These two statistics show just how bad the fiscal problems are in Greece. These problems did not happen overnight, but were the result of spending too much and collecting too little in tax revenue. The present crisis is a concern that Greece is on a path toward default on its debts.

The recent news has been Greek officials agreeing with the European Union on a bailout plan. To receive a bailout, Greece agreed to cut expenditures, raise taxes and reduce corruption. However, this plan has not gone over well in Greece. There was a massive strike among public workers because their pay would be cut due to lower government spending. The strike and protest turned violent after a fire bomb hit a bank in central Athens. Three bank employees died due to the fire bomb.

Market Reaction

The current yield on a two-year Greek note is at 14.84 percent. The cost of a five-year credit-default swap (CDS) for sovereign Greek debt is currently 830 basis points. These statistics show that the market is not convinced that Greece will avoid defaulting on its debt. Further, most governments cannot afford to raise money by issuing bonds that yield around 15 percent.

Greece is in a spiral where its fiscal problems caused its cost of capital to rise. Now that Greece is serious about fixing its problems, the rate on its debt is too high to solve the problems.

There are several scenarios for how this could end for Greece. One possibility is default, which certainly is a risk as evidenced by the yield on Greek debt. Another possibility is a combination of the European Union and the International Monetary Fund lending to Greece at below-market rates for the next few years as Greece gets its house in order.

Contagion Risk

There are other countries in Europe with fiscal problems, such as Spain and Portugal. However, it should be noted that the market does not view these countries anywhere near as likely to default on their debt as Greece. (Portugal’s five-year sovereign CDS is 430 basis points, while Spain’s five-year CDS is 245 basis points.) That doesn’t mean the risk of default isn’t there, and these countries will need to choose between decreasing their spending and paying high interest rates to raise capital.

How Does Recent United States Spending Compare to Greece?

The situation in the United States is much less severe than Greece’s situation. In 2009, the United States debt-to-GDP ratio was 83 percent, which is high. (As recently as 2002, this number was below 60 percent.) However, a high debt-to-GDP ratio does not necessarily mean impending doom. From 1945–1947, the United States had debt-to-GDP ratios above 100 percent in each year.

The recent spending is a cause for concern, but the United States has many advantages that Greece does not. The U.S. dollar is the world’s reserve currency, although there has been talk of change. The United States remains one of two most productive countries in the world and is the world’s most diversified economy.

Effect of Crisis on DFA Global Bond Funds

Given the headlines, one might ask about the effect of the crisis on DFA’s global bond funds. Investors should know no DFA funds have exposure to Greek or Portuguese bonds. Further, DFA diversifies the portfolio across countries and continuously monitors the credit quality of the bonds it purchases.

Implications for Investors

There is no doubt that things are bad for some of the weaker members of the European Union, and it is certainly possible that things will get worse for these countries. However, knowing this information is not enough for investors to make a profit (or avoid a loss). For investors to capitalize on the current crisis, they would need to know whether things will be worse or better than the market already anticipates. The best indication of how bad things will get is the reaction of the financial markets. This is manifested in the yield of Greek bonds and the price of CDSs on Greek sovereign debt.

Clearly, the market is aware of the situation in Greece and has factored the expected outcome into prices. If things turn out worse than expected, prices will fall. However, if things turn out better than expected, prices will rise. Smart investors know that the world is a risky place and factor this into their investment plan. This plan accounts for all kinds of risk, not just the most recent debt crisis in Greece. Choosing the asset allocation that fits the investor’s ability, willingness and need to take risk is the best way to be prepared for the risks of the market.

One of the biggest problems investors have to deal with is hindsight bias. There is an old saying that we all make great quarterbacks on Monday morning. With the benefit of hindsight, the right play to call and the winning strategy are always obvious. Unfortunately, it seems to be a human failing that we are either unable or unwilling to recall what our beliefs were before the events actually occurred. We have a tendency to exaggerate our pre-event estimate of the probability of an event occurring. This hindsight bias may lead us to believe that even events the “experts” failed to foresee were not only painfully obvious, but also possibly even inevitable. Every day, we hear after-the-fact analysis explaining market moves in a way that sounds as if an event were predictable.

None of us has a clear crystal ball as to how events will play out. It certainly is possible that we could see a repeat of the “Asian Contagion” that caused a sharp market correction in the summer of 1998. On the other hand, the problem could be solved quickly and markets return to normal. Unfortunately, if we do experience a severe market, many investors will believe that it was obvious that it would occur and they should have acted. And obviously there will be some market gurus making such a forecast — just as there were gurus who last March, with the S&P at 600, were predicting it would drop all the way to 400 (such as Nouriel Roubini). However, there is an overwhelming body of evidence that efforts to time the market based on forecasts of events is the loser’s game.

^{Copyright © 2010, Buckingham Family of Financial Services. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.}

In less than six months, unless Congress acts, the individual marginal income tax rate reductions under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) will expire. While the timetable for addressing the EGTRRA tax cuts is not certain, the approaching sunset of the individual rate reductions, the possibility for their extension, and the fate of the limit on itemized deductions and the personal exemption phase-out will touch all taxpayers. The potential rate change makes tax planning all the more important.

In less than six months, unless Congress acts, the individual marginal income tax rate reductions under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) will expire. While the timetable for addressing the EGTRRA tax cuts is not certain, the approaching sunset of the individual rate reductions, the possibility for their extension, and the fate of the limit on itemized deductions and the personal exemption phase-out will touch all taxpayers. The potential rate change makes tax planning all the more important.

Individual income tax rates

EGTRRA set in motion a gradual reduction of the individual marginal income tax rates. EGTRRA also created a new and temporary 10 percent regular income tax bracket for a portion of taxable income that was previously taxed at 15 percent.

The federal individual income tax rates for 2010 are:

Single individuals: If taxable income is not over $8,375: 10% of the taxable income; Over $8,375 but not over $34,000: $837.50 plus 15% of the excess over $8,375; Over $34,000 but not over $82,400: $4,681.25 plus 25% of the excess over $34,000; Over $82,400 but not over $171,850: $16,781.25 plus 28% of the excess over $82,400; Over $171,850 but not over $373,650: $41,827.25 plus 33% of the excess over $171,850; and Over $373,650: $108,421.25 plus 35% of the excess over $373,650.

Married couples filing a joint return: If taxable income is not over $16,750: 10% of the taxable income; Over $16,750 but not over $68,000: $1,675 plus 15% of the excess over $16,750; Over $68,000 but not over $137,300: $9,362.50 plus 25% of the excess over $68,000; Over $137,300 but not over $209,250: $26,687.50 plus 28% of the excess over $137,300; Over $209,250 but not over $373,650: $46,833.50 plus 33% of the excess over $209,250; and Over $373,650: $101,085.50 plus 35% of the excess over $373,650.

Unless extended or made permanent, the individual marginal income tax rates will all rise after December 31, 2010 when EGTRRA sunsets. The 10 percent regular income tax bracket will also disappear after December 31, 2010 and the first portion of an individual's taxable income will be taxed at 15 percent rather than at 10 percent.

According to the Joint Committee on Taxation (JCT), after EGTRRA sunsets and with no modification by Congress, the federal individual income tax rates for 2011 will be:

Single individuals: If taxable income is not over $34,850: 15% of the taxable income; Over $34,850 but not over $84,350: $5,227.50 plus 28% of the excess over $34,850; Over $84,350 but not over $176,000: $19,087.50 plus 31% of the excess over $84,350; Over $176,000 but not over $382,650: $47,499 plus 36% of the excess over $176,000; and Over $382,650: $121,893 plus 39.6% of the excess over $382,650

Married couples filing a joint return: If taxable income is not over $58,200: 15% of the taxable income; Over $58,200 but not over $140,600: $8,730 plus 28% of the excess over $58,200; Over $140,600 but not over $214,250: $31,802 plus 31% of the excess over $140,600; Over $214,250 but not over $382,650: $54,633.50 plus 36% of the excess over $214,250; and Over $382,650: $115,257.50 plus 39.6% of the excess over $382,650.

President Obama has asked Congress to permanently extend the current 10, 15, 25, and 28 percent rates. Under the president's proposal, these rates would continue for individuals without interruption after December 31, 2010. However, the president’s proposal would allow the 33 percent rate bracket and the 35 percent rate brackets to become 36 percent and 39.6 percent, respectively, after December 31, 2010.

The president has also asked Congress to expand the tax rate bracket for the 28 percent rate so that individuals with less than $195,550 of taxable income in 2011 ($200,000 of AGI), assuming one personal exemption and the basic standard deduction, indexed from 2009) will not be subject to the 36 percent rate that applies after December 31, 2010. For married individuals filing joint returns and surviving spouses, the dollar threshold for the 36 percent bracket would be set so that married couples and surviving spouses with AGI below $237,300 of taxable income in 2011 ($250,000 of AGI, assuming two personal exemptions and the basic standard deduction, indexed from 2009), subject to the 33 percent rate in 2010, will not become subject to the 36 percent rate after December 31, 2010.

Capital gains/dividends

At the same time taxpayers are looking at higher individual marginal income tax rates, the capital gains and dividend tax rates will also increase after December 31, 2010. For 2010, the maximum capital gains and dividends tax rate is 15 percent (zero percent for taxpayers in the 10 and 15 percent brackets). Effective January 1, 2011, the tax rate on qualified long-term capital gains will be 20 percent and taxpayers will pay tax on dividends at the same rates that apply to ordinary income.

President Obama has asked Congress to impose a 20 percent capital gains and dividends tax rate on individuals with incomes above $200,000 (less the standard deduction and one personal exemption indexed from 2009). The 20 percent rate would also apply to married couples filing a joint return with income above $250,000 (less the standard deduction and two personal exemptions indexed from 2009). All other taxpayers would pay capital gains and dividends taxes of 15 percent unless they qualify for the zero percent tax rate.

If Congress does not act, the tax rate on dividends after December 31, 2010 will be the same as that currently for dividends failing to qualify for the current 15 percent rate; that is, the same as a taxpayer's personal income tax bracket.

Limitation on itemized deductions

Along with reducing the individual marginal income tax rates, EGTRRA also repealed the limitation on itemized deductions for 2010, but only for 2010. President Obama has asked Congress to allow the limitation on itemized deductions to return but to modify it for 2011 and beyond. Under the president's proposal, the limitation on itemized deductions would apply to an AGI threshold determined by taking a 2009 dollar amount and adjusting for subsequent inflation. The Obama administration has proposed a dollar amount of $200,000 for single individuals and $250,000 for married couples filing a joint return.

Also impacting higher-income taxpayers is repeal of the personal exemption phase-out. Under EGTRRA, the personal exemption phase-out is repealed for 2010 - but only for 2010.

What’s next

Congress likely will vote on the administration’s proposal to raise only the top two tax brackets this fall. Whether that vote will come in September or in a lame-duck session after the mid-term elections remains uncertain at this time, as does the outcome of that vote. In the interim, our office will continue to monitor the debate and, as Congress gets closer to a decision, prepare year-end tax strategies that respond most effectively to what Congress decides.

While the economy continues to slowly recover, many businesses continue to face customers struggling to pay outstanding bills for services or goods. The Tax Code provides relief to businesses faced with the inability to collect on accounts receivable. Businesses that are unable to get customers to pay the bill can claim a deduction for the “bad debt.”

While the economy continues to slowly recover, many businesses continue to face customers struggling to pay outstanding bills for services or goods. The Tax Code provides relief to businesses faced with the inability to collect on accounts receivable. Businesses that are unable to get customers to pay the bill can claim a deduction for the “bad debt.”

 Business bad debt deduction

 Taxpayers may deduct any business receivable that becomes totally or partially worthless during the tax year under Tax Code Sec. 166(a). However, the business bad debt deduction is limited to the taxpayer’s adjusted basis in the receivable.

 The deduction allowed for bad debts is an ordinary deduction. To claim the deduction, you must establish that the debt is genuine and that the amount cannot be recovered from the debtor. You must also make a reasonable attempt to collect the debt (however, you do not have to turn the debt over to a collection agency or file a lawsuit in an attempt to collect on the debt if doing so has little probability of success). The law requires most taxpayers to use the specific charge-off method of accounting for bad debts. Under the specific charge-off method, the taxpayer must specifically identify the accounts or notes charged off as partially or completely worthless (it is also referred to as the direct write-off method).

 If you meet these conditions, you can take the deduction in the year in which the debts became worthless. This includes certain previous years since, for some debts, worthlessness may not be immediately apparent. You can deduct a bad debt before the debt is due if you can establish the partial or complete worthlessness of the debt.

 Partially worthless. If you failed to claim the bad debt deduction for a receivable that became partially worthless in a prior tax year, you have until the later of (1) three years after you file the tax return (including extensions) or (2) two years from the time you paid the tax to file an amended return and deduct the bad debt.

 Totally worthless. If you failed to claim a deduction for a receivable that became completely worthless in a previous tax year, you have until the later of (1) seven years after the due date of the tax return (not including extensions) or (2) two years from the time you paid the tax to file an amended return and claim a deduction for the worthless receivable.

 Cash basis taxpayers

 Cash basis taxpayers cannot claim a bad debt deduction for accounts receivable that are not collectible. However, notes received by a cash basis taxpayer in the ordinary course of business are treated as the equivalent of cash to the extent of the note’s fair market value (FMV) at the time received. Thus, the initial basis in such a note is its FMV. Cash basis taxpayers may claim a bad debt deduction for uncollectible notes receivable if they have included the FMV of the notes in gross income.

 Accrual and hybrid taxpayers

 Accrual basis taxpayers may claim a bad debt deduction for accounts receivable that become partially or completely worthless during the tax year. Accrual basis taxpayers must include the face value of a note receivable in gross income if a reasonable expectancy of collection exists at the time it is received. Taxpayers that use a hybrid method of accounting may deduct bad debts if they have included the revenue from the receivable in gross income.

 Reporting

 For self-employed taxpayers, the bad business debt deduction is reported on Schedule C, Profit or Loss from Business (Sole Proprietorship), or Schedule F (Profit or Loss from Farming (for self-employed farmers)).Corporations report bad debts on Line 15 of Form 1120, U.S. Corporation Income Tax Return. S corporations report bad debts on Line 10 of Form 1120S, U.S. Income Tax Return for an S Corporation. Partnerships report bad debts on Line 12 of Form 1065, U.S. Return of Partnership Income.

 Recovering bad debts

 If you recover a bad debt during the year, the amount recovered is gross income to the extent that you claimed the deduction for the bad debt in a previous tax year, reducing your taxable income. This is called the tax benefit rule. The bad debt you recovered may not be offset against the bad debt deduction for the tax year of the recovery.

A package of small business tax incentives, as part of the larger Small Business Jobs Act of 2010 (H.R. 5297) has been slowly making its way through Congress over the past several months. However, on July 29 members of the Senate effectively blocked a final vote on the H.R. 5297, pushing the prospects for passage of bill by both chambers of Congress into September (when Congress returns from its August recess).

A package of small business tax incentives, as part of the larger Small Business Jobs Act of 2010 (H.R. 5297) has been slowly making its way through Congress over the past several months. However, on July 29 members of the Senate effectively blocked a final vote on the H.R. 5297, pushing the prospects for passage of bill by both chambers of Congress into September (when Congress returns from its August recess).

Officially known as the Senate Substitute Amendment to H.R. 5297, the Senate's Small Business Tax bill makes significant additions to the tax title that the House passed on June 15, 2010. Most of these tax incentives are retroactive to January 1, 2010, but are only temporary; once they pass, most businesses need to act quickly to maximize their benefits.

Here's what's in store for businesses if the Senate bill is approved:

Bonus depreciation. Extends, through December 31, 2010, 50-percent first-year bonus depreciation that had expired at the end of 2009.

Code Sec. 179 expensing. Increases the maximum Code Sec.179 expensing deduction from $250,000 to $500,000 and the investment limit from $800,000 to $2 million for tax years beginning in 2010 and 2011.

S corp built-in gain. Shortens the holding period for appreciated C corp assets after an S corp conversion to five years, if the fifth tax year in the holding period precedes the S corp's tax year beginning in 2011.

Cell phones. Removes cell phones and similar communication devices from their current classification as listed property, thereby lifting strict substantiation requirements, depreciation limitations, and imputed income for employee use.

General business credit. Extends the carryback period for general business credits from one to five years for eligible small businesses, applied to tax years beginning after December 31, 2009; similarly extends the carryforward period.

AMT offset. Removes the limitations on which general business credits may offset AMT liability for eligible small businesses.

SECA deduction for health insurance. Allows the deduction for health insurance to be taken into account in determining earnings for self-employment tax purposes.

Qualified small business stock. Raises the exclusion for qualifying gain from 75 percent to 100 percent on Code Sec. 1202 stock acquired anytime from the date of enactment through the end of 2010.

Code Sec. 6707A penalty relief. Moderates the penalties that the IRS must apply to taxpayers failing to disclose participation in certain tax shelters. For listed transactions, a $5,000 minimum penalty would apply to individuals, $10,000 to corporations.

Start-up expense deduction. Raises the deduction limit on start-up expenses from $5,000 to $10,000, and increase the threshold to $60,000 for one year, 2010.

Roth retirement options. Authorize 401(k), 403(b) and 457 retirement plans to allow participants to roll over pre-tax account balances into a Roth account.

Revenue offsets. Many of the tax incentives in the bill must be "paid for" under Congressional budget rules with reciprocal offsets. In addition to counting on revenues from voluntary Roth conversions, the Senate bill would raise more than $4 billion through broadened information reporting rules and higher penalties for ignoring those rules.

Congress is set to return from its month-long August recess on September 14^th. In addition to considering further tax breaks to jump-start business growth when it returns, Congress will be focused on whether to raise individual tax rates, revise capital gains and dividends treatment, preserve the estate tax, and shorten the growing reach of the alternative minimum tax (AMT). This office will continue to closely monitor these developments and recommend appropriate tax strategies as they evolve.

Many small employers want to offer their employees the opportunity to save for retirement but are unsure of how to go about setting up a retirement plan. In this article, we’ll explore three options that are widely used by small businesses: payroll deduction IRAs, SEP plans, and SIMPLE IRAs.

Many small employers want to offer their employees the opportunity to save for retirement but are unsure of how to go about setting up a retirement plan. In this article, we’ll explore three options that are widely used by small businesses: payroll deduction IRAs, SEP plans, and SIMPLE IRAs.

Payroll deduction IRAs

Many small employers find a payroll deduction IRA very attractive because it allows them to offer their employees a retirement savings vehicle at little cost. A business of any size, even self-employed individuals, can establish a payroll deduction IRA.Under a payroll deduction IRA, only your employees make contributions to an IRA.Your responsibility as an employer is simply to transmit the employee’s authorized deduction to the financial institution that maintains the IRA. 

The IRA is set up with a financial institution, such as a bank, mutual fund or insurance company. You can limit the number of IRA providers to as few as one. The employee establishes a traditional IRA or a Roth IRA (based on the employee’s eligibility and personal choice) with the financial institution and authorizes the payroll deductions.As the employer, you withhold the payroll deduction amounts authorized by your employees and send the funds to the financial institution.

An employee’s decision to participate in a payroll deduction IRA is entirely voluntarily. If an employee decides to participate, he or she can only contribute up to a certain amount to the payroll deduction IRA every year. For 2010, the contribution limit is $5,000. An employee age 50 or older may make an additional “catch-up” contribution of $1,000 for a yearly total of $6,000. Every employee who participates is 100 percent vested in the contributions to their payroll deduction IRA.

Let’s look at an example of a payroll deduction IRA:

Aidan’s employer offers its employees the opportunity to have deductions taken from their paychecks to contribute to IRAs that the employees have set up for themselves. Aidan signs up for the program and has $100 from his $1,000 bi-weekly paycheck deposited into his IRA for a yearly total of $2,600. At the end of the year, Aidan’s employer would report the full $26,000 he earned on his Form W-2 and Aidan would add the $2,600 to any other IRA contributions he made during the year for Form 1040 deduction purposes.

The costs of a payroll deduction IRA are low. Moreover, payroll deduction IRAs are not subject to the often complex filing, documentation and administration requirements that are imposed on other employer-sponsored retirement arrangements, such as 401(k) plans.

SEP plans

“SEP” stands for “Simplified Employee Pension” plan. While there are filing, administration and documentation requirements for SEP plans, the goal of an SEP plan is to keep these as simple as possible. The IRS has created, for example, model SEP language for plan documents.

An SEP plan is similar to a payroll deduction IRA. Under an SEP plan, employers make contributions to traditional IRAs set up for employees (including self–employed individuals). An SEP-IRA is funded solely by employer contributions whereas a payroll deduction IRA is funded solely by employee contributions.

As the employer, you must select the financial institution for your SEP. This decision must be made carefully because you and the financial institution will very work closely to administer the plan. After you send the SEP contributions to the financial institution, the financial institution will manage the funds.  Depending on the financial institution, SEP contributions can be invested in individual stocks, mutual funds, and other similar types of investments.

Federal law requires you and the trustee to keep employees informed about the administration and health of the SEP. Employees must be provided with plan documents, an annual statement that reports the fair market value of each employee’s account and a copy of an annual statement that is filed by the financial institution with the IRS. Like a payroll deduction IRA, each employee is 100 percent vested in his or her SEP-IRA.

Generally, the annual contributions an employer makes to an employee’s SEP-IRA cannot exceed the lesser of:

-- 25 percent of compensation, or

-- $49,000 for 2010.

Generally, contributions are not required to be made every year to an SEP. In years that contributions are made to an SEP, they must be made to the SEP-IRAs of all eligible employees.

Contributions to an SEP-IRA must be made in cash; property cannot be contributed to an SEP-IRA. Special rules apply if you, as the employer, also contribute to a 401(k) or similar plan on the employee’s behalf.

All eligible employees must be allowed to participate. An eligible employee is any employee who is at least age 21 and has worked for you in at least three of the immediate past five years.

To encourage employers to establish SEPs, the government offers a tax credit. You may be eligible for a tax credit of up to $500 for each of the first three years for the cost of starting the SEP.

SIMPLE IRAs

A “SIMPLE IRA” is a Savings Incentive Match Plan for Employees IRA. Like an SEP plan, a SIMPLE IRA is intended to be easily created and administrated.

A SIMPLE IRA is funded both by employer and employee contributions. As the employer, you can choose either to (1) match the contributions of employees who decide to participate or (2) contribute a fixed percentage of all eligible employees’ pay. Under option (2), which is known as the nonelective contribution formula, even if an eligible employee does not contribute to his or her SIMPLE IRA, you must make a contribution to the employee’s SIMPLE IRA equal to a fixed percent of the employee’s salary. Each employee is 100 percent vested in his or her SIMPLE IRA.

While similar to a payroll deduction IRA, a SIMPLE IRA has additional requirements. One important requirement is the number of employees. Generally, your business must have 100 or fewer employees to be eligible for a SIMPLE IRA.

Let’s look at an example of a SIMPLE IRA. In this example, the employer matches the employee contributions of employees who decide to participate.

Allison’s employer has established a SIMPLE IRA plan for its employees. The employer will match its employees’ contributions dollar-for-dollar up to three percent of each employee’s salary. If an employee does not contribute to his or her SIMPLE IRA, then that employee does not receive a matching employer contribution. Allison decides to contribute five percent ($2,500) of her annual salary of $50,000 to a SIMPLE IRA. The employer’s matching is $1,500 (three percent of $50,000). Therefore, the total contribution to Allison’s SIMPLE IRA that year is $4,000.

There are contribution limits for SIMPLE IRAs. For employees, the annual contribution limit is $11,500 in 2010. Employees age 50 and older may make additional catch-up contributions of $2,500 in 2010.

The SIMPLE IRA contribution for the employer is dependent upon which contribution formula you select. If you decide to make matching contributions, only eligible employees who have elected to make contributions will receive an employer contribution.If you decide to make a nonelective contribution, each eligible employee must receive a contribution regardless of whether the employee makes contributions.

As with an SEP plan, a SIMPLE IRA creates a relationship between you and the financial institution that manages the funds. SIMPLE IRA plan contributions can be invested in individual stocks, mutual funds and similar types of investments. Each participating employee must receive an annual statement indicating the amount contributed to his or her SIMPLE IRA for the year.

As with SEP plans, you may be eligible for a tax credit to help you offset start-up costs. The tax credit can reach up to $500 per year for each of the first three years for the cost of starting a SIMPLE IRA plan.

We’ve covered a lot of material about retirement plans for small businesses. There are more detailed requirements, especially for SEP plans and SIMPLE IRAs, which we can discuss in depth. Please contact our office to set up an appointment to explore these and other retirement arrangements for small businesses.

It is no secret to students, working individuals going back to school, and their families that the cost of education is becoming continuously more expensive year after year. The Tax Code provides a variety of significant tax breaks to help pay for the rising costs of education, from elementary and secondary school to college and graduate school. Individuals may be surprised to learn the many different ways the tax laws can help make education more affordable these days. In addition to scholarships, loans and work-study grants, or simply by themselves, these incentives can provide valuable cost savings.

It is no secret to students, working individuals going back to school, and their families that the cost of education is becoming continuously more expensive year after year. The Tax Code provides a variety of significant tax breaks to help pay for the rising costs of education, from elementary and secondary school to college and graduate school. Individuals may be surprised to learn the many different ways the tax laws can help make education more affordable these days. In addition to scholarships, loans and work-study grants, or simply by themselves, these incentives can provide valuable cost savings.

 Lifetime Learning Credit

 The Lifetime Learning credit can be claimed for qualified tuition and fees paid by an individual for his or her (or a spouse’s or dependent’s) enrollment at any college, university, vocational school, or postgraduate school. The credit is equal to 20 percent of up to $10,000 of the qualified tuition and related expenses paid by a taxpayer during the tax year. Thus, the maximum credit amount per taxpayer return is $2,000.

 The Lifetime Learning credit can be claimed for all years of postsecondary school (as well as for courses to acquire or improve job skills). However, the credit phases out as your modified AGI rises, and you can not claim the credit if you are married filing separately. You cannot claim a credit if your modified AGI is $60,000 or more ($120,000 or more if you file a joint return).

 American Opportunity Tax Credit

 The American Opportunity Tax Credit (AOTC), which was previously the Hope scholarship credit but temporarily enhanced and renamed the AOTC for 2009 and 2010, can also be claimed for qualified tuition and fees paid by an individual for his or her (or a spouse’s or dependent’s) enrollment or attendance at any college, university, vocational school or postgraduate school.

 The AOTC can be used for all four years of post-secondary school. Further, the credit can be taken for more expenses, such as text books and course materials. And, although the credit phases out as adjusted gross income (AGI) rises, the income phase out range is increased through 2010 as well. Additionally, 40 percent of the credit is refundable.

 For 2010, the AOTC is available up to a maximum of $2,500 per eligible student, per year (100 percent of the first $2,000 eligible expenses plus 25 percent of the next $2,000 eligible expenses). The credit phases out at higher income levels, making the credit available to more families as well. The amount of the credit begins to phase out when an individual’s AGI falls between $80,000 to $90,000 AGI. For married joint filers the credit phases out when AGI falls between $160,000 and $180,000.

 AOTC vs. Lifetime Learning credit

 The AOTC and Lifetime Learning credits cannot both be taken for the same student in the same year. If you pay the qualified education expenses of more than one student in the same year, however, you can choose to take the credits on a per-student basis for that year (for example, you may claim the AOTC for your daughter and the lifetime learning credit for your son, etc). You should calculate the effect of the AOTC, Lifetime Learning Credit (and, if retroactively reinstated for the 2010 year, the higher education expense deduction) on your tax return to see which incentive achieves the greatest tax savings. Remember, also, in “doing the math” that the tax benefits are based on calendar tax years and not school academic years.

 Coverdell Education Savings accounts

 Individuals can contribute up to $2,000 a year to a Coverdell Education Savings account, which is established to help pay for the costs of education of an account beneficiary. A beneficiary is someone who is under age 18 or with special needs.

 Although contributions to a Coverdell account are not deductible, earnings grow tax-free, and distributions are also tax free if used for qualified education expenses, including tuition and fees, required books, supplies and equipment, as well as qualified expenses for room and board. The account can help pay for the costs of attending an elementary or secondary school, whether public, private or religious, as well as a college or university.

 As with the education credits, there are contribution limits based on the contributor’s modified AGI.  

 IRA withdrawals for education expenses

 Generally, if you take a distribution from your IRA before you reach age 59½ you must pay a 10 percent additional tax on the early distribution, as well as income tax on the amount distributed. This applies to any IRA you own, whether it is a traditional IRA, a Roth IRA or a SIMPLE IRA. However, you can take an IRA distribution before age 59½ and avoid the 10 percent tax (but not the inclusion of the distributed amount in income for income tax purposes), if the distribution is used to pay the qualified education expenses for:

 -- Yourself;

-- Your spouse; or

-- Your or your spouse's child, grandchild or foster child.

 The amount of the withdrawal is generally limited to $10,000. Qualified education expenses include tuition, fees, books, supplies, and equipment required for enrollment or attendance at any college, university, vocational school or other post-secondary educational institution. In addition, if the student is at least a part-time student, room and board are generally qualified education expenses, subject to certain limitation.

 Section 529 college savings plans

 Qualified tuition programs, more commonly referred to as 529 plans, allow you to either prepay education expenses or contribute to an account set up for paying a student’s qualified education expenses at eligible educational institutions. A 529 plan allows you to save money, tax-free, to pay for qualified education expenses for college. Although contributions are not deductible for federal tax purposes, many states allow residents to deduct contributions on their state tax return. Moreover, withdrawals from a 529 plan are tax-free unless the amount distributed is greater than the account beneficiary’s adjusted qualified education expenses. Qualified education expenses include amounts paid for tuition, fees, books, supplies and equipment, as well as reasonable costs of room and board for individuals are at least part-time students.

 Computer and technology expenses. Through 2010, parents and students can take tax-free withdrawals from their 529 plans to buy computers and computer-related equipment for college. The 2009 Recovery Act added computers, computer equipment, technology, internet access, and “related services” to the list of qualified higher education expenses that can be paid for with tax-free 529 withdrawals. However, as with the AOTC, this expanded incentive is temporary and applies only through 2010 (unless Congress extends this tax break). However, tax-free withdrawals can not be taken for computer software designed for games, sports or hobbies, unless the software is “predominantly educational in nature.”

 Caution. While the tax law allows you to combine the tax benefits of a 529 plan with one of the education credits or deductions, you cannot “double dip.” That is, the expenses you use to compute the AOTC (or Lifetime Learning Credit) cannot also be included as a qualified higher education expense for purposes of determining your tax exclusion for 529 plan withdrawals.

Remember, too, that states have their own rules regarding education benefits, such as withdrawals from 529 plans. These must be considered as part of your education tax savings strategy.

 Student loan interest deduction

 Eligible individuals can take an above-the-line deduction for up to $2,500 of interest paid on student loans used to pay for the cost of attending any college, university, vocational school, or graduate school. A student loan, for purposes of the deduction, is a loan you took out and is designated solely to pay your (or your spouse’s or dependent’s) qualified education expenses. For example, if you take out a home equity loan to pay for college tuition, the interest may be deductible as mortgage interest, but it is not considered above-the-line interest for a student loan since the lender did not specifically restrict the proceeds to education expenses.

 Good news on student loan interest, however, is that qualified education expenses include not only tuition and fees, but also room and board, books, supplies and equipment, and other necessary expenses such as transportation. Interest paid on a loan that is made to you by a related person, such as parents or grandparents, or from a qualified employer plan do not qualify for the deduction.

 The deduction is available regardless of whether or not you itemize. The amount of the deduction begins to phase out when an individual’s modified AGI exceeds $55,000 a year (or $115,000 for married couples filing jointly). The deduction is completely eliminated once an individual’s modified AGI reaches $70,000 (or $145,000 for joint filers). If you are claimed as a dependent on another’s tax return, you can not take the deduction, however.

 Expired incentives hanging in the wings

 At the end of 2009, two popular, but temporary, tax incentives expired: the higher education tuition deduction and the teachers’ classroom expense deduction of up to $250. Congress is working on legislation to extend these benefits through 2010. We will keep you posted on its progress.

 Please contact us to discuss the higher education tax saving strategies that can benefit your particular situation.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of August 2010.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of August 2010.

August 4

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 28-30.

August 6

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 31-August 3.

August 10

Employees who work for tips. Employees who received $20 or more in tips during July must report them to their employer using Form 4070.

August 11

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 4-6.

August 13

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 7-10.

August 15

Monthly depositors. Monthly depositors must deposit employment taxes for payments in July.

August 18

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 11-13.

August 20

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 14-17.

August 25

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 18-20.

August 27

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 21-24.