Newsletters

What is the key to improving business performance?

How do you know what works and what does not?

Benchmarking helps private companies answer these questions and more. It is a powerful performance tool that provides an in depth look at your company as compared to your competitors who are at the same level as your company and also compare you to those companies that are leaders in your industry. We have data based information that has been provided and entered by many CPA firms to help populate these databases. We use this data from private companies like yours to compare your operation with your competitors. This has to be relevant to your company's performance. The data we select goes beyond financials to include hard-to-find operational metrics, gathered from a combination of 2001, 2002, and 2003 companies data elements. These elements include over 200 metrics covering approximately 3,500 company data sets in more than 230 industries.

As discussed above we can use over 200 metrics within these industry segments which include some of the following: Profitability

Employee turnover

Debt Leveraging

Information Technology Costs

Health Insurance Costs

Incremental borrowing rates We have the ability to focus on your company by using your industry data sets to assist us in our analysis of your company. The data we select is within revenue ranges, relevant to the size of your business.

We analyze this data and provide you with a report that helps you guide yourself to the next level of profitability. We will make recommendations as to what will be best for your company at the time we provide this service. We can then continue to update our review periodically to help you see that you are moving in the right direction. Benchmarking is a tool that helps you chart the course for profit improvement of your company. With today's intense competition, Benchmarking is a vital performance tool for private companies. By comparing our clients' performance to their peers and competitors both inside and outside their industry, we are able to bring our clients insights and performance-based ideas on how to improve their operations.

This service is something we are recommending to our clients as a value added business consultation which will provide you with insights that you have never before considered. We are offering this value added service during the up coming months for those clients who feel the need to see what improvements they can make to increase profitability.

If you feel this service is something you need to chart your future, please feel free to give us a call to discuss this in more detail.

The IRS has released the 2024-2025 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

The IRS has released the 2024-2025 special per diem rates. Taxpayers use the per diem rates to substantiate certain expenses incurred while traveling away from home. These special per diem rates include:

1. the special transportation industry meal and incidental expenses (M&IE) rates,
2. the rate for the incidental expenses only deduction,
3. and the rates and list of high-cost localities for purposes of the high-low substantiation method.

Transportation Industry Special Per Diem Rates

The special M&IE rates for taxpayers in the transportation industry are:

• $80 for any locality of travel in the continental United States (CONUS), and
• $86 for any locality of travel outside the continental United States (OCONUS).

Incidental Expenses Only Rate

The rate is $5 per day for any CONUS or OCONUS travel for the incidental expenses only deduction.

High-Low Substantiation Method

For purposes of the high-low substantiation method, the 2024-2025 special per diem rates are:

• $319 for travel to any high-cost locality, and
• $225 for travel to any other locality within CONUS.

The amount treated as paid for meals is:

• $86 for travel to any high-cost locality, and
• $74 for travel to any other locality within CONUS.

Instead of the meal and incidental expenses only substantiation method, taxpayers may use:

• $86 for travel to any high-cost locality, and
• $74 for travel to any other locality within CONUS.

Taxpayers using the high-low method must comply with Rev. Proc. 2019-48, I.R.B. 2019-51, 1392. That procedure provides the rules for using a per diem rate to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

Notice 2023-68, I.R.B. 2023-41 is superseded.

Notice 2024-68

The U.S. Department of the Treasury announced it has recovered $172 million from 21,000 wealthy taxpayers who have not filed returns since 2017.

The U.S. Department of the Treasury announced it has recovered $172 million from 21,000 wealthy taxpayers who have not filed returns since 2017.

The Internal Revenue Service began pursuing 125,000 high-wealth, high-income taxpayers who have not filed taxes since 2017 in February 2024 based on Form W-2 and Form 1099 information showing these individuals received more than $400,000 in income but failed to file taxes.

"The IRS had not had the resources to pursue these wealthy non-filers," Treasury Secretary Janet Yellen said in prepared remarks for a speech in Austin, Texas. Now it does [with the supplemental funding provided by the Inflation Reduction Act], and we’re making significant progress. … This is just the first milestone, and we look forward to more progress ahead.

This builds on a separate initiative that began in the fall of 2023 that targeted about 1,600 high-wealth, high-income individuals who failed to pay a recognized debt, with the agency reporting that nearly 80 percent of those with a delinquent tax debt have made a payment and leading to more than $1.1 billion recovered, including $100 million since July 2024.

By Gregory Twachtman, Washington News Editor

The Internal Revenue Service has made limited progress in developing a methodology that would help the agency meet the directive not to increase audit rates for those making less than $400,000 per year, the Treasury Inspector General for Tax Administration reported.

National Taxpayer Advocate Erin Collins is working to address deficiencies highlighted by the Treasury Inspector General for Tax Administration regarding the speed of service offered by the Taxpayer Advocate Service.

National Taxpayer Advocate Erin Collins is working to address deficiencies highlighted by the Treasury Inspector General for Tax Administration regarding the speed of service offered by the Taxpayer Advocate Service.

Collins noted in a September 19, 2024, blog post that TAS, as highlighted by the TIGTA audit, is “not starting to work cases and we are not returning telephone calls as quickly as we would like.”

She noted that while overall satisfaction with TAS is high, Collins is hearing "more complaints than I would like of unreturned phone calls, delays in providing updates, and delays in resolving cases." She identified three core challenges in case advocacy:

• The increasing number of cases;

• An increase in new hires that need proper training before they can effectively assist taxpayers; and

• A case management system that is more than two decades old that causes inefficiencies and delays.

Collins noted that there has been an 18 percent increase in cases in fiscal year 2024 and advocates have inventories of more than 100 cases at a time. According to the blog post, in each of FY 2022 and 2023, there were about 220,000 cases. TAS is on track to receive nearly 260,000 in FY 2024.

"Our case advocates are doing their best to advocate for you," Collins wrote in the blog. "But when we experience a year like this in which case receipts have jumped by 18 percent, something must give. Since we don’t turn away taxpayers who are eligible for our assistance, the tradeoff is that we’re taking longer to assign new cases to be worked, longer to return telephone calls, and sometimes longer to resolve cases even after we’ve begun to work them."

Collins added that while the employment ranks continue to rise, about 30 percent of the case advocates "have less than one year of experience, and about 50 percent have less than two years of experience," meaning "nearly one-third of our case advocate workforce is still receiving training and working limited caseloads or have no caseloads yet, and half are likely to require extra support for complex cases."

She said TAS is revieing its training protocols, including focusing new hires on high volume cases so "they can begin to work those cases more quickly, while continuing to receive comprehensive training that will enable them to become effective all-around advocates over time."

TAS is also deploying a new case management system next year that will better integrate with the Internal Revenue Service’s electronic data offerings.

"My commitment is to continue to be transparent about our progress as we work toward becoming a more effective and responsive organization, and I ask for your understanding and patience as our case advocates work to resolve your issues with the IRS," Collins said.

By Gregory Twachtman, Washington News Editor

The IRS has highlighted important tax guidelines for taxpayers who are involved in making contributions and receiving distributions from online crowdfunding. The crowdfunding website or its payment processor may be required to report distributions of money raised, if the amount distributed meets certain reporting thresholds, by filing Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS.

The IRS has highlighted important tax guidelines for taxpayers who are involved in making contributions and receiving distributions from online crowdfunding. The crowdfunding website or its payment processor may be required to report distributions of money raised, if the amount distributed meets certain reporting thresholds, by filing Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS.

The reporting thresholds for a crowdfunding website or payment processor to file and furnish Form 1099-K are:

• Calendar years 2023 and prior – Form 1099-K is required if the total of all payments distributed to a person exceeded $20,000 and resulted from more than 200 transactions; and
• Calendar year 2024 – The IRS announced a plan for the threshold to be reduced to $5,000 as a phase-in for the lower threshold provided under the ARPA.

Alternatively, if non-taxable distributions are reported on Form 1099-K and the recipient does not report the transaction on their tax return, the IRS may contact the recipient for more information.

If crowdfunding contributions are made as a result of the contributor’s detached and disinterested generosity, and without the contributors receiving or expecting to receive anything in return, the amounts may be gifts and therefore may not be includible in the gross income of those for whom the campaign was organized. Additionally, contributions to crowdfunding campaigns by an employer to, or for the benefit of, an employee are generally includible in the employee’s gross income. If a crowdfunding organizer solicits contributions on behalf of others, distributions of the money raised to the organizer may not be includible in the organizer’s gross income if the organizer further distributes the money raised to those for whom the crowdfunding campaign was organized. More information is available to help taxpayers determine what their tax obligations are in connection with their Form 1099-K at Understanding Your Form 1099-K.

The IRS has significantly improved its online tools, using funding from the Inflation Reduction Act (IRA), to facilitate taxpayers in accessing clean energy tax credits. These modernized tools are designed to streamline processes, improve compliance, and mitigate fraud. A key development is the IRS Energy Credits Online (ECO) platform, a free, secure, and user-friendly service available to businesses of all sizes. It allows taxpayers to register, submit necessary information, and file for clean energy tax credits without requiring any specialized software. The platform also features validation checks and real-time monitoring to detect potential fraud and enhance customer service.

The IRS has significantly improved its online tools, using funding from the Inflation Reduction Act (IRA), to facilitate taxpayers in accessing clean energy tax credits. These modernized tools are designed to streamline processes, improve compliance, and mitigate fraud. A key development is the IRS Energy Credits Online (ECO) platform, a free, secure, and user-friendly service available to businesses of all sizes. It allows taxpayers to register, submit necessary information, and file for clean energy tax credits without requiring any specialized software. The platform also features validation checks and real-time monitoring to detect potential fraud and enhance customer service.

In November 2023, the IRS announced a significant enhancement to the ECO platform. Qualified manufacturers could submit clean vehicle identification numbers (VINs), while sellers and dealers were enabled to file time-of-sale reports completely online. Additionally, the platform facilitates advance payments to sellers and dealers within 72 hours of the clean vehicle credit transfer, significantly reducing processing time and enhancing the overall user experience.

In December 2023, the IRS expanded the ECO platform’s capabilities to accommodate qualifying businesses, tax-exempt organizations, and entities such as state, local, and tribal governments. These entities can now take advantage of elective payments or transfer their clean energy credits through the ECO system. This feature allows taxpayers who may not have sufficient tax liabilities to offset to still benefit from the available tax credits under the IRA and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act.

The IRS’s move towards digital transformation also led to the creation of an online application portal for the Qualifying Advanced Energy Project Credit and Wind and Solar Low-Income Communities Bonus Credit programs in partnership with the Department of Energy. The portal, which launched in June 2023, simplifies the submission and review processes for clean energy projects, lowering barriers for taxpayers to participate in these incentives.

These advancements reflect the IRS’s commitment to modernizing taxpayer services, focusing on efficiency, and enhancing the overall user experience. Looking ahead, the IRS is poised to continue leveraging technology to further improve processes and support taxpayers in utilizing clean energy tax incentives.

Final regulations on consistent basis reporting have been issued under Code Secs. 1014 and 6035.

Final regulations on consistent basis reporting have been issued under Code Secs. 1014 and 6035.

Consistent Basis Requirement

The general rule is that a taxpayer's initial basis in certain property acquired from a decedent cannot exceed the property's final value for estate tax purposes or, if no final value has been determined, the basis is the property's reported value for federal estate tax purposes. The consistent basis requirement applies until the entire property is sold, exchanged, or otherwise disposed of in a recognition transaction for income tax purposes or the property becomes includible in another gross estate.

"Final value" is defined as: (1) the value reported on the federal estate tax return once the period of limitations on assessment has expired without that value being adjusted by the IRS; (2) the value determined by the IRS once that value can no longer be contested by the estate; (3) the value determined in an agreement binding on all parties; or (4) the value determined by a court once the court’s determination is final.

Property subject to the consistent basis requirement is property the inclusion of which in the gross estate increases the federal estate tax payable by the decedent’s estate. Property excepted from this requirement is identified in Reg. §1.1014-10(c)(2). The zero-basis rule applicable to unreported property described in the proposed regulations was not adopted. The consistent basis requirement is clarified to apply only to "included property."

Required Information Returns and Statements

An executor of an estate who is required to file an estate tax return under Code Sec. 6018, which is filed after July 31, 2015, is subject to the reporting requirements of Code Sec. 6035. Executors who file estate tax returns to make a generation-skipping transfer tax exemption or allocation, a portability election, or a protective election to avoid a penalty are not subject to the reporting requirements. An executor is required to file Form 8971 (the Information Return) and all required Statements. In general, the Information Return and Statements are due to the IRS and beneficiaries on or before the earlier of 30 days after the due date of the estate tax return or the date that is 30 days after the date on which the estate tax return is filed with the IRS. If a beneficiary acquires property after the due date of the estate tax return, the Statement must be furnished to the beneficiary by January 31 of the year following the acquisition of that property. Also, by January 31, the executor must attach a copy of the Statement to a supplement to the Information Return. An executor has the option of furnishing a Statement before the acquisition of property by a beneficiary.

Executors have a duty to supplement the Information Return or Statements upon the receipt, discovery, or acquisition of information that causes the information to be incorrect or incomplete. Reg. §1.6035-1(d)(2) provides a nonexhaustive list of changes that require supplemental reporting. The duty to supplement applies until the later of a beneficiary's acquisition of the property or the determination of the final value of the property under Reg. §1.1014-10(b)(1). With the exception of property identified for limited reporting in Reg. §1.6035-1(f), the property subject to reporting is included property and property the basis of which is determined, wholly or partially, by reference to the basis of the included property.

Penalties

Penalties may be imposed under Reg. §301.6721-1(h)(2)(xii) for filing an incorrect Information Return, and Reg. §301.6722-1(e)(2)(xxxv) for filing incorrect Statements. In addition, an accuracy-related penalty can be imposed under Reg. §1.6662-9 on the portion of the underpayment of tax relating to property subject to the consistent basis requirement that is attributable to an inconsistent basis.

Applicability Dates

Reg. §1.1014-10 applies to property described in Reg. §1.1014-10(c)(1) that is acquired from a decedent or by reason of the death of a decedent if the decedent's estate tax return is filed after September 17, 2024. Reg. §1.6035-1 applies to executors of the estate of a decedent who are required to file a federal estate tax return under Code Sec. 6018 if that return is filed after September 17, 2024, and to trustees receiving certain property included in the gross estate of such a decedent. Reg. §1.6662-9 applies to property described in Reg. §1.1014-10(c)(1) that is reported on an estate tax return required under Code Sec. 6018 if that return is filed after September 17, 2024.

There are a number of advantages for starting a Roth IRA account, the most important being that all the investment earnings grow tax-free, and qualified distributions are tax-free. Additionally, you can continue to make contributions to your Roth after you turn 70 ½ and are not subject to the required minimum distribution rules. Currently, only individuals who have a modified adjusted gross income (AGI) of less than $100,000 and/or who do not file their return as "married filing separately" can convert their traditional IRA to a Roth.

However, beginning in 2010, everyone, no matter what their income level or filing status, will be able to have a Roth IRA. The question that remains to determine is when you should convert, if at all.

Spreading out your tax liability

A conversion is treated as a taxable distribution, but is not subject to the 10 percent early withdrawal penalty. However, taxpayers who convert to a Roth IRA in 2010 (and 2010, only) have the ability to pay taxes on the converted amount ratably over two years, in 2011 and 2012. Therefore, if you convert to a Roth in 2009, you must recognize the entire converted amount in income on your 2009 tax return.

Changes for 2010

In 2010, the $100,000 modified AGI cap that has prevented many individuals from converting from their traditional IRA to a Roth, is completely eliminated. Moreover, the filing status limitation will also be done away with, meaning that married couples filing separately will be able to convert to a Roth IRA as well. However, all other rules continue to apply, and any amount you convert to a Roth IRA will still be taxed as ordinary income at your marginal tax rate. The exception for 2010, of course is that you will have the choice of recognizing the conversion income in 2010 or averaging it over 2011 and 2012.

Example 1. You have $28,000 in a traditional IRA, which consists of deductible contributions and earnings. In 2010, you convert the entire amount to a Roth IRA. You do not take any distributions in 2010. As a result of the conversion, you have $28,000 in gross income. Unless you elect otherwise, $14,000 of the income is included in income in 2011 and $14,000 is included in income in 2012.

Example 2. On the other hand, if you currently meet the AGI and filing status requirements to convert to a Roth IRA (that is, your AGI for 2009 will be less than $100,000 and your filing status is not "married filing separately" you can also convert this year. But, you will recognize all the conversion income in 2009 instead of having it spread over two years. Therefore, if in the example above you convert the entire $28,000 to a Roth IRA in 2009, you will pay tax on the entire $28,000 conversion amount in 2009.

Taking advantage of lower tax rates

Currently, the income tax rates are at a historic low. But these rates are scheduled to revert to previously higher levels (and rise further for some taxpayers) after 2010. The Obama administration has proposed extending the lower individual marginal income tax rates but raising the two highest income tax brackets to 36- and 39.6-percent after 2010. This should be considered in your decision of when (and if) to convert to a Roth in 2010, or now in order to take advantage of the lower income tax rates, especially if you expect to be in one of the two highest income tax brackets after 2010.

Conversions in years after 2010 will be included in your income during the tax year in which you completed the conversion to a Roth IRA. While deferring tax is a traditional and beneficial part of tax planning, if you convert in 2010 the tax will be spread out ratably in 2011 and 2012, and therefore taxed at the rates in effect for 2011 and 2012 (which as mentioned could be higher for some taxpayers). Thus, if income tax rates go up, which they are anticipated to do, you may end up paying much more tax. Therefore, if you do not want to take this chance that your income rate will be higher in 2011 and 2012, you may want to elect to pay the full tax on the Roth conversion in your 2010 income tax return, at 2010 income tax rates.

So why would you accelerate a conversion? If you believe your IRA assets are currently valued on the low side, you might opt for a conversion if you are below the $100,000 AGI level for 2009. This reduces your tax liability on the conversion. Similarly, if you converted within the past year and the value of the assets has declined since then, you can elect to "undo" the conversion. Otherwise, you will have paid tax on the conversion when the assets were at a higher value.

Undoing the conversion later

If you convert to a Roth IRA, but later change your mind, you have until Oct. 15 of the year after the year of conversion to undue the transaction and go back to your traditional IRA. For example, if you convert in 2009, you will generally have until October 15, 2010 to recharacterize the transaction. However, to do this you must have filed your individual tax return by the normal filing deadline (April 15, generally) or if you obtained an extension, the extension due date.

For example, if the value of your Roth drastically declines after the conversion, and leaves you essentially with a Roth IRA value that is even less than the tax you paid to convert, this would be a good reason to undo the transaction. Recharacterizing the conversion would undo the tax consequences and therefore you'd get back the tax you paid on the larger amount that was converted to the Roth IRA.

Can you afford the conversion tax?

You will have to pay a conversion tax on the transaction, which can be a significant sum. In spite of all the advantages of a Roth IRA, a conversion is generally advisable if you can readily pay the tax generated in the year of the conversion. If the tax is paid out of a distribution from the converted IRA, that amount is also taxed; and if the distribution counts as an early withdrawal, it is also subject to an additional 10 percent penalty. For those planning to convert who may not already have the funds available, saving now in a regular bank or brokerage account to cover the amount of the tax in 2010 can return an unusually high yield if it enables a Roth IRA conversion in 2010 that might not otherwise take place.

Individuals who have been "involuntarily terminated" from employment may be eligible for a temporary subsidy to help pay for COBRA continuation coverage. The temporary assistance is part of the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act), and is aimed at helping individuals who have lost their jobs in our troubled economy. However, not every individual who has lost his or her job qualifies for the COBRA subsidy. This article discusses what qualifies as "involuntary termination" for purposes of the temporary COBRA subsidy.

Background

The 2009 Recovery Act temporarily allows individuals involuntarily terminated from their employment between September 1, 2008 and December 31, 2009 to elect to pay 35 percent of their COBRA coverage and be treated as having paid the full amount. In most cases, the former employer pays the remaining 65 percent of the premium and is reimbursed by claiming a payroll tax credit.

Some individuals who are "qualified beneficiaries" may also be eligible for the COBRA subsidy. They include spouses and dependent children. However, domestic partners generally do not qualify for the COBRA subsidy.

Income limits

The COBRA subsidy is excludable from gross income. However, individuals with modified adjusted gross incomes (MAGI) between $125,000 and $145,000 ($250,000 and $290,000 for married couples filing jointly) must repay part of the subsidy. For individuals with MAGI exceeding $145,000 and married couples with MAGI exceeding $290,000, the full amount of the subsidy must be repaid as additional tax.

Coverage period

The COBRA subsidy applies as of the first period of coverage starting on or after February 17, 2009 (the effective date of the 2009 Recovery Act). For most plans this was March 1, 2009. The subsidy is available for nine months. However, the nine-month subsidy period may end earlier if the individual becomes eligible for Medicare or another group health plan (such as one sponsored by a new employer).

Involuntary termination

One of the most important questions for purposes of the COBRA subsidy is what is involuntary termination? The IRS has explained that involuntary termination is severance from employment due to an employer's unilateral authority to terminate the employment. However, the IRS stresses that whether an involuntary termination has occurred depends on all the facts and circumstances.

Involuntary termination can also occur when an employer:

• Declines to renew an employee's contract;
• Furloughs an employee;
• Reduces an employee's time to zero hours;
• Tells an employee to "resign or be fired;"
• Relocates its office or plant and an employee declines to relocate; or
• Locks out its employees.

Extended election

Moreover, individuals involuntarily terminated between September 1, 2008 and February 18, 2009, but who declined COBRA coverage, have a second chance under the 2009 Recovery Act. They may be eligible to re-elect COBRA coverage and receive the subsidy.

Small businesses

COBRA continuation coverage and the subsidy are generally unavailable to employees of small businesses (businesses with 20 or fewer employees). However, some states have mini-COBRA laws that extend COBRA continuation coverage and the subsidy to workers at small businesses. COBRA continuation coverage and the subsidy are also unavailable if the employer terminates its health plan.

If you would like to know more about the COBRA premium subsidy, please contact out offices. We can help determine your eligibility for this assistance.

While the past year has not been stellar for most investors, the tax law in many instances can step in to help salvage some of your losses by offsetting both present and future taxable gains and other income. Knowing how net capital gains and losses are computed, and how carryover capital losses may be used to maximum tax advantage, should form an important part of an investor's portfolio management program during these challenging times.

Net capital losses

Capital assets yield short-term gains or losses if the holding period is one year or less, and long-term gains or losses if the holding period exceeds one year. The excess of net long-term gains over net short-term losses is net capital gain.

Short-term capital losses, including short-term capital loss carryovers, are applied first against short-term capital gains. If the losses exceed the gains the net short-term capital loss is applied first against any net long-term capital gain from the 28-percent group (collectibles), then against the 25-percent group (recapture property), and last against the 15- (or zero) percent group. Long-term capital losses are similarly netted and then applied against the most highly taxed net gains that a taxpayer has.

If an investor's capital losses exceed capital gains for the year, he or she may offset losses against ordinary income to the extent of the lesser of: the excess capital loss; or $3,000 ($1,500 for married persons filing separate returns). Although several bills have been introduced to raise these dollar levels, which have not been adjusted for inflation for decades, none has yet to see the light of day.

Carryovers

Individuals may carry net capital losses to future tax years but not back to prior years. There is no limit on the number of years to which net capital losses may be carried over as there is with corporate taxpayers. Short-term and long-term capital losses are carried forward and retain their character. Capital loss carryovers that originate in several years are applied in the order in which incurred.

Dividend offsets. While qualified dividends are taxed at the net capital gains rate, they do not take part in the general computation of net capital gains and, therefore, are not reduced by capital losses, either in the same year or in carried forward years. Although your overall portfolio may have experienced a loss for the year, you must still pay tax on your dividend income.

If you need any advice on how to structure your portfolio over the next year to take advantage of current losses while protecting future gains from as much income tax as possible, please do not hesitate to call this office.

The IRS has released the numbers behind its activities from October 1, 2007 through September 30, 2008 in a publication called the 2008 IRS Data Book. This annually released information provides statistics on returns filed, taxes collected, and the IRS's enforcement efforts.

Examinations Data

For example, the IRS reported that its examinations totaled over 1.54 million during FY 2008, or 0.8 percent of the total returns filed during the previous calendar year. This amount was a 0.65-percent drop from returns examined during FY 2007. Of all the returns examined, a little over one-percent were individual income tax returns, a 0.507-percent increase from FY 2007.  

Within the category of individual income tax returns, the IRS examined 0.93-percent less taxpayers with under $200,000 of total positive income than the previous year; i.e. a total of all sources of income, excluding losses. This figure increased by 33.23-percent for taxpayers with total positive income between $200,000 and $1 million, but decreased by 30.3-percent for individuals with total positive income over $1 million from the previous year. Also, for the first time, the IRS delineated examination percentages during FY 2008 for individual income tax returns according to adjusted gross income as follows:

Decreased Tax Collection

The IRS also reported that, while it received over $2.7 trillion in gross collections during the Fiscal Year (FY) 2008, its net tax collections (after refunds) actually decreased by 3.34-percent from FY 2007. The IRS distributed more than 237 million total refunds in FY 2008 with over 118 million going to individual tax payers. Total FY 2008 tax refunds rose to over $425 billion, while over $270 billion (63.52-percent) alone went to individual filers. The IRS also reported that $95.7 billion in economic stimulus payments were made during the year, as mandated by the Economic Stimulus Act of 2008.

One major reason for these large refunds was the large increase in individual income tax returns filed during FY 2008 as a result of the one-time economic stimulus payments under the Economic Stimulus Act of 2008. While the number of individual income tax returns received by the IRS only increased by 3.7-percent for FY 2007, it increased 11.1-percent for FY 2008. The increase was even greater for Forms 1040NR, 1040NR-EZ, 1040PR, 1040-SS, and 1040CC; which increased by 36-percent for FY 2008 (as compared to 2.3-percent for FY 2007).

The IRS also reported that the economic stimulus payments generated an increase in electronically filed income tax returns as well. During FY 2008, taxpayers electronically filed over 101.5 million returns, 89.5 million of which were individual income tax returns. Of all individual income tax returns filed, 58-percent were filed electronically during the year.

On December 18, 2007, Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 (Mortgage Debt Relief Act), providing some major assistance to certain homeowners struggling to make their mortgage payments. The centerpiece of the new law is a three-year exception to the long-standing rule under the Tax Code that mortgage debt forgiven by a lender constitutes taxable income to the borrower. However, the new law does not alleviate all the pain of all troubled homeowners but, in conjunction with a mortgage relief plan recently announced by the Treasury Department, the Act provides assistance to many subprime borrowers.

Cancellation of debt income

When a lender forecloses on property, sells the home for less than the borrower's outstanding mortgage debt and forgives all, or part, of the unpaid debt, the Tax Code generally treats the forgiven portion of the mortgage debt as taxable income to the homeowner. This is regarded as "cancellation of debt income" (reported on a Form 1099) and taxed to the borrower at ordinary income tax rates.

Example. Mary's principal residence is subject to a $250,000 mortgage debt. Her lender forecloses on the property in 2008. Her home is sold for $200,000 due to declining real estate values. The lender forgives the $50,000 difference leaving Mary with $50,000 in discharge of indebtedness income. Without the new exclusion in the Mortgage Debt Relief Act, Mary would have to pay income taxes on the $50,000 cancelled debt income.

The Mortgage Debt Relief Act

The Mortgage Debt Relief Act excludes from taxation discharges of up to $2 million of indebtedness that is secured by a principal residence and was incurred to acquire, build or make substantial improvements to the taxpayer's principal residence. While the determination of a taxpayer's principal residence is to be based on consideration of "all the facts and circumstances," it is generally the one in which the taxpayer lives most of the time. Therefore, vacation homes and second homes are generally excluded.

Moreover, the debt must be secured by, and used for, the principal residence. Home equity indebtedness is not covered by the new law unless it was used to make improvements to the home. "Cash out" refinancing, popular during the recent real estate boom, in which the funds were not put back into the home but were instead used to pay off credit card debt, tuition, medical expenses, or make other expenditures, is not covered by the new law. Such debt is fully taxable income unless other exceptions apply, such as bankruptcy or insolvency. Additionally, "acquisition indebtedness" includes refinancing debt to the extent the amount of the refinancing does not exceed the amount of the refinanced debt.

The Mortgage Debt Relief Act is effective for debt that has been discharged on or after January 1, 2007, and before January 1, 2010.

Mortgage workouts

In addition to foreclosure situations, some taxpayers renegotiating the terms of their mortgage with their lender are also covered by the new law. A typical foreclosure nets a lender only about 60 cents on the dollar. When the lender determines that foreclosure is not in its best interests, it may offer a mortgage workout. Generally, in a mortgage workout the terms of the mortgage are modified to result in a lower monthly payment and thus make the loan more affordable.

More help

Recently, Treasury Department officials brokered a plan that brings together private sector mortgage lenders, banks, and the Bush Administration to help homeowners. The plan is called HOPE NOW.

Here's how it works: The HOPE NOW plan is aimed at helping borrowers who were able to afford the introductory "teaser" rates on their adjustable rate mortgage (ARM), but will not be able to afford the loan once the rate resets between 2008 and 2010 (approximately 1.3 million ARMs are expected to reset during this period). The plan will "freeze" these borrowers' interest rates for a period of five years. The plan, however, has some limitations that exclude many borrowers. Only borrowers who are current on their mortgage payments will benefit. Borrowers already in default or who have not remained current on their mortgage payments are excluded.

Under the HOPE NOW plan, borrowers may be able t

- Refinance to a new mortgage;

- Switch to a loan insured by the Federal Housing Authority (FHA);

- Freeze their "teaser" introductory rate for five years.

Without the Mortgage Debt Relief Act, a homeowner who modifies the terms of their mortgage loan, or has their interest rate frozen for a period of time, could be subject to debt forgiveness income under the Tax Code. This is why the provision of the Mortgage Debt Relief Act excluding debt forgiveness income from a borrower's income is a critical component necessary to make the HOPE NOW plan effective.

If you would like to know more about relief under the Mortgage Forgiveness Debt Relief Act of 2007 and the Treasury Department's plan, please call our office. We are happy to help you navigate these complicated issues.

A: If you have the money, contributing to your IRA immediately on January 1^st or as soon thereafter as possible is the best strategy.  The #1 advantage of an IRA is that interest or other investment income earned on the account accumulates without tax each year. The sooner the money starts working at earning tax-free income, the greater the tax advantage. With a traditional IRA, that tax advantage means no tax until you finally withdraw the money at retirement or for a qualified emergency. In the case of a Roth IRA, the tax advantage comes in the form of the investment income that is never taxed.

While the earliest date to contribute to an IRA for a current year is January 1^st of that year, the latest date is 15 1/2 months later, on April 15^th of the next year when your tax return is due. (Because of the weekend-next business day rule that's April 16, 2007 for 2006 tax-year contributions.)

Although you may file for an extension to file your tax return, that extension does not extend the time you have to contribute to an IRA; April 15^th is the deadline. Another caveat: If you make a contribution after December 31^st it will be presumed to be made for the next year unless you designate it as relating back to the year just ended. Finally, until the due date for your return, you are allowed to withdraw any IRA contribution, plus earnings on that contribution.

Soon, the recently-passed Pension Protection Act of 2006 will give you another option: designating all or a portion of your tax refund for the year to be directly deposited into your IRA account. In fact, the IRS has moved quickly to provide several refund options, already announcing that new Form 8888 will be created to give all individual filers the ability to split their refunds in up to three financial accounts, such as checking, savings and retirement accounts.

In addition to knowing when to make IRA contributions, you also need to know how much you are able to contribute and whether a traditional or a Roth IRA makes more sense. For those who are already covered by a retirement plan, restrictions on contributing to deductible IRAs must be heeded. Nondeductible and "spousal" IRAs also are options to be considered. Please call our offices if you need further guidance on any of the IRA rules. They are worth using and can grow into a substantial additional nest egg for you at retirement.

When trying to maximize retirement savings contributions, you may find you have contributed too much to your IRA.  Typically, you either have too much income to qualify for a certain IRA or you can't recall what contributions you made until they are added up at tax time and you discover they were too much. There are steps you can take to correct an excess contribution.

What is an excess contribution?

An excess contribution is the amount by which your total contributions to one or more IRAs exceed the applicable dollar limit for the tax year. For tax years 2005 through 2007, the maximum annual combined contribution to a taxpayer's traditional IRAs and Roth IRA is $4,000. For those 50 years or older, an additional $500 is allowed in 2005, and $1,000 for 2006 and subsequent years.  

Your total contributions also include any rollover contributions completed more than 60 days after a distribution is received from a qualified plan or an IRA. If you contribute more than the allowable amount to all IRAs, the excess is subject to a six percent excise tax.

The six percent tax is nondeductible. The tax applies in each subsequent year if excess is not withdrawn or eliminated by treating it as allowable contribution in a future year. The excise tax is also imposed on excess contributions to a Roth IRA. This tax is reported on Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts, and medical savings accounts (MSAs).

Steps to take

The IRS treats an amount distributed from an IRA to the individual making the contribution, before the due date (including extensions) of the individual's tax return, as not contributed to the IRA.  If your excess contribution was made by mistake, you can avoid the excise tax on excess contributions (and premature withdrawals) by withdrawing the contribution and any earnings on the contribution, on or before the due date, including extensions, of your return. 

Keep in mind that IRA contributions can only be made up to the due date of the return excluding extensions. The "corrective distribution" can be made up to the due date of the return including extensions.

If you withdraw the contribution in a timely manner, you don't have to include the contribution in your gross income if no deduction is allowed and the interest attributable to the contribution is returned. The interest, however, must be included in your income for the year the contribution was made.

It's very important that you make certain that contributions to your IRA do not exceed the allowable limits. Otherwise, you could be paying the six percent excise tax.  Fortunately, there are remedies. If you discover that you have over-contributed to your IRA, please contact our office immediately. We can help you correct your excess contribution.