Pay attention to restored deductions for 2012

A number of tax breaks that had expired at the end of 2011 or were to expire at the end of 2012 were extended by the recently passed law, the "American Taxpayer Relief Act of 2012." Keep these deductions and credits in mind as you gather the paperwork for filing your 2012 tax return. Those that apply to you or your business could cut your 2012 tax bill.

FOR INDIVIDUALS. The law restored for 2012 through 2013 the following tax breaks:

* The optional deduction for state and local sales taxes instead of deducting state and local income taxes.

* The above-the-line deduction for up to $4,000 for qualified tuition and related expenses.

* The deduction for mortgage insurance premiums.

 * The above-the-line deduction for up to $250 for classroom supplies purchased by teachers.

* The exclusion from income for cancellation of mortgage debt of up to $2 million on a principal residence.

FOR BUSINESSES. Included in the law's provisions were the following items that could affect your business:

* The Section 179 first-year expensing option was increased retroactively for 2012 and extended through 2013 at $500,000 for the purchase of new and used equipment. The investment limit is set at $2,000,000.

* 50% bonus depreciation, which applies only to new equipment purchases, was extended through 2013.

* Both the research tax credit and the Work Opportunity Tax Credit were extended through 2013.

For assistance in identifying and utilizing all the tax deductions, both new and old, to which you are entitled, please give us a call.

"Chained CPI": What's it all about?

As the politicians in Washington start once again to tackle the same old problems, you're likely to hear more about a new way of measuring inflation called the "chained CPI."

The standard way to measure inflation has been with the consumer price index (CPI). The CPI has been used to calculate annual adjustments to social security benefits, federal pensions, military and veterans' benefits, and tax brackets, exemptions, deductions, and credits. According to some experts, the consumer price index currently used overstates increases in the cost of living.

So how is the "chained CPI" different? It makes different assumptions about how people spend. An oversimplified example: If a severe freeze drives up the cost of oranges and orange juice by 20%, people are likely to switch to a cheaper alternative, say, apples and apple juice instead of continuing to pay the higher price for oranges. This keeps spending more level than the regular consumer price index would indicate.

A switch to the chained CPI would mean that those government payments linked to inflation would rise more slowly. Applied to the tax code, the chained CPI would mean smaller inflation adjustments to tax brackets and other tax numbers, resulting in higher taxes than by using the regular CPI.

Home office recordkeeping simplified

The IRS is reducing the recordkeeping required for the home-office deduction, effective for 2013. Taxpayers who qualify may use a new optional deduction calculated at $5 a square foot for up to 300 square feet of an area in a home that is used regularly and exclusively for business. The deduction is capped at $1,500 a year.

Taxpayers opting for the simplified deduction cannot depreciate a portion of the home as they can under the other method. However, business expenses not related to the home, such as advertising, supplies, and employee wages, are still fully deductible.

This simplified option is available starting with the 2013 tax return which will be filed in 2014.

IRS extends deadline for farmers and fishermen

The IRS had to delay the start of this year's tax filing season until it completed programming changes made necessary by the late passage of the "American Taxpayer Relief Act of 2012" (signed into law on January 2, 2013).

Normally, farmers and fishermen are not required to make quarterly estimated tax payments if they file their tax return and pay taxes due by March 1 of the following year. The filing delay created by the new law meant that several tax forms needed by these taxpayers would not be ready on time.

As a result, the IRS has announced an extension of the March 1 filing deadline for farmers and fishermen to April 15.

The filing extension will apply to all farmers and fishermen, not just to those who use late-released IRS forms.

To qualify as a farmer or fisherman for 2012, at least two-thirds of the taxpayer's gross income for 2011 or 2012 must have come from farming or fishing.

New law causes filing season delay

The delayed passage of the "American Taxpayer Relief Act of 2012" has put the IRS behind schedule. Due to several provisions of the law affecting 2012 tax returns, the IRS could not open the Form 1040 filing season for the majority of taxpayers until late January.

Those taxpayers filing Form 5695 (Energy Credit), Form 4562 (Depreciation), and Form 3800 (General Business Credit) will not be able to file until late February or possibly not until March. Apparently a large percentage of taxpayers in this group typically file later in the season because they have more complex returns.

The IRS must complete the updating of forms and computer programming and testing before it is ready to accept any filings either on paper or electronically. The IRS said that taxpayers will receive refunds faster by e-filing and using direct deposit.

If we can be of assistance to you in preparing any of your 2012 tax filings, please contact us.

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.