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September, 2011

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Take A Refresher Course On Saving For College The Tax-Smart Way

With tuition costs climbing ever higher, setting aside funds for college can be a formidable task. Here’s a refresher course on the various programs and tax breaks you can use to lessen the financial burden of college.

Coverdell education savings accounts. These accounts offer several advantages over other college savings plans. First, there’s flexibility. Like an IRA, you can choose from a wide variety of investments to meet your individual needs. Also, funds in the account can be withdrawn tax-free if used for qualified education expenses such as tuition, room and board, books, even a computer. Unlike other programs, qualified expenses include costs of elementary and secondary school.

College Tax Breaks

However, the maximum annual contribution for a beneficiary is $2,000 — from all sources. Also, funds must be used by age 30. If the funds are not spent on college by the time the beneficiary is 30 years old, the unspent money must be withdrawn (subject to income tax and a 10% penalty) or rolled over into another family member’s education savings account.

Section 529 plans. If you want to put a large lump sum into a college savings account, a Section 529 plan may be your best option. In this type of account, there are no phase-out limits for high earners, and plan sponsors set maximum allowable contributions.

Custodial accounts. With custodial accounts (Uniform Transfers to Minors Act or UTMA), you can generally invest in a wider variety of investments than with a 529 plan. The proceeds can be taken out penalty-free — even if used for something other than education. The biggest potential disadvantage is that you gift the funds irrevocably to the child. At a certain age, your child controls the account and could spend the funds on a sports car instead of college.

American opportunity credit. With this credit you reduce your taxes dollar for dollar for education expenses incurred during four years of college. The credit has an annual limit of $2,500 per student.

Lifetime learning credit. The limit for this credit is $2,000 per tax return, and qualified expenses include tuition, fees, and books for both undergraduate and graduate programs. You’re limited to using only one credit (American opportunity or lifetime learning) per student.

Other options. Roth IRAs and U.S. savings bonds are additional options worth considering. You may also qualify for an interest deduction on education loans. If you need help reviewing the options that best fit your situation, give us a call.

IRS Explains The New Bonus Depreciation Rules

Under the Tax Relief Act of 2010, you may be able to write off the entire cost of business property placed in service this year, thanks to 100% “bonus depreciation.”

Prior to this law, a business was able to claim 50% bonus depreciation on qualified new (but not used) property placed in service in 2010.  

This included property with a cost recovery period of 20 years or less, most computer software, qualified leasehold improvement property, and certain water utility property. Bonus depreciation could be coordinated with Section 179 first-year expensing and regular depreciation deductions (subject to the annual limits).

 

The Tax Relief Act, signed December 17, 2010, improves and extends the tax benefits. It allows a business to claim 100% bonus depreciation for qualified property placed in service from September 9, 2010, through December 31, 2011 (through 2012 for property with a cost recovery period of ten years or more and certain aircraft and transportation property). 50% bonus depreciation can be claimed for qualified property placed in service during 2012.

The Tax Relief Act of 2010 did not change the definition of “qualified property”; it remains the same as it was before.

IRS issues guidance

Recently, the IRS issued new guidance on using bonus depreciation. It focuses on the following areas:

Depreciation step-down

You’re allowed to “step down” from 100% bonus depreciation to 50% bonus depreciation this year if it suits your needs. For example, it may not be advantageous for a business to front-load its depreciation deductions to receive the maximum amount. The IRS guidance spells out the procedure for cutting back to 50% bonus depreciation.

Company vehicles

The first-year depreciation deduction for “luxury cars” and other vehicles is enhanced by $8,000 due to the bonus depreciation rules.

Be aware that certain heavy-duty SUVs and other vehicles weighing more than 6,000 pounds are exempt from the luxury car limits. If purchased after September 8, 2010, and before January 1, 2012, they may qualify for 100% bonus depreciation.

Qualified leasehold property

The IRS says that qualified restaurant and retail improvement properties may be eligible for 100% bonus depreciation under the definition of “qualified leasehold property.”

Component depreciation

A business may be able to deduct certain components of a business building over a faster cost recovery period than the usual 39-year period required for an entire building. The IRS ruling authorizes an election to use 100% bonus depreciation for qualified components of a self-constructed building.

Even with the recent IRS guidance, the depreciation rules remain very complicated. For assistance in applying the rules for maximum tax benefit to your business, contact our office.

Read The Writing On The Wall

Imagine taking a newspaper classified ad and posting it up on an electronic signboard. Think about the reach your message automatically achieves. This form of advertising is called digital signage: an electronic display that conveys an advertising message. (more…)

How Grandparents Can Help With College Costs

Are you a grandparent wanting to fund your grandchild’s education? You’ll find several ways to do this, each with its own limitations and tax consequences. (more…)

Individual Tax Return Due

Date: 2011-10-17

Individual Income: Last day for individuals who received an automatic six month filing extension to file previous year income tax return (Form 1040 series) as well as to pay any tax that is due

Tax Tip Tuesday! Transferring Your Business Takes Planning

As a business owner, you’re used to making tough decisions. Yet there’s one you may be putting off: How to transfer your business to new owners when you’re ready to move on.

Now could be the perfect time to review your options, thanks to a combination of currently beneficial estate and gift tax rules and low interest rates.

Here are techniques to consider.

  • Gifting. Your succession plan might include an outright gift or setting up a trust to benefit your family. For 2011 and 2012, the lifetime exclusion for estate, gift and generation skipping transfer taxes is $5 million. That’s the amount you can give, tax-free, to anyone you choose.
  • Selling. While your first thought is likely that a sale means your business will be owned by someone outside your family, remember you can also sell the business to your children or other relatives.

    Another option is an Employee Stock Ownership Plan. An ESOP is a type of benefit plan that lets you sell your company’s stock to employees while realizing tax breaks for your business.

Along with tax issues, business succession planning involves legal and financial decisions. Please call for a comprehensive analysis of the choices available to you.

What’s New: Use Adjusted Numbers In Your Long-Range Planning

As you start to look ahead in your tax planning, here are some adjusted tax numbers you will find useful.

The amount you can set aside in a health savings account (HSA) in 2012 will increase to $3,100 for an individual and to $6,250 for a family.  If you’re 55 or older, you’re allowed an additional $1,000 contribution. HSAs permit taxpayers who have high-deductible health insurance plans to set aside pretax dollars that can be withdrawn tax-free to pay medical expenses not reimbursed by insurance.

Adjust Number

 

Another 2012 adjustment: The social security wage base is expected to increase to $110,100. That’s $3,300 higher than the 2011 wage base. Unless Congress acts to extend the 2% rate cut in the social security tax, the 2012 rate will return to 7.65% on the wage base for both employers and employees.

Paying On Time Pays Off

The downfall of many small businesses is debt racked up by not paying bills on time. To avoid becoming a fatality, the general rule of thumb is to refrain from making unrealistic or impossible promises. You will find that your clients and vendors will follow suit, creating strong relationships that will keep your firm afloat through rough times. (more…)

New Business: Small Business Alert! Hackers Target Small Companies

If you think your business computers are safe from hacking attacks because your company is too small to appeal to hackers, think again. Though the big international companies are indeed attractive to hackers, these web criminals are beginning to find small businesses lucrative targets too. (more…)

Tax Tip Tuesday! Review The SIMPLE Plan Contribution Rules

Reductions in business income may have you contemplating how you can cut back on expenses. If one area you’re eyeing is the contributions your business makes to your SIMPLE IRA plan, remember your plan must follow the rules in order to keep the tax benefits for both your business and your employees.

As an employer, that means no changing horses mid-stream. For a SIMPLE IRA, the amount you choose to contribute during the 60-day election period is the amount you must contribute for the entire year.

That’s not to say you can never change how much your business contributes to the plan. In general, you can make an annual election to reduce your contribution to no lower than 1% of employees’ wages. You can do this for up to two calendar years.

Alternatively, you can switch to non-elective contributions. With this option, you contribute a flat 2% of compensation instead of matching contributions made by your employees.

With either choice, you have to notify employees of the change to your SIMPLE IRA plan before that year’s election period. The election period is usually the 60 days beginning in November and ending December 31. The revision will start January 1 of the following year.

Another caution: Be sure you continue to deposit the funds your employees contribute to their accounts on time — no later than 30 days after the month contributions are withheld from paychecks. You have until the due date of your business tax return (including extensions) to deposit your matching contribution.

For more information about your SIMPLE IRA plan options, please contact us. We’re here to help you make the right choice for your business.

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