Year-end tax planning is especially challenging this year because of uncertainty over whether Congress will enact sweeping tax reform that could have a major impact in 2012 and beyond. And even if there’s no major tax legislation in the immediate future, Congress next year still will have to grapple with a host of thorny issues, such as whether to once again “patch” the alternative minimum tax (e.g., to avoid a drastic drop in post-2011 exemption amounts), and what to do about the post-2012 expiration of the Bush-era income tax cuts (including the current rate schedules, and low tax rates for long-term capital gains and qualified dividends), and the expiration of favorable estate and gift rules for estates of decedents dying, gifts made, or generation-skipping transfers made after Dec. 31, 2012.

Regardless of what Congress does late this year or early the next, there are solid tax savings to be realized by taking advantage of tax breaks that are on the books for 2011 but may be gone next year unless they are extended by Congress. These include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line deduction for qualified higher education expenses; and tax-free distributions by those age 70- 1/2 or older from IRAs for charitable purposes. For businesses, tax breaks that are available through the end of this year but won’t be around next year unless Congress acts include: 100% bonus first-year depreciation for most new machinery, equipment and software; an extraordinarily high $500,000 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property); and the research tax credit.

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make.

Year-End Tax Planning Moves for Individuals

□ Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. Don’t forget that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.

□ If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2011.

□ Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later.

□ Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2011 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2011. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year.

□ If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2011.

□ If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as-is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.

□ It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2012.

□ Consider using a credit card to prepay expenses that can generate deductions for this year.

□ If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2011 if doing so won’t create an alternative minimum tax (AMT) problem.

□ Take an eligible rollover distribution from a qualified retirement plan before the end of 2011 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2011. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2011, but the withheld tax will be applied pro rata over the full 2011 tax year to reduce previous underpayments of estimated tax.

□ Estimate the effect of any year-end planning moves on the AMT for 2011, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should not be accelerated.

□ Accelerate big ticket purchases into 2011 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. Unless Congress acts, this election won’t be available after 2011.

□ You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.

□ If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, and energy efficient heaters or air conditioners. You may qualify for a tax credit if the assets are installed in your home before 2012.

□ Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2011 in connection with enrollment at an institution of higher education during 2011 or for an academic period beginning in 2011 or in the first 3 months of 2012.

□ You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.

□ You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.

□ Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2012, and (2) held for more than five years. In addition, such sales won’t cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. Our office can fill you in on the details.

□ If you are age 70- 1/2 or older, own IRAs, and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.

□ Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70- 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2011, you can delay the first required distribution to 2012, but if you do, you will have to take a double distribution in 2012—the amount required for 2011 plus the amount required for 2012. Think twice before delaying 2011 distributions to 2012—bunching income into 2012 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2012 if you will be in a substantially lower bracket that year, for example, because you plan to retire late this year.

□ Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for Businesses & Business Owners

□ Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax years beginning in 2012, the dollar limit will drop to $139,000, the beginning-of-phaseout amount will drop to $560,000, and expensing won’t be available for qualified real property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.

□ Businesses also should consider making expenditures that qualify for 100% bonus first-year depreciation if bought and placed in service this year. This 100% first-year write-off generally won’t be available next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.

□ Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2011. Under current law, the WOTC won’t be available for workers hired after this year.

□ Make qualified research expenses before the end of 2011 to claim a research credit, which won’t be available for post-2011 expenditures unless Congress extends the credit.

□ If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.

□ Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.

□ If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

Other issues

Late filing penalty for S Corporation tax returns- For returns on which no tax is due, the penalty is $195 for each month or part of a month (up to 12 months) the return is late or does not include the required information, multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation’s tax year for which the return is due. If tax is due, the penalty is the amount stated above plus 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. 

North Carolina Sales and Use Tax Obligations-from NCDOR website  Every person engaged in business in North Carolina is required to register with the Department and collect and remit the tax due on all taxable tangible personal property, taxable services or certain digital property sold or delivered for storage, use, or consumption in North Carolina. Every person who purchases any taxable tangible personal property, taxable services or certain digital property for storage, use, or consumption in North Carolina for business use from out-of-state vendors upon which the tax has not been fully paid must register with the Department and remit the tax due on such purchases. To register for sales and use tax purposes, Registration Application, Form NC-BR, must be completed and mailed to the Department. All registrants will be furnished returns to be used in reporting and remitting all sales and use taxes due.

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Thank you very much; we truly appreciate you and hope to continue assist you with your tax and
accounting needs in the future! Let us know if we can do anything to better serve you.
Free Controller/CFO Consultation!
We work on an as-needed basis as Controller/CFO with businesses which neither need nor desire
a full-time employee for this function, providing the expertise you need at a fraction of the cost!
Call us for a free consultation; let us help you save $!! Your referrals are also welcome!
TIDBITS FROM THE TAX CORNER:
New standard mileage rates. The Internal Revenue Service recently announced an increase in
the optional standard mileage rates for the final six months of 2011. The rate has been increased
to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This
is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011. The
new six-month rate for computing deductible medical or moving expenses will also increase by
4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for
providing services for charitable organizations remains at 14 cents a mile.
9905 Devereaux Drive  Matthews, NC 28105  704-846-3485  www.LarryAClarkCPA.com
Tracking business miles. Rumor has it that the IRS is cracking down in this area. It is
absolutely critical that a mileage log be maintained to track your business miles. We’ve
encountered quite a few taxpayers who fail to keep adequate records, providing instead an
“estimate” of business mileage for the year. The IRS requires the following information in order
to substantiate a deduction for the standard mileage rate: date of trip, destination, business
purpose, mileage for each business trip and total miles for the year (business and non-business).
Failure to keep such records will result in no deduction on your return. Upon IRS audit, you
would owe penalties/interest on the additional tax owed because of disallowance of such
deduction. We will send you a free mileage log upon request-just let us know.
1099 provisions repealed; landlords take note. Last year, we reported on the expansion of
Form 1099 information reporting, requiring recipients of rental real estate income to file Form
1099-MISC for each service provider to whom $600 or more was paid during the calendar year.
This unpopular requirement was repealed in April of this year – it was rightly considered to be
unduly burdensome to individual taxpayers and small businesses. Also repealed was the
requirement that business file 1099’s when paying $600 or more to corporations for goods.
Increase in penalties for failing to file 1099’s. The Small
Business Jobs Act increased the penalties for failing to
file 1099’s and other information returns and to provide
copies to payees. The penalty per return is $100,
increased from $50. Basically, you must file Form 1099
if you make a payment of $600 or more to an individual
in the course of your trade or business. Contact us if you
have any questions regarding your specific situation.
Decrease in North Carolina Sales tax rate. Effective
July 1, 2011, the general State tax rate applicable to
sales and purchases of tangible personal property,
certain digital property, and certain services is
4.75%. As a result, the general State and local tax rate
will be 6.75% in eighty-two counties, 7% in Alexander,
Catawba, Cumberland, Duplin, Haywood, Hertford, Lee,
Martin, New Hanover, Onslow, Pitt, Randolph,
Robeson, Rowan, Sampson, Surry and Wilkes Counties,
and 7.25% in Mecklenburg County.
Fraudulent e-mails. Several clients have recently
received official looking e-mails supposedly from the
IRS stating that a payment to the IRS was returned and
asking them to click on a link that could have resulted in
a virus or other harm. Please check with us if you are
unsure about communication from the IRS. NOTE –
they rarely correspond to taxpayers via e-mail!

Please call or e-mail Patti at 704-846-3485 or Patti@LarryAClarkCPA.com with any related questions or concerns, or if you already know you want to file extensions. We sincerely appreciate your consideration – thank you!

Newsletter Jan 2011

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law on December 17, 2010.  This Act is the result of compromise between President Obama and the GOP, and resulted in temporarily extending the “Bush tax cuts”, unemployment benefits, reducing Social Security taxes and other important changes.  Here are a few of the highlights:

Existing income tax rates are retained through 2012.  Without this legislation, rates would have risen beginning this year.   The 10% bracket would no longer exist and the remaining brackets would have been 15%, 28%, 31%, 36% and 39.6%.  Instead, the 10% bracket is retained, as well as the 15%, 25%, 28%, 33% and 35% brackets.  The rates for long-term capital gains and qualifying dividends are also extended, with the maximum rate remaining at 15%.  The 0% rate will continue to apply if you are in the 10% or 15% marginal income tax bracket.

Social Security payroll tax reduced by 2 percentage points.  This provision applies to 2011 only.  Earnings of up to $106,800 (the Social Security wage base) are eligible.  So, your withholding for FICA is reduced to 4.2% this year.  The self-employed get the same break on the “employee” portion of FICA tax as well.

Unemployment insurance benefits for the long-term unemployed for an additional 13 months

New estate, generation skipping and gift tax provisions for 2011 & 2012, including: (1) A reduction in the top tax rate to 35%, and (2) A $5 million unified estate and gift tax exemption, or $10 million per couple.  Beginning Jan. 1, 2013, the exemption amount will revert back to $1 million. 

Enhanced depreciation expensing  Bonus depreciation is increased to 100 percent for property placed in service after Sept. 8, 2010, and before Jan. 1, 2012.  The 50% bonus depreciation is also extended for assets placed in service Jan. 1, 2012, through Dec. 31, 2012. 

The Small Business Jobs Act provided for increases in IRC Section 179 expensing to $500,000, with a dollar-for-dollar phase-out of the deduction for total purchases of qualifying property exceeding $2,000,000 annually.

Alternative Minimum Tax exemption amounts have been increased to prevent AMT exposure to some additional 20 million households, according to the IRS

The Act includes numerous other provisions; we have only touched on a few of the major items here.  Please contact us with any questions or for additional information.

Payroll Tax Cut to Boost Take-Home Pay for Most Workers; New Withholding Details Now Available on IRS.gov

IRS Kicks Off 2011 Tax Season with Deadline Extended to April 18; Taxpayers Impacted by Recent Tax Breaks Can File Starting in Mid- to Late February

10 Important Facts about the Extended First-Time Homebuyer Credit

Inside This Issue

1. 2010 standard mileage rates
2. Keeping records for barter activities
3. Tip reporting program extended
4. Winter SSA/IRS Reporter
5. Register early for Business Services Online
6. Recent IRS announcements  

• 50 cents per mile for business miles
• 16.5 cents per mile for medical or moving purposes
• 14 cents per mile in service of charitable organizations

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• Tax Tip 2009-13, 10 Important Facts about the Extended First-Time Homebuyer Credit
• IR-2009-112, New Tax Guide Features Recovery Tax Breaks; Helps People Save on their 2009 Taxes
• IR-2009-114, IRS Offers Tips for Year-End Donations