New Credits for Hiring Veterans

Congress recently passed legislation that extends and expands the Work Opportunity Credit (WOTC) for hiring unemployed veterans. This effectively gave a one-year lease on life to the WOTC, but only with respect to qualified veterans who begin work for the employer before January 1, 2013. For all other classifications, the credit ended at the close of 2011.

Under the new law, effective for individuals who begin work for the employer after November 21, 2011, a qualified veteran is a veteran who is certified by the designated local agency as falling within one of the following five categories:

• Veteran Who is a Member of a Family Receiving Food Stamps for At Least Three Months - The individual is a member of a family receiving assistance under a food stamp program under the Food and Nutrition Act of 2008 for at least three months, all or part of which is during the 12-month period ending on the hiring date. The maximum qualifying first-year wage taken into account is $6,000. Thus, the maximum WOTC is $2,400 (.4 x $6,000).
• Veteran Entitled to Compensation for a Service-Connected Disability Hired Within First Year after Separation from Service - The individual is entitled to compensation for a service-connected disability, and has a hire date that isn’t more than one year after having been discharged or released from active duty. The maximum qualifying first-year wage taken into account is $12,000. Thus, the maximum WOTC is $4,800 (.4 x $12,000).
• Veteran Entitled to Compensation for a Service-Connected Disability with Six Months of Unemployment in the Year Preceding the Hire Date - The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date that equal or exceed six months. The maximum qualifying first-year wage taken into account is $24,000. Thus, the maximum WOTC is $9,600 (.4 x $24,000).
• Veteran Has Aggregate Periods of Unemployment Exceeding Four Weeks in the Year Preceding the Hire Date - The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed four weeks (but less than six months). The maximum qualifying first-year wage taken into account is $6,000. Thus, the maximum WOTC is $2,400 (.4 x $6,000).
• Veteran Has Aggregate Periods of Unemployment Exceeding Six Months in the Year Preceding the Hire Date - The individual has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. The maximum qualifying first-year wage taken into account is $6,000. Thus, the maximum WOTC is $5,600 (.4 x $14,000).

Fast-track qualification process for qualified veterans - Effective for individuals who begin work for the employer after November 21, 2011, a veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of:

• If he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than six months during the 1-year period ending on the hiring date.
• If he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than four weeks (but less than six months) during the 1-year period ending on the hiring date.

Tax-exempt employers qualify for the credit - Effective for qualified veterans who begin work for the employer after November 21, 2011, a tax-exempt employer may claim a credit for the WOTC it could claim for hiring qualified veterans if it were not tax-exempt.

Credit Limited to OASDI - The credit is allowed against the OASDI (Social Security) tax that the exempt employer would otherwise have to pay on the wages of all its employees during the one-year period beginning with the day the qualified veteran goes to work for the tax-exempt organization and cannot exceed the OASDI tax for that one year period.
Other limits applicable to tax-exempt employers:

• The general credit percentage of qualifying first-year wages is 26% (instead of 40%).
• The credit percentage of qualifying wages is 16.25% (instead of 25%) for a qualified veteran who has completed at least 120, but less than 400, hours of service for the employer.
• The tax-exempt employer may only take into account wages paid to a qualified veteran for services in furtherance of the activities related to the purposes or function constituting the basis of the organization's exemption.

If you would like additional information related to the WOTC and hiring unemployed veterans, please give our office a call.

Read More

January 2012 Due Dates

January 2012 Individual Due Dates

January 31 - File 2011 Return to Avoid Penalty for Not Making 4th Quarter Estimated Payments File 2011

Return to Avoid Penalty for Not Making 4th Quarter Estimated Payment If you file your prior year’s return and pay any tax due by this date, you need not make the 4th Quarter Estimated Tax Payment (January calendar).

January 2012 Business Due Dates

January 31 - 1099s Due To Service Providers

If you are a business or rental property owner and paid $600 or more for the services of individuals (other than employees) during a tax year, you are required to provide Form 1099 to those workers by January 31st. "Services" can mean everything from labor, professional fees and materials, to rents on property. In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2012 (April 2, 2012 if filed electronically). They must be submitted on optically scannable (OCR) forms. This firm prepares 1099s in OCR format for submission to the IRS with the 1096 submittal form. This service provides both recipient and file copies for your records. Please call this office for preparation assistance.

Payments that may be covered include the following:

• Cash payments for fish (or other aquatic life) purchased from anyone engaged in the trade or business of catching fish
• Compensation for workers who are not considered employees (including fishing boat proceeds to crew members)
• Dividends and other corporate distributions
• Interest
• Amounts paid in real estate transactions
• Rent
• Royalties
• Amounts paid in broker and barter exchange transactions
• Payments to attorneys
• Payments of Indian gaming profits to tribal members
• Profit-sharing distributions
• Retirement plan distributions
• Original issue discount
• Prizes and awards
• Medical and health care payments
• Debt cancellation (treated as payment to debtor)

January 31 - W-2 Due to All Employees

All employers need to give copies of the W-2 form for 2011 to their employees. If an employee agreed to receive their W-2 form electronically, post it on a website and notify the employee of the posting.

January 31 - File Form 941 and Deposit Any Undeposited Tax

File Form 941 for the fourth quarter of 2011. Deposit any undeposited Social Security, Medicare and withheld income tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.

January 31 - Certain Small Employers

File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2011. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more for 2011 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return.

January 31 - File Form 943

All farm employers should file Form 943 to report Social Security, Medicare taxes and withheld income tax for 2011. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

January 31 - W-2G Due from Payers of Gambling Winnings

If you paid either reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of the W-2G form for 2011.

January 31 - File Form 940

Federal Unemployment Tax File Form 940 (or 940-EZ) for 2011. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.

January 31 - File Form 945

File Form 945 to report income tax withheld for 2011 on all non-payroll items, including back-up withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

Read More

Are You Liable for a Gift Tax Return?

Frequently, taxpayers think that gifts of cash, securities, or other assets they give to other individuals are tax-deductible and, in turn, the gift recipient sometimes thinks income tax must be paid on the gift received. Nothing is further from the truth. To fully understand the ramifications of gifting, one needs to realize that gift tax laws are related to estate tax laws.

When a taxpayer dies, the value of his or her gross estate (to the extent it exceeds the excludable amount for the year) is subject to estate taxes. Naturally, individuals want to do whatever they can to maximize their beneficiaries’ inheritances and limit the estate’s amount of inheritance tax. Because giving away one’s assets before dying reduces the individual’s gross estate, the government has placed limits on gifts, and if those gifts exceed the limit, they are subject to gift tax that must be paid by the giver.

Gift Tax Exclusions – Certain gifts are excluded from the gift tax.

• Annual Exclusion – This is the annual amount that an individual can give to any number of recipients. This amount is adjusted for inflation, and for 2011, it is $13,000. For example, a taxpayer with five children could have given $13,000 to each child in 2011 without any gift tax consequences. The taxpayer cannot deduct the dollar value of the gifts, and the value of the gifts is not taxable to the recipients. Generally, for a gift to qualify for the annual exclusion, it must be a gift of a “present interest.” That is, the recipient’s enjoyment of the gift can't be postponed into the future. For gifts to minor children, there is an exception to the “present interest” rule where a properly worded trust is established.
• Lifetime Limit – In addition to the annual amounts, taxpayers can use a portion of the federal estate tax exemption (it is actually in the form of a credit) to offset an additional amount during their lifetime without gift tax consequences. However, to the extent this credit is used against a gift tax liability, it reduces the credit available for use against the federal estate tax at the taxpayer’s death. For 2011, the credit-equivalent lifetime gift tax exemption is $5 million and is the same as for the estate tax exemption.
• Education & Medical Exclusion – In addition to the amounts listed above, there are two additional types of gifts that can be excluded from the gift tax:
1. Amounts paid by one individual on behalf of another individual directly to a qualifying educational organization as tuition for that other individual.
2.  Amounts paid by one individual on behalf of another individual directly to a provider of medical care as payment for that medical care. Payments for medical insurance qualify for this exclusion.

If, during the year, your gifts exceed the sum of the annual, education, and medical exclusions, you are required to file a gift tax return (even if you have not exceeded the lifetime limit).

Gifts of Capital Assets – Sometimes a gift might be in the form of securities, real estate, or other items that have appreciated in value. In these situations, the gift value is the item’s fair market value at the time of the gift. However, when the recipient of the gift sells that asset, he or she will measure his or her gain from the giver’s tax basis. For example, a parent gifts 100 shares of XYZ, Inc. worth $9,000 to his or her child. If the parent originally paid $5,000 for the shares and if the child sold the shares for $9,000, the child (the recipient) would be liable for the tax on the $4,000 gain. In effect, the parent (giver) transferred the taxable gain in the stock to the child. This can be beneficial from a tax standpoint if the child is not subject to the “kiddie tax” rules and is in a lower tax bracket than the parent. Caution: Watch out for unintended gifts such as an elderly parent placing a child on the title of the home or other assets.

Gift-Splitting by Married Taxpayers - If the gift-giver is married and both spouses are in agreement, gifts to recipients made during a year can be treated as split between the husband and wife, even if the cash or property gift was made by only one of them. Thus, by using this technique, a married couple can give $26,000 a year to each recipient under the annual limitation discussed previously.

If you have additional questions or would like our office to assist you in planning an appropriate gifting strategy, please give us a call.

Read More

2012 Standard Mileage Rates Announced

The Internal Revenue Service has issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes.

Beginning on January 1, 2012, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:

• 55.5 cents per mile for business miles driven (includes a 23 cents per mile allocation for depreciation);
• 23 cents per mile driven for medical or moving purposes; and
• 14 cents per mile driven in service of charitable organizations.

The new rate for business miles is the same as the rate for the second half of 2011, while the rate for medical and moving miles is down a half-cent from the July through December 2011 rate.

The standard mileage rates for business, medical, and moving uses are based on an annual study of the fixed and variable costs of operating an automobile that is conducted by an independent contractor for the IRS.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously (i.e., a fleet).

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

If you have any questions, please call our office.

Read More

It’s Tax Time! Are You Ready?

If you’re like most taxpayers, you find yourself with an ominous stack of “homework” around TAX TIME! Unfortunately, the job of pulling together the records for your tax appointment is never easy, but the effort usually pays off when it comes to the extra tax money you save! When you arrive at your appointment fully prepared, you’ll have more time to:

• Consider every possible legal deduction;
• Better evaluate your options for reporting income and deductions to choose those best suited to your situation;
• Explore current law changes that affect your tax status;
• Talk about possible law changes and discuss tax planning alternatives that could reduce your future tax liability.

Choosing Your Best Alternatives

The tax law allows a variety of methods for handling income and deductions on your return. Choices made at the time you prepare your return often affect not only the current year, but later year returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your taxes.

For example, the law allows choices in transactions such as:

Sales of property

If you’re receiving payments on a sales contract over a period of years, you are sometimes able to choose between reporting the whole gain in the year you sell or over a period of time, as you receive payments from the buyer.

Depreciation

You’re able to deduct the cost of your investment in certain business property using different methods. You can either depreciate the cost over a number of years, or in certain cases, you can deduct them all in one year.

Higher Education Expenses

If you are paying college expenses for yourself, your spouse, or your dependent(s), you may qualify for a tax benefit of either an above-the-line tax deduction or a tax credit.

Read More

Game Show Winners and Taxes

If you like to watch game shows and enjoy all the excitement that goes with watching contestants win prizes, then you can add another element to your viewing pleasure by considering how the contestants will handle the IRS Form 1099 they receive for the value of the items they won. You may not have thought much about it, but the contestants must pay federal and applicable state income tax on the cash and the value of the goods they win on game shows.

The lucky ones are those who simply win cash. They will have money to pay the taxes— unless, of course, they overlook the tax issue and spend all the winnings and end up with a tax liability they cannot pay. All that winning excitement turns into a stressful financial problem, and they probably end up wishing they hadn’t won.

The winners of non-cash prizes have more complex issues. They are required to pay taxes on the fair market value of the prize. The problem here is that game shows generally report prizes at full retail value and not the price the items would fetch on the open market. Take for example a contestant who wins a trip. Typically, hotel packages are valued by the game shows at their top retail value, not the discounted rates that can be obtained online or through a travel agent. Thus, those who accept the trip may not be able to afford the taxes on the trip, and after a week in paradise, they find themselves in tax purgatory.

The issue becomes a real financial drag for the taxpayer who is unable to pay the tax liability because they end up with failure-to-pay (and perhaps underpayment of estimated tax) penalties and interest that the IRS keeps tacking on until the liability is finally paid in full.

The tax issues can be avoided by refusing the non-cash prize, especially if the prize is something of no use to the winner. Another option for easy-to-sell items is to accept the prize and then sell it (not to a relative or friend). The gap between retail and real value can be especially harmful for winners who accept a prize with the intent to resell it: They're paying taxes on a value they have no hope of recouping, which eats into the profits.

Remember back in 2004 when Oprah Winfrey gave away to everyone in the audience a Pontiac? The sticker price of those cars was $28,500, and that amount had to be claimed as income by the audience members. If the person who received a car was in the 25% tax bracket, they were looking at a tax bill of $7,125. So the free car wasn’t free and could have ended up as a tax headache for some.

One famous contestant on “Survivor” did not report his $1 million winnings, claiming that CBS had told him the network was responsible for the taxes. It turns out that the contract he signed with CBS specifically stated that he was responsible for the taxes, and as a result, Richard Hatch ended up in federal court, where he was convicted of tax evasion and sentenced to a 51-month prison term.

When watching “Extreme Makeover: Home Edition,” you probably never thought about the tax implications to the beneficiaries of the home makeover. The makeover is classified as winnings and subject to income tax, as is the trip the homeowners took while the makeover was in progress. Then there is the real property tax issue; in most jurisdictions, the property taxes are based on the value of the home. Once the improvements are made, the homeowner’s property taxes will substantially increase.

As you can see, there is a down side to being a game show winner! If you have more questions related to prize winnings, please give our office a call.

Read More

Maximize Your Charitable Deductions

As the end of the year approaches, there are still things you can do to increase and properly document your charitable contributions for 2011. Here is a brief rundown:

Non-cash contributions – If you have used clothing or household goods that are in good or better condition that you don’t use any longer, contribute them to a charity thrift shop before the end of the year. Don’t forget: a receipt from the charity is required to document the gift. If the gift’s fair market value (FMV) is more than $500, you will also need an itemized list of the items contributed, how and when each was acquired, and the cost. If the FMV of what you’ve donated is greater than $5,000, or you contributed a vehicle, call our office for additional documentation requirements. A receipt from the charity is not required if the gift’s value is less than $250 and the donation was made at an unattended drop site. However, you will need to document the donation yourself.

Cash Donations – All cash donations must be documented either by a receipt from the charity or by a bank record such as a check, bank statement, or credit card payment. You can no longer claim contributions of cash dropped into the offering plate or Christmas kettle. So, be wise and drop a check instead. If you regularly tithe at a house of worship, you might consider pre-paying your 2012 tithing and moving the deduction into 2011. In doing so, some taxpayers that marginally itemize may be able to itemize every other year and take the standard deduction in alternate years.

Charity Volunteer Expenses – If you volunteer your time for a charity, you may qualify for some tax breaks. Although no tax deduction is allowed for the value of services performed for a charity, there are deductions permitted for out-of-pocket costs incurred while performing the services. Possible expenses might include:

• Away-from-home travel expenses while performing services for a charity, plus lodging and meals at 100 percent, provided there is no significant element of personal pleasure associated with the trip.
• Use of your personal vehicle while performing services for the charity, generally at 14 cents per mile. Be sure to keep a written record of the name of the charity, the date the vehicle was used for charitable purposes, and the number of miles driven.
• Upkeep and cost of uniforms that aren’t suitable for everyday use and if worn while performing the charitable service.

No charitable deduction is allowed unless the contribution is substantiated with a written acknowledgment from the charitable organization. The documentation must specify the need for your services and include an acknowledgement by the charity that the expenses claimed were required; be sure to maintain the receipts for the expenses.

Vehicle Donations - Generally, the deduction for used cars, boats, planes, etc. is limited to $500. More than $500 can be claimed based upon the charity’s use of the vehicle or the actual amount the charity received from the sale of the vehicle. You will need Form 1098-C from the organization to claim the deduction and attach it to your return. Call for further details related to claiming more than $500.

Timing of Acknowledgments – Whenever you are required to have an acknowledgment from a charity for donations you’ve made, you must have that letter or statement in your hands by the earlier of the date you file the return for the year of the donation or the extended due date of that return.

If you have additional questions or would like to determine how a specific donation will impact your tax return, please give our office a call.

Read More

Unmarried Couples and Home Mortgage Interest

It is becoming increasingly common for couples to live together and remain unmarried, which can lead to potential tax problems when they share the expenses of a home but only one of the couple is liable for the debt on that home.

Home mortgage interest can generally be deducted only by a person who is legally obligated to pay the mortgage (in other words, a person who is named as an obligor on the mortgage document). However, there is an exception to the preceding general rule for interest paid on a real estate mortgage when a person is a legal or equitable owner of the real estate but is not directly liable for the debt.

For example, if the one who is not liable on the mortgage makes the payment, that individual is not allowed to deduct the interest portion of the payment and neither is the other person, because he or she did not pay it. This can lead to some complications where one of the couple is the bread winner and would benefit tax-wise from an interest deduction, but the other person is the liable party on the loan. It is not uncommon for couples who both work to share the mortgage payments in the mistaken belief that they can each deduct their share of the mortgage interest on their individual tax returns.

Although state law governs what constitutes equitable ownership, equitable ownership can generally be established if both parties are on title to the property even if only one is liable on the loan. The premise behind equitable ownership is that an individual is protecting his or her ownership in the home by making some or all of the mortgage payments.

This position was recently upheld in a 2011 Tax Court decision where the court denied a taxpayer’s home mortgage interest deduction that she paid until she became co-owner of the property with her boyfriend and was legally obligated to make the mortgage payments.

If you are in a similar situation and have questions related to sharing potentially tax deductible expenses, please give our office a call.

Read More

Misclassifying Workers Can Be Costly!

Hiring independent contractors instead of employees can save a lot of money in employment taxes and employee benefits. And it can be a mine field of tax problems if workers are misclassified as independent contractors when they should have been treated as employees.

The three primary characteristics the IRS uses to determine the relationship between businesses and workers are behavioral control, financial control, and the type of relationship.

1. Behavioral Control - Covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
2. Financial Control - Covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.
3. Type of Relationship – Relates to how the workers and the business owner perceive their relationship.

If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

This issue has been heating up recently as the government looks for ways to reduce the deficit. A recent study by the IRS estimates there are 3.4 million workers misclassified as independent contractors, causing a loss of $2.7 billion in tax revenue.

The IRS initiated an expanded focus on this issue in 2010 and continues to ratchet up enforcement with increased audits, and now the IRS and the Department of Labor have begun to share information and collaborate on this issue.

The IRS just recently announced a Voluntary Classification Settlement Program (VCSP) that allows employers to come into compliance by making a minimal payment covering past payroll. Employers wishing to participate in this program must apply for the program at least 60 days before they want to start treating the workers as employees. To be eligible, the employer must have filed the required 1099 forms for the workers in the previous three years and not be under audit concerning the employees.

If you have questions related to worker classification, please give our office a call.

Read More

Report Those Foreign Financial Connections!

FinCEN is the acronym for the Treasury Department’s Financial Crimes Enforcement Network. FinCEN is a government-wide, multisource, financial intelligence and analysis network tasked with detecting money laundering, terrorist financing, tax evasion, and other financial crimes. To do its job, FinCEN must collect financial data from a multitude of sources, including each U.S. person with connections to foreign financial transactions. This has resulted in a number of reporting requirements imposed upon taxpayers; many taxpayers are unaware that these requirements can result in severe penalties for non-compliance.

• Foreign Account Reporting Requirements - Each United States person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country, if the aggregate value exceeds $10,000 at any time during the calendar year, must report that relationship to the U.S. government each calendar year. This is done by filing Form TD F 90-22.1 (often referred to as FBAR) on or before June 30 of the succeeding year. No extensions of time to file are available, and failing to comply can result in civil penalties up to $10,000. Willful violations are subject to penalties that are the greater of $100,000 or 50% of the account’s balance.
• Reporting Foreign Gifts, Bequests and Trusts - Gifts of more than $100,000 from a non-resident alien individual or foreign estate and gifts of more than $14,375 in 2011 ($14,723 in 2012) from foreign corporations or partnerships must be reported. Form 3520 is used to report the gifts and to report ownership in a foreign trust. Failure to comply can result in a penalty of the greater of $10,000 or 35% of the gross value of any property transferred to a foreign trust.
• Annual Report of Individuals with Foreign Assets – This is a new reporting requirement for 2011. Generally, U.S. persons with ownership of certain foreign assets not held by a domestic financial institution with an aggregate value of more than $50,000 must file Form 8938 with their tax returns, providing details of the assets. Failure to file can result in penalties of up to 40% of the undisclosed value.

Watch for Overlooked Accounts – You may not realize you have accounts that fall under one or more of these reporting requirements. Don’t overlook accounts where family members in foreign countries have included you on a foreign account or as part owner of a business entity or trust. Don’t overlook foreign retirement savings accounts such as Canadian RRSP and RRIF accounts. Consider business accounts where, as an officer or board member of a company, you may have signature authority over a foreign account.

If you have questions related to these reporting requirements, please give our office a call.

Read More

Year-end Capital Gains Strategies

2011 has produced some significant gyrations in the financial markets that have had an impact on everyone’s portfolios. But for tax purposes, gains and losses are not measured by the increased or decreased value of your portfolio, but by gains and losses recognized from the sale of capital assets during the year. So you still have until the end of the year to structure your gains and losses to suit your particular tax situation.

Conventional wisdom has always been to minimize gains by selling “losers” to offset gains from “winners,” and, where possible, generate the maximum allowable $3,000 ($1,500 for married taxpayers filing separately) capital loss for the year.

As a reminder, the maximum long-term (assets held for more than a year) capital gains are still at the all-time low maximum rate of 15%, and unless changed by Congress, will remain at that rate through 2012. Taxpayers who are in the 15% or lower marginal tax rate actually enjoy a 0% tax rate on long-term capital gains and should do whatever is possible to take advantage of that tax benefit. The capital gains rates are currently scheduled to revert to 20% (10% to the extent a taxpayer is in the 15% or lower tax bracket) in 2013.

Assets that are not held long-term, referred to as short-term capital gains, do not receive the benefits of the special rates afforded long-term capital gains. Taxpayers achieve a better overall tax benefit if they can arrange their transactions so as to offset short-term capital gains with long-term capital losses.

If you exercised incentive (qualified) stock options with your employer this year and you are still holding the stock, selling the stock before year’s end to avoid phantom income created by the alternative minimum tax may be appropriate.

If you are planning substantial gifts to charity or to relatives and have capital assets that have appreciated in value, gifting the appreciated assets rather than cash may be beneficial.

Finally, as an advance warning, the reporting of the sale of capital assets will become significantly more complicated this year. With the advent of brokerage firms being required to track and report basis for stock sales, the transactions for the year will have to be segregated into four possible groups: those for which the broker reported basis and those for which the broker did not know basis, and each of those categories split by short- and long-term transactions. The IRS has developed the new Form 8949 for this purpose. Each category of transactions must be reported on a separate Form 8949, and then the totals transferred to a redesigned Schedule D. The IRS requires this separation of transactions to facilitate its computer matching of transactions.

The actions mentioned above may have additional factors that must be considered and require careful planning. You are encouraged to consult with our office before acting on any of the suggested strategies.

Read More

Business Benefits Abound This Year

There are an abundant number of provisions that provide tax relief to small businesses this year. Just so that you don’t overlook any of these benefits, or in case your business would like to position itself to take advantage of some before the close of the year, here is a brief rundown on many of the business benefits that are available for 2011. Some of these provisions are currently set to expire after December 31, 2011.

• Research Tax Credit - A tax credit of up to 20% of qualified expenditures for businesses that develop, design, or improve products, processes, techniques, formulas, or software or perform similar activities. The credit is calculated on the basis of increases in research activities and expenditures.
• Work Opportunity Tax Credit – A tax credit of up to 40% based upon a portion of the first-year wages paid to members of certain targeted groups. The credit is generally capped at $6,000 per employee ($12,000 for qualified veterans and $3,000 for qualified summer youth employees).
• Differential Wage Payment Credit - Employers who have an average of less than 50 employees during the year and who pay differential wages to employees for the periods they were called to active duty in the U.S. military can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year.
• HIRE Retention Credit – In 2010, employers were granted a payroll tax holiday for hiring long-term unemployed individuals. As an incentive to retain those individuals, a non-refundable credit up to $1,000 per employee is allowed to employers who kept those employees on payroll for a continuous 52 weeks. The credit is limited to 6.2% of the employee’s wages, and will be claimed on the 2011 return.
• New Energy Efficient Home Credit - An eligible contractor can claim a credit of $2,000 or $1,000 for each qualified new energy efficient home either constructed by the contractor or acquired by a person from the contractor for use as a residence during the tax year.
• 100% Bonus Depreciation – Businesses are allowed a 100% bonus depreciation on qualified business property purchased and placed into service during the year. This generally includes machinery, equipment, computers, qualified leasehold improvements, etc. (but see limitations on vehicles).
• Expensing Allowance – In lieu of depreciating the cost of new assets, a business is allowed to deduct up to $500,000 expensed under Code Sec. 179. The $500,000 maximum amount is generally reduced dollar-for-dollar by the amount of Section 179 property placed in service during the tax year in excess of $2,000,000.
• 15-year Write-off for Specialized Realty Assets - Qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property placed in service during the year are eligible for a 15-year depreciation write-off instead of the normal 39 years.
• Business Autos – As part of the benefit of the 100% depreciation, the first-year luxury auto limit is increased to $11,060 for autos and $11,260 for light trucks and vans. For vehicles with a gross vehicle rating of over 6,000 pounds, the luxury auto limits do apply and are subject to the full benefit of the 100% bonus depreciation.
• Domestic Production Deduction – This deduction was created to encourage manufacturing and production within the U.S. and provides a deduction equal to 9% of the lesser of net income from qualified production activities or 50% of the W-2 wages paid to employees allocated to the domestic production activity.

If you have questions or wish more detail on any of the provisions or other business issues, please give our office a call.

Read More

Year-End Tax-Planning Moves for Businesses & Business Owners

Expensing Allowance (Sec 179 Deduction) – Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000, and the investment ceiling limit is $2,000,000. Without Congressional intervention, these limits are scheduled for a significant drop in 2012. That means that businesses that make timely purchases will be able to currently deduct most, if not all, of the outlays for machinery and equipment. Additionally, for 2011, the expensing deduction applies to certain qualified real property such as leasehold improvements, restaurant, and retail property.

100% First-year Depreciation – Businesses also should consider making expenditures that qualify for 100% bonus first-year depreciation if the property is bought and placed in service this year. This 100% first-year write-off rate drops to 50% next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or next should try to accelerate their buying plans if doing so makes sound business sense.

Work Opportunity Tax Credit (WOTC) – Take advantage of the WOTC by hiring qualifying workers, such as qualifying veterans, before the end of 2011. Unless extended by Congress, the WOTC won't be available for workers hired after this year.

Research Credit – Make qualified research expenses before the end of 2011 to claim a research credit, which won't be available for post-2011 expenditures unless Congress extends the credit.

Self-employed Retirement Plans – If you are self-employed and haven't done so yet, you may wish to establish a self-employed retirement plan. Certain types of plans must be established before the end of the year to make you eligible to deduct contributions made to the plan for 2011, even if the contributions aren’t made until 2012. You may also qualify for the pension start-up credit.

Increase Basis – If you own an interest in a partnership or S corporation that is going to show a loss in 2011, you may need to increase your basis in the entity so you can deduct the loss, which is limited to your basis in the entity.

These are just some of the year-end steps that can be taken to save taxes. You are encouraged to contact our office so a plan can be tailored to meet your specific tax and financial circumstances.

Read More

Year-End Tax Planning Moves for Individuals

Employer Flexible Spending Accounts – If you contributed too little to cover expenses this year, you may wish to increase the amount you set aside for next year. Keep in mind, however, that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs.

Capital Gains and Losses – We can employ a number of strategies to suit your specific tax circumstances. For example, some taxpayers may be in the zero percent capital gains bracket and should be looking for gains that benefit from no tax. Others may be affected by the wash sale rules when they are trying to achieve deductible losses while maintaining their investment position. Generally, portfolios should be reviewed near year’s end with an eye to minimizing gains and maximizing deductible losses. It may be appropriate for you to call for a year-end strategy appointment to discuss trades and actions that can produce tax benefits for you.

Roth IRA Conversions – If your income is unusually low this year, you may wish to consider converting your traditional IRA into a Roth IRA. Even if your income is at your normal level, with the recent decline in the stock markets, the current value of your Traditional IRA may be low, which provides you an opportunity to convert it into a Roth IRA at a lower tax amount. Thereafter, future increases in value would be tax-free when you retire.

Recharacterizing a Roth Conversion – If you converted assets in a traditional IRA to a Roth IRA earlier in the year, you may have seen the assets decline in value due to the recent market decline, and you will end up paying higher than necessary taxes on that higher valuation. However, you may undo that rollover by recharacterizing the conversion by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later (generally after 30 days) reconvert to a Roth IRA.

IRA to Charity Transfer – This year may well be the last chance for taxpayers ages 70-1/2 or older to take advantage of an up-to-$100,000 annual exclusion from gross income for otherwise taxable individual retirement account (IRA) distributions that are qualified charitable distributions. Such distributions aren't subject to the charitable contribution percentage limits and can't be included in gross income. However, the contribution isn’t deductible.

Advance Charitable Deductions – If you regularly tithe at a house of worship, you might consider pre-paying part or all of your 2012 tithing and thus advancing the deduction into 2011. This can be especially helpful to individuals who marginally itemize their deductions, allowing them to itemize in one year and then take the standard deduction in the next.

Income Deferral – Depending upon your particular tax circumstances, it may be appropriate to defer income into 2012 if possible. For example, if you are receiving an employee bonus, you might ask your employer to defer it until 2012.

Income Acceleration – If your taxable income is unusually low because of lower income or larger deductions, you may be able to absorb additional income with no or minimal additional tax. In that case, you should consider accelerating income when possible without incurring penalties. This would include pension plan and IRA distributions and accelerated capital gains.

Prepay Tax Deductible Expenses – Consider prepaying tax-deductible expenses to increase your 2011 itemized deductions. For example, if you have outstanding dental bills, paying the balance before year-end may be beneficial, but only if you already meet the 7.5% of AGI floor for deducting medical expenses, or if adding the dental payments would put you over the 7.5% threshold. You can even use a credit card to prepay the expenses, but you would only want to do so if the interest expense you’d incur is less than the tax savings.

Home Energy Credits – If you are a homeowner, making energy-saving improvements to your residence such as putting in extra insulation or installing energy saving windows and energy efficient heaters or air conditioners may qualify you for a tax credit, if the assets are installed in your home before 2012. The credit is 10% of the cost of the improvement with a cap of $500; the credit is reduced by any credit claimed in prior years for the purchase of other energy-saving property.

Education Credits and Deductions – If someone in your family is attending college and qualifies for an education credit, you can pre-pay the first three months of 2012’s tuition to reach the maximum credit for 2011. In addition, unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses expires after 2011. Thus, prepaying the first three months of 2012’s eligible expenses will increase your deduction for qualified higher education expenses.

Don’t Forget Your Minimum Required Distribution – If you have reached age 70-1/2, you are required to make minimum distributions (RMDs) from your IRA, 401(k) plan and other employer-sponsored retirement plans. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70- 1/2 in 2011, you can delay the first required distribution to the first quarter of 2012, but if you do, you will have to take a double distribution in 2012. Consider carefully the tax impact of a double distribution in 2012 versus a distribution in both this year and next.

Take Advantage of the Annual Gift Tax Exemption – You can give $13,000 in 2011 to each of an unlimited number of individuals, but you can't carry over unused exclusions from one year to the next. The transfers also may save family income taxes when income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Read More

It's Time for Year-End Tax Planning

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Regardless of what Congress does late this year or early next, solid tax savings can be realized by taking advantage of tax breaks that are on the books for 2011. For individuals, these include:

• the option to deduct state and local sales and use taxes instead of state and local income taxes;

• the above-the-line deduction for qualified higher education expenses; and

• tax-free distributions by those age 70-1/2 or older from IRAs for charitable purposes.

For businesses, tax breaks available through the end of this year that may not be around next year unless Congress acts include:

• 100% bonus first-year depreciation for most new machinery, equipment and software;

• an extraordinarily high $500,000 Section 179 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property); and

• the research tax credit.

Not all actions will apply to your particular situation, but you will likely benefit from many of them. There also may be additional strategies that will apply to your particular tax situation. We can narrow down the specific actions that you can take once we meet with you. In the meantime, please review this list and contact us at your earliest convenience so we can advise you on which tax-saving moves to make.

Read More