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NOTICE TO RESIDENTS OF MARYLAND

We are NOT affiliated with the State of Maryland. If you are looking for information about Maryland income taxes, please go to www.marylandtaxes.com.


Useful Links:

FindAGoodCPA.com - Not a healthcare professional?  Find a CPA or EA who understands the tax issues specific to you.

Nanny Taxes - Find out what's involved with complying with the Nanny Tax Rules

IRS Web Site - for tax forms, publications, and general tax information.

Exchange Authority - New England's first authority for IRC 1031 Exchanges

Cost Segregation Studies - Accelerate tax depreciation deductions on new and existing buildings through cost segregation studies

Social Security - find out the latest rules or your projected retirement benefit.

The Company Corporation offers fast, reliable & affordable incorporation and LLC services.


MONTHLY TAX NEWSLETTER

October 2011

PRESIDENT OBAMA RECOMMENDS TAX INCREASES FOR HIGH-INCOME TAXPAYERS

by Andrew D. Schwartz, CPA

Last month, President Obama addressed Congress and explained the concept of the Buffett Rule, "People making more than $1 million a year should not pay a smaller share of their income in taxes than middle-class families pay. To assist the Committee in its work, I also included specific tax loophole closers and measures to broaden the tax base. Together with the expiration of the high-income tax cuts from 2001 and 2003, these measures would be more than enough to reach this $1.5 trillion target...They include cutting tax preferences for high-income households."

The one big stumbling block to this strategy is that the President doesn't actually write the bills that ultimately become the laws.  Instead, the President only signs or vetos bills passed by Congress.  If you grew up in the 70's like I did, you probably remember the Schoolhouse Rock video, I'm Just a Bill.  Please take a few minutes to watch this YouTube video for either nostalgic reasons or as a refresher course in basic Civics.

Let's take a look at the recommendations made by the Obama Administration.  Included in their report, the current Administration outlines their Principles of Tax Reform as follows:

1. Lower tax rates. The tax system should be simplified and work for all Americans with lower individual and corporate tax rates and fewer brackets.

2. Cut Inefficient and Unfair Tax Breaks. Cut tax breaks that are inefficient, unfair, or both so that the American people and businesses spend less time and less money each year filing taxes and cannot avoid their responsibility by gaming the system.

3. Cut the deficit. Cut the deficit by $1.5 trillion over the next decade through tax reform, including the expiration of tax cuts for single taxpayers making over $200,000 and married couples making over $250,000.

4. Increase job creation and growth in the United States. Make America stronger at home and more competitive globally by increasing the incentive to work and invest in the United States.

5. Observe the Buffett Rule. No household making over $1 million annually should pay a smaller share of its income in taxes than middle-class families pay. As Warren Buffett has pointed out, his effective tax rate is lower than his secretary’s. This rule will be achieved as part of an overall reform that increases the progressivity of the tax code.

To be perfectly honest, I don't find anything too earth shattering in these Principles of Tax Reform.  Tax simplification and the equitableness of the Tax Code have been two issues that Congress and each President have grappled with ever since the federal income taxes were enacted on a permanent basis back in 1913.  

The Specifics:

President Obama's address last month included some specific changes he would like to see Congress make to the Tax Code, including:

Allow the 2001 and 2003 high-income tax cuts to expire

Simply stated, by Congress not doing anything, the tax rates are set to increase in 2013 for ordinary income, capital gains, and qualified dividends.  The President says that he only wants to see the tax rates increase for households with income in excess of $250k, however.

A summary of tax breaks enacted in 2001 are available in our July 2001 Newsletter.  You can read about the 2003 tax law changes in our June 2003 Newsletter

Reduce the value of a deduction

President Obama's second suggestion is to reduce the value of itemized deductions and other tax breaks to 28 percent for families with incomes over $250,000 and single individuals with income over $200,000. 

Generally, tax deductions reduce a person's tax liability based on that person's tax bracket.  Someone in the top bracket paying $10k of mortgage interest saves $3.5k in federal income taxes.

Under this proposal, even if a taxpayer is in the 33% or 35% tax bracket, the tax break for their deductions will be capped at 28%.  A person in the top bracket, therefore, will pay an extra $700 in federal income taxes for each $10,000 of allowable deductions claimed. 

According to the President's proposal, "This limit would apply to: all itemized deductions; foreign excluded income; tax-exempt interest; employer sponsored health insurance; and selected above-the-line deductions."

A Green Tinted Lining

As part of his address to Congress, President Obama proposed that Congress pass The American Jobs Act.  The President would like to see this Act include a provision that would cut in half the Social Security taxes currently being withheld from each worker's wages, as follows:

Cut the employee payroll tax in half next year for 160 million workers. Almost every working American pays payroll taxes, and middle-class Americans face a higher burden because more of their income comes from wages and salaries. The President’s plan will cut payroll taxes in half for employees next year. Rather than having 6.2 percent of their wages deducted in payroll taxes, workers will only pay 3.1 percent next year. This builds on the 2 percentage point payroll tax reduction that the President secured for workers in 2011—providing 160 million Americans the certainty of ongoing tax relief and increasing the amount of that relief by more than 50 percent.

With the Social Security Max currently at $106,800, this provision would save high-income taxpayers as much as $3,311 each year.  For people in the top tax bracket, this break in Social Security taxes will offset the President's proposed tax increase on the first $47,300 of deductions claimed.

Wait and See

President Obama's proposal is just that, a proposal.  All we know for certain is that the tax rules in place right now will continue through 2012.  With the next Presidential election set for November 2012, who knows when Congress will be able to pass a bill addressing the post-2012 tax rules,  and what changes to the tax laws that bill will contain.

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STARTUPS AND SMALL BUSINESS CAPITAL GAINS EXCLUSION EXTENDED THROUGH 12/31/11

by Bill Stukey, CPA, CVA

The “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010,” includes an extension of the 100% exclusion from income of the gain from the sale of qualifying small business stock acquired as discussed below.

The above Act contains a number of provisions aimed at encouraging investment in small businesses.  These provisions include an amendment to Section 1202 of the Internal Revenue Code of 1986, as amended (the “Code”), temporarily permitting the exclusion of 100 percent of the gain from the sale of certain “qualified small business stock” acquired after September 27, 2010 and before January 1, 2011 that is held for more than five years by a non-corporate taxpayer.  The new rule extends the deadline for purchasing "qualified small business stock" by one year.

Qualifying small business stock must be acquired from a C corporation whose gross assets do not exceed $50 million.  The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation. 

More information about this potentially lucrative tax break is available on page 65 of IRS Publication 550, Investment Income and Expenses.

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BASICS OF LONG-TERM CARE INSURANCE

by Mark J. Orr, CFP

Business owners and the self-employed looking for ways to take some more money out of their business on a tax-advantaged basis for the benefit of themselves and their spouse might consider long-term care (LTC)insurance.

Expenses for long term care vary greatly across the country, but home care costs from $150-$250 for an 8 hour shift. Assisted living facilities run from $2,500-10,000 monthly depending upon the location, the level of care and the quality of the facility. Private nursing home rooms cost even more.  And these costs are expected to triple over the next 30 years when baby boomers will likely need care. Just one spouse needing care for only 2 years could easily run to well over $500,000.

LTC policies pay benefits when the insured cannot do 2 of the 6 activities of daily living (bathing and dressing are two ADLs). Severe cognitive impairment (Alzheimer’s) is another benefit trigger.

For the self-employed or owners of pass-through entities such as S-Corps and LLCs, the business deduction for traditional LTC premiums are age based. For 2010, an owner aged 41-50 can deduct $620 (and the same for the spouse too), an owner aged 51-60 can deduct $1,230 each, and owners aged 61- 70 can deduct $3,290 each. People who are not business owners can apply those same amounts towards their medical expense deduction (subject to 7.5% of AGI).

Owners of C-Corps have no deductibility limits on premiums (subject to reasonable compensation). Many C-Corp owners buy LTC insurance on a 10-pay basis so the policy will be fully paid in 10 years and get the benefit of sizable business deductions as well. The premiums are not taxable income to the owner, nor are future benefits received taxable income. It’s a great way to use corporate dollars to prepare for retirement.

Many business owners offer long-term care insurance as a voluntary employee benefit and can pay some, all or nothing towards the employees premiums. Any premiums paid for employees (who own 0% - 1.99% of the enterprise) are fully deductible to the business and are not taxed as income to the employee. Many employers encourage their employees to participate in the benefit plan by paying as little as $15 a month towards the employee’s premiums and the insurance is fully portable.

Businesses with as few as 3 employees in the plan (executive carve outs) can benefit from simplified underwriting and/or a 5-10% premium discount. For a healthy 55 year old couple, a pretty good LTC policy can be found for as little as $59 a month each -- which could jointly preserve up to $800,000 of their assets thirty years from now when they are likely to need care.

The younger and healthier one is the better. I bought my own policy at age 40. No matter how many years one pays premiums, it usually only takes a claim of only 3 months to get all those premiums back!

Most business owners are not aware of the CLASS ACT which was hidden deep in the new Health Care reform passed by Congress that might create unlimited liability for uninformed business owners and sets up a pitiful national LTC health care program. More information: www.Worksite-LTC.com.

Finally, there are non-deductible asset-based plans which have been made even more attractive under provisions of the Pension Protection Act. These insurance products are either annuity based or life insurance based.

For example, a standard health female aged 65 might buy a life policy with $100,000 single premium with an immediate death benefit of $166,000 or LTC benefits of $498,000. If LTC is needed, she would start accessing her death benefit at up to $83,000 a year for two years.

If she needed care longer, there would be another $83,000 for 4 more years available to pay expenses. If she never needed care, the death benefit would be paid to her beneficiaries. These are especially attractive plans for people holding substantial money in low-paying, taxable CDs. And there’s a lifetime 100% premium-back guarantee for any reason.

Mark J. Orr, Certified Financial Planner (licensed in many states) has specialized in helping clients plan for LTC since 1997. You can request LTC quotes and view educational videos at: www.LTC-LongTermCare.com. He can be reached at 770-777-8309 for individual LTC planning consultations.

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LONG-TERM CARE INSURANCE REQUEST FORM

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TAX AND FINANCIAL PLANNING CALENDAR FOR OCTOBER 2011

Month

Income Taxes

Saving and Investing

 

October

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2010 & 2011 TAX FACTS

  • For 2010, the standard deduction for a single individual is $5,700 and for a married couple is $11,400. 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 2010, the personal exemption is $3,650. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $106,800 for 2010 and 2011.
  • The standard mileage rate is $.51 per business mile as of January 1, 2011, increasing to $.555 per mile as of July 1, 2011.
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2010 and 2011.  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 2011.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2012 to make your 2011 IRA contributions. 

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Need Help With Your Nanny Payroll?
 

This Month's Topics

President Obama Recommends Tax Increases For High-Income Taxpayers

Startups and Small Business Capital Gains Exclusion Extended Through 12/31/11

Basics Of Long-Term Care Insurance

The FICA Refund for Medical Residents 

2010 & 2011 Tax Facts

Tax and Financial Planning Calendar for October 2011

 

NEWSLETTER ARCHIVES
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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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