Tax Client Newsletter

TAX NEWS

TAX CLIENT NEWSLETTER

WINTER 2012

INTRODUCTION

As I was compiling this letter, Congress was in a lame duck session considering ways to avert the expiration of the Bush tax cuts and the so-called “fiscal cliff”, which would force automatic spending cuts throughout the federal budget. It is anyone’s guess what will happen, but we will know by the end of the year. I want to assure you that I stand ready to move on any new tax rules to avoid delays in your tax filings. The new, inflation-indexed thresholds for 2012 are given below that cover many tax provisions, including the nanny tax, the social security wage base, and retirement plan contributions.This issue also explains amended returns and taxation of social security benefits. Finally, the client advisory section covers reporting of merchant credit card receipts, concerns about making online tax payments, and the IRS’s potential reporting of tax debts to credit bureaus.

TAX FILING DEVELOPMENTS

INFLATION ADJUSTMENTS FOR 2013, NEW SOCIAL SECURITY WAGE BASE

The IRS has released the 2013 inflation-adjusted figures for a number of tax benefits, including the gift tax exclusion and the nanny tax. Notably absent from the numbers are indexed tax rates because Congress has not acted on the expiration of the current rates. Here are some of the new numbers:

• Annual gift tax exclusion: $14,000 per donee.

• Nanny tax reporting threshold: $1800 to any one employee per year.

• Kiddie tax: Amount used to reduce the net unearned income reported on a child’s tax return subject to the “kiddie tax,” is $1,000.

• The foreign earned income exclusion rises to $97,600.

• Exclusion of income from U.S. savings bonds: The income phase-out for the exclusion for taxpayers who pay for higher education begins at modified adjusted gross income above $112,050 for joint returns and $74,700 for other returns. The exclusion is completely phased out for modified adjusted gross income of $142,050 or more for joint returns and $89,700 or more for other returns.

• Medical Savings Accounts. The designation as a “high deductible health plan” for self-only coverage is a plan with an annual deductible not less than $2,150 and not more than $3,200, and under which the annual out-of-pocket expenses do not exceed $4,300; for family coverage, the annual deductible must be not less than $4,300 and not more than $6,450, and under which the annual out-of-pocket expenses do not exceed $7,850.

Social Security Wage Base

The Social Security wage base for 2013 will be $113,700, up from $110,100 in 2012. Once taxpayers reach this income limit, they no longer have to pay social security taxes on their wages. However, income above this limit is still subject to Medicare taxes, which have no annual limit.

Did you know…Ten years ago, in 2002, the Social Security wage base was $84,900.

NEW 2013 PENSION PLAN LIMITS ALLOW 401(k) CONTRIBUTIONS OF $17,500

The IRS has announced its yearly cost-of-living adjustments for pension plan dollar limitations that take effect in Tax Year 2013. Many of the pension plan limitations will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. Other limitations remain unchanged. Highlights of the changes appear below.

• The contribution limit is increased from $17,000 to $17,500 for employees who participate in 401(k), 403(b), and 457 plans and the federal Thrift Savings Plan.
• The catch-up contribution limit remains unchanged at $5,500 for employees aged 50 and over who participate in 401(k), 403(b), 457 plans and the federal Thrift Savings Plan.
• The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes between $59,000 and $69,000. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer plan, the income phase-out range is $95,000 to $115,000. For an IRA contributor who is not covered by an employer plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $178,000 and $188,000.
• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $178,000 to $188,000 for married couples filing jointly. For singles and heads of household, the income phase-out range is $112,000 to $127,000. For a married individual filing a separate return who is covered by an employer plan, the phase-out range remains $0 to $10,000.
• The AGI limit for the saver's credit for low- and moderate-income workers is $59,000 for married couples filing jointly; $44,250 for heads of household; and $29,500 for married individuals filing separately and for singles.
• The limitation on the annual benefit under a defined benefit plan is increased from $200,000 to $205,000.
• The limitation for defined contribution plans is increased in 2013 from $50,000 to $51,000.
• The annual compensation limit for determining allowable contributions is increased from $250,000 to $255,000.

CONGRESSIONAL UPDATE

IRS SAYS LACK OF ALTERNATIVE MINIMUM TAX PATCH WILL DELAY FILING SEASON

In a recent letter to congressional tax committee members, Acting IRS Commissioner Steven Miller said that failure of Congress to enact an alternative minimum tax (AMT) patch by year end would result in significant delays in the filing season. The last such “patch” expired on December 31, 2011.He stated that, without a timely patch, the IRS would have to begin the 2013 filing season processes based on the expiration of the current patch, which would result in an exemption amount reverting to 1998 levels. The exemption amount is what determines which income levels are subject to the tax.

For tax year 2011, the AMT exemption amount (as indexed for inflation) was $48,450 for individuals and $74,450 for married taxpayers filing jointly. Because of these thresholds, only about 4 million taxpayers paid AMT for tax year 2011. Under current law, however, the thresholds revert to much lower levels for 2012 -- $33,750 for individuals and $45,000 for married taxpayers filing jointly. At these levels, approximately 33 million taxpayers would pay AMT for tax year 2012 (with returns filed in the Spring of 2013). This is about 28 million more taxpayers who would pay the AMT than if the exemption amounts were increased, as in the past.

Calculating the alternative minimum tax is time-consuming and expensive. As your tax preparer, I do not want to see Congress’s failure to act force us to both perform a dual calculation on your tax liability. The way the AMT is calculated is that first I calculate your regular tax on Form 1040. Then, I have to perform another complete calculation, adding back in disallowed deductions and applying new rates and the AMT exemption. I will be watching the situation closely. Congress has never before failed to enact the “patch” so I am hopeful that reason will prevail, and we will be able to put this issue aside for another year.

CALIFORNIA REPUBLICAN PROPOSES ‘BOLD NEW APPROACH’ TO TAXING BUSINESS

House of Representatives member Devin Nunes, R-California, recently proposed a new tax plan that he believes would appropriately tax businesses. Nunes argues that the current debate over raising the tax rates on high-income taxpayers is not the proper focus of Congressional and Administration efforts. Instead, Nunes says chronic unemployment, a sluggish economy, and the debt crisis should be addressed by “dramatically changing the tax code so that investing is not only easier for businesses, but becomes a far better option than not investing.”

Calling his plan the “American Business Competitiveness (ABC)”program, Nunes plans to introduce a bill in Congress soon. The ABC tax reform would replace the business tax structure with a new form of consumption tax. Nunes argues that many macroeconomists recognize consumption taxes as the best tax system for encouraging capital investment and economic growth. Nunes’ plan would encourage business investment by allowing 100 percent expensing in the current year for investments in the U.S. This means that all companies regardless of size would pay no taxes on any of their spending for personnel, equipment, property or other expenditures related to the operation of their business in the United States, Nunes states. Nunes complains that while existing tax laws provide incentives for business investments, there are too many rules and “ever-changing conditions and limits.” He wants to replace these rules with 100 percent expensing.

Lower Tax Rate on Non-Expensed Income

Nunes’ proposal also would tax all income for businesses at one rate, 25 percent, which is lower than the current 35 percent.Credits, “special deals” and loopholes on the business side would be eliminated. Nunes argues that this plan would prevent special interests and big business from manipulating the tax code.

Given that Congress is talking about taking up real tax reform in the new year, Congressman Nunes’ proposal may get a serious look. I would watch this one closely

IRS UPDATE

PROFITS OF SOLE PROPRIETORS INCREASED IN 2010, SAYS IRS

The IRS has released statistics which provide sole proprietorship data for tax year 2010. That year, approximately 23 million individual income tax returns reported nonfarm sole proprietorship activity. Profits rose to $267.7 billion in 2010, a 9.3-percent increase from 2009. The new numbers also give partnership and sole proprietorship data by region and state. For tax years 2007-2009, partnership returns that were filed increased 3.1 percent. The total number of sole proprietorship returns filed for the U.S. fell 1.9 percent. Nationally, gross receipts reported on sole proprietorship returns decreased over the period 2007-09.

IRS PROVIDES EXTENSIVE TAX RELIEF FOR THOSE AFFECTED BY HURRICANE SANDY

The IRS is providing tax relief to individuals and business taxpayers affected by the extraordinary destruction of Superstorm Sandy. Sandy was the deadliest hurricane to hit the United States since Hurricane Katrina, causing damage to thousands of homes, leaving millions without electrical power and causing severe flooding. Relief is available to New Jersey and Rhode Island victims of the disaster beginning on October 26, 2012, and to New York and Connecticut victims beginning on October 27, 2012.

Taxpayers located in certain counties in Connecticut, New Jersey, New York, and Rhode Island will be given tax relief that postpones tax filings and payment deadlines until February 1, 2013. This includes the fourth quarter individual estimated tax payment, normally due January 15, 2013. It also includes payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on October 31, 2012 and January 31, 2013, respectively. Additionally, the relaxed deadline covers tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period.

The IRS is waiving failure-to-deposit penalties for federal payroll and excise tax deposits normally due on or after the disaster area start date and before Nov. 26, if the deposits were made by November 26, 2012. The relief also includes relaxed deadlines for the filing of Form 5500 series returns and for some like-kind exchanges of property.

How to Claim Casualty Losses

Affected taxpayers in a federally-declared disaster area have the option of claiming disaster related casualty losses on their federal income tax return either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax savings, depending on other income factors. Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. These deductions are subject to two limitations. For personal-use property, there is a $100 per-casualty floor, and net casualty losses may only be deducted to the extent that they exceed 10%ofadjustedgrossincome (AGI).

Payments to Hurricane Sandy Victims

The IRS has indicated that disaster relief payments made to individuals are excludable from the individual’s taxable incomebecause Hurricane Sandy is a qualified disaster. “Qualified disaster relief payments” include amounts to cover necessary personal, family, living or funeral expenses that are not covered by insurance. They also include expenses to repair or rehabilitate personal residences or their contents to the extent that these payments are not covered by insurance.

Employee Leave-Donation Programs Benefitting Hurricane Sandy Victims

The disaster relief package put forth by the IRS also includes special relief to support leave-based donation programs to aid Hurricane Sandy victims. Under these programs, employees may donate their vacation, sick, or personal leave in exchange for employer cash payments made to tax-exempt organizations providing relief to Hurricane Sandy victims. These payments will not be treated as gross income or wages to the employees and, therefore, will not need to be deducted as a charitable contribution by the employees on their tax returns. The payments are deductible by employers.

Retirement Plan Loans and Hardship Distributions

The IRS has eased administrative and procedural rules for loans from employer-sponsored retirement plans and for hardship distributions to victims of Hurricane Sandy. Plan participants may be eligible to access their money more quickly under streamlined loan procedures and liberalized hardship distribution rules. To qualify for this relief, hardship withdrawals must be made by February 1, 2013.

Under current law, retirement plan loans are tax-free if they are repaid over a period of five years or less. Hardship distributions are generally taxable. Also, a 10 percent early-withdrawal tax applies. Please contact me before you take out a retirement plan loan or request a hardship distribution from your retirement plan. These actions have tax consequences that you should understand before you make any decisions.

IRS WARNS CONSUMERS ABOUT HURRICANE SANDY SCAMS

With great disasters come great heroics, generosity, and, unfortunately, clever deception schemes which prey on disaster victims. The IRS has issued a consumer alert about possible scams taking place in the wake of Hurricane Sandy. As the IRS observes, following major disasters, it's common for scam artists to impersonate charities to get money or private information from taxpayers. Such fraudulent schemes may involve contact by telephone, social media, e-mail or in-person solicitations. Some scammers operating bogus charities may contact people by telephone to solicit money or financial information. They may even directly contact disaster victims and claim to be working on behalf of the IRS to help the victims file casualty loss claims and get tax refunds. They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims' identities or financial resources. Beware!

HOW TO DETERMINE IF SOCIAL SECURITY BENEFITS ARE TAXABLE

Here are some pointers to help you determine whether your Social Security benefits may be taxable. Social Security recipients receive a Form SSA-1099 from the Social Security Administration which shows the total amount of their benefits each year. Based on this information, you should consider the following factors in determining the taxability of benefits:

● Taxation of Social Security benefits depends on total income and marital status.

● Generally, if Social Security benefits are the only income you receive for the year, the benefits are not taxable and you do not need to file a federal income tax return.

● If you receive income from other sources, your Social Security benefits will not be taxed unless modified adjusted gross income is more than the base amount for your filing status.

● To give you an idea, the 2011 base amounts are shown below. This year’s base amounts have not been released yet.

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

● Your taxable benefits and modified adjusted gross income are figured on a tax worksheet.Tax software programs typically do this computation.

Planning Considerations

If you are receiving other income besides your Social Security benefits, I will be glad to run an analysis to see if a portion of your benefits will be taxable. This computation is important for your retirement planning, and I urge you to pursue these answers.

IRS EXTENDS REPLACEMENT PERIOD FOR LIVESTOCK SOLD BECAUSE OF DROUGHT

Farmers and ranchers who were previously forced to sell livestock due to drought now have an extended period of time in which to replace the livestock and defer tax on any gains from the forced sales. The IRS has published a list of affected counties to help livestock producers determine their eligibility for the extension.