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MONTHLY TAX NEWSLETTER

February 2013

CHECK OUT OUR TWO PRE-RECORDED WEBINARS

Get Your Deductions: Moonlighting and Professional Expenses Made Easy

Speaker Andrew Schwartz, CPA

Are you unsure what expenses you can deduct from your moonlighting income? Not sure what to track all year for professional expenses? Do you want to make sure you receive the maximum deduction allowed for work-related expenses? If so, this previously recorded webinar is for you! Learn what the most common expenses allowable for healthcare professionals are and how to track them to make tax time easy!


Recent Tax Law Changes and Basic Retirement Planning

Speaker Richard Schwartz, CPA

Are you looking for a recap of the 2013 tax law changes and how they’ll impact you? Do you need help navigating your retirement planning options for 2013? If so, this previously recorded webinar is for you! Learn what tax changes are coming in 2013 to capital gains, deductions, personal tax rates, Medicare and Social Security. Rick also covered how to choose the retirement vehicles that will bring you the most savings.

 


THE NEW AMERICAN TAXPAYER RELIEF ACT: HOW MUCH RELIEF IS IN IT FOR YOU?

by Michael Bohigian, EA

The American Taxpayer Relief Act of 2012 rescued the vast majority of Americans from the tax edge of the “fiscal cliff” and the steep tax increases scheduled to kick in as the Bush tax cuts expired at the end of 2012. This legislation, however, did not entirely spare high-income earners. Here are the key provisions of the Act passed on the first day of 2013, how they may affect you, and strategies you can implement to minimize your tax burden under these new rules: 

On The Income Side 

Top Marginal Rate Increases to 39.6%

Beginning on January 1, 2013, the Act raises the top federal marginal income tax rates from the 35% max in place since the Bush tax cuts to 39.6% for taxable income above the following thresholds: $400,000 for Single filers; $425,000 for Heads of Household; $450,000 for Married Filing Jointly and qualifying surviving spouses; and $225,000 for those Married Filing Separately. Translating this provision into real numbers, a married couple with $600k of taxable income will now pay just under $7,000 in additional federal income taxes in 2013 than they did in 2012, while an individual earning at the same income level will pay just over $9,000 more in federal income taxes.

Increase in Federal Income Taxes For 2013 Due To The 39.6% Tax Rate

Taxable income

Single

Head of Household

Married Filing Joint

Married Filing Separate

$600,000

$9,200

$8,050

$6,900

$17,250

$800,000

$18,400

$17,250

$16,100

$26,450

$1,000,000

$27,600

$26,450

$25,300

$35,650

 

New Investment Tax Rates

Starting in 2013, the top tax rate for dividends and capital gains is permanently set at 20%, a whopping one-third increase from the top rate of 15% in place since 2003, starting at the same income levels as the 39.6% tax rates. The tax rate for dividends was set to revert to one’s marginal tax rate per the pre-2003 Bush rules, so the Act provides some relief to high-wage earners with substantial corporate dividend income. 

Keep in mind that the Affordable Care Act enacted an additional Medicare tax of 3.8% on unearned income for married couples with adjusted gross income (AGI) over $250,000 and individuals with AGI over $200,000, effective January 1, 2013. Unearned income includes interest, dividends, capital gains, annuities, royalties, and rents.

Tax Rates for Capital Gains and Qualified Dividends – 2012 vs 2013

 

 Single

 

Married Filing Jointly

Capital Gains and Qualified Dividends -2012 rates

Capital Gains and Qualified Dividends -2013 rates

Increase in Tax Rates  on Investments 2012 vs 2013

$0 - $36,250

$0 - $72,500

0%

0%

0%

$36,250 - AGI of $200,000

$72,500 - AGI of $250,000

15%

15%

0%

 

$200,000 - taxable income of $400,000

$250,000 - taxable income of $450,000

15%

18.8%

3.8%

$400,000+

$450,000+

15%

23.8%

8.8%

If you’re concerned about paying higher taxes on the sale of your personal residence, please note that the first $500,000 of gain on your home for a married couple and $250,000 of gain for unmarried individuals is exempt from all taxes, including this 3.8% Medicare surtax, when your home qualifies for the residence gain exclusion. To qualify, you need to own your home and use it as your primary residence for two out of the five years prior to the date the home is sold.

What’s Being Deducted From Your Deductions

Please, No Pease!

At first blush, you may be inclined to utter this lament when learning about the reduction of your itemized deductions due to the Pease Limitation. Fear not: This provision should leave many popular deductions intact for most taxpayers, including deductions for mortgage interest and charitable giving. 

Here’s how it works: For a married couple, the Pease Limitation phases out itemized deductions by 3% of the amount that their adjusted gross income is over $300,000 [for individuals, the threshold is $250,000]. A married couple with an AGI of 800,000, for example, loses the right to deduct the first $15,000 of their itemized deductions. Since most of you already deduct more than this amount in state income taxes paid when you itemize, you effectively will still be able to deduct your mortgage interest and charitable giving. Take note that no matter how high your income, your itemized deductions cannot be phased out by more than 80%.

Personal Exemptions Phased Out

Similar to the phase out of itemized deductions, personal exemptions will be phased out at the rate of 2% for each $2,500 above $300,000 in income for married couples and $250,000 in income for individuals, causing high-income taxpayers to lose out on the tax break for themselves, their spouse, and their children and other dependents.

Other Considerations

AMT Permanently “Patched”

You no longer have to worry from year to year whether the government will patch the dreaded AMT. The Act permanently indexes the AMT to inflation, saving millions of people earning somewhere between $150,000 and $750,000 from paying this tax, and reducing the AMT for most other individuals who will end up paying this tax.

Payroll Tax Cuts Expired

The Act restores the pre-2011 Social Security tax rate of 6.2% on all non-government employees, after two years at a reduced rate of 4.2%. Physicians earning more than $113,700 should expect to pay an additional $2,274 in social security taxes in 2013 than in each of the previous two years.

Section 179 Deduction Limit Maintained at Half A Million

 For those of you who are practice owners, you will be able to write off up to $500,000 in equipment and machinery purchases under Section 179 in 2013, and this amount is retroactive for 2012 as well. Prior to the legislation, the available Section 179 would have been drastically reduced to a paltry $25,000 in 2013.  Under Section 179 of the IRS Tax Code, a taxpayer can elect to write-off the cost of equipment purchased and placed into business use during the year instead of “depreciating” those assets over their useful life of 5 or 7 years, allowing for a much larger upfront tax deduction.

Tax-Savings Tips

With the top marginal tax rate as high as it’s been in several years, and the new Medicare tax on investment income kicking in on January 1st, what can you do to minimize your tax burden?

Invest in retirement

Always a good idea, socking away money in retirement accounts is even more valuable now when it means saving 39.6% in federal income taxes and allowing your investment to grow tax-deferred. You should also consider rebalancing your portfolio, putting less tax-efficient investments in your tax-advantaged accounts while keeping index funds, ETFs, non-dividend paying stocks, and tax-exempt bonds and bond funds in your taxable accounts.

 Contribute to a 529 plan

With investment income taxes higher in 2013, take the opportunity to invest in a 529 plan to begin planning for your child’s college education. All earnings in a 529 plan are tax-free, provided that the funds are used to pay for college. And many states even allow you to deduct a 529 contribution on your state tax return. The annual maximum contribution into these tax-advantaged college savings plans is $14,000 per child per year for Gift Tax purposes (or $28,000 for spouses splitting gifts), however, you can frontload five year’s worth of contributions all in one year.  Don’t forget to file a Gift Tax Return if you contribute more than $14k ($28k if married) into 529 accounts in one calendar year on behalf of a child.

Purchase needed equipment and machinery for your practice

With the fate of the Section 179 deduction up in the air past 2013, it might be in your best interest to buy big-ticket equipment and machinery during the year to take advantage of the immediate deduction.

Employ your spouse and children

If there’s extra work to be done at your practice, putting your children and spouse on your payroll can be a great way to shift income to a lower tax bracket (in your child’s case) and enable your spouse to put away the maximum ($17,500 for 2013) pre-tax into a 401k retirement fund. Moreover, your child can fund a Roth IRA with the money they earn, up to a maximum of $5,500 in 2013.

Establish a Health Savings Account

If you have a qualified high-deductible health insurance plan, take advantage of the opportunity to pair it with a Health Savings Account (HSA). Contributions to an HSA are tax-deductible, grow tax-deferred, and allow tax-free distributions to cover your family’s health care costs.  Plus, any money remaining in the HSA is available penalty-free to supplement your retirement once you reach age 65.  The maximum contribution into an HSA for 2013 is $6,450 for married couples and $3,250 for single individuals.

The Big Picture

By and large, the American Taxpayer Relief Act maintained the status quo for most lower and middle-income Americans by extending many provisions into 2013 and making permanent many others. Those of you at the upper end of the income spectrum, however, may not feel as lucky. If that’s the case, perhaps you can take solace in the fact the Act did shunt some of the drastic tax increases set to take place. If there’s little comfort in that, remember that things could be much worse: The top marginal rate, a little more than 30 years ago, was at 70% after all.  

Michael Bohigian, EA, is a staff accountant at Schwartz & Schwartz PC with a MS in Accounting and an MBA from Boston College.

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THE IRS ISSUES A SIMPLIFIED WAY TO CALCULATE THE HOME OFFICE DEDUCTION

Check out Rev-Proc 2013-13 to learn about a simplified way that taxpayers can calculate the home office deduction starting in 2013. Here is the press release issued by the IRS:

IRS Announces Simplified Option for Claiming Home Office Deduction Starting This Year; Eligible Home-Based Businesses May Deduct up to $1,500; Saves Taxpayers 1.6 Million Hours A Year

IR-2013-5, Jan. 15, 2013

WASHINGTON — The Internal Revenue Service today announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.

In tax year 2010, the most recent year for which figures are available, nearly 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction).

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

"This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction," said Acting IRS Commissioner Steven T. Miller. "The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013."

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

The new simplified option is available starting with the 2013 return most taxpayers file early in 2014. Further details on the new option can be found in Revenue Procedure 2013-13, posted on IRS.gov. Revenue Procedure 2013-13 is effective for taxable years beginning on or after Jan. 1, 2013, and the IRS welcomes public comment on this new option to improve it for tax year 2014 and later years. There are three ways to submit comments.

  • E-mail to: Notice.Comments@irscounsel.treas.gov. Include “Rev. Proc. 2013-13” in the subject line.
     
  • Mail to: Internal Revenue Service, CC:PA:LPD:PR (Rev. Proc. 2013-13), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
     
  • Hand deliver to: CC:PA:LPD:PR (Rev. Proc. 2013-13), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC, between 8 a.m. and 4 p.m., Monday through Friday.

The deadline for comment is April 15, 2013.

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FAILURE TO READ THIS NOTICE COULD COST YOU THOUSANDS OF DOLLARS!

by Georgia Frady and Bill Stukey, CPA, CVA

Attention Business Owners!

Businesses that pay independent contractors $600 or more for services during any calendar year MUST issue a Form 1099-MISC at the end of the year to the independent contractor.  A business is any activity operated for profit.  An independent contractor is a person or business not incorporated, or an attorney whether incorporated or not, who performs services of any kind for a business.  Forms 1099 for 2012 must be given/sent  to the recipient on or before January 31, 2013 and sent to the IRS on or before February 28. 2013.

Failure to file the required Forms 1099 can result in penalties of up to $500 for each form not filed.  Failure to file Forms 1099 can also result in loss of deduction of the payment to the independent contractor from business expense which increases net income and costs more tax.

There are two new questions on every business tax return.  Question #1 is, “Did you make any payments in 2012 that would require you to file Forms 1099?”  Question #2 is, “If “Yes,” did you or will you file all required Forms 1099?” Failure to answer the questions or answering the questions untruthfully makes a taxpayer subject to penalties of perjury.  

Begin collecting information at the beginning of the year.  Keep a supply of Forms W-9 on hand.  The forms provide the information necessary to properly complete the 1099, including name, address and social security or employer identification number.  The W-9s should be filled out by the contractor, because they provide verification that you complied with the law, should the contractor/vendor provide you with incorrect information.  Each time a new independent contractor comes to work for you, have them fill out a W-9, even though you don’t plan on paying them $600 at that time.  Should you use their services later in the year, and total payment exceeds $600, you already have the necessary information.

Our firm provides Form 1099 preparation services.  If you need help or have a question, please call us.

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TAX AND FINANCIAL PLANNING CALENDAR FOR FEBRUARY 2013

Month

Income Taxes

Saving and Investing

 

February

  • Get a jump on your tax prep and call one of the MDTAXES CPAs by 2/28/13 to set up an appointment
  • Organize your tax information
  • Try to have holiday credit card balances paid off by 2/28/13

 TOP


2012 & 2013 TAX FACTS

  • For 2012, the standard deduction for a single individual is $5,950 and for a married couple is $11,900. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2012, the personal exemption is $3,800. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $113,700 for 2013, up from $110,100 for 2012.
  • The standard mileage rate is $.565 per business mile as of January 1, 2012, up one cent from $.555 per mile since July 1, 2011.
  • The maximum annual salary deferral into a 401(k) plan or a 403(b) plan is $17,500 in 2013, up from $17,000 in 2012.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account that year.
  • The maximum annual contribution to your IRA is $5,000 for 2012, increasing to $5,500 in 2013.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2013 to make your 2012 IRA contributions. 

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This Month's Topics

The New American Taxpayer Relief Act: How Much Relief is in it for You?

The IRS Issues A Simplified Way To Calculate The Home Office Deduction

Failure To Read This Notice Could Cost You Thousands Of Dollars!

The FICA Refund for Medical Residents 

2012 & 2013 Tax Facts

Tax and Financial Planning Calendar for February 2013

 

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WHAT'S NEW WITH THE FICA REFUND?

In a shocking development, the IRS recently announced that they will be honoring the FICA tax refunds submitted by residency programs and individual doctors.  The catch is that only FICA taxes paid prior to 4/1/05 qualify.

For more information, go to our April 2010 Newsletter, our January 2009 Newsletter, or our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Let's work together to keep current on this hugely valuable tax break.  Please post whatever you read or hear regarding this FICA issue on our new Message Board we set up just for this topic.

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