Tax breaks are available for disaster victims

When natural disasters occur, they often leave many people with severely damaged or destroyed homes and businesses. Some lose everything they own. If you are affected by a disaster that is declared by the President to qualify for federal assistance, there are several provisions in the tax law that may provide relief.

Extended tax deadline and interest abatement. The IRS is authorized to postpone the deadlines for filing returns and paying taxes for up to 120 days in a Presidentially declared disaster area. Also, the IRS will not charge interest that would otherwise accrue for the extension period.

Faster refund. Taxpayers suffering losses in a federal disaster area have a choice of which tax year to deduct the casualty loss. You may deduct it on the return for the year the loss occurs, or it can be claimed on your prior year's tax return. Amending your prior year's return may give you a refund of much-needed cash sooner than waiting to deduct the loss on your current year's tax return.

Tax-free gain. If the insurance payments you receive exceed the tax basis of your property, you will end up with a casualty gain. Casualty gains in federal disaster areas receive special tax treatment. For example:

*Individuals may qualify for up to a $250,000 gain exclusion ($500,000 for married couples) on their principal residence. That's because the destruction of the residence is treated as a "sale" for tax purposes.

*No gain is recognized on the insurance reimbursement for the contents of a building as long as those contents were not separately listed on the insurance policy.

*If you replace your property with similar property within four years, you may be able to avoid or postpone paying tax on any gain from your involuntary conversion.

If you suffer a casualty loss, give us a call to discuss the best tax course of action in your situation.

Try a different gift idea this year

When planning gifts for children on your holiday list, you might want to think beyond the traditional retail offerings. Consider financial gifts that can bestow benefits for many years to come.

Some financial gift options you might consider:

*U.S. savings bonds. Savings bonds are used by many families to introduce children to the savings concept. I bonds are indexed for inflation and can provide some relatively attractive rates of return.

*IRAs (regular or Roth). For 2012, you can contribute the lower of $5,000 or the earned income of the child. An early financial start can produce amazing benefits from compounded interest accumulated over several decades.

*Fund a 529 education account. Anyone can contribute to a child's Section 529 college savings plan, which accumulates savings for tuition and living expenses. There are no income restrictions on the donor, and few practical limits on the amount that can be saved. Your gift will grow tax-free in the plan.

*You could also make your gift to a Coverdell education savings account. These IRA-like accounts also grow tax-free, but there's a $2,000 limit on total contributions from all sources. The amount of your gift may also be limited, depending on your income.

*Consider this gift if you just want to encourage an interest in saving and investing. Buy a small number of shares in a mutual fund and package them with a book on basic investing. The child can watch the investment grow over time and can enjoy dividend payouts too. Modest amounts of investment income can be tax-free to children, although the kiddie tax may apply at higher levels.

Please call us if you would like to review the tax issues related to any of these financial gift options, especially if you are considering a larger amount.

Do a year-end business review

Business owners and managers spend most of their time monitoring operations and dealing with everyday problems. But just as an annual checkup from your physician helps to monitor and manage your personal health, an annual checkup can do the same for your business. The benefits of such a review are holding your company accountable and evaluating current performance to better plan and execute future operations. Here are seven things that you should make time to do every year. These are important for your longer-term business health and personal success.

1. Review your business insurance coverage. Don't just automatically write a check to renew your insurance policies when they come due. Instead, you should sit down with your insurance agent every year. Review your business operations, focusing on any changes. Discuss types of risk that could arise. Ask about new developments in business insurance. Use your agent's expertise to identify risk areas and suggest suitable coverage.

2. Review your business tax strategy. Consider adjusting taxable earnings for the year, perhaps by accelerating expenses or delaying income at year-end. (You may want to reverse that strategy this year if you think tax rates will actually increase in 2013.) If you're a cash-basis taxpayer, you could boost 2012 deductions by declaring and paying bonuses in December rather than in early January. Also, you may be able to defer invoicing or make early purchases to reduce your 2012 tax bill.

Look into the "Section 179" rule that allows you to take an immediate tax deduction for most purchases of business furniture and equipment. By deducting the full cost immediately instead of depreciating it over several years, you'll cut this year's tax bill. For 2012, you can deduct up to $139,000 of qualifying purchases, subject to limits.

As your business grows, it's always good to make sure you're using the most appropriate form of business -- whether it's sole proprietor, S or C corporation, LLC, or partnership.

Look for other tax breaks, such as specialized tax credits, that you might not be using to full advantage.

3. Survey your customers. An annual customer satisfaction survey is a great way to assess performance, obtain insight on potential new products or services, and to let your customers know how much you value their business.

4. Check the effectiveness of your marketing. Are your current methods and channels working well, or are you simply doing what you've always done?

5. Update succession planning for your business. Review your succession planning annually. You should have a specific plan for each key manager position, including yourself. Be prepared for a short-term absence or a permanent vacancy. Your plan might mean promoting from within or recruiting externally. An up-to-date plan can be invaluable if you have an unexpected vacancy.

6. Review your business banking relationships. Annually, you should go over your cash balances and banking relationships with your controller, CFO, or accountant. Then both of you should meet with your banker. Ask about new products or services that could help your company. Address any service concerns or problems you might have had. Look for ways to reduce idle cash, boost interest earned, and improve cash flows.

7. Review and update your personal estate planning. If you're a business owner, your company is likely to be a significant part of your estate. A good estate plan is essential if you hope to pass the business on to your heirs. Your company, your personal circumstances, and the tax laws are continually changing. You should take time each year to make sure your plans are current.

If you are serious about improving your business, consider a yearly assessment of your operation. For any assistance you need, give us a call.

Get organized for 1099 filing

January is always a busy month for companies. You're trying to get business off to a good start in the new year, you're trying to close the books on last year, and there's 1099 reporting to complete by month-end.

There are several variations of the information returns known as Form 1099. Most are specific to certain industries. But nearly every company, large or small, has to issue Form 1099-MISC. And you have to send it to recipients by January 31, 2013.

In many businesses, it becomes a late-January panic. There's a scramble to find out who needs to receive the form, their current address, and their taxpayer ID number. But if you're smart, you can get a head start on that before year-end.

You use Form 1099-MISC to report miscellaneous payments to non-employees. This includes fees for services paid to independent contractors, such as consultants, Web designers, accountants, lawyers, and others. If you pay fees to your outside directors, they should be on the list. Generally, you don't report fees paid to corporations, but there are exceptions. For example, you must report payments to all law firms, incorporated or not.

You obviously won't know the dollar amount to report until after year-end. But you can start to assemble the list of recipients, verify whether they're a corporation, and obtain their taxpayer ID information. Ideally you would have a process to collect this information when a new contract is signed. But if not, December is a perfect time to do the ground work. Then you might have one less crash project at the end of January.

Contact our office if you need more information on your 1099 reporting requirements.

What's ahead? Tax changes scheduled for 2013

Unless Congress acts by year-end, these are the changes you'll see in the tax rules effective January 1, 2013.

*SOCIAL SECURITY TAXES. Employee's share will increase to 6.2% after 2012, up from 4.2%.

*INCOME TAX RATES. 2012 rates of 10%, 15%, 25%, 28%, 33%, and 35% will change to 15%, 28%, 31%, 36% and 39.6% for 2013.

*CAPITAL GAINS. Maximum long-term rate will increase from 15% to 20% after 2012.

*DIVIDENDS. Top 15% rate will be eliminated; dividends will be taxed as ordinary income with a top rate of 39.6%.

*CHILD TAX CREDIT. Current $1,000 credit per qualifying child will be reduced to $500 after 2012.

*AMT. Exemption amounts will be $33,750 for singles, $45,000 for couples.

*ESTATE TAX. Top 2013 rate will increase to 55% (up from 35%); exclusion amount will be reduced to $1,000,000 (down from 2012 amount of $5,120,000).

*DEDUCTIONS & EXEMPTIONS. After 2012, higher-income taxpayers will again lose a portion of itemized deductions and personal exemptions.

*DEPRECIATION. Section 179 expensing limit will be reduced to $25,000, with a total qualifying property limit of $200,000, down from 2012 levels of $139,000 and $560,000 respectively. 50% bonus depreciation will expire.

*EDUCATION. Education savings account contribution limit will be $500, down from 2012 limit of $2,000. Expanded American Opportunity Credit will expire and be replaced by prior Hope Credit.

*TAX EXTENDERS. These tax breaks expired at the end of 2011: Teachers' classroom expense deduction, state and local sales tax deduction, tax-free charitable IRA distributions for those 70½ and older, higher education tuition deduction, business R&D credit, and 15-year depreciation for leasehold improvements and restaurant property.

Stay tuned. Congress and President Obama may agree to extend or revise some or all of these provisions. We'll keep you informed.

File for earlier disaster relief

If you were a victim of Hurricane Sandy this year or some other natural disaster severe enough to be classified as a "presidentially declared disaster," you have a special option in the tax code that may help in your recovery. You can claim your loss on your 2012 tax return, or you can amend your 2011 tax return and claim your loss against that year's taxes. Filing an amended return for 2011 could give you an earlier refund to help pay for the losses resulting from the disaster.

Credit for hiring a vet will expire soon

The IRS reminds businesses that the special credit for hiring veterans will expire soon. Companies that hire unemployed military veterans may qualify for a tax credit of up to $5,600 ($9,600 for vets with service-related disabilities). The credit is available for vets hired before January 1, 2013. The amount of the credit depends on the length of unemployment before being hired and the wages paid during the first year of work. For more information, contact our office. 

Don't fall for a charity scam

The IRS is warning people to be aware of fraud connected with Hurricane Sandy. As is usually the case following a natural disaster, scam artists are impersonating charities to get money or financial information from those wanting to help victims of the storm. The scammers contact people by phone, social media, e-mail, or in person. To avoid falling for a scam, donate only to recognized charities, and avoid those with names that are similar to real charities. Do not give personal information to those seeking contributions, and don't give cash donations. Contributions by check or credit card provide greater security as well as a record for tax purposes.

IRS increases mileage rates for 2013

The IRS has increased the standard mileage rates to be used in computing the deductible costs of operating a vehicle for business or when driving for medical or moving reasons. The new rates will apply to vehicle mileage starting January 1, 2013.

The revised rates are 56.5 cents per mile for business driving and 24 cents for medical and moving driving. The rate for charitable driving is fixed by law and remains at 14 cents per mile.

Instead of using standard mileage rates, you have the option of calculating the actual costs of using a vehicle for business, medical, or moving purposes.

Hurricane victims get tax relief

Victims of Hurricane Sandy may be entitled to some tax relief, according to an announcement by the IRS. Certain tax filing and payment deadlines from late October on will be extended until February 1, 2013. This includes the final 2012 estimated tax payment normally due January 15 and payroll and excise taxes normally due October 31, 2012, and January 31, 2013.

The relief applies to taxpayers in the disaster area and those outside the area whose tax professional and/or records are located in the disaster area. Workers assisting in hurricane relief activities conducted by recognized government or philanthropic organizations may also qualify. For more information, contact our office, call IRS toll-free disaster assistance at 1-866-562-5227, or visit www.disasterassistance.gov.