brings no resolution to fate of
tax cuts, extenders & more...
Bush-era tax cuts
for a pre-election resolution to the fate of the Bush-era tax
cuts, extenders and other tax incentives are quickly fading as
This year is increasingly looking like a replay of 2010, the
last time the Bush-era tax cuts were facing imminent
The White House, the Democratic-controlled Senate and the
GOP-controlled House all have different opinions on the fate
of these tax incentives and negotiations, which have been few
and far between, and have quickly bogged down.
One solution, which is being talked about more and more, is a
temporary extension of the tax cuts.
While this would punt the issue to the next Congress, it does
little to ease taxpayers' concerns about tax planning in a
climate of constant uncertainty.
extended, the tax cuts in the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth
Tax Relief Reconciliation Act of 2003 (JGTRRA) (as extended by
the Tax Relief, Unemployment Insurance Reauthorization and Job
Creation Act of 2010) will sunset after December 31, 2012.
The list of expiring tax incentives is long and includes
reduced individual income tax rates and capital
gains/dividends tax rates; the $1,000 child tax credit;
enhancements to the earned income tax credit (EIC); and much
On May 15, House Speaker John Boehner, R-Ohio, said that the
House will vote before the November elections on legislation
to extend the Bush-era tax cuts. Boehner gave no timetable for
It is unclear at this time if the GOP plans to vote on making
the Bush-era tax cuts permanent or merely to extend them one
or two more years. Also unclear is whether or not any
extension would be offset with revenue raisers elsewhere. Even
if the House votes on the tax cuts, there is no guarantee the
Senate will take them up. (To read the rest of this
Coordinating Education Tax Incentives
Requires Careful Planning.
Education tax incentives are often underutilized because the
rules are so complex. Some of the incentives are tax credits;
other deductions. There are also savings plans for education
costs. Making things even more complicated is the on-again,
off-again nature of the education tax incentives. Under
current law (as of June 2012), several taxpayer-friendly
features of the incentives are scheduled to expire.
American Opportunity Tax
The American Opportunity Tax Credit (AOTC) is an enhanced
version of the old Hope credit. The AOTC offers eligible
taxpayers a credit of 100 percent of the first $2,000 of
qualified tuition and related expenses and 25 percent of the
next $2,000. That means the credit reaches a maximum of
Four years. The AOTC can be claimed for the first four
years of a student's post-secondary education (including
college and university, vocational school and other qualified
institutions of learning).
The full AOTC is available to individuals whose modified
adjusted gross income is $80,000 or less ($160,000 or less for
married couples filing a joint return). If your modified
adjusted gross income is above that amount, the credit begins
to phase out. Eligible individuals may receive a refund of 40
percent of the AOTC.
Sunset. The AOTC is scheduled to expire after 2012. At
that time, the old Hope credit will return.
Lifetime Learning Credit
The Lifetime Learning Credit is often in the shadow of the
AOTC. One reason may be that the Lifetime Learning Credit and
the AOTC cannot be claimed in the same year. The Lifetime
Learning Credit reaches $2,000 for qualified educational
Key difference. There is one very valuable difference between
the Lifetime Learning Credit and the AOTC. There is no limit
on the number of years the Lifetime Learning Credit can be
claimed. This requires careful planning. Individuals who are
considering graduate school may want to use the AOTC for
undergraduate expenses and the Lifetime Learning credit for
graduate school expenses.
No sunset. The Lifetime Learning Credit is not scheduled to
expire after 2012. It is one of the few tax incentives that
have essentially remained unchanged in recent years.
(To read the rest of this article
How does a 60-day loan from an IRA work?
Many taxpayers are looking for additional sources of cash
during these tough economic times. For many individuals, their
Individual Retirement Account (IRA) is one source of cash. You
can withdraw ("borrow") money from your IRA, tax and penalty
free, for up to 60 days. However, the ability to take a
short-term "loan" from your IRA should only be taken in dire
financial situations in light of the serious tax consequences
that can result from an improper withdrawal or untimely
rollover of the funds back into an IRA.
The funds must be returned, or rolled back into, an IRA within
60 days from the day after the date of the withdrawal, or
income and penalty taxes are imposed on the amount withdrawn
and not returned. These tax consequences can be serious.
Therefore, it is imperative that you return the withdrawn
funds back into an IRA within 60 days.
Tax and interest imposed
If the funds are not returned within 60 days, the withdrawal
will not only be treated as a taxable distribution for
individuals who are under the age of 59 1/2, but you will also
face an additional 10 percent penalty tax, as well as possible
state income tax.
Example: You withdraw $10,000 from your IRA on
March 2. The 60-day period begins on March 3. To avoid
income taxes as a result of early withdrawal treatment
and an additional 10 percent penalty tax, the amounts
must be returned to an IRA on May 2. Although May 2
falls on a Saturday, there is no extension as a result
of weekends (or holidays).
Income tax reporting
If you decide to take the short-term, 60 day "loan" from an
IRA you must report the entire amount of the withdrawal. The
withdrawal is reported on line 15a of your Form 1040 for the
tax year in which you took the withdrawal. If you have
returned the withdrawn funds within the 60 day period, you
will enter "zero" as the taxable amount of line 15b of Form
You can only take a "60 day loan" from a specific IRA account
and return the funds to that IRA or a different account once
during a one-year period. If you make a withdrawal from the
same IRA more than once during a one-year period, the second
withdrawal is treated by the IRS as a taxable IRA
distribution, again generally subject to income taxes and a
10-percent early withdrawal penalty tax.
Moreover, if you redeposit funds back into a particular IRA
account and withdraw money from that same account within the
one-year period, again the withdrawn funds are again treated
as a premature withdrawal subject to income taxes and the
10-percent penalty tax.
For those struggling in these economic times and looking for
additional sources of cash, there are other options in
addition to a 60-day loan from your IRA. Our office can
discuss your options and the potential tax consequences of
What if I owe taxes and can't pay the full amount?
If you have completed your tax return and you owe more money
than you can afford to pay in full, do not worry, you have
many options. While it is in your best interest to pay off as
much of your tax liability as you can, there are many payment
options you can utilize to help pay off your outstanding debt
to Uncle Sam. This article discusses a few of your payment
Pay Uncle Sam as much as you can
First and foremost, if you cannot pay the full amount of taxes
due, you should nevertheless file your return by the April 15
deadline. Moreover, you should send in as much money as you
can with your return. The IRS assesses failure-to-file
penalties so you should file your return despite being unable
to pay the full amount with the return. As such, it's to your
benefit to file your return by its due date and pay off any
outstanding balance as soon as you can in order to minimize
interest and penalties.
If you are not able to pay the full amount of tax you owe, you
have options. While you can obtain an automatic six-month
extension of time to file, the IRS will still assess interest
on the outstanding unpaid tax liability. To do so, you must
file Form 4868, Application for Automatic Extension of Time To
File U.S. Income Tax Return, by the due date for filing your
calendar year return (typically April 15) or fiscal year
return. However, an extension of time to file is not an
extension of the time to pay your taxes. Penalties and
interest continue to accrue during the extension.
Second, consider paying some or all of your tax liability by
credit card or obtaining a cash advance on your credit card.
The interest rate your credit card or bank charges (plus
applicable fees) may be lower than the total amount of
interest and penalties imposed by the IRS under the Tax Code.
You may also be eligible to take advantage of the IRS's
monthly installment agreement option. This option allows
eligible taxpayers to pay off their tax bill over a period of
time - in monthly installments - to the IRS. However, if you
have entered into an installment agreement during the
preceding 5 years you cannot use this option. Additionally,
even while you are making payments through an installment
agreement, penalties and interest continue on the unpaid
portion of that debt. To request an installment plan, you can
use Form 9465, Request For Installment Agreement. Or, you can
use the Online Payment Agreement (OPA) application.
There are many options for paying off your tax debt. Our
office can discuss the payment options that will work best in
your specific circumstances. Please don't hesitate to call our
office with questions.
click here to listen to this video update on:
click here to listen to this video update on:
read an article in SmartMoney magazine recently that
I wanted to pass along to you titled:
5 Little-Known Tax Deductions by Bill Bischoff
where he talks about it being possible to write off
some expenses that were paid for by someone else
1. Medicare Insurance and Long-Term Care
2. Medical Expenses Paid by Someone Else
3. Real Estate Taxes Paid by Someone Else
4. Home Mortgage Points Paid by Someone Else
5. Fees to Charge Taxes to Your Credit Card
Click here to read the article online.
Combining Business and Pleasure
to Maximize Your Deductions
Read below about how a dental group combined fishing in
Alaska with continuing education for a deductible business
I am one of 18 dentists going on a fishing trip to Alaska with
our dental study group. We will have continuing education (CE)
programs with CE credits available on this trip. The CE
courses will be taught by some of the dentists in this study
Although it seems like this would be tax deductible, the CE
could be done anywhere, as the courses are just lectures given
by some of the dentists. In other words, these courses could
take place in our hometown or in Alaska. There are handouts,
sign-in sheets, etc., but would this count?
One problem I can see is that we paid our deposit to the
dental study group, but we pay the balance to the fishing
charter company in Alaska. The fishing company provides the
fishing and the lodging.
This is a three-day trip and I would assume about two hours of
CE per day. Do you think this is going to fly as a tax
This trip needs some work to make it deductible. Here is one
scenario that will pass muster.
Let's start with a basic rule: when entertainment precedes or
follows a directly related business discussion, the
entertainment is deductible as associated entertainment.
Your dental study group is a formal organization established
to assist members in both the clinical and business sides of
dental practice. This study group is putting the Alaska
meeting together for the primary purpose of educating its
members, as is evident in the CE content of the programs you
Ideally, the cost of fishing would be separated from the cost
of meetings, lodging, and airfare. The bundling of the fishing
in your study group's package makes it critical that you
clearly establish your business purpose for this trip.
Establish Business Purpose
Step one in this process is to set forth that the fishing
entertainment part of the meeting is designed simply to
encourage more of the study group members to attend this CE
program. The advantage of using the fishing is that it
promotes business discussions outside of the formal meetings;
for example, those additional business discussions that will
occur on the boat and during cocktail hours, breakfasts, and
Thus, the combination of the CE meetings and recreational time
is superior to one or two meetings in Tucson because the
proximity of the group before and after the CE simply extends
the value of the meetings and makes it more convenient and
practical for each of the dentists to participate in the
Having established the purpose, let's get to the nuts and
bolts of how you make the primary purpose of this trip
business and how you make each day of the trip a business day.
We have specified the business CE sessions as the reason for
the trip, and we are going to make the CE days count as
business days. Thus, your business reason for the travel is to
get to this educational activity, and once there, each day of
the trip is going to be either a deductible travel day or a
deductible business education day.
Deductible Business Days
For the CE days to qualify for deduction as business days, you
must pass a facts-and-circumstances test that shows that your
CE meetings provide specific business benefit to the conduct
of your dental practice. The fact that the courses qualify for
CE automatically says they are of bona fide benefit to your
Next, you need to establish that the principal character of
your combined entertainment and business activity is the
active conduct of these CE courses. We assume you are going to
spend more time fishing each day than you are going to spend
in the CE classes. That's okay; the regulations specifically
state that you don't need to spend more time devoted to
business than to entertainment.
Next, you need the CE courses to qualify the day as a business
day. Before Public Law 96-608 changed the travel rules, a
business day at a foreign convention was deemed by former
Section 274 as attending at least four out of six hours of
scheduled convention activity. Focus here on the four hours.
If the principal purpose of your day must be business, and if
principal means more than half a workday (which is generally
considered eight hours), then four hours and one minute of
work would make your principal purpose for the day . . . work.
Thus, forget the two hours of CE a day and go for four hours
and one minute or more.
Make sure that the courses take place in an educational
setting—you might use a private room at the restaurant or in
the lodge where you are staying.
We don't know much about the three days, but for this answer
we will assume that you spend three nights at the lodging
facility. We will assume that you travel on day one, fish on
days two and three, and return home on day four. Thus, we have
you away from home for three nights.
In this case, you want the more than four hours of CE to take
place on days two and three.
With this setup, you have
- tax-deductible lodging for three nights,
- tax-deductible travel costs to and from Alaska,
- tax-deductible meals, drinks, and other costs of sustaining life during
the three-day trip, and
- tax-deductible entertainment with your fellow dentists.
As to your question about the location of the course, location
is not a problem when the course takes place in the
tax-defined North America area. In general, you may take the
course in Alaska even when that same course is offered on that
same day in your hometown. This is a long-standing rule.
Technically, the rule is that you have to have an ordinary and
necessary business reason for your education and trip to
Alaska. Your first reason is to be with 18 other dentists from
your area in a close environment where you can gain
substantial insights from the other dentists. If you did this
in your backyard, it's unlikely that you could create such a
locked-in proximity to your colleagues.
50% versus 100% Deductions
Your other question concerned the check to the charter fishing
company. The only problem this check poses is how much of the
money is for fishing and how much is for lodging.
Keep these points in mind: The fishing is deductible as
entertainment, and this type of entertainment produces a
deduction for only 50 percent of the entertainment cost.
Lodging is 100 percent deductible when incurred for CE
purposes. (Lodging is not deductible at all if incurred for
entertainment purposes—this is another reason to get business
reasons for this trip correct.)
To read this & my other articles online go to
and click on the Newsletter section.
always you can call me at 714-619-0667 if you have any
questions about investing, retirement or any other tax &
accounting related issues.
Regards, Monica Rebella, CPA/IAR
President, Rebella Accountancy