Will Capital Gains Be Changed?

Currently, capital gains rates for the sale of assets held over one year are taxed at 15% (0% to the extent a taxpayer is in the 15% or lower regular tax bracket), compared with a top tax of 35% for ordinary income. Without Congressional action, these rates will increase to 20% (18% for assets held over 5 years) in 2013.

Although there has been some discussion related to extending the 15% rates for another year (2013), to date, Congress has not provided any indication one way or the other. Even without providing guidance for 2013, the House Ways and Means Committee and the Senate Finance Committee are already holding joint meetings to discuss capital gain reform.

Capital gains and related issues make up approximately half of the tax code, in excess of 20,000 pages. In addition, those with the most capital gains are generally the wealthier taxpayers, and lower capital gains rates contribute to the disparity in tax rates between the wealthy and the average working family that we hear so much about in the media. As an example, Billionaire Warren Buffet announced that his tax rate was 14%, which is lower than the rate paid by his secretary.

Some contend that capital gains should be taxed as ordinary income and should even be taxed as the income is earned rather than when the gain is realized.

Still others maintain that doing away with special long-term capital gains rates would discourage investment and would further harm the economy.

It is difficult to predict what lies ahead. But you can count on our firm to stay on top of this issue and to keep you abreast of the ever-changing tax landscape.

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Saver’s Credit Can Help You Save for Retirement

Low- and moderate-income workers can take steps to save for retirement and at the same time earn a special tax credit.

The saver’s credit helps offset part of the first $2,000 that workers voluntarily contribute to traditional or Roth Individual Retirement Arrangements (IRAs), SIMPLE-IRAs, SEPs, 401(k) plans, 403(b) plans for employees of public schools and certain tax-exempt organizations, 457 plans for state or local government employees, and the Thrift Savings Plan for federal employees. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Unlike other workplace retirement plans, IRA contributions can be set up and funded after the end of the year. Thus, eligible workers have until April 15, 2013 to make qualifying IRA contributions for 2012 and get the saver’s credit on their 2012 tax return.

Taxpayers with 401(k), 403(b), 457 and Government Thrift plans who were unable to set aside money for 2012 may want to schedule their 2013 contributions soon so their employer can begin withholding them in January.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.

The saver’s credit can be claimed by:

• Married couples filing jointly with incomes up to $57,500 in 2012 or $59,000 in 2013;
• Heads of household with incomes up to $43,125 in 2012 or $44,250 in 2013; and
• All others with incomes up to $28,750 in 2012 or $29,500 in 2013.

Like many other tax credits, the saver’s credit is not refundable and can only reduce your tax liability. Though the maximum saver’s credit is $1,000 ($2,000 for married couples), taxpayers are cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

Other special rules that apply to the saver’s credit include the following:

• Eligible taxpayers must be at least 18 years of age.
• Anyone claimed as a dependent on someone else’s return cannot take the credit.
• A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student for this credit.
• Certain retirement plan distributions reduce the contribution amount used to figure the credit.

If you have questions about how this tax benefit might apply in your situation, please give our office a call.

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Keep Track of Meal & Entertainment Expenses

When looking for deductions to add to your taxes, don’t overlook your meal and entertainment expenses. These types of expenses must be “ordinary” and “necessary” to your business or trade and must be “directly related to” or “associated with” the active conduct of business.

In order for the IRS to allow these deductions, documentation is required and should include the following items:

• The amount
• Date, time and place
• Business purpose
• Names of guests and business relationship

In addition, the surroundings must be conducive for a business meeting, and any discussion before, during or after any meal should be business-related for it to be considered for a deduction. An intimate and quiet location would be appropriate for a business discussion. Refrain from going to places with loud and distracting events that can interfere with the main objective: to talk about business. And note that merely going out to lunch with a co-worker and discussing events at work won’t qualify.

A 50% deduction on entertainment expenses is allowed by the IRS if the purpose of the business is to conduct a specific business agenda. The 50% rule also covers the cost of meals during away-from-home business travel. In addition, deductions for expenses related to the meals (e.g., taxes, tips and cover charges) are also limited to 50% of cost; however, this is not true for costs of transportation to and from the meal or entertainment location.

If your employer would otherwise reimburse you for business meals but did not because it was felt that the expense was not warranted, or if you simply chose not to seek reimbursement, the expense is not deductible.

Meal and entertainment expenses are deducted directly on the business schedule of a self-employed individual, but for an employee they are a miscellaneous itemized deduction; the total of this deduction category is reduced by 2% or your adjusted gross income. So the benefit will be reduced or possibly eliminated by the 2% reduction. In addition, miscellaneous itemized deductions are not deductible at all to the extent a taxpayer is taxed by the alternative minimum tax.

There are other important guidelines to consider, so please call our office for assistance.

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Eldercare Can Be a Medical Deduction

With people living longer, many individuals find themselves becoming the care provider for elderly parents, spouses and others who can no longer live independently. When this happens, questions always come up regarding the tax ramifications associated with the cost of nursing homes or in-home care.

Generally, the entire cost of nursing homes, homes for the aged, and assisted living facilities are deductible as a medical expense if the primary reason for the individual being there is for medical care or the individual is incapable of self-care. This would include the entire cost of meals and lodging at the facility. On the other hand, if the individual is in the facility primarily for personal reasons, then only the expenses directly related to medical care would be deductible, and the meals and lodging would not be a deductible medical expense.

As an alternative to nursing homes, many care providers are hiring day help or live-in employees to provide the needed care at home. When this is the case, the services provided by the employees must be allocated between household chores and deductible nursing services. To be deductible, the nursing services need not be provided by a nurse so long as the services are the same services that would normally be provided by a nurse, such as administering medication, bathing, feeding, dressing, etc. If the employee also provides general housekeeping services, then the portion of the employee’s pay attributable to household chores would not be a deductible medical expense.

Household employees, like other employees, are subject to Social Security and Medicare taxes, and it is the responsibility of the employer to withhold the employee’s share of these taxes and to pay the employer’s payroll taxes. Special rules for household employees greatly simplify these payroll withholding and reporting requirements and allow the Federal payroll taxes to be paid annually in conjunction with the employer’s individual 1040 tax return. Federal income tax withholding is not required unless both the employer and the employee agree to withhold income tax, but the employer is still required to issue a W-2 to the employee and file the form with the Federal government. A Federal Employer ID Number and a state ID number must be obtained for reporting purposes, and most states have special provisions for reporting and paying state payroll taxes on an annual basis similar to the Federal reporting requirements. Note: if the caregiver is hired through an agency, generally the agency is considered the employer.

To the extent the payroll taxes are for deductible nursing services, the employer’s portion of those taxes is also deductible as a medical expense.

If you need assistance in setting up a household payroll arrangement, please contact our office for additional details and filing requirements.

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Are You Required to File 1099s?

If you use independent contractors to perform services for your business and you pay them $600 or more for the year, you are required to issue them a Form 1099-MISC after the end of the year to avoid facing the loss of the deduction for their labor and expenses. The 1099s for 2012 must be provided to the independent contractor no later than January 31 of 2013.

It is not uncommon to, say, have a repairman out early in the year, pay him less than $600, and then use his services again later and have the total for the year exceed the $600 limit. As a result, you overlook getting the information needed to file the 1099s for the year. Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time you use their services. Having a properly completed and signed Form W-9s for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts.

IRS Form W-9 is provided by the government as a means for you to obtain the data required to file the 1099s for your vendors. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 prior to engaging in business with them. The form can either be printed out or filled onscreen and then printed out. A Spanish-language version is also available. The W-9 is for your use only and is not submitted to the IRS.

To avoid a penalty, copies of the 1099s must to be sent to the IRS by February 28, 2013. They must be submitted on magnetic media or on optically scannable forms.

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Are We Headed for a Fiscal Cliff?

For several years now, Congress has left the taxpaying public hanging to the last minute with tax changes and extensions. And each year, the political gridlock seems to get worse, leaving taxpayers pondering how to plan their finances and businesses undecided about capital investments and hiring new employees, not knowing what the tax laws will bring in the next year.

This year is even worse: It seems that our politicians have put on the back burner a whole host of tax issues that have expired or are going to expire in the near future, once again leaving taxpayers in the dark and at risk of some substantial tax increases. There are more tax provisions expiring this year than ever before. In fact, if Congress does nothing, there will be a huge tax increase across the board affecting just about every taxpayer, rich and poor alike. Federal Reserve Chairman Bernanke referred to this problem as a “fiscal cliff.”

To understand the enormity of the problem, here is a rundown of a number of the more significant expiring provisions:

• Capital Gains Rates Increase – Beginning in 2013, the maximum capital gains rates will increase from the current 15% (0% for lower-income taxpayers) to 20%; (18% for assets held more than five years). For lower-income taxpayers, the maximum rate will be 10% (8% for assets held for more than five years).
• Tax Rates (Brackets) Increase – Three fundamental changes will occur in 2013. (1) The 10% bracket will disappear (the lowest bracket will be 15%). (2) The size of the 15% tax bracket for joint filers and qualified surviving spouses will be 167% (rather than 200%) of the size of the 15% tax bracket for individual filers. (3) The top four brackets will rise from 25%, 28%, 33% and 35% to 28%, 31%, 36% and 39.6% respectively. This represents an across-the-board tax increase for all taxpayers.
• The 2011–2012 Payroll Tax Cuts Expire – This means that for 2013, the payroll and self-employment taxes will increase by 2% on all earned income up to $113,700. This will result in increases of up to $2,274 for working Americans.
• Education Benefits Take A Hit – After 2012, several education benefits will expire or be reduced, primarily impacting middle- and lower-income Americans.
• American Opportunity Education Credit – A tax credit that provides up to $2,500 for the first four years of post-secondary education, a portion of which is refundable. The Hope Education Credit will take the place of this credit, but it will be limited to the first two years of post-secondary education, providing a reduced maximum credit of $1,950, none of which is refundable.
• Coverdell Education Accounts – These will have their annual contribution cap reduced to $500 from the current $2,000 limit.
• Employer Education Assistance – This $5,250 tax-free employer-provided educational benefit expires after 2012.
• Student Loan Interest – This will only be allowed for the first 60 months in which interest is due and the deduction is phased out for most middle-income Americans. Previously there was no time limit for this deduction.
• Lower-Income Taxpayers Lose Benefits – The most significant changes taking place after 2012 include: The Child Tax Credit will be chopped in half to $500; the Earned Income Tax Credit bracket for taxpayers with three or more children will be eliminated; and the creditable expenses for the Child Care Credit will drop to $2,400 (formerly $3,000) for one child and $4,800 (formerly $6,000) for two or more children.
• "Obamacare" Taxes Kick In – Two taxes to fund Obamacare apply to higher-income individuals beginning in 2013.
• Surtax on Net Investment Income – The official name of this new tax is the “Unearned Income Medicare Contribution Tax.” It imposes a 3.8% surtax on the net investment income (interest, capital gains, rents, royalties and annuities) of individuals with incomes of $200,000 ($250,000 for joint filers) or more.
• Increased Hospital Insurance Tax – Currently a 1.45% payroll deduction, this will increase to 2.35% on wages in excess of $200,000 for unmarried individuals and $250,000 for married individuals filing jointly. The same increase applies to self-employed individuals.

It is anticipated that some of the provisions discussed in this article will be extended when Congress finally gets around to it, but no one knows for sure which. However, it is important that you be ready for any eventuality, given that everything is in limbo at this time.

Our office is closely following tax changes and is here to help you avoid any tax “fiscal cliffs” created by the ever-changing tax laws. Please call if you have questions or wish to do some year-end planning for yourself, or if family members or friends need assistance.

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December 2012 Due Dates

December 2012 Individual Due Dates

December - Time for Year-End Tax Planning

December is the month to take final actions that can affect your tax result for 2012. Taxpayers with substantial increases or decreases in income, changes in marital status or dependent status, and those who sold property during 2012 should call for a tax planning consultation appointment.

December 10 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during November, you are required to report them to your employer on IRS Form 4070 no later than December 12. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.

December 31 - Last Day to Make Mandatory IRA Withdrawals

Last day to withdraw funds from a Traditional IRA Account and avoid a penalty if you turned age 70½ before 2012. If the institution holding your IRA will not be open on December 31, you will need to arrange for withdrawal before that date.

December 31 - Last Day to Pay Deductible Expenses for 2012

Last day to pay deductible expenses for the 2012 return (doesn’t apply to IRA, SEP or Keogh contributions, all of which can be made after December 31, 2012). Taxpayers who are making state estimated payments may find it advantageous to prepay the January state estimated tax payment in December (Please call our office for more information).

December 31 - Caution! Last Day of the Year

If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st.

December 2012 Business Due Dates

December 17 - Social Security, Medicare and Withheld Income Tax

If the monthly deposit rule applies, deposit the tax for payments in November.

December 17 - Nonpayroll Withholding

If the monthly deposit rule applies, deposit the tax for payments in November.

December 17 - Corporations

The fourth installment of estimated tax for 2012 calendar year corporations is due

December 31 - Caution! Last Day of the Year

If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st.

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