Can you believe this is week four of tax season? We've been hard at work gearing up for another successful tax filing season! We have been busy updating our tax software, rolling 2005 data into the 2006 tax software, setting up 2007 files, preparing W-2's and 1099's, reconciling clients' December books and preparing Tax Organizers. Today, we will be mailing personalized tax organizers to our 1040 clients. It is our goal to have all tax returns and extensions completed by 5:00 PM on Saturday, April 14th. In order to accomplish this goal, we ask that you provide us with your tax information no later than March 15th. This will allow time to resolve any questions that may arise during the preparation of your return. If we do not have complete information by April 1st, it may be necessary to extend your return. If you need more time to assemble your tax information or simply prefer to file your return on your own time table, we can help you by obtaining an extension. The IRS permits you to automatically extend the filing due date of your return for six months. To avoid interest and penalty charges you should have your tax paid by April 15th. To reduce the hassle and stress surrounding the extended due date (October 15), we commit to completing your return within 30 days of receiving complete information. You choose your due date! If you want your return completed before you leave for vacation July 4th, just provide us the information in early June. We'll make sure your return is filed on a timetable that suits you. We always look forward to hearing from our clients. If there is anything else we can do to help you this season, just give us a call!

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At the ripe old age of 32, individual retirement accounts (IRAs) are proving quite popular. According to recent research, individuals had $3 trillion in IRA investments at the end of 2003.* That's a significant amount — and some of it is likely to pass from the IRA owners to their beneficiaries. If you inherit a traditional IRA, the choices you make will determine your distribution options and the resulting tax consequences. Surviving Spouses If you are the sole designated beneficiary of your spouse's IRA, you have three basic choices. One is to simply leave the account as it is. You will be able to withdraw funds without penalty, although income tax will be due on the distributions (except for amounts that represent a return of nondeductible contributions). Annual distributions of a minimum amount will be required. They can be delayed until your spouse would have reached age 70½, if desired. Your other choices are to either roll over the IRA into a new IRA in your own name, or elect to treat the IRA as your own. In either case, you can name your own beneficiaries, and you won't be required to take minimum distributions (and pay the resulting income taxes) until after you reach age 70½. However, if you make withdrawals before age 59½, they may be subject to a 10% early withdrawal penalty. Nonspouse Beneficiaries If you inherit an IRA from someone other than your spouse, the choices and tax consequences are a little different. You can leave the IRA in the deceased owner's name, but you can't postpone distributions. You generally must begin taking annual minimum distributions, spread over your life expectancy, right away. (In certain circumstances, the entire account must be distributed within five years.) And, of course, income taxes will be due on the distributions. Beginning in 2007, you may also choose to roll over the IRA into an IRA in your own name. Unlike spouse-beneficiaries who may postpone distributions, however, you will generally have to begin taking distributions (and paying income tax on them) immediately. * "The Individual Retirement Account at Age 30: A Retrospective," Investment Company Institute Perspective (February 2005), Investment Company Institute®.
Given a choice between deducting 100% of an expense on their current year's tax return or spreading the deduction out over several years, taxpayers in most situations would choose the former. So it's no surprise that taxpayers who own rental properties and commercial buildings want to distinguish currently deductible repair and maintenance expenses from amounts that must be capitalized and depreciated as property improvements. Much To Gain Where large sums are involved, the stakes can be high. The depreciation period for a residential rental property is 27.5 years. It's 39 years for a nonresidential building. Taking into account the time value of money, a taxpayer has much to gain by classifying expenditures as repair and maintenance expenses whenever the tax rules permit. Fewer Controversies? The repair versus improvement issue has been a frequent source of controversy between taxpayers and the IRS. Last August, the IRS issued proposed regulations that address this issue, among others. Although the regulations won't take effect until after they are finalized, they reveal current IRS thinking. Here's a brief overview. Building construction or erection. Under the proposed regulations, amounts paid to construct or erect property are treated as production costs that have to be capitalized if the property has a useful life extending substantially beyond the taxable year. Improvements. Amounts paid to improve a unit of property would have to be capitalized. The proposed regulations define "improvement" as a material increase in value, which would occur when the work is performed before the unit of property is placed in service or when the amount paid: Ameliorates a condition or defect that existed before the property was acquired; Adapts the property to a new or different use; Results in a betterment or material addition to the property; or, Results in a material increase in capacity, productivity, efficiency, or quality of output. Cost segregation. A building and its structural components generally are considered one unit of property under the regulations. However, if the cost of a building component (an electrical system, for example) is segregated so that the component can be depreciated more quickly than the building itself, the component is treated as a separate unit of property in determining whether the amount spent on an overhaul results in a material increase in value, thus requiring capitalization. Repair allowance method. At their option, taxpayers could treat most amounts paid for repairing, maintaining, or improving property as deductible costs to the extent they don't exceed a repair allowance specified for that type of property. Amounts in excess of the allowance would have to be capitalized. Certain costs would be ineligible for the new method. Asset Example MACRS Recovery Period Repair Allowance (% of asset cost) Diesel Tractors 3 16.50% Computers, Automobiles and Trucks 5 10.00% Equipment, Office Furniture, Fixtures 7 7.14% Residential Rental Property 27.5 1.82% Nonresidential Real Property 39 1.28%
The beneficiary of a life insurance policy can generally receive the policy proceeds free of federal income taxes. Now, the Pension Protection Act of 2006 (PPA) has changed the rules regarding employer-owned life insurance. New approach. Under PPA, employers will have to report — as ordinary income — life insurance proceeds received from policies issued after August 17, 2006, except to the extent of the amount paid in premiums. But there are ways that employers can retain income-tax free status for insurance proceeds under certain circumstances. New requirements. First of all, the employer must meet certain "notice and consent" requirements. Essentially, before a policy can be issued on an employee, that employee must be notified in writing that the employer intends to insure the employee's life. The employee must provide written consent to being insured, and the employee must also be informed that the employer/policyholder will be named a beneficiary of any death benefit. There is also an IRS filing requirement. When proceeds won't be taxed. Assuming all requirements are met, policy proceeds will not be taxed if: The insured was an employee at any time during the 12-month period before death; The insured was a director or "highly compensated employee or individual" at the time the coverage was issued; The employer uses the benefits to buy shares (or a capital or profits interest) in the company from a member of the insured's family, an individual designated beneficiary (other than the employer), a trust established for the family member or beneficiary, or the insured's estate; or, The proceeds are paid to the family member, beneficiary, trust, or estate.
If you use part of your residence as a "home office" to perform work-related activities, you may be entitled to claim a home office deduction on your income-tax return. The deduction can be quite valuable under the right circumstances, but the rules regarding the deduction are strict. The IRS recently reminded taxpayers about the distinction between personal and business expenses and the requirements for the deduction. What Expenses Are Deductible? Mortgage interest, real estate taxes, insurance, utilities, and various other expenses related to buying or renting a personal residence and repairing and maintaining the home usually cannot be deducted as business expenses. Despite this general rule, a home office deduction may be available if you use a portion of your home for business purposes. But only the business portion of your expenses can qualify for the deduction, and certain limits apply. Exclusive and Regular Use You may be eligible for a deduction if you use a portion of your home as your principal place of business or as a place to meet or deal with clients, customers, or patients in the normal course of business. A deduction also may be available if your work space is located in a separate structure that is not attached to your home. In any of these situations, the space must be used exclusively and regularly for business purposes. Example. Milt, an attorney, uses the den in his home to write legal briefs and perform other activities related to his law practice. His family also uses the den for watching TV and entertaining. Because the den is not used exclusively in Milt's profession, he cannot claim a business deduction for its use. Note that the exclusive-use test does not apply to space used for the storage of inventory or product samples. And, if you are an employee rather than self-employed, you have to meet additional requirements for the deduction: Your use of the home office must be for your employer's convenience, and your employer cannot rent the space from you. Calculating the Deduction Assuming you meet the tests for claiming a deduction, the next step is to determine the deductible amount. Essentially, it will be based on the percentage of your home that is used for business. Two methods are commonly used to calculate the business percentage. Under one method, the area of the home used for the business is simply divided by the home's total area. Example. Paula, a freelance photographer, uses a 200-square-foot bedroom in her apartment as her office. If the apartment is 1,000 square feet, the business-use percentage would be 20%. Assuming Paula has met the requirements for a home office deduction, she can deduct 20% of her rent, electric bills, and renter's insurance premiums as a business expense. The second approach divides the number of rooms used for business by the total number of rooms in the house, assuming all of them are about the same size. Thus, if a home has 10 rooms of equivalent size and one room is used as a home office, the business-use percentage would be 10%. IRS Warning Taxpayer compliance in this area is of concern to the IRS, and "playing by the rules" will help ensure that a home office deduction can withstand IRS scrutiny.
One topic that sometimes doesn't get enough attention early in the divorce process is the matter of alimony. Whether a divorcing couple wants payments from one former spouse to the other to be characterized as alimony — which will be deductible by the paying spouse and taxable to the recipient — should be near the top of the list of considerations dealt with in divorce negotiations. What Constitutes Alimony? Essentially, the law now provides that payments to a former spouse will be considered alimony only if they: Are made in cash or by check, Are received by (or on behalf of) a spouse under a divorce decree or separation agreement, and Are not required to continue after the recipient spouse dies. In addition, the former spouses cannot be members of the same household when the payments are made. Voluntary payments will not qualify as alimony and might even be considered taxable gifts. Payments to a third party rather than a former spouse may be considered alimony under appropriate circumstances. Examples of payments that could fall in this category include payments of rent, a mortgage, utilities, and medical costs for a former spouse. Child Support Payments for child support are not deductible by the payor nor are they includable in the income of the recipient. Couples should be very clear when labeling payments as alimony or child support in a divorce agreement. Front-loading of Alimony The tax law includes special "front-loading" rules to prevent payments from being deducted as alimony when they are actually disguised property settlements. These rules provide for the recapture (as income) of "excess amounts" that have been treated as deductible alimony, with a corresponding deduction by the recipient who previously included the amount in income. Taxes Matter Depending on the tax brackets of the divorcing spouses and the amounts involved, the question of the classification of payments as alimony can have a significant effect on the future finances of the individuals involved.