The IRS has provided interim guidance on the deductions for qualified tips and qualified overtime compensation under the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). For tax year 2025, employers and other payors are not required to separately account for cash tips or qualified overtime compensation on Forms W-2, 1099-NEC, or 1099-MISC furnished to individual taxpayers.

The IRS provided guidance on changes relating to health savings accounts (HSAs) under the One, Big, Beautiful Bill Act (OBBBA) (P.L. 119-21). These changes generally expand the availability of HSAs under Code Sec. 223.

The IRS provided guidance on changes relating to health savings accounts (HSAs) under the One, Big, Beautiful Bill Act (OBBBA) (P.L. 119-21). These changes generally expand the availability of HSAs under Code Sec. 223.

Background

To access HSAs, individual taxpayers (1) need to be covered under a high-deductible health plan (HDHP) and (2) should not have other disqualifying health coverage. The minimum annual deductible for an HDHP in 2025 is $1,650 for self-only coverage and $3,300 for family coverage. The out-of-pocket maximum for TY 2025 is $8,300 for self-only coverage and $16,600 for family coverage.

OBBBA Changes

The OBBA made a few key changes to HDHPs and, by extension, HSAs. First, it made permanent a safe harbor for HDHPs that have no deductible for telehealth and other remote care services. The OBBBA permanent extension applies retroactively after December 31, 2024.

Second, the term HDHP now includes any plan under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) that is available as individual coverage through an exchange, including bronze and catastrophic plans. Before the OBBBA was enacted, many bronze plans did not qualify as HDHPs because the plans’ out-of-pocket maximum exceeded the statutory limits for HDHPs or because they provided benefits that were not preventive care without a deductible. Similarly, catastrophic plans could not be HDHPs because they were required to provide three primary care visits before the minimum deductible was satisfied and to have an out-of-pocket maximum that exceeded the statutory limits for HDHPs. This provision amending the definition of an HDHP applies for months after December 31, 2025.

Finally, direct primary care service arrangements (DPCSA) under Code Sec. 223(c)(1)(E)(ii) are no longer treated as a health plan for purposes of determining HSA eligibility and enrollment, and enrolling in a DPCSA will not cause a taxpayer to fail eligibility to contribute to an HSA. These DPCSAs changes would apply after December 31, 2025.

Q&As

The IRS answered several common questions from the public regarding these three provisions with regards to administration and eligibility.

Notice 2026-5

IR 2025-119

The IRS has answered initial questions regarding Trump accounts, which it intends to address in forthcoming proposed regulations. The guidance addresses general questions relating to the establishment of the accounts, contributions to the accounts, and distributions from the accounts under Code Secs. 128, 530A, and 6434. Comments, specifically on issues identified in the notice, should be submitted in writing on or before February 20, 2026, by mail or electronically.

The IRS has answered initial questions regarding Trump accounts, which it intends to address in forthcoming proposed regulations. The guidance addresses general questions relating to the establishment of the accounts, contributions to the accounts, and distributions from the accounts under Code Secs. 128, 530A, and 6434. Comments, specifically on issues identified in the notice, should be submitted in writing on or before February 20, 2026, by mail or electronically.

Establishment of the Accounts

An account may be established for the benefit of an eligible individual by making an election on Form 4547, Trump Account Election(s), or through an online tool or application on trumpaccounts.gov. A Trump account may be created at the same time that an election is made to receive a pilot program contribution. A Trump account is a traditional IRA under Code Sec. 408(a).

A rollover Trump account can only be established after the initial Trump account is created and during the growth period of the account, which is the period that ends before January 1 of the calendar year in which the account beneficiary attains age 18. A rollover account must first be funded by a qualified rollover contribution before receiving any other contribution. Additional rules regarding the choice of trustee, rollover accounts, and the written government instrument requirements are discussed in section III.A of the notice.

Pilot Program and Contributions

The election to receive a pilot program contribution is made on Form 4547 or through the online tool, once available. Pilot program contributions will be deposited into the Trump account of an eligible child no earlier than July 4, 2026.

Trustees of Trump accounts must maintain procedures to prevent contributions from exceeding the annual limit of Code Sec. 530A(c)(2)(A). Trustees are required to collect and report the amount and sources of contributions. Contributions may be made to a Trump account and to an individual retirement arrangement for the same individual during the growth period in accordance with the rules of Code Secs. 408 and 530A(c)(2).

Qualified general contributions will be transferred by the Treasury Department or its agent to the trustee of a Trump account pursuant to a general funding contribution. More information on how and where permitted entities will make an application to make a general funding contribution will be provided before the application process opens.

An employer can exclude up to $2,500 from the gross income of an employee for a contribution made by the employer to a Trump account contribution program. The annual limit is per employee, not per dependent. A Trump account contribution may be made by salary reduction under a Code Sec. 125 cafeteria plan if the contribution is made to the Trump account of the employee's dependent and not if the contribution is made to the Trump account of the employee.

Eligible Investments

The terms "mutual fund" and "exchange traded fund" are explained, with additional comments requested on their definitions. The tracking of returns of an index and leverage for purposes of Trump accounts are also described. A mutual fund or exchange traded fund will meet the requirements of having annual fees and expenses of no more than 0.1% of the balance of the investment fund if the sum of its annual fees and expenses is less than 0.1% of the value of the fund's net assets. Additional questions regarding eligible investments are discussed in section III.D of the notice.

Distributions

Only permitted distributions, which are qualified rollover contributions or qualified ABLE rollover contributions, excess contributions, or distributions upon the death of an account beneficiary, are allowed during the growth period. Hardship distributions during the growth period are not allowed. If an account beneficiary dies after the growth period, the rules that apply to other individual retirement accounts after the death of the account owner apply. If the Trump account beneficiary dies during the growth period, the account ceases to be a Trump account and an IRA as of the date of death.

Reporting and Coordination with IRA Rules

Annual reporting by the Trump account trustee is required. Forms and instructions will be issued in the future. After the growth period, distributions from Trump accounts are governed by the IRA distribution rules of Code Sec. 408(d).

Notice 2025-68

IR 2025-117

The IRS intends to issue proposed regulations to implement Code Sec. 25F, as added by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). Code Sec. 25F allows a credit for an individual taxpayer's qualified contribution to a scholarship granting organization (SGO) providing qualified elementary and secondary scholarships.

The IRS intends to issue proposed regulations to implement Code Sec. 25F, as added by the One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). Code Sec. 25F allows a credit for an individual taxpayer's qualified contribution to a scholarship granting organization (SGO) providing qualified elementary and secondary scholarships.

Tax Credit

Beginning January 1, 2027, individual taxpayers may claim a nonrefundable federal tax credit for cash contributions to SGOs. Taxpayers must be citizens or residents of the United States. The credit allowed to any taxpayer is limited to $1,700. The credit is reduced by the amount allowed as a credit on any state tax return. Additionally, to prevent a double benefit, no deduction is allowed under Code Sec. 170 for any amount taken into account as a qualified contribution for purposes of the Code Sec. 25F credit.

SGO Requirements

An organization can qualify as an SGO after satisfying conditions that include (1) being a Code Sec. 501(c)(3) organization that is exempt from tax under Code Sec. 501(a) and not a private foundation; (2) maintaining one or more separate accounts exclusively for qualified contributions; (3) appearing on the list submitted for the applicable covered state under Code Sec. 25F(g); and (4) providing scholarships to 10 or more students who do not all attend the same school, as well as meeting certain other requirements.

Request for Comments

The forthcoming proposed regulations describe the certification process currently envisioned by the Treasury Department and the IRS for covered states to elect to participate under Code Sec. 25F . The IRS requests comments on these matters before December 26, 2025, through the Federal e-Rulemaking portal (indicate “IRS-2025-0466”). Paper submissions should be sent to: Internal Revenue Service, CC:PA:01:PR (Notice 2025-70), Room 5503, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

Notice 2025-70

IR-2025-115

The IRS has disclosed the first set of certifications for the qualifying advanced energy project credit under Code Sec. 48C(e).

The IRS has disclosed the first set of certifications for the qualifying advanced energy project credit under Code Sec. 48C(e) for the period beginning:

• March 29, 2024, through September 30, 2025, resulting from the Round 1 allocation; and
• January 10, 2025, through September 30, 2025, resulting from the Round 2 allocation.

The Service also disclosed the identities of taxpayers and amounts of the Code Sec. 48C credits allocated to said taxpayers.

Background

Notice 2023-18, I.R.B. 2023-10, established a program to allocate $10 billion of credits for qualified investments in eligible qualifying advanced energy projects under Code Sec. 48C(e)(1). Code Sec. 48C(e)(4)(A) provides a base credit rate of 6 percent of the qualified investment. In cases where projects satisfy Code Secs. 48C(e)(5)(A) and (6), the Service would provide an alternative rate of 30 percent of the qualified investment.

Certification

Each applicant for certification has two years from the date of acceptance of the Code Sec. 48C(e) application. During this time, the applicant needs to submit evidence that the requirements of the certification have been met. The IRS will publish additional notices annually for certifications issued during each successive 12-month period beginning on October 1, 2025 for both Round 1 and 2.

Announcement 2025-22

Announcement 2025-23

The IRS and Treasury Department have provided procedures for a state to elect to be a “covered state” to participate with the Code Sec. 25F credit program for calendar year 2027 prior to identifying any scholarship granting organizations (SGOs) in the state. Form 15714 is used by a state to make the advanced election.

The IRS and Treasury Department have provided procedures for a state to elect to be a “covered state” to participate with the Code Sec. 25F credit program for calendar year 2027 prior to identifying any scholarship granting organizations (SGOs) in the state. Form 15714 is used by a state to make the advanced election.

Background

For tax years beginning after 2026, a U.S. citizen or resident alien may claim a nonrefundable personal tax credit of up to $1,700 for qualified contributions made to a scholarship granting organization (SGO). A qualified contribution is a charitable contribution of cash to an SGO that uses the contribution to fund scholarship for eligible K-12 students.

In order for a contribution made by a taxpayer to an SGO in a state (or the District of Columbia) to be a qualified contribution eligible for the credit, the state must elect participate in the credit program and must identify by January 1 of each calendar year a list of qualified SGOs in the state.

Advanced Election for 2027

A state may make an advanced election using Form 15714 to be a covered state for the Code Sec. 25F credit for the 2027. The form may be submitted any time after December 31, 2026, and before the day before the final date on which the State is permitted to submit the State SGO list (as will be specified in future guidance).

The advance election will allow a state to inform potential SGOs of the state’s participation in the credit before submitting a full SGO limit to the IRS. Any SGO list submitted with Form 15714 will not be processed by the IRS and the state will need to resubmit the list as specified in future guidance. Once a state’s advance election has been made on Form 15714 for calendar year 2027, the only subsequent submission the IRS will accept is the official submission of the state’s SGO list for the calendar year.

Rev. Proc. 2026-6

IR 2025-121

The IRS has formally withdrawn two proposed regulations that would have clarified how married individuals may obtain relief from joint and several tax liability. The withdrawal affects taxpayers seeking protection under Code Sec. 6015 and relief from federal income tax obligations tied to State community property laws under Code Sec. 66.

The IRS has formally withdrawn two proposed regulations that would have clarified how married individuals may obtain relief from joint and several tax liability. The withdrawal affects taxpayers seeking protection under Code Sec. 6015 and relief from federal income tax obligations tied to State community property laws under Code Sec. 66.

The two notices of proposed rulemaking—originally issued on August 13, 2013 (78 FR 49242), and November 20, 2015 (80 FR 72649)—offered procedural guidance for requesting equitable, innocent spouse, or separation of liability relief. These proposals also reflected statutory amendments introduced by the Tax Relief and Health Care Act of 2006 and evolving jurisprudence. The Treasury Department and the IRS decided to halt progress on these rules due to the passage of time, the scope of public comments, and resource prioritization.

While the agency acknowledged the regulatory need in this area, it cited the volume and breadth of feedback as grounds for reassessment. The IRS clarified that any future rules addressing these issues would require new proposals and another round of public comment, in line with current statutory frameworks and legal developments.

Importantly, this withdrawal does not prevent the issuance of new regulations on joint and several liability relief. Nor does it alter existing statutory or regulatory obligations in place under current law. The IRS retains authority under 26 U.S.C. 7805 to revisit and re-propose rules as necessary.

The withdrawal was announced by the IRS and Treasury on December 15, 2025, and was signed by Frank J. Bisignano, Chief Executive Officer. Tax professionals and affected individuals should continue to rely on existing law and procedures when seeking relief under Code Secs. 6015 and 66.

Proposed Regulations, NPRM REG-132251-11; REG-134219-08

The American Institute of CPAs has voiced its opposition to the Internal Revenue Service’s proposal to combine the Office of Personal Responsibility and the Return Preparer Office

The American Institute of CPAs has voiced its opposition to the Internal Revenue Service’s proposal to combine the Office of Personal Responsibility and the Return Preparer Office.

“The AICPA has an extensive and resolute history of steadfastly supporting initiatives that would enhance compliance, elevate ethical conduct, and protect taxpayer confidence in our tax system,” the organization said in a November 14, 2025, letter to the directors of the two offices. “The proposed combination of OPR and RPO contravenes those principles.” A copy of this and other AICPA 2025 tax policy and advocacy comment letters can be found here.

AICPA said it “strongly opposes any efforts to combine OPR and RPO because it would inappropriately consolidate credentialed and uncredentialed return preparers under OPR, create potential conflicts of interest, and divert resources from the primary role of OPR.”

It added that the merger “would sow confusion among taxpayers trying to understand the differing qualifications and practice rights of preparers, which would harm taxpayers and erode taxpayer confidence in our tax system.”

AICPA noted that OPR “has the exclusive delegated authority to interpret and enforce the regulations in Treasury Department Circular 230 (Circular 230), which governs tax practitioners interacting with the tax administration system,” while RPO “administers the Preparer Tax Identification Number (PTIN) program, manages the enrolled agent practitioner program, encourages enrollment in the Annual Filing Season Program (AFSP), and processes some complaints against return preparers.”

“These two offices perform dissimilar government functions, oversee different types of preparers, and, therefore, should remain separate to avoid potential conflicts of interest,” AICPA said in the letter.

AICPA argued that the combination would divert resources away from the primary role of OPR and could undermine the credibility of OPR’s enforcement objective.

“Under a combined OPR unit, unscrupulous and incompetent preparers could readily misrepresent that they are subject to ethical obligations overseen by the ‘Office of Professional Responsibility,’ which would give such preparers a foothold to abuse taxpayers and undermine public trust and accountability in the tax profession,” AICPA stated in the letter.

By Gregory Twachtman, Washington News Editor

It's always nice to have extra cash lying around in your business. Say you've had a good year, but you want to wait awhile before plowing the profits back into the business. Are there any potential tax problems involved if you keep that extra cash in your business' investment account rather than withdrawing it to put in your own personal portfolio? You bet there are ... if you operate your business as a regular taxable corporation.

It's always nice to have extra cash lying around in your business. Perhaps you've had a good year, but want to wait awhile before putting the profits back into the business. Are there any potential tax problems involved if you keep that extra cash in your business' investment account rather than withdrawing it to put in your own personal portfolio? You bet there are ... if you operate your business as a regular taxable corporation.

The accumulated earnings tax trap

If your business is taxed as a regular "C" corporation and the IRS believes that your corporation has retained cash beyond "the reasonable needs of the business," it can assess an additional tax on the corporation, in addition to normal corporate income taxes. The tax is called the accumulated earnings tax.

For tax years beginning before 2011, the accumulated earnings tax is equal to 15 percent of accumulated taxable income. Accumulated taxable income is taxable income, with adjustments, reduced by dividends paid deduction and earnings accumulated for reasonable business needs or minimum credit amount.

For tax years beginning after 2010, the rate of the accumulated earnings tax, which is imposed on the excess accumulated taxable income, is imposed at the highest rate of tax for single individuals. Currently, the highest tax rate for individuals is 35 percent, but may rise back to 39 percent in 2010 under proposals set forth by the Obama Administration.

If your business is either unincorporated or is taxed as a pass-through entity such as a Subchapter S corporation, it is not subject to the accumulated earnings tax. You get a "free pass" on the accumulated earnings tax because all profits are "passed through" to you as the owner automatically, with usually nothing paid on the corporate or entity level.

Avoiding accumulated earnings tax

What does your corporation need to do to demonstrate to the IRS that its current amount of retained earnings does not exceed the reasonable needs of the business?

IRS rules list the following as acceptable grounds for accumulating income:

(1) Business expansion and plant replacement,

(2) Acquisition of a business through purchase of stock or assets,

(3) Debt retirement,

(4) Working capital, and

(5) Investments or loans to suppliers or customers necessary for the maintenance of the corporation's business.

On the other hand, unacceptable grounds for accumulating income are:

(1) Loans to shareholders and expenditures for their personal benefit,

(2) Loans to relatives and friends of shareholders or to others with no reasonable connection with the business,

(3) Loans to a related corporation (common ownership),

(4) Investments that are not related to the business, and

(5) Accumulations to protect against unrealistic hazards.

Worse yet - the personal holding company tax

If -- due to a large surplus in your business' cash account in any particular year-- the investment income from your corporation becomes its main source of income, watch out! Your business may qualify as a  "personal holding company." A personal holding company tax is imposed on any corporation that meets the definition of a personal holding company even if the corporation was formed for legitimate business reasons. Personal holding companies are subject to an additional tax on any undistributed personal holding company income.

Any and all undistributed earnings of a personal holding company are subject to a 15 percent penalty tax in 2009 and 2010. This tax is imposed on top of the regular corporate income tax. Although the personal holding company tax should usually be avoided at all cost, it nearly always can be avoided with some planning.

If you anticipate holding more of your business profits than usual on the sidelines as cash for a while, please contact this office. We can make certain that you don't fall into a tax-trap situation that might otherwise be overlooked.

Q. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?

Q. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?

A. Cooking, cleaning and childcare: domestic concerns - or tax issues? The answer is both. A few years ago, several would-be Presidential appointees were rejected -- when it was revealed that they had failed to pay payroll taxes for their domestic help. The IRS is aggressively looking for cheaters so it's particularly important that you don't stumble through ignorance in not fulfilling your obligations.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What it costs

In general, if you paid cash wages of at least $1,300 in 2001 to any household employee, you must withhold and pay social security and Medicare taxes. The tax is 15.3 percent of the wages paid. You are responsible for half and your employee for the other half but you may choose to pay the entire amount. If you pay cash wages of at least $1,000 in any quarter to a household employee, you are responsible for paying federal unemployment tax, usually 0.8 percent of cash wages.

Deciding who is an employee is not easy. Contact us for more guidance.

Have you ever thought about distributions of property dividends (rather than cash dividends) from your corporation?  In some situations, it makes sense to distribute property in lieu of cash for a variety of reasons. However, before you make the decision as to the form of any distributions from your company, you should consider the various tax consequences of such distributions.

Have you ever thought about distributions of property dividends (rather than cash dividends) from your corporation? In some situations, it makes sense to distribute property in lieu of cash for a variety of reasons. However, before you make the decision as to the form of any distributions from your company, you should consider the various tax consequences of such distributions.

A corporation can make a distribution of a "dividend in kind" - which is a property distribution. For such purposes, a distributing corporation's stock and rights for such stock acquisition are not considered to be property. Dividend distributions in these forms are not treated as income that is taxable to the corporation's shareholders, with some important exceptions (e.g., distributions made instead of money; certain distributions made on preferred stock; distributions that are disproportionate; etc.).

A whole host of items can form the basis for your company's next property dividend:

• bonds issued by the government;

• real property;

• the distributing corporation's bonds;

• another corporation's bonds;

• assumption of the indebtedness to a third party of a shareholder;

• transferable vouchers enabling shareholders to receive company products or corporate services discounts;

• promissory notes from customers or other corporate asset purchasers;

• accounts and bills receivable;

• issued transferable vouchers for transportation, by an airline company;

• acquisition options for another corporation's stock; and

• rare coins (e.g., coins having a value that exceed their value as legal tender).

When a corporation distributes property that has increased in value, the corporation will recognize gain, for tax purposes, as if it had sold the property to the shareholder at the property's fair market value. However, the corporation recognizes no loss on distributions of property that have decreased in value. So it you're trying to get rid of property that is not much value to your company anyway, unfortunately, you can't get the added benefit of a loss deduction in planning a property dividend. The distribution amount that is received by a shareholder will be equal to the property's fair market value - decreased by any liabilities that the property is subject to or by any liabilities that the shareholder assumes.

Caution. For shareholders who are not corporations: according to the Tax Court, if a corporation assumes the liability of its shareholder, then at the time of liability assumption the shareholder has a dividend. The shareholder cannot assert a decrease to zero of the dividend due to secondary liability on his or her part. However, the Eighth Circuit has held that when there is a decrease in the shareholder's liability from primary to secondary, there can be no objective assessment of the shareholder's economic benefit so that the shareholder is treated as having no dividend until the corporation pays the debt.

The distribution amount is taxed as a dividend to the extent the corporation has enough earnings and profits in order to cover the distribution. Should the property's value (decreased by any debt) be greater than earnings and profits, the excess does not constitute a dividend. Rather, it is a capital return that is not taxable and is applicable first against the shareholder's basis until there is reduction to zero, at that point representing gain that is subject to taxation.

The shareholder's basis can differ from the corporation's basis in the same property. The shareholder's basis in the property that is distributed is equivalent to the fair market value of the property when it was distributed. Debt does not decrease the value for purposes of basis and the shareholder's basis is a measure of the shareholder's future gain or loss when the property is sold or deductions for depreciation if, in the possession of the shareholder, the property is depreciable.

Property distribution impacts corporate earnings and profits, which increases from gain which a corporation may recognize and decreases by the greater amount of the basis the corporation has in the distributed property or the property's value. The earnings and profits reduction decreases by any debt amount to which the property is subject.

Property dividends may make sense in a variety of circumstances, especially if the property can no longer be put to productive use by your business and only a small amount of taxable gain is at risk of being realized on the distribution. If the property's value is lower than its tax basis, however, a sale followed by a distribution of the cash proceeds may be the better way to go. Please consult the office if you wish to explore the opportunities presented by a possible property dividend in your business situation.

Throughout all of our lives, we have been told that if we don't want to work all of our life, we must plan ahead and save for retirement. We have also been urged to seek professional guidance to help plan our estates so that we can ensure that our loved ones will get the most out of the assets we have accumulated during our lifetime, with the least amount possible going to pay estate taxes.  What many of us likely have not thought about is how these two financial goals -- retirement and estate planning -- work together. 

Throughout all of our lives, we have been told that if we don't want to work all of our life, we must plan ahead and save for retirement. We have also been urged to seek professional guidance to help plan our estates so that we can ensure that our loved ones will get the most out of the assets we have accumulated during our lifetime, with the least amount possible going to pay estate taxes. What many of us likely have not thought about is how these two financial goals -- retirement and estate planning -- work together.

Retirement plan assets are part of taxable estate

When we begin to think about estate planning, one of the first things that we usually do is to take an inventory of what our current assets are and then we project into the future and try to estimate the assets we will have when we die. If you take a moment and think about this right now, aside from your residence, the most valuable asset you currently own (and that you will own at the time of death) is most likely to be your retirement savings (your IRAs, 401(k) accounts, and other employer-sponsored retirement plans). Looking at things from this perspective really drives home the importance of estate planning in connection with saving for retirement.

One of the reasons why we may not think about estate planning in connection with our retirement benefits is that we may have the false notion that these benefits are not part of our "estate" and therefore are not subject to estate tax. This is not true. All of your assets, regardless of the source are part of your estate and subject to estate tax (or, in other words, part of your taxable estate).This means that all of the issues that you may address with a lawyer or accountant or other financial professional regarding planning your estate will also need to be considered when planning for your retirement. When you sit down with a professional to help you plan your estate it is critical that you gather and provide as much information as possible regarding any and all retirement plans in which you participate-all IRAs, 401(k), and other plans sponsored by your employer.

Special issues involved with estate planning for retirement plan assets

Even though the funds that you have in your retirement plans are subject to the same estate planning rules and considerations as any other assets that are part of your estate, there are certain special or unique issues that come into play when you incorporate retirements savings into estate plans. Decisions made with respect to these issues may also have income tax consequences as well as estate tax repercussions. Some of the most important of these issues are:

•  Whether to elect for survivor benefits to be paid to a spouse (sometimes referred to as a joint and survivor annuity);

• Whether you should choose or designate a beneficiary with respect to your interest in an IRA or another retirement plan;

•  The tax differences to beneficiaries who receive benefits on your death but before you have begun to receive pay-out of your benefits and those beneficiaries who begin receiving benefits after retirement payments to you have commenced; and

• Benefits that may be subject to both income tax and estate tax (and are sometimes provided an income tax deduction due to the double taxation)

You must plan carefully to ensure that you get the best possible results regardless of the estate tax rules that are in effect. As you consider becoming more involved in estate and/or retirement planning, please contact the office for additional guidance.

Q:  One of my children received a full scholarship for all expenses to attend college this year.  I had heard that this amount may not be required to be reported on his tax return if certain conditions were met and the funds were used specifically for certain types of her expenses.  Is this true and what amounts spent on my child's education will be treated as qualified expenses?

Q: One of my children received a full scholarship for all expenses to attend college this year. I had heard that this amount may not be required to be reported on his tax return if certain conditions were met and the funds were used specifically for certain types of her expenses. Is this true and what amounts spent on my child's education will be treated as qualified expenses?

A: Any amount received as a "qualified scholarship" or fellowship is not required to be reported as income if your child is a candidate for a degree at an educational institution. For the college that your child attends to be treated as an educational organization, it must (1) be an institution that has as its primary function the presentation of formal instruction, (2) normally maintain a regular faculty and curriculum, and (3) have a regularly enrolled body of students in attendance at the place where the educational activities are regularly carried on. Your child has received a qualified scholarship if he or she can establish, that in accordance with the conditions of the scholarship, the funds received were used for qualified tuition and related expenses.

Qualified tuition and related expenses include tuition and fees required for enrollment or attendance at the educational institution, as well as any fees, books, supplies, and equipment required for courses of instruction at the educational institution. To be treated as related expenses, the fees, books supplies, and equipment must be required of all students in the particular course of instruction. Incidental expenses, such as expenses for room and board, travel, research, equipment, and other expenses that are not required for either enrollment or attendance at the educational institution are not treated as related expenses. Any amounts that are used for room, board and other incidental expenses are not excluded from income.

Example: Assume this year your son received a scholarship in the amount of $20,000 to pay for expenses at a qualified educational institution. His expenses included $12,000 for tuition; $1,100 for books; $900 for lab supplies and fees; and $6,000 for food, housing, clothing, laundry, and other living expenses.

The $14,000 that your son paid for tuition, books and lab supplies and fees are considered to be qualified educational expenses and therefore would not have to be reported as income. The $6,000 that he spent on housing and the other living expenses is considered to be incidental expenses and would have to be reported in his income.

Note: This tax exclusion for qualified scholarships should not be confused with the Hope Scholarship Tax Credit, which has been temporarily renamed the American Opportunity Tax Credit and enhanced for 2009 and 2010 by the American Recovery and Reinvestment Act of 2009. The American Opportunity Tax Credit can reach as high as $2,500 for 2009 and 2010 for tuition expenses paid by you for yourself, a spouse or a dependent. Scholarship money that is excluded from income cannot be used in computing your costs for the American Opportunity Tax Credit (i.e. Hope Scholarship Tax Credit). "Financial aid" in the form of student loans, however, is not counted as a scholarship and any money applied to pay tuition can qualify for the Hope Scholarship Tax Credit.

There can be all sorts of complicating factors in assessing whether a particular scholarship will be taxed, such as the treatment of work-study scholarships, educational sabbaticals, scholarships paid by an employer, and stipends to cover the tax on the non-tuition portion of attending a university. If you need additional assistance in determining the taxability of scholarships funds, please contact the office.

In addition to direct giving during their lifetimes, many people look at how they can incorporate charitable giving in their estate plans. While many options are available, one plan that allows you help charities and preserve and grow assets for your beneficiaries at the same time is a charitable lead annuity trust.

In addition to direct giving during their lifetimes, many people look at how they can incorporate charitable giving in their estate plans. While many options are available, one plan that allows you help charities and preserve and grow assets for your beneficiaries at the same time is a charitable lead annuity trust.

Fixed payments to charity

When you set up a charitable lead annuity trust (or CLAT, for short), the intention is for the assets of the trust, and the income they generate, to ultimately one day pass to one or more non-charitable beneficiaries, for example, your children. Before then, however, you may want one or more charities to receive some of the funds. Under a typical CLAT, the charity receives a fixed payout for a pre-determined number of years or, in some cases, for the lives of specified persons. The payments to the charity remain the same regardless of how the trust performs and no minimum payment is required. In most cases, the rules do not allow your beneficiaries to receive anything from the trust until the trust ends.

Individuals who can be used as the measuring lives would be restricted to the donor's life, the life of the donor's spouse, or a lineal ancestor of the beneficiaries. The IRS did this to prevent abuse of CLATs. Some people have tried to artificially inflate the tax benefits of CLATs by using unrelated individuals, such as those who were seriously ill and were expected to die prematurely, as the measuring lives.

Tax benefits

When the trust ends, the assets of the trust and the income earned by the trust pass to your beneficiaries tax-free. That is a potentially huge savings of federal estate and gift taxes. The top federal estate and gift tax rate in 2009 is 45 percent. If the original trust assets were passed directly to your heirs, taxes could reduce significantly your bequest. Placing the assets in a CLAT helps to preserve - and more importantly - grow them. The estate tax is fixed when the CLAT is created and not when the assets pass to your beneficiaries.

Generally, income paid to the charity is subject to tax by the owner of the trust. However, careful planning, such as funding the trust with tax-exempt bonds, can reduce or eliminate any tax liability on the part of the owner.

Timing the creation of a CLAT

CLATS need not be set-up after you die. You can fund a CLAT today and see the benefit of your gift as a charity makes good use of it. However, if you want to create a CLAT during your life, keep in mind that you will not be able to use assets in the trust.

A CLAT -- created either before or after your death -- can continue your legacy of giving to your favorite charities, while yielding overall tax savings for you and your family. Please contact the office if you have any questions on how a CLAT, or another variety of charitable trust, might work for you.

Apart from wages, one of the most common sources of taxable income is from investments. While investment income from non-exempt sources is generally fully taxable to individuals under the Internal Revenue Code, many of the expenses incurred in producing that income are deductible. Knowing the rules governing investment expenses can reduce -- sometimes significantly -- the tax impact of investment income.

Apart from wages, one of the most common sources of taxable income is from investments. While investment income from non-exempt sources is generally fully taxable to individuals under the Internal Revenue Code, many of the expenses incurred in producing that income are deductible. Knowing the rules governing investment expenses can reduce -- sometimes significantly -- the tax impact of investment income.

Deductible investment expenses

Investment interest. A significant source of investment-related costs is investment interest expense. Investment interest paid related to the generation of taxable investment income is generally deductible on Schedule A of Form 1040, however certain limitations may reduce the amount deductible. For example, your deduction for investment interest paid may not exceed your net investment income. "Net investment income" is arrived at by subtracting your investment expenses (other than interest expense) from your investment income. Interest paid in excess of that amount determined to be deductible can be carried over and deducted in subsequent years (after application of these rules, of course).

Other investment expenses. Qualified investment expenses (other than interest) can be claimed as miscellaneous itemized deductions on Schedule A of your federal Form 1040 and are generally subject to the 2% threshold imposed on miscellaneous itemized deductions. If you itemize your deductions on your return, to the extent that these and other miscellaneous itemized deductions exceed 2% of your adjusted gross income (AGI), they are deductible from income.

The list of investment expenses approved for inclusion as miscellaneous itemized deductions (by the IRS or the courts) is a long one -- and one worth reviewing by you as a taxpayer, as unexpected ways to reduce your taxable income can be found. Some of the investment expenses that have been determined to be deductible as miscellaneous itemized deductions subject to the 2% floor include:

• Investment counsel or advisory fees, including managers or planners.
• Subscriptions to publications offering investment advice.
• Legal expenses for the maintenance, conservation or management of investment property.
• Legal expenses incurred in recovering investment property or amounts earned by such property.
• Guardian fees and expenses incurred in the production or collection of income of a ward or minor or in the management of the ward or minor's investments.
• Clerical help and office rent connected with the management of investments and/or the collection of the income they generate.
• Accounting fees for keeping investment income records.
• Depreciation of home computers used to manage investments that produce taxable income.
• Costs of premiums and other expenses for indemnity bonds for the replacement of missing securities.
• Dividend reinvestment plan (DRIP) service charges, such as charges for holding the shares acquired through the plan, collecting and reinvesting cash dividends, keeping individual records, and providing detailed statements of accounts.
• Proxy fight expenses if incurred in connection with a legitimate corporate policy dispute
• Investment expenses connected with the purchase, sale or ownership of securities
• Fees paid to a broker, bank, trustee, or other investment-related agent to collect interest or dividends on taxable investments.
• Losses on non-federally insured deposits in an insolvent or bankrupt financial institution, if the loss is treated as an ordinary loss by the taxpayer but is not treated as a casualty loss; and subject to a $20,000 limit on losses from any one institution.
• Allocable investment expenses of privately offered mutual funds.
• Custodial fees.
• Safe deposit box rent so long as the box is used for the storage of (taxable) income-producing stocks, bonds, or papers and documents related to taxable investments^.
• Travel costs incurred in making trips away from home to check on your property or to confer with investment advisors about your income-producing investments. But be careful -- if your investment property is in Vail or Maui, make sure your records establish that your trip was primarily made to check on your investment, not to take a personal vacation.

The expenses generated in connection with the management of investment property are deductible even if the property isn't currently producing income -- so long as the property is held for the production of income. And expenses incurred in reducing additional loss or to prevent anticipated losses with respect to investment property are also deductible.

Nondeductible investment expenses

What kinds of investment-related expenses are not deductible? A nonexclusive list of such expenses includes:

• Fees charged by a broker to acquire securities. These costs are instead added to the basis of the securities. Similarly, fees paid on the sale of securities reduce the selling price.
• Fees for establishing or administering an IRA, unless billed and paid separately and apart from the regular IRA contribution.
• Expenses related to tax-exempt investments.
• Trips to attend seminars or conventions connected with investment or financial planning.
• Trips to stockholder meetings. Although an exception has been made where a taxpayer with significant holdings traveled to a meeting to protest specific practices that were hurting his investment.
• Home office expenses, unless investing is actually the taxpayer's business.

Remember, for purposes of the rules governing investment expenses, rental and royalty income-related properties are not considered. These investments are subject to their own rules and reporting requirements, and are not included in the category of investment expenses limited by the 2% threshold.

While this discussion related to the tax treatment of investment-related expenses may appear comprehensive, other limitations and exceptions exist that may apply to your tax situation. For more information regarding how you can make the most of your investment-related expenditures, please feel free to contact the office for assistance.

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

Q. I have a professional services firm and am considering hiring my wife to help out with some of the administrative tasks in the office. I don't think we'll have a problem working together but I would like to have more information about the tax aspects of such an arrangement before I make the leap. What are some of the tax advantages of hiring my spouse?

A. Small business owners have long adhered to the practice of hiring family members to help them run their businesses -- results have ranged from very rewarding to absolutely disastrous. From a purely financial aspect, however, it is very important for you as a business owner to consider the tax advantages and potential pitfalls of hiring -- or continuing to employ -- family members in your small business.

Keeping it all in the family

Pay your family -- not Uncle Sam. Hiring family members can be a way of keeping more of your business income available for you and your family. The business gets a deduction for the wages paid -- as long as the family members are performing actual services in exchange for the compensation that they are receiving. This is true even though the family member will have to include the compensation received in income.

Some of the major tax advantages that often can be achieved through hiring a family member -- in this case, your spouse -- include:

Health insurance deduction. If you are self-employed and hire your spouse as a bona fide employee, your spouse -- as one of your employees -- can be given full health insurance coverage for all family members, including you as the business owner. This will convert the family health insurance premiums into a 100% deductible expense.

Company retirement plan participation. You may be able to deduct contributions made on behalf of your spouse to a company sponsored retirement plan if they are employees. The tax rules involved to put family members into your businesses retirement plan are quite complex, however, and generally require you to give equal treatment to all employees, whether or not related.

Travel expenses. If your spouse is an employee, you may be able to deduct the costs attributable to her or him accompanying you on business travel if both of you perform a legitimate business function while travelling.

IRA contributions. Paying your spouse a salary may enable them to make deductible IRA contributions based on the earned income that they receive, or Roth contributions that will accumulate tax-free for eventual tax-free distribution.

"Reasonable compensation"

In order for a business owner to realize any of the advantages connected with the hiring family members as discussed above, it is imperative for the family member to have engaged in bona fide work that merits the compensation being paid. Because this area has such a high potential for abuse, it's definitely a hot issue with the IRS. If compensation paid to a family member is deemed excessive, payments may be reclassified as gifts or as a means of equalizing payments to shareholders.

As you decide on how much to pay your spouse working in your business, keep in mind the reasonable compensation issue. Consider the going market rate for the work that is being done and pay accordingly. This conservative approach could save you money and headaches in the event of an audit by the IRS.

Hiring your spouse can be a rewarding and cost effective solution for your small business. However, in order to get the maximum benefit from such an arrangement, proper planning should be done. For additional guidance, please feel free to contact the office.

The responsibility for remitting federal tax payments to the IRS in a timely manner can be overwhelming for the small business owner -- the deadlines seem never ending and the penalties for late payments can be stiff. However, many small business owners may find that participating in the IRS's EFTPS program is a convenient, timesaving way to pay their federal taxes.

The responsibility for remitting federal tax payments to the IRS in a timely manner can be overwhelming for the small business owner -- the deadlines seem never ending and the penalties for late payments can be stiff. However, many small business owners may find that participating in the IRS's EFTPS program is a convenient, timesaving way to pay their federal taxes.

The Electronic Federal Tax Payment System (EFTPS) is a simple way for businesses to make their federal tax payments. It is easy to use, fast, convenient, secure and accurate. It also saves business owners time and money in making federal tax payments because there are no last minute trips to the bank, no waiting lines, no envelopes, stamps, couriers, etc. And best of all, tax payments are initiated right from your office!

What is the EFTPS?

EFTPS is an electronic tax payment system through which businesses can make all of their federal tax deposits or payments. The system is available 24 hours a day, seven days a week for businesses to make their tax payments either through the use of their own PC, by telephone, or through a program offered by a financial institution.

What federal tax payments are covered by EFTPS?

Some taxpayers mistakenly assume that EFTPS applies only to the deposit of employment taxes. EFTPS has much broader reach. It can be used to make tax payments electronically for a long list of payment obligations:

• Form 720, Quarterly Federal Excise Tax Return;
• Form 940, Employer's Annual Federal Unemployment Tax (FUTA) Return;
• Form 941, Employer's Quarterly Federal Tax Return;
• Form 943, Employer's Annual Tax Return For Agricultural Employees;
• Form 945, Annual Return of Withheld Federal Income Tax;
• Form 990-C, Farmer's Cooperative Association Income Tax Return;
• Form 990-PF, Return of Private Foundation;
• Form 990-T, Exempt Organization Business Income Tax Return Section 4947(a)(1) Charitable Trust Treated as Private Foundation;
• Form 1041, Fiduciary Income Tax Return;
• Form 1042, Annual Withholding Tax Return for U.S. Sources of Income for Foreign Persons;
• Form 1120, U.S. Corporation Income Tax Return; and
• Form CT-1, Employer's Annual Railroad Retirement Tax Return.

How can I get started using EFTPS?

To enroll in EFTPS, the taxpayer must complete IRS Form 9779, Business Enrollment Form, and mailing it to the EFTPS Enrollment Center. To obtain a copy of IRS Form 9779 a taxpayer or practitioner can call EFTPS Customer Service at 1-800-945-8400 or 1-800-555-4477. The enrollment form may also be requested from the IRS Forms Distribution Center at1-800-829-3676.

After you complete and mail the enrollment form, EFTPS processes the enrollment and sends you a Confirmation Packet, which includes a step-by-step Payment Instruction Booklet. You will also receive a PIN under separate cover. Once the Confirmation Packet and the PIN are received, you can begin to make tax payments electronically.

What flexibility is available within the EFTPS for payment options?

There are two primary ways to make payment under EFTPS - directly to EFTPS or through a financial institution. If you wish to make payments directly to EFTPS, the "ACH debit method" should be selected on the enrollment form. Deposits and payments are made using this method by instructing EFTPS to move funds from the business bank account to the Treasury's account on a date you designate. You can instruct EFTPS by either calling a toll-free number, and using the automated telephone system, or by using a PC to initiate the payment.

If you instead elect to make payments through a financial institution, the "ACH credit method" should be chosen on the enrollment form. This method works by using a payment system offered by the financial institution through which you instruct the institution to electronically move funds from your account to a Treasury account.

Although the ACH debit and the ACH credit methods are the primary payment methods for EFTPS, a taxpayer may also choose the Same Day Payment Method. You should contact your financial institution to determine if it can make a same day payment.

If I provide the IRS with access to my bank account, can it access my account for any other purposes?

It is important to note you retain total control of when a payment is made under EFTPS because you initiate the process in all instances. In addition, at no time does the government or any other party have access to your account from which the deposits are made. The only way to authorize deposits or payments from your account is through use of the PIN that is given to you upon enrollment.

Many businesses have recognized the convenience of voluntary participation in the IRS's EFTPS program. If you are interested in discussing whether your business would also benefit from this program, please contact the office for a consultation.

Q. Since our children are grown and now out on their own, my husband and I are considering selling our large home and purchasing a small townhouse. We have owned our home for years and have quite a lot of equity built up. How do we figure out how much our potential capital gain would be? Will we pay more in taxes because we are moving to a less expensive home?

If you are considering selling a home you've owned for years and have a lot of equity in - for example, you would like to move to a smaller place - you will want to figure out how much your potential capital gain will be on the sale. Moreover, perhaps you'd also like to know if you'll pay more taxes because you are moving to a less expensive home.

The homesale exclusion

First, you will not be penalized (in the form of recognizable capital gains) for buying a less expensive home that doesn't require that you reinvest all of your gain. Under Code Sec. 121, $500,000($250,000 for single individuals and married taxpayers filing separately) in gain from the sale of a principal residence is generally excluded from income. Remember, however, that under the Economic Recovery Act of 2008, periods of "nonqualifying use" will reduce the amount of gain you can exclude from income.

Determining basis

In order to determine your potential gain or loss from the sale, you will first need to know the basis of your personal residence. The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments

Original cost

How your home was acquired will need to be considered when determining its original cost basis.

Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.

Examples of some of the settlement fees and closing costs that will increase the original cost basis of your home are:

• Attorney's fees,
• Abstract fees,
• Charges for installing utility service,
• Transfer and stamp taxes,
• Title search fees,
• Surveys,
• Owner's title insurance, and
• Unreimbursed amounts the seller owes but you pay, such as back taxes or interest; recording or mortgage fees; charges for improvements or repairs, or selling commissions.

Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you. However, the basis for loss is the lesser of the donor's adjusted basis or the fair market value on the date you received the gift.

Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.

Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.

Improvements

If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.

An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements can not be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio.

Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs cannot be added to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.

Other basis adjustments

Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:

• Insurance reimbursements for casualty losses.
• Deductible casualty losses that aren't covered by insurance.
• Payments received for easement or right-of-way granted.
• Deferred gain(s) on previous home sales.
• Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.

Recordkeeping

In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale)

If you are considering selling your home, it pays to know in advance what the tax ramifications may be. If you need assistance determining the basis of your personal residence, please contact the office for more guidance.

Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

A. In order to accurately calculate the gain or loss realized on assets you sell, it is important that you keep track of the bases of all of your assets, including stock. However, when it comes to stock--especially lots of stock bought and sold at different times-- it may seem a bit tricky. Fortunately, the rules related to determining the basis of stock sold make the task more manageable.

In general, the basis of stock sold will be determined under one of the following methods: first-in, first-out (FIFO) or specific identification. However, securities held in mutual funds and received as a result as a corporate reorganization may be handled differently.

First-in, first-out (FIFO)

In general, if you buy identical shares of stock at different prices or on different dates and then you sell only part of the stock, your basis and holding period of the shares sold are determined on a first-in first-out (FIFO) basis, based upon the acquisition date of the securities. However, if specific shares sold are adequately identified by the delivery of certificates, by a broker having custody of them, or by a trustee or executor, the basis will be determined by the specific identification method (see below).

The acquisition date for purpose of applying the FIFO method follows the rules for holding period. For example, the acquisition date of securities received by gift takes into account the donor's holding period, and securities received in an estate distribution includes the holding period of the executor or trustee.

Margin accounts. If your shares are held in a margin account, they are considered sold in the order in which they were purchased, rather than the order in which they were placed in the account.

Stock splits or dividends. If you receive shares as a result of a stock split or tax-free stock dividend, they must be allocated among the original lots to which they relate, with the basis of the original shares allocated between the new shares and the old shares based on their fair market values.

Stock rights. If you acquire additional shares by exercising stock rights, your new shares are treated as a separate lot and your basis in them is equal to the amount paid plus the basis of the stock rights.

Multiple contracts. Shares acquired on the same day under several contracts entered into at different times to purchase stock when issued are deemed acquired for the FIFO rule in the same order as the contracts were entered into.

Specific identification

When you are able to identify the securities to be sold, and do so, FIFO will not apply to your basis allocation. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee (usually by CUSP number). Thus, if you have records showing the cost and holding period of securities represented by separate certificates, you can often better control the amount of gain or loss realized by selecting the certificates to be transferred. But be careful: delivery of the wrong certificates is binding, despite your intention to transfer securities from a different lot.

Example: You hold 1000 shares of IBM. You purchased 400 shares (actually 100 shares that split twice) in 2000 for $8,000 (net brokerage commissions). You bought 400 more shares in 2005 at $18,000; and 200 more in early 2007 for $16,000. You want to sell 300 shares now when its value is down to $50 per share. If you do not specify to your broker before the trade to sell the 200 shares purchased in 2007 and 100 shares from the 2005 lot, you will realize $9,000 in long term capital gains instead of $500 in long-term capital gain and a $6,000 short-term capital loss.

Mutual funds

If you own shares in a mutual fund, you may elect to determine the basis of stock sold or transferred from your accounts by using one of two average cost methods: either the double-category method or the single-category method. An election to use one of the average basis methods for mutual fund shares must be made on either a timely filed income tax return or the first late return for the first tax year to which the election is to apply. Different methods may be used for accounts in different regulated investment companies.

Securities received in reorganization

An exception to the FIFO rule applies to securities received in reorganization (such as a merger) and not adequately identified. These securities are given an average basis, computed by dividing the aggregate basis of the securities surrendered in the exchange by the number of shares received in the exchange. If securities in the same corporation are received in the exchange, however, they are divided into lots corresponding with those of the securities surrendered and the FIFO principle is applied, in the absence of adequate identification on a later disposition.

As illustrated in an example above, there can be negative tax effects from the misidentification of stock sold. If you are uncertain how to properly identify stock sold, please contact the office for further guidance.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

Keeping the family business in the family upon the death or retirement of the business owner is not as easy as one would think. In fact, almost 30% of all family businesses never successfully pass to the next generation. What many business owners do not know is that many problems can be avoided by developing a sound business succession plan in advance.

In the event of a business owner's demise or retirement, the absence of a good business succession plan can endanger the financial stability of his business as well as the financial security of his family. With no plan to follow, many families are forced to scramble to outsiders to provide capital and acquire management expertise.

Here are some ideas to consider when you decided to begin the process of developing your business' succession plan:

Start today. Succession planning for the family-owned business is particularly difficult because not only does the founder have to address his own mortality, but he must also address issues that are specific to the family-owned business such as sibling rivalry, marital situations, and other family interactions. For these and other reasons, succession planning is easy to put off. But do you and your family a favor by starting the process as soon as possible to ensure a smooth, stress-free transition from one generation to the next.

Look at succession as a process. In the ideal situation, management succession would not take place at any one time in response to an event such as the death, disability or retirement of the founder, but would be a gradual process implemented over several years. Successful succession planning should include the planning, selection and preparation of the next generation of managers; a transition in management responsibility; gradual decrease in the role of the previous managers; and finally discontinuation of any input by the previous managers.

Choose needs over desires. Your foremost consideration should be the needs of the business rather than the desires of family members. Determine what the goals of the business are and what individual has the leadership skills and drive to reach them. Consider bringing in competent outside advisors and/or mediators to resolve any conflicts that may arise as a result of the business decisions you must make.

Be honest. Be honest in your appraisal of each family member's strengths and weaknesses. Whomever you choose as your successor (or part of the next management team), it is critical that a plan is developed early enough so these individuals can benefit from your (and the existing management team's) experience and knowledge.

Other considerations

A business succession plan should not only address management succession, but transfer of ownership and estate planning issues as well. Buy-sell agreements, stock gifting, trusts, and wills all have their place in the succession process and should be discussed with your professional advisors for integration into the plan.

Developing a sound business succession plan is a big step towards ensuring that your successful family-owned business doesn't become just another statistic. Please contact the office for more information and a consultation regarding how you should proceed with your business' succession plan.

If you use your home computer for business purposes, knowing that you can deduct some or all of its costs can help ease the pain of the large initial and ongoing cash outlays. However, there are some tricky IRS rules that you should consider before taking - or forgoing - a deduction for home computer costs.

If you use your home computer for business purposes, knowing that you can deduct some or all of its costs can help ease the pain of the large initial and ongoing cash outlays. However, there are some tricky IRS rules that you should consider before taking - or forgoing - a deduction for home computer costs.

Although the cost of computers and peripheral equipment has dropped significantly over the past year, a tax deduction for all or part of the expense can still help lower the bottom-line price tag of this major purchase. But despite both the widespread use of computers and the temptation to somehow "write them off" on a tax return, the IRS has remained surprisingly quiet. Rather than release any direct guidance on the issue, the IRS has chosen to rely on old rules that were established before the recent computer revolution. As a result, the business use of your home computer will need to fall within these standard rules if you want to take any related deductions.

Business reason must be present

In order to claim a deduction for your home computer and any peripheral equipment, you will need to prove that the expense occurred in connection with an active business - just as you would for any other business expense. An active business for purposes of a business expense related to a home computer will usually arise from one of two types of business activities: as a self-employed sole proprietor of an independently-run profit-making business; or as an employee doing work from home. Deductions from both types of activities are handled differently on an individual's income tax return and there are separate conditions that must be met for either scenario.

Self-employed person. In order for you as a self-employed person to deduct computer-related costs on Schedule C - whether for a home-based computer or one in a separate business location - it is required that your expenses relate to a profit-motivated business versus a "hobby". In the eyes of the IRS, a business will be deemed a hobby if there is no profit motive and the "business" is half-heartedly pursued simply to write off items or achieve some other personal purpose. If your Schedule C business shows a net loss year after year, you may be considerably more likely to have the IRS audit your return to inspect whether your purported business is actually legitimate under the tax law.

Employee. A miscellaneous itemized deduction on Schedule A is allowed for computer costs that are directly related to the "job" of being an employee. In order to claim a deduction for computer-related expenses as an employee, you must show a legitimate reason related to your employment for regularly using a computer at home. The availability of a computer in the office, the ability for you to keep your job without the home computer, the lack of telecommuting policy at work, or the lack of proof that your computer is used regularly for office work will make it more difficult to convince the IRS that a legitimate business reason exists for the deduction.

Some taxpayers have succeeded in writing off the expense of a computer as an educational expense related to business. For you to succeed in this deduction, you must carefully document that the education is undertaken to maintain or improve skills required in your current business or employment, or to meet specific educational requirements set by your employer. Computer expenses related to education that qualifies you for a new trade or business is not deductible.

Note to employees: computer-related business expenses taken as a miscellaneous itemized deduction are deductible only to the extent that your total miscellaneous itemized deductions exceed 2 percent of your adjusted gross income. For many taxpayers, a good strategy is to "bunch" purchases of computer equipment all in one year so that more of the cost will rise above the 2 percent floor.

Other IRS considerations

Aside from applying the general rules discussed above for a for-profit business and miscellaneous itemized deductions to determine if you are able to deduct business-related computer costs, the IRS is likely to dust off other standard tax principles in evaluating whether your computer expense write off is acceptable:

If you have any questions regarding writing off the business-related costs associated with your home computer, please contact the office for a consultation.

The nondiscrimination rules associated with 401(k) plans can make it difficult for key employees to fully reap the benefits of these plans. However, a very useful planning technique may provide greater benefits to highly compensated employees who participate in the company 401(k) plan.

The nondiscrimination rules associated with 401(k) plans can make it difficult for key employees to fully reap the benefits of these plans. However, the IRS recently gave its approval to a very useful planning technique that may provide greater benefits to highly compensated employees who participate in the company 401(k) plan.

A perennial problem for employers sponsoring 401(k) plans is to pass the special nondiscrimination tests each year without the highly compensated employees needing to take previously-made elective deferrals back into income. While there are a number of ways that 401(k) plan sponsors can address this problem, some of these employers also sponsor a nonqualified plan that permits highly compensated employees to defer greater amounts of salary from immediate income than the 401(k) plan permits.

401(k) Wraparound

The "401(k) wraparound" planning technique is an arrangement that has been employed by some tax professionals for their clients who sponsor both a 401(k) plan and a nonqualified plan to provide HCEs with the ability to maximize the benefits offered when these two plans are paired (or coordinated to operate in tandem with respect to the HCEs).

How the Wraparound Works

The arrangement works with a 401(k) and a nonqualified plan that have almost identical provisions. Here's how it works:

• A select group of HCEs that the employer chooses for participation in the nonqualified plan each make an election in Year 1 to defer a certain amount of their Year 2 compensation to the nonqualified plan.

• Early in Year 3, the employer performs the special nondiscrimination tests applicable to 401(k) plans. At that time, a determination is made concerning how much the HCE participating in the nonqualified plan could have deferred to the 401(k) plan for Year 2 and still permit the employer to pass the nondiscrimination tests.

• That amount of the HCE's Year 2 deferral to the nonqualified plan is then transferred from the nonqualified plan to the 401(k) plan as a Year 2 deferral (the HCE also had to have made an election to make this transfer at the same time as his or her other Year 1 deferral election).

• If no amount of the HCE's Year 2 deferral can be transferred to the 401(k) plan, the entire amount deferred for Year 2 remains in the nonqualified plan.

Employers who use this technique can avoid the awkward administrative hassles that accompany the refund of excess contributions to HCEs when the plan does not initially pass the 401(k) nondiscrimination tests. In addition, the arrangement also permits HCEs to defer as much as possible in a safer 401(k) plan rather than in an unfunded nonqualified plan.

It is clear that a 401(k) wraparound arrangement may provide additional benefits to the key employees of certain companies. However, since the tax implications of such an arrangement to both a company and its key employees should be carefully considered before any implementation is initiated, please contact the office for further information or a consultation regarding how this type of arrangement can benefit your company.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break. The maximum amount of gain from the sale or exchange of a principal residence that may be excluded from income is generally $250,000 ($500,000 for joint filers).

Unfortunately, the $500,000/$250,000 exclusion has a few traps, including a "loophole" closer that reduces the homesale exclusion for periods of "nonqualifying use." Careful planning, however, can alleviate many of them. Here is a review of the more prominent problems that homeowners may experience with the homesale exclusion and some suggestions on how you might avoid them:

Reduced homesale exclusion. The Housing Assistance Tax Act of 2008 modifies the exclusion of gain from the sale of a principal residence, providing that gain from the sale of principal residence will no longer be excluded from income for periods that the home was not used as a principal residence. For example, if you used the residence as a vacation home prior to using it as a principal residence. These periods are referred to as "nonqualifying use." This income inclusion rule applies to home sales after December 31, 2008 and is based on nonqualified use periods beginning on or after January 1, 2009, under a generous transition rule. A specific formula is used to determine the amount of gain allocated to nonqualifying use periods.

Use and ownership. Moreover, in order to qualify for the $250,000/$500,000 exclusion, your home must be used and owned by you as your principal residence for at least 2 out of the last 5 years of ownership before sale. Moving into a new house early, or delaying the move, may cost you the right to exclude any and all gain on the home sale from tax.

Incapacitated taxpayers. If you become physically or mentally incapable of self-care, the rules provide that you are deemed to use a residence as a principal residence during the time in which you own the residence and reside in a licensed care facility (e.g., a nursing home), as long as at least a one-year period of use (under the regular rules) is already met. Moving in with an adult child, even if professional health care workers are hired, will not lower the use time period to one year since care is not in a "licensed care facility." In addition, some "assisted-living" arrangements may not qualify as well.

Pro-rata sales. Under an exception, a sale of a residence more frequently than once every two years is allowed, with a pro-rata allocation of the $500,000/$250,000 exclusion based on time, if the sale is by reason of a change in place of employment, health, or other unforeseen circumstances to be specified under pending IRS rules. Needless to say, it is very important that you make certain that you take steps to make sure that you qualify for this exception, because no tax break is otherwise allowed. For example, health in this circumstance does not require moving into a licensed care facility, but the extent of the health reason for moving must be substantiated.

Tax basis. Under the old rules, you were advised to keep receipts of any capital improvements made to your house so that the cost basis of your residence, for purposes of determining the amount of gain, may be computed properly. In a rapidly appreciating real estate market, you should continue to keep these receipts. Death or divorce may unexpectedly reduce the $500,000 exclusion of gain for joint returns to the $250,000 level reserved for single filers. Even if the $500,000 level is obtained, if you have held your home for years, you may find that the exclusion may fall short of covering all the gain realized unless receipts for improvements are added to provide for an increased basis when making this computation.

Some gain may be taxed. Even if you move into a new house that costs more than the selling price of the old home, a tax on gain will be due (usually 20%) to the extent the gain exceeds the $500,000/$250,000 exclusion. Under the old rules, no gain would have been due.

Home office deduction. The home office deduction may have a significant impact on your home sale exclusion. The gain on the portion of the home that has been written off for depreciation, utilities and other costs as an office at home may not be excluded upon the sale of the residence. One way around this trap is to cease home office use of the residence sufficiently before the sale to comply with the rule that all gain (except attributable to recaptured home office depreciation) is excluded to the extent the taxpayer has not used a home office for two out of the five years prior to sale.

Vacation homes. As mentioned, in order to qualify for the $250,000/$500,000 exclusion, the home must be used and owned by you or your spouse (in the case of a joint return) as your principal residence for at least 2 out of the last 5 years of ownership before sale. Because of this rule, some vacation homeowners who have seen their resort properties increase in value over the years are moving into these homes when they retire and living in them for the 2 years necessary before selling in order to take full advantage of the gain exclusion. For example, doing this on a vacation home that has increased $200,000 in value over the years can save you $40,000 in capital gains tax. However, keep in mind the reduced homesale exclusion for periods of nonqualifying use.

As you can see, there is more to the sale of residence gain exclusion than meets the eye. Before you make any decisions regarding buying or selling any real property, please consider contacting the office for additional information and guidance.

An important IRS ruling shows how the use of trusts to hold personal assets can sometimes backfire if all tax factors are not considered. This ruling also drives home the fact that tax rules may change after assets have already been locked into a trust for a long period of time, making trusts sometimes inflexible in dealing with changing tax opportunities.

An important IRS ruling shows how the use of trusts to hold personal assets can sometimes backfire if all tax factors are not considered. This ruling also drives home the fact that tax rules may change after assets have already been locked into a trust for a long period of time, making trusts sometimes inflexible in dealing with changing tax opportunities.

In the ruling, the IRS determined that the sale of a home, in which an individual resided for many years but to which title was legally held by a family trust, did not qualify for the Tax Code's new capital gains exclusion on the sale of the house. The exclusion permits those who sell their personal residence anytime after May 6, 1997, to exclude up to $250,000 in capital gains ($500,000 for those filing joint returns). The IRS concluded that the individual's inability to control the assets of the trust prevented her from being deemed an owner of the trust for tax purposes.

Family trusts: A common estate planning tool

As part of an estate plan, an individual may place assets, such as a home, into a trust and name an income beneficiary or beneficiaries. The income beneficiary has rights to any income from the trust and may even have use of the assets but has no control to sell, mortgage or dispose of the assets of the trust. Only the trust's designated trustees have the power to make decisions related to the encumbrance or disposal of the trust's assets. When the asset is a personal residence, this type of trust allows for preferential estate tax treatment while the income beneficiary has the ability to continue living in the home.

IRS: "No Capital Gain Exclusion"

The IRS's stance is that, even though an individual may have enjoyed the use of a house for many years, if the house was in a family trust, ownership of the house would always be vested in the trust. Under the federal tax rules, a beneficiary of a trust may be deemed an owner of the trust if he or she has the power to reach and to take all of the trust's assets for his or her use. When a beneficiary is treated as an owner, a sale by the trust is equivalent to a sale by the beneficiary. However, when an income beneficiary has no control over the fate of the assets of the trust, the IRS has found that the beneficiary is not the owner of the trust and therefore would not qualify for the Tax Code's capital gains exclusion upon the sale of a residence held in such trust.

Planning for the smooth transition of your assets to your family upon death can be complicated and can have serious tax ramifications. Please contact the office for additional guidance in this area.

It can happen to any busy small business owner with inadequate tax assistance - depreciation deductions lost to errors or oversight. While amending and refiling your tax returns can help you recover depreciation lost in recent years, there is another remedy available that will allow a current deduction for depreciation going back to even "closed" tax years.

It can happen to any busy small business owner with inadequate tax assistance - depreciation deductions lost to errors or oversight. While amending and refiling your tax returns can help you recover depreciation lost in recent years, there is another remedy available that will allow a current deduction for depreciation going back to even "closed" tax years.

The tax law says that when you go to sell an asset, you must reduce the basis of the asset by the depreciation "allowed or allowable." For those companies that inadvertently missed out on the full depreciable deduction allowable on its assets, they get hit twice - once by the lost depreciation deduction and then again when they go to sell the asset and the basis is reduced for depreciation "allowable" but never claimed. Fortunately, the IRS does provide some relief. There are two courses of action to choose from to claim that "lost" depreciation:

Amend your returns. If your failure to deduct the full amount of depreciation allowed by law is limited to the prior tax year, your best bet is to simply file an amended tax return for that year. The error in computing depreciation must have resulted from:

If eligible, the amended return must be filed by the later of 3 years from the date you filed your original return for the year in which you did not deduct the correct amount; or 2 years from the time you paid the tax for that year.

Change your Accounting Method. If your failure to deduct the full amount of depreciation allowed by law extends beyond the prior year, you have in effect adopted a new method of accounting and must apply with the IRS to change your accounting method in order to claim the depreciation not deducted. In order to claim depreciation allowable but never claimed in prior years as a current tax deduction, you will need to get IRS approval for your change in accounting method.

To get IRS approval, you will need to file Form 3115, Application for Change in Accounting Method. Although this form can be quite a task to complete, the IRS does grant automatic approval under certain circumstances as long as you are making a change to an allowable method. Keep in mind that you may not be eligible for automatic approval if you are being audited or had certain recent requests for change in accounting method.

If you are concerned that you may have missed depreciation deductions due to you in the past, please contact the office for a review of your prior years' returns.