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.