Timothy W. Tuttle & Associates
Volume 5 Edition 12 Please email comments to firstname.lastname@example.org Dec 2009
Major Tax Deadlines
For December 2009
* December 15 - Fourth estimated tax payment is
due for calendar-year corporations.
* December 31 - Last day to set up a Keogh retirement plan for 2009. Deductible contributions for 2009 can be made any
time up to the filing deadline for your 2009 return.
* December 31 - Deadline to complete 2009 tax-free gifts of up to $13,000 per recipient.
* December 31 - Deadline for paying expenses you want to be able to deduct on your 2009 income tax return.
NOTE: Businesses are required to make federal tax deposits on dates determined by various factors that differ from
business to business.
Payroll tax deposits: Employers generally must deposit Form 941 payroll taxes (income tax withheld from employees' pay and both the employer's and employees' share of social security taxes) on either a monthly or semiweekly deposit schedule. There are exceptions if you owe $100,000 or more on any day during a deposit period, if you owe $2,500 or less for the calendar quarter, or if your estimated annual liability is $1,000 or less.
* Monthly depositors are required to deposit payroll taxes accumulated within a calendar month by the fifteenth of the following month.
* Semiweekly depositors generally must deposit payroll taxes on Wednesdays or Fridays, depending on when wages are paid.
For more information on tax deadlines that apply to you or your business, contact our office.
What's New in Taxes:
Homebuyer's credit extended
Under prior law, an eligible first-time homebuyer could claim a maximum credit of $8,000 for a principal residence
purchased before December 1, 2009. The credit began to phase out for single filers with a modified adjusted gross income (MAGI) above $75,000 and joint filers above $150,000.
Under a new law signed November 6, 2009, the credit is available for home purchases made before May 1, 2010 (July 1, 2010, if a binding contract exists before May 1). Also, the phase-out threshold increases to $125,000 of MAGI for single filers and $225,000 for joint filers. The homebuyer credit may be elected on a 2009 tax return for a qualified purchase in 2010.
Not just for first-timers: If you buy a home after November 6, 2009, and have owned and used the previous home as your principal residence for five consecutive years in the last eight years, you may claim a credit of up to $6,500.
New limit for everyone: No credit is allowed for purchases after November 6, 2009, if the price exceeds $800,000.
New rules in 2010 open Roth IRA conversions to everyone
Beginning in 2010, the rules governing Roth IRA conversions will undergo a significant change.
Traditional IRA to Roth IRA conversions will be available to everyone, creating a financial planning opportunity that didn't exist previously. Under the 2009 rules, taxpayers with income of more than $100,000 cannot convert a traditional IRA to a Roth IRA. Tax legislation enacted in 2006 changed the rules and ends the $100,000 income limit, effective January 1, 2010.
The Roth IRA has been a popular investment vehicle, with its ability to give taxpayers tax-free distributions once the account has been in existence for five years and the taxpayer has reached age 59½. Another Roth benefit is the lack of required minimum distributions once the owner reaches age 70½.
The conversion to a Roth does have a cost. When you convert a traditional deductible IRA to a Roth, you must include the entire amount converted in your taxable income.
If you do a conversion in 2010, you are allowed to report half of the income on your 2011 tax return and the remaining half on your 2012 tax return. You can also choose to pay the taxes due on the conversion on your 2010 return. While prepaying seems counterintuitive, remember that present federal tax rates are set to expire December 31, 2010. Postponing income into future years could mean a bigger tax bill.
The new conversion rules are particularly advantageous to those upper-income taxpayers who could never participate in a Roth. Now taxpayers in high tax brackets will have access to Roth IRAs. One possible strategy is to set up a traditional IRA with nondeductible contributions in 2009 and then convert it to a Roth in 2010.
It's important to weigh the pros and cons of a conversion in your individual situation. Please give us a call if you
would like to discuss the best strategy for you.
NOL carryback extended by recent law
Normally, a business can carry back a net operating loss (NOL) for only two years before carrying it forward for up to 20 years. A prior law change allowed a carryback for three, four, or five years to qualified small businesses for NOLs in tax years beginning or ending in 2008.
A new law, the "Worker, Homeownership, and Business Assistance Act of 2009," extends the longer carryback regardless of the size of the business. This election is generally available for NOLs incurred in either 2008 or 2009.
Caveat: Under the new law, an NOL carried back to the fifth year is limited to 50% of the taxable income for the year. Any remaining NOL may offset income in the remaining four years.
Wages or dividends? An important tax question for shareholder-employees
S corporations are the most popular form of corporate business structure. There are excellent tax planning benefits uniquely available to S corporation shareholders who are also employees, not the least of which is the opportunity to manage self-employment and payroll tax liabilities. Unlike sole proprietorships, for example, S corporations can pay wages to shareholder-employees and also distribute income to them as corporate dividends, which are free of the payroll taxes that apply to wages.
* Do a comparison
If your business is a sole proprietorship with net income of $200,000, 92.35% of this amount (or $184,700) will be subject to self-employment tax. The social security portion of the tax is 12.4% on the first $106,800. The Medicare tax of 2.9% applies to the full $184,700. So your self-employment tax will be $18,600. You can take a deduction for 50% of this tax.
If you incorporate and elect to be taxed as an S corporation, the result can be dramatically different. Again assume that your business income is $200,000, and the corporation pays you a salary of $60,000 (which you can demonstrate as reasonable). You and the corporation, as your employer, will pay a combined 15.3% on your $60,000 salary as payroll (FICA) taxes. The total tax is $9,180. The remaining $140,000 of business income can be distributed to you as S corporation dividends free of payroll or self-employment taxes. The result is a significant tax savings.
The IRS is very much aware of the potential for abuse by taxpayers paying unreasonably high or low salaries. In the example above, if the IRS determined that your salary was set low to avoid taxes, you could face a reclassification of all or part of your $140,000 S corporation dividends as wages subject to payroll taxes. The key: Pay reasonable and well-documented salaries.
* So what is "reasonable"?
Determining whether wages are reasonable involves many factors, including the nature of the services performed, the responsibilities involved, the time spent, the size and complexity of the business, prevailing economic conditions, compensation paid by comparable firms for comparable services, and salaries paid in prior years. There are no hard and fast rules, and there is no definition of "reasonable" in the tax law. To analyze this strategy for your particular business situation, give us a call.
What's New in Finances:
Try a different gift idea this year
Are you searching for gift ideas for the holiday season? It's never easy, especially for older children and teenagers. They're too old for toys, but do they really need another sweater or computer game?
Have you thought of giving financial gifts? They may sound less exciting, but in the long run they'll be much more appreciated. And financial gifts can grow in value over time.
Here are a few ideas you might want to consider.
* Fund a child's Roth IRA. If your teenagers worked this summer, chances are they spent their earnings. But they can use your gift to open a Roth IRA, up to the amount of their earnings or the regular $5,000 limit. The IRA will grow tax-free, and by the time the teenager retires, your gift should have compounded to a substantial tax-free retirement fund.
* Fund a 529 education account. Anyone can contribute to a child's Section 529 college savings plan, which accumulates savings for tuition and living expenses. There are no income restrictions on the donor, and few practical limits on the amount that can be saved. Your gift will grow tax-free in the plan.
* You could also make your gift to a Coverdell education savings account. These IRA-like accounts also grow tax-free, but there's a limit on total contributions of $2,000 a year from all sources. The amount of your gift may also be limited, depending on your income.
* Consider this gift if you just want to encourage an interest in saving and investing. Buy a small number of shares in a mutual fund and package them with a book on basic investing. The child can watch the investment grow over time and can enjoy dividend payouts too. Modest amounts of investment income can be tax-free to children, although the kiddie tax may apply at higher levels.
Please contact our office for more ideas and information on the tax aspects of giving financial gifts.
Develop three habits to stay out of debt
Staying out of debt is simple, but it's not easy. It requires fortitude. It means foregoing impulsive purchases in
exchange for long-term financial freedom. Staying out of debt requires that you deny cravings, at least temporarily, for the "must-have" stuff that beckons from every mall, television advertisement, and magazine.
Personal debt can be categorized as necessary or unnecessary. Necessary debt can generally be linked to assets such as your home mortgage, a basic car for getting to work, or a college degree. Unnecessary debt, on the other hand, might include routine credit card charges or installment loans for items that rapidly decline in value.
If your goal is long-term financial freedom, avoiding unnecessary debt is crucial. Three simple habits can help you achieve this goal.
1. Live below your means. Much of the stuff that seems so essential today will, in fact, grow less desirable over time. Of course, living below your means requires that you discover what those "means" are. For many people, this means tracking your income and expenses over a period of time — a month or more — to learn where your money comes from and how it's spent. You might be surprised. That cup of gourmet coffee on the way to work, that weekly meal at the fine dining establishment, that car payment for the latest sedan — all cut into your disposable income. By spending less on such items, you'll be able to save for the future and develop long-term wealth.
2. Save for emergencies. By setting aside money in easily accessible accounts, you avoid racking up credit card bills when unexpected expenses occur. Such expenses could include trips to the emergency room, replacing the water pump on the family car, or patching a hole in the roof. A reserve fund can also help you survive periods of unemployment without incurring additional debt.
3. Use debt wisely. If you decide to incur debt, know what you're doing. Slow down, take a deep breath, think about how valuable this item will seem three months from today. Also ask yourself whether you can pay off these new charges out of next month's income.
Staying out of debt isn't glamorous, and it requires more than a little self discipline. But the long-term benefits are substantial. If you'd like additional suggestions for developing habits of financial discipline, give us a call.
Take a Break
This is the time of year to pause and reflect on our blessings and to express our appreciation to the many people who enrich our lives.
May we take this opportunity...
* To wish you and yours the happiest of holidays and a healthy and prosperous 2010.
* To thank you for your business in 2009.
* To remind you that we welcome your referrals. We would be pleased to have you mention our name to friends and associates who may need our services.
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The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.
Timothy W. Tuttle & Associates