Written by: Keith Frame, CPA

We haven’t talked much about it. We have not yet done much planning in consideration of it. I think most of us CPAs believed it would never come to be (and still don’t in some cases). But the year 2013 is set to usher in a wave of tax increases that will cost all taxpayers dearly.

Not only do the temporary Bush tax cuts disappear, but new taxes appear to fund Obamacare. A brief rundown of changes affecting individual taxpayers is as follows:

• Tax rates increase across the board with the top marginal rate rising from 35% to 39.6%
• Capital gains tax rates rise from 15% to 20%
• Tax rates on dividends increase from 15% to your marginal income tax rate which could be as high as 39.6%
• Reduction of the child tax credit from $1,000 to $500
• A new .9% hospital insurance tax on wages in excess of $250,000 for married taxpayers filing a joint return ($200,000 for single taxpayers)
• A new 3.8% tax on net investment income for married taxpayers with income in excess of $250,000 ($200,000 for single taxpayers). Net investment income includes interest, dividends, capital gains and rental income

 There are several strategies that should be considered as we get closer to the year 2013:

•  Arrange to receive income in 2012 instead of 2013 if possible
• Sell profitable investments this year – if  you are considering the sale of an asset with a significant capital gain, selling in 2012 will result in a capital gain rate of no more than 15% plus avoiding the 3.8% tax on investment income
• Reduce exposure to taxable dividends – it might make sense to include dividend paying stocks in tax-deferred accounts and purchase growth stocks and tax exempt bonds in taxable accounts
• Distributions from tax-deferred accounts are not included in investment income so this gives taxpayers an additional incentive to maximize retirement plan contributions

Taxes will be THE hot topic during this year’s presidential election. We don’t expect to see much action on these issues prior to the election as the candidates weave and dodge on their real positions.

The effect of these increased taxes on the economy in general, the housing market and the stock market will not be a positive one. The outcome of the election and the last month of this year will dictate planning decisions for many of our clients.

Written by: Lisa Whyte, CPA

If you use QuickBooks, you understand that we use your data to prepare your tax return.  You may not realize that we don’t simply take your numbers and use them as is.  We typically verify the accuracy of your accounts. 

We frequently need to make some adjustments to correct your QuickBooks balances.   If our adjustments are not entered in your QuickBooks file, then your balances will remain incorrect.    If you have received adjustments from your accountant for your 2011 tax return, please be sure to enter them.   I personally prefer to use (when possible) the QuickBooks Accountant’s Copy because it allows clients to simply import our adjustments into their file.

Please review the adjustments that your accountant gives you.  Some adjustments, such as recording depreciation, we expect to do every year.  Other adjustments, such as reclassifying an expense, may signal that transactions have been improperly recorded.  Discuss these adjustments with your accountant; they may need you to start recording transactions in a different manner.

After you have entered our adjustments, discussed with your CPA what transactions need to be recorded differently, and followed these recommendations your QuickBooks reports will be more accurate.

The old GM stock (more recently being traded as MTLQQ) stopped trading on the pink sheets in 2011, so now investors are allowed to take the loss on their 2011 tax returns.

If you have already filed your return but have a loss you would like to take, we can certainly help you amend that return.

Call us today!

If you are one of the millions that receive a sizable tax refund every year, why not use the extra money to help out your personal balance sheet.  Here are some ideas for your refund that will be more beneficial than just spending it on whatever…

1. Use the cash to pay down your debt.  Reduce any high-interest credit card debt you may have, or pay down the principal on your mortgage.
2. Contribute to an IRA or a 529 plan for your children.
3. Want to have a vacation, set aside some of your refund for just that.  Setting up a separate account helps for just that.  You could even do this for your holiday shopping!
4. Have some smaller home improvements you want to make, use some of this money to do just that.
5. Have a stock you want to invest a little in, open up a brokerage account and do just that!
6. Do a check on your emergency fund to make sure there is enough in there in case you get laid off or hurt.
7. Maybe it’s time for some additional life insurance?

These and may more tips are available at kiplinger.com

If you are planning on giving all or part of your required minimum distribution from your IRA to a charity this year, you may want to hold off until toward the end of the year as Congress has not reauthorized the law that allows this tax break.  The law that allows people over 70 1/2 to make a tax free transfer of up to $100,000 directly from their IRA to a charity has not been passed for 2012, but Congress typically does not reauthorize tax breaks until toward the end of the year.

If this is something you are interested in, please be aware that the money must be transferred directly from the IRA to the charity.  If you take the cash out now, you will have to add those monies to your gross income.  Keeping it out of your adjusted gross income will help many people stay below the income limit for other tax breaks and avoid the Medicare high-income surcharge. 

For more information about RMD’s see Rules for Required IRA Distributions.

Kiplinger.com

Written by: Paul B. Murray, CPA, ABV, CFF

Unscrupulous tax preparers are luring unsuspecting senior citizens into filing claims for fraudulent tax refunds the IRS announced. The scam involves convincing both tax filers and those with little or no income who are not required to file that they are entitled to federal refunds. Their claims are based on false and misleading information often citing nonexistent rules and regulations or “buzz words” that may sound convincing to someone with limited knowledge of the tax code. It’s understandable with the numerous tax rebates, refundable credits, stimulus programs and the ever changing tax laws that an individual may be confused and susceptible to such scams. The IRS provided a list of situations that should be considered an immediate red flag warning to individuals, including the following:

• Fictitious claims for refunds or rebates based on false statements of entitlement to tax credits.
• Unfamiliar for-profit tax services selling refund and credit schemes to the membership of local churches.
• Internet solicitations that direct individuals to toll-free numbers and then solicit social security numbers.
• Homemade flyers and brochures implying credits or refunds are available without proof of eligibility.
• Offers of free money with no documentation required.
• Promises of refunds for “Low Income – No Documents Tax Returns.”
• Claims for the expired Economic Recovery Credit Program or for economic stimulus payments. 
• Unsolicited offers to prepare a return and split the refund. 
• Unfamiliar return preparation firms soliciting business from cities outside of the normal business or commuting area.

The IRS cautions taxpayers to choose wisely when selecting a tax preparer. Ask friends and family for a referral, check web sites, community activity and how long the firm has been in business.

We realize that most of our readers wouldn’t fall prey to such scams but if you have elderly friends, family or neighbors remind them:

When It Sounds Too Good To Be True……………..

Written by: Melinda Long, CPA

There are plenty of times we are asked about which education credit is most beneficial for a client to use.  Below is a short list of various credits in the order of the biggest credit to smallest.

1. American Opportunity Credit – Receive a credit up to $2,500 PER STUDENT per year.  Fees to include are tuition and fees, books and supplies.
2. Lifetime Learning Credit – Credit up to $2,000 PER TAXPAYER per year.  Only tuition and fees can be used to calculate this credit.
3. Tuition and Fees Deduction – Deduction of up to $4,000 per taxpayer.  Only tuition and fees can be used to calculate this deduction.
4. Qualified Scholarship- Amount is excluded from gross income.  Tuition, fees, books and supplies are used to calculate this amount.
5. Qualified Tution Program – Tax-free earnings.  Can use the funds from this 529 plan for tuition, fees, books, supplies, room and board.
6. Coverdell ESA- Tax-free earnings.  Can use the funds from this ESA for tutition, fees, books, supplies, room and board.

For adjusted gross income phaseouts and a more indepth explaination of these credits/deductions, visit the Tax Benefits for Education page on the IRS.gov website.

No change is required in your current payroll software for FICA withholding.  As we noted in a previous correspondence the FICA rate was to return to 6.2% for employee withholding on March 1^st unless congress did something.  They did, the rate reduction is extended till 12-31-12.  Official release is below.

 Payroll Tax Cut Extended to the End of 2012; Revised Payroll Tax Form Now Available to Employers

IR-2012-27, Feb. 23, 2012

WASHINGTON – The Internal Revenue Service today released revised Form 941 enabling employers to properly report the newly-extended payroll tax cut benefiting nearly 160 million workers.

Under the Middle Class Tax Relief and Job Creation Act of 2012, enacted February 22, 2012, workers will continue to receive larger paychecks for the rest of this year based on a lower social security tax withholding rate of 4.2 percent, which is two percentage points less than the 6.2 percent rate in effect prior to 2011.  The reduced rate, originally in effect for all of 2011, was extended through the end of February by the Temporary Payroll Tax Cut Continuation Act of 2011, enacted December 23, 2011.

Self-employed individuals will also benefit from a comparable rate reduction in the social security portion of the self-employment tax from 12.4% to 10.4%.  For 2012, the social security tax applies to the first $110,100 of wages and net self-employment income received by an individual.

The new law also repeals the two-percent recapture tax included in the December legislation that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut.  As a result, the now repealed recapture tax does not apply.  The IRS will issue additional guidance, as needed, to implement the newly-extended payroll tax cut, and any further updates will be posted on IRS.gov.

Employers must provide W-2s by January 31st so I would imagine most of you have received them by now.  There are a few things you should do when you receive these forms to be sure there are no problems.

• Check the amounts against your records to make sure the reported items are correct.  You do this by using your final pay stub of the year and compare the gross state and federal wages; local, state and federal income tax withheld and the Medicare and Social Security taxes withheld. 
• Check to make sure your social security number on the W-2 is correct.
• If you find an error – contact the employer right away so they can issue you a corrected W-2c (as well as the Social Security Administration).
• If you do not receive your W-2 and you can not get in touch with employer because they have went out of business or disappeared, you should just use your pay stubs or other records from that job and file a Form 4852 (the “Substitute for Form W-2 Wage and Tax Statement” with your tax returns.

Written by: Annette Clark, CPA

A new year brings new payroll tax changes that you need to be aware of if you are preparing your own payroll. If you need assistance or have any questions please contact us.

•  Michigan unemployment wage base has increased from $9,000 per employee to $9,500 for 2012. 
• The Federal Unemployment tax rate for 2012 will be 1.8% on the first $7,000 earned by each employee. That rate is made up of the base rate of .6% plus 1.2% credit reduction tax.  The additional 1.2% is considered a 4^th quarter liability. As long as the State of Michigan fails to repay the federal government for federal unemployment benefits this amount will increase by .3% each year. This will be the 4^th year for Michigan.   If your UIA “actual reserve” is positive figure you should complete Form UIA 1110 to receive a credit for a portion of this excess tax on your Michigan unemployment return.
• The Social Security wage base has increased from $106,800 in 2011 to $110,100 in 2012.
• For wages paid from January 1, 2012 to February 29, 2012 the social security rate used to calculate employee’s withholding is 4.2%. The company match is still at 6.2%.  Unless the government extends this tax provision it return to 6.2% for the remained of the year.  We will keep you posted.
• The elective deferral limit for employees who participate in 401(k), 403(b) and most 457 plans increased from $16,500 to $17,000 for 2012.