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Accounting and Tax Planning

Accounting and Tax Planning Sections
Many of These Changes Will Impact Individuals and Businesses

By MARK J. COREY, CPA

Several well-known tax breaks have expired in 2014, and absent Congressional action to renew them, they will not be available for taxpayers in 2014.

There has been discussion by the Senate and the House to renew some or all of the expired provisions, but no laws have been passed. While indications are that at least some of these provisions may eventually be extended, if the expiration of these commonly used tax provisions has a significant impact on you or your business, you may want to prepare by adjusting withholdings and estimated tax payments just in case.


Expired Provisions Affecting Individuals

Mortgage-insurance Premium Deductions

Homeowners were allowed to deduct qualified mortgage-insurance premiums by treating them as home-mortgage interest.

Mortgage Debt Relief

Generally, cancelled or forgiven debt is considered taxable income. However, up to $2 million of cancelled principal-residence mortgage debt could be excluded from taxable income if the debt was discharged on or after Jan. 1, 2007, and before Jan. 1, 2014, as a result of foreclosure, short sale, or mortgage restructuring.


State and Local General Sales-tax Deduction

Taxpayers had the option to deduct sales tax instead of state income tax in years before 2014. This provision was especially beneficial for individuals who lived in states with no income tax.


Educator Out-of-pocket Expenses Deduction

For many years, elementary and secondary school teachers enjoyed an above-the-line deduction of up to $250 for out-of-pocket expenses for school and classroom-related expenses.

Tuition and Fees Deduction

Taxpayers were able to deduct above-the-line qualified higher education expenses. Taxpayers will no longer get this deduction for 2014, but the Lifetime Learning Credit and American Opportunity Credit will still be available for college students.

Non-business Energy Credit

This credit for the installation of qualified energy-efficiency improvements, such as insulation, windows, doors, and roofs, as well as certain water heaters and qualified heating and air-conditioning systems, expired Dec. 31, 2013.

Expired Provisions Affecting Businesses

Expanded IRC Section 179 Expensing

For tax years beginning in 2010 and through 2014, taxpayers were allowed to expense up to $500,000 for eligible property additions that they would have otherwise capitalized and depreciated over their useful lives, provided the eligible additions did not exceed $2 million. The Section 179 deduction dropped to $25,000 for tax years beginning on or after January 1, 2014.

Bonus Depreciation

A bonus depreciation deduction was allowed for qualifying fixed assets acquired and placed in service from 2007 through 2013. The rate was generally 50%; however, for qualifying assets placed in service from Sept. 9, 2010 through Dec. 31, 2011, the rate was 100%. For 2014 and future years, there is no current bonus depreciation allowed except on long-production property and certain non-commercial aircraft, for which the expiration was extended by one year to Dec. 31, 2014.


Retail and Restaurant Improvements

Certain qualified business assets were allowed a shorter life for depreciation purposes. Qualified leasehold improvements and restaurant improvements, placed in service from Oct. 23, 2004 through Dec. 31, 2013, were depreciated over 15 years. Qualified retail-store improvements, placed in service from Jan. 1, 2009 through Dec. 31, 2013,were also depreciated using a 15-year life. For these types of additions placed in service in 2014, the depreciable life generally reverts back to 39 years but depends upon the individual type of expenditure.

R & D Tax Credit

Taxpayers were allowed a tax credit equal to 20% of the excess of qualified research expenses for the current year over the prior year, basic research payments made to qualified organizations, and specific energy-research-consortium expenditures paid or incurred through Dec. 31, 2013.


Conclusion

There are many well-known and popular tax breaks that expired prior to 2014. On April 28, 2014, the Senate introduced the EXPIRE (Expiring Provisions Improvement, Reform, and Efficiency) Act of 2014 to extend more than 50 expired tax breaks and benefits. That same day, the bill was approved by the Senate Finance Committee but has advanced no further due to disagreements on procedural issues. The House has taken a different approach, and the House Ways and Means Committee has passed 12 separate tax bills, including seven for business-tax extenders and five related to charitable deductions.

One of the business-extender bills, a simplified research-credit bill which would make the extension permanent, was passed by the House, and it is expected that the remaining 11 bills will be considered prior to the August recess. Given the different approaches by the House and Senate, reaching agreement may be a challenge. n


Mark J. Corey is a senior tax manager in the Springfield office of Wolf & Co., P.C. Wolf is a leading regional certified public accounting firm with offices in Springfield, Boston, and Albany, N.Y., which provides accounting, tax, and consulting services to individual and business clients.

Accounting and Tax Planning Sections
Effective Planning Now Can Lower Your Tax Burden

Kristina Drzal-Houghton

Kristina Drzal-Houghton

Tax planning is inherently complex, with the most powerful tax strategies often relying as much on clairvoyance as they do on calculations.
As 2013 begins to wind down, the need for a crystal ball lessens, and the ability to strategize with more certainty is upon us. This developing certainty provides opportunities for individuals and businesses to manage tax liabilities through tax-planning techniques.
Year-end tax planning has always been arduous, but early 2013 legislation complicated the tax structure by layering in new tax brackets and income buckets, bringing a multi-dimensional complication to tax planning this year.
In this article we focus on tax-planning techniques that can be executed during the remainder of 2013, but specific facts and circumstances may open up other opportunities or limit some of the tactics discussed.
Tax Strategies for Business Owners
Business equipment. Significant tax benefits remain available for business equipment purchases during 2013. A 50% bonus depreciation deduction is available for qualified property placed in service during 2013. The deduction is set to expire for 2014. To qualify for bonus depreciation, equipment must be new and placed in service by year-end.
Section 179 expensing rules provide full expensing for up to $500,000 of qualifying property placed in service during 2013. However, the full deduction is available only if the total amount of qualifying property placed in service in 2013 does not exceed $2 million. The Section 179 deduction limit is scheduled to be drastically reduced in 2014.
• Planning point: If you are planning to purchase a significant amount of machinery and equipment for your business in the next year or two, consider accelerating your order so the assets are delivered and placed into service by Dec. 31, 2013. To take full advantage of the Section 179 deduction, monitor total purchases to prevent its phaseout.
Deduction for qualified production activities income. Taxpayers can claim a deduction, subject to limits, for 9% of the lesser of (1) the taxpayer’s ‘qualified production activities income’ for the tax year (i.e., net income from U.S. manufacturing, production, or extraction activities; U.S. film production; U.S. construction activities; and U.S. engineering and architectural services), or (2) the taxpayer’s taxable income for that tax year, before taking this deduction into account. This deduction generally has the effect of a reduction in the taxpayer’s marginal rate and, thus, should be taken into account when making decisions regarding income-shifting strategies.
Net operating losses and debt-cancellation income. A business with a loss this year may be able to use that loss to generate cash in the form of a quick net operating loss carry-back refund. This type of refund may be of particular value to a financially troubled business that needs a fast cash transfusion to keep going.
There also are a number of different kinds of debt-cancellation or debt-reduction transactions that may generate taxable income in 2013 if not deferred until 2014.
Retirement Plans. Starting a small-business retirement-savings plan is easier than you think and offers significant tax advantages. Employer contributions are deductible from the employer’s income, employee contributions are not taxed until distributed to the employee, and investments in the program grow tax-deferred. Further, the tax law offers a small incentive of a $500-per-year tax credit for the first three years of a new SEP, SIMPLE, or other retirement plan to cover the initial setup expenses for certain small employers.

Individual Tax-rate Management
In prior years, the main concern was that, if you reduced your regular income tax too far, the alternative minimum tax (AMT) would step in to appropriate your hard-earned tax savings. There are now additional dynamics to consider, when certain thresholds are exceeded, in the form of a 3.8% net-investment-income (NII) tax levied on investment income, a 0.9% Medicare payroll tax levied on wages and self-employment earnings, and a multi-tiered, long-term capital-gains tax-rate structure.
These new taxes, beginning in 2013, apply when adjusted gross income exceeds certain thresholds ranging from $200,000 for single filers to $250,000 for married taxpayers. For these thresholds and most others mentioned in this article, married filing separate uses one-half the married threshold.
Additionally, the 39.6% tax bracket returns this year after a long hiatus for taxpayers above thresholds ranging from $400,000 of taxable income for single filers to $450,000 for married filers.
Net investment income tax. The 3.8% NII tax now applies to most investment income. For individuals, the amount subject to the tax is the lesser of (1) the net investment income; or (2) the excess of modified adjusted gross income (MAGI) over the applicable threshold amount.
NII includes dividends, rents, interest, passive-activity income, capital gains, annuities, and royalties. Passive pass-through income will be subject to this new tax, but non-passive will not. Self-employment income, income from an active trade or business, and portions of the gain on the sale of an active interest in a partnership or S corporation with investment assets, as well as IRA or qualified plan distributions, are not subject to the NII tax.
• Planning point: Weighing a decision about selling marketable securities to meet current cash needs? Consider using margin debt for replacement securities. The interest on the debt will be deductible, subject to the investment-interest limitation, which could reduce your NII for purposes of the new tax.
• Planning point: To the extent your NII is income from a passive activity, increasing your material participation in the activity between now and the end of the year can reduce the amount of income subject to the NII tax. Proceed with caution, though, because a change in participation level may impact other short- and long-term tax obligations.
• Planning point: As you near the applicable threshold, consider revising the timing of distributions from retirement plans to manage your net investment income. While the distributions themselves are not NII, the distributions increase your MAGI, which could subject more of your investment income to the NII tax.
Increased maximum tax rates on long-term capital gains. While avoiding or deferring tax may be your primary goal, to the extent there is income to report, the income of choice is long-term capital gain income thanks to the favorable tax rates available. The available rates differ depending on the taxpayer’s tax bracket.
Taxpayers in the 39.6% bracket will now pay a 20% long-term capital gains and qualified dividends rate. Additionally, those above the previously noted thresholds will pay the 3.8% tax in addition to the increased capital-gains rate.
• Planning point: The netting rules provide an opportunity to manage the net gain or loss subject to taxation, making it prudent to review your investment gains and losses before the close of year to determine whether additional transactions prior to year-end may improve your tax outlook.
Recognition of same-sex marriage for federal tax purposes. Beginning in 2013, legally married same-sex couples must file a joint or married-filing-separately return. The rules do not extend to cover domestic partnerships. The ruling is retroactive, opening up a refund opportunity in certain circumstances for those who were previously prohibited from joint filing. Amended returns may be, but are not required to be, filed for tax years still open by statute of limitations.

Year-end Timing Strategies
Managing the alternative minimum tax. The AMT applies when income, as adjusted for certain preference items, exceeds certain exemptions, but the rate applied to that income falls below the AMT rate, essentially acting as a tax-leveling mechanism. Residents of states with high income and property taxes, like Connecticut and Massachusetts, are more likely to be subject to the AMT because these state taxes are not deductible when computing AMT income.
The AMT exemptions are subject to phaseouts when AMT income exceeds $115,400 for single filers and $153,900 for married joint filers.
Delaying or prepaying expenses. As a cash-method taxpayer, you can deduct expenses when you pay them or charge them to your credit card. Payment by credit card is considered paid in the year the charge is incurred. Expenses that are commonly prepaid in connection with year-end tax planning include:
Charitable contributions. A tax deduction is available for cash contributions to qualified charities of up to 50% of adjusted gross income (AGI) and up to 30% (20% for gifts to private operating foundations) of your AGI for charitable gifts of appreciated property.
• Planning point: Consider contributing appreciated securities that you have held for more than one year. Usually, you will receive a charitable deduction for the full value of the securities, while avoiding the capital-gains tax that would be incurred upon sale of the securities.
State and local income taxes. Consider prepaying any state and local income taxes normally due on Jan. 15, 2014, or with the filing of the return if you do not expect to be subject to the AMT.
• Planning Point: If you expect to owe state and/or local income tax when you file your return for 2013, consider paying that amount before Dec. 31, 2013. Although you relinquish your cash in advance, the benefit from accelerating the tax deduction and lowering your current federal income tax could be significant. It is particularly powerful if the deduction could be lost through the AMT in 2014. Just be careful that your prepayment does not make you subject to AMT in 2013.
Real-estate taxes. Like state and local income taxes, real-estate tax levies due early in 2014 can often be prepaid in 2013. For real-estate taxes on your residence or other personal real estate, just be mindful of the AMT in both years. Real-estate tax on rental property is deductible whether or not you are subject to AMT, and it can be safely prepaid.
Mortgage interest. There are limits on your ability to deduct prepaid interest. However, to the extent your January mortgage payment reflects interest accrued as of Dec. 31, 2013, a payment prior to year-end will secure the interest deduction in 2013.
Other itemized deductions. Miscellaneous itemized deductions, like many deductions, are deductible only if you itemize your deductions and are not subject to AMT. Where miscellaneous itemized deductions differ is with the requirement that the total deductions exceed 2% of your AGI to be deductible.
Itemized deduction phaseout. After a three-year hiatus, 2013 marks the return of the phaseout of certain itemized deductions for higher-income taxpayers. For affected taxpayers, itemized deductions are reduced by 3% of the amount by which AGI exceeds thresholds ranging from $250,000 for a single filer to $300,000 for married joint filers.
However, deductions for medical expenses, investment interest, casualty and theft losses, and gambling losses are not subject to the limitation. Taxpayers cannot lose more than 80% of the itemized deductions subject to the phaseout.
Exemption phaseout. A personal exemption is generally available for you, your spouse if you are married and file a joint return, and each dependent (a qualifying child or qualifying relative who meets certain tests). In 2013, the exemption amount is $3,900, subject to a reinstated phaseout of the exemption for higher-income taxpayers. These phaseout thresholds begin at the same AGI limits discussed for itemized deductions above.
Retirement-plan distributions. If you are over age 59½ and your 2013 income is unusually low, consider taking a taxable distribution from your retirement plan, even if it is not required, to use the unusually low tax rate for the period. More powerful still, consider converting the funds to a Roth account.
• Planning point: If you expect to be in a higher tax bracket in the future, consider converting your traditional IRA into a Roth IRA during your lower-income years. You will be paying taxes early, but future appreciation of the assets in your account may escape income taxes entirely.
IRA distributions to charity. If you are over age 70½, you can make a tax-free distribution of up to $100,000 from your IRA to a qualified charity before Dec. 31, 2013. Under current law, this opportunity will not be available for 2014.
Note that this opportunity is doubly powerful beginning in 2013. In addition to prior tax benefits, now the IRA is not included in your MAGI, and thus this strategy may reduce exposure to the new 3.8% NII tax.
Worthless securities and bad debts. Both worthless securities and bad debts could give rise to capital losses. Since no transaction generally alerts you to this deduction, you should review your portfolio carefully.
• Planning point: If you own securities that have become worthless or made loans that have become uncollectible, ensure that the losses are deductible in the current year by obtaining substantive documentation to support the deduction.
Contributing to a retirement plan. You may be able to reduce your taxes by contributing to a retirement plan. If your employer sponsors a retirement plan, such as a 401(k), 403(b), or SIMPLE plan, your contributions avoid current taxation, as will any investment earnings until you begin receiving distributions from the plan. Some plans allow you to make after-tax Roth contributions, which will not reduce your current income, but you will generally have no tax to pay when those amounts, plus any associated earnings, are withdrawn in future years.
You and your spouse must have earned income to contribute to either a traditional or a Roth IRA. Only taxpayers with modified AGI below certain thresholds are permitted to contribute to a Roth IRA. If a workplace retirement plan covers you or your spouse, modified AGI also controls your ability to deduct your contribution to a traditional IRA. There is no AGI limit on your or your spouse’s deduction if you are not covered by an employer plan. If your modified AGI falls within the phaseout range, a partial contribution/deduction is still allowed.
• Planning point: If you would like to contribute to a Roth IRA, but your income exceeds the threshold, consider contributing to a traditional IRA for 2013, and convert the IRA to a Roth IRA in 2014. Be sure to inquire about the tax consequences of the conversion, especially if you have funds in other traditional IRAs.

Other Personal Tax-planning Considerations

Withholding/estimated tax payments. With higher rates in effect for 2013, more taxpayers may find themselves exposed to an underpayment penalty. Underpayment penalties can be avoided when total withholdings and estimated tax payments exceed the 2012 tax liability or, in the case of higher-income taxpayers, 110% of 2012 tax.
• Planning point: If you expect to be subject to an underpayment penalty for failure to pay your 2013 tax liability on a timely basis, consider increasing your withholding between now and the end of the year to reduce or eliminate the penalty. Increasing your final estimated tax deposit due Jan. 15, 2014 may reduce the amount of the penalty, but is unlikely to eliminate it entirely. Withholding, even if done on the last day of the tax year, is deemed withheld ratably throughout the tax year.
Losses from pass-through business entities. If your ability to deduct current-year losses from a partnership, LLC, or S corporation may be limited by your tax basis or the ‘at-risk’ rules, consider contributing capital to the entity or, in some cases, making a loan to the entity prior to Dec. 31, 2013, to secure your deduction this year.
• Planning point: If you anticipate a net loss from business activities in which you do not materially participate, consider disposing of the loss activity by Dec. 31, 2013. Assuming sufficient basis exists, all suspended losses become deductible when you dispose of the activity. Even if there is a gain on the disposition, you may still benefit from having the long-term capital gain taxed at 23.8% (inclusive of the NII tax) with the previously suspended losses offsetting other ordinary income.
American opportunity tax credit (AOTC). The AOTC for college costs has been extended for five years through 2017. A credit of up to $2,500 may be claimed during the first four years of college. The credit phases out for AGI in excess of $80,000 for single taxpayers and $160,000 for married taxpayers filing a joint return.
• Planning point: If your income is too high for you to qualify for the AOTC, consider gifting your children the funds necessary to pay the qualified education expenses, making them eligible to claim the AOTC.
Energy credit. The $1,500 credit for new windows and doors has expired, but a credit of up to $500 for residential energy property is still available if prior years’ credits were not taken.
Estate and gift taxes. For 2013, taxpayers are permitted to make tax-free gifts of up to $14,000 per year, per recipient ($28,000 if married and using a gift-splitting election, or if each spouse uses separate funds). By making these gifts annually, taxpayers can transfer significant wealth out of their estate without using any of their lifetime exclusion.
• Planning point: Consider making similar gifts early in 2014. Each year brings a new annual exclusion, and a gift early in the year transfers next year’s appreciation out of your estate.
• Planning point: Additional gifts can be made using the lifetime gift exclusion, which is $5.25 million ($10.5 million for married couples) in 2013. Future exclusions are indexed for inflation. The recent increases to the exclusion make it a good time to review any existing estate and gift plans to ensure they best meet your needs.
• Planning point: When combined with other estate and gift-planning techniques, such as Section 529 plans to help fund your children’s or grandchildren’s college education, the potential exists to avoid or reduce estate and gift taxes while transferring significant wealth to other family members.

Conclusion

The changes initiated during 2013 added layers of complexity to an already difficult tax system, but with a purposeful, informed plan in place, taxpayers can still reap significant benefits. Consult your tax advisor so they can best support you in building your plan for 2013 and beyond.

Kristina Drzal Houghton, CPA, MST is a partner with the Holyoke-based accounting firm Meyers Brothers Kalicka, and director of the firm’s Taxation Division; kh[email protected]

Accounting and Tax Planning Sections
Medicare Tax Implications of the Affordable Care Act

By MICHAEL J. ROWE, CPA

Michael J. Rowe, CPA

Michael J. Rowe, CPA

The Affordable Care Act (ACA), signed into law in 2010, made two significant changes to Medicare tax for high-income taxpayers for years beginning after 2012. This article will provide a broad overview of the changes, explain how to reflect the additional taxes on an individual’s personal tax returns, and provide possible strategies to mitigate these taxes.

New 3.8% Surtax on Net Investment Income
Before the ACA, there was no Medicare tax on unearned income. The ACA imposes an additional Medicare tax of 3.8% of the lesser of: (1) net investment income, or (2) the excess of modified adjusted gross income over a threshold amount ($250,000 for joint returns or surviving spouses, $125,000 for a married individual filing a separate return, or $200,000 for all other taxpayers).
The threshold amounts are not indexed for inflation, so as time passes, more taxpayers will be subject to the tax.
Modified adjusted gross income is adjusted gross income increased by any amount excluded from income as foreign earned income, net of deductions and exclusions disallowed with respect to the foreign earned income. As a practical matter, most U.S. residents do not have foreign earned income, so modified adjusted gross income would be the same as adjusted gross income.
Net investment income is the excess of the following items over deductions allocable to those items:
• Gross income from interest, dividends, annuities, royalties, and rents, unless they are derived in the ordinary course of a trade or business to which the 3.8% surtax does not apply;
• Other gross income derived from a trade or business to which the 3.8% surtax does apply; and
• Net gain attributable to the disposition of property other than property held in a trade or business to which the 3.8% surtax does not apply.
Gross income does not include items that are not included in gross income for income-tax purposes.
The 3.8% surtax applies to a trade or business only if it is considered a passive activity or if it is a trade or business of trading in financial instruments or commodities.
The additional Medicare tax is considered a tax for estimated payment purposes. An individual cannot request additional withholding specifically for the additional Medicare tax, but may increase his or her overall withholding using Form W-4.
The 3.8% surtax is calculated on Form 8960, which will be included in the individual’s tax return.
There are a few potential strategies to minimize additional net investment income in the current year:
• Consider taking taking capital losses to offset capital gains;
• Consider the installment method of reporting gains, if possible;
• If salary and other non-investment earnings plus net investment income approximate the threshold above, try to avoid, if feasible, additional income before year-end. This will defer, and possibly eliminate, the 3.8% surtax;
• If you have a one-time significant gain which brings you close to the threshold, try to defer, if possible, the recognition of additional income; and
• The surtax applies to passive activities, but not income from an activity in which a person is a material participant. It may be possible, with the advice of a tax advisor knowledgeable in the passive-activity rules, to increase participation in an activity in order to qualify as a material participant.

New 0.9% Medicare Tax on Wages and Self-Employment Income
The ACA increases the employee portion of the Medicare tax by an additional tax of 0.9% of wages and self-employment income received in excess of the threshold amounts as follows: $250,000 for joint returns, $125,000 for a married individual filing a separate return; or $200,000 for all other taxpayers.
As with the threshold amounts for the 3.8% surtax discussed above, these threshold amounts are not indexed for inflation, so as time passes, more taxpayers will be subject to the tax.
Unlike the current 1.45% Medicare tax on wages, the additional tax on a joint return is on the combined wages of the employee and the employee’s spouse.
The employer is required to withhold the additional 0.9% Medicare tax on wages in excess of $200,000, regardless of the person’s filing status or wages paid by another employer. It is possible that the person will owe more than the amount withheld. In that case, the employee should consider making estimated tax payments or increasing their withholding using Form W-4. If the person is self-employed, then he or she should consider increasing estimated tax payments.
If an employer withholds more than is required (for example, if an employee earns more than $200,000 but the joint return has total wages less than $250,000), then the excess withholding can be claimed as a credit on the employee’s income-tax return.
The 0.9% Medicare tax is calculated on Form 8959, which will be included in the individual’s tax return. To reduce or defer this 0.9% Medicare tax, consideration should be given to deferring income, if possible, to next year if income is above the threshold, especially if a non-recurring event occurred this year that increases wage and/or self-employment income above the threshold amount.

Conclusion
These new Medicare taxes will impact most high-income taxpayers. This has been a broad overview of the rules and planning strategies. There are more complicated rules and strategies beyond the scope of this article, especially with regard to investments in partnerships and subchapter S corporations.
For more information, you can go to www.irs.gov and search for “net investment income tax” or “additional Medicare tax,” or contact your tax advisor.

Michael J. Rowe is a principal with Wolf & Co., P.C., which has offices in Boston, Springfield, and other locations; (617) 428-5437; www.wolfandco.com

Accounting and Tax Planning Sections
There Are Financial Milestones That Come Along with Many Birthdays

Jim Kenney

Jim Kenney

As Baby Boomers age, I’ve found a great many of them to be unaware of some of the financial milestones that came with each birthday.

Having always been a numbers guy, I thought it might be a good time to share some important financial-planning thoughts for some of these important digits.

 

50

The 401(k) annual contribution provision allows for a catch-up contribution of $5,500, increasing the allowable contribution to $23,000 in 2013. IRAs have a $1,000 catch-up provision, and the SEP-IRA maximum contribution goes to $51,000.

 

55

If you are 55 or older and you lose your job, then you are allowed to take a distribution from your 401(k) plan without incurring the 10% penalty.  Keep in mind that you will still have to pay taxes on the amount distributed.

 

59 1/2

This is the age when you can begin taking withdrawals from whatever type of retirement account that you have without having to pay that dreaded penalty. If the original contributions weren’t taxed, then the withdrawals will be. However, Roth IRAs are tax- and penalty-free if the account is at least five years old.

 

62

You can begin collecting Social Security benefits (this can occur earlier if you are disabled) if you are willing to take a haircut on your benefit of about 25%. Also, if you continue to work and make above a certain amount, the benefits may be further reduced. This decision takes some planning and needs some thoughtful consideration.

 

65

You can now apply for Medicare. (You will be automatically enrolled if you already started collecting on your Social Security benefits.) Most financial planners recommend you take this step three months in advance of your birthday.

 

66-67

At the IRS designated full retirement age, you can begin collecting your full retirement benefits regardless of whether or not you are still working. If you delay collecting until age 70, your benefit will increase by 8% per year.

 

70

That 8% increase benefit stops at age 70, so I can’t think of a good reason not to take advantage of the Social Security system that you contributed to.

 

70 1/2

You are now required to take withdrawals from your tax-advantage retirement accounts unless you are still working or it is in a Roth IRA that you either started or inherited from your spouse. The required distributions are computed based on a life-expectancy formula and must be withdrawn by Dec. 31 (first-year distributions can be delayed until April 1 of the next year, but that will double year two’s income). You should consider consolidating your IRAs to make the calculation easier.

That’s a quick look at your decisions by the numbers. Now it’s time to crunch the numbers and make some decisions.

 

James P. Kenney, CPA, MBA is a member of the firm with Wolf & Co., P.C., which has several offices in the Northeast, including Springfield; (413) 747-9042.

Accounting and Tax Planning Sections
It’s Not Too Early to Start Thinking About Next Year

Cheryl Fitzgerald

Cheryl Fitzgerald

It’s never too early to start thinking about tax-planning ideas for 2013 for businesses and individuals.
With some of the new Obamacare taxes kicking in for 2013, as well as tax increases from the American Tax Relief Act of 2012, the sooner you start planning, the more you’ll be able to minimize your taxes.
Here are some things to think about.

Businesses
• General depreciation: New assets generally acquired and placed in service before Jan. 1, 2014 continue to be eligible for 50% bonus first-year depreciation.
Start planning for your acquisitions now so that assets that need to be ordered will be received and installed before the expiration of this provision. Buying a used asset does not qualify for the additional bonus depreciation; it must be a new asset, and not just new to you. Section 179 is still available for used assets.
• Qualified leasehold improvement depreciation: Qualified leasehold improvement property placed in service before Jan. 1, 2014 is depreciated over a reduced 15-year period. There are related party limitations, but if improvements qualify, this is a significant benefit over the 39-year life which is scheduled to return on January 1, 2014.
• Business tax extenders: The Tax Relief Act also extended many business-tax credits and other provisions. Notably, it extended through 2013 the research and development credit. Other business provisions extended through 2013 are the work opportunity tax credit, the employer wage credit for employees who are active-duty members of the uniformed services, and numerous other business credits.

Individuals
• Tax rates: 2013 brings us a new rate bracket that begins with the 39.6% rate. The threshold amounts are keyed to taxable income and are: $450,000 for married individuals filing joint returns and surviving spouses, $425,000 for heads of household, $400,000 for single individuals, and $225,000 for married individuals filing separate returns.
Therefore, for those within the new 39.6% range, above-the-line deductions and exclusions — and strategies to maximize them — now become ever-more valuable. At these same thresholds, the top capital-gains rate increases from 15% to 20%.
The Medicare portion of the FICA tax on wages increases from 1.45% (2.9% for self-employed) to 2.35% (3.8% for self-employed) for wages over $200,000. Individuals or couples with multiple W-2s may not have this tax withheld by their employer, but will be subject to the additional tax upon filing their 2013 income-tax return. To avoid a surprise liability on April 15, 2014, individuals with multiple sources of wages may want to consider increasing their federal withholding.
• 3.8% net investment income surtax: For years beginning in 2013, under the Patient Protection and Affordable Care Act of 2010, a new-investment income (NII) surtax applies. The NII surtax on individuals generally equals 3.8% of the lesser of:
• NII for the tax year, or
• The excess, if any, of modified adjusted gross income ($250,000 for filing status of married filing jointly or surviving spouse, $125,000 for filing status of married filing separately, and $200,000 for any other filing status).
NII includes not only interest, dividends, and capital gains, but also income from passive activities such as partnerships and rental real-estate income. One category of income notably excluded is flow through income from an S corporation in which the shareholder actively participates.
This gives a significant advantage to flow through K-1 income over W-2 wages taken by the shareholder, since that is subject to the 2.9% employee/employer combined Medicare tax and the added 0.9% when wages exceed $200,000. Although it appears simple that a shareholder would want to minimize their wages, rules related to reasonable compensation as well as state-tax consideration make this a complex planning area involving the business and individual.
Given that the thresholds are lower for the 3.8% tax than the 20% maximum tax on net capital gains, capital gains subject to the 20% tax invariably will also be subject to the additional 3.8% surtax, while net capital gain subject to the 3.8% surtax will not necessarily be subject to the maximum 20% rate.
Individuals who planned large capital-gain transactions prior to Dec. 31, 2012 most likely benefited from an 8.8% savings. If the sale qualified for installment-sale reporting, this additional tax might be an incentive to elect out-of-installment sale treatment.
• Roth conversions: This lifts most restrictions and now allows participants in 401(k) plans with in-plan Roth conversion features to make transfers to a Roth account at any time.
Those making such conversions may be recognizing a large amount of income that may push them into a higher income or capital-gain threshold bracket and result in the NII surtax applying. Timing conversions, doing them over a period of years, and/or reducing capital-gain recognition events during those years are strategies now worth considering.
• IRA distribution: The Tax Relief Act extends, through Dec. 31, 2013, the provision allowing tax-free distributions from individual retirement accounts to public charities by individuals age 70 1/2 or older, up to a maximum of $100,000 per taxpayer each year. Taking advantage of this provision for charitable giving may also help reduce exposure to one or more of the threshold amounts discussed earlier.
• Phaseout of itemized deductions and personal exemptions: The phaseout of these items are reinstated, but at modified adjusted gross income thresholds of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.

Bottom Line
So, as you can see, 2013 tax planning needs to incorporate the interplay that one idea may have on another.
Additionally, it is important to monitor your tax planning as the year goes on instead of waiting until the end of the year. It is never too early to think about these things in order to help minimize some potential taxable transactions that occur throughout the year.

Cheryl Fitzgerald is a senior tax manager with the certified public accounting firm Meyers Brothers Kalicka, P.C. in Holyoke; (413) 536-8510.

Accounting and Tax Planning Sections
Despite Ambiguity, This Is Still a Time for Tax Planning

We have a challenging year before us on the tax-planning front, with expiring provisions leading to uncertain future rates and pending elections leaving us with little in the way of legislative expectations.

Historically, the last few months of the year are used to implement tax-planning techniques to manage individuals’ tax liability for the current year with the relative certainty that comes from having the majority of the year behind us. This year, the only certainty appears to be everyone’s uncertainty.

Ambiguity in the tax realm can have a paralyzing effect on planning, but a wait-and-see approach can lead to lost opportunities or last-minute scrambles to seize the remains of an opportunity. Although the tax future remains unclear, planning opportunities remain. There are gifting provisions that are largely considered once-in-a-lifetime opportunities and rates that may be the lowest to be seen in a while. They provide an opening to make meaningful tax-planning decisions before 2012 comes to a close.

The focus in this piece is on tax-planning techniques that can be initiated during the remainder of 2012. But, depending on one’s facts and circumstances, these are just the beginning of the opportunities that might be available. If you think any of these strategies apply to you, be sure to contact your tax professional or advisor.

 

Changes on the Horizon

Despite the quiet year for tax legislation, significant changes are before us for 2013. Two years ago, when faced with a comparable series of expiring provisions, the can was legislatively kicked down the road. Conclusive action was deferred in favor of short-term extension solutions.

Here we stand, nearly two years later, with a similar collection of rate reductions, deductions, credits, and incentives set to expire as the calendar flips from one year to the next. In addition, two new taxes stemming from healthcare-reform legislation become effective in January.

Absent any late-year legislation, the significant changes on the horizon in 2013 are as follows:

• Two new taxes established under the Patient Protection and Affordable Care Act will go into effect on Jan. 1 — a 0.9% tax on wages and self-employment income, and a 3.8% contribution tax on investment income;

• Individual tax rates will universally climb, with the highest rate rising from 35% to 39.6% before accounting for the new taxes stemming from the act. Including the 3.8% UIMC tax, the top rate on investment income will rise to 43.4%. The current 10% rate bracket expires, reverting back to 15% as the lowest tax rate. The UIMC tax is explained below;

• Federal estate and gift-tax rates will increase from 35% to 55%, and the exclusion amount will drop from $5.12 million to $1 million;

• A series of tax rules designed to reduce what is commonly referred to as the ‘marriage penalty’ will sunset at the end of this year, raising taxes for many dual-income couples;

• Preferential tax rates on capital gains and dividends, currently 15% for most individuals, will expire at the end of the year, with the tax rate on long-term capital gains returning to 20% and qualified dividends losing preferential treatment altogether, returning to the ordinary income rates of up to 43.4%;

• Limitations on itemized deductions and personal exemptions will return in 2013 for higher-income taxpayers;

• It is anticipated that millions of additional taxpayers will become subject to the alternative minimum tax (AMT) with the expiration of the ‘AMT patch’; and

• The child tax credit will be reduced by half for 2013.

 

Business Tax Strategies

Kristina Drzal-Houghton

Kristina Drzal-Houghton

• Section 179 Expensing: IRS Code Section 179 provides businesses the option of claiming a full deduction for the cost of qualified property in its first year of use rather than claiming depreciation over a set period of years. For 2012, the Section 179 dollar limitation is $139,000, with a $560,000 investment limitation.

The dollar limitation for 2013 is scheduled to drop to $25,000, with a $200,000 investment limitation. Businesses might want to consider accelerating scheduled purchases into 2012 to take advantage of the higher limits.

Businesses with a fiscal year-end should note that the $139,000 deduction limit applies to property purchased and placed in service during tax years beginning in 2012.

• Bonus Depreciation: Property not qualifying for an immediate tax write-off under the expensing election may qualify for an increased first-year depreciation deduction under bonus depreciation rules. This deduction is equal to 50% of the cost of qualifying property purchased and placed in service by Dec. 31, 2012.

Unlike the Section 179 deduction, bonus depreciation is not limited in amount or by an investment limitation, and it can create a current-year net operating loss.

• Changes to Repair Regulations: Comprehensive repair and capitalization regulations issued by the IRS late in 2011 may open up planning opportunities.

A new de minimis expensing rule allows a business to deduct certain amounts paid or incurred to acquire or produce a unit of tangible property if the company has an allowable policy. There is an overall ceiling limiting the total expenses a company may deduct under the de minimis rule. Accounting policies and existing depreciation schedules should be reviewed to determine whether changes in accounting methods should be filed and adjustments taken. In many cases, the change will result in accelerated expensing.

• Corporate Dividends: Traditional C corporations face double taxation on distributed earnings. Profits are taxed at the corporate level, and dividends paid out to shareholders are again subject to tax at the individual level. With the maximum 15% tax rate for qualified dividends during 2012 rising to 43.4% for 2013, this may be the year to consider paying out accumulated earnings that the corporation is not otherwise using.

• Health Insurance Tax Credit: A tax credit is available for an eligible small employer to purchase health insurance for employees. To qualify as an eligible small employer, the company must:

— Pay for at least 50% of the premium cost for employees;

— Generally have no more than 25 full-time equivalent employees employed during the year; and

— Pay its full-time equivalent employees annual wages averaging no more than $50,000.

 

Individual Tax-planning Strategies

• Planning for the New Healthcare Taxes: Effective Jan.1, a 0.9% hospital insurance (HI) tax applies to wages and self-employment income, while a 3.8% Medicare contribution (UIMC) tax applies to investment income. Neither tax becomes applicable until income exceeds the established threshold noted in the table below.

The HI tax may be managed through withholding for employees, but in certain circumstances, such as for dual-income households or in years of employer transitions, withholding may not fully cover the wages subject to the HI tax.

For the purposes of the UIMC tax, net investment income has been defined to include dividends, rents, interest, passive-activity income, capital gains, annuities, and royalties. Specifically excluded from the definition 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.

For individuals, the amount subject to the UIMC tax is the lesser of your net investment income, or the excess of your modified adjusted gross income, which is generally your adjusted gross income with certain foreign earned-income adjustments, over the applicable threshold amount.

For both taxes, the applicable thresholds are as follows:

Keep in mind that the UIMC tax applies if you have net investment income and your modified adjusted gross income is above the threshold. The impact of the tax may be minimized through shrewd management of your net investment income, proximity to the thresholds, or both.

 

Year-End Tax Planning Strategies

Bearing in mind the new Medicare taxes and the scheduled changes in tax rates, traditional year-end tax planning techniques may need to be reversed to take advantage of the known lower rates of 2012.

• Shifting Taxable Income Between Years: When you’re expecting stable rates in the future, the traditional year-end strategies are largely focused on deferring income and accelerating deductions. But with the rates set to rise for most taxpayers, the better tax answer may come from an opposite approach.

Income accelerated into 2012 could potentially result in a significantly lower rate than the same income recognized during 2013. Because rates remain relatively uncertain, now may not be the time to accelerate income. But having a plan in place should the rates hold will allow taxpayers to act deliberately as the rates become more certain.

• Managing the AMT: When undertaking tax planning, both regular and AMT tax liabilities need to be evaluated. At times, certain deductions may need to be shifted between years to manage the alternative minimum tax.

• Paying Estimated State Income Taxes: The payment timing of the fourth-quarter estimated state-tax payment, generally due Jan. 15, 2013, has some flexibility. It may be paid before year end for a current-year federal itemized deduction. The alternative minimum tax should be considered before employing this tax-planning tool because state income taxes are not deductible for AMT purposes.

• Fulfilling Charitable Goals: An alternative to cash donations is the contribution of appreciated assets. When contributing assets, you can deduct the fair market value of certain property and avoid paying taxes on the appreciation. However, if you would like to donate securities that have declined in value, you will likely want to sell them first to realize the loss and then gift the proceeds to your organization of choice. In some circumstances, particularly when there is expiring capital loss, a direct donation may not be the most effective tax-planning tool.

• Funding Retirement Plans: For retirement contributions to qualify for a deduction in 2012, contributions must be in place usually before the end of the year. The exceptions to the rule are IRAs and SEP (simplified employee pension) plans. An IRA can be created and funded by April 15, 2013, and a SEP by the extended due date of your tax return.

• Converting to a Roth IRA: Roth IRAs have long-term advantages over traditional IRAs because money grows and can be distributed tax-free. Some taxpayers find that the benefits of tax-free withdrawals in the future are in line to be greater than the tax cost on conversion.

Converting before-tax earning plans — 401(k)s, traditional IRAs, etc. — to the after-tax Roth IRA creates taxable income in the year of conversion. The upfront tax cost does not make conversion the right answer for every taxpayer, but for taxpayers with certain circumstances, conversion can be an extremely powerful tool.

• Paying with Credit Cards: As a reminder, paying tax-deductible expenditures, including charitable contributions, with a credit card secures the deduction in the current year, even if you do not actually pay the credit-card company until the following year.

• Deducting Losses from Pass-through Entities: If you are expecting a 2012 loss from a partnership, LLC, or S corporation, ensuring that you have sufficient tax basis will help to secure your ability to deduct the loss. You may be able to increase your tax basis prior to year end, but given the rates for 2013 as enacted, you might want to purposely avoid doing so until 2013 to push the loss into the higher rates of 2013.

 

Capital Gains and Losses

You should consider a few basic rules when planning for capital gain or loss transactions:

• Gains and losses from securities sales generally are recognized on the trade date as opposed to the settlement date. So a December trade will be a 2012 transaction, even if the settlement date is in the following year;

• Sales at a loss reduce other capital gains, and a net capital loss in excess of capital gains of up to $3,000 is available to be used to offset other income, with excess losses being carried forward to future years; and

• Before you sell an asset to recognize a gain, check your holding period. Capital assets held for over a year are eligible for a significantly lower tax rate than those held less than a year.

 

Estate- and Gift-tax Planning

Absent congressional action, the $5.12 million estate and gift-tax exemptions and current top tax rate of 35% will revert to a $1 million exemption with a top tax rate of 55% beginning Jan. 1, 2013. Moreover, the estate-tax exemption will no longer be portable between spouses.

Because of the reversion to a lower exemption and a higher tax rate, what could be a once-in-a-lifetime opportunity exists to transfer significant assets to the younger generation without incurring any estate and gift tax. Also note that:

• The annual gift tax exclusion for 2012 remains at $13,000. It is expected to rise to $14,000 for 2013;

• If you are married, you can avoid federal gift-tax ramifications by gifting up to $26,000 per donee, or recipient, in 2012 under the gift-splitting rules. Annual gifting is a relatively simple method to reduce your taxable estate; and

• Along with the high gift-tax exemption, the generation-skipping transfer-tax exemption is also $5.12 million during 2012. So, the door is open to bypass children and transfer significant wealth to future generations.

Developing an overall tax strategy under ambiguous circumstances can feel daunting. But the deliberate, informed implementation of a plan for what is known now can also protect against what remains to be seen — as what is unknown becomes known.

 

Kristina Drzal Houghton, CPA, MST, is partner-in-charge of Taxation at Meyers Brothers Kalicka, P.C. in Holyoke; (413) 536-8510.

Accounting and Tax Planning Sections
There Are a Host of Vanishing Tax Provisions for Small Businesses

Jana Bacon

Jana Bacon

It has been difficult to miss all the hoopla over vanishing tax provisions. This article addresses the more common provisions affecting small businesses, including the fixed-asset expensing provisions, bonus depreciation, depreciation of specialized real-estate assets, the research credit, the new-markets tax credit, and the Work Opportunity Tax Credit (WOTC).

Section 179 and Bonus Depreciation

Since 1997, Internal Revenue Code Section 179 has allowed for the deduction of certain qualified expenditures that normally would be required to be capitalized and depreciated. Section 179 property is defined generally as tangible personal property acquired and placed in service in connection with the active conduct of a trade or business. Over the years, the maximum allowable deduction amount has varied.

For 2011, the maximum allowable deduction was $500,000 and was reduced dollar-for-dollar as qualified expenditures exceeded $2 million. For 2012, the maximum allowable deduction is $139,000 with reduction as expenditures exceed $560,000. For 2013, the maximum amount is currently scheduled to decrease to $25,000 with the phase-out beginning at $200,000.

Bonus depreciation is another tax benefit scheduled to disappear after this year. In 2011, 100% first-year bonus depreciation applied to qualified tangible personal property additions with no limit. In 2012, that was reduced to 50% first-year bonus depreciation.

Although there has been considerable discussion about the fate of these provisions — because we have no idea whether they will be reinstated by Congress or, if so, at what levels — businesses may wish to take advantage of the higher Section 179 amount and/or bonus depreciation for this year by acquiring and placing in service qualified tangible personal property purchases prior to Dec. 31, 2012.

 

Cost Recovery for Specified

Real Property

Qualified leasehold improvements and qualified restaurant property placed in service between Oct. 22, 2004 and Dec. 31, 2011, and qualified retail-improvement property placed in service between Jan. 1, 2009 and Dec. 31, 2011, were subject to straight-line depreciation over a 15-year period. For such property placed in service after 2011, however, straight-line depreciation over a 39-year period is required.

Also, because these assets were previously considered 15-year property, they had qualified for Section 179 expensing and bonus depreciation. Effective Jan. 1, 2012, they no longer qualify for either.

 

Research and Experimentation Credit

The tax credit for research and experimentation expenses (R&E credit) was originally enacted in 1981, and applied to amounts paid or incurred on or before Dec. 31, 1985. The credit had been extended 14 times since then but expired on Dec. 31, 2011. The R&E credit had been allowed to expire only once before from July 1, 1995 through June 30, 1996. The traditional R&E credit provision had allowed a taxpayer to claim a credit equal to 20% of the amount by which the taxpayer’s qualified research expenditures exceeded a base amount.

The base amount reflects past research expenditures that were incurred over a fixed period of time, so the credit was really a credit on incremental increases in research costs. The credit was generally available on both in-house and contract research costs. Also available was an alternative simplified credit, which was only partially incremental and utilized a rolling three-year base period and a 14% credit rate.

 

New Markets Tax Credit

Originally enacted in 2000 for investments made after Dec. 31, 2000, the new markets tax credit provided a credit on qualified investments to promote economic and community development in low-income communities. The credit was taken over a seven-year period and totaled 39% of qualified equity investments made in a qualified community-development entity (CDE).

CDEs were required to invest in qualified low-income community business, and applications were required by CDEs to obtain an allocation of a portion of the credit authorized for the year. The last amount authorized was $3.5 billion for 2011.

 

Work Opportunity Tax Credit

Enacted in 1997, the work opportunity tax credit (WOTC) provided a credit to employers on wages paid to eligible employees who began work for the employer before Jan. 1, 2012. The amount of the credit ranged from $2,400 to $9,000 per each eligible employee, depending upon the type of eligible employee. Eligible employees included qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program, qualified veterans, qualified ex-felons, designated community residents, vocational rehabilitation referrals, qualified summer youth employees, qualified members of families in the Supplemental Nutritional Assistance Program (SNAP), qualified Supplemental Security Income recipients, or long-term family-assistance recipients.

To qualify for the credit, the employee had to complete at least 120 hours of service for the employer. The credit has been extended for wages paid through Dec. 31, 2012 only for qualified veterans.

The uncertainty of whether Congress will reinstate or extend these tax benefits makes planning extremely difficult.  Pay close attention after this year’s elections to see if any new or extending tax legislation is enacted that may affect your business.

Please note that this article contains only a general discussion, so you should consult your tax advisor for additional information or assistance.

 

Jana Bacon is a member of the firm at Wolf & Company, P.C. and focuses on tax compliance and planning services; (413) 747-9042.

Accounting and Tax Planning Sections
And with It Come Questions and Uncertainty for Taxpayers

Nicholas LaPier, CPA

Nicholas LaPier, CPA

On Jan. 1, the country may find itself falling back into recession, personal income taxes will go up, federal government spending will be cut, and unemployment most surely will rise. The good news, however, is that the federal deficit will undoubtedly be somewhat reduced.

This fiscal cliff, as it’s called, refers to a frenzy of fiscal changes that, collectively, have a far-ranging impact on all taxpayers and the economy. These changes in law are a result of a dizzying variety of tax laws enacted, altered, modified, or extended during the past 10 to 12 years. Congress’s failure to agree on its own budget cuts last summer forced the automatic spending sequestration of approximately $1.2 trillion in non-discriminatory spending cuts, across all line items, to be made over the next decade.

The Congressional Budget Office (CBO), a non-partisan arm of the U.S. Congress, estimates that the federal government could collect more than $200 billion more in personal income taxes in 2013 as a result of the changes in the personal income-tax laws. In addition, the CBO estimates that the expiration of the currently popular payroll tax cut of 2% on Social Security taxes will generate another $90 billion in revenue.

Obviously these gains are desperately needed to help balance the books of the U.S. government. However, they, in conjunction with the automatic spending sequestration, which is estimated to save the government $109 billion in 2013, will still fall well short of balancing the budget.

Other fiscal changes include the return of the 55% estate-tax rate. This item is actually a popular topic of discussion among most legislators, and has better curb appeal in getting reversed. However, the discontinuance of federally extended unemployment benefits is a hot potato, and their expiration could have a more serious impact on the U.S. economy, which relies heavily on consumer spending.

Other than a possible recession, the biggest impact of the fiscal cliff would be felt by individual taxpayers as the infamous Bush tax cuts are all reverted back to levels not seen since 2000. Gone would be the 10% income-tax rate and the imposition of a maximum 39.6% personal income-tax bracket. Also set to expire is the maximum 15% tax rate on long-term capital gains and qualified dividends.

In 2013, long-term capital-gains tax could be as high as 20%, and qualified dividends would be taxed at an individual’s ordinary tax rate, which could be as high as 39.6%. Both of these items, otherwise known as unearned income, would also be subject to an additional 3.8% surtax for taxpayers with adjusted gross income over certain levels.

The alternative minimum tax (AMT) will come into play for another 30 million taxpayers. The AMT is an archaic part of the tax code, first enacted in 1969 to increase the effective tax paid by taxpayers who, for a variety of reasons, were not paying any personal income taxes. The AMT basically increases the effective tax you pay by disallowing certain deductions that are allowed under the regular tax code.

Ironically, ever since the Bush tax cuts, more people became subject to the AMT because the built-in minimum tax rates of 24-26% had essentially wiped out the 10% and 15% tax brackets for higher earners. The CBO estimates that, even with the increase in the regular tax rates, the reduction in AMT income thresholds will still increase overall personal tax revenues. Taxpayers who reside in states where they pay higher real-estate taxes and a state income tax tend to be the victims of the AMT.

For residents in Massachusetts or Connecticut, it is very probable that an average married couple whose combined income is more than $100,000 will have the AMT.

Another area of concern is on the new 3.8% Medicare tax surtax that will be payable on unearned income, mostly by taxpayers in higher tax brackets (for example: a married couple with combined income of more than $250,000). This new tax could cause many people to shift their taxable investments, which may have an impact on financial markets.

With the expiration of the 2% Social Security tax cut, which was first enacted in 2011 and extended into 2012, an employee or self-employed individual should expect to pay up to an additional $2,202 more in Social Security tax in 2013.

So what does all this really mean? The fiscal cliff is getting nearer as Dec. 31 approaches, and without congressional action, the economy could very well give back the gains it recently made after the last recession from December 2007 to June 2009. Many experts suggest that, even though the country is not in a recession, the Jan. 1 fiscal changes will have a negative effect on the economy.

Government spending cuts will increase unemployment, higher income taxes will decrease consumer spending, and small-business owners may cut or curtail hiring. Meanwhile, investors may start shifting their portfolios to avoid the higher taxes on unearned income like capital gains and dividends. Basic uncertainty over fiscal policy and taxation is enough to make citizens pause and maintain the status quo; that alone will stymie an already semi-stagnant economy.

As a professional tax practitioner, I have learned to plan based on the tax code currently in effect. That code is complex and ever-changing. Changes in tax rates are a large part of careful tax planning, so making rash decisions or no decisions at all could increase your total tax burden.

We last saw major tax law changes at the end of 2010, but 11th-hour politics prevailed, and some tax relief was had as we headed into 2011. All taxpayers should stay abreast of the tax law changes, now and in the future, through self-awareness and professional support. Cautious optimism is my rule of thumb; the tax code is always in flux, and only over the long haul will proper tax planning really be effective, cliff or no cliff.

 

Nicholas LaPier, CPA, is the principal at Nicholas LaPier CPA P.C. in West Springfield; (413) 732-0200; www.lapiercpa.com

Accounting and Tax Planning Sections
What Is the Alternative Minimum Tax, and Who Will Be Paying It?

Sean Wandrei

Sean Wandrei

Created in 1969, the alternative minimum tax, or AMT, was the result of a public outcry to congress that the rich and wealthy were not paying their fair share of taxes. Based on testimony by the secretary of the Treasurer, 155 individuals with an adjusted gross income above $200,000 didn’t pay any tax on their 1967 income-tax returns.
Accordingly, the AMT was designed as a safeguard to keep those individuals from slipping through tax loopholes. The AMT is a tax system that is calculated in parallel with an individual or corporation’s ‘regular’ tax. The higher of the two tax calculations is the one that must be paid. We will focus on AMT as it applies to the individual.

How the AMT Is Calculated
To calculate the AMT, all ‘preference’ items are added back to regular taxable income to arrive at AMT income. Then an AMT exemption is deducted from the AMT income to determine the AMT taxable income.
Preference items include state and local income taxes, sales and property taxes, accelerated depreciation, deductible medical expenses, miscellaneous itemized deductions, certain tax-exempt income, certain credits, incentive stock options, personal exemptions, and the standard deduction. These preference add-backs are items that many families who own their homes in high-income-tax states use as deductions on their regular income-tax return.
Why You May Have to Pay It
Based on the above information, there are certain taxpayers who are more likely to pay the AMT.
Large families fall into the AMT because they must add back all of their exemptions for AMT purposes. A family with a filing status of married filing jointly with four children, for example, get six personal exemptions for regular tax purposes. These six exemptions must be added back to calculate the AMT.
State and local taxes paid are also taken into consideration when determining whether the taxpayer is subject to the AMT. State and local income taxes paid are a deduction for regular tax and must be added back to calculate the AMT. The add-back includes not only state income tax, but also property taxes and excise taxes paid. From 2004 through 2007, residents of California, Connecticut, the District of Columbia, Maryland, Massachusetts, New Jersey, and New York paid the most ATM. These are all high-income-tax states.

What Does This Mean to You?
As it stands now, the exemption for 2011, for a married couple, is $74,450 (other filing statuses have different exemption amounts). The exemption is scheduled to revert back to the 2000 exemption amount of $45,000 for a married couple in 2012. That is 40% less than what it was. If this happens, then the amount of income that can be shielded from the AMT will be less, and more people will be pulled into the AMT. That would amount to an estimated 25 million additional taxpayers paying AMT.
The good news (if there is such a thing with taxes) is that Congress usually extends the increased AMT exemption amount. Congress tends to postpone dealing with difficult issues until it has to. So we may not know until the end of 2012 if there is going to be a patch that spares the additional 25 million taxpayers from the AMT in 2012.

How Can You Avoid the AMT?
It is difficult to plan to avoid the AMT because the regular and AMT tax systems run parallel with each other, leaving you to pay the greater of the two.  Sometimes reducing one tax could increase the other tax. The best advice would be to look at your overall tax picture and start from there. You will need to know what items could cause you to be caught in the AMT and the relationship between your regular tax and the AMT. From there, you can implement a strategy that is right for you. You should review your plan if anything changes in your life or with the tax law.
One item that a taxpayer can control based on timing is the payment of estimated state income-tax payments and real-estate taxes. Since taxes paid are preference items and are added back to calculate the AMT, it may not be best to prepay those taxes prior to the end of a particular year. If you are subject to the AMT in that year, you won’t receive a tax benefit from paying early (say, in December). However, if you wait until after year end, you may have the opportunity to deduct your tax payment in the following year.
On the opposite side, if in one year you have a significant item of income resulting in a large state tax amount due with your return the following April, you will likely be subject to AMT in the year of payment since the tax will be disproportionately large compared to your income. Therefore, prepaying may be advised. Again, planning and understanding your own situation are key to determining what the best course of action is.
As always, it is best to plan and then plan some more to help reduce your overall tax bill. Calling your tax professional is a good way to start, and avoid paying more taxes than you should.

Sean Wandrei is a tax manager with Meyers Brothers Kalicka, P.C. His technical concentrations are in multistate taxation as well as real-estate entities; (413) 536-8510.

Accounting and Tax Planning Sections
Or, a Primer on How to Make Friends with Your Auditor

Donna Roundy, CPA

Donna Roundy, CPA

Summer has passed, and it’s time to focus on the balance of the year, which includes preparing your fiscal records for your accountant. Generally, the focus at year end is tax-motivated — keeping your money in your pocket rather than Uncle Sam’s. Another focus for many, however, is getting information together for their auditor.
While preparing for an audit can seem arduous, there are many benefits of having an audit. An auditor can help you analyze and better understand your company’s financials and show you where improvements within your company can be made. An audit assesses any risks to your company, as well as the efficiency and quality of your company’s processes. One of the most important benefits of an audit could be the realization of fraud and illegal activities taking place within your company.
Recognizing and optimizing the benefits of an audit can help your company become more efficient and more profitable. This article will describe the steps involved in preparing for an audit, and how to optimize the value of an audit for your company.
Many organizations must prepare for a year-end audit at the end of each fiscal year. Whether your business is public, private, or nonprofit, you may be required to have an audit performed on your company. This requirement can be government-required (such as for nonprofit organizations). It can also come from a variety of other groups, such as investors, financial institutions, or a board of directors.
‘Audit’ is not a word many business owners want to hear, but with preparation and focus, an audit can go smoothly and prove to be a valuable exercise.
The best time to start preparing for the audit is right after the auditors leave at the beginning of the year. A significant focus of an audit is on internal controls and the organization’s policies and procedures. Sometimes your auditor may, either verbally or in writing, make suggestions to better segregate duties or create a step of review. Discuss with your fiscal director how best to implement those suggestions.
Due to these changes and possibly due to changing staff levels, the flow of information in your company may change subtly in ways that will require your policies and procedures manual to be updated. Providing your auditor with updated procedures is important because he or she needs to assess risk and ascertain that things are actually happening as intended.
Soon after Jan. 1, begin to close your books for the current fiscal year. Transactions should be posted to the year in which it occurred, including receivables and sales, inventory purchases, cost of goods sold, and operating costs. You also must reconcile all sub-ledgers to make sure they are accurate with your trial balance. Performing reconciliations for all balance-sheet accounts to accurately prepared schedules and third-party statements (bank statements, loan and vendor statements) is a large part of preparing your books for year end.
If you are finding that significant adjustments are necessary at this time, look back to the monthly closing process and see where procedures need to change. A monthly close is a mini-year end, and reconciliations should be performed in a timely manner. If this isn’t happening, the reports being used are inaccurate, and decisions are being made based on wrong information.
Normally your auditors will provide you with a list of the items they need for the audit. Gathering together the entirety of this list and having it in one place for the auditors the first day they walk in has a few benefits. Saving your auditor time from having to ask for things they’ve already asked for makes him or her more efficient, which can mean a lower fee. The auditor will need your time and attention during the audit, so it’s less stressful for you if you don’t also have on your agenda to pull together items they need throughout the day. More preparation can make the audit process easier for you and your company.
Auditors will be looking for a variety of information before they begin the audit. This information will include company bylaws, corporate charters, state registrations, formal policies, a procedure manual, and loan and lease agreements. Annually you must provide to your auditors any new loan or lease agreements and minutes from shareholders or board of directors meetings through the date of your audit. Any information explaining events during the fiscal year that could potentially have an impact on the financial statements must also be provided to your auditor.
Inform your employees when the audit will begin and how long the audit will last. Indentify which employees will be working with the auditors side-by-side on a day-to-day basis. You must make sure that these employees have an open schedule during the audit period. There also must be a workspace prepared for the auditors based on their needs.
Your responsibilities during the audit process are just as important as the steps taken leading up to the audit. Be prepared to explain your procedures for any of the following processes: payroll, cash receipts, accounts receivables/sales, computer systems and software, and how you identify and implement controls to minimize fraud risks. Set aside time during the audit to ask questions of the auditor or to answer any questions the auditor may have.
An audit of cash can provide a business with validity and accuracy of the cash flow within the company, as well as provide a better understanding of where errors may occur and tests to make sure they are not occurring.
Accounts receivables is frequently the largest asset a company can have. An auditor looks at all levels of accounts receivable to help you better understand the risks that could occur and the red flags to look for to prevent these risks.
Inventory audits are designed to keep track of a company’s products and merchandise. This procedure often leads to the influencing of future policies and decision-making within companies.
For your income and expenses, the auditor will typically prepare an expectation of what your income and expense balances should be. This will be based on your organization and your discussions with the auditor. Be prepared to explain fluctuations for accounts that may fall outside of these expectations. Audits performed on income and expenses are some of the most necessary of all.
Income or revenue is required to be recorded for tax purposes. If not properly kept track of, your tax return could be misleading causing larger problems in the long run. An audit of expenses ensures that internal controls are being followed, the reasonableness of your expense costs, and timeliness of the invoice to ensure reliability of the expense. Expense audits also ensure that vendors are real businesses and exist, as well as the accuracy of all contracts, invoices, and signatures.
An audit should be a positive and productive experience. When your staff and the auditors work together, you will save money, the audit will be completed efficiently, and the transaction or requirement that created the need for the audit can be fulfilled. You and your staff will also be in a greater position to understand the financial, data-system, and workflow-process needs of your firm, which will enable you to better plan for future challenges and capitalize on future opportunities.

Donna Roundy is a senior audit manager with the Holyoke-based certified public accounting firm Meyers Brothers Kalicka, P.C.; (413) 536-8510.

Accounting and Tax Planning Sections
Understand the Many Ways It Can Impact Your Bottom Line

Bruce Fogel

Bruce Fogel

Everybody knows that the government is out of money and needs to raise cash. However, do you understand the financial impact that the 2010 health care legislation will have on your family?
This isn’t just about everybody being required to carry health insurance. It is much more. The government is using this legislation as a revenue builder, and you will be paying the bill. So what will your cost be?

Individual Mandate
The new federal law requires that non-exempt individuals must maintain qualifying health-insurance coverage for themselves and their dependents or face a tax penalty after 2013. Similar to Massachusetts law, those without qualifying health coverage will be required to pay a tax penalty. The federal penalty will be the greater of: (a) $695 per year, up to a maximum of three times that amount, or $2,085, per family, or (b) 2.5% of household income over the threshold amount of income required for income-tax-return filing.
The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee; or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment.
Exemptions will be available for a variety of reasons, including but not limited to, financial hardship,  those without coverage for less than three months, illegal aliens, prisoners, those for whom the lowest cost plan option exceeds 8% of household income, and those with incomes below the tax-filing threshold (in 2011 the threshold for taxpayers under age 65 is $9,500 for singles and $19,000 for couples).

Premium Assistance Tax Credits for Purchasing Health Insurance
A refundable tax credit is available to certain individuals who are not eligible for Medicaid, employer-subsidized health insurance, or other acceptable health coverage, and who get health insurance by enrolling in a qualified health plan through a state-run insurance exchange for tax years after 2013. While the credit generally will be payable directly to the insurer, individuals can elect to purchase health insurance out of pocket and then claim the credit on their Form 1040.
Based on the information provided to the exchange, the individual receives a premium-assistance credit based on income, and IRS pays the premium-assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium-assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an exchange, the premium payments are made through payroll deductions.
The premium-assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) who are not eligible for Medicaid, employer-sponsored insurance, or other acceptable coverage.

Higher Medicare Taxes on
High-income Taxpayers
High-income taxpayers will be subject to a tax increase on wages and a new levy on investments as well.

Higher Medicare Payroll Tax on Wages
Under current law, wages are subject to a 2.9% Medicare payroll tax with employees and employers paying 1.45% each. Self-employed people pay both halves of the tax, but are allowed to deduct half of this amount for income-tax purposes. While the payroll tax for Social Security applies to earnings up to an annual ceiling ($106,800 for 2011 and increasing to $110,100 for 2012), the Medicare tax is levied on all earnings without limit.
Under the provisions of the new law, which goes into effect in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital-insurance tax, but single people earning more than $200,000, and married couples earning more than $250,000, will be required to pay an additional 0.9% (2.35% in total) on the excess over those base amounts. Self-employed individuals will pay 3.8% on earnings over the threshold.

Medicare Payroll Tax Extended to Investments
As part of the revenue-generation aspect of the new laws, beginning in 2013, a Medicare tax will, for the first time, be applied to net investment income. A new 3.8% tax will be imposed on such income of single taxpayers with adjusted gross income above $200,000, and joint filers over $250,000. Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than most property held in a trade or business) reduced by properly allocable deductions to such income.
The new tax is intended to apply only to income in excess of the $200,000/$250,000 thresholds. For example, if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax ($300,000 minus $250,000).
Additionally, while not directly applicable to individuals, this new tax is also applicable to estates and trusts. In such situations, the tax is 3.8% of the lesser of (a) undistributed net investment income, or (b) the excess of AGI over the dollar amount at which the highest estate- and income-tax bracket begins.

Threshold for Medical-expenses Deduction Raised
Under current law, taxpayers can include in their itemized deductions unreimbursed medical expenses for regular income-tax purposes (not AMT) only to the extent that those expenses exceed 7.5% of the taxpayer’s AGI.
As noted, the new law raises the threshold for itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. However, it should be noted that the threshold for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.

Reimbursement Limited for Some OTC Medications
Qualified medical expenses, which are expenses that can be reimbursed tax-free through a health reimbursement account (HRA), health flexible savings account (FSA), health savings account (HAS), or Archer Medical Savings Account (MSA), no longer include over-the-counter medicines (except for insulin, which continues to qualify), unless prescribed by a doctor, effective for tax years beginning after Dec. 31, 2010.

Increased Penalties on Non-qualified Distributions
from HSAs and Archer MSAs
The penalty tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses has been increased to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.

FSAs Limited to $2,500
An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. It allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses, but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will be capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.

Dependent Coverage in Employer Health Plans
Effective as of March 30, 2010, the new law extended the general exclusion for reimbursements for medical-care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 (whether they qualify as a dependent or not) as of the end of the tax year.
This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for voluntary employee benefit associations (VEBAs) and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Excise Tax on Tanning Services
The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed, but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.

Liberalized Adoption-credit and Adoption-assistance Rules
For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011. The employer-provided adoption-assistance exclusion is also increased by $1,000.

Bottom Line
These are some of the highlights of the 55-page health care legislation that was signed into law by President Obama on March 30, 2010. It affects every American citizen to varying financial degrees and phases, in different aspects, at various timeframes. If you have questions about how it will affect your family, it would be wise to consult with your tax advisor.

Bruce M. Fogel, Esq. is a partner with Bacon Wilson, P.C. in Northampton. He is a member of the firm’s estate-planning, elder, real-estate, and business departments. He has extensive experience in matters relating to income, gift, and estate taxes, and he focuses on the tax implications of all legal transactions. He also co-hosts the “Taxes and Assets” radio show on WHMP-AM; (413) 584-1287;
[email protected]

Accounting and Tax Planning Sections
Effective Tax Planning Is a Saving Grace

April is generally regarded as ‘tax time,’ but experts say that tax planning is a year-round exercise, if people want to do it right. With that in mind, year end is a time to look at strategies that can minimize your tax burden and put an effective game plan in place.

As the end of 2011 approaches, now is a good time to start year-end tax planning to minimize your individual and business tax burden. Generally, year-end tax planning involves considering at least two years — in this instance, 2011 and 2012. With tax changes on the horizon, you should consider the likelihood of future changes. Tax planning is a dynamic process and is best accomplished with forethought and assistance from your tax adviser.
Before going into more specific, detailed planning tips, here are two basic principles that can help guide your overall thinking:
• If you expect your tax rate will be higher in 2012, you may benefit from accelerating income into 2011 and deferring deductions into 2012; and
• If you think your tax rate might be lower next year or will be unchanged, consider deferring income to 2012 and accelerating deductions into 2011.
Remember, the focus is on yours or your company’s marginal tax rate. That is the highest rate at which your last, or marginal, dollar of income will be taxed. Even though overall tax rates may rise in the future, if your income will be substantially lower in 2012 than in 2011, your marginal tax rate may decrease because of our graduated tax-bracket system.
In this article, we will focus on tax-planning opportunities that involve actions you can take during the remainder of 2011. This article does not include every tax-planning opportunity that may be available to you, and it is advised that tax projections confirm planning strategies.
First, some business tax-planning strategies.

Retirement Plans for Your Business
Retirement plans have significant tax advantages. Employer contributions are deductible from the employer’s income, employee contributions are not taxed until distributed to the employee (for plans other than Roths), and investments in the program grow tax-free or tax-deferred. Further, the tax law offers a small incentive of a $500-per-year tax credit for the first three years of a new SEP, SIMPLE, or other retirement plan to cover the initial setup expenses.

Depreciation
Certain enhancements to business-depreciation provisions are scheduled to expire on Dec. 31, although President Obama has proposed an extension through 2012.
Section 179: A $500,000 expensing election limit applies to qualifying property purchased and placed in service during 2011. As a result, many businesses will receive an immediate tax writeoff for the cost of most new and used tangible personal property. Unless Congress acts to further extend the higher limit, it will drop to about $134,000 in 2012. Companies that purchase more than $2 million of qualifying property during 2011 have their deduction amount reduced, dollar for dollar, for purchases in excess of $2 million.
Bonus depreciation: Property that does not qualify for an immediate tax write-off under the expensing election may qualify for an increased first-year depreciation deduction under bonus depreciation rules. Unlike the Section 179 deduction, there are no restrictions on the amount of qualifying property, and there is no taxable-income limit. The deduction is 100% of the cost for new property purchased and first placed in service during 2011. Unless Congress acts to extend the bonus depreciation (now proposed by the president), it will not be available for 2012.

Cost Segregation
Buildings and other real estate generally do not qualify for bonus depreciation or the expensing election. However, a cost-segregation study may be able to identify qualifying property within the overall project, which can often significantly increase your deduction.

Research and Development Tax Credit
Many business owners in nearly every industry are unaware that federal and state research and development (R&D) tax-credit programs exist that may reward their day-to-day efforts aimed at producing an improved product. Consider consulting an R&D expert. This credit applies to more than manufacturers.

Health Insurance Tax Credit
To encourage smaller businesses to offer medical insurance coverage for their employees, the law offers a tax credit to offset all or part of the cost. If your business qualifies as a small employer, meaning fewer than 25 employees and average annual wages of less than $50,000, you could be eligible for a credit of up to 35% of non-elective contributions you make on behalf of your employees for medical-insurance premiums. The credit requires minimum non-discriminating contributions and varies based on the numbers of employees and average compensation.

Credit for Hiring New Employees
Businesses that hire workers who are members of certain target groups, such as disabled veterans, food-stamp recipients, and ex-felons, can claim a credit up to 40% of the first $6,000 of wages paid to each such employee.

Losses from Pass-through Entities
If the business entity is operating as a partnership, LLC, S corporation, or trust, and the business will incur a loss in 2011, you may need to plan ahead to be sure the owners can take advantage of that loss on your personal tax return. These rules can be complicated, and you should consult with your tax adviser; there are steps you can take to deduct passive losses or increase your basis.

Paying Corporate Dividends
Profits of traditional C corporations (those that have not elected S-corporation pass-through status) are taxed twice: once when earned by the corporation, and again when distributed as a dividend to the shareholders. Many have seen the current 15% tax rate on qualified dividends as an opportunity to pay out accumulated earnings at relatively low tax rates. It is likely that the tax rate on dividends will increase in the future, so you may wish to discuss with your tax adviser the possibility of distributing profits to lock in the current 15% rate.

Compensation and Billing
Compensation earned in 2011 can sometimes be paid in early 2012, and the business may be entitled to the tax deduction in 2011. If your business operates on the cash method, you can delay (within reason) sending out bills for 2011 work until late in the year, so payment comes in 2012. Alternatively, you can offer a discount to a client who prepays if you are trying to increase 2011 income.

Next, we’ll consider some personal tax strategies.

Capital Gains and Losses
• Long-term capital gains from the sales of assets with a holding period greater than one year are taxed at 15%;
• Short-term capital gains are taxed as high as 35%;
• Sales at a loss can reduce other capital gains;
• Excess capital losses can be deducted to offset up to $3,000 of other income, with the balance carried forward. When selling to recognize a loss, be careful of the wash-sale rules; and
• Consider any capital-loss carry-forward that may be available to you in 2011.

Installment Sales
Selling an asset at a gain and collecting the proceeds in future years may allow you to defer part of the income until the years in which you receive the payments. Consider the fact that you will be financing the sale yourself and may face the risk of collection problems.
Also, consider the possibility that capital-gains tax rates could be higher in future years when you collect the payments because those gains are taxed at the rates in effect the year the gains are recognized. You may wish to elect out of the installment-sale method in the year of sale to lock in the 15% rate.

Credit-card Payments
Paying tax-deductible expenditures — including charitable contributions — with a credit card secures the deduction, even if you do not actually pay the credit card company until the following year.

Suspended Passive Activity Losses
If you own a passive activity with a suspended loss, and you do not have sufficient passive income in 2011 to allow you to deduct the suspended loss, consider disposing of the activity before Dec. 31.

Appreciated Assets Given to Charity
Consider fulfilling your charitable goals by contributing appreciated assets instead of cash. You can deduct the fair market value of long-term capital gain property, such as stock, contributed to charity, and you avoid paying taxes on the appreciation.

Tax Credits for Home Improvements
A tax credit for qualifying home improvements may be available for improvements placed in service during 2011 but not in 2012. The credit applies to energy-efficient improvements such as insulation, exterior windows, and heating and air conditioning systems. You will need to complete your purchase before Dec. 31 to qualify for the credit in 2011. The new energy-efficiency tax credit is a 10% credit, up to a lifetime maximum of $500. The prior cap had been up to $1,500, so check to see whether you have claimed this credit in prior years.

Income-tax Prepayments
If your estimated tax payments and withholding are not high enough to avoid penalties, increase payments. Even better, if you receive wages, IRA distributions, annuity payments, or other payments, have the additional taxes withheld because withholding is deemed to be ratable throughout the year.
If you have a fourth-quarter state estimated tax payment due Jan. 15, 2012, consider making the payment late in December if you need additional itemized deductions in 2011.

Alternative Minimum Tax
An increasing number of middle-income earners, especially retirees, are subject to the AMT. High itemized deductions (other than charitable contributions), high personal exemptions, and large capital gains, among other items, can trigger the AMT. Be sure to consider the effect of AMT in your year-end planning. For example, if you know you’ll be in AMT, prepaying state taxes or real-estate taxes will not give you any benefit.

Your Retirement Plans
Roth IRA Conversion: Roth IRAs have a number of advantages over traditional IRAs, including no tax when the money is withdrawn. Consider the following:
• The conversion results in taxable income;
• The benefits of tax-free withdrawals in the future may be greater than the current tax you will pay;
• There is no longer an income limitation prohibiting high earners from converting; and
• If you are expecting a business loss or have high itemized deductions in 2011 that could offset the income effect of the conversion, your tax consequences may be minimized.

Additional Taxes Coming in 2013
Some future tax changes have already been enacted but have yet to take effect:
• Effective Jan. 1, 2013, a new Medicare Hospital Insurance (HI) tax applies to high-income individual taxpayers:
— The tax is 0.9% of earned income in excess of $200,000 for single filers ($250,000 for joint returns); and
— A 3.8% tax applies to investment income (including dividends, annuities, royalties and rents, etc.) for the same individuals.
Consider talking with your tax adviser about strategies for minimizing this tax.
• In 2013, the threshold for the itemized deduction for unreimbursed medical expenses is increased to 10% of adjusted gross income from the current 7.5%. You may want to plan for unreimbursed medical procedures in 2011 or 2012 to maximize your tax benefit. There is a break for older taxpayers. If an individual or spouse is age 65 or older, the threshold remains at 7.5% of adjusted gross income through 2016.

Finally, let’s discuss some estate- and gift-tax planning strategies.

Estate Planning
The estate- and gift-tax exemption amount for 2011 is $5 million — essentially $10 million for a married couple. Again, there is uncertainty in the future about where the estate-tax exemption and tax rates will end up. And with the recent changes, it is a good idea to review your plan to ensure it is up to date.
Because the estate and gift tax exemptions were recently reunified, now may be an appropriate time to make gifts to take advantage of the $5 million/$10 million lifetime exemption. Making large gifts under the exemption amount removes not only the value of these gifts from your estate, but also future appreciation of the gifted assets.

Gift Tax
The annual gift-tax exclusion for 2011 remains at $13,000 per person. If you are married, you can gift up to $26,000 per donee per year by using the gift-splitting rules, without any federal gift-tax ramifications. Gifting reduces your taxable estate and may be important in an effective estate plan.

Conclusion
When Congress dealt with the Bush tax cuts at the end of 2010, the effect was to delay a ‘permanent’ decision for another two years. These provisions, originally enacted in 2001, reduced marginal tax rates for all taxpayers, provided relief from the marriage penalty, increased child tax credits, expanded education-related tax benefits, and phased out the estate tax.
The current laws, including the recently enacted estate-tax changes, are now set to expire, or sunset, on Dec. 31, 2012. If Congress does not act, most of these tax benefits will disappear, and taxes will automatically increase to pre-2001 levels on Jan. 1, 2013. Although we have covered a number of topics in this article, we undoubtedly did not address every issue relating to your specific situation. Tax projections are recommended to determine your greatest tax savings.

Kristina Drzal-Houghton, CPA, MST is the partner in charge of Taxation at Holyoke-based Meyers Brothers Kalicka, P.C.; (413) 536-8510.