Tax Planning and Law Updates Gary N Cooper CPA PC www.garycoopercpa.com
Tax Planning - General•As the first half of 2012 draws to a close, there is still plenty oftime to reduce your 2012 income tax bill and plan ahead forthe remainder of the year.•You should have a 2012 income tax projection prepared tomaximize possible tax savings.•Because many tax benefits are tied to or limited by adjustedgross income (AGI), a key aspect of tax planning is to estimateboth your 2011 and 2012 AGI.•When considering whether to accelerate or defer income ordeductions, you should be aware of the impact this action mayhave on your AGI and your ability to maximize itemizeddeductions that are tied to AGI.•Your 2011 tax return, your 2012 pay stubs, and other incomeand deduction-related materials are a good starting point forestimating your AGI.
Tax Planning - GeneralThere are many strategies and tax benefits that can be analyzed during this time of year to help maximize your income tax savings. Some of the items to keep in mind are: Deferring income to 2013 Accelerating income into 2012 Planning the recognition of capital gains and losses Personal deduction planning – method and sources Business deduction planning – method and sources Education and Child Tax Benefits Energy Incentives Business Tax Credits Charitable Gift Planning Family Gift Planning Investment Planning Social Security and Retirement Planning Alternative Minimum Tax Exposure
Tax Planning - General•Now is the time to review your income tax situation and theapplicability of any of the items listed above.•Remember that waiting until preparing your income tax returnis too late to strategize for reducing your 2012 income taxliability.•It is merely history with no proactive planning.•Currently, the planning process will encompass the next threeyears – 2012, 2013 and 2014, due to the upcoming tax lawchanges.
Tax Planning Tips•Hire your spouse to work as an official employee andput him/her on payroll. There are five benefits that youcan gain: • Build up tax-favored funds for retirement. You can put retirement plans in place for up to 25% of the compensation, or 50,000, whichever is less can be deducted and put into a retirement account. • 401(k), you can put back $17,000, and if the spouse is always in 50, you can put back an additional $5,500.• Shift taxable income away from the company if youhave a C corporation. • If the C corporation is in a higher tax bracket, this would not matter if you do have an S corporation because the earnings flow through directly to your personal tax return.• Get more tax mileage from business trips, and since youwife is an employee, you can deduct the trip for both.
Tax Planning TipsFamily Members as Employees•Health insurance coverage ills. You can set up a grouppolicy having more than one employee in your corporation.•Join the employer paid life insurance group. First $50,000 ofemployer paid group term coverage is tax-free for theemployee.•Furthermore, setting up an S corporation with more thanone employee can create an opportunity to generatedistributions versus salary, which is not subjected to FICA orMedicare taxes.
Real Estate SpecificMortgage Interest and Points•You can deduct interest expense on up to $1M of acquisitiondebt. This is for a loan use to buy or build your personal residence.•Mortgage points are fully deductible, in the year you pay them, ifyou satisfy several rules, the points must be for the purchase orrenovation of your primary home.•Points are not deductible if paid as part of a refinancing, or if theloan is used for investment, tuition, etc.• The points must be paid by you or the seller, not taken out of theloan proceeds. You must have put down enough cash to cover thepoints. This includes any loan origination fee, if the fees determineas a percentage of the loan, one of these rules is not fully satisfied,any deduction for points is spread over the life of the loan.•Points paid when refinancing or deductible or the term of theloan. If you refinanced a loan and your previous fee refinanced,you can deduct off the points left on the prior loan. But, if yourefinanced with the same lender, IRS says that you must take thededuction for the remaining points over the term of the new loan.
Real Estate SpecificCapital Gains•Married couples can exclude gains up to $500,000 fromcapital gains taxes. Singles can exclude up to 250,000 onthe sell of the personal residence.•You must have lived in the home for two of the last fiveyears. There are other exceptions due to quick sales, to ajob change, illness, or for unforeseen circumstances such asa divorce.•It is still vital to keep records on your home. You will have toprove your gain if the property appreciates and the gainexceeds $500,000.•Heres what you need: the original cost of the property vs.what you spent on permanent improvement such asadditions, fences, shades, carpets, fitted drapes, shelves,storm windows, and central air conditioning. These expensesboost your homes cost basis, and reduce the gain.
Real Estate SpecificBusiness Use of Residence•Using part of your residence for business may get you adeduction. If you pay rent, part may be deductible. Ifyoure the owner, you may get depreciation.•Deductions for operating a business in your residence areallowed only for the portion that is used solely and regularlyas your primary place of business or when your home officeis used for seeing clients, customers or patients. But it neednot be exclusive use if inventory or samples are stored there.•If you are an employee, you must show that use of yourhome is for your employers convenience, not just yours.•Home office deductions will be allowed even if clients orothers are not there, or if it is not the main place formanagerial or administrative functions.•The gain on your home office qualifies for the home saleexclusion even though the space was not used as aresidence. However, any depreciation after May 6th, 1997 isrecaptured in tax at a maximum rate of 25%.
Real Estate SpecificVacation Homes•Vacation homes can provide you with some taxdeductions, but deductions are limited when your personaluse of the rented home exceeds certain limits.Maintenance and depreciation are deductible only to theextent that rental income exceeds the real estate taxes andmortgage interest allowable to the renter.•This rule is triggered if personal use exceeds 14 days and10% of the homes rental time. If personal use is less it canget full write-off for depreciation and maintenance. The IRScounts stays rented to relatives as personal use of theowner.•Rent can be tax free if you rent your home for fewer than15 days for the year. Keep this in mind if your area attractsvisitors for sports playoffs or other special happenings. Butyou cannot deduct depreciation or upkeep.
Real Estate SpecificTax Credit Recapture•First-time home buyers who purchase their residences in2008 are entitled to a tax credit of as much as $7,500.But the credit was actually an interest free loan from thegovernment.•Starting in 2010, the credit is recaptured over 15 years.Filers who claim the maximum credit must report $500 inextra tax each year.•Any remaining credit is recaptured when the home issold. Filers who got the credit on home•Buyers who got the credit on a home bought after 2008avoid any recapture unless the home is sold within threeyears of purchase.
Real Estate SpecificInvestment Real Estate•For residential buildings the rule is straight linedepreciation for 27 years and six months. For non-residential property its 39 years.•Tax credits also are available for some buildings.Renovations of old buildings and restorations of historicstructures and sites qualify for the credit. Credits equal20% on historic sites and 10% on buildings first used before1936.
Real Estate SpecificPassive Loss Rules•Most passive losses are from two sources. One involveslimited partners. Also limited partners are passive nomatter what the size of the company or what it does.The other involves most rental real estate, homeapartments and office buildings.•Real estate professionals that are exempted from theselimits and can deduct their losses from rental real estatein full.•To qualify as a real estate professional you must satisfy acouple of requirements. You must spend more than onehalf of your working hours and at least 750 hours per yearmaterially involved in real estate as a developer, broker,landlord and the like.
Real Estate SpecificLike Kind Exchange•Code section 1031 - like kind property exchangespostpone taxes on some businesses or investment realestate. You may be able to work out a tax free changeeven if your seller doesnt want your realty in return.•You must use a qualified intermediary to hold theproceeds from the sale of your property.•You must identify replacement property within 45 daysof the sale and acquire it within 180 days. Follow therules carefully.
New Observations – IRS Audits•According to new data released by the IRS, your chanceof being audited increases dramatically if your annualearnings hit seven figures.•Conversely tax payers earning less than $200,000 have lesscause for concern. The IRS fiscal year 2011 enforcementand services results released in January show that audit ratefor taxpayers earning more than $1M is approximately 12%in 2011 up from 8% in 2010. • That is double of the 6% rate in 2009.•In contrast only 4% of taxpayers earning more than$200,000 were audited in 2011, up from approximately 3%for the previous five years.•Finally, the audit rate for taxpayers earning less than$200,000 remained around 1% level the same as it has beenfor the past five years.
New Observations – Contributions•The IRS is becoming stricter for documentation relating tocharitable deductions on your personal tax return.•No deduction is allowed for any contribution of cash,check or other monitory gift unless you can show a bankrecord or written communication from the charity.•The written communication must indicate the amount ofthe contribution, the date you made the contribution, thename of the charity.•Also, something very important that the IRS is looking atduring an audit, the acknowledgement must be obtainedby the earlier of the date you file your tax return, or the duedate of the return plus any extensions.•It should include the amount of the cash of the check, adescription of any non cash property that was contributed,and the value of any goods or services provided.•Therefore, subsequent to the date of filing, you cannot goto a charity and request substantiation and provide it to theInternal Revenue Service to support an amount under audit.
AMT – An Added Tax•First, lets briefly explain how the AMT works. In essence, you are required to run parallelcalculations of your regular income tax liability and AMT liability. Then, you musteffectively pay a higher of the two.•There are five steps for competing the AMT liability. • Figure out your taxable income for regular tax purposes. • Add designated tax preference and adjustment items to this figure. What are the adjustments? Some of the most common AMT adjustments and preferences are as follows: • Add back a personal exemption deductions. • Add back a standard deduction for itemized deductions for state and local income and property taxes, personal interest expense other than qualified residents interest, most miscellaneous deductions and part of medical deductions. • Subtraction of tax for refund of state and local income taxes. • Changes to accelerated depreciation of property. • Difference on the gain or loss on property sales reported for regular and AMT purposes. • Bargained element upon exercise of ISOs. • Change in certain passive activity loss deductions. • Add back of interest income from private activity defined interest.•Subtract a special exemption amount based on your filing status. This is one of theareas where congress has patched a law.
AMT – An Added Tax•Subtract a special exemption amount based on your filingstatus. • This is one of the areas where congress has patched a law.• Apply the AMT rate to the net amount. The AMT rate is 26% forthe first 175,000 of AMT income, 28% for AMT income above the$175,000 level.•Compare the AMT result to your regular income tax and paythe higher tax liability.•But heres the kicker - the exemption account mentionedabove could be reduced for high income tax payers. Feereduction is equal to $0.25 on each $1 of AMT income above$150,000 for joint filers and 112,500•Congress has not adjusted these dollar thresholds.•Once AMT income exceeds $382,000 on a joint return, or$273,500 for single, you get no exemption at all.
AMT – An Added TaxThere are four ways to sidestep the AMT. • Delay capital gains. If you expect to realize a large capital gain, postpone the sale until next year, or arrange an installment sale. • Two, time income tax payments. Dont prepay state or local income and property taxes. •All deductions for those prepaid amounts will cut your regular income tax. •They are added back to your AMT income calculation. •Instead, prepay just enough to bring down your regular tax liability to equal the amount of your AMT liability. •Avoid private activity bonds. •Put ISOs on hold.
Tax Law Changes• Further, some of the tax law changes listed below could have a direct effect on you and your business. These tax laws are subject to change before the given tax year listed below. Depends on Congress! • Tax Rates – highest bracket could be going to 39.6% in 2013. This would be for married filers making over $250,000 and single filers making over $200,000. • Surtax – starting 2013, this would hit married filers with AGI exceeding $350,000 and single filers with AGI over $280,000. To gain votes however, the Democrats are considering raising the surtax starting points at $500,000 for single filers and $1,000,000 for married filers. The surtax could push the effective rate up to 50%.
Tax Law Changes• Capital Gains and Qualified Dividends - Current Law Thru 2012 – Taxpayers in a tax bracket of 25% or higher pay a maximum tax rate of 15% for long-term capital gains and qualified dividends. Taxpayers in a tax bracket below 25% pay a maximum tax rate of 0% for long-term capital gains and qualified dividends. Effective 2013 - taxpayers in a tax bracket of 25% or higher could pay a maximum long-term capital gains rate of 20% and ordinary tax rates for qualified dividends. Taxpayers in a bracket below 25% could pay a maximum long-term capital gains tax of 10% and ordinary tax rate for qualified dividends. This tax law change is currently under consideration by congress.• Tuition and Fees Deduction - Current Law - the tuition and fees deduction allows tax payers to deduct up to $4,000 of tuition in related fees for enrollment, attendance at an eligible educational institution. Effective 2012 - the tuition fees deduction is no longer allowed.
Tax Law Changes•Estate gift tax exclusion increase from $1M to $5M 2012•Estate and gift tax top rate reduced from 55% to 35% 2012•LH improvements for restaurants and qualified retail space•Eligible for section 179 up to $250,000 2011•LH improvements for same type of property 15 years 2011•No phase out for personal exemptions 2012•No phase out for itemized deductions 2012•S Corp built in gains period reduced from 10 years to 5 2011•Sales tax deduction instead of State income taxes 2011•Section 179 $500,000 2011•Section 179 $125,000 2012•Bonus depreciation at 100% - new equipment 2011•Bonus depreciation at 50% - new equipment 2012
Tax Law Changes• Gift tax – Current Law - the top gift tax rate equals 45%. The gift tax exclusion equals $1M. Effective 2011 and 2012 - the gift tax rate equals 35%. The gift tax exclusion equals $1M. Effective 2013 - the gift tax rate equals 55%. The gift tax exclusion equals $1M.• Adoption Credit - Current Law - for 2011 a taxpayer could have claimed a credit up to $12,150 an also exclude up to $12,150 from income for expenses for adopting an eligible child.• Effective 2013- the adoption credit and the adoption assistance program exclusion are repealed with the exception of adoptions of children with special needs.• Itemized deductions - Current Law - the phase-out of itemized deductions no longer applies. Effective 2013 - itemized deductions for high-income taxpayers may be phased out as much as 80% of otherwise deductible expenses.• Student Loan Interest – Current Law –Effective 2012 – deduction up to $2,500 for the first 60 months with phase-out, thereafter interest is no longer deductible.
Tax Law Changes – up in the air•Adoption Credit 2011•AMT exemption amt increase over tax year 2000 amounts 2011•AMT refundable credit for prior year AMT 2012•Cap Gain and Qualified Div Max rates at 15%, 5% and 0% 2012•Charitable Contributions of IRA deductions 2011•Computer software eligible for section 179 2012•Energy efficient credit 2011
Bush Tax Cuts•Most believe the Bush tax cuts will be extended through 2013.•If the Democrats keep the White House and senate, betterodds that rates on top –incomers will rise.•Tax Reform – generally agreed by both Obama and Romney. • Rates, deductions, credits, AMT refinement will all be on the table. • This will begin as early as 2013.
Conclusion•Good news – we are on an airplane traveling at 400 MPH.•Bad news – we really don’t know where we are going!•The laws will change across the board and touch the entirecountry in some way.
Gary N. Cooper CPA PC1703 W. 12st StreetHouston, TX 77008713-243-8590www.garycoopercpa.com