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We are NOT affiliated with the State of Maryland. If you are looking for information about Maryland income taxes, please go to www.marylandtaxes.com.


Useful Links:

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Nanny Taxes - Find out what's involved with complying with the Nanny Tax Rules

IRS Web Site - for tax forms, publications, and general tax information.

Exchange Authority - New England's first authority for IRC 1031 Exchanges

Cost Segregation Studies - Accelerate tax depreciation deductions on new and existing buildings through cost segregation studies

Social Security - find out the latest rules or your projected retirement benefit.

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MONTHLY TAX NEWSLETTER

October 2009

HOW TO AVOID THE UPCOMING ONE-TWO PUNCH TO YOUR POCKETBOOK

by Andrew D. Schwartz, CPA

As a successful healthcare professional, chances are pretty good that you're on track to be hit with a one-two punch to your pocketbook.  Higher taxes coupled with lower reimbursements may be what's in store for you and your colleagues in the very near future. 

For starters, expect your taxes to go up.  Even if Obama and Congress do nothing to enact a tax increase, many of the tax cuts initiated as part of the 2001 Tax Act will sunset at the end of 2010.  That means that high income taxpayers will see the top tax rate increase by a whopping 12.9% - from today's high of 35% back to the pre-2001 high of 39.6%.

In addition to higher taxes, many healthcare professionals might also see their income fall.  Depending on the ultimate health care reform package passed by Congress, you and your colleagues could soon be hit with decreasing reimbursements paid through the next generation of government programs, including Medicare and Medicaid.

What can you do to manage this Financial Squeeze Play?  Taking full advantage of the tax-advantaged opportunities available to you will become even more important as a hedge against higher taxes and lower reimbursements.

Pre-Tax Opportunities

When is $100 worth $155?  If you're in the 28 percent tax bracket, that's the value of paying for personal expenses with pre-tax dollars.  Whenever post-tax dollars are involved, you need to earn $155 to have $100 left over after paying your federal income taxes, social security taxes, and Medicare taxes.  Here are some pre-tax opportunities that might be available to you:

  • Medical expenses paid through a Flexible Spending Account: Most employers, as part of their benefits package, allow their employees to elect to have certain expenses paid with pre-tax dollars through a "flexible spending account (FSA)", including as much as $5,000 per year to be used for medical and dental expenses. Please beware that  this benefit comes with a big caveat, you either use it or lose it. In other words, if you don't spend the money that is set aside, the excess won't be refunded to you.  You should note that under the current rules, your employer can give you to as late as March 15, 2010 to spend any money that you set aside for this pre-tax benefit in 2009.

  • Childcare expenses paid through a Flexible Spending Account:  If you're paying child care expenses, and both you and your spouse work, you can set aside $5,000 per household through your employer's FSA to pay for your dependent's care expenses. The catch is that you need to report the name, address, and taxpayer identification number of the care provider on your tax return, or the $5,000 becomes taxable to you again. If you only have one child, paying for the child's care through the FSA saves you a lot in taxes.

  • Health Savings Accounts:   With health insurance premiums on the rise, more people are looking into high-deductible products.  Did you know that you can couple a high-deductible plan with a special type of savings account known as a Health Savings Account (HSA)?  While either you or your employer contributes pre-tax dollars into an HSA in your name, money withdrawn from the HSA for health care expenses is completely tax-free.  Plus, any money remaining in your HSA grows tax-deferred, and upon your turning age 65, is available to help fund your retirement.

  • Business expenses paid through employer's "slush fund":  If you have the option of having your employer pay for some of your out-of-pocket expenses in exchange for a reduced bonus or salary, those expenses are paid with pre-tax dollars.

Tax-Free Opportunities:

Tax-free opportunities are a relatively recent phenomenon.  Prior to some of the tax law changes enacted during the late 1990's, there were very few tax-free options available to taxpayers.  Even though you don't get a current tax deduction in most cases, the potential for decades of compounded growth coupled by the promise of tax-free withdrawals down the road makes them worth a close look.

  • Roth IRAs: For 2009, you can contribute up to $5,000 to a Roth IRA, as long as you have earned income, and your adjusted gross income doesn't exceed $120,000 if single or $176,000 if married.  Anyone 50 or older can contribute an extra $1,000 annually.  Amounts contributed to a Roth grow tax-free as long as you don't withdraw any of the earnings until you turn 59 1/2, use $10,000 for first-time homebuyer costs, or meet certain other exceptions.  Starting in 2010, the income limitation preventing high-income taxpayers from converting their IRAs and other qualified retirement accounts to a Roth IRA disappears, so make sure to consider if this strategy makes sense for you for next year.

  • 529 Plans: College savings plans allow you to put away a sizeable amount of money for a child's education. Currently, you can contribute up to $13,000 per child per year into a 529 Account.  You can even frontload five years worth of contributions, up to $65,000 (or $130k if married), all at one time, but then you can't add to that child's account for the next four years and will need to file a Form 709, US Gift Tax Return. Amounts withdrawn from your 529 plan are not taxed as long as the money is used to pay for tuition and other qualified college expenses.

  • Principal residence:  When you sell your principal residence, you aren't taxed on the first $500,000 of gain if married or the first $250,000 of gain if single, as long as the home was your principal residence for two out of the previous five tax years. If you sell the house in connection with a job related move or meet certain other conditions of hardship, and lived in the house for less than two years, you can exclude a prorated amount.

  • Other Tax-Free Opportunities:  Gifts received from parents and relatives are generally not taxable to you.  Instead, the donor might be subject to a "gift tax" if the value of the gift to another person exceeds $13,000 per year.  Life insurance proceeds aren't subject to income taxes either.  Depending on who owned the policy, however, the proceeds might be subject to estate (inheritance) taxes.  Make sure to talk with an estate planning attorney about these two items.

Tax-Deferred Opportunities:

With a tax-deferred savings opportunity, you save taxes today, and then generally owe taxes when you withdraw the money later on.  Even so, these opportunities make sense for a variety of reasons.  For starters, a dollar today is more valuable than a dollar tomorrow, due to inflation and the time value of money.  Plus, the government lets you invest the taxes you save and keep the compounded earnings on that money.  For both these reasons, tax-deferred savings opportunities make a lot of sense.

  • 401(k) & 403(b) plans: These salary deferral retirement savings plans are only available through your employer's benefit package. Amounts contributed during the year reduce your taxable earnings and grow tax-deferred. For 2009, the maximum contribution into either of these plans through salary deferrals is $16,500.  Anyone 50 or older by December 31st can contribute an additional $5,500 this year. If you go with the Roth version of these plans, you forego a tax savings today in exchange for a promise from the government of tax-free withdrawals down the road.

  • SEPs, SIMPLEs, and Solo 401(k)  Plans: If you have some self-employment earnings, or own a small business, you're entitled to set up your own retirement plan. You can contribute up to 20% of your net earnings into a SEP or up to $11,500 ($14k if 50 or older) plus 3% of your income into a SIMPLE.  If you don't have access to a 401(k) or 403(b) plan through another employer, you can contribute $16,500 ($22k if 50 or older) plus 20% of your net earnings into a Solo 401(k).  Amounts contributed to these plans reduce your taxable income and grow tax-deferred.

Take Control Of Your Taxes

Don't worry about what you can't control.  How often have you heard this advice from your parents, coaches, and managers?  The best way to counteract the costly combination of higher taxes and lower reimbursements is to take advantage of every opportunity to minimize your tax burden and, therefore, maximize your post tax earnings and wealth. 

TOP


ENERGY STAR RATING MAY NOT MEET THRESHOLD FOR TAX CREDIT

Back in our June newsletter, we wrote that The American Recovery and Reinvestment Act of 2009 reinstated and improved the tax credit for energy efficient home improvements beginning on January 1, 2009.   We also warned our readers, "Please note that the new rules did increase the standards for an energy efficient purchase to qualify for this tax credit.  Expect the IRS to issue guidance for manufacturers to certify that their products meet these new standards."

Well, as promised, the federal government issued guidelines for what purchases qualify for this $1,500 tax credit.  Check out energystar.gov/taxcredits for a detailed list of qualifying expenditures, as well as a summary of the current rules for this lucrative tax credit.

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HYBRID VEHICLE TAX CREDIT UPDATE

by Andrew D. Schwartz, CPA

According to our friends at the IRS, "Starting in 2009, the new law allows the alternative motor vehicle credit, including the tax credit for purchasing hybrid vehicles, to be applied against the alternative minimum tax. Prior to the new law, the alternative motor vehicle credit could not be used to offset the AMT."   While this is welcome news to people in the market for a hybrid, I think many will agree it's Too Little Too Late for the majority of individuals who purchased a hybrid between 2006 and 2008.

Since first being introduced back in 2006 to replace the $2,000 "clean fuel" deduction, the hybrid vehicle tax credit has been more of a tease than anything else.  Due to the increasing prevalence of the AMT, the majority of my clients who purchased a hybrid never saw a dime of this tax credit.

The Hybrid Car Tax Credit also included a provision to even the playing field for some of the US car manufacturers who weren't keeping up with their Japanese competitors in the race to develop a hybrid.  Starting on January 1, 2006, the tax credit would begin to phase-out for a manufacturer upon selling 60,000 hybrids.  Toyota and Lexus hit that threshold during 2006, and Honda followed suit the next year.  So if you are in the market for a hybrid produced by these three manufacturers, no tax credit is currently available. 

There are still about a dozen 2009 hybrid models that qualify for a tax credit ranging from $1,550 to $3,000.  Please note that Ford and Mercury hit the 60,000 unit threshold last year, so the credit for their hybrids has begun to be phased-out as of the second quarter of 2009.

This hybrid car tax credit is scheduled to expire on December 31, 2010.  Fortunately, now that the Alternative Motor Vehicle Tax Credit is no longer capped by the Alternative Minimum Tax, you can finally be certain that you will save the full amount of taxes for the hybrid model you decide to buy.

For more information about this tax break, download the instructions to Form 8910, Alternative Motor Vehicle Credit.

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TAX AND FINANCIAL PLANNING CALENDAR FOR OCTOBER, 2009

Month

Income Taxes

Saving and Investing

 

October

  • Update your net worth statement using 9/30 information
  • Taxpayers on extension must fund retirement accounts by October 15th

 TOP


2008 & 2009 TAX FACTS

  • For 2008, the standard deduction for a single individual is $5,450 and for a married couple is $10,900 and increasing to $5,700 and $11,400 respectively in 2009. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2008, the personal exemption is $3,500 increasing to $3,650 in 2009. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $106,800 for 2009, up from $102,000 for 2008.
  • The standard mileage rate is $.55 per business mile as of January 1, 2009, down from $.585 per mile as of December 31, 2008.
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2009.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account this year.
  • The maximum annual contribution to your IRA is $5,000 for 2009.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2010 to make your 2009 IRA contributions. 

TOP

Need Help With Your Nanny Payroll?
 

WHAT'S NEW WITH THE FICA REFUND?

Check out this recent post on our FICA Forum:
 
I've been following this issue for 5-10 years, even submitted paperwork to the IRS many years ago to no effect. Finally, just got a notice that UPenn has hired PriceWaterhouse to try and get the FICA back for its house staff, I'll definitely be signing up.
 

This Month's Topics

How To Avoid the Upcoming One-Two Punch To Your Pocketbook

Energy Star Rating May Not Meet Threshold For Tax Credit

Hybrid Vehicle Tax Credit Update

The FICA Refund for Medical Residents 

2008 & 2009 Tax Facts

Tax and Financial Planning Calendar for October 2009

 

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WHAT'S NEW WITH THE FICA REFUND?

Check out this recent post on the FICA ForumI've been following this issue for 5-10 years, even submitted paperwork to the IRS many years ago to no effect. Finally, just got a notice that UPenn has hired PriceWaterhouse to try and get the FICA back for its housestaff, I'll definitely be signing up.

For more information, go to our January 2009 Newsletter or our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Let's work together to keep current on this hugely valuable tax break.  Please post whatever you read or hear regarding this FICA issue on our new Message Board we set up just for this topic.

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