Tax and Financial Articles

New and Improved Energy-Efficient Incentives

Have you been considering investing in home improvements that might reduce your energy costs? With the passage of the American Recovery and Reinvestment Act of 2009, two valuable tax credits are now available to taxpayers who make energy efficiency improvements to their home in 2009 or 2010.

As you may know, a tax credit is a dollar-for-dollar reduction in tax, and is therefore generally much more valuable than a deduction which only removes a percentage of the tax that is owed.   In this case, the government is offering a 30% tax credit, which means that Uncle Sam is in effect offering to pay for up to 30% of any qualified purchase.

The first tax credit is for expenditures made for qualifying energy-efficient home improvements in 2009 and 2010.

Qualifying energy-efficient home improvements include the following:

• Exterior windows (including skylights) and doors
• Insulation systems
• Certain metal and asphalt roofs
• High-efficiency central air conditioners
• Natural gas, propane and oil furnaces and water heaters
• Electric heat pumps and electric heat pump water heaters

Your tax credit will equal 30% of the cost of the improvement, subject to an overall $1,500 limit for 2009 and 2010.

A second credit is available for qualifying expenditures for more expensive “residential energy efficient property,” which includes the following:

• Solar water heating equipment
• Solar electricity generating equipment
• Wind energy equipment
• Geothermal heat pump equipment
• Fuel cell electricity generating equipment

You can qualify for this incentive credit by making any of these improvements to either your US principal residence or vacation home.  This credit also equals 30% of your cost, but, except for fuel cell equipment, there is no dollar limit.

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First-Time Home Buyers’ Tax Credit Improved

First-Time Home Buyers’ Tax Credit Improved
by Glenn Schanel, CPA - Jupiter, Florida

In an effort to revive the real estate market, in 2008 Congress created a tax credit for “first time home buyers.”  In its original form, this “credit” of $7,500 was in reality an interest free loan that the taxpayer had to repay over a 15 year period.  It soon became evident that this credit/loan was not very “stimulative”, so in 2009 Congress created a new plan that included a true credit.

The new law created a refundable federal tax credit of up to $8,000 ($4,000 for a married taxpayer filing separately) for qualifying first- time homebuyers who purchased a home between April 8, 2008, and December 1, 2009. In order to qualify for the credit, the taxpayer must have not owned a qualifying principal residence in the U.S. during the three-year period before the purchase of the new home.  This credit was phased out for individual taxpayers whose modified adjusted gross income was between $75,000 and $95,000 (between $150,000 and $170,000 for married taxpayers filing jointly).

As a result of the continuing weakness in the real estate market, last month Congress enacted the Worker, Homeownership, and Business Assistance Act of 2009.  This Act extends the $8,000 first-time homebuyer credit for contracts to purchase entered before May 1, 2010, and closed before July 1, 2010. The new law also liberalizes the credit by making it available to higher income taxpayers, as well as to those individuals who are not first-time homebuyers.

Generally, existing homeowners who are qualifying “long-time residents” may qualify for the tax credit if they contract to purchase another principal residence before May 1, 2010, and close before July 1, 2010. The Act provides that any individual who has maintained the same principal residence for any five-consecutive-year period during the eight-year period ending on the date of the purchase of a subsequent residence be treated as a “first-time homebuyer”.

However, the maximum credit for long-time residents who qualify under the Act is the lesser of $6,500 ($3,250 for married individuals who file separate returns) or 10% of the purchase price of the principal residence.

The credit now phases out for individual taxpayers whose modified adjusted gross income is between $125,000 and $145,000 ($225,000 and $245,000 for married taxpayers filing joint returns).  In addition, for purchases after November 6, 2009, the first-time homebuyer tax credit cannot be claimed for the purchase of a principal residence if its purchase price exceeds $800,000.

If you qualify, you can claim your credit by attaching a Form 5405 to your income tax return in the year of the home purchase and a copy of your settlement statement.  You can also elect to treat any home purchased in 2009 as if it occurred on December 31, 2008 and a purchase in 2010 as if it occurred on December 31, 2009.  If you choose to do this and have already submitted your prior year’s tax return, you can claim your credit by filing an amended tax return.

So if you believe that you would qualify for either the first time home buyer or long-time resident tax credits, this could be the right time to buy a home.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants.  The firm provides tax, CPA, accounting, and consulting services to clients throughout South Florida and the United States. Our clients are located in North Palm Beach, Port St. Lucie County, Palm Beach County, West Palm Beach.

The information contained in this communication is intended as general guidance on matters of interest only.  The application and impact of laws can vary widely based on specific facts involved.  Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission.  The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors.  Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

The Tax Consequences of a Short Sale or Foreclosure: Vacation Homes (Part 3)

The Tax Consequences of a Short Sale or Foreclosure: Vacation Homes
By Glenn Schanel, CPA, CFP®

(This article is the third in a three part series on the tax consequences of short sales and foreclosures. This installment will cover properties that qualify as vacation residences or second homes.)

A vacation or second home is a residence that is used for personal purposes but which does not qualify as a principal residence. Unfortunately, when it comes to a foreclosure or short sale, a transaction involving a vacation home is the situation most likely to result in an unfavorable tax situation.

Tax on Gains

The gain/loss on a short-sale or foreclosure transaction is calculated as the market price or sale price minus the cost basis. The cost basis on a vacation home is the sum of the purchase price, the purchase costs, and capital improvements. Any gains that result from the transaction must be reported as a taxable capital gain. Losses, however, are not deductible, because a vacation home is considered personal-use property.

Debt Forgiveness Income

Even if a vacation home is sold at a loss through a short sale or foreclosure, the taxpayer may still be subject to debt forgiveness income.

Debt forgiveness income is the difference between the loan amount at the time of the foreclosure or short-sale and the market price or sale price. As a general rule, debt forgiveness income is taxable as ordinary income, but there are several exceptions. Debt forgiveness income does not need to be included as income if:

(1) the debt discharge occurs as a result of a Title 11 bankruptcy case.
(2) the taxpayer is insolvent at the time of discharge (your liabilities exceed your assets).
(3) the loan is non-recourse (the lender cannot pursue you personally).

There is a catch, however. If a taxpayer elects to avoid taxes on debt cancellation income, other tax benefits (called attributes) must be reduced to the extent that the income is not recognized. In other words, the relief is temporary because it only defers the tax consequences into the future. The taxpayer can choose to reduce the basis of the depreciable property or to follow a prescribed ordering of tax attribute reductions. These include net operating losses, capital loss carryovers and passive loss carryovers.

In summary, the foreclosure or sale of a second/vacation home is likely to result in a very unfavorable tax situation. Capital losses are not deductible, but gains are taxable, and any related cancellation of debt can result in higher taxes now or in the future.

Consult with a Tax Professional

This can be a complicated issue, so we recommend that anyone involved in one of these transactions consult with a tax professional to review their particular situation. If you or someone you know is involved in a foreclosure or a short sale and is concerned about the possible tax consequences, please feel free to contact our offices at (561) 624-2118 to schedule a consultation.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

The Tax Consequences of a Short Sale or Foreclosure: Rental Property (Part 2)

By Glenn Schanel, CPA, CFP®

(This article is the second in a three part series on the tax consequences of a short sale or foreclosure. This installment covers properties that qualify as rentals.)

You may be one of the many South Floridians who purchased one or more investment properties at or near the height of the real estate boom and now are left holding a property that has significantly depreciated in value. Meanwhile, the mortgage, along with insurance, taxes and other costs of ownership are putting a severe strain on your monthly cash flow. Renting the property can help alleviate some of this pressure, but with so many rental properties on the market, the rent can be considerably less than the monthly carrying costs. As a result, you may be considering a short sale arrangement or even a foreclosure.

However, before going forward with a short sale or foreclosure on a rental property, it is not only important to understand the legal implications, but it is also critical to understand all of the potential tax consequences, because they can be significant.

Tax on Capital Gains

The tax law treats both a short sale and a foreclosure of your rental property as a sale. The gain or loss is calculated as the market price or sale price minus your cost basis. In most cases, there will be a loss, and unlike with a personal residence, the loss on a sale of rental property is immediately deductible. This is generally referred to as a Section 1231 loss. This means that the loss is likely to qualify as an ordinary, as opposed to a capital loss. As a result, the tax benefit of the loss is at higher, ordinary tax rates. This is the one primary advantage over properties held for personal use.

Debt Forgiveness Income

Debt forgiveness income is the difference between the loan amount at the time of the foreclosure or short-sale and the market price or sale price. While Congress did provide tax relief for debt forgiveness income related to a principal residence, debt forgiveness income continues to be taxable for rental properties. However, there are two basic exceptions to this general rule:

(1) When the amount forgiven/deficiency is included in a bankruptcy filing.

(2) When you are insolvent at the time the debt is forgiven.

One more exception applies if your rental qualifies as Section 1231 property. In this case, you may be able to reduce the cost basis of the rental property without being insolvent. The result is that you don’t report the income from the debt forgiveness but you have a lower loss on the “sale’ of your property. To use this strategy, you must make an election and the debt forgiven must be “qualified acquisition indebtedness,” (i.e. debt incurred to acquire, construct or improve a property.)

Consult with a Tax Professional

This can be a complicated issue, so we recommend that anyone involved in one of these transactions consult with a tax professional to review their particular situation. If you or someone you know is involved in a foreclosure or a short sale and is concerned about the possible tax consequences, please feel free to contact our offices at (561) 624-2118 to schedule a consultation.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

The Tax Consequences of Short Sales and Foreclosures: Principal Residences

By Glenn Schanel, CPA, CFP®

(This article is the first in a three part series on the tax consequences of a short sale or foreclosure. This installment will cover properties that qualify as a principal residence.)

The last thing a person involved in a foreclosure or short sale needs is a crushing tax bill, so it is important to understand and be aware of potential tax consequences. When it comes to a qualified principal residence, taxes can be avoided in most, but not all, circumstances.

A principal residence for tax purposes is a home that a taxpayer has owned and lived in for at least two of the past five years. Keeping that definition in mind, we will consider both the capital gains tax and the tax on debt forgiveness income that could result from a short sale or foreclosure.

Tax on Capital Gains

The gain/loss on a short-sale or foreclosure transaction is calculated as the market price or sale price minus the taxpayer’s cost basis. In the event there is a loss, there is nothing to report for tax purposes, because a loss on a principal residence or any personal property is not deductible. If there is a gain on the residence, then the taxpayer is eligible to exclude up to $250K (or up to $500K for a married couple that files married filing jointly) of this gain.

Therefore, when it comes to a foreclosure or short sale on a principal residence, unless the capital gain exceeds the exclusion maximums, there will be no capital gains tax.

Debt Forgiveness Income

Debt forgiveness income is the difference between the loan amount at the time of the foreclosure or short-sale and the market price or sale price. As a general rule, debt forgiveness income is taxable, but there are some exceptions.

The Mortgage Forgiveness Relief Act of 2008 says that debt forgiveness income can be excluded if the debt can be considered “Qualified Principal Residence Indebtedness” (QPRI). QPRI is any debt that is secured by a principal residence and was incurred to acquire, construct or improve a principal residence.

Therefore, a potential income recognition problem does exist if a taxpayer had refinanced and used any “cash-out” proceeds for some purpose other than home improvement. In that case, the income would be taxable unless the taxpayer qualifies for an exclusion under the bankruptcy or insolvency exceptions.

Consult with a Tax Professional

This can be a complicated issue, so we recommend that anyone involved in one of these transactions consult with a tax professional to review their particular situation. If you or someone you know is involved in a foreclosure or a short sale and is concerned about the possible tax consequences, please feel free to contact our offices at (561) 624-2118 to schedule a consultation.

Glenn Schanel, CPA, CFP® is the President of Schanel & Associates, PA, Certified Public Accountants. The firm provides tax, accounting, and consulting services to clients throughout South Florida and the United States.

The information contained in this communication is intended as general guidance on matters of interest only. The application and impact of laws can vary widely based on specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions, or inaccuracies in information contained in this transmission. The information contained herein should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisors. Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained in this communication, unless explicitly provided otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

The Need For Buy-Sell Agreements in Small Business

THE NEED FOR A BUY-SELL AGREEMENT IN SMALL BUSINESSES
By Glenn G. Schanel, CPA

All your working life you have strived to develop a successful business. The investment you make in your business is much more than just money or capital. It includes a substan tial amount of your time and hard work.

Over the years, the small business you started will grow based on your hard work. As a reward of this growth, a business’s income will increase and be available to you. In addition, the value of the business will also increase over time.

However, following your death, the business will have to be valued and that value will be added to your estate to compute the estate taxes due. The real question at this point is how to convert this illiquid business interest into cash to pay the estate taxes and other estate administration costs.

The general solution appears to be to simply sell the business or liquidate. Liquidation is not an attractive alternative because it is unlikely the liquidation value is equivalent to the business’s full fair market value. The better alternative is for the estate is to sell the business. But who will buy a closely held business interest? What is a fair price? When will the sale be made? Where will the funds come from?

This “dispositio n dilemma” is easily resolved when a buy-sell agreement is established. This agreement provides that:

• someone (e.g., the business entity, the surviving owners, or a key employee) will purchase a deceased owner’s interest, minimizing the possibility that the business might fall into the hands of outsiders
• at an agreed -upon price, minimizing the possibil ity that the parties involved will not be able to agree on a proper value for the business, and
• the deceased owner’s estate is obligated to sell the interest at that price, minimizing the chances that the parties may not live up to their agreement.

A properly drafted buy-sell agreement also minimizes the possibility that funds will be unavailable to make the purchase, and provides a deceased owner’s estate with needed liquidity by converting an illiquid asset into cash. It’s easy to see why a buy-sell agreement is so valuable. It helps assure business continuity for the surviving owners and fair treatment of the deceased owner’s heir(s).

The advantages of implementing a Buy-Sell plan are somewhat obvious: continuity of management; to create a ready market for the business interest; to provide a fair and reasonable price; and to peg the value of the business interest for federal estate tax purposes.
There are several types of Buy-Sell Agreements. Which one to use depends on several factors,including the number of business owners, the relative ages and health status of the owners,concern about the Alternative Minimum Tax, and whether a step-up in cost basis is desired by the surviving owners. Some of the most common types of Buy-Sell Agreements are the Entity or
Stock Redemption, Cross Purchase, Wait-and-See, Mixmaster, and the One Way Buyout.

Once the type of plan is chosen, it is very important to decide how the liability for the purchase price will be funded. Several possibilities exist:

• Surplus, which consists of an existing fund of the purchaser
• Sinking Fund, also known as a savings account or savings plan
• Borrowing, obtaining financing from a third party, such as a bank
• Installment Sale, financing from the seller
• Life Insurance, which may provide a death benefit and a sinking fund

Each of these funding options has advantages and disadvantages. However, the disadvantages generally outweigh the advantages in all of them except for the use of life insurance, which by its nature provides the cash, in the amount needed, at exactly the time it’s needed, usually without taxation. For this reason, life insurance is most often the preferred funding vehicle in buy-sell planning. The annual premium provides an ascertainable cost and the policy provides a benefit no other plan accomplishes — guaranteed funds in the event of a premature death. The policy, if a whole life policy, may also act as a savings or sinking fun since the cash value in the policy is accumulated on a tax deferred basis. And the death benefit is income tax free!

In sum, life insurance meets the client’s objectives. First, it not only has an ascertainable cost, but it also is the least expensive. Second, the availability of the funds is certain in the case of a premature death. It may also act as a sinking fund.

Lastly, the use of the insurance allows the surviving owner to continue the business free and clear. It also allows the deceased owner’s family to receive the cash for the decedent’s interest, since they are paid in full and there is no installment sale, borrowing, or a shortfall of funds.

Glenn G Schanel, CPA and Associates, PA

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Glenn G. Schanel of Glenn G Schanel, CPA and Associates, PA represents American General Life Insurance Company (AGL), with securities offered through American General Securitie s Incorporated (AGSI), 2727 Allen Parkway, Houston, Texas, 77019. Member NASD and SIPC. AGL and AGSI are member companies of American International Group, Inc. (AIG). Glenn G Schanel, CPA and Associates, PA is a separate entity from any member of AIG. Mr. Schanel can be reached by calling (561) 624-2118.

The U.S. Chamber of Commerce has endorsed for its members the products and services of member companies of American International Group, Inc. (AIG), the leading U.S.-based international insurance and financial services organization. American General Life Insurance Company, a member company of AIG, provides a broad portfolio of top-tier financial products for businesses, families and individuals.

The comments in this article are those of the presenter and not necessarily those of AIG American General. Neither AIG American General nor its agents provide legal or tax advice. You should always consult with your tax and legal advisors about the appropriateness of this concept to your business, and ask your life insurance representative for the best product with which to fund this plan.

AIG American General is the marketing name for the life insurance companies and affiliates of American International Group, Inc. (AIG), that comprise AIG’s Domestic Life Operations, including American General Life Insurance Company.

What are Health Savings Accounts (HSA’s)?

HEALTH SAVINGS ACCOUNTS
By Glenn G Schanel, CPA and Associates, PA

What Are They?

A health savings account (HSA) is a means of saving for medical expenses on a taxfavored basis. It is not health insurance, but rather is a custodial account that is set up with a financial institution and created exclusively for the benefit of the account holder to
save for medical expenses.

How Are Contributions Taxes?

Contributions to an HSA are deductible for federal income tax purposes. The maximum annual contribution to an HSA for 2005 is the lesser of the annual deductible under a high deductible health insurance plan or $2,650 for individual coverage or $5,250 for family coverage.

Who Is Eligible For An HSA?

Any individual under age 65 who is covered by a “high deductible” health plan and cannot be claimed as a dependent on someone else’s tax return. A high deductible health plan in 2005 has an annual deductible of at least $1,000 for individual coverage, or
$2,000 for family coverage.

How Are Distributions Taxed?

Distributions from an HSA to pay the medical expenses of the individual and family are excludible from income. Distributions not used to pay medical expenses are subject to tax and penalties.

IRS Announced 2006 Retirement Limits

IRS ANNOUNCES NEW RETIREMENT SAVINGS
CONTRIBUTION LIMITS FOR 2006

The following is a summary of the annual contribution limits for retirement savings plans for 2006:

Plan Type	Contribution Limit	Age 50 & Older “Catch Up”
Traditional and Roth IRA	$4,000	$1,000
SIMPLE Plans	$10,000	$2,500
401(k) and 403(b)	$15,000	$5,000
SEP Plans	Lesser of 25% of compensation, or $44,0000	N/A
Defined Contribution Plans	Lesser of 100% of compensation, or $44,000	N/A

Please contact our office at (561) 624-2118 if you have any questions.

Hurricane Wilma Tax Relief

TAX RELIEF RELATING TO HURRICANE WILMA
Glenn G. Schanel, CPA and Associates

On December 21, 2005, President Bush signed into law the Gulf Opportunity Zone Act of 2005. This Act includes certain tax relief for those affected by Hurricane Wilma.

The Act eliminates the 10 percent and $100 floors for casualty and theft losses from Hurricane Wilma disaster areas. This means that if you had any loss and you itemize deductions, you will receive a benefit without having to first reduce the loss by 10% of
your adjusted gross income. So when you are gathering together your tax information for 2005, be sure to include hurricane losses that were not covered by insurance. These include the reduction in value of your home due to hurricane damage, the value of
destroyed fences and pool enclosures, and the cost of removing and replacing trees and landscaping. And, as for all deductions, make certain that you maintain adequate records supporting the loss.

Tax Increase Prevention and Reconciliation Act of 2006

Glenn G. Schanel CPA & Associates, PA
14243 US Highway 1
Juno Beach, FL 33408
(561) 624-2118

THE TAX INCREASE PREVENTION AND RECONCILIATION ACT OF 2006

After much wrangling, Congress recently passed - and the President signed into law - the Tax Increase Prevention and Reconciliation Act of 2006 (TIPRA). While most of the new law’s provisions are favorable to taxpayers, some of them will result in additional taxes for some individuals and businesses. Following is a brief rundown of TIPRA’s main provisions.

Investor Tax Breaks
Capital Gains. Individuals’ long-term capital gains are taxed at rates significantly lower than regular tax rates. Generally, under pre-TIPRA law, the tax rate on long-term gains is no higher than 15%. The rate is reduced to 5% (0%, in 2008 only) for gain that would otherwise be taxed at 10% or 15% if it were ordinary income. However, under pre-TIPRA law, these favorable rates were
to expire at the end of 2008.

Under TIPRA, the favorable capital gains tax rates are extended through 2010. Moreover, the 0% capital gains tax rate for those paying ordinary income taxes at the 10% or 15% rate will be in effect for three years - 2008, 2009, and 2010.

Dividends. Under pre-TIPRA law, qualified dividends are taxed at the same rates as long-term capital gains, with those favorable rates due to expire after 2008. TIPRA extends the special rates on qualified dividends through 2010 in the same way it does for capital gains.

Alternative Minimum Tax
The alternative minimum tax (AMT) has received a lot of press in recent years. Originally enacted as an alternate tax system to ensure that higher-income taxpayers with large deductions or tax credits pay a minimum amount of tax, the AMT has affected many middleincome taxpayers in recent years. A major reason: the AMT tax brackets and exemptions have not been adjusted for inflation. A prior tax law had increased the AMT exemptions available to individuals, but those increases expired after 2005.

Under TIPRA, the higher exemptions are reinstated for 2006 only, and are increased over the 2005 level by $4,550 for joint filers (to $62,550) and by $2,250 for unmarried individuals (to $42,500). Absent a further extension,though, the exemptions will drop
dramatically after 2006 to the levels applicable in 2000. In addition, the new law extends through 2006 another expired AMT provision that allows those claiming certain tax credits (e.g., the dependent care credit and the HOPE Scholarship and Lifetime Learning Credits) to use them for both regular and AMT tax purposes.

Kiddie Tax
To minimize “income shifting” from parents to their young children, the tax law requires children who have more than a small amount of unearned income to pay tax on that income at their parents’ marginal tax rate. This “kiddie tax” applied to children under age 14. Beginning after 2005, TIPRA raises the age limit to children under age 18. Under the new law, however, the kiddie tax
does not apply to a child who is married and files a joint return for the year, or to distributions from certain qualified disability trusts.

Roth IRA Conversions
There are two main types of Individual Retirement Accounts:

• Traditional IRAs to which taxpayers may make tax-deductible or nondeductible contributions and receive distributions that are taxable (except for the nondeductible portion that has already been taxed) and
• Roth IRAs to which taxpayers make after-tax contributions but receive all qualifying distributions (including earnings) tax free.

Under the tax law, a person with a traditional IRA can “convert” it into a Roth IRA by paying tax on the previously untaxed  raditional IRA money. The benefit: No further tax will be owed on the IRA money. So, from the time of the conversion, any earnings on the IRA investments will be tax free. Under pre-TIPRA law, the ability to convert to a Roth IRA is limited to taxpayers with $100,000 or less in modified adjusted gross income. Married taxpayers filing separate returns are also prohibited from making Roth IRA conversions.

Under TIPRA, beginning in 2010, taxpayers will be able to convert traditional IRAs to Roth IRAs no matter how high their income. Married individuals filing separate returns will be allowed to convert to Roth IRAs, as well. Moreover, individuals who convert
their IRAs in 2010 may spread the income from the conversion and the resulting tax payments over the next two years -2011 and 2012.

Business Provisions
The new law also includes a number of corporate and other business provisions. Among them:

Section 179 Expensing . Taxpayers may elect to deduct as a business expense the cost of new or used assets placed in service during the tax year, rather than depreciate the cost over time. A prior tax law had increased the limit on the amount that could be expensed, as well as the amount of assets that could be purchased before the deduction would be phased out.

For 2006, after adjustment for inflation,the maximum deductible amount is $108,000, and the amount of purchases after which the deduction is to be phased out is $430,000. Those amounts were to be reduced significantly for tax years beginning after 2007. However, TIPRA extends the higher expensing deduction and phaseout limits through tax years beginning before 2010.

The Domestic Production Activities Deduction . The tax deduction available to businesses for certain U.S. production activities is subject to various limits. One of the limits is the “50% of W-2 wages” limitation. Under this limit, the amount of the domestic production activities deduction for any year may not exceed 50% of the taxpayer’s W-2 wages paid to employees for the year.

Under TIPRA, the term “W-2 wages” for purposes of the domestic production activities deduction is more tightly defined. For tax years beginning after May 17, 2006, W-2 wages includes only wages that are allocable to domestic production gross receipts. This will require employers to implement recordkeeping systems to properly allocate employees’ wages to qualified domestic production activities.

Need More Information?
This article only scratches the surface of the new tax law changes. There are other provisions in TIPRA that may affect you. In fact, Congress is still considering other tax legislation this year that may have a significant impact on you. If you have questions about how TIPRA will affect your personal or business taxes, we have answers. We invite you to contact us for an appointment to review
your tax situation in light of the new law.

Year End Tax Planning 2006

GLENN G. SCHANEL, CPA AND ASSOCIATES , PA
YEAR-END TAX PLANNING STRATEGIES FOR 2006
Fall 2006

As this year enters the home stretch, there is still time to plan to reduce your 2006 federal income taxes. Adding to existing  tax-saving strategies are some new ones presented by recent tax legislation. On the other hand, the uncertain fate of several popular tax breaks that expired at the end of 2005 could make 2006 year-end planning more difficult.

Tried and True Strategies

Here are some proven strategies that may help you reduce your taxes once again this year. Of course, before applying any of these strategies to your personal situation, consult with one of our tax professionals.

Deductible Interest. Consider making your January 2007 mortgage payment (which includes December’s interest) in late December 2006 , so that the mortgage interest will be deductible on your 2006 return (applicable only if you itemize deductions on your income-tax return).

Medical and Miscellaneous Itemized Expenses. Your deductions are limited to the amounts that exceed 7.5% of adjusted gross income for medical expenses and 2% of adjusted gross income for miscellaneous expenses.Bunching two years of your or your
family’s unreimbursed medical or miscellaneous itemized expenses (such as certain job-related expenses and investmen t expenses) into one year may allow you to surpass the deduction floors and help you gain an itemized deduction for part of your expenses.

Charitable Contributions. If you are planning to make a charitable donation in early 2007, consider a 2006 year-end donation instead. Contributions charged on your credit card in 2006 count as 2006 deductions, even if you don’t receive or pay the credit card bill until 2007.

However, if you are a high earner facing a limitation on your itemized deductions or if you expect to be in a much higher tax bracket in 2007, accelerating these payments into 2006 may not be your best course of action. In addition, if you claim high deductions in 2006, you may be subject to the alternative minimum tax. See us for more details.

Income Deferral. Review any opportunities you may have to push taxable income into a later tax year. Deferral strategies are specially effective if you expect to be in the same or a lower tax bracket in the year in which you will be reporting the income on your tax return. Any of these strategies may help cut your 2006 taxes:

• Ask your employer to defer paying your 2006 year-end bonus until early 2007.
• Maximize 2006 contributions to any tax-deferred retirement savings plan in which you participate , such as a 401(k) plan or a 403(b) tax-sheltered annuity. If you are age 50 or older, you may be able to make additional “catch up” contributions to your
• plan.
• If you are self-employed and use the cash method of accounting for income-tax purposes, time late 2006 customer billings so that payment won’t be received until 2007.

Self-employed business owners who do not already have a tax-deferred retirement plan should consider starting one before year-end. Options to examine include a so-called “solo 401(k)” plan, a Simplified Employee Pension (SEP) plan, or a SIMPLE plan.

Investment Strategies . If you have investments with “paper losses” and you are thinking about selling any of these poor performers before the end of the year, remember that capital losses offset the capital gains you may have realized.Any net loss is deductible against up to $3,000 of ordinary income per year.

Consider selling appreciated stock or other investments on which you have “paper gains” before year-end to absorb any capital losses that exceed $3,000. If this is not desirable, any unused capital losses may be carried forward for deduction in future years, subject to limitations.

Remember, too, that the maximum tax rate on 2006 qualifying dividends and net long-term capital gains is 15%. Ordinary income tax rates range as high as 35%.

New Strategies

Prepare for a Roth Conversion . Earlier this year, a new law removed the income limit for high earners who want to convert their traditional Individual Retirement Account to a Roth IRA. But this change isn’t effective until 2010.

If the income limit applies to you and you are interested in a Roth IRA, you might want to consider making contributions to a traditional IRA now with the intent of converting that IRA to a Roth IRA in 2010. Even if you cannot make deductible IRA contributions (due to you or your spouse being an active participant in an employer -sponsored retirement plan and exceeding certain income limits ) , you can make nondeductible contributions to a traditional IRA now. On conversion in 2010, only the IRA earnings on the nondeductible contributions would be taxed, and any Roth IRA earnings from then on would be nontaxable (assuming tax law rules are met). See us for more details.

Charitable Gifts from IRAs. If you are age 70½ or older, you can contribute as much as $100,000 a year from your IRA directly to one or more qualified charities without paying federal income tax on the distribution. So, if you are a charitably inclined eligible taxpayer, you can benefit your favorite charity with IRA money without having to receive a taxable distribution from your IRA. This tax break is only available for 2006 and 2007.

Charitable Gifts of Clothing or Household Items. New rules apply to contributions of clothing and household items made after August 17, 2006. In general, the items must be in “good used or better” condition. However, you can still deduct the value of an item that isn’t in good or better condition if the value of the donation is more than $500 and you  include a qualified appraisal with your tax return.

Kiddie Tax. To minimize income shifting from parents to their young children in lower tax brackets, the tax law requires children who have more than a small amount of unearned income ($1,700 in 2006) to pay tax on that excess income at their parents’ marginal tax rate. A new law increases the age of  children to whom this “kiddie tax” applies. Effective for 2006, the kiddie tax applies to children under age 18 (formerly, age 14). Due to this change, higher -income parents should consider investing any assets put aside for their under-age-18 children in investments that generate little or no current taxable income (such as U.S. savings bonds, municipal bonds, or growth stock index funds).

Energy Tax Breaks. Tax credits are available for energy efficient and alternative energy home improvements. Among the items for which credits are available: energy efficient exterior windows and doors, furnaces and central air conditioning units, and solar water heaters. Also, credits are available for the purchase of certain hybrid and alternative fuel vehicles.

Uncertain Tax Breaks

As we write this, Congress is still debating extending to 2006 certain tax breaks that expired at the end of 2005. Among those breaks: the itemized deduction for state and local sales taxes, the above-the-line deduction for the teacher’s out-of-pocket expenses for supplies used in the classroom, and the above-the-line deduction for higher education expenses. Be prepared in your
planning if these items are not extended.

For More Details

Want to learn more about these and other strategies that might cut your 2006 tax bill? Talk to us. Our tax planning know-how can benefit you.

June 2007 Tax Alert

TAX ALERT
NEW LAW INCLUDES BUSINESS/PERSONAL TAX CHANGES

A portion of a supplemental spending and minimum wage bill recently signed into law included several tax provisions that may have an impact on you and your business. The Small Business and Work Opportunity Tax Act of 2007 contains $4.8 billion in small
business tax breaks -but also includes $4.4 billion in revenue raisers.

We have briefly summarized below just two of the changes that may affect you

Section 179 Expensing Deduction .The new law increases both the maximum annual expensing amount and the threshold phaseout amount. For tax years beginning in 2007, the practical impact of these changes is to increase the annual expensing limitation from $112,000 to $125,000 and to increase the phaseout amount from $450,000 to $500,000.

Kiddie Tax. In general, the revenue code imposes taxes on a young child’s unearned income in excess of $1,700 at the child’s parents’ tax rate. A 2006 tax law increased the age at which the kiddie tax applies, from under age 14 to under age 18. Now, the new law modifies that change so that the kiddie tax applies generally to children under 19 years old, effective in tax year 2008. More importantly for many taxpayers, the law will also apply the kiddie tax if the child:

• Is over age 18 (but under age 24) and
• Is a full-time student and
• Has earned income that does not exceed one half of the student’s total support.

Summary

With the business tax changes and the new kiddie tax rules, your tax planning may need a tune-up. Why not contact us today to find out more about how the new tax law may affect your situation.

Tax Harvesting in Investment Portfolios

Tax Harvesting in an Investment Portfolio
by Todd Schanel, CPA, CFA, CFP®

In a well diversified portfolio of stocks, exchanged -traded funds, or mutual funds, chances you are holding some investments at a loss. These “unrealized losses” however, are not deductible for tax purposes. Tax harvesting is the process of converting unrealized
losses to realized losses by selling losing investments before year end. If you are considering implementing a tax harvesting strategy, be sure to consider the following:

Remember the $3,000 limit: The first thing to remember is that the IRS limits current capital gain losses to $3,000. Any losses beyond $3,000 are carried -forward to future tax years. Therefore, a tax harvesting plan should look to generate no more than $3,000 in losses.

The 30 day wash sale rule: In addition to limiting capital gain losses to $3,000, the IRS also will disallow a loss if a security sold at a loss is then repurchased within a 30 day period. This is called the “wash sale rule”. If the proceeds from the sale are parked in
cash for 30 days while you wait to repurchase the security, your investment portfolio will likely be overweight cash relative to your target asset allocation, and will miss any market gains or dividends paid during that time.

Consider “tax swapping : To prevent this overweight position in cash, consider swapping the losing position with a similar position that allows you to maintain your target asset allocation. With individual stocks, consider buying a company in a similar industry (sell GM and buy Ford), or consider buying an exchange traded fund (ETF) that covers the same market sector (sell GM and buy the S&P Dep Receipt ETF).

The advantage of ETF’s: Speaking of ETF’s, they are ideally suited for tax swapping because they are easy to trade and the universe of ETFs includes a high degree of overlap. For example, consider swapping the ishares MSCI EFA (EFA) with the
Vanguard VIPER FTSE All-World ex-US ETF (VEU). Because both ETF’s cover a substantially similar market index, the 30 day wash rule problem is essentially solved.

Considering harvesting gains: What if you have a substantial capital gain loss carryforward? The strategy still applies, but in reverse. In that case, consider selling positions that are carrying an unrealized gain to get a step up in cost basis. It may not change your tax position this year, but you are likely to move forward the benefit from any future tax losses.

Other considerations: As with any tax and investment issues, everyone’s particular circumstan ce is different and these strategies may or may not work for you. Also, make sure that the benefits of tax harvesting are not offset by excessive trading costs. These include short-term trading penalties and mutual fund front-end or back-end loads. And finally, remember that this applies only to taxable investment accounts, and not IRAs, 401Ks, or any other type of qualified or tax deferred investment account.

Please call our office at (561) 624-2118 if you have any questions about this article or
any other tax issue.

2008 Economic Stimulus Act

THE 2008 ECONOMIC STIMULUS ACT
The Rebate

In an effort to head off a major economic slowdown, the Administration and Congress agreed on a package of tax provisions intended to stimulate the economy. The Economic Stimulus Act of 2008 (”Act”) provides benefits to both individuals and businesses.

Below is a discussion of the rebate portion of the Act.

Rebate for Individ uals
Each qualifying individual will receive a tax credit in the form of a “recovery rebate” check to be received generally in 2008. Some taxpayers will receive a credit for some of or the entire rebate amount on their 2008 tax returns (filed in 2009).

The rebate has two components: (1) a base amount generally dependent on filing status and income-tax liability and (2) an increase in the child tax credit.

Base Amount.- The minimum base rebate amount is $300 ($600 for married couples filing jointly) . Very generally, a person will be entitled to this amount if he/she has at least $1 of federal income -tax liability or $3,000 in qualifying income. “Qualifying income” means the sum of earned income, veterans’ disability payments (including payments to survivors of disabled veterans), and Social Security benefits. So, those who do not pay taxes but have these other sources of income could be eligible for a rebate check.

The maximum base rebate amount is $600 ($1,200 for joint filers) . The amount of the rebate will be equal to the lesser of the individual’s tax liability or 10% of the first $6,000 of taxable income ($12,000 for joint filers).

Example: A married couple is retired and living on Social Security benefits only. They pay no income tax on their joint return. The couple would be entitled to a $600 rebate check.

Example: A single individual has a taxable income of $25,000 and pays income tax of $500. The rebate amount is $500 -the lesser of her tax ($500) or 10% of $6,000 ($600).

Example: A married couple files a joint return showing $50,000 in taxable income and a tax of $10,000. The couple would receive a base rebate of $1,200 (10% of the first $12,000 of taxable income).

In determining taxable income for eligibility and rebate purposes, taxpayers generally must use 2007 income as reported on their 2007 tax return, filed in 2008. If a person isn’t eligible for a rebate check based on 2007 income (for example, where the individual was someone else’s dependent for 2007), but becomes eligible during 2008, then the IRS won’t send that person a rebate check. However, the individual will be able to claim a credit when he files his 2008 return.

Child Credit Amount.- If an individual receives at least $1 of the base rebate and has qualifying children under age 17, that individual will receive an additional child tax credit of $300 per child, which will be included in the rebate check. This amount is a refundable credit, so the recipient receives this extra amount even if the amount of the recipient’s 2007 income tax is less than the total child tax credit.

Example: A married couple files jointly with three qualifying children. Their taxable income is $45,000 and their income tax is $5,000. The amount of the total rebate check for the couple would be $1,200 (base amount) plus $900 (three times $300 as additional child tax credit) , for a total of $2,100 .

Recovery Rebate Phase Out.- The rebate amount (including both the base credit and the additional child tax credit) is phased out at a rate of 5% of adjusted gross income (AGI) over $75,000 ($150,000 for joint filers).

Example: A married couple filing a joint return has two qualifyin g children and $160,000 of AGI. The maximum rebate of $1,800 (i.e., $1,200 base credit plus $600 additional child tax credit) is reduced by $500 (5% of the $10,000 AGI in excess of $150,000) , so the couple’s rebate is $1,300.

Therefore, most higher -income individuals’ rebate amounts will be reduced or eliminated. There is no specific amount of AGI at which the credit is fully phased out, since that amount will depend on the specific family situation of the taxpayer.

2008 Housing Stimulus Law

PRESIDENT SIGNS HOUSING STIMULUS LAW
August 2008

On July 30, 2008, the Housing Assistance Tax Act of 2008 (the “Act”) became law. The Act provides more than $15 billion in tax incentives intended to help bolster the housing industry - and some revenue offsets to help pay for them.

The Law’s Major Provisions

The new law contains numerous provisions affecting individuals, state and local governments, and companies engaged in the housing industry. Among the principal provisions that may affect you or your business:

1) Tax Credit for First-time Home Buyers. For homes purchased after April 8, 2008,through June 30, 2009, the law allows up to a $7,500 tax credit for first-time home buyers purchasing a principal residence. However, the credit must be repaid to the government in equal installments over 15 years, beginning with the second tax year after the tax year of purchase. The full credit is limited to buyers with modified adjusted gross income of $75,000 or less ($150,000 or less for married couples filing jointly). A credit phase-out applies for taxpayers with income over the limit.

2) Standard Real Property Tax Deduction. For 2008 only, a taxpayer who does not itemize deductions may claim an additional standard deduction of up to $500 ($1,000 for joint filers) for state and local real property taxes paid. This provision will especially
benefit taxpayers who have paid off their home mortgages and no longer have enough deductions to justify itemization.

3) Credit Card Information Reporting Rules. A new requirement is imposed on credit card companies and other electronic payment processors. Starting after 2010, these entities will have to report the value of a merchant’s sales to the IRS if those sales exceed
$20,000 per year and the merchant has a volume of more than 200 sales annually.

4) Exclusion for Gain on Certain Residences Disallowed. Gains on the sale of certain residences - including vacation homes and rental properties that are converted into primary residences and then sold - will no longer qualify for the full $250,000
($500,000 for joint filers) capital gain tax exclusion on sale of a principal residence. In general, the exclusion will not apply to the portion of the gain allocable to the time the residence was not used as a principal residence. This provision is effective for sales and
exchanges occurring after December 31, 2008.

Questions?

If you think you will be affected by any of these provisions of the Act or want to learn more, contact us for additional information. We stand ready to help you in your tax planning. Contact us today.

Emergency Economic Stabilization Act of 2008

SA SCHANEL
&ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
PA

THE ADVISOR

November 2008

Enacted on October 3, 2008,

The Emergency Economic Stabilization Act of 2008 (the “Act”)

The Act contains core provisions to help the financial services sector and boost the economy, along with various tax provisions that will affect individuals and businesses. The following are some of the changes in the Act that may affect your year-end 2008 and  2009 tax planning.

Alternative Minimum Tax Relief:

For 2008, the AMT exemption amounts had been scheduled to drop from the 2007 figures of $66,250 (married individuals filing jointly), $44,350 (unmarried filers), and $33,125 (married individuals filing separately) to $45,000, $33,750,and $22,500, respectively the exemption amounts in effect in 2000. Under the Act,these exemption amounts are increased to $69,950 (married individuals filing jointly), $46,200 (unmarried filers), and $34,975 (married individuals filing separately) for 2008 only.Absent further legislation, the exemptions will drop back to the 2000 amounts for 2009.

State and Local Taxes:

The new law extends two deductions for state and local taxes. A prior law had provided an additional standard deduction for individuals of up to $500 ($1,000 for married individuals filing jointly) for state and local real property taxes paid, available only for 2008. The Act extends the deduction through 2009. Also under the new law, taxpayers who itemize their deductions again have the option of  deducting state and local general sales taxes instead of state and local income taxes on their 2008 and 2009 returns

Education-Related Deductions:

The Act also extends two popular education-related deductions through 2009. Eligible taxpayers may once again be able to deduct a limited amount of tuition and related expenses paid for higher education. The abovethe-line deduction is capped at either $2,000 or $4,000, depending on income. No deduction is available if modified AGI is more than $80,000 ($160,000 on a joint return) or if an education credit is claimed with respect to the student. And eligible K-12 educators can claim an abovethe-line deduction for up to $250 of classroom-related expenses they incur.

Emergency Economic Stabilization Act cont…

Charitable Contribution Provisions:

The Act extends expired charitable contribution provisions for both individual and business taxpayers. Individual taxpayers who have reached age 70½ can roll over money in individual retirement accounts (IRAs) to qualified charities on a tax-free basis through 2009. As much as $100,000 may be donated annually.Through 2009, C corporations can claim enhanced charitabled eductions for donations of books to schools, public libraries, and literacy programs.

They can also claim enhanced deductions for charitable contributions of computer equipment and software to elementary, secondary, and post-secondary schools. Any business can take advantage of an enhanced charitable deduction for contributions of food inventory.

Energy Incentives:

The Act includes a variety of energy incentives. For individual taxpayers, it extends the tax credit of up to $500 for the costs of making certain energy-efficient improvements to your principal residence, including energy saving exterior doors, windows, insulation, and certain metal roofs, and for the installation of equipment (such as a furnace or water heater) that meets specified standards for energy efficiency. The credit, which expired December 31, 2007, will now be available for 2009 (but not for 2008).

The new law also extends the 30% credit for installing solar equipment in your principal residence or second home through 2016 and,starting in 2009, eliminates the former $2,000 cap on the credit for solar electric equipment.Also extended is the credit for installing fuel cell property in a principal residence. And the Act adds a new credit for the installation of small wind turbine systems to generate electricity and for expenditures on qualified geothermal heat pump property.

The research and development credit is extended through 2009, with an increase in the alternative simplified research credit rate from 12% to 14% for tax years ending after December 31, 2008. The alternative incremental research credit is repealed for tax years beginning after December 31, 2008. In addition,businesses can depreciate qualified leasehold and restaurant improvements placed in service before 2010 over 15 years. Improvements made to qualifying retail space in 2009 are also eligible for a 15-year depreciation period.