Claiming Your First-Time Homebuyer Tax Credit

by Administrator 1. September 2010 09:10

When the first-time home buyer credit was originally introduced, claiming the refund was simple. Taxpayers reported they’d purchased a house, how much it cost, and then claimed the refund.

However, some people took a few liberties with the process along the way.

The Internal Revenue Service as well as some watchdog groups have since reported that millions in credits were improperly paid out to people submitting multiple claims, claims for houses that were never purchased and for houses purchased before the program started. Offenders included prison inmates and even some IRS employees. As one might expect, the government took a dim view of the fraudulent filing.

When the program was revised in November 2009, Congress ordered the IRS to tighten the rules to prevent such abuse. If you’ve purchased a house and are eligible to claim either the first-time buyer credit or the repeat buyer credit, the reporting requirements are now more stringent. However, as long as you have a couple of documents handy, obtaining the credit shouldn’t be too difficult.

Eligible first-time and repeat buyers will need to take these steps to obtain the credit:

Complete and file the revised Form 5405 – First-Time Homebuyer Credit, with your annual tax return. This is something your CPA can assist you with.
Provide your CPA with Form HUD-1 – your home purchase Settlement Statement. This will be among your closing documents.
Your settlement statement(s) will need to show:
- All parties' names and signatures
- Property address
- Sales price
- Date of purchase

Normally, all this information is included in a properly executed Form HUD-1, Settlement Statement.

The challenge with using this statement is that home-closing and settlement customs vary from state to state. Sometimes the HUD-1 doesn’t include both the seller’s and buyer’s signatures. In Washington for example, buyers and sellers generally don’t sit down together at closing, so your HUD-1 may not include both sets of signatures.

The IRS addressed this problem by loosening its requirement and issued a statement announcing that the agency will accept a settlement statement without signatures if it is “completed and valid according to local law.” The agency also announced that it encourages buyers to sign the settlement statement prior to attaching it to the tax return, even if the seller has not signed the settlement and it isn’t required by state law.

In addition to the documents listed above, repeat home buyers, buyers of new construction and mobile home buyers will need to provide additional documentation.

For repeat home buyers:

Provide documentation showing that, before the latest purchase, you lived in your former property for a consecutive five-year period out of the past eight years.
You can substantiate this by providing Form 1098, mortgage interest statements (or substitute statements if applicable). These statements document the interest you’ve paid on a yearly basis. You can also provide property tax records or homeowner’s insurance records, as an alternative to Form 1098.
Regardless, records should be for five consecutive years of the eight-year period ending on the purchase date of the new home.

For a newly constructed home (where a settlement statement is not available):

Attach a copy of the certificate of occupancy showing your name, the property address and the date of the certificate.

For mobile home purchasers:

Attach a copy of the executed retail sales contract showing all parties' names and signatures, the property address, the purchase price and the date of purchase.

There’s a significant pile of paperwork that accompanies buying a home. With the hustle and bustle of moving, that paperwork can wind up out of sight and out of mind – possibly buried in your new basement or attic. So, while the topic is on your mind, make copies of the documents necessary for your purchase and keep those records somewhere they’ll be easy to find when you’re ready to send your documents to your CPA.

If you have questions about which documents you need to provide your CPA and the IRS, feel free to contact us…..and congrats on your purchase!

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Saving for College: Washington's GET Program

by Administrator 11. August 2010 09:58

We’ve been discussing college savings accounts, when to save and common funding plans available to parents and students. In these challenging economic times, plans that reduce investment risk are likely to give you less heartburn. While some Section 529 plans do present risk, there are other types Section 529 that eliminate uncertainty. They’re known as prepaid college tuition plans.

Washington state’s GET program (Guaranteed Education Tuition) is a great example of a prepaid plan that guarantees the value of your savings until your student is ready for college. In this type of plan, you prepay for your child’s future college tuition and are guaranteed by the state that the value of your account will keep pace with rising tuition.

The GET program works on a system of units, with 100 units representing the cost of one year of college tuition. When you purchase units they will keep pace with tuition at Washington’s most expensive public university. Currently the rate is $117 per unit and the state may adjust unit cost bi-annually based on a number of economic factors. The value of your purchased units remains the same, though, whether your child attends an in-state public college or an out-of state or private university. You can use your units at any college across the country that participates in federal financial aid programs.

If your child’s tuition is less than the value of your saved units, then the excess funds can be used for room and board, books, study abroad or other qualified higher educational expenses. If tuition is higher and your child’s chosen institution, then you’ll need to pay the difference.

Like most 529 plans, your investment grows tax-free and remains tax-free when it’s used for qualified educational expenses.

The state provides a useful overview of the GET program at www.get.wa.gov, or you can contact your CPA for additional information.

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Saving for College: Finding a plan that's right for you

by Administrator 5. August 2010 09:39

A college education is one of the best investments you can make for your child’s future. In a previous post, I talked about the advantages of saving early. If you’ve waited to save, fortunately, there are other options for your college savings plan.

State-sponsored college savings plans, also called Section 529 plans, allow you to make sizable investments while getting some tax breaks at the same time.

There are two types of Section 529 plans. The first type allows you to set up education savings accounts. The plan allows individuals to invest in a predetermined pool of stock and bond investments. Most plans will require you to divide your investment according to a given asset allocation determined by your child’s age. In general, the asset allocation will be more aggressive for younger children and less aggressive for children nearing college age.

Lifetime contribution limits to Section 529 plans vary from state to state, and you may have some flexibility on when you can contribute. (Check here for a resource on finding your state’s limit.) In addition, there are no income thresholds for 529 plans and typically no annual contribution limits, although annual contributions of more than $13,000 may require filing a federal gift tax return and are subject to federal gift taxes. Contributions up $13,000 annually ($26,000 when made jointly with a spouse) or a lump-sum contribution of $65,000 every five years will not incur gift taxes. If you live in the state where the plan is administered, you may be eligible for state tax deductions and any earnings in the account potentially grow tax deferred.

Once you child is college-aged, he or she can withdraw money from the account to pay for qualified higher education expenses. As long as the funds are not used for any other purpose, they are withdrawn tax-free. And if there is money left over in the account, it can be transferred to a sibling, first cousin, or other family members of the original beneficiary as long as they are in the same generation.

While Section 529 plans are flexible and can be used at almost any college, they do present an element of investment risk. These types of plans are not guaranteed, and your investment could lose value.

In a later post, I’ll provide an example of a prepaid college tuition plan available to Washington students. If you’re interested in learning more about Section 529 plans, please feel free to contact us.

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Paying Your Federal Taxes Online

by Linda Teachout 29. July 2010 12:07

In recent years, paperless and online bill paying systems have become a prevalent and secure way for individuals and businesses to complete all levels of financial transactions. And now more and more, the U.S. government is encouraging taxpayers to pay their federal taxes online using an electronic system offered by the Treasury Department. In fact, many banks no longer accept checks and Form 8109-B Federal Deposit Tax Coupons for payment of federal taxes.

The Electronic Federal Tax Payment System – EFTPS – is a free service that offers the easiest, most secure and most efficient way to pay your federal taxes. The online payment service is operated as an Official U.S. Government System and provides the highest levels of security available online today.

Here’s how it works:

Enroll at https://www.eftps.gov. With enrollment, you provide your Taxpayer Identification Number or your Employer Identification Number if you are enrolling as a business, banking account number and routing number, and address and name as they appear on your IRS tax documents.

Get your PIN. In seven business days you will receive your PIN in the mail. You will be provided instructions to get a temporary Internet password which you will be able to change. For your first payment, you’ll need to provide your SSN or EIN, your PIN and your Internet password.

Make a payment. With EFTPS, you initiate the payment. You simply make payments whenever you want, 24 hours a day, 7 days a week. All payments must be scheduled at least one calendar day prior to the tax due date by 8:00 p.m. ET. You can enter payment instructions up to 120 days in advance for businesses and 365 days for individuals.

You can also make same-day payments by calling their customer service phone number.

If you have additional question, you can always contact your CPA for further instructions.

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Saving for College: How early should you start?

by David Lowen 21. July 2010 10:31

It’s never too early to start planning for how you will help your child pay for college. College costs have risen consistently for the past 10 years, and there is little reason to think that this trend will reverse itself. In fact, most estimates predict increases in educational tuition costs of at least 5 percent per year. That means if a child born in 1999 starts college in the year 2017, a private college education could cost at least $54,000 a year!

To begin thinking about your child’s college savings plan, first consider how much college will likely cost at private and public institutions when you’re child is ready for college. There are many tools online to help estimate tuition costs. Here’s one from CollegeBoard that takes several planning factors into account.

Whatever tuition projections you establish, keep in mind that many students receive scholarships and other financial aid to help offset the cost of their studies.

How much money you are saving, though, is less important than how soon you begin saving. Using compound interest to your advantage helps grow your money over time. If you start saving early, your money works for you which costs you less in the long run. A modest weekly or monthly investment can grow to a significant college fund. For example, saving $50 a month from birth would yield about $20,000 by the time the child turns 17 (assuming a 7 percent return on investment). Saving $200 a month would yield almost $80,000.

Here are a few ideas for growing your college savings account:

Try increasing your college savings when your salary increases or add extra cash from yearly bonuses. Money that comes unexpectedly and has not been budgeted for will not be missed.

Encourage your child to put some of his or her part-time job earnings aside for college.

Consider getting other family members involved. Rather than expensive presents for birthdays and holidays, ask grandparents, aunts, and uncles to give a gift of a contribution to your child’s college savings plan.

Even if you haven’t saved from birth, it is never too late to start. Planning is the key to reaching your college savings goals. Get your finances in order – saving for college should be part of your total financial plan, not a stand alone goal.

Discuss your options with your CPA or financial advisor, and come up with a financial plan that allows you save for college as part of your overall saving for your family.

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I Now Pronounce You…Domestic Partners

by Administrator 12. July 2010 10:39

Beginning December 3, 2009, Washington state began treating registered domestic partners the same as married spouses. Domestic partnerships are available to same-sex couples and to opposite-sex couples where one partner is at least 62 years old. While the new law undoubtedly will make things simpler for these couples, it also creates the potential for confusion when dealing with federal tax matters.

If you are in a domestic partnership, you need to be aware that the federal government does not recognize state-sanctioned domestic partnerships. Therefore:

You cannot file your federal income tax as “married” (either filing jointly or separately). You must continue to file as a single taxpayer.
If your employer provides health insurance for your domestic partner and pays a portion of the premium, you must declare that amount as income on your tax return. (For married spouses, the premium payments are not considered income.)
If you have children in your household and the non-biological parent has not adopted them, that parent cannot count them for the earned income tax credit, head of household status, or child tax credit.
Domestic partners cannot take advantage of the higher limits for excluding gain on the sale of your principal residence that are available to married couples.
When one partner dies, there is no federal estate tax exemption for property transferred to the surviving partner. Similarly, any remaining balance in a retirement plan cannot be transferred (tax-free) directly to the surviving partner’s retirement account.

These differences in tax treatment mean that domestic partners require careful tax and estate planning that is specific to their situation. For more information, please contact us.

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Understanding Statement of Cash Flow

by Kara Barton 6. July 2010 05:35

Have you ever felt like your business is booming but you still struggle with paying the bills? Or maybe you don’t feel like you are making any money but always end up with large tax bill? The solution to your dilemma might be in the statement of cash flows (SCF).

Statements of cash flows show the inflow and outflow of cash for a specific period of time. There are two methods used to prepare a SCF: direct method and indirect method.

Direct method lists the major categories of cash receipts and disbursements (e.g., customer receipts, supplier payments, interest, income taxes, investing activities, and financing activities).
Indirect method is prepared by adjusting net income for non-cash transactions recorded on the income statement and then for cash transactions for investing and financing activities (e.g., purchase of fixed assets or proceeds from the issuance of debt).

In most cases, an SCF prepared using the direct method gives a more complete picture of company’s (and its owner’s) cash situation than a SCF prepared using the indirect method. However, most SCF’s are prepared using the indirect method due to the direct method being a cumbersome process.

Meeting with your CPA to review your SCF can help business owners evaluate the company’s liquidity and assist in identifying opportunities to improve the company’s available cash. Most accounting software in the market has the ability to generate a SCF, as well.

Regularly reviewing an SCF is also a useful planning tool. An SCF highlights the areas that can be improved or need extra attention. For example, if an SCF shows an increase in the accounts receivable balance and a decrease in net income, the business may need to take a look at the company’s credit policy and collection process. More specifically, whether credit terms offered to customers are appropriate for the customer’s financial situation; whether an accounts receivable aging is reviewed on a regular basis; whether customers with old receivables are being contacted on a regularly; or whether customer’s credit accounts are frozen after they become delinquent. Understanding an SCF can help owners and managers gain insight in knowing where to be more aggressive in expanding its operation or, conversely, when to look for operational efficiencies to keep the business running smoothly.

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Domestic Partnership Withholding Tax for Foreign Partners

by Brett Rice 29. June 2010 12:50

We know that a partnership is a pass through entity which means it doesn’t pay taxes itself. Incomes and expenses pass through to the partner’s and the partners themselves will pay taxes based on their share of the partnership’s income. There is no tax withholding. This is true unless the partnership has one or more foreign partners. A partner is a foreign partner if the partner is a nonresident alien individual, foreign partnership, foreign corporation (including a foreign government), foreign estate or trust, foreign tax-exempt organization, or other foreign person.

A U.S. non-publicly traded partnership has a legal responsibility to withhold and pay tax if any portion of its effectively connected taxable income (ECTI) is allocable to a foreign partner. Generally, the withholding tax rate is 30 percent, however, it may be reduced by a treaty tax rate. Withholding is also required on a foreign partner's distributive share of income that is not distributed. If tax was withheld prior to a distribution, taxes do not have to be withheld again when the amount is distributed.

The partnership must pay the withheld amount in installments based on the estimated tax requirements together with a Form 8813. The partnership must also report the partnership's total withholding liability for the year on Form 8804 and notify each foreign partner of his/her share on Form 8805.

Foreign partners need to file their US return on Form 1040NR, Form 1065, Form 1120F, or any other appropriate return, and any tax due must be paid, by the filing deadline (including extensions) generally applicable to that person. A foreign partner may claim a withholding credit for its share of any tax paid by the partnership against the amount of income tax computed on the foreign partner's return.

For example, U.S. partnership Z has a foreign partner P who owns a 20 percent of interest in the partnership. In 2009, Z has business net income $100,000. Z must withhold 30 percent or $6,000 tax for P’s $20,000. The $6,000 will be included in P's distribution calculation, so the other partners aren't penalized for the withholding.

However, for publicly traded partnerships (PTPs), the issue of withholding for foreign partners is handled differently. PTPs that have effectively connected income, gain, or loss must withhold from distributions to foreign partners, rather than on effectively connected taxable income.

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How I Learned to Stop Worrying and Love the ERISA Audit

by Administrator 22. June 2010 10:37

Most employee benefit plans with 100 or more participants are required to have an annual audit under the Employee Retirement Income Security Act (ERISA). While employers tend to view these audits skeptically – after all, they cost money, keep your staff tied up with non-essential tasks, and don’t directly add to the bottomline – they can actually be an excellent opportunity to do some fine-tuning that will help your business run more smoothly.

ERISA audits are performed by private CPA firms, not by government employees. Recent changes in auditing standards in the U.S.require auditors to have an in-depth understanding of a client’s business, business environment, operation, and internal controls. This means that as auditors work with a variety of companies within an industry, they develop a unique understanding of industry practices and benchmarks.

Business owners can take advantage of this expertise. Ask the auditor what he or she would do to improve your accounting practices, payroll system, and internal controls. Implementing these recommendations will not only make next year’s audit go that much faster, it will also enable you to have a more accurate picture of your company’s financial health throughout the year.

For more information on ERISA audits, please contact us.

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Roth IRA Conversions Available Soon for High Income Taxpayers

by Administrator 2. December 2009 10:03

Roth IRAs have several advantages over a traditional IRA: you are not required to take minimum distributions at any time; when you take qualified distributions, you don’t pay tax on the earnings; and if you need emergency funds before retirement, you can withdraw your contributions (but not earnings) without penalty.

The benefits are so substantial that for most taxpayers they outweigh the cost of converting a traditional IRA to a Roth. (Because traditional IRA contributions are made with pre-tax dollars, taxpayers converting their accounts must report the amount of those contributions as income in the year of the conversion and pay tax on the additional income.)

That option hasn’t been available to taxpayers with an adjusted gross income over $100,000. In fact, direct contributions to Roth IRAs are not available at all to taxpayers over specified income levels (depending on filing status).

But starting in 2010, high-income individuals will be able to convert a traditional IRA to a Roth. For accounts converted in 2010 only, the amount of the untaxed contributions can be reported as income over the next two years. For accounts converted after 2010, the untaxed contributions must be reported as income in the year the conversion occurs.

The expansion of Roth IRA conversions to higher-income taxpayers effectively means that these individuals can avoid the income limit on contributing to a Roth IRA. Instead, you can make contributions to a traditional IRA account, and then immediately convert it to a Roth.

In some circumstances the conversion may be tax-free. However, if you hold a mixture of taxable and non-taxable traditional IRA accounts the conversion may result in a higher-than-expected tax bill.

Even when the new rules go into effect, determining the most tax-advantageous way to contribute to your IRA will remain a complex endeavor. Contact us, and we can help you analyze your situation and recommend the best course of action.