2012 Year-End Tax Planning Strategies

With less than 30 days left in 2012, there is still time to do some year-end tax planning. This 2012 tax year is more difficult in that no one knows how the tax laws may change before the end of the year.

With certain tax deductions and credits due to expire at the end of 2012 (sunset provisions) and new higher tax brackets kicking in next year (the end of the Bush-era tax cuts), year-end tax planning is harder than ever.

However, income tax planning must go on, even in this uncertain tax environment. As a result, it is essential to know the customary year-end planning techniques that cut income taxes.

It all starts with a tax projection of whether the taxpayer will be in a higher or lower tax bracket next year. Once their tax brackets for 2012 and 2013 are known, there are two basic income tax considerations.

• Should income be accelerated or deferred?

• Should deductions and credits be accelerated or deferred?

Example: For income taxed at a higher tax bracket next year, accelerating such income to 2012 results in less taxes being paid. At the same time, deductions and tax credits deferred into next year will become more valuable as they offset income taxed at a higher bracket.

However, life is never that simple. Tax law uncertainty, especially this year, makes for some real guesswork. As discussed below, when it comes to certain deductions that have tax threshold limitations, bunching of deductions to one year may force the timing into a tax year where the tax bracket is lower than the other tax year in question. Year-end tax projections must take into account the maddening Alternative Minimum Tax.

In any event, the following lays out the basic ideas for income acceleration and deduction/credit deferral in a rising income tax bracket environment.

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2012 Tax Changes for Businesses

Whether you file as a corporation or sole proprietor here’s what business owners need to know about tax changes in 2012.

Standard Mileage Rates
The standard mileage rate in 2012 is 55.5 cents per business mile driven, 23 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.

Health Care Tax Credit for Small Businesses
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000. The credit can be claimed in tax years 2010 through 2013 and for any two years after that. The maximum credit that can be claimed is an amount equal to 35% of premiums paid by eligible small businesses.

Credit for Hiring Qualified Veterans
The maximum credit that employers can take for hiring qualified veterans in 2012 is $9,600 per worker for employers that operate for-profit businesses, or $6,240 per worker for tax-exempt organizations. See Tax Credit for Employers Hiring Veterans This Year (below) for additional details on this tax credit.

Section 179 Expensing
In 2012 the maximum Section 179 expense deduction for equipment purchases is $139,000 ($174,000 for qualified enterprise zone property) of the first $560,000 of certain business property placed in service during the year. The bonus depreciation is 50% for qualified property that exceeds the threshold amount.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.

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2012 Tax Changes for Individuals

Here’s what individuals and families need to know about tax changes for 2012.

From personal deductions to tax credits and educational expenses, many of the tax changes relating to individuals remain in effect through 2012 and are the result of tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on December 17, 2010.

Personal Exemptions
The personal and dependent exemption for tax year 2012 is $3,800, up $100 from 2011.

Standard Deductions
In 2012 the standard deduction for married couples filing a joint return is $11,900, up $300 from 2011 and for singles and married individuals filing separately it’s $5,950, up $150. For heads of household the deduction is $8,700, up $200 from 2011.

The additional standard deduction for blind people and senior citizens in 2012 is unchanged from 2011, remaining at $1,150 for married individuals and $1,450 for singles and heads of household.

Income Tax Rates
Due to inflation, tax-bracket thresholds will increase for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700 for a married couple filing a joint return, up from $69,000 in 2011.

Estate and Gift Taxes
The recent overhaul of estate and gift taxes means that there is an exemption of $5.12 million per individual for estate, gift and generation-skipping taxes, with a top rate of 35%. The annual exclusion for gifts remains at $13,000.

Alternative Minimum Tax (AMT)
AMT exemption amounts for 2012 have reverted to 2000 levels and will remain significantly lower than in 2011 unless Congress takes action before year-end: $33,750 for single and head of household fliers, $45,000 for married people filing jointly and for qualifying widows or widowers, and $22,500 for married people filing separately.

Marriage Penalty Relief
For 2012, the basic standard deduction for a married couple filing jointly is $11,900, up $300 from 2011.

Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations do not apply for 2012, but like many other tax provisions, are set to expire at the end of the year.

Flexible Spending Accounts (FSA)
FSA (Flexible Spending Arrangements) are limited to $2,500 per year starting in 2013 and indexed to inflation after that and applies only to salary reduction contributions under a health FSA. However, IRS guidance issued this year recognizes that the term “taxable year” refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.

Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.

Further, the IRS is providing relief for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.

Long Term Capital Gains
In 2012, long-term gains for assets held at least one year are taxed at a flat rate of 15% for taxpayers above the 25% tax bracket. For taxpayers in lower tax brackets, the long-term capital gains rate is 0%.

Individuals – Tax Credits
Adoption Credit
In 2012 a refundable credit of up to $12,650 is available for qualified adoption expenses for each eligible child. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) in excess of $189,710 and is completely phased out for taxpayers with modified adjusted gross income of $229,710 or more.

Child and Dependent Care Credit
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit
The $1,000 child tax credit has been extended through 2012 as well. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.

Earned Income Tax Credit (EITC)
For tax year 2012, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270 (up from $49,078 in 2011). The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Individuals – Education Expenses

Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2012. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.

American Opportunity Tax Credit
For 2012, the maximum Hope Scholarship Credit that can be used to offset certain higher education expenses is $2,500, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.

Employer Provided Educational Assistance
Through 2012, you, as an employee, can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.

Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2012, The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

Student Loan Interest
For 2012 (same as 2011), the $2,500 maximum student loan interest deduction for interest paid on student loans is not limited to interest paid during the first 60 months of repayment. The deduction begins to phase out for married taxpayers filing joint returns at $125,000, and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Individuals – Retirement

Contribution Limits
For 2012, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000. For persons age 50 or older in 2012, the limit is $22,500 (up from $22,000 in 2011). Contribution limits for SIMPLE plans remain at $11,500 for persons under age 50 and $14,000 for persons age 50 or older in 2012. The maximum compensation used to determine contributions increases to $250,000.

Saver’s Credit
In 2012, the AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, $43,125 for heads of household, and $28,750 for married individuals filing separately and for singles.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you

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Security Risks Continue to Plague IRS’s Technology

While improvements have been made in the Internal Revenue Service’s information technology systems over the past year, the IRS still needs to do more to protect sensitive financial and taxpayer data and deliver new systems, according to a new report.

 

The report, by the Treasury Inspector General for Tax Administration, was delivered as part of an annual evaluation of the adequacy and security of IRS technology, as required by the IRS Restructuring and Reform Act of 1998.

Since TIGTA’s assessment last year, the IRS implemented the daily processing and database implementation projects of the Customer Account Data Engine 2 and a new release of the Modernized e-File system.

TIGTA said it continues to believe that the IRS’s Modernization Program remains a major risk and that improved controls are needed to ensure long-term success for both of these key systems within the program. In addition, the development and implementation of new systems, which are needed to implement provisions of the Patient Protection and Affordable Care Act, introduce significant risk management challenges.

The annual assessment of the IRS’s IT program stresses the importance of continued improvements in the overall control environment, including processes and performance needed to ensure that IRS systems adequately meet all mission-critical requirements and goals for electronic tax administration.

“The IRS made significant progress in modernizing its system, but it must continue its efforts to ensure that its computer systems are effectively secured to protect sensitive financial and taxpayer data,” said TIGTA Inspector General J. Russell George in a statement.

TIGTA found that the IRS has made progress to improve information security and personnel safety. Nevertheless, the IRS needs to continue to emphasize information and physical security programs to ensure that policies, procedures and practices adequately address security control weaknesses.

TIGTA auditors identified weaknesses over system access controls, configuration management, audit trails, physical security, remediation of security weaknesses, and oversight and coordination on security related issues.

“Until the IRS addresses security weaknesses, it will continue to put the confidentiality, integrity, and availability of financial and taxpayer information and employee safety at risk,” said George.

In addition, TIGTA found that the IRS needs to ensure that it leverages viable technological advances as it improves its overall operational environment. While the IRS implemented virtualization technology to continue to improve operational efficiency, additional improvements are needed.

Because the fiscal year 2012 annual assessment report was based primarily on previously issued reports from TIGTA and other oversight organizations, focusing on the IRS’s IT Program, TIGTA said it did not offer any new recommendations. IRS officials were provided with an opportunity to review and comment on the draft report, but there was no response from IRS officials included in the report released to the public.

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IRS Updates Adequate Disclosure Rules for Tax Positions

The Internal Revenue Service has released its annual update identifying the circumstances under which the disclosure on a taxpayer’s income tax return with respect to an item or a position is adequate for the purposes of reducing the understatement of income tax and avoiding the tax return preparer penalty.

The IRS noted Monday that Rev. Proc. 2012-51 does not apply with respect to any other penalty provisions (including the disregard provisions of the Section 6662(b)(1) accuracy-related penalty, the Section 6662(i) increased accuracy-related penalty in the case of nondisclosed noneconomic substance transactions, and the Section 6662(j) increased accuracy-related penalty in the case of undisclosed foreign financial asset understatements).

The IRS noted that if the revenue procedure does not include an item, disclosure is adequate with respect to that item only if made on a properly completed Form 8275 or 8275–R, as appropriate, attached to the return for the year or to a qualified amended return.

The revenue procedure applies to any income tax return filed on 2012 tax forms for a taxable year beginning in 2012, and to any income tax return filed on 2012 tax forms in 2013 for short taxable years beginning in 2013.

The IRS noted that editorial changes have been made throughout the revenue procedure, but no substantive changes have been made.

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Pelosi Plans to Bring Tax Cut Extension Bill to House Floor

House Minority Leader Nancy Pelosi, D-Calif., said she would try to use a procedure known as a discharge petition to bring a Senate-passed bill for extending the middle-class tax cuts to the floor of the House.

 

A discharge petition would require 218 signatures to bring it to the floor of the House. Republicans, who hold a majority in the House, have so far resisted allowing a vote on a bill passed earlier this year by the Senate, which would extend the tax cuts for only those earning less than $250,000 a year.

“The message from the American people is loud and clear: we need solutions not stalemates,” Pelosi said in a statement Sunday. “We continue to call on Speaker Boehner to immediately schedule a vote on the Senate-passed bill to extend tax cuts for the middle class, which the President has said he will sign immediately. Congressional Republicans must heed the call of middle-class families during this holiday season, end the uncertainty and stop holding middle income tax cuts hostage to tax cuts for the rich. If Speaker Boehner refuses to schedule this widely-supported bill for a vote, Democrats will introduce a discharge petition to automatically bring to the floor the Senate-passed middle class tax cuts. We must find a bold, balanced and fair agreement to avoid the fiscal cliff. The clock is ticking and stalemates are a luxury we cannot afford.”

Pelosi held a press conference last Friday in which she said she planned to introduce the discharge petition this coming Tuesday. However, she admitted that Democrats will need some Republicans to join them in signing the discharge petition. Democrats currently hold 192 seats in the House, but the discharge petition would need 218 signatures to bring the bill to the floor for a vote.

“The clock is ticking, the year is ending,” Pelosi said Friday. “it’s really important, with tax legislation, for it to happen now. We’re calling upon the Republican leadership in the House to bring this legislation to the floor next week. We believe that not doing that would be holding middle income tax cuts hostage to tax cuts for the rich. Tax cuts for the rich which do not create jobs, just increase the deficit, heaping mountains of debt onto future generations. And so, to that end, we will be introducing, if the bill, if there is no announcement of scheduling of the middle income tax cut, which, by the way, has tremendous support in the Republican Caucus – I think we would get a 100 percent vote on it if it came to the floor. If it is not scheduled, then on Tuesday we will be introducing a discharge petition which you know with – if we get 218 signatures, would bring the bill automatically to the floor. That would mean that we need some Republicans who support middle income tax cuts, to sign on with us.”

House Speaker John Boehner, R-Ohio, said on Fox News Sunday that President Obama’s latest proposal, presented by Treasury Secretary Timothy Geithner, to avert the fiscal cliff was a “non-serious proposal.”

“The President was asking for $1.6 trillion worth of new revenue over 10 years, twice as much as he’s been asking for in public,” said Boehner. “He has stimulus spending in here that exceeded the amount of new cuts that he was willing to consider.  It was not a serious offer. I looked at [Secretary Geithner] and I said, ‘you can’t be serious?’ … You know, we’ve got several weeks between Election Day and the end of the year.  And three of those weeks have been wasted with this nonsense.”

Geithner, however, said on NBC’s Meet the Press that he believes a compromise on the fiscal cliff talks can be reached. “I think we’re going to get there,” he said. However, he insisted that Republicans need to come up with a counter-offer. “We need to know what they’re prepared to do on [tax] rates and revenues, and we need to know what they’re prepared to do on the spending side,” he said.

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Powerball Winner Will Face Major Tax Hit

Two lucky winners in Arizona and Missouri will be able to claim the record-shattering $580 million Powerball jackpot after Wednesday night’s drawing, but they will also face taxes and need financial advice.

Experts say that the first thing a lottery winner should do is sign their ticket, put it in a safety deposit box and consult a financial advisor or attorney before stepping forward to claim their winnings. It would also be a good idea to check with an accountant and tax planner, especially with tax rates scheduled to rise next year unless Congress and the White House can agree what to do about them.

“While the winner will have a big tax bill, the silver lining may be that it will be a lot less than it could be next year if we go over the fiscal cliff, prompting higher income tax rates, as well as when other tax increases go into effect,” said CCH principal tax analyst Mark Luscombe.

While lottery winners typically have anywhere from 90 days to a year to claim their winnings—the Powerball winner may want to make sure to claim their winnings in 2012 to avoid potential tax increases in 2013, when the maximum income tax rate could increase to 39.6 percent. Lottery winnings are generally taxed in the year in which they are received.

The next choice the winner will need to make—within 60 days of claiming the prize under current tax law—is whether he or she wants to take the lump-sum cash option, estimated at more than $360.2 million, or take the annuity option, which pays out the full amount over 29 years (30 payments). Under the annuity option, the winner is taxed on the income each year as it is received.

While it’s generally advisable to postpone any taxes to future years when possible, that’s often not the case with lottery winnings, and particularly not this year—when income taxes may very well be lower than they will be in 2013 and beyond.

The highest tax bracket today—35 percent for taxable incomes of more than $388,350 for single or joint filers—is set to increase to 39.6 percent in 2013 for taxable incomes of more than $398,350 for single or joint filers, if Congress does not act.

If the shock of winning is unfortunately heart-stopping, the winner’s heirs would be faced with a current estate and gift tax rate as high as 35 percent for 2012 with a $5.12 million exemption amount. And, unless Congress acts to extend the current rules, the maximum estate tax rate will jump to 55 percent with a $1 million exemption rate starting in 2013.

Other considerations include state and local taxes, which will likely take the winnings down even further. And investing comes into play also as investing will get more costly under the fiscal cliff: the winner can expect to be paying higher capital gain rates as of 2013, when the maximum capital gains rate under a fiscal cliff will increase from the current 15 percent to 20 percent.

One potential way to offset some of the taxes is to make sure to deduct for eligible gambling losses. Gambling losses, including those from the lottery, are tax deductible up to the amount of gambling winnings. So, if the Powerball winner spent $200 dollars this year on losing tickets before hitting the jackpot, they can deduct their losses as an itemized deduction.

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Small Business Groups Urge Tax Reform Instead of Tax Hikes from Fiscal Cliff

A group of business trade associations have sent a letter to Congress urging lawmakers to reject President Obama’s call for higher marginal tax rates on main street employers.

A total of 42 business organizations employing tens of millions of workers sent the letter to Capitol Hill urging Congress to avert tax hikes and instead pursue comprehensive tax and entitlement reform.

“[W]e strongly urge Congress to pursue comprehensive tax reform that lowers rates on all forms of business income while enacting significant entitlement reforms that put the federal budget on a sustainable fiscal path, they wrote. “[W]e call on Congress to avoid raising marginal tax rates on employers, either as part of negotiations over the fiscal cliff, or as part of larger effort to reform the tax code. Instead, Congress should seek to enact comprehensive tax reform that simplifies the tax code and encourages economic growth for both pass-through businesses and corporations.”

The small business groups cited a recent economic report from the non-partisan Joint Committee on Taxation that nearly 1 million businesses and more than half of all small business income earned will be hit by the tax hikes. A recent Congressional Budget Office report confirms that if those same tax rates rise, hundreds of thousands of jobs could disappear.

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Sales and Use Tax Rate Will Increase on January 1, 2013

Due to voter approval of Proposition 30, the statewide sales and use tax rate will increase one quarter of one percent (0.25%) on January 1, 2013. The higher tax rate will apply for four years — January 1, 2013 through December 31, 2016.

For more information on this increase, please visit our tax rate increase webpage. For a listing of tax rates, please visit California City & County Sales & Use Tax Rates webpage.

In addition to the statewide sales and use tax rate increase, voters in some cities and counties approved a number of new or increased district taxes that will go into effect April 1, 2013. These new or increased district taxes will be sent to taxpayers in a separate notice.

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Obama Meets Small Biz Leaders to Discuss Fiscal Cliff

President Obama met with a group of small business owners and advocacy groups to discuss the prospect of expiring tax cuts and the so-called fiscal cliff.

 

Colorado entrepreneur Lisa Goodbee joined the President and 14 other small business owners from across the country on Tuesday to talk about the fiscal situation being created by a host of tax increases and billions of dollars in automatic spending cuts that will take effect on Jan. 1 if Congress and the president can’t agree on a plan to reduce the deficit by year’s end—known as the fiscal cliff. If not avoided, this situation will have a dire effect on entrepreneurs and the middle class, small firms’ core customer base.

“Business is picking up as the economy recovers, but my clients could take a big hit if we fall off the so-called fiscal cliff, and that could be devastating for my business,” said Goodbee, president of Goodbee & Associates, Inc., an engineering firm in Centennial, Colo., in a statement. “It’s really important for my clients and my own business for Congress to take a balanced approach to this problem, and find a sensible solution that both generates revenue and cuts expenses.”

Obama has pushed for a number of small business tax breaks to stimulate the economy. The tax breaks would refund 10 percent of the cost of new payroll—in the form of new hiring or new wages—up to a total of $500,000 next year.

Four other participants in the White House meeting were affiliated with the American Sustainable Business Council and Business for Shared Prosperity: Mandy Cabot, CEO of Dansko Inc, a footwear company headquartered in West Grove, Penn.; Lew Prince, managing partner of Vintage Vinyl in St. Louis, the largest independent music store in the Midwest; and David Bolotsky, CEO of UnCommonGoods in Brooklyn N.Y.; Nikhil Arora, co-founder of Back to the Roots, an urban mushroom farm in Oakland, Calif.

Cabot, Prince, Bolotsky and Arora are among more than 600 business owners and executives who signed a letter sent by the advocacy groups American Sustainable Business Council and Business for Shared Prosperity calling on Congress to end costly Bush tax cuts for the top 2 percent and reinvest in America.

“We’re not here asking for anything for ourselves,” said Prince. “We’re here because we want the best for our country. I’ve run a small business for more than 30 years. Expecting high-income tax cuts to trickle down as job creation is like pouring gas on your hood and expecting it to fuel your engine. It’s time to stop giving tax breaks to wealthy households and big corporations, and reinvest in America.” Prince is a leader in Business for Shared Prosperity.

In their letter to Congress, the business leaders said, “In the last decade, we have been cutting taxes on the wealthiest Americans and underfunding vital programs to pay for them. Large and growing budget cuts have had a severe impact on business, particularly micro and small business and job creation—reducing funding for infrastructure improvements, community economic development programs, housing, job training and much more. America’s failing infrastructure is starved of funds and falling further behind our global competitors. … The high-end tax cuts are hurting our economy. It’s time to end them, not extend them. This would be an important step in rebuilding an economy that grows our small businesses and middle class.”

An opinion poll released earlier this month by the advocacy group Small Business Majority found that nearly eight in 10 small business owners are aware of the fiscal cliff. The poll also revealed that entrepreneurs don’t want a solution to interfere with job creation opportunities. A majority of them believe it’s more important for Congress to focus on creating jobs than reducing the deficit. However, small business owners see eliminating tax cuts that only benefit the wealthiest as one part of a potential solution.

By nearly a two-to-one ratio, small business owners believe spending cuts for education, health care and infrastructure would hurt the economy more than a tax increase on the top 2 percent. A majority also believe that allowing tax cuts for high-income earners to expire is the right thing to do given the current economic situation.

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