Summer 2010 Volume XV, No. 1 Newsletter

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Summer Notes: Our Philosophy

winterSome CPA’s receive a steady stream of new business referrals from clients. Others receive occasional referrals. What’s the difference between these two groups? Is it professional competence? Charisma? Magic? Conceivably, it might be any of these three qualities, but it probably isn’t. The formula for getting referrals from clients is caring. Caring is thoughtfulness for another’s welfare and an almost hovering attentiveness to the other person’s concerns or issues.

Caring, according to our practice goes beyond the ordinary. Clients assume their CPA is skilled and efficient. They trust that the finished work will be what they expect, done on time, and for the price they expect None of these items constitutes caring. Caring calls for doing extra and being continually alert for opportunities to serve better. In our practice, caring is:

  • delivering the work in advance of the date expected
  • voluntary fee reductions due to job efficiency
  • avoiding surprises and crises that could cost the client dollars or time
  • emphasis on tax planning and savings as opposed to mere compliance
  • volunteering time and resources to help clients get through a difficult time
  • visiting with clients throughout the year
  • listening with all senses active
  • anticipating future needs, large and small, to help make client lives easier and more successful
  • developing mutual interests with clients

Caring may take some time but, more importantly, it takes thought. Among other CPA firms who regard themselves as eternally busy, taking time out for thought may be a significant challenge. Here at our practice, thought that leads to caring produces the most powerful marketing strategy a CPA could ever devise.

Tax Changes: 2010 and Beyond

The health-care bill that Congress passed in March contained two surprising new taxes to help pay for the changes: an extra 0.9% levy on wages for couples earning more than $250,000 ($200,000 for singles) and a new 3.8% tax on investment income on those same people. These taxes take effect in 2013.

The extra 0.9% levy puts a progressive element in what used to be a totally flat tax. You see, the Medicare tax for workers has been 1.45% forever. The additional 0.9% levy kicks in for wages exceeding $250,000 for a couple, and $200,000 for singles.

Regarding the 3.8% tax on net investment income, this levy is a flat 3.8% on investment income above the $250,000 threshold. Investment income is generally considered to be interest, dividends, rents, royalties and capital gains. The taxable portion on insurance annuity payouts also counts, unless it is from a company pension.

For 2010, the most immediate changes provided in the health care bill are certain tax credits for small businesses, the elimination of pre-existing conditions, and an increase in the dependant coverage to age 26. Also in effect for 2010 are the prohibition of lifetime limits on benefit payments, and the closing of the so-called “doughnut hole” for Medicare patients who face a gap in their prescription drug coverage.

Homebuyers will get more time to nab the first-time homebuyer credit. Congress has extended the deadline for the credit to September 30, 2010. That means taxpayers who have entered into a contract to buy a home can still take advantage of the tax credit if they close on their contracts by September 30th. The previous deadline was June 30th. Buyers will have until September 30 to complete their purchases and qualify for tax credits of up to $8,000 for first-time buyers and $6,500 for existing owners who move. The bill only allows people who already have signed contracts to finish at the later date.

Educational Tax Credits: A Primer

Your child’s college may have provided you an IRS Form 1098-T to help determine eligibility for the new American Opportunity (formerly Hope Scholarship) or Lifetime Learning Credits. These are education tax credits that might reduce your 2009 and 2010 federal income tax liability. In 2009, as part of the American Recovery and Reinvestment Act, several positive changes have taken affect for taxpayers. The new credit modifies the existing Hope Credit making the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. For your information, here is a broad overview of the new American Opportunity tax credit:

  • Qualified Education Expenses: Tuition, Fees and Textbooks (formerly tuition and fees only)
  • Maximum Tax Credit: $2,500 (formerly $1,800)
  • Credit Calculation: 100% of the first $2,000 spent, then 25% of the next $2,000
  • Years Allowed: Four years (formerly two years)
  • Income Phase-out Range: $160,000 - $180,000 for joint filers (formerly $96,000-$116,000)
  • Alternative Minimum Tax Friendly: Yes
  • Refundable Tax Credit: Yes, up to 40% refundable (formerly not a refundable tax credit)

The Lifetime Learning Credit is a tax credit for any person who takes college classes. There is no limitation on the number of years Lifetime Learning Credit may be claimed. It provides for a maximum tax credit of up to $2,000 (20% of the first $10,000 in tuition). For joint filers, the phaseout range is lower, at $100,000 - $120,000. Obviously this credit is most appropriate for graduate school level coursework, after one has exhausted all available American Opportunity tax credits.

For more detailed information, you should obtain IRS Publication 970 and IRS Form 8863.

Section 529 Plans and You:

A 529 plan, one of the most common college savings options, is a tax-advantaged program (usually sponsored by a state), that can be used at any U.S. college or graduate school. Although contributions aren’t federally tax deductible, they may be deductible at the state level. Also, your assets will grow tax deferred, and withdrawals are income tax free when used for qualified educational expenses. With no income limitations, investors may contribute up to $320,000 per student beneficiary.

2010 Standard Mileage Rates:

For 2010 the IRS has announced that the standard mileage rates used to calculate the deductible costs of operating a vehicle are as follows:

  • 50 cents per mile for business miles driven
  • 16.5 cents per mile for medical purposes
  • 16.5 cents per mile for moving purposes
  • 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than last year’s, reflecting generally lower transportation costs compared to a year ago. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. The rate for charitable purposes is set by law and is unchanged from 2009.

Closing:

We would like to thank you for the many referrals throughout the spring and summer -- they are very much appreciated. While one might expect that financial advisors, bankers or insurance professionals would be a huge source of referrals to a CPA practice, we know by a wide margin that referrals to our practice actually come from our very own clients. We know this because we track every lead and every referral and have seen this trend occurring for years. So once again, a big thank you.

Our 2009 client appreciation dinner/financial seminar held at Ruths Chris in Baltimore was attended by over seventy-five people! We are planning to have another client appreciation dinner, in Columbia, in late September or October and we’ll let you know about it very soon. So stay tuned.

As we are now into the second half of the year, we invite each one of you to come in for year-end income tax planning. It’s a short but productive session at our offices -- for the many who came in last year I think you will agree that it was time well spent.

Periodically, we have great tickets to the Orioles games and also for Maryland Terrapin basketball games. If you’re interested, please call us anytime for free tickets.

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Matthew R. Horowitz, C.P.A.
(410) 312-7622 • email
10015 Old Columbia Rd. Suite B-215, Columbia, Maryland 21046