Photo by Liz Wade
If you have a Health Savings Account, a Health Reimbursement Arrangement, or a Flexible Spending Arrangement to pay for your health care costs, you need to know that after December 31, 2010 you won’t be able to use those funds to purchase over the counter medicines.
With cold and flu season coming our way, December is better month than January to stock up on those items that you’re likely to be using in the near future.
Let’s face it, divorce sucks and paying alimony is even worse. But if you have an arrangement where you are supposed to be paying alimony (and I mean alimony, not child support) it’s to your advantage to pay up for the year before December 31. Here’s why:
Money that is paid out as alimony is a tax deduction for you. (And, if it’s any consolation, it’s taxable to your ex.) Child support, on the other hand, gives you no tax deduction and your ex pays no income tax on it.
Alimony is considered to be an “above the line” deduction. That means it lowers your adjusted gross income. Now that sounds like a lot of accounting jibberish, but on your tax return, it’s valuable. It can make the difference between whether or not you qualify for other deductions or tax credits. Made simple: above the line deductions are good.
Now here is the really important part: if you pay both alimony and child support, and you’ve missed some payments, then whatever payments you have made get counted as being child support first, and alimony second. Okay, in plain English: Let’s say you’re supposed to pay $100 a month for alimony and $200 a month for child support. $300 a month total. (Okay, that must sound like a fantasy but I like easy numbers.) Anyway, suppose you were good all the way up through September at paying $300 a month but then something happened and you didn’t make any payments from October through December.
For those first nine months you paid a total of $2,700. In your mind you paid $900 in alimony and $1800 in child support, right? Except that’s not how the IRS sees it. To them you paid $2,400 in child support and $300 in alimony, because for tax purposes you pay the child support first. So with the money that you did pay, you don’t get your full deduction. And let’s be real here, we’re probably talking about bigger numbers in real life. This tax deduction can really make a difference.
Bottom line: if you want to claim your full alimony deduction, all of your alimony and child support for the year must be paid in full by December 31st.
When I ask, do you own a corporation, I’m talking about a C-Corp, not an S-Corp. And I’m not talking about being just a shareholder in Coca Cola or GM, this post is specifically for people who own their own business and have it set up as a regular corporation.
It’s time to think about a qualified dividend distribution. Right now, qualified dividends–and here I’m talking about money that’s been held for over one year, are taxed at the capital gains tax rate. Right now, the capital gains rate for most people is 15%. Next year, there’s talk of changing that. And even with the various proposals going on in Congress, qualified dividends may still lose out and get taxed at a higher rate anyway. No matter what, you can pretty much assume that the tax rates will not go down.
So, right now, it’s time to think about a distribution. Many owners of small corporations like to keep excess funds within the corporation (that’s your retained earnings) and it makes sense so that you have money to grow the company with. And, to be honest, for some people, it’s a bit of a tax shelter-“save it for a rainy day” kind of thing. Holding money in the corporation so they don’t pay personal income tax on it unless they really need it. If you’re in the “rainy day tax shelter” camp–now is your rainy day. For most people in your situation, taking the money now is going to cost you less than taking it in the future.
So what do you need to do? Well, I always tell my clients to never take some random advice they read off of the internet, and I’m going to tell you the same thing. You need to sit down with your accountant (or accountants if you use separate ones for your business and personal taxes) and make a plan. Here’s what you want to consider:
1. How much money is available in the corporation to give as a qualified distribution? Qualified is the important word here because a non-qualified distribution is taxed at your ordinary income rate. You want a qualified distribution because of the lower tax rate. Use your good business judgement, don’t take out too much, just the excess.
2. You’ll want to see how your personal 2010 tax return will be affected if you take in that extra income. (Also, if you’re not the sole shareholder, will taking a distribution hurt your fellow shareholders as well?) Saving money on the tax rate is good only if it doesn’t hurt you somewhere else. For example, if your higher income keeps you from claiming the education tax credit on all that tuition you paid to send your kid to college, then the cost of taking the qualified dividend might outweigh the benefit of the lower tax rate. That’s why you want to sit down with your tax person and figure this out before you try it. You may be playing a balancing act — let’s say a $20,000 distribution won’t work, but what if you take $5,000 instead? Computer tax planning programs were made for these situations. What’s important is that you do it now, before December 31st. If you wait until next month–you’ve missed your opportunity.
UPDATED FOR 2013
Did you know that if you donate money to a local food pantry in Missouri, you may be eligible for a Food Tax Credit worth 50% of what you donate? Let’s say for example that you gave $500 to your local food pantry. You would get a receipt (or have the food pantry sign a special form) and then you’d use that to take $250 off of your Missouri state tax liability. But that’s not all! It’s a charitable donation so if you file a Schedule A to itemize your deductions, you’d reduce your federal taxable income by $500. So if you’re in the 25% tax bracket, that would be another $125 you’d get back on your taxes. That’s like paying $125 to have $500 worth of value.
But it’s even better than that. I read on one of the food pantry websites that for every $1 of cash donated to the pantry, $20 worth of food is generated for the hungry. It’s a gift that just multiplies.
You can’t claim a credit for over $2,500 (that would be a $5,000 donation.) The credit is non-refndable, that means you can’t get a credit for more than the amount of your tax liability. Remember, since you’re getting a tax credit for the donation, you don’t get to claim the donation as a deduction on your Missouri return-it’s an adjustment you’ll have to make on the return.
The state of Missouri has only allocated $2,000,000 for the tax credit. What happens is that all the credits are held until April 15th before they are allocated. If there are over $2,000,000 of credits applied for, they will be allocated among the applicants. In that situation, the credits that you weren’t able to use can be carried forward to next year.
This is one of the those few tax credits that normal, everyday kind of folks can use. There’s no dollar minimums but I recommend donating at least $100 to make it payoff. Most tax companies charge an extra fee for preparing Missouri Tax Credits. It doesn’t make sense to claim a credit for less than the amount of the charge to prepare the form.
For more information about the Food Pantry Tax credit, click here to go to the Missouri Department of Revenue web site: http://dor.mo.gov/taxcredit/fpt.php
The food pantry shelves are low and the need is at an all time high. Even if you don’t want or need a Missouri tax credit, this is a charity that’s worthy of your support.
2010 is almost over but you still have time to take advantage of the Federal Tax credits for energy efficiency. Here’s the quick and dirty on it:
You can get a 30% tax break on the cost of adding insulation, energy efficient exetrior windows, doors or skylights, or a heating and cooling system. The maximum amount you can get is $1,500. If you received $1,500 for this credit last year, you can’t get it again this year. If you only got part of the credit (say $800) then you can receive up the the remaining $1,500 (in this case, $700) this year. This is the most common energy tax credit that people are claiming on their tax returns. Anything you buy must be installed in your principal residence by December 31, 2010. Principal residence, it means you have to live in the house also. It can’t be a second home or a rental unit.
If you’re really into alternative energy, there’s a different energy credit that also gives you a 30% tax break with no dollar limit. This is for stuff like solar water heaters, geothermal heat pumps and small wind turbines. You must also install these items by December 31st, but you can put them on a second home as well as your principal residence.
Know what you’re getting before you buy though. Crazy as it may seem, not every energy efficient item is included in the tax credits. The best way to figure out if you’ll qualify for the tax credit is through the Energy Star website:
http://www.energystar.gov/index.cfm?c=tax_credits.tx_index
Lets say you want to buy a water heater. Go to the site, scroll down to where it lists items you can purchase for the tax credit and click on “water heater (non-solar)” . The site will tell you what qualifications your new water heater needs to have in order to qualify for the tax credit. The web site has all sorts of information, including frequently asked questions. Best of all, it’s in plain English.