Before starting a summer job, taking a vacation or sending the kids off to camp, the Internal Revenue Service wants taxpayers to know that some summertime activities may qualify for tax credits or deductions. (more…)
Posts tagged ‘tax credits’
Even though the calendar still says summer, it’s not too early to be thinking about year-end tax planning. In fact, year-end tax planning has become around-the-year tax planning because of tax legislation (or the lack of tax legislation), new IRS rules and regulations and personal and business considerations. Looking ahead to year-end 2013, there are many tax planning strategies to explore and evaluate.
ATRA brings some certainty
Unlike last year at this time, there is some more certainty to tax planning because of passage of the American Taxpayer Relief Act of 2012 (ATRA). ATRA permanently extended the Bush-era individual income tax rate cuts for most taxpayers but also put in place a top income tax bracket of 39 percent for higher-income taxpayers. In 2012, taxpayers were unsure what the individual rate brackets would be for 2013, which complicated year-end planning. Now, we know the brackets are 10, 15, 25, 28, 33, 35, and 39.6 percent for 2013 and beyond. ATRA also ended uncertainty over the alternative minimum tax (AMT). Previously, Congress had to pass so-called “AMT patches” to prevent the AMT from encroaching on middle income taxpayers. ATRA patches the AMT for 2013 and subsequent years by increasing the exemption amounts and allowing nonrefundable personal credits to the full amount of the individual’s regular tax and AMT. In the estate tax area, ATRA brings some certainty to tax planning. ATRA set the maximum estate tax rate at 40 percent, provided for portability and more.
Many expiring provisions
ATRA extended – but did not make permanent – countless tax incentives. They range from incentives targeted to individuals, such as the state and local sales tax deduction, the teachers’ classroom expense deduction and the higher education tuition deduction, to incentives for business, including the research tax credit, bonus depreciation, and enhanced small business expensing. In 2012, for the first time in many years, Congress did not extend all of the expiring incentives (leaving, for example, the District of Columbia homebuyer credit to expire). It is possible that Congress could prune the extenders even more in 2013. President Obama has proposed to eliminate many fossil fuel extenders. If Congress keeps to past practice, the fate of the extenders will not be decided until late in 2013, or in early 2014. Late tax legislation means that the IRS will likely have to delay the start of the 2014 filing season. Our office will keep you posted of developments.
Traditional year-end considerations
Traditional year-end planning considerations should not be overlooked. These include changes in filing status due to marriage, death or divorce. Keep in mind also the Supreme Court’s decision to strike down Section 3 of the Defense of Marriage Act (DOMA), which presumably will open the door to married same-sex couples being able to file as married filing jointly (much-anticipated IRS guidance has yet to be issued). Gift-giving is another valuable year-end tool. For 2013, the annual gift tax exclusion is $14,000 ($28,000 for married couples making split-gifts). Qualified individuals can also make a gift to charity from IRA funds, but only through the end of 2013. If possible, taxpayers may want to project what will be the amount of their 2013 itemized deductions. For some taxpayers, medical expenses may make up a large percentage of their itemized deductions. The floor on deductible medical expenses is 10 percent of adjusted gross income in 2013 (7.5 percent for senior citizens). Others should compare the state and local sales tax deduction (especially taxpayers who have made or may make big ticket purchases in 2013) with the state and local income tax deduction to maximize their savings. Don’t forget the education tax incentives. For 2013, the American Opportunity Tax Credit and the Lifetime Learning credit, along with others, are available to qualified taxpayers. Timing the recognition of capital gains and losses is important, to maximize offsetting short-term gains taxed at ordinary income tax rates, with short-term losses. In 2012, the maximum tax rate on qualified capital gains (and dividends) was 15 percent (with some taxpayers qualifying for a zero percent rate). However, ATRA raises the top rate to 20 percent for certain higher-income taxpayers whose income exceeds the thresholds for the 39.6 percent income tax rate.
Additional business strategies
Along with planning for the extenders and the Affordable Care Act (discussed below) businesses also should be aware of pending revisions to regulations on the capitalization of tangibles (called “repair regs” for short). The rules go far beyond “repairs.” One important ingredient to planning under the repair regs is the provision for de minimis expensing. This rule can be helpful if the tax year in which the cost of qualified materials and supplies is paid or incurred before the tax year of use or consumption. The window for bonus depreciation is also closing, unless extended by Congress. ATRA extended 50 percent bonus depreciation through 2013 (some transportation and longer period production property may be eligible for 50 percent bonus depreciation through 2014). Qualified property must be placed in service before January 1, 2014 (or January 1, 2015 if applicable). Employers that want to take advantage of the Work Opportunity Tax Credit (WOTC), with its enhanced benefits for hiring veterans, need to act before January 1, 2013. The WOTC is a popular incentive and is likely to be extended but the provisions for veterans could be changed.
Affordable Care Act
January 1, 2014 is the start date for many provisions of the Affordable Care Act. The Obama administration has postponed the so-called employer mandate until 2015 but other requirements – including the individual mandate – continue to apply. For example, the Affordable Care Act limits annual salary reduction contributions to a health flexible spending arrangement under a cafeteria plan to $2,500 (adjusted for inflation after 2013). The IRS is also asking that employers voluntarily comply with information reporting requirements for health insurance coverage for 2014. Please contact our office for more details about the Affordable Care Act’s requirements for 2014 and beyond.
On January 1, 2013, the new 3.8 percent net investment income (NII) surtax took effect. The surtax, which was passed by Congress to help fund health care reform, is imposed on the net investment income of higher-income individuals, estates and trusts that exceeds certain thresholds. Generally, the surtax applies to passive income but can also reach capital gains from the disposition of property. Some taxpayers may have sold property or changed their source of income in 2012 to avoid the surtax. Now that the surtax is effective, new strategies should be considered to minimize, if possible, the surtax. There is also a new 0.9 percent Additional Medicare Tax that reaches higher income individuals. We have highlighted a lot of year-end planning considerations. Please contact our office to discuss year-end planning tailored for you.
As April 15 approaches, the IRS is preparing for a surge of last-minute filers and taxpayers seeking an automatic extension of time to file their 2012 returns. The IRS received more than 148 million individual income tax returns in 2012, and that number is expected to rise in 2013. The increase in returns and the expectation from taxpayers that refunds will be paid within 21 days has put some pressures on the IRS. At the same time, the IRS is preparing for employee furloughs because of sequestration (across-the-board) spending cuts. However, high-ranking IRS officials have indicated that furloughs, if necessary, would not start until after the 2013 filing season.
Filing season delays
The 2013 filing season got off to a delayed start because of late tax legislation. President Obama signed the American Taxpayer Relief Act of 2012 into law on January 2, 2013. The IRS had originally planned to open the 2013 filing season on January 24, 2013. That date was moved to January 30, 2013 to give the agency more time to reprogram its processing systems for changes to the tax laws made by ATRA, and there were many. By January 30, the IRS had successfully updated many of its processing systems but needed more time for certain forms. Included in this group were widely-used forms such as Form 44562, Depreciation and Amortization and Form 5695, Residential Energy Credits.
On March 4, the IRS announced that it was accepting all 2012 returns after completing reprogramming of all of its processing systems. Since March 4, it appears that all ATRA-affected forms are being processed although some taxpayers have experienced delays. These include taxpayers claiming education credits on Form 8863. In some cases, the delay has been attributed to taxpayers failing to complete all of Form 8863 and leaving out certain information. Additionally, taxpayers claiming the adoption credit on Form 8839 must file their 2012 returns on paper. Paper returns are processed more slowly than electronically-filed returns.
Taxpayers can request an automatic six-month extension (through October 15, 2013) by filing Form 4868, Application For Automatic Extension of Time To File U.S. Individual Tax Return. Remember that filing an extension to file is not an extension of time to pay. An extension gives taxpayers extra time to file their return but does not extend the time to pay any tax due.
To help taxpayers, the IRS is providing late-payment penalty relief to individuals and businesses requesting a tax-filing extension because they are attaching to their returns any of the ATRA-affected forms that could not be filed until after January. The IRS will abate the penalty for failure to pay if the taxpayer requests a filing extension, pays the estimated tax liability by the due date, and pays any remaining tax by the extended due date of the return.
Without this abatement, taxpayers would be subject to a penalty of one percent of the unpaid taxes for each month or part of a month after the due date that the taxes are not paid. The failure to pay penalty can be as much as 25 percent of the unpaid taxes.
While the IRS can abate penalties, it has no authority under the tax laws to stop interest from running on taxes owed after April 15th.
The IRS paid out $110 billion in refunds in 2012, and is likely to match or exceed that number in 2013. Taxpayers have become accustomed to checking on the status of the refunds on the IRS website. Traffic on the IRS’s popular “Where’s My Refund?” online tool is so heavy that the agency is reminding taxpayers to limit their usage to once a day. Where’s My Refund? is updated daily, usually at night. The IRS has requested that taxpayers use Where’s My Refund? at off-peak times, such as evenings and weekends.
Those who are owed a refund should realize that the IRS does not pay interest on it. Although a taxpayer may file a return that claims a refund under the same circumstances that would deserve penalty abatement this year if taxes were owed, the IRS will not pay interest on that refund.
Sequestration, effective March 1, 2013, imposed $85 billion in spending reductions across the federal government. In response, many federal agencies, including the IRS, are expected to furlough employees.
The IRS is working to minimize employee furloughs, a senior agency official recently said. Potentially, IRS employees are looking at five to seven furlough days. Previously, Acting IRS Commissioner Steven Miller told agency employees that furloughs will not take place until after the filing season. If that is the case, IRS employees would likely experience furloughs between May and before the end of the of the government’s fiscal year on September 30, 2013. It is unclear at this time what IRS operations, if any, could be spared from furloughs or if cuts in other areas, such as travel, could reduce the number of furlough days. The IRS is reportedly engaged in discussions with the union that represents its employees.
Sequestration has also caused the IRS to reduce the amount of awards paid to whistleblowers. Additionally, the IRS has announced that certain tax credits also have been affected by sequestration. These include the Code Sec. 45R small employer health insurance tax credit and the credits under Code Sec. 6431 for certain qualifying bonds.
If you have any questions about requesting an extension, penalty abatement, or any other questions about the 2013 filing season, please contact our office at (908) 725-4414
Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.
In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.
Child Tax Credit
Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.
Child and Dependent Care Credit
If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.
Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.
Higher Education Credits
There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student’s post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.
Extended Health Care Coverage
Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.
Child Care Assistance Credit (for businesses)
Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.
If you have any questions about these provisions and how they may benefit you, please contact our office at (908) 725-4414
Congress’ Joint Select Committee on Deficit Reduction (the so-called “super committee”) failed to reach an agreement by its November 23 deadline after weeks of sparring over the Bush-era tax cuts. The Budget Control Act of 2011 created the bipartisan super committee in August and instructed it to develop proposals to reduce the federal budget deficit by November 23. The super committee held many meetings and reportedly debated several proposals, all behind closed doors, to reform the Tax Code and entitlement programs. In the end, however, Democrats and the GOP remained far apart on taxes and entitlement programs and announced they could not agree on a final proposal.
Bush-era tax cuts
One tax item in particular appeared to frustrate the progress of the super committee: the fate of the Bush-era tax cuts. Last year, the White House and Congress agreed to extend the Bush-era tax cuts through 2012. Under current law, the following Bush-era tax cuts (not an exhaustive list) will expire after 2012 unless extended:
- Reduced individual income tax rates (10, 15, 28, 33, and 35 percent)
- Reduced capital gains and dividends tax rates
- Marriage penalty relief (expanded 15 percent tax bracket for joint filers and standard deduction for married couples twice that of single individuals)
- Repeal of the limitation on itemized deductions for higher income taxpayers
- Repeal of the phase out of personal exemptions for higher income taxpayers
In September, President Obama sent the super committee a plan that would have extended the Bush-era tax cuts for lower and moderate income individuals but not for higher income taxpayers (which the White House defines as single individuals with incomes over $200,000 and married couples with incomes over $250,000). The House GOP presented a plan that would have lowered the maximum individual and corporate tax rates to 25 percent. Several committees and individual lawmakers also sent deficit reduction plans to the super committee.
In the days leading up to the November deadline, Democratic and Republican members of the super committee acknowledged that they had reached little common ground over the fate of the Bush-era tax cuts. On November 21, the co-chairs of the super committee announced that that they “[had] come to the conclusion that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline.”
With the super committee sidelined, the fate of the Bush-era tax cuts moves to Congress and the White House. The GOP-controlled House could try to extend the Bush-era tax cuts in stand-alone legislation but any bill would likely fail to pass the Senate. Additionally, President Obama has repeatedly said he will veto legislation that extends the Bush-era tax cuts for higher income taxpayers.
Payroll tax cut
More immediately, the White House and Congress are currently debating the fate of extending for another year the 2011 payroll tax cut. Wage earners and self-employed individuals took home more pay in 2011 because of a temporary reduction in the employee-share of old age, survivors and disability (OASDI) taxes. The employee-share of OASDI taxes was reduced from 6.2 percent to 4.2 percent for calendar year 2011 (with similar relief provided to self-employed individuals). ). Although both sides of the aisle in Congress agree that an extension through 2012 is desirable, consensus must be achieved in agreeing to ways to pay for its $263 billion price tag. An agreement is expected sometime in December, although prospects are not entirely certain.
The super committee’s failure to deliver a deficit reduction plan automatically triggers spending cuts after 2012. Under the Budget Control Act, the spending reductions will be achieved through a combination of sequestration (for FY 2013) and the downward adjustment of discretionary spending limits for FY 2014-FY 2021. This means that Congress must determine the manner in which reductions are made to the federal government’s budget, including the IRS, through the annual appropriations process each year. However, some programs, such as Social Security and Medicaid, are exempt from the budget cuts.
President Obama and Congress could agree to modify the spending reductions under the Budget Control Act. On November 21, President Obama said he will veto any bills that remove the automatic triggers in the Budget Control Act. President Obama is reportedly using the veto threat to keep pressure on Congress to reach an agreement over the fate of the Bush-era tax cuts and entitlement spending.
If you have any questions about the super committee, the Bush-era tax cuts or the prospects for tax reform, please contact our office at (908) 725-4414.
2011 year end tax planning for individuals lacks some of the drama of recent years but can be no less rewarding. Last year, individual taxpayers were facing looming tax increases as the calendar changed from 2010 to 2011; particularly, increased tax rates on wages, interest and other ordinary income, and higher rates on long-term capital gains and qualified dividends.
Thanks to legislation enacted at the end of 2010, tax rates are stable for 2011 and 2012, although the uncertainty will return as 2013 approaches, as political pressure in Washington builds to do something quickly for the economy. Ordinary income tax rates for individuals currently are 10, 15, 25, 28, 33 and 35 percent; capital gains rates are zero and 15 percent.
President Obama has proposed to preserve these tax rates for taxpayers with income below $200,000 (individuals) and $250,000 (married couples filing jointly) and to raise the rates for taxpayers in these higher-income brackets. If Congress is gridlocked and takes no action, everybody’s rates will rise, but again, not until 2013.
Expiring tax breaks
Unfortunately, not all is quiet on the tax front despite no dramatic rate changes until 2013. There are some specific tax provisions that will terminate at the end of 2011, unless Congress and the President agree to extend them. These include the tuition and fees above-the-line deduction for high education expenses, which can be as high as $4,000. Another expiring provision is the deduction for mortgage insurance premiums, which covers premiums paid for qualified mortgage insurance.
Several other benefits (“extenders”) are also scheduled to expire after 2011:
- The state and local sales tax deduction;
- The classroom expense deduction for teachers;
- Nonbusiness energy credits;
- The exclusion for distributions of up to $100,000 from an IRA to charity;
- A higher deduction limit for charitable contributions of appreciated property for conservation purposes.
An old standby that makes sense from year-to-year is maximizing contributions to an IRA. The contribution is deductible up to $5,000 ($6,000 for taxpayers over 50), depending on some specific taxpayer income levels and circumstances. Taxpayers in a 401(k) plan can reduce their income by contributing to their employer plan, for which the limit in 2011 is $16,500.
In 2010, it was particularly important to consider whether to convert a traditional IRA to a Roth IRA, because the income realized on conversion could be recognized over two years. While a conversion continues to be worthwhile to consider (because distributions from a Roth IRA are not taxable), there are no longer any special break to defer a portion of the income from the conversion.
Alternative minimum tax
The AMT has been “patched” for 2011. The exemptions have been temporarily increased from the normal statutory levels to the “patched” levels:
- From $33,750 to $48,450 for single individuals;
- From $45,000 to $74,450 for married couples filing jointly and surviving spouses; and
- From $22,500 to $37,335 for married couples filing separately.
The amounts return to the “normal levels” of $33,750/$45,000/$22,500, respectively, in 2012 unless Congress takes action to maintain the patch. Elimination of the AMT is a goal of long-term tax reform, but the loss of revenue has been considered too high in the past. Without the “patch,” the Congressional Budget Office estimates that an additional 20 million middle-class taxpayers would suddenly become subject to an AMT once designed only for millionaires.
While planning for the AMT is difficult, taxpayers may want to consider realizing AMT income, such as capital gains, in 2011, when the patch is higher, rather than in 2012.
Taxpayers can take advantage of 2011 provisions to realize last-minute tax benefits. Some of these benefits may not be available in 2012. It is worthwhile to look at these planning opportunities as part of an overall year-year financial strategy.
Many tax benefits for business will either expire at the end of 2011 or become less valuable after 2011. Two of the most important benefits are bonus depreciation and Code Sec. 179 expensing. Both apply to investments in tangible property that can be depreciated. Other sunsetting opportunities might also be considered.
Bonus depreciation is 100 percent for 2011. A business can write-off, in the first year, the entire cost of its investment in new depreciable property. Under current law, bonus depreciation will decrease to 50 percent in 2012 and will terminate after 2012. (These deadlines are extended one year for certain transportation property and property with a longer production period). President Obama has proposed to extend 100 percent bonus depreciation through 2012. Normally, this would have a good chance of being approved, but with the focus on deficit reduction and the linking of tax benefits to tax increases, it is not at all clear what will happen.
So, if a business has income in 2011 and plans to invest in depreciable property, it is worthwhile to consider making that investment in 2011, while the available write-off is at its highest. Under normal depreciation rules, a business will still be able to claim accelerated write-offs, but this may be 50 percent or less of the cost of the property, with the balance written-off over several years, instead of all in one year.
Planning for bonus depreciation is important because the property must satisfy placed-in-service and acquisition date requirements. Property is placed in service when it is in a condition or state of readiness on a regular ongoing basis for a specifically assigned function in a trade or business. The acquisition date rules may vary. For 2011, property is acquired when the taxpayer incurs or pays its cost. This could occur when the property is delivered, but it could also be when title to the property passes. For 2012, property is acquired when the taxpayer takes physical possession of the property.
Code Sec. 179 expensing
Code Sec. 179 expensing (first-year writeoff) has been around for awhile, but at higher amounts more recently. While there is no limit on bonus depreciation, expensing is limited to a statutory amount. For 2011, this amount is $500,000. It is scheduled to drop to $125,000 in 2012 and to $25,000 after 2012 (adjusted for inflation). Moreover, the cap is reduced for the amount of total investment in Code Sec. 179 property. The phaseout threshold is $2 million for 2011, dropping to $500,000 for 2012 and $200,000 for 2013 and subsequent years. For businesses who want to invest in depreciable property, the payoff is definitely greater in 2011. Taxpayers taking advantage of expensing should write off assets that would otherwise have the longest recovery periods.
Other 2011 benefits
Some other important benefits expire at the end of 2011 or become less valuable. A significant benefit in 2011 is the 100 percent exclusion for small business stock. After 2012, the normal exclusion rate will drop to 50 percent, although it has been 75 percent in recent years. The exclusion is based on the year the stock is acquired; the stock must be held for five years before sold and satisfy other requirements.
Another important benefit is the 20 percent research credit. The credit has been extended one year at a time for a long period, so it is likely to be extended again. Nevertheless, until Congress acts, there is some uncertainty for research expenses incurred after 2011.
To maximize the benefits of 2011 year-end tax planning, a business must be proactive in determining what upcoming capital investments might be accelerated into this year and what investments become cost effective because of the immediate tax benefits that they offer. Some business-related tax benefits will be less valuable after 2011; for others, it is not clear what Congress and the administration will do in terms of surprising taxpayers with a year-end tax bill. Please contact us at (908) 725-4414 if you have any questions over how year-end tax strategies that begin now and continue through December can help maximize tax benefits for your business.