Congress averts tax portion of fiscal cliff

The "American Taxpayer Relief Act of 2012" approved by Congress just after we plunged over the "fiscal cliff" restores and modifies several expired tax breaks, but doesn't address other issues. Here are the highlights of the new law's provisions for individual taxpayers.

* Individual income taxes. Only the wealthiest taxpayers face an income tax increase in 2013. A new individual tax rate of 39.6% will apply to single filers with income above $400,000 and joint filers with income above $450,000. Otherwise, the 2012 tax rate structure is permanently extended. However, beginning in 2013, a new 3.8% Medicare surtax authorized by the 2010 health care law also applies to certain high-income investors.

* Capital gains and dividends. Under prior law, the maximum tax rate for net long-term capital gains would have been boosted to 20%, while qualified dividends were scheduled to be taxed at ordinary income rates, beginning in 2013. The new law extends the favorable 15% tax rate for most taxpayers and extends the zero tax rate for those in the 10% and 15% brackets for ordinary income. However, for single filers with income above $400,000 and joint filers with income above $450,000, the maximum tax rate on long-term gains and qualified dividends increases to 20%.

* Alternative minimum tax. Retroactive to January 1, 2012, the new tax law permanently revamps the alternative minimum tax (AMT) to avoid increased exposure to this "stealth tax." Without the latest fix, an estimated 30 million more filers would have been required to pay the AMT for the 2012 tax year.

* Payroll tax holiday. The 2% reduction in payroll taxes ends. Employees will pay a 6.2% social security tax instead of the 2012 rate of 4.2%. Similarly, the social security tax rate for self-employed individuals reverts to 12.4% from 10.4%.

* Itemized deductions and personal exemptions. Restrictions are imposed on high-income taxpayers with income above a specified threshold. For single filers with adjusted gross income (AGI) above $250,000 and joint filers with income above $300,000, certain itemized deductions are reduced by 3% above the threshold, but the overall reduction can't exceed 80%. Personal exemptions are phased out above the same AGI thresholds without the 80% cap.

* Tax extensions. The new law generally extends, for varying time periods and with certain modifications, several favorable provisions that had expired. The list includes the child, dependent care, adoption, and earned income credits; tax relief from the "marriage penalty"; the American Opportunity Tax Credit for higher education expenses; the deduction for tuition and related fees; the optional state sales tax deduction; the enhanced deduction for student loan interest; the $250 deduction for an educator's classroom expenses; energy credits for qualified home improvements; a conservation donation tax benefit; and the tax-free IRA-to-charity contribution of assets up to $100,000 for taxpayers age 70½ and older.

* Estate and gift taxes. The new law avoids drastic changes for several provisions that had officially ended after 2012. Significantly, the estate tax exemption, which had been scheduled to drop to $1 million from $5 million (inflation-indexed to $5.12 million in 2012) remains at $5 million with inflation indexing. Portability of exemptions between spouses is preserved. The top estate tax rate, which had been scheduled to increase from 35% to 55% in 2013, is bumped up to 40%. The estate and gift tax changes are permanent.

* Business provisions. The new law also temporarily preserves several tax breaks for businesses -- including the research credit, the enhanced work opportunity tax credit, a higher Section 179 deduction, 50% bonus depreciation and faster write-offs for qualified leasehold improvements -- as well as extending unemployment benefits and higher payments to Medicare providers.

This latest tax law is not likely to be the final word on taxes in 2013. Congress is once again talking about a complete revision of the tax code. Also, the spending side of the "fiscal cliff" issue is yet to be dealt with. Stay tuned for ongoing changes that could affect your personal and business tax planning.

Gift taxes: Clearing up the confusion

There is a great deal of confusion about gifting and gift taxes. The federal gift tax law is completely apart from the income tax law. Neither party to a gift should include the gift information on their income tax return. The gift is not tax-deductible by the one giving the gift, and it is not taxable income to the one receiving the gift. But a gift tax return may need to be filed.

So, who has to file a gift tax return? The gift tax applies to the transfer of money or property from one individual (the donor) to another (the donee). If a gift tax return is due, it is filed by the donor.

Certain gifts are not taxable and do not require the filing of a gift tax return, including the following:

*Gifts in 2012 of $13,000 or less per person to any number of people are not taxable. That limit increases to $14,000 in 2013.

*A payment for another’s tuition made directly to an educational institute.

*A payment for medical treatment of another made directly to the medical facility.

*Unlimited gifts made to one’s spouse (there is a dollar limit if the spouse is not a U.S. citizen).

If you make taxable gifts, a Form 709 is due by April 15 of the following year (the same due date as your federal income tax Form 1040). But don’t panic, you probably won’t owe gift tax. In addition to the above exclusions, you have a lifetime exemption -- in 2012 the exemption is $5,120,000. This exemption is scheduled to drop to $1,000,000 in 2013 unless Congress acts to change the law.

If you make gifts beyond the above exclusions, please contact us for assistance.

Do you need a business partner?

It is interesting to note how many partnerships were formed over a weekend. You meet someone at a party on Friday and by Monday you are in business together. No courtship, no honeymoon, just off you go into business. Well, let me suggest that such partners secure a good set of boxing gloves, because they are going to need them.

Which partner will handle various functions of the business should be decided at the outset. Who will make the final call when a major decision has to be made? Who will be in charge of telling an employee he/she is terminated? How many hours will each partner work in the business? Will spouses have a say in the business decisions?

Every partnership, even a very well planned one, is destined to terminate. It will come to an end because one partner dies, or wants to retire, or gets divorced and leaves town. You name it, there are endless reasons why, but sooner or later every partnership ends. So why not address the split-up at the time the partnership agreement is being put together.

Oh, you say, we don’t have a written agreement. We are good friends or brothers and, therefore, no agreement is necessary. Well, if one of you dies and the survivor is facing a lawyer for the deceased or a lawyer for the orphaned children, a written agreement of understanding will come in very handy.

Get with your attorney after the Friday party, but before Monday morning, and write a proper partnership agreement. You, your new partner, and your business will be better for it.

A final thought. Do you even need a partner? Unless you need a partner for financial reasons or you need technical expertise that you can’t get by hiring an employee, don’t take on a partner. You will find running the business and making business decisions much easier.

- Starting a business? Here's your to-do list

There is an almost endless list of things to do when you start a new business. Here is a brief list of some of the most important ones:

*Write a business plan.

*Consider location issues.

*Decide on the legal form of entity for the business.

*Get necessary licenses.

*Register with tax authorities.

*Involve your advisors.

Business plan. Your business plan will be useful to you and to lenders. It should present who will own the business and what the legal entity will be. It should identify your qualifications to run this type of business. You should identity your market, the products or services you will sell, and how you intend to advertise to prospective customers. The business plan should spell out the funds needed for start-up and the source of those funds. The plan should contain projected financial statements for the first couple of years. It should also address any insurance requirements and possible lease agreements. The business plan should be lengthy enough to cover the necessary items but brief enough to serve as an operating guide. It should be referred to on a regular basis and adjusted as needed.

Location. Where you locate may be one of your most important decisions. If your business will be online sales, you could operate out of your garage. But if you intend for customers to visit your establishment, it must be located in suitable surroundings. Does the general area tie into your product/service line? Is access or parking an issue? Do the other businesses in the area compliment yours; do they have similar clientele?

Legal form. Under what legal form of business do you want to operate? Should you incorporate, operate as an LLC, a partnership, or sole proprietorship? It is imperative that you discuss these options with your accountant and attorney early in the business planning stage. There are very valid tax and non-tax reasons for selecting a given entity.

Licenses. Your accountant and attorney can also assist you with applying for the necessary permits and licenses. This should be done early on to avoid possible delays.

Taxes. Your accountant will see that you have the proper registration with taxing and filing authorities such as the IRS, the state agencies for tax filings, and worker’s insurance if you have employees.

Advisors. You should run your business ideas past your business advisors before you make sizable financial commitments. Who are your advisors? You will have an ongoing need for a banker, an insurance agent, an attorney, and an accountant. You will benefit by involving them early and frequently.

If you have questions about operating your business, please contact us. We are here to assist you.

Even small companies can be hit with payroll fraud

Unless the owner handles all aspects of computing and paying payroll, there is room for fraud in every small business. The fact that your company has only a few employees does not guarantee that you will be safe.

Perhaps one of the easiest payroll fraud techniques is the overpayment of withholding or payroll taxes. Your bookkeeper simply overpays the government. When the refund check arrives, it is deposited by the employee to his or her personal account. In some cases, the employee will have an account at a different bank but in the company name. Such an account could be used for the fraudulent deposit of other company receipts as well.

The greater the number of employees, the easier it is to pull off a scam. Perhaps the payroll clerk has invented a fictitious employee or falsifies hours or commissions for a cooperating employee who shares the stolen funds. Or perhaps the employee holds the payroll deposit funds in his or her own interest-bearing account until it is time to make the payroll deposit to the government.

A payroll review by an independent accountant may help prevent such employee schemes. Even in small companies, it is possible to divide office tasks to make employee theft more difficult.

Give us a call; we will gladly review your company's internal controls to determine what changes may be needed.

- Don’t miss out on the "saver's credit"

If you're not sure what the "saver's credit" is, you're not alone. Members of the Senate Finance Committee believe many people who are eligible to claim the credit are unaware of its existence.

Here's what you need to know:

*The saver's credit, also called the "retirement savings contributions credit," is a tax break designed to encourage you to make contributions to your traditional and Roth IRAs and certain other qualified retirement plans -- including your 401(k).

*You apply the credit directly to your federal income tax liability, including the alternative minimum tax. The credit is nonrefundable, meaning you can use it to reduce your tax liability to zero, but no lower.

*The maximum credit is $1,000 ($2,000 if you're married filing a joint return).

*You're eligible if you're not a full-time student or a dependent, are over age 18, and your 2012 adjusted gross income is less than the phase-out amount of $28,750 ($57,500 for married filing jointly). For 2013, those phase-out amounts increase to $29,500 for singles and $59,000 for joint filers.

Here's why it's a good deal: If you're eligible, you can take the credit and still deduct your traditional IRA contribution, which gives you the opportunity for double savings.

Additional rules might apply. For instance, the amount of the credit may be reduced by certain distributions from your retirement plans. To learn how you can obtain the maximum benefit, please give us a call.

When can you deduct a business bad debt?

It happens to butchers, bakers, and candlestick makers. It probably happens in your business, too: A customer doesn’t pay what they owe and you end up with a bad debt. Can you take a tax deduction?

The answer depends on how you account for income on your tax return. If you included the amount due from the customer in income this year or in previous years, it’s likely you have a bad debt deduction. You can claim all or part of the worthless receivable.

What if you record income as you collect the cash? In this case, since you don't receive the amount your customer owes you, and since you never reported it as income, there’s no deduction.

Suppose you lend money to a customer for a business reason and the loan becomes uncollectible. Is the loan considered a deductible bad debt?

As a general rule, yes, as long as your intention was to make a loan, not a gift, and you attempted to collect the debt but could not. Money you lend to employees or suppliers may also be deductible.

Though you don’t have to go to court to prove a debt is uncollectible, the deduction can only be taken in the taxable year it becomes worthless. If you overlook the deduction on that year’s return, don’t despair. For a fully worthless bad debt you have up to seven years from the due date of your original return to file an amended one.

Additional rules apply to specific situations, and certain businesses can use a special method for claiming bad debt deductions. Give us a call to discuss your options.

Speed up your IRA deduction

If you did not contribute the 2012 maximum to your IRA by December 31, 2012, and you make any IRA contributions before April 15, 2013, tell your bank or other trustee that these 2013 contributions are for 2012 until you reach the $5,000 limit ($6,000 if you're 50 or older). You can then deduct these 2013 amounts on your 2012 tax return for a quicker tax benefit. For details, contact us.

Save more for your retirement

The amount you can contribute to your retirement plan increases in 2013. The 401(k) maximum salary deferral increases from the 2012 limit of $17,000 to $17,500. The catch-up limit for those 50 and older remains unchanged at $5,500. The maximum deferral for a SIMPLE increases from the 2012 limit of $11,500 to $12,000. The catch-up limit for 50 and older remains at $2,500. The 2013 maximum IRA contribution increases from the 2012 limit of $5,000 to $5,500. If you're 50 or older, your IRA contribution limit is $6,500.