Part II: Year-End 2012 Tax Planning Letter/Newsletter

Last week we started to breakdown our newsletter into smaller, more digestible snip-bits.  I for one having nothing but Turkey, travel plans & skiing on the brain, but as promised here is Part II of our newsletter synopsis.  This week we will discuss other sources of income that you may overlook/forget and remind you of some tax breaks that are going bye-bye after this year. 

Don’t overlook less obvious income:

By now you have a fairly complete picture of your income for the year from sources such as salary, retirement plan distributions and dividends.  The total of these combined with other predictable income items provide a good starting point for tax planning, one you may need to augment by thinking about less obvious additions to income.

Here are a few examples:  taxable capital gains distributed by mutual funds.  These differ from the gain you recognize when you sell mutual fund shares you own.  Capital gain distributions from funds occur when the fund manager makes a profit selling investments the fund owns.  Those gains are passed to shareholders and you generally have no control over the timing.  The distributed gains are taxable even if you reinvest them in additional shares and in some cases can impact the AMT computation.  Check with your mutual fund provider before assuming you’ve captured all your income for 2012.

Another one that is easy to over look is a 2010 Roth conversion.  If you opted to spread the tax over two years, you’ll need to include the second half on your 2012 federal income tax return.  That will increase your income which can affect your marginal tax bracket, taxable social security benefits and how much of your rental real estate activity losses are deductible.  In additional your estimated tax payments or withholding may need to be adjusted.

Utilize expiring tax breaks:

One that expires December 2012 is Bonus Depreciation which lets you write off 50% of the cost of assets purchased in your business.  You will want to review your asset acquisition schedule to determine if buying new equipment this year will garner a larger tax benefit versus waiting until 2013. (We discussed this topic in our blogs; Buying office equipment & Buying/Selling your Vehicle)

 

Next week we will continue to breakdown the newsletter and will discuss common 2012 tax credits that the IRS says are missed.  We wish everyone a very safe and Happy Thanksgiving!

 

Please feel free to contact Harvey and Caldwell, PA at 913-451-4400 or visit our website http://www.harveyandcaldwell.com/ as a resource for your tax needs.

To read this letter/newsletter in its entirety: http://www.planningtips.com/4422/default.asp?tip_id=4422&co_id=18386&pg=1

Part I: Year-End 2012 Tax Planning Letter/Newsletter

Tax Planning Letter (A Letter from our CPA’s)

Dear Clients and Friends,

Taxes are going to be a major issue for the rest of 2012 and for much of 2013. On January 1, 2013, the country faces what Federal Reserve Chairman Ben Bernanke has called a “fiscal cliff,” resulting from the expiration of the Bush-era tax cuts and the automatic across-the-board cuts in government spending. Added to these events is the uncertainty over the alternative minimum tax and the tax breaks known collectively as the “tax extenders.”

There is no way to predict what Congress will do about these issues or when they will act. That uncertainty makes doing effective tax planning for yourself and your business very challenging. Yet doing nothing could leave you paying significantly more in taxes.

This year, the wise taxpayer may have to consider more than one tax strategy, running the numbers under two or more scenarios. By staying informed and being prepared to act as events unfold, you can minimize your 2012 and 2013 tax liability. This Letter is intended to encourage you to make 2012 year-end planning a priority. We are committed to helping you analyze the tax-cutting options best suited to your particular circumstances. If you have any questions or would like to arrange a year-end tax review, please contact our office.

Harvey & Caldwell,  PA

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Some of you may have already seen this letter & accompanying newsletter, which you can also find in the resources section of our website.  We have already done a whole series on last minute tax planning tips focusing on small business owners and thought it would be a good idea to breakdown this Year-End 2012 newsletter into more easily digestible excerpts.  This newsletter focuses on everyone, not just the small business owner, and several things we should think about while there is still time to have an impact on our 2012 return.  Since the newsletter is a bit lengthy (which is where this current blog is now heading) we are going to break it up into sections.

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Newsletter Part I:  Tax-cutting time is ticking away

Tax planning is difficult in any situation; especially with the current political and economic environment.  Some rules that applied on your 2011 federal income tax return have expired and others are going to at the end of this year.  New provisions are slated to begin
in 2013 so reviewing your tax situation before the end of 2012 will position you to act quickly when the timing is right.  Here are a few tax strategies to consider as the year-end 2012 approaches.

Review options for accelerating income:

The idea of paying federal and state income tax early may make you cringe, but having a plan in place just in case paying now results in saving later is a good idea.  One reason:  Some methods of pulling income from 2013 into 2012 require time, time you may not have if you wait until the last minute.  Here are a few examples:

-Taking payroll bonus from your business at year-end.  You might choose to do this to take advantage of the current reduced rate of 4.2% for the employee portion of social security tax, which expires on December 31, 2012.

-Perhaps your goal is to lower the amount of your 2013 income tax that will be subject to either the 3.8% or o.9% Medicare surtaxes taking effect next year.

-Or maybe you want additional earned income so you can increase your retirement plan contribution.

-Distributing a dividend from your corporation this year while the maximum tax rate for qualified dividends is 15%.

-Retirement accounts also offer opportunities for accelerating income into 2012.  If you turned 70.5 this year and you expect to be subject to higher taxes in 2013 it may make sense to take your initial required minimum distribution by December 31 instead of waiting until next April.  You also can withdraw funds without penalty from traditional IRA’s beginning at age 59.5.  In some cases penalty exceptions apply when you are under 59.5.

-Converting your traditional IRA to a Roth also increases income in 2012.  The good thing about that is you can change your mind later, even after the beginning of the year.  Roth conversions provide future-year tax breaks.  Unlike traditional IRA’s withdrawals from Roth accounts are not mandatory.  When you do take them they are not subject to the new 3.8% Medicare surtax, they are not included in figuring the taxable amount of your social security benefits either.

-Regular income tax planning is only one factor in the decision to increase your current-year income.  The alternative minimum tax (AMT) is another.  The last annual AMT patch expired in 2011 so you will want to understand your exposure based on current rules.

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Next week we will continue to breakdown the newsletter for more tips regarding your Year-End 2012 taxes, and don’t worry, it will be much shorter!

 

Please feel free to contact Harvey and Caldwell, PA at 913-451-4400 or visit our website http://www.harveyandcaldwell.com/ as a resource for your tax needs.

To read this letter/newsletter in its entirety: http://www.planningtips.com/4422/default.asp?tip_id=4422&co_id=18386&pg=1

Reimburse Your Section 105 Medical Expenses

If you have put your husband & wife Section 105 Medical reimbursement plan in place make sure that reimbursements are taking place.  If you want the deductions this year you need to make the reimbursements by December 31.

 

Since tomorrow is Election Day we decided to keep this week’s blog a little light.  Although a break from the election chatter might be a welcome break, we will wait to make sure you can fully concentrate on tax matters.  After the dust settles from Tuesday we look forward to sharing with you a tax planning letter from Mr. Harvey & Ms. Caldwell regarding the “fiscal cliff” our country faces according to Federal Reserve Chairman Ben Bernanke and what you can do for your tax planning strategies.

Happy voting and we look forward to sharing more useful tax tips next week!

 

Please feel free to contact Harvey and Caldwell, PA at 913-451-4400 or visit our website http://www.harveyandcaldwell.com/ as a resource for your tax needs.

Sell a Vehicle

So last week we discussed all the ways you can buy a vehicle for your business and how it could impact you tax wise.  This week, as promised, we will share how selling a vehicle can impact you tax wise.  Selling is never as much fun as buying but the end result is usually extra money in your pocket, which is always a good thing!  Here are a couple of scenarios likely to occur and how it could impact you financially.

1.        Sell Old Business Vehicles with Embedded Tax Losses to Third Parties

  • Vehicles owned by you or your business and deducted for business purposes have built- in taxable gains and deductible losses.
  1. Original purchase price is your beginning basis
  2. Depreciation reduces your basis
  3. Depreciation comes from either the depreciation tables or the IRS mileage- rates.
  4. When you sell your business vehicle, you compare the net business sales proceeds with the net business basis to find gain or loss.
  • For planning purposes you should know if your vehicle has a gain or loss.

For example:

Ms. Smith has been in business for 11 years.  She converted her personal car to business use.  She has since traded/replaced her business car 4 times.  She had deducted each of her cars using the IRS standard mileage rates.  If Ms. Smith sells her mileage-rate business car today she will realize a loss-on-sale deduction of $27,000.  This loss is the accumulation of 11 years of car activity which she never cashed out, because she always traded cars before she learned this rule.  Trades are Section 1031 exchanges, unlike sales, trades defer the tax results to the next asset.

  • So when Ms. Smith sells car number 4 she is really selling all four cars because the 1031 exchange rules push the old basis of each vehicle into the replacement vehicle’s basis.  In her 40% combined federal and state income tax bracket the sale of vehicle number 4 at a loss of $27,000 puts $10,800 of after-tax cash in Ms. Smith’s pocket.  Be sure to examine your car for this possible loss deduction.  Do this examination soon, to take the loss you have to sell your car to a third party before the end of the year.

2.       Sell Prior Business Cars Still in Your Household

  • If you have an old business vehicle that is now being used in the household personal miles are being put on your business vehicle.  If this vehicle has a big loss embedded in it you will want to sell the vehicle to a third party and claim the loss deduction.  You will probably have to locate a replacement vehicle for your family but with the sales proceeds and the tax benefits you will most likely have some extra money in the bank!

Thank you for following this sequence regarding how buying/selling a vehicle can be another method to impact your 2012 return.  We know it was a bit lengthy but hope it was beneficial and you learned something you didn’t know before.   As always we are here to address any of your questions/concerns so please feel free to contact us at 913-451-4400 or visit our website http://www.harveyandcaldwell.com/ as a resource for your tax needs.

Buy a Vehicle

With the end of the year approaching you know it is only a matter of time before we start seeing the end of year car sales.  Over the next two weeks we will discuss several methods of buying and selling vehicles for your business and how it impacts your 2012 taxes.  There are several so we are going to break it up into sections.  This week we will share with you the ways that buying a vehicle can impact you tax wise and next week we will share how selling a vehicle can impact you tax wise.

1.        Buy a New car

  • As a calendar-year taxpayer you or your corporation can claim up to $8,000 in bonus depreciation on a new car purchased and placed in service by the end of the year.  Add this to the $3,160 luxury limit and you can deduct up to $11,160 in depreciation and expensing with 100% business use.  If business use is only 80% then the limit would be $8,928 (80% x 11,160).

2.       Buy a New SUV or Crossover vehicle with GVWR of 6,000+  pounds

  • You can qualify for three tax breaks on the purchase of a new SUV or crossover vehicle.
  1. Expensing of up to $25,000
  2. 50% bonus depreciation on amounts not expensed
  3. MACRS depreciation on the balance

For example:

Buy a new $50,000 qualifying SUV which has 90% business use.  Your business cost is $45,000 = 90% x $50,000.  With 90% business use you may write off $35,500 = $25,000 in section 179 expensing + $10,000 bonus depreciation + $500 ((assuming mid-quarter MACRS applies) = $10,000 remaining basis x 5 %.))

3.       Buy a Used SUV or Crossover Vehicle with a GVWR of 6,000+ pounds

  • Section 179 expensing applies to both new and used qualifying assets.  Thus this vehicle type qualifies for expensing of up to $25,000.  You may not use bonus depreciation on used vehicles; it only applies to new vehicles.  If the vehicle constitutes more than 40% of your personal property assets placed in service during the year you must use a mid-quarter MACRS depreciation method which grants 5% depreciation for the year.

For example:

Buy a $30,000 used crossover vehicle that qualifies for Section 179 expensing which has 94% business use.  That will give you $28,200 business basis for this vehicle ($30,000 x 94%).  You may deduct up to $25,160 = $25,000 in Section 179 expensing + $160 in MACRS depreciation (5% x $3,200 basis remaining after expensing).

4.       Buy a Qualifying Pickup Truck

  • If you buy and place in service a qualifying pickup truck, new or used, before the end of the year you may deduct up to $125,000 of its cost.  For a pickup to qualify it must have a GVWR of 6,000+ pounds, a cargo area (pickup bed) of at least 6’ in interior length which is not easily accessible from the passenger compartment.

For example:

You by a $43,000 qualifying pickup truck that you use 97% of the time for business.  Using Section 179 you may expense $41,710 (97% x $43,000).  If the pickup truck passes the weight test but fails the other truck test it is considered an SUV which is eligible for expensing of up to $25,000.

5.       Buy a Business Motor Home

  • New and used business motor homes with a GVWR over 14,000 pounds qualify for expensing of up to $125,000 of business cost.

6.       Buy a Qualifying Van

  • A van must have a GVWR over 6,000 pounds, fully enclose the driver compartment and load-carrying device, not have seating behind the driver’s seat, and have no body section that protrudes more than 30” ahead of the leading edge of the windshield to qualify for expensing of up to $125,000.  If the van fails any of the qualifying tests the law deems it an SUV eligible for expensing of up to $25,000.

 

Whew!  Can you still see straight?  I know that was a lot to cover but we thought it could be very beneficial to some of you.  So if you are debating whether or not to buy a vehicle now you have some extra information for how it can impact you tax wise.  So go hit a sale at a dealership, and try to have fun knowing you are adding value to your business & impacting your 2012 taxes.  Happy shopping!

Please stay tuned, next week we will share how selling a vehicle can benefit your business and its impact on your taxes.

 

Please feel free to contact Harvey and Caldwell, PA at 913-451-4400 or visit our website http://www.harveyandcaldwell.com/ as a resource for your tax needs.

Set Up and/or Make Your 2012 Retirement Plan Contribution

Okay ladies & gentleman, it is October and the Holiday season is fast approaching.  We are all about to be even busier in our already busy lives.  So before the holidays are in full swing let’s talk about your Retirement Plan while you still have some space in your brain that doesn’t involve turkeys and wrapping paper.  If your retirement plans aren’t already in place it is time to get busy putting one together.  This way you can obtain a tax deduction for 2012, even if you don’t make that contribution until next year, but before you file your return.

You must have a solo 401k in place by December 31 to obtain a 401k deduction for this year.  If your plan is established by then you can make your 2012 tax deductible contribution in 2013 before your 2012 tax filing deadline (this includes extensions).

So get your plan in place so you can get back to focusing on costumes, turkeys and wrapping paper.  You will enjoy it more knowing you have done everything to impact your 2012 taxes as well as impacting your long term financial planning goals for you and your family.

 

Please stay tuned over the next few weeks for more last minute tax planning tips.  We will discuss other ways you can impact your 2012 taxes ranging from reimbursing Section 105 medical expenses, buying or selling a vehicle, and much more.

Please feel free to contact Harvey and Caldwell, PA at 913-451-4400 or visit our website http://www.harveyandcaldwell.com/ as a resource for your tax needs.

Offset Capital Gains and Capital Losses

Being and individual taxpayer there are several rules & strategies to keep in mind when planning your capital gains and losses.  1st Short term capital gains & ordinary income are taxed at rates up to 35 percent.  A strategy to offset the gains would be with long term losses, i.e. kill the 35% taxes with 15% losses.  2nd Long term capital gains are taxed at rates of up to 15 percent (0% if you are taxed at a regular rate of 15% or less).  The strategy is to have long term losses create the $3,000 deduction allowed against ordinary income.  You are trying to use the 15% loss to kill the 35% tax or a zero percent loss to kill a 15% tax.  3rd If your capital losses exceed capital gains, you may deduct up to $3,000 and carry forward your unused losses.  The strategy if you have a lot of capital losses and the $3,000 allowance isn’t going to cut it, sell assets to create offsetting gains.  4th Long term gains and losses are offset before application against short term gains and losses.  The strategy as an individual investor is to avoid the wash sale rule.  If you sell stock or other security and then purchase substantially identical stock or securities within 30 days before or after the date of sale, then you many not recognize any loss on that sale.  Therefore if you want to keep the identical stock position but also recognize a loss you will need to roll the dice for more than 30 days.

 

Please stay tuned over the next few weeks for more last minute tax planning tips.  We will discuss other ways you can impact your 2012 taxes ranging from reimbursing Section 105 medical expenses, setting up or making 2012 retirement plan contributions, buying or selling a vehicle, and much more.

Please feel free to contact Harvey and Caldwell, PA at 913-451-4400 or visit our website http://www.harveyandcaldwell.com/ as a resource for your tax needs.

Give Appreciated Stock to Charity

In a down economy it may be hard to consider donating to charity.  However doing so may have an impact on your taxes.  Assuming you have some appreciated stock left in your portfolio and are going to donate to charity, consider donating appreciated stock rather than cash.  With appreciated stock you avoid paying tax on the gain and get a deduction for the fair market value, this gives you a double benefit.

For example if you bought stock for $1,000 and its now worth $10,000 and you give it to a 501(c)(3) charity you get a tax deduction for the $10,000.  You pay zero taxes on the $9,000 profit you made on the stock!

 

Please stay tuned over the next few weeks for more last minute tax planning tips.  We will discuss other ways you can impact your 2012 taxes ranging from how to offset capital gains/losses, reimbursing Section 105 medical expenses, and even buying or selling a vehicle, and much more.

Please feel free to contact Harvey and Caldwell, PA at 913-451-4400 or visit our website http://www.harveyandcaldwell.com/ as a resource for your tax needs.

Buying Office Equipment

As a small business owner there is no escaping the expenses associated with running it.  Luckily lawmakers designed Section 179 expensing for the small business.  There is a limit on SUV expensing of $25,000 (We will discuss how buying/selling a vehicle is good for business in more detail in the future).   The overall 2012 limit on Section 179 expensing is $125,000.  Qualifying items include personal property such as equipment, computers, desks & chairs.  If you buy and place in service more than $500,000 of qualifying property during the year you must reduce the $125,000 ceiling by $1 for each dollar in excess of $500,000.  There is no need to worry if you hit the $500,000 ceiling, you won’t suffer too much due to these 2012 assets also qualify for 50% bonus depreciation.  So it is a very good year to buy business assets!

Please stay tuned over the next few weeks for more last minute tax planning tips.  We will discuss other ways you can impact your 2012 taxes ranging from giving to charity, offsetting capital gains/losses, and even buying or selling a vehicle, and much more.

Please feel free to contact Harvey and Caldwell, PA at 913-451-4400 or visit our website http://www.harveyandcaldwell.com/ as a resource for your tax needs.

Use your Credit Card

Using your credit card is a Good thing!  Yes, you read that correctly.  Using your credit card for your business leads to deductions.  As a sole proprietor when you charge a purchase to your credit card the expense is deductible.  So go ahead and buy office supplies or other business necessities with the plastic.  Your business ran as a corporation using its credit card is the same.  The date of the charge is the date of deduction.  If your business is operated as a corporation and you as the personal owner use your credit card, the corporation must reimburse you to realize the deduction.  So make sure your corporation reimburses before December 31!

 

Please stay tuned over the next few weeks for more last minute tax planning tips.  We will discuss other ways you can impact your 2012 taxes ranging from buying office equipment, giving to charity and even buying or selling a vehicle, and much more.

Please feel free to contact Harvey and Caldwell, PA at 913-451-4400 or visit our website http://www.harveyandcaldwell.com/ as a resource for your tax needs.