Dramatic tax increases scheduled to go into effect in 2013 make 2012 tax planning imperative. The following taxes may be impacted:
· Not only are the Bush Administration tax cuts set to expire, but a new 3.8 percent surtax on investment income and a possible reinstated claw-back of itemized deductions could raise the tax rate on ordinary income to as high as an effective 44.6 percent for some taxpayers.
· Similarly, the tax rate on long-term capital gains could increase from 15 percent to 20 percent and the rate on qualified dividends from 15 percent to an effective 44.6 percent.
· Finally, if Congress doesn?t take action, the federal estate tax rate will increase from 35 percent to 55 percent and the exclusion amount will drop from $5,120,000 to $1,000,000.
This letter will suggest some ways to avoid or minimize the adverse effects of these changes. Planning for these likely tax changes is a major undertaking and many clients are beginning the process now rather than waiting for the fall elections. This is prudent because the additional time will allow you to become comfortable with the gifting process and provide time to custom design trusts for your family.
For many taxpayers it will make sense to harvest capital gains in 2012 to take advantage of the current lower rates. You would sell appreciated capital assets and immediately reinvest in the same or similar assets. You would then hold the new assets until you would otherwise have sold them, so there would be no change in your investment strategy.
Deciding whether to use the strategy is not as simple as it might appear on the surface, however, because the lower tax rates must generally be weighed against a loss of tax deferral. By harvesting the gains in 2012 you would be paying a lower tax rate, but recognizing the gains earlier. The greater the differential in tax rates and the shorter the time before the second sale the more favorable gain harvesting would be.
In some cases, the correct decision will be clear without doing any analysis. If you are currently in the 0% long-term capital gains bracket, 2012 gain harvesting would always be favorable because it would give you a free basis step up. Gain harvesting would also be more favorable if you planned to sell the stock in 2013 or 2014 anyway. The time value of the tax deferral would be small compared with the future tax savings.
At the other extreme, if you are currently in the 15% long-term capital gain bracket and plan to die with an asset and pass it on to heirs with a stepped-up basis, there is no reason to recognize the gain now. You would be incurring tax now without any offsetting future benefit. Nor would it make sense to harvest losses to create additional capital loss carryovers. These loss carryovers would be better employed to offset capital gains in the future when rates are expected to be higher.
If you do not fall into one of these categories, you will have to do a quantitative analysis to determine whether 2012 gain harvesting would work for you. The decision could be thought of as buying a future tax savings by recognizing gain in 2012. By analyzing the decision in this way, you could measure a return on the 2012 investment over time. If this return on investment exceeded your opportunity cost of capital, gain harvesting would make sense. Please contact us to find out which of your assets should be harvested in 2012.
Planning for the 3.8 Percent Medicare Surtax
For tax years beginning January 1, 2013, the tax law imposes a 3.8 percent surtax on certain passive investment income of individuals, trusts and estates. For individuals, the amount subject to the tax is the lesser of (1) net investment income (NII) or (2) the excess of a taxpayer's modified adjusted gross income (MAGI) over an applicable threshold amount.
Net investment income includes dividends, rents, interest, passive activity income, capital gains, annuities and royalties. Specifically excluded from the definition of net investment income are self-employment income, income from an active trade or business, gain on the sale of an active interest in a partnership or S corporation, IRA or qualified plan distributions and income from charitable remainder trusts. MAGI is generally the amount you report on the last line of page 1, Form 1040.
The applicable threshold amounts are shown below.
Married taxpayers filing jointly $250,000
Married taxpayers filing separately $125,000
All other individual taxpayers $200,000
A simple example will illustrate how the tax is calculated.
Example. Al and Barb, married taxpayers filing separately, have $300,000 of salary income and $100,000 of NII. The amount subject to the surtax is the lesser of (1) NII ($100,000) or (2) the excess of their MAGI ($400,000) over the threshold amount ($400,000 -$250,000 = $150,000). Because NII is the smaller amount, it is the base on which the tax is calculated. Thus, the amount subject to the tax is $100,000 and the surtax payable is $3,800 (.038 x $100,000).
Fortunately, there are a number of effective strategies that can be used to reduce MAGI and or NII and reduce the base on which the surtax is paid. These include (1) Roth IRA conversions, (2) tax exempt bonds, (3) tax-deferred annuities, (4) life insurance, (5) rental real estate, (6) oil and gas investments, (7) timing estate and trust distributions, (8) charitable remainder trusts, (9) installment sales and maximizing above-the-line deductions. We would be happy to explain how these strategies might save you large amounts of surtax.
Accelerating Ordinary Income into 2012
A final opportunity that should be noted is accelerating ordinary income into 2012. Perhaps the best way to do this would be to convert a traditional IRA to a Roth IRA in 2012, if a conversion otherwise made sense. Ordinary income could also be accelerated by selling bonds with accrued interest in 2012 or selling and repurchasing bonds trading at a premium. Finally, you might consider exercising non-qualified stock options in 2012.
Estate Tax Provisions
The estate tax exemption is currently $5,120,000 per person and will revert to $1,000,000 on January 1st, 2013 unless Congress acts. The President is suggesting a $3,500,000 exemption. The potential reduction in the estate tax exemption is resulting in many client making large gifts, in trust, for their family. In some instances the trusts are for the spouse, children and grandchildren and in others just for children and younger generations. Most experts would define the savings at 35%, 45% or 55% of the amount gifted over $1,000,000. On a $5,000,000 gift the savings would be $1,800,000 ($4,000,000*45%).
We are prepared to assist you in modeling scenarios to determine which strategies are right for you. Please don?t hesitate to call me at (608) 882-2795 to schedule an appointment to begin discussing your options.
Roger G. Roth, CPA
& Nicole M. Hamby, Partner
Tax Law Changes for 2011 Federal Tax Returns
Before you file your 2011 federal income tax return in 2012, you should be aware of a few important tax changes that took effect in 2011. Check www.IRS.gov before you file for updates on any new legislation that may affect your tax return.
Due date of return. File your federal tax return by April 17, 2012. The due date is April 17, instead of April 15, because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia.
New forms. In most cases, you must report your capital gains and losses on the new Form 8949, Sales and Other Dispositions of Capital Assets. Then, you report certain totals from that form on Schedule D (Form 1040). If you had foreign financial assets in 2011, you may have to file the new Form 8938, Statement of Foreign Financial Assets, with your return.
Standard mileage rates. The 2011 rates for mileage are different for January 1 through June 30 than for July 1 through December 31. For business use of your car, you can deduct 51 cents a mile for miles driven the first half of the year and 55 ½ cents for the second half. Medical and moving mileage are both 19 cents per mile for the early half of the year and 23 ½ cents in the latter half.
Standard deduction and exemptions increased.
- The standard deduction increased for some taxpayers who do not itemize deductions on IRS Schedule A (Form 1040). The amount depends on your filing status.
- The amount you can deduct for each exemption has increased $50 to $3,700 for 2011.
Self-employed health insurance deduction. This deduction is no longer allowed on Schedule SE (Form 1040), but you can still take it on Form 1040, line 29.
Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount has increased to $48,450 ($74,450 if married filing jointly or a qualifying widow(er); $37,225 if married filing separately).
Health savings accounts (HSAs) and Archer MSAs. The additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses increased to 20 percent. Beginning in 2011, only prescribed drugs or insulin are qualified medical expenses.
Roth IRAs. If you converted or rolled over an amount from a traditional IRA to a Roth IRA or designated Roth in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return.
Alternative motor vehicle credit. You can claim the alternative motor vehicle credit for a 2011 purchase only if the vehicle is a new fuel cell motor vehicle.
First-time homebuyer credit. The credit expired for most taxpayers for 2011. Some military personnel and members of the intelligence community can still claim the credit in 2011 for qualified purchases.
Health coverage tax credit. Recent legislation changed the amount of this credit, which pays qualified health insurance premiums for eligible individuals and their families. Participants who received the 65 percent tax credit in any month from March to December 2011 may claim an additional 7.5 percent retroactive credit when they file their 2011 tax return.
Mailing a return. The IRS changed the filing location for several areas. If you're mailing a paper return, see the Form 1040 instructions for the correct address.
Detailed information on these changes can be found on the IRS website ? www.irs.gov.
IR-2011-69, June 23, 2011
WASHINGTON ? The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."
While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.
The new rates are contained in Announcement 2011-40 on the optional standard mileage rates.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Mileage Rate Changes
Rates 1/1 through 6/30/11
Rates 7/1 through 12/31/11
In order to qualify for the additional deduction, the employer must have increased the number of ?full-time equivalent? employees during the year. In other words, employers must have created new jobs, not just replaced workers of existing positions. In order to be considered a ?full-time equivalent? employee, the employee must reside in Wisconsin and be required to work at least 2080 hours per year. This deduction is only available to regular, non seasonal jobs. The number of ?full-time equivalent? employees is determined based on the average employee count from your quarterly unemployment reports.
If you qualify for this deduction, it is possible to have a $2,000-$4,000 maximum deduction per additional employee added during the year. If you have any questions or believe you could qualify for the credit, contact us for additional information.
In preparation for the upcoming year-end, we would like to remind you to make sure you have a form W-9 on file for all your vendors that will receive a 1099?s from you this year. This form will ensure you have the following information needed for us to prepare their 1099: payee legal name, identification number [Federal Identification Number (EIN) or Social Security Number (TIN)], and their complete mailing address. You are required to file a 1099-MISC if, in a calendar year, you made payments of $600.00 or more to an individual, partnership, LLC or attorney(s) (regardless of entity classification), for services, rents or subcontracting services.
Also, if we prepare your payroll, please verify that we have their correct name, social security number and mailing address, so we have accurate information when preparing their W-2?s for 2012. Keep in mind that bonus pay is considered compensation and must be included in payroll calculations, for W-2 reporting purposes.
Job Search Expenses May Lower Your Taxes
Summer is often a time when people make major life decisions. Common events include buying a home, getting married or changing jobs. If you're looking for a new job in your same line of work, you may be able to claim a tax deduction for some of your job hunting expenses.
Here are seven things the IRS wants you to know about deducting these costs:
1. Your expenses must be for a job search in your current occupation. You may not deduct expenses related to a search for a job in a new occupation. If your employer or another party reimburses you for an expense, you may not deduct it.
2. You can deduct employment and job placement agency fees you pay while looking for a job.
3. You can deduct the cost of preparing and mailing copies of your résumé to prospective employers.
4. If you travel to look for a new job, you may be able to deduct your travel expenses. However, you can only deduct them if the trip is primarily to look for a new job.
5. You can't deduct job search expenses if there was a substantial break between the end of your last job and the time you began looking for a new one.
6. You can't deduct job search expenses if you're looking for a job for the first time.
7. You usually will claim job search expenses as a miscellaneous itemized deduction. You can deduct only the amount of your total miscellaneous deductions that exceed two percent of your adjusted gross income.
The Wisconsin Department of Revenue has updated its publication concerning federal and Wisconsin income tax reporting under the Marital Property Act. The publication is a joint effort of the Department and the Milwaukee office of the Internal Revenue Service (IRS). In the publication, the ?Federal Treatment? reflects the interpretation of Wisconsin's Marital Property Act by the Milwaukee IRS office and the ?Wisconsin Treatment? reflects the interpretation of that Act by the Department as of December 1, 2012. The portion of the publication dealing with the Wisconsin tax treatment of the child care credit has been revised. ( Wisconsin Dept. Rev. Tax Publication 113, 12/01/2012 .)
Wisconsin Property Lottery and gaming credit publication revised.
The Wisconsin Department of Revenue has revised its publication describing the process for computing monthly permit fees and the lottery and gaming credit for manufactured and mobile homes that are subject to monthly municipal permit fees. Manufactured and mobile homes that are subject to a monthly municipal permit fee are entitled to the lottery and gaming credit if the manufactured or mobile home is used as a primary residence. The credit is deducted by the municipal clerk when determining the monthly permit fee. ( Guide to Municipal Permit Fee and Lottery and Gaming Credit for Manufactured/Mobile Homes 2013, Wis. Dept. Rev., 12/01/2011 .)
Wisconsin Personal Income Tax Publication for retirees updated.
The Wisconsin Department of Revenue has updated its publication that provides tax information of special interest to retirees. There are no substantive differences between the 2011 and 2012 versions of the publication The publication discusses who must file a Wisconsin income tax return and provisions that may affect retirees, and contains 2012 tax rate schedules. Retired taxpayers can use this information in preparing their tax year 2012 returns. The information in the publication reflects the position of the Department on laws enacted by the Wisconsin Legislature that are effective as of December 2012. ( Wisconsin Dept. Rev. Tax Publication 106, 12/01/2012 .)
Who Should File a 2012 Tax Return?
If you received income during 2012, you may need to file a tax return in 2013. The amount of your income, your filing status, your age and the type of income you received will determine whether you're required to file. Even if you are not required to file a tax return, you may still want to file. You may get a refund if you've had too much federal income tax withheld from your pay or qualify for certain tax credits.
You can find income tax filing requirements on IRS.gov. The instructions for Forms 1040, 1040A or 1040EZ also list filing requirements. The Interactive Tax Assistant tool, also available on the IRS website, is another helpful resource. The ITA tool answers many of your tax law questions including whether you need to file a return.
Even if you've determined that you don't need to file a tax return this year, you may still want to file. Here are five reasons why:
1. Federal Income Tax Withheld. If your employer withheld federal income tax from your pay, if you made estimated tax payments, or if you had a prior year overpayment applied to this year's tax, you could be due a refund. File a return to claim any excess tax you paid during the year.
2. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. EITC is a refundable tax credit; which means if you qualify you could receive EITC as a tax refund. Families with qualifying children may qualify to get up to $5,891 dollars. You can't get the credit unless you file a return and claim it. Use the EITC Assistant to find out if you qualify.
3. Additional Child Tax Credit. If you have at least one qualifying child and you don't get the full amount of the Child Tax Credit, you may qualify for this additional refundable credit. You must file and use new Schedule 8812, Child Tax Credit, to claim the credit.
4. American Opportunity Credit. If you or someone you support is a student, you might be eligible for this credit. Students in their first four years of postsecondary education may qualify for as much as $2,500 through this partially refundable credit. Even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student. You must file Form 8863, Education Credits, and submit it with your tax return to claim the credit.
5. Health Coverage Tax Credit. If you're receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, you may be eligible for a 2012 Health Coverage Tax Credit. Spouses and dependents may also be eligible. If you're eligible, you can receive a 72.5 percent tax credit on payments you made for qualified health insurance premiums.
Tips for Taxpayers Who Travel for Charity Work
Do you plan to travel while doing charity work this summer? Some travel expenses may help lower your taxes if you itemize deductions when you file next year. Here are five tax tips the IRS wants you to know about travel while serving a charity.
1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Select Check tool to see if the group is qualified.
2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can't deduct the value of your time or services.
3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.
4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can't deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
5. Deductible travel expenses may include:
- Air, rail and bus transportation
- Car expenses
- Lodging costs
- The cost of meals
- Taxi fares or other transportation costs between the airport or station and your hotel
Special Tax Benefits for Armed Forces Personnel
If you're a member of the U.S. Armed Forces, the IRS wants you to know about the many tax benefits that may apply to you. Special tax rules apply to military members on active duty, including those serving in combat zones. These rules can help lower your federal taxes and make it easier to file your tax return.
Here are ten of those benefits:
1. Deadline Extensions. Qualifying military members, including those who serve in a combat zone, can postpone some tax deadlines. This includes automatic extensions of time to file tax returns and pay taxes.
2. Combat Pay Exclusion. If you serve in a combat zone, you can exclude certain combat pay from your income. You won't need to show the exclusion on your tax return because qualified pay isn't included in the wages reported on your Form W-2, Wage and Tax Statement. Some service outside a combat zone also qualifies for this exclusion.
3. Earned Income Tax Credit. You can choose to include nontaxable combat pay as earned income to figure your EITC. You would make this choice if it increases your credit. Even if you do, the combat pay remains nontaxable.
4. Moving Expense Deduction. If you move due to a permanent change of station, you may be able to deduct some of your unreimbursed moving costs.
5. Uniform Deduction. You can deduct the costs and upkeep of certain uniforms that regulations prohibit you from wearing while off duty. You must reduce your expenses by any reimbursement you receive for these costs.
6. Signing Joint Returns. Both spouses normally must sign joint income tax returns. However, when one spouse is unavailable due to certain military duty or conditions, the other may, in some cases sign for both spouses, or will need a power of attorney to file a joint return.
7. Reservists Travel Deduction. If you're a member of the U.S. Armed Forces Reserves, you may deduct certain travel expenses on your tax return. You can deduct unreimbursed expenses for traveling more than 100 miles away from home to perform your reserve duties.
8. Nontaxable ROTC Allowances. Educational and subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay such as pay received during summer advanced camp is taxable.
9. Civilian Life. After leaving the military, you may be able to deduct certain job hunting expenses. Expenses may include travel, resume preparation fees and job placement agency fees. Moving expenses may also be deductible.
10. Tax Help. Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after April 15.
Six Tips on Gambling Income and Losses
Whether you roll the dice, play cards or bet on the ponies, all your winnings are taxable. The IRS offers these six tax tips for the casual gambler.
1. Gambling income includes winnings from lotteries, raffles, horse races and casinos. It also includes cash and the fair market value of prizes you receive, such as cars and trips.
2. If you win, you may receive a Form W-2G, Certain Gambling Winnings, from the payer. The form reports the amount of your winnings to you and the IRS. The payer issues the form depending on the type of gambling, the amount of winnings, and other factors. You'll also receive a Form W-2G if the payer withholds federal income tax from your winnings.
3. You must report all your gambling winnings as income on your federal income tax return. This is true even if you do not receive a Form W-2G.
4. If you're a casual gambler, report your winnings on the Other Income line of your Form 1040, U. S. Individual Income Tax Return.
5. You may deduct your gambling losses on Schedule A, Itemized Deductions. The deduction is limited to the amount of your winnings. You must report your winnings as income and claim your allowable losses separately. You cannot reduce your winnings by your losses and report the difference.
6. You must keep accurate records of your gambling activity. This includes items such as receipts, tickets or other documentation. You should also keep a diary or similar record of your activity. Your records should show your winnings separately from your losses.
To learn more about this topic, see Publication 525, Taxable and Nontaxable Income. Also, see Publication 529, Miscellaneous Deductions. Both are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Renting Your Vacation Home
A vacation home can be a house, apartment, condominium, mobile home or boat. If you own a vacation home that you rent to others, you generally must report the rental income on your federal income tax return. But you may not have to report that income if the rental period is short.
In most cases, you can deduct expenses of renting your property. Your deduction may be limited if you also use the home as a residence.
Here are some tips from the IRS about this type of rental property.
You usually report rental income and deductible rental expenses on Schedule E, Supplemental Income and Loss.
You may also be subject to paying Net Investment Income Tax on your rental income.
If you personally use your property and sometimes rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. The number of days used for each purpose determines how to divide your costs.
Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.
If the property is used as a home, your rental expense deduction is limited. This means your deduction for rental expenses can't be more than the rent you received. For more about this rule, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
If the property is used as a home and you rent it out fewer than 15 days per year, you do not have to report the rental income.
Plan Now to Get Full Benefit of Saver's Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement
Plan Now to Get Full Benefit of Saver's Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement
WASHINGTON Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2012 and the years ahead, according to the Internal Revenue Service.
The saver's credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver's credit is available in addition to any other tax savings that apply.
Eligible workers still have time to make qualifying retirement contributions and get the saver's credit on their 2012 tax return. People have until April 15, 2013, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2012. However, elective deferrals (contributions) must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2013 contributions soon so their employer can begin withholding them in January.
The saver's credit can be claimed by:
- Married couples filing jointly with incomes up to $57,500 in 2012 or $59,000 in 2013;
- Heads of Household with incomes up to $43,125 in 2012 or $44,250 in 2013; and
- Married individuals filing separately and singles with incomes up to $28,750 in 2012 or $29,500 in 2013.
Like other tax credits, the saver's credit can increase a taxpayer's refund or reduce the tax owed. Though the maximum saver's credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.
A taxpayer's credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver's credit, and its instructions have details on figuring the credit correctly.
In tax-year 2010, the most recent year for which complete figures are available, saver's credits totaling just over $1 billion were claimed on more than 6.1 million individual income tax returns. Saver's credits claimed on these returns averaged $204 for joint filers, $165 for heads of household and $122 for single filers.
The saver's credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.
Other special rules that apply to the saver's credit include the following:
- Eligible taxpayers must be at least 18 years of age.
- Anyone claimed as a dependent on someone else's return cannot take the credit.
- A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.
Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2012, this rule applies to distributions received after 2009 and before the due date, including extensions, of the 2012 return. Form 8880 and its instructions have details on making this computation.
Begun in 2002 as a temporary provision, the saver's credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. For more information about this credit contact our office or visit www.IRS.gov.
Beginning January 1, 2013, the standard mileage rates will be:
56.5 cents per mile for business miles
24 cents per mile for medical or moving purposes
14 cents per mile driven in service of charitable organizations
IRS Offers Tax Tips for "The Season of Giving"
December is traditionally a month for giving generously to charities, friends and family. But it's also a time that can have a major impact on the tax return you'll file in the New Year. Here are some Season of Giving tips from the IRS covering everything from charity donations to refund planning:
- Contribute to Qualified Charities. If you plan to take an itemized charitable deduction on your 2012 tax return, your donation must go to a qualified charity by Dec. 31. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Exempt Organizations SELECTCheck tool to check if your favorite charity is a qualified charity. Donations charged to a credit card by Dec. 31 are deductible for 2012, even if you pay the bill in 2013. A gift by check also counts for 2012 as long as you mail it in December. Gifts given to individuals, whether to friends, family or strangers, are not deductible.
- What You Can Deduct. You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified charity. Special rules apply to several types of donated property, including clothing or household items, cars and boats.
- Keep Records of All Donations. You need to keep a record of any donations you deduct, regardless of the amount. You must have a written record of all cash contributions to claim a deduction. This may include a cancelled check, bank or credit card statement or payroll deduction record. You can also ask the charity for a written statement that shows the charity?s name, contribution date and amount.
- Gather Records in a Safe Place. As long as you're gathering those records for your charitable contributions, it's a good time to start rounding up documents you will need to file your tax return in 2013. This includes receipts, canceled checks and other documents that support income or deductions you will claim on your tax return. Be sure to store them in a safe place so you can easily access them later when you file your tax return.
- Plan Ahead for Major Purchases. If you are making major purchases during the holiday season, don't base them solely on the expectation of receiving your tax refund before the bills arrive. Many factors can impact the timing of a tax refund. The IRS issues most refunds in less than 21 days after receiving a tax return. However, if your tax return requires additional review, it may take longer to receive your refund.
How to Get a Transcript or Copy of a Prior Year Tax Return
There are many reasons why you should keep a copy of your federal tax return. For example, you may need it to answer an IRS inquiry. You may also need it to apply for a student loan or a home mortgage. If you can't find your tax return, the IRS can provide a copy or give you a transcript of the tax information you need.
Here's how to get your federal tax return information from the IRS:
1. Transcripts are free and you can get them for the current year and the past three years. In most cases, a transcript includes all the information you need.
2. A tax return transcript shows most line items from the tax return you originally filed. It also includes items from any accompanying forms and schedules you filed. It does not reflect any changes made after you filed your original return.
3. A tax account transcript shows any changes either you or the IRS made to your tax return after you filed it. This transcript includes your marital status, the type of return you filed, your adjusted gross income and taxable income.
4. You can get transcripts on the web, by phone or by mail. To request transcripts online, go to IRS.gov and use the Order a Transcript tool. To order by phone, call 800-908-9946 and follow the prompts.
5. To request a 1040, 1040A or 1040EZ tax return transcript by mail or fax, complete Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Businesses and individuals who need a tax account transcript should use Form 4506-T, Request for Transcript of Tax Return.
6. If you order online or by phone, you should receive your tax return transcript within five to 10 calendar days. You should allow 30 calendar days for delivery of a tax account transcript if you order by mail.
7. If you need an actual copy of a filed and processed tax return, it will cost $57 for each tax year. Complete Form 4506, Request for Copy of Tax Return, and mail it to the IRS address listed on the form for your area. Copies are generally available for the current year and past six years. Please allow 60 days for delivery.
8. If you live in a Presidentially declared disaster area, the IRS may waive the fee to obtain copies of your tax returns. Visit IRS.gov and select the Disaster Relief link in the lower left corner of the page for more about IRS disaster assistance.
9. Forms 4506, 4506-T and 4506T-EZ are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Helpful Tax Tips if You're Moving this Summer
If you make a work-related move this summer, you may be able to deduct the costs of the move. This may apply if you move to start a new job or to work at the same job in a new job location. The IRS offers the following tips on moving expenses you may be able to deduct on your tax return.
In order to deduct moving expenses, you must meet these three requirements:
1. Your move closely relates to the start of work. Generally, you can consider moving expenses within one year of the date you first report to work at a new job location. Additional rules apply to this requirement.
2. You meet the distance test. Your new main job location must be at least 50 miles farther from your former home than your previous main job location was. For example, if your old main job location was three miles from your former home, your new main job location must be at least 53 miles from that former home.
3. You meet the time test. After you move, you must work full time at your new job location for at least 39 weeks during the first year. Self-employed individuals must meet this test and also work full time for a total of at least 78 weeks during the first 24 months upon arriving in the general area of their new job location. If your income tax return is due before you have satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test.
See Publication 521, Moving Expenses, for more information about these rules. If you can claim this deduction, here are a few more tips from the IRS:
- Travel. You can deduct transportation and lodging expenses for yourself and household members while moving from your former home to your new home. You cannot deduct the cost of meals during the travel.
- Household goods. You can deduct the cost of packing, crating and transporting your household goods and personal property. You may be able to include the cost of storing and insuring these items while in transit.
- Utilities. You can deduct the costs of connecting or disconnecting utilities.
- Nondeductible expenses. You cannot deduct as moving expenses any part of the purchase price of your new home, the costs of buying or selling a home, or the cost of entering into or breaking a lease. See Publication 521 for a complete list.
- Reimbursed expenses. If your employer reimburses you for the costs of a move for which you took a deduction, you may have to include the reimbursement as income on your tax return.
- Update your address. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. File Form 8822, Change of Address, to notify the IRS.
- Tax form to file. To figure the amount of your deduction for moving expenses, use Form 3903, Moving Expenses.
Give Withholding and Payments a Check-up to Avoid a Tax Surprise
Some people are surprised to learn they're due a large federal income tax refund when they file their taxes. Others are surprised that they owe more taxes than they expected. When this happens, it's a good idea to check your federal tax withholding or payments. Doing so now can help avoid a tax surprise when you file your 2013 tax return next year.
Here are some tips to help you bring the tax you pay during the year closer to what you'll actually owe.
Wages and Income Tax Withholding
- New Job. Your employer will ask you to complete a Form W-4, Employee's Withholding Allowance Certificate. Complete it accurately to figure the amount of federal income tax to withhold from your paychecks.
- Life Event. Change your Form W-4 when certain life events take place. A change in marital status, birth of a child, getting or losing a job, or purchasing a home, for example, can all change the amount of taxes you owe. You can typically submit a new Form W4 anytime.
- IRS Withholding Calculator. This handy online tool will help you figure the correct amount of tax to withhold based on your situation. If a change is necessary, the tool will help you complete a new Form W-4.
Self-Employment and Other Income
- Estimated tax. This is how you pay tax on income that's not subject to withholding. Examples include income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets. You also may need to pay estimated tax if the amount of income tax withheld from your wages, pension or other income is not enough. If you expect to owe a thousand dollars or more in taxes and meet other conditions, you may need to make estimated tax payments.
- Form 1040-ES. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you need to pay estimated taxes on a quarterly basis.
- Change in Estimated Tax. After you make an estimated tax payment, some life events or financial changes may affect your future payments. Changes in your income, adjustments, deductions, credits or exemptions may make it necessary for you to refigure your estimated tax.
- Additional Medicare Tax. A new Additional Medicare Tax went into effect on Jan. 1, 2013. The 0.9 percent Additional Medicare Tax applies to an individual's wages, Railroad Retirement Tax Act compensation and self-employment income that exceeds a threshold amount based on the individual's filing status.
- Net Investment Income Tax. A new Net Investment Income Tax went into effect on Jan. 1, 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts.
Employers Hiring Veterans by Years End May Get Expanded Tax Credit
IRS Special Edition Tax Tip 2012-14
Employers planning to claim an expanded tax credit for hiring certain veterans should act soon, according to the IRS. Many businesses may qualify to receive thousands of dollars through the Work Opportunity Tax Credit, but only if the veteran begins work before the new year.
Here are six key facts about the WOTC as expanded by VOW to Hire Heroes Act of 2011.
- Hiring Deadline: Employers may be able to claim the expanded WOTC for qualified veterans who begin work on or after Nov. 22, 2011, but before Jan. 1, 2013.
- Maximum Credit: The maximum tax credit is $9,600 per worker for employers that operate for-profit businesses, or $6,240 per worker for tax-exempt organizations.
- Credit Factors: The amount of credit will depend on a number of factors. Such factors include the length of the veterans unemployment before being hired, the number of hours the veteran works and the amount of the wages the veteran receives during the first-year of employment.
- Disabled Veterans: Employers hiring veterans with service-related disabilities may be eligible for the maximum tax credit.
- State Certification: Employers must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their state workforce agency. The form must be filed within 28 days after the qualified veteran starts work. For additional information about your SWA, visit the U.S. Department of Labor?s WOTC website.
- E-file: Some states accept Form 8850 electronically.
Visit the IRS.gov website and enter WOTC in the search field for forms and more details about the expanded tax credit for hiring veterans.
Eight Tips for Taxpayers Who Owe Taxes
While most taxpayers get a refund from the IRS when they file their taxes, some do not. The IRS offers several payment options for those who owe taxes.
Here are eight tips for those who owe federal taxes.
1. Tax bill payments. If you get a bill from the IRS this summer, you should pay it as soon as possible to save money. You can pay by check, money order, cashier's check or cash. If you cannot pay it all, consider getting a loan to pay the bill in full. The interest rate for a loan may be less than the interest and penalties the IRS must charge by law.
2. Electronic Funds Transfer. It's easy to pay your tax bill by electronic funds transfer. Just visit IRS.gov and use the Electronic Federal Tax Payment System. You may also use EFTPS to pay your taxes by phone at 800-555-4477.
3. Credit or debit card payments. You can also pay your tax bill with a credit or debit card. Even though the card company may charge an extra fee for a tax payment, the costs of using a credit or debit card may be less than the cost of an IRS payment plan. To pay by credit or debit card, contact one of the processing companies listed at IRS.gov.
4. More time to pay. You may qualify for a short-term agreement to pay your taxes. This may apply if you can fully pay your taxes in 120 days or less. You can request it through the Online Payment Agreement application at IRS.gov. You may also call the IRS at the number listed on the last notice you received. If you can't find the notice, call 800-829-1040 for help. There is generally no set-up fee for a short-term agreement.
5. Installment Agreement. If you can't pay in full at one time and can't get a loan, you may want to apply for a monthly payment plan. If you owe $50,000 or less, you can apply using the IRS Online Payment Agreement application. It's quick and easy. If approved, IRS will notify you immediately. You can arrange to make your payments by direct debit. This type of payment plan helps avoid missed payments and may help avoid a tax lien that would damage your credit.
Taxpayers may also apply using IRS Form 9465, Installment Agreement Request. If you owe more than $50,000, you must also complete Form 433F, Collection Information Statement. For approved payment plans the one-time user fee is $105 for standard and payroll deduction agreements. The direct debit agreement fee is $52. The fee is $43 if your income is below a certain level.
6. Offer in Compromise. The IRS Offer-in-Compromise program allows you to settle your tax debt for less than the full amount you owe. An OIC may be an option if you can't fully pay your taxes through an installment agreement or other payment alternative. The IRS may accept an OIC if the amount offered represents the most IRS can expect to collect within a reasonable time. Use the OIC Pre-Qualifier tool to see if you may be eligible before you apply. The tool will also direct you to other options if an OIC is not right for you.
7. Fresh Start. If you're struggling to pay your taxes, the IRS Fresh Start initiative may help you. Fresh Start makes it easier for individual and small business taxpayers to pay back taxes and avoid tax liens.
8. Check withholding. You may be able to avoid owing taxes in future years by increasing the taxes your employer withholds from your pay. To do this, file a revised Form W-4, Employee's Withholding Allowance Certificate, with your employer. The IRS Withholding Calculator tool at IRS.gov can help you fill out a new W-4.
American Taxpayer Relief Act of 2012
The American Taxpayer Relief Act recently signed into law has kept most taxpayers from paying higher taxes after 2012. Below are some of the changes that may affect you.
The Alternative Minimum Tax was made permanent and retroactive back to January 1, 2012.
Deductions and Credits made Permanent:
· Child Tax Credit
· Marriage Penalty Relief
· The Liberalized Child and Dependent Care Credit Rules
· Expanded Adoption Credit
· Enhanced Rules for Student Loan Deductions
Deductions and Credits Extended for 5 Years:
· Earned Income Credit
· American Opportunity Credit
Deductions and Credits Extended through 2013:
· State and Local General Sales Taxes
· Educator Expenses
· Qualified Principal Residence Indebtedness
· Mortgage Insurance Premiums
· Tuition and Fees
· Charitable Distributions of IRA?s
· Credit for Energy-Efficient Existing Homes
The 2% reduction in Social Security tax for employees and self-employed individuals expired at the end of 2012 and will not be extended for 2013. An employee?s Social Security portion of FICA will increase from 4.2% to 6.2%, with a corresponding increase in self-employment tax.
Please contact our office if we can further assist you with your 2012 tax preparation or future tax planning. You can contact us at 882-2795 or www.rgr-cpa.com.