November 30, 2012
We wish all of you a very happy Holiday Season! We look forward to seeing all of you very soon. 2012 has been a year like no other from a tax perspective, and 2013 is setting up to be even more exciting. As details evolve with the changes to the tax law and the fiscal cliff, we will keep you abreast of the changes that may affect you. In the meantime, we wanted to highlight some of the current changes and provide you with some year-end planning points to keep in mind as 2012 winds down.
- Tax Rates – The Bush tax cuts and rate tables apply for 2012. Therefore, the lowest 10% tax bracket and the highest 35% tax bracket will remain until December 31, 2012, but will likely change for 2013.
- Expiring Items – Note that unless Congress acts, the following items will expire after 2012: Child Tax Credit, 2% Social Security Payroll Tax Cut, Qualified Dividends Rate, Adoption Credit, American Opportunity College Tuition Credit.
- Already Expired – Congress let the following items expire as of 2011 – Mortgage Insurance Premium Deduction, $250 Teacher Expense Deduction, Sales Tax Deduction, Charitable Donations direct from IRA’s, AMT Patch.
- Capital Gains and Qualified Dividends – The 15% maximum rate on both long-term capital gains and qualified dividends remains in effect through 2012. The same goes for the 0% rate on gains and dividends for filers in the 10% or 15% tax brackets. These favorable rates may come to an end after 2012. You may want to consider realizing capital gains (stock/real estate/installment sales) in 2012. This will allow you to take advantage of the favorable rates and act prior to the 3.8% Medicare Tax (discussed below) dependent upon your individual circumstances. Keep in mind that dividends may go back to being subject to ordinary income tax rates in 2013 and capital gain rates likely may rise.
- Please contact us to see if you have a capital-loss carry-forward from 2011 so that you can make your broker aware of it before year-end for utilization.
- 3.8% Medicare Tax – 2013 brings with it a new 3.8% Medicare tax for singles with an AGI over $200k and marrieds with an AGI over $250K. The additional 3.8% tax applies to capital gains, rental income, interest, dividends, royalties and other passive and investment-related income.
- Conversions to Roth IRAs – For 2012, traditional IRA’s can be converted to Roth IRAs without earnings restrictions. Contact us if you are considering this.
- Estate Tax – The estate tax exemption for 2012 is $5 million per taxpayer with portability between spouses, and the federal tax rate is 35%. Assets passing through the estate can be stepped-up to their fair market value for inheritance basis purposes in 2012. Keep in mind that the exemption for the state of Maryland is still $1 million per person and the estate tax rate is 16%, so planning is very prudent. Major changes are likely in the estate tax – please contact us.
- Gift Tax – The annual gift exclusion remains at $13,000 per person per year. A joint couple may give $26,000 to an individual within the calendar year. All gifts should be well documented. For 2012, the lifetime gifting exclusion is $5,120,000. Gift Tax returns may be required – check with us on compliance.
- Energy Credits – There is a separate 30% residential energy credit that remains in-tact for 2012 for installing solar electric and hot water systems, geothermal heat pumps, small wind turbines and fuel cell systems through 2016. No dollar caps are placed on this credit. The federal energy-related tax credit of up to $500 (no more than $200 for windows) that existed for 2011, was NOT renewed by Congress for 2012 and therefore no longer applies.
MAJOR CHANGES IN DEPRECIATION LAWS BELOW – PLEASE NOTE!
- Asset Purchases – Bonus Depreciation – For 2012, you can expense 50% of the entire cost of certain “new” assets by immediately claiming bonus depreciation. This applies to new assets with useful lives of twenty years or less including machinery, land improvements and single-purpose farm buildings. Please note that Maryland has decoupled from this law and utilizes a different asset life. Please be aware that at press time bonus depreciation EXPIRES after 2012.
- Section 179 Expensing Deduction – For 2012, you can only expense up to $139,000 of qualifying property placed in service – new or used (please note that this was $500,000 for 2011). The amount phases out as you exceed $560,000 in total assets placed in service during the year. Buyers of certain SUV’s weighing between 6,000-14,000lbs can deduct only up to $25,000 of the purchase price in the year the SUV is placed in service plus the regular first-year depreciation and bonus depreciation (if new). The Section 179 expensing election is scheduled to drop to $25,000 for 2013, so please take note and consider this in your asset purchase plans for now and the future.
- Health Insurance Premiums Tax Credit – If you have 10 or fewer full-time-equivalent workers and average wages under $25,000, you may qualify for a tax credit of up to 35% of the employer-paid premiums. The percentage falls for companies with more employees and higher pay. The credit is not eligible to companies with 25 or more workers or average pay of $50,000 or more.
- Nanny Tax – If you pay a household employee/nanny/housekeeper more than $1,800 in the calendar year, you are subject to the “nanny tax” and need to contact us. Non-reporting can cause significant penalty and interest.
- 2% Social Security Tax Cut – Keep in mind that this rate cut expires at 12/31/12, so you must withhold 6.2% from employees as of January 1, 2013.
- American Opportunity Tax Credit – For college tuition, the tax credit equals 100% of the first $2,000 of qualifying higher education expenses and 25% of the next $2,000 of expenses up to a maximum credit of $2,500 for each eligible student. The credit is available for any of the first four years of college. Please make sure to keep record of all amounts paid for tuition, fees and books.
PLANNING IDEAS: You may be able to reduce your taxes by controlling the payment of deductible expenses and the timing of the collection of income. Several strategies to consider may include:
- Pay all state and local income taxes (e.g., 4th Qtr ES Payments) and real estate taxes prior to the end of the year (by 12/31/12). Postmark validation required.
- Make year-end donations to qualified charitable organizations. Use your credit card if you wish, or mail your check as late as December 31, 2012. Make sure to save all acknowledgements that you receive of your gifts.
- Year-End Bonuses – Considering that we may have higher tax rates in 2013, you may want to consider recognizing year-end bonuses as income in 2012.
- Year-End Billings – Business owners may want to send invoices out early to ensure income collection in 2012 as rates may be higher on 2013 collections.
- Medical Expenses – Consider getting and paying for elective procedures in 2012 if you are close to the 7.5% of AGI threshold. Also, make sure to track your medical mileage (23 cents per mile). (Note, the AGI threshold is scheduled at 10.5% in 2013, so you may wish to capture expenses in 2012.)
- Section 529 – College Savings Plan Contributions must be made by 12/31.
- Keep good mileage logs. The standard mileage rate for business is 55.5 cents per mile. Please provide us with copies of your mileage logs for our records as the IRS is requesting these on a frequent basis.
- Review your paycheck for proper withholdings – with so many changes in tax law taking place, you may need to adjust your tax withholdings for 2013 – please contact us to discuss these changes so you don’t come up short.
IMPORTANT FIGURES FOR 2012/2013
SOCIAL SECURITY LIMIT FOR WAGE EARNERS FOR 2013: $113,700
SOCIAL SECURITY COST OF LIVING INCREASE FOR 2013 – 1.7%
HSA CONTRIBUTIONS – 2012 $3,100 SINGLE AND $6,250 FAMILY
RETIREMENT PLAN CONTRIBUTION LIMITS*:
YEAR 2012 YEAR 2013
IRA(REG/ROTH) $5,000 $5,500
SIMPLE IRA $11,500 $12,000
401K/403B/SEP $17,000 $17,500
*NOTE: IF YOU ARE OVER AGE 50, YOU ARE ELIGIBLE TO CONTRIBUTE ADDITIONAL CATCH-UP AMOUNTS DEPENDENT ON THE TYPE OF PLAN– PLEASE CALL FOR DETAILS.
MOST IMPORTANT TAX TIP OF ALL – MAINTAIN GOOD RECORDS!!
We have seen an increase in IRS enforcement with more audits taking place and an over 700% increase in IRS notices being issued to taxpayers, so please make sure to keep good records of all income and expenses. Please provide us with any notices that you may receive so that we may correspond with the authorities. As always, we are looking very forward to seeing each of you in the upcoming months. We will mail out the tax organizers shortly. We encourage you to use the organizers as a tool for gathering complete and accurate information. If you have any questions, please contact our office. Watch our website www.boalandassociates.com for updated news related to the changing tax laws.
Yours very truly,
All of us at Boal and Associates
TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE IRS, WE INFORM YOU THAT ANY U.S. FEDERAL TAX ADVICE CONTAINED IN THIS COMMUNICATION (INCLUDING ANY ATTACHMENTS) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (I) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TRANSACTION OR MATTER ADDRESSED HEREIN. THIS ADVICE MAY NOT BE FORWARDED (OTHER THAN WITHIN THE TAXPAYER TO WHICH IT HAS BEEN SENT) WITHOUT OUR EXPRESS WRITTEN CONSENT.