One of the frustrating complexities on a personal tax return is making interest expense deductible. The current law comes from the revision to the Internal Revenue Code in 1986. Essentially, you should manage four categories of interest to ensure you’re maximizing your qualifying deductions:

 Home mortgage interest

This interest is incurred on the primary residence, plus one other home (which can also be a boat or an RV). The interest is deductible on the Schedule A, but is limited to the interest incurred on the amount of debt used to purchase the property, plus improvements.

Deductible interest expense is limited to the interest on combined mortgage balances of $1,000,000 or less, plus an additional $100,000 on a second mortgage or home equity loan. Points do not count toward this limit, so lowering the periodic rate by paying extra at closing may leverage you a slightly higher total deduction.

Interest above these limits falls under personal interest, discussed below.

Investment interest

This Schedule A deduction is limited to the amount of investment income, primarily taxable interest and dividend income. For example, a margin account or a loan used to acquire an investment asset that does not generate current income qualifies for the Schedule A deduction.

If tax-exempt interest is earned in a particular year, the ratio of that income to total investment income is used to determine what investment interest expense is disallowed.

It’s also possible to increase the amount of investment income reported in a particular year by electing to treat net capital gains as investment income. The down-side to this approach is that the lower capital gains tax rates are waived, but making the election may make sense to avoid losing the deduction.

If the total investment interest expense exceeds the total investment income in a particular year, the excess may be carried for up to five years into the future.

Business interest

This deduction includes interest paid for rental property. To qualify, the proceeds of the debt must be used for business purposes and the activity should be non-passive; or if it’s passive, it must be combined with other passive activity to create a net income of at least enough to prevent the losses being limited by the passive loss rules.

If a net passive loss does get limited in a particular year, the interest expense is included with that loss. It is suspended until a future year has sufficient passive income to take an allowable deduction, or until the activity is sold and the suspended loss is included in the net income reported from the sale.

Personal interest

Finally, all other interest expense (credit cards, auto loans, vacation loans, etc., in addition to those excesses mentioned already) is considered personal interest, which has no income tax effect.

If you need help planning your debt structure to maximize your deductible interest, feel free to contact us by phone (904-396-5400) or email.

Filed under: Tax by Mark Patrick
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In our series of recent blogs we mentioned that prudent taxpayers should prepare themselves for laws that may make it into next year: the one pending for 2013 and the one which may survive the current partisan Congress this year.

Use these ideas to plan your strategy:

• Consider accelerating capital gains and dividend income into 2010 to enjoy the lower rates. If you are in the 15% bracket or below, this income could be taken tax free, so pay attention.
• Deductions can be deferred to future years when the tax rate may make them more valuable to you, but remember that the returning phase-out of itemized deductions may limit your benefit.
• A Roth IRA rollover this year (see our Blog archive) could lower future adjusted gross income (AGI) and taxable income to keep you under the investment surtax.
• Think about increasing pension and IRA contributions over the next few years to reduce the amount of income subject to the wealth taxes. These income sources will be taxed upon withdrawal in future years, but the distributions will not be subject to the investment income tax of 3.8%.
• Study the practicality of installment sales to lower the annual capital gain income in a single year, thus moving it below the investment income tax.
• Weigh the option of tax exempt income, such as municipal bonds.
• Invest in life insurance contracts that could produce tax-free income at death. Lifetime needs for income can be provided for by borrowing against the policy.
• The popularity of the S corporation may come to an end if the proposed surtax gets through this year, so planning for an organizational tax change may need to be considered.

Determining the best plan for your situation requires a careful understanding of where you are and where you are going within the evolution of the tax law changes.

We’re here to help you navigate these choppy waters, so give us a call, 904-396-5400, or Email, office@CPAsite.com, and we’ll help you find the smoothest sailing possible.

Filed under: Tax by Mark Patrick
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In this segment of our “Multiyear Tax Planning” series we’ll start preparing you for the “medicine” you’ll be required to take as the tax increases passed with the new health care law become effective.

In 2013 expect an extra 0.9% levy on wages for couples with “adjusted gross incomes” [AGI] above $250,000 ($200,000 for singles) and a new 3.8% tax on investment income on those same people. No longer will everyone pay FICA and Medicare taxes at the same rate. In short, those taxpayers who benefit least from these programs will be expected to pay more to support them.

Formerly considered payroll taxes, FICA and Medicare taxes will now be investment income taxes, too. Did you hear someone say we needed tax simplification? Not lately. Definitions are a long time coming, of course, but you get the gist of where all this is headed.

In addition, many professionals must prepare for the possibility they’ll need to pay FICA and Medicare taxes on the net income of their S corporation or partnership income, which, until this time, was considered only taxable for income tax purposes. The House already passed this additional dip into the pockets of doctors, lawyers, accountants, engineers and consultants, and the Senate is working on a similar, perhaps even more tightly defined, provision.

The core of this particular bill is to provide what the President wants to protect those people making under the wealth threshold (over $250,000); but the pack mule his plan is riding on may have more than it can carry right now, and Congress may not let it survive this year. Predictably, the proposal is linked to a myriad of other extenders offering incentives and relief for Americans in need, so it’s way too early to predict what will be in the final recipe from our elected cooks in Washington.

What can you do?  Hold tight!  Next week, we’ll be posting some tips to help you navigate the tricky waters ahead.  In the meantime, if you need a CPA or have questions about the new and future changes, call us at 904-396-5400.

Filed under: Tax by Mark Patrick
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Welcome to the first in a series of discussions about why tax planning really shouldn’t be done one year at a time. After you read this series over the next few weeks, you’ll arrive at the same conclusion we learned years ago: tax planning is no longer a single-year exercise!

We had already recommended a multiyear strategy because the Alternative Minimum Tax [AMT] can sneak up on you, but we have even more reasons to consider it now. We need to be prepared for these three imminent events:

• The prospect of dozens of changes to individual income tax rules in 2011;
• The massive new healthcare bill already providing for tax increases to most taxpayers in 2013;
• And now working its way through Congress: an attempt at raising more revenue from some while limiting tax increases on others.

With all this taxing activity in the works, planning a multiyear strategy that moves income and deductions to the most advantageous tax year possible is a wise step.  Many taxpayers hope for a reprieve after the November elections, but getting a break will require a majority of the new Senate to halt debate on any new legislation, and the President still holds the power to veto for at least 30 more months. Essentially, the odds are against returning to the status quo.

Our first hurdle is the repeal of the “Bush tax cuts.” Actually, Congress needs to take no action to reset the tax rates to those of a decade ago. The changes are already baked into the cake of the current law. Plain and simple, the tax cuts are scheduled to expire on New Year’s Day 2011. These changes include:

• The return to the 20% long term capital gain rate (from 15% for all but the lowest brackets, which are currently zero)
• The elimination of the special 15% rate (0% for the lowest brackets) on qualified dividends
• Back to the regular rate for ordinary income
• The cap on ordinary tax rates will return to 39.6% from the present 35%
• Special relief for the increasing population affected by the AMT will end
• Itemized deductions will again be limited for those with over $250,000 in gross income

Also, the current situation of not having an estate tax will end with the return of the old law with its maximum 55% tax rate and $1 million exclusion. Even if you’re one of the “small people” that BP is concerned about, the feds will take back half of your $1,000 child credit. There’s more, but you get the picture. The good old days may not look so good when they return next year.

Check back next week for details of the tax increases passed with March’s health care bill. Until then, if you have any questions about multiyear tax planning, call 904-396-5400 to speak with one of our accounting professionals.

Filed under: Tax by Mark Patrick
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If you are not using a payroll service or software that has a payroll module, make sure you keep accurate and detailed records of your payroll.  Remember, the Internal Revenue Service (IRS) does not easily bend when they impose penalties and interest on late payroll tax deposits. 

Your employees won’t be happy if the W-2 you prepare has to be amended after they have filed their tax return, and you won’t be happy if you’re stuck answering IRS or state notices of inconsistencies in the payroll returns filed.

By keeping a spreadsheet of the following, you can accurately figure the 941 payroll tax deposit amount, due dates (losing track of this obligation can bury you financially if you fall behind), and file accurate payroll returns:  

1.  Record the date of the payroll check.  The IRS determines when the taxes are due by the date your employee was paid.
2. Record the gross salary.  This figure is the amount that you report on the quarterly payroll reports and the annual W-2.
3. Itemize the deductions.  You will need to know the Federal withholding amount and both the Social Security and Medicare withheld as well as other deductions, such as health insurance, HSA, 401k or SEP, child support and other deductions.  Some of these items reduce the amount of taxable income reported and some don’t.
4. Track the net payroll check and check numbers.  This record will be a great help when it comes time to reconcile your payroll bank account.

Always remember to keep an up-to-date file on each employee.  It should contain current Forms W-4, I-9, W-11 (HIRE Act if applicable), employment application, signed and dated notice of probationary period, history of pay rates and raises, and work evaluations including details and dates of reprimands that could cause dismissal. 

If time management is an issue, we can certainly assist you in any or all of the payroll record keeping and filing of payroll tax returns.  Just call us at 904-396-5400.

Filed under: General by Kathy Bordin
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Earlier in the year, you may have read that employers who hire unemployed workers between February 3, 2010 and January 1, 2011 may be eligible for a payroll tax credit.  (If you missed it, see the “Implementing the Hiring Incentives to Restore Employment Act” blog.)

If you are a qualified employer (household employers don’t count) and hired one or more workers who met the criteria, make sure they complete and sign IRS Form W-11. To qualify, your new hires must not have worked more than 40 hours in the past 60 days. You don’t need to do anything with your W-11 for now, just keep it with your payroll records.

You will also need to complete the IRS’s revised Form 941 and calculate your exemption on lines 6a through 6d.  Instructions are available for this form, but if you need additional help, or if you need a CPA in the Jacksonville area, give us a call at (904) 396-5400.

 This tax change is actually good news for your business—we’ll make sure you take full advantage of it.

Filed under: Tax by Lynn Barwell
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You may have heard the IRS is increasing its audits of business tax returns—it’s true. But implementing some simple standard business practices will better prepare you if your business is audited:

Deposits

• First, expect the IRS to assume all deposits into your business bank account are income.  Most probably are, but you may have deposited, for example, loan proceeds. 
• Be sure the loan your business received, either from the bank or from your personal funds, is properly recorded with a written loan document. 

Expenses

• Second, expect the IRS to assume all outflows from your business bank account are going to you personally unless you can prove they are valid business deductions. Keep your receipts and statements to show that those deductions actually satisfied a valid business purpose. 
• Be especially careful if some of your vendors also sell to the general public. For example, a construction contractor may purchase from Lowe’s or Home Depot, but without proper documentation, the IRS agent may assume these are personal expenditures.

Comingling

• Never mix business and personal expenses in the company bank account, and avoid directly paying personal expenses from it! Instead, pay yourself a salary and a distribution.
• Keep business items in the business account and the personal items in the personal account.  Comingling of funds can make it difficult to manage the bank account and may, justifiably, raise the suspicion of the IRS agent. Some lawyers contend that this comingling could jeopardize the legal protection of your corporation.
• If you pay an expense personally on behalf of your business, simply complete an expense reimbursement and have the company pay you, the same way you would reimburse an employee. You can find a useful Expense Report template on our website. Click on Tax Center and scroll to the bottom for Excel spreadsheets to properly document your expenses and business mileage.

If you are “lucky” enough to be audited by the IRS, you will now be prepared with the proper documentation.  Of course, if you need the help of a CPA, call us at (904) 396-5400 and we can assist you with the IRS audit process.

Filed under: Tax by Adam Robinson
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One of the key initiatives affecting small businesses and their employees from the two health care bills passed in March is the Small Business Health Care credit. Postcards were sent to most small employers to pique their interest about this opportunity.

This new credit for small businesses through 2013 offers an incentive to increase the employer financial participation in its employees’ health insurance. Firms with fewer than 25 employees and average wages under $50,000 can receive a credit of up to 35% of the cost of employer-paid coverage, with the full credit limited to companies employing 10 or fewer full-time staff averaging under $25,000 each.

In a few cases, an employer with up to 50 employees may be eligible with the right mix of part-time and full-time employees. Not-for-profit entities are also eligible for up to a 25% credit.

To be eligible, the employer must provide at least 50 percent of the single rate cost of health care coverage for some of its employees. The credit is a bit complicated to compute, but essentially uses an average of the hours of all employees, not including overtime, to determine the average wage.

If that average is under $25,000, the full credit is likely available. Between $25,000 and $50,000, the credit begins to phase out, with nothing available if the average is above $50,000. The credit is scheduled to become more robust beginning in 2014.

As with most tax laws with specific rules of implementation, advanced planning can help your chances of benefitting from these cost-saving tactics. Don’t let this opportunity pass you by without considering if it can help you and your employees with health care coverage. We can help you with that planning.

As the Department of Health and Human Services develops these regulations, much more will be learned about this new law…and many new forms will be developed. So stay informed and give us a call now if you’re ready to get started:  904-396-5400.

Filed under: Tax by Mark Patrick
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It’s certainly believable that given the current economic conditions, U.S. home foreclosures increased nearly 22% in 2009. Losing your home is obviously devastating, but there are tax ramifications following a foreclosure which could cause you to owe more money to the Internal Revenue Service (IRS).

The basic tax rule of forgiveness of debt is simple: when a lender cancels your debt, a Form 1099C is issued to you and the IRS for the amount of the debt. The amount of forgiveness is then taxable as ordinary income to you. 

With the Mortgage Forgiveness Debt Relief of 2007, Congress provided homeowners a break, in that the forgiveness of debt on your primary residence is excludable from income. Note that this relief is only available on a primary residence mortgage up to $2 million in debt through 2012. Forgiveness of a mortgage or loan on your vacation home, car or other debt is reported as taxable income to the taxpayer.

Two exceptions can affect the homeowner. If the mortgage (even on your vacation home) is forgiven in bankruptcy, the forgiveness of debt is not taxable income. Also, if you can prove that you’re insolvent, part of the debt may be forgiven. For example, if you have assets of $150,000 and liabilities (debt) of $200,000, then up to $50,000 of your debt forgiveness is tax free. Any excess would be taxable as ordinary income.

Therefore, when you lose your primary residence due to foreclosure, no further tax burden exists on the amount forgiven. However, you should also consider what impact no longer owning a home will have on your tax bill in the future. When owning a home you’re eligible to deduct the mortgage interest paid on principal borrowed to purchase the home and the interest on an additional $100,000 in home equity borrowing. As a homeowner, you also can deduct the real estate taxes paid on the home. 

So, taxpayers who lose homes should do some tax planning to prepare for the impending amount due to the IRS because of the reduction in their itemized deductions. Someone in the 25% tax bracket who in the past could deduct $10,000 in mortgage interest and $3,000 in real estate tax will see an increase in the tax owed of $3,250. If you couldn’t pay your mortgage, chances are you’ll have difficulty paying the IRS the additional taxes.

When a home is lost to foreclosure the taxpayer may also lose the benefit of the homebuyer’s tax credit taken in previous years. First time homeowners in 2008 could take advantage of the Housing and Economic Recovery Act which gave them a refundable credit of 10% of the purchase price, up to $7,500. This credit amount was essentially a loan from the IRS and needed to be repaid beginning in 2010 over 15 years. The American Recovery and Reinvestment Act of 2009 provided a credit of up to $8,000 which did not have to be repaid if you stayed in the home for the next three years. The credits would have to be repaid if your home was foreclosed on in the next 15 years (for a home purchased in 2008) and within three years (for a home bought in 2009 or early 2010).

Losing your home is a terrible problem for many homeowners in the current economy. Homeowners facing foreclosure should be aware of all financial aspects of losing their homes before they start the process. If you still have questions, call us at (904) 396-5400.

Filed under: Tax by Lisa Campbell
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The trusty copier has been in offices for years. No longer the humble duplicator, it’s been changing, developing, and getting smarter until it’s also a printer, scanner, and fax machine. Until CBS News opened our eyes recently, many of us never thought about the hidden hard drive it now contains to enable it to do all these things*.    

It’s a potential problem when you have a spy faithfully recording everything you copy, print, scan, and fax. At least some of those documents probably contain sensitive information relating to your clients or your organization. 

No worries, though, because the copier is too big and heavy for thieves to want to steal it, right? True, but sooner or later it will get old and you’ll want to trade it in or dispose of it some other way. What to do then? Options include:

• Erasing the hard drive. You can buy software to do this erasing, but the jury is out on how effective it is. Some say wiping it of data a couple of times will do the trick, but others insist the data is still recoverable.
• Removing the hard drive and destroying it. While this task isn’t easy, at least you know your sensitive information won’t wind up in the wrong hands.

As for Patrick & Robinson, our clients depend on us to take care of the information they entrust to us. You can be sure we’ll be taking a screwdriver and mallet to Old Sharpy when it’s outlived its usefulness.

Need an accountant you can depend on? Call us at 904-396-5400.

*(View Copy Machines: Risky Business? on You Tube if you haven’t seen it yet.)

Filed under: General by Lynn Barwell
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