all the time. What can I claim for charitable contributions? What percentage does the IRS give me? Aren’t I limited to $500?
While IRS has gotten tougher on charitable contributions you are entitled to claim what you actually gave. There is no percentage that the IRS gives you. There is no percentage of income. IRS requires you to have a receipt for all charitable contributions. This does makes giving cash undesirable.
When you go to church put money in your envelopes or write out a check so that the church can track it. Then at the end of the year get a list of your contributions from the church.
If you give to a charitable organization, write out a check. You still need to receive a receipt from the charity. Most are great about automatically sending a receipt, but if you do not get one you need to request one.
Giving to a benefit for a family who has a sick child or adult, who had a fire or has lost a loved one is not a charitable donation. These individuals are not registered charities. That does not mean you should not give – you should give out of the kindness of your heart, but you will not get a charitable deduction for it.
Contributions to political campaigns are not a charitable contribution.
If you receive something of value for your contribution, you need to subtract that value from your donation. For example, if you receive a free gift when donating to public television you need to subtract that value from your contribution.
With non-cash contributions – there is really no limit to what you can claim. There are some practical considerations however. When giving clothing you can take a deduction based on fair market value given. You can use the Salvation Army’s value list regardless of who you give it to. You can use a garage sale or E-bay value. There are some books written to help you establish a value.
If the total value of your non-cash contributions exceeds $500 you need to file Form 8283. People file this form all the time and are not audited so do not feel restricted to claiming less than $500 to avoid the form. If you claim more than $5000, you will be required to get an appraisal on all items given. So for practical purposes you do want to stay below $5000 unless you are giving something like artwork or land that makes an appraisal worthwhile.
If you have questions regarding the claiming of charitable contributions or need help in preparing your income tax return please contact Gerri Harrison Financial Services. Our telephone number is 729-4144. Or check out the information on your website at GerriHarrison. com.
Tax Tip #11
Many of you have completed the filing of your 2009 tax return. Now is an ideal time to begin preparing for your 2010 tax return. If you got a large refund or owed a large amount, consider changing your withholdings from your paycheck.
If you got a large refund, you can put more money into your pocket each paycheck. Take this money and use it wisely. Consider adding the additional amount to a debt payment each month to get out of debt quicker. Use it to start an emergency fund if you do not have one. Increase your 401(k) contributions to save more money for retirement. The key is not to let it just be absorbed into your regular spending pattern. Do something special with it. Pay off debt quicker or put money away for a vacation, retirement or college education for your child.
If you owed a large amount, you need to consider changing your withholdings to have more withheld. To avoid penalties for being underpaid you must be in at least an amount equivalent to your prior year’s tax liability or 90% of your current year’s liability. If you had a large balance due and you do not anticipate any changes in the coming year, you could put yourself in the position of not meeting either of those criteria and being subject to a penalty.
Even if you did not have a large refund or balance due, you may need to adjust your withholding if you have changes that will occur on your 2010 tax return. Maybe you will be losing or gaining a dependency exemption. Maybe you will be changing filing status due to a marriage, divorce or no longer qualifying for head of household. Maybe your child is going to be too old for the child tax credit in 2010. Maybe you are going to turn 65 and get an extra amount added to your standard deduction. Maybe you are going to lose the child care credits or the education credits. Any number of changes could affect next year’s tax liability.
To change your federal withholding you need to file Form W4 with your employer’s human resource department. To change your NYS withholding you need to file Form 2105. The number of allowances for federal and state purposes may not be the same.
Be aware – as the number of exemptions or allowances increase, there will be less in taxes taken out. As the number of allowances decreases, there will be more taxes taken out. Some taxpayers have trouble figuring out which way they need to be changing the allowances. If you are already at zero allowances and need more taxes withheld, you need to request an additional dollar amount per withheld.
If you need assistance in calculating your new withholding numbers, IRS does have a calculator on its website to assist you. Your current tax preparer should be able to assist you in determining the new number of allowances. Or contact Gerri Harrison Financial Services at 729-4144 for an appointment today to help you determine your new withholding amounts.
Tax Tip # 12
With April 15th fast approaching you may find yourself unable to complete your tax return for filing or unable to pay the tax due. If you are unable to file your tax return, you can file an extension. This allows you delay filing your tax return up until October 15th. This does not delay the tax that is due. When filing an extension, you are expected to estimate your tax liability and pay that tax with your extension.
It does not make sense to delay filing your tax return just because you owe money. You will be subject to a late filing penalty if you do not file the return by April 15th. The late filing penalty is 5% per month or part of a month of the tax due for a maximum of a 25% penalty. By filing your return on or before April 15th you can avoid the late filing penalty. If you cannot pay the tax due in full, you will be subject to the late payment penalty, but not the late filing penalty.
The late payment penalty is ½% for each month or part of the month that the balance remains outstanding. It increases to 1% 10 days after a levy notice is issued. If an installment agreement is set up, the ½% drops to ¼%. Additionally you be subject to interest on the outstanding balance. The interest rate is calculated every three months and based on the short term federal treasury rate plus 3%.
If you cannot pay the tax in full – you have two choices. If you file the tax return without full payment, you will receive a bill in about 6 weeks. Pay that bill in full at that time and the accumulation of penalties and interest will stop.
If you cannot pay the tax in full, you should set up on an installment agreement. File Form 9468 with the IRS indicating the minimum payment you want to make and the date you agree to make the payment by. IRS will charge you a $105 user fee for setting up the installment agreement. The balance needs to be paid within 36 months. You can elect to pay more than the minimum payment or full pay the balance at any time.
If you cannot full pay the balance within the 36 months, IRS does have the option of allowing you to pay over 5 years or to put you in an uncollectible status for a year. You will have to provide income and living expense numbers to show you cannot pay under the normal installment agreement terms.
NYS has the same options of allowing you to pay the outstanding balance over 36 months. You will need to call NYS to set up this option.
The worst thing you can do is ignore the situation. IRS, NYS and most other states will work with you if you keep in contact with them. If you get a letter, respond to it immediately. If you need help in dealing with the IRS, NYS or any other state please call Gerri Harrison Financial Services for an appointment today at 729-4144.
Tax Tip #13
For many filing your tax return and determining how to spend your refund is all think that is involved in tax preparation. But tax preparation really begins with tax planning. This is a year round activity. Your tax liability can be significantly lower or higher depending on if you plan.
If you are about to get a divorce what assets you receive and how you receive them can make a difference in what you will actually have available in cash and pay in taxes either now or later.
Giving away a dependency exemptions not only has the ramification of losing the dependency exemption but also potentially the child tax credit of $1000 or the education credits of up to $2500.
The tax you pay on selling stock, bonds or mutual funds is partially affected by if it is a long term or short term sale since long term capital gains have a maximum tax rate of 15%.
Taking an early distribution from a retirement plan can mean a tax liability of as much as 45% of the distribution. On a $10000 distribution that is $4500 in taxes if you are in the upper tax brackets.
Having debt forgiven whether it is through a house foreclosure or the credit card company accepting a partial payment as payment in full means additional taxable income to you.
Starting your own small business, winning a prize, selling a cottage, an investment or a rental property at a profit, cashing in savings bonds, receiving a large taxable settlement, taking money out of a IRA or retirement plan, or doing a Roth conversion suggested by your financial advisor, or any number of other events can put you in the position of having to pay additional taxes. Make sure you know your tax liability before filing your tax return.
Consider seeing your tax advisor before you do anything that can affect your tax return. Doing so before the action occurs may allow some planning to reduce the tax implications. It provides the opportunity to figure out how to limit the tax effect. If you are not sure if an action will affect your taxes, make the call to your tax advisor to find out in advance.
If your tax advisor is not available year round, this can present a problem if you need tax advice in June, August or December. Paying the cost of a tax return without having someone available to do tax planning, to resolve a tax problem or to assist you if you are audited may not be in your best interest.
Gerri Harrison Financial Services is here for you year round. Even if you used someone else to prepare your taxes in 2010 if you run into a problem please call us if we can help. We hope you have found these tips throughout this tax season useful and that you were able to reduce your tax liability as a result of something you learned. Call 729-4144 for an appointment anytime if we can be of assist in the area of taxes, debt management, college financial aid assistance, education or retirement planning or small business consulting. Our purpose is to help you solve your financial problems and help you achieve your financial goals. As we say, relax- Gerri is here to help.
Yes, but you have to get planning permission to change the purpose of a building. If it’s already in a residential area, there are unlikely to be any objections. Going the other way is more problematic.
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