Refreshments will be provided as well as a chance to win a giftcard to the Cheesecake Factory or 4 tickets to the Casino Del Sol All Star Game on January 16th!

If you are not already a client, this is the perfect opportunity to come meet Gabby and her staff and pick up a 2011 income tax organizer to help organize your information and make the tax season as pain and stress free as possible.  If you are not familiar with Gabrielle M. Luoma, CPA, PLLC please check out the “About Us” page and see why hundreds of people a year are switching their businesses and individual accounting, tax, and consulting needs over to to Gabby and her team.

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.

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.

Excerpt from Clientwhys Monthly Newsletter

Getting married involves hundreds of details and decisions, from wedding planning to house hunting to joint checking accounts. Although taxes may not be high on your priority list, it’s important to consider how you will file your annual returns as newlyweds. With tax season less than a year away, it’s a great time to look at some of the changes you may need to make for the IRS.
Here are some basic tips:
• Know Your Deductions: If you get married before December 31, you may file as a couple. The IRS allows for deductions from your income before determining the amount of taxes you’ll be required to pay. For non-itemized returns, there is a standard deduction of $5,700 for an individual, or $11,400 for a couple. Start by estimating your deductions; if you’re sure they will be more than the standard deduction, it’s in your best interests to itemize your return. Many newlyweds end up owing money the first year. To avoid this, you and/or your spouse may need to adjust your withholdings to prevent any unpleasant surprises in April. Contact your employer’s HR department to make any necessary changes on your IRS W-4 forms.
• Consider Your IRA Account: With Roth IRAs, there is an income limit for contributors. For singles, the limit is under $105,000 and the amount you can contribute disappears as your income reaches $120,000. For married couples, those thresholds are $166,000 and $176,000— less than double the individual threshold. If you’ve contributed this year, make sure you are still under the income allowed for couples.
• Don’t Forget Your Student Loans: Once you’re married, there are a few changes here, too. Even if you use the short 1040 form and don’t itemize, you are eligible for a student loan deduction. A single individual making under $60,000 a year is currently eligible to receive up to a $2,500 deduction against the interest paid on school loans. The deduction disappears as your income approaches $75,000. For married couples, those thresholds are doubled: a $120,000 combined income for the full $2,500 and $150,000 combined income at the deduction cap. On the downside, couples are not eligible for both of the $2,500 deductibles they may have been receiving as two single individuals. The IRS only allows for one of these $2,500 deductions per tax return.
As you begin your life together as newlyweds, be sure to all of the necessary changes in your financial lives as well. We’ve only covered a few of the most common considerations; as always, it’s best to check with a qualified tax consultant to discuss your specific circumstances.

Changes starting in 2013

Beginning in 2013, the itemized medical expense deduction floor will be raised from 7.5% to 10% in order to limit tax-subsidized medical expenses.

Estates and trusts will be required to pay a Medicare contribution tax of 3.8% on the lesser of either their undistributed net investment income, or of their adjusted gross income in surplus of $11,200 (the current highest tax bracket threshold).

In addition, a tax of 0.9% will be instated on earned income over $200,000 (for individuals) or $250,000 (for families). Individuals and families with income over these limits will be required to pay a Medicare contribution tax of 3.8% on the lesser of either their net annual investment income (including interest, royalties, dividends, rent, trade or business income, self-employment income, estates, trust and property), or of the amount of their annual gross income exceeding the $200,000 or $250,000 limit.

Starting in 2014

Beginning in 2014, small business owners will be able to buy health insurance for groups of over 100 employees via the SHOP insurance programs set up in 2011 (see Healthcare Changes for Small Business, part 2: 2010-2011). In 2014 and 2015 only, small businesses that purchase group health insurance plans through SHOP will receive a tax credit of 50% on these contributions.

Meanwhile, companies with over 50 employees will be penalized $2,000 annually for every employee who ends up on a government-subsidized health care plan rather than being covered by an employee plan. Most people who are not eligible for Medicaid, Medicare, other government-sponsored coverage, or some form of employer-provided health insurance will be required to maintain their own minimal coverage or pay a penalty.

Low income households – those with income levels between 100% and 400% of the Federal Poverty Line – will qualify for a refundable health insurance premium tax credit. The Federal Poverty Line is current set at $10,830 for an individual, $3,740 per additional person and $22,050 for a family of four.

Finally, corporations with assets of over $1 billion will be required to pay higher estimated tax payments in July, August, and September of 2014 as this figure is raised to 15.75%.

American healthcare is poised for some pretty radical changes over the next several years – changes that are relevant to everyone from the youngest child to the oldest retiree. If you’re a small business owner or an employee of a small business, you’re probably wondering whether the new laws and regulations will impact you. Read on to learn about potential changes to your insurance and healthcare premiums.

Changes Starting in 2010

The upcoming healthcare changes will be phased in over the next few years. Although the bulk of the new regulations are slated for 2011, 2013, and 2014, there are two significant changes taking place in 2010.

During the period of 2010-2013, as the new regulations are gradually introduced, qualified small business owners are eligible for a tax credit of 35% on their contributions to health insurance premiums for their employees. Known as the Small Business Health Care Tax Credit, this perk is available only to small business with fewer than 25 employees and average wages of less than $50,000 annually.

In addition, parents will now be permitted to include adult children (up to age 26) on the coverage offered by tax-qualified, employer-provided health plans.

Changes starting in 2011

From 2011-2015, small business employers will be eligible to receive federal funding if they provide their staff with wellness programs.

Small businesses will also be permitted to form collectives or alliances in order to purchase employee health insurance policies at better rates. The online programs that will make this possible, known as SHOP or Small Business Health Options Programs, will receive state-level funding from federal sources.

You can also expect to see some more specific changes to permissible medical expenses. The definition of qualified medical expenses will be altered to exclude over-the-counter medications. This affects all Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (MSAs), as well as reimbursements through Health Flexible Spending Arrangements (Health FSAs) and Health Reimbursement Arrangements (HRAs). The annual limit on allowable medical expenses from flexible spending accounts will be capped at $2,500.

Finally, a “cafeteria plan,” which allows employees to pick and choose benefits as needed, will be introduced for small business staff and the self-employed beginning in 2011.

We’ll explore some more details on the upcoming healthcare changes in our next post.

Earlier this year, the American Recovery and Reinvestment Act (ARRA) outlined some new and expanded tax benefits for individuals and business owners who invest in energy-saving appliances, improvements, or alternate energy sources that result in reduced usage and conserved resources.

Homeowners can earn a tax credit of up to 10% of the cost of solar energy systems, energy-efficient construction, or other alternate energy sources. This isn’t just a deduction of your income—it’s a full credit that is deducted directly from the amount of taxes you’re required to pay.

Each individual improvement is subject to its own set of criteria. Below are some specific green tax incentives available to business owners:

• Commercial buildings: If you build or renovate a commercial building that uses 50% or more less energy than the national average, you may be entitled to a tax credit of up to $1.80 per square foot.
• Combined heat and power systems (CHPs): If you institute a CHP that meets the minimum efficiency specifications, you could be eligible for an investment tax credit of up to 10%.
• Commercial vehicles: If your business uses fuel-efficient hybrid vehicles, you can earn tax credits based on the weight, fuel economy, and purchase price of the vehicle.
• Fuel cells and microturbines: If you invested in these eco-friendly technologies this year to generate electricity and power for your business, you could be eligible for tax credits of 30% of the cost of fuel cells or 10% of the cost of microturbines.
• Solar energy systems: Businesses that use solar energy for lighting, water heating, or electricity can receive up to 30% of the cost of the system in the form of a tax credit.

It’s great that the IRS is taking steps to recognize and reward energy-saving measures, but the specific clauses are complex. Eligibility is dependent on where you live, whether your investment meets specific criteria, and when the energy-saving tactic was put into place. There are extensive provisions, changes, and limitations that can be confusing for the average taxpayer to decipher. To make sure you’re reaping the maximum benefit of the new “green” tax laws, it’s best to consult with your CPA.

It can happen to even the most meticulous filer: after sending off your e-return to the IRS or dropping it in the mail, you notice an error. After the initial flurry of panic, you can relax—your return may technically be out of your hands, but it’s not set in stone just yet.

The IRS has factored in a margin of error for busy taxpayers by providing the Form 1040X. The “X-file” allows you to specify what you reported on your original return, where the error was made, and what the correct figures are. You can even use the form to add or remove dependents or change your filing status. The IRS allows you to file an amendment up to three years after the original filing date.

Below are a few CPA-recommended tips for filing the Form 1040X:

• Indicate the year of the return you’re correcting and include detailed explanations on the back of the form.
• Be sure to include any additional forms or scheduled associated with the change you’re making.
• If you’re amending multiple returns, use a separate form for each year and mail them in separate envelopes.
• Check to make sure your correction doesn’t affect your state taxes; if so, you’ll need to file a separate correction.
• There’s no need to file a Form 1040X if you made a mathematical error on your return; this will be automatically detected and adjusted by the IRS.

Depending on the nature of your error, filing an amended return with the 1040X may work in your favor or could end up costing you. If you neglected to include a source of income in the original return, you’ll probably wind up paying more or receiving less of a refund. But if you’re using the Form 1040X to include an overlooked deductible, you’ll end up reaping some monetary rewards.

Either way, you’re legally bound to correct any errors. It can be tempting to let them slip by, but it’s likely that the IRS will find them sooner or later, and you could face steep interest fees.

There are some additional stipulations and exceptions surrounding tax return amendments. To make sure you cover all your bases, it’s best to consult with your CPA if you discover an error.

As we head into the heart of December, it’s time to start planning year-end tax strategies. There are several ways to maximize your 2009 savings by minimizing your taxable income through smart deductions. Below are a few tips:

• Retirement contributions: If you haven’t already reached the limit, now is the time to max out your contribution to your corporate 401K account. If you don’t work for a company, you might also consider contributing to a traditional IRA or SEP (self-employed) IRA. Your CPA can help you identify which retirement plans must be funded before the end of 2009, and which can be funded after the New Year.
• New vehicle deductions: Are you planning to buy a new car, truck, motorcycle, or RV in the coming year? If you complete the purchase before the New Year, you may be eligible to write off the sales tax as a deduction, depending on the amount of your total household income.
• Homebuyer and homeowner credit: In 2009, legislature was passed that granted first-time home buyers up to $8,000 in tax credits. This deduction is limited to taxpayers who have not bought a home in the last three years and whose incomes are below the maximum limit. If you’re planning to purchase a home in the near future, doing so before the end of the year will increase your 2009 tax savings. In addition, current homeowners may be eligible to deduct up to $6,500 in tax credits.
• Eco-friendly appliances: Federally funded programs are offering special rebates for appliances—furnaces, dishwashers, refrigerators, and washers and dryers, among others—that have earned an Energy Star rating for environmentally friendly design. Rebate values vary by state, ranging from $50-$200 per product, so be sure to check with your CPA for details.
• Business expenses: If you own a business or do independent consulting work, now’s the time to tally up your receipts and determine the amount that can be deducted as work-related expenses. If you’re anticipating any large business purchases in the coming months, you might consider making them now to boost your deductions. Your CPA can also help you analyze how depreciation schedules might impact your tax situation.

Remember, every situation is different, and this is just a sampling of end-of-year tax considerations. To make sure you’re taking advantage of all eligible tax deductions, it’s best to consult with a qualified tax professional. With the proper planning and guidance, you can kick off the New Year with some extra cash to spare.