Happy Holidays! Year-End Tax Saving Tips to Spend or Save for the Holidays
It looks like the end of the year is coming, and we are pretty sure many of you are still frantically shopping for gifts for your family and friends. Do you ever wish you had more money to spend for your friends and family, but just could not figure out how you can save more money?
Well have no fear! We are an Orange County CPA firm who will be here to provide tips on how you can cut tax spending to save or have more money to spend for you your loved ones.
Capital Gains and Dividends. The tax rate on qualified capital gains (net-long term gains) and dividends range from 0 – 20%, depending on the individuals income tax bracket.
STRATEGY: Spikes in income, whether capital gain or other income, may push gains into either the 39.6 percent bracket for short-term gain or the 20% capital gains bracket. Spending the recognition of certain income between 2016 and 2017 may help minimize the total tax paid for the 2016 and 2017 tax years.
State and local sales tax deduction. The PATH Act made permanent the itemized deduction for state and local general sales taxes. That deduction may be taken in lieu of state and local income taxes when itemizing deductions.
STRATEGY: Generally IRS tables based upon federal income levels and a taxpayer’s number of departments are used for this optimal deduction. Taxpayers who wish to claim more than the table amounts must provide adequate substantiation.
Tuition and fees deduction. The PATH Act extended the above-the-line deduction for qualified tuition and related expenses for two years, for expenses paid before January 1, 2017. The maximum amount of the tuition and fees deduction is $4,000 for an individual whose AGI (Adjusted Gross Income) for the tax year does not exceed $65,000 ($130,000 in the case of a joint return), or $2000 for other individuals who’s AGI does not exceed $80,000 ($160,000 in the case of a joint return)
STRATEGY: Payments by year-end 2016 may be particularly critical to taking this deduction. There is some – but not unlimited – flexibility regarding the deductibility of tuition paid before a semester begins. As with the AOTC, the deduction is allowed for expenses paid during a tax year, in connection with an academic term beginning during the year or the first three months of the next year.
Nonbusiness energy property credit. The PATH Act extended the nonrefundable non business energy property credit allowed to individuals, making it available or qualified energy improvements and property placed in service before January 1, 2017.
STRATEGY: Several overall limitations apply. A credit amount for qualified energy efficiency improvements equals 10 percent of the amount paid or incurred during the tax year and 100% of the amount paid or incurred for qualified energy property during the tax year. The maximum credit amount for qualified energy property varies depending on the type of property, further all nonbusiness energy property carries a $500 maximum lifetime credit cap.
Individual Shared Responsibility Payments. For 2016, the individual shared responsibility payment is the greater of 2.5% of house-hold income that is above the tax return filing threshold for the individual’s filing status or the individual’s flat dollar amount, which is $695 per adult and 347.50 per child, limited to a family maximum of $2,085, but capped at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2016.
STRATEGY: Open enrollment for coverage through the Health Insurance Marketplace for 2016 has closed. However, some qualifying life events may make an individual eligible for non-filing season special enrollment.
Medical expense deduction. Taxpayers who itemized deductions (for regular tax purposes) may claim a deduction for qualified reimbursed medical expenses to the extent those expenses exceed 10% of adjusted gross income (AGI), unless the tax payer falls within an age-based exception. Taxpayers (or their spouses) who are aged 65 or older before the close of the tax year, may apply the old 7.5% threshold for tax years but only through 2016.
STRATEGY: Tax payers who are age 65 or older may consider accelerating medical costs into 2016 if they want to itemize deductions since the AGI floor for deductible expense rise from 7.5% to 10% in 2017. For deductions by cash-basis taxpayers in general, including for purposes of the medical expense deduction, a deduction is permitted only in the year in which payment for services rendered is actually made.
All 2012 tax returns can now be filed with IRS
The IRS on Monday announced that it finished updating its processing systems and is now accepting all returns that include the 29 forms that were delayed by the late passage of the American Taxpayer Relief Act of 2012, P.L. 112-240.
On Sunday, the IRS began accepting from e-file transmitters returns with delayed forms that the transmitters had been holding. The IRS’s Modernized e-File team reviewed reject trends as returns were transmitted during the day on Sunday, and, based on the results, the IRS is now ready to accept all 2012 returns.
Corporate Income Tax: Nexus Established Due to Employee’s In-State Activities
The FTB advises a taxpayer that its corporate subsidiary, which had a single employee located in California, was doing business in the state during pre-2011 tax years and therefore was subject to corporation franchise and income taxes during those years because the employee’s transactions were conducted for the purpose of the subsidiary’s financial or pecuniary gain or profit and went beyond the P.L. 86-272 protections. The subsidiary and its parent manufacture and sell various products for consumer and professional use. The subsidiary sold its products to distributors in California, including the parent corporation, which then sold the subsidiary’s products to various retailers throughout California.
Please contact www.sonnycpa.com if you need additional information.
California—Personal Income Tax: FTB Contacting Nonfilers
The California Franchise Tax Board (FTB) is contacting more than 1 million people who did not file a 2011 state income tax return. The deadline to file was October 15, 2012. The FTB compares its records of filed tax returns with the more than 400 million income records it receives each year from the Internal Revenue Service, banks, employers, state departments, and other sources. The FTB also uses occupational licenses and mortgage interest payment information to detect others who may have a requirement to file a state tax return. Contacted individuals have 30 days to file a state tax return or show why one is not due. If a required return is not filed, the FTB will issue a tax assessment using income records to estimate the amount of state tax due. The assessment will include interest, fees, and penalties.
Rental real estate offers tremendous tax advantages
Rental real estate offers tremendous tax advantages and opportunity for tax planning. Taxpayers, such as you, can depreciate property far exceeding your actual investment, deduct interest on borrowed capital, exchange rather than sell properties to defer tax on gains, use installment sales to defer tax on sales, and profit from preferential rates on long-term capital gains. Most importantly, you can generate “positive cash flow,” or monthly income, with depreciation deductions that effectively turn the actual income into tax losses.
However, deductions are not unlimited. For example, real estate income and loss is generally considered passive income and loss for tax purposes. Taxpayers generally cannot use passive activity losses (PALs) to offset ordinary income from employment, self-employment, interest and dividends, or pensions and annuities. The rental real estate loss allowance and real estate professional status are two important exceptions to this rule. In addition, the tax consequences of renting out a vacation home depend upon the amount of time the home is rented and the amount of time you use the home for personal purposes.
The second exception allows real estate professionals not to treat their rental activity as a passive activity. Therefore, their losses are not limited to passive income. This exception requires material participation by the taxpayer which is demonstrated by meeting one of seven tests. These tests are complex and include the number of hours of participation and the facts and circumstances of the participation in the activity.
Vacation homes are taxed under one of three sets of rules depending on how long the homeowner rents the property. If you rent your vacation home for fewer than 15 days during the year, no rental income is includible in gross income. If you rent the property for 15 or more days during the tax year and it is used by you for the greater of (a) more than 14 days or (b) more than 10% of the number of days during the year for which the home is rented, the rental deductions are limited. Under this limitation, the amount of the rental activity deductions may not exceed the amount by which the gross income derived from such activity exceeds the deductions otherwise allowable for the property, such as interest and taxes.
If you have any questions as to how the rental real estate rules apply to your particular situation, please do not hesitate to call for an appointment. We can assist you in taking advantage of the available tax benefits and develop an overall tax plan.
2012 Resolves Many Uncertainties
2012 Resolves Many Uncertainties, Creates Others; Sets Stage For Future Tax Reform.
Uncertainty during 2012 over what tax laws would govern in 2013 and beyond because of the expiring Bush-era tax cuts clearly was the most significant development of the year. Now that Congress and President Obama — through the American Taxpayer Relief Act of 2012 (ATRA) — have provided a degree of certainty over tax rates into at least the immediate future, taxpayers need to adjust their tax plans accordingly. Individuals and businesses should immediately recalibrate strategies in light of ATRA. 2012 was also a significant year for important tax developments from the Treasury Department, the IRS and the courts. These developments demand the attention of individual and business taxpayers not only to caution what is no longer allowed under the tax laws but also to shape what steps can be taken in 2013 and beyond to maximize tax savings. With that forward-looking perspective, this Tax Briefing reviews key federal tax developments that took place during 2012.
3.8 Percent Medicare Tax on Investment Income
The health care reform package (the Patient Protection and Affordable Care Act and the Health Care and education Reconciliation Act of 2010) imposes a new 3.8 percent Medicare contribution tax on the investment income of higher-income individuals. Although the tax does not take effect until 2013, it is not too soon to examine methods to lessen the impact of the tax. Certain year-end strategies might also be considered to avoid the tax, such as accelerating capital gains and other investment income into 2012 or converting a portion of your investments into tax-exempt interest.
Net investment income. Net investment income, for purposes of the new 3.8 percent Medicare tax, includes interest, dividends, annuities, royalties and rents and other gross income attributable to a passive activity. Gains from the sale of property that is not used in an active business and income from the investment of working capital are treated as investment income as well. However, the tax does not apply to nontaxable income, such as tax-exempt interest or veterans’ benefits. Further, an individual’s capital gains income will be subject to the tax. This includes gain from the sale of a principal residence, unless the gain is excluded from income under Code Sec. 121, and gains from the sale of a vacation home. However, contemplated sales made before 2013 would avoid the tax.
The tax applies to estates and trusts, on the lesser of undistributed net income or the excess of the trust/estate adjusted gross income (AGI) over the threshold amount ($11,200) for the highest tax bracket for trusts and estates, and to investment income they distribute.
Deductions. Net investment income for purposes of the new 3.8 percent tax is gross income or net gain, reduced by deductions that are “properly allocable” to the income or gain. This is a key term that the Treasury Department expects to address in guidance, and which we will update you on developments. For passively-managed real property, allocable expenses will still include depreciation and operating expenses. Indirect expenses such as tax preparation fees may also qualify.
For capital gain property, this formula puts a premium on keeping tabs on amounts that increase your property’s basis. It also puts the focus on investment expenses that may reduce net gains: interest on loans to purchase investments, investment counsel and advice, and fees to collect income. Other costs, such as brokers’ fees, may increase basis or reduce the amount realized from an investment. As such, you may want to consider avoiding installment sales with net capital gains (and interest) running past 2012.
Thresholds and impact. The tax applies to the lesser of net investment income or modified AGI above $200,000 for individuals and heads of household, $250,000 for joint filers and surviving spouses, and $125,000 for married filing separately. MAGI is AGI increased by foreign earned income otherwise excluded under Code Sec. 911; MAGI is the same as AGI for someone who does not work overseas.
The tax can have a substantial impact if you have income above the specified thresholds. Also, don’t forget that, in addition to the tax on investment income, you may also face other tax increases proposed by the Obama administration that could take effect in 2013. The top two marginal income tax rates on individuals would rise from 33 and 35 percent to 36 and 39.6 percent, respectively. The maximum tax rate on long-term capital gains would increase from 15 percent to 20 percent. Moreover, dividends, which are currently capped at the 15 percent long-term capital gain rate, would be taxed as ordinary income. Thus, the cumulative rate on capital gains would increase to 23.8 percent in 2013, and the rate on dividends would jump to as much as 43.4 percent. Moreover, the thresholds are not indexed for inflation, so a greater number of taxpayers may be affected as time elapses. Congress, together with a new administration, may step in and change these rate increases, but the possibility of rates going up for upper income taxpayers is sufficiently real that tax planning must take them into account.
Please contact our office if you would like to discuss the tax consequences to your investments of the new 3.8 percent Medicare tax on investment income.
Business deduction for the entire cost of qualified property
October 26, 2012 by admin
Filed under Uncategorized
Businesses should consider accelerating purchases into 2012 to take advantage of the still generous Code Sec. 179 expensing. Qualified property must be tangible personal property that a taxpayer actively uses in its business, and for which a depreciation deduction would be allowed. Qualified property must be newly-purchased new or used property, rather than property the taxpayer previously owned but recently converted to business use. Examples of types of property that would qualify for Code Sec. 179 expensing are office equipment or equipment used in the manufacturing process. Additionally, Code Sec. 179 expensing is allowed for off-the-shelf computer software placed in service in tax years beginning before 2013.
If a taxpayer’s equipment purchases for the year exceed the expensing dollar limit, the taxpayer can decide to split its expensing election among the new assets any way it chooses. If the taxpayer has a choice, it may be more valuable to expense assets with the longest depreciation periods. As long as the taxpayer starts using its newly-purchased business equipment before the end of the tax year, it may take the entire expensing deduction for that year. The amount that can be expensed depends upon the date the qualified property is placed in service, not when the qualified property is purchased or paid for.
2012 Year-End Tax Planning for Businesses
In recent years, end-of-the-year tax planning for businesses has been complicated by uncertainty over the future availability of many tax incentives. This year is no different. In 2010, Congress extended many business tax incentives for one or two years. Now, those incentives either have expired or are scheduled to expire. Whether they will be extended is unclear, as Congress debates the fate of the Bush-era tax cuts and the across-the-board spending cuts scheduled to take effect in 2013. Taxpayers need to be aware of the expiring provisions, and to explore developing a multi-year tax strategy that takes into account various scenarios for the future of these incentives.