Accounting and Tax Tips and Information

written by Lauren Bakken, owner of Bakken CPA PC and co-author of the book, One-Income Household

Bakken CPA PC is dedicated to providing timely, professional, personalized service to businesses and individuals.

Category Archives: Financial Planning

Fixing Up Your House May Lower Your Taxes!

If you have done any work on your house to make it more energy efficient before January 1, 2012, you may be able to claim a credit on your tax return!

 

There are two credits the IRS call

 

  • Nonbusiness Energy Property Credit and
  • Residential Energy Efficient Property Credit.

 

These credits were supposed to expire in 2010 but were extended by one year to 2011 and have new rules and limitations.

 

The Nonbusiness Energy Property Credit is a nonrefundable credit that relates to your primary residence. The credit rate for 2011 is 10 percent of the qualified energy efficiency improvements cost. Qualifying improvements can be replacing items such as

  • exterior doors,
  • windows,
  • insulations,
  • heat pumps,
  • furnaces,
  • water heaters or
  • central air conditioning

 

The maximum lifetime limit is $500, which means that if you have already claimed this credit on a previous tax return, you may not be eligible to take it again, if your earlier credit was equal to or over the $500 maximum. Qualifying improvements must have been installed during certain time frames; before January 1, 2008, or after December 31, 2008 but before January 1, 2012.

 

The Residential Energy Efficient Property Credit has been established to help taxpayers pay for residential alternative energy equipment in their primary residence. The credit equals 30 percent of what the taxpayer spent on the qualifying equipment and can include labor costs. This relates to the costs of

  • eligible solar water heaters,
  • solar electric equipment,
  • fuel cell plants,
  • qualified small wind energy property and
  • qualified geothermal heat pump property

 

These pieces of equipment must be installed before January 1, 2017. There is no set maximum for this particular credit, except for the fuel cell plants. However, there is a limit on the amount of nonrefundable personal credits a taxpayer can claim in one year. Any amount over this limit can be carried forward to the next year.

 

It is important to know that not all energy efficient improvements qualify for these tax credits, so you should check the certifications of the products before you begin improvements. These credits can be claimed on Form 5695 when you file your 2011 tax return. Keep in mind that it is best to consult a tax professional before claiming these credits!

Credit Card Debt Can Be Overwhelming

Credit card debt can be overwhelming.  The minimum payments can get out of hand.  Do you feel like you will never be able to pay them off?  Well, there is a way to get out of credit card debt without going bankrupt or ruining your credit.  However, you have to promise 3 things:

1) That you are not going to use your credit cards anymore.

 

2) You are going to create a budget and follow it.

 

3) You are going to change your spending habits.

It won’t be easy, changing habits never are, but if you will
promise to try, then you are already on your way to getting out of debt.

Now, here’s what you need to do:

1) Make a list of your credit info.  Use the following table:

Name of

credit card

Balance

owed

Interest

rate

Minimum

payment
Ex. Bank of America $4,000 12% 75.00
Ex. Capital One $2,000 18% 50.00

 

2) Determine the amount that you can pay each month towards the credit card debt according to your budget.  (Ex. $200.00)

 

3) Pay the minimum on the credit card with the lowest interest and pay the rest towards the higher interest credit cards. (Ex.  $75 to Bank of America and $125 to Capital One)

 

4) Whenever you find you have some extra money put it towards the highest interest card.

 

5) Continue with this payment arrangement until the credit cards are paid off.  As one card is paid off, apply that payment to the next highest interest rate card.

 

BONUS:  if you split the monthly payment in two and make the payments twice a month, you will reducthe average monthly balance and, consequently, reduce the finance charges.

 

Now, if you are really serious about getting and staying out
of debt, here are some additional suggestions that will be topics of future
blogs:

  • Find lower interest rate cards
  • Find part-time work
  • Sell your junk and unneeded valuables
  • Downsize
  • Cutting up all of your credit cards and living
    on a cash basis

 

Credit card debt can be a scary topic for people trying to deal with it. This is just a brief overview of some ways to tackle the debt. If you need more help understanding credit card debt and how you may be able to get out of that debt, please give us a call!

Will Social Security Be Here When I Retire?

Depending on where you get your information you may or may not be convinced that Social Security will be around for much longer.

  • There are many myths about Social Security that people take for truths, for example many believe that there will be no Social Security left by 2036. But the reality is that although the surplus may run out by that time if nothing is done, the current payroll taxes would still be enough to fund 77% of all the promised benefits for future generations.
  • People believe that Social Security only gives you what you put in. This is not true because the money that you are putting in today is paying for the people that are receiving the benefits today. And your total amount of future benefits depends on how much you earn, when you retire and how long you are expected to live.
  • There are rumors that younger generations would be better off if they did not pay into Social Security, but instead invested that same amount of money, ever year of their working life, into stocks and bonds. However, you would need to invest far more into these stocks and bonds than what you would be contributing to make this work; not to mention that you would have to be sure never to tap into these resources or to skip a year of investing.

Social Security provides assistance to young and older people alike. It supports qualifying widows and widowers with children, and also aids orphans. The Social Security administration is doing all that it can to keep this benefit around for citizens, but to do that we are seeing that people must make sacrifices. For the second year in a row, retired and disabled Americans are not able to get Social Security benefits increased.

There are a few tips that will help you get the most out of your Social Security benefits:

  • Wait as long as you can to begin claiming Social Security. You can begin claiming it between the ages of 62 and 70, but the closer to 62 you start, the smaller your checks will be.
  • If you are married, you can chose to accept benefits based on your income or equal to 50% of your spouse’s benefits.
  • If you already filed your claim for Social Security, and would like a higher benefit amount, you are able to file Social Security Form 521, Request for Withdrawal of Application. This will require you to pay back all of the benefits you have received, but when you reapply, you
    are able to get your higher amount for waiting until you are older.

Social Security can be a confusing topic for people nearing their retirement age. This is just a brief overview of the issues relating to the current Social Security laws. If you need more help understanding Social Security and how laws may impact your benefits, please give us a call!

Should I Worry about Alternative Minimum Tax (AMT) this year?

Alternative Minimum Tax (AMT) is a confusing subject for most clients and, if they are required to pay, it can be a frustrating one. So, how can a client know if they may be subject to owing AMT? chances are higher if you paid it last year, you may owe again this year. Also, if you have some of the deductions on your regular tax liability that are listed below, your chances of owing AMT increase.

The percentage of people that are required to pay AMT has only been increasing over the last decade.  From 2000 to 2010 the amount of people earning between $200,000 and $500,000 that owed AMT has increased from almost 19% to 64%. AMT was established in 1969 to prevent the taxpayers that were considered wealthy by Congress from using different tax shelters to avoid substantial federal tax liabilities. But, this tax is affecting more and more taxpayers because it does not adjust for inflation.

AMT essentially forces the taxpayer to calculate their tax twice, once following regular income tax rules and again using AMT rules; you are then required to pay the higher of the two tax liabilities. There are dozens of deductions that are allowable forregular taxes but are not deductible for AMT purposes, which will increase your taxable AMT income.

Itemized deductions are AMT’s first concern. If you have taken the standard deduction, you must add that back into AMT taxable income. If you have instead elected to take itemized deductions, you must go through each section and review which of those deductions can and cannot be used for AMT purposes.

Medical expense deductions are held to a higher threshold, meaning that for it to be eligible it must be higher than 10% of your adjusted gross income, compared to the regular tax, it is a 2.5% increase.

You cannot take deductions for taxes such as state and local income or real estate paid throughout the year. But, due to the fact that you are not allowed this deduction, you are also not required to report state tax refunds as taxable income for AMT.

You are allowed to take a deduction for home mortgage interest paid, so long as the loan relates directly to buying, building, or improving your home. If the loan was used to purchase something such as a car, this is not deductible for AMT. Along the same lines, miscellaneous itemized deductions are not deductible for AMT, the main one being the employee business expenses.

Other areas that are directly related to AMT are interest income, incentive stock options, and passive activities. These topics all have unique rules that will create differences between regular and AMT tax.

There are some areas that will reverse themselves over time, depreciation and long term contracts, are two topics that create differences between AMT and regular tax. But by the time these have been
fully realized the difference between the two types of tax will be zero, and they are referred to as timing differences.

Once you have gone through these areas, you are able to take an AMT exemption, which is phased out as income increases. For married couples the exemption starts at $74,450 for 2011, but gets reduced if your AMT income is over $150,000. For a single person the exemption is $48,450, but gets reduced if your AMT income is over $112,500.

AMT has several other differences from regular tax that can be seen on Form 6251, used to calculate Alternative Minimum Tax. Each client’s tax situation is unique, and there are tax planning strategies that can help to make the best of AMT. For more information about AMT or help with tax planning for AMT, please give us a call. We’d be happy to help you understand what impact your Alternative Minimum Tax could have on your next tax return!

Does America run on Dunkin’ or does Dunkin’ run on America?

Does America run on Dunkin’ or does Dunkin’ run on America? Want to put $2.50 a day back in your pocket? Switch that medium sized iced coffee (+tip) for coffee from home or office and save $912.50 a year. What would you do with $900 bucks? The possibilities are endless but the smart thing? Put it into a retirement account and save another $136.88 in taxes (at 15% tax rate). You’ve just put over $1,000 back in your pocket. http://www.linkedin.com/in/bakkencpaaccountant