FBAR Requirements--Foreign account compliance summary

FBAR Requirements--Foreign account compliance summary

(1) US citizen required to file form TD F 90-22.1 if max value of foreign account over $10,000 at any point during the year.  (This TD F 90-22.1 is a separate form from tax return. Filed separately, no later than June 30th with US Treasury. Not extendable).
• Financial accounts include:
 :: Securities
 :: Brokerage
 :: Savings
 :: Demand
 :: Checking
 :: Deposit
 :: Time deposit or other account at institution
 :: Person performing as financial institution

(2) File 1040 Schedule B (Ask the question - Foreign accounts? FBAR?) even if no interest or dividend income.

(3) File form #8938 if max value of account exceeds $50,000 at any point during the year. Must use US Treasury FMS website 
Treasury Reporting Rates of Exchange to calculate foreign currency exchange rate. 

Note: There's nothing wrong with having a foreign account, as long as it's not being used for fraud. Avoid "shades of UBS".

Advantages & Disadvantages of Business Forms

Advantages & Disadvantages of Business Forms
Choosing the Right Business Form
Overview:  There are three basic business forms available for most business owners:

• Proprietorship (Schedule C)
• Regular Corporation (C Corporation)
• S Corporation

The matrix on below provides an excellent overview of the differences.  This section highlights important strategies for the different forms of business.

Description	Schedule C Proprietorship	Regular Corporation	S Corporation
Reasonable salary*	Not an issue	Deductible	Deductible
Unreasonable (excessive) salary	Not an issue	Not deductible by corporation;  dividend to shareholder/employee	Generally, not an  issue for shareholder/ employees
Social security taxes	Self-Employment tax based on bottom-line Schedule C income	Taxed 50% to  corporation and 50% to employee	Same as regular corporation
Net income	Taxed at individual tax rates	Taxed at corporate tax rates	Taxed at individual tax rates
Net loss	Deducted on individual return against other income; unabsorbed losses may be carried back 2 years and forward 20 years	Net loss on corporate return is carried back 2 years and forward 20 years	Deducted and carried back  and forward  on individual  return up to shareholder’s  basis in stock and loans  to corporation
Medical insurance premiums on owner	Deduct 100% on front of Form 1040	Deducted on corporate return	Same as proprietorship including ability to deduct 100% on front of Form 1040
Disability premiums on owner	Not deductible	Deductible to corporation; taxable to recipient of benefits	Not deductible by corporation or individual
Group term life insurance premiums on life of owner	Not deductible	Deductible as a tax-free fringe benefit on first $50,000 of coverage	Not deductible
Retirement benefits	Basically same as corporation	Basically same as individual	Basically same as individual
Supper money for owner	Not deductible	Deductible	Questionable
Election required	No	No	Yes – strict time limits
Ownership	Individual	Stock can be more than one class	Only individuals, estates, and trusts restricted to one class of stock (voting rights can differ)
Liquidation of ownership	Assets are sold and individual is taxed	Sale of stock or sale of assets and liquidation of corporation (double-tax problem)	Sale of stock or assets, no double tax problem, except for “built in gains”
Liability	Individual	Corporate, except for professional   corporations  wherein  professionals  remain liable under malpractice statutes	Same as regular corporation
Asset expensing IRC §179	Up to $500K if assets placed in service total less than $2MM	Claimed on  corporate return  with same  limits that apply  to an individual	Reflected on S Corporation  return and claimed  on individual return
Paperwork	Simplest form	Two separate entities for income tax purposes… payroll taxes… corporate minutes	Same as regular corporation;  however, may involve  more complex  state filing requirements
Hiring child	No social security tax if child under 18	Social security taxes apply	Social security taxes apply (may gift stock to children and eliminate social security on distribution, in addition, can still benefit from shifting income).

* Reasonable compensation:  Services performed by shareholder/owners must be reasonable compensated.  Reasonable compensation is subject to wide discretion. (Roob v. Commissioner, 50 TC 891, 898 (1968).  See Radtke vs. US; 712F. Supp. 143; Aff'd 895 F.2d 1196 (1990) in which no compensation was paid).   It must take into account: 

• Services performed
• Responsibilities involved
• Time spent
• Size and complexity of business
• Prevailing economic conditions
• Compensation paid by comparable firms for comparable services
• Salary paid to company officers in prior years

General Rules of Thumb

1. High medical expenses -- regular corporation
2. High disability premiums -- regular corporation
3. Income $20,000 to $70,000 -- S-Corporation to save social security taxes
4. High liability exposure -- corporation
5. Hiring children -- Sole proprietorship
6. Gift/Leaseback -- any form, but assets must be owned individually to create benefits
7. Appreciating assets -- S-Corporation or proprietorship

Reference:  Botkin, Sandy, Tax Strategies for Business Professionals, The Tax Reduction Institute

Alimony? Taxpayer and ex-spouse agree to a lump sum settlement

Alimony? Taxpayer and ex-spouse agree to a lump sum settlement and terminate annual alimony payments......
There is a QDRO and a distribution from the payer's 401K. The ex-spouse will be receiving the 1099-R. Does this still get reported as alimony paid since a 1099-R will be issued?

The answer is:  No.

The payer does not get to claim the deduction if he never claimed the income. Since it is a 401K he did not pay tax on it when he earned it and if the 1099-R is going to the ex-spouse then he will not have taxable income on it now either. That is one basic tenant of taxes that holds true --  if it is not included in income, then it is not able to be deducted.  Ipso facto, no alimony deduction.

Generally, when there is a QDRO, the purpose of the getting the court to order this distribution is to equalize the sharing of marital assets. Sharing/splitting marital assets does not give rise to alimony at all.

Typically when the distribution is made pursuant to a QDRO, the distribution goes to the spouse who does not own that account. If the spouse rolls it directly into his/her IRA, the distribution is not taxable to anyone.

If s/he takes the money out, it is taxable to the recipient, not to the original account holder.

Read more about it here: Retirement Topics - QDRO - Qualified Domestic Relations Order  

You may want to read more about what is alimony, here Alimony

What the IRS does not include in their description here, but should, is the timing of alimony payments. They only include that information in the explanation about alimony recapture. Read here: Recapture of Alimony

There is no alimony unless it's cash paid to (or paid on behalf of) the ex-spouse as required by the settlement agreement.

How to Take the High Road

How to Take the High Road
You may have faced moments when you want nothing more than to react unnecessarily when someone tries to push your buttons. Taking the high road will keep the peace. It's the best way to handle conflict and maintain your own moral high ground. If somebody is giving you flack, here are a few tips to "stay Zen".

Step 1 of 6
Take a deep breath. In for five, out for five. Close your eyes to get the full effect. Repeat if necessary until you feel like you're back into control.

Step 2 of 6
Smile. Look the person directly in the eye and give them a knowing smile. Usually, people find this disarming and want to smile back. Sometimes, this is all it takes.

Step 3 of 6
Respond in a manner that will not escalate the situation. If somebody cuts in front of you in line, smile and say, "Oh, are you in line for the _____, too? I think it starts back there," and point to the rear of the line. Follow this up with a compliment. "Oh, I love your purse," or "Great t-shirt. That's so funny!" will generally disarm any potential hothead.

Step 4 of 6
Find some perspective, (look at the reality of things) even if it's hard. If this person has the audacity to simply glare at you and not give in to the request, resist any urge to rap them upside the head. Say to yourself, "will this possibly matter in five years?" If it won't, then grin and bear it. Don't let a jerk ruin your day over something trivial.

Step 5 of 6
Squeeze out an ounce of compassion. Really open your eyes and look at the person who is bothering you. Maybe they're having a truly awful day, or maybe they are in a hurry for a good reason. Try to assume that these possibilities are true, and then focus on something positive.

Step 6 of 6
Shake it off and play it forward if you still think you are likely to explode. Find a place in your day to do something nice for a someone. Open a door, compliment someone, pick up a piece of trash and throw it away. You'll get a great boost from any random act of kindness and you'll find yourself back on the high road once again.

Courtesy:  eHow

ATRA 2012 for Businesses

ATRA 2012 for Businesses
On January 2, President Obama signed the American Taxpayer Relief Act of 2012 into law. The Act provides many business incentives aimed at stimulating the economy. The two biggest incentives that may affect you are the increased expensing allowance and the increased bonus depreciation provisions.

For tax years beginning in 2012 and 2013, you can now expense up to $500,000 of qualified property placed into service in those years (i.e., the Section 179 deduction). Under prior law, the amount you could expense for 2012 and 2013 was $139,000 and $25,000, respectively. In addition, the total amount of property that you can place into service before having to reduce your Section 179 deduction has been increased to $2,000,000 for 2012 and 2013. With respect to the amounts that may be expensed, the new law allows you to expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.

As you know, businesses can recover the cost of capital expenditures over time through depreciation. Before 2012, you were entitled to take 100 percent bonus depreciation for investments placed in service after September 8, 2010 and before 2012 and 50 percent bonus depreciation for investments placed in service during 2012. This provision was scheduled to end after 2012. However, the Act extends the 50 percent expensing provision for qualifying property purchased and placed in service before January 1, 2014 (before January 1, 2015, for certain longer-lived and transportation assets) and also allows you to elect to accelerate some AMT credits in lieu of taking the bonus depreciation.

Numerous other favorable tax incentives were extended under the new law. The following is a list of some of the tax provisions that were extended through 2013:

(1) the tax credit for research and experimentation expenses;

(2) the new markets tax credit;

(3) employer wage credit for activated military reservists;

(4) the work opportunity tax credit;

(5) the three-year depreciation for race horses two years old or younger;

(6) the 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements;

(7) the seven-year recovery period for motorsports entertainment complexes;

(8) the rule for adjusting stock of an S corporation making charitable contributions of property;

(9) the reduction of the recognition period for the built-in gains of S corporations;

(10) the 100 percent exclusion from gross income of gain from the sale or exchange of certain small business stock;

(11) the 9 percent low-income housing tax credit rate for newly constructed non-federally subsidized buildings;

(12) the deduction for contributions of food inventory by taxpayers other than C corporations;

(13) tax incentives for investment in empowerment zones;

(14) the deduction for income attributable to domestic production activities in Puerto Rico;

(15) tax rules relating to payments between related foreign corporations;

(16) rules for the tax treatment of certain dividends of regulated investment companies (RICs); and

(17) the subpart F income exemption for income derived in the active conduct of a banking, finance, or insurance business.

As you can see, the provisions in the American Taxpayer Relief Act of 2012 are quite extensive. Please call me at your earliest convenience so we can discuss how to best leverage these provisions to the advantage of your business.

Courtesy: Parker Tax Pro Library: January 17, 2013 - Executive Editor at Parker Tax Publishing

*CIRCULAR 230 DISCLOSURE: Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

ATRA 2012 for Moderate-Income Individuals

ATRA 2012 for Moderate-Income Individuals 
In the waning hours of January 1, Congress passed the American Taxpayer Relief Act (ATRA) of 2012 as part of an effort to resolve the fiscal cliff dilemma. President Obama signed the Act into law on January 2. As a result of ATRA, your taxes will be lower for 2013 than what they would otherwise have been without the new law. The law also extended, and in some cases made permanent, certain deductions that had expired in 2011, which if applicable to your situation, may also decrease your taxes for 2012.

Probably the most important provision in the new law is the permanent extension of lower tax rates for low, middle, and upper-middle income taxpayers for 2013 and later years. The 10 percent (i.e., lowest) individual income tax bracket that was scheduled to expire at the end of 2012, has been permanently extended. The 25, 28, 33, and 35 percent individual income tax brackets that were also scheduled to expire at the end of 2012 have been permanently extended. Higher tax rates apply to taxpayers with adjusted gross income above certain amounts (i.e., $400,000 for individual filers, $425,000 for heads of households, $450,000 for married taxpayers filing jointly, and $225,000 for married filing separately status). The top tax rate is 39.6 percent.

Another key provision is the extension of lower capital gain rates for most taxpayers. For 2013, the capital gains and dividend rates for taxpayers below the 25 percent bracket continues to be zero percent. For those in the 25 percent bracket, the capital gains and dividend rates continue to be 15 percent. For higher income taxpayers, the rate is increased to 20 percent. As under prior law, higher rates apply to gain or loss from the sale of collectibles and the eligible gain from the sale of qualified small business stock, as well as unrecaptured Section 1250 gain, regardless of the taxpayer's tax bracket.

The following are some of the more significant changes under the new tax law that may affect you:

Permanent AMT Relief

ATRA increases the alternative minimum tax (AMT) exemption amounts for 2012 to $50,600 (individuals), $78,750 (married filing jointly), and $39,375 (married filing separately). These amounts are substantially higher than the exemption amounts that were scheduled to be in effect for 2012. Thus, many individuals that might have been subject to the AMT for 2012 will escape the additional tax imposed by the AMT. However, these exemptions continue to phase-out for alternative minimum taxable income over certain amounts. In addition, ATRA indexes the exemption and phase-out amounts for years after 2012 and allows nonrefundable personal credits to reduce AMT.

Permanent Repeal of Personal Exemption Phase-out

Under the personal exemption phase-out (PEP), personal exemptions are phased out for taxpayers with adjusted gross income (AGI) above a certain level. Previous legislation temporarily repealed the PEP through 2012. ATRA permanently extends the repeal of the PEP on incomes at or below $250,000 (individual filers), $275,000 (heads of households) and $300,000 (married filing jointly), and $150,000 (married filing separately) for tax years beginning after December 31, 2012.

Permanent Repeal of Deductions Limitation

Generally, taxpayers itemize deductions if their total deductions are more than the standard deduction amount. Under prior law, the amount of itemized deductions a taxpayer could claim was reduced to the extent the taxpayer's AGI was above a certain amount. This rule was temporarily repealed for itemized deductions through 2012. ATRA permanently extends the repeal of the deduction limitation on incomes at or below $250,000 (individual filers), $275,000 (heads of households), $300,000 (married filing jointly), and $150,000 (married filing separately) for tax years beginning after December 31, 2012.

Modifications to Estate Tax; Portability Made Permanent

Legislation enacted in 2001 phased out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. Legislation enacted in 2010 set the exemption at $5 million per person with a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount was indexed beginning in 2012. ATRA makes permanent the indexed exclusion amount and indexes that amount for inflation going forward, but sets the top tax rate at 40 percent for estates of decedents dying after December 31, 2012. The exclusion is $5,120,000 and $5,250,000 for 2012 and 2013, respectively.

ATRA also permanently extends unification of the estate and gift taxes and makes permanent the provision that allowed the executor of a deceased spouse's estate to transfer any unused exemption amount to the surviving spouse.

Extension of Deduction for Expenses of Elementary and Secondary School Teachers

The rule that allowed elementary and secondary school teachers to deduct from gross income up to $250 of qualified expenses they paid during the year ($500 on a joint return if both spouses were eligible educators) expired for tax years beginning after 2011. ATRA extends the deduction through tax years beginning before 2014.

Extension of Exclusion of Income from Discharge of Qualified Principal Residence Indebtedness

For certain tax years before 2013, taxpayers could exclude from income the discharge of qualified principal residence debt. This provision was scheduled to expire for debt discharged after December 31, 2012. ATRA extends the exclusion to debt that is discharged before January 1, 2014.

Extension of Parity for Exclusion for Employer-Provided Transportation Benefits

The value of employer-provided qualified transportation benefits (such as transportation in a commuter highway vehicle between home and work, transit passes, and qualified parking) is excludable from the employee's gross income to the extent the value does not exceed certain dollar limitations. In recent years, the maximum monthly excludable amount for combined employer-provided transit passes and vanpool benefits was equal to the maximum for employer-provided parking. This parity in qualified transportation fringe benefits expired January 1, 2012, so that effective January 1, 2012, the amount that could be excluded as qualified transportation fringe benefits was limited to $125 a month in combined transit pass and vanpool benefits and $240 a month in qualified parking benefits. ATRA extends the parity in qualified transportation fringe benefits through December 31, 2013. Thus, for 2012, the monthly limit on the exclusion from gross income for combined transit pass and vanpool benefits is $240.

Extension of Mortgage Insurance Premiums Treated as Qualified Residence Interest

A taxpayers' ability to treat qualified mortgage insurance as qualified residence interest expired for amounts paid or accrued after December 31, 2011, or for amounts properly allocable to any period after that date. ATRA extends this treatment to amounts paid or accrued before January 1, 2014 (and not properly allocable to any period after 2013).

Extension of State and Local General Sales Taxes Deduction

The election to deduct state and local general sales taxes (instead of state and local income taxes) as an itemized deduction had expired for tax years beginning after December 31, 2011. ATRA extends the availability of that election to tax years beginning before January 1, 2014.

Extension of Above-the-Line Deduction for Qualified Tuition and Related Expenses

For years before 2012, taxpayers with modified adjusted gross income below certain thresholds could deduct up to $4,000 of qualified education expenses paid during the year for themselves, their spouses, or their dependents. The maximum deduction was $4,000 for an individual whose adjusted gross income for the tax year did not exceed $65,000 ($130,000 in the case of a joint return), or $2,000 for other individuals whose adjusted gross income did not exceed $80,000 ($160,000 in the case of a joint return). ATRA extends the availability of the deduction to tax years beginning before January 1, 2014.

Extension of Student Loan Interest Deduction

Taxpayers with modified adjusted gross income below certain thresholds may deduct up to $2,500 of interest paid on a qualified student loan in computing adjusted gross income. This provision was scheduled to be repealed and replaced with a less generous provision for tax years beginning after 2012. However, ATRA extends permanently the up-to-$2,500 deduction rule.

Extension of Credit for Energy-Efficient Existing Homes

A taxpayer is allowed a 10-percent nonbusiness energy property credit for the purchase of qualified energy efficiency improvements to existing homes. Additionally, a taxpayer can claim specified credits for the purchase of specific energy efficient property originally placed in service by the taxpayer during the tax year. There is a lifetime limitation of $500 on the total amount of nonbusiness energy property credit that may be claimed. There are also dollar limitations on the amount of the credit that may be claimed for specific types of qualified energy efficiency improvements and residential energy property. This credit expired for any property placed in service after December 31, 2011. ATRA extends the availability of the credit to property placed in service before January 1, 2014.

Extension of Credit for Two- or Three-Wheeled Plug-in Electric Vehicles

ATRA reforms and extends for two years, 2012 and 2013, the individual income tax credit for highway-capable plug-in motorcycles and three-wheeled vehicles.

Extension of American Opportunity Tax Credit

ATRA also extended the American Opportunity tax credit for five years through 2018. A taxpayer who pays qualified education expenses may elect to claim an American opportunity tax credit of up to $2,500 per year for each eligible student. The amount of the credit for each student is computed as 100 percent of the first $2,000 of qualified education expenses paid for the student and 25 percent of the next $2,000 of such expenses paid.

Child Tax Credit

The child tax credit was scheduled to be reduced from $1,000 to $500 in 2013. ATRA makes the $1,000 child tax credit permanent and extends for five years certain modifications relating to the additional child tax credit that will enable more individuals to claim the credit.

Earned Income Tax Credit

Working families with two or more children currently qualify for an earned income tax credit equal to 40 percent of the family's first $12,570 of earned income. Prior law increased that percentage to 45 percent for families with three or more children for tax years through 2012. ARTA extends the 45 percent rate for such families through 2017. ARTA also increases the beginning point of the phase-out range for all married couples filing a joint return (regardless of the number of children) to lessen the marriage penalty.

Marriage Tax Penalty Relief

ATRA permanently extends marriage tax penalty relief for the standard deduction, the 15 percent bracket, and the earned income tax credit for tax years beginning after December 31, 2012.

Extension of Emergency Unemployment Compensation Program and Extended Benefit Provisions

ATRA extends for one year the availability of benefits in all tiers of Federal Emergency Unemployment Compensation, and provides for a continuation of unemployment benefits for railroad workers for one year.

As you can see, the provisions in the American Taxpayer Relief Act of 2012 are quite extensive. Please call me at your earliest convenience so we can discuss how these changes will impact your tax situation.

Courtesy:  Parker Tax Pro Library: January 17, 2013 - Executive Editor at Parker Tax Publishing

*CIRCULAR 230 DISCLOSURE: Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

ATRA 2012 for High-Income Individuals

ATRA 2012 for High-Income Individuals 
In the waning hours of January 1, Congress passed the American Taxpayer Relief Act (ATRA) of 2012 as part of an effort to resolve the fiscal cliff dilemma. President Obama signed the Act into law on January 02, 2013. While the new law reduces taxes on many low, middle, and upper-middle income taxpayers, it is not so favorable for high-income taxpayers. Under ATRA, higher tax rates apply to taxpayers with adjusted gross income above certain thresholds (i.e., $400,000 for individual filers, $425,000 for heads of households, $450,000 for married taxpayers filing jointly, and $225,000 for married filing separately status). The top tax rate is 39.6 percent.

Additionally, while the lower capital gain rates of zero and 15 percent were extended for taxpayers in the 25 percent and lower tax brackets, the capital gain rate for taxpayers in higher tax brackets is increased to 20 percent. As under prior law, higher rates apply to gain or loss from the sale of collectibles and the eligible gain from the sale of qualified small business stock, as well as unrecaptured Section 1250 gain, regardless of the taxpayer's tax bracket.

Other provisions that may cause you to pay more tax in 2013 than in prior years include the phaseout of personal exemptions and the phaseout of overall itemized deductions if your income exceeds a certain threshold (i.e., $250,000 (individual filers), $275,000 (heads of households), $300,000 (married filing jointly), and $150,000 (married filing separately)) for tax years beginning after December 31, 2012.

ATRA also made permanent several estate and gift tax changes. The exemption from estate and gift taxes was increased to $5,250,000 for 2013 and indexing of the exemption amount was made permanent going forward. However, the top estate tax rate was increased from 35 percent to 40 percent for estates of decedents dying after December 31, 2012. ATRA also makes permanent the provision that allowed the executor of a deceased spouse's estate to transfer any unused exemption amount to the surviving spouse.

While ATRA increased the Alternative Minimum Tax (AMT) exemptions for 2012, those exemptions phase out for income over certain amounts. The exemption amounts for 2012 are $78,750 (joint return), $50,600 (single and head of household), $39,375 (married filing separately) and are reduced (but not below zero) by an amount equal to 25 percent of the amount by which the alternative minimum taxable income of the taxpayer exceeds (1) $150,000 in the case of a joint return or a surviving spouse; (2) $112,500 in the case of an individual who is unmarried and not a surviving spouse; and (3) $75,000 in the case of a married individual filing a separate return. ATRA indexes the exemption and phase-out amounts for years after 2012 and allows nonrefundable personal credits to reduce AMT.

The new law isn't entirely bad news, as it did extend several favorable provisions from the Bush era tax cuts. The following are some ATRA extensions that may help reduce your taxes this year.

Extension of Tax-Free Distributions from IRAs for Charitable Purposes

A qualified charitable distribution (QCD) from an IRA is excluded from gross income. This exclusion expired for distributions made in tax years after December 31, 2011. ATRA extends the availability of the exclusion to distributions made in tax years beginning after December 31, 2011, and before January 1, 2014.

If a taxpayer makes a QCD during January 2013, he or she can elect to have the QCD treated as if it were made in 2012. Also, the taxpayer may treat any portion of a distribution from an IRA during December 2012 as a QCD to the extent (1) that portion is transferred in cash after the distribution to an eligible charitable organization before February 1, 2013, and (2) that portion is part of a distribution that would meet the requirements of QCD but for the fact that the distribution was not transferred directly to the organization.

Extension of Special Rule for Contributions of Capital Gain Real Property Made for Conservation Purposes

The deduction for qualified conservation contributions is generally limited to 50 percent of adjusted gross income (100 percent, in the case of certain qualified farmers and ranchers), minus the deduction for all other charitable contributions. In other words, the 30-percent limitation on contributions of capital gain property by individuals does not apply to qualified conservation contributions. The special percentage limitations expired for contributions made after December 31, 2011. ATRA extends the availability of the special percentage limitations to contributions made in tax years beginning before January 1, 2014.

Extension of State and Local General Sales Taxes Deduction

The election to deduct state and local general sales taxes (instead of state and local income taxes) as an itemized deduction was to expired for tax years after December 31, 2011. ATRA extends the availability of that election to tax years beginning before January 1, 2014.

Extension of Temporary Exclusion of 100 Percent of Gain on Certain Small Business Stock

A noncorporate taxpayer can exclude 50 percent (60 percent for certain empowerment zone businesses) of gain from the sale of certain small business stock acquired at original issue and held for at least five years. For stock acquired after February 17, 2009 and on or before September 27, 2010, the exclusion was increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2012, the exclusion was 100 percent and the AMT preference item attributable for the sale is eliminated. Qualifying small business stock is from a C corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer's basis in the stock or $10 million of gain from stock in that corporation.

ATRA extends the 100-percent exclusion and the exception from minimum tax preference treatment for two years (i.e., for stock acquired before January 1, 2014). In the case of any stock acquired after February 17, 2009, and before January 1, 2014, the date of acquisition for purposes of determining the percentage exclusion is the date the holding period for the stock begins.

Extension of Credit for Energy-Efficient Existing Homes

A taxpayer is allowed a 10-percent nonbusiness energy property credit for the purchase of qualified energy efficiency improvements to existing homes. Additionally, a taxpayer can claim specified credits for the purchase of specific energy efficient property originally placed in service by the taxpayer during the tax year. There is a lifetime limitation of $500 on the total amount of nonbusiness energy property credit that may be claimed. There are also dollar limitations on the amount of the credit that may be claimed for specific types of qualified energy efficiency improvements and residential energy property. This credit was to expire for any property placed in service after December 31, 2011. ATRA extends the availability of the credit to property placed in service before January 1, 2014.

As you can see, the provisions in the American Taxpayer Relief Act of 2012 are quite extensive. Please call me at your earliest convenience so we can discuss how these changes will impact your tax situation.

Courtesy: Parker Tax Pro Library: January 17, 2013 - Executive Editor at Parker Tax Publishing

CIRCULAR 230 DISCLOSURE: Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

Can't Pay Taxes? What Do You Do?

Courtesy: MoneyTalksNews
You filled out your taxes and suddenly realize you owe money and you can't pay. What do you do?

EITC check-list - Who May Claim the EITC?

EITC check-list - Who May Claim the EITC?

Earned Income Credit (Refundable)
To claim the EITC, taxpayers must meet all of the following rules:
○ Investment income must be $3,200 (2012) or less for the year.
○ If married, the taxpayers cannot file separately; they must file a joint return (MfJ).
○ Taxpayer(s) and all qualifying children must have a valid Social Security number.
○ Taxpayer must be a US citizen or a nonresident alien married to a US citizen or resident alien and filing a joint return.
○ Taxpayer cannot file Form 2555 related to foreign-earned income.
○ Taxpayer cannot be the qualifying child of another person.
○ Taxpayer must have earned income; however, earned income and AGI cannot be more than an amount specified:
Preview of 2012 Tax Year

Taxpayers with no qualifying children must meet the following criteria:

○ Be age 25 but younger than 65 at the end of the year
○ Live in the United States for more than half of the year
○ Not qualify as a dependent of another person

Taxpayers with a qualifying child must meet the relationship, age, and residency tests:
○ Relationship Test – To be a qualifying child, a child must fall into one of the following categories:
• Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them (for example, a grandchild)
• Brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them (for example, a niece or nephew)
○ Age Test – A qualifying child must be as follows:
• Younger than the taxpayer or taxpayer’s spouse if filing a joint return, and
• Under age 19 at the end of the year, or
• A full-time (five months or more) student under age 24 at the end of the year
• Permanently and totally disabled at any time during the year, regardless of age
○ Residency Test – Child must have lived with taxpayer in the US for more than half of the tax year.  Important: Sometimes a child meets the rules to be a qualifying child of more than one person. 

However, only one person can treat that child as a Qualifying Child and claim the EITC using that child. Taxpayers can choose which person will claim the EITC. If the taxpayers do not reach an agreement and more than one person claims the EITC using the same child, the tiebreaker rule applies, and the parent with whom the child lived the longest during the year receives the credit. If the child lived with each parent the same amount of time, the parent with the higher AGI receives the credit.

In summary, there are two categories that qualify for the EITC: 
• Qualifying Child and 
• Qualifying Relative. 
A third category, a Person who qualifies as a dependent but is not related to the Taxpayer, has to live with the taxpayer the full year and does not qualify the Taxpayer for HofH status or credits.  A QC or QR only has to live with the Taxpayer for more than half the year, and qualifies the taxpayer for HofH status and at least some credit.

$400K a year is the new 'rich'! - American Taxpayer Relief Act of 2012

$400K a year is the new 'rich'! - American Taxpayer Relief Act of 2012

ATRA 2012 permanently extends a number of tax provisions that had already expired at the end of 2011 and 2012, revises tax rates on ordinary and capital gain income, modifies the estate tax, and extends unemployment benefits, Medicare payments and farm subsidies. Some tax provisions, however, are extended only temporarily.

The following is a very brief summary of the tax provisions impacting individuals.

Individual Income Tax Rates
ATRA permanently retains the 10%, 15%, 25%, 28%, and 33% income tax brackets. The 35% tax bracket ends at $400,000 for single filers. Above this threshold, there's a new 39.6% tax bracket. Thresholds for the new 39.6% bracket for 2013 will be

MFJ or Surviving Spouse	$450,000
Head of Household	$425,000
Unmarried Individual	$400,000
Married Filing Separately	$225,000
Estate or Trust	$11,950

ATRA permanently retains the 0% and 15% tax rates on qualified dividends and long-term capital gains, and adds a new 20% tax rate that would apply to taxpayers who fall within the new 39.6% tax bracket. Which capital gains tax rate will apply depends on what tax bracket a person is in. The new capital gains tax rates for 2013 and future years will be

Tax Bracket	Capital Gains Rate
10% and 15%	-0-%
25%, 28%, 33% or 35%	15%
39.6%	20%
Net Investment income:  MfJ                > $250K Unmarried     > $200K MfS               > $125K Additional Medicare Tax Wages & S/E income: MfJ                > $250K Unmarried     > $200K MfS               > $125K (withheld by employer)	3.8%  Medicare surtax 0.9% Medicare surtax

Alternative Minimum Tax
ATRA provides the following AMT exemption amounts for 2013, and provides that these amounts will be indexed for inflation annually: 

MFJ or Surviving Spouse	$78,750
Head of Household	$50,600
Unmarried Individual	$50,600
Married Filing Separately	$39,375
Estate or Trust	$23,100

Estate Tax Rates
ATRA permanently extends the $5 million exclusion, indexed to inflation, and unified exemption amount with portability. The new top tax rate for estates is 40%.

Limitations on Deductions
Itemized deductions will be limited. The total amount of itemized deductions that are allowable as a deduction will be reduced by the lesser of 3% of the taxpayer's adjusted gross income (AGI) over the threshold amount or by 80% of otherwise allowable itemized deductions. The threshold amounts at which itemized deductions would start to be reduced are:

MFJ or Surviving Spouse	$300,000
Head of Household	$275,000
Unmarried Individual	$250,000
Married Filing Separately	$150,000

These threshold amounts would be indexed for inflation for years after 2013.

Similarly, personal exemptions will be limited. Taxpayers would see their total personal exemptions reduced by two percent for each $2,500 (or fraction thereof) by which adjusted gross income (AGI) exceeds the threshold. The threshold amounts at which personal exemptions would start to be reduced are the same as for itemized deductions, namely:

MFJ or Surviving Spouse	$300,000
Head of Household	$275,000
Unmarried Individual	$250,000
Married Filing Separately	$150,000

These threshold amounts would be indexed for inflation for years after 2013.

Other Individual Tax Deductions
• The student loan interest deduction is permanently extended. ATRA eliminates the rule that the deduction can be claimed only during the first 60 months of repayment.
• The classroom expenses deduction of up to $250 is temporarily extended through the end of 2013.
• Mortgage insurance premiums will continue to be deductible as part of the mortgage interest deduction through the end of 2013.
• The sales taxes deduction, in lieu of a deduction for state income taxes, is temporarily extended through the end of 2013.
• The charitable deduction for contributing real property for qualified conservation purposes is temporarily extended through the end of 2013.
• The above-the-line tuition and fees deduction is temporarily extended through the end of 2013.

Various Individual Tax Credits
• The child tax credit remains unchanged and is permanently extended. The maximum amount of the child tax credit is $1,000, and the credit is partially refundable. However, the provision the reduces the earnings threshold for the refundable portion of the child tax credit to $3,000 will expire at the end of 2017.
• The dependent care tax credit remains unchanged and is permanently extended. Daycare expenses up to $3,000 for one child and $6,000 for two or more children qualify for the tax credit, and these amounts are not indexed for inflation.
• The adoption credit is permanently extended. The credit is worth up to $10,000 (indexed for inflation).
• Permanently extended is the earned income tax credit for families with three or more dependents.
• The American opportunity tax credit is extended temporarily through the end of 2017.

Tax-Advantaged Savings Accounts
• ATRA permanently extends the $2,000 annual contribution limit to Coverdell Education Savings Accounts.
• The tax-free charitable distribution from IRAs of up to $100,000 per year is temporarily extended through the end of 2013. ATRA provides rules for handling IRA distributions made in December 2012 and January 2013 so as to enable IRA beneficiaries to make charitable distributions for the 2012 tax year.

Employee Benefits
• Employer provided educational assistance is permanently extended. Employers are permitted to reimburse employees for undergraduate and graduate level courses.
• Mass transit and parking benefits set at maximum of $240 per month, which is temporarily extended through the end of 2013. The amount set for tax-free reimbursement of mass transit and parking benefits is set at $240 per month for the year 2012, up from $230 a month in 2011.

Exclusions from Income
• National Health Service Corps Scholarship program and F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program are granted permanent tax-free status for recipients.
• Alaska Native Settlement Trusts are permitted to tax income to the Trust and not to the beneficiaries, a provision made permanent by ATRA.
• Federal tax refunds are now permanently disregarded in determining income and asset eligibility factors for federal assistance programs.
• The tax-free exclusion for cancellation of debt income relating to a principal residence is temporarily extended through the end of 2013.

This list of tax changes in the American Taxpayer Relief Act is not comprehensive. There are further provisions covering business deductions, business credits, and energy tax incentives.

Resources:
H.R. 8 on Thomas
H.R. 8 (pdf) from GPO
Fact Sheet from the White House
Statement by the President on the Tax Agreement
Joint Committee on Taxation: Estimated Revenue Effects (JCX-1-13)
Congressional Budget Office: Estimate of the Budgetary Effects of H.R. 8 (pdf)
C-SPAN: House Debate on Rule and General Debate on HR 8
Tax Policy Center: Congress Kicks the Fiscal Can off the Front Stoop
Tax Foundation: Modeling the Economic and Distributional Effects of the Senate Tax Bill
Dan Shaviro: The Fiscal Cliff Deal
Paul Caron: CBO on Fiscal Cliff Deal: $1 in Spending Cuts ($15 Billion) for Every $41 in Tax Increases ($620 Billion)
Ezra Klein: Everything You Need to Know about the Fiscal Cliff Deal
Journal of Accountancy: Congress Passes Fiscal Cliff Act

The Internal Revenue Service has updated various tax parameters for the year 2013 in IR-2013-4 and Revenue Procedure 2013-15.

Courtesy: William Perez, your Guide to Taxes