Every year, there are changes to the tax code. Here are a few of the changes for 2010:

Roth IRAs. Half of any income that results from a rollover or conversion to a Roth IRA from another retirement plan in 2010 is included in income in 2011, and the other half in 2012, unless you elect to include all of it in 2010. In addition, for any tax year beginning after 2009, you can make a qualified rollover contribution to a Roth IRA regardless of the amount of your modified adjusted gross income (AGI).

IRA deduction expanded. You may be able to take an IRA deduction if you were covered by a retirement plan and your 2010 modified AGI is less than $66,000 ($109,000 if married filing jointly or qualifying widow(er)). If your spouse was covered by a retirement plan, but you were not, you may be able to take an IRA deduction if your 2010 modified AGI is less than $177,000. Read the rest of this entry »

The Internal Revenue Service issues a list of the top 12 tax scams each year – known as the Dirty Dozen. The scams are illegal and can lead to problems for taxpayers including significant penalties, interest and possible criminal prosecution. These scams don’t just happen during the tax filing season, they can happen anytime during the year. Here are five scams from the 2010 Dirty Dozen list every taxpayer should be aware of this summer. Read the rest of this entry »

An LLC is a new entity created by state statute. The IRS did not create a new tax classification for the LLC when it was created by the states; instead IRS uses the tax entity classifications it has always had for business taxpayers: corporation, partnership, or sole proprietor. An LLC is always classified by federal law as one of these types of taxable entities. Read the rest of this entry »

One of the advantages of operating your own business is hiring family members. However, the employment tax requirements for family employees may vary from those that apply to other employees. Some issues to consider when operating a husband and wife business are as follows.

How Spouses Earn Social Security Benefits

A spouse is considered an employee if there is an employer/employee type of relationship, i.e., the first spouse substantially controls the business in terms of management decisions and the second spouse is under the direction and control of the first spouse. If such a relationship exists, then the second spouse is an employee subject to income tax and FICA (Social Security and Medicare) withholding. However, if the second spouse has an equal say in the affairs of the business, provides substantially equal services to the business, and contributes capital to the business, then a partnership type of relationship exists and the business’s income should be reported on Form 1065, U.S. Return of Partnership Income.

Both Spouses Carrying on the Trade or Business

On May 25, 2007 the Small Business and Work Opportunity Tax Act of 2007 was signed into law and affect changes to the treatment of qualified joint ventures of married couples not treated as partnerships. The provision is effective for taxable years beginning after December 31, 2006.

The provision generally permits a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint venture are a husband and wife, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply.

Under the provision, a qualified joint venture conducted by a husband and wife who file a joint return is not treated as a partnership for Federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture. Each spouse takes into account his or her respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse would account for his or her respective share on the appropriate form, such as Schedule C. For purposes of determining net earnings from self-employment, each spouse’s share of income or loss from a qualified joint venture is taken into account just as it is for Federal income tax purposes under the provision (i.e., in accordance with their respective interests in the venture).

This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. However, this may not be true if either spouse exceeds the social security tax limitation.

One Spouse Employed by Another

If your spouse is your employee, not your partner, you must pay Social Security and Medicare taxes for him or her. The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and Social Security and Medicare taxes, but not to FUTA tax.

For more information on Husband and Wife Businesses, contact Debbie Simmons at (310) 701-1825.

If you pay someone to prepare your tax return, choose that preparer wisely. Taxpayers are legally responsible for what’s on their own tax returns even if prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare personal returns. Most return preparers are professional, honest and provide excellent service to their clients. Here are a few points to keep in mind when someone else prepares your return:

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How Long Do I Have to Worry About an Audit?
• Generally, your tax return cannot be audited after 3 years from the original due date of the return.
• If you understate your income by 25% or more, the audit deadline is extended to 6 years.
• If you file a fraudulent return, there is no statute of limitations on an audit.
• The statute of limitations starts to run only if and when you file a return. Nonfiled tax years are always open to audit.

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Did you know that your summer day care expenses may qualify for an income tax credit? Many parents who work or are looking for work must arrange for care of their children under 13 years of age during the school vacation. Those expenses may help you get a credit on next year’s tax return. Read the rest of this entry »

AB 183, a modified version of last year’s New Home Credit, is awaiting the Governor’s signature. The bill provides credits for first-time homebuyers, and taxpayers buying homes that have never been occupied. The Governor is expected to sign the bill.

Taxpayers who purchase a “qualified principal residence” on or after May 1, 2010, and before January 1, 2011, will be allowed a credit equal to the lesser of 5% of the purchase price or $10,000. The credits are also extended to taxpayers who enter into an enforceable contract on or after May 1, 2010, and before January 1, 2011, so long as the sale is completed before August 1, 2011. Read the rest of this entry »

A new state tax credit of $3,000 for each additional full-time employee hired is available to small businesses with 20 or less employees beginning January 1, 2009.

The total amount of credit available to be claimed by all taxpayers is capped at $400 million. The credit must be claimed on a timely filed original return received by the Franchise Tax Board on or before a cut-off date specified by the Franchise Tax Board. Taxpayers claiming the credit on an original return received by the Franchise Tax Board after the cut-off date is met will be notified that the credit has been denied. Taxpayers that have been denied the credit as a result of the $400 million cap being reached will not be assessed an underpayment of estimated tax or underpayment of tax penalty to the extent the underpayment was created or increased by the disallowance of this credit. Read the rest of this entry »