QUOTE OF THE WEEK

"Notice that the stiffest tree is most

easily cracked, while the bamboo or

willow survives by bending with the wind."
--Bruce Lee

WASHINGTON REFORMS HEALTH CARE AND TAXES

Sunday's night's health care bill will go down as one of those once-in-a-generation accomplishments. I'm not here to debate the merits of the bill - historians will still be doing that decades from now. But it's important to point out some important tax changes included in the bill and the companion "reconciliation" bill now before the Senate. (Just how important are they? Well, the Congressional Budget Office says the IRS will need $10 billion and 17,000 new employees to enforce its share of the new rules!)

Here are some of the key tax provisions:

• Starting immediately, certain small businesses with less than 10 employees will get a 35% credit for the cost of providing employee health benefits.
• Starting in 2011, employers will have to report the value of health benefits on Form W2.
• The penalty tax for Health Savings Account distributions not used for health care expenses doubles from 10% to 20%. This will discourage using HSAs for supplemental retirement savings.
• Starting in 2013, the 7.5% floor for deducting medical and dental expenses climbs to 10% (unless you or your spouse are 65 or older, in which case it remains at 7.5% until 2016).
• Healthcare flexible spending account contributions are capped at $2,500 per year.
• Starting in 2014, businesses with more than 50 employees will have to offer health benefits or pay a penalty of $750/employee.

The reconciliation bill includes one more unwelcome surprise.

• Currently, the Medicare tax is limited to 2.9% of earned income (earned income is income from wages and self employment like business, partnership and LLC income). The reconciliation bill imposes an additional Medicare tax of 0.9% on earned income above $200,000 (individuals) or $250,000 (families).
• It also adds a 3.8% "Unearned Income Medicare Contribution" on investment income - specifically, interest, dividends, annuities, royalties, capital gains, and rents - for taxpayers with Adjusted Gross Income above those same thresholds. Those new levies would take effect in 2013.

The complete bill is 1,018 pages, so it's going to take some time to analyze. But we'll be paying close attention as details become available. In the meantime, email us with any questions.

Larry Kopsa CPA

TWO NEW TAX BENEFITS AID EMPLOYERS WHO HIRE AND RETAIN UNEMPLOYED WORKERS

Employers who hire unemployed workers this year may qualify for a 6.2-percent payroll tax incentive. Check out the following IRS link to read the whole story.

http://www.irs.gov/newsroom/article/0,,id=220326,00.html

OPINION: 'GOVERNMENT EYEING CONFISCATION OF 401(K)s AND IRAs?'

I have seen this topic several times in the last week or so. At first I thought it was just one of the radical ideas that was out there to scare people about “big government.” After I saw this several times I did some research and it seems to be a legitimate proposal that is being floated. The attached is a good summary.

Larry Kopsa CPA

(Investors Business Daily) -- In a guest editorial posted at Investors.com, former House Speaker Newt Gingrich and think tank director Peter Ferrara write that investors who "did the responsible thing" by saving in their IRAs or 401(k)'s may find that "Washington is developing plans for their retirement savings." They write that "BusinessWeek reports that the Treasury and Labor departments are asking for public comment on 'the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams.'" The op-ed states: "In plain English, the idea is for the government to take your retirement savings in return for a promise to pay you some monthly benefit in your retirement years." This would be done "to pay for their unprecedented trillion-dollar budget deficits, leaving nothing to back up their political promises," write Gingrich and Ferrara. Hearings on such a proposal were "held last fall by House Education and Labor Committee Chairman George Miller, D-Calif., and Rep. Jim McDermott, D-Wash., of the Ways and Means Committee focusing on 'redirecting (IRA and 401k) tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute,'" according to the op-ed, which can be read in its entirety at http://www.investors.com/NewsAndAnalysis/Article.aspx?id=521423>

FEDERAL PAY AHEAD OF PRIVATE INDUSTRY

I remember when I was young adult trying to decide on my career path that my college adviser said that if I was to go to work for the government I would have a lower wage but good benefits and a good retirement plan. I opted to go the private route and at first had a higher salary than my peers that went to work for Uncle Sam.

Now, according to an article in USA Today, that has all changed. The average salary of $67,691 plus $40,487 in benefits to the government workers for occupations that exit both in the private and public sector compares to $60,046 of salary plus $9,882 of benefits for private sector workers. They state that in 8 of 10 occupations, federal employees earn a higher average salary.

http://www.usatoday.com/news/nation/2010-03-04-federal-pay_N.htm>

QUOTE OF THE WEEK

“The small act of paying

attention can take

you a long way.”

Keanu Reeves

CANCELLED DEBT IS TAXABLE INCOME - MAYBE

I had some money I owed written off this last year. Somebody told me I have to pay tax on the amount forgiven. Is that true?

Irene and Owen

Irene and Owen, you are not alone. In these troubled economic times, many financially distressed borrowers may have had some or all of their debt cancelled or forgiven by their lender last year. This is a good example of when you need professional help in preparing your return. There are so many variables that I cannot answer your specific situation. Here is a primer on what you are looking at.

While such relief is no doubt welcome to people who received it, what they may not have realized is that debt forgiveness may have tax consequences. Specifically, debt forgiven in 2009 may have to be included as income on your 2009 return. However, not all canceled debts trigger taxable income. And, even if there is no exception or exclusion in a particular case, that may not be the last word. The tax bite may be reduced or eliminated if you can show that the amount reported by the lender is incorrect. This is why you need professional help.

General rule. The tax laws specifically include income from the discharge of indebtedness in gross income. However, there are several exceptions to this rule. In addition, there are numerous exclusions from gross income for certain types of forgiven debts.

Exceptions. If the cancellation of debt by a private lender, such as a relative or friend, is intended as a gift, there is no income. But if the lender wants to take a deduction for the debt written off it would not be considered a gift. Likewise, a debt cancelled by a private lender's Last Will and Testament triggers no income to the borrower.

There is also an exception for certain student loans. For example, doctors, nurses, and teachers agreeing to serve in rural or low income areas in exchange for cancellation of their student loans won't have income from the cancellation if they meet certain conditions.

Also keep in mind that there is no income from cancellation of deductible debt. For example, if a lender cancels home mortgage interest that could have been claimed as an itemized deduction on Schedule A of Form 1040, there is no tax problem to contend with.

Price adjustment. There is no income if an individual purchases property and the seller later reduces the price. The purchaser's basis (yardstick for measuring gain or loss on a later sale) in the property, however, is reduced by the amount of the purchase price adjustment.

Exclusions. In addition to the above exceptions, there are exclusions from the general rule for reporting canceled debt as income for:

• discharge of debt through bankruptcy,
• discharge of debt of an insolvent taxpayer,
• discharge of qualified farm debt,
• discharge of qualified real property business debt, and
• discharge of qualified principal residence debt.

These exclusions are quite complicated and a detailed discussion of them is beyond the scope of my summary. However, it is worth pointing out that the qualified principal residence debt exclusion applies where individuals restructure their acquisition debt on a principal residence, lose their principal residence in a foreclosure, or sell a principal residence in a short sale (where the sales proceeds are insufficient to pay off the mortgage and the lender cancels the balance). Also, the exclusions require certain tax attributes to be reduced and must be reported to the IRS on its Form 982.

Repurchased business debt. Income from certain repurchased business debt can be stretched out over several years. Although all of the deferred debt discharge income will eventually be recognized, you benefit from the deferral of tax to later years.

Form 1099-C, Cancellation of Debt. A taxpayer should receive a Form 1099-C from a federal government agency, financial institution, or credit union that forgives a debt of $600 or more. The amount of the canceled debt is shown in box 2. Any forgiven interest included in the amount of canceled debt in box 2 will also be shown in box 3. As noted above, if the interest would otherwise be deductible, it does not have to be included in income.

Best of luck in the future.

Larry Kopsa CPA

AMERICAN RELIANCE ON GOVERNMENT AT ALL-TIME HIGH

(Washington Times) -- WashingtonTimes.com reports that the current recession "has left Americans depending on the government dole like never before," as transfer payments "from the government -- such as unemployment checks and Social Security -- burgeoned by $231 billion to $2.1 trillion" in 2009. The story notes that "for the first time since the Great Depression, Americans took more aid from the government than they paid in taxes." According to the Times, "the tentative revival of consumer spending in the second half of last year appears to have been fed largely by an extraordinary flood of government spending," while a respected economist says the current "situation is unsustainable." See that article in the Washington Times at http://www.washingtontimes.com/news/2010/mar/01/americans-reliance-on-government-at-all-time-high/

CHECK THIS OUT...

My son Ben who is a policeman sent me this video. It really touched me. I hope you take the minute or so to watch.

http://www.dailymotion.com/video/xc2iaj_embrace-life_shortfilms

A GUIDE TO AVOID AN IRS AUDIT

There is probably nothing more dreaded than an IRS audit. I get a lot of questions from people asking me what they can do to avoid an audit. Although there is no foolproof way to avoid a visit from the IRS, CNN Money recently posted the following piece that gives some good advice.

http://finance.yahoo.com/news/A-guide-avoid-an-IRS-tax-cnnm-837338815.html?x=0&.v=2

MORE ON THE HOMEBUYER CREDIT

Can I still get money back if I purchase a home? I heard that it expired last year?

Marlin

Marlin, the homebuyer credit has been extended and improved. Now it is not just for first time homebuyers. In short, according to the current rules you have to have a binding contract by April 30, 2010 and the closing must take place by June 30, 2010. There are a lot of specifics. Check out my posting on our website in the General Tax Information section or click on Homebuyer's Credit From IRS.

Larry Kopsa CPA

QUOTE OF THE WEEK

"Be who you are and say

what you feel, because those

who matter don't mind, and

those that mind, don't matter."
--Theodor Seuss Geisel, aka Dr. Seuss,American author

HERE IS YOUR GOVERNMENT'S FINANCIAL STATEMENT FOR THE FIRST FOUR MONTH OF THEIR YEAR

If you are a successful business owner you probably have already studied your financial statement for the last few months to determine if there are some steps that you need to take to become more profitable. I thought you might be interested in a summary of our government's first four months.

The federal government ran a budget deficit of $434 billion in the first four months of fiscal year 2010, according to the latest estimate released by the Congressional Budget Office (CBO) on Feb. 4. (Monthly Budget Review)

• Outlays declined by 4% compared to the same period in FY 2009, and revenues dropped by 11%. Receipts in January were $23 billion (or 10%) lower than receipts recorded in January 2009.
• The amount of withheld individual income and payroll taxes declined by $11 billion (or 7%), with approximately one-third of the decline attributable to provisions of the American Recovery and Reinvestment Act of 2009, CBO said.
• Corporate receipts declined by $2 billion.
• Overall for FY 2010, receipts were down by $83 billion (or 11%) compared to the same period in FY 2009.
• Two-thirds of that decline resulted from lower withholding from employees' pay for income and payroll taxes.
• Net corporate receipts declined by $18 billion (or 34%) because of a combination of higher refunds and lower payments of estimated taxes.
• This decline “can be attributed to weak corporate profits and the effects of recent legislation that extended the period over which corporations could apply current-year losses to offset income in previous years,” CBO said.
  
  The budget review is available at http://www.cbo.gov/ftpdocs/110xx/doc11041/January2010MBR.pdf

If you were the owner, what changes would you make?

Larry Kopsa CPA

NEW CAR SALES TAX DEDUCTION

Can you deduct the sales tax paid if you leased a new car in 2009?

Terry

Terry, if you’re referring to the new car sales tax deduction, leases are specifically excluded. Sorry.

Larry Kopsa CPA

IRS HAS EXTRA $1.3 BILLION IN UNCLAIMED REFUNDS - (BUT YOU HAVE UNTIL 4/15 TO CLAIM)

The Internal Revenue Service said it has unclaimed refunds totaling more than $1.3 billion awaiting nearly 1.4 million people who did not file a federal income tax return for 2006. To collect the unclaimed money, taxpayers must file a return for 2006 with the IRS no later than Thursday, April 15, 2010. The IRS estimates that the median unclaimed refund for tax-year 2006 is $604.

In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes the property of the U.S. Treasury. By failing to file a return, people stand to lose more than refunds of taxes withheld or paid during 2006. For example, most telephone customers, including most cell phone users, qualify for the one-time telephone excise tax refund. Available only on the 2006 return, this special payment applies to long-distance excise taxes paid on phone service billed from March 2003 through July 2006. The government offers a standard refund amount of $30 to $60, or taxpayers can base their refund request on the actual amount of tax paid. For details, see the Telephone Excise Tax Refund page on IRS.gov. In addition, many low-and-moderate income workers may not have claimed the Earned Income Tax Credit. The EITC helps individuals and families whose incomes are below certain thresholds, which in 2006 were $38,348 for those with two or more children, $34,001 for people with one child and $14,120 for those with no children. For more information, visit the EITC Home Page.

12 TRAPS TO AVOID WHEN CONVERTING TO A ROTH

I have been getting a lot of questions about the advantages and disadvantages of converting traditional IRA’s to Roth IRA’s. Everybody’s situation is different so there is not a “one size fits all” answer. There are a lot of variables that need to be considered. Attached is an article that Josh Rinard of our staff sent to me about the traps to watch out for. I thought you might be interested if you are considering converting.

Robert Powell: 12 traps to avoid when converting to a Roth

QUOTE OF THE WEEK

Pain is temporary.

Quitting lasts forever.

Lance Armstrong

CAN’T GET A W-2

I want to file my return but I can’t get a W-2 from a company that I worked for earlier this year. What now? I think I should get a refund and I could really use the money.

Marty

Marty, sorry for the problem. By law, employers have until February 1, 2010 to send you a 2009 Form W-2 earnings statement. Here is what I suggest.

The first thing to do is to contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address.

If that does not work, go ahead and file your tax return. There is a form for you to fill out to report the estimates of your income and withholding - Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible. My experience is that there will most likely be a delay in any refund due while the information is being verified.

If you do talk to your prior employer and he says that he is not going to provide a W-2 for some reason, make sure that he or she understands that you are going to file a substitute form that may expose him to an IRS audit.

Good luck.

Larry Kopsa CPA