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Tax Tips From Joan Sturges

Get Your Refund as Quickly as Possible:
In these difficult economic times, taxpayers will want their refunds as soon as possible. You will get your refund in less than half the time if you e-file, rather than filing a paper return. Also, consider direct deposit; you will receive your refund much faster than waiting for a check by mail. I can assist you in receiving your refund in the least amount of time by efiling and direct deposit.

Stock Market Gains And Losses Must be Reported:
Remember, if you sell stocks for a gain you can only offset these gains by losses that you have actually realized by the sale of stocks. You can only deduct $3,000 of your capital losses against your ordinary income, then you carryover your remaining losses to future years

Retirement Accounts:
Taxpayers can reduce their taxable income by contributing to a traditional IRA or other retirement plans. The maximum IRA contribution varies and it depends upon your age and income levels. For those over 50 years of age the maximum contribution is greater.

Earned Income Credit:
The EIC continues to expand to the availability to low and moderate-income workers. Eligibility is based on earned income, adjusted gross income, investment income, filing status, and the number of qualifying children. The maximum credit amount changes each year and is in addition to the $1,000 per child tax credit, making work pay credit and recovery payments. The new laws also raises the level of income before the EIC begins to phase-out.

Home Energy Credits:
The American Recovery and Reinvestment Act of 2009 triples the credit rate and the lifetime maximum and modifies the type of improvements that are eligible for the energy credits. The taxpayer is entitled to a credit of 30% of the cost of qualified energy property installed in 2009 and 2010 to a maximum of $1,500. Qualified energy property includes insulation, storm windows and doors, metal or asphalt roof designed to reduce the heat gain, efficient heat pumps and air conditioners. Taxpayers can rely on the manufacturer’s certification for qualifying energy improvements.

American Opportunity Tax and Education Credits:
Anyone seeking examples of unnecessary complexity in the Internal Revenue Code need to look no further than the provisions dealing with incentives for education. Taxpayers need to juggle the following competing and often mutually exclusive subsidies for the cost of higher education; the Hope Credit, the Lifetime Learning Credit, the Qualified Tuition Deduction, Coverdell Savings Accounts, Section 529 plans, Education Savings Bonds, Employer-Provided Educational Assistance Programs and the American Opportunity Tax Credit. The cost of tuition, books, computers, supplies and fees paid to complete the class have to be considered along with the taxpayers’ income, and whether the student is part-time or full-time.

Tax Planning in a Down Economy:
Taxpayers have been taking a beating, and full recovery hasn’t materialized as hoped. At its most basic, tax planning involves examining alternatives related to personal and business transactions and determining the tax impact of those choices. Because decisions made in one year can impact taxes in future years, careful tax planning should always encompass multiple years. Strategies for reducing taxable income might include: defering receipt of income, takeing a sabbatical or unpaid leave, investing in tax-free income producing assets, bunching deductible expenses, prepaying deductible expenses, doing repairs on rental property, maximizing expensing of new business assets, making charitable contributions from an IRA, or gifting stocks with large capital gain potential.

Capital Gains Planning:
The traditional method of capital gains planning involves offsetting gains by “harvesting” losses before year end. Worthless stock is deductible in the year when both the liquidating value and potential value is worthless. The taxpayer bears the burden of establishing when a stock is or is not worthless. Taxpayers will also pay less federal tax if they pay the state income taxes in the same year that they recognized their larger gains.

Foreclosures and Cancellation of Debt:
You don’t have to be a news junkie to know that foreclosures have reached historical levels in the U.S. and more seem to be on the way. California has accounted for almost 27% of the nation’s total foreclosures. Cancellation of debt can be taxable as ordinary income even if it arises from the sale of a personal residence. Taxes can arise when a borrower loses property by foreclosure, deed in lieu, mortgage modification, short sale, or abandonment. One out of three mortgages in California is higher than the value of the home. Cancellation of debt is excludable from income in some cases when the debt resulted from the purchase or improvement of the home.

LLC’s, FLP’s, PTR’s, and Sub S Corporations:
Over the last couple of decades, alternate entities have been created to conduct business. The most popular are the Limited Liability Companies (LLC’s), Family Limited Partnerships (FLP’s), limited and general partnerships, and various trust entities. The income and losses of most of these entities are flowed through to the owner from the K-1 issued from the entity to the owners schedules A, B, D, and E, then to the owners’ 1040 form. A non-dividend distribution in excess of the owner’s basis is taxed at the more favorable capital gains rates. Losses are not allowed in excess of the owner’s basis including debt. These entities have costs to maintain them and maybe your money would be better spent on additional insurance.

Long-Term Gains and Dividends Get Special Tax Treatment:
Uncle Sam will allow you to receive qualified dividends and tax profits on the sale of long-term assets you’ve owned, and pay no tax until they push you into the twenty five percent tax bracket. To qualify for the zero percent rate you must have owned the asset over a year and be in the ten percent or fifteen percent  tax brackets.  The twenty five percent  tax bracket starts at taxable income greater than $69,000 for married filing jointly and $34,500 for single filers.

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