Clock is Ticking on Year-End Tax Breaks….

Time again to review your year-end tax plans.The key to end-of-year tax planning is simple: Look at the overall impact on two tax years… 2011 and 2012…as you weigh your options. The goal is to cut your tax bill over both years, not just one. Most filers will save by accelerating write-offs from 2012 into 2011 and deferring income to 2012. If you’ll be in a higher bracket in 2012, consider the opposite…accelerating income and delaying your deductions.

 Tax Opportunities for Individuals

 Itemizers have the greatest flexibility:

·  State and local income taxes. Mailing your Jan. 2012 estimate in late Dec. lets you claim the deduction this year.

·  Donations. You can accelerate contributions planned for 2012 into 2011, but you must charge them or mail the checks by Dec. 31 to ensure a 2011 write-off. And consider making your donations using appreciated stock that you have owned for over a year. You deduct the full value and don’t pay any tax on the appreciation.

·  Interest. Making the Jan. 2012 mortgage payment on your residence before the end of this year enables you to deduct the interest portion in 2011.

·  Medicals. If you’ve exceeded the 7.5%-of-adjusted-gross-income threshold or are close to it, consider getting and paying for elective procedures this year.

Remember that some filers can hop in and out of the standard deduction from year to year. If your 2011 itemizations fall shy of the standard deduction amount, try delaying some and itemizing in 2012. But if their total just exceeds the standard deduction amount for this year, try to accelerate some itemizations and take the standard deduction in 2012. This year’s standard deduction for couples is $11,600, plus $1,150 more for those 65 and older. Singles get $5,800…$7,250 if 65 and up. Heads of households get $8,500 plus $1,450 if they are 65. Next year’s base amounts will be $300 higher for married couples, $200 larger for heads of households and $150 more for singles.

If you owe the alternative minimum tax, you may have to revise your strategy. Paying your Jan. 2012 state tax estimate in 2011 won’t work. And interest on home equity loans is not deductible for the AMT unless you use the proceeds to buy, build or renovate your main home. If you exercise an incentive stock option in 2011, the discount you get is hit by the tax unless you sell the shares by Dec. 31. And you won’t benefit from a 2011 payment of a real estate tax bill due in early 2012.

 Taking certain types of deductions makes you more likely to owe the AMT. Many write-offs must be added back when you calculate AMT liability: Sales taxes, state income taxes, property taxes, some medicals and most miscellaneous write-offs. Large gains can also trigger the tax if they cost you some of your AMT exemption.

Make an IRA Qualified Charitable Distribution. If you’re 701/2 or older, you may qualify to donate up to $100,000 from an individual retirement account (IRA) directly to a qualifying charitable organization. The donated amount must be a direct transfer from the IRA trustee to the charity; you should never take possession of the funds. The donated amount can then be excluded from your gross income for 2011, and it can be used to satisfy any required minimum distribution that must otherwise be received from that IRA. At this time, the Qualified Charitable Distribution deduction is scheduled to end on Dec. 31, 2011, so contributions need to be made early. The transaction won’t happen overnight, so be sure to leave plenty of time for paperwork and processing.

The long-standing advice of making the maximum allowable contribution to a 401(k) or 403(b) plan still stands. Taxable income reduction and tax-deferred growth yield benefits now and in the future. For 2011, the maximum contribution to a 401(k) or 403(b) is $16,500, with an additional $5,500 “catch-up” contribution allowed for those 50 and older by Dec. 31, 2011. For a traditional or Roth IRA, the maximum annual contribution is $5,000. For 2012, the maximum contribution to 401(k) and 403(b) plans will increase to $17,000.

Convert to a Roth IRA. Since 2010 it has been possible for any taxpayer, regardless of income, to convert a traditional IRA to a Roth IRA. In doing so, you sacrifice the current deductible contributions of a traditional IRA for the tax-free distributions of a Roth IRA. This is not for everyone, but if you expect to be in a higher tax bracket in retirement and you have sufficient cash to pay the income tax due on the conversion, it may be worth considering.

Get Energy Efficient. Installing energy-efficient improvements to your home may result in a tax credit opportunity. Exterior windows and doors, insulation, furnaces, solar cells, small wind turbines and other upgrades may qualify for up to $500 in credits. If you install some of these products in your home, be sure to get the proper documentation from the retailer. Unless Congress takes action, this deduction will end on Dec. 31, 2011.

 Get Credit for Child and Dependent Care Costs. If you pay child care expenses so you (and your spouse) can work, up to $3,000 of expenses ($6,000 for two or more dependents) can qualify for the deduction. You may also be able to deduct expenses related to caring for a disabled spouse or other adult dependent while you work. 

Deduct Student Loan Interest. If you’re paying off student loans, up to $2,500 of interest on qualified loans may be deductible in 2011. As usual, there are income limitations: Phase-out begins for joint filers at $120,000, and for singles at $60,000. Unfortunately, you can not deduct your child’s student loan interest, only your own.

Get a Break for Tuition Costs. Deductions of up to $4,000 are available to qualified taxpayers (based on income) for college tuition or job training courses paid in 2011.

Shrink Your Estate. Carefully planned gifting can help reduce your taxable estate to a point where it falls under the current $5 million estate

and gift tax exemption limits ($10 million for married couples). Those limits could drop significantly if the current law sunsets as scheduled on Dec. 31, 2012. In addition, you can give $13,000 each to anyone without it counting toward the $5 million lifetime gifting limit. Consider making these “annual exclusion” gifts to each of your children, putting them into a special trust for their benefit. By removing assets that are likely to appreciate and become a more significant part of your estate, you may be able to reduce future estate taxes.

 Delay Income/Accelerate Deductions. Talk to your employer about delaying end-of-year bonuses, incentive pay and other income that could push you to a higher taxable income level in 2011. Accelerating deductible payments of property tax, estimated state income tax and medical expenses may also aid in reducing your taxable income for the year. It’s not certain if the relatively low tax rates in effect until Dec. 31, 2012, will get renewed, so you may end up wanting to take the opposite approach toward the end of 2012 by accelerating income to take advantage of lower rates and deferring deductions to reduce 2013 taxable income.

 Think Ahead to the Medicare Surtax in 2013. Starting in 2013, a 3.8 percent Medicare surtax will be assessed on net investment income for those with incomes of $200,000 or more ($250,000 for married couples). Assuming that the law stands until 2013, consider strategies to bring your net investment income (interest and dividends, royalties, annuities and rents, for example) below the threshold.

Tax Opportunities for Businesses

 If you are buying assets, it usually pays to put them in service by Dec. 31. The reason: 100% bonus depreciation. Firms can write off the entire cost of qualifying assets placed in use this year, even for assets purchased in late Dec. They can take bonus depreciation on new assets with useful lives of 20 years or less…

Machines, equipment, land improvements and farm structures such as chicken coops. Leasehold improvements made to the interiors of commercial realty are eligible, too. The bonus depreciation percentage is scheduled to fall to 50% for assets put in use in 2012, although there is a good chance Congress will extend the 100% write-off because of the weak economy. Even if that occurs, putting a qualifying asset in service in 2011 rather than in 2012 accelerates the income tax benefit from the deduction.

 New heavy SUVs put in service in 2011 are entitled to a huge tax break: You can write off 100% of the cost if no personal use is made of the vehicle, thanks to 100% bonus depreciation. SUVs must have loaded gross vehicle weights over 6,000 pounds to qualify for this break. The $25,000 ceiling on expensing SUVs doesn’t apply if you take bonus depreciation. Used SUVs don’t get bonus depreciation.  And you can fully write off new pickup trucks with loaded weights over 6,000 pounds. Ditto for used heavy pickup trucks if the cargo bed is at least six feet in length. For lighter vehicles, the maximum write-off in the first year is $11,060.

 Expensing is also available for assets placed in service by Dec. 31. If you are putting used assets in service, you cannot claim 100% bonus depreciation on them, but those assets are eligible for expensing. For 2011, firms can expense up to $500,000 of the assets’ cost. Although this cap is supposed to fall sharply after 2011, Congress is likely to keep the higher cap for 2012. The $500,000 ceiling is reduced dollar for dollar after more than $2 million of assets are placed in service.

 Buying too many assets in the last quarter can cost you some write-offs on property that isn’t eligible for bonus depreciation. If you make more than 40% of your 2011 asset purchases after Sept., regular depreciation on all assets put in use in 2011 is figured on a quarterly basis. So assets you buy in late 2011 get 1½ months of depreciation instead of six months’ worth. This rule does not apply to buildings.

 Business owners can shift income and expenses between 2011 and 2012. Professionals can opt to delay year-end billings. Or they can speed them up if they expect to be in a higher tax bracket next year. Since 2012 is an election year, we don’t think that lawmakers will be increasing income tax rates for any filers. Firms can shift expenses from one year to another to tweak their income. However, the Revenue Service will balk if there is too much distortion of earnings.

 Owners can delay paying year-end bonuses so they aren’t taxed until 2012. But this doesn’t work for a majority owner if the bonus amount is fixed during 2011 and the firm has the cash to pay it…the owner is in constructive receipt of the money. Deductions for accrual method firms are limited. They can’t deduct bonuses in 2011 that are deferred to 2012 by owners of more than 50% of regular corporations or by owners of any interest in an S corporation, personal service firm or partnership. And weigh taking dividends in lieu of salary. This pays off if the corporation is in a low tax bracket and the owner is in a high bracket. The owner’s tax savings due to the 15% top rate on dividends plus the payroll tax savings on the dividend can exceed the extra tax the corporation pays because the dividend isn’t deductible. Note: This won’t work for S firms. Or for personal service firms…they pay a flat 35% tax.

 Disclaimers   

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by Sigma Accountants LLC to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her tax professional prior to taking any action based upon this information. Sigma Accountants LLC assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

Tax Saving Opportunity for those who switched to Roth in 2010…

If you switched an IRA to a Roth in 2010, note this tax-saving opportunity:

 You have until Oct. 17, 2011 to undo the switch and recover the tax paid.

 If the balance in your Roth has fallen since the conversion…a reasonable possibility in light of the recent decline in the stock market…switching the funds back to an IRA can save you a lot of tax. By returning the money to the IRA, you eliminate the tax on the conversion.

 If you’ve already filed for 2010, use Form 1040X to recoup the tax.You then must wait 30 days before you are able to reconvert the funds to a Roth. At that time, reconverting the smaller balance to a Roth will produce a lower tax bill.

 If the stock market drop has you thinking about a Roth conversion now… Consider using separate Roth IRAs for different asset classes. That way, if one segment of your Roth investments drops in value while the others increase, you can switch the underperforming account back to an IRA tax and penalty free.

This strategy gives you maximum flexibility. If you timely file your 2011 return, you will have until Oct. 15, 2012 to decide whether you are better off unconverting. Note that the old $100,000 adjusted gross income cap on conversions is no more, and the option to defer the tax bill on the switch over two tax years ended after 2010.

Seniors who are thinking of converting should note a couple of tax traps: The extra income from the conversion can affect Medicare Part B premiums. Upper incomers have to pay a monthly surcharge on top of their regular premium. The surtax starts above $85,000 of AGI for singles and $170,000 for married filers, rising to 220% of the basic premium for single filers with income above $214,000 and married couples with AGI over $428,000. Roth conversion income is included in computing AGI for the surcharge. That can cause Part B premiums to increase by up to $3,000 a year per person. So reporting a lot of Roth conversion income in 2011 may end up dramatically increasing your Medicare Part B premium for 2013.

There’s a similar effect with Social Security benefits. Lower-income seniors who convert may see more of their benefits taxed because of that additional income. But seniors won’t have to take required minimum payouts from their Roths. And any payouts they take will be tax free. That will trim their AGI in future years.

Many early payouts from IRAs and plans are exempt from the 10% penalty. IRS has a helpful chart that lists the exceptions for distributions made before the recipient reaches age 59½, along with the section of the income tax code where the exception appears. Examples: A series of substantially equal payments for the longer of five years or until age 59½ and payouts for large medical expenses.

Go to http://www.irs.gov/pub/irs-tege/early_distributions.pdf to view the complete list.

Clearing Medicare Surtax confusion after 2012 Sales

The 3.8% Medicare surtax won’t apply to all home sale profits after 2012.

Clients tell us they’ve received e-mails or read newspaper articles asserting that gains on all home sales will be hit by a 3.8% tax. That is incorrect.

Most gains on sales of primary residences will be exempt. Only the portion of profits that exceeds the $250,000 or $500,000 exclusion will be subject to the tax.

And only higher incomers will owe the surtax…singles with adjusted gross incomes over $200,000 or joint filers with AGIs above $250,000. The 3.8% surtax is levied on the smaller of the filer’s net investment income (including taxable capital gains) or the excess of the taxpayer’s adjusted gross income over the threshold amounts.

But profits on sales of rental properties and second homes will be hit by the surtax, assuming that the seller’s adjusted gross income is large enough.

The passive loss rules are strict for short-term rentals of real estate… average rentals of seven days or less. A couple rented out several property units that each had rental periods averaging seven days or less. They used the companies that managed the properties to obtain tenants, collect rents, and perform maintenance and the like. They visited occasionally to buy items for the units and make repairs.

The couple must materially participate in the units to deduct their losses, the Tax Court says. The easier-to-satisfy active participation test does not apply in the case of short-term rentals. So to deduct their rental losses, the owners must put in at least 100 or more hours a year on each unit, and their participation must be more than anyone else’s. Or they must work over 500 hours on each rental.

In this case, the couple did not satisfy either test ( Jende, TC Summ. Op. 2011-82).

Did you send your school-age child to math day camp this summer?

The cost qualifies for the dependent care credit, according to the IRS. The same goes for camps that focus on improving reading, writing or study skills.  And other special day camps, such as those for computers, theater or soccer.

But the costs of summer school and tutoring programs aren’t eligible for the credit… they’re treated as education, not care. The other rules for the credit aren’t affected: The child must be under 13 and the costs must be incurred so the parents can work.

However, the credit is not available for any tuition paid for kindergarten.

Parents who have a child in half-day kindergarten can take the credit on the cost of care both before and after school. But they are not allowed to apportion expenses if they otherwise decide to send the child to a school with full-day kindergarten.

Debating between leasing or buying a company vehicle? Here are the tax deduction rules….

New heavy SUVs put in service in 2011 are entitled to a bigger tax break:

100% of the cost can be written off if no personal use is made of the vehicle, thanks to 100% bonus depreciation. SUVs must have loaded gross vehicle weights over 6,000 pounds to qualify for this break. The $25,000 ceiling on expensing SUVs doesn’t apply if bonus depreciation is taken. Used SUVs don’t get bonus depreciation.

New pickup trucks with loaded weights over 6,000 pounds can be fully written off. This also applies for used heavy pickup trucks if the cargo bed is at least six feet in length.

 

Leasing a vehicle to use in your business is much cheaper this year. The amount taxed is about 50% less than in 2010 (Rev. Proc. 2011-21). If a vehicle that’s worth more than $18,500 is first leased for business during 2011, the lessee must pay income tax each year on an amount spelled out in IRS tables. The extra income partially offsets the lessee’s tax deduction for the lease payments and is intended to approximate the squeeze on buyers from the cap on depreciation.

NOTE: Depreciation for autos put in use in 2011 doesn’t change: The first year cap is $11,060 for new cars and $3,060 for used cars. The second and third year limits are $4,800 and $2,850, respectively. The ceiling in all subsequent years is $1,775.

Reminder: Report Certain Foreign Bank and Financial Accounts to Treasury by June 30

This is a reminder to anyone who has a bank or other financial account in a foreign country, or who has signature authority over such an account, that they may be required to report the account to the U.S. Department of the Treasury by June 30 each year.

Many people in the U.S. have foreign financial accounts. While there is nothing improper about setting up or maintaining such accounts, many people may mistakenly believe their accounts are not large enough on a combined basis to trigger reporting obligations. Foreign account owners may have to report their accounts to the government, even if the accounts do not generate any taxable income.

U.S. persons are required to file a Report of Foreign Bank and Financial Accounts (FBAR), Treasury Department Form TD F 90-22.1, each year if they have a financial interest in or signature authority over
financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year.

For 2010, the due date for filing the FBAR is Thursday, June 30, 2011, though some financial professionals will have until June 30, 2012 to file. Unlike with federal income tax returns, requests for an extension of time to file an FBAR cannot be granted.

The FBAR is not an income tax return and should not be mailed with any income tax returns. It is due by June 30 of the year following the calendar year in which the aggregate value of the foreign accounts, on any one day, exceeds $10,000. But for 20009 and earlier years, the due date is generally Nov. 1, 2011
for individuals whose filing deadline was properly deferred under Notice 2009-62 or Notice 2010-23, and have no financial interest in a foreign financial account but with signature or other authority over that account.

FBARs are filed with the U.S. Department of the Treasury, P.O. Box 32621, Detroit, Mich. 48232-0621.

Civil and criminal penalties for non-compliance with the FBAR filing requirements are significant. Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for a willful
violation can range up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR requirements while also violating certain other laws can range up to a $500,000 fine or 10 years imprisonment or both. Civil and criminal penalties may be imposed together.

If you learn you were required to file FBARs for earlier years, you should file the delinquent FBAR reports and attach a statement explaining why the reports are filed late. No penalty will be asserted if IRS determines
that the late filings were due to reasonable cause. Keep copies, for your records, of what you send. If, however, you have any unreported taxable income related to the foreign accounts, you should instead follow the procedures for making a voluntary disclosure to IRS under the 2011 Offshore Voluntary Disclosure Initiative.

The address for delivery of an FBAR by a method other than U.S. mail is: U.S. Department of the Treasury, Currency Transaction Reporting, 985 Michigan Avenue, Detroit, Mich., 48226.

The FBAR form is not available for electronic filing, but many income tax software packages can prepare a printed copy. FBAR forms and instructions are also available on IRS.gov or the Financial Crimes Enforcement Network website, FinCEN.gov, and by calling 1-800-829-3676.

Taxpayers who need assistance completing Form TD F 90-22.1 can contact the IRS by telephone at 1-800-800-2877, option 2, or via email at FBARquestions@irs.gov.

Disclosure Statement pursuant to Circular 230 of US Treasury Regulations: Unless expressly stated
in writing otherwise, any federal tax advice contained in this communication, including all attachments, cannot be used by any person or persons for the purpose of avoiding penalties imposed on any such person or persons by the Internal Revenue Service. Furthermore, no one may use any part of this communication and any attachments hereto, to promote, market or recommend any federal tax transaction without my express written consent.

 

June 15th Due Date for 2 Qtr Estimted Taxes

June 15, 2011, is the due date for making your second installment of 2011 individual estimated tax. Your check to the United States Treasury should be accompanied by Form 1040-ES. June 15 is also the due date for calendar-year corporations to make their second quarter 2011 estimated tax payment.

Please remember that the quarterly periods are never exactly three months. Don’t make the mistake of assuming that it’s quarterly, or you’ll end up making your second payment on July 15, and it will be a month late!

These six tips from the IRS will provide you with a quick look at estimated taxes and how to pay them…

1. If you have income from sources such as self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, or awards, then you may have to pay estimated tax.
2. As a general rule, you must pay estimated taxes in 2011 if both of these statements apply: 1) you expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and credits, and 2) you expect your withholding and credits to be less than the smaller of 90% of your 2011 taxes or 100% of the tax on your 2010 return. There are special rules for farmers, fishermen, certain household employers, and certain higher-income taxpayers.
3. For sole proprietors, partners, and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
4. To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions, and credits for the year. Use the worksheet in Form 1040ES, Estimated Tax for Individuals, which we can send you. You want to be as accurate as possible to avoid penalties. Also, consider changes in your situation and recent tax law changes.
5. The year is divided into four payment periods, or due dates, for estimated tax purposes. Those dates generally are April 15, June 15, Sept. 15, and Jan. 15.
6. Form 1040ES, Estimated Tax for Individuals, provides all you’ll need to pay estimated taxes. This includes instructions, worksheets, schedules, and payment vouchers. The easiest way to pay estimated taxes, however, is electronically through the Electronic Federal Tax Payment System or EFTPS. You can also pay estimated taxes by check or money order using the Estimated Tax Payment Voucher or by credit or debit card. 

Please read our original post on estimated taxes: http://sigmataxes.wordpress.com/2010/09/27/small-biz-issuesestimated-taxes/

Take our advice and don’t ignore your estimated tax payments. And please call us with any questions.

Disclosure Statement pursuant to Circular 230 of US Treasury Regulations:

Unless expressly stated in writing otherwise, any federal tax advice contained in this communication, including all attachments, cannot be used by any person or persons for the purpose of avoiding penalties imposed on any such person or persons by the Internal Revenue Service. Furthermore, no one may use any part of this communication and any attachments hereto, to promote, market or recommend any federal tax transaction without my express written consent.