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December 2010

Feature Articles

Tax Tips

Financial Tips

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This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.

Who Benefits from Health Care Reform?

There's plenty of debate about whether the new health care reform bill is good for America. Whatever your views, it looks like the Affordable Care Act - a massive piece of legislation passed by Congress in March - is here to stay.

The majority of Americans without health insurance are the owners or employees of small businesses. For many of these individuals, health insurance has been unaffordable for themselves, their families, and their employees.

But the new legislation is set to change that. It makes it less expensive to purchase insurance - and it provides tax credits for small business owners who do.

And, because the aim of the bill is to get the vast majority of Americans at least minimally covered, the Act imposes tax penalties on those who don't purchase insurance.

If you own a small business or are a sole proprietor, read on for an overview of how the bill affects you.

What Do Small Businesses Get?

Cheaper Insurance through Health Exchanges. The Affordable Care Act sets up state-run Health Insurance Exchanges that allow individuals and small business owners to get the same discounted insurance rates larger corporations have been enjoying for years. This makes coverage much more affordable for these folks.

Tax Credits. The Act comes with $40 billion in tax credits for small businesses who offer health insurance coverage to their employees. The federal government expects that more than 60% of small employers - or 4 million firms - will be eligible for these incentives. These are meant to recover some of the companies' cost of offering coverage.

Effective now, if your business employs 25 or fewer people who are making $50,000/year or less on average, you get up to 35% credit on health insurance premiums. The credit is based on a sliding scale, with smaller companies that have lower-paid workers receiving the largest credit.

In 2014, if you buy that insurance through a Health Care Exchange, the maximum credit rises to 50% for 2 years.

Tip: The tax credit cannot be claimed by small business owners themselves or self-employed individuals. However, those folks may be eligible for federal subsidies. See the guidelines below.

What If You're Self-Employed?

Individuals who work for themselves can buy insurance on the health exchanges and also receive more affordable rates.

To help pay for the premiums, people whose annual income is up to four times the poverty level receive federal subsidies.

Tip: Individuals can make up to $44,000 and still qualify for subsidies to pay for their health care from health exchanges. A family of four can make up to $88,000.

Note: To help pay for health care reform, taxpayers in the highest tax bracket - those making $200,000 individually or $250,000 married - will see a rise in their Medicare taxes. Medicare Part A taxes will rise by .9%, and taxes on unearned income will increase by 3.8%. These changes take effect January 1, 2013.

The Coverage Mandate - Are You Affected?

Small businesses with 50 or fewer employees are not required to provide insurance to their employees under the new health care law.

However, larger companies with more than 50 full-time employees do need to provide insurance, beginning in 2014, or face tax penalties of $2,000 annually per worker above 30 workers.

Everyone Must Participate - or Face a Fine

If you don't buy coverage, you're faced with a tax penalty to the federal government, beginning in 2014. This fine starts fairly small, but by 2016, when it's fully phased in, it's more substantial. An insurance-less person would have to pony up whichever is greater: $695 for each uninsured family member, up to a maximum of $2,085; or 2.5 percent of household income.

Special Attention for Three Industries

Employers in three industries - tanning salons, construction, and restaurants - see these specific changes under health care reform:

Tanning Salons. In July 2010, a 10% sales tax was instituted on individuals using tanning salons. The revenue raised by this measure is meant to help pay for the costs of the Act.

Construction. In the construction industry, a higher percentage of companies must comply with the 2014 coverage mandate - those with just 5 or more employees.

Restaurants. Under the mandated insurance provision that goes into effect in 2014, two part-time workers equal one full-time worker.

Want to Know More? Give Us a Call

There's a lot more to the Affordable Care Act than we've covered here - including the elimination of denial of coverage for pre-existing conditions and free preventive care. At a whopping 2,600 pages, this bill is complicated and far-reaching.

If you have any questions about how this bill affects your business and your tax obligations, please let us know. We're here to help.

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How to Prepare for a Successful Retirement

As you approach retirement, it's vital that you pay attention to key financial questions. Here are some of the items you should check:

Health Insurance. Are you among the lucky few who will continue to be covered after retirement? If not, you'll need to replace the coverage. If you will be eligible for Medicare, you may want to start checking up on "Medigap" coverage.

Tip: Before you retire, take care of any non-emergency medical, dental, or optical needs (if your employee plan coverage is broader than Medicare).

Other Types of Insurance. Once you retire, you may need to replace employer-provided life insurance with extra coverage. You should also consider purchasing long-term health care insurance in case of a lengthy nursing home stay in the future.

Social Security. Decide whether you want to take early Social Security benefits if you're retiring before your full retirement age. You can get 80% of your benefits at age 62.

Tip: For most people, taking Social Security benefits at their full retirement age makes the most financial sense. If you think you might need to take early benefits, be sure to discuss this with us.

Company Plan Payout. You should plan well in advance how you'll take the payout from your pension plan or 401(k) plan. Will you transfer the funds to an IRA? How will the funds be invested?

Relocation. If you're planning a move to another state, explore the financial ramifications of living there before you move.

Tip: If you're relocating, it might be wise to buy the new home before retirement.

Let Us Help. Retirement is an exciting time - but a little advance planning makes for a much smoother transition. Use this checklist, and contact us for additional guidance.

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Ensuring Your Family's Security with an Estate Plan

No matter what your net worth, you should have an estate plan in place. Such a plan ensures that your family is cared for and your assets maximized upon your death. An estate plan consists of your will, health care documents, powers of attorney, life insurance coverage, and post-mortem letters.

For those of you with an estate plan already, good for you! But we have additional advice: make it a priority to review the plan every two years to see whether it needs updating.

Here are the life events that necessitate an update to your plan:

  • Divorce
  • Marriage or remarriage
  • Birth/adoption of child
  • Death of spouse or child
  • Sale of residence or purchase of new residence
  • Retirement
  • Enactment of new tax laws

Tip: We suggest that you consult with the professional who prepared your estate plan should any of these events occur.

Here are some of the action steps you may need to take when you update:

  1. Change an executor
  2. Revise a will to account for an increase in assets
  3. Reassess your life insurance needs
  4. Add or change a power of attorney
  5. Change legal documents to comport with state laws if you move to a different state
  6. Change wills or trust instruments to account for changes in beneficiaries
  7. Change your post-mortem letter to reflect new assets, changes in executors, or other changes

Because of the recent amendments to the estate tax laws, many estate plans may need to be revised. Give us a call for a review of your situation.

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Financial Planning Dos & Don'ts

During these uncertain economic times, financial planning has become a challenge. Here are a few financial planning suggestions that can add to your peace of mind about financial matters and simplify your life:

  • At least once a year, write down your investment goals and what strategy you will use to reach them. This will keep you focused.

  • Instead of giving money to many different charities, pick a few that are important to you, and give them a larger amount. This type of directed giving not only makes more sense, but also makes it easier to track your donations at tax time.

  • Inventory your household possessions, optimally with a camera or camcorder. Keep the inventory at work or in a safe-deposit box. This inventory will help should you need to submit a homeowner's insurance claim.

  • Use one insurance agent and one financial advisor for your transactions.

  • If you have doubts about entering into a transaction, don't do it. You will probably save yourself money, time, and aggravation.

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Your Pension Plan - Small Changes for 2011

In 2011, dollar limitations for pension plans and other retirement-related items will either remain unchanged, or the inflation adjustments for 2011 will be small. Check out what to expect in the new year....

  • The contribution limit for employees who participate in section 401(k), 403(b), or 457(b) plans, and the federal government's Thrift Savings Plan, remains unchanged, at $16,500.

  • The catch-up contribution limit in those plans for those aged 50 and over remains unchanged, at $5,500.

  • The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010.

    For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple's income is between $169,000 and $179,000, up from $167,000 and $177,000.

  • The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to 179,000 for married couples filing jointly, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.

  • The AGI limit for the saver's credit (also known as the retirement savings contributions credit) for low- and moderate-income workers is $56,500 for married couples filing jointly, up from $55,500 in 2010; $42,375 for heads of household, up from $41,625; and $28,250 for married individuals filing separately and for singles, up from $27,750.

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Should You File a Tax Return?

Do you ever wonder whether your income is high enough to warrant the filing of a tax return? Because the minimum income level varies depending on filing status, age, and the type of income you receive, it can be a bit complicated.

Use the following guide to determine whether you must file a federal income tax return for 2010.

Single Taxpayers
If you expect to file a single return, the IRS requires you to file a return for 2010 if your gross income for the year is at least $9,350 if you are under age 65 and $10,750 if you are 65 or older.

Married Filing Jointly
For married persons filing jointly, you are required to file a return if gross income for 2010 is at least $18,700 if both of you are under age 65. If one of you was at least age 65 in 2010, the limit is $19,850 - and if both of you were 65 or over, you must file if you made at least $20,900.

If you are not living with your spouse at the end of the year or you weren't living with them on the day they passed away, the IRS requires you to file a return if your gross income is at least $3,650. Each personal exemption in 2010 is worth $3,650.

For married persons filing a separate return, no matter what age, you must file a return if gross income is at least $3,650.

Head of Household
For persons filing as head of household, you must file a return for 2010 if gross income is at least $12,000 if under age 65 and $13,400 if at least age 65.

Qualifying Widow or Widower
For persons filing as a qualifying widow or widower with a dependent child, you must file a return for 2010 if gross income is at least $15,050 if under age 65 and $16,150 if at least age 65.

Other Situations That Require Filing
Even if you don't earn this much income, other situations necessitate filing a tax return. For example, a dependent has to file a return for 2010 if they received more than $950 in unearned income or more than $5,700 in earned income.

Other situations include:

You Owe Certain Taxes. If you owe FICA or Medicare taxes (also called payroll taxes) on unreported tips or other reported income that were not collected, you must file a return. You must also file a tax return if you are liable for any alternative minimum tax. Finally, you must file a return if you owe taxes on individual retirement accounts, Archer MSA accounts, or an employer-sponsored retirement plan.

Advance Earned Income Tax Credit Payments. The Earned Income Tax Credit is a federal income tax credit for eligible low-income workers. The credit reduces the amount of tax an individual owes, which may be returned in the form of a refund. If you receive advance payments for the earned income credit from your employer, you must file a return.

Self-Employment Earnings. If your net earnings from self-employment are $400 or more, you must file a return.

Church Income. If you earn employee income of at least $108.28 from either a church or a qualified church-controlled organization that is exempt from employer-paid FICA and Medicare taxes, you must file a return.

Call us for more information about filing requirements and your eligibility to receive tax credits.

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Filing Status - What You Need to Know

Your federal tax filing status is based on your marital and family situation. It is an important factor in determining your standard deduction and your correct amount of tax, and whether you must file a return.

Your marital status on the last day of the year determines your status for the entire year. If more than one filing status applies to you, you may choose the one that gives you the lowest tax obligation.

There are five filing status options:

  • Single. Generally, if you are unmarried, divorced, or legally separated according to your state law, and you do not qualify for another filing status, your filing status is Single.
  • Married Filing Jointly. If you are married, you and your spouse may file a joint return. If your spouse died during the year and you did not remarry, you may still file a joint return with that spouse for the year of death. This is the last year for which you may file a joint return with that spouse.
  • Married Filing Separately. Married taxpayers may elect to file separate returns.
  • Head of Household. Generally, you must be unmarried and paid more than half the cost of maintaining a home for you and a qualifying person for more than half a year.
  • Qualifying Widow(er) with Dependent Child. You may be able to file as a qualifying widow or widower for the two years following the year your spouse died. To do this, you must meet all four of the following tests:
    1. You were entitled to file a joint return with your spouse for the year he or she died. It does not matter whether you actually filed a joint return.
    2. You did not remarry in the two years following the year your spouse died.
    3. You have a child, stepchild, or adopted child (a foster child does not meet this requirement) for whom you can claim a dependency exemption.
    4. You paid more than half the cost of maintaining a household that was the main home for you and that child, for the whole year.

    After the two years following the year in which your spouse died, you may qualify for head of household status.

We can definitely help you determine which filing status is best for your situation. Just call us up or send an email.

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Financial Tips for December 2010

Make Charitable Contributions
Consider making charitable contributions before year-end both to obtain the maximum tax deduction and to fulfill any charitable programs or commitments you may have established.

Buy a New Car
If you need a new car, now is a great time to purchase or lease. Frequently, dealers are anxious to clear out last year's inventory prior to year-end. In making your choice, consider the federal tax (and occasional state tax) advantages for buying fuel-efficient vehicles.

Examine Investments
Examine your current investments to determine those with unrealized losses. Consider selling those investments to take the loss this year. You can deduct up to $3,000 in capital losses in excess of capital gains. However, do not let the tax savings outweigh the investment potential. You might consider "swapping" for a similar company in the same industry if you like the potential of the industry.

Pay Tax-Deductible Expenses
Consider paying tax-deductible expenses prior to year-end. Some common examples are real estate taxes, quarterly state or local income taxes, investment-related expenses, and dues. These must be paid by December 31 to obtain a deduction this year. Professional guidance will be helpful here, so please call us.

Evaluate Your Progress
Evaluate your progress for the year. How close were you to your budget? Recalculate your net worth. Compare it to the value at the beginning of the year. How did you do?

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Tax Due Dates for December 2010

December 10 Employees who work for tips - If you received $20 or more in tips during November, report them to your employer. You can use Form 4070.
December 15 Corporations - Deposit the fourth installment of estimated income tax for 2010. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.

Employers Social Security, Medicare, and withheld income tax - If the monthly deposit rule applies, deposit the tax for payments in November.

Employers Nonpayroll withholding - If the monthly deposit rule applies, deposit the tax for payments in November.

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