Tax Rates Increase in 2013

As part of the 2012 American Taxpayer Relief Act (ATRA), tax rates, both ordinary and capital gains, increased in 2013 for higher income taxpayers whose taxable income exceeds the income threshold for their filing status.

The thresholds at which taxpayers are subject to the top ordinary and long-term capital gains tax rates are $450,000 for joint filers and surviving spouses, $425,000 for heads of household, $400,000 for single filers, and $225,000 for married couples filing separately.

These increases will have the following impact on ordinary income and long-term capital gains rates:

• Ordinary Income Rates – Prior to the law change, there were six tax brackets: 10, 15, 25, 28, 33 and 35%. The ATRA added a new top rate of 39.6%. Thus, higher-income taxpayers, to the extent their taxable income exceeds the income threshold for their filing status, will be subject to the new 39.6% rate (up 4.6% from previous 35% top rate).

Example: Jack and Sally, who are filing jointly, have an ordinary taxable income of $600,000. Their income above $450,000 will be subject to the 39.6% tax rate. Thus, they will see a tax increase of $6,900 (($600,000  $450,000) x 4.6%) as a result of the new tax bracket.

• Capital Gains and Dividends – Prior to the law change, the long-term capital gain was zero for taxpayers in the 10 and 15% ordinary income tax bracket and 15% for taxpayers with taxable income above the 15% bracket. The ATRA increased the top rate for long-term capital gains and qualified dividends to 20% (up from 15%) for taxpayers with incomes exceeding the threshold for their filing status. Thus, for years beginning in 2013, there will be three long-term capital gains rates: 0, 15, and 20%, with the 20% applying to higher-income taxpayers.
  
  Example: Howard, a single individual, retired this year and sold his rental property, which he had owned for a long time, for a profit of $700,000. Even though his income is generally in a lower-income tax bracket, the profit from the sale itself pushed his income above the $400,000 threshold for single taxpayers, and to the extent his income exceeds the $400,000 threshold, he will be subject to the increased capital gains rate. Had Howard’s other taxable income been $50,000, he would have had a total income of $750,000, of which $350,000 exceeds the 20% long-term CG rate threshold. As a result, Howard pays the 20% rate on $350,000, resulting in an increase of $17,500 ($350,000 x 5%) over what he would have paid in 2012.
  
  Generally, sales that are subject to long-term capital gains rates are also investment income subject to the 3.8% unearned income Medicare contribution tax that is part of the Affordable Care Act.
  
  If Howard had utilized an installment sale, he could have spread the gain over multiple years and possibly avoided the higher CG rate. He might have also utilized a tax-deferred exchange to defer the gain into another real estate property.

If you have any questions about how these new tax rates will impact you, please give our office a call.

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Higher Income Taxpayers Hit with Exemption & Itemized Deductions Phase-out

Generally, taxpayers are allowed to deduct personal exemptions of $3,900 for themselves, their spouses and their dependents. In addition, taxpayers are allowed a standard deduction or, if their deductions are large, they can itemize their deductions.

The American Taxpayer Relief Act of 2012 included a provision to phase out, beginning in 2013, both the personal exemptions and itemized deductions for higher income taxpayers. The phase-out will begin when a taxpayer’s adjusted gross income (AGI) reaches a phase-out threshold amount.

The threshold amounts are based on the taxpayers’ filing statuses and are: $250,000 for single filers, $275,000 for individuals filing as heads of households, $300,000 for married couples filing jointly and $150,000 for married individuals filing separately. Here is how the phase-out will work:

• Personal Exemption—The otherwise allowable exemption amounts are reduced by 2% for each $2,500 or part of $2,500 ($1,250 for a married taxpayer filing separately) that the taxpayer’s AGI exceeds the threshold amount for the taxpayer’s filing status.
  
  Example: Ralph and Louise have an AGI of $412,500 for 2013 and two children for a total of four exemptions totaling $15,600 (4 × $3,900). The threshold for a married couple is $300,000; thus, their income exceeds the threshold by $112,500. Dividing $112,500 by $2,500 equals 45. So 90% (45 × 2%) of their $15,600 exemption allowance is phased out, leaving them with a reduced exemption deduction of $1,560 ((100–90) × $15,600). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out costs them an additional $4,633 ($15,600 × 90% × 33%).
  Divorced or separated parents subject to the phase-out should consider relinquishing the exemption of a dependent child to the other parent. Where a taxpayer is a party to a multiple support agreement, the taxpayer may want to allow another contributing member of the agreement who is not hit by the phase-out to claim the dependent’s exemption.
• Itemized Deductions—The total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions.
  
  Not all itemized deductions are subject to phase-out. The following deductions are not subject to the phase-out:
• Medical and dental expenses
• Investment interest expenses
• Casualty and theft losses from personal-use property
• Casualty and theft losses from income-producing property
• Gambling losses

Thus, a taxpayer who is subject to the full phase-out still gets to deduct 20% of the deductions subject to the phase-out and 100% of the deductions listed above.

Example: Ralph and Louise from the previous example, who had an AGI of $412,500 for 2013, exceed the threshold for a married couple by $112,500. Thus, they must reduce their itemized deductions subject to the phase-out by $3,375 (3% of $112,500), but the reduction must not exceed 80% of the deductions subject to the phase-out. For 2013, Ralph and Louise had the following itemized deductions:

                                                               Subject to Phase-out                  Not Subject to Phase-out

                  Home mortgage interest:               $10,000
                  Taxes:                                            $8,000
                 Charitable contributions:                $6,000
                 Casualty loss:                                                                                   $12,000
                 Total:                                           $24,000                                      $12,000

The phase-out is the lesser of $3,375 or 80% of $24,000. Thus Ralph and Louise’s itemized deductions for 2013 will be $32,625 ($24,000  $3,375 + $12,000). Assuming Ralph and Louise are in the 33% federal tax bracket, the phase-out will cost them an additional $1,114 ($3,375 × 33%).

Conventional thinking is to maximize deductions. However, where taxpayers normally are not subject to a phase-out and have a high-income year because of unusual income, it may be appropriate, where possible, to defer paying deductible expenses to the year following the high-income year or perhaps pay and deduct the expenses in the preceding year.

If you have questions about how these phase-outs will impact your specific situation, you want to adjust your withholding or estimated taxes, or you want to make a tax planning appointment, please give our office a call.

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Keeping You Informed: Health Insurance Mandate

One can hardly turn on the television or radio without hearing about some aspect of health care reform. For larger employers, there is planning and information gathering to be done right now for the employer mandated health coverage provision effective January 1, 2014. A less-discussed aspect of reform, however, is the communication requirement for all employers subject to the Fair Labor Standards Act (FLSA). The FLSA applies to employers engaged in interstate commerce. For most, a test of not less than $500,000 in business volume applies. It also specifically covers the following regardless of business aspects: hospitals, nursing homes, schools, and government agencies. To help determine whether you’re subject to the FLSA, see www.dol.gov/elaws/esa/flsa/scope/screen24.asp.

This notice requirement had an original deadline of March 1, but was extended to October 1, 2013. By this date, all employers must automatically provide all current employees with the notice and new employees must receive it within 14 days of their start date. All employees must receive the notice regardless of their full or part time status or their current health coverage status.

The notice informs the employees about the existence of the Health Insurance Marketplace (also referred to as an “exchange”), the benefits or consequences regarding the purchase of insurance from the Marketplace, and the available coverage through their employer, if any. Temporary guidance issued May 8, 2013, provides additional details regarding the substance of the notice and also provides two model notices: one for employers with Health Plans and one for employers with no Health Plan. These models can be modified by employers, but any modified notices still must cover the minimum content requirements. Model notices can be found at www.dol.gov/ebsa/healthreform.

For further information or questions, please feel free to contact Jennifer Jenkins at 601-649-5207.

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Did You Overlook Something on a Prior Tax Return?

Occasionally, clients will realize that an item of income was overlooked, a deduction was not claimed, or that an amended tax document was received after the tax return was already filed. Regardless of whether the oversight will result in more tax due or a refund, it should not be dismissed. Failing to report an item of income will most certainly generate an IRS inquiry, which typically happens a year after the original return was filed and after the interest and penalties have built up. On the other hand, if you have a refund coming, you certainly don’t want that to go by the wayside.

The solution is to file an amended return as soon as the error or omission is discovered. Amended returns can also be used to claim an overlooked credit, correct the filing status or the number of dependents, report an omitted investment transaction, submit delayed K-1s, or anything else that should have been reported on the original return.

If the overlooked item will result in a tax increase, penalties and interest can be mitigated by filing an amended return as soon as possible. Procrastination leads to further complication once the IRS determines something is missing, so it is best to take care of the issues right away.

Generally, to claim a refund, an amended return must be filed within three years from the date the original return was filed or within two years from the date the tax was paid, whichever is later.

If any of the above applies to your situation, please give our office a call so we can prepare an amended tax return for you.

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Energy Costs Rise as Tax Incentives Fade

With energy costs skyrocketing, you would think that the federal government would come up with some tax incentives aimed at curbing the consumption of energy. However, on the consumer end of taxes, the incentives are actually fading away. Apparently, federal lawmakers and administrators believe the high cost of energy itself is incentive enough to reduce consumption. The following are the only energy-related tax incentives remaining for individual taxpayers:

• Credit for Energy-Efficient Home Modifications— Through 2013, a taxpayer can still claim a credit for making qualifying energy-saving improvements to his existing home. But after 2013, this credit will not be available. The credit is 10% of the cost of making the improvement but is limited to $500 and is reduced by any credit claimed under this provision in any prior year.
  
  Qualified energy-efficiency improvements are the following building-envelope components installed on or in a taxpayer’s main home in the United States that the taxpayer owned during 2012, provided that the original use of the component (1) began with the taxpayer and the component can be expected to remain in use at least 5 years and (2) the component meets certain energy standards. These credits are nonrefundable and can offset both income tax and alternative minimum tax (AMT) for the year.
• Any insulation material or system that is specifically and primarily designed to reduce heat loss or gain of a home when installed in or on the home(1).
• Exterior windows and skylights. The credit for these items is limited to $200(1)(2).
• Exterior doors(1)(2).
• Any metal roof with appropriate pigmented coatings or an asphalt roof with appropriate cooling granules that are specifically and primarily designed to reduce the heat gain of the home(1)(2).
• Certain electric heat pump water heaters; electric heat pumps; central air conditioners; natural gas, propane, or oil water heaters; and stoves that use biomass fuel. No more than $300 of the cost is credit-eligible.
• Qualified natural gas, propane, or oil furnaces and qualified natural gas, propane, or oil hot water boilers. No more than $150 of the cost is credit-eligible.
• Certain advanced main air circulating fans used in natural gas, propane, or oil furnaces. No more than $50 of the cost is credit-eligible.

(1)To figure the credit, do not include the amounts paid for the on site preparation, assembly, or original installation.
(2) Must meet or exceed the Energy Star program requirements.

• Energy Generation Credits—Through 2016, a taxpayer can claim a credit for installing systems that generate energy. The expenses used to determine the credit include installation costs; but generally no portion of the cost allocated to heating a swimming pool or hot tub can be used toward the credit.
• Solar electric systems—A credit equal to 30% of the cost for the installation of a qualified solar electric system (50% of the energy is generated from the sun) in the taxpayer’s primary or secondary home in the United States.
• Solar water heating systems—A credit equal to 30% of the cost for the installation of a qualified solar water heating system in the taxpayer’s primary or secondary home in the United States.
• Fuel cell power plant—A credit of $500 per 0.5 kilowatts of electricity generated by electrochemical means from a qualified fuel cell plant installed in the taxpayer’s primary home in the United States.

These credits are nonrefundable and can offset both income tax and AMT for the year. However, any unused credit can be carried forward.

• Plug-in Electric Vehicles Credit—The American Taxpayer Relief Act (ATRA) of 2012 modified and extended for two years, through 2013, the individual income tax credit for highway-capable plug-in motorcycles and 3-wheeled vehicles, replacing the 10% tax credit that expired at the end of 2011 for plug-in electric motorcycles, 3-wheeled vehicles, and low-speed vehicles.
  
  Through revised definitions, ATRA repeals the ability of golf carts and other low-speed vehicles to qualify for the credit. The credit continues to be the lesser of 10% of the purchase cost or $2,500 per qualified vehicle. The revised rules require that the vehicle must have been manufactured primarily for use on public streets, roads, and highways; be capable of a speed of at least 45 miles per hour; and be acquired in 2012 or 2013.
  
  Other requirements are the same as under the old credit: The vehicle must have 2 or 3 wheels, have a gross vehicle weight rating of fewer than 14,000 pounds, and have been acquired for use or lease by the taxpayer and not for resale. The original use must be with the taxpayer and the vehicle must have been made by a manufacturer and be propelled to a significant extent by an electric motor that draws electricity from a battery with a capacity of no less than 2.5 kilowatt hours.
  
  The personal use portion of this credit is nonrefundable and may offset both the current year’s income tax and AMT. However, if the vehicle is used for business, the unused business portion of the credit can be carried back one year and then carried forward up to 20 years. This credit (other than any business portion being carried over) will no longer be available after 2013.

If you have a question related to any of these credits, you may wish to contact our office in advance to verify how the tax benefits will apply to your specific tax situation.

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President’s Proposed Tax Changes for 2014

The budget proposal released by President Obama on April 10 includes a substantial number of proposed tax changes impacting individuals, businesses, estate taxation, energy incentives, and international issues. Although these are only proposals, they provide an insight into the administration’s thinking on tax reform. An overview of the most prominent issues related to individuals and small business is provided below.

Individual Proposals

• Reduce the value of itemized deductions and other tax preferences to 28% for families with income in the three highest tax brackets. This limit would apply to all itemized deductions; foreign excluded income; tax-exempt interest; employer-sponsored health insurance; retirement contributions; and selected above-the-line deductions.
• Observe the “Buffett rule” by requiring millionaires to pay no less than 30% of income (after charitable contributions) in taxes. This would be referred to as the “fair share tax.”
• For tax years beginning after Dec. 31, 2017, permanently extend the American Opportunity Tax Credit (AOTC), a partially refundable tax credit worth up to $10,000 per student over the course of four years of college.
• For tax years beginning after Dec. 31, 2017, permanently extend the increased refund ability of the child tax credit (CTC) by permanently reducing the earned income threshold to $3,000.
• Extend the exclusion from income for the cancellation of certain home mortgage debts to amounts that are discharged before Jan. 1, 2016 and amounts that are discharged pursuant to an agreement entered into before that date.
• For tax years beginning after Dec. 31, 2017, make permanent the expansion of the EITC for workers with three or more qualifying children by maintaining (i) at 45%, the phase-in rate of the EITC for workers with three or more qualifying children, and (ii) the phase-out range for married couples at $5,000 higher than those for unmarried filers (indexed after 2009).
• Increase the child and dependent care credit available to working families with incomes between $15,000 and $103,000.
• Extend the exclusion for income from the discharge of qualified principal residence indebtedness (QRPI) to amounts that are discharged before Jan. 1, 2015, and to amounts that are discharged pursuant to an agreement entered into before that date.
• Prohibit individuals from accumulating over $3 million in tax-preferred retirement accounts.

Business Proposals

• Make permanent the $500,000 Sec. 179 deduction with a $2million phase-out threshold.
• Enhance and make permanent the research credit and increase the simplified credit percentage to 14%.
• Permanently extend the work opportunity tax credit (WOTC) to wages paid to qualified individuals who begin work after Dec. 31, 2013.
• Offer a one-time, temporary, 10% tax credit for increases in company wage payments over wages paid in 2012, whether driven by new hires, increased wages or salaries, or both.
• Require employers who have over 10 employees and do not currently offer a retirement plan to enroll their employees in a direct-deposit Individual Retirement Account (IRA) that is compatible with existing direct-deposit payroll systems. (Employees can opt out if they choose.) Employers would be entitled to a tax credit of $25 per participating employee, up to $250 per year, for six years.
• Deny deductions for punitive damages.
• Make the 100% exclusion permanent for qualified small business stock (QSBS) acquired after Dec. 31, 2013.
• Permanently double the maximum amount of start-up expenditures that a taxpayer may deduct (in addition to amortized amounts) in the tax year in which a trade or business begins from $5,000 to $10,000 for tax years ending on or after the date of enactment. Reduce this maximum amount of start-up expenditures (but not to below zero) by the amount that start-up expenditures with respect to the active trade or business exceed $60,000.
• For tax years beginning after Dec. 31, 2012, expand the group of employers who are eligible for the tax credit available to small employers providing health insurance to employees so as to include employers with up to 50 full-time (or the equivalent) employees, and begin the phase-out at of the restriction to no more than 20 full-time equivalent employees.
• Create a new general business credit against income tax equal to 20% of the eligible expenses paid or incurred in connection with in sourcing a U.S. trade or business.
• Disallow deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business.

Estate and Gift Tax Proposals

• Beginning in 2018, return to 2009 levels the estate, generation-skipping transfer (GST), and gift tax exemptions and rates. Thus, the highest tax rate would be 45%, and the exclusion amount would be $3.5 million for estate and GST taxes and $1 million for gift taxes.
• Require that the basis of property in the hands of the recipient be no greater than the value of that property as determined for estate or gift tax purposes (subject to subsequent adjustments). These rules would apply to transfers on or after the enactment date.

Keep in mind that these are only proposed changes, and they must be passed by both houses of Congress in order to become law.

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May Due Dates

May 2013 Individual Due Date Reminders

May 10 - Report Tips to Employer

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

May 31 - Final Due Date for IRA Trustees to Issue Form 5498

Final due date for IRA trustees to issue Form 5498, providing IRA owners with the fair market value (FMV) of their IRA accounts as of December 31, 2012. The FMV of an IRA on the last day of the prior year (Dec 31, 2012) is used to determine the required minimum distribution (RMD) that must be taken from the IRA if you are age 70½ or older during 2013. If you are age 70½ or older during 2013 and need assistance determining your RMD for the year, please give our office a call. Otherwise, no other action is required and the Form 5498 can be filed away with your other tax documents for the year.

May 2013 Business Due Date Reminders

May 10 - Social Security, Medicare and Withheld Income Tax

File Form 941 for the first quarter of 2013. This due date applies only if you deposited the tax for the quarter in full and on time.

May 15 - Employer’s Monthly Deposit Due

If you are an employer and the monthly deposit rules apply, May 15 is the due date for you to make your deposit of Social Security, Medicare and withheld income tax for April 2013. This is also the due date for the non-payroll withholding deposit for April 2013 if the monthly deposit rule applies.

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Beware of Bogus IRS Emails

Every tax-filing season, the scammers and ID thieves try to sucker people into providing personal and financial information through the use of phony e-mails.

The IRS receives thousands of reports every year from taxpayers who received emails out of the blue claiming to be from the IRS. Scammers use the IRS name or logo to make the message appear authentic in an effort to get you to respond and then to trick you into revealing your personal and financial information. The criminals use this information to commit identity theft or steal your money. It is a scam known as “phishing” and we do not want you to become a victim.

You should know that the IRS does not initiate contact with any taxpayer via e-mail or social media to request personal or financial information. If you should receive an e-mail claiming to be from the IRS or directing you to an IRS site, the first thing you should do is contact this office. But above all, DO NOT

• Reply to the message
• Open any attachments (attachments may contain malicious code that will infect your computer)
• Click on any links in a suspicious email or phishing website and enter your confidential information

Here are additional key points you should know about phishing scams:

• The IRS never asks for detailed personal and financial information like PINs, passwords, or similar secret access information for credit cards, banks, or other financial accounts.
• The address of the official IRS website is www.irs.gov. Do not be misled by sites claiming to be the IRS but ending in .com, .net, .org or anything other than .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 site.
• If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS, you should immediately contact our office before providing any information. You should do this whether you suspect the contact is legitimate or not. You can also contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you.
• You can help the IRS and other law enforcement agencies shut down these schemes. Visit the IRS.gov website for Reporting Phishing: http://www.irs.gov/uac/Report-Phishing to get details on how to report scams and helpful resources if you are the victim of a scam. You can report any bogus e-mails by forwarding a suspicious email to phishing@irs.gov.

Identity Theft is a Growing Problem—When a taxpayer’s ID has been stolen, the IRS will issue the individual a special number with which to file a return. The victim gets a new one each year for three years to provide time for the taxpayer to correct the ID theft damage. In 2012, the IRS issued 250,000 of these special numbers and for the 2013 filing season it issued 770,000—an increase of more than 300%. That is why it is so important for you to protect yourself from the nightmare of ID theft.

To learn more about how to protect yourself from ID theft, visit the following IRS webpages: Identity Protection Tips http://www.irs.gov/uac/Identity-Protection-Tips and Identity Protection Home Page http://www.irs.gov/uac/Identity-Protection.

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Checking the Status of Your Federal Tax Refund is Easy

If you already filed your federal tax return and are due a refund, you can check the status of your refund online.

Where’s My Refund? http://www.irs.gov/Refunds/Where's-My-Refund-It's-Quick,-Easy,-and-Secure. is an interactive tool on the IRS web site. Whether you split your refund among several accounts, opted for direct deposit into one account, or asked the IRS to mail you a check, Where’s My Refund? will give you online access to your refund information nearly 24 hours a day, 7 days a week.

If you e-file, you can get refund information 72 hours after the IRS acknowledges receipt of your return. Nine out of 10 taxpayers typically receive refunds in less than 21 days when they use e-file with direct deposit. If you file a paper return, refund information will be available within three to four weeks. When checking the status of your refund, have a copy of your federal tax return handy. To access your personalized refund information, you must enter:

• Your Social Security Number (or Individual Taxpayer Identification Number);
• Your Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)); and
• The exact refund amount shown on your tax return.

Once your personal information has been entered, one of several responses may come up, including the following:

• Acknowledgement that your return was received and is in processing.
• The mailing date or direct deposit date of your refund.
• Notice that the IRS could not deliver your refund due to an incorrect address. You can update your address online using the Where’s My Refund? feature.

Where’s My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you can start a refund trace online.

Where’s My Refund? is also accessible to visually impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes.

If you do not have Internet access, you can check the status of your refund by calling the IRS TeleTax System at 800-829-4477 or the IRS Refund Hotline at 800-829-1954. When calling, you must provide your Social Security Number (or your spouse’s), your filing status and the exact refund amount shown on your return.

IRS2Go is the IRS’ first smartphone application that let’s taxpayers check on the status of their tax refund. Apple users can download the free IRS2Go application by visiting the Apple App Store. Android users can visit the Android Marketplace to download the free IRS2Go app.

Where’s My Refund? provides the most up-to-date information the IRS has. There’s no need to call the IRS unless Where’s My Refund? tells you to do so. Where’s My Refund? is updated every 24 hours – usually overnight -- so you only need to check once a day. Please call our office if you encounter problems.

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Individual Estimated Tax Payments for 2013 Start Soon

Our tax system is a “pay-as-you-go” system, and if your pre-paid amount is not enough, you become liable for non-deductible interest penalties. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. The primary among these include:

• Payroll withholding for employees;
• Pension withholding for retirees; and
• Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

Determining how much tax to pre-pay through withholding and estimated tax payments has always been difficult, but thanks to Congress’ constant tinkering with the tax laws, ensuring there are no underpayment penalties or tax surprises when the tax return is prepared next year can be challenging.

There are several new tax laws and changes taking effect in 2013 that add complexity to estimating one’s tax liability including: higher ordinary tax rates, higher capital gains tax rates, the phase out of exemptions and itemized deductions for higher income taxpayers, the new 3.8% tax on net investment income and .9% increase in self-employment tax for upper-income self-employed individuals, not to mention myriad of extended and sun setting tax provisions.

When a taxpayer fails to prepay a safe harbor (minimum) amount, he or she can be subject to the underpayment penalty. This penalty is the short-term federal rate plus 3 percentage points and the penalty is computed on a quarter-by-quarter basis. So, even if you pre-pay the correct amount for the year, if the amounts are not paid evenly you could be subject to a penalty. Interestingly enough, withholding amounts are treated as paid ratably throughout the year, so taxpayers who are underpaid in the earlier part of the year can compensate by bumping up their withholding in the later part of the year.

Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (referred to as the de minimis amount), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:

1. The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
2. The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for a higher income taxpayer whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.

However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

If your state has a state tax, the state’s de minimis amount and safe-harbor percentage and amount may be different.

This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc.

If you have questions regarding your pre-payments or would like to review and adjust your W-4 payroll withholding, W-4P pension withholding, and estimated tax payments to provide the desired tax result for 2013, please give our office a call.

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Tax Breaks for Charity Volunteers

If you volunteer your time for a charity, you may qualify for tax breaks. Although no tax deduction is allowed for the value of services performed for a charity, some deductions are permitted for out-of-pocket costs incurred while performing the services. The normal deduction limits and substantiation rules also apply. The following are some examples:

• Away-from-home travel expenses while performing services for a charity, including out-of-pocket round trip travel cost, taxi fares, and other costs of transportation between the airport or station and hotel, plus lodging and meals are allowed at 100%. Unlike other areas of taxes, meals are not subject to the 50% limitation. These expenses are only deductible if there is no significant element of personal pleasure associated with the travel, or if your services for a charity do not involve lobbying activities. Any "significant element of personal pleasure" negates a deduction (i.e., not even partial deduction is allowed). Significant personal pleasure is assumed if the taxpayer has only minor duties and is not required to perform any duties for the charity for major portions of the away-from-home stay.
• The cost of entertaining others on behalf of a charity, such as wining and dining a potential large contributor are allowed at 100 % (but the cost of your own entertainment or meal is not deductible).
• If you use your car while performing services for a charitable organization, you may deduct your actual un-reimbursed expenses directly attributable to the services, such as gas and oil costs, or you may deduct a flat 14 cents per mile for the charitable use of your car. You may also deduct parking fees and tolls.
• You can deduct the cost of the uniform you wear when doing volunteer work for the charity, as long as the uniform has no general utility. The cost of cleaning the uniform can also be deducted.

No charitable deduction is allowed for a contribution of $250 or more unless the contribution is substantiated with a written acknowledgment from the charitable organization. To verify your contribution:

• Get written documentation from the charity about the nature of your volunteering activity and the need to pay for related expenses. For example, if you travel out-of-town as a volunteer, request a letter from the charity explaining why you're needed at the out-of-town location.
• Submit a statement of expenses if you are out-of-pocket for substantial amounts, and preferably, a copy of the receipts to the charity. Also, arrange for the charity to acknowledge the amount of the contribution in writing.
• Maintain detailed records of your out-of-pocket expenses, including receipts and a written record of the time, place, amount and charitable purpose of the expense.

Please call our office if you have questions related to your volunteer expenses or any other charitable contributions.

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Are You Collecting the Needed W-9s?

If you use independent contractors to perform services for your business or rental that is a trade or business, and you pay them $600 or more for the year, you are required to issue them a Form 1099 after the end of the year to avoid facing the loss of the deduction for their labor and expenses. (This requirement generally does not apply for payments made to a corporation. However, the exception does not apply to payments made for attorney fees and for certain payments for medical or health care services.)

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

Many small business owners and landlords overlook this requirement during the year, and when the end of the year arrives and it is time to issue 1099s to contractors, they realize they have not collected the required documentation. Often it is difficult to acquire the contractor’s information after the fact, especially from those contractors with no intention of reporting the income.

IRS Form W-9, “Request for Taxpayer Identification Number and Certification” is provided by the government as a means for you to obtain the data required from your vendors in order to file the 1099s. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor or independent contractor complete the Form W-9 prior to engaging in business with him or her.

If you have questions or need copies of the Form W-9, please call our office. Our office can also assist you with your 1099 filing requirements next January.

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Tax Filing Deadline Rapidly Approaching

Just a reminder to those who have not yet filed their 2012 tax return that April 15, 2013 is the due date to either file your return and pay any taxes owed, or file for the automatic six-month extension and pay the tax you estimate to be due.

In addition, the April 15, 2013 deadline also applies to the following:

• Tax year 2012 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.
• Tax year 2012 contributions to a Roth or traditional IRA – April 15 is the last day contributions for 2012 can be made to either a Roth or traditional IRA, even if an extension is filed.
• Individual estimated tax payments for the first quarter of 2013 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2013 estimated taxes are due on April 15. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. Please call our office for any questions.
• Individual refund claims for tax year 2009– The regular three-year statute of limitations expires on April 15 for the 2009 tax return. Thus, no refund will be granted for a 2009 original or amended return that is filed after April 15. Caution: The statute does not apply to balances due for unfiled 2009 returns.

If our office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 15 deadline. Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute. If it is apparent that the information will not be available in time for the April 15 deadline, then let the office know right away so that an extension request, and estimate tax vouchers if needed, may be prepared.

If your returns have not yet been completed, please call right away so that we can schedule an appointment and/or file an extension if necessary.

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April 2013 Due Dates

April 2013 Individual Due Dates

April 10 - Report Tips to Employer

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

April 15 - Individual Tax Returns Due

File a 2012 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call our office.

Caution: The extension gives you until October 15, 2013 to file your 2012 1040 return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call our office to discuss your individual situation if you are unable to file by the April 15 due date.

April 15 - Household Employer Return Due

If you paid cash wages of $1,800 or more in 2012 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2011 or 2012 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call our office.

April 15 - Estimated Tax Payment Due (Individuals)

It’s time to make your first quarter estimated tax installment payment for the 2013 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include:

• Payroll withholding for employers;
• Pension withholding for retirees; and
• Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.

Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than the $1,000 de-minimis amount, no penalty is assessed. In addition, the law provides "safe harbor" prepayments. There are two safe harbors:

• The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
• The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for higher-income taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.

Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can't avoid the penalty under this exception.

However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than the 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.

This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call our office as soon as possible.

CAUTION: Some state de-minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.

April 15 - Last Day to Make Contributions

Last day to make contributions to Traditional and Roth IRAs for tax year 2012.

April 2013 Business Due Dates

April 15 - Social Security, Medicare and Withheld Income Tax

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

April 15 - Non-Payroll Withholding

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

April 15 - Corporations

The first installment of 2012 estimated tax of a calendar year corporation is due.

April 15 - Partnerships

File a 2012-calendar year return (Form 1065). Provide each partner with a copy of Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc., or a substitute Schedule K-1. If you want an automatic 5-month extension of time to file the return and provide Schedules K-1 or a substitute Schedules K-1 to the partners, file Form 7004. Then, file Form 1065 and provide the K-1s to the partners by September 15.

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Tax Tips for Recently Married Taxpayers

If you got married during 2012, here are some post-marriage tips to help you avoid stress at tax time.

1. Notify the Social Security Administration − Report any name change to the Social Security Administration so that your name and SSN will match when filing your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security Card at your local SSA office. The form is available on SSA’s Web site, by calling 800-772-1213, or at local offices. Your income tax refund may be delayed if it is discovered your name and SSN don’t match at the time your return is filed.
2. Notify the IRS - If you have a new address, you should notify the IRS by sending Form 8822 Change of Address.
3. Notify the U.S. Postal Service - You should also notify the U.S. Postal Service when you move so that any IRS or state tax agency correspondence can be forwarded.
4. Review Your Withholding and Estimated Tax Payments - If both you and your new spouse work, your combined income may place you in a higher tax bracket, and you may have an unpleasant surprise when we prepare your return for 2012. On the other hand, if only one works, filing jointly with your new spouse can provide a significant tax benefit, enabling you to reduce your withholding or estimated payments. The fat is in the fire for 2012, but it may be appropriate to review your withholding (W-4 status) and estimated tax payments, if any, for 2013 to make sure you are not going to be under-withheld and set yourself up to receive bad news.

If you have any questions, please give our office a call.

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