Tax Tips and News
Alternative Minimum Tax ‐ Will it affect your 2010 income tax return?
Congress has failed to act this year to
change the tax code concerning Alternative
Minimum Tax (AMT) for tax years after
2009. For the past few years, Congress has
passed legislation to temporarily extend on
a year‐by‐year basis an exemption that was
increased significantly from the early 2000’s.
This could easily mean a 2010 tax
increase of $2‐3,000 for some taxpayers.
One study predicts that nearly every
married taxpayer with income between
$100,000 and $500,000 will owe AMT in
2010.
AMT is a flat tax that originated in the late
1960’s to prevent taxpayers with large
incomes from not paying any tax. Certain
items are added back into a taxpayer’s
income and subject to a flat tax of 26 or 28
percent. Tax rates were cut to very low
levels almost ten years ago and the AMT
Exemption was increased to shield taxpayers
from AMT. In 2010 this AMT
exemption has dropped approximately
$26,000 for married filing jointly and
$13,000 for single taxpayers.
One area that makes a taxpayer more likely
to owe AMT is deducting higher amounts of
state income or real estate taxes. Also,
larger families are more exposed to AMT
due to the number of exemptions. Married
taxpayers are more likely than single
taxpayers to be subject to AMT.
From our analysis of the AMT problem, we
have not been able to find a solution to help
taxpayers. The only way we have been able
to reduce AMT is to have a taxpayer’s
income decline significantly. This is not a
viable option.
We have developed a quick test to help
identify taxpayers that may be subject to
AMT, assuming that the taxpayer’s 2010 tax
situation is identical to their 2009 tax
return. If you are interested in finding out
more about this, please contact our office.
There is not a charge to run the test.
Please note that this test is not reliable if
there are significant changes in your
situation.
If you desire a more complete analysis of
your AMT situation, or if the quick test
cannot be performed, we can utilize our
tax planning software for you. This will
require you to give us information about
your 2010 income and deductions. Our fee
for this starts at $150 and increases if we are
requested to run more scenarios or explain
the results more thoroughly.
Please note that your employer’s tax
withholding or your estimated tax payments
have NOT taken into account the AMT
liability. You will owe the extra tax when
you file your 2010 tax return in early 2011.
Contact us now so we can give you the
potential estimated amount you might
owe this fall instead of surprising you
on April 15th.
Helping You Make Better Business Decisions
As a business owner, it’s important to
understand how your current financial condition
will affect your growth and profitability. As a
proactive effort to the current economic
conditions, we’ve developed a method for
analyzing your financial metrics in contrast to
companies similar to your industry. Private
Company Industry Data reports compare your
business’ liquidity, profitability, and sales with
trends of the same type of businesses. This will
allow us to determine where and how we can save
you money. Some questions you may or should be
asking yourself:
- Will cash‐flow be steady all year?
- Am I budgeting properly to cover a decrease in revenue?
- Who do I turn to for financial advice? Are they knowledgeable in my industry?
- Can I keep my business afloat?
By analyzing your information we can provide a Financial
Statement Analysis which will show a business’ liquidity
or ability to meet obligations, profit and profit margin
trend, growth of sales, borrowing and debt management,
assets and utilization of those assets, and employee hiring
and management.
We will help you to make strategic, proactive decisions,
which will directly affect your bottom line. We will give
you detailed analysis of how you compare to your peers
using industry‐specific metrics. This will allow you to
address areas of weakness and improve the overall health
of your business.
We also have the ability to generate Business Projections
reports which can allow us to project or forecast sales
growth, profit and profit margins, overhead, accounts
receivable, accounts payable, and inventory on a monthly,
quarterly, or annual basis. We can also provide an
informal value of your business today and in the future
based on trends, scenarios and projections.
By scheduling an annual Business Checkup, together we
can determine your business’ strengths and weaknesses
and devise a plan for improvement. Our Business
Checkup will review the five most critical metrics for
success; Liquidity, Profits & Profit Margin, Sales,
Borrowing and Assets.
We can also discuss how your business’ performance
stacks up to your industry peers. We invite you to sit
down with us to discuss your financial health. Provide us
a copy of your current financial statements and we’ll
design a report that will tell you how well your business is
doing, and provide specific ways to improve.
Healthcare & HIRE Bills
In March 2010, President Obama signed two
bills that give important credits to business
owners. The credits offered in the
Healthcare bill will be discussed first
followed by the credits offered in the HIRE
bill.
Healthcare Credit
The Healthcare credit is specifically targeted
to help small businesses that primarily
employ low and moderate‐income workers.
To be eligible for the credit, business owners
have to pay at least half the cost of the
health coverage for their employees in 2010.
For tax years 2010 to 2013, the maximum
credit is 35 percent of premiums paid by
eligible small business employers.
The maximum credit goes to smaller
employers –– those with 10 or fewer fulltime
equivalent (FTE) employees –– paying
annual average wages of $25,000 or less.
Because the eligibility rules are based in part
on the number of FTEs, not the number of
employees, businesses that use part‐time
help may qualify even if they employ more
than 25 individuals.
The credit is completely phased out for
employers that have 25 FTEs or more or that
pay average wages of $50,000 per year or
more.
Eligible small businesses can claim the
credit as part of the general business credit
starting with the 2010 income tax return
they file in 2011.
HIRE Credit
Employers who hire unemployed workers
this year (after February 3, 2010 and before
January 1, 2011) may qualify for a 6.2‐percent
payroll tax incentive, in effect exempting
them from the employers share of Social
Security taxes on wages paid to these
workers after the date of enactment through
the end of 2010. This reduced tax
withholding will have no effect on the
employee’s future Social Security benefits,
and employers would still need to withhold
the employee’s 6.2‐percent share of Social
Security taxes, as well as income taxes.
Medicare taxes are not affected.
New hires filling existing positions also
qualify, but only if the workers replaced left
voluntarily or were terminated with cause.
Family members and other relatives do not
qualify.
In addition, the new law requires that the
employer get a W‐11 form from each eligible
new hire certifying that he or she worked
fewer than a total of 40 hours during the 60‐
day period, prior to the hire date.
Employers claim the payroll tax benefit
either on the form 941 or 944, depending on
their filing requirements with the IRS.
Eligible employers will be able to claim the
new tax incentive on their revised
employment tax form for the second quarter
of 2010.
In addition, for each new worker retained
for at least a year, businesses may claim an
additional general business tax credit, up to
$1,000 per worker, when they file their 2011
income tax returns.
Three Key Decision Factors for IRA Conversions
It’s an overall belief that most investors
should consider including a Roth IRA as
part of their overall retirement savings
plan. If you have already started saving
in another retirement account,
converting to a Roth IRA may help you
minimize taxes and maximize your
retirement savings. The decision to
convert should be made with thoughtful
consideration and a consultation with
Kruger & Clary before you make a final
decision.
Consider these three key factors to help
you make your decision:
- Taxes - If you anticipate a higher
tax rate in retirement or plan to
leave your savings to your heirs,
you may want to consider a Roth
conversion. You may pay lower
taxes now with a conversion than if
you wait to pay taxes in retirement.
- Time - Generally, if you have 10
years or more before you begin to
take withdrawals, a conversion is
likely to benefit you. Some
investors with a shorter time
horizon may also benefit based on
other considerations.
- Cost - Can you cover the cost of
the taxes you'll need to pay with
cash or other non-retirement
savings? If not, it might not be
advantageous to convert.
The rules are changing in January 2010
Before January, single investors and
married investors filing jointly with
modified adjusted gross incomes
greater than or equal to $100,000 (as
well as married investors filing
separately) were ineligible for a Roth
conversion. In 2010, the conversion
income limit will be removed. Every
investor will be able to convert to a
Roth IRA (the annual contribution
income restrictions will still apply).
Investors who convert in 2010 have the
option to spread their tax liability by
including half of the conversion in their
2011 tax return and half in their 2012
tax return. In subsequent years, they
will have to pay all taxes the year they convert
The Importance of Buy - Sell Agreements
Any business with two or more partners or shareholders should create a buy-sell agreement. Despite their name, buy-sell agreements are probably better titled buyout agreements, as they establish the terms and conditions of a future sale between owners. A buy-sell agreement specifies events that would trigger the buyout of one owner's portion of the business, such as an owner's death, disability, retirement or bankruptcy. A buy-sell agreement also details the method of establishing a purchase price, terms of payment, types of allowable (and prohibited) ownership transfers and many other crucial items.
Why are these agreements so important? Because without a buy-sell agreement in place, a change in ownership could be devastating to a business. If one owner files for bankruptcy, the business could get tied up in bankruptcy court. If an owner dies suddenly, the remaining partners could wind up with an unsuitable replacement partner (such as the deceased owner's relative). Or if an owner wishes to retire, disputes may arise between owners as to a fair purchase price and ideal timeline for such a buyout. Addressing these types of scenarios before they happen will help you avoid unnecessary headaches and legal issues and ensure a smooth transition of ownership.
There are two common types of buy-sell agreements, both which are activated by a partner's death or disability and typically use insurance to fund the purchase of ownership interests. In a cross purchase plan, each business owner buys a life insurance policy on the other owners. That way, if an owner dies, the surviving owners will use the life insurance proceeds to purchase the deceased owner's share of the business. In a stock redemption plan, the business agrees to purchase an owner's shares upon their death with the proceeds from the life insurance policy that the company owns on the shareholder's life. Whatever buy-sell agreement you choose, be sure that it adequately covers a wide range of events, not just death or disability.
A good buy-sell agreement will help ensure continuity of your business and most importantly, give you as a business owner peace of mind. If you would like to learn more about creating the right type of buy-sell agreement for your business, contact Kruger & Clary today.
Other Newsletters
September 2010 Newsletter
June 2010 Newsletter
January 2010 Newsletter
October 2009 Newsletter
June 2009 Newsletter
January 2009 Newsletter
September 2008 Newsletter
June 2008 Newsletter
January 2008 Newsletter
September 2007 Newsletter
June 2007 Newsletter
January 2007 Newsletter
September 2006 Newsletter
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August 2005 Newsletter
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