Recently there has been much talk about the fiscal cliff that we are facing as a nation. One of the best articles that we’ve found on this (non-partisian) is at:
Please read it.
We know that Halloween was last month but here is something real scary that deals with the fiscal cliff. The following chart shows the public debt per person when we last check the figures (note that they have changed since we posted this and have only gotten worse and that we have not considered county or city debt)
Amount Population Per Person
National Debt 121,657,630,000,000 314,853,769 386,394
State Debt 82,733,405,000 9,906,192 8,352
Per Person 394,746
Now if you factor out non-taxpayers (kids, etc) the national debt per taxpayer is over $1,000,000 per taxpayer. I do not know about you but I personally do not have an extra million dollars laying around doing nothing – let alone laying around.
Hopefully, this will prompt people to realize the severity of our debt situation and prompt them to address this issue with your local Congressional Critters.
These websites are where we got the information. Note that Michigan’s debt is actually going down.
Noteworthy 2013 Healthcare Provisions
The 2010 Healthcare Act included several significant tax changes scheduled to take effect next year. Listed below is information on two provisions that could impact numerous taxpayers. We have also noted what you can do before year-end to minimize the negative impact of these provisions.
$2,500 Cap on Healthcare Flexible Spending Account (FSA) Contributions. Before the Healthcare Act, there was no tax-law limit on the amount you could contribute each year to your employer’s healthcare FSA plan. That said, many plans have always imposed their own annual limits. Amounts you contribute to the FSA plan are subtracted from your taxable salary. Then, you can use the FSA funds to reimburse yourself tax-free to cover qualified medical expenses. Good deal! Starting in 2013, however, the maximum annual FSA contribution for each employee will be capped at $2,500.
Note: An employee employed by two or more unrelated employers may elect up to $2,500 under each employer’s health FSA.
Tax Planning Implications: If you have an FSA plan, your employer will ask you near the end of the year to decide how much you want to contribute to your healthcare FSA for 2013. At that point, the new $2,500 contribution limit may affect you. Other than that, just make sure you use up your 2012 contribution before the deadline for doing so.
Higher Threshold for Itemized Medical Expense Deductions. Before the Healthcare Act, the allowable itemized deduction for unreimbursed medical expenses paid for you, your spouse, and your dependents equaled the excess of your qualified medical expenses over 7.5% of your adjusted gross income (AGI). Starting in 2013, the deduction threshold will be raised to 10% of AGI for most individuals. However, if either you or your spouse reaches age 65 by December 31, 2013, the new 10%-of-AGI threshold will not take effect until 2017 (in other words, the long-standing 7.5%-of-AGI threshold will continue to apply to those taxpayers for 2013–2016). Also, if you or your spouse turns age 65 in any year 2014–2016, the long-standing 7.5%-of-AGI threshold will apply for that year through 2016. Starting in 2017, the 10%-of-AGI threshold will apply to everyone.
Tax Planning Implications: If you will be affected by the new 10%-of-AGI threshold next year, consider accelerating elective qualifying unreimbursed medical expenses into 2012 so that your allowable medical expense deduction for this year will be based on the more taxpayer-friendly 7.5%-of-AGI threshold.
Individual Year-end Tax Planning
The current federal income tax environment remains favorable through December 31st. Here are some tax planning ideas to consider as we approach year-end.
Leverage Standard Deduction by Bunching Deductible Expenditures. Are your 2012 itemized deductions likely to be just under or just over the standard deduction amount? If so, consider bunching expenditures for itemized deduction items every other year, while claiming the standard deduction in the intervening years. The 2012 standard deduction for married joint filers is $11,900; $5,950 for single and married filing separate filers; and $8,700 for heads of households.
For example, say you’re a joint filer whose only itemized deductions are $4,000 of annual property taxes and $8,000 of home mortgage interest. If you prepay your 2013 property taxes by December 31st, you could claim $16,000 of itemized deductions on your 2012 return ($4,000 of 2012 property taxes, plus an-other $4,000 for the 2013 property tax bill, plus the $8,000 of mortgage interest). Next year, you would only have the $8,000 of interest, but you could claim the standard deduction. Following this strategy will cut your taxable income by a meaningful amount over the two-year period (this year and next). You can repeat the drill again in future years. Finally, check for any negative AMT implications before implementing this strategy.
Examples of other deductible items that can be bunched together every other year to lower your taxes include charitable donations and state income tax payments.
Caution: If you think you’ll be in a higher tax bracket next year, you may want to claim the standard deduction this year and bunch your itemized deductions into 2013 when they can offset the higher taxed in-come. This will boost your overall tax savings for the two years combined.
Take Advantage of the 0% Rate on Investment Income. For 2012, the federal income tax rate on long-term capital gains and qualified dividends is 0% when they fall within the 10% or 15% federal income tax rate brackets. This will be the case to the extent your taxable income (including long-term capital gains and qualified dividends) does not exceed $70,700 if you are married and file jointly ($35,350 if you are single). While your income may be too high to benefit from the 0% rate, you may have children, grandchildren, or other loved ones who will be in one of the bottom two brackets. If so, consider giving them some appreciated stock or mutual fund shares that they can then sell and pay 0% tax on the resulting long-term gains. Gains will be long-term as long as your ownership period plus the gift recipient’s ownership period (before he or she sells) equals at least a year and a day.
Giving away stocks that pay dividends is another tax-smart idea. As long as the dividends fall within the gift recipient’s 10% or 15% rate bracket, they will be federal-income-tax-free.
Caution: The Kiddie Tax rules could cause capital gains and dividends to be taxed at the parent’s tax rate. Also, the gift tax exclusion is $13,000 in 2012.
Time Investment Gains and Losses. As you evaluate investments held in your taxable accounts, con-sider the impact of selling appreciated securities this year. The maximum federal income tax rate on long-term capital gains in 2012 is 15%. Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling. On the other hand, now may be a good time to cash in some long-term winners to benefit from today’s historically low capital gains tax rates.
Biting the bullet and selling some loser securities (currently worth less than you paid for them) before year-end can also be a good idea. The resulting capital losses will offset capital gains from other sales this year, including short-term gains from securities owned for one year or less that would otherwise be taxed at ordinary income tax rates. The bottom line is that you don’t have to worry about paying a higher tax rate on short-term gains if you have enough capital losses to shelter those short-term gains.
If capital losses for this year exceed capital gains, you will have a net capital loss for 2012. You can use that loss to shelter up to $3,000 of this year’s ordinary income from salaries, bonuses, self-employment, and so forth ($1,500 if you’re married and file separately). Any excess net capital loss is carried forward to next year.
For the Charitably Inclined. Say you want to make some gifts to favorite relatives (who may be hurting financially) and/or favorite charities. You can make gifts in conjunction with an overall revamping of your stock and equity mutual fund portfolio. Here’s how to get the best tax results from your generosity:
Gifts to Relatives (nondeductible). Do not give away loser shares. Instead sell the shares, and take ad-vantage of the resulting capital losses. Then give the cash sales proceeds to the relative. Do give away winner shares to relatives. Most likely, they will pay less tax than you would pay if you sold the same shares. In fact, relatives who are in the 10% or 15% federal income tax brackets will generally pay a 0% federal tax rate on long-term gains from shares that were held for over a year before being sold in 2012. (For purposes of meeting the more-than-one-year rule for gifted shares, you get to count your ownership period plus the recipient relative’s ownership period, however brief.) Even if the shares are held for one year or less before being sold, your relative will probably pay a lower tax rate than you would (typically only 10% or 15%). However, be aware that gains recognized by a relative who is under age 24 may be taxed at his or her parents’ higher rates under the so-called Kiddie Tax rules.
Gifts to Charities (deductible). The strategies for gifts to relatives work equally well for gifts to IRS-approved charities. Sell loser shares and claim the resulting tax-saving capital loss on your return. Then, give the sales proceeds to the charity and claim the resulting charitable write-off (assuming you itemize deductions). This strategy results in a double tax benefit (tax-saving capital loss plus tax-saving charitable contribution deduction). Give away winner shares to charity instead of giving cash. Here’s why. For publicly traded shares that you’ve owned over a year, your charitable deduction equals the full current market value at the time of the gift. Plus, when you give winner shares away, you walk away from the related capital gains tax. This idea is another double tax-saver (you avoid capital gains tax on the winner shares, and you get a tax-saving charitable contribution write-off). Because the charitable organization is tax-exempt, it can sell your donated shares without owing anything to the IRS.
This article should get you started thinking about tax planning moves for the rest of this year. Please don’t hesitate to contact us if you want more details or would like to schedule a tax planning strategy session.
Fringe Benefit Rules for 2% S Corporation Shareholders
Employee fringe benefits paid on behalf of a 2% S corporation shareholder are subject to special rules. A 2% shareholder is one who owns more than 2% of the corporation’s outstanding stock on any day of the corporation’s tax year, considering direct and constructive ownership. Under the family stock attribution rules, a person is considered to own the stock owned by that person’s spouse, children, grandchildren, and parents. However, stock that is constructively owned by one family member cannot be reattributed to a second family member when applying the family stock attribution rules to that second family member.
While there is some uncertainty regarding which fringe benefits are subject to these special rules, they appear to apply to adoption assistance programs, cafeteria plans, employee achievement awards, group-term life insurance coverage up to $50,000, health and accident insurance plans, health savings accounts, meals and lodging furnished for the convenience of the employer, medical reimbursement plans, disability plans, moving expense reimbursements, and transportation fringe benefits.
Fringe benefits not covered by the 2% shareholder rules (which include educational assistance programs, pension plans, and work-related fringe benefits) are deductible by the corporation, up to the limits specified by the relevant IRS Code section, and are excluded from the 2% shareholder’s income.
Health and accident insurance premiums paid on behalf of a 2% shareholder are reported as additional compensation to the shareholder. The value (normally cost) of the fringe benefit is added to the 2% shareholder’s wages. (However, the premiums can avoid employment taxes if made under a plan for employees and their dependents, or for a class of employees and their dependents.)
Since the 2% shareholder is not considered an employee for fringe benefit purposes, he or she cannot exclude the cost of the health insurance premiums from gross income as employer-provided coverage. However, the 2% shareholder may be able to claim the self-employed health insurance deduction. The deduction is not available for calendar months in which the 2% shareholder or spouse is eligible to participate in another employer-subsidized health insurance plan. Furthermore, the deduction is limited to the 2% shareholder’s earned income (i.e., the social security wages the shareholder receives from the corporation). Any portion that exceeds the earned income limitation is deductible as an itemized deduction, subject to the 7.5% (in 2012) of AGI floor for itemized medical deductions.
When taxable fringe benefits are included in wage income, all shareholders will share in the corporation’s additional compensation deduction, according to each shareholder’s percentage ownership in the corporation (under the normal per-share, per-day allocation rules). However, if one person owns all of the stock, his or her compensation is increased, but pass-through income from the S corporation is decreased by the same amount.
Fortunately, payments of health insurance premiums for shareholders will not be considered distributions for purposes of the one-class-of-stock rule. Furthermore, fringe benefit programs are not considered "governing provisions;" therefore, providing fringe benefits will not create a second class of stock unless they are part of a plan to circumvent the one-class-of-stock rule.
This article provides just a brief overview of these complicated and confusing rules. Please contact us if you would like information on the 2% S corporation shareholder rules or have tax planning or compliance questions.
Recent Graduates’ Job Search and Moving Expenses
With many college and high school graduates still looking for jobs, we thought it would be a good time for a refresher on which expenses are and are not deductible in connection with landing that first post-graduation job.
Job Search Expenses
Expenses incurred by taxpayers when searching for new employment in the same trade or business are deductible as a miscellaneous itemized deduction. Therefore, they are deductible for regular tax purposes and only to the extent they and other miscellaneous itemized deductions exceed 2% of adjusted gross income (AGI). Examples of deductible job search expenses include employment agency fees, resume preparation expenses, and travel and transportation expenses. Additional expenses that may be deductible include employment counseling fees, postage, typing and printing, and advertising.
However, the costs of finding first-time employment are not deductible, since first-time employment by definition cannot be in the taxpayer’s same trade or business. Therefore, recent college and high school graduates seeking first-time employment cannot deduct any of their job search expenses.
While the costs of finding first-time employment are not deductible, moving expenses associated with first-time employment are deductible if the time and distance tests are met (see below). Moving expenses (for both foreign and domestic moves) are generally deductible above the line in computing AGI. These expenses include the cost of transporting household goods and personal effects from the former residence to the new residence. This includes the cost to pack and crate, store, and insure household goods and personal effects within any period of 30 days in a row after they were moved from the taxpayer’s old home and before they were delivered to the new home. Moving costs also include the cost of traveling from the former residence to the new residence. (Traveling expenses include lodging, but not meals.) Automobile expenses can be calculated per mile in lieu of actual expenses. For 2012, the standard mileage rate is 23 cents per mile.
In most cases, moving expenses incurred within one year from the date the individual first reports to work at the new location meet the time test. It is not necessary that the individual has a job before moving to a new location, as long as he or she actually goes to work in that location. And in the case of an individual without a former principal place of work (for example, recent high school or college graduates), the distance test is met if the distance between the individual’s former residence and the new principal place of work is at least 50 miles (as long as the distance from the new home to the new job location is not more than the distance from the former home to the new job location).
Substantiating Charitable Contributions
One of the most popular tax deductions for individuals is the one allowed for donations to charitable organizations—from the local church or synagogue to the Red Cross and various other national organizations. Unfortunately, this deduction has also been among the most abused. Thus, perhaps it is not surprising that Congress has responded to the problem by regularly enacting more rules around documenting donations.
What we’re left with is a confusing array of rules that you must comply with in order to claim a deduction. For example, donors must obtain a written acknowledgment from the charity if the value of the contribution (cash or other property) is $250 or more—a canceled check is not sufficient proof. A recent court case illustrates how easy it is to run afoul of the documentation requirements.
In the case, the taxpayers donated $22,517 to their church during the tax year. Several individual donations were made by check, each of which was in excess of $250. Although the donations were made by check and the taxpayer provided canceled checks to document the gift, the IRS disallowed the deduction because the taxpayers failed to obtain a timely receipt from their church to support the donations. Such receipt (or receipts) must be received by the time you file your return for the year of the donation (or, if earlier, by when the return is due). In addition, it must include all of the following:
1. The name and address of the charity.
2. The date of the contribution.
3. The amount of cash or a description (but not an estimate of value) of any property contributed.
4. A list of any significant goods or services received in return for the donation (other than intangible religious benefits) or a specific statement that the donor received no goods or services from the charity.
In the case at hand, the taxpayers had a receipt from their church, but it did not contain the required statement regarding whether goods or services were provided. They tried to correct this omission by getting a new receipt from their church after the IRS challenged the deduction. By then, of course, it was too late.
While this gives you a glimpse at the substantiation requirements for charitable donations, the rules can get much more complicated, especially when you make charitable donations of property rather than cash. Please contact us to discuss the requirements for specific types of donations or with questions on other tax compliance or planning issues.
2013 Standard Mileage Rates Up 1 Cent per Mile for Business, Medical and Moving
The Internal Revenue Service today issued the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
• 56.5 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations
The rate for business miles driven during 2013 increases 1 cent from the 2012 rate. The medical and moving rate is also up 1 cent per mile from the 2012 rate.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.
These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51. Notice 2012-72 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.
While the IRS continued to make important progress during fiscal year 2012 in addressing its deficiencies in internal control, the Government Accountability Office says a material weakness in internal control over unpaid tax assessments exists and the IRS’s financial management systems are not in compliance with federal law. Read highlights of the GAO report; or read the full report.
Don't Fall for Phony IRS Websites
The Internal Revenue Service is issuing a warning about a new tax scam that uses a website that mimics the IRS e-Services online registration page.
The actual IRS e-Services page offers web-based products for tax preparers, not the general public. The phony web page looks almost identical to the real one.
The IRS gets many reports of fake websites like this. Criminals use these sites to lure people into providing personal and financial information that may be used to steal the victim’s money or identity.
The address of the official IRS website is www.irs.gov. Don’t be misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov.
If you find a suspicious website that claims to be the IRS, send the site’s URL by email to firstname.lastname@example.org. Use the subject line, 'Suspicious website'.
Be aware that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.
If you get an unsolicited email that appears to be from the IRS, report it by sending it to email@example.com.
The IRS has information at www.irs.gov that can help you protect yourself from tax scams of all kinds. Search the site using the term “phishing.”
In C-suites and boardrooms around the world, pessimists now outnumber optimists nearly 8 to 1 as senior finance executives take an increasingly dim view of the global economy and show growing concern about regional conditions. That’s according to the third quarter CGMA Global Economic Forecast released by the American Institute of CPAs and Chartered Institute of Management Accountants. The survey of 1,179 CEOs, CFOs, controllers and other senior-level Chartered Global Management Accountants in 62 countries found only 7 percent with an optimistic outlook for the global economy over the next 12 months. The negative sentiment is taking a toll at home, with domestic conditions now topping the list of executive concerns. Read more.
Lower Your Taxes by Purchasing a Business Vehicle
As we enter the final quarter of 2012, purchasing a new business vehicle may be an effective way to lower your 2012 tax bill. The tax code allows increased first-year depreciation limits for qualifying vehicles purchased and placed in service during 2012.
Taxpayers can claim up to an additional $8,000 of first-year depreciation (in addition to the normal maximum of $3,160) on automobiles in 2012, for a total maximum of $11,160. For light trucks, vans, and SUVs, the $8,000 additional first-year allowance is in addition to the normal maximum of $3,360, for a total maximum of $11,360. The vehicle must be new and purchased during 2012. Like the regular depreciation rules, the additional first-year depreciation is reduced proportionately when business use is less than 100%.
Heavy SUVs continue to receive favorable treatment under the tax laws. Business owners can expense up to $25,000 of the cost of a new heavy SUV (those with gross vehicle weight ratings between 6,001 and 14,000 pounds) purchased in 2012 and used more than 50% in their businesses. These vehicles qualify for 50% bonus depreciation in 2012. In addition, the rules that limit the amount of annual depreciation allowed on passenger automobiles do not apply to heavy SUVs. This means heavy SUVs are eligible for 50% bonus depreciation and unrestricted first-year depreciation, on top of the $25,000 that can be expensed.
For example, the 2012 deductions for a new $50,000 heavy SUV purchased in 2012 and used 100% for business could add up to $30,000 (50% bonus depreciation of $25,000 plus the $5,000 first-year depreciation deduction). The maximum first-year depreciation deduction for a $45,000 passenger automobile placed in service during 2012 and used 100% for business is $11,160.
Other heavy vehicles (non-SUVs with over 6,000 pounds gross vehicle weight) qualify for even more favorable treatment under the tax laws. Not only do these vehicles escape the rules that limit the amount of annual depreciation, they also qualify for a first-year expensing deduction of up to $139,000 for 2012. However, these more favorable rules only apply to vehicles that are not classified as SUVs under the tax law definition. This definition includes:
• Vehicles equipped with a cargo area of at least six feet in interior length. The cargo area cannot be readily accessible directly from the passenger compartment, but it can be either open or enclosed by a cab. Many pickups with full-size cargo beds will qualify for this exception, but “quad cabs” and “extended cabs” with shorter cargo beds may not qualify. So when you go to the dealership, be sure to pack a tape measure.
• Vehicles that seat more than nine passengers behind the driver’s seat, such as a hotel shuttle van.
• Vehicles with an integral enclosure that fully encloses the driver’s compartment and load carrying device; that do not have seating behind the driver’s seat; and that have no body section protruding more than 30 inches ahead of the leading edge of the windshield, such as delivery vans.
For these heavy non-SUVs, businesses will often be able to write off the full cost of the vehicle. So, the 2012 deduction for a new $50,000 heavy non-SUV purchased in 2012 and used 100% for business could add up to $50,000.
Please contact us if you have questions or want more information on this tax-saving opportunity.
College Loan Repayment Plan Application Is Simplified
Federal college loan borrowers have several repayment plan options. One option—Income-Based Repayment (IBR)—is about to get simpler. Under IBR, required monthly payments are capped based on income and family size. Previously, applicants had to enter their income tax data onto the application. Now, the Department of Education is collaborating with the IRS so applicants can import their tax return data directly into the IBR application and submit it online. This will allow borrowers to complete the application in one sitting.
Visit http://studentaid.ed.gov/repay-loans/understand/plans/income-based for more information.
Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.
15427 Vivian - Taylor, Michigan 48180 – voice (734) 946-7576 fax (734) 946-8166