Meadows Urquhart Acree & Cook, LLP - Certified Public Accountants

IRS to Delay Accepting Some 2012 Business Returns

admin — Tue, 05 Feb 2013 18:06:44 +0000

Due to the recently passed tax legislation, the IRS is working to update tax forms and their computer systems. The IRS issued a statement on January 7^th that included a list of tax forms that they do not anticipate having ready until the end of February or early March. One of these forms is Form 4562 which is for depreciation and amortization of assets. This form effects nearly every business return we file, so until further guidance is released from the IRS, we anticipate that we will be unable to file business tax returns until late February or early March.

Other forms affected are as follows:

Form 3800: General Business Credit
Form 4136: Credit for Federal Tax Paid on Fuel
Form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporations
Form 5735: American Samoa Economic Development Credit
Form 5884: Work Opportunity Credit
Form 6478: Credit for Alcohol Used as Fuel
Form 6765: Credit for Increasing Research Activities
Form 8820: Orphan Drug Credit
Form 8834: Qualified Plug-in Electric and Electric Vehicle Credit
Form 8844: Empowerment Zone and Renewal Community Employment Credit
Form 8845: Indian Employment Credit
Form 8864: Biodiesel and Renewable Diesel Fuels Credit
Form 8874: New Markets Credits
Form 8900: Qualified Railroad Track Maintenance Credit
Form 8903: Domestic Production Activities Deduction
Form 8908: Energy Efficient Home Credit
Form 8909: Energy Efficient Appliance Credit
Form 8910: Alternative Motor Vehicle Credit
Form 8911: Alternative Fuel Vehicle Refueling Property Credit
Form 8912: Credit to Holders of Tax Credit Bonds
Form 8923: Mine Rescue Team Training Credit
Form 8932: Credit for Employer Differential Wage Payments
Form 8936: Qualified Plug-in Electric Drive Motor Vehicle Credit

Contact Meadows Urquhart for more details, to see if your business will be affected by the delay or to be notified of the new date.

Important Provisions of the American Tax Relief Act Of 2012

admin — Tue, 22 Jan 2013 20:02:56 +0000

Waiting until the last minute to avoid the so-called “fiscal cliff,” Congress passed the American Tax Relief Act of 2012” (“ATRA”) on January 1, 2013. This long-awaited tax legislation permanently retains the Bush-era tax rates for lower and moderate income individuals while raising the highest tax rates on regular income, dividends, and capital gains on those with higher income; provides a permanent lifetime gift and estate tax exemption amount of $5 million as adjusted for inflation ($5.12 million for 2012; $5.25 million for 2013); sets a top estate and gift tax rate of 40%; and locks in AMT relief on a permanent basis. In addition, the legislation retroactively extends (or makes permanent) a long list of tax breaks for both individuals and businesses that expired after 2011 (or, were scheduled to expire after 2012). Please note that our reference to “permanent” provisions simply means that the provision no longer has a sunset date. Of course, Congress could always change these provisions with future legislation. Caution! ATRA did not extend the temporary 2% Social Security tax holiday beyond 2012. Thus, those who receive W-2 compensation or self-employed income will experience an increase in Social Security taxes in 2013.

In addition to the recent changes under ATRA, the sweeping Health Care Act enacted in 2010 contains a 3.8% Medicare Tax on investment income, and a .9% Medicare Tax on earned income that will apply to higher-income individuals for the first time in 2013. In late November 2012, the IRS released extensive guidance on these new Medicare Taxes. These new taxes are in addition to the tax rate increases for higher-income taxpayers under ATRA (which also become effective in 2013).

Planning Alert! In the attachment below, we suggest planning opportunities created by these new tax developments. However, you cannot properly evaluate a particular planning strategy without calculating your overall tax liability (including the alternative minimum tax) with and without the strategy. You should also consider any state income tax consequences of a particular planning strategy. We recommend you contact our firm before implementing any tax planning technique discussed in this letter, or if you need more information. Also, we highlight only selected provisions of ATRA and the new Medicare Taxes. If you have heard or read about any related tax development not discussed in this letter, feel free to contact our office.

Read the attachment to keep abreast of the most important provisions under ATRA and the new Medicare Tax guidance.

2013 Late Breaking Tax Relief Information (pdf)

Summary of 2012 New Developments for Businesses and Individuals

admin — Tue, 20 Nov 2012 00:33:56 +0000

Jump to: Summary for Individuals | Summary for Businesses

Summary for Businesses

Middle Class Tax Relief Act (Payroll Tax Cut Bill). Last February Congress extended through December 2012 the temporary reduction in the Social Security tax rate from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for self-employed individuals. Planning Alert! Employers should remind employees that effective January 1, 2013, the employee-share of Social Security taxes is scheduled to revert back to 6.2% (unless the 2012 payroll tax holiday is extended by Congress).

Three Percent Withholding Repeal And Job Creation Act. The popular Work Opportunity Tax Credit (WOTC) for hiring workers from certain disadvantaged groups expired for individuals hired after 2011, except for “qualified veterans.” Congress continued the WOTC for “qualified veterans” to encourage employers to hire certain military veterans. To qualify, the new employee must be a “qualified veteran” who is hired after November 21, 2011 and before 2013. Depending on the “tax” classification of the “qualified veteran,” the maximum credit runs from $2,400 to $9,600. In addition, unlike previous credits under the WOTC, tax-exempt employers (other than government agencies) that hire “qualified veterans” may receive a “refundable” credit of 65% of the credit allowed for taxable employers. Tax Tip. To qualify for the credit, all employers (including tax-exempt employers) must have the veteran complete IRS Form 8850 (“Pre-Screening Notice and Certification Request for the Work Opportunity Credit”), and submit that form to the state employment security agency no later than 28 days after the employee begins work. You can locate Form 8850 at www.irs.gov., and the instructions to the form providing detailed information on the definition of a “qualified veteran.”

Selected Health Care Act Tax Provisions Impacting Businesses. Starting in 2014, the Health Care Act will generally require certain larger employers to offer and contribute to their employees’ qualified health insurance coverage, or pay a penalty. This so-called play-or-pay penalty contains a host of technical provisions that is too lengthy to address in this letter. However, businesses should be aware of the following tax provisions in the Health Care Act that will generally apply starting in 2013: 1) Employers must begin withholding a .9% surtax on wages paid to an employee once the wages exceed $200,000 in a calendar year; 2) Subject to certain exceptions, manufacturers, producers, and importers of taxable medical devices will generally be subject to a 2.3% tax on the sales price of those devices sold after 2012; 3) A business providing a qualified retiree prescription drug plan will be required to reduce its business deduction for the retiree prescription drug plan by the amount of the federal subsidy; and 4) Certain health insurance providers will not be able to deduct annual compensation to any single officer, director, or employee in excess of $500,000.

IRS Releases Long-Awaited “Repair vs. Capitalization” Regulations. One of the most significant “tax” issues confronting business taxpayers is whether expenditures involving an existing business asset 1) may be immediately deducted as a “repair and maintenance” expense, or 2) must be capitalized as an “improvement” and depreciated over the life of the underlying asset. For example, let’s assume that a storm damaged the roof of your commercial building causing you to incur $50,000 to bring the roof back to its pre- damaged condition. If you are allowed to treat the expenditure as a “repair and maintenance” expense, you could deduct the entire $50,000 immediately. By contrast, if you are required to “capitalize” the expenditure as an “improvement” to the building, you would be required to deduct the $50,000 over the depreciable life provided for a commercial building (i.e., over 39 years). Virtually every business, large and small, eventually confronts this “repair” vs. “capitalization” issue. In late December, 2011, the IRS released long-awaited guidance on this issue as it relates to “tangible” property (known as the “repair/capitalization” regulations). These regulations are intended to clarify the standards for capitalization of specific expenses associated with business assets, and provide comprehensive guidelines and examples for applying the standards. The IRS has also issued procedures explaining how taxpayers can automatically change their accounting methods to a method permitted or required under these regulations. Practice Alert! These new regulations, for the most part, are effective retroactively and apply to prior years. However, the IRS has provided a grace period for taxpayers to comply with these new rules, allowing taxpayers to change their accounting methods to comply either in the first or second “tax” year after 2011. We will be discussing the implications of these new regulations with you as we complete your accounting and tax work.

New IRS Guidance For Self-Employed Individuals, S Corporation Shareholders And Partners Deducting Health Insurance Premiums (Including Medicare Premiums). Generally, if you are a self- employed individual, a partner in a partnership, or a more-than-2% shareholder of an S corporation, you may qualify for an “above-the-line” deduction (i.e., unrestricted by the limitations on “itemized deductions”) for health insurance premiums you pay for yourself, your spouse, your dependents or your children who have not reached age 27 by the end of the tax year (even if not your dependent). Until recently, there had been some confusion as to whether Medicare premiums paid by a self-employed individual, a partner in a partnership, or a more than 2% shareholder of an S corporation, qualified for this treatment. The IRS has confirmed that if you otherwise qualify for an above-the-line deduction for health insurance premiums, you may be able to deduct your Medicare premiums (including Part B and Part D). Planning Alert! If you are a partner in a partnership or a more-than-2% shareholder in an S corporation and you are paying your 2012 health insurance premiums directly (including Medicare premiums), the IRS says that you should have the partnership or S corporation reimburse you for those premiums (including Medicare Premiums) before the end of 2012 to qualify for the above-the-line deduction. The IRS also says that, if you are an S corporation shareholder, the premium reimbursement must be included in your W-2. For partners in a partnership, the premium reimbursement must be treated by the partnership as a “guaranteed payment.”

IRS Releases Guidance For Determining How An S Corporation Shareholder May Generate “Basis” From Loans To The Corporation. If you own stock in an S corporation that is generating a tax loss, you will not be able to deduct that loss on your personal return unless and until you have adequate “basis” in your S corporation. Any pass-through loss that exceeds your S corporation “basis” will carry over to succeeding years. You generally have basis to the extent of the amounts paid for your stock (adjusted for net pass-through income, losses, and distributions), plus any amounts you have personally loaned to your S corporation (“debt basis”). However, the IRS has frequently argued that a shareholder will not create debt basis if the shareholder borrows from a controlled entity, and then loans the proceeds to the shareholder’s S corporation (a back-to-back loan transaction). Based on the specific facts of each case, the courts have frequently agreed with the IRS and denied debt basis when these back-to-back loan arrangements have been used between commonly-controlled entities. In order to provide more certainty to this long-standing controversy, the IRS has released “proposed” regulations providing guidance for determining whether an S corporation shareholder is allowed debt basis for loans to the corporation. These regulations generally provide that a shareholder will obtain debt basis in the S corporation if, based on all of the facts and circumstances, the loan constitutes a “bona fide indebtedness” from the S corporation to the shareholder under general Federal tax principles. Planning Alert! Although the regulations do not provide a precise definition of what constitutes a bona fide indebtedness, it is clear that, at a minimum, there should be proper and timely documentation establishing the specific terms and conditions of the loan. Moreover, once the terms of the loan are established and documented, the shareholder and S corporation should comply with the precise terms of the loan agreement (e.g., make all principal and interest payments in a timely manner). Tax Tip! If funds are borrowed from a financial institution to finance the operation of an S corporation, the funds should be loaned to the S corporation shareholder or shareholders and the shareholder or shareholders should in turn loan the funds to the S corporation. This is the safest way to ensure that S corporation shareholders have tax basis from the loans. If you expect your S corporation to show a loss for the current year, please call us before the end of the year so that we can determine if you will have sufficient basis in the S corporation to take the loss. Caution! You cannot get debt basis by merely guaranteeing a third-party loan to your S corporation.

Summary for Individuals

Middle Class Tax Relief Act (Payroll Tax Cut Bill). Last February, Congress extended through December 2012 the temporary reduction in the Social Security tax rate from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for self-employed individuals. Therefore, if you are an employee, for 2012, the normal 6.2% “employee” portion of your Social Security tax rate has been reduced to 4.2%. Thus, your take-home pay for 2012 has been generally increased by 2% of each dollar of compensation that you earn. However, since Social Security taxes apply only to the first $110,100 of compensation in 2012, your maximum savings for 2012 will generally be $2,202 (i.e., $110,100 x 2%). If you are self-employed, your Social Security taxes are reduced by 2% of your self-employment income for 2012 (up to $110,100). Tax Tip. You and/or your spouse should consider accelerating into 2012 compensation (e.g., by accelerating a bonus, commission, etc.) or self-employed income (e.g., encouraging a customer or client to pay early) in order to save the 2% Social Security tax to the extent the income acceleration does not cause either of you to exceed the $110,100 cap. Caution! Before accelerating income into 2012 to save the 2% Social Security tax, we should first evaluate the impact on your overall 2012 and 2013 “income” tax liability (state and federal).

Supreme Court Upholds Patient Protection And Affordable Care Act (Health Care Act). This past summer, in a much anticipated decision, the Supreme Court generally upheld the provisions of the Patient Protection and Affordable Care Act (Health Care Act). Although the majority opinion concluded that the individual mandate requiring noncomplying individuals to purchase health insurance coverage (or face a monetary penalty) was a valid exercise of Congress’s taxing power, this provision is not effective until 2014. However, by upholding the constitutionality of the Health Care Act, the Court has also upheld several tax provisions contained in the legislation effective in 2013 that impact tax strategies for 2012. The following highlights selected tax changes that are effective starting 2013:

Additional .9% Medicare Surtax On Earned Income Of Higher-Income Taxpayers. Generally, effective for wages and self-employed earnings received after 2012 that exceed certain thresholds, the Health Care Act imposes a new .9% Medicare Surtax, in addition to the existing Medicare tax. If you are married filing a joint return, this additional .9% surtax applies to the amount by which the sum of your W-2 wages and your self-employed earnings exceeds $250,000 (exceeds $200,000 if you are single, or $125,000 if married filing separately). Note! For married individuals filing a joint return, the .9% Medicare Surtax will apply to the extent the sum of both spouses’ W-2 earnings and the self-employed earnings exceed the $250,000 threshold. Planning Alert! Starting in 2013, employers will have a new withholding requirement for the .9% Medicare Surtax.
New 3.8% Medicare Surtax On Net Investment Income. Since the inception of the Medicare program, the Medicare tax has only been imposed on an employee’s “wages” and a self-employed individual’s “income from self employment.” Starting in 2013, certain higher-income individuals are subject to a new 3.8% Medicare Surtax imposed on their net investment income. The tax will apply to individuals whose modified adjusted gross income (MAGI) exceeds the following “threshold amounts”–$250,000 for married filing jointly; $200,000 if single; and $125,000 if married filing separately. Trusts and estates that have net investment income and adjusted gross income (AGI) in excess of certain “threshold amounts” (projected to be $11,950 for 2013) will also be required to pay the 3.8% Medicare Surtax, unless the net investment income is timely distributed to beneficiaries.
- Net Investment Income. “Net investment income” generally includes (net of allocable deductions) interest, dividends, annuities, royalties, rents, gains from the sale of property (e.g., long-term and short-term capital gains), and operating income from a business that trades in financial instruments or commodities. It also includes “operating business income” that is taxed to certain “passive” owners (unless the operating income constitutes self-employment income to the owner subject to the 2.9% Medicare Tax). Caution! The rules for applying the 3.8% Medicare Surtax to the business income of a “passive” owner are technical and complicated. Please call us if you need additional details.
- Investment Income Exempt From The Surtax. The following types of income are not subject to the 3.8% Medicare Surtax: tax-exempt bond interest; gain on the sale of a principal residence otherwise excluded under the home-sale exclusion rules (i.e., up to $250,000 on a single return, up to $500,000 on a joint return); and, distributions from qualified plans (e.g., IRAs, §403(b) annuities, etc.). Planning Alert! Taxable distributions from qualified plans, traditional IRAs, etc. will increase your MAGI which could, in turn, push you over the $250,000 (joint return) or $200,000 (single return) thresholds, subjecting your net investment income to the 3.8% Medicare Surtax.
Planning Considerations For The 3.8% Medicare Surtax. The following are selected planning considerations relating to the new 3.8% Medicare Surtax on net investment income:
- Tax-Exempt Income Becomes More Valuable. Investments that generate tax-exempt income will become more attractive. For example, tax exempt municipal bond interest will potentially provide higher-income individuals with a double tax benefit: 1) the interest will not be included in the taxpayer’s MAGI, thus reducing the chance that the taxpayer will exceed the income thresholds for the 3.8% Medicare Surtax, and 2) the tax-exempt interest itself is exempt from the Medicare Surtax.
- Consider Roth IRA Conversions. Tax-free distributions from a Roth IRA are exempt from the 3.8% Medicare Surtax, and do not increase your MAGI (and, thus will not increase your exposure to the Medicare Surtax). Therefore, these tax-favored features should be factored into any analysis of whether you should convert your existing IRA to a Roth IRA. However, if the Roth conversion occurs after 2012, the income triggered by the conversion itself increases your MAGI and therefore your potential exposure to the Medicare Surtax. Thus, by converting to a Roth prior to 2013, you may avoid any Medicare Surtax that would otherwise apply because of the conversion. Planning Alert! Whether you should convert your traditional IRA to a Roth IRA can be an exceedingly complicated issue, and this new Medicare Surtax is just one of many factors that you should consider. Please call our firm if you need help in deciding whether or not to convert to a Roth IRA.
- “Tax-Deferred” Investments May Reduce Medicare Surtax Exposure. The 3.8% Medicare Surtax does not apply to earnings generated by a tax-deferred annuity (TDA) contract until the income is distributed. Thus, investing in a TDA in your higher-income years may allow you to defer the annuity income until later years when your MAGI is below the Medicare Surtax income thresholds.
- Recognizing Capital Gains In 2012. With the scheduled increase in the maximum long-term capital gains rates from 15% to 20% in 2013, and the imposition of the new 3.8% Medicare Surtax on capital gains starting in 2013, timing your sales of stocks, bonds, or other securities for 2012 is even more important than in previous years. If you are a higher-income taxpayer, you may save taxes by selling your appreciated long-term capital investments that have peaked in value in 2012, instead of waiting until 2013 or later. Likewise, overall tax savings may occur if you postpone selling investments producing a capital loss until 2013 or later, so that those losses can shelter capital gains that otherwise would be subject to the higher 20% capital gains rate and the 3.8% Medicare Surtax. Tax Tip. Under the so-called “wash sale” rules, you are not allowed to recognize a loss on the sale of securities if, within 30 days before or after the sale, you acquire substantially identical securities. However, the “wash sale” rules do not apply if you sell securities at a gain. Thus, you can accelerate gain by selling your appreciated securities before 2013, even if you purchase identical securities before or after the sale. Furthermore, by purchasing the replacement securities at their current appreciated values, you will obtain a higher tax basis in the newly-acquired securities. This higher basis in the securities will reduce any gain you recognize after 2012 from a sale of the securities, and thus may reduce your exposure to the 3.8% Medicare Surtax. Caution! If the replacement securities go down in value after your purchase, you could face the “capital loss” limitations when you sell the investment. Also, you should always consider the economics of a sale or exchange first!

Deduction Threshold For Medical Expenses Raised From 7.5% To 10% Of AGI. Starting in 2013, the Health Care Act generally increases the threshold for claiming an itemized deduction for un-reimbursed medical expenses from 7.5% of adjusted gross income (AGI) to 10% of AGI. Exception For Seniors. If either you or your spouse is age 65 or older before the close of the tax year, the 7.5% of AGI threshold will continue to apply through 2016 (whether you file a joint return or separate returns). Tax Tip. If you will be subject to the 10% threshold in 2013, you should consider accelerating (i.e., bunching) your anticipated discretionary medical expenses into 2012 if your total medical expenses will exceed the 7.5% threshold, but not the 10% threshold.

Annual Contributions To Health FSAs Will Be Capped At $2,500. Employer-sponsored cafeteria plans are one of the most popular tax-free fringe benefits offered to employees. Under these plans, employees can generally select certain tax-free benefits or taxable cash payments. One common option under these plans is a health care flexible spending arrangement (Health FSA). Through 2012, there is no limit (except as imposed by the plan itself) on the amount an employee can elect to contribute to a health FSA through salary reductions. Starting in 2013, cafeteria plans will be required to cap the annual salary reduction contribution to a health FSA at $2,500. Planning Alert! The IRS has recently announced that if you have a grace period (up to 2 months and 15 days) after the 2012 plan year to use your 2012 health FSA account, the unused portion that is carried over from 2012 into the 2013 grace period will not count toward your $2,500 limit for 2013.

Courts Are Denying Charitable Contribution Deductions Where Taxpayer Failed To Receive Qualifying Receipt. Depending on the size and nature of the gift, there are rigid documentation requirements you must satisfy before you are entitled to deduct a charitable contribution. For example, if you contribute $250 or more to a charity, you are allowed a deduction only if you receive a qualifying written receipt from the charity by the time you file your return (provided that you received the receipt no later than the due date of your return). The qualifying written receipt must contain the following information: 1) the amount of cash and a description (but not value) of any property other than cash you contributed to the charity, 2) a statement as to whether the charity provided you with any goods or services in return for your contribution, and 3) a description and good faith estimate of the value of any goods or services, if any, the charity provided to you (or, if applicable, a statement that the goods and services consisted solely of intangible religious benefits). Planning Alert! Over the last 12 to 18 months, the IRS has successfully taken several taxpayers to court denying a charitable deduction for those who failed to timely obtain a qualifying written receipt. For example, a taxpayer was denied a $22,000 deduction because the written receipt from the church did not include a statement that no goods or services were provided; another taxpayer was denied a charitable deduction of $1,870,000 for a donation of a “conservation easement” on real estate because the taxpayer failed to obtain a timely qualifying written receipt. Caution! If you contribute property to a charity, you may be required to have documentary support in addition to the “qualified written receipt” (e.g., qualified appraisal).

IRS Releases Proposed Guidance On The Portability Of Estate And Gift Tax Exclusion Amounts Between Spouses. Over the years, the estate tax has generally been imposed only on estates exceeding a certain dollar amount (“applicable exclusion amount”). The applicable exclusion amount, which may be used to reduce either estate or gift taxes, was increased to $5,000,000 for 2011, and to $5,120,000 for 2012. For 2011 and 2012, the maximum estate and gift tax rates are 35%. Caution! For individuals dying after 2012 and for lifetime gifts made after 2012, the applicable exclusion amount is currently scheduled to drop to $1 million, and the top tax rate is scheduled to increase to 55%.

Historically, although each spouse’s estate has been entitled to a full applicable exclusion amount, technical estate tax planning structures and strategies (e.g. credit shelter trusts) were often necessary to ensure that the applicable exclusion amount of the first spouse to die was not partially or completely wasted. However, legislation enacted in 2010 provides that for individuals dying in 2011 or 2012 who leave a surviving spouse, the executor or administrator of the deceased spouse’s estate may “elect” for the unused portion of the deceased spouse’s applicable exclusion amount (up to $5,120,000 for deaths in 2012) to be available to the surviving spouse. Caution! Unless this portability feature is extended by Congress, a deceased spouse’s unused exclusion amount may only be used by a surviving spouse’s estate where the surviving spouse passes away before 2013, or may be used for gifts made by the surviving spouse before 2013. Planning Alert! The IRS recently announced that in order to make the portability election, the surviving spouse’s estate must file a timely (including extensions), properly-completed estate tax return (Form 706), even if an estate return is not otherwise required to be filed (e.g., the value of the estate is below $5,120,000). The estate tax return must be filed within 9 months of the spouse’s death, unless the estate timely requests a 6-month extension (which would allow the estate tax return to be filed within 15 months of the decedent’s death). Missing these filing deadlines could cause the surviving spouse to lose all of the pre-deceased spouse’s unused applicable exclusion amount. Consequently, if you are involved with the estate (of any size) of a person who died in 2011 or 2012 and who left a surviving spouse, please call our firm before these filing deadlines expire. We will help you evaluate whether filing an estate tax return for the deceased spouse’s estate is advisable.

FINAL COMMENTS

The information contained in this material represents a general overview of tax developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation. Please contact us before implementing any planning ideas discussed here, or if you need additional information.

Our 2012 Year End Tax Planning Guides

admin — Mon, 19 Nov 2012 21:29:30 +0000

2012 has been a busy year for tax developments. Over the past 12 months, the IRS and courts have released a series of regulations, rulings, and cases impacting almost every area of the tax law. Moreover, this summer, in the landmark decision of National Federation vs. Sebelius, the U.S. Supreme Court largely upheld the constitutionality of the “Patient Protection Act of 2010″ (Health Care Act) which contains a host of new tax provisions beginning in 2013, including a Medicare Surtax of .9% on wages and self-employment income and a separate Medicare Surtax of 3.8% on “investment” income of higher-income individuals.

The new provisions combined with the expiring tax legislation is making year end tax planning more complex. And keeping up with these rapidly changing tax provisions is extremely challenging. To help you with that task, we are providing these links as summaries of the key legislative, administrative, and judicial tax developments that we believe will have the greatest impact on our clients.

The information represents a general overview of tax developments and should not be relied upon without an independent, professional analysis of how any of these provisions may apply to a specific situation. Please contact us before implementing any planning ideas discussed here, or if you need additional information.

2012 Year-End Income Tax Planning For Individuals

admin — Mon, 19 Nov 2012 21:25:04 +0000

This information is intended to: 1) identify potential year-end tax strategies that exist in light of the major tax changes scheduled to take effect in 2013; 2) identify alternative considerations if Congress changes the law late in 2012; and, 3) remind you of traditional year-end planning opportunities that could likely save 2012 taxes no matter what course Congress takes with future legislation.

To help you locate items of interest, we have divided planning ideas into the following topics:

Preparing For Potential Tax Rate Increases
Expired, Expiring, And Scaled Back Tax Breaks
Traditional Year-End Tax Planning Techniques In Light Of Tax Uncertainties
Consider Maximizing Family Gifts
Miscellaneous Year-End Tax Planning Opportunities

Our firm is monitoring potential 2012 tax legislation, so please call us if you want a status report. Also, tax planning strategies that we discuss in this letter may subject you to the alternative minimum tax (AMT). For example, many deductions are not allowed for AMT purposes, such as: personal exemptions; state and local income taxes; real estate taxes; and interest on home equity loans (unless the loan proceeds were used to improve, build, or buy your residence). Also, AMT can be triggered by taking large capital gains or exercising incentive stock options. Therefore, we encourage you to call our firm before implementing any tax planning technique discussed in this information. You cannot properly evaluate a particular planning strategy without calculating your overall tax with and without that strategy. Please Note! This information contains ideas for Federal tax planning only. State tax issues are not addressed.

PREPARING FOR POTENTIAL TAX RATE INCREASES

Starting In 2013 – Scheduled Significant Rate Increases. Unless Congress changes current law, individuals are facing an increase in their federal income tax rates beginning next year. In 2013, the top regular individual income tax rate on income, other than long-term capital gains, is scheduled to jump from 35% to 39.6%. The maximum tax rate on long-term capital gains is scheduled to increase from 15% to 20%. And, the top tax rate on dividends is scheduled to increase from 15% to 39.6%. Furthermore, starting in 2013, the Health Care Act imposes an additional Medicare Surtax of .9% on the wages and self- employment income of higher-income individuals as well as a new 3.8% Medicare Surtax on their net investment income. Thus, the Federal tax rates for individuals taxed in the highest income tax brackets in 2013 who are also subject to these new Medicare surtaxes could be as high as: 40.5% for wages and self-employment income; 23.8% for long-term capital gains; and 43.4% for dividend and interest income.

The uncertainty concerning the extension of the Bush-era tax cuts makes tax planning during 2012 extremely challenging. Our firm is available to help you accelerate ordinary income, capital gains, and dividends into 2012 and to defer deductions into 2013, if doing so would result in significant tax savings. However, it is uncertain at this point whether Congress will allow the scheduled rate increases to take effect in 2013 or continue 2012 tax rates at least for the short term. Therefore, we recommend that individuals who will be significantly hurt by the scheduled 2013 rate increases begin planning now to accelerate income into 2012 and possibly defer deductions into 2013.

However, it seems prudent to postpone the actual acceleration of the income until later in 2012 when we will, hopefully, have a better handle on Congress’s plans. In addition, please remember that the only way to determine the benefit from accelerating income into 2012 or deferring deductions until 2013 is by performing detailed calculations with and without such acceleration or deferral. With and without calculations will take into account regular Federal income taxes, the AMT, the new Medicare Surtaxes, and state income taxes.

Although the overall tax rates for 2013 are currently in a state of flux, the temporary 2% Social Security tax holiday scheduled to expire after 2012, and the new Medicare Surtaxes enacted under the “Patient Protection Act of 2010″ (Health Care Act), discussed below, may warrant action before 2013 that could save you taxes.

The “Temporary”2% Social Security Tax Holiday Scheduled To Expire After 2012. Last February, Congress extended through December 2012 the temporary reduction in the Social Security tax rate from 6.2% to 4.2% for employees, and from 12.4% to 10.4% for self-employed individuals. Therefore, if you are an employee, for 2012, the normal 6.2% “employee”portion of your Social Security tax rate has been reduced to 4.2%. Since Social Security taxes apply only to the first $110,100 of compensation in 2012, your maximum savings for 2012 is generally $2,202 (i.e., $110,100 x 2%). Likewise, if you are self-employed, your Social Security taxes are reduced by 2% of your self-employment income for 2012 (up to $110,100). Tax Tip. You and/or your spouse should consider accelerating into 2012 compensation (e.g., by accelerating a bonus, commission, etc.) or self-employed income (e.g., encouraging a customer or client to pay early) in order to save the 2% Social Security tax to the extent the additional income does not cause either of you to exceed the $110,100 cap, and does not cause you to pay more income taxes. Moreover, the compensation or self-employed income that you accelerate into 2012 will not be subject to the new .9% Medicare Surtax (discussed in the next segment) which becomes effective in 2013.

New .9% Medicare Surtax On Earned Income Of Higher-Income Individuals Begins In 2013. Generally, effective for wages and self-employed earnings received after 2012 that exceed certain thresholds, the Health Care Act imposes an additional .9% Medicare Surtax. This surtax applies to the amount by which the sum of your W-2 wages and your self-employed earnings exceeds $250,000 if you are married filing a joint return (exceeds $200,000 if you are single, or $125,000 if married filing separately). Note! For married individuals filing a joint return, the .9% Medicare Surtax will apply to the extent the sum of both spouses’ W-2 earnings and the self-employed earnings exceeds the $250,000 threshold.

New 3.8% Medicare Surtax On Net Investment Income Of Higher-Income Taxpayers Begins In 2013.Starting in 2013, higher-income individuals may be subject to a new 3.8% Medicare Surtax on net investment income (e.g., interest, dividends, annuities, royalties, rents, certain “passive”income, and capital gains –less applicable expenses). The tax will apply to individuals with net investment income where their modified adjusted gross income (MAGI) exceeds the following “threshold amounts” – $250,000 for married individuals filing jointly; $200,000 if single; and $125,000 if married filing separately. Trusts and estates that have net investment income and have adjusted gross income (AGI) in excess of $11,950 for 2013 will also be subject to the 3.8% Medicare Surtax, unless the net investment income is timely distributed to beneficiaries. Fortunately, the following types of income are exempt from the 3.8% Medicare Surtax: tax- exempt income (e.g., municipal bond interest); gain on the sale of a principal residence excluded from income under the home-sale exclusion rules (i.e., up to $250,000 on a single return, up to $500,000 on a joint return); and distributions from qualified plans (e.g., IRAs, §403(b) annuities, etc.). Caution! Although distributions from retirement plans are not directly subject to the 3.8% Medicare Surtax, these distributions increase MAGI and may cause your investment income to be hit with the tax. Planning Alert! The following are actions you might take before 2013 to reduce the amount of income subject to the 3.8% Medicare Surtax in 2013:

Consider Investments That Generate Tax-Exempt Income. Investments generating tax-exempt income will become more attractive in 2013. For example, tax exempt municipal bond interest may provide higher-income individuals with a double tax benefit: 1) the interest will not be included in MAGI thus reducing the chance that MAGI will exceed the income thresholds for the 3.8% Medicare Surtax, and 2) the tax-exempt interest itself is exempt from the Medicare Surtax. Planning Alert! Always consider the economics of the investment first!
Consider “Tax-Deferred” Investments. The 3.8% Medicare Surtax does not apply to earnings generated by a tax-deferred annuity (TDA) contract until the earnings are distributed. Thus, investing in a TDA in your higher-income years may allow you to defer the annuity income until later years when your MAGI is below the Medicare Surtax thresholds. Caution! The economics of the TDA should always be considered before investing.
Recognizing Capital Gains In 2012 And Deferring Capital Losses Beyond 2012. With the scheduled increase in the maximum long-term capital gains rates from 15% to 20% in 2013, and the imposition of the new 3.8% Medicare Surtax on capital gains starting in 2013, timing your sales of stocks, bonds, or other securities for 2012 is even more important than in previous years. If you are a higher-income taxpayer, you may save taxes by selling investments producing long-term capital gains that have increased in value in 2012, instead of waiting until 2013 or later. Likewise, overall tax savings may occur if you postpone selling investments producing a capital loss until 2013 or later, so that those losses can shelter capital gains that otherwise would be subject to the higher 20% capital gains rate and the 3.8% Medicare Surtax. Tax Tip. Under the so-called “wash sale” rules, you are not allowed to recognize a loss on the sale of securities if, within 30 days before or after the sale, you acquire substantially identical securities. However, the “wash sale” rules do not apply if you sell securities at a gain. Thus, you can accelerate capital gains by selling your appreciated securities before 2013, even if you purchase identical securities before or after the sale. Furthermore, by purchasing the replacement securities at their current appreciated values, you will obtain a higher tax basis in the newly-purchased securities. This higher basis in the replacement securities will reduce any gain you recognize from the sale of the securities after 2012. Caution! If the replacement securities go down in value after your purchase, you could face the “capital loss” limitations when you sell the investment. Also, you should always consider the economics of a sale or exchange first!
Consider Roth IRA Conversions. Tax-free distributions from a Roth IRA are exempt from the 3.8% Medicare Surtax, and do not increase your MAGI (and, thus will not increase your exposure to the Medicare Surtax). Therefore, these new tax-favored features should be factored into any analysis of whether you should convert your existing IRA to a Roth. However, if the conversion occurs after 2012, the income triggered by the conversion increases your MAGI and, therefore, increases your potential exposure to the 3.8% Medicare Surtax on your net investment income (e.g., capital gains, dividends, interest, rents). Thus, by converting to a Roth in 2012 rather than in 2013, you might avoid the higher income tax rates in 2013 and avoid any 3.8% Medicare Surtax on your net investment income that might otherwise apply for 2013 because of the conversion. Planning Alert! If you want the Roth conversion to be effective for 2012, you must transfer the amount from the regular IRA to the Roth IRA no later than December 31, 2012 (you do not have until the due date of your 2012 tax return). Caution! Whether you should convert your traditional IRA to a Roth IRA can be an exceedingly complicated issue, and this new 3.8% Medicare Surtax is just one of many factors that you should consider. Please call our firm if you need help in deciding whether or not to convert to a Roth IRA.

EXPIRED, EXPIRING, AND SCALED BACK TAX BREAKS

Selected Individual Tax Breaks That Expired After 2011. There is an ever-expanding list of temporary tax breaks that expire every few years. However, even though Congress often waits until the last minute, it has historically extended most of the more popular provisions. Unfortunately, as we complete this letter, Congress has yet to extend a host of tax breaks that expired at the end of 2011, including: School Teachers’ Deduction (Up to $250) for Certain School Supplies; Deduction for State and Local Sales Tax; Deduction (Up to $4,000) for Qualified Higher Education Expenses; Qualifying Tax-Free Transfers from IRAs to Charities for Those at Least 701⁄2; Higher Alternative Minimum Tax (AMT) Exemption Amounts; Increased Charitable Deduction Limits for Qualifying Conservation Easements; Lifetime $500 Credit for Qualified Energy-Efficient Home Improvements; and Deduction for Qualified Home Mortgage Insurance Premiums. Planning Alert! If recent history is a guide, Congress will likely extend these provisions eventually, but there is no guarantee. Our firm will monitor the status of these expired provisions.

Tax Breaks Currently Scheduled To Expire (Or To Be Reduced) After 2012. As discussed previously, the so-called Bush-era tax rate cuts are scheduled to expire after 2012. In addition, there are many other tax breaks that were enacted or expanded in 2001 and 2003 that are also scheduled to expire or to be reduced, including: Student Loan Interest Deduction; Adoption Credit; Child Tax Credit; Earned Income Tax Credit; Child and Dependent Care Credit; Exclusion for Income From Principal Residence Mortgage Cancellations; Various Marriage Penalty Relief Provisions; and the Moratorium on Phase-Outs of Personal Exemptions and Itemized Deductions.

TRADITIONAL YEAR-END TAX PLANNING TECHNIQUES IN LIGHT OF TAX UNCERTAINTIES

Traditional year-end tax planning typically includes strategies to postpone taxes until later years. Classic techniques to accomplish these goals include deferring the recognition of taxable income into future years, and accelerating deductible expenses into the current tax year. Although these strategies may still be advisable for individuals whose effective tax rates for 2013 are equal to or less than their rates for 2012, they are not advantageous for individuals whose effective tax rates are scheduled to increase dramatically after 2012. Therefore, the following are suggested planning ideas for individuals whose tax rates will increase significantly after 2012. Caution! We encourage you to call our firm before implementing any tax planning technique discussed below. You cannot properly evaluate a particular planning strategy without calculating your overall tax (including the AMT and any state income tax) with and without that strategy.

Year-End Planning For Investments. As mentioned earlier in this letter, the maximum long-term capital gain rate is scheduled to increase from 15% to 20% after 2012, and to 23.8% if the new 3.8% Medicare Surtax applies. In addition, through 2012, long-term capital gains that would otherwise be included in the 15% (or below) ordinary income tax bracket, are taxed at zero percent. After 2012, this zero percent bracket is scheduled to increase to 10% (8% if the asset is held more than 5 years). Planning Alert! After fully evaluating the economic factors, the following are year-end tax planning ideas that could save you 2012 taxes for sales of capital assets:

Planning With Temporary Zero Percent Capital Gains Tax Rate. For 2012, all ordinary income (e.g., W-2, interest income) up to $70,700 for those filing joint returns ($35,350 if single) is taxed at the 15% rate, or below. Thus, married taxpayers filing jointly can benefit from the zero percent capital gains rate if (and to the extent) they have 2012 ordinary taxable income under $70,700 ($35,350 if single). For example, if a married couple has taxable income of $50,700 for 2012 before considering their long-term capital gains, up to $20,000 (i.e., $70,700 – $50,700) of their long-term capital gains could be subject to the zero percent capital gains rate. Tax Tip. If you anticipate your taxable income to be below these levels and you own appreciated securities, please call our firm and we will help you determine if it is possible for you to take advantage of this zero percent capital gains rate. Planning Alert! Don’t forget, long-term capital gains that currently qualify for the zero percent rate will be taxed at 10% (8% if you have held the asset more than 5 years) starting in 2013, unless Congress extends the zero percent rate beyond 2012.
Timing Your Capital Gains And Losses. If you have already recognized capital gains in 2012, and you want to shelter those gains from the current 15% maximum capital gains rate, you should consider selling securities that have declined in value prior to January 1, 2013. These losses will be deductible on your 2012 return to the extent of your recognized capital gains, plus $3,000. Tax Tip. These losses may have the added benefit of reducing your income to a level that will qualify you for other tax breaks, such as the: $2,500 American Opportunity Tuition Tax Credit, $1,000 child credit, $12,650 adoption credit, etc. Planning Alert! If within 30 days before or after the sale of loss securities, you acquire the same securities, the loss will not be allowed currently because of the “wash sale”rules (although the disallowed loss will increase the basis of the acquired stock). Caution! As we previously warned in the discussion of the new 3.8% Medicare Surtax, it may be better tax-wise for high income individuals to wait to sell investments that are worth less than cost until after 2012. That way, the capital losses may offset 2013 capital gains that might otherwise be hit with the higher 20% capital gains rate and the new 3.8% Medicare Surtax.

Postponing Taxable Income. Even if all or some of the currently-scheduled tax rate increases become effective after 2012, it is still generally a good idea to defer income into 2013 if you believe that your marginal tax rate for 2013 will be equal to or less than your 2012 marginal tax rate (for example if your taxable income is significantly less in 2013, you are subject to the AMT in 2012 and 2013, etc.). Tax Tip. This classic tax planning strategy may be particularly valuable for 2012 if it also keeps your 2012 income below the phase-out thresholds for the many tax breaks that are currently scheduled to expire or be scaled back after 2012 (e.g., adoption credit, student loan interest deduction, American Opportunity Tax Credit, child tax credit).

Taking Advantage Of Deductions. After considering the currently-scheduled tax rate increases for 2013, if you believe that your marginal tax rate for 2012 will be equal to or greater than your 2013 marginal tax rate, you may save taxes by accelerating deductions into 2012. Likewise, accelerating into 2012 items that are deductible in calculating adjusted gross income “AGI”may be particularly valuable if the deductions keep your 2012 AGI below the phase-out thresholds for the many tax breaks that are currently scheduled to expire or to be scaled back after 2012 (e.g.,adoption credit, student loan interest deduction, American Opportunity Tax Credit, child tax credit).

Accelerating Deductions Into 2012. As a cash method taxpayer, you can generally accelerate a 2013 deduction into 2012 by “paying” for the deduction item in 2012. Accelerating an “above-the-line” deduction (e.g., IRA contribution, Health Savings Account (HSA) contribution, health insurance premiums for self- employed individuals, qualified student loan interest, qualified moving expenses, deductible alimony) into 2012 may allow you to reduce your “adjusted gross income” (AGI) or “modified adjusted gross income” (MAGI) below the thresholds needed to qualify for many other tax benefits (e.g., child credit, education credits, adoption credit, ability to contribute to an IRA, etc). Caution! “Itemized” deductions (i.e., below-the-line deductions) do not reduce your AGI or MAGI and, therefore, will not affect your 2012 deductions and credits that are reduced as your income increases. Itemized deductions generally include charitable contributions, state and local income and property taxes, medical expenses, unreimbursed employee business expenses, and home mortgage interest. Tax Tip. “Payment” typically occurs in 2012 when your check is delivered to the post office, when your electronic payment is debited to your account, or when an item is charged in 2012 on a third-party credit card (e.g., Visa, MasterCard, Discover, American Express). Planning Alert! Until 2010, itemized deductions (other than medical expenses, investment interest, casualty and theft losses, and gambling losses) were generally reduced by a percentage of an individual’s AGI above a threshold amount. For 2010, 2011, and 2012, all individuals are exempt from this phase-out. However, beginning in 2013, itemized deductions (other than medical expenses, investment interest, casualty and theft losses, and gambling losses) are scheduled to be reduced by 3% of an individual’s AGI above the 2013 threshold amount. Thus, if you anticipate that your income will exceed the beginning phase-out threshold in 2013 (projected to be $178,150), accelerating 2013 itemized deductions into 2012 can avoid the phase-out.

Starting In 2013 –Medical Deduction Threshold Increases From 7.5% To 10% Of AGI. Currently, you are generally allowed an itemized deduction for un-reimbursed medical expenses (including un-reimbursed health insurance premiums) to the extent that the expenses exceed 7.5% of adjusted gross income (10% for alternative minimum tax purposes). Starting in 2013, the Health Care Act generally increases this threshold from 7.5% of adjusted gross income (AGI) to 10% of AGI. Exception For Seniors. If either you or your spouse is at least age 65 before the close of the tax year, the 7.5% of AGI threshold will continue to apply through 2016 (whether you file a joint return or separate returns). Tax Tip. If you will be subject to the 10% threshold in 2013, you should consider accelerating (i.e., bunching) your anticipated discretionary medical expenses into 2012 if your total medical expenses will exceed the 7.5% threshold, but not the 10% threshold.

Charitable Contributions. A charitable contribution deduction is allowed for 2012 if the check is mailed on or before December 31, 2012, or the contribution is made by a credit card charge in 2012. However, if you merely give a note or a pledge to a charity, no deduction is allowed until you pay off the note or pledge. Planning Alert! For the past several years, we have had a popular (but temporary) rule that allowed a taxpayer at least age 701⁄2, to make a qualifying transfer of up to $100,000 from his or her IRA directly to a qualified charity, and exclude the distribution from income. The IRA transfer to the charity also counted toward the owner’s “required minimum distributions”(RMDs) for the year. Although this provision expired after 2011 and is not currently available for 2012, it is possible that Congress may retroactively reinstate this provision for 2012. If so, and you wish to use this provision if retroactively extended, be prepared to make the transfer from your IRA to the charity on short notice. Also, if you are eligible for this provision and you have not taken your 2012 RMD from the IRA, consider waiting until later in 2012 to take the distribution. That way, if Congress retroactively extends this provision through 2012, you will have the option of transferring up to $100,000 directly to a charity and reduce (or eliminate) your RMD for 2012. Caution! There is generally a 50% penalty for failure to make the RMD by the end of 2012.

CONSIDER MAXIMIZING FAMILY GIFTS

Utilize Annual Gift Tax Exclusion. For individuals dying in 2012, there is generally a 35% estate tax to the extent the value of the estate, plus any taxable gifts made during the decedent’s life, exceeds $5,120,000 (the estate and gift “unified exclusion amount”). This current unified exclusion amount is scheduled to drop to $1 million for gifts made after 2012 and for estates of individuals dying after 2012. Also, the top estate and gift tax rate is scheduled to increase to 55% after 2012. If your estate is large enough to be exposed to the estate tax, and you want to minimize that exposure, you can reduce your estate without using any of your unified exclusion amount by making annual gifts up to $13,000 per donee (projected to be $14,000 for 2013). Your spouse can do the same, bringing your combined 2012 gift to $26,000 per donee, without reducing either your or your spouse’s unified exclusion amount. Planning Alert! If you make your 2012 gift by check, the IRS says that the donee must actually “deposit” the check by December 31, 2012 in order to utilize the $13,000 annual gift tax exclusion for 2012. Therefore, if gifts are made by check near the end of the year, instruct the donee to deposit the check no later than December 31, 2012, or consider using a cashier’s check –which should constitute a gift when the check is delivered.

Larger Estates Should Consider Using The Temporary $5,120,000 Unified Exclusion Amount For Lifetime Gifts. As mentioned above, the current unified exclusion amount of $5,120,000, which may be used to reduce either gift taxes for lifetime gifts or estate taxes at death, is scheduled to drop to $1 million after 2012. This dramatic drop in the unified exclusion amount has caused many high-wealth individuals to consider large family gifts before 2013. If you are in this situation, please call our firm and we will review with you the many tax and non-tax factors you should consider before implementing a significant year-end gift strategy. Planning Alert! Maximizing the benefits of a 2012 gift may require appraisals, the establishment of trusts, etc. Therefore, we need to begin planning for the gift as soon as possible. That way, we will be in a position to “implement” the gift if it appears the unified exclusion amount will, in fact, drop in 2013 or postpone the gift if Congress extends the current $5,120,000 unified exclusion amount and you wish to wait.

MISCELLANEOUS YEAR-END TAX PLANNING OPPORTUNITIES

Before wrapping up your traditional year-end planning review, here are several more strategies you might consider:

Consider Increasing Withholding If You Are Facing A Tax Underpayment Penalty. If you have failed to pay sufficient estimated taxes during 2012 potentially causing an underpayment penalty, increasing your withholdings before the end of 2012 may solve the problem. Any income tax withholding (including withholdings at the end of 2012 from a year-end bonus or IRA distribution) is generally deemed paid 1/4 on April 17, 2012, June 15, 2012, September 17, 2012 and January 15, 2013. Therefore, amounts withheld on or before December 31, 2012 may reduce or eliminate your penalty for underpaying estimated taxes.

IRA Owners Reaching Age 701⁄2 During 2012. If you reached age 701⁄2 at any time during 2012, you must begin distributions from a traditional IRA account no later than April 1st of 2013. A 50% penalty applies to the excess of the “required minimum distribution”over the amount actually distributed. If you wait until 2013 to take your first payment, you will still be required to take your second required minimum distribution no later than December 31, 2013, which will cause you to take two payments in 2013. Planning Alert! This “bunching” of the first two annual payments into one tax year (2013) could cause your income to be taxed in a higher tax bracket and, therefore, result in more overall tax than if you received the first required payment in 2012. Also, taking your first required distribution in 2012 may save even more taxes than in previous years, if the scheduled tax increases after 2012 actually occur.

Maximize Tax-Favored Medical Benefits For Children Under Age 27. An employer-provided health plan may provide tax-free reimbursements to an employee’s child who is under age 27 at the end of the tax year. This exclusion applies even if the employee cannot claim the child as a dependent for tax purposes. Tax Tip. If your employer’s health insurance plan is currently covering your child who will turn age 27 in 2013, accelerating discretionary medical expenses for that child from 2013 to 2012 will allow your employer’s 2012 reimbursements to be tax-free. In addition, if you are self-employed and you otherwise qualify, you may take an “above-the-line”deduction (i.e., unrestricted by the limitations on “itemized deductions”) for health insurance premiums that you pay for your child who is under age 27 at the end of the year, even if the child is not your “dependent” for tax purposes.

FINAL COMMENTS

2012 Payroll Checklist

admin — Mon, 19 Nov 2012 21:19:12 +0000

In preparation for the 2012 tax year we have developed a payroll checklist to ensure all payments that are considered compensation are captured in your employees’ W-2. Whether you process payroll internally or externally, you should review this checklist.

2012-C204-payroll-checklist-updated (PDF)

2012 Year-End Income Tax Planning For Businesses

admin — Mon, 19 Nov 2012 20:46:26 +0000

This information is intended to: 1) identify potential year-end tax strategies for businesses and owners that exist in light of the major tax changes currently scheduled to take effect in 2013; 2) identify alternative considerations if Congress changes the law late in 2012; and, 3) remind you of traditional year-end planning opportunities that could save taxes for businesses and business owners no matter what course Congress takes with future legislation.

To help you locate items of interest, we have divided planning ideas into the following topics:

Preparing For Potential Tax Rate Increases On Businesses
Expired, Expiring, And Scaled Back Business Tax Breaks
Taking Maximum Advantage Of The 50% §168(k) Bonus Depreciation Deduction And the §179 Deduction
Other Year-End Planning Opportunities For Businesses

Although this letter contains planning ideas, you cannot properly evaluate a particular planning strategy without calculating the overall tax liability on the business and its owners (including the alternative minimum tax) with and without the strategy. In addition, this information contains ideas for Federal income tax planning only. You should also consider any state income tax consequences of a particular planning strategy. We recommend that you call our firm before implementing any tax planning technique discussed in this letter, or if you need more information.

PREPARING FOR POTENTIAL TAX RATE INCREASES ON BUSINESSES

Unless Congress changes current law, most businesses (regardless of form) are facing a significant increase in Federal income tax rates after 2012. For individual owners of pass-through entities (e.g., S Corporations, Partnerships, LLCs), the top individual income tax rate on the pass-through business income is generally scheduled to jump from 35% to 39.6%. Although there is no scheduled increase in the maximum 35% regular “income” tax rate for “C” corporations, the “accumulated earnings” and “personal holding company” penalty taxes that can be imposed on “C” corporations are scheduled to increase from 15% to 39.6%. Furthermore, the top tax rate on a “dividend” paid to a corporate shareholder generally increases from 15% to 39.6%. Also, if a business entity (regardless of form) redeems or buys out an owner in a “capital gain” transaction, the top capital gains rate to the redeemed owner increases from 15% to 20%. Finally, in addition to these tax rate increases, the Health Care Act imposes on higher-income employees and self-employed individuals a new .9% Medicare Surtax on their compensation and earnings from self employment, and a new 3.8% Medicare Surtax on the net investment income of higher income individuals. The 3.8% surtax applies not only to classic investment income (e.g., dividends, interest, capital gains), but also generally applies to “rental” income and to “business income” taxed to “passive” owners (if the income is not otherwise subject to the 2.9% Medicare Tax on self-employment income). Consequently, the Federal tax rates for business owners taxed in the highest income tax brackets in 2013 who are also subject to these new Medicare surtaxes could be as high as: 40.5% (up from the current 35%) for pass-through business income, wages, and self-employment income; 43.4% (up from 35%) for certain “passive” pass-through business income; 23.8% (up from 15%) for long-term capital gains; and 43.4% (up from 15%) for dividend income.

Planning Alert! The uncertainty concerning the extension of the Bush-era tax cuts for individuals makes tax planning during 2012 extremely challenging for owners of S corporations, partnerships and proprietorships where the income of the business is passed through and taxed to the owners. It is uncertain at this point whether Congress will allow the scheduled rate increases to take effect in 2013, or continue 2012 tax rates at least for the short term. Therefore, we recommend that businesses and owners who will be significantly hurt by the scheduled 2013 rate increases begin planning now for strategies that take advantage of the current lower rates on dividends, capital gains, rental income, and pass-through business income. However, it seems prudent to postpone implementing any proposed strategy that would accelerate income into 2012 until later in 2012 when we will, hopefully, have a better handle on Congress’s plans. In addition, please remember that the only way to determine the benefit from accelerating income into 2012 or deferring deductions until 2013 is by performing detailed calculations with and without such acceleration or deferral. With and without calculations will take into account regular Federal income taxes, the AMT, the new 2013 Medicare Surtaxes, and state income taxes.

The following are several basic tax strategies that businesses (and owners) should consider in anticipation of the scheduled 2013 tax rate increases:

S Corporation Shareholders And Limited Partners Should Consider Taking Steps Before 2013 To Minimize Exposure To The New Medicare Surtaxes On “Passive” Business Income. Starting in 2013, the new 3.8% Medicare Surtax on “net investment income” applies to married individuals filing jointly with modified adjusted gross income (MAGI) exceeding $250,000 (exceeding $200,000 if single). For purposes of this 3.8% surtax, net investment income includes operating business income that is taxed to a “passive” business owner (unless the income is self-employment income subject to the 2.9% Medicare tax). For this purpose, an owner is considered “passive”in a business activity if the owner is “passive”under the passive loss limitation rules that have been around for years.

Special Rule For “Passive”Operating Income. Business income reported by a “passive” owner is not “net investment income” if the income is otherwise subject to the 2.9% Medicare tax. Pass-through business income taxed to a “general” partner or a proprietor is subject to S/E tax (including the 2.9% Medicare tax and the new .9% Medicare Surtax).Therefore, business income of a partnership taxed to a “general” partner is exempt from the 3.8% surtax on net investment income as is business income of a proprietorship. However, business income taxed to an S corporation shareholder or a “limited” partner (other than “guaranteed payments”) is not subject to S/E tax (neither the 2.9% Medicare tax nor the new .9% Medicare Surtax). Therefore, if you are a limited partner or S corporation shareholder, your pass-through business income will generally be net investment income (and, thus exposed to the 3.8% Medicare Surtax), unless you “materially participate” in the operations of the business. Planning Alert! If you are a “passive” S Corporation shareholder or limited partner and want to avoid exposure to the 3.8% Medicare Surtax on your share of the income of the S corporation or the partnership after 2012, you should consider taking steps to “materially participate” in the business of the entity after 2012. For example, one way to materially participate in the business would be to work over 500 hours each year in the business. Tax Tip. Depending on the specifics of your business operation, and the type of ownership interest you have in that business (e.g., S corporation shareholder vs. limited partner), there may be other ways you can “materially participate” while spending less than 500 hours working in the business. Planning Alert! If you have other “passive” activities generating losses, you may prefer to remain passive so that your pass-through business income may be used to offset your passive losses from the other passive activities. Caution! These rules are complicated and require a thorough review of your particular situation to develop the most tax-wise strategy.

Certain Owners Of Rental Real Estate May Be Able To Avoid The New Medicare Surtax. Real estate rental income is generally 1) presumed “passive” income, and 2) exempt from S/E tax (including the 2.9% Medicare tax). Consequently, real estate rental income is generally net investment income which may be hit with the new 3.8% Medicare Surtax starting in 2013. However, if you are a “qualified real estate professional” and you materially participate in your rental real estate activity, your real estate rental income: 1) is not “passive,” 2) is not subject to S/E tax (including the 2.9% Medicare tax), and 3) will presumably not be subject to the 3.8% Medicare Surtax on net investment income. Consequently, a “qualified real estate professional” should be able to avoid the 3.8% Medicare Surtax on real estate rental income by materially participating in the rental real estate activity. Generally, a qualified real estate professional (QREP) is an individual 1) who performs more than 750 hours of services during the year in “real property” trades or businesses (e.g., real estate development, management, construction, rental, leasing, brokerage), 2) who materially participates in those businesses, and 3) who spends more than 50% of his or her total working hours for the year performing services in “real property” trades or businesses. Tax Tip. There are certain tax elections relating to your rental real estate activities that may enhance your ability to qualify as a QREP and to materially participate in your rental real estate activities.

Owners Of Closely-Held “C”Corporations Should Prepare For Late-Breaking Tax Rate Changes. There are several techniques shareholders of closely-held “C” corporations can use to take money out of their corporation, including: paying compensation to the shareholder-employee; having the corporation redeem all or a portion of the shareholder’s stock; and/or, paying the shareholder a dividend. If “compensation” is paid and is “reasonable,” the corporation generally gets a deduction and the owner is taxed at maximum rate of 35% (scheduled to be as high as 40.5% after 2012). If a “dividend” is paid, the corporation gets no deduction, and the shareholder is taxed at a maximum rate of 15% (scheduled to be as high as 43.4% after 2012). If the corporation “redeems” all or a portion of the shareholder’s stock in a transaction that qualifies for capital gains treatment, the corporation gets no deduction, and the shareholder’s long-term capital gain is taxed at a maximum rate of 15% (scheduled to be as high as 23.8% after 2012). If you are a shareholder, the technique that is most tax advantageous overall for taking money out of your corporation depends largely on 1) your particular situation, and 2) what ultimately happens with the various tax rates after 2012.

If the scheduled tax rate increases do in fact occur after 2012, then a shareholder who wants to take money out of his or her “C”corporation might save considerable taxes by paying compensation, redeeming stock, and/or paying a dividend before 2013. Planning Alert! Whichever technique or combination of techniques is used (i.e., compensation, redemption, or dividend), each technique should be properly structured and documented in order to be honored for tax purposes. So, if you are considering taking substantial funds from your closely-held “C”corporation at some point, please call us as soon as possible. We will help you determine a tax advantaged way to distribute the funds.

EXPIRED, EXPIRING, OR SCALED BACK BUSINESS TAX BREAKS

In addition to the overall tax rate increases scheduled for individuals reporting business income, dividends, and long-term capital gains, there is also an ever-expanding list of temporary targeted business tax breaks that expire every few years. Although often waiting until the last minute, Congress has historically extended most of the more popular provisions. Unfortunately, as we finalize this letter, Congress has yet to extend many important tax breaks that expired at the end of 2011. To help you determine the status of tax breaks you may have used in the past, we list below selected business tax breaks that expired or were scaled back after 2011, and those that are scheduled to expire or to be reduced after 2012.

Selected Business Tax Breaks That Expired Or Were Reduced After 2011. The following is a list of the more popular business tax breaks that either expired or were scaled back after 2011: 1) 15-Year (instead of 39-Year) Depreciation Period for “Qualified Leasehold Improvements”(Expired); 2) 15-Year (instead of 39-Year) Depreciation Period for “Qualified Restaurant Improvement Property” (Expired); 3) 15-Year (instead of 39-Year) Depreciation Period for “Qualified Retail Improvement Property”(Expired); 4) Section 179 Deduction up to $250,000 for Qualified Leasehold Improvements, Qualified Restaurant Property, and Qualified Retail Improvement Property (Expired); 5) Overall §179 Deduction Cap (Reduced From $500,000 for 2011 tax years to $139,000 for 2012 tax years); 6) 100% First-Year §168(k) Depreciation (Generally Reduced from 100% to 50% for 2012); 7) 7-Year Depreciation Period For Motorsports Entertainment Complexes (Expired); 8) Research and Development Credit (Expired); 9) 5-Year (Instead of 10-Year) Recognition Period For S Corporation Built-In Gains Tax (Reverts to 10 Years After 2011); 10) Increased Charitable Deduction Limits for Qualifying Conservation Easements (Reverts to Regular Limits After 2011); 11) Employer Differential Wage Credit for Payments to Military Personnel (Expired); 12) Various Tax Incentives for Investing in the District of Columbia (Expired); 13) Various Business Tax Incentives for Gulf Opportunity Zone (Expired); 14) 100% Qualified Small Business Stock Gain Exclusion (Reverts to 50% Exclusion for Stock Acquired After 2011); 15) Work Opportunity Tax Credit (Expired – Except for “Qualified Veterans”); 16) Favorable S Corporation Charitable Contribution Provisions (Expired); and 17) Enhanced Charitable Contribution Deduction for Qualifying Business Entities Contributing Computer Equipment and Book or Food Inventory (Expired). Planning Alert! If recent history is a guide, Congress may retroactively extend many of these provisions eventually, but there is no guarantee. Our firm will monitor the status of these expired provisions.

Selected Business Tax Breaks That Are Scheduled To Expire Or To Be Reduced After 2012. The following is a list of the more popular business tax breaks that are currently scheduled to expire or to be scaled back after 2012: 1) Overall §179 Deduction Cap (Reduced From $139,000 to $25,000 after 2012); 2) 50% §168(k) First-Year Depreciation (Generally Eliminated after 2012); 3) Accumulated Earnings and Personal Holding Company Penalty Tax Rates of 15% (scheduled to return to 39.6% after 2012); 4) Work Opportunity Tax Credit (Expires for any Worker Hired After 2012); 5) Employer-Provided Educational Assistance Tax-Free Fringe (Expires); and 6) Credit For Employer-Provided Child Care Facilities (Expires).

TAKING ADVANTAGE OF THE 50% §168(k) BONUS DEPRECIATION AND §179 DEDUCTIONS

Perhaps the most significant “targeted”business tax break scheduled to expire (for most qualifying property) after 2012 is the 50% §168(k) first-year bonus depreciation deduction. Although the amount of the §168(k) depreciation deduction has fluctuated from 30% to 100% of the property’s cost over the last several years, qualifying property placed-in-service during 2012 generally qualifies for 50% first-year bonus depreciation. Caution! The deduction expires altogether for property placed-in-service after 2012 (after 2013 for certain long-production-period property and qualifying noncommercial aircraft). If you plan to acquire property qualifying for the §168(k) deduction for your business and you do not want to miss out on this deduction, your business must generally “acquire” and “place-in-service” qualifying property no later than December 31, 2012. Planning Alert! In order to qualify for the 50% deduction, the deadline for acquiring and placing in service “qualifying property” (described below) is generally December 31, 2012, whether your business has a fiscal tax year or a calendar tax year.

§179 Deduction. For the last several years, Congress has temporarily increased the maximum §179 up- front deduction for the cost of qualifying “new” or “used” depreciable business property (e.g., business equipment, computers, etc.). For tax years beginning in 2010 and 2011, the overall cap was increased to $500,000. Although the §179 deduction traditionally applied only to depreciable “personal” property, for tax years beginning in 2010 and 2011, the deduction was temporarily expanded to “qualifying real property.” Caution! For tax years beginning in 2012, qualifying real property no longer qualifies, and the overall §179 cap is $139,000 (this overall cap phases out as your total purchases of §179 property for 2012 increase from $560,000 to $699,000). Planning Alert! For tax years beginning after 2012, the maximum §179 deduction is currently scheduled to drop to $25,000, and the deduction will phase-out as qualifying §179 acquisitions go from $200,000 to $225,000.

Although the §168(k) bonus depreciation and the §179 up-front deduction for 2012 are reduced from 2011 levels, both deductions are still significant. To ensure that your capital expenditures qualify for these deductions before they expire (or are reduced) after 2012, please review the following:

Qualifying 50% §168(k) Bonus Depreciation Property. Property qualifying for the §168(k) bonus depreciation deduction is generally new property that has a depreciable life for tax purposes of 20 years or less (e.g., machinery and equipment, furniture and fixtures, cars and light general purpose trucks, sidewalks, roads, landscaping, modern golf course greens, depreciable computer software, farm buildings, “qualified motor fuels facilities”, and “qualified leasehold improvements”). Tax Tip. Make sure you properly classify “land improvements” as “15-year property” (and not as part of the building) since land improvements qualify for the 50% §168(k) bonus depreciation deduction, and buildings (other than “qualified leasehold improvements,” farm buildings, and qualified motor fuels facilities) generally do not. Planning Alert! These are only examples of qualifying property.
Newly-Constructed Or Renovated Buildings And Cost Segregation Studies. Depreciable components of buildings that are properly classified as depreciable personal property under a cost segregation study are generally depreciated over 5 or 7 years. Since these non-structural components have a depreciable life of 20 years or less, they should qualify for the 50% §168(k) bonus depreciation if either the building or the newly-constructed building improvements are placed-in-service in 2012.
Interplay Of The 50% §168(k) And §179 Depreciation Deductions. The 50% §168(k) deduction and the §179 deduction can apply to the same property (e.g., new business equipment). If both deductions are taken on the same property, the §179 deduction must be taken first. For example, let’s assume that you are a small business owner who paid $239,000 for a qualifying asset (e.g.,new equipment) that was placed- in-service in 2012. Assuming that you want maximum deductions, you would first “elect” to deduct the maximum §179 deduction of $139,000. That leaves a remaining basis of $100,000. Next, you would take the 50% §168(k) bonus depreciation deduction on the remaining $100,000 for an additional deduction of $50,000. That leaves $50,000, for which you can take regular MACRS depreciation. Assuming the asset is 5-year property, you would generally deduct 20% of the remaining $50,000 basis in the first year, for an additional $10,000 depreciation deduction. So, for 2012, you could deduct a total of $199,000 ($139,000 + $50,000 + $10,000), or approximately 83% of the $239,000 cost of the equipment. Tax Tip. If you have both new and used §179 property acquisitions for 2012 and your total acquisitions of §179 property are more than $139,000, you should generally elect §179 for the used property first. Any §179 depreciation taken on used property will not reduce the 50% §168(k) bonus depreciation deduction for the year since the 50% depreciation deduction is not allowed for used assets.
Passenger Automobiles, Trucks, And SUVs. The maximum annual depreciation deduction (including the §179 deduction) for most business automobiles is capped at certain dollar amounts. For a business auto first placed-in-service in calendar year 2012, the maximum first-year depreciation deduction is generally capped at $3,160 ($3,360 for trucks and vans not weighing over 6,000 lbs). However, if the vehicle otherwise qualifies for the 50% §168(k) bonus depreciation (i.e., the vehicle is new) the maximum depreciation deduction is increased by $8,000. Tax Tip. If you purchase a passenger auto, truck, or SUV in 2012, to qualify for the 50% §168(k) bonus depreciation deduction or the §179 deduction, your business mileage through December 31, 2012 must exceed 50% of the total mileage. By keeping your personal use to a minimum, you will maximize your business percentage for 2012 which could significantly increase your 2012 depreciation deduction. Heavy Vehicles (i.e., > 6,000 lbs.) Trucks and SUVs with loaded rated vehicle weights over 6,000 lbs are generally exempt from the annual depreciation caps discussed above. These “heavy vehicles,” if used more than 50% in business, will also qualify for the 50% §168(k) bonus depreciation deduction (if new), and the §179 deduction (whether new or used). However, the §179 deduction for an SUV is limited to $25,000 (instead of $139,000). For example, let’s assume that in 2012 you purchase a new “over-6,000 lbs” SUV for $50,000 used entirely for business. If you elect to take the §179 deduction on the vehicle, for 2012 you could deduct: 1) up to $25,000 under §179, 2) 50% of the remaining balance as §168(k) first-year bonus depreciation, and 3) 20% of the remaining cost as regular MACRS depreciation. Thus, for a $50,000 new heavy SUV placed-in-service in 2012, you could write off $40,000 (assuming 100% business use) in 2012. Planning Alert! Pickup trucks with loaded vehicle weights over 6,000 lbs are exempt from the $25,000 limit under §179 (imposed on SUVs) if the truck bed is at least six feet long. Caution! If you take the §179 deduction and/or the §168(k) first-year bonus depreciation deduction on your business vehicle, and your business use percentage later drops to 50% or below, you are required to bring into income a portion of these depreciation deductions taken in previous years.

OTHER YEAR-END PLANNING OPPORTUNITIES FOR BUSINESSES

Self-Employed Individuals, Partners, And S Corp Owners Should Take Maximum Advantage Of Deduction For Health Insurance Premiums. Generally, if you are self-employed, a partner in a partnership, or a more-than-2% shareholder of an S corporation, you may qualify for an “above-the-line” deduction (i.e., unrestricted by the limitations on “itemized deductions”) for health insurance premiums you pay for yourself, your spouse, your dependents, and your children under 27 at the end of the year (even if the child is not your dependent). Until recently, there was confusion as to whether Medicare premiums paid by a self-employed individual, partner, or S corporation shareholder qualified for this “above-the-line” deduction. The IRS has now confirmed that if you otherwise qualify for an above-the-line deduction for health insurance premiums, you may deduct your Medicare premiums (including Part B and Part D). Planning Alert! If you are a partner in a partnership or an S corporation shareholder, and you are paying your 2012 health insurance premiums directly (including Medicare premiums), the IRS says that you should have the partnership or S corporation reimburse you for those premiums before the end of 2012 to qualify for the above-the-line deduction. The IRS also says that, if you are an S corporation shareholder, the premium reimbursement must be included in your W-2. For partners, the premium reimbursement must be treated by the partnership as a “guaranteed payment.”

S Corporation Shareholders Should Check Stock And Debt Basis Before Year End. If you own S corporation stock and you think your S corporation will have a tax loss this year, you should contact us as soon as possible. These losses will not be deductible on your personal return unless and until you have adequate “basis” in your S corporation. Any pass-through loss that exceeds your “basis” in the S corporation will carry over to succeeding years. You have basis to the extent of the amounts paid for your stock (adjusted for net pass-through income, losses, and distributions), plus any amounts you have personally loaned to your S corporation. Planning Alert! If an S corporation anticipates financing losses with funds borrowed from an outside lender (e.g., a financial institution), the best way to ensure the shareholder gets basis for the loan is to: 1) have the shareholder personally borrow the funds from the outside lender, and 2) then have the shareholder formally (with proper and timely documentation) loan the borrowed funds to the S corporation. It also may be possible to restructure (with timely and proper documentation) a pre-existing loan from an outside lender directly to an S corporation in a way that will give the shareholder debt basis. Caution! A shareholder cannot get debt basis by merely guaranteeing a third-party loan to the S corporation. Please do not attempt to restructure your loans without contacting us first.

Work Opportunity Tax Credit (WOTC) Extended Through 2012 Only For “Qualified Veterans.” The popular Work Opportunity Tax Credit (WOTC) for hiring workers from certain disadvantaged groups expired for individuals hired after 2011, except for “qualified veterans.” Congress continued the WOTC for “qualified veterans” to encourage employers to hire certain military veterans. To qualify for the credit, the new employee must be a “qualified veteran” who is hired after November 21, 2011 and before 2013. Depending on the “tax” classification of the “qualified veteran,” the maximum credit runs from $2,400 to $9,600. In addition, unlike previous WOTC credits, tax-exempt employers (other than government agencies) that hire “qualified veterans” may qualify for a “refundable” credit of 65% of the credit allowed for taxable employers. Tax Tip. To qualify for the credit, all employers (including tax-exempt employers) must have the veteran complete IRS Form 8850 “Pre-Screening Notice and Certification Request for the Work Opportunity Credit” on or before the day the veteran is offered employment and must submit that form to the state employment security agency no later than 28 days after the veteran begins work. You can locate Form 8850 at www.irs.gov. The instructions to the form provide detailed information on the definition of a “qualified veteran” and additional information for claiming the credit.

Take Advantage Of The Expiring 2% Social Security Tax Holiday. Last February, Congress extended through December 2012 the temporary 2% reduction in the Social Security tax for employees and for self-employed individuals. However, since Social Security taxes apply only to the first $110,100 of compensation or self-employment income in 2012, your maximum savings for 2012 will generally be $2,202 (i.e., $110,100 x 2%). If you are married, and you and your spouse each earn at least as much as $110,100 of wages and/or self-employment income, your maximum combined savings will be $4,404. Tax Tip. You and/or your spouse should consider accelerating compensation (e.g., by accelerating a bonus, commission, etc.) or self-employment income (e.g., encouraging a customer or client to pay early) into 2012 in order to save the 2% Social Security tax. However, accelerating compensation or self-employment income into 2012 will not save Social Security taxes to the extent your compensation and self-employment income exceeds the $110,100 cap. Caution! Before accelerating income into 2012 to save the 2% Social Security tax, we should first evaluate the impact on your overall 2012 and 2013 “income” tax liability (state and federal).

FINAL COMMENTS

2013 Annual Exclusion for Gifts

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For calendar year 2013, the first $14,000 of gifts to any person are not included in the total amount of taxable gifts made during that year.

2013 Cost of Living Adjustments for Retirement Plans

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The following plan limits are increased effective 1/1/13:

Elective deferrals – Increased from $17,000 to $17,500 (401k and 403b plans)
SIMPLE accounts – Increased from $11,500 to $12,000
Defined benefit plans – Increased from $200,000 to $205,000
Defined contribution plans – Increased from $50,000 to $51,000
Annual compensation limit – Increased from $250,000 to $255,000
Deferred compensation plans – Increased from $17,000 to $17,500 (deferred compensation plans of state and local governments and tax-exempt organizations)

The following plan limits are unchanged:

Catch-up contributions – For individuals over 50 remains at $5,500
Key employee in top-heavy plan – The dollar limit remains unchanged at $165,000
Highly compensated employee – The dollar limit remains unchanged at $115,000

New for 2012: The Virginia Tax Refund Debit Card

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The Virginia Department of Taxation is implementing a significant change in the way individual income tax refunds are issued. We have provided the information below to help prepare our clients for choosing the best option for their 2012 refunds.

As required by the 2012-2014 Appropriations Act, there will be two options on 2012 returns for receiving individual income tax refunds – direct deposit or debit card. Both paper and software versions of the individual income tax returns will require that one of these two options be selected. Requesting a paper check in preference to direct deposit or a debit card will not be an option.

Why was the law changed? The Department of Taxation issues over a million income tax refund checks each year. The switch to debit cards will save the Commonwealth of Virginia money by reducing check printing and mailing costs. The Department of Treasury has partnered with Xerox State and Local Solutions, Inc. to administer the tax refund debit card program at no cost to the Commonwealth. Issuing debit cards to individuals who do not choose direct deposit on their 2012 returns will reduce the Treasury’s annual costs by $200,000.

What are the benefits of each option for Virginia taxpayers? Direct deposit is still the fastest method for receiving a refund, provided accurate bank account information is entered on the return, so be sure to check your bank information carefully before filing your return. For individuals who prefer not to use direct deposit, the refund debit card offers a more secure and convenient alternative to paper checks that also lets the recipient avoid check-cashing fees.

Is the Virginia Tax Refund Debit Card secure? The Virginia Tax Refund Debit Card is the equivalent of a bank account with a MasterCard® bank, and is protected by federal and state banking laws. The card itself can be activated only by using the recipient’s identifying information, including social security number and date of birth. Once activated, the card can be used only with a personal identification number (PIN) chosen by the recipient.

How can the debit card be used? The card can be cashed at any MasterCard® bank, or it can be used like a regular debit card at retail stores and ATMs, or to make transactions online. Unlike some types of debit cards, the Virginia Tax Refund Debit Card is valid only until the refund amount has been exhausted. The card cannot be reloaded.

Are there fees associated with using the debit card? Many transactions are free, such as a one-time withdrawal of funds or cash back with a purchase, but there are fees for some other transactions. A fee schedule is available on the VA Department of Taxation website.

How will debit cards work for a joint refund? In the case of a joint return, a debit card will be issued to each spouse to enable both spouses to access their joint refund. The refund itself cannot be divided between the spouses. Instead, a couple will access their funds as they mutually agree, just as they would have done with a paper check.

To ensure the smoothest possible transition from the use of paper checks, we ask your help with two critical areas. First, ensure that we have accurate dates of birth, addresses, and telephone numbers, as well as complete and correct bank account information for those who wish to use direct deposit. Second, educate yourself about the refund options on the return. If you have questions please contact us or view the VA Department of Taxation website for more details & Frequently Asked Questions.