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Brighten Your Future, with Tax Tips and Retirement Planning

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  • Assuming 100% business use of auto
  • Assuming 100% business use of auto
  • The first item I’m going to talk about is the above-the-line sales tax deduction. If you purchased a new vehicle in 2009 you are entitled to a deduction for the state and if any, local sales tax paid on the new vehicle. There are two limits on this deduction: if you bought the car here in PA, the sales tax deduction cannot exceed $2,970 which is the full 6% sales tax on a vehicle with a purchase price of $49,500. If the vehicle costs more than that amount, you will be limited to the $2,970 for your deduction. The second limitation is that the deduction will start to be phased out at AGI exceeding $125,000 or $250,000 for joint filers.
  • The next slide discusses the sale of a principal residence. As some of you may know, the IRS allows you to exclude gain on the sale of your primary residence up to $500,000 on a joint return and $250,000 for single filers. One requirement for this exclusion is that you must have owned and occupied the home as your principal residence for at least 2 of the last 5 years preceding the sale. If you have only met a portion of this 2-year requirement then the exclusion amount of the gain is reduced on a pro-rata basis.
  • The first-time homebuyer credit has been one of the more popular credits in 2009. Lots of people have been talking about this credit because it is a fairly large credit and there have been several modifications to this credit since it was originally instituted by the Housing and Economic Recovery Act of 2008. I’m going to focus on the expanded provisions of this credit that were adopted on November 6, 2009 when the Worker, Homeownership & Business Assistance Act of 2009 was signed. Under the provisions of this Act an ………… (read slide bullet 2) to be considered as a first-time homebuyer you cannot have owned a primary residence in the last 3 years. The amount of this credit is 10% of the purchase price of the home however, there is a maximum set at $8,000.
  • For any home purchases made after November 6, 2009 there has been an increase to the amount of MAGI that a taxpayer can have and still receive the full $8,000 credit. For single filers the amount is $125,000 and $225,000 for joint returns. And, if your MAGI falls between $125,000 and $145,000 for single and $225,000 and $245,000 for joint you will still be eligible to receive a reduced credit amount. For qualifying home purchases made in 2010 you can claim this credit on either your 2009 tax return or wait and claim the credit when you file your 2010 return.
  • There is also a new provision to this credit that was not available prior to November 6, 2009. If you are not a first-time homebuyer but qualify as what is referred to as a long-time resident you may be able to receive a credit up to $6,500. A long-time resident is someone who has owned and used the same house for 5 consecutive years of the last 8 years and the home must have been used as your primary residence. So, if you purchased a home in 2009 or are considering purchasing a home in the near future you will want to take a close look at this credit and determine if you might qualify. Form for this credit is 5405
  • I’m sure many of you have heard people talking more and more about going “green” and trying to become more energy efficient both within your homes and your businesses. There are some energy credits available to individuals for qualifying home improvements and equipment. If you have purchased or are planning to purchase new doors, windows, insulation systems, furnaces, hot water heaters for your personal residence be sure to ask the salesperson if these items qualify as energy efficient. There should be a manufacturer’s certification with the product you are purchasing – you will need this to be able to claim the energy credit on your return. Be careful because the energy star labels used to be an indication that the product qualified but after May 31, 2009 these labels will no longer automatically qualify the product as eligible.
  • There are no income limits for this credit – meaning you can claim them regardless of your AGI. The credit is equal to 30% of the amount paid with a limit of $1,500 over both 2009 and 2010. This means that if you claim a credit of $1,000 on your 2009 tax return then you will only have $500 of energy credit available on your 2010 return, regardless of the purchases you might make in that next year. I also wanted to mention, there are additional energy credits available for more significant purchases that qualify as energy efficient. If you are looking to purchase a geothermal heat pump, solar water heating equipment or wind energy equipment there is a credit of 30% of the amount paid and again there are no income limits on these credits.
  • If you are looking to set up a college savings fund – the Section 529 plan is a great way to get started. This plan is administered by the PA State Treasury Department and there are 2 types of plans in PA. The first is the Guaranteed Savings Plan – which is tied to the rate of college tuition inflation. With this plan you are essentially prepaying for college education. You are buying the credits are today’s price. The second is the Investment Plan – which allows for pure investments to use later for tuition. This plan allows you to contribute funds to pay for college at some point in the future. The hope here is that the investment return is greater than the increase in tuition costs. You can use these funds to pay for most college expenses including….. The only requirement is that you must be 18 years old and a PA resident at the time of enrollment in this plan.
  • Some of the benefits of the plan are: It allows tax-deferred growth of your contributions. When computing your PA taxable income you can deduct up to $13,000 of contributions per beneficiary. Also, any withdrawals that Are made for qualified education expenses are tax-free both for federal and PA purposes. There are also gift, estate and inheritance tax benefits to using this type of plan. Keep in mind, if amounts in 529 plan do not cover the full cost of education expense a parent , grandparent, aunt, uncle can directly pay tuition of a student in excess of the annual gifting limits without tax consequence on this additional payment
  • Read slide – Qualified expenses DO NOT include room and board charges
  • Read slide – One thing to be aware of with this credit is that it’s a non-refundable credit, so if you have no tax liability, which may be the case for a student claiming himself on a tax return then there will be no benefit for this credit.
  • Also related to education expenses there is an above-the-line deduction available. The maximum deduction allowed is $4,000. If you are claiming any of the other education credits I just mentioned then you are not able to take this deduction in addition to that. You cannot claim this deduction for expenses that have been paid with tax-free scholarships, fellowships, grants or any type of educations savings account fund. If you are using a 529 plan, you can only take a deduction for the amounts that are purely a return of your contributions to this plan.
  • There is a deduction available for interest paid on student loans. This is also an above-the-line deduction. The maximum deduction of $2,500 is reduced when MAGI exceeds $60,000 Single and $120,000 for joint filers and is complete eliminated when MAGI is $75,000 for single and $150,000 for joint returns.
  • Transcript

    • 1. Presented by: Stephen H. Klunk, CPA Colette M. Brownson, Tax Advisor Stambaugh Ness PC January 19, 2010 Brighten Your Future… with Tax Tips and Retirement Planning
    • 2.
      • Depreciation of Assets
        • 50 Percent Bonus Depreciation
          • New depreciable property
          • Class life of 20 years or less
          • Taken on top of regular depreciation
          • Expired 12/31/2009
          • No bonus permitted in 2010
    • 3.
      • Depreciation of Assets
        • Section 179 Expensing
          • Increased expensing of $250,000
          • Claimed on new or used depreciable property
          • Increased limits expired 12/31/2009
          • 2010 limit = $134,000
    • 4.
      • Depreciation of Assets
        • Luxury Automobiles
          • Placed in service prior to 1/01/10
          • Cars year 1 limit = $10,960 with bonus
          • Trucks and vans year 1 limit = $11,060 with bonus
          • Vehicles in excess of 6,000 pounds
            • Certain SUVs, vans, trucks
            • Limited to $25,000 (Sec 179 expensing)
    • 5.
      • Fringe Benefits
        • Section 125 (Cafeteria) Plan
          • Contributions for health, specialized insurance and medical reimbursements
          • Not taxable for federal, social security, Medicare, state, local or federal unemployment
          • Contributions for child care are not taxable for federal, social security, Medicare or federal unemployment
    • 6.
      • Meals and Entertainment
        • Must be directly related to active conduct of business
          • Meal expense directly precedes or follows business discussion
          • Subject to 50 percent limitation rule
        • Expenses for recreational, social or similar activities for benefit of employee are 100% deductible
        • Club dues – generally not deductible (i.e. – Country Club)
    • 7.
      • Company Car – Buy vs. Lease
        • Purchased car in 2009
        • Subject to 2009 depreciation limits
        • Deduction for actual expenses or use standard mileage rate
          • Once method is chosen, must stay with this
        • Deduction for interest paid on business portion
        • Standard mileage rate is 55 cents for 2009, 50 cents for 2010
    • 8.
      • Company Car – Buy vs. Lease continued
        • Leased car in 2009
        • Deduction for entire lease payments made during the year (business use %)
        • Deduction for actual expenses or use standard mileage rate
        • No depreciation deduction
        • Auto lease inclusion
    • 9.
      • Company Car – Buy vs. Lease continued
        • Auto lease inclusion
          • FMV of business auto is at least $18,500
          • Use IRS Tables to determine income inclusion
          • Based on FMV at start of lease
          • Table amount multiplied by business use percentage
    • 10.
      • Company Car – Buy vs. Lease Comparison 2009
      • (assumes 100% business use of auto)
      Buy 2009 Lease 2009 Purchase Price $50,000 $50,000 Lease Payments in year (876*12) $0 $10,512 Interest paid in year 1 (5% rate) $2,433 $0 Depreciation year 1 $10,960 $0 Actual expenses $2,500 $2,500 Auto Lease Inclusion $0 ($78) Total deduction $15,893 $12,934
    • 11.
      • Company Car – Buy vs. Lease Comparison 2010
      • (assumes 100% business use of auto)
      Buy 2010 Lease 2010 Purchase Price $50,000 $50,000 Lease Payments in year (876*12) $0 $10,512 Interest paid in year 1 (5% rate) $2,433 $0 Depreciation year 1 $2,960 $0 Actual Expenses $2,700 $2,700 Auto Lease Inclusion $0 $(78) Total deduction $8,093 $13,134
    • 12.
      • Tax Credits
        • Disabled Access Credit
          • Small business (<$1 million in gross receipts or <30 full-time employees)
          • Amounts paid to comply with American Disabilities Act
            • Acquire or modify equipment or devices for individuals with disabilities
          • Expend at least $250 and up to maximum of $10,250
          • Credit is 50% of eligible access expenditures
    • 13.
      • Tax Credits
        • Work Opportunity Credit
          • Credit for hiring individuals in targeted group
            • Unemployed veterans, qualified veteran
            • SNAP recipient, SSI recipient
            • Disconnected youth (at least 16 but not 25)
          • Must be issued certification for each employee from State Employment Security Agency (SESA)
          • Employee hired before September 1, 2011
    • 14.
      • Tax Credits
        • Work Opportunity Tax Credit – continued
          • Credit up to 40% of qualified first-year wages
            • Up to $2,400 for each new qualified adult hire
            • Up to $1,200 for each new summer youth hire
            • Up to $4,800 for each new disabled veteran hire
    • 15.
      • Sales & Use Tax
        • Taxable Items
          • Medical equipment
          • X-Ray aprons
          • Chairs, computer hardware & software
          • Die spacers
          • Hand tools, plaster, gypsum
          • Sterilization solutions
        • PA Use Tax Postcard
    • 16.
      • Sales & Use Tax
        • Non-taxable Items
          • Masks
          • Bridges, crowns, dentures, filings, inlays
          • Syringes
          • Disposable toothbrushes, toothpaste, dental floss
            • Still non-taxable if sold to patients
    • 17.
      • New Car Purchases
      • Purchasers of new vehicles for 2009
        • Above-the-line deduction
        • State and local sales taxes or excise taxes paid on the purchase
      • Two limits on this new deduction
        • Deductible sales tax cannot exceed the portion of the tax attributable to the first $49,500 of the purchase price of any one vehicle. (For PA =$2,970)
        • Deduction will be phased out beginning at AGI exceeding $125,000 ($250,000 joint) 
    • 18.
      • Sale of Principal Residence
        • Up to $500,000 of gain on a joint return can be excluded ($250,000 on a single return)
        • Owned & occupied as your principal residence for at least 2 of the last 5 years preceding the sale
        • If only portion of 2-year ownership & use requirement is met – exclusion amount is reduced on pro rata basis
    • 19.
      • Expanded & Extended Homebuyer Credit
        • Worker, Homeownership and Business Assistance Act of 2009 (signed Nov. 6, 2009)
        • Eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence
          • On or before April 30, 2010, and close on the home no later than June 30, 2010
        • First-time homebuyer
          • Has not owned a primary residence in the last 3 years
        • Maximum credit of $8,000
    • 20.
      • Expanded & Extended Homebuyer
      • Credit continued
        • Increased income limits on purchases after 11/6/09
          • Full credit to taxpayers with MAGI up to $125,000, or $225,000 for joint filers
          • Reduced credit for MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers
        • For qualifying purchases in 2010, claim the credit on 2009 or 2010 return
    • 21.
      • Expanded & Extended Homebuyer
      • Credit continued
        • Long-time resident credit
          • Up to $6,500
        • Do not qualify as “first-time” homebuyer
        • Owned & used the same home for 5 consecutive years of the last 8 years
          • Must be used as primary residence
    • 22.
      • Energy Credits
        • Qualifying home improvements and equipment
          • For personal residence
          • Purchased in 2009 or 2010
        • Exterior doors, windows, insulation systems, furnaces, water heaters
        • Must obtain manufacturer’s certification
          • After 5/31/09 – energy star labels don’t automatically qualify
    • 23.
      • Energy Credits continued
        • No income limits for credit
        • Credit equals 30% of amount paid
        • Maximum credit over both years is $1,500
        • Additional energy credits available for geothermal heat pump, solar water heating equipment, wind energy equipment
          • No income limits on these credits
          • Credit equals 30% of amount paid
          • Available 2009 through 2016
    • 24.
      • Section 529 Plan
        • Contributions to college savings fund
          • Administered by PA State Treasury Dept
          • PA 529 Guaranteed Savings Plan
            • Tied to rate of college tuition inflation
          • PA 529 Investment Plan
          • Pay for most college expenses
            • Tuition, room & board, books, mandatory fees
          • Must be 18 and PA resident upon enrollment
    • 25.
      • Section 529 Plan continued
        • Tax-deferred growth
        • Contributions up to $13,000 per beneficiary in 2009 are deductible in computing PA taxable income
        • Federal & PA income tax-free withdrawals for qualified education expenses
        • Gift, estate and inheritance tax benefits
    • 26.
      • American Opportunity Tax Credit (Hope Credit)
        • Up to $2,500 per student
        • Available first four years of post-secondary education
        • Enrolled at least half-time
        • Qualified tuition and related expenses
          • Includes books, supplies & equipment needed
        • Cannot claim credit if claiming Lifetime Learning Credit
    • 27.
      • American Opportunity Tax Credit (Hope Credit) continued
        • Generally, 40% of credit is refundable
        • Phase out at MAGI between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return)
    • 28.
      • Lifetime Learning Credit
      • 20% of the first $10,000 of out-of-pocket expenses
        • Qualified tuition and related expenses
        • All eligible family members
      • Not required to be enrolled at least half-time
      • Phase out at MAGI between $50,000 and $60,000 ($100,000 and $120,000 joint return)
    • 29.
      • Tuition & Fees Deduction
      • Above-the line deduction up to $4,000
      • Cannot claim education credits and this deduction for same student
      • Cannot claim deduction for expenses paid with tax-free scholarship, fellowship, grant or education savings account fund
      • Can deduct qualified expenses paid with that part of the distribution that is a return of your contribution to the plan
    • 30.
      • Student Loan Interest
      • Deduction up to $2,500
      • Does have income limitations
      • Loan to pay qualified education expenses
    • 31.
      • Traditional IRAs
      • Contributions
        • For 2009 – can contribute up to $5,000
        • Age 50 or older – additional $1,000 contribution
        • Allowable deduction can be limited (member of a plan)
          • Phase-out between $55,000 and $65,000 for single (HOH plan participant)
          • Phase-out between $89,000 and $109,000 for joint (plan participant)
          • Phase-out between $166,000 and $176,000 for joint filer (non-plan participant married to plan participant)
      Retirement Planning
    • 32.
      • Traditional IRAs continued
      • Contributions
        • Can be made as late as due date of return
          • Excluding extensions (April 15, 2010)
        • Cannot make contributions if over 70 ½
      Retirement Planning
    • 33.
      • Traditional IRAs continued
      • Distributions
        • Required minimum distributions
        • Calculate by totaling all traditional IRA accounts
        • Certain distributions may include nondeductible contributions
          • To calculate nontaxable amount
            • Nondeductible Contributions x Distribution = Nontaxable
            • Balance of all IRA Accounts Amount
      Retirement Planning
    • 34.
      • Roth IRAs
      • Contributions
        • For 2009 – can contribute up to $5,000
        • Age 50 or older – additional $1,000 contribution
        • Reduce maximum amount by any contributions to regular IRA
        • Never deductible
        • Phase-out between $105,000 and $120,000 for single
        • Phase-out between $166,000 and $176,000 for joint
      Retirement Planning
    • 35.
      • Roth IRAs continued
      • Contributions
        • Can be made as late as due date of return
        • Excluding extensions (April 15, 2010)
      • Can make contributions if over 70 ½
        • Must have earned income equal to contribution
      Retirement Planning
    • 36.
      • Roth IRAs continued
      • NO Required Minimum Distributions for account owner
        • RMD applies to beneficiaries
      • Qualified distributions are not taxable
        • Made 5 or more years after established and one of the following:
          • Account owner is at least 59 ½
          • Made to beneficiary or estate of owner after owner’s death
          • Attributable to owner’s being disabled
          • First-time home purchase ($10,000 lifetime cap)
      Retirement Planning
    • 37.
      • Roth IRAs continued
      • Non-qualified distributions
        • Portion of distribution may be included in gross income
          • Amounts exceeding owner’s contributions to all Roth IRAs
        • 10% early withdrawal penalty may apply
        • Penalty applies to amount of distribution that exceeds the contributions to Roth
      Retirement Planning
    • 38.
      • Conversion to Roth IRA
      • Starting in 2010, the MAGI limit of $100,000 no longer applies
      • All taxpayers may convert regular IRA to a Roth IRA
        • Regardless of income or filing status
      • Pay ordinary income tax on converted assets
        • Can include ½ of the income in 2011 and the other ½ in 2012
      • Assets with potential for high growth are ideal investments to convert
      Retirement Planning
    • 39.
      • Conversion to Roth IRA continued
      • Starting in 2010, the MAGI limit of $100,000 no longer applies
      • All taxpayers may convert regular IRA to a Roth IRA
        • Regardless of income or filing status
      • Pay ordinary income tax on converted assets
        • Can include ½ of the income in 2011 and the other ½ in 2012
      • Assets with potential for high growth are ideal investments to convert
      Retirement Planning
    • 40.
      • Simplified Employee Pension (SEP)
      • 100% funded by employer
      • Contributions vest immediately
      • Contributions can vary and are discretionary
      • Establish by due date of 2009 tax return including extensions
      • Contribution must be made by same date
      Retirement Planning
    • 41.
      • Simplified Employee Pension (SEP) continued
      • Employees who must be covered
        • Age 21 or over
        • Must have earned at least $550 during the year
        • Have performed services for employer during any 3 of last 5 years
      • For 2009 – employer contributions are limited to the lesser of 25% of compensation or $49,000
      • Percentage contribution must be same for all employees
      Retirement Planning
    • 42.
      • Savings Incentive Match Plans (SIMPLE)
      • Employees are eligible if they received $5,000 of compensation from employer in any 2 preceding years AND
        • Are reasonably expected to receive at least $5,000 in the current year
      • Employer can lower minimum compensation limit but cannot increase
      Retirement Planning
    • 43.
      • Savings Incentive Match Plans (SIMPLE) continued
      • Maximum elective deferral contribution limit is $11,500 for 2009
        • Catch-up contribution is $2,500
      • No limits can be placed on these amounts by employer
      • Employer matching:
        • Match employee’s contribution up to 3% of participating employee’s compensation, or
        • 2% of compensation of all eligible employees earning at least $5,000
      Retirement Planning
    • 44.
      • Savings Incentive Match Plans (SIMPLE) continued
      • Matching contributions due by due date of employer’s return including extensions
      • If eligible employee leaves before employer contribution is made
        • Employer must leave account open and still make required contribution
      Retirement Planning
    • 45.
      • Age-Weighted Profit Sharing Plan
      • Higher contributions are permitted by the IRS for older plan participants
      • Limit the employer’s maximum deductible contribution to 25% of the participant’s compensation
      Retirement Planning
    • 46.
      • Questions?