Tax Relief Blog

President Signs Military Spouses Residency Relief Act

Source: Journal of Accountancy

President Barack Obama signed into law the Military Spouses Residency Relief Act (PL 111-97), which will ensure that the spouses of military personnel who move because their spouse is posted for military duty will be treated as not having changed residency for tax purposes.

Under the act, the fact that a military spouse is present in or absent from a jurisdiction in the United States will not affect that spouse’s residence or domicile for tax purposes, as long as that presence in (or absence from) the jurisdiction is due to the service member’s compliance with military orders. In addition, any income the military spouse earns in a jurisdiction will not be treated as income from services performed or sources within that jurisdiction if that spouse is not treated as a resident of the jurisdiction under the act.

The act conforms the treatment of military spouses to the treatment accorded military personnel under the Servicemembers Civil Relief Act (SCRA). Congress was concerned that in certain cases, military personnel were losing the benefits of the SCRA where they held property in joint title with their spouses. For example, where the family car was not titled in the service member’s name only, some states were collecting personal property tax on that car. In addition, military families were subject to return filing complications when the service member retained residency in the home state, but the spouse was treated as a resident of the new state.

The act also accords similar treatment to military spouses for voting and certain land rights residency requirements.

The act is effective for any state or local tax return filed for any tax year beginning with the tax year that includes the date Nov. 11, 2009.

Effective Date of Regulations Under § 411(b)(5)(B)(i); Relief Under § 411(d)(6); and Notice to Pension Plan Participants

Announcement 2009-82

The Treasury Department and the Internal Revenue Service are announcing relief for sponsors of statutory hybrid plans that must amend the interest crediting rate in those plans. Plan sponsors may rely on this announcement pending publication of the anticipated additional guidance described below. Treasury and the Service expect to issue in the near future final regulations and proposed regulations relating to statutory hybrid plans. The regulations will include rules interpreting the requirement in § 411(b)(5)(B)(i) of the Internal Revenue Code that such plans not have an interest crediting rate in excess of a market rate of return. The rules in the regulations specifying permissible market rates of return are not expected to go into effect before the first plan year that begins on or after January 1, 2011.

In addition, it is anticipated that Treasury and the Service will exercise the authority under § 1.411(d)-4, A-2(b)(2)(i) of the Treasury regulations to provide that, once final regulations regarding the market rate of return requirements are issued, an amendment to a statutory hybrid plan with an interest crediting rate that is in excess of a market rate of return under those final regulations that is adopted prior to the effective date of those final regulations will not violate § 411(d)(6) merely because it reduces the future interest crediting rate on participants’ account balances to the extent necessary to constitute a permissible rate under those final regulations. Under this anticipated guidance, § 411(d)(6) will not operate to bar such an amendment, even if the amendment is adopted after the last day of the first plan year that begins on or after January 1, 2009, and therefore is not an amendment described in section 1107 of the Pension Protection Act of 2006 (PPA ’06), Pub. L. 109-280. Section 1107 of PPA ’06 provides, in general, that a plan will not fail to satisfy § 411(d)(6) as a result of amendments that are adopted pursuant to PPA ’06 or regulations thereunder by the last day of the first plan year that begins on or after January 1, 2009.

Finally, it is anticipated that future guidance will include a special timing rule for providing section 204(h) notice, as defined in § 54.4980F-1, Q&A-4, to participants and other applicable individuals with respect to an amendment that changes a statutory hybrid plan’s interest crediting rate that is adopted by the last day of the first plan year that begins on or after January 1, 2009 (that is, by the end of the period described in section 1107 of PPA ’06) and after November 10, 2009. Under this special timing rule, any required section 204(h) notice relating to such an amendment will be permitted to be provided as late as 30 days after the effective date of the amendment. It is expected that this relief will apply to an amendment only if the amendment is effective not later than the first day of the first plan year that begins on or after January 1, 2010.

Essential year end tax planning

Year-end tax planning could be especially productive this year because timely action can nail down a host of tax breaks that won’t be around next year unless Congress acts to extend them. These include, for individuals: the option to deduct state and local sales and use taxes instead of state income taxes; the standard or itemized deduction for state sales tax and excise tax on the purchase of motor vehicles; the above-the-line deduction for qualified higher education expenses; tax-free distributions by those age 70 1/2 or older from IRAs for charitable purposes; and the $8,000 first-time homebuyer credit (expires for purchases after Nov. 30, 2009). For businesses, tax breaks that are available through the end of this year but won’t be around next year unless Congress acts include: 50% bonus first year depreciation for most new machinery, equipment and software; an extraordinarily high $250,000 expensing limitation; the research tax credit; the five-year writeoff for most farm equipment; and the 15-year writeoff for qualified leasehold improvements, qualified restaurant buildings and improvements and qualified retail improvements. Finally, without Congressional “extender” legislation (which has come at the eleventh hour for several years), alternative minimum tax (AMT) exemption amounts for individuals are scheduled to drop drastically next year, and most nonrefundable personal credits won’t be available to offset the AMT.

High-income-earners have other factors to keep in mind when mapping out year-end plans. Many observers expect top tax rates on ordinary income to increase after 2010, making long-term deferral of income less appealing. Long-term capital gains rates could go up as well, so it may pay for some to take large profits this year instead of a few years down the road. On the other hand, the solid good news high-income-earners have to look forward to next year is that there no longer will be an income based reduction of most itemized deductions, nor will there be a phaseout of personal exemptions. Additionally, traditional IRA to Roth IRA conversions will be allowed regardless of a taxpayer’s income.

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 (or a family member) 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:

• 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 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 2009.

• 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. It may be advisable for us to meet to discuss year-end trades you should consider making.

• Postpone income until 2010 and accelerate deductions into 2009 to lower your 2009 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2009 that are phased out over varying levels of adjusted gross income (AGI). These include IRA and Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child 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 2009. 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 adjusted gross income for 2009.

• It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2010.

• 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.

• 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 2010 if doing so won’t create an AMT problem (see below).

• Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2009, 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 be deferred rather than accelerated to keep them from being lost because of the AMT.

• Those facing a penalty for underpayment of federal estimated tax may be able to eliminate or reduce it by increasing their withholding.

• Accelerate big ticket purchases into 2009 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.

• If you are planning to buy a car, do so before year-end in order to nail down a deduction for state sales tax and excise tax on the purchase.

• 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 qualify for a tax credit. Additional, substantial tax credits are available for installing energy generating equipment (such as solar electric panels or solar hot water heaters) to your home.

• If you or a family member are thinking of becoming a first-time homebuyer, make the purchase before Dec. 1, 2009, in order to qualify for an up-to-$8,000 credit.

• 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.

• Businesses should consider making expenditures that qualify for the business property expensing option, which is up to $250,000 for assets bought and placed in service this year; the maximum expensing amount will drop to $134,000 for assets bought and placed in service next year (higher expensing amounts apply in certain specialized situations). Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation if bought and placed in service this year. This bonus writeoff generally won’t be available next year.

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

• You can save gift and estate taxes by making gifts sheltered by the annual gift tax exclusion before the end of the year. You can give $13,000 in 2009 to an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next.

• If you are age 70 1/2 or older, own IRAs (or Roth 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.

• If you are age 70 1/2 or older and took a distribution from a retirement plan or IRA earlier this year, you may be able to avoid tax on the payout by rolling it over into an eligible retirement plan (including an IRA) before Dec. 1, 2009.

• If you are receiving Social Security benefits, there are a number of steps you can take to reduce or eliminate tax on your benefits.

• Consider extending your subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc., to bunch into 2009 miscellaneous itemized deductions subject to the 2%-of-AGI floor.

• Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2010, electing to deduct investment interest against capital gains, and disposing of a passive activity to allow you to deduct suspended losses.

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.

Mike Habib, EA at 1-877-78-TAXES
Keywords: tax planning, estate planning, ROTH IRA Conversion 2010, tax saving strategies, tax shelters, effective tax planning

Roth IRA Rollovers

Mike Habib, EA

I am writing to tell you of an interesting new rollover opportunity that’s coming up in a few months. After 2009, you will be able to roll over amounts in qualified employer sponsored retirement plan accounts, such as 401(k)s and profit sharing plans, and regular IRAs, into Roth IRAs, regardless of your adjusted gross income (AGI). Currently, individuals with more than $100,000 of adjusted gross income as specially modified are barred from making such rollovers.

What’s so attractive about a Roth IRA? Here’s a summary:

  • Earnings within the account are tax-sheltered (as they are with a regular qualified employer plan or IRA).
  • Unlike a regular qualified employer plan or IRA, withdrawals from a Roth IRA aren’t taxed if some relatively liberal conditions are satisfied.
  • A Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) after he or she reaches age 70 1/2 as is generally the case with regular qualified employer plans or IRAs. (For 2009, there’s a moratorium on RMDs.)
  • Beneficiaries of Roth IRAs also enjoy tax-sheltered earnings (as with a regular qualified employer plan or IRA) and tax-free withdrawals (unlike with a regular qualified employer plan or IRA). They do, however, have to commence regular withdrawals from a Roth IRA after the account owner dies.

The catch, and it’s a big one, is that the rollover will be fully taxed, assuming the rollover is being made with pre-tax dollars (money that was deductible when contributed to an IRA, or money that wasn’t taxed to an employee when contributed to the qualified employer sponsored retirement plan) and the earnings on those pre-tax dollars. For example, if you are in the 28% federal tax bracket and roll over $100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA, you’ll owe $28,000 of tax. So you’ll be paying tax now for the future privilege of tax-free withdrawals, and freedom from the RMD rules.

Should you consider making the rollover to a Roth IRA? The answer may be “yes” if:

  • You can pay the tax hit on the rollover with non-retirement-plan funds. Keep in mind that if you use retirement plan funds to pay the tax on the rollover, you’ll have less money building up tax-free within the account.
  • You anticipate paying taxes at a higher tax rate in the future than you are paying now. Many observers believe that tax rates for upper middle income and high income individuals will trend higher in future years.
  • You have a number of years to go before you might have to tap into the Roth IRA. This will give you a chance to recoup (via tax-deferred earnings and tax-deferred payouts) the tax hit you absorb on the rollover.
  • You are willing to pay a tax price now for the opportunity to pass on a source of tax-free income to your beneficiaries.

You also should know that Roth rollovers made in 2010 represent a novel tax deferral opportunity and a novel choice. If you make a rollover to a Roth IRA in 2010, the tax that you’ll owe as a result of the rollover will be payable half in 2011 and half in 2012, unless you elect to pay the entire tax bill in 2010.

Why on earth would you choose to pay a tax bill in 2010 instead of deferring it to 2011 and 2012? Keep in mind that absent Congressional action, after 2010 the tax brackets above the 15% bracket will revert to their higher pre-2001 levels. That means the top four brackets will be 39.6%, 36%, 31%, and 28%, instead of the current top four brackets of 35%, 33%, 28%, and 25%. The Administration has proposed to increase taxes only for those making $250,000, but it is difficult to predict who will get hit by higher rates. What’s more, there’s a health reform proposal before the House of Representatives right now that would help finance healthcare reform with a surtax on higher-income individuals.

So if you believe there’s a strong chance your tax rates will go up after 2010, you may want to consider paying the tax on the Roth rollover in 2010.

Here are some ways individuals can prepare now for next year’s rollover opportunity.

(1) Non-high-income individuals who are able to make deductible IRA contributions this year should do so. They’ll reduce their 2009 tax bill and, if they make the conversion to Roth IRA next year, they won’t have to pay back the tax savings until 2011 and 2012.

(2) Individuals who have never opened a traditional IRA because they weren’t able to make deductible contributions (and who never rolled over pre-tax dollars to a regular IRA) should consider opening such an IRA this year and making the biggest allowable nondeductible contribution they can afford. If they convert the traditional IRA to a Roth IRA next year they will have to include in gross income only that part of the amount converted that is attributable to income earned after the IRA was opened, presumably a small amount. In 2010 and later years, they could continue to make nondeductible contributions to a traditional IRA and then roll the contributed amount over into a Roth IRA. However, note that if an individual previously made deductible IRA contributions, or rolled over qualified plan funds to an IRA, complex rules determine the taxable amount.

(3) Some high-income individuals may plan to make large conversions in 2010 but to opt out of the deferral of tax until 2011 and 2012 because they fear they will be in a higher tax bracket in those years than in 2010. These individuals should avoid the standard year-end-planning wisdom of accelerating deductions and deferring income but should, rather, do the reverse in an effort to avoid being pushed into the highest brackets by a large IRA-to-Roth-IRA conversion in 2010. These individuals should be considering ways to defer deductions to 2010, and accelerate income from next year into 2009.

We should discuss your and your family’s entire financial situation before you plan for a large rollover to a Roth IRA after 2009. There also are many details that we should go over, such as whether the amounts you are thinking of switching to a Roth IRA are eligible for the rollover (technically, they are called “eligible rollover distributions”), whether you can make rollovers from your employer sponsored plan (for example, there are restrictions on rollovers from 401(k) plans), and the tax impact of rolling over amounts that represent nondeductible as well as deductible contributions.

I’m looking forward to your call at 1-877-78-TAXES (1-877-788-2937).

Keywords: Roth IRA Rollover, Estate Planning, Tax Planning, Roth IRA 2010, Stretch IRA

Extended and liberalized homebuyer tax credit rules

Mike Habib, EA

On November 6, the President signed into law H.R. 3548, the ”Worker, Homeownership, and Business Assistance Act of 2009.” The new law extends and generally liberalizes the tax credit for first-time homebuyers, making it a much more flexible tax-saving tool. It also includes some crackdowns designed to prevent abuse of the credit. These important changes could it make it easier for you or someone in your family to buy a home. And because the changes generally aid buyers and aim to improve residential real estate markets nationwide, they also could make it easier for you or someone in your family to sell a home. This Client Letter fills you in on the details you need to know about the first-time homebuyer credit.

Homebuyer credit basics. Before the new law was enacted, the homebuyer credit was only available for qualifying first-time home purchases after April 8, 2008, and before December 1, 2009. The top credit for homes bought in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10% of the residence’s purchase price, whichever is less. Only the purchase of a main home located in the U.S. qualifies. Vacation homes and rental properties are not eligible. The homebuyer credit reduces one’s tax liability on a dollar-for-dollar basis, and if the credit is more than the tax you owe, the difference is paid to you as a tax refund. For homes bought after Dec. 31, 2008, the homebuyer credit is recaptured (i.e., paid back to the IRS) if a person disposes of the home (or stops using it as a principal residence) within 36 months from the date of purchase.

Before the new law, the first-time homebuyer credit phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.

Your guide to the revised homebuyer credit. The new law makes four important changes to the homebuyer credit:

(1) New lease on life for the homebuyer credit. The homebuyer credit is extended to apply to a principal residence bought before May 1, 2010. The homebuyer credit also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010. In general, a home is considered bought for credit purposes when the closing takes place. So the extra two-months (May and June of 2010) helps buyers who find a home they like but can’t close on it before May 1, 2010. They can go to contract on the home before May 1, 2010, close on it before July 1, 2010, and get the homebuyer credit (if they otherwise qualify). Note that certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit; they also can avoid the recapture rules under certain circumstances.

(2) The homebuyer credit may be claimed by existing homeowners who are “long-time residents. For purchases after November 6, 2009, you can claim the homebuyer credit if you (and, if married, your spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that you buy the subsequent principal residence. For example, if you and your spouse are empty nesters who have lived in your suburban home for the past ten years, you are potentially eligible for the credit if you “move down” and buy a smaller townhome. There’s no requirement for your current home to be sold in order to qualify for a homebuyer credit on the replacement principal residence. Thus, the replacement residence can be bought to beat the new deadlines (explained above) before the old home is sold. For that matter, you can hold on to your prior principal residence in the hope of achieving a better selling price later on.

The maximum allowable homebuyer credit for qualifying existing homeowners is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.

(3) The homebuyer credit is available to higher income taxpayers. For purchases after November 6, 2009, the homebuyer credit phases out over much higher modified AGI levels, making the credit available to a much bigger pool of buyers. For individuals, the phaseout range is between $125,000 and $145,000, and for those filing a joint return, it’s between $225,000 and $245,000.

(4) There’s a new home-price limit for the homebuyer credit. For purchases after Nov. 6, 2009, the homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000. It’s important to note that there is no phaseout mechanism. A purchase price that exceeds the $800,000 threshold by even a single dollar will cause the loss of the entire credit.

The new purchase price limitation applies whether you are buying a first-time principal residence or are a qualifying existing homeowner purchasing a replacement principal residence.

Other homebuyer credit changes. The new law includes a number of new anti-abuse rules to prevent taxpayers from claiming the homebuyer credit even though they don’t qualify for it. The most important of these are as follows:

  • Beginning with the 2010 tax return, the homebuyer credit can’t be claimed unless the taxpayer attaches to the return a properly executed copy of the settlement statement used to complete the purchase of the qualifying residence.
  • For purchases after Nov. 6, 2009, the homebuyer credit can’t be claimed unless the taxpayer has attained 18 years of age as of the date of purchase (a married person is treated as meeting the age requirement if he or his spouse meets the age requirement).
  • For purchases after Nov. 6, 2009, the homebuyer credit can’t be claimed by a taxpayer if he can be claimed as a dependent by another taxpayer for the tax year of purchase. It also can’t be claimed for a home bought from a person related to the buyer or the spouse of the buyer, if married.
  • Beginning with 2009 returns, the new law makes it easier for the IRS to go after questionable homebuyer credit claims without initiating a full-scale audit.

What hasn’t changed. The tax law still gives you the extraordinary opportunity to get your hands on homebuyer credit cash without waiting to file your tax return for the year in which you buy the qualifying principal residence. Thus, if you buy a qualifying principal residence in 2009 you can treat the purchase as having taken place this past December 31, file an amended return for 2008 claiming the credit for that year, and get your homebuyer credit cash relatively quickly via a tax refund. Similarly, you can treat a qualifying principal residence bought in 2010 (before the new deadlines) as having taken place on December 31, 2009, and file an original or amended return for 2009 claiming the credit for that year.

What also hasn’t changed is the need for getting expert tax advice in negotiating through the twists and turns of the new beefed-up homebuyer credit. Please call us today for details on how the homebuyer credit can help you or your family members.

IRS Back Taxes

Mike Habib, EA

You incur IRS back taxes when you haven’t been filing your income tax returns religiously every year. Tax season can be a stressful time and there are a lot of people who tend to overlook the deadlines so they find themselves having to rush to make it in time. For those who are not so lucky, they have to incur penalties because of late filings. Things could get uglier once the government finds that you’re years behind in your income tax filing. You don’t want to have to pay IRS back taxes but in case you find yourself in this rut, understand that you do have options to get you out of this mess.

What to do

There are probably 6,000,000 non-filer American taxpayers who haven’t been paying their IRS back taxes and they think they are able to get away with it; you must not take your chances. It is, after all, your responsibility as a citizen to pay your taxes so your government can provide you with better public services. To get started, you might want to get all your tax documents together to prepare your unfiled tax returns.

You need to think back to the last time that you have filed your income tax return. Do you still have a copy of it? You will need your copy of W-2s, and other related tax documents to address your IRS back taxes. If you can’t find these documents, contact the Internal Revenue Service and request copies, or your power of attorney can obtain that from the IRS.

Get a tax expert

When it comes to dealing with IRS back taxes it’s always wiser to have the assistance of a tax professional with you. A tax expert can help you coordinate with the IRS on the best course of action for clearing your back taxes. He can also assist you in handling incomplete tax documentations. The best ones in the industry are licensed to negotiate with the IRS for the best terms that will suit your financial situation.

The good thing about working with a tax expert is that you know that you have a knowledgeable resource person on your side to help you when IRS back taxes become too confusing for you to comprehend. Understand that even the best financial experts and professionals usually need the assistance of a tax expert because if there was one person who knows the intricacies of IRS back taxes and other related issues, it would have to be a tax professional.

Get your tax returns in order

Before you worry about paying for back tax debts, you want to prepare your tax returns first. This is the most logical way to find out whether or not you really owe the IRS. In some cases, you might even end up getting a tax refund instead of incurring tax debts.

Review your tax refunds

Did you know that the late filers are the most likely to have tax refunds? Working with a tax professional on your IRS back taxes will also help you keep track of your refunds. You have to know the time limits for audits, refunds and for debt collection. When it comes to back taxes, you will need to estimate on how long it could take for you to get your tax refund checks. Tax refunds are important because they can even cover your tax debts that have accumulated over the years.

Get the help of Mike Habib, EA for your back taxes. He will personally see to your case and negotiate the best tax resolution plan with the IRS according to your financial situation. For inquiries and to schedule a free consult, contact us through this website today.

Keywords: IRS back taxes, IRS back tax help, IRS unfiled returns, past due tax returns, back tax relief, tax relief

Tax Debt Relief

Mike Habib, EA

If you failed to file your returns and the IRS is already calling your attention so you can pay for back taxes, you need to seek tax debt relief. These back taxes are derived from the SFR (Substitute For Return) filings that the IRS files if you cannot do it yourself. The returns are made from income notifications like the W-2 that your employer files with your social security number. You will need professional assistance to resolve the issue especially if your returns were provided to the SFR of the government for some period of time yet marked by too much debt that you have ignored. Tax debt relief often requires the help of a professional attorney, but you can still rely on an Enrolled Agent licensed by the IRS to help you solve your debt in taxes.

Why you need help from an Enrolled Agent

As long as you have problems with the IRS, you and your loved ones will greatly be affected emotionally, physically, and financially. Compared to credit card debt and other forms of debt, IRS problems are difficult to ignore because they will always go after you until you finally address them. This means that unless you settle your tax debts, the IRS will not leave you alone. If you do not want the hassle of being harassed just because of your tax debt, go for tax debt relief with the help of an Enrolled Agent, a person who is authorized by the Treasury Department of the US to represent you before the IRS.

Asking help from an Enrolled Agent allows you the ability to handle tax debt relief well with the promise of successful results. Since you are being helped by an expert, you can gain all the information you need regarding the matter to have a better understanding about it. The Enrolled Agent will represent you before the IRS.

More benefits

Compared to other tax professionals, Enrolled Agents are “The Tax Experts” and they are the only ones who are granted the right to practice regardless of the state where they are based in. Attorneys and CPAs are only granted permission according to the state where they are licensed, so the Enrolled Agent can help you in tax debt relief in more ways than other professionals. Also, the Enrolled Agent will represent, advise, and prepare your tax returns.

Never meet with the IRS

There are many solutions for tax debt relief and an Enrolled Agent can present you with the best ones. However, it is up to you to decide on which route to take when it comes to solving your tax problems. Still, do not worry because an Enrolled Agent can guide you all the way, and the best part is, you will not have to face the IRS yourself. He will do all the talking and negotiating for you.

Solutions for tax debt relief

Let Mike Habib, an Enrolled Agent help you out achieve tax debt relief. As an EA, he specializes in helping both businesses and individuals solve every tax problem with the IRS that they are facing. With more than 20 years of experience in financial advisory and taxation, Mike Habib has helped a lot of individuals and companies ranging from small businesses and even those belonging to the Fortune 500 companies. Get in touch with him by calling for a free consultation at 1-877-788-2937. You can also explore this website for more information on tax debt relief.

Year-end tax planning letter

Mike Habib, EA

As year-end approaches, taxpayers generally are faced with a number of choices that can save taxes this year, next year or both years. Employees too are faced with these choices. However, employees have some special considerations to take into account that retirees and other nonworking individuals don’t face. To help our clients who are employees take advantage of these special tax saving opportunities, we have put together a list of items to consider.

Please review the list and contact us if you need additional information on one or more of the items.

Health flexible spending accounts. Many employees take advantage of the annual opportunity to save taxes by placing funds in their employer’s health flexible spending account (health FSA). You save taxes because you use pre-tax dollars to pay for medical expenses that might not be deductible. They would not be deductible if you don’t itemize. Even if you do itemize, some medical expenses would not be deductible because of the 7.5% adjusted gross income floor beneath medical expense deductions. Also, a health FSA can be used to get tax-free reimbursement for over-the-counter medications and other items even though they would not be deductible as medical expenses if you paid for them outside of a health FSA.

If you have set aside funds in your employer’s health FSA, check your balance so that you have sufficient time to incur additional reimbursable expenditures to prevent loss of any unused amount under the use-it-lose-it feature of these plans. Don’t forget you can get tax-free reimbursements for aspirin, antacids and other over-the-counter items. Your plan should have a listing of qualifying items and any documentation from a medical provider that may be needed to get a reimbursement for any such items.

To avoid the lose-it-use it rule, you must incur qualifying expenditures by the last day of the plan year (Dec. 31, 2009 in the case of a calendar year plan) unless the plan allows an optional grace period. Any grace period cannot extend beyond the 15th day of the third month following the close of the plan year (e.g., March 15 for a calendar year plan). An exception to the use-it-or lose-it rule allows FSAs to make distributions of all or part of unused health FSA benefits to military reservists who are called to active duty for a period exceeding 179 days (or an indefinite period ).

Examining your year-to-date expenditures now will also help you to determine how much to set aside for next year. Don’t forget to reflect any changed circumstances in making your calculation.

Dependent care FSAs. Some employers also allow employees to set aside funds in dependent care FSAs. They allow employees to use pre-tax dollars to pay for dependent care. In particular cases, participating in a dependent care FSA can yield greater tax savings than foregoing participation and claiming a dependent care credit. Taxpayers who are eligible to participate in a dependent care FSA and are (a) in a high tax bracket and/or (b) have only one dependent and more than $3,000 of employment-related expenses, should use the FSA to pay for child care expenses. For these taxpayers, the FSA almost always provides greater federal tax savings than does the credit. Additionally, participating in a dependent care FSA can also save on FICA taxes.

However, like health FSAs, dependent care FSAs are subject to the use-it-or lose it rule. Thus, now is a good time to review expenditures to date and to project amounts to be set aside for next year.

Adoption assistance FSAs. Under an adoption assistance FSA, adoption reimbursement accounts are established for participating employees. Typically, these accounts are funded with employee pre-tax contributions uniformly withheld from each paycheck throughout the year. The balances in these accounts are used to reimburse qualified adoption expenses incurred during the year, subject to a reimbursement maximum. Like their health and dependent care FSA siblings, these accounts are subject to the use-it-or-lose-it rule. However, predicting the amount and timing of adoption expenses may be far more difficult than projecting medical and dependent care assistance expenses. As a result, the use-it-or-lose-it rule could pose a greater risk of loss with this type of FSA. This should be borne in mind in choosing the extent to which to participate in an adoption FSA.

Adjustments to state withholding. If you expect to owe state and local income taxes when you file your return next year, ask 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 2009.

Adjustments to federal withholding. If you face a penalty for underpayment of federal estimated tax, you may be able to eliminate or reduce it by increasing your withholding. In this connection, it should be stressed that the Making Work Pay Credit, which was enacted earlier this year, automatically lowered tax withholding rates for employees. However, you should especially review your withholding to ensure that enough tax is withheld if you hold multiple jobs, you and your spouse both work, or you can be claimed as dependent by another person.

401(k) contributions. Review and make appropriate adjustments to your contributions to you employer’s 401(k) retirement plan for the remainder of this year. Figure your contribution rate for next year as well.

Tax Impact of Job Loss


The Internal Revenue Service recognizes that the loss of a job may create new tax issues. The IRS provides the following information to assist displaced workers.

> Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time are also taxable. You should ensure that enough taxes are withheld from these payments or make estimated payments. See IRS Publication 17,
your Federal Income Tax, for more information.

> Generally, withdrawals from your pension plan are taxable unless they are transferred to a qualified plan (such as an IRA). If you are under age 59 1⁄2, an additional tax may apply to the taxable portion of your pension. See IRS Publication 575, Pension and Annuity Income, for more information.

> Certain expenses incurred while looking for a new job may be deductible. Examples of deductible expenses include employment and outplacement agency fees, resume preparation, and travel expenses for job search and interviews. See IRS Publication 17, Your Federal Income Tax, for more information.

> Moving costs you incur because of a change in your job location may be deductible. You must meet certain criteria relating to distance moved and timing of the move. See IRS Publication 521, Moving Expenses, for more information.

> Some displaced workers may decide to start their own business. The IRS provides information and classes for new business owners. Please visit or see IRS Publication 334, Tax Guide for Small Businesses, for more information.


JOB LOSS: What Income is Taxable?

The following Questions and Answers are provided by the Internal Revenue Service to clarify the tax implications of financial issues faced by workers who have lost their jobs. References are provided for
additional information.

Is Severance Pay taxable?

Yes, severance pay is taxable in the year that you receive it. Your employer will include this amount on your Form W-2 and will withhold appropriate federal and state taxes. See Publication 525 for additional

What about Accumulated Leave or Vacation Pay and Sick Pay?

Yes, annual, or vacation pay, and sick pay are calculated as wages by your employer and will be included in your Form W-2.

Is Unemployment Compensation taxable?

Yes, your state unemployment insurance benefits (up to 26 weeks) and your extended benefits (up to an additional 13 weeks) are taxable. You may choose to have 10% withheld for federal taxes by completing
Form W-4V. The State will provide you with a Form 1099-G prior to January 31st of each year, showing the amount of taxable benefits paid in the prior year. See Publication 525 for additional information.

Temporary Suspension of Tax on Portion of Unemployment Benefits

For tax year 2009, each taxpayer can exclude from gross income up to $2,400 of unemployment compensation. Unemployment compensation over $2,400 is subject to federal income tax.

Individuals who receive unemployment benefits in 2009 should check their withholding to ensure they are not having unnecessary tax withheld.

Is there a COBRA Health Insurance Continuation Premium Subsidy?

Workers who have lost their jobs may qualify for a 65 percent subsidy for Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation premiums for themselves and their families for up to nine
months. Eligible workers will have to pay 35 percent of the premium to their former employers.

To qualify, a worker must have been involuntarily separated between September 1, 2008, and December
31, 2009.

More information on the COBRA subsidy is available from the U.S. Department of Labor.

What about Gifts of Cash and Property from Family or Friends?

Generally, the person who receives the gift is not liable for any taxes on the gift. If the gift produces income like interest, dividends or rent payments, the receiver would be responsible for taxes on that
produced income. Each year there is a specific maximum amount that may be given that will not create a taxable event to either the giver or the receiver. Gifts in excess of this maximum may be subject to gift
taxes by the gift giver. See Publications 17 or 950 for additional information.

If I am eligible for Public Assistance or Food Stamps, is it taxable? No.

When will I get my final Form W-2 from my employer?

Your employer must provide your Form W-2 by January 31st after the close of the calendar year. As an example, 2008 Forms W-2 are due to employees by January 31, 2009.

What if my employer filed bankruptcy or went out of business, how do I get my Form W-2?

In either case the employer must file and report your wages and withholding on a Form W-2 at year’s end. If you do not receive your Form W-2, try to contact your employer or their representative. If you are unsuccessful, the IRS can assist you in filing a substitute Form W-2 using your records. A good precaution is to keep year-to-date records or pay stubs until you receive your Form W-2.

Can I file an early tax return and receive any refund due?

No. Individual income tax returns are based on a calendar year and cannot be filed and processed earlier than January 1st of the next calendar year.

JOB LOSS: What Income is Taxable?

If I sell other assets like stocks, bonds, and investment property, are they immediately taxable?

Not necessarily, however the sale of such assets should be reported. If you have a gain on the sale, it maygenerate an income tax liability. You should review your overall tax situation and make sure you have paid your taxes as required to avoid any estimated tax penalty. Information on estimated tax is in Publication 505.

What can I do if I owe taxes and cannot pay them?

Contact the Internal Revenue Service as soon as possible to request a payment plan. Communication is the key to minimizing problems.

Is special assistance available on unresolved tax matters that create hardships?

Yes, if you are experiencing economic harm, a systemic problem or are seeking help in resolving tax problems that have not been resolved through normal channels, you may be eligible for Taxpayer
Advocate Services (TAS) assistance. You can reach TAS by calling toll-free 1-877-777-4778 or TTY/TTD 1-800-829-4059.

Copies of the referenced publications can be found at, or you may call 1-800-829-3676.

JOB LOSS: Pensions/IRAs – What’s Next?

The following Questions and Answers are provided by the Internal Revenue Service to help you handle financial issues with a tax impact which may arise if you lose your job.

What if I withdraw money from my qualified retirement plan or IRA?

Generally speaking, if you withdraw the funds before you reach eligible age, and do not roll it over into another qualified retirement plan or Individual Retirement Account (IRA) within 60 days, that amount will
be taxable income in the year in which it is withdrawn. You may also have to pay an additional 10% tax on those early distributions. There are special rules for computing tax on lump-sum distributions. See IRS
Publication 17 or Publication 575 for detailed information.

Can I move money from my qualified retirement plan into another qualified retirement plan or IRA?

Yes, this is called a “rollover” and the amount will not be taxed if you redeposit the amount withdrawn into another qualified retirement plan or traditional IRA within 60 days. See Publication 575 for additional

Are there any “hardship” exceptions to the early distribution penalties?

Yes. If you are totally and permanently disabled or if you withdraw the money to pay medical expenses (these expenses must be more than 7.5% of your adjusted gross income) or to pay an alternate payee
under a qualified domestic relations order. Other specific exceptions are detailed in Publication 575.

If I made an IRA contribution during the current tax year, can I withdraw it before the close of the


Yes. Contributions returned before the due date of the return can be withdrawn without penalty. You must take not only the contribution but any interest or dividend it may have earned. This is a tax-free event if (1) you do not take a deduction for the contribution and (2) you withdraw any income or interest the investment made while in the IRA and include that amount in your income. See Publication 590, Individual Retirement Arrangements for more information.

I’ve had my IRAs for several years, in some of those years I didn’t benefit from any deduction due to my income. How do I figure what part of the distribution is taxable?

If you had non-deductible IRA contributions, you would have completed Form 8606 to establish your basis (cost) in your combined IRAs. Use the worksheet in Publication 590 to calculate what part of the distribution is taxable and complete Part I on Form 8606 and attach it to your return.

If I take my pension and want to transfer it to an IRA, are there any special rules or restrictions?

Rolling over your pension distribution to a financial institution: (i.e., bank, credit union, brokerage house, etc.) is straightforward. There are some prohibited transactions including borrowing the distribution even with a signed contract with interest due, receiving unreasonable compensation for managing these funds, buying property for personal use (present or future), or using the distribution as security for a loan. Review the information in Publications 575 and 590 for additional information.

In addition to the Publications 17, 575 and 590, take advantage of every resource including your financial and/or tax advisor before deciding how to proceed in transitioning your retirement funds. Copies of the referenced publications can be found at or you may call 1-800-829-3676.

JOB LOSS: Starting Your Own Business

Every new phase of life brings many challenges. The Internal Revenue Service recognizes that the loss of a job can create new tax situations for you. The following information is provided to clarify possible tax

Can I be an Employee and a Business Owner in the same tax year?

Yes. Under the tax law, you can be both an Employee and a Business Owner at the same time if you choose. The primary issue is to report all income on your return.

Where can I get information about starting my own business?

Publication 334, Tax Guide for Small Business and Publication 3207, The Small Business Resource Guide CD ROM provides tax related information. These publications contain information on starting your
own business, record keeping, and deductible expenses. In addition, Publication 3207 contains all of the business tax forms, instructions and publications needed by small business owners.

What options do I have for organizing my business?

Under the federal tax code, there are three options: Sole Proprietorship, Partnership or Corporation. A number of factors may influence your decision about which structure is best for you including cost of startup, exposure to risk or liability, financing and the tax implications.

What record keeping requirements do I have as a Sole Proprietor?

Generally, you should keep detailed records of your income and expenses for your business to prepare not only required tax returns but also financial statements to help in maintaining and growing your
business. The same general rules apply for Partnerships and Corporations with some additional detail.

How do I report my business income?

As a Sole Proprietor, you will need to file a Form 1040, Schedule C or C-EZ and Schedule SE. For more information, please see Publication 334, Tax Guide for Small Business.

What kinds of taxes do I pay as a Sole Proprietor?

Taxes due on net self-employment income (total business income minus expenses) include income tax and self-employment (Social Security and Medicare) taxes. Additional information is available in
Publication 334, Tax Guide for Small Businesses. You may be responsible for Employment Taxes if you have employees working in your business, see Publication 15, Circular E, Employer’s Tax Guide for

How do I pay my taxes as a Sole Proprietor?

Generally, you would pay using the 1040ES Estimated Tax process on a quarterly basis. Federal income taxes including Self-Employment tax use a pay-as-you-go system. You generally must make estimated tax
payments if you expect to owe taxes of $1,000 or more when you file your return. For more information on Estimated Tax see Publication 505. Employment taxes are paid using Forms 941, Employer’s Quarterly Federal Tax Return, and Form 940, Employer’s Annual Federal Unemployment Tax Return. The filing requirements for each of these forms and instructions about how to pay taxes due are included in the Publication 15, Circular E, Employer’s Tax Guide.

Can I claim the Earned Income Credit on my net self-employment?

Net income from a Sole Proprietorship is earned income. The Earned Income Credit is available to taxpayers that meet certain income guidelines. See Publication 596, Earned Income Credit.

Are classes or seminars available to get additional information?

Yes. The Small Business/Self-Employed Division of the Internal Revenue Service has a number of Small Business seminars through out the nation. You can also order Publication 1066C, A Virtual Small Business Workshop DVD on the Small Business Web Site at Other products are available to order at the Small Business Web Site as well.

JOB LOSS: Miscellaneous Tax Information

Every new phase of life brings many challenges. The Internal Revenue Service recognizes that the loss of a job can create new tax situations for you. The following information is provided to clarify the tax

Can I deduct any of the expenses that I have from looking for a new job?

Yes, you can deduct certain expenses for looking for a new job in your present occupation, even if you do not get a new job. For additional information, see Publication 529, Miscellaneous Deductions.

What types of expenses can I include?

Generally, you can deduct employment and outplacement agency fees and amounts for typing, printing, and mailing copies of your resume to prospective employers for work in your current occupation. More
specific information is available in Publication 529, Miscellaneous Deductions.

What about travel costs for interviews or job hunting?

If you travel to an area to look for work in your current occupation or attend an interview you can generally deduct the ordinary and necessary travel costs. The purpose of the trip must be considered. Trips that are primarily personal are not deductible. For more information on how to compute your travel expenses, see
Publication 463, Travel, Entertainment, Gifts and Car Expense.

Do I need to file the “long-form” to deduct my job hunting costs?

Yes, you will need to file a Form 1040 and Schedule A. Job hunting costs are a miscellaneous itemized deduction, subject to a 2% Adjusted Gross Income limitation. For more information, please see
Publication 17, Your Federal Income Tax.

Can I deduct the moving costs I paid to move to my new job?

Certain moving costs are deductible if you meet the time and distance requirements. Generally, your move has to be closely related in time to the start of your new job and you must have moved at least
50 miles. Deductible moving costs are calculated on Form 3903. Publication 521, Moving Expenses, provides additional information.

If I sell my home, do I have to pay taxes on the money I make?

Usually you do not have to pay tax on the first $250,000 ($500,000 on a joint return in most cases) of gain from the sale of your main home. Generally, you must have lived in and owned the home for at least two
years of the five years prior to the sale and not excluded a gain on another home in the past two years.

For more information, see Publication 523, Selling Your Home.

Now I have to pay the full cost for my health insurance. Is this deductible?

Health insurance premiums are includible in your medical and dental bills. They are deductible on Schedule A, if you itemize. Some limitations apply. See Publication 502, Medical and Dental Expenses, for more information.

Can I deduct contributions I made to a Health Savings Account (HSA)?

If you are an eligible individual, you can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040. For more information see Pub 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Can I claim the Earned Income Credit this year?

Even though your income may have exceeded the thresholds for this credit in past years, you may be eligible for the credit this year. The credit is available to taxpayers who meet certain income guidelines.

For more information, see Publication 596, Earned Income Credit.

My chances of finding a new job will be better if I take a few college courses. Can I deduct any of

my tuition?

You may qualify for the Hope or Lifetime Learning educational credits. Sometimes, the tuition costs can even be an itemized deduction. For more information, see Publication 970, Tax Benefits for Higher
Education. Copies of the referenced publications can be found at or you may call 1-800-829-3676.


About Mike Habib, EA

Mike Habib is an IRS licensed Enrolled Agent who concentrates his tax practice on helping individuals and businesses solve their IRS & State tax problems. Mike has over 20 years experience in taxation and financial advisory to individuals, small businesses and fortune 500 companies.

Tax problems do not go away unless you take some action! Get Tax Relief today by calling me at 1-877-78-TAXES You can reach me from 8:00 am to 8:00 pm, 7 days a week.

Also online at

Do You Barter?

Mike Habib, EA

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. Barter may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third party basis through a modern barter exchange company.

Bartering is the most ancient form of commerce. While our ancestors may have exchanged eggs for corn, today you can barter computer services for auto repair.

Another example of a one-on-one, non-barter exchange transaction is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of the goods and services exchanged must be reported as income by both parties.

Here are a few things you should know about bartering:

Barter Exchange A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is internet based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.

Barter Income Barter dollars or trade dollars are identical to real dollars for tax reporting. If you conduct any direct barter – barter for another’s products or services – you will have to report the fair market value of the products or services you received on your tax return.

Taxes Income from bartering is taxable in the year it is performed. You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

Reporting The rules for reporting barter transactions may vary depending on which form of bartering takes place. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations, or Form 1120-S for Small Business Corporations.

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