IRS Posts Revised Form 941 and Instructions for Claiming New Hire Payroll Tax Exemption

MAY 18, 2010

Stuart Rohatiner, CPA, JD

On May 18, the IRS posted a new version of Form 941, Employer’s QUARTERLY Federal Tax Return, and its instructions for claiming the special payroll tax exemption that applies to new workers hired in 2010.

The Hiring Incentives to Restore Employment Act (HIRE Act) created a payroll tax exemption for employers who hire workers who have been unemployed for at least 60 days and who are not replacement hires. For qualifying new employees hired after Feb. 3, 2010, and before Jan. 1, 2011, an employer can claim an exemption equal to the employer’s share of Social Security taxes on wages paid in 2010 after March 19.

On the newly revised Form 941, employers will claim the exemption related to wages paid after March 31 on lines 6a through 6e (or on lines 12c through 12e for the exemption related to wages paid between March 19 and March 31). These lines ask for the number of qualified employees who were first paid exempt wages or tips in the quarter, the number of qualified employees who were paid exempt wages or tips in the quarter, and the amount of the wages and tips paid to qualified employees, which are multiplied by 0.062 (the amount of the employer’s share of Social Security tax). This amount is subtracted from the total Social Security and Medicare tax reported on line 5d.

The exemption for the employer’s share of Social Security taxes on wages paid to eligible employees between March 19 and March 31 is treated on the second quarter Form 941 as an April 1 tax deposit and does not adjust the amount of tax liability reported on lines 10 and 17.

The instructions say that an employer cannot claim the Social Security tax exemption and the work opportunity credit for the same employee. If an employer does not wish to claim the Social Security tax exemption for an eligible employee, the employer omits that employee and his or her wages from lines 6a through 6d (and lines 12c through 12e, if applicable).

To be a qualified employee for purposes of the payroll tax exemption, the employee must have signed Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, (or a similar statement) under penalties of perjury. The employee must not be a replacement hire, unless the worker being replaced separated from service voluntarily or for cause, and the employee cannot be related to the employer or to a 50% owner.

Nickel and dimed by Obama’s microtaxes

May 14, 2010: 9:32 AM ET

Stuart Rohatiner, CPA, JD

(Fortune) — Woven throughout President Barack Obama’s health care reform act are a variety of new taxes on high earners: a 3.8% tax on interest and dividends, a 0.9% increase in the Medicare payroll tax, a $2,500 cap on pretax contributions to flexible savings accounts. Then there are new taxes on the most expensive health insurance plans and on sales of medical equipment like bedpans and catheters. The President’s proposed budget is laden with assorted other goodies, including a limit on deductions for mortgage interest and charitable contributions, and a capital gains hike.

It’s easy to get lost in the maze of new levies. Which is really the point, at least as a political strategy. Call it nickel-and-diming by a President who seems to instinctively understand the electoral dangers of imposing a single broad new levy — even on people he defines as high income. (Manhattan families earning just over $250,000 — not exactly a killing in New York City — that means you.) Even his plan to raise the top two individual income tax rates is marketed as a rollback of unfair tax cuts under President Bush. Some of us would call it a hike.

Not long ago House Democrats were pushing a more overt “millionaire’s tax.” At least the intention was clear. Instead, the White House is pursuing a drip, drip, drip of microtaxes on the nearly 3.5 million households Obama considers wealthy enough to fund his government plans. And, oh, how those nickels and dimes add up. “We estimate that the health reform law will take an additional $52,000 on average from the top 1%” of earners, concluded the nonpartisan Tax Foundation. Households affected by the expiration of the Bush tax cuts — along with other tax hikes in his budget — will pay an additional $17,925 on average. Citizens, especially the so-called wealthy, aren’t going to be happy about the onslaught of new tariffs.

A huge segment of the country has always felt overtaxed. In 1938, when taxes were roughly 17% of income, a Fortune survey found that nearly half of all Americans thought they paid too much relative to what they got in return. That number was remarkably similar — 46% — when Gallup asked the question last year, as taxes were eating up roughly 30% of our paychecks. We can presume, moreover, that those who actually pay federal income taxes — a record 36% do not — will be especially irked by politicians who want them to send more of their hard-earned money to Washington.

In recent years Democrats have enjoyed a reputation as the most trusted party on tax questions. That is now changing, with Republicans gaining the upper hand in the latest NBC News/Wall Street Journal poll. Obama’s tax hikes fuel the mood shift. But the White House’s ambitious spending also plays a role: Americans think half their money is wasted by government.

This is a dangerous political environment for President Obama as he faces his next big economic challenge: what to do about a national debt scheduled to balloon to 77% of GDP in the next decade. It’s hard to microtax your way out of that one, and it’s far from clear that this administration has the stomach for massive cuts to entitlement programs. He can keep squeezing revenue out of the rich, but the top 1% of earners already pay more in federal income taxes than the bottom 95% combined.

That, of course, is why some politicians are floating the idea of a value added tax (VAT) — an embedded sales tax that hides all those nickels and dimes along the production chain. It’s a big revenue raiser that offers the illusion that people won’t really notice a little tax here, a little tax there.

But all that loose change adds up to hundreds and thousands of dollars. Upper-income earners are stirring tax revolts this election year, despite White House efforts to suggest that its collection of taxes won’t be quite so painful. If Democrats pursue a VAT that adds to the tax burden of average Americans, the middle class will sit up and take notice too. And that adds up to a big headache for Democrats — in 2010, 2012, and beyond. 

By Nina Easton, senior editor at large

Origin of Wall Street’s Plunge Continues to Elude Officials

By GRAHAM BOWLEY                    WATCH THE MARKET LIVE ON THURSDAY!

Published: May 7, 2010            

A day after a harrowing plunge in the stock market, federal regulators were still unable on Friday to answer the one question on every investor’s mind: What caused that near panic on Wall Street?

Traders applauding Duncan L. Niederauer, chief of NYSE Euronext, on Friday. He had defended his exchange in an interview.

Through the day and into the evening, officials from the Securities and Exchange Commission and other federal agencies hunted for clues amid a tangle of electronic trading records from the nation’s increasingly high-tech exchanges.

But, maddeningly, the cause or causes of the market’s wild swing remained elusive, leaving what amounts to a $1 trillion question mark hanging over the world’s largest, and most celebrated, stock market.

The initial focus of the investigations appeared to center on the way a growing number of high-speed trading networks interact with one another and with venerable exchanges like the New York Stock Exchange. Most investors are unaware that these competing systems have fractured the traditional marketplace and have displaced exchanges like the Big Board as the dominant force in stock trading.

The silence from Washington cast a pall over Wall Street, where shaken traders returned to their desks Friday morning hoping for quick answers. The markets remained on edge, as the uncertainty over what caused Thursday’s wild swings added to the worries over the running debt crisis in Greece.

In a joint statement issued after the close of trading, the S.E.C. and the Commodity Futures Trading Commission said they were continuing their review. And the two agencies indicated they were looking particularly closely at how different trading rules on different exchanges, which temporarily halted trading on some markets while activity in the same stocks continued on other markets, might have contributed to the problem.

“We are scrutinizing the extent to which disparate trading conventions and rules across various markets may have contributed to the spike in volatility,” the statement said.

A government official who was involved in the investigation said regulators had moved away from a theory that it was a trading mistake — a so-called fat finger episode — and were examining the links between the futures and cash markets for stocks.

In particular, this official said, it appeared that as stock trading was slowed on the New York Exchange when big price moves started, orders moved automatically to other, electronic exchanges that did not have pricing restrictions.

The pressure in the less-liquid markets was amplified by the computer-driven trades, which led still other traders to pull back. Only when traders began to manually respond to the sharp drop did the market seem to turn around, said the official, who spoke on the condition of anonymity because the investigation was not complete.

On Friday evening, another government official directly involved in the investigation said that regulators had not yet been able to completely rule out any of the widely discussed possible causes of the market’s gyrations.

This official, who also spoke on the condition of anonymity, said that regulators had collected statistical and trading data from stock and futures exchanges, and had begun cross-analyzing that with trading reports from brokerage firms and large market participants. Regulators have also gathered anecdotal accounts of what happened from hedge funds and other trading firms.

The two major regulatory agencies — the Securities and Exchange Commission and the Commodity Futures Trading Commission — have generated multiple memos detailing what they have found and offering possible causes for the market events. Among the issues discussed in the memos, the official said, were the disparate rules that different stock exchanges have for dealing with large price movements on the same securities and how prices on futures markets and stock exchanges appeared to lead or follow each other’s movements down and back up.

The lack of a firm answer, more than 24 hours after the market’s plunge Thursday, left some on Wall Street frustrated.

“The problem is you don’t come in and find out what the clear answer is,” said Art Hogan, the New York-based chief market analyst at Jefferies & Company. “We don’t have the clear explanation for how it happened.”

Others, however, said it would take time to pinpoint what happened given the increasingly complex nature of modern stock trading.

Over the last five years, the stock market has split into a plethora of new competing hubs and trading outlets, a legacy of deregulation earlier this decade and fast-paced technological change. On Friday, the rivalry between the two main exchanges erupted into view as each publicly pointed the finger at the other for being a main cause of the collapse on Thursday, which sent shockwaves around the globe.

“This is the sort of situation that has been a worry for a long time, but the markets have changed in a way that has made things more difficult,” said Robert L. D. Colby, former deputy director of trading and markets at the S.E.C. “They’ve become more fragmented, so it’s harder for any one exchange to see the full picture and take action.”

On Friday, President Obama sought to provide reassurance that regulators were working to find the root of the problem.

“The regulatory authorities are evaluating this closely with a concern for protecting investors and preventing this from happening again,” the president said.

The absence of a unified system to halt trading in individual stocks led to bitter accusations between exchanges on Friday. Robert Greifeld, chief executive of Nasdaq OMX, appeared on CNBC to criticize the New York Stock Exchange for halting trading for up to 90 seconds in half a dozen stocks on Thursday.

“Stopping for 90 seconds in time of crisis is exactly equivalent to not picking up the phone,” Mr. Greifeld said.

A few minutes later, Duncan L. Niederauer, chief executive of NYSE Euronext, responded in an interview on CNBC, blaming Nasdaq’s computers for continuing trading while the market was in free fall.

“These computers go out and just find the next bid they can find,” he said.

Mr. Niederauer acknowledged the need to introduce circuit-breakers along the lines of those already in place on the Big Board, and his views were echoed by some chief executives of the new exchanges.

Financial overhaul bill gets bipartisan push in Senate

By Brady Dennis and Shailagh Murray

Washington Post Staff Writer

In a rare show of bipartisanship, the Senate on Wednesday overwhelmingly approved an amendment to the financial regulatory bill aimed at ensuring that taxpayers never again be on the hook for bailing out collapsed banks and investment firms.

The 93 to 5 vote brought together senators as diverse as ultra-liberal Bernard Sanders (I-Vt.) and Richard C. Shelby (R-Ala.), the conservative who co-wrote the amendment with Christopher J. Dodd (D-Conn.), chairman of the Senate banking committee.

The vote came as Democrats on Wednesday also sought to undercut key GOP objections to the bill, a strategy aimed at securing much-needed Republican support for the sweeping legislation in the days ahead.

Lawmakers began voting on proposed amendments to the 1,400-page bill a week after the Senate opened formal debate on the legislation. The first two amendments Democrats allowed to reach the Senate floor had an unambiguous purpose: To put an end to GOP attacks that the far-reaching bill would perpetuate taxpayer-funded bailouts.

Sen. Barbara Boxer (D-Calif.) secured nearly unanimous support for her three-paragraph amendment clarifying that taxpayers would not bear any losses from the liquidation of bankrupt firms, a goal widely shared by both parties and reflected in a 96 to 1 vote.

Perhaps more significant was the Dodd-Shelby amendment that followed.

Their deal — hammered out late Tuesday night and into Wednesday — centered on a portion of the bill aimed at giving the government power to wind down large, troubled firms without putting taxpayer money at risk. The heart of the agreement was Dodd’s willingness to drop a proposed $50 billion fund, which would be filled upfront by the financial industry, that would cover the cost of closing down failing firms.

Republicans had criticized the provision as a “bailout fund” that could encourage financial firms to act recklessly, knowing the fund was in place. Dodd said Wednesday that neither he nor the Obama administration had proposed the fund. It was a GOP suggestion, he said.

Under the Dodd-Shelby deal, the Federal Deposit Insurance Corp. would liquidate faltering firms by borrowing money from Treasury to cover initial costs. The government would recover the costs by selling off the firm’s assets, with creditors and shareholders incurring losses. Other large banks could be assessed to pay for additional costs as a last resort.

Also, creditors of a failing firm would be forced to pay back the government any money they received above what they would have gotten under a bankruptcy proceeding. Any seizure of a large, failing firm would require court approval to ensure that the government not shut down a company inappropriately. In addition, Congress would have to approve the use of federal debt guarantees, and regulators also would be able to ban management and directors of failed firms from working in the financial sector for a minimum of two years.

‘A good first step’

Both parties praised the deal Wednesday, though from different perspectives.

Minority Leader Mitch McConnell (R-Ky.) said in a statement that “while some said the Dodd bill did not allow for bailouts, this bipartisan agreement improves the bill by limiting loopholes and seeks to make sure investors, not taxpayers, are on the hook when a Wall Street bank fails.” He called it “a good first step.”

Dodd and other Democrats said the amendment addressed one of the primary complaints that so far has kept Republicans united against the legislation. “With this agreement,” Dodd said, “there can be no doubt that this Senate is unified in its commitment to end taxpayer-funded bailouts.”

After voting on the Dodd-Shelby changes, lawmakers quickly approved two amendments put forward by Sen. Olympia J. Snowe (R-Maine), aimed at preserving the ability of small-business owners to use their homes as collateral and lightening regulatory burdens on small banks.

Democrats have been eager to please Snowe because they view her as one of the Republicans most likely to lend support for the bill.

In another effort to acquire Republican backing — and to satisfy thousands of community bankers, who comprise a powerful lobbying force — Democrats moved to an amendment from Sen. Jon Tester (D-Mont.) and Sen. Kay Bailey Hutchison (R-Tex.) that, as Tester said, “would force the big banks to pay their fair share of assessments” into the FDIC’s deposit insurance program. The bill instructs the FDIC to set the premiums that banks pay based on how risky they are. Dodd said he expects wide support for the amendment.

Next up: More debate

Despite the harmonious votes Wednesday, thorny issues lie ahead.

Republicans made a renewed push to put their own stamp on the wide-ranging bill, offering alternative visions for a proposed regulator of consumer financial products, as well as oversight of the vast derivatives market and legislation to overhaul government-backed mortgage giants Fannie Mae and Freddie Mac.

GOP members argued for placing a consumer protection division within the FDIC, with the authority to make rules that would be approved by the agency’s board. The proposal also would keep in place the doctrine of preempting states, which has allowed big banks to answer solely to federal regulators. Dodd’s bill currently would create a more autonomous consumer watchdog housed at the Federal Reserve.

Administration officials disparaged the Republican proposal Wednesday, with White House spokeswoman Amy Brundage calling it “nothing more than a lobbyist-influenced defense of the status quo.”

As of Wednesday, nearly 100 proposed amendments had been filed to the legislation. It remained unclear how many would get a hearing on the Senate floor in the coming days.

‘Bush-ama’ tax cuts: The $2.2 trillion decision

May 4, 2010: 12:10

NEW YORK (CNNMoney.com) — They’re often called the “Bush” tax cuts. But at this point they might as well be called the Bush-ama tax cuts.

That’s because President Obama has embraced the tax relief measures introduced in 2001 and 2003, proposing they be extended indefinitely for most Americans. If lawmakers do nothing, the measures expire Dec. 31.

The tax cuts lowered income and investment tax rates, boosted the child credit, reduced the estate tax, and narrowed inequalities affecting married taxpayers.

Another reason for the new Bush-ama moniker: Like President Bush, President Obama has not called on Congress to pay for the cost of the tax cuts. In fact, the extension of the cuts is exempt from the new “pay-go” rules that Obama signed into law recently.

Extending the tax cuts for most Americans will increase the federal deficit by an estimated $2.2 trillion over 10 years.

Deficit hawks are uber-frustrated.

“Why do you spend over $2 trillion in your budget — the most you spend on any single policy item — on your predecessor’s tax policy, which you repeatedly explain is to blame for the deterioration and unsustainability of our nation’s fiscal outlook?” Diane Rogers, chief economist for the Concord Coalition, wrote in her blog Economistmom.com.

In a nod to deficit reduction, Obama did propose that lawmakers let the tax cuts expire for high-income households, couples making more than $250,000. Doing so would reduce the deficit by $678 billion from where it would be if the cuts were extended for everyone.

But recently, while he didn’t say so explicitly, Obama seemed open to rethinking his campaign promise not to raise taxes on the middle-class. In an interview last month, he said he would weigh recommendations from the bipartisan fiscal commission he created to suggest ways to put the U.S. fiscal house in order.

“We should be able to solve this problem without putting a burden on middle class families,” he told CNBC. “Having said that, I’m also going to wait for the fiscal commission to provide me [with] their best recommendations. … At a certain point, what we’ve got to do is match up money going out and money coming in.”

The next 7 months

The commission won’t report its recommendations until Dec. 1. In the meantime, it’s not clear when Congress will take up the issue of the 2001/2003 tax cuts. One theory is that they’ll vote to extend them before their August recess to score political points before the midterm elections in November.

“It would look ugly to go home and campaign for five weeks without having done something for the middle class,” said Clint Stretch, managing principal of tax policy at Deloitte Tax LLC.

On the other hand, the legislative agenda is already fairly packed.

Anne Mathias, director of research at Concept Capital’s Washington Research Group, is in the camp that believes Congress may not address the issue until December.

It’s also not clear yet how long lawmakers might opt to extend the tax cuts. There had been a push by both parties to make them permanent. But some believe extending them for a year or two may be the smartest move given current political and economic constraints.

IOUSA Solutions’: Deficit explosion

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, proposes that lawmakers extend the tax cuts to the end of 2012, and then use the prospect of making them permanent as a “sweetener” to draw votes for a serious deficit-reduction deal. No deal, no tax cuts.

“This would turn the expiration of the tax cuts at the end of 2012 into a realistic action-forcing hammer … . Otherwise, the task of stabilizing the debt goes from really hard to nearly impossible,” MacGuineas wrote in a blog post.

No matter how long the tax cuts are extended, no one should bank on low rates forever, Stretch cautioned. The country’s long-term fiscal condition is too precarious for that.

“No matter what happens, Americans’ taxes are going up one way or another. The middle class is going to have to be called on to help reduce the deficit. There’s not enough fiscal capacity if we just tax the top 3%,” Stretch said.

Tax Havens’ Days Are Numbered

Robert Olsen, 05.03.10

The era of banking secrecy may be coming to an end.

HONG KONG — As Democrats and Republicans haggle over the details of financial reform in the Senate, a new tax law is quietly approaching that will force all overseas banks to reveal the overseas holdings of American account holders.

“I don’t think a lot of people have paid attention to this,” said Scott D. Michel, president of Caplin & Drysdale law firm.

“The whole purpose of this is to put American account holders around the world in a position where they can have no safe haven in any bank that wants to offer U.S. investments to any of its clientele,” he added.

American citizens are required to report all of their worldwide income every year when filing their tax returns. As a part of that process, they are also required to disclose any offshore bank accounts they may have or hold signature authority over.

If an individual falsifies his or her tax claim by concealing their income in offshore accounts, banking secrecy laws in countries like Switzerland have in the past helped to keep that income hidden by making it a crime for the banks and their employees to disclose information about clients.

U.S. lawmakers designed the Foreign Account Tax Compliance Act (FACTA) to “force foreign financial institutions, foreign trusts, and foreign corporations to provide information” on undisclosed assets held by Americans after Dec. 31, 2012. If they fail to do so, the Internal Revenue Service (IRS) can hit the banks with 30% withholding on all income originating from the U.S.

The full details of FACTA have yet to be ironed out between the U.S. Treasury and the IRS, but one of its requirements will include a document for new account holders to sign that waives whatever rights they may have under local banking secrecy laws.

The U.S. estimates that it will raise an additional $8.5 billion in tax revenue over the next 10 years by forcing Americans to disclose income they are hiding from tax collectors.

Spurred by rising fiscal deficits, the United States and other members of the Organization for Economic Cooperation and Development (OECD), particularly Germany and France, have been using a variety of methods to clamp down on tax cheats, tax havens and overseas financial centers.

The most high profile of these were the UBS ( UBS – news – people ) AG case and the OECD’s attempt to name and shame those countries that fail to comply with internationally agreed standards.

Tax havens are usually characterized by extremely low tax rates, strong banking secrecy laws and flexible regulations in terms of licensing, incorporation and supervision. So-called shell companies, trusts and other legal entities are often used to shield assets from overseas authorities.

The OECD had initially singled out 47 jurisdictions that included the likes of Hong Kong, Macau, the Philippines and Malaysia, but hasty commitments to improve transparency along with some backroom deal-making led to all four being removed from the blacklist.

The U.S. tax authorities, however, have recently introduced another far more effective means of collecting information on tax evaders: They pay informers for it.

The IRS Whistleblower Office can pay anywhere between 15% and 30% of the taxes, penalties and interest collected for cases valued at $2 million or more. (See: “Tax Informants Are On The Loose”)

The IRS has yet to make any payments under the new scheme, but that hasn’t dissuaded people like Bradley C. Birkenfeld from trying. Formerly an employee of Switzerland’s largest bank UBS, Birkenfeld was sentenced to 40 months in jail for helping billionaire California real estate developer Igor M. Olenicoff hide $200 million offshore. (See: “April 15 Plea: Pardon Tax Whistleblower”) Motivated in part by the possibility of a reward, Birkenfeld provided evidence to U.S. tax authorities detailing how the secretive Swiss bank helped wealthy Americans hide money offshore.

As a result, UBS was forced to admit wrongdoing, pay a fine of $780 million and to turn over data on as many as 4,450 UBS accounts to the Swiss government, which will pass the information to the U.S.

A number of banks from some of Europe’s best-known tax havens are facing similar investigations. Germany launched over 1,000 tax evasion probes against clients of Credit Suisse ( CS – news – people ) last month. In December the French authorities said that it had the details of 24,000 Swiss bank accounts provided by a former HSBC ( HBC – news – people ) employee.

Fearing the possibility of heavy fines and prosecution, many tax evaders from the U.S., Germany and France have come forward to report their assets.

Michel believes the disclosure of banking secrets will continue to grow. “When you combine the whistleblower regime with the template that the [U.S.] government used in the UBS case, with the information they’re getting with all these voluntary disclosure cases and now FACTA, I think the era of bank secrecy is fairly rapidly eroding in front of our eyes,” he said

Related articles:

Foreign Investment’s New Landscape

New Guidance Targets Loan Modifications

May 2, 2010
Journal of Accountancy

Responding to the recent rise in loan modifications, FASB on Thursday updated standards related to troubled-debt restructuring.

Amendments in the update are aimed at increasing comparability regarding modifications of loans accounted for within pools under ASC Subtopic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality.

FASB said differences in practice had developed over whether a loan that is part of a pool of loans accounted for as a single asset should be removed from that pool after a modification that would constitute a troubled-debt restructuring. The objective of the amendments is to address the diversity in practice regarding such transactions.

“In the view of certain entities, accounting for troubled debt restructuring does not apply to individual loans within a pool, and modified loans should remain within the pool,” according to the update. “In the view of other entities, each modified loan should be evaluated against the troubled debt restructuring criteria, and if the loan modification is a troubled debt restructuring, the modified loan should be removed from the pool and accounted for as a separate asset.”

The amendments also clarify guidance about maintaining the integrity of a pool as the unit of accounting for acquired loans with credit deterioration.

Accounting Standards Update No. 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset (a consensus of the FASB Emerging Issues Task Force), is effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early application is permitted.

“Upon initial adoption of the guidance … an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30,” according to the update. “This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.”

Five Lessons From Your ’09 Tax Return

From MoneyWatch.com:

These Money-Making Tips Will Help you Analyze Last Year’s Finances in Order to Lower Your Taxes in the Future

(MoneyWatch.com)  This story, by Jill Schlesinger, originally appeared on CBS’ Moneywatch.com

Your 2009 taxes are done. Congratulations! But you’re not done yet. (Sorry.) While you have all your 2009 tax forms and documents handy, this is the perfect time to analyze last year’s finances and use those insights to lower your taxes in 2010 and beyond.

The sooner you get started, the more you can save. So, take a big breath and then take these five steps:

1. Avoid a Big Tax Refund

You think you love getting a tax refund. What’s not to like about found money? But a refund is really just the return of a year-long, interest-free loan that you extended to your spendthrift Uncle Sam.

You can do much smarter things with that money, like putting it into a retirement plan or a college savings fund. So if you will be receiving a 2009 refund of more than a few thousand dollars and you’re an employee, adjust your withholding at work. If you’re self-employed, lower your quarterly estimated tax payments accordingly.

If your 2010 income will be less than $75,000 ($150,000 if you’re married and will file jointly), be sure your tax withholding has been properly adjusted for the new Making Work Pay Tax Credityou’re entitled to receive this year. This credit (up to $400 for singles and $800 for couples) should be reflected in the amount of taxes taken out of your paycheck. But you may need to submit a revised W-4, especially if you’re holding down multiple jobs or you’re married, since your employer wouldn’t know about your extra work or your spouse’s income.

2. Save More in Your Retirement Plan

If you are not maxing out your employer-sponsored, tax-deferred retirement plan, you’re missing outon the single best opportunity to save on taxes.

I know that the idea of saving more may be difficult these days, as so many people are just getting back on their feet. But if you can squeeze just an extra 1 or 2 percent out of your paycheck and pour that cash into the plan, you’ll reduce your taxable income and your 2010 tax bill.

Doing so might also bring your income under certain thresholds that will let you qualify for bigger tax breaks you’d otherwise miss – such as personal exemptions, itemized deductions, an Individual Retirement Account, the Child Tax Credit, the Child and Dependent Care Credit, and the Hope and Lifetime Learning Credits for college.

Here’s an example, courtesy of Research401k.com: Say you’re a single person earning $50,000 and in the 25 percent tax bracket. Without making a 401(k) contribution, you might owe $12,500 in taxes this year. By contributing $4,000 to the plan, however, you’d lower your taxable income to $46,000 and might owe $11,500 in taxes. Essentially, the government lends you $1,000 to invest for your future and you don’t have to pay the loan back until you withdraw the money from the 401(k) in retirement.
3. Look into Muni Bonds and Funds

If you have money in interest-paying bank accounts, CDs, money market funds, or taxable bonds or bond funds, you could be adding to your tax liability. High-income taxpayers need to be especially concerned since their tax liability will rise as a result of the passage of health care reform.

You may want to consider moving some of those taxable savings and investments into tax-free municipal bond funds. I’m a fan of ones from Vanguard (VWITX), T. Rowe Price (PRTAX) and Fidelity (FLTMX).

After a stellar 2009, muni funds are not quite as good a deal as they were last year, compared with taxable investments. Still, if you are in a high tax bracket, muni funds could offer a better tax-exempt yield. To see how much more in your case, use this taxable-equivalent yield calculator. Just be aware that the sweet yields on munis come with some extra risk, since there’s always a possibility that a few bond issuers won’t make their payments. Historically, that risk is pretty slim, but it’s not zero.

4. Lower Your Mutual Fund Taxes

As the equity and fixed income markets recover from the financial meltdown, be on the lookout for mutual fund taxable distributions. A distribution is one of the most aggravating features of a managed mutual fund: You are on the hook for capital gains on the fund’s investments as well as the fund’s tax liability. You may even be taxed on gains the fund incurred before you owned it!

One way to limit the damage before you invest is to ask the fund company if it will be making a distribution soon. If the answer is “yes,” hold off buying until afterward.

Or you might invest in funds with low turnover ratios, such as index funds, since they’ll be less likely to throw off taxable distributions. A turnover ratio below 10 percent is generally tax-efficient. (A fund’s annual report will show its turnover rate.) Morningstar’s Fund Screener tool can help you find low-turnover stock funds.

One class of mutual funds, tax-managed funds, is all about keeping your tax liability down. These funds do so by keeping turnover low and avoiding dividend-paying stocks. Some tax-managed funds own stocks; some own stocks and bonds. Morningstar and Yahoo! Finance’s Mutual Funds Center can help you find them.

5. Keep Better Tax Records

Organizing your tax records might not only lower your tax liability, it could help you get rid of the tax-filing headache sooner. Create a file called “Taxes 2010” and throughout the year toss into it business receipts; bank, brokerage, and mutual fund statements; W-2s; 1099s; property tax bills; and mortgage interest statements. And keep track of your purchase price, commission, and sales price for any investment transactions in 2010. You’ll thank yourself in April 2011.

• Last-Minute Tax-Filing Strategies

• How to File for an Extension

• What if You Can’t Pay the IRS?

• Save Time Filing Your Taxes

• Lower Your Taxes in 2010

Also important: self employment tax information, paying your estimated taxes