Information reporting rules don't change for 2010

You've probably been hearing about changes to Forms 1099 for purchases of goods, payments to corporations, real estate rentals, and credit card transactions.

Are you wondering how your business will be affected? The first thing to know is that none of the new rules apply to the 2010 Forms 1099 you will file in January 2011. As in prior years, you'll report payments to independent contractors and other vendors totaling $600 or more.

Reportable payments generally include amounts you pay for services in the course of your business, such as contract labor or bookkeeping. For 2010 returns, there's no need to send Forms 1099 to corporations with which you do business. Exceptions to this rule include payments you make for certain medical or legal costs.

You can continue to use Form W-9, "Request for Taxpayer Identification Number and Certification," to gather the name, mailing address, and identification number of vendors. Keep the completed Form W-9 with your tax records.

In cases when a vendor fails to provide an identification number, the rate you'll use to withhold federal income tax - known as backup withholding - remains at 28%.

One change that takes effect this year is increased penalties. For example, the penalty for failing to file correct information returns can be as much as $100 per Form 1099.

Information reporting requirements continue to expand, with new rules for real estate rental expenses and credit card transactions applying to payments made during 2011.

We'll keep you updated. Please call if you have questions.

Where you hold an investment matters

You'll probably be reviewing your investment portfolio at year-end for tax and rebalancing purposes. As part of your review, check to be certain you are holding your specific investments in the right type of account. Your goal is to hold investments that produce ordinary taxable income in tax-deferred accounts and to hold those that produce tax-free or tax-favored income in your regular taxable accounts.

Consider this situation. If you hold tax-free municipal bonds in a tax-deferred retirement account, you are "sheltering" interest income from taxes that never would be taxed in the first place. Withdrawals from the retirement account will be taxed as ordinary income at ordinary income rates, and that includes interest from the municipal bonds. The result is that normally tax-exempt earnings eventually become subject to income tax.

Another example: Long-term capital gains are taxed at lower rates than interest income. So investments generating interest might be better held in retirement accounts, while investments generating capital gains might be better held in taxable accounts. Remember, withdrawals from retirement accounts (other than Roth IRAs) are taxed at ordinary income rates even if the income comes from long-term capital gains.

Tax-deferred retirement plans should outperform an investment account that is exposed to annual taxation. But if you're not careful where you hold specific types of investments, you could end up with less rather than more income.

There's still time to make 2010 tax-free gifts

The tax code allows you to give away up to $13,000 each year to as many people as you want, without triggering gift tax. If you and your spouse "split" your gifts, you can double this $13,000 annual gift-tax exclusion and give $26,000 per recipient.

If you're thinking of sharing your wealth, here are some important gift-giving considerations.

* All gifts during the year, including birthday and holiday presents, count toward the $13,000 (or $26,000) annual gift tax exclusion. For example, say you give a $500 birthday present to your grandchild. You may give another $12,500 to that grandchild during the year without triggering the need for a gift tax return.

* A gift made by check isn't complete until the recipient actually deposits or cashes the check. Plan accordingly when making year-end gifts, especially if you want such gifts to be counted toward this year's gift tax exclusion.

* For a gift to be valid, you must part with ownership. Pay special attention to gifts of stock in the family business or gifts of your personal residence.

* Three types of gifts are exempt from the $13,000 limit. You can make unlimited gifts for tuition expenses or medical expenses on behalf of any person, provided you make the payments directly to the educational institution or health care provider. You can also make unlimited gifts to your spouse.

If you would like to discuss the benefits of making tax-free gifts, please contact our office.

IRS issues energy reminder

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IRS issues energy reminder

The IRS recently issued a bulletin reminding taxpayers that making energy-saving improvements to their homes before the end of the year can lower their taxes for 2010.

The credit allows you to claim up to 30% of the cost of energy-efficient windows, doors, certain roofs, high-efficiency heating and air conditioning systems, water heaters, and other energy-saving improvements to your principal residence. The maximum credit for amounts spent in 2009 and 2010 is $1,500.

A second energy credit is available to encourage investment in alternative energy equipment such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property.

The IRS cautions homeowners to check the manufacturer's tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer's website or with the product packaging. Not all energy-efficient improvements qualify for the tax credits. The manufacturer's certification is different from the Department of Energy's Energy Star label, and not all Energy Star labeled products qualify for the tax credits.

Act fast if you want to cut your 2010 taxes

1. Tax rates are likely to go higher in 2011, so you might benefit from shifting income into 2010 and delaying deductions until 2011. It’s always a matter of personal circumstances, so analyze the two-year results of shifting income and deductions before you do anything.

2. Remember that required minimum distributions from retirement plans are back this year. If you’re over 70½, your 2010 distribution must be taken by December 31 or a 50% penalty may apply. If you turn 70½ this year, you could wait until April 1, 2011, to take your first distribution. In deciding, consider the likelihood of higher tax rates next year and the fact that a delay means you'll have two taxable distributions for 2011.

3. With the $100,000 income limit dropped for converting a traditional IRA to a Roth, consider doing a conversion before year-end. You can elect to pay the tax over two years’ tax returns, 2011 and 2012, or pay in full on your 2010 return.

4. Consider buying needed equipment for your business to benefit from the first-year $500,000 expensing option and 50% bonus depreciation.

5. If you’re planning to add employees soon, do so before January 1, 2011. If you hire someone who has been unemployed for a while, you might qualify for an exemption from social security payroll taxes on the new hire’s wages. Keep the new worker for at least a year and you could also qualify for a tax credit of up to $1,000.

6. Start a pension plan for your small business. You may be entitled to a credit of up to $500 in each of the plan’s first three years.

7. Review your portfolio and start thinking about offsetting gains and losses for the year. You can deduct $3,000 of losses against ordinary income.

The Coming Sunset Affects More Than Tax Rates

"The Coming Sunset Affects More Than Tax Rates"

Unless Congress acts soon, the "2001 Tax Act" will expire at the end of this year, bringing back pre-2001 tax rates and rules. While the current discussions focus on the income tax rates that will rise if the law is allowed to expire, there are dozens of other major changes that will sunset too.

Here's a quick overview of what 2011 will bring unless Congress intervenes.

* The limitation on itemized deductions based on income will be reinstated in full.

* The phase-out of the deduction for personal exemptions for higher-income taxpayers will be reinstated in full.

* Married couples filing a joint return will not be entitled to twice the standard deduction amount allowed for single taxpayers. Nor will couples get the 15% tax rate on twice the amount of income as single taxpayers get. The marriage penalty, in other words, is back to pre-2001 levels.
* The child tax credit and the dependent care credit will revert to pre-2001 levels.

* The maximum rate for capital gains will revert to 20%, and dividends will be taxed at ordinary income rates as high as 39.6%.

* Among the changes to education tax breaks, the annual contribution to Coverdell education savings accounts will revert to $500.

* The estate tax will return with a maximum rate of 55% and an exclusion amount of $1 million.

Your tax planning, as challenging as it already is, should take these potential changes into account. For guidance in your year-end planning, give us a call.

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About Jose F. Padro, P.A.

Padro and Company, P.A. CPA Doral, Miami Florida – Tax Services, Business Planning & Taxes, Bookkeeping and Accounting, IRS Audit and Dispute Representation, Personal & Business Taxes.
José F. Padró has over 25 years of public accounting experience having practiced is small, mid-size and large accounting firm environments. José has a broad range of experience in taxation, financial reporting and management consulting.

Trust the Professionals at PADRÓ & Company, P.A. Our professional staff is trained to understand the intricacies of business accounting and tax laws - and how to use them to benefit your bottom line.

Padro and Company, P.A. CPA Doral, Miami, Florida
2520 N.W. 97 Ave, Suite 120, Doral, FL 33172 –
(305) 500-9361 - Fax (305) 500-9492