Prpr webinar 121411

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Income Tax 2011: Are you the Biggest Loser? PRPR Webinar given 12/14/11, by Gregory O. Hyde, CPA

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  • Did your business (or your job) pay you over $112,125 last year? If so, you are in the top 10% of earners who paid 70% of all Federal income taxes. Perhaps you are overpaying your fair share! During today’s webinar, we will discuss these four important ways in which you can reduce your tax liability. Often-overlooked tax deductions Tax deductions set to expire 12/31/11 Retirement savings opportunities Alternative minimum tax strategies
  • Other than retirement plan-related deductions (which we will discuss later), there are a number of often-overlooked tax deductions I’d like to briefly discuss today.
  • A number of Federal tax provisions are scheduled to expire December 31, 2011. While there is still a chance some of these laws may be extended, as there is not less than one month remaining before the deadline, it is prudent to plan as though these will NOT be extended. The so-called “charitable IRA” direct transfer option, first introduced several years ago, is scheduled to disappear at the end of this year. This option is available to those 70 ½ and older, and is limited to 100K per year. The distribution DOES go toward your annual required minimum distribution (“RMD”) requirement. Taxpayers who are extremely generous, or those who are in lower-income brackets, tend to benefit most from this rule, although more often than not it provides at least a small benefit to any taxpayer that qualifies for it. Not all charities qualify as recipients of the charitable rollover- such as donor-advised funds…so be sure to check with the charity you have in mind before initiating the direct transfer. Another targeted deduction which goes off the books at year-end is the ability to deduct state and local sales taxes instead of state and local income taxes. One of the reasons for this law, was that it was expected to stimulate purchases of big-ticket items. Another reason is that it can increase deductions for taxpayers in states such as Alaska, Nevada, Washington, and Wyoming, which have no state income tax.
  • Remember that a credit is a dollar for dollar tax benefit (subject to limitations of course), whereas a deduction reduces the amount of income subject to tax.
  • Other QSBS items: 15% rate change up to 28% Must be qualified business (80% active business requirement) Original issue stock $10M lifetime limit
  • Prpr webinar 121411

    1. 1. Income Tax 2011: Are you the Biggest Loser? Presented by Gregory O. Hyde, CPA, PFS, CFP ® December 14, 2011
    2. 2. © Gregory O. Hyde. December 2011 Presenter Information: Gregory O. Hyde, CPA, PFS, CFP ® Pinnock, Robbins, Posey, & Richins, PC 136 East South Temple, Suite 2250 Salt Lake City, UT 84111 Phone: 801-533-0409 Email: [email_address] Website: www.cpaandmore.com This outline is for the purpose of a presentation and the speaker is not engaged in rendering legal, accounting, or professional services to the recipients of this outline. Users of this outline should verify its accuracy before relying on its contents. If legal advice or other professional assistance is required, the services of a competent professional person should be sought.
    3. 3. Today’s Presentation <ul><li>Often-overlooked tax deductions </li></ul><ul><li>Tax deductions set to expire 12/31/11 </li></ul><ul><li>Retirement savings opportunities </li></ul><ul><li>Alternative minimum tax strategies </li></ul>© Gregory O. Hyde. December 2011
    4. 4. Often-overlooked tax credits/ deductions for Business Owners <ul><li>Domestic production activities deduction </li></ul><ul><ul><li>Deduction of up to 9% of net income from “qualifying” activities like manufacturing, construction, farming </li></ul></ul><ul><ul><li>Limited to 50% of W-2 wages paid during year </li></ul></ul><ul><li>Increasing research activities credit </li></ul><ul><ul><li>Must rely on “hard” sciences- computer sciences, physics, chemistry, biology </li></ul></ul><ul><ul><li>Requires process of experimentation </li></ul></ul><ul><ul><li>Wages, 65% of contractor costs, and supplies costs </li></ul></ul><ul><ul><li>Many states (including Utah) also have own credit </li></ul></ul>© Gregory O. Hyde. December 2011
    5. 5. Often-overlooked tax credits/ deductions for Business Owners <ul><li>Small employer health insurance premiums credit </li></ul><ul><ul><li>Average annual wages must be below $50,000, although owner wages are disregarded </li></ul></ul><ul><ul><li>25 or fewer employees and state premium benchmark limits apply </li></ul></ul><ul><li>Real estate professional </li></ul><ul><ul><li>Allows current deduction of real estate-related losses without regard to passive activity loss rules </li></ul></ul><ul><ul><li>Must participate for 750 hours or more, per year </li></ul></ul><ul><ul><li>Can’t rely on spouse’s hours, or investor hours </li></ul></ul>© Gregory O. Hyde. December 2011
    6. 6. Often-overlooked tax credits/ deductions- individuals <ul><li>Health savings account </li></ul><ul><ul><li>Effectively avoids the general 7.5% of AGI limitation on deductible medical expenses </li></ul></ul><ul><ul><li>Must be coupled with a high-deductible health plan </li></ul></ul><ul><li>Triggering suspended passive and/or basis losses (via disposition and/or additional investment) </li></ul><ul><li>Noncash charitable donations </li></ul><ul><ul><li>Be careful of substantiation requirements </li></ul></ul>© Gregory O. Hyde. December 2011
    7. 7. Often-overlooked tax credits/ deductions- individuals (cont’d) <ul><li>Points on home mortgage </li></ul><ul><li>Forgiveness of debt income exceptions- can apply even if 1099-C received </li></ul><ul><ul><li>Bankruptcy and/or insolvency </li></ul></ul><ul><ul><li>Qualified residential indebtedness </li></ul></ul><ul><ul><li>Qualified business real property indebtedness </li></ul></ul><ul><li>Consider additional withholding, rather than estimated payments, to avoid underpayment penalties </li></ul>© Gregory O. Hyde. December 2011
    8. 8. Significant tax cuts set to expire 12/31/11 <ul><li>Tax-free direct transfers by those age 70 ½ or older from IRAs to qualified charities </li></ul><ul><ul><li>Limited to $100,000 per year </li></ul></ul><ul><ul><li>Only certain charities qualify </li></ul></ul><ul><ul><li>Can meet minimum distribution requirements </li></ul></ul><ul><li>The option to deduct state & local sales taxes instead of state & local income taxes </li></ul><ul><ul><li>Especially important in states with no income tax </li></ul></ul>© Gregory O. Hyde. December 2011
    9. 9. Significant tax cuts set to expire 12/31/11 (cont’d) <ul><li>Credit of up to $500 for qualifying energy-efficient home improvements </li></ul><ul><ul><li>Prior lifetime credits are applied against the limit </li></ul></ul><ul><ul><li>Refundable against A.M.T. </li></ul></ul><ul><ul><li>10% of cost; $200 limit for windows </li></ul></ul><ul><li>The up-to-$4,000 above-the-line deduction for qualified higher education expenses </li></ul><ul><ul><li>Many other education incentives, such as Lifetime Learning and American Opportunity Credits, remain </li></ul></ul>© Gregory O. Hyde. December 2011
    10. 10. Significant tax cuts set to expire 12/31/11 (cont’d) <ul><li>100% UNLIMITED bonus first-year depreciation for most NEW machinery, equipment and software </li></ul><ul><ul><li>Scheduled to decrease to 50% in 2012, and disappear thereafter </li></ul></ul><ul><ul><li>No income limitations (unlike Section 179) </li></ul></ul><ul><ul><li>Asset must be “original use” (not just new to taxpayer) </li></ul></ul><ul><ul><li>Must “elect out” if not desired </li></ul></ul>© Gregory O. Hyde. December 2011
    11. 11. Significant tax cuts set to expire 12/31/11 (cont’d) <ul><li>An extraordinarily high $500,000 “Section 179” immediate expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property) </li></ul><ul><ul><li>Section 179 expense limitation scheduled to drop to $139,000 in 2012 </li></ul></ul><ul><ul><li>Phaseouts apply for large businesses </li></ul></ul><ul><ul><li>Not available for all vehicles, or rental property </li></ul></ul>© Gregory O. Hyde. December 2011
    12. 12. Significant tax cuts set to expire 12/31/11 (cont’d) <ul><li>The research tax credit </li></ul><ul><ul><li>Has been schedule to expire for a number of years: extension is seen as likely, but not certain. </li></ul></ul><ul><li>Exclusion of 100% of gain on qualified small business stock (QSBS) purchased by the end of 2011. </li></ul><ul><ul><li>Must be (1) purchased after September 27, 2010 and before January 1, 2012, and (2) held for more than five years. In addition, such sales won’t cause AMT preference problems. Additional requirements apply. </li></ul></ul>© Gregory O. Hyde. December 2011
    13. 13. Retirement savings- Roth IRA <ul><li>Roth IRA contribution and/or conversion- Advantages of Roth vs Traditional IRA; </li></ul><ul><ul><li>No lifetime minimum distributions required- so potentially a good “legacy” planning vehicle </li></ul></ul><ul><ul><li>Provided 5-year rule is met, income grows tax-free, and lifetime distributions, if needed are also tax-free </li></ul></ul><ul><ul><li>No income limit on conversion (unlike contribution) </li></ul></ul><ul><ul><li>Must consider projected tax rates currently, and in retirement, as well as other issues </li></ul></ul>© Gregory O. Hyde. December 2011
    14. 14. Retirement savings- Roth (cont’d) <ul><ul><li>Converting before 2013 may provide tax benefits, as the Medicare surtax looms beginning 1/1/13, and Roth conversion income could push you over limits. This surtax will apply if your “MAGI” exceeds 250K (or 200K if filing single). The rate is 3.8% on investment- type income, and 0.9% on compensation income. </li></ul></ul><ul><ul><li>By converting, all of “traditional” IRA balance is taken in to income in the year of conversion (although taxable amount is reduced by any previous nondeductible IRA contributions). Staggered conversion may be beneficial. </li></ul></ul><ul><ul><li>“ Recharacterization” option provides flexibility. </li></ul></ul>© Gregory O. Hyde. December 2011
    15. 15. Retirement savings (cont’d) <ul><li>Small business retirement plan options </li></ul><ul><ul><li>401(k)/profit sharing plan </li></ul></ul><ul><ul><ul><li>Up to $16,500 annual contribution (plus $5,500 “catchup” if over 50) </li></ul></ul></ul><ul><ul><ul><li>Must contribute for employees </li></ul></ul></ul><ul><ul><ul><li>Most popular small business option </li></ul></ul></ul><ul><ul><li>Simplified Employee Pension (“SIMPLE”) </li></ul></ul><ul><ul><ul><li>Up to $11,500 annual contribution (plus $2,500 “catchup” if over 50) </li></ul></ul></ul><ul><ul><ul><li>Less annual reporting by plan than 401(k) </li></ul></ul></ul><ul><ul><ul><li>Must be established by 10/1/11 for 2011 </li></ul></ul></ul>© Gregory O. Hyde. December 2011
    16. 16. Retirement savings (cont’d) <ul><ul><li>Simplified employee pension plan (“SEP”) </li></ul></ul><ul><ul><ul><li>Can be adopted “late” (up to due date of tax year for the contribution year)- so allows for flexibility </li></ul></ul></ul><ul><ul><ul><li>Allows for large contributions- up to lesser of 25% of compensation or $49,000 </li></ul></ul></ul><ul><ul><li>Defined benefit plans </li></ul></ul><ul><ul><ul><li>Can allow for significantly larger contributions; ideal for self-employeds with very high income; higher administration costs than other plans </li></ul></ul></ul><ul><ul><li>Traditional deductible / nondeductible IRA </li></ul></ul>© Gregory O. Hyde. December 2011
    17. 17. Alternative minimum tax (“AMT”) <ul><li>Name is a misnomer </li></ul><ul><li>First imposed decades ago as a means to reduce benefit of certain deductions for ultra-wealthy taxpayers </li></ul><ul><li>Applies to businesses and individuals </li></ul><ul><li>Traps more and more taxpayers each year due to inadequate inflation indexing, and lower current regular tax rates </li></ul>© Gregory O. Hyde. December 2011
    18. 18. Alternative minimum tax (cont’d) <ul><li>Now TENDS TO apply to individuals with income from $150,000 to $500,000. Due to complexity of this tax, no absolute rules of thumb apply. Requires fact-specific planning, and often makes traditional planning strategies inapplicable. </li></ul><ul><li>Individuals pay at a 26% and 28% tax rate (“flat tax”), denies numerous deductions </li></ul><ul><li>Most AMT paid is never recoverable </li></ul>© Gregory O. Hyde. December 2011
    19. 19. Alternative minimum tax (cont’d) <ul><li>Typical reasons AMT is owed include </li></ul><ul><ul><li>Disallowed deductions , such as </li></ul></ul><ul><ul><ul><li>High state/local income, sales, and/or property taxes </li></ul></ul></ul><ul><ul><ul><li>Mortgage interest on debt NOT paid to buy, build, or improve your home </li></ul></ul></ul><ul><ul><ul><li>Miscellaneous itemized deductions, such as investment fees, tax preparation costs, and unreimbursed employee expenses </li></ul></ul></ul><ul><ul><ul><li>Investment interest expense </li></ul></ul></ul>© Gregory O. Hyde. December 2011
    20. 20. Alternative minimum tax (cont’d) <ul><li>Other reasons AMT is owed </li></ul><ul><ul><li>“ Phantom income ” for AMT purposes </li></ul></ul><ul><ul><ul><li>Exercise and hold of certain employee compensatory incentive stock options (“ISOs”) </li></ul></ul></ul><ul><ul><ul><li>Private activity bond interest from certain “tax-exempt” bonds </li></ul></ul></ul><ul><ul><ul><li>Certain life insurance proceeds (for corporations only) </li></ul></ul></ul><ul><ul><li>Income in the AMT exemption “phaseout” range (about 150K to 447K) </li></ul></ul><ul><ul><li>No personal exemptions allowed (hurts large families) </li></ul></ul>© Gregory O. Hyde. December 2011
    21. 21. AMT planning strategies <ul><li>“ Bunch” deductible taxes and/or misc. itemized deductions, where possible </li></ul><ul><li>ISO holders should seek expert advice if pursuing “buy and hold” strategies </li></ul><ul><li>Inquire about AMT taxability of municipal bonds before purchasing </li></ul><ul><li>Don’t assume that all home equity or 2 nd mortgage debt will be tax-deductible </li></ul>© Gregory O. Hyde. December 2011
    22. 22. Conclusion <ul><li>Don’t be the biggest loser! Take advantage of opportunities we’ve discussed today and start saving taxes! </li></ul><ul><li>Review your specific situation with a competent tax advisor </li></ul><ul><li>Request specific tax projections </li></ul><ul><li>Tax increases are expected by 2013, if not sooner, so don’t delay. </li></ul>© Gregory O. Hyde. December 2011

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