December 7, 2011
Dear Tax Clients:
As the 2011 tax year comes to a close, now is the time to review your financial situation and determine what tax planning opportunities exist to decrease your 2011 taxes. We are ready to help you plan efficiently and effectively for 2011 and future years.
Individual Income Tax
While the lower Bush era tax cuts are currently not scheduled to expire until the end of 2012, there are still year-end tax savings opportunities available. The additional twist for year-end 2011 tax planning is the uncertain future for tax rates after 2012. Many political observers forecast that higher income taxpayers will only be asked to pay more.
Year End 2011 Action Items:
Make your 2011 State Income Tax payments in December 2011, instead of waiting until January 2012, unless you are in an AMT situation.
Sell any stock “losers” this month to offset your 2011 capital gains, plus $3,000. Avoid “wash sale” rules by not buying the same stock within 30 days before or after the sale of the stock. Otherwise, the losses will not count.
Has your 2011 Federal Income Tax been under-withheld? Or have you had other income and not made estimated tax payments? Have more tax withheld from your December paychecks. This will avoid underpayment penalties.
If you are 70 ½ and older, you can make charitable contributions directly from your IRA to a bona fide charity. No charitable deduction is available for the donation, but income tax will not be due on what would otherwise be a taxable distribution form the IRA. This tax break is especially advantageous for retired taxpayers who are no longer able to itemize their deductions. The limit is $100,000 and it is scheduled to expire at the end of this year.
Consider converting your traditional IRA to a Roth IRA. You would owe tax on the IRA amount currently, to the extent it exceeds basis, but retirement distributions from the Roth IRA would potentially be tax free – especially advantageous since it is expected that tax rates will increase after 2012.
Provisions currently scheduled to expire 12/31/2011:
Payroll Tax – For the 2011 tax year, the employee share of Social Security Tax withholding was reduced from 6.2% to 4.2% of the taxable wage base of $106,800. This reduction is scheduled to expire at the end of the year. President Obama has proposed a measure that would continue the payroll tax deduction for 2012 at an even lower rate of 3.1% of the scheduled 2012 taxable wage base of $110,100. This new measure has not yet become law and is currently under debate in Congress.
Alternative Minimum Tax Exemption – In order to prevent many moderate income tax payers from being subject to the AMT, the exemption amounts for 2011 were increased to $48,450 for single taxpayers and $74,450 for married taxpayers filing jointly and surviving spouses. Unless Congress acts to extend the higher exemption amounts, the exemption for 2012 and beyond will decrease to $33,750 for single taxpayers and $45,000 for jointly filing married taxpayers and surviving spouses.
Provisions currently scheduled to expire 12/31/2012:
Federal Income Tax Rate Brackets – The current tax rates of 10, 15, 25, 28, 33 and 35% are scheduled to expire 12/31/2012. If they were allowed to expire, the rates for 2013 and future years would revert to the “pre- Bush tax cut” rates of 15, 28, 31, 36 and 39.6%.
All indications at this time are that President Obama supports extending the tax rate cuts, except to the highest tax brackets starting at $250,000 for married filling jointly taxpayers and $200,000 for all other taxpayers. The Republicans continue to only support an extension of the lower Bush-era rates across-the-board to all taxpayers. This will continue to be a hotly debated issue in Washington. We will keep you informed as new developments continue to unfold.
Capital Gains/Dividends – In 2011 and 2012, qualified capital gains and dividends are taxed at a maximum rate of 15%. Unless this provision is extended, the maximum rate on net capital gains would increase to 20% in 2013. All dividends would be taxed as regular income, and therefore, could be subject to the maximum rate of 39.6%.
Limit on Itemized Deductions – Unless the Bush tax cuts are extended, higher-income taxpayers will revert to a limitation on itemized deductions in excess of a statutory threshold of adjusted gross income. There would also be a similar limitation on personal exemptions for high-income taxpayers.
Marriage Penalty Relief – The provisions currently in place to mitigate the “marriage penalty” for two income couples will expire at the end of 2012.
Small Business Tax
Bonus Depreciation – The bonus depreciation percentage for the cost of new equipment, including computers and software, purchased and placed in service in 2011 will be 100%. The bonus depreciation rate is scheduled to drop to 50% in 2012.
Action Item: Accelerate planned equipment purchases to December and you will be able to deduct the entire cost of the equipment on your 2011 tax return.
Hiring Incentives for Veterans – The Returning Heroes Tax Credit and the Wounded Warriors Tax Credit were recently enacted on November 21, 2011. Under this new law, employers are eligible for a tax credit when hiring certain qualified military veterans. This provision is currently scheduled to expire on 12/31/2012.
Action Item: A certification form must be filed with the state workforce agency within 28 days of the employment date to certify that the individual is eligible for the Work Opportunity Tax Credit.
From 1099 Reporting – There are new questions on this year’s Schedule C (Profit or Loss from Business) and Schedule E (Supplemental Income and Loss) regarding the 1099 reporting of certain payments made to individuals in the course of your trade or business. IRS is asking taxpayers if they had any payments that would require 1099 reporting and if yes, were all required forms filed.
Action Item: Confirm that you are in compliance – Penalties can add up quickly.
Federal Estate and Gift Tax
The current estate tax for 2011 is set at a maximum 35% rate and a $5 million exclusion. For 2012, the maximum rate remains the same at 35% and the inflation-adjusted exclusion is $5.120 million. Absent future legislation, after 2012, the exclusion amount will be $1 million with a maximum 55% rate. However, many experts are predicting that Congress will lower the exclusion to $3.5 million and raise the maximum rate to 45% after 2012.
Action Item: Lifetime gift giving should continue to be part of your master estate plan. Individuals can currently gift up to $13,000 per year and married couples can gift up to $26,000 per year, to each individual gift recipient free of any gift tax.
IRS “Phishing” Scams – The IRS continues to be diligent in their efforts to protect taxpayer information and “shut down” scams as quickly as possible. They stress that the IRS does not solicit taxpayer information via e-mail. Any emails received from the “IRS” requesting personal information should be deleted.
Audits of Tax Returns – There has been an increase in audit and notice activity related to clients’ Individual Income Tax Returns (Form 1040) over the past couple of years. As the federal government continues to struggle financially, the audit/notice activity for Estate and Trust Tax Returns (Form 1041) is also starting to increase. This includes the assessment of severe non-filing penalties in cases where tax returns have not been properly filed. It should be noted that tax returns are required to be filed even if no tax is due. We are ready to help if you have any issues in this area.
Health Care Directives – Once a child turns 18, a parent/guardian’s access to medical records is terminated. Therefore, if you have young adult children, it is advisable for them to execute and Advanced Health Care Directive naming you (or someone they trust) as their personal representative so that these records do not become blocked from access.
Health Care Act
Small Business Tax Credit – Currently a tax credit is available to qualified small employers to help offset the cost of employer provided health insurance coverage.
Medicare Payroll Surtax – Effective 2013 the law currently contains provisions for imposing an additional Hospital Insurance tax of .9% on earned income in excess of $200,000 for individuals and $250,000 for married couples filing jointly. An additional 3.8% Medicare contribution tax is imposed on unearned income for higher-income taxpayers.
Estates and Trusts – The 3.8% tax is also imposed on certain estates and trusts.
Medical Expense Deduction – The threshold for the itemized medical deduction will increase after 12/31/2012. However, individuals who are 65 and older will be exempt from this increase through 2016.
State of Georgia Changes
Individual Income Tax Retirement Exclusion – The income tax exclusion on retirement income, for taxpayers who are 65 or older, increases from the current $35,000 of retirement income to the following:
2012 $ 65,000
No need to move to Florida – Georgia is increasingly becoming a retiree friendly State.
Individuals who are ages 62 through 64 are still entitled to the $35,000 individual tax exclusion on retirement income.