New Income Tax Brackets for 2011

The more you, as a taxpayer, understand about the Federal Income Tax brackets for 2011 breakdown, the better prepared you will be for filing taxes with Steger Gowie. The end of the year 2010 marks the start of a new set of income tax brackets, as the tax cuts during the administration of former president Bush becomes obsolete.  This raises concerns that the 2011 tax brackets might have a significant difference from its predecessor. There have been stories going around that the new tax brackets would start to implement the pre-Bush tax rates, which were 36% and 39.6% for the two upper ends of the income levels, but the good news is that the tax brackets would not be changed for now.

Regardless, Steger Gowie believes that it is important that you are aware of what your responsibilities are as a citizen, and contributing your share to the federal income tax is among such duties. You might be thinking that for the past years, the portion of your income being withheld on a monthly basis is too much, and that might actually be the case. If you think that you need to find a way to get at least a fair share of your hard-earned money, you must first understand what it means to file for and fall under the various tax brackets.

The  Income Tax Brackets for 2011 varies per individual; this means that your status as a citizen would which bracket you would be in. The typical basis of the brackets is the current status of the filer, which could be either Single, Married, or Head of the House. The income tax rates varies from one citizen type to another, but the basic percentage of taxes are 10%, 15%, 25%, 28%, 33%, and 35% for the different levels of income.

As an example, single persons who have an average income of about $8500 or less are obliged to have a 10% tax, while the same percentage applies to married couples (filing together) who have a cumulative income of about $17,000. As you might have observed, the latter amount ($17,000) is just double the amount of the former ($8,500), which means that for a couple applying together, the tax is just the same as those of the single persons or married couples filing separately. However, if you were considered as Head of the Household, you would be in the same bracket if you have an income of about $12,150 or less.

The Federal tax brackets for 2011 were divided accordingly such that the earning power of each individual is taken into consideration, and each would be appropriately have their corresponding taxes. Although the 2011 tax bracket projections (in terms of the country’s finances) were not truly favorable, citizens could have the opportunity to retrieve their earnings suitably if they file their income taxes properly.

Understanding the Income Tax Brackets for 2011 should not be a problem for you if you know your rights and your responsibilities as a citizen. Be sure to know which deductions are rightfully applicable in your case, and keep in mind that as a tax-paying citizen, you can enjoy financial privileges if your income tax is filed accordingly. For more information please contact Steger Gowie at (610) 335-1020.

Rental Property to Reduce Your Taxes? – Be Careful!

As many of you know the value of real estate has reduced considerably over the last couple of years. In fact, with low interest rates and lots of housing inventory many people feel it is a buyers’ market.

Many investors may also feel that if they own a rental property that has a loss that they will also reduce their tax liability. In many cases, you are able to deduct real estate losses but there are also circumstances where you may not be able to deduct real estate losses. You need to understand your individual tax situation to determine if you can deduct your losses in real estate.

The United States tax code allows a deduction of up to $25,000 per year in losses for a real estate rental property. This deduction begins to reduce once a taxpayer’s modified adjusted gross income (MAGI) is above $100,000 and is completely phased out (not allowed) once the MAGI exceeds $150,000. In other words, if your MAGI is above $150,000 be careful because you may not be able to count on a tax deduction from your rental property.

Let’s look at an example- Bob and Jane purchase a rental property in January of 2010. The rental income for the year is $24,000 and the various expenses to run the property for the year are $30,000. Therefore, the couple has a $6,000 loss. The taxpayer’s ability to deduct the loss depends first on their adjusted gross income. If the couple’s adjusted gross income is $100,000 or below they are able to deduct up to $25,000 of rental losses. Therefore, in this example if their adjusted gross income is below $100,000 they will be able to deduct the full $6,000 loss. Now, if the couple’s adjusted gross income is $150,000 or more they will not be able to deduct this loss in the current year.

You may ask, “Do I lose the loss forever if my modified adjusted gross income is greater than $150,000?” Fortunately you do not lose the loss. What happens is the $6,000 loss would be carried forward to future years and could be used when your MAGI is below $100,000, you sell the property, or you have other passive income.

Please be advised that this is a general summary of the deductibility of real estate losses. If you own a rental property or are considering purchasing a rental property, I highly encourage you to give us a call to understand the potential tax impact of purchasing a rental property.

David Fultz, Jr., MBA, CPA
Steger, Gowie and Co., Inc.
411 Old Baltimore Pike
Chadds Ford, PA 19317
Tel:610-388-7800 ext 2103
www.stegergowie.com

email:Dfultz@stegergowie.com

Year End Tax Planning Tips for Businesses

If you are looking for strategies to help reduce your business taxable income, then you have come to the right place.  The list below highlights some basic year-end tax planning strategies for businesses.  If you would like to learn additional information on any of the strategies listed below please call us at 610-388-7800 for tax planning assistance. 

1.       Update your accounting records to ensure accuracy

2.       Examine your choice of entity

3.       Purchase new property, plant, equipment – taking advantage of section 179 depreciation

4.       Contribute to a retirement account – SEP IRA, 401K, etc

5.       Grant yearend bonuses to employees and officers

6.       Pre-pay expenses

7.       Defer income

8.       Inventory write-offs for damaged/spoiled goods

9.       Write-off bad debts

10.   Take advantage of government credits

11.   Make estimated tax payments for business shareholders

SEP vs 401(k) Retirement Plans

One of the biggest decisions self-employed individuals and small business owners face is which type of retirement vessel is most beneficial to them.  The two most common plans are the SEP IRA and the Individual 401K.  These plans are used by successful self-employed individuals or business owners due to their high contribution limits and flexible contribution amounts.

A SEP IRA is a good choice for business owners that would like to contribute 25% of their W-2 earnings or up to 20% of net self-employment income.  Contributions within annual limits are tax deductible and as it is an IRA, the plan’s earnings will not be taxed until they are withdrawn at retirement.  The max contribution for 2010 is $49,000.  The SEP is slightly easier to set up and has low administrative responsibilities and costs.  The contribution can be made up until the filing date of the return,  including extension.

An Individual 401K, while similar to a SEP, may be a possible better fit for business owners due to a few key differences.   The max annual contribution is also $49,000 for 2010; however individuals ages 50 and above may contribute an additional $5,500 per year.  The key difference separating these plans is how the contributions are made.  The 401K contribution allows 100% of the first $16,500 of an individual’s W-2 to be withheld and contributed and the other portion of the contribution is made by the business.  Both portions are fully tax deductible to the contributor.  The business portion is either a match or the max is 25% of the W-2 earnings or 20% of net self-employment income similar to the SEP.

One enticing advantage of the Individual 401K is the ability to borrow money from the retirement plan.  An Individual 401K loan may be taken out and the balance of the 401K plan is used as collateral on the loan.  The SEP plan does not offer this feature, so if business earnings are not steady, the 401K may be a better choice to survive weak cash flow periods.

The final point on these plans is that an individual is also capable of setting up a SEP and they will have the option to convert it into an Individual 401K.  This conversion will require minimal paperwork to be filed with the plans administrator.

Are You an S-Corporation?

This is the time of year that you also want to consider how your business is organized. For example, if you’re filing as a sole-proprietor and file your taxes on your Schedule C of your personal income tax return you may want to consider forming an S-Corporation for your company. S-Corporations provide liability protection where as a sole-proprietor provides no protection between a business liability and your personal assets. S-Corporations also offer the opportunity to reduce your self-employment tax because the profits of an S-Corporation are not subject to self-employment tax whereas the profits of a sole-proprietorship are subject to self-employment tax. For example, if you are the owner of a sole-proprietor and your profit is $100,000 in addition to paying federal, state and local tax on this $100,000 you are also subject to an additional 15.3% social security and medicare tax on this money. If you were to form an S-Corporation you may be able to save $6,000 or $7,000 per year.

Attention Business Owners

It’s February!  Have you started thinking about year-end tax planning?  Believe it or not, the best time to plan for the end of the year is NOW!!!

The first step to prepare for planning is to make sure your accounting system is providing you with accurate financial information. This information should show a profit and loss statement and balance sheet which will indicate the general health of your business.

Now, provided that you have a profit, you may want to look at your capital requirements, meaning large purchase items, that you are considering making in the next year and a half.  Accelerating these capital purchases into the current year may provide you with a substantial depreciation adjustment to reduce your profit.

You will want to review your retirement contributions for the year and the type of pension plan your company provides. Some retirement plans require contributions into the plan prior to year-end in order to get the deduction.

Review your accounts payable that will be due in the next ninety (90) days. For tax payers that report on the cash basis of accounting you will want to make sure that you pay all bills prior to the end of the year so that you may take a deduction in the current year as opposed to the following year.

For accrual based tax payers you will want to make sure that all of your bills have been entered so that you can take the deduction in the current year.

You will want to determine your bonus and your employees’ bonuses that you anticipate paying during the current year as these bonuses will reduce your profit and therefore your income tax.

2010 ROTH IRA Conversion

Effective Jan. 1, 2010, anyone can convert their Traditional IRA to a ROTH IRA regardless of their taxable income.   The advantages of a ROTH IRA are that they grow tax free, all distributions after age 59 ½ are tax free and you are not required to take minimum distributions.  As long as the funds are transferred within a 60 day window, you will not be assessed early withdrawal penalties on the conversion.   Income tax will be calculated based on the amount converted, and you are able to defer the full amount and pay half the tax of the deferred amount in 2011 and half the tax on the deferred amount in 2012. ROTH IRA conversion is not recommended for those who do not have the funds to pay the tax.  Withdrawing from an IRA to pay tax liabilities results in a 10% early withdrawal penalty.

Your current and anticipated future tax brackets will be very influential in helping you make your decision.  Younger taxpayers are advised to make the switch as you have much longer to allow these assets to grow tax free and tax rates are expected to be much higher in the future.   In addition, taxpayers whom do not wish to take large minimum distributions or any distributions at all from their retirement plans are encouraged to convert as this will help reduce taxable income during retirement years and also assist with leaving money to heirs.  

Only you can decide whether converting your traditional IRA to a ROTH IRA is a savvy investment decision for you.  Please contact us for further advice related to this topic.