The state of California is getting even more aggressive at collecting all the taxes the law allows – no matter how small. Use tax is the latest way for the state to look for cash. The Legislature has enacted strict new registration and filing requirements for businesses with gross income of $100,000 or more.

You may have received a letter from the California State Board of Equalization (BOE) requesting contact information so you could be registered as a use tax payer.

The letter advised you to provide contact information. Whether you provided that information or not, the BOE registered your business because they believe you meet the $100,000 requirement.

The letter also requests that you file returns and pay use tax that you have not paid for 2007 and 2008.

You must also file a Use Tax Return on or before April 15, 2010 to pay use tax on any out-of-state purchases during 2009. You tax preparer will file the use tax return for you. You will need to provide them with a list of purchases you made where no California sales or use tax was paid but where the item was sent to and first used in California during 2009.

What is and is not subject to sales and use tax can be complicated. There are numerous exceptions to the rules, but here are some common ways that people make out-of-state purchases that are subject to use tax:

• Internet purchases;
• Certain foreign purchases;
• Shopping channel purchases;
• Mail-order purchases; and
• Phone-ordered purchases.

These are some common examples of items subject to use tax:

• Machinery and equipment;
• Computers, printers and other electronic equipment;
• Office furniture and supplies;
• Computer programs shipped on a disc; and
• CDs and books.

Items that are exempt from sales tax are also exempt from use tax. Here are a few examples:

• Softward that is transferred over the Internet and nothing is mailed to you;
• Newspapers, magazines, and other periodicals; and
• Purchases where the seller added California sales tax to your purchase.

What if another state’s sales tax was paid?

If you were required to pay, and did pay, another state’s sales tax on the purchase, you may take a credit against the California use tax due. So, for example, if you paid 7% sales tax to another state, you are only required to pay the difference between the 7% and your rate.

This past year has been a year of changes for many of you. Between the recession, job loss, and massive federal tax benefits and state tax increases, tax planning is more important now than ever.

Both the IRS and the state of California have changed the tables used to withhold income tax from your paycheck. Caution: These changes could mean you will owe a big tax bill.

Important changes include:

• Increased benefits for education expenses for 2009 and 2010;.
• Bigger credits for solar and energy efficient property;
• COBRA benefits and unemployment that may be taxable; and
• New California small business hiring credit.

Normally we like to try to push income into the next year and take deductions early. But that strategy may not be the best one in the next couple of years.

Also, job changes (including severance pay, unemployment, and income reduction), foreclosures, and investment losses present a new set of challenges. We want to make sure we limit your tax bill to the smallest legally possible.

The President wants to raise taxes on high-income taxpayers in 2011 and popular wisdom says the capital gain rates will go up. California is again in a big revenue shortfall. The Legislature has already borrowed from 2010 and 2011, so we could easily see large tax increases in 2010.

Check your withholding

As mentioned above, major changes in withholding and taxes for both federal and California could create a big tax bill.

If you fall into any one of the following categories, you should have your tax professional perform a withholding check-up to make sure you don’t have to write a big check this April. Schedule an appointment if you:

• Have children or other dependents;
• Have more than one job;
• Are married and you both work;
• Received a COBRA subsidy;
• Receive a pension and you have taxes taken out of your pension;
• Have or expect to have total income over $1 million;
• Owed taxes when you filed your last year’s return and did not change your withholding; and/or
• Got married, divorced, or became widowed this year.

Even if your financial situation is dire, a short tax planning session now could save a big tax bill and penalties next year.

U.S. taxpayers are required to report their worldwide income; that is, income from both U.S. and foreign sources. In addition, taxpayers who have an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account are required to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of all such financial accounts exceeds $10,000 at any time during the calendar year. The FBAR is not filed with your tax return. Instead, it is filed with the Department of the Treasury in Detroit, Michigan, no later than June 30 of the year following the calendar year reported.

Failure to report income in foreign bank accounts, or to file the FBAR, carries serious consequences including large monetary penalties and, in some case, criminal penalties.

If you have foreign accounts and are unsure whether you are required to file the FBAR, contact your tax professional to review your portfolio and advise you.

Many of my clients have a significant portion of their wealth in IRAs and company retirement plans. There may be a benefit to move money among different plans, each of which involves its own set of costs and benefits.

One such opportunity is the “Roth conversion”. If you have a traditional IRA (one in which you got a deduction each time you made a contribution to the account), distributions from the account (presumably during your retirement) will be treated as taxable income. Distributions from a Roth IRA are tax-free.

You may convert all or a portion of a traditional IRA to a Roth IRA and make future distributions tax-free, but there is a cost: The amount of the conversion is taxable income in the year of the conversion.

There are two reasons why the conversions are at the forefront of tax planning strategies this year:

• There have always been income limitations that prevented many people from making the conversions. Those limitations go away in 2010.
• It is good planning to make conversions when income is down and you can report the income from the conversion in a low tax bracket. Many people’s incomes are down in this economy.

I would like to suggest that you schedule an appointment prior to the end of the year with your tax professional so you can plan on how to save the maximum amount of tax. Make sure you bring your most recent account statements.

From www.irs.gov, if you are in the market for a new home, you may still be able to claim the First-Time Homebuyer Credit. Congress recently passed The Worker, Homeownership and Business Assistance Act Of 2009, extending the First-Time Homebuyer Credit and expanding who qualifies.

Here are the top 10 things the IRS wants you to know about the expanded credit and the qualifications you must meet in order to qualify for it.

1. You must buy – or enter into a binding contract to buy a principal residence – on or before April 30, 2010.
2. If you enter into a binding contract by April 30, 2010 you must close on the home on or before June 30, 2010.
3. For qualifying purchases in 2010, you will have the option of claiming the credit on either your 2009 or 2010 return.
4. A long-time resident of the same home can now qualify for a reduced credit. You can qualify for the credit if you’ve lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009.
5. The maximum credit for long-time residents is $6,500. However, married individuals filing separately are limited to $3,250.
6. People with higher incomes can now qualify for the credit. The new law raises the income limits for homes purchased after November 6, 2009. The full credit is available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers.
7. The IRS will issue a December 2009 revision of Form 5405 to claim this credit. The December 2009 form must be used for homes purchased after November 6, 2009 – whether the credit is claimed for 2008 or for 2009 – and for all home purchases that are claimed on 2009 returns.
8. No credit is available if the purchase price of the home exceeds $800,000.
9. The purchaser must be at least 18 years old on the date of purchase. For a married couple, only one spouse must meet this age requirement.
10. A dependent is not eligible to claim the credit.

For more information about the expanded First-Time Home Buyer Credit, visit IRS.gov/recovery.

From www.irs.gov, many parents and college students will be able to offset the cost of college over the next two years under the new American Opportunity Tax Credit. This tax credit is part of the American Recovery and Reinvestment Act of 2009.

Here are six important facts the IRS wants you to know about the new American Opportunity Tax Credit: MORE

From www.irs.gov, the American Recovery and Reinvestment Act provides tax incentives for first-time homebuyers, people purchasing new cars, those interested in making their homes more energy efficient, and parents and students paying for college.

Here are six things the IRS wants you to know about ARRA tax incentives for individuals:

1. First-Time Homebuyer Credit Taxpayers who haven’t owned a principal residence during the past three years prior to the purchase date of a home before Dec. 1 of this year may be eligible to receive a credit of up to $8,000 on an original or amended 2008 tax return. They can also wait and claim the credit on their 2009 return.
2. New Vehicle Purchase Incentive Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. The deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle and phases out for taxpayers at higher income levels.
3. Making Work Pay and Withholding The Making Work Pay Credit lowered employees’ tax withholding rates this year and has already put more money into the pockets of wage earners. Self-employed individuals will have an opportunity to claim this credit when they file their 2009 return. Taxpayers who fall into any of the following groups should review their tax withholding rates to ensure enough tax is currently being withheld: multiple job holders, families in which both spouses work, workers who can be claimed as dependents by other taxpayers, workers without a valid social security number, some social security recipients who work and pensioners. Failure to adjust your withholding in these situations could result in potentially smaller refunds or in limited instances may cause you to owe tax rather than receive a refund next year.
4. Tax Credit for First Four Years of College The American Opportunity Credit can help parents and students pay part of the cost of the first four years of college. The new credit modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student.
5. Certain Computer Technology Purchases Allowed for 529 Plans ARRA adds computer technology to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.
6. Energy-Efficient Home Improvements The credit for nonbusiness energy-efficient improvements is increased for homeowners who make qualified improvements to existing homes. Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.

For more information on this and other key tax provisions of the Recovery Act, visit the official IRS Website at IRS.gov/Recovery

From www.irs.gov, working taxpayers may be eligible for the Making Work Pay tax credit, a significant tax provision of the American Recovery and Reinvestment Act of 2009. This tax credit means more take-home pay for millions of American workers.

Here are five things the IRS wants every taxpayer to know about the Making Work Pay tax credit:

1.  This credit — available for tax years 2009 and 2010 — equals 6.2 percent of a taxpayer’s earned income. The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers. Most wage earners have been enjoying a boost in their paychecks from this credit since April.

2.  Eligible self-employed taxpayers can also benefit from the credit by evaluating their expected income tax liability. If eligible, self-employed taxpayers can make the appropriate adjustments to the amounts of their upcoming estimated tax payments in September and January.

3.  Taxpayers who fall into any of the following groups should review their tax withholding to ensure enough tax is being withheld.  Those who should pay particular attention to their withholding include:

•  Married couples with two incomes
•  Individuals with multiple jobs
•  Dependents
•  Pensioners
•  Social Security recipients who also work
•  Workers without valid Social Security numbers

Having too little tax withheld could result in potentially smaller refunds or – in limited instances –small balance due rather than an expected refund.

4.  The Making Work Pay tax credit is either phased out or unavailable for higher-income taxpayers. The phase out begins at $75,000 for single taxpayers and $150,000 for couples filing a joint return.

5.  For those who believe their current withholding is not right for their personal situation, a quick withholding check using the IRS withholding calculator may be helpful. Taxpayers can also do this by using the worksheets in IRS Publication 919, How Do I Adjust My Withholding? Adjustments can be made by filing a revised Form W-4, Employee’s Withholding Allowance Certificate. Pensioners can adjust their withholding by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments.

For more information on this and other key tax provisions of the Recovery Act, visit the official IRS Website at IRS.gov/Recovery.

From www.irs.gov, every year, the IRS sends millions of letters and notices to taxpayers. Many taxpayers will receive this correspondence during the late summer and fall. Here are eight things every taxpayer should know about IRS notices – just in case one shows up in your mailbox.

1. Don’t panic. Many of these letters can be dealt with simply and painlessly.
2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.
4. 4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help us respond to your inquiry.
8. It’s important that you keep copies of any correspondence with your records.

For more information about IRS notices and bills, see Publication 594, The IRS Collection Process. Information about penalties and interest charges is available in Publication 17, Your Federal Income Tax for Individuals. Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

From www.irs.gov, summer is a time many Americans take their fishing poles and gardening tools out of storage. Hobbies – such as woodworking, stamp collecting and scrapbooking – are often done for pleasure, but can result in a profit.

If your favorite activity does make a profit every year or so, there may be tax implications. You must report income to the IRS from almost all sources, including hobbies.

Here are eight questions that will help determine if your activity is a hobby or a business.

1. Is the purpose of your activity to make a profit? Generally, your activity is considered a business if it is carried on with the reasonable expectation of earning a profit.
2. Do you participate in your activity just for fun? Hobbies – also called not-for-profit activities – are those activities that are not pursued for profit. 
3. Do you depend on income from the activity? If so, your activity is likely considered a business.
4. Have you changed methods of operation to improve profitability? If so, your hobby may actually be a business.
5. Do you have the knowledge needed to carry on the activity as a successful business? People who carry out hobbies just for fun, often don’t have the business acumen to turn their not-for-profit activity into a profitable business venture.
6. Have you made a profit in similar activities in the past? This may indicate your activity is a business rather than a not-for-profit hobby. An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year – or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
7. Does the activity make a profit in some years? Even if your activity does not make a profit every year, it still may be considered a business.
8. Do you expect to make a profit in the future from the appreciation of assets used in the activity? This indicates your activity may be a business rather than a hobby.

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity. If you are conducting a trade or business you may deduct your ordinary and necessary expenses.

More information about not-for-profit activities is available in Publication 535, Business Expenses, available on the IRS.gov Web site or by calling 800-TAX-FORM (800-829-3676).