THE ACCOUNTING DEPT., INC.
                                                                                                                                    405 A N. BRICE RD., P.O. BOX 577
                                                                                                                                         BLACKLICK, OR 43004
                                                                                                                                             (614) 759-9967

CLIENT                                                                                                                                                JANUARY/FEBRUARY/MARCH                         2010


    li.t~il~J,~At~:~I~:i~Jittl                                                                     i Howto Tell If MunisAre RightforYou

                                                                                                     Some investors will receive higher after- : no tax to North Carolina because Treasury'
1                 How IlLTe1lif.Mnnis                                                              I
                                                                                                         tax yields from tax-exempt      municipal                Interest is           from      and
                                                                                                                                                          : bond income tax. exempt Ashley state earn
               Are Right for You 1-2                                                               I                                                      :                                                      I

                                                                                                   I     (muni) bonds than from taxable bonds.              local               Thus,        will
              Gifts to Trusts Must Be
                                                                                                         To find out what's best for you, you must        : more, after tax, from this muni bond fund
                Handled With Care 2
                                                                                                         crunch some numbers.                             : than       from this Treasury bond fund.
                                                                                                   I                                                                Example 3: Ashley's son Eric is in a
                                                                                                                                                : 15% federal tax bracket.

           Past Mutual Fund Losses
                                                                                                   : Try an online calculator
                                                                                                   I                                                      I
                                                                                                                                                                                            If Eric invests in
                                                                                                   : One option is to use one of several online : the Treasury bond fund                    yielding 5% and
     Can Shelter Future Gains 2-3
                                                                                                   : calculators
                                                                                                                     to help you     determine   your     : pays 15% to the          IRS, he will net 4.25%
                                                                                                    : personalized     tax-exempt yield.                  : after tax. Therefore, Eric will earn more
              For College Costs, Pick
                                                                                                    : Example          1: Ashley Burns enters her         : after tax from the Treasury bond fund
               Your Tax Breaks '4-5                                                                 : federal tax
                                                                                                                      rate of 33% into an online          : than from the muni bond fund.
                                                                                                    : calculator. She also enters her North               : Example 4: Ashley also is considering
        Refinance Your Mortgage,                                                                    : Carolina state tax rate of 7.75%. Ashley
                                                                                                                                                          : a bond fund that holds high quality
       Retain the Tax Benefits 5--6
                                                                                                    : enters 4% as the current tax-exempt yield           : intermediate term corporate bonds. It

                                                                                                    : from a hypothetical muni bond fund.                 : yields 6%. However, Ashley would owe
       Maximize Tax Advantages                                                                      : The
                                                                                                    I        calculator   shows her "tax-equivalent"          : income
                                                                                                                                                                           tax to North Carolina as well
     for Charitable Contributions 6                                                                 : yield to be 6.49%. That is, if Ashley earns             I
                                                                                                                                                                  as to the IRS on that 6% interest. She
                                                                                                    : 6.49% on a taxable bond and pays federal : can deduct                     the tax she'll pay to North
                                                                                                    : as well as state income tax on her interest : Carolina on
                                                                                                    I                                                         I
                                                                                                                                                                                her federal tax return, which
                                                                                                    : income, she'll net the same 4% interest : will reduce the effective federal tax she'll
                                                                                                    : she can get from the muni bond fund she : pay. Ultimately, Ashley will owe about
                                                                                                    I                                                         I
                                                                                                    : is considering.
                                                                                                                                                  -     - ~ ~~o~in taJf Qn=th'!t_~%Yield, so she'll n~t              I
                                                                                                    I                                                         : about 3.7% after tax. Her after-tax yield

                                                                                                         Real world math                                      : would
                                                                                                                                                                         be lower than the muni fund's 4%.
                                                                                                    I    A second option is to compare the after- : (The math would be different if Ashley
                                                                                                         tax yield you'd receive on a taxable bond            : were   subject to the alternative minimum
                                                                                                    I    with the yield of a tax-exempt bond using            :   tax and, consequently, could not deduct
                                                                                                         real world numbers.                                  : state tax payments on her federal tax
                                                                                                    I       Example 2: Suppose Ashley can earn                : return.)
                                                                                                         5% interest from a hypothetical mutual               : Typically, the higher your tax bracket,
                                                                                                         fund that invests in Treasury bonds or               : the greater the advantage of muni bonds
                                                                                                    I    4% interest from a hypothetical fund that            : and muni funds. Many observers expect
                                                                                                         invests in high quality tax-exempt muni              : tax rates to increase in the next few years,
                                                                                                         bonds. Because both funds hold interme-              : especially for high-bracket taxpayers. Our
                                                                                                         diate term bonds, their exposure to inter-           : office   can help you determine whether
                                                                                                         est rate risk is similar.                            : you will earn  higher yields, after tax, from
                             (CPA)'"                                                                I
                                                                                                            If Ashley receives 5% interest from this          :
                                                                                                                                                                  taxable or tax-exempt investments.
             America Counts on CPAs
                                                                                                     I   Treasury bond fund and pays 33% of it to             I
                                                                                                         the IRS, she will net 3.35%. She will owe            I
                                                                                                                                                                                         continued nextpage
                                                                                          JANUARY/FEBRUARY/MARCH                                 2010

continued                                                        to Tell If Munis Are Right for You
                                                                                                                     2009Tax Brackets
                                    Tax Rate                                                     Single filers taxable income                   Married filing jointly taxable income
                                      10%                                                                 Notover
                                                                                                                .$8,375                                       Notover$16,750
                                      15%                                                                 .$8,376-.$34,000                                    .$16,751-.$68,0900
                                         25%                                                              .$34,001-'.$82,400                                  .$68,001*.$131,300
                                         28%                                                              .$82,401-$171,850                                   $137,301-$209,250
                                         33%                                                              $171,851.$373,650                                   $209,251.$373;650
                                         35%                                                                      or
                                                                                                          .$373,651 more                                              or
                                                                                                                                                              .$373,651 more

GiftstoTrustsMustBe HandledWith Care
You can reduce your beneficiaries'                                                               : If you give $13,000 to an irrevo- :
exposure to future estate tax by giv-                                                            : cable trust for your daughter, that:
                                                                                                 I                                                    I
ing away assets you don't need. Those:                                                                   transfer may trigger gift tax. You might:
assets and any future appreciation will                                                          :       have to file gift tax returns and, if you:
be removed from your taxable estate.                                                             :
                                                                                                 I       already have used up your $1 million:
Giving money to your daughter Kristi                                                             :       gift tax exemption, you might have:
can be a simple process. But what if                                                             :
                                                                                                         to pay gift tax. As of this writing, the:
Kristi is young and you feel she'll be                                                           :       maximum gift tax rate is 35% of the:
tempted to spend that money unwise-                                                              :       amount transferred, in 2010.                 :
ly? Or what if Kristi is married to                                                              :
                                                                                                 I           To make gifts in trust and avoid gift    :
someone you fear will gamble away:                                                                       tax consequences, you can follow the:
your gifts? For any number of reasons,                                                           :       "Crummey" procedure. This process is         :
you might prefer to put money into an                                                            :       named after a precedent-setting court        :

irrevocable trust for Kristi rather than:                                                                decision in which the taxpayer pre-          :
make an outright gift to her.                                                                    :
                                                                                                         vailed over the IRS. Here is how the:        I
                                                                                                 I       Crummey procedure might work:                :
Dealingwith the gift tax
                                                                                                 I          Example: Ben Richards creates an          : transferred to           the trust. This gives
Unfortunately, transfers to an irrevoca-
                                                                                                         irrevocable trust and names his two          : them a present
                                                                                                                                                          I                     interest in the transfer
ble trust may not qualify for the annu-                                                          I       children as trust beneficiaries. Ben:                and qualifies the gifts for the annual

al gift tax exclusion, which is $13,000                                                          I
                                                                                                         names his sister Meg, a CPA, as the:             I   exclusion. After 30 days, if no with-
per recipient in 2010. To qualify, such
                                                                                                 I       trustee. Ben transfers $26,000 into:                 drawals have been made, the $26,000
gifts must offer a "present interest."                                                            I
                                                                                                         the trust. Meg sends notices to both:                can stay in the trust or be used by the
That is, the recipient must be able
                                                                                                  I      trust beneficiaries that state they have:            trustee, with no gift tax consequences.
to get his or her hands on the asset.
                                                                                                         30. days to withdraw up to $13,000               :
                                                                                                                                                              If Ben's wife Lara joins in the gift, the
However, often the reason for making                                                              I
                                                                                                  I      apIece.                                          I   couple can move up to $52,000 worth
gifts in trust is to keep the assets out of                                                       I         Therefore, both beneficiaries have:               of assets (twice $26,000) into the trust
the trust beneficiary's easy reach.                                                               I      the opportunity to access the assets:                this year, tax free.

PastMutualFundLosses               Gains
During the bear market of late 2008                                                                  : Example 1: Shareholders of stock : million. In order to avoid owing taxes
and early 2009, virtually all stock: I fund ABC own a total of one million                                                                   : itself, ABC makes a $10-per-share capi-
mutual                funds              posted               large           losses.                : shares. During a given year, ABC buys tal gains distribution to its shareholders.

Those losses, although painful, may:                                                                     and sells various stocks in hopes of             : For those shareholders who hold
provide mutual fund investors a cru-                                                                 :   increasing returns and to generate cash          : ABC in a taxable account, these distri-

cial tax benefit in 2010 and perhaps in                                                              :   for investors who redeem shares of the           : butions are taxable events. If Heather
later years. To take advantage of this:                                                                  fund. As ABC reaches the end of its              : Gray owns 100 shares of ABC, she

tax break, you should understand how:                                                                    tax year, it finds that its trades for the       : will report $1,000 of capital gains on
mutual fund taxes work.                                                                              :   year have resulted in net gains of $10           :                        continued next page

                                                                                                                             I   2   I
                                          JANUARY/FEBRUARY/MARCH                                 2010


continued(Tompage 2   -   Past Mutual Fund Losses Can Shelter Future Gains
her tax return    and owe income tax          : account,           however, you have to report:              Others insist that an unrealized loss
on those gains. She will owe this tax         : a gain or loss.                                       : has value,too. Ifyou investwhen XYZ
regardless of whether she pockets the         :              For example, if you buy XYZ at $12       :   has an unrealized loss of $12 million,
$1,000 distribution or chooses to rein-       : a share           in 2010 and sell for $18 a share:       you probably will not see taxable capi-
vest it in more ABC shares.                   :           in 2011, you'd have to report a gain:              tal gains distributions for several
                                              : of $6 a share, even if XYZ still:                                     years. When XYZ makes a
Tax-free gains                                : has loss carryforwards.
                                              I                                                                            trade, going forward,
In the recent bear market, many mutu-         :                                                                               that trade is far more
al funds inC1.11:1:ed..more losses- than               o
                                             i BeaJizedr unreBlized?                                                         - likely to result in a
gains on their stock trades. Unlike           :
                                               Mutual fund losses fall                                                          taxable loss than a
gains, funds can't pass through those         : into two categories:                                                           taxable gain.
losses to shareholders.                       : 1. Realized losses. If                                                            As an investor,
   Example 2: Stock fund XYZ also             :    fund XYZ lost $10                                                           you might want to
has one million shares in the hands of        : million in trades                    in                                       consider both real-
investors. As XYZ reached the end of              i          its 2009 tax year,                                             ized and unrealized
its 2009 tax year, it determined that its         :          those losses                                                   losses but give greater
trades for the year had resulted in $10           :
                                                  I          are locked in.                                                  weight    to   realized
million of net losses. Therefore, XYZ             :          Investors know                                                  losses. In any case,
made no capital gains distributions               :          that they'll be                          I                      the magnitude of the
for the year. XYZ did not distribute its          :
                                                             able to offset $10 mil-                  :
                                                                                                                            losses is less important
losses either. Instead, it carried a $10          :          lion of future gains real-               :                   than the ratio of losses
million" capital loss carryforward" on            :          ized by XYZ and owe no                   : to   the fund's assets. If XYZ has $10
its books.                                                   income tax.                                  million of realized losses and $20
                                                  :                                                   : million of assets (50%), it probably
                                                  :                                                   :

    Such losses can carry forward to as    2. Unrealized losses. Suppose XYZ
many as eight future years. Suppose I             :
                                              holds stocks currentl y valued at I                     : will offer a longer holiday from tax
that XYZ has $7 million in realized               :
                                               $20 million. XYZ bought those:                             than a fund with $10 million of real-
capital gains in 2010. The fund's $10 :       stocks for $32 million. Therefore,                      : ized losses  and $100 million of assets
million loss carryforward would com-          XYZ has unrealized losses of $12                            (10%).
                                                  :                                                   :

pletely offset the $7 million gain, so :      million. Some observers will com-
shareholders would owe no tax for
                                         I            :
                                               bine the two numbers and say that: I                              thedog,notthetail
tnat year.Tl1eom:er~    milliOn net loss ~ XYZ's potential capital losses total --;-                      Bolli Teatized and unrealized losses
would carry forward for up to eight :    I
                                               $22 million: $10 million realized: I                       can be hard to discover from a mutual
years after the original loss, to offset          :
                                               plus $12 million unrealized.          I                    fund's financial statements. Our office
tax on up to $3 million of realized               :
                                              Is this viewpoint      valid? There:                        can help you determine the capital
gains by XYZ.                              are two schools of thought on this:
                                                  :                                                       loss position of a particular fund.
    The bottom line is that mutual                :
                                           issue. Some people say that a real-                        : However,      you should not forget the
fund losses from the 2008-2009 bear               :
                                         I ized, locked-in capital loss is the only: I                    traditional advice: Don't let the tax tail
market might shelter future mutual                :
                                           one to count. You know you have:                               wag the investment dog. When you're
fund gains for several years. However,
                                           $10 million of tax shelter in the XYZ I                    :   deciding whether to buy or hold onto
this tax shelter applies only to inves-           :
                                           example. On the other hand, depend-                        :   a mutual fund, your key concerns may
tors who buy mutual funds and con-                :
                                           ing on how the stock market does:                              include the fund's investment phi-
tinue to hold them. As long as you                :
                                           today, that $12 million unrealized:                            losophy, the manager's performance
hold onto mutual fund shares, you          loss could be an $11 million unreal-
                                                  :                                                   :   record, and its expenses. Nevertheless,
don't have to report any gains except             :
                                           ized loss or a $13 million unrealized:             capital loss carryforwards  can be
those that the mutual fund distributes
                                                    loss tomorrow. There's no knowing: important, too, especially if you're
                                                  : if those unrealized losses will ever be : choosing between funds that are oth-

from its own transactions. When you
sell mutual fund shares in a taxable              I       realized and offset future gains.           I   erwise equally appealing.

                                                                              I3 I
                                        JANUARY/FEBRUARY/MARCH                               2010

ForCollegeCosts, ickYourTaxBreaks
In 2010, many parents of college:                    he qualifies minus his $1,200 in tax        : Nevertheless, if you or someone you
students will pay five-figure bills for      : savings.        Wayne will receive a $900         : know has lost a job and experienced

higher education. Fortunately, most:                 refund (40% of $2,250) from the IRS.        : a drop in income, the lifetime learn-
families can use tax benefits to pare:
    .                                        I
                                                        The American opportunity          tax    : ing credit can help defray the cost of
theIr after-tax costs. If you use some:              credit is subject to a phaseout for tax-    : going back to school to improve career

of the tax breaks for higher education,      :       payers with modified adjusted gross         : prospects.
you can't use certain others. By know-       :       income (MAGI) between $80,000 and

ing the rules, you can get an idea of        :
                                                     $90,000 ($160,000 and $180,000 for          :    Tuitionandfees deduction
what your actual costs will be, now or       I
                                                 :   married couples filing jointly).
                                                                                                 I        Both the American opportunity
in future years.                             :
                                                                                                      and lifetime learning tax breaks are
                                             I       Lifetimelearning credit                     I
                                             I                                                   I    tax credits. That is, you calculate your
Americanopportunitytax credit                I
                                                     You can claim the American oppor-           I
                                                                                                 I    federal income tax obligation and
The Hope scholarship tax credit was          I       tunity tax credit only for expenses         I
                                                                                                      then subtract tax credits. A $1,000
                                             I                                                   I
created by the Taxpayer Relief Act of        I       incurred in the first four years of post-   I
                                             I                                                   I    credit, for example, trims your tax bill
1997. The American Recovery and              I
                                                     high school education. In contrast,         I
                                                                                                      by $1,000. If you're paying college
Reinvestment Act of 2009 (Recovery           I       you may claim the lifetime learning         I
                                                                                                      bills, you have yet another option-
                                             I                                                   I
Act) effectively replaced the Hope tax       I
                                                     credit for any year of higher educa-        I
                                                                                                 I    a deduction for tuition and related
                                             I                                                   I
credit with the American opportu-            I       tion, including graduate or profes-         I
                                                                                                      fees. Like any deduction, it cuts your
                                             I                                                   I
nity tax credit for 2009 and 2010            I       sional education.                           I
                                             I                                                   I    taxable income rather than your tax
(see CPA Client Tax Letter, July/August/     I
                                             I           In order to qualify for the American    I
                                                                                                 I    bill. For example, if you take a $1,000
                                             I                                                   I
September 2009). With the new credit,        I       opportunity    tax credit, the student      I
                                                                                                      deduction and are in the 25% fed-
                                             I                                                   I
taxpayers who pay at least $2,000 for        I
                                                     must be enrolled at least half time. By     I
                                             I                                                   I    eral tax bracket, you will reduce your
tuition, fees, books, and materials for      I
                                                     comparison, you can take a lifetime         I
                                                                                                 I    tax obligation by $250: 25% of your
higher education can get a dollar-           I
                                                     learning credit for any course of study     I
                                                                                                 I    $1,000 deduction.
for-dollar tax credit, saving $2,000 in      I
                                             I       that is designed to help you acquire or     I
                                                                                                 I        Also, you take the tuition and fees
tax. Above $2,000, the tax credit is 25      I       improve job skills as long as you pay
                                             I                                                   I    deduction "above the line," on page
cents on the dollar. When a taxpayer         I       the fees to an accredited school.           I
                                                                                                 I    one of your tax return. Therefore, even
reaches $4,000 of expenses, he or she        I           The lifetime learning credit is 20      I
                                                                                                      if you don't itemize deductions, such
                                             I                                                   I
will qualify for the maximum credit          I
                                                     cents on the dollar. Therefore, if you      I
                                                                                                      as mortgage interest and charitable
of $2,500.                                   I
                                                     spend at least $10,000 for tuition and      I
                                                                                                      donations, you can take this deduc-
    This tax credit is per student. If you   I       related expenses this year, you can         I
                                                                                                      tion. Moreover, an above-the-line de-
                                             I                                                   I
have a college freshman and senior           I       save the maximum-$2,OOO          in tax.    I
                                                                                                      duction reduces your adjusted gross
this year, for example, and you spend        I       The lifetime learning credit is not         I
                                                                                                      income (AGI), which can increase
                                             I                                                   I
more than $4,000 for each of them,           I       refundable.                                 I
                                             I                                                   I    your ability to take other deductions
you may be able to claim two $2,500          I
                                             I           While the American opportunity          I
                                                                                                 I    and tax credits.
                                             I                                                   I
American opportunity tax credits, for        I       tax credit is per student, the lifetime     I        The tuition and fees tax break is a
                                             I                                                   I
a total tax savings of $5,000. In addi-      I
                                                     learning credit is per taxpayer. Thus,      I
                                                                                                 I    "cliff" rather than a phaseout deduc-
                                             I                                                   I
tion, the American opportunity tax           I       no matter how many people in your           I    tion. A taxpayer paying college tuition
                                             I                                                   I
credit is refundable, up to 40% of the       I
                                                     family take higher education courses,       I
                                                                                                 I    can take a $4,000 deduction as long
amount for which you qualify.                I
                                             I       the most you can save with this credit      I
                                                                                                 I    as his or her MAGI is no more than
                                             I                                                   I
    Example: Wayne Wallace spends            I       is $2,000 in tax on $10,000 or more in      I
                                                                                                      $65,000 ($130,000 for married couples
                                             I                                                   I
$3,000 on his daughter's college tuition     I
                                                     expenses. You cannot use the American       I
                                                                                                 I    filing jointly). If your MAGI is even
                                             I                                                   I
and other expenses in 2010. Therefore,       I       opportunity credit and the lifetime         I
                                                                                                      $1 above those numbers, you fall off
                                             I                                                   I
he qualifies for an American oppor-          I
                                                     learning credit for the same student        I
                                                                                                 I    a metaphorical cliff to a $2,000 deduc-
tunity tax credit of $2,250: $2,000          I
                                             I       in the same year, but you can use           I
                                                                                                 I    tion. What's more, if your MAGI is
plus $250 (25% of $1,000). However,
                                                     different credits for different students'   I
                                                                                                      even $1 above $80,000 ($160,000 in
Wayne's federal income tax liability         I
                                                     educational expenses in the same year.      I
                                                                                                 I    joint returns), you fall off another cliff
(the amount that he owes on his 2010         I           The phaseout    for the lifetime        I
                                                                                                 I    and get no tuition deduction.
                                             I                                                   I
tax return before taking this credit) is     I
                                                     learning credit is stricter than for        I
                                                                                                          You can't claim this deduction in
only $1,200 this year. The American           I
                                                     the American opportunity tax credit:        I
                                                                                                 I    the same year you claim the American
                                              I                                                  I
opportunity tax credit completely off-        I      $50,0000-$60,000    of MAGI for sin-        I
                                                                                                      opportunity      or lifetime     learning
                                              I                                                   I
sets his tax liability, with $1,050 left      I
                                                     gle taxpayers and $100,000-$120,000         I
                                                                                                      tax credit for the same student. In
                                              I                                                  I
over: the $2,250 tax credit for which         I      for married couples filing jointly.         I                                on
                                                                                                                          continued nextpage

                                                                       I   4   I

                                                  JANUARY/FEBRUARY/MARCH                                  2010


continued from page 4     -   For College Costs, Pick Your Tax Break
addition, you can't claim the tuition                   I           to $2,500 per student per year, that:                  is available to families with higher
                                                                                                                   : incomes. Our office can help you sort

and fees deduction for expenses paid                    I
                                                        I           probably will be your best choice.
with earnings from a Section 529                        I           However,if you are paying bills for stu-       :       through your choices as you prepare
plan or withdrawals from a Coverdell
                                                                    dents who already have four years of           : your        2009 tax return and make plans
Education SavingsAccount.                               I
                                                        I           higher education, you can only claim:                  for 2010. We also can let you know if
                                                        I           a lifetime learning credit or a tuition:               it makes sense to forego claiming a stu-
How they compare                                            :
                                                            I       and fees deduction.                   I
                                                                                                            dent as a dependent in order to let the
If you qualify for an American oppor-                       :          Although the credit might pro-              :
                                                                                                             student take a higher education tax
tunity    tax credit,    with tax savings        up         :       vide mor~ -tax savings, the de-duGtkm-:-~--iit Gn-IDSorn€T-own ~re-mm.

Refinance YourMortgage, RetaintheTaxBreaks
Mortgage rates are at some of their:                                  Example 2: Richard and Sarah:
lowest levels since the 1950s.As of this:                       I
                                                                    Tucker refinance a mortgage with a             :   I

writing, the average rate on a 30 year,                         :   $250,000 balance. Their new loan is            :
fixed rate mortgage is below 5%. Many:                              $300,000. After paying off their old:
lenders offer lower rates. Therefore, if                    :
                                                                    loan, the Tuckers keep $50,000 in              :

you have a home loan with an inter-                         :       cash. They spend $20,000 to install            :
est rate of 6% or higher, this may be a                     :       a powder room in their home and:
good time to refinance.                                     :       use the other $30,000 to pay college:
    To refinance your loan, you may:                                tuition for their son Adam.                    :
have to clear several hurdles. You'll:                      I           Under the tax code, the $250,000           :

have to show that your home's value:                                the Tuckers use to replace their old:
is high enough to provide the lender:                       I       mortgage and the $20,000 they spend:           I
with adequate security. Additionally,                       : on         improvements     is all considered:
you'll probably have to demonstrate:                        I
                                                                    "home acquisition debt." The interest:         I

that you have enough income to make:                                on that $270,000 will be tax deduct-           :
the loan payments and a solid credit:                               ible as long as the Tuckers' home loans:               tax (AMT) can deduct the interest on
history.                                                    : are no larger than $1 million.
                                                            I                                                      : home equity debt only if the money
                 -. - - ~ -     ~~   --
                                                      -I- -- Howe\Tet:,          -the--$JO,OOO-   usoo fut.-+ is             1]spn for home..   imprmze.ments-<Ihe
Taxtactics                                                  : Adam's         schooling is "home equity:                    $100,000 cap still applies.) If you are
Assuming you qualify to refinance                           : debt."         The Tuckers can deduct the:                   subject to the AMT, be careful about
your home mortgage, you'll want to                          :       interest on no more than $100,000 of           :       how you use the proceeds of cash-out
make sure you maximize the available                        :
                                                                    such debt. Therefore, in order for the:        I
                                                                                                                           refinancing and how you report the
tax benefits. The simplest way to do                        :       Tuckers to deduct the interest paid on         : interest on your tax return.
this is to get a straight replacement                       : that
                                                                         $30,000, they can have no more:           I
                                                        : than            $70,000 of other home equity         : Payingpoints
    Example    1: Patrick Rogers has                    :           debt, such as an existing balance on       : Homeowners frequently pay "points"
a 6.5% mortgage with a balance of I                     :           a home equity line of credit. Also,        : when they refinance a mortgage.

$250,000. He refinances with a 5%,                      :           for the interest on the home equity        :               Example 3: Jerry and Kay Martin
$250,000 mortgage. Patrick's mort-
                                                        :           debt to be fully deductible, the total:    I
                                                                                                                           refinance a $300,000 loan and pay
gage interest on the new loan (about                    :
                                          mortgage debt on the home cannot:                                                two points (2%), or $6,000. Paying
$12,500 per year) will be tax deduct- : exceed its value. The total mortgage:                                              these points reduces the interest rate
ible as long as the total of all of his : debt includes all acquisition debt and:                                          on their loan. The Martins can deduct
home loans is $1 million or less. The     all home equity debt.
                                                        :                                                      :
                                                                                                                           these points over the life of the loan.
situation is trickier, however, if you I                :
                                              What's more, taxpayers who are:                                  I
                                                                                                                           If they get a 30 year (360 month)
refinance with a larger loan.           I subject to the alternative minimum                                   I                                continued on next page

                                                                                     I5 I
                                                                                                        JANUARY/FEBRUARY/MARCH                       2010

  continuedfrom page 5 - Refinance Your Mortgage, Retain the Tax Benefits
 loan, they can deduct $16.67 ($6,000 :      However, if you refinance with the:                                                                                     Example     6: Diane Jensen refi-
 divided by 360) every month that this: I same lender, you can't deduct the:                                                                                     nances a loan secured by her princi-
loan is outstanding, or $200 each cal-                                                                       : old   points. Instead, the old and new:           pal residence, borrowing $200,000
endar year ($16.67 times 12). What's:                                                                            points are combined and deducted:               and paying $4,000 in points. Of the

more, when the loan is paid off, all                                                                         :
                                                                                                                 over the life of the new loan.              :   $200,000, she uses $50,000 (25%) for
of the not-yet-deducted points can be                                                                        :      Example 5: As mentioned, the:                home improvements.        In this situa-
deducted. This might occur if they refi-                                                                     :
                                                                                                             I   Martins take out a 30 year loan and:
                                                                                                                                                                 tion, Diane can deduct $1,000 (25%
nance the loan again or sell the house.                                                                      :   pay $6,000 in points. Suppose they:     I
                                                                                                                                                                 of $4,000) immediately because she
                                                                                                                                                                 used $50,000 (25% of her loan) for
   Example 4: The Martins refinance:                                                                     I       had $2,000 worth of nondeducted         :       home improvements. She can deduct
their mortgage in mid 2010 and:                                                                                  points from their old mortgage and:             the other $3,000 worth of points over
deduct $100 worth of points that:                                                                                they refinance with the same lend-      :       the life of her new loan.
year, for the six months since they:                                                                             er. Now the Martins have $8,000 in      :           You can deduct home improve-
got the new loan. In 2011, 2012, and:                                                                    I       points to deduct over their 30 year:            ment points immediately        only for

2013, they deduct $200 worth of        :                                      :                                  loan: about $22 a month.                        work on your principal residence.
points each year. In 2014, they sell   : In another situation, suppose:                                                                                          If Diane had spent the $50,000 on
                                                                                                                                                                 her vacation home, she would have
their home and payoff their loan. On   : you refinance with a cash-out mort- :                           I

                                                                                                                                                                 to deduct all $4,000 worth of points
their 2014 tax return, the Martins can: gage and use some of the proceeds:
                                                                                                                                                                 over the life of the loan. If you con-
take a $5,300 deduction: the $6,000 : to improve your principal residence. :

                                                                                                                                                                 tact our office when you refinance
of points they paid upfront minus:       Then some of the points you pay can:                                                                                    your mortgage, we can help you take
the $ 700 they've already deducted.    : be deducted upfront, pro rata.       :                          I                                               I       all legitimate tax deductions.


 MaximizeTaxBreaksfor CharitableContributions
Good times or bad, many Americans         worth only $4,400: he would have                               :                                               I       She owns shares of XYZ Corp., which
contribute    generously   to charity.    owed $600 in capital gains tax (15%                            :                                               : she bought for $50 a share. Now those
Charitable donations are tax deduct-      of his $4,000 profit) on a sale.                                                                               : shares trade at $20 apiece. Ellie
ible-,-but some strategies work better : Therefore, this strategy gives                                                                                  :           can sell 250 shares to raise
than others. Often, you will gain the     Doug a $5,000 tax ben-                                         :
                                                                                                                                                                             $5,000 for the donation.
greatest tax advantage by donating        efit for relinquishing a                                       :                                                                    Not only will she get a
appreciated securities.                 I
                                          $4,400 asset.                                                  :                                                                      $5,000 tax deduction,
    Example 1: Doug Davis decides II                                                                                                                                             Ellie will have a $7,500
to donate $5,000 to his alma mater. II lack of appreciation                                                                                                                      capital loss: $30 per
He owns shares of ABC Corp., which II Some taxpayers don't                                                                                                                    share on 250 shares. Her
he bought years ago for $10 a share. I have appreciated secu-                                                                                                                 capital loss can offset the
Now those shares trade for $50. Doug II rities to donate now.                                                                                                                  tax on realized capital
decides to give 100 shares to his alma I In that situation, you                                                                                                                 gains, now and in the
mater. Doug gets a $5,000 tax deduc- II shouldn't       donate depreci-                                                                                                         future. If she doesn't
tion for this donation. His alma mater II ated securities. Instead, you                                                                                                         have enough         capital
is a tax-exempt organization, so it II should sell first and donate
                                                                                                                                                                             gains to offset this   capital
can sell the shares and use the entire II the cash.                                                                                                      :                loss, she can use the     loss to
$5,000 of sale proceeds. To Doug,                                                                        I
                                                                                                         I          Example 2: Ellie Evans also wants    :         offset ordinary income up to     $3,000
however, those shares were ultimately
                                                                                                                 to donate $5,000 to her alma mater.     : per year until the loss is used in full.

  In accordance with IRS Circular 230, this newsletter is not to be considered a "covered opinion"                                                                                      or other written
  tax advice and should not be relied upon for IRSaudit, tax dispute, or any other purpose.

      The CPA Client Tax Letter (ISSN 1066-1867) is prepared by AICPA staff for the clients of its members and other practitioners. The Tax Letter carries no
      official authority, and its contents should not be acted upon without professional advice. Copyright @ 2010 by the American Institute of Certified
      Public Accountants, Inc., New York, NY 10036-8775. Printed in the U.S.A. Sidney Kess, CPA, JD, Editor. For AICPA customer service call (888) 777-7077
      or visit

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