A new tax relief law allows people who contributed in 2010 to charities providing earthquake relief in Haiti to take a tax deduction for the contribution on their 2009 tax return instead of their 2010 return. This means you can receive an immediate tax benefit, rather than having to wait until you file next year’s return. Certain requirements apply:

• Only cash contributions made to these charities after Jan. 11, 2010, and before March 1, 2010, are eligible. This includes contributions made by text message, check, credit card or debit card.
• The contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti.
• You may deduct these contributions on either your 2009 or 2010 returns, but not both.

• You must itemize your deductions on Schedule A; those claiming the standard deduction, including all short-form filers, are not eligible.
• You must keep a record of any deductible donations you make.  For donations by text message, a telephone bill will meet the requirement if it shows the name of the donee organization and the date and amount of the contribution.  For cash contributions made by other means, be sure to keep a bank record, such as a cancelled check, or a receipt from the charity showing the name of the charity and the date and amount of the contribution.
• Contributions to foreign organizations generally are not deductible.

Article by Karen Blumenthal, Wall Street Journal Personal Finance

Here's some friendly year-end advice: Read those disclosure letters that banks and credit-card companies are sending you in coming months—or at least try really hard.

The text of these mailings may seem like gobbledygook. But they may require you to make important choices soon. Ignoring them could mean paying a lot more money to your credit-card company, having a credit card rejected or getting an unpleasant surprise at the ATM.

New legislation and Federal Reserve rules that go into effect in February and next summer will force banks and credit-card companies to give more notice of significant changes in card terms, limit some interest-rate hikes and require more detailed billing statements. But the rules will also require us to decide whether to opt in or out of rate increases and programs such as "overdraft protection" that we may have been automatically enrolled in previously.

The letters may be easy to miss, since some of them look like junk mail. And don't expect reader-friendly prose. The banks' approach is: "It's not our job to teach you the law; it's our job to comply with the law," says Adam Levin, co-founder and chairman of Credit.com, a credit-information Web site.

When you open the envelopes, here are some details to look for and moves you may want to consider:

Is the credit-card's interest rate or annual fee changing? Many companies have been aggressively raising rates as high as 29.99%. But you now have the right to "opt out" of these changes before they become effective, essentially canceling the card for new purchases, though you can continue to pay off the balance at the old interest rate.

If you have an outstanding balance, this option especially matters right now because credit-card companies have a narrow window to hit you with higher interest rates. After the second round of the Credit Card Act goes into effect Feb. 22, the companies can raise rates on future transactions but not on your current balances unless you are at least 60 days behind in your payments. But until Feb. 22, any interest-rate increase can apply to both future purchases and current balances—which could mean substantially higher costs.

Has your credit limit been lowered? And do you borrow close to your limit? Starting in February, the new law will bar credit-card companies from charging fees (typically up to $39) for exceeding a credit cap unless the customer "opts in," or agrees to pay fees for the convenience of busting the limit. If you don't opt in, you run the risk that your credit card will be rejected when you near your limit. That could put those with small credit limits or high balances in an awkward position at the cash register. It also makes travel trickier since hotels and rental-car companies often put a hold on your card as a precaution, reducing your available credit.

To avoid rejection—and fees—set up email and text alerts to notify you when you're near your limit. Credit-card issuers and banks generally offer that option as part of their online service. Also, if you have the discipline, consider a second, back-up card.

Is the bank changing how it handles overdrafts on your debit card? New Fed rules that take effect this summer will bar banks from charging overdraft fees on debit transactions (but not checks or electronic transfers) unless you opt in. Banks will no doubt market their overdraft programs, which charge up to $35 per overdraft, as a convenience. But there are cheaper options.

Again, set up email and text alerts to tell you when your balance drops below a certain level. If you have good credit, you can apply for an overdraft line of credit, which kicks in when your checking account is empty. There's a fee, often $10, for any transaction, plus interest rates comparable to those of credit cards.

Source: See the full article “Credit-Card Mail May be Boring, But Ignoring It Could Cost You” by Karen Blumenthal, Wall Street Journal 12/16/09

Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.  Some of these changes include the following:

To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. A written appraisal should be provided for any noncash contribution of over $5,000. Household items include furniture, furnishings, electronics, appliances and linens.

• Contributions are deductible in the year made.
• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible.
• For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property.

Labor and employment lawyers and their clients have seen an increasing emphasis by states on investigating and correcting employer misclassification of workers as independent contractors rather than as employees. The development of new state legal remedies for employees under state law has underlined the importance of properly classifying workers, and attorneys interviewed by BNA agree they have seen a surge in misclassification lawsuits.

Source: Bureau of National Affairs Daily Tax Report 12/14/09

• 50 cents per mile for business miles driven
  
• 16.5 cents per mile driven for medical or moving purposes
  
• 14 cents per mile driven in service of charitable organizations

The new rates for business, medical, and moving purposes are slightly lower than last year’s (tax year 2009). The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.

Tax credits are now available for home improvements meeting the following criteria:

• Must be "placed in service" from January 1, 2009 through December 31, 2010
• Must be for taxpayer's principal residence, EXCEPT for geothermal heat pumps, solar water heaters, solar panels, and small wind energy systems (where second homes and rentals qualify)
• $1,500 is the maximum total amount that can be claimed for all products placed in service in 2009 & 2010 for most home improvements, EXCEPT for geothermal heat pumps, solar water heaters, solar panels, fuel cells, and small wind energy systems which are not subject to this cap, and are in effect through 2016
• Must have a Manufacturer Certification Statement to qualify
• For record keeping, save your receipts and the Manufacturer Certification Statement
• Improvements made in 2009 will be claimed on your 2009 taxes
• If you are building a new home, you can qualify for the tax credit for geothermal heat pumps, photovoltaics, solar water heaters, small wind energy systems and fuel cells, but not the tax credits for windows, doors, insulation, roofs, HVAC, or non-solar water heaters

Tax credits are available at 30% of the cost, up to $1,500, in 2009 & 2010 (for existing homes only) for:

• Windows and Doors
• Insulation
• Roofs (Metal and Asphalt)
• HVAC
• Water Heaters (non-solar)
• Biomass Stoves

• Geothermal Heat Pumps
• Solar Panels
• Solar Water Heaters
• Small Wind Energy Systems
• Fuel Cells

For tax years beginning after 2009, the $100,000 modified adjusted gross income limit on conversions of traditional IRAs to Roth IRAs is eliminated. Additionally, married taxpayers filing a separate return will be able to convert amounts in a traditional IRA into a Roth IRA (currently they are barred from doing so).
Source: Federal Tax Updates on RIA Checkpoint Newsstand tab 11/23/09

IRS has allowed taxpayers to keep electronic tax records since 1997 under Rev. Proc. 97-22 “Recordkeeping Requirements – Electronic Storage System.”

IRS provided guidelines on maintenance of books and records on electronic storage system that either images hardcopy or transfers computerized books and records to electronic storage media. Records kept in compliance with guidelines will be deemed in compliance with Code Sec. 6001; recordkeeping requirements. In general, storage system must reliably transfer, store, index, preserve, retrieve, and reproduce electronically stored books and records, and any records reproduced must have high degree of legibility when displayed or reproduced.

This revenue procedure permits the destruction of the original hardcopy books and records and the deletion of the original computerized records, after the taxpayer has completed its own testing of the electronic storage system that establishes that hardcopy or computerized books and records are being reproduced in compliance with all the provisions of this revenue procedure, and has instituted procedures that ensure its continued compliance with all the provisions of this revenue procedure.

Previous law. A refundable tax credit is available for qualifying first-time home purchases after Apr. 8, 2008, and before Dec. 1, 2009. For homes bought in 2009, the maximum first time homebuyer tax credit (FTHTC) is equal to the lesser of $8,000 ($4,000 for a married individual filing separately) or 10% of the principal residence's purchase price (for purchases before 2009, the dollar limits are $7,500 ($3,750 for marrieds filing separately). The FTHTC phases out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.

New law. The Act extends the FTHTC and liberalizes it by making it available to (1) higher-income taxpayers and (2) to existing homeowners who are qualifying “long-time residents” and who buy another principal residence. However, for the first time there will be a dollar cap on residences qualifying for the FTHTC.

FTHTC extended. Under the Act, the First Time Homebuyer Tax Credit is extended to apply to a principal residence purchased by the taxpayer before May 1, 2010. The FTHTC also applies to the purchase of a principal residence before July 1, 2010 by any taxpayer who enters into a written binding contract before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010.

FTHTC available to higher income taxpayers. For purchases after the enactment date, the FTHTC phases out for individual taxpayers with modified adjusted gross income (AGI) between $125,000 and $145,000 ($225,000 and $245,000 for joint filers) for the year of purchase.

FTHTC available for existing homebuyers who are “long-time residents.” For purchases after the enactment date, any individual (and, if married, the individual's spouse) who has maintained the same principal residence for any 5-consecutive year period during the 8-year period ending on the date of the purchase of a subsequent principal residence is treated for FTHTC purposes as a first-time homebuyer of that subsequent principal residence. The maximum allowable credit for such taxpayers is $6,500 ($3,250 for a married individual filing separately).

New limitation on home price for FTHTC. For purchases after the enactment date, the FTHTC cannot be claimed for buying a residence if its purchase price exceeds $800,000

Additional liberalizations for Service Members. The Act extends the FTHTC for an additional year, and waives recapture provisions, for individuals who are on qualified official extended duty, which means service on official extended duty as a member of the uniformed services, a member of the Foreign Service of the United States, or an employee of the intelligence community. Qualified official extended duty is any period of extended duty while serving at a place of duty at least 50 miles away from the taxpayer's principal residence or under orders compelling residence in government furnished quarters. Extended duty is any period of duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period.

Source: RIA Checkpoint Newsstand 11/06/09

Extension of home buyer credit overcomes procedural hurdle in Senate on 11/2/09.

The Senate votes 85-2 to invoke cloture on legislation (H.R. 3548) that would extend and expand the home buyer tax credit and tax benefits for money-losing businesses, clearing the way for final passage in coming days. The bill would extend the deadline for first-time home buyers to take advantage of an $8,000 tax credit for housing purchases through April 30, 2010, and provide for a new $6,500 tax credit to help certain existing homeowners interested in buying a different house. Businesses also would benefit from a provision to extend and expand the five-year net operating loss carryback provision to all businesses.

Source: Bureau of National Affairs Daily Tax Report 11/3/09

On October 30, House leaders unveiled the “Affordable Health Care for America Act.” It's a massive 1,900-page health reform bill that revises and combines the tri-committee (Ways and Means, Energy and Commerce, and Education and Labor) bills issued earlier this year. The timetable for the House of Representatives to take up the measure is uncertain at this point. And should the House pass the measure it would have to be reconciled with any bill that passes Senate as the two bills would likely have different approaches on many non-tax and tax provisions.

“Shared responsibility” and tax provisions in the House bill:

• Employers would have to either provide health insurance to their employees or make a contribution to help fund affordable health insurance. Employers not offering qualified coverage would pay a payroll tax equal to 8% of their payroll to help cover expenses of employees who seek coverage through the exchange. Small businesses (annual payrolls below $500,000) would be exempt from coverage requirements, including the 8% payroll contribution for failure to provide health benefits to their workers. The 8% contribution requirement would be phased in for small businesses with an annual payroll between $500,000 and $750,000.

• Individuals would be required to obtain health insurance coverage or pay an additional tax equal to the lower of 2.5% of their adjusted income above the filing threshold or the average premium on the insurance exchange.

• The penalty on distributions from health savings accounts that are not used to pay for health related expenditures would be increased from 10% to 20%.

• The deduction for expenses allocable to Medicare Part D subsidy would be eliminated.

During our tax season interviews at Predovich & Company, we find that many clients would have realized substantial tax savings if they had talked to us prior to taking certain taxable actions.

Some areas where a pre-planning appointment with one of our CPAs may help you:

• Discuss your life goals
• Change in employment status
• Review retirement income scenarios
• Purchase or sale of rental or investment real estate
• Purchase or sale of personal residence
• Refinance of real estate property
• Business startup
• Business funding
• Sale of business
• IRA/Pension plan withdrawals
• Investment and financial planning
• Cash management
• Tax implications of education funding plans for children or grandchildren
• Whether long-term care or other insurance should be part of your (or your parents’) estate plan

Income

• Net operating losses – The ARRA amended IRC Sec. 172(b)(1)(H) to allow eligible small businesses to carry back a 2008 net operating loss up to five years instead of the otherwise available two-year limit. To be eligible for the longer carryback period, the loss must arise from an eligible small business – a proprietorship, partnership, or corporation with average gross receipts of $15 million or less for the three-year period ending in 2008. 
• Unemployment compensation – For 2009, $2,400 of unemployment compensation is excluded from tax.

• Motor vehicle taxes – Taxpayers may deduct “qualified motor vehicle taxes,” defined as state or local sales or excise taxes imposed on the purchase of a new qualified motor vehicle. The vehicle must be a passenger car, light truck, or motorcycle weighing 8,500 pounds or less, or a motor home. The vehicle must be acquired after Feb. 17, 2009, and before 2010. The deduction is limited to tax on the first $49,500 of the purchase price.

• Child tax credit – While the amount of the child tax credit remains at $1,000 per dependent child under age 17, the refundable portion is increased for tax years 2009 and 2010 to the extent of 15% of the taxpayer’s earned income over $3,000 (lowered from $8,500). Beginning in tax year 2009, a child who qualifies for the child tax credit must also be the taxpayer’s dependent.
• Hope credit – Beginning in tax year 2009, the Hope credit is increased to a maximum of $2,500 per year (100% of the first $2,000 of qualifying expenses and 25% of the next $2,000), with 40% of the credit refundable. The provision extended the credit to all four years of college and expanded the definition of qualifying expenses to include course materials.
• Earned income credit – For tax years 2009 and 2010, the earned income tax credit percentage for families with three or more qualifying children is increased from 40% to 45%.

• AMT exemptions increased for 2009 to $70,950 for a joint return, $46,700 for single taxpayers and heads of household, and $35,475 for married taxpayers filing separately. Commonly referred to as the “AMT patch,” this measure comes with an estimated cost of $70 billion to provide AMT relief to an estimated 26 million taxpayers.

The following is a summary of several important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Administration launches new initiative to boost retirement savings. The Administration has issued a barrage of guidance designed to increase retirement savings. Three revenue rulings, four notices, and new IRS website explanations make it easier for employers to provide for automatic retirement plan enrollments and automatic contribution increases, permit unused leave to be converted into retirement savings, give employees a clearer understanding of rollover options, and permit income tax refunds to be used to purchase U.S. Savings Bonds. The new developments will, to be sure, make it easier for employers to offer automatic enrollments, and enhance the chances that taxpayers won't spend their lump-sum payouts. However, the real trail blazers are the ruling that permits the dollar value of unused paid time off to be contributed to a 401(k) plan, and Treasury's new policy of allowing taxpayers to funnel tax refunds directly into U.S. Savings Bonds.

Next year's tax figures increase slightly if at all. Inflation data that is finalized each August is used by the IRS to compute the following year's standard deductions, exemptions, tax brackets and other key items. While the IRS has not yet released its “official” computations (it has until Dec. 15 to do so), a reputable publisher of tax law information has calculated the figures for 2010. It has determined that, because of the extremely low inflation over the past 12 months, for the first time ever, many key tax items will not increase next year or will increase only slightly. Items that won't increase include the personal exemption and the standard deduction for all but heads of household. Some tax brackets will remain the same but most will increase slightly.

IRS can examine tax accrual workpapers. A Federal appellate court has held that so-called tax accrual workpapers are not protected by the work-product privilege. That privilege protects work done for litigation, not in preparing financial statements, and the workpapers were prepared to support financial filings and gain auditor approval. As a result, the IRS could examine the tax accrual workpapers in auditing the taxpayer.

Simplified per diem rates increased effective Oct. 1, 2009. Reimbursements of an employee's business travel costs (lodging, meal and incidental expenses (M&IE)) at a per diem rate are payroll-and income-tax free if simplified substantiation is provided and the daily rate doesn't exceed the federal per diem rate (the maximum amount that the federal government reimburses its employees) for the locality of travel for that day. While the per diem rates vary by travel destination, employers can make reimbursements at the simplified “high-low” per diem rates, which assign one per diem rate to high-cost areas within the continental U.S., and another to non-high-cost areas.

Source: Federal Tax Updates on RIA Checkpoint Newsstand 10/15/09

Government Accountability Office report addresses impact of sole proprietor noncompliant loss deductions on tax gap.

Ninety-five percent of all sole proprietors who reported losses in 2006 deducted some or all of their losses against other income, deducting a total of $40 billion, said the Government Accountability Office (GAO) in a report issued on Oct. 13. Approximately 5.4 million (or 25%) of all sole proprietors reported losses in 2006. The latest estimates for 2001, when the gross tax gap was some $345 billion, found “70% of the sole proprietor tax returns reporting losses had losses that were either fully or partially noncompliant,” GAO said. “About 53% of aggregate dollar losses reported in 2001 were noncompliant,” the report said, adding that “this noncompliance would correspond to billions of dollars of lost tax revenue.”

On October 8, the House of Representatives, by a vote of 416-0, approved H.R.3590, the “Service Members Home Ownership Tax Act of 2009.” The bill heads to the Senate for its consideration.

The bill would make the following changes to improve how the homebuyer credit and Homeowner's Assistance Program (HAP) provisions apply to service members (i.e., members of the uniformed services, members of the Foreign Service, and intelligence employees):

• The tax credit claimed on qualifying first-time home purchases in 2009 must be recaptured if the home is sold (or ceased to be used as a principal residence) within three years of the purchase. A more restrictive recapture rule applies to qualifying first-home purchases in 2008. Sec. 2(a) of the bill would amend Code Sec. 36(f)(4) to provide that the first-time homebuyer credit does not need to be paid back if after Dec. 31, 2008, the home is sold (or stops being used as a principal residence) by a member of the uniformed services, a member of the U.S. Foreign Service, or an employee of the intelligence community, in connection with a government order for qualified official extended duty.

• The first-time homebuyer credit won't be available for purchases after Nov. 30, 2009 (unless Congress extends this tax break). Sec. 3(a) of H.R. 3590 would amend Code Sec. 36(h) to provide those serving on qualified official extended duty service outside of the U.S. for at least 90 days in calendar year 2009 with an additional year (until Nov. 30, 2010) to buy a principal residence and be eligible for the first-time homebuyer credit (if otherwise qualified). Additionally, those buying a home after 2009 but before July 1, 2010 under the change would be able to elect to treat the home as bought on Dec. 31, 2009, in order to claim the credit on the 2009 return.

• Sec. 4(a) of the bill would amend Code Sec. 132(n) to ensure that certain payments under HAP are exempt from tax. This would apply to HAP payments made after Feb. 17, 2009, to (1) wounded members (and their spouses) of the Armed Forces, Department of Defense, or the United States Coast Guard and (2) members of the Armed Forces that bought a home before July 1, 2006 and are subsequently permanently reassigned between July 1, 2006 and Sept. 30, 2012.

Although many investment assets have lost value in the past year, individuals coming to CPAs for estate planning advice often hold highly appreciated assets, and many want to make significant charitable gifts. For that reason, charitable remainder trusts remain a popular method of reducing assets subject to estate tax. They allow donors an income stream from assets that also support a charity. Thus, it’s not surprising to place a high priority on regulating these vehicles.

The IRS issued final regulations modifying the regime for unrelated business taxable income (UBTI) received by charitable remainder trusts. For tax years beginning after Dec. 31, 2006, a charitable remainder trust that receives UBTI in a tax year is liable for a 100% excise tax on UBTI but retains its tax-exempt status.

In a revenue ruling, the IRS addressed pro rata division of a charitable remainder trust with two or more income recipients into new trusts. Generally, charitable remainder trusts may be divided without termination or other penalties and the bases of assets carried over to the new trusts.

In the “transaction of interest,” a charitable remainder trust with highly appreciated, low-basis assets sells them and replaces them with new assets. The income and charitable beneficiaries then sell their interests in the charitable remainder trust to a third party. The income beneficiary recognizes little or no gain on the transaction by claiming and exception to the no-basis rule of IRC Sec. 1001(e).

Source: “Charitable Remainder Trust Update” by Justin P. Ransome, Esq., CPA, and Vinu Satchit, CPA, Journal of Accountancy, October 2009

In recent weeks, a phony e-mail claiming to come from the IRS has been circulating in large numbers. The subject line of the e-mail often states that the e-mail is a notice of underreported income. The e-mail may contain an attachment or a link to a bogus Web page directing taxpayers to their "tax statement." In either case, when the recipient opens the attachment or clicks on the link, they download a Trojan horse-type of virus to their computers.

Malicious code (also known as malware), of which the Trojan horse is but one example, can take over the victim’s computer hard drive, giving someone remote access to the computer, or it could look for passwords and other information and send them to the scammer. The scammer will then use whatever information they gather to commit identity theft, gain access to bank accounts and more.

The IRS does not send unsolicited e-mails to taxpayers about their tax accounts. Anyone who receives an unsolicited e-mail claiming to come from the IRS should avoid opening any attachments or clicking on any links. People can report suspicious e-mails they receive which claim to come from the IRS to a mailbox set up for this purpose, phishing@irs.gov. Those who believe they may already be victims of identity theft should find out what do by going to the U.S. Federal Trade Commission's Web site, OnGuardOnLine.gov.

Source: Internal Revenue Service at http://www.irs.gov/ 10/2/09

The IRS has updated guidance on how taxpayers obtain consent for changes in methods of accounting. Revenue Procedure 2009-39 provides guidance on automatic consents for accounting method changes and clarifies the general procedures for obtaining non-automatic consents.


In general a taxpayer may not request a change in accounting method when under examination. The updated revenue procedure includes changes to the earlier revenue procedure and adds to the definition of "under examination." It also refers to changes in filing requirements for an accounting method change, defines which issues mandate filing a change in accounting method form, and provides guidance for specific accounting method changes and when an automatic consent will not apply.

For more information see Internal Revenue Bulletin: 2009-38.

Source: AICPA Tax Alert 9/25/09

Problems persist with IRS's handling of large dollar refund freezes.

IRS has been paying an excessive and unnecessary amount of interest on improperly frozen large dollar refunds, the Treasury Inspector General for Tax Administration (TIGTA) said in a recent audit. The agency's inability to promptly resolve some accounts with a large dollar refund freeze has been a persistent problem. It was the focus of two previous TIGTA audits, in September '99 and March 2002. “In those reports, we recommended that computer programming changes be made to periodically alert employees to review accounts with large dollar frozen refunds and systematically release these refunds if the credit amount went below the large dollar refund freeze threshold (currently $10 million),” TIGTA said in its latest audit. This time around, auditors found fewer accounts with the large dollar refund freeze. “Nevertheless, the amount of interest the IRS continues to owe taxpayers with improperly frozen refunds is substantial because it has yet to implement our recommendations from the prior reviews,” TIGTA said. The audit located 152 taxpayer accounts with the large dollar refund freeze, including 75 (or 49%) which were improperly frozen. Among these 75 accounts were 49 accounts for which refunds totaling $620 million were not timely issued. The government was required to fork out $62.9 million in additional interest, the audit said. TIGTA urged IRS to implement its previous recommendations. The audit is available at http://treas.gov/tigta/auditreports/2009reports/200930106fr.pdforts/200930106fr.pdf .