Tax breaks can help when disaster strikes

Recent events here and abroad are reminders that disasters can occur at any time - often with staggering human and financial costs. If you're a victim of disaster, you may receive insurance and federal disaster aid. But the tax code also offers some relief. You may be able to take an itemized deduction for part of your loss. In tax terms, it's a "casualty loss," and it can also apply to events such as a car crash, a house fire, or theft. Here are the basics.

•  The loss or damage must be due to an unexpected and sudden event. Losses due to slow deterioration over the years, such as rot, rust, or insect damage, don't qualify.

•  Your tax deduction won't equal your total loss. You must subtract any insurance or other reimbursement. Then you must also deduct $100 for each loss and 10% of your adjusted gross income.

•  Your loss may also be limited by your adjusted basis in the property. That's generally what you paid for it, plus or minus any improvements or previous losses.

•  In a widespread disaster, the area may be classified a "Presidentially declared disaster area." If that happens, you have a special option. You can claim your casualty loss against the current year's taxes. Or you can amend the previous year's return and claim your loss against that year's taxes. That usually generates a faster refund, but it may change the amount of your deduction.

If you suffer a casualty loss, please contact us. We'll explain the rules and help you claim the maximum possible tax benefit.

Maris & Associates CPA's
10512 19th Ave SE #101
Everett, WA 98208
425-338-0414
info@mariscpa.com

www.mariscpa.com

Will the dreaded AMT affect you?

With the attention surrounding the alternative minimum tax (AMT) year after year, you may be wondering if you'll be snared by it in 2011. What can cause you to owe the tax?

The answer lies in items that are treated differently when calculating the AMT than they are when figuring your regular tax. Certain itemized deductions fall into this category. For instance, under the regular federal income tax computation, you can claim an itemized deduction for medical and dental expenses in excess of 7.5% of adjusted gross income.

For the AMT, these expenses must exceed 10% of your adjusted gross income, which means your deduction is limited even more.

Another example: Taxes, including real estate taxes, state income taxes, and sales taxes, are not allowed under the AMT calculation.

The same restriction applies to miscellaneous itemized deductions such as investment expenses and employee business expenses.

Your mortgage interest deduction may differ for AMT purposes, too. Why? Interest you pay on home equity loans is generally not deductible unless you use the loan proceeds to buy, build, or improve your primary or second residence.

Don't itemize? The standard deduction is also not allowed for the AMT calculation. That's one reason it can sometimes make sense to itemize even when your standard deduction is higher.

In addition to the items mentioned here, the IRS form used to compute your AMT liability includes other adjustments that may affect you. Give us a call for an AMT review. We can help with planning suggestions and strategies you may be able to implement before year-end.

Maris & Associates, CPA's

10512 19th Ave SE, Suite 101

Everett, WA 98208

425-338-0414 

info@mariscpa.com

www.mariscpa.com

Consider the time value of money in making business decisions

Suppose you’re selling your business, and it’s worth $400,000. You’re offered $210,000 down and lump sums of $100,000 at the end of year one and year two. Should you take the offer?

Most people know that $1,000 now is worth more than $1,000 a year from now. Here’s why:

1. Inflation: In a year, a dollar will buy less than it would today.

2. Risk: Over time, the risk increases that some of the money owed you will not be paid.

3. Opportunity loss: Funds on hand could be invested and earning more money.

Present value analysis attempts to quantify these variables. It discounts the value of future funds by estimating inflation rates, risks of loss, and rates of return from alternative investments.

Assume you could earn 2% by investing in a $100,000 CD. Disregarding compounding, in a year your investment would be worth $102,000. Conversely, if you postponed receipt of $100,000 for a year and inflation eroded the principal by 3%, you’d receive the equivalent of $97,000 in today’s dollars. (Note that with 3% erosion, even the $102,000 CD proceeds would be worth only $98,940 in today’s dollars.)

In the opening example, your proposed “investment” (a two-year $200,000 note receivable) would be far riskier than a CD. To compensate, you might decide not to accept anything less than an 8% return. A present value table indicates that at 8%, the discount factors for one and two years are .926 and .857, respectively. $100,000 times .926 is $92,600; $100,000 times .857 is $85,700.

Thus, in today’s dollars, the buyer is offering $388,300 ($210,000 down payment plus $92,600 plus $85,700). Since your business is worth $400,000, you would be selling for $11,700 less than full value.

A similar analysis can be applied to any business transaction involving future payments. For help with the calculations or assistance with any of your business needs, call us for an appointment.

Maris & Associates CPA's

10512 19th Ave SE #101

Everett, WA 98208

www.mariscpa.com

425-338-0414

Plan for a Smaller Refund

Did you receive a big refund check from last year’s taxes? If so, you’re not alone. Many of us deliberately pay extra taxes throughout the year so we can enjoy a nice bonus early the next year. Sometimes it’s insurance against having to come up with extra cash when you file your return. That’s a valid concern. But sometimes it’s just a form of enforced saving. Or perhaps you’ve simply never bothered to adjust your withholding. Those aren’t such good reasons. After all, when you overpay your taxes, you’re making an interest-free loan to the government.

Should you adjust your withholding? Reducing your withholding is as simple as filing a new Form W-4 with your employer. The form comes with a worksheet to figure out how many allowances you should claim. Don’t forget to allow for your other taxable income besides wages, such as dividends or investment gains.

If you’re worried about underpaying tax, there are a couple of rules you should know. Generally, you’ll escape a penalty if you pay, through withholding or quarterly estimated payments, at least 100% of last year’s taxes (110% if your adjusted gross income is over $150,000), or if you pay at least 90% of what you owe for this year.

If you reduce withholding, here are some ideas on how to use your extra take-home pay.

* Contribute more to your employer’s 401(k) plan, especially if your company matches contributions. You’ll enjoy a double benefit because the extra contributions will reduce the tax on your wages as well as provide tax-deferred savings.

* Pay down balances you’re carrying on your credit cards. That’s equivalent to earning interest on your extra payments, often at double-digit rates.

* Put the money in a tax-favored Coverdell IRA or Section 529 plan for your child’s education.

Contact our office if you’d like help figuring out your withholding level for 2011.

Maris & Associates CPA's

10512 19th Ave SE #101

Everett, WA 98208

www.mariscpa.com

425-338-0414

Business Tax Planning

There’s a new twist on an existing option for accelerated write-off of assets you purchase from September 9, 2010 through December 31, 2011. You can choose to expense 100% of the cost of new equipment, such as machinery, some vehicles, and computers under expanded “bonus” depreciation rules.

While this sounds similar to Section 179, which also allows immediate expensing of assets you’d otherwise have to write off over several years, differences between the two methods exist. For instance, the amount of Section 179 expensing you can claim may be limited by your income. In contrast, bonus depreciation can create an operating loss that you may be able to carry back to prior years to generate a refund. Also, bonus depreciation is available only for new assets; Section 179 expensing applies to both new and used assets.

And what about the rules for Section 179? The expensing limit was increased to $500,000. Your deduction begins to shrink if you buy more than $2 million of assets.

Another depreciation break was also extended: the 15-year life for certain leasehold and retail improvements and restaurant buildings and improvements. These assets will no longer qualify for 15-year depreciation after 2011.

Check out this tax break if your business has fewer than 25 full-time employees: You might qualify for a tax credit of up to 35% of employer-paid health care costs.

We can help you with your tax planning. Please give us a call and see us on our website at www.mariscpa.com. Thanks for reading.

Maris & Associates CPA's
10512 19th Ave SE #101
Everett, WA 98208
425-338-0414
info@mariscpa.com

How to improve your credit score

The days of easy credit, offered to anyone who can breathe, are history. In this sluggish economy, lenders want to know whether borrowers are likely to stay current on their loans, mortgages, and credit card accounts. Banks and other lending institutions are looking more closely at credit scores, the numbers that (in theory at least) predict the likelihood that a borrower will default on his or her outstanding debts. As a result, knowing your score and ensuring that it's climbing toward the upper percentiles should be a part of your regular financial planning.

The most commonly used credit score is the FICO, developed by Fair Isaac Corporation. FICO scores range from a low of 300 to a high of 850 and may be obtained (for a fee) at myfico.com. The score is considered a predictor: the higher the score, the more creditworthy the consumer. Not so long ago, a score that just nudged the 700 mark would bring lenders to the table with their lowest interest rates. Over the last few years, however, higher scores are often required to get premium rates.

About 35% of the FICO score is derived from your payment history, and another 15% comes from the length of that history. Ten percent of the score is based on the types of credit you use—credit cards, retail accounts, and other types of loans. Another 30% takes into account the amounts you owe as a fraction of your available credit. These numbers and others are fed into the FICO calculator to determine your overall score.

To raise that score, focus on the numbers that matter most:

* Avoid late payments. If you must juggle payments because of cash flow problems, try to limit the number of past-due accounts. A history of late payments on several accounts will hurt your score more than delinquencies on a single account.

* Mix it up. Spread your debt over several types of accounts: installment loans, credit cards, and accounts with retail merchants.

* Curb spending. Keep your outstanding balances to less than 50% of your available credit.

* Check your credit report regularly. By law, you're entitled to a free annual credit report from the three main credit-reporting agencies. Check the report for errors, and follow up to ensure that problems get fixed. One vendor's erroneous reporting can tank your score.

Good credit is a valuable commodity. Guard it carefully.
 
Maris & Associates CPA's
10512 19th Ave SE #101
Everett, WA 98208
425-338-0414
info@mariscpa.com

Choose the right filing status

While gathering information to complete your income tax return, you may give little thought to your filing status. But there's a reason "filing status" choices appear at the beginning of tax forms: They're important.

Why? Because filing status can impact exemptions, reportable income, deductions, credits, tax rates, liability, the type of form you file, and whether you need to file at all. In addition, some states require that you use the status reported on your federal return, which can affect the amount of state tax you pay.

Here are facts to consider when determining filing status:

 1. Your status generally depends on whether you're married or single on the last day of your taxable year (typically December 31). In cases of divorce or separate maintenance decrees, the laws of your state determine whether you're considered married or single. Same-sex marriages are not recognized for federal income tax purposes.

 2. As a married couple, you can choose joint or separate returns. When you file separately, you can change your mind later and amend your return to file jointly. However, you can't switch from joint status to married filing separately after the due date of the original return.

 3. If you were widowed during the year and have not remarried, you have the option of filing jointly with your late spouse. When you're widowed and have dependent children, you can continue to use joint tax rates for two additional years following the year your spouse died.

 4. Head of household status is intended for single taxpayers with dependent children. It may also be available when you're single and maintaining a separate household for a parent - including one living in a nursing home.

If you need more information or if you have questions about your filing status please contact us.

Thanks for reading, 

Maris & Associates CPA's

10512 19th Ave SE Suite 101

Everett, WA 98208

425-338-0414

info@mariscpa.com