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July 2011 Newsletter

Our regularly updated newsletter provides timely articles to help you achieve your financial goals.

Feature Articles

Tax Tips

Tax Due Dates

 
This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
 

How to Save for College Tax-Free

College tuition and fees are on the rise. Shockingly, the cost for 4-year private schools now tops $36,000 per year on average.
 
But the investment is well worth it. According to the U.S. Census Bureau, individuals with a bachelor's degree earn more than double those with just a high school diploma.
 
The two most popular college savings programs are 529 plans and Coverdell Education Savings Accounts. Whichever you choose, be sure to start when your child is young. The sooner you begin, the less money you will have to put away each year.
  
Example: Suppose you have one child, age six months, and you estimate that you'll need $120,000 to finance his college education 18 years from now. If you start putting away money immediately, you'll need to save $3,500 per year for 18 years (assuming an after-tax return of 7%). On the other hand, if you put off saving until your son is six years old, you'll have to save almost double that amount every year for twelve years.
 
  
Financial Calculator: College Savings Planner
Use this calculator to help develop and fine-tune your child's college education savings plan.

 

How Much Will College Cost?

Based on the survey completed for the 2010 Trends in College Pricing, the average cost for tuition, fees, and room and board for 2010-11 was:
  • $16,140 per year for 4-year public (in state) colleges and universities.
    This is an increase of 6.1% from 2009-10 findings.
  • $36,993 per year for 4-year private colleges and universities.
    This is an increase of 4.3% from 2009-10 findings.
It should be noted that, on average, full-time students receive $16,000 of financial aid per year in the form of grants and tax benefits for private 4-year institutions, $6,100/yr for public 4-year institutions, and $3,400/yr for public 2-year institutions.

 

Saving with 529 Qualified Tuition Plans

Section 529 plans, also known as Qualified Tuition Programs, are the best choice for many families.
 
Every state now has a program allowing persons to prepay for future higher education, with tax relief.
 
There are two basic plan types, with many variations:
1.    The Prepaid Education Arrangement. You essentially buy future education at today's costs, by buying education credits or certificates. This is the older type of program, and it tends to limit the student's choice of schools within the state.
2.    Education Savings Accounts. You contribute to an account earmarked for future higher education.
Tip: When approaching state programs, one must distinguish between what the federal tax law allows and what an individual state's program may impose.
 
You may open a Section 529 plan in any state. But when buying prepaid tuition credits (less popular than savings accounts), you often need to apply the credits to a specific college or group of colleges.
 
Unlike certain other tax-favored higher education programs, such as the Hope and Lifetime Learning Credits, federal tax law doesn't limit the benefit only to tuition. Room, board, lab fees, books, and supplies can be purchased with funds from your 529 Savings Account. (Individual state programs could be narrower.)
 
The key parties to the program are the Designated Beneficiary, the student-to-be, and the Account Owner, who is entitled to choose and change the beneficiary and who is normally the principal contributor to the program.
 
There are no income limits on who may be an account owner. There's only one designated beneficiary per account. Thus, a parent with three college-bound children might set up three accounts. (Some state programs don't allow the same person to be both beneficiary and account owner.)

Tax Rules Relating to 529 College Savings Plans

Income Tax. Contributions made by the account owner or other contributor are not deductible for federal income tax purposes. Earnings on contributions grow tax-free while in the program.
 
Distributions from the fund are tax-free to the extent used for qualified higher education expenses.
 
Qualified expenses include tuition, required fees, books, supplies, equipment, and special needs services. For someone who is at least a half-time student, room and board also qualify.
  
Tip: In 2009, the American Recovery and Reinvestment Act (ARRA) added expenses for computer technology/equipment or Internet access to the list of qualifying expenses. Software designed for sports, games, or hobbies does not qualify, unless it is predominantly educational in nature. In general, however, expenses for computer technology are not qualified expenses for the American Opportunity Credit, Hope Credit, Lifetime Learning Credit, or tuition and fees deduction.
  
Gift Tax. For gift tax purposes, contributions are treated as completed gifts even though the account owner has the right to withdraw them - thus they qualify for the up-to-$13,000 annual gift tax exclusion. One contributing more than $13,000 may elect to treat the gift as made in equal installments over that year and the following 4 years, so that up to $65,000 can be given tax-free in the first year.
  
Estate Tax. Funds in the account at the designated beneficiary's death are included in the beneficiary's estate - an odd result, since those funds may not be available to pay the tax.
 
Funds in the account at the account owner's death are not included in the owner's estate, except for a portion thereof where the gift tax exclusion installment election is made for gifts over $13,000. For example, if the account owner made the election for a gift of $65,000 in 2011, a part of that gift is included in the estate if he or she dies within 5 years.
  
Tip: A Section 529 program can be an especially attractive estate-planning move for grandparents. There are no income limits, and the account owner giving up to $65,000 avoids gift tax and estate tax by living 5 years after the gift, yet has the power to change the beneficiary.
  
State Tax. State tax rules are all over the map. Some reflect the federal rules, some quite different rules. For specifics of each state's program, see http://www.collegesavings.org.

 

Saving with Coverdell Education Savings Accounts

The total contributions for the beneficiary of a Coverdell Education Savings Account (ESA) cannot be more than $2,000 in any year, no matter how many accounts have been established. (A beneficiary is someone who is under age 18 or is a special needs beneficiary.)
 
The beneficiary will not owe tax on the distributions if they are less than a beneficiary's qualified education expenses at an eligible institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.
 
Here are some things to remember about distributions from Coverdell accounts:
  • Distributions are tax-free as long as they are used for qualified education expenses, such as tuition, books, and fees.
  • There is no tax on distributions if they are for an eligible educational institution. This includes any public, private, or religious school that provides elementary or secondary education as determined under state law.
  • The Hope and Lifetime Learning Credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
  • If the distribution exceeds education expenses, a portion will be taxable to the beneficiary and will be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

Professional Guidance

Considering the wide differences among state plans, federal and state tax issues, and the dollar amounts at stake, please call us before getting started with any type of college savings plan.
 
 

Protecting Financial Records from Wild Weather

With the unsettled weather to date in 2011 and hurricane season now under way, individuals and businesses should safeguard their tax records by taking a few simple steps.
  
Create a Backup Set of Records Electronically. Taxpayers should keep a set of backup records in a safe place. The backup should be stored away from the original set.
 
Keeping a backup set of records - including, for example, bank statements, tax returns, insurance policies, etc. - is easier now that many financial institutions provide statements and documents electronically, and much financial information is available on the Internet. Even if the original records are provided only on paper, they can be scanned, which converts them to a digital format. Once documents are in electronic form, taxpayers can download them to a backup storage device, like an external hard drive, or burn them onto a CD or DVD.
 
Taxpayers should also consider online backup, which is the only way to ensure data is fully protected. With online backup, files are stored in another region of the country - so if a hurricane or other natural disaster occurs, documents remain safe.
  
Document Valuables. Another step a taxpayer can take to prepare for disaster is to photograph or videotape the contents of his or her home, especially items of higher value. Call us for more help compiling a room-by-room list of belongings.
 
A photographic record can help prove the market value of items for insurance and casualty loss claims. Photos should be stored with a friend or family member who lives outside the area, or in the taxpayer's online backup solution.
  
Update Emergency Plans. Emergency plans should be reviewed annually. Personal and business situations change over time, as do preparedness needs. When employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.
  
Check on Fiduciary Bonds. Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.
  
We're Here to Help. If disaster strikes, call us right away. We can help you get back copies of tax returns and all attachments, including Forms W-2.
 
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Getting a Tax Credit for Your Honey Do List

Summer is a great time to tackle home improvements - and, happily, it's not too late to receive a tax credit when making your home more energy efficient. Although significantly reduced from 2010 levels, energy-efficiency tax credits are still available in 2011.
 
The home energy credit applies to energy-related improvements, such as adding insulation, energy-efficient exterior windows, and energy-efficient heating and air-conditioning systems to an existing home that is your primary residence. The tax credit is not available on rental properties or new construction.
 
The tax credit is 10% of the cost of the home improvement, up to a maximum of $500. There is a lifetime limit of $500, so if you took a $500 credit in 2010, you do not qualify in 2011. The tax credit expires December 31, 2011.
 
The credit on some items have been reduced below $500:
-        Windows limited to $200; Energy Star qualification.
-         Air conditioners, water heaters, and biomass stoves limited to $300.
-         Furnace and boiler improvements limited to $150 and must meet certain standards.
-         $50 credit for advanced main air circulating fans.
 
Further, the Residential Energy Efficient Property Credit is a nonrefundable energy tax credit that helps individual taxpayers pay for certain alternative-energy equipment, such as solar hot water heaters, geothermal heat pumps, and wind turbines. The maximum amounts for a credit equal 30% of the cost of qualified property, with no upper limit. This credit expires on December 31, 2016, and is available for new and existing homes, whether primary or second. Rentals do not qualify.
 
We're happy to help you sort out the tax credits available for your home improvements this summer. Just give us a call or send us an email.
 
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2011 IRS Mileage Rates Changed for July 1, 2011

The IRS standard mileage rate for the final six months of 2011 was increased as a result of the recent increase in gasoline prices. The IRS usually only adjusts this rate annually in the fall.
 
The standard mileage rate was increased by 4.5 cents for business, medical and moving travel for the last six months of 2011. Charitable travel remained unchanged at 14 cents per mile as this rate is set by statue, not the IRS.
 
The standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
 
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
  
Mileage Rates for July 1, 2011 to December 31, 2011 are:
-         Business: 55.5 cents per mile (Compared to first six months at 51 cents per mile).
-         Medical: 23.5 cents per mile (Compared to first six months of 2011 at 19 cents per mile).
-         Moving: 23.5 cents per mile (Compared to first six months of 2011 at 19 cents per mile).
-         Charitable: Unchanged at 14 cents per mile.

 

Do You Need to Pay Estimated Taxes?

What Is Estimated Tax? Estimated tax is the method used to pay tax on income that is not subject to withholding, such as self-employment income, interest, dividends, rents, alimony, etc. In addition, if you do not elect voluntary withholding, you should make estimated payments on other taxable income, such as unemployment income and the taxable portion of Social Security benefits.
  
Who Needs to Pay Estimated Tax? In most cases, you must make estimated payments if you expect to owe at least $1,000 in tax in 2011 and you expect your withholding and credits to be less than the smaller of:
1.    90% of the tax shown on your 2011 tax return, or
2.    100% of the tax shown on your 2010 tax return. Note that exceptions apply for higher income taxpayers (see below). Further, if you did not file a 2010 tax return or if your 2010 return did not cover the full 12 months, the 100% rule does not apply.

 

Special Rules

Higher Income Taxpayers. If your adjusted gross income for 2010 was more than $150,000 ($75,000 if your filing status for 2010 is married filing separately), substitute 110% for 100% in Rule 2. This rule does not apply to farmers or fishermen.
  
Farmers and Fishermen. If at least two-thirds of your gross income for 2010 or 2011 is from farming or fishing, your required annual payment is the smaller of:
    • 66% (.6667) of your total tax for 2011, or
    • 100% of the total tax shown on your 2010 return. (Your 2010 tax return must cover all 12 months.)

Questions?

Don't hesitate to contact us if you're not sure whether you need to pay estimated tax. We'll evaluate your situation and let you know.
 
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After I Do - Best Filing Status for Married Couples

Summer is wedding season. If you are getting married this summer, remember to give some attention to your 2011 tax filing status.
 
You have two filing status options: married filing jointly, or married filing separately.

 

Married Filing Jointly

You can choose married filing jointly as your filing status if you are married and both you and your spouse agree to file a joint return. On a joint return, you report your combined income and deduct your combined allowable expenses. You can file a joint return even if one of you had no income or deductions.
 
According to the IRS, if you and your spouse decide to file a joint return, your tax may be lower than your combined tax for the other filing statuses. Also, your standard deduction (if you do not itemize deductions) may be higher, and you may qualify for tax benefits that do not apply to other filing statuses.
 
We recommend that if you and your spouse each have income, you figure your tax both on a joint return and on separate returns (using the filing status of married filing separately). You can choose the method that gives you the lower combined tax.
  
Joint Responsibility. Both of you may be held responsible, jointly and individually, for the tax and any interest or penalty due on your joint return. One spouse may be held responsible for all the tax due even if all the income was earned by the other spouse.

 

Married Filing Separately

You can choose married filing separately as your filing status if you are married. This filing status may benefit you if you want to be responsible only for your own tax or if it results in less tax than filing a joint return.

 

We Can Help

Give us a call if you're unsure of which status to file under.

 

Deducting Your Home Office

If you use a portion of your home for business purposes, you may be able to take a home office deduction whether you are self-employed or an employee. Expenses that you may be able to deduct include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, painting, and repairs.
 
You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively
o    as your principal place of business for any trade or business, or
o    as a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business.
Generally, the amount you can deduct depends on the percentage of your home that you use for business. Your deduction will be limited if your gross income from your business is less than your total business expenses.
 
If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it.
 
The rules vary depending on whether you're self-employed, a qualified daycare provider, or storing business inventory or product samples. If you are an employee, you have additional requirements to meet. The regular and exclusive business use must be for the convenience of your employer.
 
Call us if you want to explore deducting for the business use of your home.

 

Got a Letter from the IRS? What You Need to Know

The Internal Revenue Service sends millions of letters and notices to taxpayers every year. Here are eight things taxpayers should know about IRS notices - just in case one shows up in your mailbox.
1.    First of all, don't panic. Many of these letters can be dealt with simply and painlessly.
2.    The IRS might send you a notice for a number of reasons. They may request payment of taxes, notify you of changes to your account, or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3.    Each letter and notice offers specific instructions on how to satisfy the inquiry.
4.    If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5.    If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.
6.    If you do not agree with the correction the IRS made, it is important that you respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper-left-hand corner of the notice. Allow at least 30 days for a response.
7.    Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper-right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call.
8.    Be sure to keep copies of any correspondence.
If you get an IRS notice, follow these guidelines. If you need further guidance, just give us a call. We'll help you with next steps.
 
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Tax Due Dates for July 2011

July 11
Employees Who Work for Tips - If you received $20 or more in tips during June, report them to your employer. You can use Form 4070.
July 15
Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in June.
  
Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in June.
August 1
Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the second quarter of 2011. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until August 10 to file the return.
  
Employers - Federal unemployment tax. Deposit the tax owed through June if more than $500.
  
Employers - If you maintain an employee benefit plan, such as a pension, profit sharing, or stock bonus plan, file Form 5500 or 5500-EZ for calendar year 2010. If you use a fiscal year as your plan year, file the form by the last day of the seventh month after the plan year ends.
  
Certain Small Employers - Deposit any undeposited tax if your tax liability is $2,500 or more for 2011 but less than $2,500 for the second quarter.
 
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