This year, I have completely revamped my tax tip structure. It’s time to think of tax concepts in big broad general categories, and then analyze the details later.  Accordingly,  I have realized that with the numerous tax law changes that seem to be coming faster and faster, and with the ever increasing expansion of the details and nuances of each tax idea, that there is too much information that can make the concepts get lost.  Therefore, I have structured these tips in a format that is meant to be used as check list. They are grouped into broad categories.  For example, there are tips related to being a homeowner, tips related to investments, tips related to owning your own business, etc. After all, it’s easy to go back and look up the details later if you think one of these may apply to you. I certainly can’t remember the details anyway.  It’s the concepts that are important. These tips each have a vast amount of detail behind them such as AGI limitations, and other numerous considerations.  However, just seeing the tip below will allow you to look up these details later and see if the tip can save you money.  In fact, I recommend actually running the numbers with tax software to determine the actual impact of savings these tips will give you.

I have tried to structure the tips below in a bullet point manner, and also include where on your tax return these may apply (i.e. itemized deductions, schedule C, etc).  I believe this will greatly improve your chances of actually using this check list and hopefully even if only 1 or 2 apply, you will save some nice money on your taxes.  I also want to make sure you’re aware of one very important “tip” if you will.  I just learned in a class I took called “Super Advanced IRS Problem Resolutions” that the IRS is ramping up big time.  The current administration has and apparently is going to continue allocating huge dollars to the IRS’s enforcement budget.  This means thousands of new IRS collection agents, more audits, and more careful tax planning needed.  Hey, this entire stimulus has to be paid for somehow.  Enjoy the new format.

Residences & Vacation Homes (applies if you: live, rent, sell, bought, gift, financed, refinanced, had debt cancelled, convert part of all of residence to rental):

Specifically, this section covers:

■Home Mortgage Reduced or Canceled

■Gain Exclusion – Sale of Principal Residence

■Residence Gain – Other Issues

■Home with Personal & Rental Use

■Homes Classified as Rental Property

■Vacation Home – Not Rented

■Converting Residence to a Rental or Investment Property

■First-Time Homebuyer’s Credit

■Energy Tax Credit for Homeowners

1. Owning a House – typically allows someone to itemize their deductions (taxes & mortgage interest).
2. Refinance – get a copy of the closing statement.  There are likely deductible closing points, and prorated interest and taxes that may be deductible.
3. Gain Exclusion – singles can exclude $250,000, married (and certain surviving spouses) can exclude $500,000.  Certain tests must be met.
4. Electing Out of Gain Exclusion – if first house has only a small gain, include the gain and wait for the sale of another house within two years that has much larger gain.
5. Reduced Gain Exclusion – if you don’t meet the two year ownership and use tests, a reduced exclusion still may apply if the reason for selling is job relocation, health problems, unforeseen circumstances (involuntary conversions, natural or man-made disasters, death, cessation of employment, change in employment that results in person’s inability to pay basic living expenses, divorce or legal separation, multiple births resulting from the same pregnancy – many other “unforeseen circumstances” are defined in IRS Private letter rulings).
6. Effect of Rental or Business Use – gain exclusion still applies if part rented is not detached.
7. Converting a Vacation or Rental Property to a Principal Residence – Starting in 2009, gain attributable to a period of nonqualified use cannot be excluded (proration of gain required).
8. Homes with Personal & Rental Use – allocation of expenses based on days rented required. See various scenarios below:

If personal use is more than 14 days, rental use is 14 days or less, then income is not taxable and not reported, mortgage interest all deducted on Schedule A, property taxes all deducted on Schedule A, expenses directly related to rental are nondeductible, and other rental expenses (maintenance, insurance, depreciation)  are nondeductible.

TIP:           Have 14 business meetings at home and charge fmv rent.  Rent your children’s home for your business for fmv rent (great income shifting strategy – you get deduction, they don’t pay tax on the rent).

If personal use is no more than the greater of (1) 14 days or (2) 10% of the number of days rented, rental use is more than 14 days, then income all reported on Schedule E, mortgage interest portion related to rental deducted on shed E, BUT personal use portion nondeductible if the dwelling unit is not used as a home (BE CAREFUL OF THIS). if it is, then the mortgage interest is prorated between Schedule E and Schedule A, property taxes prorated between schedule E and schedule A, expenses directly related to rental deducted on Schedule E, other rental expenses – portion related to rental activity deducted on Schedule E, personal use portion nondeductible.

1. Vacation Home – Not Rented – consider if it was used as principal residence for any part of the year because that may count toward 2 year rule for gain exclusion. Even part year use as principal residence may count because periods can be aggregated to meet two year rule. TIP: If you own two or more vacation homes, you can designate only one as second residence for qualified residence interest. However, you don’t have to pick the same one each year (i.e. mortgage on one vacation home is paid down or refinanced at a lower rate, then pick another vacation home that year as designated second home to yield larger interest deduction.)

10.  Converting Home to Investment Property – if former home is not rented may be classified as held for investment. Interest expense becomes investment interest expense subject to limitations and taxes can be deducted or capitalized.  Also, you can deduct properties operating expenses, but they would be subject to 2% of AGI limit,  IRS looks closely at taxpayer’s purpose, intentions and motive to determine if its investment property (if you continue to hold property after its conversion, this is investment.  If you try to sell property immediately after it’s not a residence, it stays as a residence.  TIP: If you have owned the property as a principal residence for at least two years, you can still convert the property to investment property for up to three years and exclude gain.  Also, after conversion, it can be exchanged for like kind exchange on a tax deferred basis.

11.  First Time Homebuyer’s Credit – Homes purchased between January 1^st, 2009 and November 30, 2009 – credit is $8,000.  AGI phase out applies.  TIP: You can elect to treat 2009 purchase as made in 2008 and amend your 2008 return for this purpose.  GREAT NEWS – CREDIT HAS NOW BEEN EXTENDED THRU PURCHASES MADE THROUGH JUNE 30^TH, 2010.  CFREDIT IS REDUCED TO $6500. AGI LIMITATIONS FOR PHASE OUT RAISED.

12.  Energy Tax Credits for Homeowners – A credit can be claimed for certain energy efficient home improvements or property placed in service in 2009 and 2010.  Keep the manufactures certification when an item is purchased for three years (statute of limitations on your return). Summary of Personal Energy Property Placed in Service During 2009 (ALL OF THESE LIMITED TO LESSOR OF 30% OF THE COST OR $1500 MAXIMUM PER TAXPAYER):  WINDOWS & DOORS, ROOFING, INSULATION, HVAC, WATER HEATERS, BIOMASS STOVE (STOVE WHICH BUNRS BIOMASS FUELS LIKE WOOD AND WOOD WASTE AND WOOD PELLETS, GRASSES, ETC.), SOLAR WATER HEATING, SOLAR ELECTRIC, FUEL CELLS, SMALL WIND ENERGY, GEOTHERMAL HEAT PUMP, ETC. 

13.  Energy- Efficient Credit For Contractors – up to $2000 allowed to a contractor for each qualified new energy efficient home that the contractor constructs and which is acquired by a person from the contractor for use as a residence.

14.  Home Mortgage Reduced or Cancelled – exception for debt cancellation of qualified principal residence (up to $2 mil).  Even if not principal residence, insolvent or bankrupt taxpayers can exclude the income.

15.  House as Rental – Passive Activity Loss Exception – losses up to $25k may be allowed to offset ordinary income.  AGI limits apply.

Investments (Stocks, Bonds & Mutual Funds):

Specifically, this section covers:

■Capital Gain Rules & Rates

■Taxable vs. Tax-Exempt Returns

■Treasury Bills

■Discount Bonds

■Premium Bonds

■U.S> Savings Bonds

■Stocks – Share Identification

■Section 1244 Stock Ordinary Losses

■Wash Sales

■Worthless Securities

■Stock Dividends & Stock Splits

■Investors vs. Traders

■Mutual Funds

■Investment Expenses

16.  Capital Gain Rates – 28% rate on gain of sale of collectibles held more then one year, 25% rate on un-recaptured Section 1250 gain on sales of depreciable real property held more then a year (if in lower tax bracket, the lower rate applies – TIP:  Consider putting property in name of family members in lower tax bracket), 15% and 0% rate – the 15% rate (0% for taxpayers in the 10% and 15% ordinary income tax brackets) applies to the sale of assets held more than one year. The 15% (or 0%) rate also applies to qualified dividends.  PLANNING IDEAS TO REDUCE TAXABLE INCOME IN YEARS 2009-2010 TO GET THE 0% CAP GAIN RATE – (1) DEFER BONUSES OR CONTRIBUTE TO RETIREMENT PLANS AND IRA(S), (2) CONVERT INVESTMENTS FROM TAXABLE INSTRUMENTS TO NONTAXABLE MUNICIPAL BONDS OR OTHER TAX-FREE FUNDS, (3) CONSIDER TRANSFERRING MUTUAL FUND HOLDINGS INTO EXCHANGE TRADED FUNDS (ETFs) TO AVOID YEAR-END DISTRIBUTED INCOME, (4) REVIEW STATE TAX POSITION AND DETERMINE THE BEST YEAR TO PAY ESTIMATED TAX (FOR STATE TAX DEDUCTION), (5) BUNCH DEDUCTIONS FOR MEDICAL EXPENSES, CHARITABLE CONTRIBUTIONS AND THE LIKE INTO A SINGLE TAX YEAR, (6) CONSIDER HME EQUITY LOANS TO CONVERT OTHERWISE NONDEDUCTIBLE PERSONAL INTEREST OR STUDENT LOAN INTEREST INTO DEDUCTIBLE EXPENSE, (7) POSSIBLE GIFTING OF APPRECIATED CAPITAL GAIN PROPERTY TO DONEES EXPECTED TO BE SUBJECT TO THE 0% LONG-TERM CAP  GAIN RATE IN 2009-2010 (MAY NOT LAST BEYOND THAT) – WATCH OUT FOR KIDDIE TAX RULES.

17.  Capital Losses.  Up to $3000 of capital losses can be deducted against ordinary income each year. Any remaining loss is carried forward indefinitely to future tax years.

18.  Grouping Capital Gains & Losses – First grouped into long term and short term, and then the long term is further grouped into the various cap gain rates (28%, 25%, 15% or 0%.  Further details available on how they are grouped and used, then the net remaining unused loss from the short and long term capital losses can be used up to $3000 each year then carried over indefinitely.

19.  Timing Security Sales to Minimize Taxes – delay a planned sale if at a gain to meet 12 month holding period (lower rates will apply).

20.  Use Capital Losses to Offset Short-Term Gains – Consider timing the recognition of capital losses for years when they can offset short-term gains rather than long-term gains. Capital losses produce the most tax savings when they offset short term gains, 25% Section 1250 gain or 28% capital gains.

21.  Take Advantage of Stepped Up Basis Rules – Taxpayers holding appreciated capital assets but who have a short life expectancy either because of age or terminal illness should avoid recognizing the gain. Taxpayer’s estate or heirs receive a stepped up basis (fmv at death) and any gain recognized because of post death appreciation is treated as long term, regardless of when the property is sold.

22.  Watch Out for Stepped-Down Basis Rules – adjusting a capital asset’s tax basis to date of death value works both ways.  If it has depreciated, it must be adjusted down to new lower fmv.  If a taxpayer dies owning property that has declined in value, the unrealized loss goes away and no tax benefit is ever realized.  Therefore taxpayers with a short life expectancy should consider selling depreciated property to claim the tax loss, which may reduce income taxes in years before death. Any unused capital losses at the time of death expire unused. 

23.  Compute the Price to Which a Stock Can Fall & Still Be Advantageous to Hold for Long-Term Capital Gain Treatment.  Very important because if you think the stock will fall in price before long term holding period is met, then you may be better off selling the stock at the current price and recognizing a short term capital gain.  Formula is:  Stock Price Break Even Point = Current Price – [(Current price – basis) X ordinary tax rate] – (.15 X basis) / .85

24.  Be Careful if Your Brokerage Firm Allows Your Stocks to be Short Sold (Now You Know To Ask Your Brokerage Firm This) – The Dividends paid while lent out on short sale (which are known as payments in lieu of dividends) will not be qualified, and subject to ordinary income tax rates. Many stock brokerage agreements allow the broker to lend out stock held in a margin account. In the past, investors were generally indifferent (and often unaware) that their stock was lent out, since it did not affect the amount they received, and dividends and payments in lieu were taxed at the same rate.  The rate reduction on qualified dividends now creates a tax cost to lending securities.

25.  Taxable vs. Tax-Exempt Returns.  It’s important to know if the after-tax returns of a taxable bond are higher or lower then a municipal bond.  Just because the taxable bond pays a higher yield doesn’t mean its really yielding a higher rate of return after taxes are factored in.  Use the following formulas to help with this determination:   Taxpayer Does Not Deduct State Income Taxes (doesn’t itemize):  After tax yield = Pretax yield X (1-combined state and federal tax rate).  Taxpayer Deducts State Income Tax (itemizes):  After tax yield = Pretax yield x [1-combined state and Federal tax rate + Federal rate X state rate)]   Another method that can be used for this comparison is to determine the equivalent taxable yield of the tax exempt investment using one of the following formulas:  Taxpayer Does Not Deduct State Income Taxes (doesn’t itemize):  Equivalent Taxable Yield = Tax-exempt yield (after-tax yield / 1-combined state and Federal tax rate.  Taxpayer Deducts State Income Tax (itemizes):  Equivalent taxable yield = Tax exempt yield (after tax yield) / 1-Combined state and Federal tax rate + (Federal rate x State rate)

26.  Other Factors to Consider That Affect the Analysis of Taxable Versus Tax-Exempt Investments:  (1) Taxable interest increase AGI, which can reduce allowable itemized deductions or certain credits subject to an AGI phase out (2) Taxpayers who do not generate sufficient taxable income may lose the benefit of itemized or standard deductions and personal exemptions. Taxpayers may want to generate enough taxable income to take advantage of these deductions, assuming the rate earned on taxable investments is at least equal to the rate earned on tax exempt investments.

27.  Potential Tax Advantages of T-Bills:  No OID (interest taxable at maturity rather then over the life of the T-Bill., T-Bill interest income not subject to state and local income taxes, taxpayers can elect to recognize the acquisition discount of T-Bills as it accrues rather than at maturity or sale (this matters if you think you will sell T-Bill before maturity because if no election has been made, and gain from the sale is less then the amount of discount that would have ratably accrued to the date of sale, ordinary income is recognized to the extent of the lesser of (1) gain from the sale or (2) the amount of discount that would have ratably accrued to the date of sale. If the accrual election was made and the T-Bill is sold at a loss, capital loss results.  In this case, making the election to include the accrued discount would not be beneficial.

28.  Be Aware That OID Applies For Bonds Other Than Tax-Exempt Bonds, T-Bills and Other Short-Term Obligations, Series E, EE and I U.S. Savings Bonds Issued at a Discount.

29.  Purchasing Bonds at a Premium (at a price above face value) & Making Election to Deduct the Premium Paid over the Life of the Bond.  This offsets interest income on the bond, which otherwise would be taxed at ordinary income tax rates.  Amortizing bond premium is generally advantageous because the taxpayer can offset a portion of ordinary income from the bond.  Unamortized premium otherwise becomes part of the bond’s basis so its recovery reduces capital gains (or increases capital losses), which is generally less beneficial than an ordinary deduction.

30.  Selling Bonds Purchased at a Premium – The sale of the bond will result in a capital gain or loss. If held long term, preferential rates could apply. Taxpayers can use a sale and repurchase to create a beneficial tax situation. This is possible when a taxpayer receives capital gain treatment on the sale of a bond and obtains an offsetting ordinary deduction for a bond that has a corresponding premium deduction.

31.  Bonds Held To Maturity – if election was made to amortize premium, then it will have a basis equal to its face value, and no gain or loss will be recognized on redemption, but while holding the bond, the premium was amortized offsetting interest income (preferential). If the premium had not been amortized, on redemption a capital loss will be recognized (not as advantageous).

32.  U.S. Saving Bonds Tax Advantages – interest income can be deferred until redemption or maturity on the following bonds. (1) Series E and EE U.S. Savings Bonds, (2) Series I U.S. Savings Bonds combine the features of deferring taxes on the interest until maturity with inflation protected growth.

33.  Election to Accrue Savings Bond Interest.  Taxpayers can elect to report interest on the bonds mentioned above over the life of the bond.  This makes sense when any of the following apply (1) Additional current income may go untaxed (for example, the taxpayer’s income is below the filing limit), (2) Additional current income would be taxed at a lower rate than income in the year of the bond’s maturity, (3) The tax rate is relatively low for the final return of a deceased tax-payer in relation to the tax rate of the estate or beneficiary, (4) An NOL or other carry forward item is expiring or otherwise could be used to offset the additional income, (5) Itemized deductions are of little or no benefit because of a low level of taxable income, (6) the accelerated income is offset by investment interest expense that would otherwise be deferred until investment income is incurred.

34.  Taxpayer’s Should Consider the Impact of the Accrued & Recognized Income on the Taxability of Social Security Benefits. I.e. spreading the income may create less of an impact than including all of the accrued interest in the year the bond matures.

35.  Taxpayer’s Should Consider That Tax Rates are Likely Going Up.  By accruing the income now, rather then taxing it all at maturity, it may be subject to a lower tax rate.

36.  Transfer Bonds to Donee in Lower Tax Bracket – although taxable income is triggered equal to the difference between the bond’s issue and redemption prices at the date of transfer, gifting a bond may be beneficial if substantial income is yet to be earned on the bond and the donee is in a lower tax bracket.

37.  Savings Bonds for Education Expenses – if the interest from EE U.S. Savings bonds is used to pay for a child’s education expenses, all or a portion of the interest may be excluded from income. Must be for qualified higher education expenses.

38.  Swapping Bonds to Claim Losses – sell bond with a loss to create a capital loss if you have capital gains needing to be offset.  Watch out for the wash sale rules (can’t buy substantially identically bond within 30 days – bonds issued by different states are not substantially identical, bonds with different coupon rates are not substantially identical).

39.  Watch Out For AMT Tax From Private Activity Bonds – just make sure to ask your advisor if any “tax-exempt bonds” are “private activity bonds”.  If they are, they are likely going to subject you to AMT. 

40.  Be Aware That TIPS (Treasury Inflation-Protection Bonds) Can Create Phantom Income.  Each year, you must recognize interest and any increase in principal resulting from inflation. This is phantom income because you’re not actually receiving the increase in principal until you sell the bond. Therefore, these really may be more suitable for retirement accounts where the phantom income has no impact.

41.  Stock Share Identification – Be aware that you have the right to identify to your broker which shares of stock you want sold.  This could impact the gain or loss on sale as stocks bought at different times may have a different basis.  Be sure this is done in writing.  Otherwise FIFO is used.

42.  Be Aware of Rules for Stock Holding Periods.  Just be aware that there are various different rules on how long you are deemed to have held a stock (for determining short term versus long term) depending on how the stock was acquired (purchase, nontaxable stock dividend, taxable stock dividend, dividend reinvestment plan, stock split, received as a gift, inherited stock, by exercising a sock option, employer stock received from an employer’s retirement plan, etc…).

43.  Section 1244 Stock – Eligible Small Business Stock – Sale That Results in a Loss is Ordinary (limited to $50,000 per year single or $100,000 MFJ).  Definition of section 1244 stock should be researched further. Consider spreading the sale if these limits will be exceeded in the year of sale.

44.  Sale of Qualified Small Business Stock at a Gain – Two Tax Advantages available (1) 50% of the capital gain can be excluded (60% if in empowerment zone, and even a 75% exclusion for empowerment one stock acquired from 2/18/09 through 12/31/10), and (2) Rollover of gain available if new QSBS purchased within 60 days.

45.  Wash Sale Rules – No loss is allowed on the sale of a stock if within 30 days taxpayer buys substantially identical stock or securities (TIP: Sell a stock at a loss and buy the ETF of that stock to replace it – this wont be subject to wash sale rule).

46.  Worthless Securities – a capital loss is allowed in the year the investment becomes worthless.  Very detailed rules are applicable for determining when a stock is considered worthless (in general, considered worthless at the time it first has no liquidation value and no reasonable hope or expectation exists tat it will become valuable at a future date).

47.  Stock Dividends & Stock Splits – there are a slew of rules related t whether or not stock dividends are taxable and what the basis in these new shares are.  Further research should be done if you received stock dividends or stock splits, t properly account for the transaction for future tax ramifications.

48.  Investors versus Traders – Different tax rules apply so it’s necessary to distinguish if you are a trader or an investor.  Very specific rules are used to determine this classification.  Big tax differences such as trading expenses for traders are deductible as ordinary and necessary business expenses on Schedule C, a home office deduction may be available for traders, and many more tax differences.  If you are actively trading your account (you spend a lot of timing trading and do it on a regular basis, you should further research this area).

49.  Mutual Funds – Determining Basis – FIFO, Weighted Average or Specific identification can be used.  Must be used constantly.  Can have vast differences in tax results.  Mutual funds usually have dividends re-invested so this becomes important.

50.  Be Careful Not to Purchase a Mutual Fund Right Before The Record Date (the date which determines which shareholders will receive a distribution). Purchasing just before the record date is buying a tax liability.  This is because the funds price usually goes up by the income that is about to be paid out. Also, typically at year end they make capital gain distributions.  Don’t purchase them near year-end.

51.  Consider ETFs Over Mutual Funds – ETFs typically distribute little or no income and have very little fees.

52.  Tax Efficient Mutual Funds – these funds turn over their investments far less then non efficient funds. Index funds tend to be more tax efficient, resulting in less phantom capital gains.

53.  Consider Selling Shares of a Mutual Fund Before Distribution – in essence this converts what would be dividend income, typically taxed at a higher rate then capital gains) to a capital gain subject to a lower rate because the funds price usually increases by the amount of income about to be distributed.

54.  Donate Appreciated Stock or Mutual Fund Shares to a Charity Just Before Dividend Paid – deduction is fmv at date of donation, and no capital gain is recognized.  Doing this right before a dividend is distributed usually results in a higher deducting amount because FMV is higher.

55.  Mutual Fund Capital Loss Carryover – read the fund prospectus to see if the mutual fund has capital loss carryovers.  The fund can carry these over for 8 years and this will help shelter future capital gains that would otherwise be distributed t shareholders and taxed.

56.  Investment Interest Expense – Investment interest is interest paid or incurred on indebtness incurred to purchase or carry property held for investment. It does not include qualified residence interest, interest in a passive activity, capitalized interest, interest related to tax exempt income. Investment property includes any property producing interest, dividends, annuities, royalties and gain generating property other than that used in a trade or business.

57.  Investment Expense Are the Deductions Allowed (Other Than Interest) That Are Directly Related to the Production of Investment Income.

58.  Election to Include Qualified Dividend Income & Net Capital Gains in Investment Income – Normally, these are not considered investment income.  You can elect to include all or part of these as investment income. If elected, this income is subject to ordinary income tax rates (not preferential dividend or capital gains rate) but then investment interest expense can offset this income.

59.  Minimize Expenses Allocated to Tax Exempt Income – Because these expenses are not deductible.  So investment interest expense for the purchase of tax exempt income investments is not deductible. An allocation can be made using a pro-ration based on the number of transactions or time spent in each class. A statement must be attached to the return showing the allocation method used.

To file or not to file; that is the question. There are certain instances where you should file a claim if your car was damaged due to an accident. However, there are other instances where filing a claim for losses less than $1,000 may not be necessary. But there’s a catch.

Depending upon the terms of your insurance policy, a claim needs to be filed in cases where the amount of damage to the car exceeds the deductible. In addition, the law requires damage above a specific amount to be reported to the Department of Motor Vehicles. The amount varies by state.

For example, let’s assume you are parked in your car at the curb and another driver whizzes by so closely that he rips the side view mirror off your car. The first thing you have to do is to find out how much it will cost to replace the mirror.

Afterward, you have to decide whether it is worth claiming this as collision damage. You can call the insurance agent and ask if this incident will raise your rates and how much, or you can absorb the cost of the replacement.

It should be noted that:

* Some insurance companies require that agents who receive inquiries of this type have to report the incident and, consequently, your premium may be increased.

* Some insurance companies will give you the information you seek freely without reporting it as an accident.

* Some insurance companies may not raise rates if the claim is under a certain amount.

* Some insurance companies “forgive” a first-time accident based on certain criteria.

Another consideration is the amount of collision damage you currently have on your car. If you have the minimum $500 deductible, it may be a good idea to increase the amount to $1000. This will serve two purposes – it will allow you to file a claim for damages incurred through no fault of your own (such as the example given above), and it may lower your overall premium.

Any car accident that involves another vehicle should be reported, however, even if the damage is slight. There are many instances in which an injury may reveal itself later on and by reporting the collision, you are fully protected from the outset.

Brought To You By:
Woody Alpern
CPA/PFS
www.yourwealth.com
woody@yourwealth.com

Woody’s 100 Best Tax Tips for 2008 and 2009 from Woody Alpern on Vimeo.

Owners of privately held S-Corporations should take part of their compensation as a dividend, rather than as salary.
Be careful with this one. The IRS is aware that the dividends from an S-Corp are used to avoid paying FICA. However, as long as you are paying yourself a “reasonable salary” – meaning standard for your position, from your company, you should be ok. If your salary is under the FICA limit in 2002 of $84,900, then the rest should be paid with a dividend – escaping over 15% on FICA taxes.

Don’t hold on to stock dogs.
Nobody likes admitting mistakes, but usually dogs stay dogs. Selling a loser in a taxable account can save you money and free up cash for more promising, higher quality investments. Remember, a stock that has dropped 50% in value needs to gain 100% just to break even.

Stop treating your mutual fund like a checking account.
This creates an accounting nightmare, because the fund will sell shares to clear your check, creating a taxable transaction on each check.

Don’t ignore estate tax planning (Estate planning is often misunderstood to think it only applies to the rich).
WRONG!!! The estate tax comes back in full force in 2011. Also, are your wills and beneficiary forms consistent? Do you have a health care directive in case you can’t make these decisions for yourself?
Cancelled checks alone are not enough to support a deduction to a charity. Make sure you get a receipt, and that in fact it is a qualified charity for tax purposes. Remember, political contributions are not deductible.

Don’t undervalue your charitable contributions.
If you donate something worth $5,000 or more, a qualified appraisal must be attached to your tax return. Web sites are available for determining values. We like www.itsdeductible.com and the Salvation Army’s site http://www.salvationarmysouth.org/valueguide.htm.

If you refinance, remember to write off the remaining balance of you unamortized points on your old loan.
They are now fully deductible, and your new points must be amortized over the life of the new loan. Lots of people forget about these old points.

If you paid income taxes in another state, remember that can be used as credit to offset your Georgia taxes.
This is often overlooked.

Teachers’ Classroom Expenses are now an above line deduction up to $250.
The taxpayer must have spent at least 900 hours during a school year as an educator that provides kindergarten through grade 12.

Divorce Fees – Only the fees for tax advice from your divorce attorney are deductible.
Have the bill tailored in a tax wise way.

Important IRS numbers
Practitioner Priority Service – 866-860-4259, Taxpayer Advocate Service (when all else fails) 877-777-4778.
See IRS PHONE NUMBERS, Exhibit 8

Real Estate Professionals – are able to use losses from rental real estate as deductions from non-passive income.
More than 50% of the individual’s services during the year are in real estate which taxpayer material participates in and taxpayer spends more than 750 hours per year in this business. IMPORTANT: If you want to combine all your real estate activities, you must make a special election to do so by filing a statement with your return declaring that the taxpayer is a qualifying taxpayer

Medical Coverage Deduction, Employee-Spouse
Sole proprietors can deduct as a business expense the full amount of medical insurance premiums and medical reimbursement costs incurred under an accident and health plan that covers all employees. If the sole proprietor’s spouse is also an employee, the sole proprietor can be covered under the medical plan as part of the employee’s family. (Excludable from the employee-spouse’s gross income, ad deductible by the employer).

Meals and Incidental Expenses Rate
IN lieu if using actual expenses incurred for meals and incidental expenses, employees and self-employed individuals may deduct per diem amounts which are equal to or less than IRS approved rates. See attached schedule. Easier and less scrutinized than actual expenses.
See MEAL RATE CHART, exhibit 2

Buy House/Apartment for College-Age Child
By treating this house/apartment as a second home, parents can deduct mortgage interest and property taxes. Also, the child will have a free place to live. By setting the house up as rental property, parents can write off up to $25,000 of losses on the property if their AGI is $100,000 or less.
When the child finishes school, the investment will likely have appreciated. Must charge and collect FMV rents. Parents can pay child a reasonable salary and deduct it as a business expense (a good way to get college spending money into your child’s hands and deduct it! Up to $4,850 of child’s salary will be tax free or taxed at the child’s rate.

Disadvantages of Married, Filing Separately
See exhibit 9

How to Pay Taxes by Credit Card.
The IRS accepts American Express, MasterCard, Discover and Visa. Get those airline miles. The taxpayer will be charged a percentage of the amount paid by credit card as a convenience fee, and it will be announced during the phone call. You will have the option of discounting.
These are the service providers:
• Official Payments Corporation 1-800-2PAYTAX (800-272-9829) 877-754-4413 (customer service) www.officialpayments.com
• Link2Gov Corporation 1-888-PAY-1040 (888-729-1040) 888-658-5465 (customer service) www.pay1040.com

Turn Your Vacation into a Tax Deduction (Investment Travel Cost Is Deductible).
The cost of travel for the management or conservation of investments is generally deductible. This includes trips to the broker or financial adviser, and also trips to look after investment property. No deduction is allowed for expenses allocable to a convention, seminar or similar meeting dealing with investments.

A List of Major Miscellaneous Deductions Chart
See exhibit 10.

Taxpayer Penalty Chart
See exhibit 11.

Dependent Care Assistance Plan (in a cafeteria plan)
Ask your employer if they have one of these set up. The cost to maintain one is minimal. Employees may elect to have up to $5,000 ($2,500 MFS) excluded from gross income under an employer dependent care assistance plan.

The plan may be
1. paid with employee’s pre-tax earnings (salary reduction cafeteria plan),
2. paid with employer contributions or
3. the value of an employer-sponsored day care facility. This amount is not included in gross wages or subject to Social Security or Medicare taxes.

Selling a home for a profit may be tax-free
$250,000 if single, $500,000 if married. You must have owned and used home as your main home for two years or more during a five-year period ending on the date you sold your home. You have not sold or exchanged another main home during a two-year period ending on the date you sold your home. The $500,000 exclusion also applies to a surviving spouse if the sale occurs within two years of their spouse’s death.

Job-hunting expenses of looking for a new job in a taxpayer’s present line of work are deductible, even if a new job is not found.
Expenses looking for a new job in a new trade or business are not.

Droughts damage may qualify for casualty loss.
Damage to trees, docks, foundation, etc. may be deductible as casualty loss. Courts seem to support this. Stevens, TCM 1984-365).

Turn nondeductible vacation expenses into deductible business travel expenses by conducting some business while on vacation.

Exemptions from FICA.
Child under 18 employed by parent in unincorporated business or if under 21 and employed by parent for domestic work.

Retirement Saver’s Credit – Tax credit for elective deferrals and IRA contributions.
Don’t forget this one. You can get a tax credit for your IRA, 401(k) and other retirement plan contributions based on these limitations, UP TO $1000 ($2000 MFJ):

Boy does this create opportunity for family income shifting.

Don’t abuse a home equity loan.
In other words, it’s ok to use a home equity loan to finance a car. But make sure you pay it off in 3 to 5 years like you would a regular car loan.

Pay attention to long term capital gains holding period.
Instead of potentially paying 35%, you could pay 15%, or if in the 10% bracket, you’ll pay 0%. See Exhibit 6
Consider tax effects of selling your home if you take the home office deduction.
The part of your home that is used for business and depreciated does not qualify for the $500,000 exclusion on sale.
Dividend reinvestments – make sure you account for them when determining your basis.

Take charitable contribution deduction for non-cash donated items.
Keep a list of the clothes you give away, and use thrift value as your guide for deduction. See Donations Substantiation Guide and Donated Goods Valuation Guide– Exhibit 7

Qualified Charitable Distributions (QCDs)
Taxpayers who have reached age 70.5 can make a nontaxable distribution of up to $100,000 from their IRA to a charitable organization. You don’t get any charitable deduction for this, but remember, in essence this money escaped tax forever; it will never being taxed nor will it ever be taxed.

Track your year-to-year carryover items.
Computers help with this. State and local taxes paid for the prior year in the current year, capital loss carryovers (NET capital losses can offset $3,000 of ordinary income each year), charitable contribution carryovers, Section 179 expense limitations.
Make sure qualified retirement plans are set up by December 31.

Failing to name a beneficiary to an IRA, 401(k) or other retirement plan.
Upon death, these accounts pass tax-free to your spouse. If you don’t designate, then your estate is the beneficiary, subjecting it to estate taxes. Naming grandchildren may subject the account to generation skipping transfer tax.

Don’t make a federal or state estimated tax payment right after a big income event.
Wait until April 15th. As long as you projected correctly in paying your estimated taxes (110% of last year’s tax), than why give the government an interest free loan?

Expect distributions from funds that have declined in value.
The selling in the funds due to the stock market decline will require them to distribute capital gains. Have cash set aside to handle the impact. THAT’S WHY WE LIKE MANAGED “PRIVATE MUTUAL FUNDS”. NO FORCED SELLING.

Watch out for capital gain distributions from “tax exempt” investments.
While interest on municipal bonds is tax exempt, managers tend to manage these funds with lots of buying and selling creating capital gains that are not tax exempt.

Consider the timing of fund transfers.
Remember, selling one fund to buy another, even if it’s the same type of fund, is not tax exempt. Try to postpone the transfer until after Dec 31st.

Steer clear of tax-free investments in tax-sheltered plans.
Since all the dividends, interest and capital gains grow tax-free anyway, you’ll do better over THE LONG RUN concentrating on high yielding income and growth oriented investments. I.e. – don’t put an annuity inside of an IRA.

Installment Sale
If you are planning to sell an asset that will generate a large capital gain, consider selling it on installment (carrying a note on sale). This way, you report the gain as the payments are received.

Wrong Social Security Number
This is the most common mistake on returns. It can delay your refunds and cause you to have to file amended returns for incorrect dependent’s social security numbers, etc.

Keep your records for at least three years from the date you actually file your return.
File electronically FOR FREE to receive your refund in as little as 7 to 10 days (rather than 6 to 8 weeks)
To avoid delays with paper return, make sure it is signed (by you and preparer), make sure supporting documents are securely attached, and have your refund directly deposited into your bank account. FOR FREE ELCTRONIC FILING, GO TO www.irs.gov/efile/article/0,,id=118986,00.html

Deduct charitable driving mileage.
For example, if you drive a van full of Scouts to camp, or kids to your religious school function, etc., you can deduct 14 cents per mile.

Deduct all tax preparation cost AND INVESTMENT ADVISORY FEES (MANY PEOPLE FORGET THIS ONE).
These costs include preparation software, books about doing your taxes, fees to a professional. If you are in a divorce proceeding, have your divorce attorney itemize part of their bill as tax advice fees related to the divorce.

Deduct your commuting expenses.
If your principal place of business is your home, you can deduct costs of commuting from your home to another work location in the same trade or business. If your home office is used exclusively and regularly for administrative or management activities for your business, and you have no other fixed location where you conduct those types of activities, your home office qualifies.

Stepped-up basis on stock you inherit.
Remember, if you sell stock you inherit, your basis is the value of the stock on the date of death of the deceased.
Watch out for alternative minimum tax!
AMT is a parallel tax that’s computed on Form 1040 to cause taxpayers with high income and lots of deductions to pay at least some amount of tax – 26% or 28%. Tax exempt mutual funds’ dividends may be subject to AMT.
State taxes, car licenses, real estate taxes, home equity interest expenses, a portion of your medical expenses, and all misc. itemized deductions (such as tax prep fees and employee business expenses are NOT deductible for AMT purposes. If a significant portion of your misc-itemized deductions is employee expenses, see if your employer will reimburse you directly for cost. Don’t always assume its best to prepay your state income taxes or your property taxes.
If you’re subject to AMT, neither of these will give you a benefit. Consider itemizing deductions instead of using standard deduction, since standard deduction is not deducted for AMT purposes. Even if itemized deduction is less than standard deduction, if taxpayer is subject to AMT, this may reduce their tax in that particular year.
Remember to also consider the effects on state income taxes since most states require you to use the same method as you did for federal tax purposes (either itemize or standard deduction). Use a computer to run the numbers. See AMT CHART, Exhibit 5

Some business meals are deductible beyond the 50% limitation.
Meals provided on premises and furnished for the convenience of the employer are excludable from employee’s income and are deductible in full by the employer.

Consider tax effects of a particular fund.
High turnover funds generate short-term gains taxed at ordinary tax rates. Low turnover funds generate long-term capital gains, which are taxed at 15% rate at most.
Watch the hobby loss rule
The IRS says you are a business if you make a profit in the last 3 of 5 years. Otherwise they may make you prove it. They will consider the following facts and circumstances:

1. Manner in which taxpayer carries on the activity,
2. Expertise of taxpayers or advisors,
3. Time and effort spent by taxpayer carrying on the activity,
4. Expectation that assets used may appreciate in value,
5. Taxpayer’s success in other similar or dissimilar activities,
6. Taxpayer’s history of income/loss with respect to the activity,
7. amount of occasional profits,
8. financial status of taxpayer,
9. elements of personal pleasure or recreation.

Things you should do to help prove it’s a business rather than a hobby:

1. keep thorough and businesslike books
2. use a separate business checking account
3. record business and personal use of assets in a log book (such as for a charter boat or photography equipment),
4. use a separate credit card for business,
5. research market/technology trends used in similar businesses,
6. obtain the insurance, registration, certification, proper license, etc., needed for that type of business,
7. maintain a qualified home office with a second telephone listing,
8. document periodic evaluations of operations to attempt to improve business’s profitability,
9. develop a written business plan and update it annually.

Head of household status is good
Lower tax rates. You qualify if you are unmarried on the last day of the year, you maintain a household for a qualifying person (usually a dependent child or other relative), you live with the qualifying person in the same house for more than half the year (unless it’s your parent, they don’t have to live with you), you pay more than half the cost of maintaining your home.

Section 179 Deduction.
Rather than depreciating business property over several years, Section 179 allows a taxpayer to expense in the year of purchase qualifying property used more than 50% in the active conduct of a trade or business and acquired from an unrelated party. The total cost of property that can be expensed for 2008 under Section 179 is $250,000. See Exhibit 14 for list of qualifying and non-qualifying property.

Depreciation – Pay attention to the useful lives prescribed by the IRS
Note that “personal property” has much shorter useful lives (better for tax purposes) than real property. Consider getting a cost segregation study. The IRS has issued “facts and circumstances” guidelines to help determine if an item is a structural component of a building or is tangible personal property, such as: can an item be moved, is item designed to remain permanently in place, are there circumstances which show that the property may have to be moved; how substantial and time consuming a job is removing the property; how much damage will occur on removal; how is the property affixed to the land.
For more information on this, and really get insight on the IRS’s views on these determinations, visit http://www.irs.gov and search for “Cost Segregation Audit Techniques Guide”. For depreciation lives, see exhibit 13.

Figure Estimated Payments
100% of last year’s tax liability, or 90% of this year’s. If you made over $150,000 (MFJ) or $75,000 (MFS) last year – 110% of last year’s tax liability. Try to be precise, because otherwise you’re giving government a free loan.

Dollar cost average into retirement accounts
Instead of waiting until filing of your taxes, average into the market.

Make gifts to children and grandchildren
$13,000 to each person free of gift taxes. (REMEMBER THAT DIRECT PAYMENT OF MEDICAL EXPENSES OR TUITION FOR ANOTHER PERSON IS NOT CONSIDERED A GIFT FOR GIFT TAX PURPOSES). Remember, the estate tax repeal only last thru 2010 – returns in full force in 2011!

Consult your tax adviser about stock options
Exercise of nonqualified stock options requires company withholding. However, the exercise can cause you to be in a higher tax bracket. Run the numbers. Watch out for AMT. You may need to turn traditional tax planning on its head by deferring deductions into next year. Consider spreading the sale of your options.

Put domestic employees on the payroll
If you pay them more than $1,600, you must pay employment taxes. If you control their work, they are employees. Someone who provides their own tools and offers his services to the general public may not be an employee.

Avoiding an Audit.
Avoid these items: Schedule C, Avoid home office deduction, watch your travel and entertainment expenses, large losses in a business each year for many years (hobby losses), Avoid casualty losses (hard to qualify), Match your return income to 1099s and or W-2s. Also see Exhibit 12

Fund a Section 529 Qualified Tuition Plan (QTP)
Tax-free distributions can pay an expanded list of higher education expenses. Kavanagh likes www.savingforcollege.com. Georgia has a GOOD plan.

Other Self-Employed Tax Tips
Delay your December billings. Pay expenses in December with credit card to accelerate deduction into next year. Consider establishing a retirement plan. Family 401(k) can defer lots of income for your family. Low cost to set up, no discrimination testing maximizes deductions. Buy supplies and equipment this year. Use Section 179 deduction to expense up to $250,000 in 2009 of otherwise depreciable assets.

Have Your Next Business Meeting At Home
One of my favorites. You can rent your home for less than 15 days per year tax-free. So, you should have 14 business meetings at your home, have your business pay you rent which is tax deductible by the business, and the income is tax-free to you. Use local hotel rates as a guide. Document meeting with a video camera.

Employ Child Family Members
Paying wages to a child can be an effective income-shifting strategy for a taxpayer who owns a business or income producing property. Income may be taxed at a lower rate, or escape tax altogether. The child’s contributions to a retirement plan can enhance tax benefits.
If a child earns enough from the family business during college years, the child may be able to claim the Hope or lifetime learning credit that the parents lose because of AGI limitation. Earned income is not subject to kiddie tax regardless of age.
NOTE: A child’s wages are deductible by a parent-employer only if
1. the work is done in connection with the parent’s trade or business (or income producing property)
2. the child actually renders the services, and
3. the payments are actually made. The payments must be reasonable in relation to the services rendered. Maintain records showing services performed and wages paid. Earned income taxed at the child’s rate regardless of age. Pay them enough so they can contribute to a ROTH. ROTH limit is lesser of $5,000 or earned income. Potentially makes them eligible for IRA, ROTH or 401(k).
Avoid “kiddie tax” on investment income – $1,900 is “kiddie tax” thresholds on unearned income and applies to children under age 18 and full time students age 19-23, unless the child’s earned income is more than 50% of his or her support.

Family Loans
Instead of simply gifting money to a child, which has no tax benefit to the donor, consider making a loan. Then if loan is not repaid by the child, you may be able to deduct it as a bad debt loss. Must be a bona fide loan. In general, to be bona fide, lender should have an enforceable note
1. fixed loan amount,
2. defines payment dates,
3. stated rate of interest at least equal to applicable federal rates “AFR”.
The interest paid by the borrower is also deductible if the loan is for business, investments or is a qualified home mortgage. This is much better tax consequences then a simple gift for both lender and borrower.

Child Claim Hope and Lifetime Earning Credit (no one claims child as dependent).
It may be advantageous for a parent who does not qualify for the education credit due to AGI limitations to not claim an eligible dependent, so the student can claim the education credit on his or her tax return. Therefore, no one claims the dependency exemption.

Sell Stock Losers
Consider selling some stock that will generate a loss before year-end. Short term-gains can be offset by short-term losses. This is particularly advantageous because short-term gains are taxed at high ordinary income tax rate.
Be careful of wash sale rules, which disallow the loss if you buy back the same stock within 30 days. If you are concerned about the market moving higher, buy an index fund or ishare that matches the stock style you sold. FOR THE ADVANCED INVESTOR, consider selling a PUT option on the stock if you really think it’s going to go up.

Donate appreciated stock
You get to deduct the FMV of the stock at date of gift, but don’t have to report the appreciated gain on your tax return. Also, remember, you can make a charitable contribution by credit card before the end of year, and take the deduction.

Wash Sale Rules
A wash sale occurs if a taxpayer sells stock or securities at a loss, and within 30 days before or after the sale, directly or indirectly: buys substantially identical stock or securities, acquires substantially identical stock or securities in a fully taxable trade, or enters into a contract or option to acquire substantially identical stock or securities. The deduction of the loss is not allowed and the basis of the substantially identical property is increased by the amount of the disallowed loss.