First installment of taxes owed on 2010 Roth conversions. Individuals who did a Roth conversion in 2010 and elected to spread the tax payment over 2011 and 2012 will have to pay one-half of the tax owed on their 2011 income tax return. However, if a taxpayer took a distribution in 2011 from their 2010 Roth conversion, they may be required to pay more to cover taxes on the distributed amount. In addition, tax on any additional conversions done in 2011 will have to be included on the 2011 tax return. If you elected to spread the payment or took a distribution in 2011, make sure you bring that documentation with you so we can discuss options and calculations.

Changes for investors in reporting basis. If you’re an investor, the IRS will receive a revised Form 1099-B from your broker that now records the basis of transactions during the year. You should also receive a copy of that form. The IRS will check to see that this information matches the basis reported on your return. Additionally, these transactions will now be reported on the new Form 8949, rather than directly on Schedule D. Be sure you bring all 1099-Bs to our tax appointment.

Carryover basis on inherited assets. If you inherited assets where the estate elected to use the 2010 estate tax repeal option, you will receive a Form 8939 in January or February from the estate executor providing the basis information for those assets. An heir of a 2010 estate using the 2010 estate tax repeal option (and who sold the asset before receiving Form 8939) may be surprised at the amount of capital gain owed on the sale. It can be a complicated calculation, so if you inherited assets and receive Form 8939, bring that with you to our tax appointment.

New requirements for reporting foreign assets. Foreign Account Tax Compliance Act (FATCA) reporting requires foreign assets to be reported if they have a total value of more than $50,000 ($100,000 if married filing jointly). FATCA is broader than what is defined under the Report of Foreign Bank and Financial Accounts, or FBAR. In addition to the prior obligation to report FBAR accounts on Form TDF90-22.1, FATCA must now be reported on a new Form 8938, so if you have a foreign account with balances of $50,000/$100,000, bring that information with you to the tax appointment.

New W-2 reporting of employer-sponsored health care coverage. Although it is only optional for Form W-2s issued in 2012 (becoming mandatory in 2013 under the health care reform legislation), some employees may receive W-2s for 2011 that include a new code (DD) in Box 12 along with the amount for employer-sponsored health care coverage. This provides the IRS with information to determine if the employer and employee have complied with the health insurance mandates of health care reform. However, as those mandates are not yet in effect, this added information on the W-2 does not impact 2011 federal tax return filing requirements.

Employee retention credit. This credit related to 2010 hiring, however, it required retaining the employee for at least 52 weeks to qualify for the credit, thereby moving eligibility for the credit to 2011 tax returns. To qualify for the credit, the employer must have paid wages in the last 26 weeks equal at least to 80 percent of the wages for the first 26 weeks. The credit is claimed on Form 5884-B and is the lesser of $1,000 or 6.2 percent of the retained worker’s wages during the period.

Limited Non-Business Energy Property Credit for 2011. This credit generally equals 10 percent (down from 30 percent the past two years) of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $500 (down from the $1,500 combined limit that applied for 2009 and 2010). In addition, the energy standards are increased for most property (windows, exterior doors and skylights, for example, must meet Energy Star Program requirements). The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items do not. Be sure to let us know if you think you may qualify for this credit, and bring receipts with you to our tax appointment.

More Tax Information of Interest . . .

Standard mileage rates up in 2011. The standard mileage rate for business use of a car, van, pick-up or panel truck is 51 cents a mile for miles driven during the first six months of 2011 (January through June) and 55.5 cents a mile for the rest of the year, up from 50 cents for 2010. The rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 19 cents a mile from January through June and 23.5 cents a mile after that, up from 16.5 cents per mile in 2010. The rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile.

AMT exemption increased. For tax-year 2011, the alternative minimum tax exemption increases to the following levels:

$74,450 for a married couple filing a joint return and qualifying widows and widowers, up from $72,450 in 2010.
$37,225 for a married person filing separately, up from $36,225.
$48,450 for singles and heads of household, up from $47,450.

Health insurance deduction for self-employed people. In 2011, eligible self-employed individuals and S corporation shareholders can use the self-employed health insurance deduction to reduce their income tax liability. Premiums paid for health insurance covering the taxpayer, spouse and dependents generally qualify for this deduction. In addition, premiums paid to cover an adult child under age 27 at the end of the year, also qualify, even if the child is not the taxpayer’s dependent. However, the deduction from self-employment income for determining self-employment tax, which was available only in tax-year 2010, no longer applies. As before, the insurance plan must be set up under the taxpayer’s business, and the taxpayer cannot be eligible to participate in an employer-sponsored health plan.

Change for HSAs and MSAs. Starting in 2011, the additional tax on distributions from a health savings account (HSA), not used for qualified medical expenses, increases from 10 percent to 20 percent. Similarly, the additional tax on distributions from an Archer medical savings account (MSA), not used for qualified medical expenses, rises from 15 percent to 20 percent.

I hope you find this helpful, and as always, we look forward to seeing you as we continue to help you manage these complex and growing tax issues.

Contact us today for your tax appointment at info@strategictaxgroup.com or (972) 788-1524.

Steve Eubanks, EA, MBA
Strategic Tax Group
Dallas, Texas
steve.eubanks@strategictaxgroup.com
www.strategictaxgroup.coom

“Points”
The concept is simple, but it starts to get a little more complicated when you add in “points.” Points are one type of fee paid at closing to your lender. If you pay points when you buy your new home, these may be deducted in full in the year of purchase. However, if you refinance your loan, the points must then be deducted over the life of the new loan. In the event you are deducting points annually and then decide to refinance again, you will be able to deduct the balance of the points when you pay off the old mortgage. Of course, all these deductions are based on being able to itemize your deductions on Schedule A.

There are some limitations.

• Points must not be more than amounts generally charged in your area.
• Funds provided at closing must be at least equal to the points.
• Loan must be used to buy or build taxpayer’s main home.
• Points are stated as a percentage of the principal amount of loan.
• Points are clearly stated on the settlement statement as charged for the mortgage.

Predictably, there are limits on mortgage interest deduction. Only the interest on the first $1 million of home acquisition debt is deductible. (Acquisition debt is defined as debt to purchase, build or substantially improve the residence.) Home equity debt limits are the lesser of the fair market value of the home reduced by the acquisition debt or $100,000 ($50,000 if married filing separately).

Probably the greatest advantage of home ownership occurs when you decide to sell your home. If you have owned and lived in your personal residence for two out of five years, you can sell the home and not be taxed on a profit up to $250,000 for singles and $500,000 for couples. The way home values have increased in recent years, this can be a tremendous investment opportunity. This rule seems very straight forward and simple, but beware! There are a number of exceptions.

Job related move — if you have to move out of your area (a 50-mile radius), and are unable to meet the two year time period, you can prorate the time based on a formula utilizing a ratio consisting of the number of days that you owned and lived in the home to the total number of days in the relevant 24-month period (approximately 730), multiplied by the exclusion amount.

Health problems requiring a sale — if health problems force you to move from your principal residence, you can prorate the time and exclusion based on the formula above.

Ideally, a couple that kept good records of time of ownership could buy and live in a home for two years, sell for a profit and then repeat this process. Still, there are a number of pitfalls that cause tax problems, such as the special rules surrounding home offices and move out/rent/return situations that effect the two in five requirement (this involves adjusting for depreciation recapture). Given the many regulations and nuances of the tax laws, many people opt to hire a licensed tax practitioner, such as an enrolled agent.

Steve Eubanks, EA, MBA
steve.eubanks@strategictaxgroup.com
www.strategictaxgroup.coom

While no deduction is available for contributions made to a Roth IRA, you may be entitled to a credit (saver’s credit) against tax for your contribution. And earnings on the contributed amounts build up tax-free, and it’s fairly easy to qualify for tax-free distributions for retirement. Here’s how the Roth IRA works:

Contributions. For 2011, you can contribute up to $5,000 to a Roth IRA (as long as you have compensation for the year at least equal to the contributed amount). The $5,000 limit will be increased when the cost-of-living index warrants it. Individuals age 50 or older can make additional contributions of $1,000. Thus, the limit is $6,000 a year for people who will be age 50 (or older) before the end of 2011.

However, the maximum contribution allowance must be reduced by any contributions (deductible or nondeductible) you make to “traditional” IRAs.

There are some limits on Roth IRA contributions. For single taxpayers, if adjusted gross income (AGI) is $122,000 or more, no regular contribution can be made to a Roth IRA. If AGI is between $107,000 and $122,000, the $5,000 maximum contribution is phased out (reduced) according to a formula. For married taxpayers filing jointly, no contribution can be made if AGI is $179,000 or more, and the $5,000 maximum (per spouse) is phased out for AGIs between $169,000 and $179,000. For married taxpayers filing separately, the allowable contribution is phased out for AGIs between $0 and $10,000.

You may be allowed a credit against your income tax equal to a percentage of your Roth IRA contribution if your AGI doesn’t exceed certain levels (which are much lower than the phase-out AGI levels above).

Contributions can be made to Roth IRAs even if you are a participant in a qualified plan and even if you reach age 701/2.

Distributions. “Qualified” distributions from a Roth IRA are tax-free. Thus, you can avoid tax on Roth IRA earnings forever (i.e., even at distribution). A distribution is qualified if made: once you reach age 591/2, upon death or disability, or (up to $10,000 per lifetime) for first-time homebuyer expenses. However, a distribution is not qualified if made within the five-year period beginning with the first tax year you made a contribution to a Roth IRA.

A nonqualified distribution is treated first as a nontaxable return of contributions. To the extent a nonqualified distribution exceeds contributions it is taxable and is also subject to a 10% penalty under the regular early withdrawal rules (i.e., the penalty will not apply if the distribution is made once

you reach age 591/2, or upon death or disability, or in other limited circumstances).

Qualified rollover contributions. You may be able to roll funds over from a regular IRA into a Roth IRA so the post-rollover income can grow tax-free in the Roth IRA. (Converting a regular IRA into a Roth IRA is treated as such a rollover.) You can roll funds over from a regular IRA to a Roth IRA regardless of your AGI (unlike in years before 2010). Any funds rolled over to a Roth IRA will be taxed under the regular IRA distribution rules (as if there were only a distribution and no rollover). The 10% early withdrawal penalty will not apply to the rollover. However, if rolled over funds are withdrawn within the five year period that renders them taxable, the 10% penalty will apply to the withdrawal.

Ordering rules apply if a Roth IRA contains conversion amounts (possibly from different years) as well as other contributions. The regular Roth IRA contributions are treated as withdrawn first and then converted amounts, starting with amounts first converted. Withdrawals of converted amounts will be treated as coming first from amounts already included in income. Earnings are treated as withdrawn after contributions. For these purposes, all Roth IRAs will be treated as a single Roth IRA.

Certain elements of the Roth IRA can be complicated. Nonetheless, many taxpayers can benefit significantly from Roth IRAs.

Steve Eubanks, EA, MBA
steve.eubanks@strategictaxgroup.com
www.strategictaxgroup.coom

Enhanced Work Opportunity Tax Credit (WOTC) for Hiring Qualified Veterans
The Act gave a one-year lease on life to the work opportunity tax credit (WOTC), but only with respect to qualified veterans who begin work for the employer before Jan 1, 2013. (Code Sec. 51(c)(4), as amended by Act Sec. 261(d)) The Act also made these important WOTC changes for hiring qualified veterans.

Broadened categories of qualified veterans. Under the Act, effective for individuals who begin work for the employer after Nov. 21, 2011, a qualified veteran is a veteran who is certified by the designated local agency as falling within one of the following four categories (Code Sec. 51(d)(3)(A), as amended by Act Sec. 261(b)):

The individual is a member of a family receiving assistance under a food stamp program under the Food Stamp Act of ’77 for at least three months, all or part of which is during the 12-month period ending on the hiring date. (Code Sec. 51(d)(3)(A)(i))

The individual is entitled to compensation for a service-connected disability, and either:

• has a hiring date that isn’t more than one year after having been discharged or released from active duty in the U.S. Armed Forces, or (Code Sec. 51(d)(3)(A)(ii)(I))
• has aggregate periods of unemployment during the 1-year period ending on the hiring date that equal or exceed six months. (Code Sec. 51(d)(3)(A)(ii)(II))

The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed four weeks (but less than six months). (Code Sec. 51(d)(3)(A)(iii))

The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. (Code Sec. 51(d)(3)(A)(iv))

My observation: The Act adds the third and fourth categories of qualified veterans but leaves the first two categories unchanged.

Larger WOTC for hiring certain qualified veterans. Under the Act, effective for individuals who begin work for the employer after Nov. 21, 2011, the maximum amount of qualifying first-year wages against which the WOTC may be claimed is:

• $12,000 for an individual who is a qualified veteran under Code Sec. 51(d)(3)(A)(ii)(I) , i.e., is entitled to compensation for a service-connected disability and has a hiring date that isn’t more than one year after having been discharged or released from active duty in the U.S. Armed Forces.

My observation: The maximum WOTC for hiring qualified disabled veterans in Category A is $4,800 (.4 × $12,000 maximum qualifying first-year wages).
My observation: The maximum WOTC for hiring qualified veterans in this category is unchanged from pre-Act law.

• $24,000 for an individual who is a qualified veteran under Code Sec. 51(d)(3)(A)(ii)(II), i.e., is entitled to compensation for a service-connected disability and has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months.

My observation: The maximum WOTC for hiring qualified disabled veterans in Category B is $9,600 (.4 × $24,000 maximum qualifying first-year wages).

• $14,000 for an individual who is a qualified veteran under Code Sec. 51(d)(3)(A)(iv), i.e., has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. (Code Sec. 51(b)(3), as amended by Act Sec. 261(a))

My observation: The maximum WOTC for hiring qualified veterans in Category C—i.e., longer-term unemployed veterans—is $5,600 (.4 × $14,000 maximum qualifying first-year wages).

Fast-tracked qualification process for qualified veterans. Under the Act, effective for individuals who begin work for the employer after Nov. 21, 2011:

• A veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of Code Sec. 51(d)(3)(A)(ii)(II) or Code Sec. 51(d)(3)(A)(iv) (see above), if he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than six months during the 1-year period ending on the hiring date. (Code Sec. 51(d)(13)(D)(i)(I), as amended by Act Sec. 261(c))
• A veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of Code Sec. 51(d)(3)(A)(iii) (see above), if he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than four weeks (but less than six months) during the 1-year period ending on the hiring date. (Code Sec. 51(d)(13)(D)(i)(II), as amended by Act Sec. 261(c))
• Additionally, IRS at its discretion may provide alternative methods for certification of a veteran who is a qualified veteran because of unemployment (i.e., is described in Code Sec. 51(d)(3)(A)(ii)(II), Code Sec. 51(d)(3)(A)(iii), or Code Sec. 51(d)(3)(A)(iv)). (Code Sec. 51(d)(13)(D)(ii), as amended by Act Sec. 261(c))

Tax-exempt employers get a payroll-tax credit for hiring qualified veterans. Under the Act, effective for individuals who begin work for the employer after Nov. 21, 2011, a tax-exempt employer (one described in Code Sec. 501(c) and exempt from tax under Code Sec. 501(a)) may, subject to the limits described below, claim a credit for the WOTC it could claim for hiring qualified veterans if it were not tax-exempt. The credit is allowed against the OASDI (Social Security) tax that the exempt employer would otherwise have to pay on the wages of all its employees during the “applicable employment period” (with respect to any qualified veteran, the one-year period beginning with the day he or she goes to work for the tax-exempt organization). (Code Sec. 52(c)(2) and Code Sec. 3111(e), as amended by Act Sec. 261(e))

The credit for hiring qualified veterans, which can’t exceed the OASDI tax otherwise payable for employment of all the tax-exempt’s employees during the “applicable employment period,” is calculated as it would be under Code Sec. 51, but with the following modifications:

• The general credit percentage of qualifying first-year wages is 26% (instead of 40%).
• The credit percentage of qualifying wages is 16.25% (instead of 25%) for a qualified veteran who has completed at least 120, but less than 400, hours of service for the employer.
• The tax-exempt employer may only take into account wages paid to a qualified veteran for services in furtherance of the activities related to the purposes or function constituting the basis of the organization’s exemption under Code Sec. 501. (Code Sec. 3111(e)(2) and Code Sec. 3111(e)(3), as amended by Act Sec. 261(e)(2))

Steve Eubanks, EA, MBA
steve.eubanks@strategictaxgroup.com
www.strategictaxgroup.coom

Source: Federal Tax Updates on Checkpoint News 11/22/2011

I recommend that you sit down with a tax professional and review together how a rental decision will affect your income and deductions, and your tax breaks as a homeseller. Depending on your situation, we may also have to review how your tax situation will be affected if you eventually sell your home at a loss.

You generally are treated like a regular real estate landlord once you begin renting your home to others. That means you must report rental income on your return, but also are entitled to offsetting landlord-type deductions for the money you spend on utilities, operating expenses, and incidental repairs and maintenance (e.g., fixing a leak in the roof). Additionally, you can claim depreciation deductions for your home. You can fully offset your rental income with otherwise allowable landlord-type deductions. However, under the tax law passive activity loss (PAL) rules, you may not be able to currently deduct the rent-related deductions that exceed your rental income unless an exception applies. Under the most widely applicable exception, the PAL rules won’t affect your converted property for a tax year in which your adjusted gross income doesn’t exceed $100,000, you actively participate in running the home-rental business, and your losses from all rental real estate activities in which you actively participate don’t exceed $25,000.

You should also be aware that potential tax pitfalls may arise from the rental of your residence. Unless your rentals are strictly temporary and are made necessary by adverse market conditions, you could forfeit an important tax break for homesellers if you finally sell the home at a profit. In general, you can escape taxation on up to $250,000 ($500,000 for certain married couples filing joint returns) of gain on the sale of your home. However, this tax-free treatment is conditioned on your having used the residence as your principal residence for at least two of the five years preceding the sale. So renting your home out for an extended time could jeopardize a big tax break. Even if you don’t rent out your home so long as to jeopardize your principal residence exclusion, the tax break you would have gotten on the sale (i.e., exclusion of gain up to the
$250,000/$500,000 limits) will not apply to the extent of any depreciation allowable with respect to the rental or business use of the home for periods after May 6, 1997. A maximum tax rate of 25% applies to this gain (attributable to depreciation deductions).

Some homeowners who bought at the height of a market may ultimately sell at a loss. In such situations, the loss is available for tax purposes only if the owner can establish that the home was in fact converted permanently into income-producing property, and isn’t merely renting it temporarily until he can sell. Here, a longer lease period helps an owner. However, if you are in this situation, you should be aware that you probably won’t wind up with much of a loss for tax purposes. That’s because basis (cost for tax purposes) is equal to the lesser of actual cost or the property’s fair market value when it’s converted to rental property. So if a home was bought for $300,000, converted to rental property when it’s worth $250,000, and ultimately sold for $225,000, the loss would be only $25,000.

The question of whether to turn a principal residence into rental property isn’t easy to resolve.

Steve Eubanks, EA, MBA

steve.eubanks@strategictaxgroup.com
www.strategictaxgroup.coom

2012 Pension Plan Amounts: The IRS published cost-of-living adjustments to various pension plan and related amounts for 2012. For instance, the (1) benefit limit for defined benefit plans will increase from $195,000 to $200,000; (2) defined contribution plan limit will go up from $49,000 to $50,000; (3) compensation limit for determining benefits and contributions will increase from $245,000 to $250,000; (4) definition of a highly compensated employee will go from $110,000 to $115,000; and (5) elective deferral limit for employees who participate in 401(k), 403(b), and most 457 plans will go from $16,500 to $17,000. The following dollar limitations will stay the same—the $550 SEP contribution threshold, and the $11,500 SIMPLE elective deferral limitation. News Release IR-2011-103 .

2012 Social Security Wage Base: The social security wage base will increase from $106,800 in 2011 to $110,100 in 2012. As in prior years, there is no limit to the wages subject to the Medicare tax, so all covered wages are subject to the 1.45% tax. The FICA tax rate, which is the combined social security tax rate of 6.2% (4.2% on the employee portion in 2011) and the Medicare tax rate of 1.45%, is normally 7.65%, while the self-employment tax rate is normally 15.3% (13.3% in 2011). The threshold for coverage for domestic employees will be $1,800 in 2012.

Steve Eubanks, EA, MBA
steve.eubanks@strategictaxgroup.com
www.strategictaxgroup.coom

Deductibility of long-term medical care services. The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income. Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal-care services required by a chronically ill individual provided under a plan of care presented by a licensed health-care practitioner.

To qualify as chronically ill, an individual must be certified by a physician or other licensed health-care practitioner (e.g., nurse, social worker, etc.) as unable to perform without substantial assistance at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity, or as requiring substantial supervision for protection due to severe cognitive impairment (memory loss, disorientation, etc.). A person with Alzheimer’s disease qualifies.

Deductibility of premiums paid for qualified long-term care insurance. Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subjects to an annual premium deduction limitation based on age, as explained below) to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income. A qualified long-term care insurance contract is insurance that provides coverage only for qualified long-term care services, doesn’t pay costs that are covered by Medicare, is guaranteed renewable, and doesn’t provide for a cash surrender value. A policy isn’t disqualified merely because it pays benefits on a per diem or other periodic basis without regard to the expenses incurred during the specific payment period. Qualified long-term care premiums are includible as medical expenses up to the following dollar amounts: For individuals over 60 to 70 years old, the 2011 limit on deductible long-term care insurance premiums is $3,390 ($3,290 for 2010), and for those over 70, $4,240 ($4,110 for 2010).

Deductibility of amounts paid to the nursing home. Amounts paid to a nursing home are fully deductible as a medical expense if the principal reason that a person stays at the nursing home is for medical, as opposed to custodial, etc., care. If a person isn’t in the nursing home principally to receive medical care, then only the portion of the fee that is allocable to actual medical care qualifies as a deductible medical expense. But if the individual is chronically ill (as defined above), all of the individual’s qualified long-term care services, including maintenance or personal care services, are deductible.

Including medical expenses you pay for your parent as part of your deductible medical expenses. If your parent qualifies as your dependent under the rules discussed below, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction. If your parent doesn’t qualify as your dependent only because of the gross income or joint return test ((b) and (c), below), you can still include these medical costs with your own.

Claiming a parent confined to a nursing home as a dependent. You may be able to claim your parent as a dependent, thus qualifying for an exemption, even though your parent is confined to a nursing home. To qualify, (a) you must provide more than 50% of your parent’s support costs, (b) your parent must not have gross income in excess of the exemption amount ($3,700 in 2011; $3,650 in 2010), (c) your parent must not file a joint return for the year, and (d) your parent must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. Your parent can qualify as your dependent even though he or she doesn’t live with you, provided the support and other tests mentioned above are met. Amounts you pay for qualified long-term care services required by your parent and eligible long-term care insurance premiums, discussed above, as well as amounts you pay to the nursing home for your parent’s medical care, are included in the total support you provide. If the support test ((a) above) can only be met by a group (you and your brothers and sisters, for example, combining to support your parent), a multiple support form can be filed to grant one of you the exemption, subject to certain conditions.

Qualification for head-of-household filing status. If you aren’t married and you are entitled to claim a dependency exemption for your parent, you may qualify for the head-of-household filing status, which is more favorable than the single filing status. You may be eligible to file as head of household even if the parent for whom you claim an exemption doesn’t live with you. In order to qualify for head-of-household status, generally you must have paid more than half the cost of maintaining a home for yourself and a qualifying relative for more than half the year. In the case of a parent, however, you may be eligible to file as head of household if you pay more than half the cost of maintaining a home that was the principal home for your parent for the entire year. Thus, if your parent is confined to a nursing home, you are considered to be maintaining a principal home for your parent if you pay more than half the cost of keeping your parent in the nursing home.

Exclusion of gain on sale of your parent’s home. If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. In most cases, the seller, in order to qualify for this $250,000 exclusion, must have (a) owned the home for at least two years out of the five years before the sale, and (b) used the home as his or her principal residence for at least two years out of the five years before the sale. However, there is an exception to the two-out-of-five-year use test under (b) if the seller becomes physically or mentally unable to care for him or herself at any time during the five-year period.

Your parent can qualify for this exception to the use test if, during the five-year period before the sale, your parent (1) becomes physically or mentally unable to care for him or herself, and (2) your parent owned and lived in the home as his or her principal residence for a total of at least one year. Under this exception, your parent is treated as using the home as his or her principal residence during any time during the five-year period in which he or she owns the home and resides in any facility (including a nursing home) licensed by a state or political subdivision to care for an individual in your parent’s condition.

Exclusion for payments under life insurance contracts. If your parent is terminally or chronically ill and is insured under a life insurance contract, he or she may be able to receive tax-free payments (accelerated death benefits or so-called “viatical” payments) while living. Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards. These lifetime payments could be used to help pay the costs of your parent’s nursing home.

Reverse mortgage as alternative to nursing home. It is often desirable for an elderly person to remain in his or her own home with proper in-home care rather than entering a nursing home. A reverse mortgage loan may make this a feasible alternative. Many states permit a reverse mortgage loan, which is designed to permit elderly persons with limited income to remain in their homes by borrowing against the value of their homes.

Typically, a bank commits itself to a principal amount based on the appraised value of the property, which is loaned to the borrower in installments over a period of months or years. The monthly installments can be used to help pay for the upkeep of the home and for in-home care. Repayment of the loan is due when the principal amount has been fully paid to the borrower, or the residence that secures the loan is sold, or the borrower dies or ceases to use the home as his principal residence.

The loan agreement may provide that interest will be added to the outstanding loan balance monthly as it accrues. However, the borrower can’t deduct this interest until it is actually paid.

Steve Eubanks, EA, MBA
steve.eubanks@strategictaxgroup.com
www.strategictaxgroup.coom

1. Dependency exemption. You may be able to claim the cared-for individual as your dependent, thus qualifying for an exemption. To qualify, (a) you must provide more than 50% of the individual’s support costs, (b) he must either live with you or be related, (c) he must not have gross income in excess of the exemption amount, which is $3,700 for 2011 ($3,650 for 2010), (d) he must not himself file a joint return for the year, and (e) he must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. If the support test ((a), above) can only be met by a group (several children, for example, combining to support a parent), a “multiple support” form can be filed to grant one of the group the exemption, subject to certain conditions.

2. Medical expenses. If the individual qualifies as your dependent, you can include any medical expenses you incur for him along with your own when determining your medical deduction. If he doesn’t qualify as your dependent only because of the gross income or joint return test ((c) and (d), above), you can still include these medical costs with your own. The costs of qualified long-term care services required by a chronically ill individual and eligible long-term care insurance premiums are included in the definition of deductible medical expenses. There’s an annual cap on the amount of premiums that can be deducted. The cap is based on age, going as high as $4,240 for 2011 ($4,110 for 2010) for an individual over 70.

3. Filing status. If you aren’t married, you may qualify for “head of household” status by virtue of the individual you’re caring for. If the person you’re caring for (a) lives in your household, (b) you cover more than half the household costs, (c) he qualifies as your dependent, and (d) he is a relative, you can claim head of household filing status. If the person you’re caring for is your parent, he need not live with you, as long as you provide more than half of his household costs and he qualifies as your dependent.

4. Dependent care credit. If the cared-for individual qualifies as your dependent, lives with you, and physically or mentally cannot take care of himself, you may qualify for the dependent care credit for costs you incur for his care to enable you and your spouse to go to work.

5. Exclusion for payments under life insurance contracts. Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards.

Steve Eubanks, EA, MBA
steve.eubanks@strategictaxgroup.com
www.strategictaxgroup.coom

A limited liability company (LLC) is somewhat of a hybrid entity in that it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality can provide the owners with the best of both worlds.

Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) are generally not liable for the debts of the business except to the extent of their investment. Thus, the owners can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.

Unlike a regular or “C” corporation, an LLC can be structured to be treated as a partnership for federal tax purposes. This can provide a number of important benefits to the owners. For example, partnership earnings are not subject to an entity-level tax; instead, they “flow-through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual returns. Thus, earnings are taxed only once. In addition, since you are actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you and your spouse may have.

An LLC that is taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that is similar to a partnership). Another reason for using an LLC over an S corporation is that LLCs are not subject to the restrictions the Internal Revenue Code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued.

In summary, an LLC would give you corporate-like protection from creditors while providing you with the benefits of taxation as a partnership. For this reason, you should seriously consider operating your business as an LLC. Please give me a call at your earliest convenience so that we can discuss in more detail how use of an LLC might benefit you and the other owners.

Steve Eubanks, EA, MBA
steve.eubanks@strategictaxgroup.com
www.strategictaxgroup.coom

Regardless of what Congress does late this year or early the next, there are solid tax savings to be realized by taking advantage of tax breaks that are on the books for 2011 but may be gone next year unless they are extended by Congress. These include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line deduction for qualified higher education expenses; and tax-free distributions by those age 70 1/2 or older from IRAs for charitable purposes. For businesses, tax breaks that are available through the end of this year but won’t be around next year unless Congress acts include: 100% bonus first year depreciation for most new machinery, equipment and software; an extraordinarily high $500,000 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property); and the research tax credit.

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Year-End Tax Planning Moves for Individuals

• Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. Don’t forget that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.

• If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2011.

• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.

• Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2011 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2011. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year.

• If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2011.

• If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as-is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

• It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2012.

• Consider using a credit card to prepay expenses that can generate deductions for this year.

• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2011 if doing so won’t create an alternative minimum tax (AMT) problem.

• Take an eligible rollover distribution from a qualified retirement plan before the end of 2011 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2011. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2011, but the withheld tax will be applied pro rata over the full 2011 tax year to reduce previous underpayments of estimated tax.

• Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2011, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should not be accelerated.

• Accelerate big ticket purchases into 2011 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. Unless Congress acts, this election won’t be available after 2011.

• You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.

• If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner. You may qualify for a tax credit if the assets are installed in your home before 2012.

• Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2011 in connection with enrollment at an institution of higher education during 2011 or for an academic period beginning in 2011 or in the first 3 months of 2012.

• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

• Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2012, and (2) held for more than five years. In addition, such sales won’t cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. Our office can fill you in on the details.

• If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.

• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2011, you can delay the first required distribution to 2012, but if you do, you will have to take a double distribution in 2012—the amount required for 2011 plus the amount required for 2012. Think twice before delaying 2011 distributions to 2012—bunching income into 2012 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2012 if you will be in a substantially lower bracket that year, for example, because you plan to retire late this year.

• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for Businesses & Business Owners

• Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax years beginning in 2012, the dollar limit will drop to $139,000, the beginning-of-phaseout amount will drop to $560,000, and expensing won’t be available for qualified real property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.

• Businesses also should consider making expenditures that qualify for 100% bonus first year depreciation if bought and placed in service this year. This 100% first-year writeoff generally won’t be available next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.

• Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2011. Under current law, the WOTC won’t be available for workers hired after this year.

• Make qualified research expenses before the end of 2011 to claim a research credit, which won’t be available for post-2011 expenditures unless Congress extends the credit.

• If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.

• Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.

• If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes.

Steve Eubanks, EA, MBA

steve.eubanks@strategictaxgroup.com

http://www.strategictaxgroup.com