Archive for October, 2012|Monthly archive page

Tax Changes on the Horizon?

Originally published in the Cedar Street Times

October 19, 2012

Unless you have been hiding under a rock, you are sure to have heard the hubbub surrounding potential tax increases in 2013.  These tax increases do not require Congress to take action, but to gridlock and do nothing, which is why they stand a much better chance of actually occurring than a concerted effort to raise taxes. Most of the increases are the result of the expiration of the temporary tax decreases dubbed “The Bush Tax Cuts,” passed in 2001 and 2003 while George W. Bush was in office.  There was also a two percent reduction in payroll taxes a few years ago that was meant to be a temporary stimulus for the economy.  The Tax Policy Center estimates that nearly 90% of American households will face an average tax increase of $3,500 if the tax cuts expire.

If current legislation stays in place, ordinary income tax brackets will jump 3-5%, depending on your bracket.  Capital gains tax will increase 5-15%, depending on your bracket, and there will be a new Medicare surtax, generally for people making over $200,000, of another 3.8% on net investment income.

Alternative Minimum Tax (AMT) is another big issue that could affect most Americans.  AMT is a parallel tax calculation that runs alongside the normal system, cutting out common deductions, and if it results in a higher overall tax liability, you pay the incremental difference as additional tax.

Estate and lifetime gift tax will also get hit hard.  Currently, there is a $5,120,000 exemption for the combined estate and gift tax.  If you have a taxable estate above that and you pass away by December 31, the excess will be taxed at a top rate of 35%. Next year, this exemption reverts to $1,000,000 with a maximum tax rate of 55% on your taxable estate above that figure.

This certainly presents questions for you, your tax professional, and your estate planner to analyze.  If you knew ordinary tax rates, capital gains, and estate tax rates were going to rise next year, you would likely try to push expected income from next year to this year, sell your stocks now that could result in a gain in the future, and gift money from your estate to your heirs.  It is not quite this simple, and you should get professional assistance, but it is something to think about now rather than December 31st.

Related to the estate and gift tax issue, on Saturday morning, October 27th, I will be presenting with local attorney, Kyle A. Krasa, and local investment advisor, Henry Nigos, in a free seminar titled “Opportunities and Clawbacks – Taking Advantage of the Once-in-a-Lifetime 2012 Estate/Gift Tax Rules” from 10:00 am to 11:30 am at 700 Jewell Avenue, Pacific Grove.  The seminar is sponsored by Krasa Law – please RSVP at 831-920-0205.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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Can’t Finish Returns by October 15 Deadline?

Originally published in the Cedar Street Times

October 5, 2012

If you placed your 2011 personal tax returns on extension, you have 10 days left to complete the returns and get them filed.  This is especially important if you did not withhold enough tax or make enough estimated tax payments during the year to cover your tax liability that was technically due on April 17.  Penalties are assessed based on the unpaid balance of tax that was due on that date.  There are several penalties assessed, but the hefty penalty is the late filing penalty which equates to five percent of your unpaid tax as of April 17 for each month or part of a month the return is late (capped at 25 percent).

In the past, I have had problematic situations where a client did not receive tax documents until after October 15.  This is sometimes seen when a client is invested in a partnership or has an interest in an S-Corporation or LLC and that entity is filing their returns late – causing all the others to be late as well.  There are even situations when other entities are filing timely and it can cause you to be late.  An example of this would be if you were a beneficiary of an irrevocable trust.  These types of trusts generally have the same due dates that your personal returns do – April 15, with a six month extension to October 15.  What if the trust is completed at the end of the day on October 15?  Will the beneficiary be able to get their K-1 tax document and provide to their accountant to finish before midnight!!  Maybe not!

So what do you do if you still cannot file by October 15?  Is there any hope?  There are some specific exceptions for military service members and taxpayers working abroad, but if you do not qualify for those exceptions, what then?  One option would be to wait until the information is received and then file the return requesting penalty relief for reasonable cause.  This is a tough row to hoe in actuality, because the IRS places a high degree of responsibility on the taxpayer:  I can almost guarantee you that what you feel is reasonable will not be the same as what the IRS feels is reasonable!  You will be categorized as delinquent from the outset, and then you will start on the defensive.

A better solution in many cases would be to go ahead and file a tax return with the information available and your best estimate of any missing information.  (There are provisions in the code that allow for estimates under certain circumstances.)  A statement should be included with the return explaining the situation and the efforts made to obtain the information.  You should also state the intent to amend the return if materially different from the actual information when it is available.  This would prevent a late filing penalty from being assessed, and you would be categorized as timely filed unless the return is challenged by audit.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

SIMPLE-IRA – 10 Days Left!

Originally published in the Cedar Street Times

September 21, 2012

If you started a business in 2012 or have an existing small business, you have ten days left (October 1) until the annual deadline to establish a SIMPLE-IRA if you want to make contributions this year for yourself or your employees.  A SIMPLE-IRA is a solid retirement option for small businesses for a number of reasons.  The first reason is that they are free and easy to set-up.  By comparison, if you start a plan such as a 401(k), you can bank on approximately$1,000 a year in administrative fees.  The SIMPLE-IRA (Savings Incentive Match Plan for Employees) is established by filling out an easy form (IRS Form 5304-SIMPLE) and signing and dating it.  You also need to contact a custodian which will be responsible for initially handling the funds.  If you have a financial advisor, this person will often be the point-person.  Otherwise, you can contact Vanguard, Fidelity, Schwab, or a number of other financial companies and they will be happy to set you up at no charge in minutes.  They may have account fees, but those should be minimal.

The SIMPLE-IRA allows the employees (and the owner) to contribute up to $11,500 of their wages through payroll deductions into a retirement account.  This directly reduces their taxable wages.  The other part is the employer match.  Each year, before the year starts, the employer chooses a one, two, or three percent match, or a two percent guaranteed contribution.  If the employer chooses one of the match options, they will match the employee’s (and their own) contributions dollar-for-dollar up to a cap of one, two, or three percent of the employee’s annual wages.  The match is tax deductible by the business but is not taxable income to the employee.  A business can choose to exclude employees that are not expected to make over $5,000 during the year or have not made over $5,000 in any two prior years (whether or not consecutive).

Self-employed individuals with or without employees can also take advantage of this plan.  If you are a sole proprietor, your wages are determined by your net income at the end of the year.  You must submit your contributions by January 30 of the following year.  The match for your employees and yourself does not have to be submitted until the tax return due date.

Self-employed individuals with no employees that net over $70,000 may wish to consider a SEP-IRA since you can contribute more at that point.  A SEP-IRA is also easy and inexpensive to maintain.

Of course, the best reason to set up a SIMPLE plan is to start contributing to your retirement and helping others see the value as well.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.