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“Taxing” is a word synonymous with “onerous” and “wearing.” Bond Beebe, Accountants & Advisors, have created a user friendly blog called “It’s Taxing” to inform and educate our clients and business associates on timely topics related to tax, estates, accounting and finance. We hope our blog answers your questions and alleviates the heavy burden and anxiety related to understanding complicated tax laws and related matters.
As the on-going battle over the extension of the payroll tax cuts continues in Congress, those of us in the tax professional community are left scratching our heads and trying to advise our clients on what will happen with respect to income and estate taxes over the next few years. The only thing I can say to my clients with any confidence is that anyone who tries to predict what tax changes may emerge from this Congress is talking through his or her hat. Uncertainty continues to be the theme with respect to tax and fiscal policy in the current political environment of Washington.
To that end, I strongly advise that my clients follow the time honored adage, “Make hay while the sun shines.” In some respects, the current income and estate tax law provide really great opportunities and anyone concerned about higher income tax rates or fundamental changes to our estate tax system would be well served to seize on these opportunities while they still exist.
You can look to prior entries in this blog to highlight many of the taxpayer friendly provisions of the code that are set to expire after 2011 and 2012, but below I am highlighting what I consider to be the big three opportunities.
Last week, the Internal Revenue Service issued the 2012 optional standard mileage rates for taxpayers who choose to use this method in calculating the deductible costs of operating an automobile for business, charitable, medical, or moving purposes.
The rate for business miles driven remains unchanged from the mid-year adjustment on July 1, 2011. The charitable mileage rate remains unchanged from 2011 as well, while the medical and moving mileage rate is reduced by 0.5 cents per mile.
The IRS has introduced a new tax form (Form 8949) for reporting capital gains and losses from stocks, bonds, mutual funds and similar investments. Starting with the 2011 tax year, investment transactions will be reported on the new Form 8949, Sales and Other Dispositions of Capital Assets.
Starting in 2011, cost basis information for “covered securities” will be included directly on the 1099-B. Brokers are required to provide cost basis for stock in a corporation acquired on or after January 1, 2011, for mutual fund shares acquired on or after January 1, 2012, for stock in a corporation purchased through a dividend reinvestment plan acquired on or after January 1, 2012, and notes, bonds, commodities (and derivatives or contracts based on commodities) acquired on or after January 1, 2013 directly on the 1099-B. Stock purchased prior to 2011, mutual fund shares purchased prior to 2012, and bonds purchased before 2013 will not have basis reported on the 1099-B. As before, this information will likely be found in other reports or data such as brokerage statements, year-end reports or trade confirmations.
As we enter the last month of the year, taxpayers are once again faced with a mountain of expiring tax provisions. There are 59 different provisions that will expire on December 31, unless Congress sees fit to extend some or all of them. It is a safe bet that some will be extended, (perhaps retroactively), but others will die.
The most likely survivor will be the extension of the social security tax payroll reduction that has been around since January, 2011. Congressional Democrats and Republicans are in favor of this extension. The sticking points are how much of a reduction and how will it be paid for. Stay tuned for that argument.
What taxes on real estate are deductible? Many people will get out their end of year mortgage statement or Form 1098 and look for the “Real Estate Taxes Paid” line on the form and use that amount. However, depending on where you live this number may contain several non-deductible fees and assessments. In order to accurately determine the deductible taxes you paid you need the actual tax bill. The state of California is making an effort to educate property owners about which taxes are deductible in an attempt to reduce the tax gap. In a time of falling revenue many governments are looking for any extra tax revenue they can find.
A deductible real estate tax is based on the assessed value of the property (called “ad valorem”) and charged uniformly against all property in the taxing authority's jurisdiction. A deductible tax must be imposed by a governmental body which could be state or local. This rules out fees and payments to homeowners associations and many utility districts as well as payments to developers or companies for maintenance of public or private areas.
Under current law, 2011 is the final year a charitable contribution can be made from an IRA, (by an individual age 70 ½ or older), directly to a qualified tax-exempt charity. This type of distribution is called a “qualified charitable distribution”. The distribution is not taxed to the donor, and counts towards fulfilling the required minimum IRA distribution amount (RMDs) that must be withdrawn each year.
If a “qualified charitable distribution” is made, no itemized deduction is allowed. However, since the distribution is not included in taxable income, the 50%-of-AGI limitation that cash contributions are generally subject to does not apply.
The IRS has announced many cost-of-living-adjustments for retirement plans, social security tax and some other tax items.
The limits on contributions to retirement plans have been increased for 2012. Participants can elect to defer up to $17,000 (up from $16,500) into 401(k) plans. The "catch-up" contributions for participants over age 50 is still the same at $5,500. The total contribution for defined contribution plans has increased to $50,000 from $49,000, using a compensation base of up to $250,000 (up from $245,000). IRA and Roth IRA contribution limits have not changed.
The Social Security wage base has been increased to $110,100 from $106,800 for 2012. The employee's share (if the tax rate reverts to 6.2%) will be $6,826.20 for 2012.
The standard deduction for 2012 was increased to $5,950 for Single filers and $11,900 for Married-Filing-Joint returns (up from $5,700 and $11,400 respectively). The personal exemption was inreased to $3,800 from $3,650.
The annual gift exlcusion remains at $13,000, but the estate tax exclusion for decedents dying in 2012 has been inreased to $5,120,000 from $5,000,000.
There were many more changes as well--you can click through to the link to read more or stay tuned for any other important changes!
In Announcement 2011-64, the IRS details an offer for settling potential worker classification issues. The IRS is offering employers a chance to reclassify workers as employees (as opposed to independent contractors) going forward. An employer who wishes to avail themselves of this settlement offer will pay 10% of the employment taxes (as calculated under IRC section 3509) that would have been due for the most recent tax year (if the worker had been classified as an employee), but will not be charged any interest or penalties. Further, the IRS will not subject the employer to an employment tax audit related to worker classification for those workers for any prior year.
The employer must apply with the IRS, and the IRS retains discretion on whether to accept the settlement. However, this could be a unique opportunity to correct misclassification issues with very little cost. The IRS has increasingly been focusing on worker classification issues, and the Obama administration seems to be particularly aggressive about pursuing misclassified workers.