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Yet Another Part of the Tax Law That Leaves us Hanging | Tax Tip of the Week | No. 161 August 29, 2012

Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , add a comment

IRAs and Charitable Distributions

I recently fielded a question from one of our clients that I felt would be of interest to many of our readers.

He wanted to know whether he could still make a contribution from his IRA directly to his church and not have it be included in his taxable income for 2012.

He is referring to the Qualified Charitable Distribution (QCD) provision of the tax law that allows a tax-free distribution directly to a charity, up to $100,000, from your IRA if you are 70 ½ or older. This distribution also counts towards your Required Minimum Distribution (RMD).

While you do not get a charitable deduction for this type of distribution, it is a great way for seniors to get tax-free treatment on their RMDs.

This provision in the tax law expired at the end of 2011. Therefore, the answer to his question right now is “NO.”

However, on August 2, 2012, the Senate Finance Committee approved the Family and Business Tax Cut Certainty Act of 2012. This bill includes, as one of its provisions, an extension of the QCD for 2 years.

If, and when, Congress approves this bill, and the President signs it into law, I will let you know.

As always, give us a call with any questions you may have.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

Penalty Relief and Expanded Installment Agreements | Tax Tip of the Week | No. 160 August 22, 2012

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New IRS Collection Rules

The IRS announced an expansion of the “Fresh Start” initiative to help struggling taxpayers by taking steps to provide new penalty relief to the unemployed and making installment agreements available to more people.

Wage earners (employees) who have been unemployed for 30 days or longer will be able to avoid failure-to-pay penalties during a six-month grace period (October 15, 2012 for 2011 taxes). In addition, the IRS is doubling the dollar threshold from $25,000 to $50,000 for taxpayers to be eligible for automatic installment agreements to help more people qualify for the program as well as extended the maximum payment period from 60 months to 72 months.

This initiative also changes the rules on getting an Offer in Compromise accepted.

For more information, review IR-2012-31

Then give us a call if you need help in settling your debt with the IRS.You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

What You Should Consider Now | Tax Tip of the Week | No. 159 August 15, 2012

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Tax Planning for 2012

Two weeks ago we discussed upcoming 2013 tax increases due to the health care bill.  Last week we looked at potential tax increases if the current tax cuts are not extended.  This week are some suggestions to consider for the remainder of 2012 while we know what the tax rules are.

The basic strategy for 2012 is to accelerate income while we are enjoying what may be the lowest tax rates we will see for the foreseeable future.  Specific strategies include:

– Accelerating income by asking for 2012 bonuses in lieu of 2013 pay increases.

– Exercising nonqualified stock options in 2012.

– Cash basis business owners should be aggressive in collecting on accounts receivables so income is taxed in 2012.

– Business owners should consider maximizing dividends in 2012 so they are taxed at the  15% rate.

– If you have unused investment interest expenses, consider planning that elects to treat qualified dividends and/or long-term capital gains as ordinary income in 2012.  You could then use the investment interest expense in 2012 and delay usage until 2013. (Note-this is a pretty complex tax tool and should only be considered with the help of a tax pro).

– Consider a traditional IRA conversion to a Roth IRA.  This way you can calculate the tax hit on today’s tax rate and reap the benefit of tax-free distributions in future years when tax rates may be higher.

– Start looking now at possible reallocations of investment portfolios to minimize the 3.8% Medicare tax on investment income in 2013.

– If reallocating your investment accounts makes sense, reap your long-term capital gains in 2012 so they are taxed at 15%.

– Self-employed individuals should look at establishing retirement accounts to minimize taxable income in 2012 and 2013.

– There are other charitable and gift giving strategies that should be considered in 2012 that go beyond the scope of this article.

– Some pundits are even advocating some couples get divorced in 2013!  This would be in situations when each spouse has income below the $200,000 threshold that avoids the additional 0.9% Medicare tax, but whose combined income would exceed the $250,000 threshold that makes couples subject to this tax.

Every individual has a unique set of circumstances and goals.  These tips are just a few strategies that may apply to you.  This year, more than ever, it is important to begin your year-end tax planning early.

We will keep you posted as the tax laws evolve over the next several months.

As always, give us a call if you would like to discuss your personal tax planning strategies.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

A “Perfect Storm” Brewing | Tax Tip of the Week | No. 158 August 8, 2012

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Pending Tax Increases in 2013

Last week we looked at some pending tax increases in 2013 as a result of the Supreme Court upholding the major provisions of the Patient Protection and Affordable Care Act (Obamacare). 

This week we will look at some additional tax increases if Congress allows the Bush tax cuts to expire on December 31, 2012. 

Next week we will examine some tax savings opportunities to consider before the end of this year and the Perfect Storm of all tax increases hits us in 2013.

These are some of  the tax cuts scheduled to end on December 31, 2012: 

Elimination of the 10% tax rate.  Currently the first $8,500 ($17,000 if married) of taxable income is taxed at a 10% rate.  In 2013, the first dollar of taxable income will be taxed at a 15% rate.

All other tax brackets will increase.  Currently the highest tax rate is 35%.  That tax bracket will increase to 39.6% in 2013.

Long-term capital gain increases.  In 2012, long-term capital gains are taxed at 0% if you are in the 15% tax bracket or below, and taxed at 15% for those in the higher tax brackets.  In 2013, long-term capital gains will be taxed at 10% or 20% depending on your tax bracket.

Elimination of qualified dividends.  The current tax rate on qualified dividends is 0% (if you are in the 15% tax bracket or lower) and taxed at 15% if you are in the higher tax brackets.  In 2013, dividends will be taxed as ordinary income.  This means they will be taxed as high as 39.6%.  Remember from last week, there will be a new 3.8% surtax on investment income for those with taxable incomes over $200,000 ($250,000 if married).  In 2013, if you are in the higher tax brackets your dividend income could be taxed at 43.4% (39.6% + 3.8%) vs. the 15% tax rate in 2012.  (Editor’s note:  this can’t be good for the stock market!)

Payroll taxes will increase.  Today we still have the 2% rollback on the employee portion of FICA taxes.  That rollback could end in 2013.

Child tax credit reduction.  For those with dependent children under age 17 the current child tax credit is $1,000.  The credit could be reduced to $500 next year.

Elimination of college education credits.  The current American Opportunity Credit offers a very generous credit of up to $2,500 to help defray the cost of higher education expenses.  That credit is eliminated in 2013.

These are just a few of the potential increases.  Other increases include the return of limitations on itemized deductions and personal exemptions, return of the marriage penalty, reduced student loan interest deductions, and more. 

In addition to these pending tax increases we are also left with a lot of uncertainty about estate taxes and any possible relief from the Alternative Minimum Taxes (AMT).  The current estate tax exclusion is $5 million ($10 million if married) with a 35% estate tax rate.  In 2013, the estate tax exclusion will return to $1 million ($2 million if married) and assets above the exclusion will be taxed at a 55% tax rate. 

We’ll keep you posted.

As always, give us a call with any questions you may have.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.

What Does the Supreme Court Ruling on the Health-Care Reform Law Mean for you? | Tax Tip of the Week | No. 157 August 1, 2012

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U.S. Supreme Court Ruling

On June 28, 2012, the U.S. Supreme Court ruled, in a landmark decision, that the Patient Protection and Affordable Care Act (ACA), including the provision that most Americans must carry health insurance or pay a penalty, is constitutional.

The ACA, signed into law in 2010, made sweeping reforms to health-care coverage in the United States. Many provisions of the law have already taken effect. A number of other provisions are scheduled to take effect in subsequent years, including the requirement that most Americans and legal residents have qualifying health insurance (exceptions apply) or pay a penalty in the form of a tax. Here’s a summary of some of the important provisions that are already in place, and those that are on their way by 2014.

In effect now

 •  Children can no longer be denied insurance coverage because of pre-existing conditions

 •  Payment of $250 rebate to Medicare Part D beneficiaries subject to the coverage gap (beginning January 1, 2010) and gradually reducing the beneficiary coinsurance rate in the coverage gap from 100% to 25% by 2020

 • Insurers will not be able to impose lifetime caps on insurance coverage

 •  All plans offering dependent coverage will be required to allow children to remain under their parents’ plan until age 26

 •  Insurers cannot cancel or deny coverage if you are sick except in cases of fraud

 •  Adults with pre-existing conditions will be able to buy coverage from temporary high-risk pools until 2014, when coverage cannot otherwise be denied for pre-existing conditions

Key provisions effective on or before January 1, 2014

  •  Increasing the medical expense income tax deduction threshold to 10% of adjusted gross income, up from the current 7.5% (January 1, 2013)

  •  Increasing the Medicare tax rate by 0.9% on wages over $200,000 for individuals ($250,000 for married couples), and assessing a new 3.8% tax on some or all of the net investment income for these higher-income individuals (January 1, 2013)

  •  All Americans must carry health insurance or face a penalty (in the form of a tax) of up to 2.5% in 2016 of household income on individuals, with exceptions for economic hardship, religious beliefs, and other situations (January 1, 2014)

  •  Adults with pre-existing conditions cannot be denied coverage or have their insurance cancelled due to pre-existing conditions (January 1, 2014)

  •  A requirement that establishes an American Health Benefit Exchange, sponsored by state or federal governments,  that facilitates the purchase of qualified health plans and includes an Exchange for small businesses (January 1, 2014)

  •  Tax credits will be available to qualifying families to offset the cost of health insurance premiums (January 1, 2014)

 •  Flexible spending accounts face an annual pretax limit of $2,500 in 2013 (a decrease from the current amount of $5,000)

 •  Employers with more than 50 employees must offer health insurance for their employees or be fined per employee (January 1, 2014)

  •  Imposing taxes or fees on health insurance providers and drug companies, while doctors and hospitals will receive less compensation from government sources (January 1, 2014)

So is this it?

While the Supreme Court has ruled the ACA constitutional, it may still face challenges as Congress may seek to repeal the law. The ultimate fate of the health-care reform law may be determined by the outcome of the November elections.

As always, give us a call with any questions you may have.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

Tax Tip of the Week Video Series:

http://youtu.be/BlhqUiVEsJo

…until next week.