Dear friends of RC Jones & Associates
With the end of the year fast approaching, you can often cash in on unique tax-saving opportunities that won’t be available once Jan. 1 rolls around. Be aware that certain new tax developments may also have an impact on year-end planning in 2009.
With that in mind, following are several strategies you might use to cut your personal tax bill at the end of the year.
• Use capital gains and capital losses to offset each other. Depending on your situation, you may realize gains or losses at year-end. Any excess loss can offset up to $3,000 of ordinary income. Key point: For 2009, the maximum tax rate on long-term capital gain is 0% for certain taxpayers (e.g., your children) in the regular 10% or 15% tax brackets.
• Try to minimize the “kiddie tax.” For 2009, the kiddie tax generally applies to a child under age 19 or a full-time student under age 24 receiving more than $1,900 of unearned income. This may eliminate or reduce the benefit of the 0% capital gains rate.
• Have an estimate made of your alternative minimum tax (AMT) liability. It may be possible to avoid or reduce the AMT by postponing certain “tax preference” items to 2010. Note: The new economic stimulus law provides slightly higher AMT exemption amounts for 2009.
• Contribute to your favorite charities. But know that the IRS recently toughened the substantiation rules for monetary gifts. In general, you are required to obtain a written confirmation of your gift.
• Avoid estimated tax penalties. No penalty is imposed if your tax payments for 2009, including withholding, equals at least 90% of this year’s tax liability or 100% of last year’s liability (110% if your 2008 AGI was $150,000 or over).
• Bunch medical expenses in the year you may qualify for a deduction. Your unreimbursed expenses can be deducted only to the extent the total exceeds 7.5% of your adjusted gross income (AGI).
Of course, other year-end planning techniques may be appropriate or preferable for certain taxpayers. Call us to arrange a meeting to discuss your situation at (816) 792-9966.
Very truly yours,
Robert C. Jones
www.rcjonesinc.com
Thursday, October 22, 2009
2009 BUSINESS YEAR-END TAX PLANNING
Dear friends of RC Jones & Associates
Despite conventional wisdom, year-end planning isn’t just for personal tax savings. There’s plenty a small business owner or manager can do between now and Dec. 31 to cut taxes in 2009. Furthermore, new legislation may give a boost to year-end tax planning for your business. Consider the following points:
• Under the Section 179 “expensing” deduction, a business can write off the full cost of certain business assets, up to a dollar cap. For 2009, the new economic stimulus law preserves the maximum deduction of $250,000 initially limited to 2008.
• Take advantage of bonus depreciation. For qualified assets placed in service in 2009, you may claim an extra 50% deduction in addition to available Section 179 and regular depreciation deductions.
• Increase your business driving or decrease personal driving—or both—to preserve top deductions for personally-owned vehicles. In lieu of deducting actual expenses, you might use the standard mileage rate. The rate for 2009 is 55 cents per mile (plus related tolls and parking fees).
• If your company operates on the accrual basis, fix bonus amounts before Jan. 1, but pay them early next year. Generally, the bonuses aren’t taxable to employees until 2010, but can be deducted on your company’s 2009 return so long as they’re paid by March 15, 2010.
• Nail down current deductions for repairs to business premises by scheduling them separate and apart from major renovations. As opposed to repairs, capital improvements aren’t deductible but are instead added to the “basis” of property.
• Keep detailed records of collection efforts to support deductions for bad debts that became worthless in 2009.
• Reschedule business trips planned for early next year to December to increase travel deductions for 2010.
Obviously, this is only a quick summary of several popular tax techniques. Give us a call at (816) 792-9966 for more in-depth information about year-end planning for your business.
Very truly yours,
Robert C. Jones
www.rcjonesinc.com
Despite conventional wisdom, year-end planning isn’t just for personal tax savings. There’s plenty a small business owner or manager can do between now and Dec. 31 to cut taxes in 2009. Furthermore, new legislation may give a boost to year-end tax planning for your business. Consider the following points:
• Under the Section 179 “expensing” deduction, a business can write off the full cost of certain business assets, up to a dollar cap. For 2009, the new economic stimulus law preserves the maximum deduction of $250,000 initially limited to 2008.
• Take advantage of bonus depreciation. For qualified assets placed in service in 2009, you may claim an extra 50% deduction in addition to available Section 179 and regular depreciation deductions.
• Increase your business driving or decrease personal driving—or both—to preserve top deductions for personally-owned vehicles. In lieu of deducting actual expenses, you might use the standard mileage rate. The rate for 2009 is 55 cents per mile (plus related tolls and parking fees).
• If your company operates on the accrual basis, fix bonus amounts before Jan. 1, but pay them early next year. Generally, the bonuses aren’t taxable to employees until 2010, but can be deducted on your company’s 2009 return so long as they’re paid by March 15, 2010.
• Nail down current deductions for repairs to business premises by scheduling them separate and apart from major renovations. As opposed to repairs, capital improvements aren’t deductible but are instead added to the “basis” of property.
• Keep detailed records of collection efforts to support deductions for bad debts that became worthless in 2009.
• Reschedule business trips planned for early next year to December to increase travel deductions for 2010.
Obviously, this is only a quick summary of several popular tax techniques. Give us a call at (816) 792-9966 for more in-depth information about year-end planning for your business.
Very truly yours,
Robert C. Jones
www.rcjonesinc.com
Wednesday, September 23, 2009
TAX ANGLES ON DONATED 'CLUNKERS'
Dear friends of RC Jones & Associates
The hugely popular cash-for-clunkers program ended Aug. 25, 2009. This new program enabled vehicle owners to realize a tax-free discount of up to $4,500 on a trade-in. But you can still qualify for big tax benefits if you donate your "clunker" to charity.
Instead of trading in your vehicle, simply give it away to a qualified charitable organization. This entitles you to a deduction on your '09 return.
The rules for charitable donations of vehicles were recently tightened by the American Jobs Creation Act of 2004. However, you may be able to qualify under a special exception.
Prior to 2004, you could generally deduct the fair market value (FMV) of a vehicle you donated to charity. But Congress became concerned about some over-aggressive valuations for beat-up jalopies. Under the 2004 law, the charitable deduction for a vehicle valued above $500 is generally limited to the amount the charity receives from a resale of the vehicle. The crackdown also applies to donations of boats and aircraft.
On the other hand, if (1) the charity "materially improves" the vehicle (e.g., it repairs dents or installs new features like a any system) or (2) it “significantly uses” the vehicle for its tax-exempt purpose and properly certifies its use, you can still deduct the full FMV.
In addition, the regular limit on the donation value doesn’t apply if the charity sells the vehicle after 2004 at a price significantly below FMV, or gives it away, to a "needy individual." To qualify under this exception, the charity must be dedicated to relieving the poor and distressed or the underprivileged that are in need of transportation.
We can help you maximize the tax benefits for charitable donations of vehicles. Before you give away a clunker, call our office at (816) 792-9966. One of our expert staff can provide guidance.
Very truly yours,
Robert C. Jones
www.rcjonesinc.com
The hugely popular cash-for-clunkers program ended Aug. 25, 2009. This new program enabled vehicle owners to realize a tax-free discount of up to $4,500 on a trade-in. But you can still qualify for big tax benefits if you donate your "clunker" to charity.
Instead of trading in your vehicle, simply give it away to a qualified charitable organization. This entitles you to a deduction on your '09 return.
The rules for charitable donations of vehicles were recently tightened by the American Jobs Creation Act of 2004. However, you may be able to qualify under a special exception.
Prior to 2004, you could generally deduct the fair market value (FMV) of a vehicle you donated to charity. But Congress became concerned about some over-aggressive valuations for beat-up jalopies. Under the 2004 law, the charitable deduction for a vehicle valued above $500 is generally limited to the amount the charity receives from a resale of the vehicle. The crackdown also applies to donations of boats and aircraft.
On the other hand, if (1) the charity "materially improves" the vehicle (e.g., it repairs dents or installs new features like a any system) or (2) it “significantly uses” the vehicle for its tax-exempt purpose and properly certifies its use, you can still deduct the full FMV.
In addition, the regular limit on the donation value doesn’t apply if the charity sells the vehicle after 2004 at a price significantly below FMV, or gives it away, to a "needy individual." To qualify under this exception, the charity must be dedicated to relieving the poor and distressed or the underprivileged that are in need of transportation.
We can help you maximize the tax benefits for charitable donations of vehicles. Before you give away a clunker, call our office at (816) 792-9966. One of our expert staff can provide guidance.
Very truly yours,
Robert C. Jones
www.rcjonesinc.com
CAN YOU RE-CONVERT AN IRA?
Dear friends of RC Jones & Associates
Suppose you converted your IRA to a Roth IRA just before the bottom fell out of the stock market last year. Because the tax liability for the conversion is based on the value of the account on the last day of the prior year – Dec. 31, 2007 -- you would have paid tax on an inflated value. So you may have opted to re-characterize your Roth into a traditional IRA.
But now you see signs of a market rebound. And you'd like to take advantage of the Roth IRA setup for all the same reasons that attracted you to it in the first place.
In this case, you might "reconvert" your IRA. In other words, you can convert your re-characterized traditional IRA back into a Roth IRA. This is essentially treated as a new conversion for tax purposes.
With a Roth IRA in existence at least five years, qualified distributions are completely exempt from federal income tax. A qualified distribution is one that is paid after reaching age 59 1/2, received on account of death or disability or used for first-time homebuyer expenses (up to a lifetime limit of $10,000). In contrast, traditional IRA distributions are taxed at ordinary income rates as high as 35% -- probably even higher in future years.
However, the IRS doesn't allow you to keep flip-flopping back and forth between the two types of IRAs. You must meet specific time restrictions for a reconversion. Specifically, a traditional IRA can’t be reconverted to a Roth before the later of:
1. The beginning of the tax year following the tax year of the conversion
2. The end of the 30-day period beginning on the day of the re-characterization.
This rule applies regardless of whether the re-characterization falls into the year of the conversion or the following year.
This is an important decision for taxpayer’s rapidly approaching retirement. We can help you analyze your personal needs. Call us at (816) 792-9966 to arrange a consultation.
Very truly yours,
Robert C. Jones
www.rcjonesinc.com
Suppose you converted your IRA to a Roth IRA just before the bottom fell out of the stock market last year. Because the tax liability for the conversion is based on the value of the account on the last day of the prior year – Dec. 31, 2007 -- you would have paid tax on an inflated value. So you may have opted to re-characterize your Roth into a traditional IRA.
But now you see signs of a market rebound. And you'd like to take advantage of the Roth IRA setup for all the same reasons that attracted you to it in the first place.
In this case, you might "reconvert" your IRA. In other words, you can convert your re-characterized traditional IRA back into a Roth IRA. This is essentially treated as a new conversion for tax purposes.
With a Roth IRA in existence at least five years, qualified distributions are completely exempt from federal income tax. A qualified distribution is one that is paid after reaching age 59 1/2, received on account of death or disability or used for first-time homebuyer expenses (up to a lifetime limit of $10,000). In contrast, traditional IRA distributions are taxed at ordinary income rates as high as 35% -- probably even higher in future years.
However, the IRS doesn't allow you to keep flip-flopping back and forth between the two types of IRAs. You must meet specific time restrictions for a reconversion. Specifically, a traditional IRA can’t be reconverted to a Roth before the later of:
1. The beginning of the tax year following the tax year of the conversion
2. The end of the 30-day period beginning on the day of the re-characterization.
This rule applies regardless of whether the re-characterization falls into the year of the conversion or the following year.
This is an important decision for taxpayer’s rapidly approaching retirement. We can help you analyze your personal needs. Call us at (816) 792-9966 to arrange a consultation.
Very truly yours,
Robert C. Jones
www.rcjonesinc.com
Thursday, August 20, 2009
NEW TAX BREAKTHROUGH FOR LLC'S
Dear friends of RC Jones & Associates
An important new Tax Court case could provide valuable tax savings for owners of limited liability corporations (LLCs) and partners in limited liability partnerships (LLPs). The decision permits a couple to use a loss from an LLC or LLP to offset highly taxed income. Previously, it was presumed that such losses could only be used to offset income from other "passive" activities.
Background: New forms of business ownership featuring limited liability are growing in popularity. In particular, the LLC setup is advantageous for its owners (called "members"). As with other pass-through entities, like S corporations and partnerships, items of income and loss of an LLC are passed through to the members. There's only one level of tax as opposed to double taxation for C corporations.
However, the IRS has long presumed that the passive activity loss (PAL) rules automatically apply to LLCs. If a business activity is characterized as a passive activity, the loss may only be used to offset income from other passive activities. Therefore, you can't use a PAL to offset income from wages or other highly taxed income. Any excess loss is suspended and is carried forward to future years.
A passive activity is defined as a trade or business in which you do not “materially participate.” The IRS has established several tests for determining material participation. But certain activities, such as rental real estate and limited partnership interests, are treated as passive activities right from the start.
In the new case, a couple's losses from several LLCs and LLPS were disallowed by the IRS. But the Tax Court disagreed with the IRS' presumption. Unlike a limited partner in a limited partnership, LLC and LLP owners do not compromise their limited liability under state law by participating in management. Therefore, the taxpayers should not automatically be treated as passive investors. If they qualify as material participants, they can deduct the losses against other income.
This new decision may have particular significance for many LLC members. Based on the new Tax Court case, some LLC members may be entitled to refunds for prior years. Call us at (816) 792-9966 to see if it affects your situation.
Very truly yours,
Robert C. Jones
An important new Tax Court case could provide valuable tax savings for owners of limited liability corporations (LLCs) and partners in limited liability partnerships (LLPs). The decision permits a couple to use a loss from an LLC or LLP to offset highly taxed income. Previously, it was presumed that such losses could only be used to offset income from other "passive" activities.
Background: New forms of business ownership featuring limited liability are growing in popularity. In particular, the LLC setup is advantageous for its owners (called "members"). As with other pass-through entities, like S corporations and partnerships, items of income and loss of an LLC are passed through to the members. There's only one level of tax as opposed to double taxation for C corporations.
However, the IRS has long presumed that the passive activity loss (PAL) rules automatically apply to LLCs. If a business activity is characterized as a passive activity, the loss may only be used to offset income from other passive activities. Therefore, you can't use a PAL to offset income from wages or other highly taxed income. Any excess loss is suspended and is carried forward to future years.
A passive activity is defined as a trade or business in which you do not “materially participate.” The IRS has established several tests for determining material participation. But certain activities, such as rental real estate and limited partnership interests, are treated as passive activities right from the start.
In the new case, a couple's losses from several LLCs and LLPS were disallowed by the IRS. But the Tax Court disagreed with the IRS' presumption. Unlike a limited partner in a limited partnership, LLC and LLP owners do not compromise their limited liability under state law by participating in management. Therefore, the taxpayers should not automatically be treated as passive investors. If they qualify as material participants, they can deduct the losses against other income.
This new decision may have particular significance for many LLC members. Based on the new Tax Court case, some LLC members may be entitled to refunds for prior years. Call us at (816) 792-9966 to see if it affects your situation.
Very truly yours,
Robert C. Jones
DONATE IRA FUNDS TO CHARITY
Dear friends of RC Jones & Associates
Time is running out on a unique tax break for older taxpayers with charitable intentions. If you donate funds directly from your IRA to a qualified charity of your choice, you can avoid tax on the distribution.
The 2006 pension law created a two-year window for these tax-free distributions. This provision was extended through 2009 by last year's bailout law, so there are just a few months left to cash in on this tax break.
Here are more details: If you are age 70 ½ or older, you can exclude from tax “qualified charitable distributions” of up to $100,000 that would otherwise be taxable as IRA distributions. A qualified charitable distribution isn’t reported as taxable income or claimed as a charitable deduction. The distribution also will not increase your adjusted gross income (AGI) for other tax purposes.
For example, if you have unreimbursed medical expenses this year, the IRA distribution to charity may help you qualify for a medical expense deduction. Similarly, you might be able to reduce the tax due on Social Security benefits through such a gift.
Note that your contribution must otherwise qualify as a charitable donation. Also, contributions must be made directly by an IRA trustee to the charitable organization.
We can help you determine if this technique is appropriate for your particular circumstances. Remember this tax break expires on Dec. 31. Call us at (816) 792-9966 to arrange a one-on-one
Very truly yours,
Robert C. Jones
Time is running out on a unique tax break for older taxpayers with charitable intentions. If you donate funds directly from your IRA to a qualified charity of your choice, you can avoid tax on the distribution.
The 2006 pension law created a two-year window for these tax-free distributions. This provision was extended through 2009 by last year's bailout law, so there are just a few months left to cash in on this tax break.
Here are more details: If you are age 70 ½ or older, you can exclude from tax “qualified charitable distributions” of up to $100,000 that would otherwise be taxable as IRA distributions. A qualified charitable distribution isn’t reported as taxable income or claimed as a charitable deduction. The distribution also will not increase your adjusted gross income (AGI) for other tax purposes.
For example, if you have unreimbursed medical expenses this year, the IRA distribution to charity may help you qualify for a medical expense deduction. Similarly, you might be able to reduce the tax due on Social Security benefits through such a gift.
Note that your contribution must otherwise qualify as a charitable donation. Also, contributions must be made directly by an IRA trustee to the charitable organization.
We can help you determine if this technique is appropriate for your particular circumstances. Remember this tax break expires on Dec. 31. Call us at (816) 792-9966 to arrange a one-on-one
Very truly yours,
Robert C. Jones
Thursday, July 23, 2009
PENALTY-FREE WITHDRAWALS FROM YOUR 401(K) OR IRA
Dear friends of RC Jones & Associates
Normally, it is not advisable to take withdrawals from your qualified retirement plans and IRAs prior to age 59 1/2. Not only does this erode your nest egg, but you're generally hit with a 10% penalty tax on top of regular income tax.
However, you may be facing a cash crunch during this recession with no place else to turn. In that case, you can minimize your exposure to income tax and penalties if you qualify for one of several tax-law exceptions. Here are five prime examples.
1. No penalty will be assessed if you arrange to receive “substantially equal periodic payments” (SEPPs) from a qualified plan or IRA based on your life expectancy or the joint life expectancies of you and a designated beneficiary. The payments must last for the longer of five years or until you reach age 59 1/2.
2. If your family has been hit with some unexpected medical bills, you can tap into your plan or IRA to pay for medical expenses. The withdrawals are exempt from the penalty to the extent that the cost qualifies for the medical expense deduction (i.e., unreimbursed medical expenses above 7.5% of your adjusted gross income).
3. The tax law includes a special tax break for "first-time homebuyers." You don't have to pay the penalty on pre-age 59 1/2 withdrawals if you take money out of an IRA to buy or build a qualified home. Similarly, you might use IRA funds to help your child buy a home. Caution: There’s a lifetime dollar cap of $10,000 on this exception. (Don’t forget about the $8,000 credit that is currently available)
4. Distributions from an IRA made before age 59 1/2 won’t trigger the penalty if the funds are used to pay for a child's qualified higher education expenses. This includes tuition, books, supplies, etc. -- even room and board if your child is a full-time student.
5. If IRA funds are used to continue health insurance coverage under COBRA, early withdrawals are exempt from the penalty. In a new field advice memo, the IRS says self- employed individuals are also exempt if they can show they would have received unemployment benefits for 12 weeks if they were an employee.
Everyone's situation is different and early withdrawals from retirement accounts should be viewed as a last resort. We can analyze whether you should take an early withdrawal or utilize other resources. Call us at (816) 792-99666 to arrange a consultation.
Very truly yours,
Robert C. Jones
www.rcjonesinc.com
Normally, it is not advisable to take withdrawals from your qualified retirement plans and IRAs prior to age 59 1/2. Not only does this erode your nest egg, but you're generally hit with a 10% penalty tax on top of regular income tax.
However, you may be facing a cash crunch during this recession with no place else to turn. In that case, you can minimize your exposure to income tax and penalties if you qualify for one of several tax-law exceptions. Here are five prime examples.
1. No penalty will be assessed if you arrange to receive “substantially equal periodic payments” (SEPPs) from a qualified plan or IRA based on your life expectancy or the joint life expectancies of you and a designated beneficiary. The payments must last for the longer of five years or until you reach age 59 1/2.
2. If your family has been hit with some unexpected medical bills, you can tap into your plan or IRA to pay for medical expenses. The withdrawals are exempt from the penalty to the extent that the cost qualifies for the medical expense deduction (i.e., unreimbursed medical expenses above 7.5% of your adjusted gross income).
3. The tax law includes a special tax break for "first-time homebuyers." You don't have to pay the penalty on pre-age 59 1/2 withdrawals if you take money out of an IRA to buy or build a qualified home. Similarly, you might use IRA funds to help your child buy a home. Caution: There’s a lifetime dollar cap of $10,000 on this exception. (Don’t forget about the $8,000 credit that is currently available)
4. Distributions from an IRA made before age 59 1/2 won’t trigger the penalty if the funds are used to pay for a child's qualified higher education expenses. This includes tuition, books, supplies, etc. -- even room and board if your child is a full-time student.
5. If IRA funds are used to continue health insurance coverage under COBRA, early withdrawals are exempt from the penalty. In a new field advice memo, the IRS says self- employed individuals are also exempt if they can show they would have received unemployment benefits for 12 weeks if they were an employee.
Everyone's situation is different and early withdrawals from retirement accounts should be viewed as a last resort. We can analyze whether you should take an early withdrawal or utilize other resources. Call us at (816) 792-99666 to arrange a consultation.
Very truly yours,
Robert C. Jones
www.rcjonesinc.com
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