Health Savings Accounts

Dear Client:

The IRS has issued a notice providing both employers and employees with a set of formal questions and answers on Health Savings Accounts (HSAs). Contributions to HSAs are deductible by employees in determining adjusted gross income, which effectively allows taxpayers with high-deductible health insurance to make contributions on a pre-tax basis to cover health care costs.

The guidance includes over 40 frequently asked questions and answers, grouped into categories including eligible individual, HDHPs, HSA contributions, HSA distributions, prohibited transactions, and establishing an HSA.

[The following paragraph applies to individuals who participate in a health savings account. Delete if not applicable.]

As an individual who is eligible to participate in a health saving account or has previously reported a deduction for a HSA, you may wish to consider utilizing this tax-efficient plan for medical expenses. Please contact us at your earliest opportunity if you would like more information about health savings accounts, your eligibility to participate and how you can get the maximum tax benefit from deductible contributions.

[The following paragraph applies to employers who provide a health savings account to their employees. Delete if not applicable.]

As an employer, you are not required to make contributions to employee HSAs. However, if you make a contribution to any employee’s HSA, you must make comparable contributions to all comparable participating employee HSAs. Other rules apply as well. Please contact us if you would like additional information on this development, or if you would like us to perform an analysis to determine whether your current employee benefit plan is in compliance.

Sincerely yours,

Education Tax Credits

Education Tax Credits (Hope and Lifetime Learning Credits)

For tax years 2009 and 2010, there is a new education credit called the American opportunity tax credit (AOC).

This is a modification of the Hope Credit.

  • The maximum amount of the AOC is $2,500 per student. The credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). Exception. For 2009, if you claim a Hope credit for a student who attended a school in a Midwestern disaster area, you can choose to figure the amount of the credit using the previous rules. However, you must use the previous rules in figuring the credit for all students for which you claim the credit.
  • The credit can be claimed for the first four years of post-secondary education. Previously the credit could be claimed for only the first two years of post-secondary education.
  • Generally, 40% of the AOC is now a refundable credit for most taxpayers, which means that you can receive up to $1,000 even if you owe no taxes.
  • The term “qualified tuition and related expenses” has been expanded to include expenditures for “course materials.” For this purpose, the term “course materials” means books, supplies, and equipment needed for a course of study whether or not the materials must be purchased from the educational institution as a condition of enrollment or attendance.

Income limits for Hope and lifetime learning credit reduction increased. For 2009, the amount of your Hope or lifetime learning credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $50,000 and $60,000 ($100,000 and $120,000 if you file a joint return). You cannot claim a Hope or lifetime learning credit if your modified AGI is $60,000 or more ($120,000 or more if you file a joint return).

Eligibility for the Hope credit. For 2009, you can claim a Hope credit only if at least one eligible student is

attending an eligible educational institution in a Midwestern disaster area and you do not claim an American opportunity credit for any other student in the same year.

Holding Period for Capital Assets

Re: Holding Period for Capital Assets – A LETTER IN RESPONSE


 Dear Client:


This letter is intended to give you a better understanding of the importance of holding period to your investment strategy, as well as how to measure holding period for federal income tax purposes.


Holding period makes the greatest difference in determining whether an asset is entitled to short-term or long-term capital gain treatment. At today’s rates, that can be the difference between being taxed at the highest ordinary income tax rate of 35% and the long-term capital gain rate of 15%. Although an investment strategy should not postpone good economic decisions in order to benefit from the 15% long-term capital gain rate, it should consider postponing action when a “sell” decision is made just short of the one year and a day holding period necessary for long-term capital gain. By the same token, however, a decision to sell an asset at a loss may involve timing the sale prior to the one year and one day holding period, to take advantage of short-term capital loss treatment.


The basic rules for holding period include the following:


Long- and short-term capital gain.  In general, the capital gains rates of 15% (or 5%, reserved for those in the 10% and 15% regular income tax bracket) applies for the sale of capital assets. In general, this includes all investment assets, and for individuals it includes assets held for business income purposes. Assets must be held for one year and one day to be entitled to long-term capital gain treatment. That requires keeping track of exactly when a property is purchased (when the asset is sold, not the date the sales contract is executed; for stocks, it is the trade date that counts, not the settlement date).


Determining holding period.  In determining how long an asset was held, the taxpayer begins counting on the date after the day the property was acquired. The same date of each following month is the beginning of a new month regardless of the number of days in the preceding month. For example, if property was acquired on February 1, 2003, the taxpayer’s holding period is considered to have begun on February 2, 2003. The date the asset is disposed of is part of the holding period.


5-year holding period eliminated.  The 2003 tax legislation has eliminated a special rate that had applied to assets held for more than five years. That rate was 8 percent for those in the 10 or 15 percent tax brackets and 18 percent for those in the higher brackets. Those in the former category had the 8 percent rate available for tax years 2001 and 2002. For the latter group, the rate would only have applied for tax years after 2005. In order to qualify for the 18 percent rate on assets held before 2001, however, a taxpayer had to have made a “deemed sale election,” on which appreciation up to 2001 was taxed immediately. Since that “deemed sale election” is now useless, any taxpayer who made a “deemed sale election” should file an amended return immediately.


Wash sales.  Where there has been a wash sale of securities, the holding period of the securities acquired includes the period for which the taxpayer held those securities on which the loss was not deductible.


Options.  In determining whether a capital gain on stock is long-term or short-term, the holding period begins on the date after the option is exercised, not the date the option is granted.


“Carryover” holding period.  In determining the holding period for long-term capital gain and loss purposes, the holding period is “tacked on” to another person’s holding period in the case of gifts or property received in a divorce. Additional rules when business assets are distributed to owners or partners may also apply.


If you have any further questions in regard to how tax holding period rules may apply to your particular situation, please do not hesitate to call.


Sincerely yours,

Like-Kind Exchanges


Dear Client:

This letter is in reply to your questions regarding the federal income tax consequences of a “like-kind” exchange. The principal advantage of a like-kind exchange is that taxable gain is not triggered at the time of an exchange but, instead, that gain is deferred and added to the gain that will eventually be taxed upon the sale or other disposition of the exchanged property. Alas, from such a simple principal, however, comes a set of federal income tax rules that will make your head spin.

Deferred exchange. If the exchange of properties is not simultaneous, the property to be received must be identified within 45 days after the date the relinquished property is transferred. In addition, the identified property must be received within 180 days after the date of transfer or the extended due date for the return for the tax year in which the transfer occurred, whichever date is earlier.

Several other potential pitfalls may threaten to derail deferred exchanges (for example, failure to adhere to certain time limits and/or meet qualified intermediary requirements). Our office can help you avoid these pitfalls.

Safe harbors in deferred exchange. In a deferred exchange, the “seller” cannot actually or constructively receive money or other property for the relinquished property before the replacement property is received. To protect a seller who has given up his property but has received nothing in return except a promise to acquire replacement property in the future, several safe harbors in particular have been utilized by practitioners to prevent the transaction from being treated as a sale. The “buyer” can deposit cash into an escrow account or provide a letter of credit or third-party guarantee. Alternatively, the seller can transfer his property to a qualified intermediary (defined in Treasury regulations). A qualified intermediary will acquire the replacement property with funds furnished by the buyer and then transfer the relinquished property to the buyer and the replacement property to the seller.

Contribution to another entity. The transfer of replacement property to an entity may be desired for nontax purposes but could be viewed as violating the investment or trade or business use requirement, thereby jeopardizing Code Sec. 1031 treatment. For example, the IRS held in Rev. Rul. 75-292, that replacement property contributed to a corporation for stock shortly after an exchange was not a continuation of the real property investment. However, the Tax Court distinguished Rev. Rul. 75-292 in Magneson v. Commr. , when it allowed an immediate contribution of replacement property to a partnership.

The Tax Court in Mason v. Commr. (1988) also recognized a nontaxable exchange when a partnership first distributed property to its partners before the exchange. Since not all of the partners desired like-kind treatment, they were free to make their own arrangement to recognize or not to recognize gain. Limited liability companies (LLCs) with at least two members are similarly treated.

Recent ruling. The IRS in a recent Letter Ruling held that the conversion of two LLCs treated as partnerships into limited partnerships did not result in termination of either LLC under Internal Revenue Code Section 708 and the respective limited partnerships were considered a continuation of the respective LLCs. Furthermore, the partnerships were treated as both the transferors of the relinquished properties and the transferees of the replacement properties.

In this latest ruling, the taxpayers intended to exchange hotels in one state for resort hotels in another state through a qualified intermediary. Each LLC was to be liquidated, with the assets transferred to the new limited partnership. Following the formation of partnerships and on or before 180 days following the transfer of the relinquished property to the qualified intermediary, the qualified intermediary would transfer the replacement property to the partnerships. The stated business purpose for the formation of the partnerships was to satisfy the requirements of potential lenders that the acquiring entities of the replacement properties be separate and apart from the owners of the relinquished properties as a safeguard against any liabilities carrying over to the replacement properties.

Vehicles. In 2009, in a Letter Ruling, the IRS determined that cars, light-duty trucks, and cross-over vehicles qualify as like-kind business property that can be exchanged tax-free under Code Sec. 1031. The IRS concluded that the vehicles are like-kind even though they are in different asset classes under the depreciation rules.

We hope that this letter gives you an understanding of the many variables that should be considered before a “like-kind” exchange is undertaken in place of a contemplated ordinary sale. Please call to discuss how these rules may interrelate with your specific circumstances and how we can achieve the most advantageous results for you.

Sincerely yours,

10 Tax Tips for Home Sellers

10 Tax Tips for Home Sellers

  1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
  2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
  3. You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
  4. If you can exclude all of the gain, you do not need to report the sale on your tax return.
  5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
  6. You cannot deduct a loss from the sale of your main home.
  7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.
  8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
  9. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

Unemployment & Taxes

Unemployment & Taxes

Unemployment and Taxes

  • Unemployment compensation generally includes any amounts received under the unemployment compensation laws of the United States or of a specific state. It includes state unemployment insurance benefits, railroad unemployment compensation benefits and benefits paid to you by a state or the District of Columbia from the Federal Unemployment Trust Fund. It does not include worker’s compensation.
  • Normally, unemployment benefits are taxable; however, under the Recovery Act, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their federal tax return.
  • For a married couple, if each spouse received unemployment compensation then each is eligible to exclude the first $2,400 of benefits.
  • You should receive a Form 1099-G, Certain Government Payments, which shows the total unemployment compensation paid to you in 2009 in box 1.
  • You must subtract $2,400 from the amount in box 1 of Form 1099-G to figure how much of your unemployment compensation is taxable and must be reported on your federal tax return. Do not enter less than zero.


Education Credits and Deductions

Education Credits and Deductions


As a taxpayer with higher education costs, you should be aware of the many tax benefits that are available to you. Generally, educational assistance such as scholarship, fellowship, or employer-provided educational benefits are excludable from income. For education costs not covered by educational assistance, tax benefits include the Hope scholarship credit (also known as the American Opportunity credit for 2009 and 2010) and the lifetime learning credit. Alternatively, you may have the option of deducting qualified tuition and fees expenses “above the line.” These credits and deductions are coordinated with the exclusion for distributions from education savings plans, such as, Coverdell Savings Accounts and qualified tuition programs. For taxpayers who take out a loan to pay for their education, a deduction is available for the student loan interest.


The amount of the American Opportunity tax credit is computed as 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of such expenses, for a total maximum credit of $2,500. The lifetime learning credit is generally available for 20 percent of education expenses up to $10,000. For taxpayers who do not itemize, an above-the-line higher education tuition deduction can be claimed in 2009 for up to $4,000.


Each education credit and the deduction have adjusted-gross-income phase out limitations. In addition the education credits are coordinated with the deduction and Coverdell Savings Accounts and qualified tuition programs so that taxpayers cannot realize duplicate tax benefits for the same dollars of education costs. Because of the variety of tax benefits and the variations as to eligibility and the definition of qualifying education expense, some or all of the benefits may apply to you. Every taxpayer should review their tax plan in order to take maximum advantage of the tax savings for education.


For instance, a taxpayer generally should elect the Hope scholarship credit rather than the exclusion from income for distributions from a Coverdell ESA. However, a taxpayer may be better off electing the exclusion in situations in which the student incurs relatively lower tuition and fees and higher expenses of other kinds (such as expenses that qualify for the exclusion, but not for the credits). Also, because the credits are phased out when a taxpayer’s modified adjusted gross income exceeds a specific level, it may be more advantageous to forego the exemption for a dependent student and have the student claim the education credit on their own return.


Determining the best alternative for you and your dependents requires an analysis of your expected costs, resources, and income. We can advise you on the best course of action. Please call our office at your earliest convenience.

Charitable Contributions & Taxes

Charitable Contributions & Taxes


Cash contributions.  Congress has tightened the rules for cash contributions. In order to take a deduction for charitable contributions of cash, check or other monetary gift — no matter what the amount — you must provide a bank record or a written communication from the charity indicating the amount of the contribution, the date the contribution was made, and the name of the charity. Self-created log books will not suffice.

A cash-basis taxpayer generally takes a deduction when cash or property is actually paid, regardless of when a pledge is made. Payment by check is considered a payment. If the check is mailed, the payment is made at the time of mailing, even if the check is received in the following year, as long as the check is honored in the routine course of business. However, if the taxpayer post-dates the check to 2008, if the check bounces, or if the recipient holds the check because the account lacks sufficient funds, no payment has been made. If the recipient delays but ultimately cashes the check, and the date of delivery is not disputed, the payment dates back to the time the check is delivered or mailed.

Payment by a credit card is also considered a payment. The IRS treats the transaction as a cash equivalent. In effect, the taxpayer has borrowed funds from the bank issuing the card and has paid the seller for goods or services. Likewise, payment with a debit card is treated as a payment when the sale is completed, not when funds are later deducted from the purchaser’s account.

Household goods and clothing.  Just like the rules for cash gifts, the rules for deducting donations of clothing and household items have also been tightened. In order to take a deduction for household goods and clothing, the clothing must be in at least “good” condition, which is undefined, however. The amount of the charitable contribution is based on the fair market value of the clothing or household item. Household items must also be in good or better condition. Ensure that your donations of furniture, pots and pans, dinnerware, sheets and blankets, home furnishings, electronics, appliances, and similar items are not broken or in disrepair. You must obtain a receipt from the charity, showing the name of the charitable organization, the date and location of the gift and a detailed description of the property contributed.

Moreover, gifts of $250 or more must be substantiated by a contemporaneous written acknowledgment from the charity containing a description of the contribution, whether you received any goods or services in consideration for the contribution, and a good faith estimate of the value of any goods or services. If the claimed deduction exceeds $500, donors must include Form 8283, Noncash Charitable Contributions, with their return. Special rules apply for deductions of $5,000 or more. Our office can help navigate you through the various rules.

Contributions of automobiles.  There are special rules that apply to donations of motor vehicles to charities. For instance, if you want to donate your car to charity (or a plane or boat) with a claimed value of more than $500, your charitable deduction amount will depend on the charity’s use of the vehicle. You can deduct the full fair market value (FMV) of the vehicle if the charity actually uses the vehicle to substantially further its regularly conducted charitable activities and the use is significant. Alternatively, you can deduct the full FMV if you have made a material improvement such as a major repair that improves the vehicle’s condition in a way that increases its value. Otherwise, your contribution will be valued at its “auction price,” which is typically quite low.

Contributions of appreciated capital gain property.  The deduction for contributions of appreciated capital gain property can be quite complex. Generally, contributions of appreciated capital gain property to a qualified charitable organization are subject to a 30 percent of adjusted gross income ceiling, unless a specific election is made to reduce the deductible amount of the contribution. This election will limit your deduction to the basis of the contributed property.

Contributions from an IRA.  The deductible amount of an individual’s charitable contributions made during a tax year generally may not exceed 50-percent of the taxpayer’s “contribution base” (basically, a modified adjusted gross income amount). Certain distributions made directly from an IRA to a charity before 2010, however, are not limited by this 50-percent ceiling nor do they count toward that limit in the case of other types of contributions. This special treatment is accomplished not by allowing a charitable deduction for an IRA contribution but rather by excluding any qualifying distribution from inclusion into the taxpayer’s income. The exclusion may not exceed $100,000 per taxpayer per taxable year. To be a qualified charitable distribution, the distribution must be made after the IRA owner turns age 70 1/2 and is made directly from the IRA trustee to a qualifying charitable organization. The ability to make a donation directly from our IRA to a charity is only available through 2009, unless Congress acts to extend this provision.

Conservation easements.  You can also make a contribution of a qualified real property interest to a charity exclusively for conservation purposes. Through the end of 2009, the 30 percent contribution base limit does not apply to an individual’s qualified conservation contribution. Moreover, if the total amount of your pre-2010 qualified conservation contributions exceeds the applicable limit, you can carry over the excess to each of the 15 succeeding years.

If you have any questions about making a charitable contribution and taking a deduction for your contribution, please call our office.

Tax Return Checklist

 Tax Return Check List

  • Wages, salaries, or any other employment compensation?
  • W-2?
  • W-2G?
  • 1099R?
  • 1099INT?
  • 1099DIV?
  • Any other 1099?
  • Tips?
  • Interest on savings or checking, cash U.S. bonds, or receive stock dividends?
  • Social security or railroad retirement?
  • Lump sum from an employer sponsored plan and the recipient and/or employee was born before 1936?
  • Pension or IRA distributions and the recipient was under 59 1/2?
  • Other pension, annuity, IRA, or retirement income?
  • Unemployment compensation?
  • Alimony?
  • Self-employment and/or operation of a business?
  • Operation of a farm?
  • Rental of land and property for agricultural purposes?
  • Other rental property?
  • Gambling winnings? (lottery, race track, casinos, raffles).
  • Any miscellaneous income? (prizes, awards, jury duty) Royalties?
  • Schedules K-1? partnership or S corporation or estates or trust
  • IRS notice of a change to a prior year’s return?
  • Closing statements from real estate sales?
  • Stock, mutual fund, or other non-business related security?
  • Your personal residence?
  • Rental property?
  • State Refund (from last year)
  • Property relating to a business or farm?
  • Business property not listed above? (equipment, land)
  • Did the sale of any property above involve a bartering agreement?
  • Are you receiving installment payments on any property sold?
  • Have a home mortgage?
  • Use a portion of your home exclusively for self-employment?
  • Have medical expenses or pay for health insurance?
  • Make substantial contributions to charity, church, etc.?
    • If yes, over $500 in noncash contributions?
  • Suffer a loss from a casualty? (fire, theft, natural disaster)
  • Purchase a car, boat, aircraft, motor home, or home building materials in 2009 or keep receipts on all sales tax items purchased in 2009?
  • Itemize deductions last year and receive a state tax refund?
  • Incur out-of-pocket expenses or use your personal auto on the job?
  • Move to be closer to a new job?
  • Send prepayments to IRS and/or state for your current year tax liability (estimated taxes) or apply an overpayment from 2008?
  • Have any household employees to whom you paid $1,000 or more?
  • Have a qualified Federal fuel tax credit?
  • Contribute to an IRA, SEP, Keogh, or Simple retirement plan?
  • Get claimed (or were eligible to be claimed) as a dependent on someone else’s income tax return?
  • Did your children receive more than $950 and less than $9,500 from interest and dividends that you wish to claim on your own tax return instead of your child’s return?
  • Did you pay child or dependent care expenses?
  • Did you pay qualified postsecondary education tuition and related expenses for yourself, your spouse, or your dependents?
  • Did you cash any U.S. EE or I Bonds to pay for postsecondary education for yourself, your spouse, or your dependents?
  • Did you pay interest on higher education loans?
  • Were you a pre-college educator who purchased books or classroom supplies, for which you were not reimbursed?
  • Were there any births, adoptions, divorces, marriages or deaths in your household?