Coming Up: Tax-Free August Shopping

The new school year is just around the corner, and for millions of parents and students that means back-to-school shopping. Luckily, several states will be offering sales tax holidays in August. This year there are 17 states with tax holidays that apply to a number of items including clothing and basic school supplies. Forbes.com put together a good summary of the states offering tax-free shopping. I have included a portion of their article below, but you can find the full text at Forbes.com.

Within the next five weeks 17 states with sales taxes will be offering "holidays" during which certain purchases can be made tax-free. Take a trip to the right mall at the right time and you can save up to 10% in tax (including local levies) and possibly more, since some retailers offer sales timed to capitalize on the attention sales tax holidays draw. (Five states--Alaska, Delaware, Montana, New Hampshire and Oregon--have no general sales taxes.)

The timing for these holidays is no accident. The average family will spend $606 on back-to-school shopping for K-12 students this year, up from $549 last year, according to the National Retail Federation. In fact, back-to-school is the second-biggest consumer spending event for retailers, behind the winter holidays.

Mississippi kicks off the tax-free shopping season on Friday, July 30, with a two-day period when clothing items costing less than $100--but not school supplies--will be free from the state's 7% sales tax. In August 15 states will hold holidays, generally covering such items as school supplies, clothing costing less than $100 per item and in some cases, computers. In high-income Connecticut, clothing and footwear priced at up to $300 will be exempt from the state's 6% state tax.

Sales tax holidays aren't all aimed at back-to-school shopping, however. In Louisiana, on Aug. 6 and Aug. 7, shoppers can buy all sorts of items, including furniture, costing up to $2,500 free of state sales tax. Then in September, at the start of dove hunting season, the state will offer a special sales tax holiday for hunting supplies. (Guns, ammunition and off-road vehicles, but not hunting dogs, are exempt.) South Carolina also will hold a "Second Amendment" holiday, exempting handguns, rifles and shotguns from sales tax on the Friday and Saturday after Thanksgiving--during deer hunting season

Tax-Saving Moves for Small Businesses

There are a lot of important business tax changes on the horizon, and I always encourage my readers to stay up to date on these new developments. By studying the tax code, and planning your finances throughout the year you can save money when next tax season arrives.

The other day the Wall Street Journal posted a great article on easy tax-saving moves business owners can make. I have included a section of the article below, but if you are self-employed or own a business then I highly recommend reading the full text here.

Higher Taxes on Dividends

The maximum federal rate on dividends will automatically leap to 39.6% from the current 15% on Jan. 1 as the Bush tax cuts expire. Although the president has promised more than once to limit the maximum rate on dividends to 20%, the little-known fact is Congress must take action for that to happen. It's no sure thing. Even if it does happen, the maximum rate on dividends will jump again to 23.8% in 2013, thanks to the additional 3.8% Medicare tax that takes effect that year. So you're facing a 59% increase in the maximum federal tax on dividends (at least).

Higher Taxes on Long-Term Gains

Starting Jan. 1, the maximum federal rate on long-term capital gains will automatically increase to 20% from the current 15%. Starting in 2013, it will jump again to 23.8% due to the additional 3.8% Medicare tax. So you're facing a 59% increase in the maximum federal tax on long-term capital gains too.

What Can You Do?

Thankfully, you still have some time to take advantage of this year's historically low tax rates on dividends and long-term gains. Here are three strategies to consider right now. Don't ponder too long, because these ideas will take some time to execute, and Jan. 1 will arrive before you know it.

Strategy No. 1: Take Low-Taxed Dividends This Year

Say your profitable C corporation has a healthy amount of earnings and profits, or E&P. The concept of E&P is somewhat similar to the more-familiar financial accounting concept of retained earnings. While lots of E&P indicates a successful company, it also creates a tax side effect. To the extent of your corporation's E&P balance, corporate distributions to shareholders (like you) count as taxable dividends. Since the 2010 federal rate on dividends can't exceed 15%, dividends received this year will be taxed lightly. That probably won't be true for dividends received in 2011 and beyond. Therefore, shareholders (like you) should weigh the option of triggering a manageable current tax hit by taking dividends in 2010 against the option of absorbing a potentially bigger (but deferred) tax hit on dividends taken in future years.

Top College Savings Plan

With the cost of going to college increasing more and more each year, parents and grandparents need to start saving now. Many students and families are faced with the tough decision of how to pay for higher education—it is a tragedy when families have to make the decision not to attend college due to the inability to afford tuition cost. I have always been an advocate for making it possible for young people to attend college—I have personally sent five young adults to college! The best way to ensure your loved one gets a college education is to save for the expense. A 529 savings plan is recommended as a great investment for your future college plans.

These savings plans do not get taxed federally and many states also give a state income-tax credit for having one. Check whether your state offers a tax break and take advantage of it. To escape federal taxes on the distribution, you must use the 529 savings to pay for qualified educational expenses such as tuition, books, fees, room and board. Don’t worry, the 529 accounts are flexible. If your child doesn’t want to go to college, you can transfer funds to another family member without losing the tax benefits. If you do need to withdraw the money and use it elsewhere please know you will pay taxes on the distribution and a 10% penalty on the earnings. Buy a 529 savings account directly from your state and you will avoid paying commissions or adviser fees. According to Klipinger.com more than 60% of investors put their 529 money on autopilot by choosing age based portfolios.

Questions for the Tax Lady: December 21st, 2009

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: I have a small business with a few employees. If I throw a holiday party for them can I write off the expenses?

Yes, the IRS will let you deduct all expenses related to throwing a holiday office party. You could also deduct the costs of presents for your employees, as long as you do not give out cash or items easily exchangeable for cash, such as stocks.

Question # 2: What are some last minute ways to lower my taxable income for the year?

There are lots of quick ways you can lower your taxable income without leaving your computer. First of all, you could make a charitable donation. The Hannah Rose Foundation, a cause near to my heart, accepts donations online. Just remember to print out your receipt. You could also make an extra mortgage payment, or order energy efficient appliances online. For a list of 10 ways to lower your tax liability in under 10 minutes, check out this article on the RDTC Tax Help Blog.

10 Holiday Season Tax Tips

The holiday season is in full swing, and while your children’s heads may be filled with visions of sugarplums, yours is probably full of nightmares about the upcoming tax season. The holidays are expensive, and while hitting up the sales rack may save you a few bucks, the real savings this time of year come from strategic tax planning. Although most of us would probably prefer to be out in the snow than inside worrying about Uncle Sam and the IRS, you may be surprised to see how much money holiday season tax planning can save you.

1. ‘Tis the Season to Give

We all know that making a charitable donation can help lower your tax bill. Unfortunately, many families have cut back on charitable contributions this year because of the economy. However, after you review your financial documents you might need to make a few more donations to keep your tax liability low. The holiday season presents many excellent opportunities to give, from toy drives to coats for kids campaigns. Just be sure you are donating to a qualified charity, otherwise you might not be able to claim the deduction.

2. Purge & Organize Records

Getting your tax records organized before New Year’s Eve could be very beneficial in your tax planning efforts. Set aside some time to go through all of your financial documents and shred anything you no longer need. Then, you can calculate your total tax liability and determine if you need to take any last minute actions to reduce your adjusted gross income or increase the benefit of a tax credit.

3. The Office Holiday Party

Small business owners may get carried away while planning a seasonal party for your valued employees. Luckily, the IRS allows business owners to deduct some costs for parties and holiday gifts for your employees.

4. Gifts from Your Boss

If you work as a wage earning employee, then you might be getting a holiday or end-of-year gift from your employer. Most small gifts will not have tax implications. However, if your boss gives you a cash bonus, then you will have to claim it as income on your tax return.

5. Pay the Doctor

If you fell getting off the bunny slope, or threw out your back hanging Christmas lights on your house, then you may want to pay those medical bills sooner rather than later. If your yearly medical expenses exceed 7.5% of your adjusted gross income, you can deduct the expenses on your tax return. If your current expenses are a little shy of the deduction threshold, buying a new pair of glasses or an extra prescription could help reduce your tax liability.

6. Defer Now, Save Later

Self-employed taxpayers and small business owners may be able to defer some income until next year. Simply hold off on sending out a few invoices until after Christmas. This can reduce your taxable income for 2009 and give your clients the gift of more time to pay. Remember, this simply pushes the income off until next year, so this is not the best move for everyone. Wage-earning employees generally cannot take advantage of deferred income.

7. Smart Savings

If you have an IRA or retirement account that allows you to make tax-free contributions, then you check to see if you have maxed out your contributions for the year. If not, making a few extra contributions in December is a great way to lower your taxable income.

8. Look at Losses

In between shopping and decorating for the holidays, you should also take a few minutes to look over any stock market gains or losses for the year. If you have an especially high net capital gain, it might be beneficial to sell some stocks before the New Year begins. Capital losses can offset any capital gains, and you can deduct up to $3,000 in losses against regular income. Of course, you should never sell an investment for tax purposes alone, and you should speak with a tax professional.

9. Give Yourself an Extra Mortgage Payment

Although money is usually pretty tight around the holidays, if you can find a way to make an extra mortgage payment before the end of the year, you can save money on your taxes. Mortgage interest is 100% tax deductible, and the deduction is claimed when the interest is paid, regardless of when it was due.

10. The Un-welcome Gift Tax

If you are feeling extra generous and intend to give a large sum of money to a child or relative for the holidays, remember that the IRS taxes gifts over $13,000 per year (as of 2009). Speak with a tax professional if you need guidance on avoiding this nasty tax. Alternatively, the IRS does not place limits on funds used to pay for someone else’s education or medical expenses, and what better gift could there be than health and education?

Personal Finance: Now's The Time To Plan Tax Savings

This morning Reuters.com posted a new article stressing the importance of starting to plan for tax season now, and I could not agree more! By planning early you can make a conscious effort throughout the year to reduce your total liability! You can read a segment of the article below, or check out this article I posted on the topic earlier this year: Tax Planning for 2009 - How to Benefit from Recent Tax Law Changes.

High debts and recession anxiety have prompted many consumers to cut their expenses to the bone. But there's one other place they could be saving, and that's taxes.

Mid-year is the best time to start planning a year-end tax strategy. Accountants and other tax preparers aren't as busy as they are in the spring and the winter, so they have more time to meet with you and look over your financial situation. If you use a professional to help you at tax time, consider setting up an appointment this month. You'll get a lot of personal attention.

If you're a do-it-yourself tax planner and filer, it's still a good time to check out your status and lay plans for the remainder of 2009. You'll have five months to make the financial moves that will save you money when you file your income taxes for this year. And it's not just about income taxes: This year there are some sales and property tax moves that can put more cash in your pocket quickly.

Here's a grab bag of summer maneuvers -- from renegotiating your property taxes to grabbing the car tax break -- that you can use now to keep more money for yourself through 2009 and into 2010.

Appeal your property taxes. In the last three years, average U.S. home prices have fallen by about a third, according to the S&P/Case-Shiller Home Price Index. But it's unlikely your local or state government has been dropping your home's assessment or property taxes by the same percentages. It may be too late for this year's tax bill, but most states do have relatively easy procedures to follow if you want to appeal your assessment or the amount of your taxes. There's no reason not to do it. Check the website of your county or state treasurer's office to see how to do this.

Get organized early. Take a look at your year-to-date earnings and compare them with last year's. Remember that there is a Making Work Pay tax credit in play that will pay individuals $400 and couples filing jointly $800 for 2009. If you haven't already cut your withholding at work for this, you may be able to trim your withholding for the rest of the year. You may also be able to reduce your estimated tax payments if you typically earn a lot of money in interest income and find yourself earning less than usual this year. Start collecting and keeping all pertinent receipts. For example, you can get a child-care tax credit for the cost of day camp for kids under 13 if you are busy working while the kids are being bussed to the pool and park.

Law Offers Special Tax Breaks for Small Business

According to the IRS’ newest press release, they are urging “small businesses to act now and take advantage of tax-saving opportunities included in the recovery law.”

The American Recovery and Reinvestment Act (ARRA), enacted in February, created, extended or expanded a variety of business tax deductions and credits. Because some of these changes—the bonus depreciation and increased section 179 deduction, for example—are only available this year, eligible businesses only have a few months to take action and save on their taxes. Here is a quick rundown of some of the key provisions.

Faster Write-Offs for Certain Capital Expenditures

Many small businesses that invest in new property and equipment will be able to write off most or all of these purchases on their 2009 returns. The new law extends through 2009 the special 50 percent depreciation allowance, also known as bonus depreciation, and increased limits on the section 179 deduction, named for the relevant section of the Internal Revenue Code. Normally, businesses recover these capital investments through annual depreciation deductions spread over several years. Both of these provisions encourage these investments by enabling businesses to write them off more quickly.

The bonus depreciation provision generally enables businesses to deduct half the cost of qualifying property in the year it is placed in service.

The section 179 deduction enables small businesses to deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture and other qualifying property placed in service during 2009. Without the new law, the limit would have dropped to $133,000. The existing $25,000 limit still applies to sport utility vehicles. A special phase-out provision effectively targets the section 179 deduction to small businesses and generally eliminates it for most larger businesses.

Tax Move Saves Family $1.5 Million

From the Wall Street Journal.com:

The elderly couple weren't even Eileen O'Connor's clients, but she knew they needed assistance.

The husband, a longtime executive at a technology firm near Washington, D.C., had accumulated $6 million in company stock through his retirement plan and an employee stock purchase plan. He was in his mid-eighties and ready to retire. The problem: If he rolled the funds into an IRA, he would be required to take large distributions and pay the subsequent income tax on those withdrawals - which the couple actually didn't need in the first place.

O'Connor, a certified financial planner and vice president at McLean Asset Management Corp., heard about the situation from the couple's adult daughter, who was a client. O'Connor saw an opportunity to take advantage of tax benefits related to closely held stock in a retirement account. Certain employees who own such stock can gain tax benefits by rolling the shares into a taxable account instead of an IRA: The rollover earns a step-up in basis, the taxable account doesn't require minimum withdrawals, and any withdrawals are taxable at the capital-gains rate instead of the significantly higher ordinary-income rate.

To take advantage of those provisions, Internal Revenue Service rules require the employee elect this option before he or she retires. So timing was of the essence for this family - as was compliance with the complex set of IRS requirements related to such transactions.

There was another big issue as well: "Her father was used to managing everything himself, so he started making some of the arrangements on his own," says O'Connor. "Then he dropped dead in the middle of the whole thing."

That's when O'Connor stepped in. Last September, two months after the man's death, she investigated whether the transaction was still possible. Satisfied that it was, she began working nearly full-time on the project, which had to be completed by year end, in partnership with a CPA firm.

Ultimately, O'Connor's solution was to establish two trusts for the family. The first held assets for the wife, who is in her mid-eighties and in poor health. The second was funded with the rolled-over company stock in order to exclude it from the wife's taxable estate and to achieve the step-up in basis. Once the rollover was complete, O'Connor sold all the shares and distributed the proceeds to individual accounts for each of the couple's three adult children.

"It was a tremendous amount of work," O'Connor says." And it made me realize that there's a real opportunity in helping people who have complex estates to settle. There are new assets to be managed, and new planning issues for the beneficiary."

O'Connor's help certainly paid off: By taking advantage of the relatively obscure provisions in IRS code, she helped the family save $1.5 million.

Today, her firm manages assets for each member of the family. "It was a very stressful time for them. They were going through their own adjustments, and then there were all these details to deal with," she says. "It felt really good at the end to have taken care of that for them, and they recognized the value, too. I think they'll be clients for a long time because of it."

Several Tax Breaks Are Available For Tough Times

Freep.com recently posted an article discussing some tax breaks that are especially helpful during the economic downturn. You can find a snippet of the article below, but the full story can be read here.

If you lost a job or earned less money during the recession, you could be shocked to discover something that could generate a bigger income tax refund than you'd imagine.

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States with high unemployment, including Michigan, are seeing more families with children who qualify for the Earned Income Tax Credit -- a refundable credit worth up to $4,824 in 2008 for some strapped families with two or more qualifying children.

"The earned income credit kicks in more readily than before for some of our clients because they're making less money," said Lew Elbert, a retired salaried employee from General Motors Corp. and an Accounting Aid Society volunteer.

Taxpayers could take advantage of several tax breaks to save money in rough economic times. The key thing, of course, is to file by Wednesday -- even if you do not have enough money to pay a bill.

Here's some tax help for cash-challenged taxpayers:

• Who gets the Earned Income Credit?

You may be able to take the Earned Income Tax Credit if you have more than one qualifying child and your earned income was less than $38,646 or less than $41,646 if married filing jointly.

The income limits drop if you have one qualifying child or no children. The maximum credit for workers with no kids is $438.

The credit can be complicated. You must have a valid Social Security number, among other rules, and earned income must come from employment or self-employment.

Low- to moderate-income Michigan residents now can get a new state Earned Income Tax Credit by filing a state return. The Michigan credit is 10% of the federal credit on the 2008 return.

• Who gets the Michigan Homestead Property Tax Credit?

If you've got a modest income and rent or own a home, you might qualify if all of this is true: The place where you have your permanent home is in Michigan. Vacation homes don't count. You were a resident of Michigan for at least 6 months during the year. You own or rent and resided in a Michigan homestead on which property taxes were levied. Your household income is less than or equal to $82,650.

Everyone won't get money; it will depend on how much you pay for your property taxes or rent in relation to your household income.

Retirees Can Reap Some Tax Savings In Down Year

From The Associated Press:

Retirees reeling from the impact of the stock market's ruinous slide can take some solace from recent tax-law changes to help minimize their losses.

While the new options are no cause for wild celebration, taking advantage of them offers the chance to save on taxes in 2009 and regain some control over one's finances.

"Even with the market having gone down, you have the ability to cut some of your losses by using tax breaks," said Mitch Franklin, assistant professor of accounting at Syracuse University. "That can make your investment losses maybe a little less painful."

The biggest break for seniors is the one-year suspension of the required minimum distribution (RMD) rule, which Franklin called "a bit of light in this doom."

The rule mandates that those age 70 1/2 or over take a specified amount of money out of their IRA, 401(k) or similar retirement accounts annually. The total is based on their age and account value at the end of the previous year. But legislation passed by Congress late last year temporarily waives the whopping penalty for failing to take out the money: normally 50 percent on the amount that should have been taken out.

That gives seniors flexibility on how much to withdraw from their retirement accounts. They could choose not to touch their account and give their balance time to recover from the market downturn. They could take out whatever they need to help get by. Or they could take a distribution and just sit on it — getting it out of the account in order to lessen next year's required withdrawal.

IRS Outlines Tax Savings

The IRS Spokeswoman, Sue Hales, recently explained the some new tax credits in an article on the Daily Journal. You can find a clip of the article below, but the full post can be found here.

Housing Credits

The America Recovery and Reinvestment Act, which Obama recently signed into law, will affect 2009 tax returns more than 2008, Hales said, but it does include a new deduction for first-time homebuyers that can be applied this tax season. Additional real estate tax deductions of up to $500 for singles and $1,000 for married couples are available for those who file standard deductions.

Disaster Relief Credits

Net losses suffered in federally declared disasters can be deducted on tax filings.

Additional relief is being offered for victims of federally declared disasters in the Midwest that occurred between May 20 and July 31, 2008.

Qualified disaster victims can deduct casualty and theft losses without subtracting $100 plus 10 percent of adjusted gross income from that amount.

Income Tax Credit

Earned income tax credit, a refundable credit for eligible low- to moderate-income individuals, has increased to $4,824 for families with two or more children; $2,917 for families with one child; and $438 for individuals between 25 and 64 years old who have no children. If the income tax credit amount exceeds taxes owed, the difference will be refunded to the taxpayer.

Free tax filing through the IRS is available for those with a 2008 adjusted gross income of $56,000 or less. The program, available through the IRS Web site, has 20 participating tax companies, and three offer service in Spanish.

"We encourage people to e-file. There are many benefits for people to e-file," Hales said. "You can request to have it deposited in a bank account, and receive it in 10 days or less, which is much faster than mail. E-filing is far more accurate than paper filing. The error rate on e-file returns is usually less than 1 percent. The error rate on paper returns is around 20 percent."

A recovery rebate credit -- an extension of last year's stimulus payment -- is available to eligible taxpayers. Hales noted that the stimulus payment is not taxable or deductible, and only used to determine if an individual will receive a recovery rebate credit, and what amount it will be.

"Most will not be eligible for the recovery rebate credit this year," Hales said. "But if you did not receive the maximum (stimulus) amount for your financial situation last year, if your income changed in 2008, if you could be claimed as dependent in 2007 but not in 2008, or if you adopted a child in 2008, then you are eligible for recovery rebate credit."

5 Tax Saving Valentines Day Gifts

Valentines Day is known across the country as a day to give gifts to your loved ones (that is 2 weeks from this Thursday, for all you “Forgetful Freds” out there). But this date just so happens to fall in the middle of tax season, when taxpayers across the country have taxes in the mind. But do not be worried, there are a few gifts you can give that might also help you lower your tax liability. So if you had to write a big check to the IRS last year you may want to try one of the following tax saving valentines day gifts.

1. Give Money to a Spouse

If you and your spouse are both American citizens, then you can transfer money directly to your spouse. You will not have to pay any taxes on the transfer and it will actually lower your overall tax liability. However, it will have an adverse effect and raise your spouse’s liability.

2. Setup a Retirement Account

What better way to celebrate Valentines Day than by planning for your future? If you are married you can setup a retirement account for you and your spouse. You can transfer additional funds into this account which will help lower your tax liability.

3. Make a Charitable Contribution

Making a charitable donation in you’re the name of your loved one can be an excellent Valentine’s day gift. It will not only show them you care about charitable causes, but you can also deduct the expense as a charitable contribution. Just be sure keep proof of your contribution!

4. Pay College or Medical Bills

By offering to pay for a loved ones college or medical bills you can help them out while also getting a tax deduction. The IRS allows you to deduct these expenses as long as you mail in the bill yourself so that you have proof.

5. Give a Business Branded Gift

If you own a business you can always purchase some type of product that bears your company logo and write it off as a business expense. This may not seem like the most romantic of gifts, but now days you can have your logo printed on just about anything. Try considering a bathrobe with a small logo on the front, or custom chocolates.