Expanded First-Time Homebuyer Credit

The first-time homebuyer credit has been extended and is now also available for long-time homeowners. This is currently one of the most generous tax breaks for individuals.

Here’s how it works for a first-time homebuyer: a first-time homebuyer is eligible for a credit of $8,000 if they purchase a principal residence before April 30, 2010 and close before June 30, 2010. In order to qualify for the full credit amount, your modified adjusted gross income cannot exceed $125,000 or $225,000 for married couples filing jointly. The full phase-out amounts are $145,000 or $245,000 for married couples filing jointly to receive a partial credit. This is an increase to the original income limitations of $75,000 or $150,000 for joint filers.

For long-time homeowners: after November 6, 2009, long-time homeowners are eligible for a credit of $6,500 if they have lived in the same principal residence for any five-consecutive year period during the period that ended on the date the new home is purchased. The same income limitations apply.

Along with the new law there are also some newer restrictions. The credit is disallowed if the purchase price exceeds $800,000, you must be at least 18 years old on the date of purchase, and a dependent is not eligible for the credit. Since this credit is so generous and fraudulent returns have been filed, the IRS now requires a settlement statement to be attached to the return. The IRS also has the authority to deny the credit without having to audit your return.

Buy or Lease?

When thinking of buying vs. leasing we usually think of cars, but did you know that you can lease just about anything? Personal computers, apartments and houses, business equipment, and even employees can all be leased. Which is the best way?

First, there is no best way because each decision should be made on an individual basis. I know that we want to know an exact answer, but there really is none. Let’s look at buying vs. leasing a car for a business owner.

If you lease a car for your business you are generally able to deduct your lease payments as expenses. When financing or buying the same car you will generally be able to deduct your interest payments and a portion of the purchase price as depreciation, which may be an amount that is lower than your loan payments.

It sounds like leasing may be a better deal, right? In many cases it is for tax purposes, but did you know that you may be eligible to take an extra $8,000 in depreciation expense during 2009? For this year financing or purchasing a car is usually more beneficial from a tax standpoint. But are taxes the only factor to consider?

Other factors to consider are how long you intend to keep your car, how many miles you drive, how well the car maintains its value, or just personal preference (meaning that you may want to drive a newer car every two to three years). The decision should be thought out carefully, and similar questions should be asked when purchasing or leasing other items, such as computers, equipment, or furniture.

Estate Planning Basics

No one wants to think of the inevitable, but there are some basic points regarding estate planning we should all know. There are complex trusts and gifting strategies that can be incorporated, but let’s talk about first things first. Do you have a will? How do you own your assets? Are your beneficiaries updated in your insurance policies or retirement plans?

A will is your last will and testament, which spells out your wishes when you become deceased. With a properly set-up will, your assets will transfer to the beneficiaries you desire. Without a will your assets will be distributed according to state law, and your spouse or children may not receive all of your assets. Additionally, if you have children you will need to appoint a guardian to take care of them. It is important to see a qualified attorney to handle this for you. Do not attempt this yourself. We can refer you to an attorney that best fits your needs.

The way you own assets also affects the way assets are distributed upon death, such as your house. The two ways are tenants in common and joint tenancy. As tenants in common, your share of the house is passed to your heirs designated in your will. With joint tenancy, your share is passed to the surviving joint tenant, regardless of what your will states. It is important to make sure your assets are owned in the way that best suits your needs.

Life insurance is separate from your will. You will need to designate a beneficiary when purchasing a policy, and the same applies to your retirement accounts. Upon death the proceeds will be automatically transferred to your beneficiaries. This is why it is critical to update your beneficiaries periodically. Can you imagine if you are divorced and never changed your life insurance beneficiary who is now your ex-spouse? The answer is obvious – your ex-spouse will be very happy!

Many people tend to think that estate planning is only for the wealthy or they don’t need an estate plan. It can be a costly mistake to feel this way, especially since simple wills are not very expensive, and it doesn’t cost money to change your beneficiaries of your life insurance or retirement plans.

Are You Forgetting About Your Old Corporation?

You have a great idea for a new business, so you naturally take the next step to move your idea forward. You incorporate your business. This may be a wise choice to make, but what happens if your new company never becomes active and you ignore it? Or what about a corporation you have that was once active and is now dormant? Should you really care anymore?

When you own an inactive corporation that you have been ignoring, this can create an ever-enlarging tax liability. Even though the corporation is inactive, you are still required to file federal and state income tax returns and possibly sales tax returns.

A New Jersey corporation still continues to be liable for minimum corporate taxes, even if it doesn’t have any income or assets. The minimum tax is currently $520, which can easily double after several years go by due to interest and penalties. Between late filing penalties, late payment penalties, and interest assessments, there is no escape. If your corporation was registered to collect sales taxes and has no longer been submitting sales tax returns, the problem becomes worse. Additionally, the IRS assesses monthly late fees for unfiled corporate and partnership returns.

I think that I am making my point that you need to take action. I have been coming across this situation more and more. If you have an old corporation or partnership, please contact our office so that we can advise you on the proper course of action.

What is the Difference Between an LLC, S-Corp, C-Corp, and Sole Proprietor?

Business owners have several choices of how they can operate their business. The decision should be well thought out and be able to meet your objectives. Here are some of the pros and cons of each structure:

The easiest form of operating your business is as a sole proprietor. A sole proprietor has a lighter administrative burden because you account for your business activity on your individual tax return. Also, you may not need to file quarterly payroll tax returns, and may not need worker’s comp insurance. The downside to operating as a sole proprietor is unlimited legal liability, high self-employment taxes, and a greater potential to be audited by the IRS.

A limited liability company offers greater legal protection than a sole proprietor, and is also extremely flexible. You may have the option to be taxed as a sole proprietor, partnership, C-corporation, or S-corporation. Usually, single-member LLC’s are taxed as sole proprietors, which means that you have the potential to pay high self-employment taxes.

A C-corporation offers legal protection like an LLC. The drawback is that you have to abide by more legal formalities, and also pay corporate taxes. Then, when you want to distribute the profits, you will pay taxes yet again as a dividend. C-corporations have their place, but are generally suitable for larger corporations.

A variation of the C-corporation is the S-corp. An S-corp operates just like a C-corporation, but avoids the corporate level tax by taxing profits on the owner’s individual tax return and potentially saves self-employment taxes. The downside to an S-corp is a higher administrative burden.

As you can see there are many pros and cons to each business structure and the decision should not be taken lightly. If you are thinking about choosing or changing your business structure, please call our office so we can advise you.

NJ Homestead Rebate and Senior Freeze Deadlines Extended

The filing deadline for the New Jersey Homestead Rebate and Senior Freeze has been extended to November 2, 2009. The eligibility requirements for the Homestead Rebate have tightened due to budget constraints.

The first requirement for the Homestead Rebate is that you must have owned and occupied a home in New Jersey that was your principal residence on October 1, 2008. If you are age 65 or older, blind, or disabled you must have income of less than $150,000. For homeowners under age 65 you must have less than $75,000 of income.

For homeowners age 65 or older, blind, or disabled the maximum amount of the rebate is $1,200, which is calculated as a percentage of your property taxes. For homeowners under age 65, the amount is 20% of your property taxes if your income is lower than $50,000 and 13.34% of your property taxes if your income is between $50,001 and $75,000.

To be eligible for the 2008 Senior Freeze Program, you must be age 65 or older, lived in NJ for the past 10 years, lived in your home for at least 3 years, have paid the full amount of property taxes, and meet the income limitations.

To apply for the 2008 reimbursement, your income for 2007 must be $60,000 or less, and $70,000 or less for 2008. For the 2009 program, the income limitation increases to $80,000 for 2009, while remaining unchanged at $70,000 for 2008. Applications for the 2009 program will not be available until February 2010 or later.

FSA Plan = Money Saved

What exactly is an FSA plan and how can it save you money? FSA stands for flexible spending account, which is a special account that is used to pay for medical expenses on a pretax basis. In other words, the money put towards the plan is not subject to income taxes and social security/medicare taxes.

An FSA plan must be set-up by your employer for the benefit of its employees. For this reason, sole proprietors, partners, and S-corporation owners are not eligible to participate. Each year you need to decide how much money you want to put towards the FSA plan, which will then be deducted equally from each paycheck. For example, if you decide to put aside $1,200 and you get paid twice each month, then $50 will be deducted from your paycheck. For a person in the highest tax bracket the tax savings would be over $500 each year!

There are of course some drawbacks to an FSA plan from both an employee and employer perspective. First, if you don’t use the full amount that you elected to set aside by the end of the year, then you will forfeit the money to your employer. The best way around this is to set aside the absolute minimum that you project you will need for medical expenses. Additionally, even if you come up a little short, the tax savings may still be much greater than the shortfall.

The drawback to the employer is the extra cost of for administration of the plan, although it is offset partially by the social security/medicare tax savings. Another point is that if an employee leaves during the beginning of the year and has already spent their maximum, you cannot ask the employee to repay you back. This is why you want to set the threshold to a reasonable level so you lower your risk.

We all seem to be paying more and more for healthcare, but the FSA plan is one way to help lower our costs by lowering our taxes. Regardless of what the current administration elects to implement regarding healthcare, an FSA plan should still remain a viable way to help us out.

Tax Law Changes and Updates for 2009

There are many tax law changes for 2009 that can save taxpayers hundreds to even thousands of dollars in taxes. Here is a list highlighting some of these changes:

A tax break on the purchase of a new car. This break allows taxpayers the ability to deduct the sales taxes they pay on a new car regardless of whether they itemize or not. The vehicle must be purchased between February 16, 2009 and December 31, 2009. Additionally, there is a phase-out for joint filers with incomes greater than $250,000 and single filers with incomes greater than $125,000.

A suspension of Required Minimum Distributions from retirement plans for 2009. This benefits retirees who are required to take distributions from their retirement accounts after reaching age 70½, but do not need to. By not taking distributions, it gives your retirement account a chance to grow after the downturn of the markets during 2008.

Bonus depreciation for equipment purchases. This benefit is extended for businesses that purchase equipment during 2009. An additional 50% of the purchase price can be expensed during the first year.

First-time homebuyer credit. First-time homebuyers may be eligible to receive a credit of up to $8,000 if they purchase a home before December 1, 2009. Prior year purchases between April 8, 2008 and December 31, 2008 may be eligible for a $7,500 credit.

Getting the Most from Your Deductions

No one likes to pay any more taxes than they have to. One simple way to avoid this is to get the most from your deductions and expenses. This means keeping track of all of your tax deductible expenses throughout the year. Once the last-minute rush to gather up all of your receipts begins, expenses are often overlooked that can reduce your tax liability.

Here is one strategy for charitable contributions: each time you make a charitable contribution, obtain a written receipt to acknowledge your donation, which should contain the name of the charity, the date, and the amount contributed. When donating household goods, such as clothing, you can use a guide, such as the one at www.salvationarmyusa.org to determine the value of your donations. Please note that the IRS does not allow a deduction for contributions without a proper receipt or a cancelled check (for amounts under $250).

Keep track of unreimbursed employee expenses. As always, you should keep your receipts for any business expenses that you pay out of pocket. These can include tolls, parking, gas, meals and entertainment, dues, subscriptions, advertising, and marketing. Additionally, if you use your vehicle for your job, keep track of your business and overall mileage. It will be well worth the savings come next tax season.

One more way to better keep track of expenses is to reconcile your bank statements to your checkbook. This is true whether you use QuickBooks, Quicken, or a pencil and paper. By reconciling your checkbook, it insures that you are capturing all of your expenses, such as bank fees, or checks that you forgot to record. Both businesses and individuals can benefit from reconciling their books.

Keep all of your receipts in one place or in an envelope – whatever works best for you. Usually the extra effort is worth the hassle, especially because it makes you more conscious of what you are doing with your money.

Are You Backing Up Your Data?

Most of us use computers for both our businesses and personal lives. What would happen if the information in our computers was lost or destroyed? Would you lose valuable information to run your business, such as the amounts due from your customers? What about the 1,200 pictures that you took with your digital camera over the last five years? Here are a few simple options for backing up your data:

Offsite remote backup: There are many companies out there that will backup your data remotely and securely over the internet for a nominal cost. For instance, QuickBooks can backup your QuickBooks data for as little as $4.95 a month. Plenty of companies are out there that will backup your entire hard drive, but you need to make sure that the company is both reputable, financially strong, and that your data is secure.

External or Second Hard Drive: Starting at less than $100, you can purchase an additional hard drive that backs up your data on a regular basis. This is not very difficult, as the hard drive can be connected to a USB drive, along with installing the backup software, and now you are ready.

These are just some of the most basic ways to backup your data, but it is always advisable to speak to a computer consultant when dealing with complex issues.

New Jersey Budget Creates Tax Hikes

New Jersey just passed the budget for its current fiscal year, which includes additional tax hikes. Some of the tax hikes affect corporations, property tax deductions, an increase to income tax rates for certain taxpayers, and alcohol.

If you own a NJ corporation you have probably noticed that over the past several years you have been paying a 4% surtax on your corporate tax liability. For instance, if you owe just the minimum corporate business tax of $500, your actual liability is $520. Unfortunately, this surtax has been extended for one year.

Income tax rates for taxpayers filing jointly have changed if you make over $400,000 as follows. Additionally, the top tax rate increases to 10.75% for those making over $1,000,000. Although this tax change does affect only high income earners, it actually gives high income taxpayers an incentive to move out of state such as to Pennsylvania to save taxes. Only time will tell if this actually happens with any significance.

The property tax deduction has been scaled back so that if you have gross income of more than $250,000 and are younger than age 65 you will not receive a property tax deduction from your NJ taxes. If your income is between $150,000 to $250,000 your deduction will be capped at $5,000.

Wine drinkers, smokers, and anyone who drinks hard alcohol will also pay additional taxes. The tax on cigarettes is now $2.70 per pack, an increase of $12.5 cents. Starting August 1st, the taxes that retailers pay to manufacturers and distributors of hard alcohol, wine, and apple cider (the alcoholic kind) all will increase. Of course the increase to retailers will be passed on to consumers. I think that lawmakers are encouraging us to drink more beer (no tax increase this year) and to quit smoking.

Yes, there is one last tax increase for gamblers – all NJ lottery winnings greater than $10,000 are subject to NJ income tax.

An Overview of IRS Audits

I recently spoke to a group of business owners about the different types of IRS audits. The first and least complex is the correspondence audit, next is the office audit, and lastly and most complex, the field examination. I highly recommend to anyone who receives a letter from the IRS, or even the State of NJ, to contact their tax advisor as soon as possible.

The correspondence audit is the most commonly used audit of all three types of audits. It starts with a letter issued from the IRS stating that a change has been made to your tax return, such as for dividend income that you failed to report. Assuming in this case the IRS is correct, you will need to submit the additional tax assessed on the unreported dividends, along with interest to the IRS. If the IRS is not correct and you disagree then you will need to provide an explanation to prove that you do not owe additional taxes.

Since correspondence audits are very cost effective for the IRS, they do also send letters for specific deductions, such as charitable contributions, to request substantiation for your deductions. This is why it is extremely important to keep all receipts for your deductions, because without any proof that you made donations, your deduction will be disallowed and additional taxes and interest will be assessed.

The next audit, the office examination, takes place at one of the field offices of the IRS by a local agent. Although more complex than a correspondence audit, the agent usually focuses on a select number of items. It is very important to be very prepared for this type of audit because it can lead to the agent broadening the scope of the audit.

Lastly, and most in-depth, is the field examination. This involves an IRS agent visiting your place of business or possibly your home. The agent requests much more information and asks a lot more questions. Again, it is very important to be well-prepared for this audit. It is also crucial to communicate with and work closely with your tax advisor.

After completion of an audit, there can be several outcomes. The first is an assessment of additional taxes, interest, and/or penalties, the second is no change to your tax liability, and third you may actually be due a refund. You can also appeal an assessment, which we will talk about in a future article.