The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.

These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.

The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.

Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.

The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.

The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.

Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.

To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.

The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.

Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.

Payroll tax cut

The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.

Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.

Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.

House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.

One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.

Extenders

The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.

President Obama’s FY 2013 proposals

President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.

Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.

On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.

If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.

Previous disclosure programs

The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.

Reopened program

The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.

The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.

In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.

The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.

Quiet disclosures

One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.

Critics

The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.

If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.

Dependency Exemption

In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.

Child Tax Credit

Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.

Child and Dependent Care Credit

If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.

Adoption Credit

Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.

Higher Education Credits

There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.

Extended Health Care Coverage

Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.

Child Care Assistance Credit (for businesses)

Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.

If you have any questions about these provisions and how they may benefit you, please contact our office.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.

Offset

If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.

A taxpayer’s refund may be reduced by FMS and offset to pay:

• Past-due child support
• Federal agency non-tax debts
• State income tax obligations, or
• Certain unemployment compensation debts owed a state.

FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.

Form 8379

If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.

The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.

The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.

February 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.

February 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.

February 8

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.

February 10

Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.

February 15

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.

Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.

February 17

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.

February 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.

February 24

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.

February 29

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.

March 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.

March 7

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.

The standard mileage rate may be taken in lieu of proving actual expenses such as depreciation on your automobile and the cost of gas. You must still prove that you took the trip for business and that you took it in your vehicle, whether owned or leased. The standard mileage rate applies to the actual miles driven and not simply to miles traveled.

The standard mileage rate may be taken in lieu of proving actual expenses such as depreciation on your automobile and the cost of gas. You must still prove that you took the trip for business and that you took it in your vehicle, whether owned or leased. The standard mileage rate applies to the actual miles driven and not simply to miles traveled.

Car travel for business is a deductible expense.  The standard mileage rate can be used to determine the deductible amount, rather than keeping track of actual expenses for using a car. An individual who owns or leases a car and has other expenses, such as gasoline, can deduct actual expenses or can take the standard mileage rate, even if the standard mileage rate is higher.

Rather than drive to a business destination, an individual can travel by rail, bus, plane or taxi. However, the standard mileage rate is not available if the individual travels by other means, rather than by motor vehicle. In this situation, the deduction is limited to reasonable expenses for the manner of travel used by the individual, which may be the actual expenses incurred. On the latter point, the Tax Court has taken this approach in the case of a businessman who traveled by charter rather than by commercial plane. The court allowed the use of first class plane fare but not the cost of the charter.

For further assistance on how to maximize your travel expense deductions, whether by automobile, jet or otherwise, please feel free to contact this office.

A: If you have the money, contributing to your IRA immediately on January 1st or as soon thereafter as possible is the best strategy. The #1 advantage of an IRA is that interest or other investment income earned on the account accumulates without tax each year. The sooner the money starts working at earning tax-free income, the greater the tax advantage. With a traditional IRA, that tax advantage means no tax until you finally withdraw the money at retirement or for a qualified emergency. In the case of a Roth IRA, the tax advantage comes in the form of the investment income that is never taxed.

A: If you have the money, contributing to your IRA immediately on January 1^st or as soon thereafter as possible is the best strategy.  The #1 advantage of an IRA is that interest or other investment income earned on the account accumulates without tax each year. The sooner the money starts working at earning tax-free income, the greater the tax advantage. With a traditional IRA, that tax advantage means no tax until you finally withdraw the money at retirement or for a qualified emergency. In the case of a Roth IRA, the tax advantage comes in the form of the investment income that is never taxed.

While the earliest date to contribute to an IRA for a current year is January 1^st of that year, the latest date is 15 1/2 months later, on April 15^th of the next year when your tax return is due. (Because of the weekend-next business day rule that's April 16, 2007 for 2006 tax-year contributions.)

Although you may file for an extension to file your tax return, that extension does not extend the time you have to contribute to an IRA; April 15^th is the deadline. Another caveat: If you make a contribution after December 31^st it will be presumed to be made for the next year unless you designate it as relating back to the year just ended. Finally, until the due date for your return, you are allowed to withdraw any IRA contribution, plus earnings on that contribution.

Soon, the recently-passed Pension Protection Act of 2006 will give you another option: designating all or a portion of your tax refund for the year to be directly deposited into your IRA account. In fact, the IRS has moved quickly to provide several refund options, already announcing that new Form 8888 will be created to give all individual filers the ability to split their refunds in up to three financial accounts, such as checking, savings and retirement accounts.

In addition to knowing when to make IRA contributions, you also need to know how much you are able to contribute and whether a traditional or a Roth IRA makes more sense. For those who are already covered by a retirement plan, restrictions on contributing to deductible IRAs must be heeded. Nondeductible and "spousal" IRAs also are options to be considered. Please call our offices if you need further guidance on any of the IRA rules. They are worth using and can grow into a substantial additional nest egg for you at retirement.

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. The new Pension Protection Act cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better.

Every year, Americans donate billions of dollars to charity. Many donations are in cash. Others take the form of clothing and household items. With all this money involved, it's inevitable that some abuses occur. The new Pension Protection Act cracks down on abuses by requiring that all donations of clothing and household items be in "good used condition or better."

Good used or better condition

The new law does not define good or better condition. For guidance, you can look to the standards that many charities already have in place. Many charities will not accept your donations of clothing or household items unless they are in good or better condition.

Clothing cannot be torn, soiled or stained. It must be clean and wearable. Many charities will reject a shirt with a torn collar or a jacket with a large tear in a sleeve. As one charity spokesperson summed it up, "Don't donate anything you wouldn't want to wear yourself." 

Household items include furniture, furnishings, electronics, appliances, and linens, and similar items.  Food, paintings, antiques, art, jewelry and collectibles are not household items. Household items must be in working condition. For example, a DVD player that does not work is not in good used or better condition. You can still donate it (if the charity will accept it) but you cannot claim a tax deduction. Household items, particularly furnishings and linens, must be clean and useable. 

The new law authorizes the IRS to deny a deduction for the contribution of a clothing or household item that has minimal monetary value. At the top of this list you can expect to find socks and undergarments, which have had inflated values for years.

Fair market value

You generally can deduct the fair market value of your donation. Unless your donation is new - for example, a blouse that has never been worn - its fair market value is not what you paid for it. Just like when you drive a new car off the dealer's lot, a new item loses value once you wear or use it.  Therefore, its value is less than what you paid for it.  

If you're not sure about an item's value, a reputable charity can help you determine its fair market value. Our office can also help you value your donations of used clothing and household items.

Get a receipt

Generally, you must obtain a receipt for your gift. If obtaining a receipt is impracticable, for example, you drop off clothing at a self-service donation center, you must maintain reliable written information about the contribution, such as the type and value of the property.

Charitable contributions of property of $250 or more must be substantiated by obtaining a contemporaneous written acknowledgement from the charity including an estimate of the value of the items. If your deduction for noncash contributions is greater than $500, you must attach Form 8283 to your tax return. Special rules apply if you are claiming a deduction of more than $5,000.

Exception

In some cases, the new rules about good used or better condition do not apply. The restrictions do not apply if a deduction of more than $500 is claimed for the single clothing or household item and the taxpayer includes an appraisal with his or her return.

If you have any questions about the new charitable contribution rules for donations of clothing and household items, give our office a call. The new rules apply to contributions made after August 17, 2006.

American workers don't have the best track record when it comes to saving money for retirement. In fact, they're ranked near the bottom when compared to workers in other industrialized countries. The The Saver's Credit, also known as the retirement savings contribution credit, is available to low and moderate-income workers to help save for retirement. It can provide valuable tax savings for many workers.

The Saver's Credit, also known as the retirement savings contribution credit, is available to low and moderate-income workers to help save for retirement. The credit, which is nonrefundable, was introduced in 2002, and made permanent in 2006. In order to preserve the value of the benefit, income limits are adjusted annually to keep pace with inflation. Often, this valuable credit is overlooked and underused by taxpayers.

Dollar-for-dollar tax savings

The Saver's Credit offers individuals some real incentives to save for retirement. It can reduce the federal income tax your employees pay dollar-for-dollar. The amount of the employee's credit is based on the contributions he or she makes and his or her credit rate.

The credit helps offset part of the first $2,000 a worker voluntarily contributes to an IRA or 401(k) plan, or similar workplace retirement plan. The credit rate can be as high as 50 percent, depending on the employee's adjusted gross income (AGI). However, the credit rate generally declines as income rises. The credit rate also depends on the amount an employee contributes to his or her retirement plan, the employee's filing status, and tax liability. The amount of the credit cannot exceed the taxpayer's tax liability.

Applicable AGI and percentages for 2009 tax year

For single taxpayers (and married filing separate or qualifying widow(er)), the Saver's Credit rate is 50 percent of the contribution if AGI is $0-$16,500. The rate is 20 percent if AGI is $16,501-$18,000; 10 percent if AGI is $18,01-$27,750; and zero percent if AGI is above $27,751.

For married couples filing jointly, the Saver's Credit rate is 50 percent of the contribution if AGI is $0-$33,000. The rate is 20 percent if AGI is $33,001-$36,000; 10 percent if AGI is $36,001-$55,500; and zero percent if AGI is above $55,501. The AGI amounts for a head of household is 50 percent of the contribution if AGI is $0-$24,750. The rate is 20 percent if AGI is $24,751-$27,000; 10 percent if AGI is $27,001-$41,625; and zero percent if AGI is above $41,6261.

$2,000 maximum annual contribution

The maximum annual contribution taken into account for the credit is $2,000. For married couples filing jointly, the maximum annual contribution taken into account for the credit is $2,000 for each person. An individual also has to be over age 18, not a full-time student and not claimed as a dependent on another taxpayer's return.

In some cases, the amount of any contribution eligible for the Saver's Credit is reduced by the amount of any taxable distribution received by the taxpayer or by the taxpayer's spouse.

Many types of retirement savings arrangements

The Saver's Credit is available for so many types of retirement savings arrangements that more workers should be taking advantage of it. Salary reduction contributions to the following arrangements are eligible for the Saver's Credit:

• 401(k) plans
• 403(b) annuity plans
• Governmental 457 plans
• SIMPLE IRA
• Salary reduction SEP

A contribution made under an automatic enrollment plan also qualifies. Additionally, contributions to an IRA - traditional and Roth IRAs - are eligible for the Saver's Credit.

Are your employees taking advantage of the Saver's Credit? Our office can help you get the word out to your employees about this valuable tax break. Not only will your employees benefit from saving for the future, they may also receive an immediate tax savings.

Uncle Sam takes a tax bite out of almost every asset sold and collectibles are no exception. Indeed, collectibles are currently subject to one of the highest rates of federal taxation on investment property. Capital gain from the sale of a collectible is taxed at 28 percent.

Uncle Sam takes a tax bite out of almost every asset sold and collectibles are no exception. Indeed, collectibles are currently subject to one of the highest rates of federal taxation on investment property. Capital gain from the sale of a collectible is taxed at 28 percent.

What is a collectible?

What is a "collectible?" Of course, collectibles include stamps and coins, fine wines, glassware, and other commonly collected items.

It's important to keep in mind that less obvious items are often "collectibles." For example, a collection of political campaign buttons and badges can be a collectible. If an item is an antique, it is probably a collectible.  

Higher tax rate

Traditionally, collectibles have been taxed at a high capital gains rate because of public policy arguments. Supporters of high capital gains tax rates for collectibles justify their position by the lack of broader benefits, such as innovation, new products and higher productivity, that society receives from collectibles. On the other hand, society benefits from the preservation of works of art, antiques and many other collectibles.

Currently, the capital gains tax rate for collectibles is 28 percent. This is significantly higher than the capital gains tax rate for stocks, securities and many other investments, which enjoy a 15 percent capital gains tax rate (five percent for taxpayers in the 10 or 15 percent tax brackets).

Understanding basis

Before you calculate gain, you have to have an understanding of basis. If you purchased the item, then your calculations start with the cost of acquisition. These costs include not only what you actually paid for the collectible but also auction and broker's fees.

Inherited collectibles are treated differently. Your basis is the collectible's fair market value at the time of inheritance. Most commonly, fair market value is determined by an appraisal but there are other methods. Another way to show fair market value is by looking at current sales of comparable collectibles.

Your collectible may have been a gift from another person. In this case, your basis is the same as that of the person who made the gift.

Many collectibles require special care. You may have spent money to maintain the collectible or restore it.  These costs are also part of your basis in the collectible.

After you have calculated your basis in the collectible, you subtract your basis from the amount you sold the item for. This is your capital gain.

Example. Beverly inherits a 19th century rocking chair from her grandmother. Shortly before she died, Beverly's grandmother had the chair appraised. Its value was determined to be $2,000. Beverly spends $500 to restore the chair. Two years later, Beverly sells the chair online. Beverly earns $3,900 from the sale. Beverly's basis in the chair is ($2,500) ($2,000, which was the chair's fair market value when she inherited it, plus the $500 she spent to restore it). Beverly's capital gain is $1,400 ($3,900 minus $2,500). As a collectible, it is taxed at 28 percent rather than 15 percent, a difference of $182 in tax.

"Gold bug" advice

The price of gold has almost doubled in the past several years. Investing in gold presents two issues. First, there is the issue of valuing gold coins. When coins have numismatic worth exceeding their face denomination, the amount realized is the numismatic value of the coins, not the face value. Second, if you want to invest in the price of gold rather than in the collectible nature of a gold coin, you should consider investing in gold strictly as a precious metal, through a mutual fund, gold stocks, or other negotiable certificate. That interest, and the gain realized by selling it, is entitled to full capital gain treatment.

Understanding the tax treatment of collectibles is complicated. Our office can help you determine if your item is a collectible, what your basis is and, if you have sold it or are thinking of selling it, what your capital gain would be. Don't hesitate to give our office a call.

Yes. If you received a cash incentive from your employer to help you purchase a hybrid vehicle, the IRS treats it as taxable compensation.

Yes. If you received a cash incentive from your employer to help you purchase a hybrid vehicle, the IRS treats it as taxable compensation.

Green vehicles grow in popularity

Many employers, large and small, are offering employees cash incentives to purchase hybrid or "green" vehicles. The perk is especially attractive these days with gasoline prices at all-time highs.

Most hybrids on the market today combine an electric motor with a gasoline-powered engine. A small number of hybrids operate on compressed natural gas and flex-fuels, such as ethanol. These vehicles not only help conserve oil, they cut down on smog and greenhouse gases.

While hybrids are popular, they are still just a very small percentage of the U.S. car market.  Out of 230 million vehicles on the nation's roads, hybrids account for just over one percent but their numbers are growing. Domestic and foreign manufacturers are revving-up production of hybrids.

Hybrids are also more expensive than gasoline-powered vehicles, although demand is helping to bring costs down. To help employees purchase hybrid vehicles, many employers are pitching in with cash incentives.

Taxable compensation

Like other forms of compensation, these cash incentives are taxable. Your employer must include the incentive on your year-end W-2 earnings statement. These cash incentives are also subject to income tax withholding and federal employment taxes (Social Security, Medicare and federal unemployment taxes).

New tax credit

Last year, Congress replaced the hybrid vehicle tax deduction with a tax credit. The IRS has certified more than 20 models of cars and trucks as eligible for the hybrid tax credit (officially known as the alternative motor vehicle credit). Many states have similar tax breaks.

The credit varies depending on the vehicle. For some vehicles, it can reach as high as $3,400. For others, it is much lower. The IRS determines the amount of the credit based on information it receives from the manufacturer about the vehicle's hybrid design.

The full credit is only available for a limited time. Basically, when a manufacturer sells its 60,000^th hybrid vehicle, the credit falls from 100 percent to 50 percent. Eventually, the credit falls to zero. President Bush and many members of Congress want to repeal this ceiling. Domestic manufacturers do not. They want to keep it because sales of foreign-made hybrids are ahead of U.S.-made hybrids.

The credit only applies to vehicles purchased or placed in service after January 1, 2006. If you purchased a hybrid vehicle before January 1, 2006, you may qualify for the old tax deduction.

Manufacturers are stepping up production of hybrids and we'll be seeing a lot more models on the roads.  Give our office a call if you have any questions about hybrid vehicles, the tax treatment of employer-provided incentives and federal and state tax breaks.

If you're thinking about setting up employees as telecommuters, you're not alone. Businesses ranging from large multi-nationals to small shops know that telecommuting not only can improve worker morale and performance, it can also save you and your employees money. What's not to like about zero commuting costs and no office rent? You can also sell the benefits of telecommuting by alerting employees to some significant tax breaks.

If you're thinking about setting up employees as telecommuters, you're not alone.  Businesses ranging from large multi-nationals to small shops know that telecommuting not only can improve worker morale and performance, it can also save you and your employees money. What's not to like about zero commuting costs and no office rent? You can also sell the benefits of telecommuting by alerting employees to some significant tax breaks.

Your federal tax responsibility

As the employer, your federal tax responsibilities will not change because one or all of your employees telecommute. They are still your employees even though they are not working in one central location, or multiple locations, owned and operated by you.  You'll withhold federal payroll and income taxes from their paychecks just as before. Some states and local jurisdictions, however, are trying to capitalize on the telecommuting trend by demanding withholding taxes based on the location of the telecommuter rather than that of a business's regular office. Check with our office to see if this development applies to you.

Tax savings for employees

Telecommuting can open the door to some tax savings for your employees. However, and this is very important, the IRS looks very carefully for abuses, especially inflated home office deductions. You'll want to spell things out very clearly when you set up an employee in a home office.

The home office must meet some tough IRS tests to qualify for the deduction. It must be used for the convenience of the employer and used regularly -- and exclusively -- as a principal place of business or a place where the taxpayer meets or deals with patients, clients or customers.  Additionally, the employee must not rent any part of his or her home to the employer.

If you decide that an employee, or all your employees, should telecommute, your decision satisfies the "at the convenience of the employer" test. However, if an employee asks you if he or she can work from home, that request likely would not satisfy the test. An employee's preference to work from home would not meet the IRS's criteria.

Telecommuters who work exclusively from home should not have difficulty satisfying the "principal place of business" test. Their home office is where they work for you 100 percent of the time.  However, taking depreciation deductions on a home office may not provide a significant tax savings since those deductions reduce your tax basis in your home and therefore raise the amount of gain potentially taxable on its eventual sale. The $250,000 exclusion of taxable gain from the sale of a principal residence ($500,000 in the case of a joint return) may not be used to shelter any gain attributable to the business-use of your residence. That may point to foregoing the home office deduction even if the employee may be entitled to it.

Your employee may not work from home all the time. For example, he or she may work at home three out of five days. If you're thinking about this type of telecommuting arrangement, contact our office for more details. We'll help you and your employees avoid any potential mishaps with the IRS.

Home office supplies

A home office needs supplies just like in the employer's workplace. Items you supply, such as furniture, computers, scanners, fax machines, stationary, telephones, are deductible by you as the employer. They get the same tax treatment just as if you provided them in your workplace. This is regardless of whether a portion of the home itself qualifies for the home office deduction.

You may want to reimburse your telecommuters for utility charges, telephone calls and similar expenses. Generally, these amounts will not be considered income to the employee. They could also be treated as tax-free working condition fringe benefits.

Just like the rules for deducting a home office, deductions for supplies can get complicated. Again, let us help you put together a telecommuting plan that not only maximizes tax savings for you and your employees but, most importantly, does not raise any red flags for the IRS.

Transportation costs

Transportation costs from a home office to another place of business may be either a deductible transportation expense or a nondeductible commuting expense. It depends on which location is the individual's principal place of business. This area is fraught with potential traps. The IRS and the courts have made some very technical and fine distinctions. Our office can help you understand them and set up a transportation policy that meets your needs.

When you receive cash other than the like-kind property in a like-kind exchange, the cash is treated as "boot." Boot does not render the transaction ineligible for non-recognition treatment but it does require you to recognize gain to the extent of the cash received. The same is true for other non-like-kind property. In other words, anything you receive in addition to the like-kind property, such as relief from debt from a mortgage or additional property that is not like-kind will force you to recognize the gain realized.

When you receive cash other than the like-kind property in a like-kind exchange, the cash is treated as "boot." Boot does not render the transaction ineligible for non-recognition treatment but it does require you to recognize gain to the extent of the cash received. The same is true for other non-like-kind property. In other words, anything you receive in addition to the like-kind property, such as relief from debt from a mortgage or additional property that is not like-kind will force you to recognize the gain realized.

An illustration

An example helps to show the gain computation and basis adjustments in a like-kind exchange where boot is received:

You want to transfer land with an adjusted basis of $70,000 and a fair market value of $100,000 in a like-kind exchange. As replacement property you will receive land from Charlie that is like-kind to the one you will transfer. However, Charlie's land has a fair market value of only $80,000. To equalize the value of the like-kind properties being exchanged, Charlie will give you $20,000 in cash. Because the $20,000 is not like-kind property, the like-kind exchange rules treat it as boot and you will have to recognize gain to that extent. Your computation will be as follows:

  $80,000  FMV of like-kind land received
+ $20,000  cash received 
________
$100,000   Your amount realized
- 70,000  Your adjusted basis of the land transferred
________
  $30,000  Realized gain  

However, because you will receive only $20,000 of cash (boot), you will recognize only $20,000 of the gain realized. The rest of the gain or $10,000 will be preserved for a future date when the acquired property is recognized in a taxable transaction.

Basis adjustment. Gain that is not recognized when cash is present in a like-kind exchange will be "preserved" by adjusting your basis in the new property to reflect the remaining gain. The basis rules achieve the gain preservation by first allocating the gain realized to boot to the extent of its fair market value, then to the like-kind property in proportion to its relative fair market value.

The basis of the acquired property will be the adjusted basis of the property transferred, increased by recognized gain and decreased by loss recognized or money received in the exchange. In the above example, your adjusted basis in the replacement property will be $70,000. Because the fair market value of the replacement property is $80,000, the $10,000 of realized but unrecognized gain will be preserved in your adjusted basis.

Cash in excess of gain. In addition, if the fair market value of boot received exceeds the gain realized, only this amount of realized gain is recognized.

If, in our example, your adjusted basis were $90,000, your realized gain would only be $10,000 ($100,000 amount realized minus $90,000 adjusted basis).  In that case, your recognized gain would be limited to $10,000 even though you received $20,000 in cash.

The new Tax Increase Prevention and Reconciliation Act (TIPRA), signed into law in May, makes some important changes to offers-in-compromise (OIC). The new rules now require taxpayers to make nonrefundable partial payments with a submission of any OIC made on or after July 16, 2006. Taxpayers should be aware of the new requirements as the IRS is known for granting few OICs. Not complying with the new rules will likely increase the chances that the IRS will reject your offer.

The new Tax Increase Prevention and Reconciliation Act (TIPRA), signed into law in May, makes some important changes to offers-in-compromise (OIC). The new rules now require taxpayers to make nonrefundable partial payments with a submission of any OIC made on or after July 16, 2006. Taxpayers should be aware of the new requirements as the IRS is known for granting few OICs. Not complying with the new rules will likely increase the chances that the IRS will reject your offer.

Often a measure of last resort

OICs are often a measure of last resort to be used by taxpayers who are unable to pay tax liabilities in lump sums or through installment agreements. OICs must be in the best interest of the government and the taxpayer and must promote voluntary compliance with future payment and filing requirements.

In general, there are several requirements to file a valid OIC. These are:

• File Form 656, "Offer in Compromise" and Forms 433-A and 433-B, "Collection Information Statements";
• Submit a $150 application fee, or Form 656-A, "Income Certification for Offer in Compromise Application Fee";
• File all required tax returns;
• File and pay any required employment tax returns on a timely basis for the two quarters prior to filing the OIC and must be current with the deposits for the quarter in which the OIC is submitted; and
• Must not be a debtor in bankruptcy.

How much money is included?

In addition to the $150 nonrefundable application fee, taxpayers must now include partial payments with their OICs. Taxpayers submitting OICs offering to make a lump-sum payment must include a payment of 20 percent of the amount offered.

Taxpayers who submit OICs offering to make periodic payments must include the first payment with the OIC. They must continue making payments as proposed in the OIC while the OIC is being considered by the IRS.

The partial payments as well as the application fee are nonrefundable but are applied towards the taxpayer's liability.  Also, in situations where taxpayers have more than one liability, they may decide towards which liability they want the payments to apply.

Non-compliant OICs

If taxpayers do not include the required payments with their OICs, the IRS will return the OICs as "unprocessable". In addition, taxpayers offering a periodic payment OIC will be deemed to have withdrawn their offers if they don't submit their periodic payments under the terms of their offers.

Other changes

The new tax law deems as accepted any OIC that has been submitted to the IRS but has not been rejected in 24 months. This period does not include time periods when the liability is in question in a judicial proceeding.

Since the IRS is known for taking a long time to review OICs, this may speed up the process. Although a more speedy evaluation period seems like a pro-taxpayer provision, some commentators have said that it may lead the IRS to reject offers when it has not had enough time to fully evaluate them

Contact our office if you have any questions about the new rules for OICs. Although the IRS has historically been very reluctant to grant an OIC, there are times when an OIC is the best course of action and the IRS recognizes this.