Home Improvement Tax Credits

Posted on December 14, 2010 by taxblogger

Tax Tip:  Home-Improvement Tax Credits| Tip of the Week | December 8, 2010 | No. 20
 

As the end of the year approaches, so does the end to some tax credits for energy-saving home-improvements. If you plan to take advantage of some of those credits, you will need to act fast. All improvements must be in place and the equipment in service by December 31, 2010 to qualify.

The tax credit covers installing certain wood or pellet stoves; energy-efficient furnaces, water heaters and air-conditioning systems; windows and doors; and wall and ceiling insulation. The tax credit covers 30% of the purchase costs up to a maximum $1,500 for the combined 2009 and 2010 tax years. Don’t forget to save the manufacturer’s certificate that states the equipment or service is eligible under the program. If you cannot place your hands on it, the certificates can also be found on the website of the manufacturer.

The improvements qualify for an existing home that is your primary residence. Vacation homes, rentals and new construction are not eligible for the credit.

The cost of installation is covered for installing heating and air-conditioning systems, water heaters and biomass stoves.

In addition, the cost of energy-efficient windows and skylights, energy-efficient doors and qualifying insulation also qualify for the credit, though the costs of installing these items does not count.

Appliances do not qualify for the tax credit, but appliances carrying the Energy Star seal will help reduce your energy bill. Many states and local utilities are offering direct rebates that allow you to take the rebate at the time of purchase. Check http://www.energysavers.gov to see the details of the Energy Savers program in your state.

Tax credits that are not going to expire this year are the tax incentives for rooftop solar-power systems, small residential wind turbines and geothermal pump systems. The tax incentive covers 30% of all costs with installation included and no upper limit. These credits are good on both existing principal residences, new construction and second homes. Rentals do not qualify. Another plus is that they don’t expire until 2016.
Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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Tax Tip: Year-End Tax Planning Tips| Tip of the Week | November 24, 2010 | No. 18

Posted on November 23, 2010 by taxblogger

 Planning Tips to Consider:
Last week we looked at some of the pending tax increases in 2011 if congress does not act by the end of the year.  Since no one can predict what congress may or may not accomplish, the following are some planning tips to consider:• Make money now!  As we discussed last week, the tax rates may increase in 2011, so you want as much earned income as you can now versus receiving it next year. Some small business owners may have some flexibility in the timing of their billings.  You will definitely want to increase any collection efforts to receive the money in 2010. Also, some employers may allow you to “cash in” your unused vacation days for 2010, as opposed to letting them roll over to 2011.

• Evaluate Capital Gains.  The current long-term capital gains rate is either 0% or 15% depending on your tax bracket.  In 2011, these rates may jump to 10% and 20%. Meet with your financial adviser to see if any investments should be sold this year.  Of course, the tax consequences of an investment strategy are just one factor to consider when deciding to hold or sell.

• Change your portfolio.  You will also want to review your dividend-paying stocks and mutual funds holdings with your financial adviser. Currently, qualified dividends are taxed at long-term capital gains rates. In 2011, these may be taxed as ordinary income. Some things to consider would be to move dividend-paying investments into IRA plans. You may also want to consider moving some of these investments into tax-free investments.

• Schedule an appointment.  With the return of the Estate Tax, you will definitely want to schedule an appointment with your attorney to review your estate plans.

• Increase your 401(k) contributions in 2011.  If you are an employee whose marginal tax rate is increasing by 3%, consider increasing your 401(k) contribution by 1%. The after-tax effect will be about the same, but the money will be yours and not the government’s.

• Green your home. With the expiring energy credits in 2010, be sure to make any improvements to your home this year. These credits are for the purchase of energy efficient windows, doors, insulation, HVAC systems, etc.

• Consider your 2011 tax withholdings and/or estimated payments.  With all of the potential tax changes coming in 2011, you will want to meet with your tax adviser to make sure you don’t have a large tax bill to pay next year. According to the Joint Committee on Taxation, taxpayers with earnings of $40,000 to $50,000 per year will be looking at a tax increase of $923 in 2011. Taxpayers with earnings of $50,000 to $75,000 will pay on average $1,126 more in taxes next year. Higher income individuals will obviously be paying even more in 2011.

As you all know, the only thing that is constant is change.; Some changes, however, are better than others!
 
Warm wishes to you and your family for a wonderful Thanksgiving.  May you enjoy good food and all the blessings of the season.  Thank you for your business and support throughout 2010.
 

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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Tax Tip: Saving for Retirement Series – Part 4: Roth IRAs

Posted on November 17, 2010 by taxblogger

Tax Tip:  Saving for Retirement Series – Part 4: Roth IRAs| Tip of the Week | November 17, 2010 | No. 17

In this week’s issue, we will discuss the second major type of IRA, the Roth IRA. As a reminder, an individual retirement arrangement (IRA) is a personal retirement savings plan that offers specific tax benefits.

Similar to the Traditional IRA, the Roth IRA allows you to make annual contributions of up to $5,000 for 2010. The law also allows taxpayers age 50 and older to make additional “catch-up” contributions. In total, they can contribute up to $6,000 in their IRAs on or before April 15, 2011.

The important difference between the Traditional IRA and the Roth IRA is that the Roth IRA invests after-tax dollars. The benefit of the Roth IRA is that, if you meet certain conditions, your withdrawals from a Roth IRA will be completely free from federal income tax, including both contributions and investment earnings.

Conditions:
The ability to withdraw your funds with no taxes or penalty is a key strength of the Roth IRA. Qualifying distributions will also avoid the 10% early withdrawal penalty. For the distribution to qualify as tax free and penalty free, you must meet a five-year holding period and have met one of the following conditions:
(1) You have reached age 59 ½ by the time of your withdrawal
(2) The withdrawal is made because of a disability
(3) The withdrawal is made to pay first-time home buyer expenses up to $10,000
(4) The withdrawal is made by your beneficiary or estate after your death.

There are several items to consider when choosing which type of IRA is right for you. The first requirement for setting up a Roth IRA is that you must have taxable compensation of at least $5,000. Your ability to contribute to a Roth IRA in any year depends on your MAGI (modified adjusted gross income) and your income tax filing status. Your allowable contribution is limited for a Single filer, between $105,000 – $120,000 and for a Married filing joint, between $167,000 – $177,000. Above those respective amounts, no contribution is allowed.

Another advantage of the Roth IRA is that there are no required distributions after age 70 ½. And as long as you have taxable compensation and qualify, you can keep contributing to a Roth IRA after age 70 ½.

The question remains, which type of IRA is best for you? Call us to discuss your own situation.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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SEP IRAs – One alternative to building a bigger retirement nest egg.

Posted on November 10, 2010 by taxblogger

A simplified employee pension (SEP) is a written plan that allows the self-employed and employees to make retirement contributions to individual retirement arrangements (called SEP-IRAs). SEP-IRAs are attractive to self-employed individuals because this plan allows you to make contributions toward your own retirement and your employee’s retirement without getting involved in a more complex qualified plan (which require annual tax return filings).

Contributions to a SEP-IRA cannot exceed the lesser of 25% of the employee’s compensation or $49,000. Compensation generally does not include your contributions to the SEP and the employee’s Form W-2 does not include these SEP contributions. The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants.

Several strengths of the SEP-IRA include:
(1) Contributions to the plan are pre-tax and grow tax deferred.
(2) The plan does not require the employer to make contributions.
(3) The plan can be adopted and funded after year end (but no later than the due date of the employer’s return, including extensions).
(4) This plan is simple to establish and maintain.
(5) Since SEP accounts are treated as IRAs, funds can be invested the same way as any other IRA.

There are a few tradeoffs to consider as well:
(1) All eligible employees must be included in the SEP.
(2) Employees have immediate access to contributions and are 100% vested in their contributions.
(3) The SEP-IRA account is both owned and controlled by the employee.
(4) This plan does not allow for employees to contribute to the plan through salary reduction.

When it comes time to withdraw funds from a SEP-IRA, you will follow the rules for withdrawal of the traditional IRA.

Call us to see if a SEP make sense for you.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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401(k) Profit Sharing Plans Provide Great Flexibility

Posted on November 3, 2010 by taxblogger

A traditional 401(k) Plan allows an employee to save for retirement through a 401(k) salary reduction plan, have the savings invested, and defer current income taxes on the saved money and earnings until withdrawal. A Profit Sharing Plan is an employer funded, discretionary plan that can provide benefits to owners and their employees based on the company’s profitability. These two plans coupled together, called the “401(k) Profit Sharing Plan”, can be a nice tool to flexibly save for owners’
retirement through the 401(k) portion of the plan and to recruit and retain good employees.

The 2010 annual contribution limits for the 401(k) are $16,500 with a $5,500 catch-up contribution if you are age 50 before year-end. This allows for $22,000 total contribution with a catch-up contribution. The Profit Sharing Plan also allows for the employer to make annual contributions that are the lesser of 25% of an employees compensation or $49,000. As you can see, retirement savings can be significant with this plan while maintaining the maximum flexibility for the employer during these difficult economic times.

The employer’s contributions to the Profit Sharing Plan are strictly discretionary. One benefit of Profit Sharing Plans is that the employer can utilize different vesting schedules and forfeitures for the plan to encourage employees to stay with the employer.

Under this type of retirement plan, the administrative costs may be higher due to the annual requirement of the 5500 Form and the necessity to perform testing to maintain that the plan does not discriminate in favor of the highly compensated employees.

An employee may withdraw from their retirement account free from penalty once they have reached age 59 ½. Any withdrawal that is permitted before the age of 59 ½ is subject to a 10% penalty and normal taxation as ordinary income. Certain hardship
provisions can be built into the plan document to allow for these withdrawals. Loans are another provision that can be put into a plan to allow for an employee to access their money prior to retirement of age 59 ½.

Call us to discuss how you could use a 401(k) / Retirement Plan for your business in 2010. They must be started on or before December 31, 2010 for the 2010 calendar year.

Questions or Comments? You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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Tax Tip: Saving for Retirement Series – Part 1: Traditional IRAs

Posted on October 27, 2010 by taxblogger

Tax Tip:  Saving for Retirement Series – Part 1: Traditional IRAs | Tip of the Week | October 27, 2010 | No. 14Saving for Retirement Series We are beginning a series of Tax and Money Tips to take a look at ways that you can save for retirement in a tax advantaged way. As we approach year-end, now is a good time to review your current retirement plan and consider any moves needed to maximize your tax savings.In this series we will cover over the next few weeks:
    1.  IRAs – both Traditional and Roth options
    2.  SEP Plans (Simplified Employee Pension)
    3.  Uni-k for Sole Proprietors
    4.  Profit Sharing and 401(k) Plans
   
This week we will highlight the Traditional IRA. An individual retirement arrangement (IRA) is a personal retirement savings plan that offers specific tax benefits. In fact IRAs are one of the most powerful retirement savings tools available to you. Even if you are contributing to a 401(k) or other plan at work, you should also consider investing in an IRA.  Even if the IRA is not deductible, you should consider still making the contribution in order to get as much money each year into a tax-advantaged account.

A traditional IRA allows you to make annual contributions of up to $5,000 in 2010. Generally, you must have at least as much taxable compensation as the amount of your IRA contribution. But if you are married filing jointly, your spouse can also contribute to an IRA, even if he or she does not have taxable compensation. The law also allows taxpayers age 50 and older to made additional “catch-up” contributions. In total, they can put up to $6,000 in their IRAs in 2010.

Practically anyone can open and contribute to a traditional IRA. The only requirements are that you must have taxable compensation and be under age 70 ½. You can contribute the maximum allowed each year as long as your taxable compensation for the year is at least that amount. If your taxable compensation for the year is below the maximum contribution allowed, you can contribute only up to the amount you earned.

Your contributions to a traditional IRA may be tax deductible on your federal income tax return. This is important because tax-deductible (pretax) contributions lower your taxable income for the year, savings you money in taxes. Even if neither you nor your spouse is covered by a 401(k) or other employer-sponsored plan, you can generally deduct the full amount of your annual contribution. If one of you is covered by such a plan, your ability to deduct may be limited.  Call us to discuss your own situation.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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Does Staying the Course still work for you?

Posted on October 20, 2010 by taxblogger

Does Staying the Course still work for you? | Tip of the Week | October 20, 2010 | No. 13
 

Many current investment strategies direct the client to invest assets while reducing risk through sensible diversification.  This approach assumes that the best performing asset class will change each year and cannot be predicted.

We learned in 2008, when nearly all asset classes realized losses, that this approach may not work.  Clients are fatigued with the current conditions of the investing marketplace and are demanding a more active approach to better protect their wealth.  They have ridden the ride of the past decade of bubbles, then following corrections, and are questioning the traditional buy-and-hold approach.  We can agree that the nature of investing has dramatically changed over the past 10-20 years.  Specifically, the advances in technology have allowed for increased trading volume and volatility.

One solution to the buy-and-hold approach may be a tactical investment strategy that utilizes active management.  Active investment strategies are ones that allocate assets to markets that are trending well and avoiding areas that are declining.  These strategies consider Cash as a viable investment option, allowing for wealth preservation and reduction of risk.  Investors should consider active tactical investing a permanent component of a well-diversified portfolio.  With a large defensive cash position, investors will appreciate the proactive nature of tactical management the next time there is a large market decline.

Call us to find out more…… 

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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Using IRAs to Cover College Expenses

Posted on October 13, 2010 by taxblogger

Using IRAs to Cover College Expenses| Tip of the Week | October 13, 2010 | No. 12

It’s time for college students to head back to school.  But how are you going to pay for this next year of college?  Some people will be able to write the check.  But the majority of the population relies on loans, grants, scholarships, funds from family members and student earnings to cobble together enough money to pay the bills.  What if it isn’t enough?  Can you use your retirement savings to help pay the bill?

First of all, consider whether you should use your retirement assets.  Are you putting your retirement at jeopardy to give your student a chance to have a good life?  Many advisors will tell you that you can borrow to pay for college, but you cannot borrow to pay your expenses in retirement.  The message is to look for all possible sources of cash before you consider using your retirement funds.

If you are over the age of 59 1/2, you have access to your retirement funds without penalty.  You will have to pay income tax on any distributions you take, but the retirement funds are now available for you to use as you wish.

A problem exists if you are under age 59 1/2 and are subject to the 10% early distribution penalty.  Fortunately, payment of higher education expenses is an exception to this penalty and the tax code is generous about applying this exception.  The IRA owner can pay for expenses for himself, his spouse, or the children or grandchildren of either the account owner or the spouse.  You can apply the exception to the unreimbursed payment of tuition, books, fees, supplies and required equipment – in other words, the expenses minus any financial aid.  Room and board are qualified expenses if the student is enrolled on at least a half-time basis.  The expenses must be paid in the same year that a distribution is taken from the IRA.

So good luck to all those students returning to college this fall.  And good luck to those that are footing the bill.  Use your retirement assets only as a last resort and don’t pay the early distribution penalty if you qualify for this exception!

If you should have any questions, call us.

Questions or Comments?

Give us a call, 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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The Small Business Jobs Act of 2010

Posted on October 6, 2010 by taxblogger

The Small Business Jobs Act of 2010 | Tip of the Week | October 6, 2010 | No. 11
 

What you need to know – The Small Business Jobs Act of 2010 passes 9/27/2010

On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (H.R. 5297).  The legislation contains several provisions designed to ensure that small businesses have access to adequate credit.  The Act also contains targeted short-term tax relief for small businesses.

Specific tax changes include:

Increased IRC Section 179 expense limits – Effective for 2010 and 2011, the maximum amount that a business is able to expense under IRC Section 179 is increased to $500,000 (without the legislation, the expense limit would have been $250,000 for 2010 and $25,000 for 2011).  The $500,000 limit is reduced if capital expenditures exceed $2 million.  The Act also temporarily expands the application of Section 179 to up to $250,000 of certain real property (for example, qualified restaurant property).

First-year “bonus” depreciation extended – The Act extends the additional 50% first-year depreciation deduction that was in effect for 2008 and 2009 for one year, to qualified property acquired and placed in service during 2010.

Small business stock exclusion increased – The Act temporarily increases the exclusion percentage for qualified small business stock purchased by individuals to 100%, and does not treat the excluded gain as an alternative minimum tax preference item.  Therefore, subject to certain limits, you’ll pay no regular tax or alternative minimum tax on the sale of qualified small business stock acquired at original issue after September 27, 2010, and before January 1, 2011, provided you hold the stock for at least five years.

Small businesses get enhanced general business credit – Eligible small businesses (generally, non-publicly traded corporations, partnerships, or sole proprietorships with gross receipts averaging $50 million or less) will be able to carry back excess general business credits up to 5 years (instead of 1) in 2010, and will be able to use the general business credit to offset both regular and alternative minimum tax liability.

Health insurance costs will reduce self-employment tax – If you’re self-employed and pay health insurance premiums for you and your family, you get a break on your 2010 self-employment tax (the tax that you calculate on form 1040, Schedule SE).  That’s because, for 2010 only, the deduction you get for the cost of health insurance for yourself and your family will apply in calculating your earnings for purposes of self-employment tax, as well as, in reducing your income for income tax purposes.

Cell phones no longer listed property – Effective 2010, cell phones are not considered listed property, significantly reducing the substantiation rules and depreciation limits that apply when cell phones are used for business purposes.

New reporting requirements for rental property expenses – With some exceptions, starting in 2011, if you receive rental income from real property, you’ll be required to file an information return (Form 1099) when you make payments totalling $600 or more to a service provider (such as a plumber, painter or accountant) for rental property expenses.

Portion of nonqualified annuity can be annuitized – Beginning in 2011, if you have a nonqualified annuity (an annuity that is held outside of a qualified retirement plan or IRA), you can annuitize only a portion of the annuity, provided the annuitization period is for 10 years or more, or is for the lives of one or more individuals.  The portion of the annuity or contract that is annuitized will be treated as a separate contract, and the investment in the annuity will be allocated on a pro-rata basis.

If you should have any questions, call us.

Questions or Comments?

You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.

Mark Vitek, CPA/PFS, CFP®
…until next week.

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