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The IRS has provided details clarifying the federal tax status involving special payments made by 21 states in 2022. Taxpayers in many states will not need to report these payments on their 2022 tax returns.

The IRS has provided details clarifying the federal tax status involving special payments made by 21 states in 2022. Taxpayers in many states will not need to report these payments on their 2022 tax returns.

General welfare and disaster relief payments

If a payment is made for the promotion of the general welfare or as a disaster relief payment, for example related to the COVID 19 pandemic, it may be excludable from income for federal tax purposes under the General Welfare Doctrine or as a Qualified Disaster Relief Payment. Payments from the following states fall in this category and the IRS will not challenge the treatment of these payments as excludable for federal income tax purposes in 2022:

• California,

• Colorado,

• Connecticut,

• Delaware,

• Florida,

• Hawaii,

• Idaho,

• Illinois,

• Indiana,

• Maine,

• New Jersey,

• New Mexico,

• New York,

• Oregon,

• Pennsylvania, and

• Rhode Island.

Alaska is in this group only for the supplemental Energy Relief Payment received in addition to the annual Permanent Fund Dividend. Illinois and New York issued multiple payments and in each case one of the payments was a refund of taxes to which the above treatment applies, and one of the payments is in the category of disaster relief payment. A list of payments to which the above treatment applies is available on the IRS website.

Refund of state taxes paid

If the payment is a refund of state taxes paid and recipients either claimed the standard deduction or itemized their deductions but did not receive a tax benefit (for example, because the $10,000 tax deduction limit applied) the payment is not included in income for federal tax purposes. Payments from the following states in 2022 fall in this category and will be excluded from income for federal tax purposes unless the recipient received a tax benefit in the year the taxes were deducted.

• Georgia,

• Massachusetts,

• South Carolina, and

• Virginia

Other Payments

Other payments that may have been made by states are generally includable in income for federal income tax purposes. This includes the annual payment of Alaska’s Permanent Fund Dividend and any payments from states provided as compensation to workers.

The IRS intends to change how it defines vans, sports utility vehicles (SUVs), pickup trucks and “other vehicles” for purposes of the Code Sec. 30D new clean vehicle credit. These changes are reflected in updated IRS Frequently Asked Questions (FAQs) for the new, previously owned and commercial clean vehicle credits.

The IRS intends to change how it defines vans, sports utility vehicles (SUVs), pickup trucks and “other vehicles” for purposes of the Code Sec. 30D new clean vehicle credit. These changes are reflected in updated IRS Frequently Asked Questions (FAQs) for the new, previously owned and commercial clean vehicle credits.

Clean Vehicle Classification Changes

For a vehicle to qualify for the new clean vehicle credit, its manufacturer’s suggested retail price (MSRP) cannot exceed:

• $80,000 for a van, SUV or pickup truck; or

• $55,000 for any other vehicle.

In December, the IRS announced that proposed regulations would define these vehicle types by reference to the general definitions provided in Environmental Protection Agency (EPA) regulations in 40 CFR 600.002 (Notice 2023-1).

However, the IRS has now determined that these vehicles should be defined by reference to the fuel economy labeling rules in 40 CFR 600.315-08. This change means that some vehicles that were formerly classified as “other vehicles” subject to the $55,000 price cap are now classified as SUVs subject to the $80,000 price cap.

Until the IRS releases proposed regulations for the new clean vehicle credit, taxpayers may rely on the definitions provided in Notice 2023-1, as modified by today’s guidance. These modified definitions are reflected in the Clean Vehicle Qualified Manufacturer Requirements page on the IRS website, which lists makes and models that may be eligible for the clean vehicle credits.

Expected Definitions of Vans, SUVs, Pickup Trucks and Other Vehicles

The EPA fuel economy standards establish a large category of nonpassenger vehicles called “light trucks.” Within this category, vehicles are defined largely by their gross vehicle weight ratings (GVWR) as follows:

• Vans, including minivans

• Pickup trucks, including small pickups with a GVWR below 6,000 pounds, and standard pickups with a GVWR between 6,000 and 8,500 pounds

• SUVs, including small SUVs with a GVWR below 6.000 pounds, and standard SUVs with a GVWR between 6,000 and 10,000 pounds

• Other vehicles (passenger automobiles) that, based on seating capacity of interior volume, are classified as two-seaters; mini-compact, subcompact, compact, midsize, or large cars; and small, midsize, or large station wagons.

However, the EPA may determine that a particular vehicle is more appropriately placed in a different category. In particular, the EPA may determine that automobiles with GVWR of up to 8,500 pounds and medium-duty passenger vehicles that possess special features are more appropriately classified as “special purpose vehicles.” These special features may include advanced technologies, such as battery electric vehicles, fuel cell vehicles, plug-in hybrid electric vehicles and vehicles equipped with hydrogen internal combustion engines.

FAQ Updates

The IRS also updated its frequently asked questions (FAQs) page for the Code Sec. 30D new clean vehicle credit, the Code Sec. 25E previously owned vehicle credit and the Code Sec. 45W qualified commercial clean vehicles credit. In addition to incorporating the new definitions discussed above, these updates:

• Define “original use” and "MSRP;"

• Describe the information a seller must provide to the taxpayer and the IRS;

• Clarify that the MSRP caps apply to a vehicle placed in service (delivered to the taxpayer) in 2023, even if the taxpayer purchased it in 2022; and

• Explain what constitutes a lease.

Effect on Other Documents

Notice 2023-1 is modified. Taxpayers may rely on the definitions provided in Notice 2023-1, as modified by Notice 2023-16, until the IRS releases proposed regulations for the new clean vehicle credit.

The IRS established the program to allocate environmental justice solar and wind capacity limitation (Capacity Limitation) to qualified solar and wind facilities eligible for the Low-Income Communities Bonus Credit Program component of the energy investment credit.

The IRS established the program to allocate environmental justice solar and wind capacity limitation (Capacity Limitation) to qualified solar and wind facilities eligible for the Low-Income Communities Bonus Credit Program component of the energy investment credit. The IRS also provided:

• initial guidance regarding the overall program design ,

• the application process, and

• additional criteria that will be considered in making the allocations.

After the 2023 allocation process begins, the Treasury Department and IRS will monitor and assess whether to implement any modifications to the Low-Income Communities Bonus Credit Program for calendar year 2024 allocations of Capacity Limitation.

Facility Categories, Capacity Limits, and Application Dates

The program establishes four facilities categories and the capacity limitation for each:

The IRS anticipates applications will be accepted for Category 3 and Category 4 facilities in the third quarter of 2023. Applications for Category 1 and Category 2 facilities will be accepted thereafter. The IRS will issue additional guidance regarding the application process and facility eligibility.

The program will also incorporate additional criteria in determining how to allocate the Capacity Limitation reserved for each facility category among eligible applicants. These may include a focus on facilities that are owned or developed by community-based organizations and mission-driven entities, have an impact on encouraging new market participants, provide substantial benefits to low-income communities and individuals marginalized from economic opportunities, and have a higher degree of commercial readiness.

Finally, only the owner of a facility may apply for an allocation of Capacity Limitation. Facilities placed in service prior to being awarded an allocation of Capacity Limitation are not eligible to receive an allocation. The Department of Energy (DOE) will provide administration services for the Low-Income Communities Bonus Credit Program. An allocation of an amount of capacity limitation is not a determination that the facility will qualify for the energy investment credit or the increase in the credit under the Low-Income Communities Bonus Credit Program.

The IRS announced a program to allocate $10 billion of credits for qualified investments in eligible qualifying advanced energy projects (the Code Sec. 48C(e) program). At least $4 billion of these credits may be allocated only to projects located in certain energy communities.

The IRS announced a program to allocate $10 billion of credits for qualified investments in eligible qualifying advanced energy projects (the Code Sec. 48C(e) program). At least $4 billion of these credits may be allocated only to projects located in certain energy communities.

The guidance announcing the program also:

• defines key terms, including qualifying advanced energy project, specified advanced energy property, eligible property, the placed in service date, industrial facility, manufacturing facilities, and recycling facility;

• describes the prevailing wage and apprenticeship requirements, along with remediation options; and

• sets forth the program timeline and the steps the taxpayer must follow.

Application and Certification Process

For Round 1 of the Section 48C(e) program, the application period begins on May 31, 2023. The IRS expects to allocate $4 billion in credit in this round, including $1.6 billion to projects in energy communities.

The taxpayer must submit a concept paper detailing the project by July 31, 2023. The taxpayer must also certify under penalties of perjury that it did not claim a credit under several other Code Sections for the same investment.

Within two years after the IRS accepts an allocation application, the taxpayer must submit evidence to the DOE to establish that it has met all requirements necessary to commence construction of the project. DOE then notifies the IRS, and the IRS certifies the project.

Taxpayers generally submit their papers through the Department of Energy (DOE) eXHANGE portal at https://infrastructure-exchange.energy.gov/. The DOE must recommend and rank the project to the IRS, and have a reasonable expectation of its commercial viability.

Energy Communities and Progress Expenditures

The guidance also provides additional procedures for energy communities and the credit for progress expenditures.

For purposes of the minimum $4 billion allocation for projects in energy communities, the DOE will determine which projects are in energy community census tracts. Additional guidance is expected to provide a mapping tool that applicants for allocations may use to determine if their projects are in energy communities.

Finally, the guidance explains how taxpayers may elect to claim the credit for progress expenditures paid or incurred during the tax year for construction of a qualifying advanced energy project. The taxpayer cannot make the election before receiving its certification letter.

The IRS has released new rules and conditions for implementing the real estate developer alternative cost method. This is an optional safe harbor method of accounting for real estate developers to determine when common improvement costs may be included in the basis of individual units of real property in a real property development project held for sale to determine the gain or loss from sales of those units.

The IRS has released new rules and conditions for implementing the real estate developer alternative cost method. This is an optional safe harbor method of accounting for real estate developers to determine when common improvement costs may be included in the basis of individual units of real property in a real property development project held for sale to determine the gain or loss from sales of those units.

Background

Under Code Sec. 461, developers cannot add common improvement costs to the basis of benefitted units until the costs are incurred under the Code Sec. 461(h) economic performance requirements. Thus, common improvement costs that have not been incurred under Code Sec. 461(h) when the units are sold cannot be included in the units' basis in determining the gain or loss resulting from the sales. Rev. Proc. 92-29, provided procedures under which the IRS would consent to developers including the estimated cost of common improvements in the basis of units sold without meeting the economic performance requirements of Code Sec. 461(h). In order to use the alternative cost method, the taxpayer had to meet certain conditions, provide an estimated completion date, and file an annual statement.

Rev. Proc. 2023-9 Alterative Cost Method

In releasing Rev. Proc. 2023-9, the IRS and Treasury stated that they recognized certain aspects of Rev. Proc. 92-29 are outdated, place additional administrative burdens on developers and the IRS, and that application of the method to contracts accounted for under the long-term contract method of Code Sec. 460 may be unclear.

The alternative cost method must be applied to all projects in a trade or business that meet the definition of a qualifying project. However, the alternative cost limitation of this revenue procedure is calculated on a project-by-project basis. Thus, common improvement costs incurred for one qualifying project may not be included in the alternative cost method calculations of a separate qualifying project.

The revenue procedure provides definitions including definitions of "qualifying project,""reasonable method," and "CCM contract" (related to the completed contract method). It provides rules for application of the alternative cost method for developers using the accrual method of accounting and the completed contract method of accounting, rules for allocating estimated common improvement costs, and a method for determining the alternative costs limitation. The revenue procedure also provides examples of how its rules are applied.

Accounting Method Change Required

Under Rev. Proc. 2023-9, the alternative cost method is a method of accounting. A change to this alternative cost method is a change in method of accounting to which Code Secs. 446(e) and 481 apply. An eligible taxpayer that wants to change to the Rev. Proc. 2023-9 alternative cost method or that wants to change from the Rev. Proc. 92-29 alternative cost method, must use the automatic change procedures in Rev. Proc. 2015-13 or its successor. In certain cases, taxpayers may use short Form 3115 in lieu of the standard Form 3115 to make the change.

Effective Date

This revenue procedure is effective for tax years beginning after December 31, 2022.

The IRS announced that taxpayers electronically filing their Form 1040-X, Amended U.S Individual Income Tax Return, will for the first time be able to select direct deposit for any resulting refund. 

The IRS announced that taxpayers electronically filing their Form 1040-X, Amended U.S Individual Income Tax Return, will for the first time be able to select direct deposit for any resulting refund. Previously, taxpayers had to wait for a paper check for any refund, a step that added time onto the amended return process. Following IRS system updates, taxpayers filing amended returns can now enjoy the same speed and security of direct deposit as those filing an original Form 1040 tax return. Taxpayers filing an original tax return using tax preparation software can file an electronic Form 1040-X if the software manufacturer offers that service. This is the latest step the IRS is taking to improve service this tax filing season.

Further, as part of funding for the Inflation Reduction Act, the IRS has hired over 5,000 new telephone assistors and is adding staff to IRS Taxpayer Assistance Centers (TACs). The IRS also plans special service hours at dozens of TACs across the country on four Saturdays between February and May. No matter how a taxpayer files the amended return, they can still use the "Where's My Amended Return?" online tool to check the status. Taxpayers still have the option to submit a paper version of Form 1040-X and receive a paper check. Direct deposit is not available on amended returns submitted on paper. Current processing time is more than 20 weeks for both paper and electronically filed amended returns.

"This is a big win for taxpayers and another achievement as we transform the IRS to improve taxpayer experiences," said IRS Acting Commissioner Doug O’Donnell. "This important update will cut refund time and reduce inconvenience for people who file amended returns. We always encourage directdeposit whenever possible. Getting tax refunds into taxpayers’ hands quickly without worry of a lost or stolen paper check just makes sense."

The OECD/G20 Inclusive Framework released a package of technical and administrative guidance that achieves clarity on the global minimum tax on multinational corporations known as Pillar Two. Further, it provides critical protections for important tax incentives, including green tax credit incentives established in the Inflation Reduction Act. 

The OECD/G20 Inclusive Framework released a package of technical and administrative guidance that achieves clarity on the global minimum tax on multinational corporations known as Pillar Two. Further, it provides critical protections for important tax incentives, including green tax credit incentives established in the Inflation Reduction Act. Pillar Two provides for a global minimum tax on the earnings of large multinational businesses, leveling the playing field for U.S. businesses and ending the race to the bottom in corporate income tax rates. This package follows the release of the Model Rules in December 2021, Commentary in March 2022 and rules for a transitional safe harbor in December 2022. The guidance will be incorporated into a revised version of the Commentary that will replace the prior version.

Additionally, the package includes guidance on over two dozen topics, addressing those issues that Inclusive Framework members identified are most pressing. This includes topics relating to the scope of companies that will be subject to the Global Anti-Base Erosion (GloBE) Rules and transition rules that will apply in the initial years that the global minimum tax applies. Additionally, it includes guidance on Qualified Domestic Minimum Top-up Taxes (QDMTTs) that countries may choose to adopt.

"The continued progress in implementing the globalminimum tax represents another step in leveling the playing field for U.S. businesses, while also protecting U.S. workers and middle-class families by ending the race to the bottom in corporate tax rates," said Assistant Secretary of the Treasury for Tax Policy Lily Batchelder. "We welcome this agreed guidance on key technical questions, which will deliver certainty for green energy tax incentives, support coordinated outcomes and provide additional clarity that stakeholders have asked for."

A new IRS ruling confirms that HRAs are entitled to significant tax breaks. Properly structured, they can provide a deduction for the business, tax-free benefits for employees, and more direct and personal control over health care costs…a classic "win-win" situation, compliments of the tax code.

Health reimbursement arrangements (HRAs) have just been given the "green light" by the IRS -paving the way for you and many businesses to consider whether an HRA is a good solution to rising health-care costs.

A new IRS ruling confirms that HRAs are entitled to significant tax breaks. Properly structured, they can provide a deduction for the business, tax-free benefits for employees, and more direct and personal control over health care costs…a classic "win-win" situation, complements of the tax code.

As Treasury Secretary Paul O'Neill put it, "With this new guidance, we clear the way for employers to adopt health plans with patient-directed features so that employees have more choice and greater control over their health care coverage."

Patient-directed health plan

An HRA is a written arrangement set up by employers to provide employees with reimbursement up to a pre-selected amount for a variety of medical expenses. In order to qualify, an HRA must:

• Be funded solely by employer contributions and never through voluntary salary reduction contributions under a cafeteria plan or by any other form of employee contribution;

• Require funds to be used to reimburse employees for substantiated medical expenses of employees, their spouses, and dependents.

The two outstanding features of an HRA are:

• (1) Each employee gets his or her own account balance that may be carried over from year to year, indefinitely. Flexible spending accounts (FSAs), in contrast, work on a "use-it and lose-it" basis under which amounts left unspent at the end of the year are lost. The carryover feature of the HRA gives employees incentive to spend wisely and save on medical costs whenever possible, so that their "personal care accounts" can increase over the years.

• (2) Amounts in the HRA can be used to pay medical insurance premiums as well as for reimbursement of medical services and other costs. FSAs are expressly prohibited from being used to pay insurance premiums.

Options

HRAs can offer an employer great flexibility in the overall health care package presented to employees. An HRA can either supplement a deductible group health plan, or it can operate alone in providing your employees with medical benefits. It can also be used together with FSAs to enhance the benefits of both.

How to get started

To win the benefits of an HRA, certain rules must be followed. HRAs may only provide benefits that cover substantiated medical expenses. They cannot discriminate in favor of highly-compensated employees.

While an HRA cannot be funded within a cafeteria plan, employers can coordinate cafeteria plan benefits with HRAs in a manner that provides an attractive, yet IRS-sanctioned package. Planning can also enhance other HRA features.

Contact this office for further details on how an HRA can improve your financial as well as medical health.

U.S. Savings Bonds can be a relatively risk-free investment during time of upheaval in the stock market, such as we are experiencing now. There are two different types of savings bonds for tax purposes. The first includes Series EE bonds and Series I bonds. If you invest in these bonds, you have a choice of reporting interest as it accrues each year you hold the bond until you sell it or redeem it. A second category consists of a special type of savings bond, HH bonds, on which income generally must be reported as accrued.

U.S. Savings Bonds can be a relatively risk-free investment during time of upheaval in the stock market, such as we are experiencing now. There are two different types of savings bonds for tax purposes. The first includes Series EE bonds and Series I bonds. You purchase these bonds at a discount from their face value and they accrue interest until reaching face value at maturity.

If you invest in these bonds, you have a choice of reporting interest as it accrues each year you hold the bond until you sell it or redeem it.

A second category consists of a special type of savings bond, HH bonds, on which income generally must be reported as accrued.

Series EE and I bonds

Generally, you do not have to pay taxes on interest accruing on EE and I bonds until they mature. You can make a special election to pay tax on the interest as it accrues.

Most investors choose not to make this election. However, if you have little or no other taxable income during the years in which the bond is maturing, you may be better off electing to pay tax annually as the bond earns interest until it reaches maturity, since you will be paying taxes on annual interest at a lower tax rate.

Once you make the election to pay tax annually, the election applies to all Series EE and I bonds that you own for all future years. This means the election cannot be made on a bond-by-bond basis. The IRS has a special rule and you may be able to cancel your election in some circumstances.

Higher education expenses

If you buy Series EE bonds, you can exclude all the interest earned at maturity if you use the bond to pay for higher education expenses. Many, but not all, higher education expenses qualify. Check with your tax advisor.

Series HH bonds

You may have acquired a special type of bond, the HH bond, which cannot be purchased for cash. You obtain HH bonds in exchange for EE bonds. HH bonds pay interest semi-annually at a variable interest rate.

Interest is reportable when you receive it. However, there is one important exception. If you obtained HH bonds in exchange for EE bonds, on which you did not pay interest currently, interest continues to be deferred until the bond is redeemed or matures. HH bonds mature in 10 years.

Generally, if you do volunteer work for a charity, you are not entitled to deduct the cost of services you perform for the charity. However, if in connection with the volunteer work you incur out-of-pocket expenses, you may be entitled to deduct some of those expenses.

Q. I spend 20 hours every week cooking meals and delivering them to an organization that feeds the hungry and homeless. Am I entitled to a deduction for my time and the food I pay for out of my own money?

A. Generally, if you do volunteer work for a charity, you are not entitled to deduct the cost of services you perform for the charity. However, if in connection with the volunteer work you incur out-of-pocket expenses, you may be entitled to deduct some of those expenses.

Qualifying expenses

If the amounts that you pay for food and other supplies used in the preparation and packaging of the meals are not reimbursed by the charity, generally you may deduct these expenses as contributions to the charity.

In addition, if the amounts that you pay to travel by car or other means to deliver the meals are not reimbursed by the charity, and you derive no personal benefit from the travel, the expenses are deductible. Qualifying expenses include gasoline for your car and fares for taxis or public transportation.

Special mileage rate

If you drive your own vehicle to deliver the meals, you can use a special IRS mileage rate to calculate charitable contribution deductions involving use of your car. The standard mileage rate for charitable purposes, which is statutorily set, is 14 cents per mile.

Other expenses

Other out-of-pocket expenses incurred in connection with services you provide to a charity that are deductible include costs related to uniforms, travel, meals, and lodging. Sometimes, expenses incurred while serving as a charity's delegate to a convention may be deducted.

Keep receipts

If you take a deduction for out-of-pocket expenses you incurred incident to your performance of services for a charity, it is important to have receipts to document expenses. It is also a good idea to get a written acknowledgement from the charity for the services you provide.

A pre-tax benefit can come in a variety of shapes and sizes, but usually can fit into one of two categories.

A pre-tax benefit can come in a variety of shapes and sizes, but usually can fit into one of two categories.

Most are benefits that an employee elects to pay for by using a portion of his or her compensation that would have otherwise been taxed as salary. The other category consists of benefits paid by your employer on a take-it-or-leave-it basis for which you are not taxed.

Pre-tax benefits usually are provided either within a cafeteria plan or separately.

Cafeteria plan pre-tax benefits

A cafeteria plan is a written plan under which all participants are employees who may choose among two or more benefits consisting of cash and qualified benefits.

Qualified benefits include:

1. Accident or health plan coverage;
2. Dependent care assistance;
3. Contributions to a cash or deferred arrangement such as 401(k) plans; and
4. Taxable and nontaxable group-term life insurance.

In general, the benefits that may be offered under a cafeteria plan are those that are not includable in the employee's gross income because of a specific Internal Revenue Code provision. However, cash, group-term life insurance on an employee's life in excess of $50,000, and group-term life insurance on the lives of the employee's spouse or dependents may be provided under a cafeteria plan even though they are taxable. Employees are not taxed on taxable options offered under a cafeteria plan unless they elect to receive them.

Other pre-tax fringe benefits

Employees are taxed on fringe benefits unless the benefits are specifically excluded from income by the Internal Revenue Code. Benefits that are specifically not included in an employee's taxable salary include:

1. Benefits that can be offered in a cafeteria plan, but are instead offered separately;
2. No-additional-cost services ("excess-capacity" services offered for sale to customers);
3. Employee discounts;
4. Working condition fringe benefits (for example, the use of a company car for business);
5. De minimis fringe benefits (benefits too small to count, such as occasional personal use of the company photocopier, or an occasional free ticket to a sporting event);
6. Qualified moving expense reimbursements;
7. Qualified retirement planning services; and
8. Qualified transportation fringe benefits (including van pooling, transit passes and qualified parking, up to specified dollar limits).

In connection with the last item-qualified transportation fringe benefits-either the employer can fund this benefit directly for everyone or only those employees who choose to receive this benefit can have a portion of their salary used to fund it.

Flexible spending accounts

A flexible spending account (FSA) can either form part of a cafeteria plan or it can be offered as a separate pre-tax fringe benefit. Either way, its purpose is to use funds that would otherwise be paid out as taxable salary to pay for certain benefits on a pre-tax basis.

An FSA is an arrangement under which an amount is credited to an account from which an employee may be reimbursed for health care, dependent care or other expenses that are excludable from gross income if paid by an employer. A separate account must be set up to pay for each type of expense, and the account cannot be drawn upon in any way other than for reimbursement of that type of expense. Beginning in 2013, an FSA for health care costs cannot exceed a $2,500 annual limit, as required under the Affordable Care Act.

The account may be funded by employer contributions or by a salary reduction agreement. An FSA can be a cafeteria plan if it is funded by a salary reduction agreement or otherwise allows employees to choose to receive cash instead of a qualified benefit. It is not a cafeteria plan if employees are not given this choice.

Please contact this office if you have any questions about taking advantage of pre-tax fringe benefits.

The Electronic Federal Tax Payment System (EFTPS) allows individuals and businesses to make tax payments by telephone, personal computer or through the Internet.

The Electronic Federal Tax Payment System (EFTPS) allows individuals and businesses to make tax payments by telephone, personal computer or through the Internet.

Paperless

EFTPS is one of the most user-friendly programs developed by the IRS. EFTPS is totally paperless. Everything is done by telephone or computer. Because it's electronic, it's available 24 hours a day, seven days a week.

You make your tax payments electronically by:

• · Calling EFTPS; or

• · Using special computer software or the Internet.

Who can use EFTPS

EFTPS is available to businesses and individuals but businesses have more options.

Businesses: If your total deposits of federal taxes are more than $200,000 each year, you must use EFTPS. If not, you can still use EFTPS but you're not required to.

To calculate the $200,000 threshold, you have to include every federal tax your business pays, such as payroll, income, excise, social security, railroad retirement, and any other federal taxes.

The IRS wants businesses to use EFTPS and makes it difficult to stop using it. Once you meet the $200,000 threshold, you have to continue using EFTPS even if your annual tax deposits fall below $200,000 in the future.

Individuals: Individuals can also use EFTPS. Many of the individuals using EFTPS are making quarterly estimated tax payments but it's also available to people paying federal estate and gift taxes and installment payments.

How EFTPS works

There are two versions of EFTPS: direct and through a financial institution.

Direct: EFTPS-Direct is just what the name suggests. You access EFTPS directly - by telephone or computer - and make your tax payments. You tell EFTPS when you want to deposit your taxes and on that date EFTPS tells your bank to transfer the funds from your account to the IRS. At the same time, the IRS updates your payroll tax records to reflect the deposit.

Example. Your payroll taxes are due on the 15th. You have to contact EFTPS by 8PM at least one day before your tax due date. You either call EFTPS or log-on using special software or through the Internet. You enter your payment and EFTPS automatically debits your bank account and transfers the funds to the IRS on the date you indicate.

If you're a business, you can schedule your tax deposits up to 120 days before the due date. Individuals can schedule tax deposits up to 365 days before the due date.

Through a financial institution: You can also access EFTPS through a bank or credit union. Instead of contacting EFTPS directly and making your tax payments, your bank does it for you. Not all banks and credit unions participate in EFTPS so you have to check with your financial institution.

Only businesses can use EFTPS through a financial institution. If you're an individual and you want to use EFTPS, you have to use it directly. Also, while EFTPS-Direct is free, some financial institutions charge a fee for accessing EFTPS.

Getting started

To access EFTPS, you have to enroll. Your tax advisor can help you navigate the enrollment process and, once you're part of EFTPS, he or she can make the payments for you.

Q: What tax deductions am I entitled to as an investor?

A: Certain investment-related expenses are deductible, others are specifically restricted. Still others won't get you a deduction, but you will be able to add them to your tax basis in the underlying investment, or net them from the amount you are otherwise considered to have received on its sale.

Certain investment-related expenses are deductible, while others are specifically restricted. Still other expenses likely will not provide you with a deduction, but you will be able to add them to your tax basis in the underlying investment, or net them from the amount you are otherwise considered to have received on its sale.

Investor expenses

Investment counsel fees, custodian fees, fees for clerical help, office rent, state and local transfer taxes, and similar expenses that you pay in connection with your investments are deductible as an itemized deduction on Schedule A of Form 1040, subject to the 2% floor for all such itemized deductions.

Travel expenses related to the production or collection of income are deductible if you provide proof both of the expenses and the necessity for incurring them. Deductions for travel expenses related to attending investment seminars, however, are specifically prohibited. Travel expenses to attend stockholder meetings are permissible deductions only if travel is not for personal reasons and expenses are reasonable in relation to value of the investment.

Interest expenses

If you take out a loan to carry investment property, you are entitled to an itemized deduction for the interest you pay, reported on Form 4952, which is limited to your net investment income (dividends, interest, rents, etc.) Margin interest paid connected with your stock portfolio qualifies. The investment interest deduction is not subject to the 2% floor - you can start with deducting the first dollar of interest paid. Any disallowed interest over the net investment income limit can be carried over to a succeeding tax year.

Caution. Net capital gain from the disposition of investment property is not considered investment income. However, you may elect to treat all or any portion of such net capital gain as investment income by paying tax on the elected amounts at their ordinary income rates. This is usually not advisable.

Brokerage commissions

Brokerage commissions related to a particular stock purchase or sell, on the other hand, are considered a cost of the sale itself. As such, any commissions paid to buy a stock are added to your tax basis in the shares, which will later determine the amount of taxable gain you have when the property is sold. Any commission on the sale of the shares is netted from the amount you will be considered to realize on that sale.

Once you retire or reach age 70 ½ (depending on your retirement plan), the law requires that you start making -at a minimum-some periodic withdrawals. These withdrawals are called required minimum distributions.

Why required minimum distributions?

First, the tax policy behind letting you save in a tax-deferred account was to allow you to use those funds in your retirement, rather than to use them as just another way to build up your estate for your heirs. Second, because those accounts are usually tax-deferred, withdrawals after retirement are taxed to you as ordinary income. As a result, the IRS wants you to withdraw at least a minimum amount from those accounts each year so that it can be taxed.

New IRS rules substantially simplify the computation of required minimum distributions (RMDs). In addition, Congress has forced the IRS to adopt new life expectancy tables that reflect longer life expectancies, resulting in distributions to be made over a longer time-period and for the RMD to be smaller than would have been required in previous years.

Good tax news

Good news for taxpayers who are interested in retaining funds in their IRAs and their tax-qualified plans because it means deferring income tax on the funds even longer.

If you are alive in the year in which you must begin required minimum distributions, your new MRD is calculated each year by dividing the account balance by your life expectancy, as determined by the uniform distribution period table (the "Uniform Table") in the new IRS rules.

• Example. At the time his required beginning date is reached (usually retirement or 70 ½), John Smith had a balance of $1 million in his IRA, as of the previous December 31. He previously named a beneficiary, who is age 67.

The difference in the computation of the RMD under the new rules is dramatic.

• Under pre-2001 rules, he checks the joint and last survivor table and finds that his divisor for his $1 million account is 22.

• Under revised rules in effect in 2001, his divisor is 26.2.

• Under the new Uniform Lifetime Tables now in effect, his divisor is 27.4.

The difference in required distributions is significant.

• Under pre-2001 rules, John must withdraw at least $45,454 this year

• Under the 2001 rules, John must withdraw at least $38,168 this year.

• Under the new tables, John must withdraw at least $36,496 this year.

Because of the new regulations, John has an extra $8,958 in his IRA at the end of the year over what he could have kept under the rules only a few years ago. This amount can then continue to accumulate earnings. This savings can be realized-and compounded-every subsequent year for the next 27 years. As a bonus, John's federal income tax (assuming a marginal rate of 35 percent) is more than $3,135 less ($12,773 instead of $15,908).

If you die before reaching your retirement having designated your spouse as beneficiary, distributions must begin by December 31 of the year following your death or the year that you would have turned 70½, whichever is later. At that time, RMD is computed over your spouse's life expectancy.

Caution!

The new rules-although more flexible-leave little room for mistakes in timing. Failure to take the minimum required distribution by the RBD will result in a 50 percent excise tax equal to half of the amount that should have been paid out but wasn't. Although early versions of proposed legislation included a decrease in the penalty from 50 percent to 10 percent, that provision is not the law.

If you'd like more specific advice on how the new Minimum Required Distribution rules apply to your retirement strategies, please contact this office.

Making gifts is a useful, and often overlooked, tax strategy. However, when thinking about whether to make a gift, or gifts, to your children or other minors, the tax consequences must be evaluated very carefully. Many times, though, the tax consequences can be beneficial and lower your tax bill.

When thinking about whether to make a gift, or gifts, to your children or other minors, the tax consequences must be evaluated very carefully. Many times, though, the tax consequences can be beneficial and lower your tax bill.

Different strategies, whether used alone or in combination, can produce the most advantageous tax results for you and the recipients of your generosity. However, everyone's situation is unique so before you start making gifts, talk to a tax professional.

Basic considerations

-- Generally, a minor is any person under age 18.

-- Different tax rules apply to gifts to minors under age 19 and minors under age 14.

-- Unearned income exceeding $950 (the 2009 amount) of a minor who is under 19 years of age (and college students who are under 24 years of age) will generally be taxed at the highest marginal rate of his or her parents under the "kiddie tax" rules.

-- Income from property given to a minor who is 14 years old or older will be taxed at the minor's marginal income tax rate.

-- If a minor's gift is in trust, there is a 15 percent tax rate on the first $2,300 (the 2009 amount) each year that grows in the trust.

Estate tax

The tax on your estate is determined at the time of your death. Making gifts over your lifetime is often overlooked and undervalued as a means of reducing your estate tax. When you make gifts of money or property during your life the net result is a smaller estate and a smaller tax. Also, when you give a gift of property to a minor, which later increases in value, your estate will not be taxed on this increase in value.

Annual exclusion

In general, you can give away up to $13,000 in 2009 to anyone (including minors) during the year, tax-free. You and your spouse, together, can also give up to $26,000, tax-free, in 2009, to each donee.

UGMA/UTMA accounts

Under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), annual gifts can be made by individuals to a custodial account.

Tax-free gifts can be made under the UGMA. In 2009, each taxpayer can transfer up to $13,000--and each married couple can transfer up to $26,000--to a custodial account. Some of the earnings will receive tax exemption while some or all of the earnings will receive taxation at the minor's tax rate. One drawback to UGMA accounts, however, is that the gifts are irrevocable. Another drawback is that if a student applies for financial aid, UGMA accounts may be deemed assets of the student that are part of the student's contribution toward his or her educational expenses.

UGMA and UTMA accounts have another downside that many parents dislike. When the minor reaches 18 or 21 years of age (depending upon state law), the child can generally do whatever he or she wants with the custodial account money. (That's why some individuals prefer "Crummey" trusts, which are discussed below.)

UTMA accounts operate very similarly to UGMA accounts. However, UTMA accounts let individuals make property gifts to their children that are tax-free.

Trusts

If you use property that does not produce income (such as a life insurance policy) to fund a minor's trust, this can have bad tax consequences. The IRS could assert that the true value of the gift cannot be determined, causing unavailability of the annual exclusion.

With a "Crummey" trust, your gift can stay in trust for as long as you desire without giving up the annual exclusion. However, contributions to a "Crummey" trust do not qualify for the annual exclusion unless the beneficiary receives notification that the contributions were made and is given a limited time (usually 30 days) to withdraw the contribution.

It is understood that the beneficiary will not withdraw the money or property. However, such an understanding should not be written because the IRS will use any evidence to say that the beneficiary had no withdrawal power.

If you are planning to make some gifts to your children or other minors, contact the office for additional guidance so we can make sure you get the best tax breaks possible.

No use worrying. More than five million people every year have problems getting their refund checks so your situation is not uncommon. Nevertheless, you should be aware of the rules, and the steps to take if your refund doesn't arrive.

Average wait time

The IRS suggests that you allow for "the normal processing time" before inquiring about your refund. The IRS's "normal processing time" is approximately:

• Paper returns: 6 weeks
• E-filed returns: 3 weeks
• Amended returns: 12 weeks
• Business returns: 6 weeks

IRS website "Where's my refund?" tool

The IRS now has a tool on its website called "Where's my refund?" which generally allows you to access information about your refund 72 hours after the IRS acknowledges receipt of your e-filed return, or three to four weeks after mailing a paper return. The "Where's my refund?" tool can be accessed at www.irs.gov.

To get out information about your refund on the IRS's website, you will need to provide the following information from your return:

• Your Social Security Number (or Individual Taxpayer Identification Number);
• Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and
• The exact whole dollar amount of your refund.

 Start a refund trace

If you have not received your refund within 28 days from the original IRS mailing date shown on Where's My Refund?, you can start a refund trace online.

Getting a replacement check

If you or your representative contacts the IRS, the IRS will determine if your refund check has been cashed. If the original check has not been cashed, a replacement check will be issued. If it has been cashed, get ready for a long wait as the IRS processes a replacement check.

The IRS will send you a photocopy of the cashed check and endorsement with a claim form. After you send it back, the IRS will investigate. Sometimes, it takes the IRS as long as one year to complete its investigation, before it cuts you a replacement check.

A bigger problem

Another problem may come to the fore when the IRS is contacted about the refund. It might tell you that it never received your tax return in the first place. Here's where some quick action is important.

First, you are required to show that you filed your return on time. That's a situation when a post-office or express mail receipt really comes in handy. Second, get another, signed copy off to the IRS as quickly as possible to prevent additional penalties and interest in case the IRS really can prove that you didn't file in the first place.

Minimize the risks

When filing your return, you can choose to have your refund directly deposited into a bank account. If you file a paper return, you can request direct deposit by giving your bank account and routing numbers on your return. If you e-file, you could also request direct deposit. All these alternatives to receiving a paper check minimize the chances of your refund getting lost or misplaced.

If you've moved since filing your return, it's possible that the IRS sent your refund check to the wrong address. If it is returned to the IRS, a refund will not be reissued until you notify the IRS of your new address. You have to use a special IRS form.

IRS may have a reason

You may not have received your refund because the IRS believes that you aren't entitled to one. Refund claims are reviewed -usually only in a cursory manner-- by an IRS service center or district office. Odds are, however, that unless your refund is completely out of line with your income and payments, the IRS will send you a check unless it spots a mathematical error through its data-entry processing. It will only be later, if and when you are audited, that the IRS might challenge the size of your refund on its merits.

IRS liability

If the IRS sends the refund check to the wrong address, it is still liable for the refund because it has not paid "the claimant." It is also still liable for the refund if it pays the check on a forged endorsement. Direct deposit refunds that are misdirected to the wrong account through no fault of your own are treated the same as lost or stolen refund checks.

The IRS can take back refunds that were paid by mistake. In an erroneous refund action, the IRS generally has the burden of proving that the refund was a mistake. Nevertheless, although you may be in the right and eventually get your refund, it may take you up to a year to collect. One consolation: if payment of a refund takes more than 45 days, the IRS must pay interest on it.

If you are still worrying about your refund check, please give this office a call. We can track down your refund and seek to resolve any problem that the IRS may believe has developed.

Is a property transfer to your child or other minor a possible event on your horizon? If it is, just don't cover yourself on the tax consequences of such transfers. There are important legal considerations over and above the transfer's tax impact.

If you're considering a substantial gift to a young child, usually you don't let him or her take direct control of the property. Instead, one of two popular ways of transferring property is generally used -- through custodianships and trusts. Here are some points to consider.

Custodianship

Most states have adopted the Uniform Transfers to Minors Act (UTMA), with some variations. Under the UTMA, a person can transfer any type of property to a custodian (an adult), who manages it for a minor's benefit (the minor owns the property) until the minor reaches a certain age (the "age of majority," which is 18 or 21, depending on state law).

Since a minor or custodian could face possible personal liability problems via ownership of cars, real estate, etc., the UTMA in general gives protection for the minor and custodian from personal liability (if they are not personally at fault) to third parties.

However, custodianships can have drawbacks:

• When the minor reaches the specified age, there is no guarantee he or she will handle the property in a responsible manner.
  
• Once a person transfers the property to a custodial account, that donor can no longer get it back. Taking money from the custodial account could cause someone to be sued, or it could be prosecuted as a criminal act.
  
• Custodial accounts may cause financial aid from colleges to be reduced -- those amounts are considered to go 100 percent toward what a student is expected to contribute for his or her educational expenses.
  
• A custodianship can be set up for only one beneficiary -- for instance a parent cannot legally transfer money from the custodial account of one of their children to the custodial account of another.

Trusts

People often opt to use custodianships rather than trusts because there is less paperwork and generally lower administrative costs. Custodianships can be set up quite informally, while trusts can be more elaborate and require more formalities.

When large amounts are involved, most people use trusts rather than custodianships even though there are greater administrative costs. For instance, a trust will give someone more flexibility to specify at what age a trust beneficiary will be distributed trust funds. A trust can also allow the donor to split benefits among several beneficiaries.

If you are thinking about making a cash or other property transfer to a minor, please contact this office so that we can further discuss how to use the various options to properly carry out your intentions.

Q: An extension to file my tax return seems such a painless procedure, is there any good reason for me not to postpone my filing deadline to avoid just one more hassle during the busy start of Spring?

Q: An extension to file my tax return seems such a painless procedure, is there any good reason for me not to postpone my filing deadline to avoid just one more hassle during the busy start of Spring?

A: Many taxpayers unrealistically and, to their own detriment, believe that when the IRS grants them an extension to file their tax return, it is the "magic wand" that waves away all tax concerns until the extended filing deadline is upon them. This is not the case. Even though getting extensions has been made easier--individuals can obtain an automatic four-month extension by phone, the mail or computer, and an additional two months is granted for qualifying taxpayers--there are drawbacks, and certainly "no free rides."

When a taxpayer gets an extension to file his or her return, this does not mean that he or she has more time in which to pay any taxes that are owed without interest or penalty. An extension to file also does not extend the time for payment of taxes. Your ultimate tax liability is an official obligation that starts on April 15^th, 2008. You don't have to pay; but if you don't pay, interest charges (currently 7 percent, compounded daily) are applicable to any tax unpaid after the regular deadline. And that may only be the start.

If payments by the regular deadline are less than 90 percent of the actual 2007 tax, the IRS also has the right to asses a 0.5 percent per month late filing penalty. In addition, you must properly estimate the amount of total tax liability based on current information when filing for an extension. If the IRS later determines that estimate to be unreasonable, it can treat the extension as completely void and assess hefty failure-to-file penalties.

An extension, and not filing until October 15^th also means that you won't receive a stimulus rebate check (up to $600 for individuals and $1,200 for joint filers, not including any applicable $300 rebate for a qualifying child) until November or early December, rather than based on the May through July distribution schedule for those filing their 2007 returns by the regular April 15^th, 2008 deadline.

Some procedural pitfalls can also surprise taxpayers who had every intention of making a proper extension request. For example, if a husband and wife file separate returns, an automatic extension application filed by one does not give an extension of the filing time to the other.

Q. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?

Q. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?

A. Cooking, cleaning and childcare: domestic concerns - or tax issues? The answer is both. A few years ago, several would-be Presidential appointees were rejected -- when it was revealed that they had failed to pay payroll taxes for their domestic help. The IRS is aggressively looking for cheaters so it's particularly important that you don't stumble through ignorance in not fulfilling your obligations.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What it costs

In general, if you paid cash wages of at least $1,300 in 2001 to any household employee, you must withhold and pay social security and Medicare taxes. The tax is 15.3 percent of the wages paid. You are responsible for half and your employee for the other half but you may choose to pay the entire amount. If you pay cash wages of at least $1,000 in any quarter to a household employee, you are responsible for paying federal unemployment tax, usually 0.8 percent of cash wages.

Deciding who is an employee is not easy. Contact us for more guidance.

In the wake of the Enron collapse has come a new interest in the accounting profession and the spin on the news is often not too flattering. That's wrong. Accounting professionals play a very important role in our global economy but it's a role not too many people understand.

In a nutshell, auditors certify the accuracy of profits, losses, debts and other financial data reported by companies. They are hired by a company's board of directors - and the shareholders - to make sure that financial statements comply with federal law.

In the wake of the Enron collapse has come a new interest in the accounting profession and the spin on the news is often not too flattering. That's wrong. Accounting professionals play a very important role in our global economy but it's a role not too many people understand.

In a nutshell, auditors certify the accuracy of profits, losses, debts and other financial data reported by companies. They are hired by a company's board of directors - and the shareholders - to make sure that financial statements comply with federal law.

Publicly held companies are required by the Securities and Exchange Commission to issue financial statements that have been independently audited. The independent auditor assures investors that the company's' financial statements conform to generally accepted accounting practices (GAAP).

The audit process

An audit is an evaluation that is based on financial information prepared by the management of the company. The auditor has nothing to do with the preparation of this information. Once it has been provided to the auditor, he or she uses accepted testing techniques and professional expertise and judgment to develop an opinion on the accuracy and fairness of the financial statements.

An auditor speaks only to the company's finances. He or she doesn't express a judgment on how well management is doing its job. Neither does he or she offer advice about investing in or lending to a company nor guarantee that employees are honest and/or qualified.

The framework

It would be impossible for an auditor to examine every transaction so the auditor relies on selective testing techniques. Audits should not be expected to provide pinpoint accuracy. They should, however, give investors a reasonable level of assurance that the financial statements are accurate.

Before an auditor can form an opinion, he or she considers the company's internal control structure. The auditor identifies the risk of error in the financial statements and designs procedures to reduce that risk. The auditor also uses analytical procedures to evaluate financial information through the various stages of the audit.

The report

When an audit is completed, the auditor issues a report. The standard report consists of three paragraphs:

• · The first paragraph talks about the different duties of management and the auditor.

• · The second paragraph says that the audit was performed to obtain reasonable assurance about whether the financial statements are free of errors or irregularities. It also provides a brief description of what is involved in an audit and states that the auditor formed an opinion on the financial statements taken as a whole.

• · The last paragraph, the opinion paragraph, contains the auditor's conclusions. The auditor is also expected to take an extra step if the audit raises doubt that the company can stay in business. In that case, he or she has to include an explanation of why the company may be on shaky ground.

Professional opinion

The auditor issues one of the following types of professional opinions. Only the first one is generally considered acceptable for investors' purposes:

• · Unqualified (no significant limitations affected audit performance and no material deficiencies exist in the financial statements)

• · Qualified (the scope of the auditor's work is significantly restricted, or there is a material departure from generally accepted accounting principles)

• · Disclaimer (restrictions in the audit's scope are so pervasive that the auditor cannot form an opinion on the fairness of the presentation)

• · Adverse (departures from generally accepted accounting principles are so significant that the financial statements do not fairly represent the company's financial position)

An auditor's opinion is just that -- an opinion. It indicates that a professional judgment, not a guarantee, has been given on management's financial statements. If Enron has taught investors anything, it is that the underlying financial statements -- and all the small footnotes - are just as important as the auditor's report.

In 2009, individuals saving for retirement can take advantage of increased contribution limits for various retirement plans. More money can be socked away with tax advantages like tax-deferred growth and possible tax-deductibility.

In 2009, individuals saving for retirement can take advantage of increased contribution limits for various retirement plans. More money can be socked away with tax advantages like tax-deferred growth and possible tax-deductibility.

Traditional IRAs

Individuals who receive compensation and who are not age 70½ or older can make contributions to Individual Retirement Accounts (IRAs). Money saved in a traditional IRA is not taxed until you take it out. Contributions are tax deductible.

For 2009, the maximum amount you can contribute to an IRA is $5,000 (not including rollover contributions) if you are under the age of 50. Individuals age 50 or older can add $1,000 for a total contribution of $6,000 in 2009. These are so-called "catch-up" contributions to help older workers save for retirement. Keep in mind, your contribution may be limited if your income is higher than thresholds set by Congress and you participate in certain employer-sponsored retirement plans. Sometimes, a taxpayer can also contribute to his or her spouse's IRA.

Deductible contributions to a traditional IRA must be made on or before April 15, 2009 (which is generally the deadline to file your federal individual income tax return).

Roth IRAs

Contributions to a Roth IRA are not deductible. Contributions, therefore, are made with after-tax dollars. However, income accrued on Roth IRA contributions is not taxed when it is withdrawn if it is a qualified distribution. A qualified distribution is any one of the following: -- On or after the date the individual attains age 59 ½;

-- For a qualified first-time home purchase

-- To a beneficiary or to the estate of the individual on or after the death of the individual; or

-- As a result of the individual becoming disabled.

As with a traditional IRA, the maximum annual contribution to a Roth IRA is $5,000 in 2009. And, like a traditional IRA, individuals who are 50 or older can make an additional $1,000 in "catch-up" contributions, for a total of $6,000.

Note. For tax years beginning after December 31, 2009, a taxpayer can convert a traditional IRA or make rollover from an eligible retirement plan to a Roth IRA without regard to the his or her income and without regard to whether he or she is a married individual filing a separate return. For conversions taking place before 2010, the taxpayer's adjusted gross income (AGI) cannot exceed $100,000 and the taxpayer cannot be a married individual filing a separate return. For conversions taking place in 2010, the taxpayer recognizes the conversion amount ratably in AGI in 2011 and 2012, unless the taxpayer elects to recognize it all in 2010. However, 2009 is a perfect year to start planning in order to take advantage of the new Roth IRA rules.

401(k)s

An employee can defer as much as $16,500 in 2009 on a pre-tax basis under a 401(k) plan. Employees who are 50 years old by the end of the plan year may make additional "catch-up" payments of up to $5,500 in 2009 (for a total contribution of $22,000). "Catch-up" contributions are also pre-tax, but only can be made if the plan permits. Employers can also make 401(k) contributions for their employees' benefit. In general, an employer's matching 401(k) contributions are not subject to the same annual limit as are employee contributions.

SIMPLE IRA and 401(k) plans

Employers can establish a Savings Incentive Match Plan for Employees (SIMPLE) if 100 or fewer of its employees received at least $5,000 in compensation from the employer last year. Eligible employees can make contributions of up to $11,500 in 2009 (indexed for inflation). Employees who are 50 and over can make additional catch-up contributions of $2,500 in 2009 (for a total of $14,000). Employer contributions to the SIMPLE plan are not included in the annual limit.

Tax-shelter annuity arrangements - 403(b) plans

Public school systems and certain types of tax-exempt organizations may provide retirement benefits to their employees through a tax shelter annuity plan, also referred to as a 403(b) plan. In 2009, employees can contribute up to $16,500 to a 403(b) plan and the maximum catch-up contribution is $5,500. As with other retirement plans, employees who are age 50 and above can make catch-up contributions.

Please contact this office if you have any questions concerning how much, or in what combinations, you can save in 2009 for your retirement on a tax-favored basis.