Maco & Associates
News You Can Use
May 2010

In This Issue
Newsflash: Electronic Filing
An Update for Freelancers
Alternative Minimum Tax
Changes & Expiring Tax Credits
An Update for Businesses
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Client Portal
If you haven't already, please contact us to establish your Web Portal password. The Portal is a secure place where you can access your tax records. The login is located in the top right corner of our website. Initially, you'll find your 2009 tax records here, and we'll be adding previous years shortly.
Record Retention Tips
Tax Records - how long should you keep them?
We get a lot of questions about how long our clients should keep their tax records.

Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the "three-year law" and leads many people to believe they're safe, provided they retain their documents for this period of time.

However, if the IRS believes you have significantly under-reported your income (by 25 percent or more), or believes there may be indication of fraud, it may go back six years in an audit.

Visit our Record Retention Guide for more details.

Tax News and Changes That Affect You Now

You can count on Maco & Associates to bring tax issues to your attention year-round. Today, we have a number of updates affecting you now and in the near future!
Newsflash: Electronic Filing...

efileThe IRS has announced that Tax Preparers preparing 100 returns or more in 2011 (for 2010 tax returns) must file all returns electronically. Additionally, in 2012 (for 2011 tax returns), 100% of the returns filed by Preparers preparing 10 or more returns must be filed electronically.

What does this mean for you?
We'll be working with you a lot more electronically in the 2011 tax season to ensure that you are comfortable with the security of the web portal and the electronic return process, since we no longer have any choice but to efile. You'll be hearing more about our electronic processes throughout the year!
An Update for Freelancers...

FreelancingMany of our clients have turned to freelancing as a way to make more money in these hard times. If you're one of them, you are now a bona fide business, and have assumed the complexities of a business return. But you also have opportunities to save money with judicious record-keeping before you get that surprise 1099- MISC in 2011!

According to the IRS, you can deduct anything that's considered "ordinary and necessary" to conduct your specific business. This is a broad definition that should not be abused.

What can you deduct?
Allowable deductions include the cost of an individual golf outing at the country club, a single event in your Skybox seats, or entertaining business guests for the day at your summer house, provided you document the guests and business purpose. But, you cannot deduct the entire year of country club dues. The list is endless.

More ideas for legitimate business deductions can be found online.
Alternative Minimum Tax: Worse in 2010...

Statistics indicate that 17% of Americans will be hit with the Alternative Minimum Tax (AMT) in 2010, compared with the rate of 1% that was subject to it in 2009. What a dramatic shift! If you wailed when we gave you the AMT bad news with your 2009 tax return, the odds are that you're ready to plan to avoid it in the future. Those of you who weren't hit in 2009 will probably be surprised next year.

Tax IncreaseThe AMT began as a way to ensure that taxpayers pay at least a minimum amount of tax. It has a completely different set of calculations than the regular tax. For the regular tax, you add up your total income, subtract out various deductions and personal exemptions, then calculate the tax. Against the regular tax, you can claim various credits to reduce your tax even further. The AMT, however, does not allow the standard deduction, personal exemptions, or certain itemized deductions. Also, some income which is not subject to the regular tax is added for AMT purposes. Your tax under AMT rules may be higher than your tax under regular tax rules.

Let's talk numbers
The AMT is a recomputation of your federal income tax bill at a flat 26% rate. What you end up paying is the higher of this 26% or what you owe under regular tax rules. For our clients with AMT taxable income over $175,000, it becomes a flat 28% rate, except for those in the "married filing separately" category (for them, the 28% rate applies to income above $87,500). So you need to carefully manage your income and deductions between years to minimize the impact of AMT. Under the AMT, you're going to be taxed at a 26% or 28% rate. If you're in a higher bracket under the regular tax computation, income acceleration will yield a smaller net tax under the AMT. Alternatively, deduction deferral to a year in which you're in that higher bracket should give you a greater tax benefit. Although there is a long list of items that can trigger the AMT, for most individuals, the triggers include the following or a combination of the items listed below:
  • Preference income from exercising stock options from an employer's qualified plan, sometimes referred to as incentive stock options (ISOs);
  • Having large itemized tax deductions;
  • Having large miscellaneous itemized deductions;
  • Large itemized deductions for state income or sales tax, real property tax and personal property tax;
  • Large medical itemized tax deductions;
  • Home equity debt interest deduction; and
  • Interest income from private activity bonds.
Alternative Minimum Tax
Kiplinger has a great reference article on how to avoid the AMT for those that are interested.

And, as always, you can rely on us to offer advice and strategies to minimize your tax liability.
Changes & Expiring Tax Credits for 2010...

Individuals should be aware of the important changes below before filing taxes for the 2010 tax year.

  • Adjusted gross income (AGI) limitations will no longer affect personal exemptions and itemized deductions
  • Individuals will be allowed to claim personal casualty and theft losses in excess of $100
  • IRA deduction will open up to even more taxpayers
  • Maximum allowable AGI will increase in relation to the Earned Income Credit (EIC)
  • More credits may be taken against alternative minimum tax
  • The alternative minimum tax (AMT) exemption will decrease
Spring Greetings!A reminder that those who took the First Time Homebuyer Credit in 2008 must begin repaying in 2010.

The government giveth and the government taketh away! Below are the expiring tax credits:
  • Reduced Capital Gains Rate: The current long-term capital gains rates are capped out at 15%. These rates are set to expire at the end of 2010, at which time the maximum rate will increase to 20%.

  • Reduced Dividend Rate: Dividends are currently taxed at capital gains rates (currently maxed out at 15%). This provision is set to expire at the end of 2010, at which time dividends will be taxed as ordinary income. Ordinary income currently has a maximum tax rate of 35%. We expect some relief on dividends for lower income tax payers, but those with higher incomes will likely be paying additional taxes on their dividends in 2011.

  • Estate Tax Exemption: The estate tax is set to disappear in 2010 and then to reappear in 2011 with an estate exemption of $1,000,000. Receiving the full benefit of this provision in 2010 is a bit difficult to plan for, unless you yourself are planning on expiring!

  • Making Work Pay Tax Credit: Working individuals will receive a tax credit in 2010 up to $400. Couples will receive up to $800. This law is set to expire after 2010.
An Update for Businesses...

Now HiringThe HIRE Act provides an employer who hires a previously unemployed person (some terms apply - for example it looks like hiring your relatives is a no-no) with a tax incentive for the employer's share of Social Security taxes (a 6.2% savings).

This credit will be claimed on your employer tax returns and we'll need the IRS form W-11 from the newly hired employee.

Secondly, the HIRE Act provides a general business tax credit for each eligible worker retained for at least a year. The credit amount may be up to $1,000 per employee and would be claimed on the 2011 employer tax returns.

There will be more news to come regarding this and the impact of the Patient Protection and Affordable Care Act in future issues...
We know that it's hard to absorb all of the tax updates, changes, and expiring credits that we write about in our newsletter. Rest assured that Maco & Associates stays abreast of all tax news and looks out for you. We do the research so you don't have to!

As always, we're here year-round to help you make sense of the numbers. Give us a call at 610-489-7215 or send us an email any time throughout the year. We look forward to hearing from you.
- Maco & Associates