No more paper savings bonds after 2011

For the past 76 years, investors had the option of buying U.S. savings bonds at a bank or credit union. After December 31, 2011, that will no longer be the case. Savings bonds can then only be purchased electronically through TreasuryDirect, sponsored on the Internet by the Treasury’s Bureau of Public Debt.  

Bonds have been available through TreasuryDirect since 2002, but investors have been slow to purchase bonds electronically. Only 11% of bonds purchased from October 2010 through June 2011 were bought through TreasuryDirect.  

Selling bonds exclusively through electronic means will save the government $70 million over five years. The Treasury points out that investors benefit too: electronic bonds are less likely to be misplaced, and they are automatically redeemed when they mature.  

The change won’t affect outstanding paper bonds.

Heed the rules for deducting charitable contributions

Sticking to the rules when making charitable contributions can save tax dollars. Here are three tips.  

• Recordkeeping is vital if you want to be able to deduct a contribution to charity.  

What records do you need? For starters, to claim an itemized deduction, you’re required to have support for all cash contributions, no matter what the amount. A bank statement, a copy of the cancelled check, or a credit card record will usually suffice for donations under $250. For donations of $250 or more, a statement from the charity is required, giving the charity’s name, the date, the amount of your donation, and the value of goods and services received for the donation, if any. In the case of payroll donations, your pay stub or W-2 can back up your deduction.  

The substantiation rules for noncash donations such as household items differ depending on the type of property and its value. For instance, you’ll need a contemporaneous written acknowledgment from the charity for donations of $250 or more. As a general rule, “contemporaneous” means you receive the acknowledgment before you file your return or before the due date of your return, whichever is earlier.  

• Make a gift from your IRA. The break allowing a transfer of up to $100,000 from your IRA to a qualified charity is available for 2011. To benefit, you must be over age 70½, and the contribution has to be a direct payment from your IRA to the charitable organization.
• Write down your vehicle mileage for charitable driving. Written records rule, whether you claim the standard mileage deduction of 14¢ a mile or actual expenses. Make sure your log or other paperwork includes the name of the charity, the date, and the miles you drove or the total cost you incurred.  

Contact us for advice on getting the most benefit from your donations, including appreciated property and out-of-pocket expenses. 

Email info@fedoriwcpa.com or call 561-852-4577

www.fedoriwcpa.com

 

Some business meals are 100% deductible

Are you watching what you eat at work? Though that may not seem like a tax question, how you account for meals can affect your business tax return.

One reason why: While you can generally deduct only half the cost of meals related to your business activities, the tax code includes specific exceptions that allow a deduction of 100% of what you spend on food and beverages in certain situations.

Here are three exceptions to the general rule.

• Meals provided to your employees on a social basis. That once-a-year holiday party qualifies for 100% deductibility as a “recreational, social, or similar activity,” as long as it is primarily for the benefit of all your employees.
•  Food with nominal cost. Do you supply bottled water, morning-meeting donuts or office snacks for your staff? “De minimis” employee benefits — those small items your business pays for that are not considered taxable income to your employees — are typically 100% deductible.
• Items available to the public. Food served at seminars, promotions, or a “new office warming” reception where you invite the public is 100% deductible.

Remember that you’ll still need to keep detailed records to substantiate your deductions for meals and food served under these exceptions.

We’ll be happy to help you review your expenses and set up a system to account for items that qualify for a more generous deduction.

Call (561) 852-4577 or email info@fedoriwcpa.com

www.fedoriwcpa.com

Who should take advantage of the IRA charitable rollover?

Last year’s tax law extended the “charitable IRA rollover” rule through the end of 2011. Taxpayers who are 70½ or older may make tax-free distributions of up to $100,000 directly to a charity from their IRA. The rollover fulfills the required minimum distribution (RMD) rule, and the rollover amount is not included in taxable income.

If you or someone in your family could qualify to make a charitable IRA rollover, should it be considered? Here are some of the situations in which this tax break could be beneficial.

• You have to take the RMD, but you don’t need the money and you don’t want to pay tax on the distribution. 
• You want to give to charity, but you don’t itemize deductions so any contribution you make would not be tax-deductible. 
• You do itemize deductions, but your charitable contribution deduction would be affected by the 50% / 30% of AGI limit. 
• Having to include your RMD in income would result in the phasing out of other deductions and credits based on adjusted gross income.

The charitable IRA rollover is a powerful tool for tax planning. But remember, as it now stands, this provision will expire December 31, 2011. Give us a call if you would like to analyze whether this option makes tax sense for you or a family member.

Call (561) 852-4577 or email info@fedoriwcpa.com

www.fedoriwcpa.com

Act soon to benefit from expiring tax breaks

A number of tax breaks are due to expire at the end of this year. Though Congress may renew some or all of them, there is no way of knowing if or when they will. As part of your year-end 2011 tax review, consider whether any of these opportunities to cut your tax bill fit your situation.

• The option for deducting state and local sales taxes in lieu of deducting state and local income taxes.
• The above-the-line deduction for up to $4,000 of higher education expenses.
•  The above-the-line deduction of up to $250 for classroom supplies purchased by teachers.
•  The tax-free charitable contribution from an IRA of up to $100,000 allowed for taxpayers 70½ or older.
•  100% bonus depreciation on new equipment purchased by business.
•  $500 energy credit for energy-saving expenditures for your personal residence.
•  Section 179 expensing election on up to $500,000 of new or used business equipment purchases.

IRS issues guidance on bonus depreciation

Under the “Tax Relief Act of 2010,” you may be able to write off the entire cost of business property placed in service this year, thanks to 100% “bonus depreciation.”

 Prior to this law, a business was able to claim 50% bonus depreciation on qualified new (but not used) property placed in service in 2010. This included property with a cost recovery period of 20 years or less, most computer software, qualified leasehold improvement property, and certain water utility property. Bonus depreciation could be coordinated with Section 179 first-year expensing and regular depreciation deductions (subject to the annual limits).

 The “Tax Relief Act,” signed December 17, 2010, improved and extended the tax benefits. It allows a business to claim 100% bonus depreciation for qualified property placed in service from September 9, 2010, through December 31, 2011 (through 2012 for property with a cost recovery period of ten years or more and certain aircraft and transportation property). As the law currently stands, 50% bonus depreciation can be claimed for qualified property placed in service during 2012.

 The “Tax Relief Act of 2010″ did not change the definition of “qualified property”; it remains the same as it was before.

 Recently, the IRS issued new guidance on using bonus depreciation. It focuses on the following areas:

• Depreciation step-down. You’re allowed to “step down” from 100% bonus depreciation to 50% bonus depreciation this year if it suits your needs. For example, it may not be advantageous for a business to front-load its depreciation deductions to receive the maximum amount. The IRS guidance spells out the procedure for cutting back to 50% bonus depreciation.
•  Company vehicles. The first-year depreciation deduction for “luxury cars” and other vehicles is enhanced by $8,000 due to the bonus depreciation rules.

 Be aware that certain heavy-duty SUVs and other vehicles weighing more than 6,000 pounds are exempt from the luxury car limits. If purchased after September 8, 2010, and before January 1, 2012, they may qualify for 100% bonus depreciation.

• Qualified leasehold property. The IRS says that qualified restaurant and retail improvement properties may be eligible for 100% bonus depreciation under the definition of “qualified leasehold property.”
• Component depreciation. A business may be able to deduct certain components of a business building over a faster cost recovery period than the usual 39-year period required for an entire building. The IRS ruling authorizes an election to use 100% bonus depreciation for qualified components of a self-constructed building.

Even with the recent IRS guidance, the depreciation rules remain very complicated. For assistance in applying the rules for maximum tax benefit to your business, contact our office.  

Call (561) 852-4577 or email info@fedoriwcpa.com

File by October 17 to avoid penalties

Tick-tock. Time is almost up on that six-month extension you filed back in April to give yourself more time to complete your 2010 individual income tax return.

What happens if you fail to file your return by the extended due date? One consequence: Unless a disaster-relief exception applies or you have a valid reason, you may be charged penalties and interest.

For example, the penalty for filing your return after October 17, 2011, is 5% of the amount of your unpaid tax, per month, up to a maximum of 25%. After 60 days, a minimum penalty of the smaller of $135 or 100% of the tax due applies.

In addition, a late payment penalty of ½ of 1% of the tax due may apply for each month or part of a month that you fail to pay the tax due until you reach the full 25%. The two penalties interact and can be combined.

You’ll also have to pay interest on the tax due. During 2011, the rate on underpayment of tax was 3% in the first quarter, 4% in the second and third quarters, and back to 3% in the fourth quarter. The interest is compounded daily and can be charged on penalties.

Since the penalty and interest are based on unpaid tax, neither applies when your return shows zero tax due. Filing a return is still a good idea, however. Why? The general rule limiting the IRS to a three-year period for assessing tax begins when you file. No return means no triggering of the statute of limitations.

Give us a call if you think you may miss a deadline. We can help keep penalties to a minimum.

Should you undo a Roth to save taxes?

Yes, 2010 was the year of the Roth, and you may have converted your traditional IRA to take advantage of the one-time option to postpone recognizing the income. As you know, half of the related tax bill will be due with your 2011 tax return.

End of story? Not exactly. You can still take advantage of a planning window that may save you money. Under the rules, you have until October 17, 2011, to change your mind about the original conversion.

The tax term for the “do-over” election is recharacterization. It works like this: Say the value of the assets you converted to a Roth during 2010 has declined. That means if you had waited until now to convert, you would have ended up paying less tax. Reversing your 2010 decision puts you back in the position you were in before the Roth conversion and wipes out your original tax liability.

Even better, you can still do another traditional-to-Roth IRA conversion after recharacterizing. While the option of splitting the income over future years is no longer available, you can achieve the same effect by reconverting over a multi-year period. Just be aware that time restrictions may apply on this strategy. For details or assistance, give us a call.

Use Tax Breaks to Cut Education Costs

As schools get back in session, it’s a good time to check the education tax breaks for which you might qualify. First, there’s the American Opportunity Tax Credit (formerly called the Hope credit) for a percentage of qualified expenses paid during the first four years of higher education. Second, the Lifetime Learning Credit allows a deduction for a percentage of qualified expenses paid for any year the American Opportunity Credit isn’t claimed, and it even applies to job-related classes. Third, you may qualify for a deduction for interest paid on student loans. Fourth, education savings accounts allow annual nondeductible contributions for children under 18, with tax-free withdrawals for qualifying education expenses. Section 529 plans for college expenses should also be investigated.

When is income taxable, and when is it not?

You only have to examine your paycheck to realize certain income is tax-free. For example, health insurance premiums paid by your employer are generally not includible in your income.

Do you know the tax status of other types of income? Here’s a quiz to test your knowledge.

1. You tell your son he’ll be the sole beneficiary of your estate, and that you’ve decided to give him an advance on his inheritance. You hand him a check for $10,000. He wants to know how much he’ll have to pay in taxes. What do you tell him?

Answer: Gifts, bequests, devises, and inheritances are generally not taxable to the beneficiary. Income produced from those sources is taxable to the beneficiary.

2. You withdraw $20,000 of the contributions you made to your Roth IRA over the past five years, but you’re not of retirement age. Do you have a taxable event?

Answer: Unlike traditional IRAs, distributions from Roths are first allocated to amounts you contributed to the account. To the extent the distribution is a return of your contributions, it’s not included in your income, and you can withdraw it penalty- and tax-free.

3. You purchase a piano at an auction and take it home. While cleaning it, you discover $5,000 inside. Is this money taxable to you?

Answer: Yes. Once it becomes yours, “treasure trove” property is taxable to you at fair market value.