What Income Is Nontaxable?

Generally, you are taxed on income that is available to you regardless of whether it is actually in your possession, but there are some situations when certain types of income are partially taxed or not taxed at all.

Here are some examples of items that are NOT included in your income:

• Adoption expense reimbursements for qualifying expenses
• Funding of your Health Savings Account (HSA) with a one-time direct transfer from your qualified individual retirement plan (Roth IRA or IRA, but not an ongoing SEP IRA or SIMPLE IRA), an Archer MSA, health reimbursement account (HRA), or health flexible spending account (FSA), but not from an ongoing SIMPLE IRA and SEP IRA
• Child support payments
• Gifts, bequests, and inheritances
• Workers' compensation benefits
• Meals and lodging for the convenience of your employer
• Compensatory damages awarded for physical injury or physical sickness
• Welfare benefits
• Cash rebates from a dealer or manufacturer

Here are examples of items that may or may not be included in your income:

• Life Insurance. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.
• Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
• Non-cash Income. Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

Please contact us if you'd like more information concerning the taxability and nontaxability of income items.

Gift Taxes

In 2011, if you give any one person gifts such as cash or property valued at more than $13,000, you must report the total gifts to the Internal Revenue Service. You may have to pay tax on the gifts, but the person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value.
Gifts include both cash and property, including the use of property, without expecting to receive something of equal value in return. For example, if you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.
There is a lifetime maximum of $1 million and there are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit of $13,000 in 2011:

·        Tuition or medical expenses that you pay directly to an educational or medical institution for someone's benefit

·        Gifts to your spouse

·        Gifts to a political organization

·        Gifts to qualifying charities (also deductible on your tax forms for the value of the gifts made)

If you are married, both you and your spouse can give separate gifts of up to the annual limit of $13,000 each or a total of $26,000 in 2011 to the same person without making it a taxable gift.
If you're confused about gift taxes or need more information,we can help clear up the confusion. Contact our office today.

Protect Your Business With The Right Insurance

Starting a business is expensive and the capital that you've poured into your company can disappear in an instant if a major weather event damages your offices or one of your products injures someone.
Having the right kind of insurance is critical to your business and multiple insurance policies should be in place before you even open your doors for business. And, they should be reviewed every year or when a business change occurs such as stocking new products or moving to a new location.

Commercial Business Insurance

Commercial Property Insurance policies are either all-inclusive or risk specific and protect your office and its contents from damage caused by natural disasters, fires, or vandalism.
Product Liability Insurance is necessary if you manufacture or sell products. Product Liability Insurance safeguards you if a product defect causes injury to someone.
For protection against lawsuits related to negligence claims, you need to consider both General Liability Insurance and Professional Liability Insurance as well.
Other types of insurance your business might need include:

• Coverage that protects Directors and Officers from personal liability
• Key Executive Life Insurance
• Business Interruption (covers lost profits and expenses)
• Commercial Vehicle Insurance
• Website Insurance (protects you from legal claims)

Employer-Related Insurance

Workers' Compensation Insurance (administered by individual states) and Unemployment Insurance (under certain conditions) are mandatory in the United States. Some states require employers to provide other types of insurance. For example, if any of your employees are located in California, Hawaii, New Jersey, New York, Puerto Rico, or Rhode Island you will be required to provide Disability Insurance. Disability Insurance is a benefit provided to employees who are unable to work because of illness or injury.
Employers are not required to provide Life, Medical, and Dental Insurance for employees.

Don't under-insure, but don't over-insure either.

Some Tips:

• Assess your liability risk honestly and thoroughly.
• Ask your lawyer for advice.
• Get quotes from several companies.
• Talk to your insurer about how you can minimize risk and premiums.

Your insurance company will be your ally if you encounter legal problems because of an accident or injury that happens to someone on your property, to an employee doing business for you, or if a service you provide causes harm to someone.
Avoid lawsuits by making sure you have the right insurance for your business.

Seven Tax Tips for Students with a Summer Job

Are you, or do you know a student with a summer job? Here are seven things you should know about the income earned during the summer months.

1. All taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure your withholding is correct, call our office.
   
2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable and is therefore subject to federal income tax.
   
3. Many students do odd jobs over the summer to make extra cash. If this is your situation, keep in mind that earnings you receive from self-employment are subject to income tax. This includes income from odd jobs like baby-sitting and lawn mowing.
   
4. If you have net earnings of $400 or more from self-employment, you also have to pay self-employment tax. (Church employee income of $108.28 or more must also pay.) This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed just as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.
   
5. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay - such as pay received during summer advanced camp - is taxable.
   
6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:
   
   • You are in the business of delivering newspapers.
   • All your pay for these services directly relates to sales rather than to the number of hours worked.
   • You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.
7. Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

A summer work schedule is sometimes a patchwork of odd jobs - which makes for confusion come tax time. Contact us if you have any questions at all about income your child earned this summer season.

 

Paying Off Debt the Smart Way

Being in debt isn't necessarily a terrible thing. Between mortgages, car loans, credit cards, and student loans - most people are in debt. Being debt-free is a great goal, but you should focus on the management of debt, not just getting rid of it. It's likely to be there for most of your life - and, handled wisely, it won't be an albatross around your neck.
You don't need to shell out your hard-earned money for exorbitant interest rates, or always feel like you're on the verge of bankruptcy. You can pay off debt the smart way, while at the same time saving money to pay it off faster.

Know Where You Are

First, assess the depth of your debt. Write it down, using pencil and paper, a spreadsheet like Microsoft Excel, or a bookkeeping program like Quicken. Include every financial situation where a company has given you something in advance of payment, including your mortgage, car payment(s), credit cards, tax liens, student loans, and payments on electronics or other household items through a store.
Record the day the debt began and when it will end (if possible), the interest rate you're paying, and what your payments typically are. Add it all up, painful as that might be. Try not to be discouraged! Remember, you're going to break this down into manageable chunks while finding extra money to help pay it down.

Identify High-Cost Debt

Yes, some debts are more expensive than others. Unless you're getting payday loans (which you shouldn't be), the worst offenders are probably your credit cards. Here's how to deal with them.

• Don't use them. Don't cut them up, but put them in a drawer and only access them in an emergency.
• Identify the card with the highest interest and pay off as much as you can every month. Pay minimums on the others. When that one's paid off, work on the card with the next highest rate.
• Don't close existing cards or open any new ones. It won't help your credit rating.
• Pay on time, absolutely every time. One late payment these days can lower your FICO score.
• Go over your credit-card statements with a fine-tooth comb. Are you still being charged for that travel club you've never used? Look for line items you don't need.
• Call your credit card companies and ask them nicely if they would lower your interest rates. It does work sometimes!

Save, Save, Save

Do whatever you can to retire debt. Consider taking a second job and using that income only for higher payments on your financial obligations. Substitute free family activities for high-cost ones. Sell high-value items that you can live without.

Do Away with Unnecessary Items to Reduce Debt Load

Do you really need the 800-channel cable option or that dish on your roof? You'll be surprised at what you don't miss. How about magazine subscriptions? They're not terribly expensive, but every penny counts. It's nice to have a library of books, but consider visiting the public library or half-price bookstores until your debt is under control.

Never, Ever Miss a Payment

Not only are you retiring debt, but you're also building a stellar credit rating. If you ever move or buy another car, you'll want to get the lowest rate possible. A blemish-free payment record will help with that. Besides, credit card companies can be quick to raise interest rates because of one late payment. A completely missed one is even more serious.

Do Not Increase Debt Load

If you don't have the cash for it, you probably don't need it. You'll feel better about what you do have if you know it's owned free and clear.

Shop Wisely, and Use the Savings to Pay Down Your Debt

If your family is large enough to warrant it, invest $30 or $40 and join a store like Sam's or Costco. And use it. Shop there first, then at the grocery store. Change brands if you have to and swallow your pride. Use coupons religiously. Calculate the money you're saving and slap it on your debt.
Each of these steps, taken alone, probably doesn't seem like much. But if you adopt as many as you can, you'll watch your debt decrease every month.

IRS Mileage Rates Changed for July 1, 2011

The IRS standard mileage rate for the final six months of 2011 was increased as a result of the recent increase in gasoline prices. The IRS usually only adjusts this rate annually in the fall.
The standard mileage rate was increased by 4.5 cents for business, medical and moving travel for the last six months of 2011. Charitable travel remained unchanged at 14 cents per mile as this rate is set by statue, not the IRS.
The standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Mileage Rates for July 1, 2011 to December 31, 2011 are:

• Business: 55.5 cents per mile (Compared to first six months at 51 cents per mile).
• Medical: 23.5 cents per mile (Compared to first six months of 2011 at 19 cents per mile).
• Moving: 23.5 cents per mile (Compared to first six months of 2011 at 19 cents per mile).
• Charitable: Unchanged at 14 cents per mile.

How to Save for College Tax-Free

College tuition and fees are on the rise. Shockingly, the cost for 4-year private schools now tops $36,000 per year on average.

But the investment is well worth it. According to the U.S. Census Bureau, individuals with a bachelor's degree earn more than double those with just a high school diploma.
The two most popular college savings programs are 529 plans and Coverdell Education Savings Accounts. Whichever you choose, be sure to start when your child is young. The sooner you begin, the less money you will have to put away each year.

Based on the survey completed for the 2010 Trends in College Pricing, the average cost for tuition, fees, and room and board for 2010-11 was:

$16,140 per year for 4-year public (in state) colleges and universities.
This is an increase of 6.1% from 2009-10 findings.

$36,993 per year for 4-year private colleges and universities.
This is an increase of 4.3% from 2009-10 findings.

It should be noted that, on average, full-time students receive $16,000 of financial aid per year in the form of grants and tax benefits for private 4-year institutions, $6,100/yr for public 4-year institutions, and $3,400/yr for public 2-year institutions.

Saving with 529 Qualified Tuition Plans

Section 529 plans, also known as Qualified Tuition Programs, are the best choice for many families.

Every state now has a program allowing persons to prepay for future higher education, with tax relief. There are two basic plan types, with many variations:

1.      The Prepaid Education Arrangement. You essentially buy future education at today's costs, by buying education credits or certificates. This is the older type of program, and it tends to limit the student's choice of schools within the state.

2.      Education Savings Accounts. You contribute to an account earmarked for future higher education.

You may open a Section 529 plan in any state. But when buying prepaid tuition credits (less popular than savings accounts), you often need to apply the credits to a specific college or group of colleges.

Unlike certain other tax-favored higher education programs, such as the Hope and Lifetime Learning Credits, federal tax law doesn't limit the benefit only to tuition. Room, board, lab fees, books, and supplies can be purchased with funds from your 529 Savings Account. (Individual state programs could be narrower.)

The key parties to the program are the Designated Beneficiary, the student-to-be, and the Account Owner, who is entitled to choose and change the beneficiary and who is normally the principal contributor to the program.

There are no income limits on who may be an account owner. There's only one designated beneficiary per account. Thus, a parent with three college-bound children might set up three accounts. (Some state programs don't allow the same person to be both beneficiary and account owner.)

Tax Rules Relating to 529 College Savings Plans

Income Tax. Contributions made by the account owner or other contributor are not deductible for federal income tax purposes. Earnings on contributions grow tax-free while in the program.
Distributions from the fund are tax-free to the extent used for qualified higher education expenses. Qualified expenses include tuition, required fees, books, supplies, equipment, and special needs services. For someone who is at least a half-time student, room and board also qualify.

Tip: In 2009, the American Recovery and Reinvestment Act (ARRA) added expenses for computer technology/equipment or Internet access to the list of qualifying expenses. Software designed for sports, games, or hobbies does not qualify, unless it is predominantly educational in nature. In general, however, expenses for computer technology are not qualified expenses for the American Opportunity Credit, Hope Credit, Lifetime Learning Credit, or tuition and fees deduction.

Gift Tax. For gift tax purposes, contributions are treated as completed gifts even though the account owner has the right to withdraw them - thus they qualify for the up-to-$13,000 annual gift tax exclusion. One contributing more than $13,000 may elect to treat the gift as made in equal installments over that year and the following 4 years, so that up to $65,000 can be given tax-free in the first year.

Estate Tax. Funds in the account at the designated beneficiary's death are included in the beneficiary's estate - an odd result, since those funds may not be available to pay the tax.
Funds in the account at the account owner's death are not included in the owner's estate, except for a portion thereof where the gift tax exclusion installment election is made for gifts over $13,000. For example, if the account owner made the election for a gift of $65,000 in 2011, a part of that gift is included in the estate if he or she dies within 5 years.

Saving with Coverdell Education Savings Accounts

The total contributions for the beneficiary of a Coverdell Education Savings Account (ESA) cannot be more than $2,000 in any year, no matter how many accounts have been established. (A beneficiary is someone who is under age 18 or is a special needs beneficiary.)
The beneficiary will not owe tax on the distributions if they are less than a beneficiary's qualified education expenses at an eligible institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.
Here are some things to remember about distributions from Coverdell accounts:

• Distributions are tax-free as long as they are used for qualified education expenses, such as tuition, books, and fees.
• There is no tax on distributions if they are for an eligible educational institution. This includes any public, private, or religious school that provides elementary or secondary education as determined under state law.
• The Hope and Lifetime Learning Credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
• If the distribution exceeds education expenses, a portion will be taxable to the beneficiary and will be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.