Steiny

The Atypical Accountant Blog

177 posts in this topic

Hey everyone, I just recently started a new CPA firm and I will be posting up my tax articles and tax information from time to time here on KOAT. Below is an article I recently wrote regarding 2012 year-end tax planning. If you haven't already started looking at your tax situation I strongly suggest you do ASAP - you can contact me or your current tax advisor.

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Can you believe the holiday season is rapidly approaching? Hopefully you have all of your shopping done at this point and can start to get ready for something a little more exciting -- year-end tax planning! As you may already know, the big whigs down in D.C. have yet to come to an agreement on the 2013 tax situation for individuals and businesses. Because of this, it is pertinent to take a hard look at yours or your businesses’ current tax situation so you can minimize both your 2012 and 2013 taxes.

The natural question to ask is “Where do I start?”. Below are some key issues you should consider:

3.8% Medicare Contribution Tax (“MCT”)

Upon the recent issue of the Patient Protection and Affordable Care Act (“Act”) by the U.S. Supreme Court, one of the provisions of the act was institution of the MCT. The MCT imposes a tax of 3.8% on net investment starting in 2013.

Taxpayers will be subject to this tax if you have net investment income and your Modified Adjusted Gross Income (“MAGI”) is over $250,000 for married filing jointly (MFJ) or $200,000 (single).

The 3.8% tax is calculated on the lesser of your net investment income or MAGI in excess of the limitations mentioned above.

In general, net investment income includes the following amounts: interest, dividends, capital gains, annuities, rents, royalties, passive activities, and trading of financial instruments or commodities. Please note that deductions related to these types of investment income are allowed (i.e. investment interest expense, investment expenses, etc).

0.9% Medicare Surtax

The Act also included a 0.9% increase to the employee portion of Medicare taxes on wages starting in 2013. The additional surtax takes effect on ordinary income levels over $250,000 (MFJ) or $200,000 (single filers).

Please note that employers are required to withhold this additional tax based solely on the individual’s income level and not based on the employees filing status. If the employer does not withhold this amount you are still liable to pay this amount with your taxes. The 0.9% tax also applies to self-employment income and estimated tax payments.

2013 Potential Tax Rate Increases

Along with the Medicare tax increases stated above, tax rates are scheduled to increase as well if the government does not extend the current tax brackets. For the 2012 tax year, the top tax rate for individual income taxpayers is 35%. Beginning in 2013, this top tax rate is scheduled to increase to 39.6%. Couple this with the additional Medicare taxes and your marginal ordinary income tax rate could potentially reach 43.4%. This does not even include state income taxes!

Long-Term Capital Gains and Qualified Dividends

Through the 2012 tax year, long-term capital gains (“LTCG”) and qualified dividends have been generally taxed at a 15% tax rate. In 2013 the rates are scheduled to change as follows:

  • LTCG rate is scheduled to increase to 20%
  • Qualified dividends rate will equal your individual tax rate

Please note that if you add in the new Medicare taxes, LTCG gains could be taxed as high as 23.8% and qualified dividends could be taxed up to 43.4%.

Transfer Taxes

The estate, gift, and generation-skipping (“GST”) tax rules and rates are all scheduled to change in 2013 as well:

  • Tax rates are scheduled to increase from 35% to 55%
  • The gift tax exemption will decrease from $5.12 million to $1 million
  • GST exemption will decrease to a projected $1.43 million

Other Considerations

Some other items of note worth consider before year-end:

  • Medical expense deduction: for individuals under the age of 65, the threshold to deduct medical expenses increases from 7.5% to 10% of AGI. If you are over the age of 65, the threshold will remain at 7.5%.

  • Itemized Deductions: deductions over the standard deduction will begin to be phased out over certain AGI thresholds.

  • Alternative Minimum Tax: if the government does not issue a “patch”, AMT exemptions will revert back to old laws. This could potentially push a great deal of middle-class income taxpayers into an unexpected tax bill this upcoming April.

Now more than ever the timing of income and deductions will play a crucial part in tax savings for this year and in the future. With that being said, it may make sense for some taxpayers to accelerate income into 2012 vs. deferring the income to 2013. Another strategy could involve deferring expenses to 2013 and beyond to combat rising tax rates.

Should you be interested in talking about your current or future tax situation and potential tax planning opportunities, please feel free to shoot me a PM with your contact information and we can discuss further.

Disclaimer: IRS Treasury Regulations require us to inform you that any tax advice contained in the body of this communication (including any attachments) was not intended or written to be used, and cannot be used, by the recipient for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Here is another article I wrote.....

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Education Costs Put Dollars in Your Pocket

As of the end of the year nears, tax planning for 2012 should be on everyone’s minds. One of the key areas the government allows for tax incentives is for the cost of your education.

Two of the most attractive incentives the government offers are the Lifetime Learning Credit and the American Opportunity Credit. Both credits are available for post-secondary qualified expenses such as tuition, fees, and course materials for yourself, your spouse, or your dependent. The great part about tax credits is that they reduce your tax bill dollar-for-dollar for the amount of credit you are able to claim.

  • The Lifetime Learning Credit is a non-refundable credit of up to $2,000 of qualified expenses. There is no limit on the number of years you can claim this credit for each eligible student.
  • The American Opportunity Credit (formerly known as the Hope Scholarship Credit) allows for a maximum credit of up to $2,500 of qualified expenses for each eligible student for the 2012 tax year. Up to 40% of the credit, or $1,000, may be fully refundable.

Both credits are subject to statutory phase out limits. The American Opportunity Credit expires after the 2012 tax year and if it is not renewed by Congress it will revert back to the old Hope Scholarship Credit rules. The maximum credit under these rules is $1,500.

In addition to the education credits mentioned above the government also allows for educational tax deductions. Although these amounts are not dollar-for-dollar savings they can still reduce your tax bill significantly.

  • Student Loan Interest: up to $2,500 may be deducted, subject to phase out limits.
  • Employer-Provided Education Assistance: these employer-provided programs can be used for qualified expenses such as tuition, fees, book, and supplies. Under this program you may be able to exclude up to $5,250 from your taxable W-2 wages. This program can be used for work and non-work related educational activities.
  • Business Deductions for Work-Related Education: if you pay for education that is required by your employer or improves your skills needed in your present line of work, some or all of these expenses may be deductible. For individual taxpayers, these expenses must be greater than 2% of your adjusted gross income. For the self-employed, these expenses are deductible against your self-employment income.
  • Qualified Education Expenses: expenses such as tuition or fees for postsecondary education may be deducted from your taxable income. There is a $4,000 limit and the amount is subject to phase out limits.

In addition to the credits and deductions above you may also want to consider a Coverdell Education Savings Account (Coverdell ESA) or a Qualified Tuition Program (529 Plan) to fund a student’s expenses.

If you have any questions or need additional information please shoot me a PM or contact your tax advisor.

Disclaimer: IRS Treasury Regulations require us to inform you that any tax advice contained in the body of this communication (including any attachments) was not intended or written to be used, and cannot be used, by the recipient for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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All timely tax planning advice and 3rd party articles/links will be posted here.

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Another year-end tax planning strategy for investors:

If you have made some nice short-term swing trades during 2012 and have built up long-term unrealized losses in other stocks, it may be a wise move to sell your long-term "loser" stocks.

Reason being is that for Federal income tax purposes, long-term losses can offset short-term gains (but can't go in excess of $3,000). Long-term losses are generally taxed at 15% and your short-term gains are taxed at your ordinary tax rate, which can be as high as 35% in 2012. By selling these long-term "loser" stocks you will be able to offset 35% tax bracket income with 15% tax bracket losses.

Please note that this situation may not work for everyone so please be sure to contact your trusted tax advisor before undertaking this strategy. Also, be sure to consider wash sale losses before selling any stock!

Disclaimer: IRS Treasury Regulations require us to inform you that any tax advice contained in the body of this communication (including any attachments) was not intended or written to be used, and cannot be used, by the recipient for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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Just noticed this Steiny....its awesome, looking forward to learning from your experience and expertise.

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Now that the 2012 tax year is completed, many individuals and investment companies who deal with producing income and gains (and hopefully not losses!) from securities and other investments need to determine if they qualify as a "trader" for income tax purposes. I have attached a write-up that will help assist you in determining your status.

If you need any additional assistance with determining your status please feel free to shoot me a PM.

Trader vs Investor Status.pdf

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After more information is known about the 2013 tax law changes I will be posting an article to summarize them for everyone.

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Now that the 2012 tax year is completed, many individuals and investment companies who deal with producing income and gains (and hopefully not losses!) from securities and other investments need to determine if they qualify as a "trader" for income tax purposes. I have attached a write-up that will help assist you in determining your status.

If you need any additional assistance with determining your status please feel free to shoot me a PM.

Thanks, really did not know there was a difference from a tax perspective. Just spitballing here, but I'm guessing Bassmaster was a "Trader", hope he is doing well.

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Hey Steiny, is there any changes now that the Cliff bill was signed to the normal mans capital gains tax %'s? Meaning gains under 400k....

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I'll take the answer to the question below: THX

Hey Steiny, is there any changes now that the Cliff bill was signed to the normal mans capital gains tax %'s? Meaning gains under 400k....

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Hey Steiny, is there any changes now that the Cliff bill was signed to the normal mans capital gains tax %'s? Meaning gains under 400k....

EDIT: ST cap gains discussed in next post

No changes to capital gains rates under 400k single or 450k MFJ luckily. So long-term gains will be 15% for the "ordinary" people of society.

Only to the gains for those over those amounts of income (15% to 20%).

Will be posting a comprehensive summary of the tax law changes soon.....

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Im more interested in changes to short term capital gains, than long term. Thanks.

ST gains will be taxed at your ordinary tax rate, so this did not change at all. The only tax rates that changed are for those who were in the 35% bracket making over $400k/$450k. These "wealthy" individuals will be taxed at 39.6% going forward on their income over the $400k/$450k threshold.

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Do you have a website for the CPA office?

Mike-

The website will be QuantifyAS.com - wait about a week from now as we need to move our old website over to this domain name.

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For all those that take a home office deduction please read below - this is hot of the presses from the IRS for the 2013 tax year, so this would be something that is implement and available when you file your 2013 tax return in April 2014.

The IRS is actually simplifying things for once, have to say I am shocked and pleasantly surprised at the same time. Hopefully more complicated forms and issues are simplified going forward.

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IRS Announces Simplified Option for Claiming Home Office Deduction Starting This Year; Eligible Home-Based Businesses May Deduct up to $1,500; Saves Taxpayers 1.6 Million Hours A Year

WASHINGTON — The Internal Revenue Service today announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.

In tax year 2010, the most recent year for which figures are available, nearly 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction).

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

"This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction," said Acting IRS Commissioner Steven T. Miller. "The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013."

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

The new simplified option is available starting with the 2013 return most taxpayers file early in 2014. Further details on the new option can be found in Revenue Procedure 2013-13, posted today on IRS.gov. Revenue Procedure 2013-13 is effective for taxable years beginning on or after January 1, 2013, and the IRS welcomes public comment on this new option to improve it for tax year 2014 and later years. There are three ways to submit comments.

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All -

My company's website is up and running now - www.QuantifyAS.com. If you are unhappy with your current accountant, feel free to give me a shout and I will give anyone from KOAT the following for free:

1) Initial consultation

2) Review of your company's books

3) Review of your prior year's returns for potential savings

4) Quote for services

FYI - the above services range anywhere from a $250 - $500 value.

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The end of January is rapidly approaching, those who sold "loser" stocks in December hoping to claim the loss on their taxes should consider the IRC Section 1091 "Wash Sale" rules.

Please contact me for additional information on these rules and how they may affect your current tax situation.

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I just created a group page for my company, Quantify Accounting Solutions, on Linkedin, Facebook, and Twitter. If you can like us on Facebook, join the group on Linkedin, and/or follow us on Twitter I would greatly appreciate it. Myself and my partners will be posting timely tax updates and other types of discussions in these forums going forward.

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Good Luck Steiny (KOAT - neighbor) i may take you up on that.. perhaps over beers between KOP to WC?

Sounds good to me Mike, I'm right around that area. I'll shoot you a PM so we can set something up soon.

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