Rebella Accountancy | 507 E. First Street, Suite A | Tustin, CA 92780 | Phone: 714-619-0667 | Fax: 714-544-0236

       

 

 

Monica Rebella, CPA/IAR - President

Rebella Accountancy

 

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Feature Articles

- Mid-year brings no resolution to fate of Bush-era tax cuts, extenders and more
- Don't overlook the value of depreciation deductions
- Coordinating education tax incentives requires careful planning
- June 2012 tax compliance calendar
- The Saver's Credit: An underused retirement savings benefit
- Using fringe benefits as an income substitute during the economic downturn

How Do I?

- Comply with the upcoming
- Obtain an appraisal for a noncash charitable contribution
- Deduct a contribution of clothing or a household item under the new rules?

Frequently Asked Questions

- How much proof is enough, when contributing used clothing to charity?
- What is IRS's new "real-time" tax system?
- When is the best time of year to contribute to an IRA?
- How does a 60-day loan from an IRA work?
- What if I owe taxes and can't pay the full amount?
- How does the new sales tax deduction for vehicle purchases work?

 

 

 

Mid-year brings no resolution to fate of Bush-era tax cuts, extenders & more...


Hopes for a pre-election resolution to the fate of the Bush-era tax cuts, extenders and other tax incentives are quickly fading as summer approaches.

This year is increasingly looking like a replay of 2010, the last time the Bush-era tax cuts were facing imminent expiration.

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.

Bush-era tax cuts

Unless 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 more.

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 a vote.

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 article click here.)
 


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 Credit

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 $2,500.

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 expenses.

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 click here.)


FAQ: 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 1040.

One-year rule

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 each.


FAQ: 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 options.

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.

Payment options

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:

   

I 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 such as:

  1. Medicare Insurance and Long-Term Care Premiums
  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 trip!

Question:
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 group.

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 deduction?

The Solution

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 have planned.

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 dinners.

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 business discussions.

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 business.

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.

Education Setting

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.

Location

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 www.MyDentalCPA.com and click on the Newsletter section.

 


 

As 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

 
Disclaimer:  The opinions contained herein are not intended to be investment advice or a solicitation to buy or sell any securities. With any investment you should carefully consider the investment objectives, potential risks, management fees, and charges and expenses before investing.  Past performance is not a guarantee of future results. The investment return and principle value of any investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.

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Monica Rebella, CPA/IAR | President - Rebella Accountancy | Certified Public Accountants
507 E. First Street, Suite A | Tustin, CA 92780 | Phone: 714-619-0667 | Fax: 714-544-0236
Email: mrebella@rebellacpa.com | www.RebellaCPA.com | www.MyDentalCPA.com