TOP TEN FACTS ABOUT TAKING EARLY DISTRIBUTIONS FROM RETIREMENT PLANS

If you are considering taking an early distribution from your retirement plan, here are some things you need to know:

1. Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.

2. Early distributions are usually subject to an additional 10 percent tax.

3. Early distributions must also be reported to the IRS.

4. Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.

5. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.

6. If you made nondeductible contributions to an IRA and later take early distributions from that same IRA, the portion of the distribution attributable to those contributions is not taxed.

7. If you received an early distribution from a Roth IRA the distribution attributable to contributions is not taxed.

8. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.

9. There are several exceptions to the additional 10 percent early distribution, such as when the distributions are used for purchase of a first home, certain medical and educational expenses or if you become disabled.

10. At age 50 you can start taking distributions without the 10% penalty if you take the money over a specified time period. If you are considering this option, make sure you discuss this with your investment advisor.

CONSUMER CONFIDENCE HITS EIGHT MONTH HIGH

GREAT NEWS

Defying negative news on employment and housing prices, consumer confidence increased this month in the U.S., reaching its highest level in eight months, according to The Conference Board. The optimism substantially topped analysts' forecasts. "Looking ahead, consumers are considerably less pessimistic than they were earlier this year," said Lynn Franco, head of The Conference Board's Consumer Research Center. USA TODAY

ARE YOU READY FOR A NATIONAL SALES TAX?

To paraphrase Ronald Regan, "There is nothing so permanent as a temporary tax."

(Washington Post) -- The Washington Post is reporting that "with budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax."

According to the Post story, the "value-added tax, or VAT," has advocates that say it could "generate the kind of money the nation will need to avert fiscal calamity." A key Senate leader, Sen. Kent Conrad (D-N.D.), said in an interview: "I think a VAT and a high-end income tax have got to be on the table."

According to the story, "a VAT is a tax on the transfer of goods and services that ultimately is borne by the consumer. Highly visible, it would increase the cost of just about everything, from a carton of eggs to a visit with a lawyer. ... Because producers, wholesalers and retailers are each required to record their transactions and pay a portion of the VAT, the tax is hard to dodge. It punishes spending rather than savings, which the administration hopes to encourage."

Read the story at <http://www.washingtonpost.com/wpdyn/content/article/2009/05/26/AR2009052602909_pf.html>

THE IRS IS FEELING THE ECONOMIC PINCH

IRS tax revenue falls 34%

(USA TODAY) – USA TODAY reports that "federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago." That is the biggest April drop since 1981 according to a study by the American Institute for Economic Research. "Big revenue losses mean that the U.S. budget deficit may be larger than predicted this year and in future years," according to the story. The Congressional Budget Office already projects a $1.7 trillion budget deficit for fiscal year 2009.

See the story at <http://www.usatoday.com/money/perfi/taxes/2009-05-26-irs-tax-revenue-down_N.htm>

HEY RETIRED PEOPLE - YOUR STIMULUS CHECK IS IN THE MAIL

Stimulus Payments Being Mailed to Retirees

Eligible working taxpayers most likely have a little more money ($400) in their pocket because they had reduced withholding.

For those whose income consists primarily of social security benefits, supplemental security income, disabled veterans benefits or railroad retirement benefits, the government will send checks for $250 based on information that it already has. Eligible individuals who are collecting these benefits while continuing to work will receive a Making Work Pay Credit of the greater of $250 or $400.

But watch out, this is a one-time payment that will be taxable as ordinary income if the retiree has sufficient income this year.

Larry Kopsa CPA

REMEMBERING THE PAST

Cartoon from 1934 Chicago Tribune
Those who cannot remember the past are condemned to repeat it.
George Santayana, The Life of Reason, Volume 1, 1905

STORE FRONT TAX PREPARERS

I recently ran into an old client of mine who had moved out of state. When I asked what she was doing, she proudly told me that she had set up a store front income tax service. We chatted for a while, as tax preparers do, and she told me that most of her clients were small businesses or individuals. I mentioned to her that we had many of our clients incorporate or set up limited liability companies over the last few years. Her response to that was, “Oh, I would never do that, if they switched it would really hurt my business.”

I told her I didn’t understand because there are so many advantages out there for certain small businesses to be either an S corporation, C corporation or partnership. Along with the potential liability protection, I did not understand why not to recommend different forms of doing business. Her comment was, “We do not do corporate or partnership tax returns so if I told them to switch forms of doing business, they would have to go somewhere else to get their tax work done and it would cost me money.” Unfortunately, her clients did not know the possible tax savings they could be getting.

I couldn’t help but think what a disservice she was doing for those small businesses that should be entertaining different forms of doing business. The only thing I could say was, “Be on the look out for part time tax preparers.”

Larry Kopsa CPA

KOPSA OTTE SURVEY RESULTS

Getting client feed back is very important to our accounting office. We want to make sure that if we did not meet your expectations, we fix the problem. I’m happy to report that 30% of the surveys were returned and that 100% of the surveys said they would recommend us to others.

To do our surveys we used Zoomerang, which is a very inexpensive and efficient way to do email surveys. We only had five questions on our survey so it was easy for clients to fill out and return back to us. If you are considering a survey, take a look at www.Zoomerang.com. It really worked well for us.

Larry Kopsa

IDENTITY THEFT

Don't think that scams only happen to the "other guy." We have clients that have dealt with the repercussions of identity theft and in fact, a form of identity theft recently happened to us.

One of our staff members used her company credit card last Friday at the local post office, and on Sunday she had a message from the credit card company suspecting fraudulent charges. It turns out that $3,000 had been charged on her card over the weekend. The 'thieves' had a great weekend going to the Hampton Inn, Apple Computer, Best Buy and so on...

The offended credit card is now cut up, while we are busy filling out fraud paperwork for the credit card company. Our hopes are that the 'thieves' are caught before they steal again.

About.com published an article called, Credit Card Protection Basics. It's worth reading. I guess you never can be too careful.

Larry Kopsa CPA

ACCOUNTABLE EXPENSE REIMBURSEMENT PLAN

Larry, I run a small business and have two full-time employees. One of the employees is always asking for an advance on her paycheck. I am hesitant to do this without some type of agreement. Do you have any type of agreement so I can make sure I get reimbursed?

Sammie

Sammie, we have a client who recently went through an audit and they did not have a reimbursement plan in place. The auditor was quite fussy regarding this detail.

If you don't have a plan in place, go to Accountable Expense Reimbursement Plan on our website to learn about recording your business expenses.

Larry Kopsa CPA

MAYBE YOU WON'T GET SOCIAL SECURITY BENEFITS AFTER ALL

When I talk to clients about social security tax, I always hear the same response. “I probably won’t get social security benefits anyway.” Now, that is becoming reality.

According to an article in the Washington Post, President Obama has hinted that maybe everyone will not receive social security benefits. As he calls it, “entitlement reform.” That means hundreds of billions of cuts in social security, Medicare and Medicaid. The social security fix will be “relatively easy”, combining a means test that will scale back benefits for the wealthy with an increase in the retirement age.

What this means is, if you have been prudent and have saved money in your pension plan or in outside savings, don’t plan on receiving full social security benefits. The government has to pay for the one trillion dollar deficits somehow.

Larry Kopsa CPA

UNLIMITED NUMBER OF VEHICLES MAY QUALIFY FOR NEW SALES TAX DEDUCTION (Which posting will this change?)

An IRS spokesperson says that the new deduction for sales taxes on a qualifying motor vehicle is not limited to taxes paid or incurred on a single vehicle. Rather, taxes paid or incurred on two or more vehicles may qualify for the deduction.

TAX BREAKS ON ELECTRIC VEHICLES

There are tax breaks available for taxpayers who purchase qualified plug-in electric vehicles. Check out the article on the IRS website at:

http://www.irs.gov/newsroom/article/0,,id=207051,00.html.

ANOTHER QUESTION ON THE NEW PERSONAL AUTO TAX DEDUCTION

Larry, can the deduction be claimed for more than one vehicle?

Connie

Connie, this is a very good question. Your question only goes to prove just how complicated the tax code is. Here is the best that I can do. The Code and legislative history are not clear on this. The deduction is allowed for “qualified motor vehicle taxes.” This term means “any State or local sales or excise tax imposed on the purchase of a qualified motor vehicle.” One could argue that the use of “a” as opposed to “any” or “one or more” suggests that the deduction is allowed only with respect to one vehicle. The dollar limitation seems to confirm this in that it too uses “a” in its language. Specifically, it says that “[t]he amount of any State or local sales or excise tax imposed on the purchase of a qualified motor vehicle...shall not exceed the portion of such tax attributable to so much of the purchase price as does not exceed $49,500.”

On the other hand, one could argue that “a” being an indefinite article (according to my old English teacher Miss Kolar) shouldn't be interpreted as “one.” But if the deduction were available for two (or more vehicles), the $49,500 limitation would produce an anomalous result—an individual buying two cars each costing $49,500 could deduct the taxes on both, whereas another individual buying one car costing $99,000 could only deduct the tax on the first $49,500.

Thus, the better view seems to be that the deduction is limited to the tax on one qualified motor vehicle subject to the applicable limitations.But IRS guidance will have to resolve the matter. I will let you know if they figure out what the word "a" means.

Larry Kopsa CPA

CASH FOR CLUNKERS - BILL INTRODUCED TO HELP THE CAR INDUSTRY

'Cash-for-clunkers offered to drive new-car sales'

(The Washington Post/journalstar.com) -- The Washington Post reports that some in the United States are looking at plan in which the "German government offered drivers a few thousand dollars to scrap their old cars and buy new ones" -- a plant that lead to a 21% jump in new car sales. "Rep. Betty Sutton, D-Ohio, introduced" the bill, which proposes to have "the government would buy cars and trucks that are at least eight years old and send them to the scrap heap or to be recycled for parts and materials." "Owners would receive vouchers worth $3,000 to $7,500 to buy more fuel-efficient North American vehicles or use mass transit." New cars would need to get at least 27 miles per gallon on the highway, while trucks would need to get at least 24 mpg. "The better the fuel efficiency, the bigger the payout. And the sticker price on the new car can be no more than $35,000." See more at <http://journalstar.com/articles/2009/03/23/news/business/doc49c40b5c2c0af768623074.txt>

WOULD YOU BUY A $2,000 CAR?

'World's cheapest car is launched; less than $2,000 per vehicle'

(BBC) -- The BBC reports that "the Tata Nano, the world's cheapest car, is being launched in India" for the retail price of just $1,979. "Tata hopes the 10 feet long, five-seater car will be cheap enough to encourage millions of Indians to trade up from their motorcycles." ... 'I think we are at the gates of offering a new form of transport to the people of India and later, I hope, other markets elsewhere in the world,'" a Tata official said. See the full story at <http://news.bbc.co.uk/2/hi/business/7957671.stm>

TWO MORE QUESTIONS ON NEW VEHICLE PURCHASES

Larry, thanks for all the information. I purchased a new vehicle for my business. Do I still get the new deduction that you talked about?

Terry

No. The new deduction is just for personal vehicles. You are already getting the deduction on your business return.

Larry Kopsa CPA


I purchased a new car in March. I am estimating that it will be 60% business and 40% personal. Can I still get the new deduction?

Cam

There has been no guidance from the IRS so I cannot be sure, but my best guess is that you would get to take 40% of the taxes as a deduction. I will watch for more guidance from the IRS and let you know.

Larry Kopsa CPA

WHAT VEHICLES QUALIFY FOR THE HYBRID TAX CREDIT?

Can you tell me what vehicles qualify for the hybrid tax credit? I can't seem to find the answer anyplace.

Wayne

Wayne, I am glad to answer your question. Beware that this list may change from time to time depending on the number of vehicles sold. To be sure the vehicle that you are looking at still qualifies, you can find the list by searching the IRS website, or you could simply contact the various auto manufacturers.

First, a little background and the rules. The Energy Policy Act of 2005 created a credit for taxpayers who purchase certain energy efficient vehicles, including Qualified Hybrid vehicles.

Generally, for a qualified hybrid vehicle, a taxpayer may rely on the manufacturer’s certification that a specific make, model and model year vehicle qualifies for the credit and the amount of the credit for which it qualifies.

Even though a manufacturer has certified a vehicle, a taxpayer must meet the following requirements to qualify for the credit:

• The vehicle must be placed in service after 12-31-05 and purchased on or before 12-31-10.


• The original use of the vehicle must begin with the taxpayer claiming the credit.
  
• The credit may only be claimed by the original owner of a new, qualifying, hybrid vehicle and does not apply to a used hybrid vehicle.


• The vehicle must be acquired for use or lease by the taxpayer claiming the credit.


• The credit is only available to the original purchaser of a qualifying hybrid vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.
  
• For qualifying vehicles used by a tax-exempt entity, the person who sold the qualifying vehicle to the person or entity using the vehicle is eligible to claim the credit, but only if the seller clearly discloses in a document to the tax-exempt entity the amount of credit.
  
• The vehicle must be used predominantly within the United States.


• The following passenger vehicles and light trucks have been certified for the hybrid tax credit in the following amounts.

Qualified Cars and Credit Amounts (click the link below)
Model Year 2010
Model Year 2009
Model Year 2008

TAX BREAK FOR NEW CAR PURCHASES

I have gotten several questions on the new tax break for new car purchases. I think that the following summary should answer all of the questions.

Taxpayers who buy a new passenger vehicle this year may be entitled to deduct state and local sales and excise taxes paid on the purchase on their 2009 tax returns next year. The deduction enables taxpayers to buy now and get cash back later on their tax returns.

The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new (not used) car, light truck, motor home or motorcycle.

But like many tax breaks, the amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.
In addition, the vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010, to qualify for the deduction.

The special deduction is available regardless of whether a taxpayer itemizes deductions on their return. The deduction may not be taken on 2008 tax returns.

Larry Kopsa CPA

QUESTION ON 2008 PENSION DISTRIBUTIONS

A few days ago you posted an item telling a person that he could run back his 2009 IRA. Can I do the same thing with the $4,000.00 I took out in 2008?

Yvonne

Sorry Yvonne, the new rules are for 2009 only.

Larry Kopsa CPA

THE LAW OF BIG NUMBERS

As I have written before, it is impossible for a person to fathom how big a million, or a billion or a trillion is. To count to a million would take ten and ½ days...to count to a billion would take 31½ years...and to count to a trillion would take over 31,000 years.

I thought about this as I saw President Obama trim 100 million dollars from his 3.5 trillion dollar budget. A quick calculation shows that this is a drop in the bucket. For example, if a family with an income of $50,000 cut a comparable amount out of its budget, it would spend just $1.50 less over the course of a year.

Larry Kopsa CPA

EARLY WITHDRAWAL FROM RETIREMENT ACCOUNTS CAN BE REALLY EXPENSIVE

I have received a lot of questions lately from people that are considering taking cash out of their pension plans before retirement. The taxes and penalties triggered by early withdrawals from 401(k)s and IRAs can be quite harsh.

The attached article from the Wall Street Journal provides a good summary of the costs involved.

The Wall Street Journal/Dow Jones Newswires (5/6)

QUESTION ON DISTRIBUTIONS FROM IRA'S AND PENSION PLANS

I am confused about the new rules for required minimum distribution. I already took my IRA contribution for 2009. Now what?

Ted

Ted, more new rules all the time… I wonder what a stethoscope would look like if they changed the medical rules as often as they change the tax laws. One day the heart would be in the foot. A couple of months later it would be in the shoulder.

Anyway, you can ‘undo’ your 2009 distribution. The 2008 pension law suspended required minimum distributions for 2009. If you have decided that you don’t need the money this year, you can roll back the distribution into your IRA. Your IRA provider should be knowledgeable about your options. Glad to help.

Larry Kopsa CPA

GAIN ON INHERITED PROPERTY

How do I record my gain on inherited property? I inherited property in 1982 when my husband died. I am considered 1/12 owner and received 1/12 of the proceeds when the house sold in 2008. If the house was assessed at $60,000 in 1982, then is my cost basis $5,000 (1/2 of $60,000)? In addition, do I reduce my proceeds by the settlement charges I paid at closing? Finally, does this get reported on Schedule D?

Molly

I am sorry Molly but there are too many unknowns for me to answer your question. You really need to be working with a professional tax advisor on this. There are many factors that need to be considered. Some of the issues that you will need to discuss with your own personal professional tax advisor so that s/he will know how to properly report the sale include the following.

• For the basis of the property, it is important to know if it was owned as separate property by your late husband or jointly by both of you. The amount of the step-up in basis will also depend on whether or not you were in a community property state or not and if it was jointly owned.


• Any improvements to the property that you paid for will be added to the basis.


• You didn't say what kind of property it was and what it was used for. If it had been used for rental or other business purposes, any depreciation claimed or claimable will reduce the basis and trigger depreciation recapture at a higher rate than the other profit. It will also require reporting the sale on Form 4797, which will then flow onto Schedule D.


• I assume you received the full amount of your share of the proceeds; but if you are receiving periodic payments, it will probably need to be reported as an installment sale on Form 6252, with any interest received reported on Schedule B.


• If you had been living in the property as your primary personal residence, you would most likely be eligible to exclude up to $250,000 of profit.

These are all important items to clear up with your own personal professional tax preparer, who will then know how to show the sale on your 1040. Good luck.

Larry Kopsa CPA

QUESTION ON GAMBLING WINNINGS AND LOSSES

I got lucky and won quite a bit of money at the slot machines. I got a form from the casino showing my winnings. Can I deduct my losses? Are there any other deductions like driving back and forth to the track and casino? What about the losses I had in the previous years?

Wanda

Wanda, you may be able to deduct your losses but only the losses in the year that you had the winnings. In order to take your losses you must itemize your deductions. If you do not itemize you cannot take the losses. You cannot go back and take the losses in prior years. Finally, since this is not a "trade or business," your mileage would not be deductible.

Here are some general guidelines on gambling income and losses:

• Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse and dog races and casinos, as well as the fair market value of prizes such as cars, houses, trips or other noncash prizes.


• Reporting winnings: The full amount of your gambling winnings for the year must be reported on line 21, Form 1040. You may not use Form 1040A or 1040EZ. This rule applies regardless of the amount and regardless of whether you receive a Form W-2G or any other reporting form.


• Deducting losses: If you itemize deductions, you can deduct your gambling losses for the year on line 28, Schedule A (Form 1040).


• You cannot deduct gambling losses that are more than your winnings.


• It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

Good luck.

Larry Kopsa CPA

CHANGE OF ADDRESS

I filed my tax return and now I have moved to a new address. Do I need to do anything for the IRS?

Robin

Robin, if you move after you filed your return, you should send Form 8822, Change of Address, to the Internal Revenue Service. If you are expecting a refund through the mail, you should also notify the post office serving your former address, which will ensure your check makes it to your new address.

Larry Kopsa CPA