Katy Estrada, CPA - Newsletter

2009 Newsletter in English - written by Katy Estrada, CPA (updated 12/2/09)

New Tax Credits will affect workers and small businesses

In 2008, you may have received a rebate check depending on your income levels and filing status. 2009 will be in the form of a tax break instead of a physical check. The American Recovery and Reinvestment Act calls for fewer tax dollars being taken out of paychecks of 95 percent of Americans.

The Making Work Pay credit starts April 1. The math works out to be on average of $13 a week more in your wallet if you have FICA taxes taken out of your paycheck. It lasts two years, so in January 2010, the average amount will be $9.

“This tax credit will be calculated at a rate of 6.2% of earned income and will phase out for taxpayers with adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.” said 1st District Congressman Tim Walz.

If you don't take taxes out of your paycheck, the IRS requires you to report the credit on your income tax return next year. If you don't work and are on Social Security or veterans benefits, the government will cut you a $250 check.

Other Tax Credits for 2009

The qualifying factors for the $1,000 refundable child credit has eased. You can begin to claim it at $3,000 and get the full amount after $6,667 in income.

Small businesses — annual receipts of less than $15 million — that face net operating losses can spread them out over five years instead of two. These are often referred to as “carrybacks.”

The marriage penalty on the earned-income tax credit is gone. Married couples can have a higher combined income and still get the credit. And the act extends EITC to larger families. Families with three or more children can get the benefit on up to 45 percent of their earned income. The credit's top climbs to $5,657 for filing jointly, three kids and earning up to $45,295.

The Hope Scholarship, temporarily renamed the American Opportunity Tax Credit, is up to $2,500 per student per year for tuition and related expenses for the first four years of college. The previous level was $1,800. It phases out starting at $160,000 in earnings for couples, for singles $80,000.

The act allows taxpayers on next year's federal return to deduct state and local sales taxes from the purchase a new car, light truck or motorcycle up to $49,500 between Feb. 17 and the end of this year. The break phases out at the adjusted gross income of $125,000 or for joint filers $250,000.

There is a new Schedule! Schedule L is what I call the Modified Standard Deduction. This form can be used if you don't have enough deductions to itemize but still paid property taxes in 2009.

IRS Audit Red Flags

Claiming too many deductions—Your return might be flagged if you claim large deductions for business travel and entertainment, take a home office deduction or show a large overall loss. Retain all receipts for business meal and entertainment expenditures of $75 or more. For expenses less than $75, keeping a detailed diary is sufficient. In addition, the IRS employs a program called discriminate index function (DIF), which compares taxpayer deductions to others in the same income bracket. If the IRS’s DIF data finds, for example, that the average taxpayer in your income tax bracket claims $1,000 in charitable donations, and you claim $10,000, it’s a likely red flag.

In-home office deductions—Any area in your home designated as office space must be used exclusively for business.

The tax credit for energy-efficient homes

The special credit for builders selling energy-efficient homes expired after 2007. It is back in effect for 2009. You could qualify for a 30 percent tax credit, up to $1,500.

Guidance Issued for deducting Health Insurance of S-Corp Shareholders

The IRS has just issued guidance that will enable most shareholder-employees who own 2% or more of the corporate stock to get the deduction. In order to qualify, the insurance must either be provided in a company plan or reimbursed by the company to the shareholder for an individual policy. The amount paid by the corporation is included in taxable wages on the shareholder-employee’s Form W-2.

Lower Capital Gains Rate Extended

Previously, Congress lowered the tax rate on most dividends and most long-term capital gains to 15%. It was in effect until the year 2008. The new law extends these lower rates until 2010.

Standard business mileage rate decreases for 2010

Business standard mileage rate—The standard business mileage rate for 2009 is 55¢ per mile. The standard business mileage rate for 2010 decreases to 50¢ per mile. (Be sure to keep a good mileage log.)

The standard mileage rate for medical and moving expenses is 24¢ for 2009 and 16.5 ¢ per mile for 2010 and the standard mileage rate for charitable deductions is 14¢ for 2009 and 2010. ( IR-2009-111, Rev. Proc. 2009-54.)

What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. My rule of thumb is to ask yourself "Did I spend this money to help create future income?"

Note: If you have an expense that is partly for business and partly personal, separate the personal part from the business part.

Self-Employment Tax

The maximum amount of self-employment income subject to Social Security taxes increases to $106,800 in 2009 and stays at that limit for 2010. The self-employment tax rate remains 15.3% on earnings to the Social Security maximum and 2.9% after the maximum.

Don't just think about your tax liability once a year. With careful tax planning throughout the year, you will be better aware and possibly reduce that liability.

Pursuant to requirements for practicing before the Internal Revenue Service, any tax advice contained in this communication is not intended to be used, and cannot be used, for purposes of (a) avoiding penalties imposed under the United States Internal Revenue Code or (b) promoting, marketing or recommending to another person for any tax-related matter. Each taxpayer has unique facts and circumstances in relation to the applicability of the above laws. You are strongly advised to consult with a tax professional to determine the applicability of the law to your circumstances.

IRS Audit Red Flags
Claiming too many deductions—Your return might be flagged if you claim large deductions for business travel and entertainment, take a home office deduction or show a large overall loss. Retain all receipts for business meal and entertainment expenditures of $75 or more. For expenses less than $75, keeping a detailed diary is sufficient. In addition, the IRS employs a program called discriminate index function (DIF), which compares taxpayer deductions to others in the same income bracket. If the IRS’s DIF data finds, for example, that the average taxpayer in your income tax bracket claims $1,000 in charitable donations, and you claim $10,000, it’s a likely red flag. In-home office deductions—Any area in your home designated as office space must be used exclusively for business.
The tax credit for energy-efficient homes
The special credit for builders selling energy-efficient homes expired after 2007. It is back in effect for 2009. You could qualify for a 30 percent tax credit, up to $1,500.
Guidance Issued for deducting Health Insurance of S-Corp Shareholders
The IRS has just issued guidance that will enable most shareholder-employees who own 2% or more of the corporate stock to get the deduction. In order to qualify, the insurance must either be provided in a company plan or reimbursed by the company to the shareholder for an individual policy. The amount paid by the corporation is included in taxable wages on the shareholder-employee’s Form W-2.

Lower Capital Gains Rate Extended
Previously, Congress lowered the tax rate on most dividends and most long-term capital gains to 15%. It was in effect until the year 2008. The new law extends these lower rates until 2010.
Standard business mileage rate decreases for 2010
Business standard mileage rate—The standard business mileage rate for 2009 is 55¢ per mile. The standard business mileage rate for 2010 decreases to 50¢ per mile. (Be sure to keep a good mileage log.) The standard mileage rate for medical and moving expenses is 24¢ for 2009 and 16.5 ¢ per mile for 2010 and the standard mileage rate for charitable deductions is 14¢ for 2009 and 2010. ( IR-2009-111, Rev. Proc. 2009-54.)
What Can I Deduct?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. My rule of thumb is to ask yourself "Did I spend this money to help create future income?" Note: If you have an expense that is partly for business and partly personal, separate the personal part from the business part.
Self-Employment Tax
The maximum amount of self-employment income subject to Social Security taxes increases to $106,800 in 2009 and stays at that limit for 2010. The self-employment tax rate remains 15.3% on earnings to the Social Security maximum and 2.9% after the maximum.

Don't just think about your tax liability once a year. With careful tax planning throughout the year, you will be better aware and possibly reduce that liability.