Tax Tip--Some Retirement Plans Require Action By Year-End

If you plan to set up a retirement plan other than an IRA--including a SEP-IRA--you must establish the plan by December 31, 2010. Funding is not required until the due date of your income tax return, or, if extended, September 15, 2011.

This pertains to defined benefit pension plans, profit-sharing plans, money purchase pension plans, etc.

Do yourself a favor, set it up now. The amount of funding can be determined later.

Apathy

I haven't stopped following our Congress, but I feel great lethargy whenever I think of what they are not doing. My apathy is extreme.

Perhaps the crisp days of autumn will finally clear my mind, if only we can have more than one consecutive day of crispness in the Mid-Atlantic region.

Federal tax reform report

The President's Economic Recovery Advisory Board (also know as PERAB) yesterday released its report on tax reform options for simplifying the federal tax system, improving taxpayer compliance, and reworking the corporate tax rules.

The Board did have a directive to not consider tax options that would raise taxes for families with incomes less than $250,000 a year. They took this to mean that options “taken together should be revenue neutral for each income class with annual incomes less than $250,000", while considered separately may increase or decrease the tax burden for each group.

For the most part, the Board reviewed options that have been bruited about for the past 20 years.There are good options for tax simplification for individuals and tax compliance.

The report discusses a number of options to streamline the tax code for family credits and incentives, savings and retirement accounts, capital gains, tax filing, small businesses, and the individual alternative minimum tax (AMT).It also looks at simplifying the tax return preparation process by increasing the standard deduction and reducing the benefit of itemized deductions.{Was I not right on in my screed in the spring?—see my April 25th blog post.)

The report reflects the common belief that that largest area of non-compliance is in underreporting income by small businesses and individuals. But the options discussed on small-business bank reporting, withholding for independent contractors, and multiple year audits of small businesses and individuals are new.

In the discussion on corporate and international tax reform, the main theme was that there needed to be comprehensive reform because any one option would be too expensive—mainly for the Treasury.

The question now is what is going to be done with this report? Will the President change his proposals? What effect will it have on his overall tax policy? Will Congress act in accordance with some of the simplifications and tax compliance options? Or, will it be placed on the tall pile of unused reports that recommend reform of the Federal tax code? to be continued...

DC Amnesty Update

See  DCTAXAMNESTY for the details and forms necessary for the DC amnesty program ongoing now through September 30.

Tax Tip--Check your estimated payments and withholdings

I'm back from vacation.  Congress is in its  6-week recess and any happenings are sub rosa.

You can be working on your 3rd quarter estimated tax payment due on September 15th--does it need to be revised up or down?  What income do you have that needs to be covered by these estimated payments? 

Do you only have withholding from your salary?  Then do a projection of your tax liability and determine whether you have the right amount being paid in through withholding.  Too little and you can be hit with a penalty.  Too much and you are giving the government an interest free loan.

The year is two-thirds over and now is a good time to do some tax planning.  As I wrote in an earlier post in June,  Take your money in 2010, you may wish to accelerate income into 2010.  Or plan for it if Congress doesn't extend the Bush tax cuts or pass some version of President Obama's proposed tax cuts.

If you determine this isn't the time to accelerate income, you may want to consider all the normal tax planning items:

• If you have capital loss carryovers from the past couple of years and some unrealized gains in your portfolio, it may be worth cleaning up your portfolio to bring it where you want it to be as an investor.  If the loss carryovers offset any potential gains you can rebalance your portfolio without any negative tax consequences.
• Determine your charitable giving strategy for the year and plan on giving before December 31
• For those with businesses, take advantage of the increased expensing limit for acquisition of furniture, machinery and equipment under Section 179 of the Internal Revenue Code.  Again for 2010, the limit is $250,000 with limitations for those who purchase qualifying fixed assets over  $800,000 and for those who do  not show a profit in that business.
• Consider deferring income and accelerating deductions where possible.
• Energy credits are still around for 2010, so consider installing qualifying windows or HVAC systems.

 I'll try to give more focused Tax Tips when Congress returns and we know what the law will  be for next year and the future.

Nothing

That's what the House of Representative did with any tax bill before it .  Then, today, they recessed for the month of August. Well, until after Labor Day--September 14th.  Election day is early this year, November 2nd, so little will be done once they come back from "August" recess until the beginning of November.  One hopes the lames ducks will do something before the end of the year.

There are too many important tax bills sitting around to be lackadaisical about all this: the estate tax that is to come roaring back next January 1; all of Bush's tax cuts that are to expire; foreign tax credit reform; and on and on.  I won't go into why each one of these are so important, that has been rehashed in blogs throughout the web and newspapers around the country.

I began following these bills last February, now I'm frustrated with the slowness of Congress.  Political posturing doesn't make good laws.

Getting the money in

The tax amnesty programs I referred to in my previous post are all geared to getting cash in the door at the various states.  Then, for some states, depending upon the amnesty program, to create future tax revenues by having previous nonfilers on the the tax rolls.

All states are dealing with tight budgets, if not budget reductions or potential bankruptcy, and any way to get the money in is being looked at.  The DC amnesty program which is geared toward current tax bills, not nonfilers, is expected to bring in $120 million of receipts for the 2010 budget and $170 million overall.

These are all viable solutions for taxpayers who want to/will be paying the tax anyway--they can at least avoid penalties on the late payments and in some cases part of the interest due.  There is no program that reduces the actual amount of tax due.  But be care with the dates, any late filing for these programs and you're out of luck.