News / 2011

Energy credits are still available to homeowners

November 30, 2011 Posted by Tasha Helms

Homeowners can still make energy-saving home improvements and qualify for either of two energy tax credits. The Nonbusiness Energy Property Credit can benefit homeowners who install energy efficient improvements such as insulation and new windows and furnaces. The Residential Energy Efficient Property Credit is aimed at encouraging investment in alternative energy equipment. Eligible homeowners can use Form 5695, Residential Energy Credits, to claim the credits on their 2011 tax returns. For more information, contact your CPA before year-end.

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There’s still time to reduce your AGI for 2011

October 16, 2011 Posted by Tasha Helms

Many tax breaks, like tax credits, deductions and other tax benefits, are reduced or even eliminated if your adjusted gross income (AGI), or modified AGI exceed certain thresholds. The year-end is approaching quickly and those of you who otherwise qualify for these tax breaks should consider modifying or reducing your 2011 AGI. Here are some key tax breaks that may be limited by AGI thresholds.

  • Up to $4,000 deduction for qualified higher education expenses paid.
  • Nondeductible Roth IRA contributions.
  • Deductible contributions to traditional IRAs by those who are active participants in an employer-sponsored retirement plan.
  • Deductible contributions to traditional IRAs if you are married and not an active plan participant but your spouse is.
  • $1,ooo child tax credit for children under age 17.
  • American Opportunity Credit (formerly the Hope Credit) and the Lifetime Learning Credit for higher education expenses at accredited post-secondary education institutions.
  • Up to a $2,500 deduction for interest paid on qualified education loans.
  • Contributions (up to $2,500 annually) to a tax-exempt Coverdell Education Savings Account (CESA) for an individual under age 18.
  • Tax-free break on U.S. savings bonds redeemed to pay qualified higher education expenses.
  • Credit for qualified adoption expenses.
  • A limited offset of non-passive income against passive losses for an active participation rental real estate activity.

Other key items affected by AGI levels are miscellaneous itemized deductions, Social Security benefit taxation, medical expense deduction and non-business casualty loss deduction.

Contact your tax professional regarding the details of these tax breaks and how reducing your AGI levels may benefit you.

Stay tuned for some techniques that may assist in keeping your AGI levels below relevant phase-out thresholds and potentially reduce your income tax burden.

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Income Tax Extension Deadlines Just Around the Corner

September 8, 2011 Posted by Tasha Helms

If you or your business requested the automatic 6-month (5-month, for partnerships and trust/estates) extension of time to file your income tax returns that deadline is rapidly approaching.

The final deadline for Corporations, Partnerships and Trust & Estate Income Tax Returns is September 15, 2011 if an extension was requested. And for those individual filers the final deadline is October 17, 2011 (with extension).

So if you haven’t pulled together your tax information yet, now is the time. Contact your CPA today to assist you in preparing your income tax returns and meet those final deadlines.

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Substantiating Charitable Contributions

July 25, 2011 Posted by Tasha Helms
As we approach year-end, many of us may need to catch up on our charitable contributions for a number of reasons in addition to a tax break. So, let’s briefly review the IRS rules on deducting charitable contributions.

A donor will not be allowed any deduction for a contribution by cash or check, or any other monetary gift, regardless of the amount unless the donor retains either:

  1. a bank record that supports the donation or
  2. a written receipt or communication from the charity showing the name of the organization, date, and amount of the contribution.

 

Property donations valued at less than $250 must be substantiated by a written receipt or letter from the charitable organization showing the organization’s name, the date and place of the contribution, and a detailed description of the property. Donors must also obtain a written acknowledgment from the charity if the value of the contribution (in cash or other property) is $250 or more – a canceled check or other reliable records are not sufficient proof.

Please contact us if you have questions about substantiating charitable contributions.

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Borrowing from Your 401K

July 25, 2011 Posted by Tasha Helms
Individuals who participate in a 401(k) plan sometimes borrow from their plan. While you may justifiably feel squeamish about taking out a 401(k) plan loan, it can actually make good sense in appropriate circumstances?assuming it is paid back on time. For instance, in today’s tough economy, plan loans can be a source of much-needed cash when bank loans are unavailable or prohibitively expensive. 401(k) plan loans are generally economical and easy to obtain.

In particular, a 401(k) plan participant with less-than-stellar credit or tapped out credit lines may find it much easier and cheaper to borrow from their 401(k) plan than from a commercial lender. 401(k) plan loans provide participants with access (within limits) to their 401(k) plan dollars without incurring income tax liabilities and the 10% premature withdrawal penalty tax. The 10% penalty tax generally applies to withdrawals before age 59 1/2, however, exceptions are available. In essence, the participant (borrower) pays interest to himself or herself when taking out a plan loan. 

401(k) plan loans are only permitted if the plan document allows them, and many plans do. The maximum amount that can be borrowed is generally the lesser of $50,000 or 50% of the participant’s (borrower’s) vested account balance. Most 401(k) plan loans are secured exclusively by the participant’s vested account balance (although other forms of security, such as a lien against the participant’s home, are sometimes seen). 

At least two major potential pitfalls are associated with 401(k) plan loans. First, the participant’s account balance is irreversibly diminished if the loan is not paid back. Second, the federal income tax consequences are harsh for failure to pay back a plan loan according to its terms, and the loan will usually have to be repaid in full soon after the employee leaves the job for any reason. Such failure to repay the loan can result in a deemed distribution of the unpaid loan balance that triggers a federal income tax hit (possibly a state income tax hit, too). In addition, the dreaded 10% premature withdrawal penalty will generally apply unless the participant is age 59 1/2 or older. 

Interest paid on a loan secured by the participant’s (borrower’s) 401(k) plan account balance is nondeductible if any of the account balance used to secure the loan is attributable to elective deferrals (i.e., elective salary reduction contributions the employee signed up for). This is true regardless of how the loan proceeds are used and regardless of the existence of other security for the loan, such as the participant’s home. Since 401(k) account balances will almost always include at least some elective deferral dollars, interest on loans from such plans will usually be nondeductible. 

In most cases, borrowing from your 401(k) plan should only be done when funds are not available elsewhere. But, during this difficult economic time, it may be prudent to do so. Please contact us if you have questions on the tax ramifications of 401(k) plan loans or other tax compliance or planning issues.

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