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ProAdvisor On Staff
As seen in
Los Angeles Certified Health Business Development Consultant
Tuesday February 07, 2017
The year 2009 will be one to tell your
grandchildren about! Not since the Great Depression has the economy dampened
growth and prosperity as it has this year. The year has seen massive
unemployment, a surge in Chinese financial muscle, and the bankruptcy of
venerable U.S. institutions, among other ‘firsts’.
Another way of looking at the financial mire is to see a long overdue
‘correction’ and awakening to a changing world. The way we handle our
finances and manage our businesses is entering a forever-new phase.
The lesson as I see it is to plan for the worst and always look for new
opportunities. Be nimble to shift direction with the blowing winds. Above
all, as always, stick to basics.
Note that all tax laws included in these Highlights are subject to last
minute changes by Congress. The financial currents in this country are
constantly changing . . .
Breaking news . . . December 3, 2009 the House passed legislation
permanently extending the top federal estate tax rate of 45 percent with a
$3.5 million exclusion ($7 million for married couples). The Senate’s
December schedule is dominated by debate on health care reform, which leaves
little time for action on the estate tax bill. Watch the news for end of the
NOTEWORTHY NEW TAX LAWS
First-time homebuyer credit extended and enhanced. First-time homebuyers
who purchase their homes after November 6, 2009 and before May 1, 2010 are
entitled to a maximum credit of $8,000. Certain non-first-time homebuyers
who are long-time residents are entitled to a maximum tax credit of $6,500.
Assorted rules and limitations apply. For more information go to:
Net operating loss carrybacks are extended and enhanced. A small
business can now elect to carry back a Net Operating Loss five, four,
or three years. This allows businesses to recover cash paid to the IRS in
mitigation of a weakened business climate. It is effective for net operating
losses generated in tax years beginning or ending in 2008. For years
beginning in 2009, the loss that is carried back five years can only
offset a maximum of 50% of the taxpayer’s taxable income for that fifth
New tax legislation affecting individuals.
. . . Required Minimum
Distributions are suspended for 2009 for all qualified defined
contribution plans and IRA accounts. (You may still take a distribution if
. . . Unemployment compensation excluded up to $2,400 per person (2009 only)
. . . $ 2 million exclusion on discharge of debt on principal residence
. . . One year extension of enhanced Section 179 ‘expensing’
. . . One year extension of special 50% bonus depreciation. Buy and place
use assets in service on or before December 31, 2009 for this benefit
. . . Congress also temporarily reduced the recovery period from 39 years to
15 years for
qualified leasehold improvements, restaurant property and retail improvement
property placed in service by December 31, 2009.
. . . Deduction for sales tax on new car purchase – with some limitations
. . . Hope Credit enhanced and temporarily renamed American Opportunity Tax
Strategies for reducing taxable income.
• Prepay deductible tax
payment such as state income taxes and property taxes;
• Step up your charitable contributions – noncash items will work well .
• Shelter wages by maximizing 401(k) elective contributions or making a
deductible IRA contribution
• Defer receipt of income where you can control payment sources
• Prepaying deductible expenses to the extent allowable
• Performing deferred maintenance and repairs on rental properties
generating taxable income
• Maximizing IRC Section 179 expensing and bonus depreciation for new
• Reduce distributions from retirement plans under RMD guidelines
Accelerate capital gains. The final step in taking advantage of the
maximum 15% capital gains rates in the years 2008 to 2010 before they
revert to 20% in 2011 is to ensure that collection of proceeds are
recognized as long-term capital gains. Consider:
• Accelerate collection
on installment sales;
• Reposition investment portfolio allocation; and
• Defer capital losses to offset higher-taxed capital gains.
With federal tax revenues declining, the
low 15% rate may not be extended beyond 2010. If investment considerations
justify selling your stock, it may be smart to cash in your gains at these
favorable rates in 2009.
If you hold stocks with both gains and losses, you can sell the appreciated
stock in 2009, to include the income at low capital gains rates, and then
sell the depreciated stock in the following year, when the losses could
offset income taxed at a high rate. Other strategies may apply depending
upon the extent of your gains and losses.
The Standard Deduction also includes
. . . sales tax paid on
the purchase of a new car
. . . property taxes paid by non-itemizers
. . . net disaster losses
Deduct medical expenses of a qualifying relative even though you cannot
claim that person as a relative. If you follow the rules these payments
to the provider of services can help you get over the 7-1/2% AGI hurdle.
Charitable donation substantiation. The rules are generally the same
as for 2008. The basic concepts to remember are to have a bank record of the
payment and a written contemporaneous acknowledgement from the donee. For
non-cash contributions you can prove the items to be in ‘good used condition
or better’ (as required by the IRS) with a detailed statement complete with
pictures. If you want the deduction then take photos and prepare a
Estimated tax payment requirements eased for small business owners.
For 2009, an individual who is a small business owner (a business which had
an average of less than 500 employees in the prior year) can avoid
the underpayment penalty if that individual makes estimated tax payments
equal to the lesser of 90% of the tax shown on the return or 90% of the tax
shown on the return for the preceding year. This compares to the 2008
requirement of 100% of the prior-year tax or 110% if AGI for the prior year
. . . You qualify if
• Your AGI on the
prior-year return is less than $500,000, and
• You certify that more than 50% of the gross income shown on the
prior-year return was from your small business.
Enhanced education tax credit. The newly
named American Opportunity Tax Credit (formerly the Hope Credit). Covers
the first four years of college; maximum credit of $2,500; includes tuition,
fees, and materials; up to 40% refundable; AGI phase-out in 2009 and 2010 of
$80 to $90,000 ($160,000 to $180,000 on a joint return).
Non-business energy credits for the cost of energy efficient improvements
to a principal residence. For 2009 and 2010 the credit rate is increased
from 10% to 30%, the dollar limitation on residential energy property
expenditures are eliminated, the lifetime limitation of $500 for the credit
has been eliminated, and the credit is now limited to $1,500 in the
aggregate for 2009 and 2010.
Due to the numerous types of property and
improvements that may qualify,
the following resources are provided:
www.dsireusa.org.summarytables (California energy)
Gift tax exclusion. For 2009 and
2010 the annual exclusion is $13,000 a person.
Additional planning pointers:
• Contribute appreciated
assets such as stock, rather than cash, to a charitable organization and
get a deduction of the full Fair Market Value and be relieved of tax on
the capital gain.
• Make sure you have maximized your 401(k) plan for 2009. The maximum
deferral is $16,500. If you are at least age 50, you may make a catch-up
contribution of $5,500.
• 401(k) and profit-sharing plans must be set up before the end of the
year. SEPs may be set up on or before the due date of the return (including
extensions). IRAs may be set up on or before the original due date of
the return (NOT including extensions).
• Consider putting the spouse on the payroll and contributing for him or
• Maximum IRA contribution for 2009 is $5,000 plus a $1,000 catch up
contribution if age 50 or over. Consider making a spousal IRA
contribution as well.
Roth IRA Conversions. You may
convert all or a portion of a traditional IRA to a Roth IRA and make future
distributions tax-free, but there is a cost: The amount of the conversion is
taxable income in the year of the conversion. If the conversion takes place
in 2010 you can recognize half the income in 2011 and half in 2012. Or you
can elect to include all the income in 2010.
There are two reasons why the
conversions are at the forefront of tax planning strategies this year:
1. Beginning in 2010
there are no longer any income limitations to prevent you from
making the conversion
2. It is good planning to make conversions when income is down,
which may be the case in 2009, and you can report the income from
the conversion in a low tax bracket.
BUSINESS AND OTHER PROVISIONS
Domestic Production Activities Deduction. As mentioned in my last
several Tax Highlights, this deduction is a ‘give-away’ to business
taxpayers. The deduction is a fixed percentage of income from qualified
production activities or adjusted gross income, whichever is less. For 2005
and 2006 the deduction was 3%; for 2007 through 2009 the percentage was 6%,
and for 2010 and after is 9%. Complex calculations must be followed.
Qualified production activities include manufacturing based in the U.S.;
selling, leasing, or licensing items that have been manufactured, produced,
grown or extracted in the U.S.; selling, leasing, or licensing motion
pictures that have been produced in the U.S.; construction services in the
U.S. including building and renovation of residential and commercial
properties including infrastructure; engineering and architectural services
relating to a U.S.-based construction project; software development in the
U.S., including the development of video games.
A comprehensive explanation is provided in my 2006 Tax Highlights on my web
Partnerships and LLCs. Beginning in 2009, partnership extensions are
for five months, not six.
Troubled real estate – foreclosures. There seems to be no end to
foreclosures in sight. For a better understanding of foreclosures see my Tax
Highlights for 2008 as posted on my web site.
Mandatory e-file. HR 3548 requires nearly all paid preparers to file
their individual clients’ returns electronically. Although we don’t know
when e-filing will be the law of the land – it certainly will be one day.
Changes in the wind . . . Currently the top two rates are 33% and 35%
but they are temporary and will expire after December 31, 2010. The Obama
administration has proposed reinstating the 36% and 39.6% rates for
higher-income taxpayers . . .
CALIFORNIA TAX CHANGES
The California Legislature has already borrowed from 2010 and 2011, so we
could easily see large tax increases in 2010. So here goes . . .
Increase in personal income tax rates. The personal income tax rate
has increased by 0.25 percent across the board for taxable years 2009 and
2010. Although the withholding tables were changed twice during the year, it
is highly possible that many individuals will find themselves under-withheld
Estimated tax payment schedule is again front-loaded. On or after
January 1, 2010 the four estimated payments, for individuals and businesses,
are 30%, 40%, zero, and 30%
Tax credit for purchase of a qualified residence.
Any taxpayer who purchased a qualified principal residence on or after March
1, 2009, and before March 1, 2010, is allowed a credit equal to the lesser
of 5% of the purchase price or $10,000. Unfortunately, there was a $100
million limit on the amount of the credit, and by early July, 2009 the FTB
had ceased issuing certificates to qualified applicants. So . . . no cigar.
Small business New Jobs Credit of up to $3,000 for each net increase
in qualified full-time employees hired. The total amount of credit available
to taxpayers is capped at $400 million – so hurry and file early – meaning
file during the first three months of 2010.
Electronic tax payment requirements
Beginning in 2009, individuals who met certain thresholds were required to
make all tax payments electronically. In March of 2009, the Franchise Tax
Board announced they would not penalize taxpayers who failed to meet the
requirement. The FTB has not yet made a decision about applying penalties
All payments made by an individual on or after January 1, 2009, regardless
of taxable year or amount must be remitted electronically to the FTB
after the individual either has:
• Made a single estimated
tax or extension payment greater than $20,000 for a taxable year
beginning on or after January 1, 2009; or
• Filed an original return with a tax liability greater than $80,000 for
a taxable year beginning on or after January 1, 2009.
Once an individual meets either of these tests, ALL future payments must
be made electronically. However, the ‘trigger payment’ may be made by
Thus, although the FTB did not penalize
taxpayers for failing to pay electronically in 2009, any individual that
met either of the two requirements is required to made payments by
Electronic Funds Transfer in 2010.
A 1% penalty for noncompliance will be assessed except if reasonable cause
and not willful neglect is established. A reasonable cause waiver is nigh
impossible to get. Electronic payments can be made by:
• Web Pay.
www.ftb.ca.gov/online/webpay/index.asp and follow the
prompts. (No fee is charged)
• Credit card.
Either call 800 272-9829, or access
(a convenience fee of 2.5% will be charged)
Caution: Using a
bank’s online bill pay service is not an electronic payment
How to file an appeal to reduce property
taxes. Property owners who believe their property is overvalued may seek
a reappraisal from their local county assessor’s office. They may not need
to file a formal appeal if they talk with their assessor’s staff first. You
may file an appeal with your local Clerk of the Board. Note: you must pay
assessed property taxes on time – even if you file an appeal.
Solutions For You and Your Business
You don’t have to be a financial genius to
solve the financial crisis that surrounds all of America and is now
affecting you! You just need solutions from someone who makes his living
providing solutions to individuals and business.
Answers are often difficult to come by when the crisis affects you or your
business. But rest assured there are answers to every crisis.
You may not visualize the solution, you may not want to hear it, or you may
believe that nothing will help. But there is a way to deal with all
I’ve been providing solutions to my clients for over 30 years. During that
time I’ve untangled thousands of unique problems. Every one of them is
unique, just like your present situation.
The basic principals I employ are based on best practices, proven methods,
careful analysis of the facts, and the ability to ‘think outside the box’.
If you would like to discuss your situation, email us and say you are asking about Financial Bailout Solutions.
There is no charge for our conversation. If you would like to tap into my
experience to help your situation, we can arrange a personal interview and
meeting at my office in Encino.
People often take out a life insurance
policy, yet as their lives change, the need for the policy disappears. Not
wanting to continue paying, they’ll either turn it back to the original
insurance company for cash or just let it lapse. Good news: there’s now an
option which can deliver a huge cash payment for this unwanted policy.
Over the last few years, a new market has developed which buys unwanted life
insurance policies (called “Life Settlement” market.) They consider a life
insurance policy an asset (like real estate) with a market value. They will
appraise your policy and often deliver a cash payment much greater than just
turning back the policy to the original life insurance company.
For example, a couple in their early 80’s had a $5.0 million life insurance
policy they didn’t want anymore. They were about to give the policy back to
the insurance company for the $100,000 cash value. Their attorney suggested
they try to sell the policy for a higher value in the “Life Settlement
Market.” A life insurance broker who specializes in this area was able to
deliver a check to them for $800,000.
If you’re over age 70 and you have a life insurance policy which is no
longer needed, check with me for a referral to a broker who specializes in
IRS AUDITS S CORPORATIONS
The IRS is launching a
new research compliance program of S corporations. The study will examine
5,000 randomly selected S corporation returns from tax years 2003 to 2004.
The 5,000 represents 1.6 thousandths of 1% of all S corporations.
The last compliance study
was in 1984, prior to tax law changes that spurred the growth of S
corporations from 724,749 to 3,154,377 in 2002.
Purpose of the audits
Research programs are
undertaken periodically to ensure that corporations and individuals pay
their fair share of taxes. Based on study results using statistical
analysis, the IRS updates its methods of finding returns that might
potentially have problems.
The impetus for the S
corporation study is a result of Social Security hearings early in 2005.
The highlight of the hearings was the loss of payroll revenue to the federal
government. “People are taking salaries that are too low, sometimes as
little as zero, to beat the 15.3% FICA tax. Or there are those who pay
themselves $10,000, but take out $90,000 in distributions.”
The study expects to find
a disproportionate amount of inappropriate deductions in small and midsized
WHAT YOU SHOULD DO BEFORE AN AUDIT
Compensation to owner
employees should be reasonable: what you would have to pay a third party to
perform your services. In addition, all expenses should be directly related
to the business of the S corporation, and be well documented. Contact your
CPA to determine if you will pass the new IRS research program audit.