What to Do If You Are Missing a W-2

Have you received all of your W-2s? These documents are essential for completing individual tax returns. You should receive a Form W-2, Wage and Tax Statement, from all of your employers each year. Employers have until January 31st to provide or send you a 2012 W-2 earnings statement, either electronically or in paper form. If you have not received your W-2, follow these steps:

1. Contact Your Tax Preparer—And let him or her know that you are missing a W-2. If your appointment is in the near future, your preparer will advise you whether to keep the appointment or change it to another time. Generally, when a W-2 or 1099 is missing, it is best to keep the appointment so that everything else for the return can be completed. You can then mail the missing document to the office or drop it off at a later date. That way, your return can be finished as soon as the W-2 or 1099 is available, which will speed up your refund, if you are receiving one.
2. Contact Your Employer—Contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer due to an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for the employer to resend or re-issue the W-2.
3. Contact the IRS—If you still have not received your W-2 by February 15, you can contact the IRS for assistance at 800-829-1040. However, we recommend that you hold off from contacting the IRS until you are certain that you will not be receiving a W-2 from the employer. If and when you do call the IRS, have the following information at hand:
• Employer's name, address, city, and state, including zip code;
• Your name, address, city, state, zip code, and Social Security number; and
• An estimate of the wages you earned, the federal income tax withheld, and the period in which you worked for that employer. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible. Our office can assist you with making the estimate.
4. File Your Return—Even if you don’t receive a W-2, you are still required to file your tax return or to request a filing extension by April 15.
• If you anticipate that you will ultimately receive the missing W-2, our office can estimate your 2012 tax liability and file extensions for you. If you have a substantial refund coming, you may opt to have our office prepare a substitute W-2, enabling you to file without the W-2. Refunds for returns, including substitute W-2s, can be delayed significantly while the IRS verifies the W-2 information.
• If you don’t anticipate receiving the missing W-2, then our office can prepare a substitute W-2, enabling you to file your 2012 tax return.

If a substitute W-2 is used and it is later determined that the information used to prepare the substitute W-2 was in error, an amended return may need to be prepared for you to be able to file.

 

Please call our office if you have questions or need assistance.

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Revising Your W-4? Seek Professional Advice

This time of the year, many employers will request from their employees updated W-4 forms (and the equivalent state form for those who live in a state with income tax). The W-4 form allows you to specify your filing status and the number of dependent exemptions to be used for figuring the amount of income tax to be withheld from your pay. Even though the IRS provides an on-line W-4 calculator, it is generally suitable for the more simple returns and may not be appropriate in all cases since it does not take into account all income adjustments, credits, and deductions available. Be careful when completing the W-4 form because errors can create some significant financial problems.

This is where a frequent error occurs. Let’s say that you are married and have two dependents. On your tax return, you claim four exemptions. The natural thing for you to do would be to claim “married” and four exemptions on the W-4. However, for W-4 purposes, the exemption for the taxpayer and spouse are automatically built into the married rates, and only two exemptions need to be claimed. The result, of course, is that you would end up claiming more exemptions than you actually have, which can result in under-withholding if the standard deduction is used.

It is common practice and acceptable for taxpayers to claim additional exemptions when they have excessive withholding. The withholding tables do not account for large itemized deductions or other situations that might reduce their taxable income. It’s also quite common for taxpayers to increase their exemptions to provide more take-home pay from their payroll checks. In doing so, they are essentially borrowing tax money from the government, which they will have to repay, along with possible penalties and interest, when they file their return next year. That might seem like a good idea now, but it could lead to an unexpected tax liability at tax time. This is where a professional tax projection can more accurately establish appropriate withholding amounts.

Determining the appropriate number of exemptions to claim on the W-4 can be tricky if you have other substantial income on which no tax is withheld or when both spouses of a married couple are employed. The guidance of a tax professional also may be beneficial in these cases to help figure the W-4 withholding allowances and to analyze how the withholding amount may affect the need for estimated tax installment payments.

If you feel you need assistance in establishing your withholding amount, please give our office a call.

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Prepared for the New Surtax?

As part of Obama Care, we have a new tax beginning in 2013. The official name of this tax is the “Unearned Income Medicare Contribution Tax,” and even though the name implies it is a contribution, don’t get the idea you deduct it as a charitable contribution. It is, in actuality, a surtax levied on the net investment income of higher-income taxpayers.

The surtax is 3.8% on the lesser of your net investment income or the excess of your modified adjusted gross income (MAGI) over a threshold based on your filing status. MAGI is your regular AGI increased by income excluded for working out of the country; net investment income is your investment income reduced by investment expenses.

The filing status threshold amounts are:

• $250,000 for married taxpayers filing jointly and surviving spouses.
• $125,000 for married taxpayers filing separately.
• $200,000 for single and head of household filers.

Example - A single taxpayer has net investment income of $100,000 and MAGI of $220,000. The taxpayer would pay a Medicare contribution tax only on the $20,000 amount by which his MAGI exceeds his threshold amount of $200,000, because that is less than his net investment income of $100,000. Thus, the taxpayer's Medicare contribution tax would be $760 ($20,000 × 3.8%).

Investment income includes:

• Interest, dividends, annuities (but not distributions from IRAs or qualified retirement plans), and royalties,
• Rents (other than derived from a trade or business),
• Capital gains (other than derived from a trade or business),
• Home sale gain in excess of the allowable home gain exclusion,
• Your child’s investment income in excess of the excludable threshold if, when eligible, you elect to include your child’s investment income on your return,
• Trade or business income that is a Sec. 469 passive activity with respect to the taxpayer, and
• Trade or business income with respect to trading financial instruments or commodities.

Planning Note: for surtax purposes, gross income doesn't include interest on tax-exempt bonds. Thus, one can avoid the net investment income surtax by investing in tax-exempt bonds.

Investment expenses include:

• Investment interest expense,
• Investment advisory and brokerage fees,
• Expenses related to rental and royalty income, and
• State and local income taxes properly allocatable to items included in Net Investment Income.

Do you think you will never get hit with this tax because your income is way under the threshold amounts? Don’t be so sure. When you sell your home, the gain is a capital gain, and to the extent that the gain is not excludable using the home gain exclusion, it will add to your income, and possibly push you above the taxation thresholds. And, since capital gains are investment income, you might be in for a surprise. The same holds true for gains from selling stock and a second home. So when planning to sell a capital asset, be sure to consider the impact of this new surtax.

The surtax also applies to undistributed net investment income of trusts and estates, and there are special rules applying to the sale of partnership and Sub-S Corporation interests.

If this surtax will apply to you in 2013, you may need to increase your income tax withholding or estimated tax payments to cover the additional tax so you can avoid or minimize an underpayment of estimated tax penalty when you file your 2013 return.

If you have questions about this new tax or wish to do some related tax planning, please give our office a call.

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Don’t Forget to Report Those Foreign Financial Assets!

Don’t overlook the requirement for any individual who holds any interest in a “specified foreign financial asset” during the tax year to complete and attach Form 8938 to his or her income tax return if a certain reporting threshold is met. The reporting threshold varies, depending on whether or not the individual lives in the U.S. and files a joint return with his or her spouse. For example, an individual who is not married and does not live abroad will need to file Form 8938 for 2012 if the total value of his or her specified foreign financial assets amounts to more than $50,000 as of December 31, 2012 or more than $75,000 at any time during 2012. For married taxpayers filing a joint return and living in the U.S., the threshold amounts are twice as high. The thresholds are also higher for taxpayers residing abroad.

Specified foreign financial assets include financial accounts maintained by foreign financial institutions and other investment assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counterparties that are non-U.S. persons, and interests in certain foreign entities. However, no disclosure is required for interests that are held in a custodial account with a U.S. financial institution.

The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, there are additional penalties of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.

To the extent that the IRS determines the individual to have an interest in one or more foreign financial assets but fails to provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 (or other applicable reporting threshold amount) for purposes of assessing the penalty.

No penalty will be imposed if the failure to file the 8938 is due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information is not reasonable cause.

In addition, if it is shown that the individual failed to report the income from the foreign financial account on his or her income tax return, a 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset.

If you have questions related to this issue or are uncertain as to whether you are required to file Form 8938, please give our office a call in order to discuss your particular situation.

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Direct Deposit Puts Your Money in Your Pocket...Faster

Don’t wait around for a paper check. Have your federal (and state, if applicable) tax refund deposited directly into your bank account. Selecting Direct Deposit is a secure and convenient way to get your money into your pocket more rapidly.

• Security—Eliminates any possibility of a check being lost in the mail. Thousands of checks are returned to the IRS by the US Post Office every year as undeliverable mail. Direct Deposit eliminates the possibility of you not receiving your check, or of your refund check being stolen from your mailbox.
• Convenient—The money goes directly into your bank account. You won’t have to make a special trip to the bank to deposit the money yourself.
• Easy—Simply provide this office with your bank routing number and account number when we prepare your return and you’ll receive your refund far more quickly than you would by check.
• Multiple Options—You also have the option of electronically directing your refund to multiple accounts. With the "split refund" option, taxpayers can divide their refunds among up to three checking or savings accounts and three different U.S. financial institutions. A word of caution—some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted.
• Deposit Can’t Be to a Third Party’s Bank Account—To protect taxpayers from scammers, direct deposit tax refunds can only be deposited into an account or accounts owned by the taxpayer. Therefore, only provide your own account information and not account information belonging to a third party.

For more information regarding direct deposit of your tax refund and the split refund option, we would be happy to discuss your options with you at your tax appointment.

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American Taxpayer Relief Act of 2012

President Obama on January 2 signed the American Taxpayer Relief Act of 2012. The new law makes permanent Bush-era tax rates for individuals and couples with annual income of $400,000 and $450,000, respectively. The law also permanently indexes the alternative minimum tax for inflation, extends unemployment insurance benefits for one year and extends numerous business benefits.

The following is a summary of the provisions applicable to individuals and small businesses included in the 157 page American Taxpayer Relief Act.

Tax Rates - For tax years beginning after 2012, the 10% rate has been made permanent. Thus income tax rates for individuals will stay at 10%, 15%, 25%, 28%, 33% and 35%, but with a 39.6% rate applying for income above the threshold of $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married filing separately. These dollar amounts are inflation-adjusted for tax years after 2013.

Personal Exemption Phaseout (PEP) for High Income Earners – For tax years beginning after 2012, the Personal Exemption Phaseout (PEP), which had previously been suspended, is reinstated with a starting threshold for those with AGI of $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. These dollar amounts are inflation-adjusted for tax years after 2013.

Itemized Deduction Phaseout - For tax years beginning after 2012, the “Pease” limitation on itemized deductions, which had previously been suspended, is reinstated with a starting threshold for those with AGI of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3% of the amount by which the taxpayer's adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions. These dollar amounts are inflation-adjusted for tax years after 2013.

Capital Gains and Dividends - For tax years beginning after 2012, the top rate for long-term capital gains and qualified dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($425,000 for head of household, $450,000 for married joint, and $225,000 for married separate taxpayers). For taxpayers whose ordinary income is generally taxed at a rate below 25%, long-term capital gains and qualified dividends will permanently be subject to a 0% rate. Taxpayers who are subject to a 25%-or-greater rate on ordinary income, but whose income levels fall below the thresholds listed above, will continue to be subject to a 15% rate on capital gains and dividends.

Marriage Penalty Relief - The ATRA extends the marriage penalty relief for the standard deduction, the 15% bracket, and the EITC for taxable years beginning after December 31, 2012. For example, had this provision not been extended the standard deduction for married taxpayers filing jointly (and qualified surviving spouses) would have been 167% (rather than 200%) of the standard deduction for single taxpayers.

Dependent Care Credit - The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increased the amount of eligible expenses from $2,400 for one child and $4,800 for two or more children to $3,000 and $6,000, respectively and increased the applicable percentage from 30% to 35%. The Act permanently extends these increased amounts.

Adoption Credit – The Act permanently extends the increased adoption tax credit and the adoption assistance programs exclusion. Taxpayers that adopt children can receive a tax credit for qualified adoption expenses. A taxpayer may also exclude from income adoption expenses paid by an employer. The EGTRRA increased the credit from $5,000 ($6,000 for a special needs child) to $10,000, and provided a $10,000 income exclusion for employer-assistance programs, with both amounts inflation-adjusted. The Patient Protection and Affordable Care Act of 2010 extended these benefits to 2011 and made the credit refundable. The ATRA extends, for taxable years beginning after December 31, 2012, the increased adoption credit amount and the exclusion for employer-assistance programs as enacted in EGTRRA.

Employer Expenses for Child Care Assistance – The act permanently extends the credit for employer expenses for child care assistance. The EGTRRA provided employers with a credit of up to $150,000 for acquiring, constructing, rehabilitating or expanding property which is used for a child care facility. The ATRA extends this provision for taxable years beginning after December 31, 2012.

Child Credit – The Act permanently extends the 2001 modifications to the child tax credit. Generally, taxpayers with income below certain threshold amounts may claim the child tax credit to reduce federal income tax for each qualifying child under the age of 17. The EGTRRA increased the credit from $500 to $1,000 and expanded refundability. The amount that may be claimed as a refund was 15% of earnings above $10,000. These rates become permanent.

However the refund provision (15% of earnings above $10,000) is temporarily set at 15% of earnings above $3,000 through 2017.

EITC –Under prior law, working families with two or more children qualified for an earned income tax credit equal to 40% of the family’s first $12,570 of earned income. The American Recovery and Reinvestment Act of 2009 (ARRA) increased the earned income tax credit to 45% for families with three or more children and increased the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children) to lessen the marriage penalty. The Act temporarily extends the third-child/45% credit rate and marriage penalty relief provisions through 2017.

Coverdell Accounts – The Act permanently extends the expanded Coverdell Accounts provisions which allow an annual $2,000 (was $500) contribution and includes elementary and secondary school expenses.

Employer-provided Educational Assistance – The Act permanently extends the expanded exclusion for employer-provided educational assistance. An employee may exclude from gross income up to $5,250 for income and employment tax purposes per year of employer-provided education assistance.

Student Loan Interest Deduction - The Act Permanently extends the expanded above-the-line deduction for student loan interest deduction for qualified education loans up to $2,500. It also makes permanent the elimination of the 60 month deduction limit and the increased income phase-out of $55,000 to $70,000 ($110,000 and $140,000 for joint filers).

Scholarship Exclusions – The Act permanently extends the exclusion from income of amounts received under certain scholarship programs. The National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program provide education awards to participants on the condition that the participants perform certain services. The EGTRRA allowed the scholarship exclusion to apply to these programs.

American Opportunity Tax Credit - Temporarily extends the American Opportunity Tax Credit. Created under the ARRA, the American Opportunity Tax Credit is available for up to $2,500 of the cost of tuition and related expenses paid during the taxable year. Under this tax credit, taxpayers receive a tax credit based on 100% of the first $2,000 of tuition and related expenses (including course materials) paid during the taxable year and 25% of the next $2,000 of tuition and related expenses paid during the taxable year. Forty percent of the credit is refundable. This tax credit is subject to a phase-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). The ATRA extends the American Opportunity Tax Credit for five additional years, through 2017.

Refund and Tax Credit Disregard for Means-Tested Programs – The Act permanently extends refund and tax credit disregard for means-tested programs. The receipt of a tax credit would put a substantial number of families over the income limits for these programs in the month that the tax refund is received.

Permanent AMT Patch - Without this change, effective in 2012, a taxpayer would have received an AMT exemption of $33,750 (individuals) and $45,000 (married filing jointly, and would not have been allowed nonrefundable personal credits to be used against the AMT. The ATRA increases the exemption amounts for 2012 to $50,600 (individuals) and $78,750 (married filing jointly) and indexes the exemption and phaseout amounts thereafter. The Act also allows the nonrefundable personal credits against the AMT. The changes are effective for taxable years beginning after December 31, 2011.

Gift & Estate Tax - The Act prevents steep increases in estate, gift and generation-skipping transfer (GST) tax that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (as indexed for inflation). However, the Act also permanently increases the top estate and gift tax rate from 35% to 40%. The exemption amount for 2013 is $5.25 million.

Portability of Unused Estate Tax Exemption - The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRUIRJCA) allowed the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse for estates of decedents dying after December 31, 2010 and before December 31 2012. The ATRA makes permanent this provision and is effective for estates of decedents dying after December 31, 2012. CAUTION – A Form 706 (Estate Tax Return) must be timely filed to obtain the portability.

Gift & Estate Exemption Reunification - Prior to the EGTRRA, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The TRUIRJCA reunified the estate and gift taxes. The ATRA permanently extends unification and is effective for gifts made after December 31, 2012.

Mortgage Debt Relief – A Principal Residence Acquisition Debt Relief Exclusion was established by the Mortgage Debt Relief Act of 2007 and provided a COD exclusion of $2 million ($1 million MFS) limited to acquisition debt. Equity debt is considered the first debt relieved. This exclusion is available even if the taxpayer is solvent. The 2012 Taxpayer Relief Act extends this exclusion for one year so that it applies to home mortgage debt discharged before 2014.

Teachers’ Above-the-line Expense Deduction – The Act revives the deduction allowing up to $250 of a teacher’s qualified classroom expenses for 2012 and extends it through 2013.

Mortgage Insurance Premiums as Qualified Residence Interest - Premiums for mortgage insurance contracts entered into after Dec. 31, 2006 on a qualified residence have been deductible as qualified residence interest. The ATRA extends the ability to deduct the cost of mortgage insurance on a qualified personal residence for two additional years, through 2013. The deduction is phased-out ratably by 10% for each $1,000 by which the taxpayer’s AGI exceeds $100,000. Thus, the deduction is unavailable for a taxpayer with an AGI in excess of $110,000.

Tax Free Employer Mass Transit Benefits –The excludable employer-provided mass transit benefit is revived to $240 per month for 2012 and continues through 2013.

State & Local Sales Tax - The Act extends for two years the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes. The option to deduct State and local general sales taxes, which expired at the end of 2011, is revived for 2012 and continued through 2013.

Contributions of Capital Gain Real Property Made for Conservation Purposes - The special rule allowing a 50% (instead of 30%) of AGI limitation for contributions of conservation easement capital gain property and the 15 year carryover period if the conservation easement contribution exceeds the 50% of AGI limitation, which expired at the end of 2011, is now revived for 2012 and continued through 2013.

Above-The-Line Tuition Deduction - The above-the-line deduction for qualified tuition and related expenses, which expired at the end of 2011, is now revived for 2012 and continued through 2013.

Tax-Free IRA to Charity Contributions - Tax-free distributions (up to $100,000) made by taxpayers over age 70.5 from individual retirement plans for charitable purposes, which expired at the end of 2011, is now revived for 2012 and continued through 2013.

Research Credit Reinstated and Liberalized - The research credit equals the sum of: (1) 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount, (unless the taxpayer elected an alternative simplified research credit); (2) the university basic research credit (i.e., 20% of the basic research payments); (3) 20% of the taxpayer's expenditures on qualified energy research undertaken by an energy research consortium. Under pre-Act law, the research credit didn't apply for amounts paid or accrued after Dec. 31, 2011. The 2012 Taxpayer Relief Act retroactively extends the research credit for two years so that it applies for amounts paid or accrued before Jan. 1, 2014.

For tax years beginning after Dec. 31, 2011, the Act also liberalizes the research credit rules for persons that acquire the major portion of either a trade or business or a separate unit of a trade or business of another person. It also revises the rules for allocating the research credit among members of a controlled group or members of a group of commonly controlled trades or businesses.

Low-Income Housing Tax Credit - 9% Credit Rate Freeze for the Low-Income Housing Tax Credit Program. The low-income housing tax credit program provides a tax credit over a period of ten years after the housing facility is placed-in-service. The credit provided each year is determined by present-value formula based on the federal cost of borrowing. Over the past few years, as the federal cost of borrowing has declined, so has the amount of tax credits that can be used to build a LIHTC project. To deal with this, in 2008, Congress adjusted the formula and set a minimum credit amount of 9%, which is based on the original credit rate when the program was created and was effective for facilities placed-in-service before December 31, 2013. This ATRA extends the expiration date by changing the deadline to projects that have received an allocation before January 1, 2014.

Treatment of military basic housing allowances under low-income housing credit. The ATRA extends a provision whereby a member of the military’s basic housing allowance is not considered income for purposes of calculating whether the individual qualifies as a low-income tenant for the low income housing tax credit program. The provision, which expired at the end of 2011, is continued for two additional years.

Indian Employment Credit Reinstated and Extended - The Indian employment credit for businesses is 20% of the excess, if any, of the sum of qualified wages and qualified employee health insurance costs (not in excess of $20,000 per employee) paid or incurred (other than paid under salary reduction arrangements) to qualified employees (enrolled Indian tribe members and their spouses who meet certain requirements) during the tax year, over the sum of these same costs paid or incurred in calendar year '93. The 2012 Taxpayer Relief Act retroactively extends the Indian employment credit for two years. It now applies to tax years beginning before Jan. 1, 2014.

New Markets Tax Credit Reinstated and Extended - The 2012 Taxpayer Relief Act retroactively extends the new markets tax credit two years, through 2013. It provides that a $3.5 billion cap applies for 2010, 2011, 2012, and 2013, but no amount can be carried over to any calendar year after 2018.

Differential Wage Payment Credit for Employers Reinstated and Extended - Eligible small business employers (less than an average of 50 employees during the year), with a written plan, that pay differential wage payments to qualified employees (been an employee during the 91-day period immediately preceding the period for which any differential wage payment is made) for periods that they are called to active duty with the U.S. uniformed services (for more than 30 days) that represent all or part of the wages that they would have otherwise received from the employer can claim a credit equal to 20% of up to $20,000 of differential pay made to an employee during the tax year. The 2012 Taxpayer Relief Act retroactively extends the credit for two years. It applies for differential wages paid through Dec. 31, 2013.

Work Opportunity Tax Credit Extended - The work opportunity tax credit (WOTC) allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of first-year wages up to $6,000 per employee ($3,000 for qualified summer youth employees). Where the employee is a long-term family assistance (LTFA) recipient, the WOTC is a percentage of first and second year wages, up to $10,000 per employee. Generally, the percentage of qualifying wages is 40% of first-year wages; it's 25% for employees who have completed at least 120 hours, but less than 400 hours of service for the employer. For LTFA recipients, it includes an additional 50% of qualified second-year wages.

The maximum WOTC for hiring a qualifying veteran generally is $6,000. However, it can be as high as $12,000, $14,000, or $24,000, depending on factors such as whether the veteran has a service-connected disability, the period of his or her unemployment before being hired, and when that period of unemployment occurred relative to the WOTC-eligible hiring date.

The 2012 Taxpayer Relief Act retroactively extends the WOTC so that it applies to eligible veterans and nonveterans who begin work for the employer before Jan. 1, 2014. Thus, the Act grants a two-year lease on life for the WOTC for eligible nonveterans, and a one-year lease on life for the WOTC for qualifying veterans.

7-Year Write-off for Motorsport Racing Track Facilities Reinstated and Extended - The 2012 Taxpayer Relief Act retroactively extends the 7-year straight line cost recovery period for motorsports entertainment complexes for two years. The quick write-off applies to qualifying motorsports entertainment complexes placed in service through Dec. 31, 2013.

Business Property on Indian Reservations – The accelerated depreciation for business property on an Indian reservation is retroactively extended through 2013.

Contributions of Food Inventory - The Act extends for two years (through 2013) the provision allowing businesses to claim an enhanced deduction for the contribution of food inventory.

Section 179 Expensing Increased for 2012 and 2013 – Under prior law the Section 179 expensing cap for 2012 was $139,000 and dropped to $25,000 in 2013. The 2012 Taxpayer Relief Act extends 2011 caps to both 2012 and 2013. Thus for both years the cap will be $500,000 with a $2,000,000 investment ceiling. The Act also provides that:

Off-the-shelf computer software is expensing-eligible property if placed in service in a tax year beginning before 2014 (a one-year extension).

For tax years beginning before 2014 (also a one-year extension), an expensing election or specification of property to be expensed may be revoked without IRS's consent. But, if such an election is revoked, it can't be reelected.

For any tax year beginning in 2010, 2011, 2012, or 2013 (a two-year extension) up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) is eligible for expensing.

For tax years beginning after 2013, the maximum expensing amount is scheduled to drop to $25,000 and the investment-based phaseout amount is scheduled to drop to $200,000.

Special Expensing Rules for Certain Film and Television Productions - The Act extends for two years, through 2013, the provision that allows film and television producers to expense the first $15 million of production costs incurred in the United States ($20 million if the costs are incurred in economically depressed areas in the United States).

Qualified Small Business Stock Exclusion – Normally 50% of the gain from QSBS is excluded from taxation (but is an AMT preference). Under prior law the 50% was increased to 100% for the exclusion of gain on certain small business stock acquired after Sept. 27, 2010 and before Jan. 1, 2012. The 2012 Taxpayer Relief Act retroactively extends this provision for two years, through 2013.

CAUTION – For California (CA) purposes the requirement that 80% of the business be conducted in CA to benefit from the CA exclusion and reinvestment was recently found to be discriminatory and all exclusions or reinvestments since 2009 have been invalidated. The FTB will be sending out tax due notices to affected taxpayers.

S Corporation Charity Basis Adjustment Provision Extended – Prior to the Pension Protection Act of 2006 (PPA) shareholders made their pro-rata ownership basis adjustment based upon the FMV of property donated to charity. PPA temporarily changed that to the adjusted basis of the property for tax years beginning before Jan. 1, 2010. The provision was later extended to years beginning before Jan. 1, 2012. The 2012 Taxpayer Relief Act retroactively extends the PPA rule for two years so that it applies for contributions made in tax years beginning before Jan. 1, 2014.

Reduction in S Corporation Recognition Period for Built-in Gains Tax - If a taxable corporation converts into an S corporation, the conversion is not a taxable event. However, following such a conversion, an S corporation must hold its assets for a certain period in order to avoid a tax on any built-in gains that existed at the time of the conversion. The American Recovery and Reinvestment Act reduced that period from 10 years to 7 years for sales of assets in 2009 and 2010. The Small Business Jobs Act reduced that period to 5 years for sales of assets in 2011. The ATRA of 2012 extends the reduced 5-year holding period for sales occurring in 2012 and 2013. In addition, this Act clarifies rules for carry forwards and installment sales.

Empowerment Zone Tax Incentives - The Act extends for two years the designation of certain economically depressed census tracts as Empowerment Zones. Businesses and individual residents within Empowerment Zones are eligible for special tax incentives.

Bonus First-Year Depreciation Extended for One Year – Under prior law, a bonus first-year depreciation was 50% of the adjusted basis of qualified property acquired and placed in service after Dec. 31, 2011, and before Jan. 1, 2013 (before Jan. 1, 2014 for certain longer-lived and transportation property). Bonus depreciation applies for both regular tax and AMT purposes, but is not allowed for purposes of computing earnings and profits. A taxpayer may elect out of additional first-year depreciation for any class of property for any tax year. The 2012 Taxpayer Relief Act extends 50% first-year bonus depreciation so that it applies to qualified property acquired and placed in service before Jan. 1, 2014 (before Jan. 1, 2015 for certain longer-lived and transportation property).

First-Year Depreciation Cap for 2013 Autos and Trucks Boosted by $8,000 – As a result of the one-year extension of the 50% bonus depreciation the yet-to-be determined luxury auto dollar limits for 2013 are increased $8,000 when the bonus depreciation is used.

15-Year Write off for Qualified Leasehold and Retail Improvements and Restaurant Property Reinstated and Extended - The 2012 Taxpayer Relief Act retroactively extends for two years the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class. Such property qualifies for 15-year recovery if it is placed in service before Jan. 1, 2014.

Energy-efficient Improvements to Existing Homes - The non business energy property credit under Code Sec. 25C for energy-efficient existing homes is retroactively extended for two years through 2013. A taxpayer can claim a 10% credit on the cost of: (1) qualified energy efficiency improvements, and (2) residential energy property expenditures, with a lifetime credit limit of $500 ($200 for windows and skylights).

Alternative Fuel Vehicle Refueling Property Credit - The alternative fuel vehicle refueling property credit under Code Sec. 30C is retroactively extended for two years through 2013 so that taxpayers can claim a 30% credit for qualified alternative fuel vehicle refueling property placed in service through Dec. 31, 2013, subject to the $30,000 and $1,000 thresholds.

Plug-in Electric Vehicles Credit - The credit for 2- or 3-wheeled plug-in electric vehicles under Code Sec. 30D is modified and retroactively extended for two years through 2013.

Credit for Energy-efficient New Homes - The credit for energy-efficient new homes under Code Sec. 45L is retroactively extended for two years through 2013.

Pension Provision Roth Transfers - For transfers after Dec. 31, 2012, in tax years ending after that date, plan provisions in an applicable retirement plan (which includes a qualified Roth contribution program) can allow participants to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contribution under Code Sec. 408A(e).

Roth Conversions for Retirement Plans - Under current law, a deferral plan under section 401(k) (including the Thrift Savings Plan), 403(b) or 457(b) governmental plan can have Roth accounts that allow participants to save on a Roth basis. That is, they can make after-tax contributions to the plan and all the principal and earnings are tax-free when distributed. Plans can currently allow participants to convert their pre-tax accounts to Roth accounts, but only with respect to money they have a right to take out of the plan, usually because they have reached age 59½ or separated from service. The ATRA allows any amount in a non-Roth account to be converted to a Roth account in the same plan, whether or not the amount is distributable. The amount converted would be subject to regular income tax.

Please call our office with any concerns you may have related to how these new tax laws may impact your tax situation.

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February 2013 Due Dates

February 2013 Individual Due Dates

February 11 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during January, you are required to report them to your employer on IRS Form 4070 no later than February 11.

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.

February 15 - Last Date to Claim Exemption from Withholding

If you claimed an exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.



February 2013 Business Due Dates

February 11 - Non-Payroll Taxes

File Form 945 to report income tax withheld for 2012 on all non-payroll items. This due date applies only if you deposited the tax for the year in full and on time.

February 11 - Social Security, Medicare and Withheld Income Tax

File Form 941 for the fourth quarter of 2012. This due date applies only if you deposited the tax for the quarter in full and on time.

February 11 - Certain Small Employers

File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2012. This due date applies only if you deposited the tax for the year in full and on time.

February 11 - Farm Employers

File Form 943 to report Social Security and Medicare taxes and withheld income tax for 2012. This due date applies only if you deposited the tax for the year in full and on time.

February 11 - Federal Unemployment Tax

File Form 940 for 2012. This due date applies only if you deposited the tax for the year in full and on time.

February 15 - Social Security, Medicare and Withheld Income Tax

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

February 15 - Non-Payroll Withholding

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

February 16 - All Employers

Begin withholding income tax from the pay of any employee who claimed exemption from withholding in 2012, but did not give you a new Form W-4 to continue the exemption this year.

February 28 - Payers of Gambling Winnings

File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2012. If you file Forms W-2G electronically, your due date for filing them with the IRS will be extended to April 1. The due date for giving the recipient these forms was January 31.

February 28 - Informational Returns Filing Due

File information returns (Form 1099) and transmittal Forms 1096 for certain payments you made during 2012. There are different forms for different types of payments. These are government filing copies for the 1099s issued to service providers and others (see January 31).

If you file Forms 1098, 1099, or W-2G electronically, your due date for filing them with the IRS will be extended to April 1. The due date for giving the recipient these forms was January 31.

February 28 - All Employers

File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2012. If you file Forms W-2 electronically, your due date for filing them with the SSA will be extended to April 1. The due date for giving the recipient these forms was January 31.

February 28 - Large Food and Beverage Establishment Employers

File Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer’s Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically, your due date for filing them with the IRS will be extended to April 1.

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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 you save! When you arrive at your appointment and are 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 that are 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 future returns as well. When you’re fully prepared for your appointment, you will have more time to explore all avenues available for lowering your tax.

For example, the law allows choices in transactions like:

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 costs over a number of years; or, in certain cases, you can deduct them all in one year.

Where to Begin?

Ideally, preparation for your tax appointment should begin in January of the tax year you’re working with. Right after the New Year, set up a safe storage location – a file drawer, a cupboard, a safe, etc. As you receive pertinent records, file them right away, before they’re forgotten or lost. By making the practice a habit, you’ll find your job a lot easier when your actual appointment date rolls around.

Other general suggestions to consider for your appointment preparation include:

• Segregate your records according to income and expense categories. For instance, file medical expense receipts in an envelope or folder, mortgage interest payment records in another, charitable donations in a third, etc. If you receive an organizer or questionnaire to complete before your appointment, make certain you fill out every section that applies to you. (Important: Read all explanations and follow instructions carefully to be sure you don’t miss important data – organizers are designed to remind you of transactions you may miss otherwise.)
• Be sure to call our attention to any foreign bank account, foreign financial account or foreign trust in which you have an ownership interest, signature authority or control over. We also need to know about foreign inheritances and ownership of foreign assets. Generally any foreign financial dealings should be brought to our attention so we can determine if you have any special reporting requirements. The penalties for not making and submitting the required reports can be draconian.
• Keep your annual income statements separate from your other documents (e.g., W-2s from employers, 1099s from banks, stockbrokers, etc., and K-1s from partnerships). Be sure to take these documents to your appointment, including the instructions for K-1s!
• Write down questions you may have so you don’t forget to ask them at the appointment. Review last year’s return. Compare your income on that return to the income for the current year. For instance, a dividend from ABC stock on your prior-year return may remind you that you sold ABC this year and need to report the sale or that you haven’t yet received the 1099-DIV form for the current year.
• Make certain that you have social security numbers for all your dependents. The IRS checks these carefully and can deny deductions for returns filed without them.
• Compare deductions from last year with your records for this year. Did you forget anything?
• Collect any other documents and financial papers that you’re puzzled about. Prepare to bring these to your appointment so you can ask about them.

Accuracy Even for Details

To ensure the greatest accuracy possible in all detail on your return, make sure you review personal data. Check name(s), address, social security number(s) and occupation(s) on last year’s return. Note any changes for this year. Although your telephone number isn’t required on your return, current home and work numbers are always helpful should questions occur during return preparation.

Marital Status Change

If your marital status changed during the year, if you lived apart from your spouse or if your spouse died during the year, list dates and details. Bring copies of prenuptial, legal separation, divorce or property settlement agreements, if any, to your appointment. If your spouse passed away during the year, you should have a copy of his or her trust agreement or will available for review.

Dependents

If you have qualifying dependents, you will need to provide the following for each:

• First and last name
• Social security number
• Birth date
• Number of months living in your home
• Their income amount (both taxable and nontaxable)

If you have dependent children over age 18, note how long they were full-time students during the year. To qualify as your dependent, an individual must pass five strict dependency tests. If you think a person qualifies as your dependent (but you aren’t sure), tally the amounts you provided toward his/her support vs. the amounts he/she provided. This will simplify making a final decision about whether you really qualify for the dependency deduction.

Some Transactions Deserve Special Treatment

Certain transactions require special treatment on your tax return. It’s a good idea to invest a little extra preparation effort when you have had the following transactions:

Sales of Stock or Other Property: All sales of stocks, bonds, securities, real estate and any other type of property need to be reported on your return, even if you had no profit or loss. List each sale, and have the purchase and sale documents available for each transaction.

Purchase date, sale date, cost and selling price must all be noted on your return. Make sure this information is contained on the documents you bring to your appointment.

Gifted or Inherited Property: If you sell property that was given to you, you need to determine when and for how much the original owner purchased it. If you sell property you inherited, you need to know the date of the decedent’s death and the property’s value at that time. You may be able to find this information on estate tax returns or in probate documents.

Reinvested Dividends: You may have sold stock or a mutual fund in which you participated in a dividend reinvestment program. If so, you will need to have records of each stock purchase made with the reinvested dividends.

Sale of Home: The tax law provides special breaks for home sale gains, and you may be able to exclude all (or a part) of a gain on a home if you meet certain ownership, occupancy and holding period requirements. If you file a joint return with your spouse and your gain from the sale of the home exceeds $500,000 ($250,000 for other individuals), record the amounts you spent on improvements to the property. Remember, too, possible exclusion of gain applies only to a primary residence, and the amount of improvements made to other homes is required regardless of the gain amount. Be sure to bring a copy of the sale documents (usually the closing escrow statement) with you to the appointment.

Purchase of a Home: Be sure to bring a copy of the closing escrow statement if you purchased a home.

Vehicle Purchase: If you purchased a new plug-in electric car (or cars) this year, you may qualify for a special credit. Please bring the purchase statement to the appointment with you.

Home Energy-Related Expenditures: If you installed solar, geothermal or wind power generating systems, please bring the details of those purchases and the manufacturer’s credit qualification certification to your appointment. You may qualify for a substantial energy-related tax credit.

Identity Theft: Identity theft is becoming more and more prevalent and can impact your tax filings. If you have reason to believe that your identity has been stolen, please contact this firm as soon as possible. The IRS provides special procedures for filing returns of taxpayers who have had their identity stolen.

Car Expenses: Where you have used one or more automobiles for business, list the expenses of each separately. The government requires that you provide your total mileage, business miles, and commuting miles for each car on your return, so be prepared to have them available. If you were reimbursed for mileage through an employer, know the reimbursement amount and whether the reimbursement is included in your W-2.

Charitable Donations: Cash contributions (regardless of amount) must be substantiated with a bank record or written communication from the charity showing the name of the charitable organization, date and amount of the contribution.

Cash donations put into a “Christmas kettle,” church collection plate, etc., are not deductible. For clothing and household contributions, the items donated must generally be in good or better condition, and items such as undergarments and socks are not deductible. A record of each item contributed must be kept, indicating the name and address of the charity, date and location of the contribution, and a reasonable description of the property. Contributions valued less than $250 and dropped off at an unattended location do not require a receipt. For contributions of $500 or more, the record must also include when and how the property was acquired and your cost basis in the property. For contributions valued at $5,000 or more and other types of contributions, please call this office for additional requirements.

If you have questions about assembling your tax data prior to your appointment, please give our office a call.

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Don’t Be a Victim!

Not too long ago, we cautioned you about being duped by Internet identity thieves. We want to remind you once again about this fast-growing threat and how to protect yourself from being a victim and avoid the immense amount of trouble and aggravation that accompanies identity theft.

As the tax-filing season approaches, the identity thieves are gearing up with tax scams to sucker you into providing them with your identity information, which they can then use to charge against your credit cards, tap your bank account, steal your tax refund, file a fraudulent tax return in your name . . . the list goes on and on.

These thieves are clever, and some even disguise e-mails to look as if they come from a government agency; the IRS banner has been used in many scams to steal taxpayer identities. For example, you may receive an e-mail with the IRS banner indicating that you have a refund coming and directing you to a web site where you are duped into revealing your identity to obtain the refund. During the holidays, scammers were sending out e-mails disguised as being sent by major department stores you may have received one indicating that you had won a gift card and asking you to reveal your financial information to receive the gift card.

The scams, known as phishing, have one goal: to trick you into revealing your personal and financial information. The scammers can then use that information such as your Social Security number, bank account, or credit card numbers to commit identity theft or steal your money.

Here are some tips you should know about phishing scams:

1. The IRS never asks for detailed personal and financial information such as personal identification numbers (PINs), passwords, or similar secret access information for credit card, bank, or other financial accounts.

2.  The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information.  If you receive an e-mail from someone claiming to be a representative of the IRS or directing you to an IRS site:

• Do not reply to the message.
• Do not open any attachments. Attachments may contain malicious code that will infect your computer.
• Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, you may have compromised your financial information. If you entered your credit card number, contact the credit card company for guidance. If you entered your banking information, contact the bank for the appropriate steps to take. The IRS website provides additional resources that can help. Visit the IRS website and enter the search term “identity theft” for additional information.

3. The address of the official IRS website is www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site.

4. If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS but you suspect he or she is not an IRS employee, contact the IRS at 1-800-829-1040 to determine whether the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward suspicious e-mails to phishing@irs.gov.

If you have any questions or doubts related to a letter, phone call, or e-mail from the IRS or other taxing authorities, please call our office before responding or providing any financial or personal information. Better safe than sorry!

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Don’t Forget Those Nominee 1099s

For tax purposes, if you receive income in your name that actually belongs to someone else, you are also a nominee. Being a nominee means that you must file a 1099 form with the IRS appropriate to the type of income you received and give a copy of the 1099 to the actual owner of the income. However, if the other person is your spouse, no 1099 filing is required.

One of the most commonly encountered nominee situations is having a joint bank account or brokerage account with someone other than your spouse and all of the income from those accounts being reported under your SS number. You will need to provide the IRS and your joint account owner with a 1099 reporting the co-owner’s share of the income under his or her SS number. Then, when you file your return, you need to show all of the income but back out the co-owner’s share as “nominee amount.”

The type of 1099 to file depends upon the type of income: 1099-INT for interest, 1099-DIV for dividends, and 1099-B for the proceeds from selling stocks and bonds.

Forms 1099-INT and 1099-DIV issued by you as a nominee are supposed to be provided to the recipients by January 31, while the deadline for providing forms 1099-B to the other owner(s) is February 15. In order to avoid penalties, copies of the 1099s need to be sent to the IRS by February 28. The 1099s must be submitted on magnetic media or on optically scannable forms (OCR forms). This firm prepares 1099s in OCR format for submission to the IRS along with the required 1096 transmittal form. This service provides recipient and file copies for your records.

If you have questions about filing 1099s as a nominee, please call our office.

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American Taxpayer Relief Act

After weeks, indeed months of proposals and counter-proposals, seemingly endless negotiations

and down-to-the-wire drama, Congress has passed legislation to avert the tax side of the socalled

"fiscal cliff." The American Taxpayer Relief Act permanently extends the Bush-era tax

cuts for lower and moderate income taxpayers, permanently "patches" the alternative minimum

tax (AMT), provides for a permanent 40 percent federal estate tax rate, renews many individual,

business and energy tax extenders, and more.

The American Taxpayer Relief Act is intended to bring some certainty to the Tax Code. At the

same time, it sets the stage for comprehensive tax reform, possibly in 2013. Moreover, it creates

important planning opportunities for taxpayers, which we can discuss in detail.

Individuals

If Congress had done nothing, tax rates would have increased for all taxpayers at all income

levels after 2012. Both the White House and GOP realized that going over the fiscal cliff would

jeopardize the economic recovery, and the American Taxpayer Relief Act is, for the moment,

their best compromise.

Tax Rates - The American Taxpayer Relief Act extends permanently the Bush-era income tax

rates for all taxpayers except for taxpayers with taxable income above certain thresholds:

$400,000 for single individuals, $450,000 for married couples filing joint returns, and $425,000

for heads of households. For 2013 and beyond, the federal income tax rates are 10, 15, 25, 28,

33, 35, and 39.6 percent. In comparison, the top rate before 2013 was 35 percent. The IRS is

expected to issue revised income tax withholding tables to reflect the 2013 rates as quickly as

possible and provide guidance to employers and self-employed individuals.

Additionally, the new law revives the limitation on itemized deductions and personal exemption

phase out (PEP) after 2012 for higher-income individuals, but at revised thresholds. The new

thresholds for being subject to both of these limitations after 2012 are $300,000 for married

couples and surviving spouses, $275,000 for heads of households, $250,000 for unmarried

taxpayers; and $150,000 for married couples filing separate returns.

Capital Gains - The capital gains and dividend tax rates are modified by the American Taxpayer

Relief Act. Generally, the new law increases the top rate for qualified capital gains and dividends

from 15 to 20 percent to the extent that a taxpayer's income exceeds the

$400,000/$425,000/$450,000 thresholds discussed above. The 15 percent tax rate will continue

to apply to all other taxpayers (in some cases, zero percent for qualified taxpayers within the 15

percent or lower income tax bracket).

Payroll Tax Cut - The employee-side payroll tax holiday is not extended. Before 2013, the

employee share of OASDI taxes was reduced by two percentage points from 6.2 percent to 4.2

percent up to the Social Security wage base (with a similar tax break for self-employed

individuals). For 2013, the 2 percent reduction is no longer available and employee-share of

OASDI taxes reverts to 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent.

In 2012, the payroll tax holiday could have saved a taxpayer up to $2,202 (taxpayers earning at

or above the Social Security wage base for 2012). As a result of the expiration of the payroll tax

holiday, everyone who receives a paycheck or self-employment income will see an increase in

taxes in 2013.

AMT - In recent years, Congress routinely "patched" the AMT to prevent its encroachment on

middle income taxpayers. The American Taxpayer Relief Act patches permanently the AMT by

giving taxpayers higher exemption amounts and other targeted relief. This relief is available

beginning in 2012 and going forward. The permanent patch is expected to provide some

certainty to planning for the AMT. No single factor automatically triggers AMT liability, but

some common factors are itemized deductions for state and local income taxes; itemized

deductions for miscellaneous expenditures, itemized deductions on home equity loan interest

(not including interest on a loan to build, buy, or improve a residence); and changes in income

from installment sales. Our office can help you gauge if you may be liable for the AMT in 2013

or future years.

Child Tax Credit and Related Incentives - The popular $1,000 child tax credit was scheduled to

revert to $500 per qualifying child after 2012. Additional enhancements to the child tax credit

also were scheduled to expire after 2012. The American Taxpayer Relief Act makes permanent

the $1,000 child tax credit. Most of the Bush-era enhancements are also made permanent or

extended. Along with the child tax credit, the new law makes permanent the enhanced adoption

credit/and income exclusion; the enhanced child and dependent care credit, and the Bush-era

credit for employer-provided child care facilities and services.

Education Incentives - A number of popular education tax incentives are extended or made

permanent by the American Taxpayer Relief Act. The American Opportunity Tax Credit (an

enhanced version of the Hope education credit) is extended through 2017. Enhancements to

Coverdell education savings account, such as the $2,000 maximum contribution, are made

permanent. The student loan interest deduction is made more attractive by the permanent

suspension of its 60-month rule (which had been scheduled to return after 2012). The new law

also extends permanently the exclusion from income and employment taxes of employerprovided

education assistance up to $5,250 and the exclusion from income for certain military

scholarship programs. Additionally, the above-the-line higher education tuition deduction is

extended through 2013, as is the teachers' classroom expense deduction.

Charitable Giving - Congress has long used the tax laws to encourage charitable giving. The

American Taxpayer Relief Act extends a popular charitable giving incentive through 2013: taxfree

IRA distributions to charity by individuals age 70½ and older up to maximum of $100,000

for qualified taxpayer per year. A special transition rule allows individuals to re-characterize

distributions made in January 2013 as made on December 31, 2012. The new law also extends

for businesses the enhanced deduction for charitable contributions of food inventory.

Federal Estate Tax - Few issues have complicated family wealth planning in recent years, as has

the federal estate tax. Recent laws have changed the maximum estate tax rate multiple times.

Most recently, the 2010 Tax Relief Act set the maximum estate tax rate at 35 percent with an

inflation-adjusted exclusion of $5 million for estates of decedents dying before 2013. Effective

January 1, 2013, the maximum federal estate tax will rise to 40 percent, but will continue to

apply an inflation-adjusted exclusion of $5 million. The new law also makes permanent

portability between spouses and some Bush-era technical enhancements to the estate and

generation-skipping transfer taxes.

Businesses

The business tax incentives in the new law, while not receiving as much press as the individual

tax provisions, are valuable. Two very popular incentives, bonus depreciation and small business

expensing, are extended, as are many business tax "extenders."

Bonus Depreciation/Small Business Expensing - The new law renews 50 percent bonus

depreciation through 2013 (2014 in the case of certain longer period production property and

transportation property). Code Sec. 179 small business expensing is also extended through 2013

with a generous $500,000 expensing allowance and a $2 million investment limit. Without the

new law, the expensing allowance was scheduled to plummet to $25,000 with a $200,000

investment limit.

Small Business Stock - To encourage investment in small businesses, the tax laws in recent years

have allowed non-corporate taxpayers to exclude a percentage of the gain realized from the sale

or exchange of small business stock held for more than five years. The American Taxpayer

Relief Act extends the 100 percent exclusion from the sale or exchange of small business stock

through 2013.

Tax Extenders - A host of business tax incentives are extended through 2013. These include:

• Research tax credit
• Work Opportunity Tax Credit
• New Markets Tax Credit
• Employer wage credit for military reservists
• Tax incentives for empowerment zones
• Indian employment credit
• Railroad track maintenance credit
• Subpart F exceptions for active financing income
• Look-through rules for related controlled foreign corporation payments

Energy

For individuals and businesses, the new law extends some energy tax incentives. The Code Sec.

25C credit, which rewards homeowners who make energy efficient improvements, with a tax

credit is extended through 2013. Businesses benefit from the extension of the Code Sec. 45

production tax credit for wind energy, credits for biofuels, credits for energy-efficient appliances,

and many more.

Looking Ahead

The negotiations and passage of the new law are likely a dress rehearsal for comprehensive tax

reform. Both the President and the GOP have called for making the Tax Code more simple and

fair for individuals and businesses. The many proposals for tax reform include consolidation of

the current individual income tax brackets, repeal of the AMT, moving the United States from a

worldwide to a territorial system of taxation, and a reduction in the corporate tax rate. Congress

and the Obama Administration also must tackle sequestration, which the American Taxpayer

Relief Act delayed for two months. All this and more is expected to keep federal tax policy in the

news in 2013. Our office will keep you posted of developments.

If you have any questions about the American Taxpayer Relief Act, please contact our office.

We can schedule an appointment to discuss how the changes in the new law may be able to

maximize your tax savings

Sincerely,

WM. F. HORNE & CO., PLLC

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Ready For a Take-Home Pay Cut?

For two years, employees have enjoyed a 2% reduction in the FICA payroll tax. That will all come to an abrupt end beginning with their first payroll check in 2013 when the FICA rate returns to 6.2% (up from 4.2% in 2011 and 2012). Self-employed individuals will have a corresponding increase in their SE tax.

The maximum wage subject to the FICA tax in 2013 is $113,700 (up from $110,100 in 2012). Thus, if you make $113,700 or more during the year, the result will be a $2,274 increase in payroll tax for the entire year, and each paycheck will be reduced by 2% of your pay until the maximum amount has been withheld. If you make less than the maximum, simply multiply your pay for the year by 2% to determine your tax increase.

Employees who made more than $110,100 in 2012 enjoyed a period of time with no FICA withheld, but FICA withholding will return at the full 6.2% rate with the first paycheck in 2013.

To make matters worse, as part of the Obamacare legislation, higher income taxpayers are faced with an additional 0.9% health insurance (HI) tax. Starting in 2013, this surtax is imposed upon wage earners and self-employed taxpayers whose wage and self-employment income exceeds $250,000 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 for all others.

Although each employer will withhold the additional tax, the employer is not required to account for other employment or both spouses working. Thus, in these situations when the total earned income exceeds the threshold amounts, the unpaid tax will have to be included on the 2013 tax return.

Example: John is a single individual who had two jobs in 2013. He earns $150,000 from one employer and $100,000 from the other. For the purposes of determining his liability for the extra 0.9% HI tax, his wages from both are added together, and to the extent that they exceed $200,000, he is subject to the additional 0.9% tax. Because he earned less than $200,000 from each employer, neither of them withheld any of the additional 0.9% tax. Because his total wages for the year were $250,000, John is liable for an additional $450 (0.009 x $50,000) in taxes when he files his 2013 tax return.

Example: A married couple, one earning $300,000 and the other $100,000, is subject to an additional tax of 0.9% of their combined incomes in excess of $250,000. In this case, that’s an additional 0.9% on $150,000 ($400,000 less $250,000). However, the spouse earning the $300,000 will already have had the additional tax withheld, so the amount of additional tax on their 2013 return will be $900 (0.009 x $100,000).

Employees in these situations may want to adjust their 2013 income tax withholding amounts or make estimated income tax payments to account for the additional tax. Self-employed taxpayers subject to the tax will need to increase their 2013 estimated tax payments to cover the additional amount.

Please give our office a call if you have additional questions.

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January 2013 Due Dates

January 2013 Individual Due Dates

January 4 - Time to Call For Your Tax Appointment

January is the beginning of tax season. If you have not made an appointment to have your taxes prepared, we encourage you do so before the calendar becomes too crowded.

January 10 - Report Tips to Employer

If you are an employee who works for tips and received more than $20 in tips during December, you are required to report them to your employer on IRS Form 4070 no later than January 10.

January 15 - Individual Estimated Tax Payment Due

It’s time to make your fourth quarter estimated tax installment payment for the 2012 tax year.

January 15 - Farmers & Fishermen Estimated Tax Payment Due

If you are a farmer or fisherman whose gross income for 2011 or 2012 is two-thirds from farming or fishing, it is time to pay your estimated tax for 2012 using Form 1040-ES. You have until April 15, 2013 to file your 2012 income tax return (Form 1040). If you do not pay your estimated tax by January 15, you must file your 2012 return and pay any tax due by March 1, 2013 to avoid an estimated tax penalty.

January 31 - File 2012 Return to Avoid Penalty for Not Making 4th Quarter Estimated Payments

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 2013 Business Due Dates

January 15 - Employer’s Monthly Deposit Due

If you are an employer and the monthly deposit rules apply, January 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for December 2012. This is also the due date for the nonpayroll withholding deposit for December 2012 if the monthly deposit rule applies. employment tax deposits must be made electronically (no more paper coupons), except employers with a deposit liability under $2,500 for a return period may remit payments quarterly or annually with the return.

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, 2013 (April 1, 2013 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 our 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 2012 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 2012. 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 11 to file the return. January 31 - Certain Small Employers File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2012. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more for 2012 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 2012. 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 11 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 2012.

January 31 - File Form 940 File Form 940 (or 940-EZ) for 2012

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 11 to file the return.

January 31 - File Form 945

File Form 945 to report income tax withheld for 2012 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 11 to file the return.

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