The Wait Is Over!

Congress recently passed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Now, we have some certainty regarding the immediate tax picture and can help you make better decisions regarding your tax presence. The first step of that process is to know the rules that your are following. We’re going help you with that today by providing you with highlights from the above Act.

Important Tax Rates remain the same:

Your individual income tax brackets did not move; the top bracket is frozen at 35%
Capital gains & dividends tax rates are still at a reduced rate of 0% or 15%; the same qualification parameters exists
Many popular tax credits and deductions were extended, including (among others):

· Child Tax Credit

· Earned Income Credit

· Energy Efficiency Credit

· Many popular Education related credit and deductions

Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010 - 2012

There is a 35% top rate and a $5 million exemption for estate, gift and GST tax
The legislation contains an option for 2010 decedents. Executors may elect to be taxed under the 2010 rules of no estate tax (or generation-skipping tax (GST)) and with the modified carry-over basis regime in place for the sale of inherited assets.
Unused exemption may be transferred to spouse.
Exemption amount indexed for inflation beginning in 2012
Temporary Employee Payroll Tax Cut

The Act provides a payroll tax break during 2011 only. The IRS regulations state that the employee tax rate for social security tax in 2011 is 4.2%. The employer tax rate for social security remains unchanged at 6.2%. The 2011 social security wage base limit is $106,800. In 2011, the Medicare tax rate is 1.45% each for employers and employees, unchanged from 2010. There is no wage base limit for Medicare tax. Employers should implement the 4.2% employee social security tax rate as soon as possible, but not later than January 31, 2011.
Extension of Unemployment Insurance

The unemployment insurance proposal provides a one-year extension.


So, what does this mean for you and your tax planning? As the old CPA joke goes, “it depends”!!! And it truly does, each individual and/or business is unique and their tax picture should be analyzed and dealt with as such. With that said, generally speaking, this tax law extension pretty much allows you to operate as business as usual for the next 2 years in regards to your tax planning. Be diligent, involve your CPA, and if you have questions, do not hesitate to call a qualified tax professional.

Happy Holidays to you all and we here at McArthur & Company wish you a happy and prosperous New Year!!!

brad@mcarthurco.com
704.544.8429

Code Section 179-- One Big Win for Small Businesses

With passage of the Small Business Jobs Act of 2010 on September 27, 2010, Small Businesses can celebrate an extension and increase of Code Section 179 deduction ability. Specifically, for tax years beginning in 2010 and 2011, the maximum amount of deductible assets placed in service increases from $250,000 to $500,000.

What Qualifies for Code Section 179?
• Generally speaking, the same assets that always have qualified. For 2010, new assets, purchased and placed in service between January 1, 2010 and December 31, 2010 including, among others:
 Equipment (machines, etc)
 Tangible personal property used in business
 Computers
 Office Furniture
 Office Equipment

• A new group of assets are available for Section 179 depreciation this year. Out of the $500,000 limit, $250,000 may be derived from “Qualified Real Property”.
 Qualified Real Property means (1) qualified leasehold improvements with certain requirements, (2) qualified restaurant property with certain requirements, and (3) qualified retail improvement property with certain requirements.
 As you probably noted above, there are certain requirements with each of the above categories, so you should contact our tax advisors if you feel like you qualify for this new category of Sec. 179 depreciation.

In summary, a qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property. The Small Business Jobs Act of 2010 increases the IRC section 179 limitations on expensing of depreciable business assets and expands the definition of qualified property to include certain real property for the 2010 and 2011 tax years. Under the Act, qualifying businesses can now expense up to $500,000 of section 179 property for tax years beginning in 2010 and 2011. Without the Act, the expensing limit for section 179 property would have been $250,000 for 2010 and $25,000 for 2011.
The $500,000 amount provided under the new law is reduced, but not below zero, if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2,000,000. The definition of qualified section 179 property will include qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for tax years beginning in 2010 and 2011.

In our next blog, we’ll discuss how this same act addresses vehicles purchased for your business and your depreciation options. In the meantime, if you have any questions regarding this topic or any other recent tax legislation, please contact your tax advisor or our Firm directly.

brad@mcarthurco.com
704.544.8429

One-Year Tax Deduction for the Self-Employed

On September 27, 2010 the Small Business Jobs and Credit Act of 2010 was signed into law. This Act gives the self-employed a one-year tax deduction for health costs in determining self-employment tax. A summary of the Act can be found at www.nase.org/Advocay/NASEinAction.aspx.

• Who can qualify for this one-year deduction?

Self-employed business owners must meet ALL of the following requirements:

1. File a 1040 with a Schedule C or Schedule E with earned income – this would include sole proprietors, single member LLC’s, and sole owner S-Corps
2. Pays self-employment tax on their 1040
3. Pays for individual or family health coverage in 2010

• To take the deduction, the self-employed owner will make the proper adjustments when filing their 2010 1040 for the April 15, 2011 deadline.

When preparing your 2010 taxes, be sure to inquire with your tax preparer or CPA about this deduction, your eligibility, and tax savings.

info@mcarthurco.com
704.544.8429

Sniffing out Scams

Whether you’re a business owner or just an individual tax filer, scams abound that try to use the weight of the IRS, the fear of the taxpayer, and complicated nature of the tax code to obtain information and/or money from you. Quite simply, the IRS does not initiate taxpayer communications through e-mail. If you receive a message claiming to be from the IRS or EFTPS, do not reply to the sender, access links on the site, or submit any information to them. The next step you should take is to report this e-mail scam or bogus IRS website by forwarding the information to the IRS at the following address: phishing@irs.gov.

One scam in particular has been prevalent over the last number of weeks. The IRS has now issued a formal warning regarding a scam that targets Electronic Federal Tax Payment System (EFTPS) users. The scheme uses an e-mail claiming that the user’s tax payment was rejected and directs the user to a website for additional information. This website contains malware that will attempt to infect the user’s computer. Our Firm received such an email, but if you remember that the IRS does not communicate via email, you can always sniff out the scam and protect yourself and your business from any breaches in security or financial loss.

info@mcarthurco.com
704.544.8429

How Low Will They Go?

Mortgage rates are dropping and remain at all time lows. Many folks have already taken advantage of this historic opportunity and locked in their rates and completed their refinancing. If you have not, then perhaps now is a good time to assess whether this opportunity is right for you. Many banks will roll the closing fees into your loan, leaving only application and appraisal fees for you to pay. Your bank should be able to guide you through this process and help you analyze whether the decision to refinance makes sense to you.

There are some factors you should consider:

• What will be my monthly savings?
• What are the closing costs involved and how many months will it take me to recover?
• How long do I plan on living here?

These are some pretty basic questions, but important to ask before making the decision to refinance.

There might be some of you out there thinking you can’t qualify due to being “upside down” in your mortgage, meaning you owe more than your home is worth or would appraise for due to the housing downturn. You might be surprised to find that you just might be eligible for a special program call the Home Affordable Refinance Program (HARP). For detailed information, please visit www.makinghomeaffordable.gov. The general criteria are as follows:

• You own a one unit to four unit home that is your primary residence
• Your mortgage is owned or guaranteed by Fannie Mae or Freddie Mac
• You are current on your mortgage payments and have not been more than 30 days late making a payment within the past 12 months
• You have a first mortgage not exceeding 125% of the current market value of your home
• You have income sufficient to support the new mortgage payments
• You can improve the long-term affordability or stability of your loan with the refinance

In addition to the above website, if you’re interested in determining your eligibility for the above program, you can call the Homeowner’s HOPE hotline at 1-888-995-4673.

What’s your mortgage rate? Financing your home is one the biggest costs in our respective lives, so let’s be vigilant about saving where we can.

info@mcarthurco.com
704.544.8429

Get Ready for Electronic Payments

As of late August the IRS has proposed regulations that would eliminate paper coupons for deposits of employment taxes, corporate income and estimated taxes, and many others as the paper coupon system would no longer be maintained by the Treasury Department after December 31, 2010. The IRS expects to finalize this regulation by the end of this year but they are not to take effect before January 1, 2011. With this change, the IRS will require taxpayers to use their Electronic Federal Tax Payment System (EFTPS) to process federal tax deposits.

As proposed, the regulations will require the following taxes to be deposited electronically:

• Corporate income and corporate estimated taxes
• Unrelated business income taxes of tax-exempt organizations
• Private foundation excise taxes
• Taxes withheld on nonresident aliens and foreign corporations
• Estimated taxes on certain trusts
• FICA taxes and withheld income taxes
• Railroad retirement taxes
• Nonpayroll taxes, including backup withholding
• FUTA taxes
• Excise taxes reported on Form 720

It is worth noting that the proposed regulations due keep intact the exception for businesses that are depositing a minimal amount of withheld income and FICA taxes. These businesses that qualify can simply make their payments with their tax return.

As we move into the final months of 2010 and these regulations draw closer to becoming permanent and effective, please be aware that your method of paying taxes may need to change if you currently use paper coupons. If you fall into this category and are not sure where to start, please contact your CPA as they should be able to guide you through getting set up on the EFTPS payment system.

info@mcarthurco.com
704.544.8429

Noncash Charitable Contributions

Picking up where we left off in our last blog, lets summarize charitable contributions of the noncash variety. These contributions can take many forms, but the record keeping for each is the same. If the tax man comes knocking on your door, you will want to have the following on file to substantiate your charitable contribution and related deductions:

1. Name of charitable organization
2. Date and location of contribution
3. Reasonably detailed description of contributed property
4. Fair market value (FMV) and the method used to value property
5. Cost or other basis

In addition to the above guidelines for record keeping, there are also important dollar figure break points that will determine what sort of documentation is required as follows:

• Less than $250: A receipt is not required where it is not practical to obtain one. An example would be at an unattended Goodwill drop location.
• $250 to $500: You must obtain written acknowledgement from the charity that contains the name and address of the organization, date and location of donation, and a description of the property.
• $501 to $5,000: The same requirements as above. Additionally, records must show how the donated property was acquired, the date acquired, and the adjusted cost basis of the donated property.
• More than $5,000: The same requirements as above. Additionally, most donations of property valued over $5,000 require an appraisal.
• Form 8283: If noncash contributions exceed $500 (in aggregate), then Form 8283 must be filed with your 1040 in order to properly claim these deductions

One common donation that falls into the noncash category is that of an automobile. The deduction amount available to the taxpayer depends on the how the vehicle is used by the charity set to receive the donation. No matter how the vehicle is eventually used, the taxpayer cannot claim any deduction above $500 for a donated vehicle unless Form 1098-C is filed. Form 1098-C must be provided within 30 days of the donation and the taxpayer must attach Copy B of this form to their 1040. How much can be deducted for the donation of a vehicle?

• The Donated Vehicle is Sold: If the charitable organization takes the donated vehicle and sells it without using it for charitable purposes, then the deduction to the taxpayer is limited to the gross proceeds realized from the sale of the vehicle. In this case, the fair market value of the donated vehicle is inconsequential. The gross sale proceeds amount is reported on line 4c of the Form 1098-C.
• The Donated Vehicle is Transferred to a Needy Individual: If the charitable organization donates or sells the vehicle for under FMV to a needy individual , then the gross proceeds rule does not apply. In this case, the FMV as of the date of the contribution can be used as the deduction amount.
• The Donated Vehicle is Used by the Charity: If the donated vehicle is used by charity, then it can be deducted at the FMV as of the date of contribution.

The above details will help you with your record keeping for noncash charitable contributions. We hope that as you plan your charitable contributions for the remainder of the year, you will keep these guidelines in mind and have your records in order. At the end of the day, the tax deduction is not the most important part of giving to charity, but it is a part that can help your tax position is you are charitably inclined. Labor Day weekend is right around the corner, so stay safe and enjoy your Holiday.

info@mcarthurco.com
704.544.8429

Charitable Contributions

If you itemize deductions on your Federal tax return, you probably have some measure of Charitable Contribution deductions on Schedule A of your 1040. This is one of the most commonly questioned areas by our clients: Can I deduct this? As you move through the remainder of the year, please keep in mind the following as you plan your charitable giving.

• Limits: The total amount of your deductions for charitable contributions cannot exceed 50% of the taxpayer’s Adjusted Gross Income. Additionally, special 20% and 30% rates apply to certain types of charitable contributions. Any contributions exceeding the 50% AGI limit in a given year can be carried over to each of the five succeeding years.
• Cash is King: Cash is the simplest way to make a charitable contribution. However, it is not the only method that can be used. A variety of other options are available to you. Briefly, a few of those options are Credit Card contributions, Tangible personal property, Stock donations, Real Estate, and many others. We will discuss some of these unique options in our next blog.
• Charitable Travel: Transportation expenses can be added to any monetary or property charitable contributions made; either actual expenses or 14 cents a mile is the deductible amount. Additionally, meals and lodging as related to the charitable travel are deductible.
• Records Requirements: Regardless of the amount, to deduct a contribution of cash, check or other monetary gift, a written record must be maintained. This written record can be in the form of a bank record, payroll deduction or written communication from the charitable organization. A new trend is charitable donations via text and for this sort of donation a copy of the phone bill will suffice.
• What’s Not Deductible? The list is long here, but I will highlight some of the major areas that confuse clients as they total their charitable contributions for the year. Money or property given to the following are NOT deductible contributions:


 Civic leagues, sports clubs, labor unions, chambers of commerce
 Foreign organizations (with minor exceptions)
 Lobbyist groups, political groups or candidates
 Cost of raffle, bingo or lottery tickets
 If your contributions entitle you to entrance/participation in a charity related event, you can deduct only the amount that exceeds the FMV of the benefit received. For example, you purchase tickets for a charity ball that cost $500 and the FMV of the tickets are $200. Only $300 ($500-$200) can be deducted.
 Value of time or services

Join us for our next blog as we will talk more specifically about non cash contributions: what form they can take and any special rules that may apply.



info@mcarthurco.com

704.544.8429

Tax Planning

During these dog days of Summer, the last thing on many people’s minds is taxes and tax planning. However, as we move into August and have the 4th quarter in sight, it just might be the appropriate time for you to sit down with your tax advisor and take a look at where you stand through the midpoint of the year. You might be asking yourself why, or do I really need to take the time to do this? For many of you, the answer would be no. If your taxes are covered by withholding and your financial position remains unchanged, then this planning is probably unnecessary. However, there is a large segment out there who can benefit from this planning in order to avoid any tax season surprises and have the ability to maximize their 2010 tax position.

If you have any of the following characteristics, you might want to sit down with your tax advisor and take inventory of where you stand for the year:
• Business Owners
• Individuals paying estimated taxes
• Substantial increase or decrease in taxable income including wages, interest, dividends, business profits, etc
• Substantial increase or decrease in itemized deductions
• Recent move to an assisted living home
• Receiving a Severance package
• Distribution of IRA or Pension Funds that are new to you
• Started a new home business
• Large capital gains/losses
• Considering a Roth IRA conversion

The above are just a few of many reasons to sit down with your tax advisor. The key is to take time to think about your financial and tax position now while there is still time in the year to make the adjustments necessary to help you avoid tax seasons surprises and plan accordingly.

info@mcarthurco.com
704.544.8429

Thinking About Hiring?

In these tough economic times where unemployment figures are at levels not seen in numerous years, even decades, there are signs that businesses are starting to hire again. If you are one of those business owners thinking about hiring or who have hired recently, there are government tax breaks available that you should be aware of. The Hiring Incentives to Restore Employment Act (HIRE) was signed into law on March 18, 2010 and was designed to encourage employers to hire and retain new workers by creating the below incentives.

Payroll Tax Exemption

Employers who hire unemployed workers after Feb. 3, 2010 and before Jan. 1, 2011 are exempt from paying the employer 6.2% share of Social Security employment taxes on wages paid from Mar. 19, 2010 to Dec. 31, 2010 to newly hired “qualified” individuals. A “qualified” individual is one that meets the following criteria:

1. Hired between Feb. 3, 2010 and Jan. 1, 2011
2. Certifies by signed affidavit, under penalties of perjury, that they have not been employed for more
than 40 hours during the 60-day period ending on the date the individuals begins employment with
the qualified employer
3. Did not replace other employees of the employer unless the former employee left voluntarily or for
just cause
4. Is not related to the employer under special definitions

Form W-11 as posted on the IRS website can be used to meet this criteria of affidavit. From there, most eligible employers will use Form 941, Employer’s Quarterly Federal Tax Return, to actually claim the exemption. The certification is required to claim the payroll tax exemption; however, it need not be filed with the IRS. It should be retained with your payroll and income tax records.

It should be noted that this exemption will not affect the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2% share of Social Security taxes, as well as income taxes.

As a business owner, you may be asking yourself if you qualify for this credit or not. Non-eligible employers include household employers, federal, state, and local government employers, other than public colleges and universities. If you do not fall in this category, chances are that you do qualify but you should verify this with your tax advisor.

The following links are great resources published by the IRS:

www.irs.gov/pub/newsroom/marketing/print/hire-flyer.pdf
www.irs.gov/businesses/small/article/0,,id=220745,00.html


Employee Retention Credit

In addition to the above exemption, employers may also qualify for an up-to-$1,000 tax credit for retaining the above mentioned “qualified” individuals. The individual must be employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period. This credit should be claimed on the employer’s 2011 income tax return.

The above issues can become convoluted, so please contact your tax advisor. Further, the IRS has issued guidance applicable to these tax breaks and can be a great resource for any employers who think they may be eligible.

info@mcarthurco.com
704.544.8429
Check out our new website! www.mcarthurco.com

S Corporation Changes Pending

We typically like to focus on planning ideas here on our blog, but we feel that’s important to make Personal Service S Corp firms aware of a pending aspect of a Bill currently in Congress to reinstate a set of expired tax breaks. An addendum to the bill includes a Self-Employment tax change that will result in an increase. Firms in the following fields should be aware of this possible change: Accounting, Law, Health, Actuarial Science, Engineering, Architecture, Lobbying, Consulting, Brokerage Services, Investment Management, Sports, and Performing Arts.

Currently, owners of S Corps pay a tax on 15.3% of the first $106,800 of wages, and 2.9% on any wages above that. Any additional profits flow through to the owners’ individual income tax returns as dividends and are exempt from self-employment tax but are subject to income tax. This portion of the new legislation will end this advantage of electing an S Corp by requiring owners to pay self-employment tax on their entire profit.

In its current form, this bill only affects small (3 or fewer owners) professional service corps. The dividend pass through option still exists for owners of larger personal service S Corps, or for S Corps that aren’t in the professional service fields listed above.

If you’re an owner of a personal service S Corp, please stay apprised of this bill and how it affects your tax position.

info@mcarthurco.com
704.544.8429

More Healthcare...

I’m sure that if you've been listening, you’ve heard that high income taxpayers will be responsible for a Medicare “surtax” on earnings in excess of $250,000. In the recently passed legislation, this is true, but it does not take effect until after 2012. Specifically, an additional 0.9% Medicare surtax will be levied for W-2 wages and self-employed earnings in excess of $250,000 for married individuals filing jointly or $200,000 for single individuals. Currently, the aggregate Medicare tax rate is 2.9% with one half paid by the employer and the other half paid by the employee. A self-employed individual pays the entire 2.9%, but is then allowed to deduct half of that on their Federal Income Tax return. These are the basic rules, but let’s look at some intricacies that could come into play in your given tax situation.

• Married Filing Jointly – 2 Income Family

If you are in a family that both the Husband and Wife are working, both bringing home $175,000 for a total of $350,000, then you fall into bracket of owing the 0.9% Medicare surtax. Although your individual wages are under $250,000, your combined earnings are what is reported; therefore, pushing you into the 0.9% surtax territory. Since neither the Husband’s nor the Wife’s wages exceed $250,000, then the respective employers will not withhold the additional 0.9% Medicare surtax. Therefore, on their joint return they would have to pay an additional Medicare surtax on $100,000, the excess of their $250,000 threshold.

• Self Employed Individuals

As mentioned above for self employed individuals, they are responsible for the full share of Medicare taxes but are allowed a deduction of one-half of what they pay in. This one-half deduction is not valid for the excess surtax amount. For example, if you make $300,000 in self employment earnings, you are liable for 2.9% Medicare tax up to $200,000. For the next $100,000 in excess of $200,000, the self employed individual is liable for the 2.9% plus the 0.9% excess. Further, the 0.9% excess is not eligible for the one-half deduction for Federal Income tax purposes.

Next time, we are going to move away from specifics on the Health Care legislation and start to focus on small business and midyear tax planning. Until then (especially if you’re in the South), stay cool!

info@mcarthurco.com
704.544.8429

Healthcare & Tax Implications Continued...

Below, we are going to discuss some other areas to be aware of that are on the horizon.

Reimbursements from Health Savings Accounts (HSA’s), Flexible Spending Accounts (FSA’s), and Medical Savings Accounts (MSA’s)

Effective for distributions made after December 31, 2010, Over-the-Counter medications (non-prescription) will not be reimbursed any longer.

Increased Penalties

For non-qualified distributions made from HSA’s and Archer MSA’s that are not used for “qualified” medical expenses , the penalty has been increased to 20% for any distributions meeting this description made after December 31, 2010. This represents a 10% increase for the HSA penalty and a 5% increase for the Archer MSA penalty.

Capping FSA Contributions

Beginning with tax years after December 31, 2012, FSA contributions will be capped at $2,500 for health FSA’s. This dollar amount will be indexed for inflation after 2013.

7.5% Floor Increased to 10%

Medical expense deductions currently only come into play for those of us that have them in excess of 7.5% of AGI. If your 1040 adjusted gross income is $100,000, then not a single medical expense dollar you spend is deductible until you reach $7,500 in expenses. The new law raises this Floor to 10% beginning with tax years after December 31, 2012. So, with that same AGI of $100,000, your medical expenses now have to be in excess of $10,000 before they become deductible. For individuals who are 65 and older (and spouses), the AGI Floor of 7.5% will remain in place through 2016.

This legislation encompasses a lot to digest, and much of it is not effective immediately. Rather, it is being phased in over a number of years. The above items are a few that many of our clients will be effected by and dealing with. Although they are not in place for this 2010 tax season, they should be noted as planning for the future is done. Next week, we will check back in on this issue by examining the legislation‘s stance on high-income taxpayers and medicare taxes.

info@mcarthurco.com
704.544.8429

Healthcare & Tax Implications

Unless you were hiding under a rock for the last several months, you’ve heard a thing or two about the Health Care debate. Whether you lean left or right, the Bill is here and our job now is to digest what it all means for our clients. Over the next few weeks, we’re going to take a look at some of the various tax implications of the Bill, so join us and let’s learn together.

Only portions of this far reaching legislation are effective immediately and that is where we will start today.

Small Business Health Care Tax Credit

The IRS took a giant first step in educating the public on the above credit by sending out millions of postcards beginning the week of April 19 that alert the small business owner of their opportunity. The first questions to ask yourself as a small business owner is whether or not you are eligible for the credit. For tax years beginning after 2009, the eligibility rules are as follows:

1. Must Provide Health Care Coverage: From the IRS website, “A qualifying employer must cover at
least 50 percent of the cost of health care coverage for some of its workers based on the single
rate.” Simply stated, if you aren’t paying for your employees health care, then no credit is available
to you.
2. How big is your business? Only a qualifying “Eligible Small Employer” can received the credit. It
doesn’t matter how you formed your business (C Corp, S Corp, LLC, Sole Proprietors, etc), but it
does matter how big your business is. A qualifying employer must have less than the equivalent of
25 full-time employees AND average annual wages must be below $50,000.
3. Contribution Rate: In addition to having to cover at least 50% of each employee’s cost, the amount
you contribute must also be uniform for each employee enrolled.
4. Both Taxable and Tax-Exempt businesses qualify

In addition to the above eligibility requirements, there are some other items of interest to note:

• The Health Care Act provides a maximum Credit of up to 35% of the cost of qualifying employee
health insurance for tax years beginning after 2009 and before 2014. The maximum credit rate
jumps up to 50% after that. Please not that the Credit can be as high as 35%, but can be reduced
according the number of full time employees and average wage rate. When it comes time to make
this calculation, you would be best served to check with your CPA or tax professional.
• The Credit is not available for the Owner or members of the Owner’s family.
• Carryback and Carryover options do exist. If you are unable to use your credit in a given year, it
can be carried back one year and carried forward for up to twenty years. Since the bill was enacted
for 2010 and forward, only the Carryover option is available in 2010.

The IRS has been very active in educating the public about this credit and the opportunity that exists. They already have a FAQ section, a YouTube video explaining who, what, why and how, and even examples of how the credit applies to employers in different circumstances. The following link is a great starting point to get to any of these sections http://www.irs.gov/newsroom/article/0,,id=220809,00.html?portlet=6

Tax-Free Employer-Provided Health Coverage Now Available for Children under Age 27

Health coverage provided for an employee's child under the age of 27 is now, generally, tax-free to the employee. This became effective March 30th of this year. The IRS announced on April 27, that the changes in this area immediately allowed employers with cafeteria plans to permit employees to begin making pre-tax contributions to pay for this expanded benefit. IRS Notice 2010-38 explains in detail these changes and provided further guidance. Briefly, this health care tax benefit applies to various workplace and retiree health plans as well as to self-employed individuals who qualify for the self-employed health insurance deduction. Further a child includes a son, daughter, stepchild, and adopted or eligible foster children. There is no requirement that the child generally qualify as a dependent for tax purposes.

Join us again next week as we look a little further into the new legislation’s tax implications for HSA, MSA and FSA plans and other various aspects to be aware of as we move further in to the 2010 tax year with these new regulations.

Goodbye April 15th!!!

Well, we’ve survived another Tax season rush, but our work isn’t done. For those of you on extension, you’ve been granted a reprieve, but there is still work to do. Stay in touch with your CPA. If you don’t have a CPA and you uncovered a tax situation you were uncomfortable in dealing with, then go out and find a CPA with a good reputation, one that you can trust, and one that will work hard for you.

For those of you who filed timely (maybe just in the nick of time in some cases), I’ve listed a few pointers for you to take with you as tax season is now behind you.

Where’s my Refund?

Straight from our friends at the IRS is a great tool to help you track the status of your refunds (if your lucky enough to get one). They have published the following information for taxpayer reference and use:

You can go online to check the status of your 2009 refund 72 hours after IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after you mail a paper return. Be sure to have a copy of your 2009 tax return available because you will need to know your filing status, the first Social Security number shown on the return, and the exact whole-dollar amount of the refund. You have three options for checking on your refund:

• Go to IRS.gov, and click on "Where’s My Refund"
• Call 1-800-829-4477 24 hours a day, seven days a week for automated refund information
• Call 1-800-829-1954 during the hours shown on your tax form instructions


Oops…I made a Mistake

Well, you filed your return, but now you’ve realized you made a mistake. Perhaps you left out some income or even missed a big deduction. It’s important to know that you can go back and make your return accurate by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Are you planning to move?

If you move after filing your return, and your worried about your refund and/or tax correspondence lost in the shuffle, take the time to send in Form 8822, Change of Address to the IRS. Additionally, file your change of address with the U.S. Postal Service.

That’s all for now. The mad rush for the 15th is behind, so now it’s safe to exhale. Check back in with us for our next series on Small Businesses kicking off in a few short weeks. Until then, enjoy this Spring time weather!!!

info@mcarthurco.com
704.544.8429

Ten Days to Tax Day

Now that April 15 is within shouting distance, let’s take a look at some deadline related items and reminders.

This is one deadline that doesn’t move!

First and foremost, get your taxes filed by April 15. Missing the deadline is something that can be avoided and should be. If you have a balance due and don’t file a tax return by April 15, then you'll be hit with a failure to file penalty, along with interest on the unpaid taxes. If you can’t meet this deadline to submit a finalized return, then request and extension of time to file. In order to request an automatic six-month extension, you will need to file Form 4868 and this form needs to be submitted by April 15. This will be push your filing deadline back to October 15. An important aspect of filing an extension is to remember that it only extends your time to file, not your time to pay. Therefore, if you owe the tax man, then you will need to pay at the time you file the extension or you will face a non-payment penalty. One last aspect to remember, is that if you are mailing your returns in on April 15, be aware of your post office closing times, expect crowds, and plan appropriately. Further, using a certified mail method is recommended in order have verified proof that your tax returns or extensions were filed timely.

Direct Deposit for Refunds

If you are part of the population lucky enough to be due a refund this year, then consider Direct Deposit. Your direct deposit information (checking or savings) can be included in your return, thus allowing you to receive an expedited refund versus receiving a paper check. Further, direct deposits also remove the chance that your paper check gets lost or stolen in the mail, so many consider this a safer method of receiving your refund. One last thing to note in this area is that you even have the capability of splitting your direct deposits into as many as 3 different bank accounts.

Haste makes Waste

Don’t fall prey to the rush and heat of April 15th looming. It is important that you aren’t overlooking the details. Recheck your figures, recheck your calculations. Simple things such as confirming that your Social Security Number, all signatures are completed where needed, and attaching the appropriate forms, statements and schedules can’t be overlooked. If your feeling overwhelmed with some of these details, then call your local CPA and see how they can assist.

Can’t Pay? There are options

If your tax liability is more than you have the capability of paying, there are options out there for you to explore. The answer is not to simply not pay. The IRS will allow an installment agreement to be put into place that makes provisions for you to pay any remaining balance in monthly installments. Per IRS regulations, if you owe $25,000 or less, you can even apply for such a payment plan online or by attaching Form 9465 – Installment Agreement Request – to your completed tax return. In doing either of these options, you would list the amount of your proposed monthly payment and the date you wish to make your payment each month. There is a IRS charge for this service of $105 for setting up the agreement or only $52 if you deduct the payments directly from your bank account. This is not an interest free loan for the IRS. You will have interest plus a late payment penalty on the unpaid taxes for each month after the due date that the tax is left unpaid.

April 15 always comes around quicker than we think. If you are feeling overwhelmed and need help, your local CPA is always a good place to start. As Benjamin Franklin is credited with phrasing, “By failing to prepare, you are preparing to fail.” Take the time to meet the deadlines and make your tax life simpler and a smoother process.

info@mcarthurco.com
704.544.8429

The Roth Conversion, Continued....

Last week, I left you with some important factors to consider when weighing this decision. Let’s take some time today to look a little deeper into one of those questions.

Future Tax Brackets

This is probably one of the most hotly contested areas of this debate. On one side of the coin, proponents for the Roth Conversion argue that rates have to go up, are scheduled to go up, and inevitably will go up. On the other side, economists and financial planners alike would argue that we just don’t know, so how can we base our decision on future tax rates if we can’t determine what they might be with any certainty? Now, obviously, the closer to retirement age you are, the more certainty you can have in predicting your tax rate base. So, where does that leave you and your decision making process?

There are a few certainties we can use as a leg to stand on when making this decision. First, the tax deferral rules that apply to contributing to a Traditional IRA work better for individuals that find themselves in a higher tax bracket today than at their retirement. Conversely, if you end up in a higher tax bracket at retirement, then you would benefit more from converting to a Roth IRA now and shielding your distribution at retirement from taxability. With these facts in hand, that leaves an important decision to be made by you and your trusted financial advisors. Will my tax bracket be higher or lower at retirement? We’ve determined that this is not the easy question to answer, but it is essential for you to answer when making this decision. Use the two “rules” above when thinking about your decision. For example, if you decide your tax bracket is going to be higher at retirement than it is currently, then that would lead you to strongly consider the path of Converting to a Roth.

One approach that might be worth considering is a hybrid method, or diversification of your taxability. Diversification is a term used commonly by investment professionals when discussing how to increase your return while minimizing your risk. The point of diversification is that we don’t know. We don’t know what asset class is going to earn us the most return or pose the most risk, so instead we diversify our funds across asset classes in order to hedge our bets. If this makes sense to you with your investment portfolio, it may be that it makes sense in your “taxability portfolio” as well. What do we mean by this? If you’re unsure what your tax rate base might be in the future or if you’re unsure whether you should lock in your taxes now by converting versus delaying taxation by not converting, then maybe a hybrid method is an option worth analyzing. If you’re contributing to a 401(K) or other tax deferred employer sponsored plan, then converting your Traditional IRA to a Roth might be a good fit. This would allow you to have the Roth IRA tax free growth and tax free distributions at retirement by paying taxes now on the Conversion amount, and, at the same time, will still provide you with a Tax-deferred piece of retirement funds with your 401(K) or similar investment vehicle.

This is by far the biggest area of debate with the Roth conversion and requires in depth analysis of your situation. Just because converting is the right answer for your neighbor does not necessarily mean that it is the right answer for you as well. We’ll be back next week to consider the remaining factors. Until then, email us with any questions you might have regarding this Conversion opportunity or any other tax matter that you would like.

To Convert or Not Convert?

For many months, the opportunity for any taxpayer to convert their IRA, SEP, SIMPLE IRA, and qualified plan amounts into a Roth IRA has been highly publicized and widely ballyhooed. So, I’m sure many of you find yourselves in the position of asking that very questions we pose above…To Convert or Not? Over the next few weeks, we are going to discuss a number of different angles surrounding this decision and try to provide you with as much information as possible to help you make that decision. However, this decision should not be made lightly and without careful consideration and planning. We highly recommend you consult your CPA, Financial Planner, and Investment Advisor before proceeding.

Before jumping into the details, I think it is important to highlight that many of the items that need to be weighed when making this decision are assumptions and/or questions that we don’t have the answers for: Will tax rates go up? What will market conditions be like? Will I be in a higher or lower tax bracket when I retire? Nobody knows the absolute answer to these questions; educated guesses can be made, but bear in mind that you are making a choice her on an educated opinion and that your final results may vary depending on what the future holds.

The Basics:

The reason this conversion opportunity has gained such wide spread publicity is that prior to 2010 the ability to convert was limited to individuals with Modified Adjusted Gross Income of under $100,000. That limitation has now been lifted, opening up the conversion opportunity up to any taxpayer (exceptions still may apply). Further, unless a taxpayer elects otherwise, then no gross income will be recognized from the conversion in 2010. Rather, it will be spread evenly across 2011 and 2012. This unique “tax liability spread” feature is only for 2010. After 2010, the taxes will all be in paid in full for the year the conversion is made.

Factors to Consider

The rules are pretty simple, but the decision is very complicated. The reason behind that are the various factors that come into play and the unknown aspect of those factors. Some important things to consider are as follows:


• Will I be in a higher or lower tax bracket when I retire?
• Where will I pay the taxes that result from my conversion?
• What are my goals with these funds? Will I need them for Retirement or do I want to leave the funds
to family?
• Will this affect my Social Security position at Retirement?
• What if I’m not sure? Where do I go for help?

These factors will each play an important role in your decision. Some may weigh certain factors higher than others, but it is certain that they should all be analyzed before moving forward with your decision to convert or not. Join us next as we will move into analyzing these factors and how they might work into your own situation. Until then, April 15th is approaching quickly, round up your tax materials and visit your local CPA.

info@mcarthurco.com
704.544.8429

401(k) Plan Mechanics

401(K) plans have taken a prevalent role in retirement planning over the past number of years. The recent market downturn has caused them to come under some scrutiny, and if you are one of those people doing the scrutinizing, then you should be equipped with all the information. Today, let’s start to take a look at some specifics behind 401(K) plans and how they will function in your retirement planning.

The Basics

When participating in a 401(K) plan, you, as the employee, make an election to receive pay as a contribution to the 401(K) plan on a pretax basis rather than in your paycheck. These elective contributions are excluded from your current gross income and become invested on a tax-deferred basis. As such, the elective deferrals are not subject to income tax withholding at the time of deferral and will not be taxed as a portion of your income on your 1040. However, they are included as wages subject to Social Security, Medicare, and federal unemployment taxes. Be aware, the government will get its taxes, so when your elective contributions are paid out at the time of retirement, the distributions will be taxed as ordinary income. With a majority of 401(K) plans, employee contributions are matched, up to a certain percentage, by employer contributions. These employer contributions are taxed in the same way that employee contributions are taxed.

Distribution Options/Rules

In this down economy, many people have searched for ways to find liquidity of their funds. There are methods for this to be achieved through the use of your 401(K) funds. If you are considering the following topics of discussion, they should be considered carefully and please consult your Financial planner and/or CPA. There are three basic ways to tap into the funds accumulated in your 401(K) plan.

1. 401(K) Hardship Distributions:
The rules for hardship distributions are very restrictive and specific. If considering, the best source
for information may be your 401(K) Plan sponsor and/or Company HR. The IRS has a good amount of
information in Publication 575. I’m going to highlight a few key points here. First, Hardship
distributions are limited to the amount of the employee’s elective deferrals and generally do not
include any income earned on the deferred amounts. If the plan permits, certain employer matching
contributions and employer discretionary contributions may also be included. Second, a Hardship
distribution is treated as such only if it is made on the account of an immediate and heavy financial
need of the employee AND is necessary to satisfy that financial need. For these two primary
requirements, there are a number of sub-requirements that must be examined to determine if you
meet the criteria for a hardship distribution. This is a decision that must be analyzed carefully before
proceeding, along with the help of professional advice.

If you’ve already taken a Hardship distribution or are considering one, please note that income tax is
due on the withdrawn amount, regardless of whether an early withdrawal penalty is also due.

2. 401(K) Plan Loans:
Again, the IRS Publication 575 is a great resource for Plan loans. First and foremost, the plan
document must specify if loans are permitted or not. If a plan loan meets the following criteria, then
it is not taxable:
 The plan participant may borrow up to 50% of their vested account balance up to a
maximum of $50,000.
 The loan must be repaid within 5 years (unless used in a first time home purchase)
 Repayment of the loan must be in “substantially level payments”, at least quarterly.

If the loan is deemed to not meet the above criteria, then entire distribution is taxable and subject to
the 10% premature distribution penalty. Further, if an individual is unable to repay the loan and
defaults, the IRS treats the outstanding loan balance as a premature distribution, subject to income
tax and the 10% penalty. This is another form of 401(K) distributions to proceed cautiously with for
there a number of angles, calculations, and considerations to take into account before making a
decision. Again, please consult with your professional advisors.

3. Regular Distributions:
This is the form of distributions majority of taxpayers is familiar with, so I won’t spend much time here.
Again, Publication 575 can provide you with much greater detail. The first important thing to note is
that you are Required to take distributions upon April 1 of the first year following the later of (1) the
calendar year in which you reach age 70 ½ or (2) the calendar year in which you retire. A 401(K) Plan
must provide that you will either receive your entire amount in the 401(K) by your Required
Distribution date or begin receiving periodic distributions by the Required Distribution date, often
referred to as your Required Minimum Distribution (RMD). These distributions are taxable as ordinary
income in the year in which they are made.

Above is a brief discussion of some of the taxability issues surrounding 401(K) Plans. If you have further questions regarding your situation, we are equipped here at McArthur & Company to help you find the answers you need. Next week, we are going to build off of this topic and dive into a discussion that has been getting a lot of press this year – the 401(K) to Roth IRA conversion. Does it fit your circumstances and what exactly are the rules?

info@mcarthurco.com
704.544.8429

Seeking Safety with Annuities

The decision to invest in an annuity should be made carefully and with the help of your trusted financial team. Due to the market decline and economic downturn, annuity investments have found favor in the eyes of many investors who see the possibility of outliving their retirement savings, especially without a strong recovery and/or the emergence of another market decline. The quick and dirty of an annuity arrangement is that an individual makes a lump-sum or other front-loaded investment, in exchange for periodic payments starting at a certain date. There are a number of options as to how you can have your annuity structured, so contacting a professional is suggested if you are considering an annuity as the right investment choice for you.

Today, we’re going to focus on the tax nature of annuities and how they can be a piece of your retirement planning.

As with all investment vehicles, the taxation of the vehicle will depend on what “garage” you decide to hold it in. As we previously discussed, there are really two options here and that is to hold it outside of a traditional tax-favored retirement account or to hold it inside such an account, i.e. Traditional IRA. The decision where to hold your annuity investment is important and should be considered with your Financial Planner and CPA. These are some factors to consider when making this decision:
• Tax rates on income generated by the investment
• Ability to Defer Income
• Future tax rates
• Flexibility needed to use funds

Generally, a distribution from an annuity is subject to ordinary income tax. However, any individual who receives an annuity payment will have the ability to exclude part of the payment from their gross income. The reason behind this is that a portion of each payment is considered to be a return on capital (your initial investment). The exclusion amount is calculated via a formula that multiplies the annuity amount received by the exclusion ratio. The exclusion ratio is calculated by dividing the investment in the annuity by the expected return under the annuity.

If an annuity is held in an IRA, remember a few key taxation points:
• To the extent allowed by law, if you make a Annuity contribution to your Traditional
IRA, it is tax deductible. Contributions made directly to annuities, outside of IRA’s, is
not tax deductible. The key here is whether or not you are eligible to make tax
deductible contributions to an IRA.
• Be careful or the contribution limits associated with IRA’s and how this will affect how
much you can fund your annuity held in an IRA.
• RMD at age 70 ½: For an annuity held in an IRA, the owner will be required to start
taking distribution in the year in which they reach age 70 ½. This is not the case if you
hold your annuity outside of an IRA structure.

Next week, we will continue talking about retirement vehicles and tax issues related to them. On the docket is 401(K) plans and some offshoots that are inevitably encountered by some of our readers. W-2’s, 1099’s, etc. should be in, so remember, it’s never too early to start your tax work!

Rebuilding Toward Retirement

There’s no doubt that this economic downturn took a big bite out of many retirement saving nest eggs and rearranged the plans of millions of Americans of when they can retire, how they can retire, and even where they may retire. Over the coming weeks, we are going to touch briefly on some aspects of trying to rebuild your retirement nest egg in the most effective and efficient way. We won’t pretend to be stock market prognosticators or decide on the economic fate of the US economy, but we will try to educate you on your options and equip you with the right information to make informed decisions with your Financial advisement team, your CPA and Financial planners. Investing is hard enough without having all the information, so it is our goal to provide you with the tax laws and ramifications behind many of the retirement savings vehicles and techniques employed by your Financial planners and advisors.

We’ll start with some of the basics. Majority of retirement savings strategies call for individuals to hold their retirement assets and savings in tax-deferred or tax-free accounts as well as taxable accounts. There a few reasons for this. First, investing retirement funds in tax-deferred or tax-free accounts offers you the ability to grow your funds outside of the reach of the IRS until the funds are distributed to the owner of the account. However, these tax-deferred or tax-free accounts do have some shortcomings and additional taxable accounts are needed to maximize your savings and have a balanced approach to retirement. One such shortfall is that these accounts have an annual contribution limit depending on the type of account that will obstruct you from saving as much as you may need to in order to adequately provide for your retirement. Additionally, tax-favored accounts, generally, impose a penalty for “early withdrawals” from these accounts. These are two quick examples of why taxable accounts are needed in addition to tax-favored accounts in your retirement planning. Let’s take a brief look at taxable accounts and how they can factor into your overall tax picture.

Taxable Account Planning

I think we all might agree that losing money in the stock market is not the optimal choice; however, if it comes to pass, there are some positive tax ramifications for the taxpayer. This is pretty basic planning, but let’s review a few basics listed below and then briefly touch on a few examples.

• Unlike business losses, personal capital losses can only be carried forward. (Only
exception is in the case of a natural disaster. Contact your CPA if you feel you fall into
this category).
• If selling stocks, remember that your Losses can be used to offset your Gains. Short
term losses can be used valuably if timed correctly to offset any short term gains that
would otherwise be taxed ad your individual income tax bracket rather than the
preferred long term capital gain rate of 15%.
• If you sell stock and realize a net loss, it can be used to offset your wage income up to
$3,000 and the remainder is carried forward to the next year.
• Be careful with qualified dividends. They are taxed at the long-term capital gains rate;
however, capital losses (short and long) con only off-set them up to the $3,000 limit.

Example 1:

During 2009, James earned $60,000 from his job as a mechanic. He also sold a mutual fund he owned that resulted in a long term loss of $8,000. Additionally he sold stocks that resulted in a long term gain of $15,000, short term gain of $2,000 and $14,000 in short term losses. As a result of his sales in 2009, James realized a net $5,000 short term capital loss calculated as follows:
--$4,000 - $2,000 = $12,000 short term loss
--$15,000 - $8,000 = $7,000 long term gain
--$12,000 - $7,000 = $5,000 short term loss

Of this $5,000 short term loss, $3,000 may be used to offset his current income of $60,000 and $2,000 may be carried forward as a net short term capital loss into 2010.

Example 2:

During 2009, Samantha has qualified dividend income of $8,000 and a net long term capital loss of $10,000. The net long term capital loss can only offset $3,000 of the qualified dividend income; therefore, the remaining $5,000 of dividend income is taxed at a maximum rate of 15%. The balance of the long term capital losses, $7,000, is carried forward to 2010.

We’ll be back week to talk more about retirement and how taxability and tax deferral play a role in your decision making. On deck is annuities. Have a great week and as always, if you have any tax or accounting questions, we at McArthur & Co. would be glad to become your trusted tax advisor.

info@mcarthurco.com
704.544.8429

Get Ready, Get Set, Go...

Over the past several weeks, we have tried to provide you with as many tax saving and planning ideas and tips as possible and we will continue to do so in the weeks moving forward. However, today, let’s take a moment to step back and get ready for the onslaught of paperwork, and for some out there, the stress that so often is associated with tax season. Even if you have a CPA prepare your taxes for you, dealing with and organizing the paperwork can cause unneeded stress for individuals if they aren’t ready for it and properly prepared to handle it. At McArthur & Co, we provide our clients with Client Organizers to help with the process of getting your paperwork organized as it arrives allowing it to be passed on to the CPA without anything falling through the cracks or any sort of delay developing. What you’ll read today is not rocket science, but it can make your life less stressful if you’re willing to put some of these simple steps into practice.

• Have a Dedicated place for your Tax Related Information: The documents have begun to trickle in for some of you and the stream of paperwork is only going to increase. As these documents (W-2’s, 1099’s, etc.) come in the mail, don’t just casually place them to side to deal with later. Make it point to store these documents in one location so that you aren’t searching throughout your entire house to find that one 1099 that you know you opened but can’t seem to put your hands on.

• Useful Categories: In addition to have a dedicated location for all of your tax documentation, it is also helpful to categorize your information according how it works into your tax return. Here, you can get as specific as you’d like, but should at the very least have a folder for Income Items, Deductible Items, Charitable Contributions, Investments. When an item is received in the mail, open it up, take it to your dedicated location for storage and then place it in the applicable folder. When it comes time to pass it on to your CPA, you’re ready. If you’re preparing your taxes on your own, this will significantly cut down on the time you spend sorting through the paperwork.

• Know what you Need: Half the battle is simply knowing what information you need to have to complete your return. The below list is by no means comprehensive, but it provides a guideline of some common items that should be noted, recorded, and/or received/reported:
1. Original W-2 forms reporting wages, salaries and tips.
2. All 1099 forms for interest, dividends, miscellaneous income, state refunds, or
retirement income.
3. All year-end, December 31, 2009, brokerage statements showing investment
transactions and any accompanying brochures received related to mutual funds.
If you sold any stocks or bonds, then you will need the original purchase price
and date if not provided by the brokerage statement.
4. Schedule K-1 showing income from LLC, Partnerships, S corporations, estates,
and trusts.
5. Statements supporting deductions for mortgage interest and real estate and
personal property taxes (autos, boats, etc.).
6. Details of any out-of-pocket medical expenses, including medical insurance
premiums and long-term care insurance premiums. Don’t forget medical miles if
significant. Do not include amounts reimbursed to you.
7. A list of charitable contributions (be sure and note those that are non cash), and
don’t forget charitable mileage. NOTE: All contributions must be traceable to a
canceled check or credit card statement. This is in addition to required receipt
from organization for contributions of $250 or more.
8. Details regarding any possible tuition credit or education interest deduction
(1098-T).
9. Income and expenses related to any small business you might have.
10. Rental income and expenses related to any rental property you might have.
11. Did you make any contributions to any sort of Individual Retirement Account? If
so, make sure you have the details for the amount and the type of IRA (Roth,
deductible, or non deductible).
12. For any estimated taxes you might have paid know the amount paid, the dates
they were paid, and to whom they were paid.

The above three steps seem so very simple, but you would be surprised how often they are overlooked. The result is frequently undue stress, delays in filing returns, and inability for individuals to take full advantage of their tax saving opportunities. Take the time and make the effort to implement these three steps and you will have the ability to take control of tax season instead of tax season taking the control of you.

info@mcarthurco.com
704.544.8429

The Current Homebuyer's Tax Credit

If you are in the market to buy a home this year, then pay attention to the new terms found in the extended version of the First-Time Homebuyer’s Tax Credit as it may open up the door for you to claim this credit even if this isn’t your first home.

We are going to highlight some of the basics first, many of which come straight from the IRS website as key points for taxpayers to know and follow. First, the IRS is in the process of revising Form 5405 – First-Time Homebuyer Credit, which must be filed in order to claim the Credit. The revisions are being completed to reflect the new provisions found in the extended version of the Credit. If you bought your home prior to Nov. 6, then you can still use the old version of Form 5405 to file your claim; any homes bought after Nov. 6 will have to wait until the revised Form 5405 is released. Additionally, the following are some key dates and qualifications to be aware of:

• First-Time Homebuyer – The details here have stayed pretty constant. To qualify as a First-Time Homebuyer you must meet the same qualifications as previous and you are still eligible to take a Credit of up to $8,000 for the purchase of your principal residence.

• On or Before April 30, 2010 – This is the key date to have purchased or to be entered into a binding contract to purchase a principal residence. If only entered into a binding contract, then you must close on the home on or before June 30, 2010.

• Claim Credit on 2009 or 2010 Return – For qualifying purchases in 2010, you will have the option of claiming the credit on either your 2009 or 2010 return.

• Long-time Resident now Eligible for Reduced Credit – You can qualify for the credit if you’ve lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009. The maximum credit for long-time residents is $6,500. However, married individuals filing separately are limited to $3,250.

• Higher Incomes can now Qualify – The new law raises the income limits for homes purchased after November 6, 2009. The full credit is available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers.

• Purchase Price Limit – No Credit can be applied to the purchase of a home if the purchase price of that home exceeds $800,000.

One’s marital status has a huge effect on how and if the Credit can be claimed. If you have been recently married, divorced or have a pending marriage or divorce, then your situation may require a closer look and the availability of the credit could become difficult to determine. If you find yourself in one of these situations, then please contact your CPA for more information. There are a number of different scenarios to consider, but we are only going to touch on a few here today.

First, for those of you who have been through the process of a divorce, the marital home is considered your principal residence until the divorce is finalized. Therefore, you would need to wait three years from when the divorce was finalized in order to be eligible for the $8,000 portion of the credit. However, you may qualify for the $6,500 portion of the credit. This would be a good time to call your CPA to see exactly where your eligibility stands.

Next, let’s take a look at a newly married couple. Spouse #1 is a long term resident and is a current homeowner and Spouse #2 qualifies as a First-Time Homebuyer (according to the terms of the First-Time Homebuyer Credit) and they have decided to purchase a new principal residence together. In this situation, does this couple qualify for either the $8,000 credit or the $6,500? Rulings and guidance indicate that the answer here is No. To qualify for the First-Time Homebuyer tax credit, then both Spouse #1 and Spouse #2 would have to qualify as a First-Time Homebuyer; the same can be said for qualifying as a long term resident for the $6,500 credit. One question to ask in this situation is can Spouse #2 (the First-Time Homebuyer) amend their previous year return to be able to claim the credit? Contact your CPA as this requires a more in depth analysis of your personal situation.

Outside the realm of marital status, there is one further scenario we want to discuss. If you are a homeowner who qualifies as a “long term resident” for the purposes of claiming the $6,500 Credit, do you have to sell your home in order to qualify? The early answer is No. If you replace your current principal residence with a new principal residence, and if you meet all of the other qualifications, then you may be eligible to claim up to $6,500. The key here is that the new home you purchase is going to be your Principal Residence. It is not important what comes of your old home for the purposes of claiming the Credit.

If you are in the market for a home, please take time to consider whether or not you qualify for either the $8,000 or $6,500 version of the First-Time Homebuyer Credit. This can be complicated to consider, so please contact your CPA to see what your situation holds for your eligibility.

Please join us again next week as Tax season draws closer and we consider some steps you can take to be prepared.

info@mcarthurco.com
704.544.8429

Know Your Limits

We hope you all had a wonderful Holiday season and that your new year is off to a great start. Before we get into the heat of tax season, we want to make you aware of some 2010 limits and key figures as you start to do your 2010 planning.

Standard Mileage Rates
The IRS has issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 50 cents per mile for business miles driven
• 16.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

It might pay to do the math here because you always have the option of calculating the actual costs of using your vehicle rather than using the standard mileage rates.

Standard Deduction Amounts
The Standard Deduction amounts for 2010, with the exception of Heads of Households, will remain constant to the levels that were seen in 2009 and are as follows:

Married Filing Jointly -- $11,400
Heads of Households -- $8,400 (up from $8,350)
Single -- $5,700
Married Filing Separate -- $5,700

Personal Exemption
The personal exemption is also remaining at its 2009 level of $3,650.

FICA Wage Base
The Wage base remains frozen for 2010 at $106,800. The tax rates remains the same also, with self-employed individuals paying 15.3% on first $106,800 of net earnings and 2.9% on any amount above that. For those who fall outside of the self-employed category, your rates are the same; however, half is paid by your employer and half is paid by you.

Student Loan Interest Deduction
The maximum deduction for student loan interest is $2,500 and is phased out as follows:

Phased out on a Single return beginning at $60,000 and ending at $75,000.
Phased out on a Joint return beginning at $120,000 and ending at $150,000.

Lifetime Learning Credit
In order to claim the Lifetime Learning Credit, you must be paying qualified tuition and related expenses at a postsecondary educational institution and that institution must classified as an eligible educational institution. Unlike the Hope Scholarship Credit, students are not required to be enrolled at least half-time in one of the first two years of postsecondary education. The Modified AGI phase-out ranges are as follows for this credit:

Phase out on a Single return begins at $50,000 and ends at $60,000.
Phase out on a Joint return begins at $100,000 and ends at $120,000.

IRA Contributions
Various phase-out ranges apply to your Contributions, so please contact your CPA for more detailed advice. However, generally speaking, the maximum IRA contributions for Traditional and Roth IRA’s for 2010 are as follows:

Under Age 50 -- $5,000
Age 50 and Over --$6,000

Qualified Plan Contribution Limitations
Limits on what you can place into your Qualified Plans (401(K), profit sharing, defined benefit plans, etc) did not move from your 2009 limits and are as follows:

401(K) Elective Deferral:
Under Age 50 -- $16,500
Over Age 50 -- $22,000

SIMPLE Plan Deferral Amount:
Under Age 50 -- $11,500
Over Age 50 -- $14,000

Benefit Limit for Defined Benefit Plans:
All Ages -- $195,000

HSA High Deductible Health Plan
Many employees and self-employed individuals now take advantage of a Health Savings Account and if so should be aware of the following Limit changes in 2010 as follows:

Minimum Deductible
For Self-Only coverage -- $1,200
For Family coverage -- $2,400

Maximum Out-Of-Pocket Expenses
For Self-Only coverage -- $5,950
For Family coverage -- $11,900

Maximum Contribution Amount
For Self-Only coverage -- $3,050
For Family coverage -- $6,150
If an Individual is over the age of 55, add $1,000 to Contribution Amount limits.

Annual Gift Tax Exclusion
While Congress still debates some Estate and Gift tax law, one thing we do know is that the Annual Gift Tax Exclusion amount remains the same as 2009 at $13,000.

The above listed amounts represent just a sampling of some key limits and figures that you will need to know in order to plan for your 2010 tax year. If you have more specific questions or areas of interest, please reach out to us here at McArthur & Co or to your local CPA. Next week, we plan to take a look at the newest version of the First Time Homebuyer tax credit and how it opens up the door to more home buyers. If you’re in the real estate market, check back in and see if you can apply this opportunity to your buying situation.

info@mcarthurco.com
704.544.8429