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Archive for May, 2009

IRS Announces Withholding Adjustment Option for Pension Plans and Provides Taxpayer Education

May 26th, 2009

As part of a wider outreach effort to educate taxpayers about the benefits they will receive under the American Recovery and Reinvestment Act, the Internal Revenue Service today released new withholding adjustment procedures for pension plans.

In February, the IRS issued revised withholding tables incorporating the Making Work Pay Tax Credit, one of the key provisions of the American Recovery and Reinvestment Act. That change resulted in more take home pay for more than 120 million American households and provided an immediate economic stimulus. The new procedure for pensions will make withholding more accurate for pension recipients.

While the newly announced procedures apply only to pension payments, the IRS is gearing up for a wider outreach campaign to educate pensioners and other taxpayers about the withholding tables and Recovery payments. The IRS will work with partner groups to provide taxpayers information to make sure they have the appropriate withholding for their situation. The IRS will also work on developing a variety of information products, including brochures, video and audio material to help educate taxpayers.

The change announced today will help some pensioners avoid a smaller refund next spring or even a balance due in limited situations. A wide variety of factors, such as outside jobs and other earned income, can affect how much, if any, withholding is needed by people receiving a pension to satisfy their annual tax liability. The optional adjustment procedure which may be used by those paying pensions is available in Notice 1036-P, Additional Withholding for Pensions for 2009. The on-line version of Publication 15-T, New Wage Withholding and Advance Earned Income Credit Payment Tables, will be updated and available next week.

Pension payors are not required to use this new procedure and may continue to use only the February 2009 withholding tables. For plans that adopt the new procedure, withholding on pension payments will be automatically adjusted with no action needed by pensioners. The IRS is also encouraging pension payors who choose to implement the new withholding adjustment procedures to contact retirees who previously submitted a Form W-4P, Withholding Certificate for Pension or Annuity Payments, requesting additional withholding after the February withholding tables were issued.

Those who should pay particular attention to their withholding include married couples with two incomes, individuals with multiple jobs, dependents, some Social Security recipients who work and workers who do not have valid Social Security Numbers. Depending on their personal situation, some people could have less withheld from their paychecks than they need or want.  People who believe their current withholding is not appropriate for their personal situation can perform a quick check by using the IRS withholding calculator on IRS.gov.  Any necessary adjustments can be made by filing a revised Form W-4, Employee’s Withholding Allowance Certificate, with their employer.

Basics of Creating a 501(c)(3) Charity

May 21st, 2009

Creating a nonprofit organization, especially a Section 501(c)(3) organization, can be a daunting taApprovedsk.  If you do not know what you are doing, you are most likely going to get lost in the paperwork, the process, and the extensive steps necessary to get a nonprofit organization created.  However, some basic tips are available to give taxpayers a heads-up before a taxpayer starts to create a nonprofit organization.

First, a Section 501(c)(3) organization must be organized as a corporation, trust, or unincorporated association.  A taxpayer cannot create a Section 501(c)(3) organization without first creating one of the above listed entities.  Also, the organization’s organizing documents must limit the organization’s purpose to those described in Section 501(c)(3) and to not expressly permit activities that do not further its exempt purposes.

Second, the Section 501(c)(3) organization must have a substantial portion of its activities further its exempt purposes.  However, certain activities are prohibited from occurring by the organization, such as the following:

  • Cannot participate in political campaigns of candidates for local, state, or federal offices
  • Must restrict its lobbying activities to an insubstantial part of its total activities
  • Must ensure that its earnings do not inure to the benefit of any private shareholder or individual
  • Must not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose
  • Cannot have purposes or activities that are illegal or violate fundamental public policy

Third, the Section 501(c)(3) organization must  have one or more exempt purposes that are stated in its organizing documents.  The following list of exempt purposes are generally allowed for Section 501(c)(3) organizations:  (1) charitable, (2) educational, (3) religious, (4) scientific, (5) literary, (6) preventing cruelty to children or animals, and (7) testing for public safety.

Deductible Travel Expenses

May 20th, 2009

Many taxpayers go away on business and incur expenses while travelling, and those same taxpayers think that all expenses incurred while travelling are deductible as a business expense.  This is not true.  In fact, there are many restrictions on business travel expenses and the IRS highly scrutinizes any tax return that claims these business travel expenses.

The first step in determining what travel expenses are deductible is to determine the tax home of the taxpayer.  Once the tax home is established, the taxpayer will know when they are travelling away from their tax home.  Once the tax home has been established, the taxpayer should separate their business travel expenses into three categories:  (1) meals, (2) entertainment, and (3) other expenses.

The following chart summarizes the travel expenses that a taxpayer can deduct once they are away from their tax home:

  • Transportation – A taxpayer can deduct the cost of travel by airplane, train, bus, or car between the taxpayer’s tax home and the business destination. 
  • Taxi, Bus, and Airport Limousines – A taxpayer can deduct the cost of fares for these and other types of transporation that takes the taxpayer (1) between the airport or station and the taxpayer’s hotel, and (2) between the taxpayer’s hotel and the work location or meeting location.
  • Baggage and Shipping – A taxpayer can deduct the cost of sending baggage and sample or display material between regular and temporary work locations.
  • Car – A taxpayer can deduct the cost of operating and maintaining the taxpayer’s car when travelling away from home on business.  However, the taxpayer can only deduct either (1) the actual expenses or (2) the standard mileage rate, plus any businses-related tolls and parking.
  • Cleaning – A taxpayer can deduct the cost of dry-cleaning and laundry.
  • Telephone – A taxpayer can deduct the cost of business calls while on a business trip.
  • Tips – A taxpayer can deduc the cost of tips paid for any expense listed in this chart.
  • Other – A taxpayer can deduct the cost of any ordinary and necessary expenses related to business travel.

Homeowner Taxes You Can Deduct and Not Deduct

May 19th, 2009

The following list (not comprehensive or all-inclusive) of taxes is provided to first-time homeowners, ohomeownersr even homeowners in general, that wish to get the most tax deductions from the cost of owning a home.

  • Real Estate Taxes – A homeowner can deduct a real estate tax if the tax is an annual tax based on the assessed value of the real property and the taxing authority charges a uniform rate on all property in its jurisdiction.  In order to be deductible, the tax must also be for the welfare of the general public and not be a payment for a special privilege or service.
  • Homeowners’ Association Assessments – A homeowner cannot deduct these assessments because the fees are not assessed by a state or local government.
  • Transfer Taxes – A homeowner cannot deduct the transfer taxes and similar taxes and charges on the sale of a personal home.  However, the homeowner can include these taxes and costs in the basis of the property.
  • Sales Taxes – A homeowner can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A of Form 1040.  Deductible sales taxes may include sales taxes paid on a home or building materials.
  • Mortgage Interest – A homeowner can deduct their mortgage interest if the loan is secured by the homeowner’s main home.  It does not matter if the loan is a first, second, or a home equity loan.
  • Points – A homeowner cannot deduct the full amount of the points or charges paid by a borrower in order to obtain a home mrotgage, with a small exception.  Instead, the homeowner must deduct the points over the life of the mortgage.
  • Mortgage Insurance Premiums – A homeowner can take an itemized deduction on Schedule A of Form 1040 for premiums paid or accrued for qualified mortgage insurance in connection with home acquisition debt on the homeowner’s qualified home.

Net Operating Losses Overview

May 18th, 2009

A corporation generally figures and deducts a net operating loss (NOL) the same way an individual, estate, or trust does.  However, a corporation’s NOL generally differs from an individual, estate, or trusts’ NOL in the following ways:

  1. A corporation can take different deductions when figuring an NOL
  2. A corporation must make different modifications to its taxable income in the carryback or carryforward year when figuring how much of the NOL is used and how much is carried over to the next year
  3. A corporation uses different forms when claiming an NOL deduction

The general rules for a corporation’s NOL is that it must carry an NOL back two years prior to the year the NOL is generated, and if the NOL is not used in the prior two years, then the remaining NOL can be carried forward for up to 20 years after the tax year in which the NOL was generated.

A corporation can make an election to waive the two year carryback period and use only the 20 year carryforward period by attaching a statement to the original return filed by the due date (including extensions) for the NOL year.

A corporation carries forward its NOL by entering the amount of the carryover on Schedule K of Form 1120 Line 12 and on Line 29(a) of Form 1120 or line 25(a) of Form 1120-A.

IRS Announces Withholding Adjustment Option for Pension Plans and Provides Taxpayer Education

May 15th, 2009

As part of a wider outreach effort to educate taxpayers about the benefits they will receive under thIRS and money pilee American Recovery and Reinvestment Act, the Internal Revenue Service today released new withholding adjustment procedures for pension plans.In February, the IRS issued revised withholding tables incorporating the Making Work Pay Tax Credit, one of the key provisions of the American Recovery and Reinvestment Act. That change resulted in more take home pay for more than 120 million American households and provided an immediate economic stimulus. The new procedure for pensions will make withholding more accurate for pension recipients.

While the newly announced procedures apply only to pension payments, the IRS is gearing up for a wider outreach campaign to educate pensioners and other taxpayers about the withholding tables and Recovery payments. The IRS will work with partner groups to provide taxpayers information to make sure they have the appropriate withholding for their situation. The IRS will also work on developing a variety of information products, including brochures, video and audio material to help educate taxpayers.

The change announced today will help some pensioners avoid a smaller refund next spring or even a balance due in limited situations. A wide variety of factors, such as outside jobs and other earned income, can affect how much, if any, withholding is needed by people receiving a pension to satisfy their annual tax liability. The optional adjustment procedure which may be used by those paying pensions is available in Notice 1036-P, Additional Withholding for Pensions for 2009. The on-line version of Publication 15-T, New Wage Withholding and Advance Earned Income Credit Payment Tables, will be updated and available next week.

Pension payors are not required to use this new procedure and may continue to use only the February 2009 withholding tables. For plans that adopt the new procedure, withholding on pension payments will be automatically adjusted with no action needed by pensioners. The IRS is also encouraging pension payors who choose to implement the new withholding adjustment procedures to contact retirees who previously submitted a Form W-4P, Withholding Certificate for Pension or Annuity Payments, requesting additional withholding after the February withholding tables were issued.

Those who should pay particular attention to their withholding include married couples with two incomes, individuals with multiple jobs, dependents, some Social Security recipients who work and workers who do not have valid Social Security Numbers. Depending on their personal situation, some people could have less withheld from their paychecks than they need or want. People who believe their current withholding is not appropriate for their personal situation can perform a quick check by using the IRS withholding calculator on IRS.gov. Any necessary adjustments can be made by filing a revised Form W-4, Employee’s Withholding Allowance Certificate, with their employer.

New Rules for Differential Pay

May 14th, 2009

If you are not familiar with differential pay, which many people are not, it mainly deals with members of the military and employers who have employees who are in the military. 

Differential pay is the pay an employer gives to an employee who has is away due to their military obligations.  The pay is normally the difference between the employee’s military pay and the employee’s normal pay had they not been in the military and were just working for their employer. 

Revenue Ruling 2009-11 expands the tax treatment governed by Revenue Ruling 69-136 and further states that differential pay payments to an active member of the military who is on active duty for more than 30 days are subject to income tax withholdings even though the payments are not subject to the taxes imposed by FICA and FUTA. 

Internal Revenue Code 6051(a) provides that any person required to deduct and withhold from employees the tax under Internal Revenue Code 3402 must furnish each employee with a written statement showing the amount of wages paid and amounts withheld for income tax purposes.  Internal Revenue Code Section 31.6051-1(a) states that employers must use Form W-2 to fulfill this requirement.

Because differential payments are treated as wages subject to income tax withholding, an empoyer must report the payments on each employee’s Form W-2.

Nonprofits and Political Activities

May 13th, 2009

Public charities are prohibited from directly or indirectly participating in, or intervening in, Children of the worldany political campaign on behalf of or in opposition to a candidate for public office.

Contributions to political campaign funds or public statements of position made on behalf of the organization in favor of or in opposition to any candidate for public office violates the prohibition against political campaign activity.  Violation of this prohibition may result in revocation of an organization’s tax-exempt status and an imposition of excise taxes.

However, certain activities or expenditures are not prohibited, depending on the facts and circumstances.  For example, the conduct of certain voter education activities in a non-partisan manner does not constitute a prohibited political campaign activity.  Ohter activities intended to encourage people to participate in the electoral process also do not violate the prohibited political campaign activity rules.  But any voter education or voter registration activities with evidence of bias that would favor one candidate over another constitutes a prohibited campaign activitiy and should not be performed.

Disadvantages of Debt Cancellation

May 12th, 2009

With the economy in a downturn, more and more companies are choosing to discharge money and debt owed to them instead of attempting to collect.  When this discharge happens, the people receiving the discharged debt are initially happy to know that they no longer owe that company or that person.  Unfortunately, debt cancellation has its downs as well as its ups.

Generally, if a debt is cancelled or forgiven, then the debtor must include the cancelled amount in their gross income for tax purposes.  This means that the debtor’s amount of cancelled debt will be treated as income to the debtor, casuing the debtor to be required to report the cancelled debt amount on their federal income tax return.

However, there are several exceptions to the general rule that a cancelled debt is taxable to the debtor.  The following is a brief list of the most common exceptions:

  1. The cancellation of a student loan for a student required to work for certain employers
  2. The cancellation of debt that would have been deductible if paid
  3. The reduction of a debt by the seller of property if the debt arose from the purchase of the property
  4. The cancellation takes place in a bankruptcy case under the U.S. Bankruptcy Code
  5. The cancellation takes place when the debtor is insolvent and the amount excluded is not more than the amount by which the debtor is insolvent
  6. The cancelled debt is qualified real property business indebtedness

Although the cancellation of debt can be a good thing for a person, the debt must remember that there can be tax ramifications for the cancellation of their debt as well.

Military Combat Zone Exclusion

May 11th, 2009

militaryMost military taxpayers are aware of the combat zone exclusion, but they are unaware of the rules and restrictions placed on the exclusion and who actually qualifies for the exclusion.

If a person is a member of the U.S. Armed Forces who serves in a combat zone, then the person can generally exclude certain pay combat pay from their income.  However, a member of the U.S. Armed Forces must actually be a member of the United States military and not a contractor for the military.

The following is a small list of the types of combat pay that is tax free for enlisted members, warrant officers, or commissioned warrant officers:

  1. Active duty pay earned in any month served in a combat zone
  2. Imminent danger or hostile fire pay
  3. A re-enlistment bonus if the voluntary extension or re-enlistment occurs in a month served in a combat zone
  4. Pay for accrued leave earned in any month served in a combat zone
  5. Student loan repayments if the entire year of service required to earn the payment was performed in a combat zone

The most common combat zones are the areas of Afghanistan, Kosovo, the Persian Gulf, or any other area the President designates by Executive Order as an area in which the U.S. Armed Forces are engaging or have engaged in combat.

A military taxpayer’s combat zone exclusion pay should not be included in their Box 1 of Form W-2.  If the combat zone exclusion pay is included in the taxpayer’s Form W-2, then the taxpayer should get a corrected Form W-2 from their finance office.  All wages shown in Box 1 of Form W-2 are generally taxable.