Personally Speaking…
We have already been processing early bird tax returns and we are now on a roll. If you haven’t yet given us your tax information, we urge you to do so as soon as possible.
Returns must be properly prepared and ready to mail by April 15th. In order for us to make sure that happens, your completed electronic or hardcopy Client Organizer and back up documents must be delivered to our office no later than March 20th.
The sooner you set time aside to complete your Client Organizer and hand it off to us, the sooner you can relax by getting that tax return deadline off your mind. As always, first come first served is our policy.
Paperless 1040s
Electronic processing of your return has its benefits in that you have 24/7 access to your electronic Client Organizer via our web site, we are able to process your returns faster, e-filing is not an additional charge, and you can download your present and past returns any time you need to via our web site as well.
Our November 2008 newsletter included an insert explaining paperless 1040 processing. If you misplaced the information and would like to read it again, we would be happy to fax or e-mail it to you. Just let us know.
We hope all our clients will finally cross over this year and become a truly “paperless 1040” client. In the future, this will
be our standard method for processing and delivering returns.
So, get on board—or rather, online—to save time and money. If you need help, we’d be happy to walk you through the paperless process.
Extensions
We can file your federal and state extensions from our office without your signature. Before we can file an extension for you, we will need you to provide to us with the following:
l name, address, and social security
number(s) if you are a new client,
or if you need to update our records;
l total federal tax liability;
l federal income tax withheld;
l total state liability;
l state income tax withheld;
l personal check or money order for
any additional amounts you’re
paying made payable to the U.S.
Treasury and/or your state.
Once an extension is filed, you automatically have until October 15th to file your return. Remember, an extension only extends the time to file, not the time to pay additional taxes owed, and it does not increase your chances of being audited.
It is important to keep in mind that any payments made after April 15th are subject to late payment penalties and interest even if a timely extension is filed. If you believe an extension is necessary, we need to hear from you well before the 8th of April.
Automobile Deductions
To help you stay on top of the business usage of your vehicle, we have complimentary auto logs in our office. Stop in and pick one up.
In Closing
We look forward to preparing your return. And, if you have friends or associates who you believe would benefit from or be in need of our services, we would like to hear from them.
Required Minimum Distribution Relief 2009
A recent tax law change promises to help give older Americans some much needed financial flexibility as they struggle to manage their finances during this difficult economic time. A key provision in the recently passed Worker, Retiree and Employer Recovery Act of 2008 is designed to help alleviate the financial burden facing seniors who have seen their retirement savings shrink dramatically.
The new provision provides relief to senior citizens by allowing them to continue to keep money in retirement accounts that they are typically required by law to withdraw once they reach age 70 ½.
Brief Summary of the 2009 Provision
As you know, the tax laws generally require individuals with retirement accounts to make withdrawals based on the size of their account and their age every year after age 70 ½. The laws were created to minimize the amount of time the taxes are deferred. Any individual who fails to take a required minimum distribution (RMD
is heavily penalized, by the IRS, at 50%
of the amount not withdrawn.
The new law suspends the required minimum distribution from retirement accounts for 2009. Suspending the mandatory withdrawal allows retirees to keep the money in their account if they choose and possibly recover some of their losses.
This waiver, which is available to everyone regardless of their total retirement account balances, applies to all defined contribution plans, including 401(k), 403(b), 457(b), and IRA accounts.
This is only a brief explanation of the 2009 provision. As Congress continues to stir the tax dollar pot, looking to generate more revenue, the RMDs will continue to change and will need to be watched closely. If you would like to learn more about RMDs, please do not hesitate to call our office.
Social Security Wage Base for 2009 and Related Information
The Social Security Administration (SSA) announced that the wage base for computing the Social Security tax (OASDI) in 2009 rises to $106,800 from $102,000 in 2008, an increase of about 4.7%. The $4,800 increase is due to an increase in average total wages.
Observation: The increase from 2008 to 2009 is $300 larger than the increase from 2007 to 2008 (when the wage base increased by $4,500).
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax.)
The FICA tax rate for employees and employers is 7.65% each—6.2% for OASDI and 1.45% for HI. For self-employed workers, the FICA tax is 15.3%—12.4% for OASDI and 2.9% for HI. There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.
Illustration: On a salary of $106,800 (or more), an employee and his employer each will pay $297.60 more ($6,621.60 instead of $6,324) in Social Security tax in 2009 than in 2008.
Illustration: A self-employed person with at least $106,800 in net self-employment earnings will pay $595.20 more ($13,243.20 instead of $12,648) in the
Social Security part of the self-employment tax in 2009 than in 2008.
Observation: Self-employed workers deduct half of their self-employment tax above the line in arriving at adjusted gross income.
Observation: The FICA tax rates have remained unchanged since 1990.
Your Social Security Statement
Once a year the SSA sends out Social Security Statements. The Statements relate information specific to each individual’s Social Security retirement benefits. They also list one’s earnings record, explain how benefits are estimated, and give some facts on the back page about the entitlement program in general.
What is Social Security?
Although many people think of Social Security as a government required retirement program in which one will receive a check every month after reaching a certain age, Social Security actually encompasses more than that. It is also a government tax imposed form of regulated life insurance and disability entitlements.
The government determines who receives benefits/money from the program and when—no matter how much or how little any one individual has paid into the program.
For instance, if an individual makes one payment into Social Security and then hurts himself on or off the job, he may be entitled to Social Security disability benefits from that point forward for the remainder of his life.
If an individual dies and leaves behind a wife and five children, family members may be eligible to begin receiving what government refers to as “survivorship benefits.”
For instance, money may be paid out for each child until the age of 18, or until 19 if said child is in college, or for adult children disabled before age 22.
The Social Security “Trust Fund”
Is there really a Lockbox?
To start with, one must first understand the definition of trust fund. According to American Heritage Dictionary, trust fund is “property, especially money and securities, held or settled in trust.”
Currently, Social Security taxes collected exceed the disbursements of benefits, and the overage is spent as part of the year’s federal budget in other areas the government wants to use it for.
The federal government (the Trustee) then issues special securities, basically an IOU, to the Social Security “Trust Fund” while claiming the IOU an asset.
Now, don’t try this accounting mechanism at home. Only government can get away with that special practice. The rest of us would go to jail. To get additional information regarding the “special securities,” go to www.ssa.gov/OACT/PorgData/investheld.html.
In 2017, when it is estimated that the Social Security taxes collected will not be enough to fund the benefits of those receiving them, the federal government (the Trustee) will have to make up the difference from the general fund.
Unless something changes between now and then, budget spending will still be in deficit and the public debt will be much greater than today’s amount that well exceeds $10.5 trillion ($10,626,078,634,370.54 as of 01/27/09.) To see daily results of the government deficit, go to www.treasurydirect.gov/NP/BPDLogin?application=np.
As the money deficits grow, how will government meet the unfunded liabilities? Will it continue to raise taxes or allow people to make their own security/retirement choices? And, is it, too, late to fix the Social Security program in any event?
IRAs and 401(k)s: Create a Winning Situation for Beneficiaries
Inheriting IRA or 401(k) proceeds from a friend or relative can be a potentially huge windfall, but it can also be a sizable tax headache. For both giver and recipient, it’s worth getting some advice.
Bank accounts, stocks, real estate, and life insurance proceeds generally pass to heirs free of income tax. However, inherited retirement benefits can be a different story.
Beneficiaries have to pay ordinary income tax on distributions from 401(k) plans and traditional IRAs after they are inherited. (You don’t see the same problem with Roth IRAs—their benefits can be free of income tax to your heirs if all tax requirements are met.)
A financial planning professional or an experienced tax advisor can work with you based on your personal tax and estate circumstances to determine an inheritance strategy that is best for you.
Some Strategic Guidelines
Spouses are always the first choice as beneficiary because federal law dictates that your surviving spouse must be the primary beneficiary of your 401(k) plan benefit unless your spouse signs a waiver to redirect those funds.
Even with a traditional IRA, naming your spouse as the primary beneficiary may be an appropriate option. Should the surviving spouse have his or her own IRA, this approach would allow a spouse to simply roll over the assets from the decedent’s IRA into their own.
Furthermore, if the surviving spouse were significantly younger than the deceased, the surviving spouse would receive the added benefit of stretching out distributions from the IRA until he or she turns 70 ½. The stretch-out allows the assets to continue to grow on a tax deferred basis, thereby maximizing asset value and delaying any income tax due.
Is there any reason you might want to rethink a spousal beneficiary? Yes. When the surviving spouse’s estate is expected to be large enough to exceed the applicable exclusion amount for federal and state estate taxes.
The applicable exclusion amount after allowable expenses is $2 million in 2008 and above $3.5 million in 2009. It should also be noted that in addition to federal estate tax, many states impose a state tax on estates with considerably lower asset levels (often anything over $1,000,000.) Proper estate planning may alleviate this issue.
Second choice is a non-spousal beneficiary, such as children, relatives, or friends. Today, non-spouse beneficiaries may be able to roll over all or a part of inherited 401(k) benefits to an inherited IRA.
A recent change in IRS regulations still requires non-spousal heirs to withdraw a minimum amount from Inherited IRA assets every year, but it’s based on the age of the recipient rather than the age of the decedent.
Additionally, due to recent changes in the minimum distribution law, taxpayers may now establish what is called a stretch IRA. Stretch IRAs are designed to stretch out the time period over which a non-spouse beneficiary is required to take minimum distributions from an inherited IRA.
Proper use of stretch IRAs may potentially allow for continued growth of tax-deferred earnings over multiple generations and can have a substantial impact on the future value of the family portfolio.
A third choice for beneficiaries would be trusts or charities. Placing IRA assets in trust can have substantial advantages, but can be complex. It should only be considered after receiving tax advice from a competent professional.
Trusts can be complex instruments with which to bequeath assets, and even though naming a charity as one’s primary beneficiary will not affect distributions in your lifetime, it could affect the tax consequences for non-charitable beneficiaries who are sharing the same asset upon your death.
Mileage Rate Deductions
The Internal Revenue Service issues each year’s optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
The new rates for business, medical,
and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices.
The mileage rates for 2009 reflect generally higher transportation costs as compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant cost factor in the mileage rate, other fixed and variable costs, such as depreciation, enter into the calculation.
Although there was a special rate of 32 cents per mile in 2006 for Hurricane Katrina related charitable work, the rate for charitable purposes is set by law and is unchanged from 2007.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or
for more than four vehicles used simultaneously.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Below are the standard mileage rate deductions for the use of a car (also vans, pickups, or panel trucks) for 2009 planning purposes, 2008 rates for tax return purposes, and 2007 rates for those who may need to file an amended return.
|
Mileage Rate Deductions
|
|
Year
|
Business
|
Moving
|
Medical
|
Charitable
|
|
2009 per mile rates
|
55 cents
|
24 cents
|
24 cents
|
14 cents
|
|
2008 per mile rates (second half)
(July 1st thru December 31st)
|
58.5 cents
|
27 cents
|
27 cents
|
14 cents
|
|
2008 per mile rates (first half)
(January 1st thru June 30th)
|
50.5 cents
|
19 cents
|
19 cents
|
14 cents
|
|
2007 per mile rates
|
48.5 cents
|
20 cents
|
20 cents
|
14 cents
|
Important Tax Deadlines
March
10th: last day to schedule an appointment to meet with us on or before March 19th;
19th: last day of appointments until after April 20th;
20th: tax information and Client Organizer must be in our office by March 20th in order for us to guarantee your return will be completed and ready to mail by April 15th.
April
8th: last day to call us with your tax extension information;
15th: tax returns must be picked up by noon; last day to file your return and first quarter 2009 estimated tax payment, or to fund your IRA or other retirement plan;
17th: our office will be closed Friday the 17th, and then reopen for business as usual the following Monday.
Elvis’ Corner
I’m so lucky to be in a warm home with my family. Over the past year, I have read about so many companion pets being turned over to animal shelters or out onto the streets because the recession has made it impossible for many owners to continue to provide for them.
This year, if you are thinking about making charitable donations, tax deductible or otherwise, please consider donating to an animal shelter.
A county shelter is not the only animal shelter around these days. Did you know that there are people in Virginia who have set up specific shelters for specific animals, like birds and rabbits for instance? In fact, there is even a well known shelter located in Hohenwald, Tennessee that is just for elephants. Isn’t that wonderful?
There are many types of animal shelters to choose from, and I hope you will find one worthy of a donation.
