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By Editor, October 21, 2011

As we approach year-end, it’s again time to focus on last-minute moves you can make to save taxes-both on your 2011 return and in future years. Before we get to specific suggestions, here are two important considerations to keep in mind.

First, remember that effective tax planning requires considering both this year and next year-at least. Without a multiyear outlook, you can’t be sure maneuvers intended to save taxes on your 2011 return won’t backfire and cost additional money in the future. For example, postponing a stock sale gain until next year would reduce your 2011 adjusted gross income (good), but increase the 2012 figure (bad). Higher income next year could make you ineligible for the child tax credit; reduce or eliminate the credits or deduction for college expenses; limit deductible losses from your rental real estate investments; and so on.

Second, be on the alert for the Alternative Minimum Tax (AMT) this year. It’s an add-on tax over and above your “regular” tax. Although you may have never owed AMT in the past, your odds of being hit are higher now. Why? Because the tax brackets, standard deduction, and personal exemption allowances used in calculating your regular tax liability are all indexed annually for inflation. Most AMT parameters are not. The odds of owing the tax go up every year due to this factor alone. The risk goes up another notch or two if you deduct a significant amount of state and local taxes or miscellaneous itemized deductions (like unreimbursed employee business expenses) or claim multiple dependents. These deductions are not allowed against the AMT. Finally, if you exercised incentive stock options or recognized a large capital gain this year, consider yourself a likely AMT victim.

Here are a few tax-saving ideas to get you started. As always, you can call on us to help you sort through the options and implement strategies that make sense for you.

Ideas for Your Business

Take Advantage of Tax Breaks for Purchasing Equipment, Software, and Certain Real Property. If you have plans to buy a business computer, office furniture, equipment, vehicle, or other tangible business property or to make certain improvements to real property, you might consider doing so before year-end to capitalize on the following generous, but temporary tax breaks:

• Bigger Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. (However, limits apply to the amount that can be deducted for most vehicles.) For tax years beginning in 2011, the maximum Section 179 deduction is $500,000. For tax years beginning in 2012, however, the maximum deduction is scheduled to drop back to $125,000.
• Section 179 Deduction for Real Estate. Real property costs are generally ineligible for the Section 179 deduction privilege. However, an exception applies to tax years beginning in 2011. Under the exception, your business can immediately deduct up to $250,000 of qualified costs for restaurant buildings and improvements to interiors of retail and leased nonresidential buildings. The $250,000 Section 179 allowance for these real estate expenditures is part of the overall $500,000 allowance. This temporary real estate break will not be available for tax years beginning after 2011 unless Congress extends it.

Note: Watch out if your business is already expected to have a tax loss for the year (or be close) before considering any Section 179 deduction, as you cannot claim a Section 179 write-off that would create or increase an overall business tax loss. Please contact us if you think this might be an issue for your operation.

• 100% First-year Bonus Depreciation. Above and beyond the bumped-up Section 179 deduction, your business can also claim first-year bonus depreciation equal to 100% of the cost of most new (not used) equipment and software placed in service by December 31 of this year. For a new passenger auto or light truck that’s used for business and is subject to the luxury auto depreciation limitations, the 100% bonus depreciation break increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service this year. The 100% bonus depreciation break will expire at year-end unless Congress extends it.

Note: 100% bonus depreciation deductions can create or increase a Net Operating Loss (NOL) for your business’s 2011 tax year. You can then carry back a 2011 NOL to 2009 and 2010 and collect a refund of taxes paid in those years. Please contact us for details on the interaction between asset additions and NOLs.

Claim the Health Insurance Tax Credit for Small Employers. Qualifying small employers can claim a tax credit that can potentially cover up to 35% of the cost of providing health insurance coverage to employees. A qualifying small employer is one that: (1) has no more than 25 Full-time Equivalent (FTE) workers, (2) pays an average FTE wage of less than $50,000 and (3) has a qualifying healthcare arrangement in place. The allowable credit is quickly reduced under a complicated phase-out rule when the employer has more than 10 FTE employees or an average FTE wage in excess of $25,000. Please contact us if you have questions about this break.

Evaluate Inventory for Damaged or Obsolete Items. Inventory is normally valued for tax purposes at cost or the lower of cost or market value. Regardless of which of these methods is used, the end-of-the-year inventory should be reviewed to detect obsolete or damaged items. The carrying cost of any such items may be written down to their probable selling price (net of selling expenses). [This rule does not apply to businesses that use the Last-in, First out (LIFO) method because LIFO does not distinguish between goods that have been written down and those that have not].

To claim a deduction for a write-down of obsolete inventory, you are not required to scrap the item. However, in a period ending not later than 30 days after the inventory date, the item must be actually offered for sale at the price to which the inventory is reduced.

Ideas for Maximizing Nonbusiness Deductions

One way to reduce your 2011 tax liability is to look for additional deductions. Here’s a list of suggestions to get you started:

Make Charitable Gifts of Appreciated Stock. If you have appreciated stock that you’ve held more than a year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock (or mutual fund shares) instead. You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. If you want to maintain a position in the donated securities, you can immediately buy back a like number of shares. (This idea works especially well with no load mutual funds because there are no transaction fees involved.)

However, if the stock is now worth less than when you acquired it, sell the stock, take the loss, and then give the cash to the charity. If you give the stock to the charity, your charitable deduction will equal the stock’s current depressed value and no capital loss will be available. Also, if you sell the stock at a loss, you can’t immediately buy it back as this will trigger the wash sale rules. This means your loss won’t be deductible, but instead will be added to the basis in the new shares.

Maximize the Benefit of the Standard Deduction. For 2011, the standard deduction is $11,600 for married taxpayers filing joint returns. For single taxpayers, the amount is $5,800. Currently, it looks like these amounts will be about the same for 2012. If your total itemized deductions are normally close to theseamounts, you may be able to leverage the benefit of your deductions by bunching deductions in every other year. This allows you to time your itemized deductions so that they are high in one year and low in the next. You claim actual expenses in the year they are bunched and take the standard deduction in the intervening years.

For instance, you might consider moving charitable donations you normally would make in early 2012 to the end of 2011. If you’re temporarily short on cash, charge the contribution to a credit card-it is deductible in the year charged, not when payment is made on the card. You can also accelerate payments of your real estate taxes or state income taxes otherwise due in early 2012. But, watch out for the AMT, as these taxes are not deductible for AMT purposes.

Bunch Deductions Subject to an Adjusted Gross Income Limit. Miscellaneous itemized deductions (such as unreimbursed employee business expenses) are deductible to the extent they exceed 2% of your adjusted gross income (AGI). (Your AGI is the number at the bottom of the first page of your return.) Medical expenses are deductible only to the extent they exceed 7.5% of AGI. To lessen the affect of these AGI limitations, try to bunch your miscellaneous and medical expense deductions into every other year.

Making the Most of Year-end Securities Transactions

For 2011 sales, you’ll generally owe only 15% on gains from investment assets held over one year (0% if the gains would otherwise fall into the 15% regular income tax bracket). Gains from investments held one year or less are taxed at your ordinary rates. So, the framework for year-end tax selling of investment securities is fairly simple. First, list those stocks, mutual fund shares, and bonds that you feel you could easily live without. You’ll probably have some winners (current market value above your cost) and some losers (value below cost) on the list.

Between now and year-end, you can sell enough losers to offset any capital gains recognized earlier this year. Plus, you can sell enough to generate another $3,000 in losses ($1,500 for married filing separate status), which then can be deducted against your income from all other sources. Because selling the losers reduces your income, the odds are increased that you’ll qualify for various other tax breaks.

If your year-to-date sales have resulted in an overall loss in excess of $3,000, you can sell enough winners between now and year-end to get back to the “negative $3,000″ level. Cashing in gains to that extent won’t add a cent to your federal tax bill, whether or not the assets have been held over 12 months. On the other hand, if your year-to-date sales are currently standing at zero or a net gain and you want to unload some winners, but no more losers, before year-end, try to sell only those you’ve owned over 12 months. Then, the resulting gains will be taxed at no more than 15%.

When selling stock or mutual fund shares, the general rule is that the shares you acquired first are the ones you sell first. However, if you choose, you can specifically identify the shares you’re selling when you sell less than your entire holding of a stock or mutual fund. By notifying your broker of the shares you want sold at the time of the sale, your gain or loss from the sale is based on the identified shares. This sales strategy gives you better control over the amount of your gain or loss and whether it’s long-term or short-term.

Secure a Deduction for Nearly Worthless Securities. If the dismal economy has left you with securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year. You can deduct a loss on worthless securities only if you can prove the investment is completely worthless. Thus, a deduction is not available, as long as you own the security and it has any value at all. Total worthlessness can be very difficult to establish with any certainty. To avoid the issue, it may be easier just to sell the security if it has any marketable value. As long as the sale is not to a family member, this allows you to claim a loss for the difference between your tax basis and the proceeds (subject to the normal rules for capital losses and the wash sale rules restricting the recognition of loss if the security is repurchased within 30 days before or after the sale).

Employer Stock Options. If you own appreciated stock acquired by exercising Incentive Stock Options (ISOs) and are now considering selling as part of your overall year-end strategy, remember what it takes to qualify for the 15% rate. First, the shares must be held over two years from the option grant date (the date you received the ISO). Second, the shares must be held over 12 months after the exercise date (the date you acquired the stock by exercising your ISO). Selling sooner means all or part of your gain may be taxed at your higher ordinary tax rate.

What if you own nonqualified options? It may pay to exercise now, if there’s just a modest spread between market value and your exercise price and you expect the stock to appreciate. You’ll owe tax at your ordinary rate on the spread, but any future appreciation will qualify for the 15% rate if you’ve held the shares over 12 months by the time you sell.

If you already own shares from exercising nonqualified options, remember your post-exercise gains will qualify for the 15% rate as long as more than 12 months have passed since you acquired the stock. A shorter holding period means your gains will be taxed at your higher ordinary rate, unless you have offsetting capital losses from other transactions this year.

Ideas for Seniors Age 701/2 Plus

Make Charitable Donations from Your IRA. IRA owners and beneficiaries who have reached age 70½ are permitted to make cash donations totaling up to $100,000 to IRS-approved public charities directly out of their IRAs. These so-called Qualified Charitable Distributions, or QCDs, are federal-income-tax-free to you, but you get no itemized charitable write-off on your Form 1040. That’s okay because the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages too. Contact us if you want to hear about them.

Be careful-to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Also, this favorable provision will expire at the end of this year unless Congress extends it. So, this could be your last chance.

Take Your Required Retirement Distributions. The tax laws generally require individuals with retirement accounts to take withdrawals based on the size of their account and their age every year after they reach age 701/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. There’s good news for 2011 though-QCDs discussed above count as payouts for purposes of the required distribution rules. This means, you can donate all or part of your 2011 required distribution amount (up to the $100,000 limit on QCDs) and convert taxable required distributions into tax-free QCDs.

Also, if you turned age 701/2 in 2011, you can delay your 2011 required distribution to 2012 if you choose. But, waiting until 2012 will result in two distributions in 2012-the amount required for 2011 plus the amount required for 2012. While deferring income is normally a sound tax strategy, here it results in bunching income into 2012. Thus, think twice before delaying your 2011 distribution to 2012-bunching income into 2012 might throw you into a higher tax bracket or have a detrimental impact on your other tax deductions in 2012.

Ideas for the Office

Maximize Contributions to 401(k) Plans. If you have a 401(k) plan at work, it’s just about time to tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you can stand, especially if your employer makes matching contributions. You give up “free money” when you fail to participate to the max for the match.

Take Advantage of Flexible Spending Accounts (FSAs). If your company has a healthcare and/or dependent care FSA, before year-end you must specify how much of your 2012 salary to convert into tax-free contributions to the plan. You can then take tax-free withdrawals next year to reimburse yourself for out-of-pocket medical and dental expenses and qualifying dependent care costs. Watch out, though, FSAs are “use-it-or-lose-it” accounts-you don’t want to set aside more than what you’ll likely have in qualifying expenses for the year.

Married couples who both have access to FSAs will also need to decide whose FSA to use. If one spouse’s salary is likely to be higher than what’s known as the FICA wage limit (which is $106,800 for this year and will likely be somewhat higher next year) and the other spouse’s will be less, the one with the smaller salary should fund as much of the couple’s FSA needs as possible. The reason is the 6.2% social security tax levy for 2012 is set to stop at the FICA wage limit (and doesn’t apply at all to money put into an FSA). Thus, for example, if one spouse earns $115,000 and the other $40,000 and they want to collectively set aside $5,000 in their FSAs, they can save $310 (6.2% of $5,000) by having the full amount taken from the lower-paid spouse’s salary versus having 100% taken from the other one’s wages. Of course, either way, the couple will also save approximately $1,400 in income and Medicare taxes because of the FSAs.

If you currently have a healthcare FSA, make sure you drain it by incurring eligible expenses before the deadline for this year. Otherwise, you’ll lose the remaining balance. It’s not that hard to drum some things up: new glasses or contacts, dental work you’ve been putting off, or prescriptions that can be filled early. Although, over-the-counter drugs (e.g., aspirin and antacids) no longer qualify for reimbursement by healthcare FSAs, bandages and medical equipment (e.g., thermometers and blood pressure monitoring devices) do qualify.

Adjust Your Federal Income Tax Withholding. If it looks like you are going to owe income taxes for 2011, consider bumping up the Federal income taxes withheld from your paychecks now through the end of the year. When you file your return, you will still have to pay any taxes due less the amount paid in. However, as long as your total tax payments (estimated payments plus withholdings) equal at least 90% of your 2011 liability or, if smaller, 100% of your 2010 liability (110% if your 2010 adjusted gross income exceeded $150,000; $75,000 for married individuals who filed separate returns), penalties will be minimized, if not eliminated.

Don’t Overlook Estate Planning

For 2011 and 2012, the unified federal gift and estate tax exemption is a relatively generous $5 million. However, the exemption will drop back to only $1 million in 2013 unless Congress takes action. In addition, the maximum federal estate tax rate for 2011 and 2012 is 35%. For 2013 and beyond, it is scheduled to rise from the current 35% to a painfully high 55%. Therefore, planning to avoid or minimize the federal estate tax should still be part of your overall financial game plan. Even if you already have a good plan, it may need updating to reflect the current $5 million exemption. Contact us for more information on the best ways to minimize estate taxes for someone in your situation.

Conclusion

Through careful planning, it’s possible your 2011 tax liability can still be significantly reduced, but don’t delay. The longer you wait, the less likely it is that you’ll be able to achieve a meaningful reduction. The ideas discussed in this letter are a good way to get you started with year-end planning, but they’re no substitute for personalized professional assistance. Please don’t hesitate to call us with questions or for additional strategies on reducing your tax bill. We’d be glad to set up a planning meeting or assist you in any other way that we can.  

Contact Us

Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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By Editor, September 13, 2011

President Obama introduced The American Jobs Act last night during a speech to Congress and the nation.  Details of this plan are outlined below in the official press release from The White House.

If you have any questions about how this act may effect your individual or business tax planning, please contact your Wilson Price accountant.

The White House
Office of the Press Secretary
For Immediate Release
September 08, 2011 

Fact Sheet: The American Jobs Act

THE AMERICAN JOBS ACT  

1. Tax Cuts to Help America’s Small Businesses Hire and Grow

• Cutting the payroll tax in half for 98 percent of businesses: The President’s plan will cut in half the taxes paid by businesses on their first $5 million in payroll, targeting the benefit to the 98 percent of firms that have payroll below this threshold.
• A complete payroll tax holiday for added workers or increased wages: The President’s plan will completely eliminate payroll taxes for firms that increase their payroll by adding new workers or increasing the wages of their current worker (the benefit is capped at the first $50 million in payroll increases).
• Extending 100% expensing into 2012: This continues an effective incentive for new investment.
• Reforms and regulatory reductions to help entrepreneurs and small businesses access capital.
    

2. Putting Workers Back on the Job While Rebuilding and Modernizing America

• A “Returning Heroes” hiring tax credit for veterans: This provides tax credits from $5,600 to $9,600 to encourage the hiring of unemployed veterans.
• Preventing up to 280,000 teacher layoffs,while keeping cops and firefighters on the job.
• Modernizing at least 35,000 public schools across the country, supporting new science labs, Internet-ready classrooms and renovations at schools across the country, in rural and urban areas.
• Immediate investments in infrastructure and a bipartisan National Infrastructure Bank, modernizing our roads, rail, airports and waterways while putting hundreds of thousands of workers back on the job.
• A New “Project Rebuild“, which will put people to work rehabilitating homes, businesses and communities, leveraging private capital and scaling land banks and other public-private collaborations.
• Expanding access to high-speed wireless as part of a plan for freeing up the nation’s spectrum.

3. Pathways Back to Work for Americans Looking for Jobs.

• The most innovative reform to the unemployment insurance program in 40 years: As part of an extension of unemployment insurance to prevent 5 million Americans looking for work from losing their benefits, the President’s plan includes innovative work-based reforms to prevent layoffs and give states greater flexibility to use UI funds to best support job-seekers, including:
  • Work-Sharing:  UI for workers whose employers choose work-sharing over layoffs.
  • A new “Bridge to Work” program: The plan builds on and improves innovative state programs where those displacedtake temporary, voluntary work or pursue on-the-job training.
  • Innovative entrepreneurship and wage insurance programs: States will also be empowered to implement wage insurance to help reemploy older workers and programs that make it easier for unemployed workers to start their own businesses.
• A $4,000 tax credit to employers for hiring long-term unemployed workers.
• Prohibiting employers from discriminating against unemployed workers when hiring.
• Expanding job opportunities for low-income youth and adults through a fund for successful approaches for subsidized employment, innovative training programs and summer/year-round jobs for youth.

4. Tax Relief for Every American Worker and Family

• Cutting payroll taxes in half for 160 million workers next year: The President’s plan will expand the payroll tax cut passed last year to cut workers payroll taxes in half in 2012 – providing a $1,500 tax cut to the typical American family, without negatively impacting the Social Security Trust Fund.
• Allowing more Americans to refinance their mortgages at today’s near 4 percent interest rates, which can put more than $2,000 a year in a family’s pocket.

5. Fully Paid for as Part of the President’s Long-Term Deficit Reduction Plan.To ensure that the American Jobs Act is fully paid for, the President will call on the Joint Committee to come up with additional deficit reduction necessary to pay for the Act and still meet its deficit target. The President will, in the coming days, release a detailed plan that will show how we can do that while achieving the additional deficit reduction necessary to meet the President’s broader goal of stabilizing our debt as a share of the economy.

AMERICAN JOBS ACT OVERVIEW

The American people understand that the economic crisis and the deep recession weren’t created overnight and won’t be solved overnight. The economic security of the middle class has been under attack for decades. That’s why President Obama believes we need to do more than just recover from this economic crisis – we need to rebuild the economy the American way, based on balance, fairness, and the same set of rules for everyone from Wall Street to Main Street.  We can work together to create the jobs of the future by helping small business entrepreneurs, by investing in education, and by making things the world buys. The President understands that to restore an American economy that’s built to last we cannot afford to outsource American jobs and encourage reckless financial deals that put middle class security at risk.

To create jobs, the President unveiled the American Jobs Act – nearly all of which is made up of ideas that have been supported by both Democrats and Republicans, and that Congress should pass right away to get the economy moving now. The purpose of the American Jobs Act is simple: put more people back to work and put more money in the pockets of working Americans. And it would do so without adding a dime to the deficit.

Tax Cuts to Help America’s Small Businesses Hire and Grow

New Tax Cuts to Businesses to Support Hiring and Investment:The President is proposing three tax cuts to provide immediate incentives to hire and invest:

• Cutting the Payroll Tax Cut in Half for the First $5 Million in Wages:This provision would cut the payroll tax in half to 3.1% for employers on the first $5 million in wages, providing broad tax relief to all businesses but targeting it to the 98 percent of firms with wages below this level.
• Temporarily Eliminating Employer Payroll Taxes on Wages for New Workers or Raises for Existing Workers:The President is proposing a full holiday on the 6.2% payroll tax firms pay for any growth in their payroll up to $50 million above the prior year, whether driven by new hires, increased wages or both. This is the kind of job creation measure that CBO has called the most effective of all tax cuts in supporting employment.
• Extending 100% Expensing into 2012:The President is proposing to extend 100 percent expensing, the largest temporary investment incentive in history, allowing all firms – large and small – to take an immediate deduction on investments in new plants and equipment.
• Helping Entrepreneurs and Small Businesses Access Capital and Grow: The President’s plan includes administrative, regulatory and legislative measures – including those developed and recommended by the President’s Jobs Council – to help small firms start and expand. This includes changing the way the government does business with small firms. The Administration will soon announce a plan to accelerate government payments to small contractors to help put money in their hands faster. The President is also charging his CIO and CTO to, within 90 days, stand up a one-stop, online portal for small businesses to easily access government services. As part of the President’s Startup America initiative, the Administration will work with the SEC to conduct a comprehensive review of securities regulations from the perspective of these small companies to reduce the regulatory burdens on small business capital formation in ways that are consistent with investor protection, including expanding “crowdfunding” opportunities and increasing mini-offerings. Finally, the President’s plan calls for Congress to pass comprehensive patent reform, increase guarantees for bonds to help small businesses compete for infrastructure projects and remove burdensome withholding requirements that keep capital out of the hands of job creators.

Putting Workers Back on the Job While Rebuilding and Modernizing America 

• Tax Credits and Career Readiness Efforts to Support Veterans’ Hiring:The President is proposing a Returning Heroes Tax Credit of up to $5,600 for hiring unemployed veterans who have been looking for a job for more than six months, and a Wounded Warriors Tax Credit of up to $9,600 for hiring unemployed workers with service-connected disabilities who have been looking for a job for more than six months, while creating a new task force to maximize career readiness of servicemembers.
• Preventing Layoffs of Teachers, Cops and Firefighters:The President is proposing to invest $35 billion to prevent layoffs of up to 280,000 teachers, while supporting the hiring of tens of thousands more and keeping cops and firefighters on the job. These funds would help states and localities avoid and reverse layoffs now, requiring that funds be drawn down quickly. Under the President’s proposal, $30 billion be directed towards educators and $5 billion would support the hiring and retention of public safety and first responder personnel.
• Modernizing Over 35,000 Schools – From Science Labs and Internet-Ready Classrooms to Renovated Facilities:The President is proposing a $25 billion investment in school infrastructure that will modernize at least 35,000 public schools – investments that will create jobs, while improving classrooms and upgrading our schools to meet 21st century needs. This includes a priority for rural schools and dedicated funding for Bureau of Indian Education funded schools. Funds could be used for a range of emergency repair and renovation projects, greening and energy efficiency upgrades, asbestos abatement and removal, and modernization efforts to build new science and computer labs and to upgrade technology in our schools. The President is also proposing a $5 billion investment in modernizing community colleges (including tribal colleges), bolstering their infrastructure in this time of need while ensuring their ability to serve future generations of students and communities.
• Making an Immediate Investment in Our Roads, Rails and Airports: The President’s plan includes $50 billion in immediate investments for highways, transit, rail and aviation, helping to modernize an infrastructure that now receives a grade of “D” from the American Society of Civil Engineers and putting hundreds of thousands of construction workers back on the job. The President’s plan includes investments to improve our airports, support NextGen Air Traffic Modernization efforts, and resources for the TIGER and TIFIA programs, which target competitive dollars to innovative multi-modal infrastructure programs. It will also take special steps to enhance infrastructure-related job training opportunities for individuals from underrepresented groups and ensure that small businesses can compete for infrastructure contracts.The President will work administratively to speed infrastructure investment through a recently issued Presidential Memorandum developed with his Jobs Council directing departments and agencies to identify high impact, job-creating infrastructure projects that can be expedited in a transparent manner through outstanding review and permitting processes. The call for greater infrastructure investment has been joined by leaders from AFL-CIO President Richard Trumka to U.S. Chamber of Commerce President Thomas Donohue.
• Establishing a National Infrastructure Bank: The President is calling for Congress to pass a National Infrastructure Bank capitalized with $10 billion, in order to leverage private and public capital and to invest in a broad range of infrastructure projects of nationaland regional significance, without earmarks or traditional political influence. The Bank would be based on the model Senators Kerry and Hutchison have championed while building on legislation by Senators Rockefeller and Lautenberg and the work of long-time infrastructure bank champions like Rosa DeLauro and the input of the President’s Jobs Council.
• Project Rebuild: Putting People Back to Work Rehabilitating Homes, Businesses and Communities. The President is proposing to invest $15 billion in a national effort to put construction workers on the job rehabilitating and refurbishing hundreds of thousands of vacant and foreclosed homes and businesses. Building on proven approaches to stabilizing neighborhoods with high concentrations of foreclosures, Project Rebuild will bring in expertise and capital from the private sector, focus on commercial and residential property improvements, and expand innovative property solutions like land banks. This approach will not only create construction jobs but will help reduce blight and crime and stabilize housing prices in areas hardest hit by the housing crisis.
• Expanding Access to High-Speed Wireless in a Fiscally Responsible Way: The President is calling for a deficit reducing plan to deploy high-speed wireless services to at least 98 percent of Americans, including those in more remote rural communities, while freeing up spectrum through incentive auctions, spurring innovation, and creating a nationwide, interoperable wireless network for public safety.  

Pathways Back to Work for Americans Looking for Jobs 

• Reform Our Unemployment Insurance System to Provide Greater Flexibility, While Ensuring 6 Million People Do Not Lose Benefits: Drawing on the best ideas of both parties and the most innovative states, the President is proposing the most sweeping reforms to the unemployment insurance (UI) system in 40 years help those without jobs transition to the workplace. Alongside these reforms, the President is reiterating his call to extend unemployment insurance, preventing 6 million people looking for work from losing their benefits and extending what the independent Congressional Budget Office has determined is the highest “bang for the buck” option to increase economic activity.
• Reemployment Assistance: States will be required to design more rigorous reemployment services for the long-term unemployed and to conduct assessments to review the longest-term claimants of UI to assess their eligibility and help them develop a work-search plan.  These reforms are proven to speed up UI beneficiaries’ return to work.
• Work-sharing: The President will expand “work-sharing” to encourage arrangements using UI that keep employees on the job at reduced hours, rather than laying them off.
• State Flexibility for Bold Reforms to Put the Long-Term Unemployed Back To Work: The President is proposing to provide additional funds to allow states to introduce new programs aimed at long-term unemployed workers, including:
• “Bridge to Work” Programs:States will be able to put in place reforms that build off what works in programs like Georgia Works or Opportunity North Carolina, while instituting important fixes and reforms that ensure minimum wage and fair labor protections are being enforced.  These approaches permits long-term unemployed workers to continue receiving UI while they take temporary, voluntary work or pursue work-based training. The President’s plan requires compliance with applicable minimum wage and other worker rights laws.
• Wage Insurance:  States will be able to use UI to encourage older, long-term unemployed Americans to return to work in new industries or occupations.
• Startup Assistance:  States will have flexibility to help long-term unemployed workers create their own jobs by starting their own small businesses.
• Other Reemployment Reforms:  States will be able to seek waivers from the Secretary of Labor to implement other innovative reforms to connect the long-term unemployed to work opportunities.
• Tax Credits for Hiring the Long-Term Unemployed: The President is proposing a tax credit of up to $4,000 for hiring workers who have been looking for a job for over six months.
• Investing in Low-Income Youth and Adults: The President is proposing a new Pathways Back to Work Fund to provide hundreds of thousands of low-income youth and adults with opportunities to work and to achieve needed training in growth industries. The Initiative will do three things: i) support summer and year-round jobs for youth, building off of successful programs that supported over 370,000 such jobs in 2009 and 2010; ii) support subsidized employment opportunities for low-income individuals who are unemployed, building off the successful TANF Emergency Contingency Fund wage subsidy program that supported 260,000 jobs in 2009 and 2010; and iii) support promising and innovative local work-based job and training initiatives to place low-income adults and youths in jobs quickly.
• Prohibiting Employers from Discriminating Against Unemployed Workers: The President’s plan calls for legislation that would make it unlawful to refuse to hire applicants solely because they are unemployed or to include in a job posting a provision that unemployed persons will not be considered.  

 More Money in the Pockets of Every American Worker and Family

• Cutting Payroll Taxes in Half for 160 Million Workers Next Year:The President’s plan will expand the payroll tax cut passed last December by cutting workers payroll taxes in half next year. This provision will provide a tax cut of $1,500 to the typical family earning $50,000 a year. As with the payroll tax cut passed in December 2010, the American Jobs Act will specify that Social Security will still receive every dollar it would have gotten otherwise, through a transfer from the General Fund into the Social Security Trust Fund.
• Helping More Americans Refinance Mortgages at Today’s Historically Low Interest Rates:The President has instructed his economic team to work with Fannie Mae and Freddie Mac, their regulator the FHFA, major lenders and industry leaders to remove the barriers that exist in the current refinancing program (HARP) to help more borrowers benefit from today’s historically low interest rates. This has the potential to not only help these borrowers, but their communities and the American taxpayer, by keeping borrowers in their homes and reducing risk to Fannie Mae and Freddie Mac. 

Fully Paid for as Part of the President’s Long-Term Deficit Reduction Plan. 

• To ensure that the American Jobs Act is fully paid for, the President will call on the Joint Committee to come up with additional deficit reduction necessary to pay for the Act and still meet its deficit target. The President will, in the coming days, release a detailed plan that will show how we can do that while achieving the additional deficit reduction necessary to meet the President’s broader goal of stabilizing our debt as a share of the economy.

• Proposal has a gross cost of $10 billion, but a net deficit reducing impact of $18 billion because of spectrum auction proceeds.

Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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By Editor, August 2, 2011

On June 9, 2011 Governor Robert Bentley signed into law the Beason-Hammon Alabama Taxpayer and Citizen Protection Act which imposes tough new restrictions on dealing with unauthorized aliens as well as significant new obligations for employers. Although the Act is being challenged, it is scheduled to go into effect in part on September 1, 2011.

Employer Provisions

This new Act includes two major provisions that affect employers. The first makes it unlawful (by State law) to knowingly employ, hire, or continue to employ an unauthorized alien. The second mandates employers to use the E-Verify system to verify the employment eligibility of every new employee starting April 1, 2012 (or January 1, 2012 if contracting with any State-funded entity).

While we suspect the E-Verify system may be a little burdensome, its correct use will provide “protection” should the employee later be determined to be an unauthorized alien.   Additionally, the Act provides employers immunity from claims by terminated employees, provided the termination was within the law and not made in regard to race, ethnicity, or national origin but instead was consistent with the requirements of the law and Act.

Penalties for Non-Compliance

Penalties for first violation include:

• Court ordered termination of every unauthorized alien;
• Three year probation requiring quarterly reports to the local DA regarding each new employee;
• File an affidavit with the DA regarding compliance; and
• Business license suspended for up to ten (10) days for the violating location.

Penalty for second violation:

• Permanent revocation of business license for violating location.

Penalty for third violation:

• Permanent revocation of business license for all locations through-out the state.

While it remains improper to deduct any wages or compensation of any kind from state income or business taxes for the performance of any services paid to an unauthorized alien, the new Act imposes a penalty equal to ten (10) times the business expense deduction claimed in violation of the Act.

The Act also includes new causes of action for discrimination for failure to hire a “legal” job applicant or for discharging a “legal” employee while hiring or retaining any unauthorized alien that the employer should have reasonably known was unauthorized. Damages may include compensatory relief, court costs, and reasonable attorney fees.

The Act allows any Alabamian to petition the Attorney General to bring enforcement action against a noncompliant business. Additionally, the Act makes it illegal for an unauthorized alien to apply for work, solicit work in a public or private business, or perform work as an employee or independent contractor. Violations are a Class C misdemeanor and are subject to a fine of up to $500.

Contractual Agreements Un-Enforceable

The courts will not enforce any contracts between a party and an unauthorized alien if the party had constructive knowledge that the unauthorized alien was “illegal” unless the contract did not require the unauthorized alien to remain in the U.S. for more than twenty-four (24) hours upon execution of the contract. Exceptions to this rule include: one (1) nights lodging, food to be consumed by the unauthorized alien, medical services, or travel to the unauthorized alien’s home country.

Contractor/Subcontractor Liabilities

A prime contractor will not be liable if it obtains an affidavit from its subcontractors that they are in compliance with the law. This should include a statement that they do not employ any unauthorized aliens and that they use the E-Verify system.

Definitions and Other Components Included in the Act

• The Act includes self-employed individuals but excludes casual domestic labor performed within a household.
• An unauthorized alien is anyone who is not a citizen or national of the United States and who is not authorized to work in the U.S. pursuant to federal law.
• What is considered “reasonable knowledge” under Federal standards?
  • Unauthorized alien admits that he/she is unauthorized/illegal;
  • Employer fails to require the timely or correct completion of the I-9 Form (or use the E-Verify system starting April 1, 2012); or
  • Failure to act or follow-up on a “No-Match Letter” or “Tentative Nonconfirmation” from the E-Verify system.

What Should You Do?

• Enroll in the E-Verify system at https://e-verify.uscis.gov/enroll/StartPage.aspx?JS=YES
• Audit current I-9 practices and documentation to ensure compliance;
• Designate and train responsible parties on the Alabama Immigration Act including I-9 and E-Verify;
• Include an E-Verify policy in your employee handbook.

Wilson Price Human Resource Services can help. For assistance, please call your Wilson Price professional or Kelly Cochran at 334-260-2433.

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By Editor, July 7, 2011

The recent storms have made the tax treatment of losses, and recoveries related to such events an important topic.  Special tax treatment is provided for Federally Declared Disaster Areas, including an option to claim the loss deduction on the 2010 (prior year) tax return and exclusion from taxation of Qualified Disaster Relief Payments.

The following counties in Alabama have been determined to be Federally Declared Disaster Areas as a result of the recent storms:

Autauga, Bibb, Blount, Calhoun, Chambers, Cherokee, Chilton, Choctaw, Clarke, Colbert, Coosa, Cullman DeKalb, Elmore, Escambia, Etowah, Fayette, Franklin, Greene, Hale, Jackson, Jefferson, Lamar Lauderdale, Lawrence, Limestone, Madison, Marengo, Marion, Marshall, Monroe,  Morgan, Perry, Pickens, Shelby, St. Clair, Sumter, Talladega, Tallapoosa, Tuscaloosa, Walker, Washington, and Winston.

The IRS provides the following information regarding casualty losses:

Casualty Losses – Definition

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.

• A sudden event is one that is swift, not gradual or progressive.
• An unexpected event is one that is ordinarily unanticipated and unintended.
• An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged.

Casualty Losses – Disaster Loss

A disaster loss is a casualty loss that occurred in an area determined by the President of the United States to warrant federal disaster assistance. These places are known as “Federally Declared Disaster Areas”.

Casualty Losses – Loss Proof

The following is information needed to support a casualty loss claim:

• The type of casualty (car accident, fire, storm, etc.) and when it occurred.
• That the loss was a direct result of the casualty.
• That you were the owner of the property, or if a lessee, that you were contractually liable for the damage.
• Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
• Documentary evidence to support the claimed allowable loss.

Casualty Losses – To Prove a Loss

Records may have to be reconstructed. The information gathered will be used for tax purposes, as well as insurance reimbursement.

Casualty Losses – Claiming Disaster Losses on a Return

• Affected taxpayers in a Federal Disaster Area have the option of claiming disaster-related casualty losses on their federal income tax return either in the tax year the casualty occurred or the immediate preceding tax year.
• Depending on when the disaster occurred, claiming the loss on an original or amended return for last year may get the taxpayer an earlier refund. But, waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Casualty Losses – Pub 547 and Pub 584

• Individuals may deduct personal property losses that are not covered by insurance or other reimbursements, but they must first subtract $100 for each casualty event and then subtract ten percent of their adjusted gross income from their total casualty losses for the year.
• Details on figuring a casualty loss deduction can be found in IRS Publication 547, Casualty, Disasters and Thefts.
• Publication 584, Casualty, Disaster and Theft Loss Workbook is designed to help you figure loss on personal-use property. It contains schedules to help you compute loss on your main home, personal property and your vehicles. However, the schedules are for information purposes only. You must file Form 4684 to report your loss on Form 1040.

Casualty Losses – Determination

To determine the amount of casualty loss to claim for damaged or destroyed property, you must:

• Determine the adjusted basis of the property before the disaster.
• Determine the decrease in Fair Market Value (FMV) of the property as a result of the disaster.
• Then, from the smaller of the adjusted basis or the FMV,
• Subtract any insurance or other reimbursement received.
• All individual losses are subject to:
  • 2% AGI limit if used for business by employee.
  • $100 deductible per event.
  • 10% AGI limit per annum.

Casualty Losses – Federally Declared Disaster Areas

In any federally-declared disaster area:

• No gain is recognized on any insurance proceeds received for “unscheduled” personal property that was part of the contents of a main home.
• Payments for the home and any scheduled property are treated as one payment. Any of this money used to replace any type of replacement property is not a recognized gain.
• Disaster relief payments or assistance do not reduce the casualty loss unless they replace lost or destroyed property.
• Disaster unemployment payments are unemployment income and are taxable.
• Post-disaster grants are generally not included in income. See IRC 139.  However, do not include as casualty losses any amounts covered by the grant payments.
• Taxpayers have the option to claim disaster-related casualty losses for either the year of occurrence or the prior year.  However, the State of Alabama allows a claim for the loss only in the year the loss occurs.
• Taxpayers should put the assigned Disaster Designation in red ink at the top of their tax forms. [For example, “Alabama/ Severe Storms, Tornadoes, Straight-line Winds and Flooding.” ]
• Taxpayers should include in income:
  • Temporary living payments from insurance that are in excess of the actual increase in temporary expenses.
  • The excess goes on line 21 of Form 1040.

Gains on Casualty Losses

If you receive an insurance payment or other reimbursement in excess of the adjusted basis of damaged or destroyed property you will have a gain:

• The gain is the amount received minus the adjusted basis in the property.
• If your main home is destroyed and the insurance proceeds result in a gain:
• You can treat this as a sale of residence subject to the same rules.
• If the home was not used or owned for 2 of the last five years a reduced maximum gain exclusion will apply.
• If located in a Federally Declared Disaster Area, you can postpone any “recognized” gain on your main home if you buy a new home within 4 years of the end of the year the disaster occurred, or
• You can recognize the gain and report it.
• You do not have to recognize gain on destroyed/damaged business property if it is replaced within two years of the end of the tax year in which the gain is realized.
• If received payment in 2011 resulting in a gain, you must replace the property prior to 1/1/2014 to defer the gain. 
• You cannot postpone the gain if you buy replacement property from a related party. This applies to:
  • C Corps
  • Partnerships in which more than 50% of the capital or profits is owned by a C Corp
  • All others if the total realized gain for the year is over $100,000.
• To defer the gain:
  • You must buy property specifically to replace the damaged or destroyed property in order to defer the gain.
  • The basis of the replacement property will be the adjusted basis of the property being replaced.

Reporting Casualty Gains/Losses

Report loss on return for year it occurred. If the event took place in a federally declared disaster, you can amend the prior year return.

The election to amend must be made by:

• Due date (without extensions) for filling your income tax return for the tax year in which the disaster actually occurred.
• Due date (with extensions) for filing the return for the preceding tax year.
• Once the election is made, it can be revoked within 90 days of making the election. The taxpayer must:
  • Return any refund or credit received from making the choice.
  • If revoked prior to getting a refund, must return refund within 30 days of receiving it for the revocation to be effective. 

Individual Returns:

• Losses go on Form 4684 and carry to Schedule A.
• Gains go on Form 4684 and carry to Schedule D.
• Includes losses on income-producing property and property used in performing services as an employee (held less than one year).
• Have the option to claim disaster-related casualty losses for either the year of occurrence or the prior year.

Business and income producing property:

• Losses are reported on Form 4684 and carry to various forms.
• Business use of home carries to Form 8829
• .Other business property carries to Form 4797.

Rental Properties:

• Report on Form 4684 and then on Form 4797.
• Have 2 years from the close of tax year when you realize the gain to replace the property and defer the gain.
• Losses are not limited by Form 8582.

Insurance Reimbursement after filing:

• If less than expected (and accounted for on casualty loss) include the difference as a loss on the return for the year when you can reasonably say you’re not getting any more money.
• If greater than expected (and accounted for on casualty loss) include the difference as income in the year received.

Reporting Casualty Gains/Losses –Net Operating Losses

• Individual or Business casualty losses can generate Net Operating Losses (NOL).
• NOLs generated by casualty losses can be carried back or forward the same as any other NOL.

Reporting Casualty Gains/Losses -What’s Not Included

Losses do not include:

• A reduction in profits or
• Loss of income.

The recent storms have been traumatic for many.  There is some tax relief to assist with recovery from these disasters.  Please contact us and we will help you take full advantage of the available tax relief.

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By Editor, June 5, 2011

Although business is business and pleasure is pleasure, the world rarely adheres to absolutes. Thus, this time of year you may want to mix some vacation days with your business travel. With a little planning, you can get Uncle Sam to subsidize your downtime. Here are the strategies for doing just that.

Combine Business and Vacation Plans for Domestic Travel

If you go on a business trip within the U.S. and add on some vacation days, you know you can deduct some of your expenses. The only question is how much. First, let’s cover just the pure transportation expenses. By this, we mean the costs of getting to and from the scene of your business activity, which includes travel to and from your departure airport, the airfare itself, baggage fees and tips, cabs to and from the destination airport, and so forth. Costs for rail travel or to drive your personal car also fits into this category. The bottom line is your domestic transportation costs are 100% deductible, as long as the primary reason for the trip is business rather than pleasure. On the other hand, if vacation is the primary reason for your travel, none of your transportation expenses are deductible.

The IRS doesn’t specify how to determine if the primary reason for domestic travel is business. Obviously, the number of days spent on business versus pleasure is the key factor. We can look to the rules covering foreign travel for guidance on this issue. They say your travel days count as business days, as do weekends and holidays if they fall between days devoted to business, and it would be impractical to return home. “Standby days,” when your physical presence is required, also count as business days, even if you’re not called upon to work on those days. Any other day principally devoted to business activities during normal business hours is also counted as a business day, and so are days when you intended to work, but couldn’t due to reasons beyond your control (local transportation difficulties, power failure, etc.).

For domestic trips, you should be able to claim business was the primary reason for a sojourn whenever the business days exceed the personal days. Be sure to accumulate proof about this and keep the proof with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or training seminar, keep the program and take some notes to show you attended the sessions.

Once at the destination, your out-of-pocket expenses for business days are fully deductible. Out-of-pocket expenses include lodging, hotel tips, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days are nondeductible (except in the “Saturday Night Stayover” situation explained later in this letter).

Example: You are a sole proprietor. You arrange a business meeting with an important client in San Francisco on Wednesday morning. You fly out Sunday evening and spend all day Monday sight-seeing. Tuesday you spend most of the day preparing for the meeting, attend the meeting the next morning, take the client to lunch, and return home Wednesday night. So, Sunday, Tuesday, and Wednesday count as business days. The business meeting obviously necessitated the trip, and you clearly didn’t spend an unreasonable amount of time on personal activities. Therefore, you can deduct your airline tickets, plus your lodging for Sunday and Tuesday nights, 50% of your meals for Sunday, Tuesday, and Wednesday, your other out-of-pocket expenses for those days, and 50% of the cost of lunching with your client.

Maximizing the Tax Benefits of a Saturday Night Stayover

A great way to maximize deductions for the personal portions of a trip is with a Saturday night stayover that reduces the overall cost of the trip. If you can show staying the extra day or two costs less (or no more) than coming back home immediately after the business meeting is over, the IRS allows you to deduct your additional meal and lodging expenses (subject to the 50% disallowance rule for meals) for the extra day(s). Naturally, you still must have a dominant business purpose for making the trip in the first place. Be sure to document that your airfare savings equaled or exceeded the out-of-pocket costs of staying the extra day(s). Keep the proof with your tax records.

Example: You have a business meeting in New York on Monday morning. You and your spouse fly into town Saturday morning and spend the weekend sightseeing. Your round trip airfare is only $400 versus $1,200 if you came in Sunday night and left Monday. In this situation, Saturday is a personal day since you would normally fly in Sunday. No problem. As long as your meal and lodging expenses for Saturday are no more than $800, you can write-off your whole trip (subject to the 50% disallowance rule for meals). Of course, you generally can’t deduct the additional costs for your spouse (his or her airfare and meals and any extra charges for having two people instead of one in the hotel room), and you can’t deduct purely personal expenses like show tickets and baseball games. Still, this is a great deal taxwise.

Deducting Foreign Travel Costs

When you travel outside the U.S. primarily for business reasons, the general rule is that you must allocate all your travel expenses, including transportation, between business and personal. However, there are two big exceptions, and you often can plan ahead to take advantage of them. You can deduct 100% of your transportation expenses if the trip is primarily for business and you meet either of the following rules:

• The One-week Rule. You’ll meet this rule if your business trip is a week or less, not counting the day you leave, but counting the day you return. In this case, you can deduct 100% of your transportation costs and 100% of your other out-of-pocket expenses for business days (subject to the 50% disallowance rule for meals). You cannot deduct out-of-pocket costs incurred on vacation days. The good news: Weekends and holidays falling between business days count as business days. Ditto for an intervening weekday between two business meeting days. “Standby days” when your physical presence is required for business also count, even if you spend most of your time on personal pursuits during those days. Finally, business days include the day of your return trip plus days you intended to work, but couldn’t due to reasons beyond your control.
• The 25% Rule. You can also deduct 100% of your transportation expenses for trips lasting over a week, as long as you spend less than 25% of your days on vacation. For this purpose, count the day of departure and day of return as business days, as long as you are traveling to or from the business destination. Also, count all the other types of business days mentioned under the one-week rule above. Once again, however, you cannot deduct meals, lodging, and other expenses allocable to personal days.

Even if you don’t qualify for either of the above two exceptions, you (or, more likely, your employer) can still deduct 100% of your transportation costs if you’re traveling on behalf of your employer under a reimbursement or travel allowance arrangement and you’re not a managing executive of the company or related to your employer. Finally, in sort of a catchall provision, 100% of your transportation costs to foreign destinations are deductible if you can prove a personal vacation was not a consideration in choosing to make the trip.

If 100% of your transportation expenses aren’t deductible under any of the above rules, the business percentage of your transportation costs are still deductible—assuming the trip is primarily for business. To calculate the business percentage, divide the days spent principally on business activities by the total number of days outside the country, counting departure and return days. The travel days count as business days, just as the other types of days are considered business days for purposes of the one-week rule and 25% rule. You can also deduct the out-of-pocket expenses allocable to your business days (subject to the 50% disallowance rule for meals).

Example: On Thursday, you fly to Paris for customer meetings on Friday and Monday. You vacation the following Tuesday through Friday and return home Saturday. The two travel days, the two meeting days, and the weekend days in between count as business days. However, the four vacation days amount to 40% of your time, so you fail the 25% test. Therefore, you must allocate your airfare between business and personal. You can deduct 60% of your airfare, plus your out-of-pocket expenses for the six business days.

Example: Same as above, except this time you have only two vacation days (20% of your total days). Remember, the weekend days between your business meetings also count as business days. Now you can deduct 100% of your airfare because you pass the 25% test. You can also deduct your out-of-pocket expenses for the eight business days.

Example: Same as above, except this time you return home on Thursday, three days after concluding your business meetings. Now, your trip is considered to last only a week (the departure day doesn’t count). So, you can deduct 100% of your airfare under the one-week rule. You also deduct your out-of-pocket expenses for all the business days.

Travel to Attend Foreign Conventions

If the reason for a trip outside North America is to attend a business convention directly related to your trade or business, you may qualify for deductions. However, you must follow all of the foreign travel rules just discussed plus show it was just as reasonable for the meeting to be held on foreign soil as in North America and that the time spent in business meetings or activities was substantial when compared to that spent sight-seeing and other personal activities. Otherwise, you can only deduct the registration fees and other costs directly related to business while on your trip. Regardless of the location, you cannot deduct travel costs to attend investment or financial planning conventions and seminars.

Fortunately, the stricter rules for foreign conventions are inapplicable in many cases because the definition of “North America” for this purpose is very liberal. It includes Canada, Mexico, Puerto Rico, the U.S. Virgin Islands, American Samoa, the Northern Mariana Islands, Guam, the Marshall Islands, Micronesia, Palau, Netherlands Antilles, Bahamas, Aruba, Antigua, Barbuda, Barbados, Bermuda, Costa Rica, Dominica, Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Saint Lucia, Trinidad and Tobago, Midway Islands, Palmyra Atoll, Baker Island, Howland Island, Jarvis Island, Johnston Island, Kingman Reef, and Wake Island.

Conventions on Cruise Ships

Deductions related to conventions directly related to your trade or business that are held aboard cruise ships are limited to $2,000 per individual per calendar year. In addition, the ship must be a U.S. registered vessel, and all of its ports-of-call must be in the U.S. or its possessions. Finally, the following information must be attached to your return in the year the deduction is claimed:

1.    A signed statement showing the total days of the trip (excluding travel to and from the ship), the number of hours each day spent attending scheduled business activities, and the program of the convention’s scheduled business activities.

2.    A statement signed by an officer of the sponsoring organization that includes a schedule of each day’s business activities and the number of hours you attended those activities.

Conclusion

We hope this information helps you plan some lovely trips that also deliver some nice tax breaks. However, we realize the rules explained here are rather complicated. Please contact your Wilson Price accountant if you have questions or want more information.

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By Editor, May 4, 2011

IRA owners and beneficiaries who have reached age 70 1/2 are permitted to make cash donations to IRS-approved public charities directly out of their IRAs. These so-called qualified charitable distributions, or QCDs, are federal-income-tax-free to you, but you get no itemized charitable write-off on Form 1040. That’s OK because the tax-free treatment of QCDs equates to an immediate 100% deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages too. Here is what you need to know.

QCD Basics

A QCD is a cash payment of an otherwise taxable distribution, by your IRA trustee, directly to a qualified public charity. The funds must be transferred directly from your IRA trustee to the charity. You cannot receive the funds yourself and then make the contribution to the charity. However, the IRA trustee can give you a check made out to the charity that you then deliver to the charity.

You cannot arrange for more than $100,000 of QCDs in any one year. If your spouse has IRAs, he or she has a separate $100,000 limitation. If you are the beneficiary of an IRA (as opposed to an account owner), you too are eligible for the QCD deal if you are at least age 70 1/2.

You must get and keep substantiation of the contribution from the charity. Also, you must not have received any benefit in return for making the contribution.

The QCD privilege is scheduled to expire at the end of this year, so if you want to take advantage of the idea, it is not too soon to start thinking about it.

Income Tax Benefits

QCDs are not included in your Adjusted Gross Income (AGI). This lowers the odds that you’ll be affected by various unfavorable AGI-based phase-out rules. In addition, you don’t have to worry about the 50%-of-AGI limitation that can delay itemized deductions for garden-variety cash donations to public charities.

QCDs count as a payouts for purposes of the Required Minimum Distribution (RMD) rules. Therefore, you can donate all or part of your 2011 RMD amount (up to the $100,000 limit on QCDs) and thereby convert taxable RMDs into tax-free QCDs.

Does the QCD Deal Work for You?

The QCD privilege is beneficial for seniors in the following circumstances:

• You don’t itemize deductions. Under the “normal” rules, only itemizers get any income tax benefit from charitable donations. Making QCDs will save taxes whether you itemize or not because neither you nor your heirs will ever have to pay income taxes on the donated amounts.
• Your itemized charitable donations would be delayed by the 50%-of-AGI limitation. Making QCDs will avoid this unfavorable limitation.
• You want to avoid being taxed on RMDs that you are forced to take from your IRAs. The QCD strategy does the trick while also allowing you to satisfy your charitable inclinations.

Conclusion

If you’re interested in taking advantage of the tax-saving QCD strategy for 2011, you will need to arrange with your IRA trustee for money to be paid out to one or more qualifying charities by year-end.

If you have questions about QCDs or want more information, your Wilson Price accountant.