Wednesday, October 3, 2012

Year End Tax Tidbits 2012

Year End Tax Tidbits 2012
As the end of the year approaches, here is some year-end planning information.  As it is every year, I know the number of listed topics is a bit overwhelming. For these tax topics and others about which you have questions, feel free to contact me.

Withholding for 2013
If you think your withholding should be adjusted for 2013 (e.g. your income will either increase or decrease; you have additional dependents; you have fewer dependents; you marred in 2012 or will marry in 2013,  you divorced in 2012 or your divorce will become final in 2013), we need to talk about adjusting your withholding.

Reminders for Individual Filers ~  
IRA and Roth IRAs
You may contribute to your IRA or Roth IRA for 2012 as long as you do it by April 15, 2013.  If your income is too high to make a contribution to your IRA or Roth IRA, you may contribute to a non-deductible IRA.  Your contribution may be as much as $5,000 plus an additional $1,000 if you're over 50 years of age.  If you participate in a retirement plan at work, the amount of your deductible IRAs is limited.  If the IRS considers you high income, phase outs also apply to contributions to Roth IRAs.

Employer Plans: 401(k)s, 403(b)s, 457s, SIMPLE IRAs, etc.
For plans other than SIMPLEs, the maximum contributions to retirement plans increased for 2012.  For 401(k)s, 403(b)s, 457s, and other retirement plans, you may contribute up to $17,000 in salary deferrals plus an additional $5,500 if you're over 50 years of age.  For SIMPLE IRAs, you may contribute up to $11,500 plus $2,500 if you're over 50 years of age.

Saver's Credit
For 2012, if you contribute to your retirement plan at work or to a traditional IRA and your income is lower than the income thresholds (less than $28,750 to less than $57,500 depending upon your filing status), you qualify for the Saver's Credit.  You must be at least 18 years of age, not a full-time student, and not claimed as a dependent on someone else's tax return.  Depending on your income, the tax credit is from 10% of your contribution to as high as 50% of your contribution.

Investment Income
The lower 15% tax rates on long-term capital gains (held over 1 year plus 1 day) and qualified dividends may expire in 2013.  The capital gains rate for some investors is zero in 2012. The zero-percent rate is limited to taxpayers in the 10% to 15% income tax brackets.   Capital gains rates will likely increase after 2012.

College Savings Accounts – 529 Plans
529 Plans allow you to contribute to a college account and if the funds are used for higher education, any amount you pull out is tax free.  529 Plans are clearly an excellent strategy for saving for higher education for family members.

Kiddie Tax
The kiddie tax applies to dependents under the age of 19 and also includes dependents under the age of 24 who are full-time students.  Income up to $950 is tax-free in 2012.  The next $950 is taxed at 10%, and income above that amount is taxed at your tax rate.

Gift Tax Exclusion
The annual exclusion for tax year rises from $13,000 in 2012 to $14,000 in 2013 for gifts to individuals who are citizens of the U.S.  Any gifts over this amount require that a gift tax return be filed.  For gifts to spouses who are not citizens of the United States, a non-taxable gift is limited to $139,000 (for 2013 $143,000). If you gift something that is non-cash (e.g. stock), I do not recommend gifting any asset that is worth less than what you paid for it.

Charitable Contributions (cash or check)
Both charitable contributions in the form of cash or check require a receipt from the charity.  This means that if you attend church on Sunday and put $10.00 cash in the collection plate, you cannot take a deduction without a receipt from your church.  If you pay by check, your canceled check is your receipt unless the total of your contributions is $250 or more.  Because of recent tax court cases, the best practice is to obtain a receipt for every donation.

Non-Cash Charitable Contributions 
Don't forget that non-cash charitable deductions require documentation and if the value of your donation exceeds $250, a detailed receipt from the charity.  You cannot simply say "3 bags of clothing.  If you need my non-cash charitable contribution worksheet to arrive at the deductible amount, let me know and I'll email it to you.

Charitable Travel
You may still deduct local charitable mileage at 14 cents per mile, but you cannot deduct charitable travel unless there is "no significant element of personal pleasure."  If you travel for a charity (a chorus, symphony, fraternal organization, etc.), you cannot deduct your expenses unless you can prove that all or most of that trip was directly related to the charitable work.

Unreimbursed Employee Business Expenses
For those of you who deduct expenses related to your employment, the IRS is actively auditing these deductions.  Labor laws state that if you incur expenses related to your employment, your employer is required to reimburse you.  If your expenses are reimbursable by your employer and you fail to request reimbursement, you do not qualify for any deduction.  

Use Tax
If you made a purchase on the Internet and did not pay sales tax, you are required to pay sales tax to your state when you file your tax return.

Home equity interest and refinancing
Unless you substantially improve your home with funds from a home equity loan, your mortgage interest deduction may be limited.  The total of your home equity debt is limited to $100,000 for you to be able to deduct the interest.  Any interest paid on loans that exceed $100,000 is considered personal interest and is not deductible.  Home equity interest is not deductible for AMT purposes.

Educator Expense Deduction
For credentialed teachers, the teacher's educator expenses deduction of $250 is scheduled to expire after 2011.

IRA conversions to Roth IRAs
Roth Conversions – if you converted any retirement funds to your Roth IRA in 2012, you have six months to move those funds back to your retirement account to avoid paying income taxes.  This strategy is especially good if the value of those funds is worth less today than they were when you made the transfer to your Roth.

Roth Conversions that took place in 2010
Don’t forget that if you converted a traditional IRA to a Roth IRA in 2010, unless you elected to pay the tax on your 2010 tax return, you’ll pay 50% of the tax when filing your 2011 tax return and 50% of the tax when filing your 2012 return.

Roth Conversions that take place after 2010
All taxpayers are allowed to convert a traditional retirement funds with tax-deferred growth to a Roth IRA that grows tax-free.  Conversions are included in income during the tax year in which the conversion is completed, and must be completed no later than December 31st.  Removing the Roth IRA conversion cap, however, doesn't mean anyone can contribute to a Roth IRA, but it does mean that anyone can convert a retirement account to a Roth IRA.  Please contact us before doing a Roth conversion to discuss your individual situation.

IRA/Retirement Plans Minimum Distributions for those over age 70 (MRD)
For those of you who are over 70 years of age, you are required to take a required minimum distribution each year.  Make sure you take your distribution before 12/31/12.  The penalties for not taking the distribution are severe.

Alternative Minimum Tax (AMT)
There's is bipartisan support for an AMT patch so that middle income taxpayers won't pay AMT for 2012.  Without a 2012 patch, an estimated 21 million households will have to pay more AMT in 2012.

Estate Taxes
Until the end of 2012, estate tax will apply only to estates valued at more than $5 million.  The maximum estate tax rate is 35%.  For 2013 the tax is scheduled to revert back to estates valued at over $1 million with a maximum rate of 55%.  Congress must act to extend the more favorable treatment.

Flexible Spending Accounts (FSAs), Cafeteria Plans, Section 125 Plans
If your company offers these plans, the enrollment period is often times toward the end of the year.  Remember that whatever amount you elect to contribute to your plan comes out of your wages tax-free.  You pay no income tax, social security tax, or Medicare tax on the amount you contribute for your projected medical expenses for 2013 (not including over-the-counter drugs unless you have a prescription) and/or dependent care expenses (not including overnight camps).  The key to how much you elect to contribute either for dependent care or medical expenses is to not contribute more than you will spend in a calendar year plus 2 months 15 days.  Should you not spend what you contributed, you forfeit that amount for that calendar year.  

Medicare Part B
In 2012, if you're not considered high income, your Medicare B premium that covers doctors’ visits and outpatient procedures will increase to $99.90 per month.  If you're covered by Medicare and you're considered high income, you can expect a Medicare Part B surcharge.  The surcharge is based on your 2009 tax return.  The surcharge begins at adjusted gross income of over $85,000 if you're single and $170,000 if you're married.  If your income decreased since 2009, you can dispute the surcharge, but you must do it right away.   If you plan to dispute the charge, make sure you call the local Social Security office to file your dispute right away.

Your broker will now report your tax basis to the IRS when you sell
When your broker sends you a letter that asks you to verify the basis of your investments (that’s the amount you paid for the investment), make sure you look at what the broker says is your basis.  If there is an error, notify your broker that the basis they reflect is not correct.  A problem could occur if you have held the investment for a long time or transferred that investment to your current broker, etc.

Stock Options
Companies who issue stock options are now required to report to the IRS the grant date and the exercise price of any stock options that were exercised by employees.

Tax Credit for First Four Years of College
Through 2012, the American Opportunity Credit of up to $2,500 is designed to help parents and students pay part of the cost of the first four years of college. The credit is available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Tuition, related fees, books, equipment (including laptop computers) and other required course materials generally qualify. 

Reminders for Business Filers ~

Form 1099-K
Starting in 2011, you received Form 1099-K from the party that processes credit card payments made to your business.  Originally the IRS was going to require that credit card payments be tracked and reported separately from other payments on business tax returns.  The IRS has backed off on this recordkeeping requirement for the business but they will still compare the amount reported on Forms 1099-K with the total income you report on your business tax return.

Office in Home
If you have an office in home, your office must be used exclusively for your business and regularly for your business (little personal use is allowed).  Also, the 1st business related trip of the day from your qualified home office is not deductible unless you qualify under special rules.  It is considered part of your personal commute.  The trips after that 1st stop of the day are deductible business miles if the stop is business related.

Telephone expense
If you have a business that you operate in your home, you must have a separate business telephone line to deduct your telephone expenses.  If you have a personal phone from which you make business calls, you may deduct only the business long-distance amount as telephone expense.

Business Use versus Personal Use Property Deductions
This is a category that includes home computers, auto expenses, etc.  The IRS examines the personal use versus the business use.  How much of the time do you spend on your computer that is personal use as opposed to business use?

Travel and Meal & Entertainment Expense
In addition to a receipt, make sure you keep a log noting the name of the client, the purpose of the meeting, the cost, and who attended.  Your credit card statement is not considered substantiation.

Business travel expense
Keep a log of your business mileage.  Without a mileage log, no deduction is allowed.  Again, keep track of the name of the client and business purpose of the meeting.  Most of you use the standard mileage rate. For 2012, it is 55.5 cents per mile.

Forms 1099-MISC
The IRS is now penalizing businesses that file these forms later than the required filing deadline.  So, if you paid more than $600 to a business or individual for services rendered, you are required to issue Form 1099-MISC.  Forms must be mailed to the recipients no later than January 31, 2013.  Your forms must be mailed to the IRS no later than February 28, 2013 (April 1, 2013 if e-filed).  If you are required to issue the forms and do not, your deduction may be disallowed by the IRS.

Business Inventory
The IRS continues to place an increased emphasis on the physical inventory of businesses as of December 31st each year.  Make sure that if your business does have inventory, you count that inventory the last day of each year. 

Sales Tax
Sales and use tax audits are increasing.  In general, you must pay sales or use tax on any item you purchase that is not re-sold (e.g. office supplies, equipment, etc.).  You must collect sales tax on any item sold to non-exempt customers.  This is includes items purchased online on which you paid no sales tax.

Corporate records 
To avoid losing the S Corp or C Corp liability protection, make sure that your corporate records are maintained on an annual basis.  S and C corporations are required to maintain minutes while LLC's have no such requirement.

Section 179 Expense for Businesses
The maximum Section 179 deduction and investment limit for 2012 is $139,000 for $560,000 in qualifying property.  In addition to California, many states do not conform to these larger limits so an adjustment will be made on your state return.

Bonus Depreciation
For purchases made in 2012, bonus depreciation is 50% for qualified investments and property purchases.  Bonus depreciation is set to expire after 2012.

This written advice is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

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