Controlling Expenditures in Difficult Economic Times The current slowing economy has prompted many individuals to take a closer look at how and where they spend their money.  If you find yourself in this situation, and many of us do, you may need to develop some restraint in consumptiona nd grasp the value of saving to build wealth for the future.  However, an intellectual grasp of the reasons to control expenditures may not be enough.  You may need to establish budgetary controls over your expenditures, as well. To properly analyze your spending habits, carefully review your expenditure levels from previous periods.  This can be done by analyzing your bank and credit card statements for a period of several months, an entire year, or even longer.  By using the best or most easily obtained information about your past expenditures, you can identify areas needing control in the future. But, acknowledging that restraint is necessary is quite often not enough to bring about a change in spending habits.  You should make a serious commitment to reduce spending.  Next, develop a workable technique for budgeting.  This can be done by acquiring a simplified budgeting system that can help you get started on a budgeting routine.  You are probably familiary with the timeless adage that says you should pay yourself first.  That's an excellent way to build your savings. In that light, you are less likely to spend money if you do not actually see it.  You may require the discipline of having savings taken car of automatically.  You can arrange to have your bank systematically transfer funds from  checking to savings accounts.  Mutual funds can be purchased with systematic transfers from your bank to the fund company.  Your employer can also make automatic payroll deductions to fund voluntary contributions to employer 401(k) and savings plans. In summary, controlling expenditures and systematic savings, even in tough economic times, can help build wealth to fund future endeavors. Tax Calendar January 15 - Individual taxpayers' final 2008 estimated tax payment is due unless Form 1040 is filed by February 2, 2009, and any tax due is paid with the return. February 2 - Most employers must file Form 941 (Employer's Quarterly Federal Tax Return) to report Medicare, social security, and income taxes withheld in the fourth quarter of 2008.  (If your tax liability is less than $2,500, you can pay it in full with a timely filed return).  If you deposited the tax for the quarter in full and one time, you have until February 10 to file the return.  Small employers who have been notified by teh IRS should file Form 944 (Employer's Annual Federal Tax Return).  - Give your employees their copies of Form W-2 for 2008.  If an employee agreed to receive Form W-2 electronically, have it posted on te webiste and notify the employee.  - Generally, give annual information statements to recipients of certain payments you made during 2008 (see February 17 for exceptions).  You can use the appropriate version of Form 1099 or other information return.  Form 1099 can be filed electronically with the consent of the recipient.  - File Form 940 (Employer's Annual Federal Unemployment (FUTA) Tax Return) for 2008.  If your undeposited tax is $500 or less, you can either pay it with your return or deposit it.  If it is more than $500, you must deposit it.  However, if you deposited the tax for the year infull and on time, you have until February 10 to file the return.  - File Form 945 (Annual Return of Withheld Federal Income Tax) for 2008 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on pensions, annuitities, IRAs, etc.  If your tax liability is less than $2,500, you can pay it in full with a timely filed return.  If you deposited the tax for the year in full and one time, you have until February 10 to file the return. February 17 - Give annual information statement Forms 1099-B, 1099-S, and 1099-Misc. (if box 8 or 14 is checked) to recipients of certain payments you made during 2008.  You can use the appropriate version of the Form or other information return. March 2 - The government's copy of Form 1099 series returns (along with the appropriate transmittal form) should be sent in by today.  However, if these forms will be filed electronically, the due date is extended to March 31.  - The government's copy of Form W-2 series returns (along with the appropriate transmittal form) should be sent in by today.  However, if these forms will be filed electronically, due the date is extended to March 31. March 16 - 2008 income tax returns must be field or extended for calendar-year corporations.  If the return is not extended, this is also the last day for calendar-year corporations to make 2008 contributions to pension and profit-sharing plans. Social Security  Changes for 2009 The Social Security Administration (SSA) recently announced numerous adjustments to Social Security benefit amounts, thresholds, limits, and exclusions.  For 2009, Social Security and Supplemental Security Income (SSI) beneficiaries will receive a 5.8% cost of living adjustment.  The maximum benefit for workers retiring, after attaining full retirement age, in 2009 will be $2,323/month (up from $2,185/month in 2008).  Finally, the wage base for calculating the Social Security portion (OASDI) of the annual payroll tax obligation will be $106,800 in 2009 (up from $102,000 in 2008).  There is no limit on wages for calculating the Medicare contribution. The SSA estimates the average monthly benefit for all retired workers in 2009 will be $1,153, up from $1,090 in 2008.  For aged couples, both receiving benefits, the average 2009 monthly benefit is estimated to be $1,876, compared to $1773 in 2008.  Finally, the SSA estimates the monthly benefit for all disabled workers will be $1,064, up from $1,006 in 2008. How Earned Income Impacts your Social Security Benefits If you are a social security beneficiary under full retirement age (currently age 66), an earnings tast determines whether your social security retirement benefits will be reduced because you earned more from a job or business than an annual exempt amount (discussed below).  A different earnings test applies to individuals entitled to disability benefits. As a general rule, the earnings test is based on income earned during the year as a whole, without regard to the amount you earned each month.  However, in the first year you receive benefits, they are not reduced for any month in which you earn less than one-twelth of the annual exempt amount. One of the provisions of the Senior Citizens' Freedom to Work Act is that the social security retirement earnings test is eliminated in the calendar year in which you reach your full benefit retirement age for the month of, and months after, such attainment.  In other words, once you reach your full benefit retirement age, there is no longer an earnings test to reduce your social security retirement benefits.  However, the earnings test still applies for the years and months before the month you reach your full benefit retirement age. Social security beneficiaries under the full benefit retirement age who have earnings in excess of the annual exempt amount are subject to a $1 reduction in benefits for each $2 earned over the exempt amount ($14,160 in 2009) for each year before the year during which they reach the full benefit retirement age (see the example in the next  column).  However, in the year beneficiaries reach their full benefit retirement age, earnings above a different annual exempt amount ($37,680 in 2009) are subject to a $1 reduction in benefits for each $3 earned over the exempt amount.  Social security benefits are not affected by earned income beginning the with the month the beneficiary reaches full benefit retirement age. You woul use the first exempt amount ($14,160 for 2009) from the year you reach age 62 through the year before the year you reach your full benefit retirement age.  The second exempt amount ($37,680 in 2009) is used in the year you raech your full benefit retirement age.  (However, social security benefits are not affected by earned income beginning with the month your reach your full benefit retirement age.) Example:  Applying the annual earnings test. Linda retired in 2008 at age 63.  In 2009, her social security retirement benefits are $1,200 per month, so she expects to receive benefits totalling $14,400 during the year.  Linda's employer asks her to cme back to work for four months during 2009 at a salary of $6,000 per month (a total of $24,000) and Linda accepts.  Since she received $9,840 over the exempt amount ($24,000 - $14,160), her benefits are reduced by half that amount, or $4,920.  Therefore, she will receive only $9,480 in social securit5y benefits in 2009 ($14,400 - $4,920).  The fact she worked only four months during the year is inconsequential.  The results would be the same if Linda was self-employed, rather than an employee. As you plan your retirement, be mindful that, as the example shows, working during retirement may reduce your social security benefits.  This, in turn, could have a negative impact on your financial plans. Managing Business Net Operating Losses We touched upon current poor economic conditions and the need to control expenditures, particularly during tough economic times, in the article one article.  But, the anemic economy has alos impacted small business owners, many of whome may have an operating loss for 2008.  That's the bad news.  The good news is, if your business sustained an operating loss, you may be able to benefit from carrying what is called a net operating loss (NOL) into a different tax year - a tax year in which you had or will have taxable income - and take a reduction for the current NOL against that different year's taxable income.  This is what is known as taking an NOL deduction, which could result in a refund of previously paid taxes (or a reduction of future taxable income). Generally, an NOL can be carred back two years and forward for up to 20 years to offset taxable income in those years.  The NOL first offsets taxable income from the previous two years (the earliest year first), and is then carried forward to offset taxable income in future years.  The initial result is a refund of all or a portion of the taxes you paid for the two prior years, limited by the amount of the NOL. There are more advantageious rules for treating NOLs arising from special situations.  For example, a three-year carryback applies for NOLs sustained by small businesses and farmers and arising from federally declared disasters, no matter when they arose.  A special five-year NOL carryback is available for farming losses (whether or not related to disaster areas) incurred in tax years after December 31, 1997.  Finally, for NOLs in tax years beginning after 2007, there is a special five-year carryback period to the extend of a qualified disaster loss occurring in a federally declared disaster area before January 1, 2010.  These extended carryback periods allow taxpayers the opportunity to receive a quick refund of taxes paid in several prior years versus waiting to carry the NOL forward. In determining the maount of your NOL, you don't simply use your negative taxable income from your tax return.  Several modifications must be made and the computations can grow quite complex, depending upon your particular circumstances.  So, please contact us to discuss how a business loss might qualify as an NOL and turn into a tax refund to supplement your cash flow during this difficult economic period.

Enhanced Residential Energy Credit Congress recently enhanced the tax credit for solar energy and added two new energy systems to the list of residential energy enhancements qualifying the the residential energy efficient property (REEP) credit.  The recently enacted Energy Improvement and Extension Act of 2008 (Energy Act) includes these provisions designed to give taxpayers an immediate tax break and partially cover the cost of these new systems that will lower future energy bills. Prior to the Energy Act, individuals were allowed a tax credit for REEP expenditures for qualified solar water heating and photvoltaic systems.  These credits, available for systems placedin service between January 1, 2006, and December 31, 2008, amounted to 30% of the system's cost.  The credit for individuals was 30% per system in any tax year, but was capped at a maximum of $2,000 per system. For tax years beginning after December 31, 2008, the Energy Act makes several enhancements to previous legislation.  First, the credit is extended for an additional eight years through 2016.  Next, the $2,000 cap for solar water heating property expenditures is eliminated and the credit will be 30% of the system's entire cost.  This allows a taxpayer installing a $30,000 system to receive a $9,000 tax credit where, prior to the Energy Act, the credit would have been limited to just $2,000.  A nice break considering the high cost of these systems.  Finally the credit is fully available to offset the AMT in 2009.  As with prior law, the dwelling unit must be located in the U.S. and be used as a residence by the taxpayer. The Energy Act adds small wind energy property and geothermal heat pump systems as components eligible for the REEP credit.  Qualified small wind energy property is property that uses a wind turbine to generate electricity for use in connection with a dwelling unit in the U.S. and used as a residence by the taxpayer.  The Code does not require the residence to be the principal residence of the taxpayer.  So, wind turbines installed on a second residence appear to comply.  This component of the credit is limited to $500 for each 1/2 kilowatt of capacity, not to exceed $4,000. In addition, the 30% credit is now available for qualified geothermal heat pump system property expenditures.  A qualified geothermal heat pump is geothermal heat pump property installed on or in connection with a dwelling unit located in the U.S. and used as a residence by the taxpayer.   As with wind property, it appears that geothermal heat pumps installed in a second residence will qualify for the credit.  This component of the credit is limited to $2,000 for any qualified geothermal heat pump system expenditure.  Prior to the Energy Act, heat pumps qualified for the nonbusiness energy property credit, but that credit amount was limited to $300. With the enhancement of the REEP credit, Congress has given taxpayers an even greater opportunity to save on taxes and their future energy costs as well.  This law change also presents a tax planning opportunity since dealying the installation until 2009 could result in a new or higher tax credit.  For example, if, during 2008, a taxpayer spends $10,000 on solar energy property, the credit will be limited to $2,000 (the cap).  However, if that same taxpayer delayed the purchase until 2009, the credit would be $3,000 ($10,000 x 30%). Congress Extends Numerous Tax Breaks The recent Tax Extenders and AMT Relief Act of 2008 (Extenders Act) provides extensions for several popular tax breaks and the addition of several new relief provisions, including disaster-area tax relief.  Following is an overview of some of the key provisions for individuals and business owners in the new legislation: College Tuition Deduction.  The above-the-line deduction for up to $4,000 of college tuition and related fees were retroactively restored for 2008 and extended through 2009. Optional Sales Tax Deduction.  The optional itemized deduction for general state and local sales taxes was retroactively restored for 2008 and extended through 2009. Additional Standard Deduction for Property Taxes.  The new (for 2008) standard deduction for nonitemizers of up to $1,000 for married joint-filers ($500 for others) was extended through 2009. Educator Expense Deduction.  The above-the-line-deduction for up to $250 of personal expenditures by teachers and other school employees was retroactively restored for 2008 and extended through 2009. IRA Rollover Provision.  The provision allowing qualified taxpayers to make tax-free contributions from their IRA plans to qualified charitable organizations is extended through 2009. 15-year Cost Recovery.  The 15-year write-off for qualified leasehold, restraurant, and retail improvements is extended through 2008. S Corporation Charitable Contributions of Property.  Favorable Subchapter S basis rules for gifts of appreciated property are extended through 2009. Disaster Relief.  Included in the new legislations are Midwestern disaster area tax relief and a new tax relief package for victims of all federally declared disasters occurring after December 31, 2007, and before January 1, 2010.