President Obama Releases Proposed Budget for Fiscal Year 2013
February 17, 2012 No CommentsOn Monday, February 13, President Obama sent to Congress his budget proposals for fiscal year 2013, which begins October 1, 2012. The $3.8 trillion proposal outlines five principles for tax reform and proposes that a “Buffett Rule” replace the current alternative minimum tax. It continues the 2001 and 2003 income tax rate cuts but excludes higher income taxpayers and also reinstates the 45% estate tax rate. Many expiring provisions would be extended but several business tax deductions would die.
On the spending side, the President recommends cuts that reduce the budgets of six cabinet level agencies but also makes commitments to new mandatory spending initiatives; Yet the budget proposal as submitted still adds more than $1 trillion to our budget deficits without any specific proposals for tax reforms or entitlement reforms.
The President’s budget normally sets the outline for congressional budget negotiations and for setting appropriations targets for the next fiscal year. However, as this is an election year for the President and Congress, it remains unlikely that a budget agreement will be reached and federal spending will continue under the existing spending levels well into next year.
The likelihood of any expiring provisions being enacted during 2012 is highly speculative, including the extension of Alternative Minimum Tax indexing. For now, provisions that expired on December 31, 2011, remain in limbo until Congress determines to take action. Whether this will once again take place in a lame duck legislative session is yet to be determined.
Calculating Cost Basis Gets Easier This Year
February 4, 2012 No CommentsBrokers must track and report cost basis to both you and the IRS
Anyone who has ever been baffled by calculating the net proceeds from the sale of an investment will find some relief, starting with the 2011 tax return due April 17. If you bought any stocks after January 1, 2011, and sold them later in the year, you should be receiving information from your broker shortly that tells you the adjusted cost basis of those stocks. Your adjusted cost basis, which affects the amount of tax you may owe on the sale, represents the original purchase price plus any commissions or other fees, and takes into account factors such as stock splits, corporate acquisitions or spinoffs, and reinvested dividends.
In the past, cost basis information has sometimes been available as a service; the Emergency Economic Stabilization Act of 2008 now requires all broker-dealers and other financial intermediaries to report the information on your 1099-B form. However, you won’t be the only one to receive that information; your broker also is required to report the same information to the Internal Revenue Service. Individual taxpayers (or their tax preparers) will still be responsible for accurately reporting the net proceeds of a sale on their federal income tax returns, but the IRS will now have a better way to double-check those figures.
In some cases, you’re still on your own this year
The new reporting requirements don’t mean you can empty your files completely. Because they’re being phased in, the rules don’t apply to stocks bought before January 1, 2011, for which you’ll still need to do your own calculations, or to securities held in retirement accounts. Cost basis reporting does go into effect this year for mutual funds and stock bought as part of a dividend reinvestment plan; however, it will apply only to shares bought after January 1, 2012, and will be reported on the 1099-B that will be available in 2013 for the tax year 2012. And cost basis for bonds, options, and other securities won’t have to be reported until 2013, so those will still need to be monitored independently.
Brokers also will be required to report losses that are disallowed as a result of a wash sale (which occurs when shares are sold and then repurchased within 30 days). However, they only have to do so if the newly acquired securities are identical to the securities sold (meaning the securities share the same CUSIP identification number). They also are not required to report adjusted cost basis for wash sales when the purchase and sale transactions occur in different accounts.
You can tailor your reporting method to suit your tax situation
Investors sometimes use cost basis to help manage their tax liability on a securities sale. If you’re one of them, the reporting requirements make it more important to determine in advance what accounting method you wish to use for each sale. Most broker-dealers will designate a default option to use if you do not specify a method. That default will typically be the so-called FIFO method (an acronym for “first in, first out”), which means that the first shares of a security purchased are considered the first shares sold. However, your broker might also allow you to specify LIFO (“last in, first out”) or designate specific shares as the ones sold. In some cases, such as shares bought through a direct reinvestment program, using an average cost basis for all shares may be most convenient (most mutual fund companies already employ this method of calculating cost basis).
If you don’t want to use your broker’s default method, you may be able to put in a standing order specifying the method you want to use for all trades, or choose on a case-by-case basis; you may also authorize your financial professional to make that decision for you. The rules permit investors to change the designated method for a given trade until the settlement date (the date on which money actually changes hands, which for a typical stock sale is three business days after execution of the trade). After the trade settles, you cannot change your mind about the method used.
Brokers also will be required to report to the IRS the cost basis of a short sale in the year in which the short is closed (in the past, it was done for the year a short sale was opened).
Presidential Candidates’ Income Tax Returns
January 25, 2012 No CommentsFor your viewing pleasure, here are the 2010 tax returns for the 2012 Republican presidential candidates. As of this posting, Ron Paul and Rick Santorum’s returns have not yet been released.
In addition, here are the 2010 tax returns for the President and Vice President:
What Congress Left Behind from 2011
January 6, 2012 No CommentsCongress left behind a mess. The extension of the payroll reduction is only for the first two months of 2012, leaving more uncertainty for taxpayers, along with a complex apportionment formula to be used in filing 2012 tax returns if Congress does not extend the payroll tax credit for all of 2012. Although 2011 returns are more or less unchanged from 2010, it will be difficult to estimate 2012 tax liabilities or to advise on business decisions or tax strategies as many expiring provisions did just that – they expired on December 31, 2011. Among the more important provisions Congress left unaddressed for 2012 are:
Individual Provisions
- Increased exemption levels for the individual AMT and personal tax credits allowed against regular tax and the AMT
- Deduction for state and local general sales taxes
- Above-the-line deduction for qualified tuition and related expenses
- Deduction for elementary and secondary school teacher expenses
- Expansion of adoption credit and adoption assistance programs
- Parity for exclusion from income for employer-provided mass transit and parking benefits
- Treatment of premiums for mortgage insurance deductible as interest that is qualified residence interest
Business Provisions
- 100 percent bonus depreciation
- Increased section 179 expensing limit of $500,000 with $2 million phaseout threshold and expanded definition of section 179 property.
- Research and development credit
- 15-year straight-line cost recovery for qualified leasehold improvements, restaurant buildings and improvements, and retail improvements
- Wage credit for employers of active-duty military members
Before the end of 2012, Congress must address many other expiring provisions, which means reviving the really big debate over whether to once again extend the Bush income tax cuts, estate and gift tax rules, capital gains tax rates.
In this uncertain environment, we feel that it is important to remain flexible when it comes to 2012 tax planning. Please do not hesitate to contact us to see how we can help.
OMG, the House and Senate Agreed on Something!
December 23, 2011 No CommentsHouse and Senate approve bill temporarily extending the payroll tax cut
Late on December 22, House and Senate leaders agreed to end their stalemate over extending the payroll tax break. Under the agreement, for the first two months of 2012, a 4.2% Social Security tax would continue to apply to workers’ pay (10.4% OASDI tax for self-employment income).
However, the agreement calls for new language to be inserted into the tax relief bill to prevent a potential payroll tax problem for employers. According to information provided by the House Ways & Means Committee, the revision would allow employers to withhold employee payroll taxes at 4.2% (instead of 6.2%) on all wages paid during the two-month extension period, subject only to the full 2012 wage base ($110,100) and without regard to the $18,350 cap (two-twelfths of the wage base of $110,100) on wages earned through the end of February, 2012. If an employee’s wages during the first two months of 2012 exceed $18,350, and the payroll tax reduction is not extended for the remainder of 2012, an amount equal to 2% of those excess wages would ultimately be recaptured on the worker’s individual tax return for 2012.
Both the Senate and House approved the bill on the morning of December 23. It will now be sent to the President for his expected signature.
Under the agreement, both Republicans and Democrats in the Senate and House will immediately appoint negotiators to a conference to forge a full-year extension of the payroll tax reduction.
Please do not hestiate to contact us for planning ideas that may help you leverage this payroll tax cut extension.
Year-End Tax Planning
November 29, 2011 No CommentsThe window of opportunity for many tax-saving moves closes on December 31. So set aside some time to evaluate your tax situation now, while there’s still time to affect your bottom line for the current tax year. With that in mind, here are 10 things to consider as the curtain closes on 2011.
1. Deferring income to 2012 means postponing taxes
Consider opportunities you might have to defer income to 2012. You might be able to delay a year-end bonus, for example. If you’re able to push what would have been 2011 income into 2012, you may be able to put off paying income tax on the deferred dollars until next year.
2. Paying deductible expenses sooner may help you in 2011
Does it make sense for you to accelerate deductions into 2011? If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012.
3. Income tax rates to remain the same in 2012
The same six federal income tax rates that apply in 2011 will apply in 2012. So, depending upon your income, you’ll fall into either the 10%, 15%, 25%, 28%, 33%, or 35% rate bracket. And, as in 2011, long-term capital gains and qualifying dividends will continue to be taxed at a maximum rate of 15% in 2012; and if you’re in the 10% or 15% tax rate brackets, a special 0% tax rate will generally continue to apply.
4. Is AMT a factor?
If you’re subject to the alternative minimum tax (AMT), special rules apply. For example, the AMT rules can effectively disallow a number of itemized deductions, making it a potentially significant consideration when it comes to year-end planning. You’re more likely to be subject to AMT if you claim a large number of personal exemptions, deductible medical expenses, state and local taxes, and miscellaneous itemized deductions. If you’ve been subject to the AMT in the past, or think that you might be for 2011, you’ll want to make sure that you understand how the AMT rules might affect you.
5. IRA and retirement plan contributions
Employer-sponsored retirement plans like 401(k) plans and traditional IRAs (if you qualify to make deductible contributions) present an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) aren’t deductible, so there’s no tax benefit for 2011–they’re still worth considering, though, because qualified distributions are free from federal income tax. The window to make 2011 contributions to your employer plan closes at the end of the year, but you can generally make 2011 contributions to your IRA up to April 17, 2012.
6. Special distribution requirements at age 70½
Once you reach age 70½, you’re generally required to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans you own. It’s important to make withdrawals by the date required–the end of the year for most individuals. The penalty is steep for failing to do so: 50% of the amount that should have been distributed. Barring additional legislation, 2011 will be the last year to take advantage of a popular provision allowing individuals age 70½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity (these charitable distributions are excluded from your income, and count toward satisfying any RMDs that you would otherwise have to take from your IRA for 2011).
7. Depreciation and expense limits to drop for business owners and the self-employed
If you’re a small business owner or a self-employed individual, you’re allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011; this “bonus” first-year additional depreciation deduction will drop to 50% for property acquired and placed in service during 2012. For 2011, the maximum amount that can be expensed under IRC Section 179 is $500,000, but in 2012 the limit will drop to $139,000.
8. Last chance to deduct energy-efficient home improvements
This is the last year you’ll be able to claim a credit for energy-efficient improvements you make to your home (up to 10% of the cost of qualifying property). Improvements can include a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of energy-efficient furnaces and hot water boilers. However, there’s a lifetime credit cap of $500 ($200 for windows). So, if you’ve claimed the credit in the past–in one or more years since 2005–you’re only entitled to the difference between the current cap and the amount you’ve claimed in the past.
9. Other expiring provisions
Barring additional legislation, this is the last year that you’ll be able to elect to deduct state and local general sales tax in lieu of state and local income tax, if you itemize deductions. This also will be the last year for both the above-the-line deduction for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals.
10. Get help
Making effective year-end moves requires a solid understanding of the rules that are in effect for both 2011 and 2012. It also requires a comprehensive grasp of your overall financial situation. We are available to help you evaluate potential tax planning opportunities.
What’s in the President’s Job Bill?
September 15, 2011 No CommentsPresident Barack Obama submitted his American Jobs Act to Congress on Monday, and among its provisions are several tax items, including a temporary payroll tax cut, a limit on itemized deductions for certain high-income taxpayers, and a proposal to tax carried interests as ordinary income rather than capital gains.
The proposed bill follows the president’s pledge last week in a speech to a joint session of Congress to create more jobs. He has asked Congress to take up the measure promptly, but its fate in Congress is unknown.
Specific tax breaks in the proposal include the following:
Temporary payroll tax cut for employers, employees, and the self-employed: The current temporary reduction in payroll taxes would be expanded. For 2012, the employee’s portion of Social Security tax would be 3.1%; the employer’s portion would also be 3.1%, up to the first $5 million of wages paid by the employer. The tax on self-employed workers would be reduced to 6.2%.
Temporary tax credit for increased payroll: From Oct. 1, 2011, through Dec. 31, 2012, the proposed bill would provide a payroll tax credit to offset the employer portion of Social Security tax due to wage increases over the corresponding period in the prior year.
Extension of temporary 100% bonus depreciation for certain business assets: The proposal would extend 100% bonus depreciation under IRC § 168(k) through the end of 2012.
Delay in application of withholding on government contractors: The measure would delay the effective date of the 3% withholding requirement on payments to government contractors until after 2013.
Returning heroes and wounded warriors work opportunity tax credits: The measure would double the section 51(b) credit available for hiring certain unemployed, disabled veterans. It also would create two new credits: One for hiring veterans who have been unemployed for at least four weeks and another for hiring veterans who have been unemployed for at least six months.
Long-term unemployed workers work opportunity tax credits: Another credit would be available for employers who hire individuals who have been unemployed for at least six months.
Revenue Raisers
The proposal also contains a number of tax-related revenue raisers:
28% limitation on certain deductions and exclusions: This provision would limit the value of deductions and exclusions to 28% of the taxpayer’s taxable income. This would apply to joint filers with adjusted gross income over $250,000 and single filers with adjusted gross income over $200,000.
Tax carried interest in investment partnerships as ordinary income: This provision would change the rules regarding partnership interests transferred in connection with performance of services and would add a new Code section with special rules for partners providing investment management services to partnerships. The effect would be to tax carried interests at ordinary income rates instead of as capital gains.
Change corporate jet depreciation: Under this provision, corporate jets would be depreciated over the same seven-year period as other aircraft.
Repeal oil subsidies: Various deductions and credits available to oil and gas producers would be repealed.
The bill also would make changes to the foreign tax credit rules and the treatment of taxes paid on foreign oil and gas income.
It’s 10PM: do you know where your bookkeeper is?
January 31, 2011 No Comments1/31/11: A local bookkeeper accused of stealing $760,000.
1/24/11: A local bookkeeper accused of forging $160,000 worth of checks.
11/26/10: A former A/P clerk accused of stealing $590,871 from a local university.
7/02/10: A local bookkeeper convicted of stealing $230,000 for her employer. (for or from?)
It seems like every couple of months there is a story of bookkeeper theft in the Daily Camera. The statistics on employee theft are staggering. The U.S. Chamber of Commerce estimates that 75% of employees steal from work in some way, and that 30% of corporate bankruptcies are a direct result of employee theft.
Credit crisis, recession, housing market, job layoff, pick a reason. The fact is that employee theft is on the rise and many small businesses are suffering because of it. Is YOUR business suffering because of it? Would you know before it’s too late?
In our experience, when it comes to small business, all employee theft starts with the owners. It happens when the owners have been too trustful or too distracted either chasing more business or enjoying success. There are just too few employees to check the effectiveness of procedures and systems in small businesses.
Some easy-to-implement internal controls include:
Preparing monthly reconciliations of all bank accounts. Monthly bank statements sent directly to, and reviewed by the owner prior to giving to the bookkeeper. Separating the opening of mail from the preparation of deposits. Maintaining an approved vendor list. Outsourcing your accounting function.
An outsourced accounting system may help mitigate your exposure to employee theft and may lower your overhead. Scher Jasper recently implemented an outsourced accounting solution for a successful medical practice. The doctor’s concerns regarding employee theft were addressed, and after restructuring the accounting department staff, the doctor’s accounting costs were reduced by over $45,000 per year.
Additional Tax Relief
December 20, 2010 No CommentsThe recently enacted “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” is a sweeping tax package that includes, among many other items, an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year “patch” of the alternative minimum tax (AMT), a two-percentage-point cut in employee-paid payroll taxes and in self-employment tax for 2011, new incentives to invest in machinery and equipment, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses. Here’s a look at the key elements of the package:
- The current income tax rates will be retained for two years (2011 and 2012), with a top rate of 35% on ordinary income and 15% on qualified dividends and long-term capital gains.
- Employees and self-employed workers will receive a reduction of two percentage points in Social Security tax in 2011, bringing the rate down from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for the self-employed.
- A two-year AMT “patch” for 2010 and 2011 provides a modest increase in AMT exemption amounts and allows personal nonrefundable credits to offset AMT as well as regular tax. Without the patch, an estimated 21 million additional taxpayers would have owed AMT for 2010.
- Key tax credits for working families that were enacted or expanded in the American Recovery and Reinvestment Act of 2009 will be retained. Specifically, the new law extends the $1,000 child tax credit and maintains its expanded refundability for two years, extends rules expanding the earned income credit for larger families and married couples, and extends the higher education tax credit (the American Opportunity tax credit) and its partial refundability for two years.
- Businesses can write off 100% of their new equipment and machinery purchases, effective for property placed in service after September 8, 2010 and through December 31, 2011. For property placed in service in 2012, the new law provides for 50% additional first-year depreciation.
- Many of the “traditional” tax extenders are reinstated for two years, retroactively to 2010 and through the end of 2011. Among many others, the extended provisions include the election to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction for state and local income taxes; the $250 above-the-line deduction for certain expenses of elementary and secondary school teachers; and the research credit.
- After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate of 35%. The exemption amount will be $5 million per individual in 2011 and will be indexed to inflation in following years. Estates of people who died in 2010 can choose to follow either 2010′s or 2011′s rules.
