This Just In

Document Retention – 1/18/2011

There always seems to be confusion on how long to keep documents that support your tax return. These documents need to be kept long enough so that the period of limitations has expired, which is the period of time in which you can amend your tax return to claim a credit or refund or that the IRS can assess additional tax. Here are some guidelines directly from the IRS website:

  1. You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
  2. You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
  3. You file a fraudulent return; keep records indefinitely.
  4. You do not file a return; keep records indefinitely.
  5. You file a claim for credit or refund after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
  6. You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
  7. Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Of course, there are other issues that may come up with records related to a particular asset. Here, the period of limitations begins after the asset is dispose of, not purchased. If there is any confusion or question, you should always contact a knowledgeable professional before discarding anything.

Bush Tax Cuts – 12/23/2010

By now you've heard that Washington finally extended the Bush tax cuts that were scheduled to expire on December 31. This means the top rate stays at 35% (rather than 39.6%) and the rate on capital gains and qualified corporate dividends stays capped at 15% (rather than 20%). But the new law keeps taxes down for everyone, not just the highest earners. If those Bush cuts hadn't been extended, the 10% rate would have disappeared, and tax brackets would have increased faster for everyone. So don't think that you get no benefit just because you aren't in those top brackets!

There's more good news, too. The law also cuts the employee portion of Social Security and self-employment taxes by 2% (for 2011 only), and, restores the estate tax, but with only a 35% rate applying on estates over $5.0 million. Finally, it extends a list of popular tax breaks that were scheduled to expire: (1) it "patches" the Alternative Minimum Tax for two more years, thus protecting millions of Americans from the AMT, (2) it extends the Child Tax Credit and American Opportunity Tax Credit (for college tuition), (3) it expands the Earned Income Tax Credit, (4) it extends bonus depreciation and first-year expensing for businesses, and (5) it extends miscellaneous tax breaks for expenses like educator expenses, state and local sales taxes, and IRA distributions given directly to charity.

Now let's talk about what it all means. The reality is, the law's provisions will last for two years at most. That means Washington will have to fight it out all over again -- with a divided Congress, in a Presidential election year -- with another $2 trillion or so added to the national debt (on top of the $13.9 trillion that's already there)! If the economy continues to pick up over the next two years, there may be enormous pressure to increase taxes. This will make tax planning even more important over this period. So if you don't yet have a plan, take action now! Give us a call at 512-275-6588.

Small Business Stock – 11/1/2010

On September 27, President Obama signed the Small Business Jobs Act of 2010 into law. While the Act focuses on expanding credit for small business, it also includes a number of tax provisions that can help in your clients' long-term tax planning efforts.

One of these allows for the exclusion of 100% of the gain on the sale of certain small business stock if it is issued before January 1, 2011. There are restrictions related to the size of the exclusion, business operations and size, the holding period of the stock and other factors. This can be used for new as well as existing businesses which may need to be restructured.

This change in the tax laws provides an incredible opportunity for business owners to build and operate a business, then keep all proceeds from the sale to invest towards retirement or into other businesses. It is important to move quickly, because at the end of the year this provision expires.

Healthcare – 5/15/2010

Since the passage of the healthcare reform bill earlier this year there has been a lot of news about upcoming changes to our healthcare system. You will hear about how insurance must be extended to those with pre-existing conditions and how children can keep their parent's insurance until age 26.

Strangely, there are fewer stories about how all of these changes will be paid for, aside from the claims that the bill is "revenue neutral". And perhaps when looking at the Federal Budget, it is. However, from the perspective of the tax payer, taxes are going up for many of you. Here are some of the details:

  • Starting in 2010, certain small businesses with fewer than 10 employees receive 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 W-2.
  • The penalty tax for Health Savings Account distributions not used for health care expenses doubles, 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 $2,000 per employee.

The reconciliation bill that accompanied the act includes one more change. Currently the Medicare tax is limited to 2.9% of earned income. The reconciliation bill raises that tax by 0.9% for earned income above $200,000 (individuals) or $250,000 (families). It also adds a 3.8% "Unearned Income Medicare Contribution" on investment income (interest, dividends, annuities, royalties, capital gains, and rents) for taxpayers with Adjusted Gross Incomes above those same thresholds. Those new taxes would take effect in 2013.

The health care reform act includes so many tax law changes that the CongressionalBudget Office says the IRS will need $10 billion and 17,000 new employees to enforceits share of the new rules.

These changes, coupled with the changes from the recently passed "Small Business Jobs Act of 2010", can make the tax landscape seem treacherous and uncertain. And for the uninformed, it is. However, these changes can provide tremendous opportunities to those who understand them and can take advantage of them. The key is finding a guide to lead you through the seemingly endless jungle of legislation and regulation.

IRS Circular 230 Notice: The statements contained herein are not intended to and do not constitute an opinion as to any tax or other matter. They are not intended or written to be used, and may not be relied upon, by you or any other person for the purpose of avoiding penalties that may be imposed under any federal tax law or otherwise.

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