Tax Primer for Filing your 2011 Taxes

TaxesIt's that time of year when we are all hunkering down getting our documents together to file our income taxes.  While we recently blogged about proposed changes to the tax code, filing your taxes deals with the laws that are in place here and now.  

So, what  do you need to know?  Marty Abo, CPA at Abo and Company apparently spent last weekend putting together a punch-list of what you need to know for the 2011 tax season:

"From tax credits, exemptions and deductions for individuals and Section 179 expensing for small businesses, here's what Abo and Company thinks you may want to know about the tax changes for 2011."

So, here is your tax season checkup checklist reproduced with permission from the email alerts sent to clients and friends of Abo and Company, Certified Public Accountants - litigation & forensic consultants. www.Aboandcompany.com.  I found it valuable and Marty was happy to allow us to share it with you.

Individuals

From personal deductions to tax credits and educational expenses, many of the tax changes relating to individuals remain in effect through 2012 and are the result of tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

Personal Exemptions - The personal and dependent exemption for tax year 2011 is $3,700, up $50 from 2010.

Standard Deductions - In 2011 the standard deduction for married couples filing a joint return is $11,600, up $200 from 2010 and for singles and married individuals filing separately it's $5,800, up $100. For heads of household the deduction is $8,500, also up $100 from 2010.

The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50, and $1,450 for singles and heads of household, also up $50.

Income Tax Rates - Due to inflation, tax-bracket thresholds will increase for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $69,000 for a married couple filing a joint return, up from $68,000 in 2010.

Estate and Gift Taxes - The recent overhaul of estate and gift taxes means that there is an exemption of $5 million per individual for estate, gift and generation-skipping taxes, with a top rate of 35%. For married couples the exemption is $10 million.

Alternative Minimum Tax (AMT) - AMT exemption amounts for 2011 are slightly higher than those in 2010 at $48,450 for single and head of household fliers, $74,450 for married people filing jointly and for qualifying widows or widowers, and $37,225 for married people filing separately.

Marriage Penalty Relief - For 2011, the basic standard deduction for a married couple filing jointly is $11,600, up $200 from 2010.

Pease and PEP (Personal Exemption Phaseout) - Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations do not apply for 2011, but these are set to expire at the end of 2012.

Flexible Spending Accounts (FSA) - 
Under new standards, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles.

The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer's plan.

A similar rule went into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs).

Long Term Capital Gains - In 2011, long-term gains for assets held at least one year are taxed at a flat rate of 15% for taxpayers above the 25% tax bracket. For taxpayers in lower tax brackets, the long-term capital gains rate is 0%.

Individuals - Tax Credits

Adoption Credit - A refundable credit of up to $13,360 for 2011 is available for qualified adoption expenses for each eligible child.

Child and Dependent Care Credit - If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit - The $1,000 child tax credit has been extended through 2012. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.

Energy Tax Credits for Homeowners - Energy tax credits for homeowners expire at the end of 2011 and are not as generous as in previous years. In addition, a taxpayer who has claimed an amount of $500 in any previous year is not eligible for this tax credit.

Homeowners can claim an Energy Star window tax credit of up to $200 maximum as well as a water heater tax credit, which includes electric, natural gas, propane, or oil, up to a maximum of $300. The same maximum ($300) applies to air conditioners, but insulation, doors, and roof credits are capped at $500. The furnace tax credit (includes natural gas, propane, oil, or hot water) and is capped at $150 maximum and efficiency must be at 95%.

Earned Income Tax Credit (EITC) - 
The maximum EITC for low and moderate income workers and working families is $5,751, up from $5,666 in 2010. The maximum income limit for the EITC has increased to $49,078, up from $48,362 in 2010. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Individuals - Education Expenses

Coverdell Education Savings Account - For two more years, you can contribute up to $2,000 a year to Coverdell savings accounts. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.

American Opportunity Tax Credit (Higher Education) - The expansion of the Hope Scholarship Credit by the American Opportunity Tax Credit has been extended through 2012. For 2011, the maximum Hope Scholarship Credit that can be used to offset certain higher education expenses is $2,500, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.

Employer Provided Educational Assistance - Through 2012, you, as an employee, can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.

Lifetime Learning Credit - A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2011, the credit is fully phased out at $122,000 adjusted gross income for joint filers and $61,000 for others.

Student Loan Interest - For 2011 and 2012, the $2,500 maximum student loan interest deduction for interest paid on student loans is not limited to interest paid during the first 60 months of repayment. The deduction begins to phase out for higher-income taxpayers.

Tuition and Related Expenses Deduction - For 2010 and 2011, there is an above-the-line deduction of up to $4,000 for qualified tuition expenses. This means that qualified tuition payments can directly reduce the amount of taxable income, and you don't have to itemize to claim this deduction. However, this option can't be used with other education tax breaks, such as the American Opportunity Tax Credit, and the amount available is phased out for higher-income taxpayers.

Individuals - Retirement

Roth IRA Conversions - There is no longer an income limit for taxpayers who want to convert regular IRAs into Roth IRAs. The difference is that taxpayers who convert to Roth IRAs in tax year 2011 must pay taxes on the conversion income now instead of deferring it in later years as was the case in 2010.

Businesses

Standard Mileage Rates - The standard mileage rate increases to 51 cents per business mile driven (19 cents per mile driven for medical or moving purposes and 14 cents per mile driven in service of charitable organizations) for the first half of 2011. From July 1, 2011 to December 31, 2011 however, the rate increases to 55.5 cents per business mile. This increase is a special adjustment by the IRS and reflects higher gasoline prices.

Health Care Tax Credit for Small Businesses - Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000. The credit can be claimed in tax years 2010 through 2013 and for any two years after that. The maximum credit that can be claimed is an amount equal to 35% of premiums paid by eligible small businesses.

Section 179 Expensing - In 2011 (as well as 2010), the maximum Section 179 expense deduction for equipment purchases is $500,000 ($535,000 for qualified enterprise zone property) of the first $2 million of certain business property placed in service during the year. The bonus depreciation increases to 100% for qualified property. If the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2 million, the $500,000 amount is reduced, but not below zero.
  

 Thank you again Marty  and the team at Abo and Company for this very useful information!

This Will Impact Your Wallet - Tax Changes Proposed in Obama 2012 Budget

President Obama’s fiscal year 2013 budget has the potential to trim the deficit by Four Trillion ($4,000,000,000,000.00) Dollars through a combination of spending cuts and tax increases. These proposals will effect all taxpayers, but have particular impact to top earnings, business owners, and those with asset in excess of $5 million.  

President Obama unveiled his fiscal year 2013 budget on February 13, 2012 amidst a cloud of uncertainty relating to Bush era tax cuts and the more immediate the fate of the payroll tax cuts (which news channels advise are to be extended later today). President Obama’s fiscal year 2013 budget proposals incorporate initiatives from his “Blueprint for America” as described in his 2012 State of the Union address. While some of the President’s proposals were immediately rejected by the GOP, others could move along quite quickly. The expected extension of the Employee Side Payroll Tax Cut could serve as a vehicle to move some of the proposals, such as an extension to the 100% bonus depreciation.

What you will find striking in the summary outlining the budget proposal is the effect directly on individuals and businesses. The most significant issue are:

  • Reinstatement of the top individual income tax rates at the 36% and 36.9% tax brackets
  • Reinstatement of  the personal exemption phase out/limitation of itemized deductions for taxpayers earning more than $200,000 a year for individuals or joint returns with incomes over $250,000
  • Return of a $ 1million lifetime gift tax exemption
  • Capping the federal estate tax and generation skipping tax exemptions at $3.5 million per person (with portability between spouses)

Click here for a complete summary.

 

Win Big on the Superbowl? Surprise - Those gambling winnings are income.

The Giants won big yesterday, and you might have also if you participated in an office pool, or bet on the over/under, the coin toss, the number of Clydesdale's in Budweiser ads, or any other of the myriad of ways to wager your dollars on Superbowl Sunday.  What you may not know is that those wager winning are taxable income.  

The IRS has issued Tax Tip 2010-34 "Gambling Winnings Are Always Taxable Income" - I guess the name of that Tax Tip says it all.  They go on to give you the top 7  facts the IRS wants you to know about gambling winnings.

  1. Gambling income includes – but is not limited to – winnings from lotteries, raffles, horse and dog races and casinos, as well as the fair market value of prizes such as cars, houses, trips or other non-cash prizes.
  2. Depending on the type and amount of your winnings, the payer might provide you with a Form W-2G and may have withheld federal income taxes from the payment.
  3. The full amount of your gambling winnings for the year must be reported on line 21 of IRS Form 1040. You may not use Form 1040A or 1040EZ. This rule applies regardless of the amount and regardless of whether you receive a Form W-2G or any other reporting form.
  4. If you itemize deductions, you can deduct your gambling losses for the year on line 28 of Schedule A, Form 1040.
  5. You cannot deduct gambling losses that are more than your winnings.
  6. It is important to keep an accurate diary or similar record of your gambling winnings and losses.
  7. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

Want to know more?  Look to IRS Publication 529 "Miscellaneous Deductions" or Publication 525 "Taxable and Nontaxable Income".

Excess Estate Expenses can be Windfall to Beneficiary

Who would have thought it, but the 1041 income tax return for an estate could make the beneficiaries money.  

Many times an estate may have deductions in excess of its income. An estate’s income would include any items of income earned by the estate from the time of the decedent’s death until the time that the estate is closed and a final income tax return is filed. These items of income are reflected on a United States Income Tax Return for Estates and Trusts (IRS Form 1041).

An Executor must file an income tax return for an estate (i.e. IRS Form 1041) each tax year for the estate where it has gross income of $600 or more or as a beneficiary who is a non-resident alien. The return is due April 15, like a personal income tax return.

There may be situations where an estate does not have significant income, but has significant deductions. The Executor has a choice of deducting certain estate administration expenses or losses on either the estate tax return (Form 706), or the estate’s income tax return (Form 1041). In a situation where it is not a taxable estate (for example, all assets are passing to the spouse, and there is an unlimited marital deduction) it doesn’t necessarily make sense to reflect the estate administration expenses on the estate tax return; there is more value to the beneficiaries of the estate than having those expenses reflected on the estates income tax return (Form 1041). By being reflected on the return, these expenses and losses can (1) be used to shelter any income earned by the estate during the time that the estate is open, and (2) potentially flow to the beneficiaries upon the filing of a final estate income tax return, Form 1041, in the final year for filing the return.

You cannot claim the estate administration and other expenses of loses on both returns – if a deduction is claimed for income tax purposes on the 1041, the Executor must file a statement that no estate tax deduction for those items has been allowed and waive any right to take an estate tax deduction for them.

When the estate is concluded, the estate may file a final income tax return marked as “final.”

The instructions to the Schedule K-1 for Form 1041 identify how a beneficiary filing a Form 1040 should report their share of income and deductions. Section 11 reflects final year deductions proportionate to each beneficiary and how it these deductions can be reflected on the beneficiary’s personal 1040. The 1041 instructions specifically provide “if the estate or trust has for its final year deductions (excluding the charitable deduction and exemption) in excess of its gross income, the excess is allowed as an itemized deduction to the beneficiary succeeding to the property of the estate or trust.”

Note that these deductions will be subject to any limitations and be applied to the beneficiary because of his or her taxpayer profile. Even where an estate has no income, a 1041 should be properly filed each year in order to record the deductions and/or losses of the estate, which may, in the estate’s final year be passed along, on a pro rated manner to the beneficiaries estate for utilization in their personal tax returns. 

Valentines Day and the IRS - Not your usual love match

Heart Balloons Valentine's Day usually puts one in the mind of hearts, flowers and candy. This year however, it's going to be a favorite day for the millions of taxpayers who itemize their returns, because it's the first day that those tax payers returns will be able to be filed into the IRS system.

 I previously advised to Hold your Horses on Filing those Income Tax Returns because the IRS needed to update its internal computer software to reflect the changes in the 2010 Tax Act.  The IRS issued an alert yesterday that:

Beginning Feb. 14, the IRS will start processing both paper and e-filed returns claiming itemized deductions on Schedule A, the higher education tuition and fees deduction on Form 8917 and the educator expenses deduction. Based on filings last year, about nine million tax returns claimed any of these deductions on returns received by the IRS before Feb. 14.

However, for those of you who e-file, you can go ahead and put all of your return information into the system. The filing software will hold your return until the February 14 "Go" date if yours is the type of return that cannot yet be filed.

The biggest impact itemize return filers – if they're only starting to process the returns on February 14, and by their own numbers they received 9 million such returns by February 14 of last year, you're likely not getting your tax refund happily direct deposited in a 10 day time frame that you been used to.

Looking who to blame for the interest free loan you're extending to the government by waiting to get your refund back? Point the finger at Congress and the President who waited until December of 2010 to create the income tax rules for income earned in 2010.

Image: graur razvan ionut / FreeDigitalPhotos.net

Hold your Horses on Filing those Income Tax Returns

Are you an early filer?  You know the one.  You get all your tax papers by February 3, you file on-line by February 4, and get your refund deposited by February 11?  Well, if you itemize, that quick time-line won't be happening this year.  Steven A. Loeb, Esq. of our Tax, Trust & Estates, and Elder Law Department brought to my attention that due to the tax compromise legislation, the IRS needs to reprogram its computers.  USA Today reports:

The delay is necessary because the IRS needs time to program its systems to accommodate tax breaks included in a compromise tax bill President Obama signed last week.

The delay means millions of taxpayers will have to wait longer to get their refunds next year. Taxpayers who will have to wait until mid- to late February to file include:

Taxpayers who claim itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses, state and local taxes.

Taxpayers who claim a deduction for tuition and fees. This is a so-called "above-the-line" deduction, which means taxpayers don't have to itemize to claim it.

Parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit, will not have to wait to file, the IRS said, assuming they don't itemize.

Taxpayers who claim the educator expense deduction. This deduction, which is also an above-the-line deduction, allows teachers to deduct up to $250 in out-of-pocket costs for classroom materials.

So for all of us who pay a mortgage, plus others who itemize, we will have to wait to file, which means those refunds will be coming a little later this year.

 

What does the New Tax Law mean for New Jersey?

I wouldn’t have taken bets on it, but Washington has hammered out how our federal tax laws are going to look for the next 2 years. On the plus side, we know what taxes are going to look like in January 2011, which is a far better place to be than Monday of last week. On the downside, this does not represent thoughtful tax reform – instead, it is knee-jerk politicking with the intent to dump the tax issues in the voters' laps at the next election so no politician is "responsible" for having taxes go up.

The cost of this package? $858,000,000,000.00 added to the federal deficit- yeah, that's a big number. Oh, and "added to the federal deficit” really just means that we spent $858,000,000,000.00 that we don't have. What I'd like to see happen in the new year – an actual bi-partisan examination of how tax policy affects the economy, and a roadmap to create a balance between the amount that we are spending, and the amount of revenue being generated.

To get back to the new law, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRA") extends many tax cuts that were going to expire on December 31, 2010, as well as throws in some new tax laws. Some highlights:

  • The maximum federal income tax rate will remain at 35%. New Jersey income taxes are an additional maximum 8.97%
  • Married couples will continue to benefit from the 200% standard deduction
  • High income taxpayers will not be subject to phase-out of itemized deductions and personal exemptions for high-income taxpayers
  • Most key - "Patch" of alternative minimum tax exemption to keep rate with inflation (this is a law they should really make permanent)
  • Capital gains and dividends will continue to be taxed at 15%. New Jersey income taxes are an additional maximum 8.97%
  • The federal estate tax returns with a portable exemption of $5 million per person and a maximum tax rate of 35% (more to follow). New Jersey’s exemption rate continues to be $675,000 per person and is not portable.
  • The greatest opportunity is created in the increase of the gift tax exemption and generation skipping tax exemption to $5 million per person at a 35% maximum rate. New Jersey does not have a gift tax.
  • Extension of unemployment benefits for 13 months
  • Employees will benefit from a 2% reduction in Social Security withholding
  • Business owners can depreciate 100% of new business assets placed in service before January 1, 2012

My thanks to Sobel & Co for their excellent TRA summary, which I used as a resource.

 

Estate Tax, AMT, etc - Has Washington forgetten about the Other Taxes

So Dem and GOP appear to all agree to extend this years income tax rates to next year - avoiding a jump in income and capital gains taxes when the ball falls on New Years Eve.  This has been greeted with great fanfare in the press and an apparent sigh of relief and an attitude of  "well, that's done now, on with Holiday shopping!". Whoa there - wait a minute - y'all ain't done yet.

Yes - the income tax effects everyone who earns or invests money, so agreement on that is the biggie.  But there are lots of other tax issues that need to be addressed before year end.

The AMT (Alternative Minimum Tax) is a second way to calculate taxes.  If you fall into the AMT, you pay the higher of the normal tax calculation or the AMT.  The AMT was designed to more effectively tax income of very high earners back in the days of tax shelters,etc. The problem is that the level at which a person "qualifies" for the AMT is not indexed for inflation - so each year more and more families fall into the AMT not because they necessarily earned more, but because their earnings increased by a natural costs of living amount and the AMT did not.  The result?  Each year in December Congress traditionally passes an AMT "patch" which effectively adjusts the AMT limit for inflation (why they don't just pass the law one time to index for inflation automatically each year I don't know - maybe so lawmakers can create press being seen as Robin Hood each year "we staved off the AMT for another year - Merry Christmas").

Even the IRS has implored Congress to patch the AMT.  According to Reuters "The U.S. tax chief told lawmakers on Wednesday the Internal Revenue Service needs clarity on the fate of the alternative minimum tax, which could ensnare 21 million unintended taxpayers if a law is not amended before year-end."  In fact, the IRS computers are already programmed as if the AMT was patched - if its not, they need to reprogram all their computers, which could delay refund processing as people being to file their 2010 income tax returns.

The Estate Tax is coming back to life next year too - anyone want to talk about that? Just like the income taxes were scheduled to rise, the estate tax is scheduled to come back at a $1million exemption per person next year.  Congress keeps talking about increasing the exemption to $3.5 million, but nothing concrete so far.  People want to be able to plan their estates, and this complete uncertainty of what to do next is paralyzing.

Image: renjith krishnan / FreeDigitalPhotos.net

LeBron James Team Selection for Tax Purposes Revisited

I blog because I enjoy talking to people about things that interest me - including how how tax policy drives individual behavior (everyone has to have their passions after all).  The best feedback is to get a dialog from another person who not only reads the blog (thank you very much) but is generous enough with their time to respond to a post with their own analysis.  Such a compliment happened recently on my post "Playing the State Income Tax Game". Gregory A. Viggiano, Senior Director of Taxes, Corporate Finance, at Maersk Inc. in Madison was kind enough to send me some thoughts about points that I overlooked in my "35,000 view" of the issues raised. 

I came across your blog while surfing the net and found it very interesting.

I did have one comment on the post of August 10 on the state income tax considerations LeBron James might have had in choosing the Miami Heat over NBA teams. You mention (or quote another blog) that LeBron's state income tax bill will be "zero, nothing, nada," as a result of this choice.

Perhaps you did not want to confuse your readership, but while LeBron will reap considerable state income tax benefits from living and playing in Miami, he will not entirely escape state income tax since the other states with income taxes in which he plays will tax him. Since half of his games and all or most of his practice time will be in Florida, this means that the majority of LeBron's salary will not be taxed, but a substantial portion will. Of course, he will save a lot more money when endorsements, which can dwarf the salary of a superstar like LeBron, are considered as well.

Moreover, I thought the tax figure for New York was low. You mention that it is only for New York State income tax, but you must be aware that New York City imposes its own hefty income tax that, in combination with the state levy, give the total for New Jersey a run for its money.
 

Greg, you are correct on all points.  A key point relevant even for non-superstar basketball players is that when you earn money in another state, those earnings are subject to the tax laws of other states.  And if that money is earned in New York City, the income taxes are even higher.

Thank you for the feedback!

Can your parent be a Dependent and you get a Deduction?

Clearly your parents can be dependent on you (an issue beyond the scope of any article) , but can you claim them  as dependents and get a tax deduction?

The answer - maybe (a lawyers stock in trade).  There is a 5 (possibly 6)  step test if you can claim a parent as a dependent and get a tax deduction.  You can find more details on the deduction in IRS Publication 501, although not necessarily more clearly explained.

What do you get if you can claim a parent as a dependent?  You receive an additional dependent exemption valued at $3650 and 2010.  This is the same standard deduction that you can claim for a dependent child, although with children there is not normally an analysis that you need to go through to see whether or not they qualify as dependents.

The 5 Step Test:

(1)  The person you're claiming as a dependent must be related to you or living with you.  This is generally going to include parents, grandparents, great grandparents, stepmother or stepfather, and an aunt or uncle.  Alternatively, the person must live with you all year as a member of your household. A person can be related to you and your dependent but not live with you   -- this is very important when a mother or father might still live in their own household, or reside in assisted living or nursing home.

(2) There are citizenship requirements.  The person must be a United States citizen, United States resident, or a citizen of Canada or Mexico.

(3)  The dependent person cannot file a joint return with any other person.  For example, if your mother is married to your stepfather, and they're filing a joint return, and you won't be able to claim your mother as a dependent.

(4) The dependent parent cannot earn more than  $3650 of includable income.  A great post from the New York Times "Ask an Elder Law Attorney: Claiming a Parent as a Dependent" explains this further:

Now, here come the tricky parts. The parent’s gross taxable income can’t exceed the I.R.S.’s personal exemption, which is set each year. It’s $3,650 for 2010. Social Security income, however, isn’t taxable unless someone receives more than $25,000 in total income. So if your mother’s only income is $6,000 of Social Security, then she meets this test.

(5) You, the child, and must provide at least 50% of the dependent parents support.  An example from the New York Times article.:

Let’s say your mother’s expenses for the year amount to $12,500 for food, lodging, clothing, medical and dental care, transportation and recreation — anything spent on her behalf. Your mother will collect $6,000 in Social Security benefits this year, so you have to spend more than that, at least $6,001, to claim her as a dependent.

This last point can be the most challenging to determine.  If you are paying all of your mother's bills directly, then it can be pretty easy to say if what you paid is greater than what she earned.  However, if your dad lives with you and you are buying your dad stuff (food, clothes, furniture) it can be more difficult to determine if you meet the 50% test.  You will need to look back to Publication 501 to determine the "fair rental value" of what you are providing.  There is a great article at Bankrate.com "Tax Help in Caring for an Aging Parents" that has more examples of how you can look at the support test.

Oh, and one last point.  If you are a "high income earner" the amount that you can take as a dependent deduction is reduced, and possibly eliminated.  If your Adjusted Gross Income (AGI) is more than $250,200 for joint filers, $166,800 for single filers, or $208,500 for heads of household (using 2009 figures), then the $3650 starts to reduce.  

Regardless of the complexities, the dependent parent deduction can put money in your pocket, so it is worth exploring if you are caring for older relatives.

Image: graur razvan ionut / FreeDigitalPhotos.net

Playing the State Income Tax Game

Why did LeBron James cross to the Miami Heat? Because his tax adviser said so of course! At least, that is what is posited in a very interesting article "Play The State Income Tax Strategies Game Like LeBron James" by Trace Mayer at Citizen Economists.

As a free agent, LeBron had options. He could go wherever he thought he could win a title, get the most money in endorsements, where he could enjoy the best Cuban food and beach lifestyle, and maybe all three. After being courted by half a dozen teams, he had some really nice offers and some potentially lucrative deals. The biggest players were Cleveland, the New Jersey Nets, New York Knicks, maybe even the Bulls or the Clippers and of course Miami. LeBron finally picked Miami. Miami could arguably offer a lot, but I wouldn’t doubt that his state income tax attorney whispered a few sweet words into his ear about income tax strategies, like “$2-5 million a year,” that may have influenced his Decision."

The math really makes a difference when you are earning $44 million a year.  What was LeBron looking at with the other teams wooing him:

  • Cleveland Cavaliers (Ohio) - state income tax bill - $2.6 million
  • Chicago Bulls (Illinois) -- state income tax bill -- $1.65 million
  • New York Knicks (New York) -- state income tax bill -- $3 million
  • LA Clippers (California) --state income tax bill  -- $4.6 million
  • New Jersey Nets (New Jersey) -- the winner!, with a state income tax bill of over $4.8 million

And the state income tax bill for the Miami Heat  (Florida) - zero, nothing, nada.  Hmmm, so maybe there is something to the concept of people don't want to come to  New Jersey because of the taxes.

This does illustrate an interesting tax planning concept regarding gifting. Many times we  will recommend to clients that they create a trust with situs in a state other than New Jersey. The trust's income would then be taxed by the state income tax rates, or not taxed all, in a state like Florida where there's no income tax.  This is done by having a trustee who is resident in the state that has no income tax.

 

Obama Needs to Turn to Taxes

Tax Forms for ConcernIn reviewing the Obama administration's first 200 days, CNN Money correctly predicts that the next 200 days will bring and shift to taxes.  Regardless of where we end up on health care, where is all the money going to come from for all the hundreds of billions ($X00,000,000.00's) that have already been spent?
 

Some thoughts:

  • New Health Care cost related taxes will be in the works - somebody will need to pay.  Could be reduction in itemized deductions for certain income earners, surcharge to income earners, additional taxes to insurers, or reduction of the tax free nature of employer provided benefits.
  • Extend the estate tax for at least one year at the current levels of $3.5 million exemption per person and 45% maximum bracket.  They won't let the estate tax expire in 2010.  The question is if they will push one year, or just make it permanent at existing levels to not have to address again in 2010.
  • Closing "Corporate Tax Loopholes" - This may be combined with a rate reduction.  The thought is the certain provisions make it less expensive to operate offshore.  The goal would be to make it more expensive to operate offshore, but create an incentive to operate, and thereby employ in the US, so the tax revenue effect may be flat.