THE NEW AMERICAN TAXPAYER RELIEF ACT – PART 2

by | Feb 21, 2013 | Uncategorized

By Michael Bohigian, EA

In part 1 of this series, we looked at the income side of the American Taxpayer Relief Act of 2012.? We’ll wrap up with Deductions and some tax-savings tips.

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.

NEW YEAR’S RESOLUTIONS – PT 1

by | Jan 17, 2013 | Commentary, Miscellaneous, Savings

There might be a lot of uncertainty surrounding the tax rules these days. Don’t use that uncertainty as an excuse to avoid trying to improve your personal finances. What better time to make some resolutions for 2013 than New Year’s Day?

Last January 1st, did you make any resolutions concerning your personal finances? If so, how’d you do? Did you attain your financial goals, or was 2012 a total financial washout?

The good news about New Year’s resolutions is that you get to make new ones each year. Below are some New Year’s resolutions to improve your finances.

Pay Some Extra Principal With Your Mortgage Payment Each Month

Looking for a risk-free return on your money? By paying extra toward your mortgage each month, you’ll get a risk-free return on that money equal to your mortgage interest rate. Plus, you’ll cut down on the number of years it will take to pay off your mortgage. As a rule of thumb, try to pay extra principal each month equal to at least 10% of your total mortgage payment.

If You Don’t Own A Home, Try to Qualify For the Home Office Deduction

If you’re a renter, the rent you pay generally isn’t deductible on your federal tax return. By claiming the home office deduction, you make a portion of your rent tax deductible. To qualify, you need to use a portion of your home regularly and exclusively in connection with your trade or business. Using your office for managerial and administrative tasks qualifies. You’ll claim the home office either directly against your self-employment income on the Schedule C or as a miscellaneous itemized deduction on the Schedule A.

Save A Set Amount Of Money Each Month

Did you know that if you deposit $81.50 into your savings account each month, the account would be worth $1,000 at the end of the year? To help you reach your goal, make sure to transfer the money out of your checking account into a separate savings or investment account. By doing so, it’s more difficult to spend the money that you have managed to save.

Download our (Microsoft Excel) debt/savings calculator to calculate how much you need to set aside each month to reach a certain savings goal.

We’ll post more Resolutions in Part 2 of this series – stay tuned!

IRS: Job Search Expenses Can Be Tax Deductible

by | Aug 29, 2012 | IRS, Planning, Taxes

Many healthcare professionals work based on the Academic Calendar. That means that a lot of Doctors switch jobs over the summer. According to our friends at the IRS in their IRS Summertime Tax Tip 2012-06:

Summertime is the season that often leads to major life decisions, such as buying a home, moving or a job change. If you are looking for a new job that is in the same line of work, you may be able to deduct some of your job hunting expenses on your federal income tax return.

Here are seven things the IRS wants you to know about deducting costs related to your job search:

  • To qualify for a deduction, your expenses must be spent on a job search in your current occupation. You may not deduct expenses?you incur while looking for a job in a new occupation.
  • You can deduct employment and outplacement agency fees?you pay while looking for a job in your present occupation. If your?employer pays you back in a later year for employment agency fees, you?must include the amount you received in your gross income, up to the amount of your tax benefit in the earlier year.
  • You can deduct amounts you spend for preparing and mailing copies of your r?sum? to prospective employers as long as you are?looking for a new job in your present occupation.
  • If you travel to look for a new job in your present?occupation, you may be able to deduct travel expenses to and from the area to which you travelled. You can only deduct the travel expenses if the?trip is primarily to look for a new job. The amount of time you spend on personal activity unrelated to your job search compared to the amount of time you spend looking for work is important in determining whether the?trip is primarily personal or is primarily to look for a new job.
  • You cannot deduct your job search expenses if there was?a substantial break between the end of your last job and the time you begin looking for a new one.
  • You cannot deduct job search expenses if you are looking for a job for the first time.
  • In order to be deductible, the amount that you spend?for job search expenses, combined with other miscellaneous expenses, must exceed a certain threshold. To determine your deduction, use Schedule A, Itemized Deductions. Job search expenses are claimed as a miscellaneous?itemized deduction. The amount of your miscellaneous deduction that?exceeds two percent of your adjusted gross income is deductible.

For more information about job search expenses, see IRS Publication 529, Miscellaneous Deductions. This publication is available on www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

  • Schedule A, Itemized Deductions (PDF)
  • Publication 529, Miscellaneous Deductions (PDF)