• PAYROLL TAX CUT for employees extended through February 29, 2012. (Social security tax rate on wages up to $110,100 will be 4.2% rather than 6.2%.)

• ADOPTION TAX CREDIT decreases to $12,650 for adoption of an eligible child.

• SECTION 179 maximum deduction decreases to $139,000, with a phase-out threshold of $560,000.

• STANDARD MILEAGE RATE for business driving remains at 55.5¢ a mile. Rate for medical and moving mileage decreases to 23¢ a mile. Rate for charitable driving remains at 14¢ a mile.

• ESTATE TAX top rate remains at 35%, and the exemption amount increases to $5,120,000. The ANNUAL GIFT TAX EXCLUSION remains at $13,000.

• 401(k) maximum salary deferral increases to $17,000 ($22,500 for 50 and older).

• SIMPLE maximum salary deferral remains at $11,500 ($14,000 for 50 and older).

• IRA contribution limit remains at $5,000 ($6,000 for 50 and older).

• KIDDIE TAX threshold remains at $1,900 and applies up to age 19 (up to age 24 for full-time students).

• NANNY TAX threshold increases to $1,800.

• TRANSPORTATION FRINGE BENEFIT limit decreases to $125 for vehicle/transit passes and increases to $240 for qualified parking.

• SOCIAL SECURITY taxable wage limit increases to $110,100. Retirees under full retirement age can earn up to $14,640 without losing benefits.

• HSA CONTRIBUTION limit increases to $3,100 for individuals and to $6,250 for families. An additional $1,000 may be contributed by those 55 or older.

Thank you for visiting our site. Please call Bill Huml or Ronda Landry with any questions.

As the owner of an S corporation trying to determine a reasonable salary to pay yourself, the question is important – and difficult to answer. The reason: At present, there are no specific regulations, safe-harbor provisions, or minimum wage requirements defining what amount of compensation is “reasonable” for S corporation shareholder-employees.

As a result, when times are tough, the lack of hard and fast rules could tempt you to forego paying yourself a salary and instead take money from your corporation in other ways, such as distributions or loans. Yet that approach might be costly.

Why? While these methods can be legitimate, without the presence of a reasonable salary, it’s possible for distributions and loans that you pay yourself from your S corporation to be reclassified as wages. If that happens, you could end up owing interest and penalties in addition to payroll taxes.

Here are two general guidelines for setting your salary.

* How much you pay key employees. Wages and other amounts you pay unrelated, non-owner staff can indicate a starting point for your own compensation.

* The average salary for your profession or industry. Information from government wage surveys and online benchmarking tools offer compensation trends and information.

Congress is considering new rules concerning certain professional services and the salary paid by S corporations. Give us a call to review your situation.

If you receive an IRS notice, don’t ignore it. Let your tax advisor know about it right away. The problem can be resolved in less time and with less fuss if an experienced professional is involved right from the beginning.

If you convert in 2010, special rules allow you to spread the income over two years (2011 and 2012).   There are many factors to consider when making a conversion and in some situations, paying the tax now would be more beneficial than paying it later.  If you’re interested in this new opportunity or want to understand how it may impact your taxes, contact us for details.

If you itemize deductions on your return, you may elect to take a charitable deduction on your 2009 return for contributions you made for qualified Haiti disaster relief. The contributions must have been made after January 11, 2010, and before March 1, 2010. 

The law also provides another way to substantiate these charitable contributions. Normally, you would need a bank record or written communication from the charity to back up your deduction. However, under the new law if you make a monetary contribution through your cell phone via a text message, you may use your telephone bill to substantiate your contribution. The telephone bill must show the name of the charitable organization, the date of the contribution, and the amount of the contribution.

If you claim a Haiti relief deduction on your 2009 return, you may not also claim it on your 2010 return (which you will be filing in 2011). You should compare the tax benefit of a 2009 deduction or a 2010 deduction. For 2009, higher-income taxpayers have a limit on their total itemized deductions. This limit is eliminated for 2010, so the deduction may actually provide a bigger tax break if taken on your 2010 tax return.

If you need additional information or filing assistance, please contact our office.

The law requires the IRS to make annual inflationary adjustments to a variety of tax numbers. Because 2009 inflation was minimal, most of these numbers will remain unchanged or change only slightly for 2010. Here are some of the key tax numbers you’ll use for your 2010 tax planning.

* ADOPTION TAX CREDIT increases to $12,170 for adoption of an eligible child.

* SECTION 179 maximum deduction decreases to $134,000. Phase-out threshold is $530,000. (It is generally expected that a stimulus law in early 2010 will increase these amounts to the 2009 levels of $250,000 and $800,000.)

* STANDARD MILEAGE RATE for business driving effective January 1, 2010, is 50¢ a mile. Rate for medical and moving mileage is 16.5¢ a mile. Rate for charitable driving remains at 14¢ a mile.

* ESTATE TAX is eliminated for 2010. (Congress is expected to retroactively reinstate the tax effective January 1, 2010.) The ANNUAL GIFT TAX EXCLUSION remains at $13,000.

* 401(k) maximum salary deferral remains at $16,500 ($22,000 for 50 and older).

* SIMPLE maximum salary deferral remains at $11,500 ($14,000 for 50 and older).

* IRA contribution limit remains at $5,000 ($6,000 for 50 and older).

* KIDDIE TAX threshold remains at $1,900. The tax applies up to age 19 (up to age 24 for full-time students).

* NANNY TAX threshold remains at $1,700.

* TRANSPORTATION FRINGE BENEFIT limit for vehicle/transit passes and qualified parking remains at $230.

* SOCIAL SECURITY taxable wage limit remains at $106,800. Retirees under full retirement age can earn up to $14,160 without losing benefits.

* AMERICAN OPPORTUNITY (HOPE) CREDIT maximum remains at $2,500.

* HSA CONTRIBUTION limit increases to $3,050 for individuals and to $6,150 for families. An additional $1,000 may be contributed by those 55 or older.

The biggest change involves tax rates. Current favorable capital gains and ordinary income tax rates are scheduled to expire at the end of 2010. On January 1, 2011, rates will revert to higher pre-2001 levels – unless Congress enacts new legislation. Either way, the potential for increased tax rates in 2011 and beyond calls for advance planning. Two areas in particular need your attention if you want to minimize your taxes.

* Investment planning

For 2010, the maximum long-term capital gains tax rate for most investments and for qualified dividends is 15%. The rate falls to zero if you’re in the 10% or 15% tax brackets for ordinary income. Those two brackets currently apply when you’re married filing jointly and your taxable income is less than $68,000 ($34,000 if you’re single).

After the temporary rules end on December 31, 2010, selling appreciated investments may cost you more in taxes. Yet making sales in the current year to take advantage of lower rates can put you in a higher bracket and affect income-limited deductions and credits.

As an alternative to selling, other forward-looking tax strategies might better suit your overall goals.

For instance, since after this year it’s likely that dividends will once again be taxed at your ordinary income tax rate – which may also be higher than this year’s rates – you could choose to invest in stocks with growth potential instead of those paying current income in the form of dividends.

If tax rates go higher, you might want to consider investing in tax-free municipal bonds. There is an easy way to compare the yield on tax-exempt municipal bonds with the after-tax yield from taxable investments. Subtract your top tax bracket from 100 and divide the tax-exempt interest rate by that number. The result is the equivalent taxable return. In making your investment decision, you’ll want to choose the investment that provides the greater after-tax return.

As you rebalance your portfolio over the course of 2010, you might also consider increasing your investment in mutual funds with low turnover rates. Here again, you’ll reduce taxable capital gains in future years.

Gifts of stock to certain family members in lower tax brackets and donations of appreciated assets to your favorite charity are other viable alternatives for reducing the amount of capital gains tax you’ll pay now and in the future.

* Timing income

When tax rates are expected to increase in the near future, a basic tax planning move is to calculate the effect of shifting income into the current period. This year offers an excellent opportunity to do just that.

Are you aware that you’ll be able to convert your traditional IRA to a Roth during 2010 no matter your income or filing status? The conversion creates taxable income this year, which you can pay in full prior to any tax rate increase.

The benefit to doing this is that later withdrawals will be tax-free. Converting to a Roth also eliminates the need to withdraw required amounts from the account, so you could reduce your income, and the related taxes, in future years.

Another income planning consideration is the effect of minimum distributions from your traditional IRA if you’ll reach age 70½ this year. The rule requiring mandatory withdrawals is reinstated in 2010. However, for the first year in which you’re required to take distributions, you have the option of deferring your initial withdrawal from December 31 until the following April.

Doing so means you’ll have to take two distributions in 2011. Depending on your expected income next year, waiting may not be advantageous.

Planning for future events is an ongoing process, made more important by the big changes coming. For suggestions and advice that will help you save tax dollars, please call for a tax planning review.

With the ever-changing tax law, it’s easy to lose track of what’s deductible from one year to the next. Don’t overlook these deductions available for your 2009 return:

* Sales tax paid on up to $49,500 of the purchase price for a new vehicle.

* Choice of deducting sales taxes paid in 2009 or state and local income taxes paid.

* Educator’s deduction of up to $250 for classroom supplies purchased.

* Deduction for college tuition and fees.

* Additional standard deduction of up to $500 ($1,000 for couples) for real estate taxes paid.

Various restrictions and income limits usually apply.

* IRA contributions

Make contributions as early in 2010 as you can. If you didn’t reach the 2009 contribution maximum last year, designate 2010 contributions as being for 2009 until you reach the dollar limit or April 15. Then you can deduct these contributions on your 2009 return for a quicker tax benefit.

* Check your children’s income

Your children may be required to file a 2009 income tax return, too. Generally, a 2009 return is required if the child had wages of more than $5,700, self-employment earnings over $400, or investment income (such as dividends, interest, or capital gains) over $950. If your child had both earned and investment income, other thresholds apply. Also, if your child is due a refund, a return must be filed to get it.

* Charity recordkeeping

The law has strict recordkeeping requirements for deducting charitable contributions. For cash contributions under $250, you must have a bank record such as a cancelled check, credit card record, or receipt from the charity. For donations of $250 or more, a receipt from the charity must be obtained before filing your return.

* Your tax refund

If you’re among the many taxpayers who get a large tax refund this year, do yourself two favors: (1) invest the refund instead of spending it, and (2) adjust your withholding for 2010 so your money can be invested for you rather than the government.

* Extension request

For most people, the deadline for filing a 2009 individual income tax return is April 15, 2010. If you cannot file your return on time, be sure to file an extension request with the IRS by this date. You must pay any tax due by the April 15 deadline to avoid penalties and interest, but an extension gives you until October 15, 2010, to file your return.

The Worker, Homeownership, and Business Assistance Act of 2009 extends the deadline for qualifying home purchases from Nov. 30, 2009, to April 30, 2010. Additionally, if a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase.

The maximum credit amount remains at $8,000 for a first-time homebuyer –– that is, a buyer who has not owned a primary residence during the three years up to the date of purchase.

But the new law also provides a “long-time resident” credit of up to $6,500 to others who do not qualify as “first-time homebuyers.” To qualify this way, a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.

For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns.

A new version of Form 5405, First-Time Homebuyer Credit, will be available in the next few weeks. A taxpayer who purchases a home after Nov. 6 must use this new version of the form to claim the credit. Likewise, taxpayers claiming the credit on their 2009 returns, no matter when the house was purchased, must also use the new version of Form 5405. Taxpayers who claim the credit on their 2009 tax return will not be able to file electronically but instead will need to file a paper return.

A taxpayer who purchased a home on or before Nov. 6 and chooses to claim the credit on an original or amended 2008 return may continue to use the current version of Form 5405.

Income Limits Rise

The new law raises the income limits for people who purchase homes after Nov. 6. The full credit will be available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000, or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

For homes purchased prior to Nov. 7, 2009, existing MAGI limits remain in place. The full credit is available to taxpayers with MAGI up to $75,000, or $150,000 for joint filers. Those with MAGI between $75,000 and $95,000, or $150,000 and $170,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

New Requirements

Several new restrictions on purchases that occur after Nov. 6 go into effect with the new law:

* Dependents are not eligible to claim the credit.
* No credit is available if the purchase price of a home is more than $800,000.
* A purchaser must be at least 18 years of age on the date of purchase.

For Members of the Military

Members of the Armed Forces and certain federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and still qualify for the credit. An eligible taxpayer must buy or enter into a binding contract to buy a home by April 30, 2011, and settle on the purchase by June 30, 2011.

In February, the American Recovery and Reinvestment Act provided an expanded NOL carryback, but it was limited to small businesses with average gross receipts of $15 million or less. The new law extends the NOL carryback to larger businesses, including life insurance companies that incurred a loss from operations, but excludes any company that received payments under the Troubled Asset Relief Program.

Taxpayers under the procedure may elect to carry back an NOL for a period of three, four or five years, or a loss from operations for four or five years, to offset taxable income in those preceding taxable years. An NOL or loss from operations carried back five years may offset no more than 50 percent of a taxpayer’s taxable income in that fifth preceding year. This limitation does not apply to the fourth or third preceding year.

The procedure applies to taxpayers that incurred an NOL or a loss from operations for a taxable year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010.