Are Your Social Security Benefits Taxable?

All Social Security recipients should receive a Form SSA-1099 from the Social Security Administration which shows the total amount of their benefits.

But many people may not realize the Social Security benefits they received in 2012 may be taxable. The information outlined below should help you determine whether those benefits you receive in 2012 are taxable or not.

1. How much, if any, of your Social Security benefits are taxable depends on your total income and marital status.

2. Generally, if Social Security benefits were your only income for 2012, your benefits are not taxable and you probably do not need to file a federal income tax return.

3. If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status (see below).

4. Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet. Your tax software program will also figure this for you.

5. You can do the following quick computation to determine whether some of your benefits may be taxable:

  • First, add one-half of the total Social Security benefits you received to all your other income, including any tax-exempt interest and other exclusions from income.
  • Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

6. The 2012 base amounts are:

  • $32,000 for married couples filing jointly.
  • $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouse at any time during the year.
  • $0 for married persons filing separately who lived together during the year.

Confused? Give us a call. We’ll make sure you receive all of the Social Security benefits you’re entitled to.

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IRS Finalizes Rules on Use and Disclosure of Taxpayer Information

The Internal Revenue Service has finalized its regulations regarding how tax preparers can use and disclose the information on their clients’ tax returns.

The regulations in TD 9608 provide updated guidance affecting tax preparers regarding the use of information related to lists for solicitation of tax return business; the disclosure or use of statistical compilations of data under Section 7216 of the Tax Code by tax preparers in connection with, or in support of, their tax prep business; and the disclosure or use of information for the purpose of performing conflict reviews.

The regulations take effect on Dec. 28, 2012, but finalize temporary regulations that have been in effect since 2010, with some minor clarifications and revisions.

The modifications in the temporary and proposed regulations were made following the issuance of Notice 2009-13 in February 2009, and the receipt of comments submitted in response to the notice.

The IRS and the Treasury Department received seven comments in response to the proposed regulations. As proposed, Section 301.7216-2(n) allows tax preparers to maintain a list of limited tax return information that may be used by the compiler to contact taxpayers to provide tax information and general business or economic information or analysis for educational purposes or to solicit tax return preparation services. One commentator asked to expand the acceptable list maintenance purposes to include solicitation of “accounting services” “consistent with legal and ethical responsibilities.” The commentator explained that these accounting services include, for example, assistance with bookkeeping, the preparation of payroll returns, and the preparation of regulatory returns. The commentator also included the preparation of state and local income tax returns as an accounting service.

Preparation of state and local income tax returns is, however, tax return preparation expressly authorized by the statute, and use of the list is permissible to solicit this service, the IRS noted. The language of Section 7216(a)(2) prohibits the use of “any such information for any purposes other than to prepare, or assist in the preparing, of any such return.”

The general rule under Section 7216 prohibits the disclosure or use of tax return information unless a written consent is obtained or an exception applies. With the expiration of Notice 2009-13 on Dec. 31, 2009, the uses of statistical compilations allowed for in the notice were no longer permissible. The IRS noted that if Section 301.7216-2(o) were made effective only upon publication of the final regulations, as one commentator suggested, neither the exceptions provided for Notice 2009-13 nor those provided for in Section 301.7216-2T(o) would be applicable after December 2009. The permissible use of statistical compilations without taxpayer consent would be more, not less, restrictive than if Section 301.7216-2(o) had not been published as a temporary regulation.

For more information: www.onts9.com

 

Taxpayers Face Fiscal Cliff unless Washington Agrees on Deal

Congress is scheduled to return Thursday, with one of its top priorities a deal to avert the December 31 “fiscal cliff” deadline of looming tax increases and automatic spending cuts, but it will need to work quickly or reach some type of interim agreement.

“While a deal looked close on several occasions during negotiations, it’s been elusive so far,” said CCH senior federal tax analyst George Jones. “Whether a resolution can be reached before Congress recesses for the year grows dimmer as the day’s progress.”

The fiscal cliff, shorthand for Jan. 1, 2013, when the terms of the Budget Control Act of 2011 are scheduled to go into effect, includes a series of across-the-board spending cuts and tax increases.
According to CCH, three scenarios that could transpire over the next few days include:

  • A full resolution is reached. The Presidential and Senate Democratic proposal and the Republican plan still remain miles apart. Most attention has focused on the divide between the tax increases in the Democratic proposal on incomes of more than $200,000 for single filers and $250,000 for joint filers; and the spending cuts in the Republican proposal, particularly to entitlement programs. “Last week it seemed President Obama and House Speaker Boehner were circling in on a middle ground, but that fell apart and it’s not clear they will be able to return to those positions to resume negotiations this week,” said Jones.

The President had mentioned being open to a $400,000 threshold on income tax rates at one point.

  • An agreement “in principle” with details worked out in 2013. A full resolution would require reaching an agreement, finalizing the bill and getting it voted on in both the House and Senate. That may not be possible with the time left, however. “They could pass legislation establishing a framework of general tax increases and/or spending cuts and allow the new Congress to work out the details early next year,” said Jones.

 

  • No agreement is reached and the Bush-era tax cuts fully expire. Not only would this increase taxes across the board based on income, it also would make an estimated 20 million additional families subject to the alternative minimum tax, raise the capital gains rate and tax dividends as ordinary income. In addition, the child tax credit would be cut in half to $500 from $1,000 and the estate tax would revert to 55 percent with a $1 million exemption amount compared to 2012’s 35-percent maximum estate tax after a $5.12 million exemption, among other tax impacts.

“Even if we go over the fiscal cliff, Congress could act early next year to reach a compromise and make any agreement retroactive to the beginning of the year,” said Jones. “However, this would not be the ideal scenario for most taxpayers, businesses or investors—most of whom would prefer some degree of certainty heading into 2013.”

Tax Outcomes for Middle-class Couples
Depending upon the taxpayer’s situation, the different proposals could have an impact of a few hundred dollars to several thousand dollars in the taxes they owe.

The free CCH 2013 Fiscal Cliff Estimator allows individuals and tax advisors to compare a taxpayer’s 2012 tax liability against the two proposals as well as what would happen if Congress does not act.

For more information: www.onts9.com

 

IRS Warns Congress Tax Season Might Be Delayed until March or Later without AMT Patch

IRS Acting Commissioner Steven T. Miller warned Congress on Wednesday that if lawmakers fail to extend the traditional alternative minimum tax patch, up to 100 million American taxpayers could be affected, and most taxpayers might not be able to file their tax returns until late March 2013 or later.

 

Miller sent a letter to leaders of the House Ways and Means Committee warning of the trouble ahead. He has warned Congress in the past about not patching the AMT, but he has increased his estimates for how many taxpayers could be affected (see IRS Warns AMT Could Affect 60 Million Taxpayers Unless Patched).

“In my previous letter, I estimated that more than 60 million taxpayers might be prevented from filing their tax returns while we are reprogramming our computers,” he wrote. “As we consider the impact of the current policy uncertainty on the upcoming tax filing season, it is becoming apparent that an even larger number of taxpayers —80 to 100 million of the 150 million total returns expected to be filed—may be unable to file.”

Without enactment of a new patch in the near future, he warned, “nearly 30 million additional taxpayers will become subject to the AMT on their 2012 income tax returns.”

House Ways and Means Committee ranking member Sander Levin, D-Mich., concurred with the warning. “There could be no clearer warning that failure to act on the fiscal cliff will throw the 2013 tax filing season into chaos,” he said in a statement. “The consequences of inaction would be enormous. Extending the AMT patch will prevent needless delays and tax increases on millions of middle-class Americans.”

Miller warned about a delayed start to tax season unless Congress fixes the AMT and resolves other pressing tax matters.

“If an AMT patch is not enacted by the end of this year, the IRS would need to make significant programming changes to conform our systems to reflect the expiration of the patch,” he wrote. “In that event, given the magnitude and complexity of the changes needed, I want to reiterate that most taxpayers may not be able to file their 2012 tax returns until late in March of 2013, or even later.”

Miller noted that the most recent AMT patch, and the exemption amounts of $74,450 for joint filers and $48,450 for single taxpayers, expired at the end of 2011. For 2012, the current-law AMT exemption amounts are much lower: $45,000 for joint filers and $33,750 for single taxpayers.

Miller also warned that the unpatched AMT could lead to delays in tax refunds and higher taxes for many taxpayers. “This situation would create two significant problems: lengthy delays of tax refunds and unexpectedly higher taxes for many taxpayers, who will be unaware that they are newly subject to AMT liability,” he wrote. “Moreover, if Congress were to act at some point next year to enact a new AMT patch, the time and substantial expense necessary for the IRS to reprogram its systems to reflect expiration of the patch would ultimately be wasted.”

Miller noted that the IRS might need to limit filing by those who might be potentially affected. “The IRS cannot process the returns of any taxpayers whose return characteristics do not allow us to differentiate them from those whose tax liability would be altered by the AMT expiration,” he pointed out. “This means that there are certain forms and schedules we could not accept from any taxpayer—even those who ultimately may not have additional AMT liability. Similarly, returns of any taxpayers whose income levels may subject them to the AMT could not be processed.”

He added that it might not be possible even to process some returns that are clearly not subject to or affected by the AMT. “Allowing only some taxpayers to file as we reprogram could substantially increase the risk of fraud and error in initial filings as well as create the potential for a large number of amended returns,” he noted. “We continue to work diligently to review scenarios and to assess the impact of these factors on the 2013 filing season.”

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5 Tax Benefits for Small Businesses before New Year

While there are just a few weeks to go in 2012 and continuing uncertainty over what Congress and the White House will do on the issue of expiring tax benefits, there is still enough time for small businesses to take advantage of several tax benefits before the New Year.

• Move up bonuses. Employers may want to consider accelerating bonuses or other incentive compensation payments into this year if it appears that policymakers will not reach an agreement by year end to extend the lower tax rates currently scheduled to end in 2012.

• Make planned asset purchases now. Businesses are permitted to take a Section 179 deduction for the full purchase price of qualifying assets, such as equipment, computers or software, purchased during the tax year to lower their taxable gross income. However, without Congressional action, the limit of this deduction is scheduled to dramatically decrease in 2013.  For assets that don’t qualify for the Section 179 deduction, small businesses can also take advantage of a 50 percent bonus first-year depreciation allowance on certain assets placed in service during 2012; this benefit is also set to expire at year end without legislation extending it.

• Start a retirement plan. If you are considering offering a retirement plan for your employees, doing so before the end of the year could provide tax benefits. Your business might be eligible for a $500 tax credit for the first three years of your plan to help defray setup costs. In addition, any employer contributions to employee plans enjoy tax deductions, and a business owner can realize personal tax savings by contributing to a plan.

• Small business tax credit. A tax credit is available to certain small businesses to encourage them to offer health insurance coverage.  Generally, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

• Hire a veteran. The Work Opportunity Tax Credit for hiring qualifying veterans is scheduled to expire at the end of the year. The tax credit can range from $2,400 to $9,600, depending on certain factors, including how long the veteran has been out of work and whether they have a service-connected disability.

“With the potential tax increases and government spending cuts planned for 2013, it’s important for small business owners to understand how they could be impacted,” said Paychex president and CEO Martin Mucci in a statement. “Now is the time for business owners to re-examine their upcoming business needs and determine where they can make adjustments that will allow them to take advantage of the tax benefits currently available.”

For more information: www.onts9.com

IRS Extends Deadline for Complying with Service Charge Treatment Rules

The Internal Revenue Service has given businesses an extra year to make sure they are compliant with new rules on how to treat service charges.

The rules were released in Revenue Ruling 2012-18 last summer, with guidance included in Announcement 2012-25, to help companies properly distinguish between tips and service charges.

Businesses were originally expected to be in compliance by Jan. 1, 2013, but the IRS had also sought comment on whether that would give enough time for companies to modify their practices and change their systems.

In response to the comments received, the service announced that businesses will now have until Jan. 1, 2014.

For more information: www.onts9.com

IRS Offers Tips for Year-End Giving

Individuals and businesses making contributions to charity should keep in mind some key tax provisions that have taken effect in recent years, especially those affecting donations of clothing and household items and monetary donations.

Rules for Clothing and Household Items

To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Reminders

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:

  • Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2012 count for 2012. This is true even if the credit card bill isn’t paid until 2013. Also, checks count for 2012 as long as they are mailed in 2012.
  • Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. Exempt Organization Select Check, a searchable online database available on IRS.gov, lists most organizations that are qualified to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
  • For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2012 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
  • For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
  • The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
  • If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
  • And, as always it’s important to keep good records and receipts.

For more information: www.onts9.com

 

How to Create a No Equity Partner Position

Most firms are faced with the dilemma of keeping long term managers who are major contributors to the firm but for whatever reason are not ready to be equity partners (or who perhaps never will have what it takes to be equity partners). In the past, most of us would not make the decision to outplace the long-term managers since from many perspectives including client service, engagement and staff management and profitability, they did a great job.

But there were missing pieces to making them an equity partner: we just weren’t willing to make an up-or-out decision although we were not willing to bring them into the partnership. So, we procrastinated until, in many cases, they left the firm.

We have also seen the opportunity to make partner in many firms be limited in the last few years due to the economy and slowing growth. We risk losing some of our stars because we can’t bring them in as quickly as we would like.

Both issues have the same result: the loss of high-level, talented people. A relatively new approach to dealing with the problem is gaining popularity in medium- to smaller-sized firms. It is the no-equity partner position. Some firms call it a principal spot. For other firms, there is a small piece of equity and they will call it a low-equity partner spot. Regardless, the mission is to create an intermediate level between senior manager and partner. This type of partner position has been a common level on the ladder for the top 100 firms for several years.

Here is an outline of what the position looks like, how it differs from the normal equity partner spot and some considerations to implement it in your firm.

First, the difference between no equity and equity should be internal only. From the perspective of the public and clients, this is a partner position. Making a new no-equity partner is a big deal and you should celebrate it inside and especially outside the firm, just as you would a new equity partner. These individuals wear the partner title.

In most firms, the no-equity partners function just like the equity partners in terms of serving clients. They probably have been already as senior managers. The differences are typically in how you pay them and whether they receive other partner benefits like buyout and retirement.

Most firms utilize a different compensation plan for the no-equity partners. They may participate in firm profits to some extent but they are typically not in the equity partner compensation plan or year-end pool. It is common to see a base salary that is between a senior manager and an equity partner with a bonus potential based on some percentage of that salary or a profit pool separate from the equity partners.

The no equities make either a very small equity contribution or none at all and they do not participate in the firm’s equity partner goodwill buy out or deferred comp plan. They do participate in the firm’s qualified pension plan and, in most cases, their other fringe benefits are the same as the benefits provided to equity partners.

From the perspective of firm governance, the no-equity partners should participate in partner meetings including firm retreats. Normally, they will not be eligible for service on the firm’s executive board or management committee. They will be able to vote their shares if they hold any.

Many firms use the no-equity partner position as a preliminary step to admitting someone as an equity partner. In other words, you will spend some time at the no-equity level while developing your book of business or fulfilling whatever additional requirements are necessary. Most of the time, firms will permit someone to remain indefinitely at the no-equity level. I encourage you to establish and communicate the criteria for moving to the equity level as a part of your firm’s career development program. The expectations should be clear.

You may also be witnessing the phenomena in your firm where at least one or two generations of your people don’t want the same things that we (the older folks) wanted. Their motivations may be different and they just might be happy (happier) with something less than the full equity role that most of us chased. Maybe title and some recognition/differentiation along with minor financial changes are the perfect combination for them.

Consider the no-equity partner position in your firm. It may be the answer to keeping talented people while helping the firm maintain the right leverage and number of equity owners.

For more information: www.onts9.com

 

 

IRS Publishes Formal Amendments to Repair vs. Capitalization Regulations

The Internal Revenue Service has published amended temporary Repair vs. Capitalization regulations to incorporate the changes announced in the recent Notice 2012-73.

The changes announced by the IRS on Friday include a two-year delay of the effective date of the regulations to Jan. 1, 2014.

While Notice 2012-73 indicated that taxpayers had the option to apply the temporary or final regulations for any taxhttp://www.onts9.com/ year beginning after Jan. 1, 2012, it was unclear whether taxpayers could choose to apply only favorable portions of the regulations for those years (see IRS Delays Effective Date of Repair vs. Capitalization Regulations). These formal amendments clarify this question and make clear that taxpayers can. As such, taxpayers and CPAs should not overlook the possible tax benefits of applying favorable portions of the regulations immediately.

With the delay of the effective date to Jan. 1, 2014, some taxpayers are hesitant to file the necessary Change of Accounting Method forms for 2012 because of concern the rules will change.

However, CPAs should advise taxpayers that even if the regulations do change and some deductions must be reversed in 2014, such deductions would be given back evenly over four years starting in 2014 (see Rev. Proc. 2011-14). In most cases this will not result in a significant difference in tax savings. However, depending on the situation, some taxpayers may benefit from applying the rules immediately.

For more information: www.onts9.com

 

Helpful Tips for the Coming Tax Season

As the holiday season begins and the year comes to an end, here are some things to keep in mind for your federal tax filings:

  1.  Maximize your tax savings by contributing to your retirement account.  Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 2012 must be made by April 15, 2013.    For additional information, see:   http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits. 

2.  Have you made a substantial gift?  If you gave money or property to someone as a gift, you may owe federal gift tax. Many gifts are not subject to the gift tax, but the IRS offers the following eight tips about gifts and the gift tax:
http://www.irs.gov/uac/Eight-Tips-to-Determine-if-Your-Gift-is-Taxable.

3. Did you know that taxpayers in your area can receive up to $5,891 when filling their tax returns and claiming the Earned Income Tax Credit (EITC)?  Consider the financial boost EITC provides for working people in a recovering economy and the impact of that influx of cash to the local economy.  The amazing part is that there are potentially eligible recipients who miss this credit because they don’t file a Federal tax return!

EITC is a refundable federal income tax credit for low to moderate income workers. When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. To qualify, taxpayers must meet certain requirements and file a tax return, even if they owe no tax or do not have a filing requirement.

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