Eilts – A Great Value for Tax Prep

For CPAs like me, January is actually the start of our favorite season of the year: tax season.

Just as the start of the holiday season is marked by lots of television commercials from stores hoping to win your business, the beginning of tax season is marked by commercials for H&R Block, Jackson Hewitt, and other retail tax preparers. These commercials promote gimmicks such as free 1040EZ filing and reviewing last year’s return to win your business.

At Eilts & Associates, we think the best tool for promoting our tax-prep capabilities is to provide outstanding service and expertise at a very competitive price. Like the retail shops, we provide free 1040EZ filing and review your previous years’ returns. But unlike those companies, we have Certified Public Accountants review your return and make recommendations based on a detailed understanding of your personal and business circumstances. Our clients receive:

• Year-round tax advice:The service we provide does not end as soon as your return is filed. We are available throughout the year to answer our clients’ tax and financial planning questions. One of the most rewarding parts about our jobs is helping clients prepare for and understand the tax implications of college savings, retirement, buying or selling a home, having a child, or other momentous life events. Our website has a library of articles addressing some of the most important tax issues facing individuals and small businesses.
• CPA expertise: Each return we file is reviewed by a Certified Public Accountant. We check your previous years’ returns to ensure that you are receiving all possible credits, deductions, and other tax breaks and can file amended returns to cash in on things you may have missed in previous years.
• Competitive pricing: The fees we charge for preparing tax returns are extremely competitive with the retail shops.

As you can see, when you hire us to prepare your tax return, you get a lot more than just tax preparation. If you know of anyone who is looking for convenient, affordable tax preparation that comes with year-round expertise and service, please forward this email to them.

Now that W-2s, 1099s, 1098s, and other tax documents have started arriving in the mail, check out our article, “Top 10 Tips for Organizing Your Tax Information.” Using these tips will simplify your life between now and April 15. (Actually, it is April 17 this year because April 15 is a Sunday and that Monday is a holiday, Emancipation Day, in Washington, D.C.)

If you have any questions about preparing for tax season or organizing your tax information, please contact us at 773.525.6171 or bart@eiltscpa.com. We look forward to working with you this spring!

Understanding the Dreaded Alternative Minimum Tax

As if figuring out how much you owe in taxes weren’t complicated enough, the government actually makes you figure it out two separate ways. Welcome to the head-scratching world of the Alternative Minimum Tax (AMT).

Although it was originally created to target only the ultra-wealthy who benefited from unusual tax benefits, the AMT has become decidedly more egalitarian in recent years and now affects many middle-class taxpayers.  The thought of being hit by the AMT might send chills up your spine, but the more you know about it, the less scary it seems.

Where did the AMT come from?

Congress created the AMT in 1969 as a way to ensure that high-income taxpayers were not able to completely avoid paying taxes thanks to extensive use of deductions, credits, and loopholes in the tax code. But the AMT system, which affected only a sliver of U.S. taxpayers in its first year, continually expands its reach because the amounts used to calculate the AMT are not automatically indexed to inflation. In 2009, 4 million Americans had to pay the AMT.

How does it work?

The AMT is a parallel tax system to the regular income tax. You essentially have to calculate your tax bill under both systems and then pay whichever one is higher. The primary difference between the two systems is that the AMT does not allow many of the common deductions or income exceptions found in the regular system.

Here is a high-level look at how the AMT is calculated:

• Start with your Adjusted Gross Income as determined under the regular tax system
• Add back the standard deductions for yourself and your dependents
• Add back the itemized deductions that are either eliminated or reduced under the AMT, such as deductions for state and local income and property taxes, some medical expenses, interest on a home-equity loan (in some instances), and employee business expenses
• Add income that was not counted as taxable income under the standard system, including interest from private-activity bonds and unrealized gains from incentive stock options granted by your employer
• Add or subtract any remaining AMT preference items
• Subtract the AMT exemption amount to determine the amount of income you have that is subject to the AMT; for 2011, the AMT exemption is $74,450 for joint filers and $48,450 for single filers, but these exemption amounts are reduced by 25 cents for each dollar of AMT income above $150,000 for couples and $112,500 for singles
• Calculate your AMT tax at 26% of the first $175,000 of AMT taxable income and 28% on the remainder of AMT taxable income

What are some common AMT triggers?

Claiming the following deductions, credits, or types of income for your regular income tax can increase the likelihood that you will be subject to the AMT:

• Personal deductions for multiple dependents
• Itemized deductions for state and local taxes, medical expenses, unreimbursed employee expenses, and other miscellaneous expenses
• Mortgage interest on home equity debt
• Accelerated depreciation
• Exercising (but not selling) incentive stock options
• Tax-exempt interest from private activity bonds
• Passive income or losses
• Net operating loss deduction
• Foreign tax credits
• Investment expenses

What can I do to lessen the impact of the AMT?

By now you may be asking if there is any way to get around the AMT altogether. Because it adjusts for various deductions and credits, there is not a whole lot you can do to dodge the AMT. But planning ahead can help keep your AMT adjustments low.

• Seek reimbursements from your employer for business expenses incurred. Unreimbursed expenses incurred by employees are one of the itemized deductions not allowed under the AMT.
• Review your state tax withholding and make sure to pay in enough so you don’t owe, but not so much that you overpay. This will keep your state tax deduction as low as possible.
• Pay your property taxes close to the due date instead of prepaying; this will keep your deduction for state and local taxes as low as possible.
• Sell incentive stock options in the same year you exercise them. By exercising and selling options in the same year, you’ll be subject to the regular tax on the income but not the AMT.

Is it true that the AMT is going to affect millions of additional middle-class taxpayers in 2012?

It’s possible, but not likely. Because the AMT components are not indexed for inflation (like the amounts in the regular tax system are) Congress has to periodically pass laws to increase the AMT exemption amount. It is true that the AMT exemption amount is scheduled to decrease significantly in 2012, but no one will be surprised if Congress steps in (probably as the last minute) to pass another AMT patch that adjusts the exemption amount upward from the current levels.

How can I tell if I will be subject to the AMT?

For clients of Eilts & Associates, we calculate both your regular tax and your AMT, so we will let you know what you owe under both systems. There are also several online tools that can help you determine if you are subject to the AMT. The Internal Revenue Service has an online calculator called the AMT Assistant for Individuals.

I hope this article helped answer some of your questions about the AMT and, in process, made it a little less scary. If you have any questions, please contact Bart Eilts at 773.525.6171 or bart@eiltscpa.com.

Illinois Education Tax Credit for K-thru-12

Illinois residents can receive a tax credit of up to $500 for expenses relating to kindergarten through 12th grade. The state income tax credit equals 25% of expenses in excess of $250 for tuition, books, and lab fees for a child or dependent. The student must be younger than 21 at the end of the school year and may attend either public or private school in Illinois.

Some education expenses that qualify for this credit include:

• Tuition (including summer school classes meeting elementary or secondary graduation requirements)
• Book fees covering the rental for books that were required as a part of the school’s education program
• Lab fees covering the use of supplies, equipment, materials, or instruments that were required as part of a lab course in the school’s education program. For example, if you rented a musical instrument from the school (not from a business) for a class, or for participation in an extracurricular activity that resulted in a credit toward completion of the school’s education program, this rental expense qualifies for the tax credit.

Some education expenses that DO NOT qualify for this credit include:

• Expenses paid to daycare, preschool, or kindergarten at a school that does not also have a first grade, college, university, independent tutoring service, or trade school
• Expenses paid for the purchase of supplies, books, or equipment that is not significantly used up during the school year (e.g., purchasing musical instruments or costumes for a play)
• Expenses paid for the use of supplies, equipment, materials, or instruments if the program does not result in a credit towards completion of the school’s education program
• Expenses paid directly to a business (e.g., renting a musical instrument from a music store)
• Expenses for after-school care, even if paid to the school

For more information about Illinois’ education tax credit, see Publication 132, “Education Expense Credit General Rules and Requirements for Parents and Guardians.” (PDF)

Education Tax Breaks 101

You don’t need a statistics degree from M.I.T. to realize that college is expensive. According to the National Center for Education Statistics, the average annual cost of tuition and room and board at a four-year institution is $12,804 at public schools and $32,184 at private schools. And these expenses are growing fast: between 2000 and 2010 college expenses, after being adjusted for inflation, increased 37% at public schools and 25% at private schools.

Fortunately, the federal government provides several types of tax incentives to make college and other postsecondary education more affordable for students and their parents. The education incentives can be divided into two groups: credits and deductions. Credits directly reduce your overall tax bill by the amount of the credit. Deductions, on the other hand, indirectly reduce your final tax bill by lowering your taxable income.

Both types of education tax incentives can go a long way in lowering the net cost of higher education. It is up to you and your tax preparer to determine which incentives you qualify for and which ones are most advantageous to you.

Education Tax Credits

There are two federal income tax credits for postsecondary education, the American Opportunity Credit (which has replaced the Hope Credit) and the Lifetime Learning Credit. This is an either or proposition; you may only claim one of the credits per student per year.

	American Opportunity Credit	Lifetime Learning Credit
Amount	$2,500 per student	$2,000 per student
Type of schooling	Undergraduate courses or other recognized credential programs (but not graduate school)	Undergraduate, graduate, or other courses to improve job skills (student doesn’t have to be pursing a degree or credential)
Duration	First four years only of postsecondary education	All years of postsecondary education
Refundable	Up to $1,000	No
Covered expenses	Tuition, fees, and course-related books, supplies, and equipment	Tuition, fees, and course-related books, supplies, and equipment
Income restrictions	Phase-out begins at $80,000 for single taxpayers; $160,000 if married filing jointly	Phase-out begins at $60,000 for single taxpayers; $120,000 if married filing jointly
Other considerations	Student must be enrolled at least half-time for at least one academic period

Notice that the American Opportunity Credit is larger, $2,500 compared with $2,000 for the Lifetime Learning Credit. But the Lifetime Learning Credit is less restrictive; it applies to any postsecondary education, whereas the American Opportunity Credit applies to just the first your years of college.

Although you can claim only one of the credits per student per year, you can switch credits from year to year. For example, you could claim the American Opportunity Credit for the student’s freshman year and Lifetime Learning Credit for the sophomore year. Also, the credit may be claimed by the parent or the student, but not both.

Education Tax Deduction

There is also a federal tax deduction of up to $4,000 for qualified postsecondary education expenses. The deduction begins phasing out at income levels of $65,000 ($130,000 if married filing jointly) and is completely eliminated for those who earn more than $80,000 ($160,000 if married filing jointly).

The only expenses that qualify for the deduction are tuition and other expenses required for enrollment at a college, graduate school, or other postsecondary educational institution. Books, room and board, student health fees, and other school-related costs generally do not count as qualifying expenses for the deduction.

Again, taxpayers cannot claim the education deduction if they also claim one of the education credits described above. The deduction is temporary, and 2011 is scheduled to be the last year that taxpayers can capitalize on it.

K – 12 Education Credit for Illinois Residents

Illinois taxpayers may also qualify for a state income tax credit of up to $500 for qualified education expenses for children or dependents in kindergarten through 12th grade. The credit equals 25% of expenses in excess of $250 for tuition, books, and lab fees. The student(s) must be younger than 21 at the end of the school year and may attend either public or private school in Illinois.

Figuring out which tax incentives you qualify for and then calculating which one is the most valuable can be a bit complicated. Here at Eilts & Associates, we are happy to guide you through these decisions and help you maximize the value of the education tax breaks. If you have any questions, please contact us at 773.525.6171 or bart@eiltscpa.com.

Top 10 Tips for Organizing Your Tax Information

When it comes to getting ready for tax season, organization is more than half the battle. By taking a few easy steps in January and February, you can make your life much simpler come April.

1)    Put tax documents in a folder – Get a folder and write “Taxes – 2011” on it. Whenever an important tax document (e.g., 1099, 1098, W-2, giving statement from a charity) shows up in the mail, put it in this folder. This way, when it is time to compile your tax return, all the necessary documents will be in one place.  I recommend putting the folder in a convenient spot, preferably close to wherever you keep your mail. Don’t leave these documents sitting around on the kitchen counter or computer desk where they can accidently get mixed in with other papers.

2)    Check the odometer – In case you didn’t write down your mileage on December 31 (like I recommended in my article on the business use of automobiles), write down your current mileage and date. This will allow us to estimate what the mileage was at year-end. An even better solution is to have the odometer documented by an oil-change or repair shop. This third-party documentation will be very helpful in case of an audit. If you have been keeping an actual mileage log throughout the year, add it up and put it in your taxes folder.

3)    Track your donations – For donations of less than $250, you may not receive an acknowledgement form from the charitable organization. If this is the case, look through your records and compile a list of your donations. Don’t forget to include non-cash donations to organizations such as Goodwill and The Salvation Army. If you made a charitable donation through your employer, provide us the final pay stub of 2011 as evidence of the amount; this information is usually not on the W-2.

4)    Use the tax organizer – Eilts & Associates clients should have received a tax organizer from us in the mail during the past few weeks. In addition to listing the documents needed for your tax return, the tax organizer also includes a list of questions that will help us identify all the tax deductions you are eligible for. Please let us know if you need another copy of the organizer.

5)    Remember property taxes – If you are a homeowner and your property taxes are not paid from an escrow account, find your total property taxes for the year by adding the amounts from both installments. Remember that you need to provide us with your house’s PIN to take advantage of the Illinois property tax credit.

6)    Cash in on new kids – If you welcomed a new child to the family in 2011, first of all—congratulations! Secondly, remember that the new child arrived with some built-in tax benefits. Provide us the child’s full name, Social Security Number, and birthday, so you can take advantage of these tax benefits.

7)    Track gains and losses - If you sold stocks, bonds, or other investments during 2011, the broker or investment company will provide documentation with the sale proceeds. But these documents might not include the cost basis. If this is the case, look through your records to find the amount you paid for the investment, so we can determine the gain or loss.

8)    Book those education expenses – There several potentially valuable tax breaks for college tuition and other postsecondary education expenses. Students or their parents may be able to claim one of two federal income tax credits or a deduction. There also is an Illinois state income tax credit of up to $500 for expenses relating to kindergarten through 12th grade. For more information, check out our article on education tax breaks.

9)    Prepare for the use tax – The State of Illinois moved the reporting of the use tax to the IL-1040 in an effort to increase reporting of this little-known tax. Let us know if you plan to calculate the actual amount for this tax, use an estimate, or report $0 use-tax liability. If you plan on using the actual amount, provide us a list of purchases you made in 2011 that were not subject to state sales tax. For more information about the use tax, see our article on the new use-tax reporting requirements.

10) Put tax documents in a folder – I know this tip was already on this list, but it’s so important that it deserves to be on the list twice. (Plus, a Top 10 list sounds a lot better than a Top 9 list.)

I hope this helps you get organized for tax season. If you have any questions, please contact Bart Eilts at 773.525.6171 or bart@eiltscpa.com.

Tax Credits for Energy Efficiency

These days it pays to go green…literally. There are several tax credits available for home improvements, electric cars, and other energy-efficient products. But some of these credits are scheduled to expire at the end of 2011, so if you haven’t made these purchases yet, you will have to act fast to cash in on these green tax breaks.

The history of green tax credits

In 2005 Congress created tax credits for energy-efficient home improvements and certain types of fuel-efficient vehicles. These credits expired after 2007 but were reinstated, with changes, in 2009. The Tax Relief and Job Creation Act of 2010 extended the credits through the end of 2011, but with the rules that were in place for 2006 and 2007.

All of this brings us to today. As of mid-December, taxpayers have only a few weeks left to cash in on some of these credits, which expire at the end of the year. (But as we have seen, just because a tax break expires, doesn’t mean it is gone for good. Congress may very well decide to reinstate the credits in 2012. Of course, trying to predict what Congress will do next year, an election year, is no easy task.)

Home improvements

If you did any projects in 2011 to improve the energy efficiency of your home, there is a good chance that you can qualify for tax credits of up to $500. The Nonbusiness Energy Property Credit applies to the following types of home improvements:

• Exterior windows, including skylights and storm windows
• Insulation, exterior doors, or roofs, including seals to limit air infiltration, such as caulk, weather stripping and foam sealants, as well as storm doors
• Central air conditioners, heat pumps, furnaces, boilers, water heaters, or biomass stoves

In order to claim this tax credit, you will need to fill out IRS Form 5695 with your tax return.

The tax credit, which is capped at $500, equals 10 percent of the cost of the improvements. Labor costs cannot be included for insulation, windows, doors, and roofs, but labor costs can be included for heating and air conditioning systems, water heaters, and stoves that burn biomass fuel. Plus, only $200 of the credit can be used for windows.

The credit has a lifetime limit of $500. This means that if you claimed the credit in previous years, the amount of the credit available to you in 2011 is reduced by the previous years’ credits.

The credit applies only to improvements made to the taxpayer’s principle residence, and any windows, doors, insulation, and roofs must be expected to last at least five years. The credit applies to improvements that were installed during 2011, so items that were purchased during the year but never installed do not qualify.

Alternative energy equipment

Solar water heaters, solar energy panels, geothermal heat pumps, and wind turbines can provide generous tax credits of 30% of the equipment cost, including installation. This credit, which is called the Residential Energy Efficient Property Credit, is available through 2016 and applies to equipment that provides energy for a primary residence. (Solar water heaters used for swimming pools or hot tubs do not qualify.)

Plug-in electric cars

Taxpayers who purchase plug-in electric vehicles can receive a large tax credit. The minimum credit is $2,500 and can reach up to $7,500 depending on the vehicle’s battery capacity. Before 2011, tax credits were available for a wider range of fuel-efficient vehicles, including hybrid or diesel vehicles. But starting in 2011 the credit is available only for plug-in electric vehicles.

 

At a time when everyone is looking for ways to cut back, investing in energy-efficient products can be an attractive option. In addition to reducing pollution, you can also reduce your energy bills and tax bills. If you have any questions about how to cash in on these energy-efficient tax credits, we are happy to help. You can contact us at 773.525.6171 or bart@eiltscpa.com.

 

Year-End Tax Tips for 2011

December 31 may be fast-approaching, but there is still plenty of time to take action and reduce your 2011 tax bill. We have compiled a list of some of the most valuable year-end tax tips for individuals and businesses.

Harvest Your Investment Losses – The European debt crisis and continued uncertainty about the global economy caused significant stock market declines over the past six months. While this is hardly good news, there is a silver lining. Any capital losses that you “recognize” in 2011 by selling a security can be used to fully offset any capital gains recognized during the year. Plus, if your losses exceed your gains, you can use the excess losses to reduce your ordinary income (such as wages and commissions) by up to $3,000.

Contribute to Charity – The holiday season is a great time to help out the community through donations. In addition to supporting a worthy cause, your donations will also help your tax bill. Monetary donations to a 501(c)(3) organization are tax-deductible. (Most charities, churches, museums, schools, and other not-for-profit organizations are qualified 501(c)(3) groups, but political campaigns are not.) Even if you do not have extra money to donate, you can still get a deduction. If you donate clothes, furniture, electronics, or other items in useable condition to Goodwill or another charity, you can deduct the value of the items. Just make sure you get a receipt from the charity.

Invest in Energy Property Credits – Adding insulation can reduce your heating bill…and your tax bill. New insulation, windows, furnaces, or other energy-saving investments for your primary residence can qualify for the Nonbusiness Energy Property Credit. The credit is limited to $500 in 2011, and that amount is reduced by any non-business energy credits taken from 2006 through 2010. There are also separate tax credits available for solar hot water heaters, geothermal heat pumps, and plug-in electric vehicles.

Defer Income to Next Year – Postponing income until 2012 and accelerating expenses into 2011 will lower your 2011 taxable income. This strategy may also allow you to claim larger deductions, credits, and other tax breaks that aren’t available to higher-income taxpayers. Deferring income can be doubly beneficial if you think you might be in a lower tax bracket next year because of changing jobs, a smaller bonus, or other changes to your financial situation.

Here are some techniques for deferring income and accelerating deductions:

• Ask your employer to pay out bonuses in January instead of December.
• Delay taking distributions from your IRA or other retirement accounts until the following year. But before considering this strategy, make sure you have satisfied the required minimum distribution requirements for your retirement accounts.
• If you are considering selling a stock or other asset that has gone up in value, wait until after January 1 to sell it. And if you already have capital gains for 2011, consider offsetting them by selling some other assets that have depreciated.
• Pay tax-deductible expenses, such as medical bills, charitable donations, and property tax, before January 1.
• Make additional tax-deductible 401(k) or IRA contributions. For IRA contributions, you have until April 16, 2012 to make contributions that are deductible from your 2011 income.

Take Advantage of Expiring Tax Provisions – There are several deductions that are scheduled to be eliminated after 2011. This is your last chance to take advantage of the following deductions:

• Classroom Expense Deduction – Teachers can deduct up to $250 for books, supplies, and other unreimbursed classroom expenses.
• Mortgage Insurance Premiums – The amount paid for qualifying mortgage insurance premiums is tax-deductible.
• Sales Tax Deduction – You have the option of deducting either state and local income taxes OR sales taxes. The sales tax option can be particularly valuable if you purchased a car or other big-ticket items in 2011 or if you live in one of the states that has no state income tax.
• Higher-Education Tuition Deduction – You can deduct up to $4,000 in tuition and enrollment fees paid for you, your spouse, or your dependents. Amounts paid in 2011 for classes starting in early 2012 can qualify for a deduction on your 2011 tax return.

Business Deductions – Here are some year-end strategies that businesses should consider:

• Purchase Capital Equipment – Most capital equipment, including furniture, computers, and most vehicles, will qualify for more generous expensing options in 2011 than in future years. For 2011, tax code Section 179 allows a deduction of up to $500,000 for qualified purchases of up to $2 million (either outright, financed, or through a capital lease). If Congress does not extend this provision, the maximum deduction in 2012 drops to $139,000 and the limit for qualified purchases drops to $560,000.
• Hiring Qualified Workers – Businesses that hire qualified veterans and food stamp recipients can earn a credit of up to 40% of the first $6,000 in wages paid to those workers. These credits, however, are scheduled to expire after 2012, so businesses should definitely take that into consideration when making their decisions.
• Make Qualified Research Expenditures Before 2012 – Businesses can earn tax credits for certain consulting, legal, and professional fees that are tied to research and development in 2011. But this research credit expires after 2011, so you will have to act fast.

As you can see, there are still plenty of ways over the final weeks of December for you to lower your 2011 tax bill. If you have any questions about how to take advantage of the year-end strategies listed above, we are happy to walk you through your options. You can contact us at bart@eiltscpa.com or 773.525.6171.