02.08.10 Taxes
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Quote of the Month:
“About the time we can make the ends meet, somebody moves the ends.”
— Herbert Hoover, 31st American President (1874-1964)
Natalie Barrett, CPA, is passionate about accounting. “Accounting chose me,” she said of her career. She did her first tax return at age 14 and for Christmas that year she received an executive-style desk with a drawer that pulled out, along with a calculator with printable tape. “I was in heaven.”
She spent several years in corporate accounting and went out on her own in 2006. “I am extremely blessed to have a skill set that enables me to do what I do and be home with my child,” she said.
So, onto taxes and two laws in particular for 2009 filing: the American Recovery and Reinvestment Act of 2009 (ARRA) and the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA).
The ARRA and WHBAA were enacted to stimulate the economy. Natalie talked about five sections.
1. The enhanced standard deduction relates to individuals and items affecting individual taxpayers. “Not everyone has the opportunity to itemize,” she said. “The majority of people who itemize are homeowners who have mortgage interest to deduct on their taxes.” When filing your 2009 taxes, you are now allowed to deduct property tax even if you don’t itemize. You used to have to itemize to get that deduction. The real property tax deduction is up to $500 for individuals; $1,000 for filing jointly. “It used to be that if you did not itemize, you would lose it,” she said.
Also, if you bought a new car in 2009, the motor vehicle sales tax deduction is up to $49,500 and is not limited to one vehicle. “This is a big change in the standard deduction this year,” said Natalie.
2. Making Work Pay Credit. Initiated in 2009 for taxpayers who earned a wage, people saw this credit by way of reduced withholding on their paychecks, $400 for individuals, $800 for filing jointly. “The ‘gotcha’ is when you go to file your tax return you may find yourself coming up short in withholding if you filed jointly with your spouse or if you are a dependent who has a job making your own wage or if you are an individual with more than one job,” said Natalie. People who are accustomed to receiving a big refund may see a smaller refund this year or they might even be in a position to owe taxes.
“They wanted to get money into people’s hands right away and spread it out over eight months,” said Natalie. “I’d rather see an increase in the refund at the end of the year.” If you have a tax preparer, she would have told you about this so you would have had enough withheld each paycheck. “See your tax preparer early so you’re not caught short with the expectation of getting money back and find out you actually owe.”
3. American Opportunity Tax Credit. A reworking of the Hope Credit, it used to be available to students only for the first two years of college. Now it has been extended for up to four years of college. The original Hope Credit covered only tuition and fees; the new credit also covers course materials. It does not include graduate school.
4. First-time Homebuyers/Longtime Homeowners Credit. You have until June 30, 2010, (but have to be contracted by April 30) to take this credit, and through an amended return if necessary. The new credit is up to $8,000 for first-time buyers and up to $6,500 for longtime homeowners. “Before, you could not have been a homebuyer within three years; now if you’re presently buying a home you can get this credit.”
5. Section 179 Deduction. Business owners have real opportunities to see expense deductions now, rather than writing them off over time. You can expense, rather than capitalize, up to $250,000 for computers, office furniture, big equipment, etc. “This is a big one because for 2010 the limits will drop way down,” said Natalie. The ‘gotcha’ is that Kentucky doesn’t recognize Section 179.
Business reporting issues.
One of the hot-button items relates to S Corps and reasonable compensation. What is ‘reasonable’ compensation and how do you pay yourself? “They don’t give black-and-white guidelines,” said Natalie. But if you’re paying yourself $1,000 a month and you take $30,000 in quarterly dividends, it just won’t pass the smell test. If you’re structured as an S Corp and you are the only employee and only shareholder, everything you draw out of the business they will want to characterize as a wage.
In another S Corp, one with employees, the owner is not generating all of the income, so the structure of compensation is different. “This is a conversation you want to have with your tax professional to make sure you’re covered,” said Natalie. “It’s subject to the auditor of the day’s interpretation.” In litigation, more often than not the courts will side with the IRS in the wages vs. dividends debate.
Employee vs. independent contractor is another hot topic. The IRS is making it increasingly difficult to make the case for hiring independent contractors, but again there are no black-and-white answers. If you hire someone in your home (for example to assist with a young or old family member), check out Schedule H.
The threshold for form 1099 is $600 per year. But even if you don’t receive a 1099 you still have to report the income.
If you are in business for yourself, there are (well, were) opportunities for the business to pay for your healthcare for 2009. And if you don’t have enough medical deductions to itemize, look at it in another way and consider yourself fortunate. “This is a blessing,” said Natalie.
Business mileage. Keep good records to substantiate this deduction. The rate is $.55 per mile for 2009. If you were reimbursed, you can’t claim it both ways.
Estimated tax payments. If you are self-employed, it’s imperative to send in these payments four times a year (April 15, June 15, Sept. 15, Jan. 15) so you are not slammed with penalties and a big tax bill at the end of the year. “I have my clients make their estimated payments for 2010 based on 2009 and we meet throughout the year to see if things are changing, if the payments need to be bumped up or scaled back.” Look at your situation quarter by quarter.
Want to use software and do your own taxes? You are really better off in the long run to seek tax advice from a professional, even if it’s just one time, so you know what to look for as you go forward. “You don’t know what you don’t know,” said Natalie.
We thank Natalie for her presentation. Feel free to contact her with any questions.
Natalie Barrett, CPA
http://www.NatalieLBarrettCPA.com
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RECOMMENDED READING:
The Difference: How Anyone Can Prosper in Even the Toughest Times
by Jean Chatzky
Save Big: Cut Your Top 5 Costs and Save Thousands
by Elisabeth Leamy
Start Over, Finish Rich: 10 Steps to Get You Back on Track in 2010
by David Bach
Suze Orman’s Action Plan: New Rules for New Times
by Suze Orman
Wow! You Saved How Much?: A Step-by-Step Money-Saving Guide
by Renita R. Perrone
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WEB SITES OF INTEREST:
Laura Belgray blogs about working from home
Article on teaching your kids to master money skills for life
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Have a fabulous month!
KS
Kathie Stamps Contact me
ISBO.biz Web content and meetings
Charlotte Caldwell Contact me
ISBO.biz Web design and technology
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This is a recap of the February 2010 ISBO.biz luncheon in Lexington, KY.
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