The IRS has announced a second Voluntary Disclosure Program for employers to resolve erroneous claims for credit or refund involving the COVID-19 Employee Retention Credit (ERC). Participation in the second ERC Voluntary Disclosure Program is limited to ERC claims filed for the 2021 tax period(s), and cannot be used to disclose and repay ERC money from tax periods in 2020.

The IRS has announced a second Voluntary Disclosure Program for employers to resolve erroneous claims for credit or refund involving the COVID-19 Employee Retention Credit (ERC). Participation in the second ERC Voluntary Disclosure Program is limited to ERC claims filed for the 2021 tax period(s), and cannot be used to disclose and repay ERC money from tax periods in 2020.

The program is designed to help businesses with questionable claims to self-correct and repay the credits they received after filing erroneous ERC claims, many of which were driven by aggressive marketing from unscrupulous promoters.

The first ERC Voluntary Disclosure Program was announced in late December 2023, and ended on March 22, 2024 (Announcement 2024-3, I.R.B. 2024-2, 364). Over 2,600 taxpayers applied to the first program to resolve their improper ERC claims and avoid civil penalties and unnecessary litigation.

The second ERC Voluntary Disclosure Program will allow businesses to correct improper payments at a 15-percent discount, and avoid future audits, penalties and interest.

Procedures for Second Voluntary Disclosure Program

To apply, employers must file Form 15434, Application for Employee Retention Credit Voluntary Disclosure Program, and submit it through the IRS Document Upload Tool. Employers must provide the IRS with the names, addresses, telephone numbers and details about the services provided by any advisors or tax preparers who advised or assisted them with their claims, and are expected to repay their full ERC claimed, minus the 15-percent reduction allowed through the Voluntary Disclosure Program.

Eligible employers must apply by 11:59 pm local time on November 22, 2024.

The Department of the Treasury and the IRS released statistics on the Inflation Reduction Act clean energy tax credits for the 2023 tax year. Taxpayers have claimed over $6 billion in tax credits for residential clean energy investments and more than $2 billion for energy-efficient home improvements on 2023 tax returns filed and processed through May 23, 2024.

The Department of the Treasury and the IRS released statistics on the Inflation Reduction Act clean energy tax credits for the 2023 tax year. Taxpayers have claimed over $6 billion in tax credits for residential clean energy investments and more than $2 billion for energy-efficient home improvements on 2023 tax returns filed and processed through May 23, 2024.

For the Residential Clean Energy Credit, 1,246,440 returns were filed, with a total credit value of $6.3 billion and an average of $5,084 per return. Specific investments include:

• Rooftop solar: 752,300 returns, up to 30 percent of the cost;
• Batteries: 48,840 returns, up to 30 percent of the cost.

For the Energy Efficient Home Improvement Credit, 2,338,430 returns were filed, with a total credit value of $2.1 billion and an average of $882 per return. Specific improvements include:

• Home insulation: 669,440 returns, up to 30 percent of the cost;
• Windows and skylights: 694,450 returns, up to 30 percent of the cost or $600;
• Central air conditioners: 488,050 returns, up to 30 percent of the cost or $600;
• Doors: 400,070 returns, up to 30 percent of the cost, $250 per door or $500 total;
• Heat pumps: 267,780 returns, up to 30 percent of the cost or $2,000;
• Heat pump water heaters: 104,180 returns, up to 30 percent of the cost or $2,000.

Internal Revenue Service Commissioner Daniel Werfel is calling on Congress to maintain the agency’s funding and not make any further cuts to the supplemental funding provided to the agency in the Inflation Reduction Act, using recent successes in customer service and compliance to validate his request.

Internal Revenue Service Commissioner Daniel Werfel is calling on Congress to maintain the agency’s funding and not make any further cuts to the supplemental funding provided to the agency in the Inflation Reduction Act, using recent successes in customer service and compliance to validate his request.

"The Inflation Reduction Act funding is making a difference for taxpayers, and we will build on these improvements in the months ahead," Werfel said during a July 24, 2024, press teleconference, adding that "for this progress to continue, we must maintain a reliable, consistent annual appropriations for the agency as well as keeping the Inflation Reduction Act funding intact."

During the call, Werfel highlighted a number of improvements to IRS operations that have come about due to the IRA funding, including expansion of online account features (such as providing more digital forms, making it easier to make online payments, and making access in general easier); providing more access to taxpayers wanting face-to-face assistance (including a 37 percent increase in interactions at taxpayer assistance centers); IT modernization; and the collection of more than $1 billion in taxes due form high wealth individuals.

Werfel did highlight an area where he would like to see some improvements, including the number of taxpayers who have activated their online account.

While he did not have a number of how many taxpayers have activated their accounts so far, he said that “"we are nowhere near where we have the opportunity to be,"” adding that as functionality improves and expands, that will bring more taxpayers in to use their online accounts and other digital services.

He also noted that online accounts will be a deterrent for scams, and it will provide taxpayers with the information they need to not be fooled by scammers.

“We see the online account as a real way to test these scams and schemes because taxpayers will have a single source of truth about whether they actually owe a debt, whether the IRS is trying to reach them, and also information we can push out to taxpayers more regularly if they sign up and opt in for it on the latest scams and schemes,” Werfel said.

By Gregory Twachtman, Washington News Editor

The IRS has intensified its efforts to scrutinize claims for the Employee Retention Credit (ERC), issuing five new warning signs of incorrect claims. These warning signs, based on common issues observed by IRS compliance teams, are in addition to seven problem areas previously highlighted by the agency. Businesses with pending or previously approved claims are urged to carefully review their filings to confirm eligibility and ensure credits claimed do not include any of these twelve warning signs or other mistakes. The IRS emphasizes the importance of consulting a trusted tax professional rather than promoters to ensure compliance with ERC rules.

The IRS has intensified its efforts to scrutinize claims for the Employee Retention Credit (ERC), issuing five new warning signs of incorrect claims. These warning signs, based on common issues observed by IRS compliance teams, are in addition to seven problem areas previously highlighted by the agency. Businesses with pending or previously approved claims are urged to carefully review their filings to confirm eligibility and ensure credits claimed do not include any of these twelve warning signs or other mistakes. The IRS emphasizes the importance of consulting a trusted tax professional rather than promoters to ensure compliance with ERC rules.

The newly identified issues include essential businesses claiming ERC despite being fully operational, unsupported government order suspensions, misreporting wages paid to family members, using wages already forgiven under the Paycheck Protection Program, and large employers incorrectly claiming wages for employees who provided services. The IRS plans to deny tens of thousands of claims that show clear signs of being erroneous and scrutinize hundreds of thousands more that may be incorrect. In addition, the IRS announced upcoming compliance measures and details about reopening the Voluntary Disclosure Program, aimed at addressing high-risk ERC claims and processing low-risk payments to help small businesses with legitimate claims.

IRS Commissioner Danny Werfel emphasized the agency’s commitment to pursuing improper claims and increasing payments to businesses with legitimate claims. Promoters lured many businesses into mistakenly claiming the ERC, leading to the IRS digitizing and analyzing approximately 1 million ERC claims, representing over $86 billion. The IRS urges businesses to act promptly to resolve incorrect claims, avoiding future issues such as audits, repayment, penalties, and interest. Taxpayers should recheck their claims with the help of trusted tax professionals, considering options such as the ERC Withdrawal Program or amending their returns to correct overclaimed amounts.

The IRS, in collaboration with state tax agencies and the national tax industry, has initiated a new effort to tackle the rising threat of tax-related scams. This initiative, named the Coalition Against Scam and Scheme Threats (CASST), was launched in response to a significant increase in fraudulent activities during the most recent tax filing season. These scams have targeted both individual taxpayers and government systems, seeking to exploit vulnerabilities for financial gain.

The IRS, in collaboration with state tax agencies and the national tax industry, has initiated a new effort to tackle the rising threat of tax-related scams. This initiative, named the Coalition Against Scam and Scheme Threats (CASST), was launched in response to a significant increase in fraudulent activities during the most recent tax filing season. These scams have targeted both individual taxpayers and government systems, seeking to exploit vulnerabilities for financial gain.

CASST will focus on three primary objectives: enhancing public outreach and education to alert taxpayers to emerging threats, developing new methods to identify fraudulent returns at the point of filing, and improving the infrastructure to protect taxpayers and the integrity of the tax system. This initiative builds on the successful framework of the Security Summit, which was launched in 2015 to combat tax-related identity theft. While the Security Summit made significant progress in reducing identity theft, CASST aims to address a broader range of scams, reflecting the evolving tactics of fraudsters.

The coalition has received widespread support, with over 60 private sector groups, including leading software and financial companies, joining the effort. Key national tax professional organizations are also participating, all committed to strengthening the security of the tax system.

Among the measures CASST will implement are enhanced validation processes for tax preparers, including improvements to the Electronic Filing Identification Number (EFIN) and Preparer Tax Identification Number (PTIN) systems. The coalition will also target the issue of ghost preparers, who prepare tax returns for a fee without proper disclosure, leading to inflated refunds and significant revenue losses.

In addition to these technical improvements, CASST will address specific scams, such as fraudulent claims for tax credits like the Fuel Tax Credit. By the 2025 filing season, CASST aims to have new protections in place, bolstering defenses across both public and private sectors to make it more difficult for scammers to exploit the tax system. This coordinated effort seeks to protect taxpayers and ensure the integrity of the nation’s tax system.

The Internal Revenue Service will be processing about 50,000 "low-risk" Employee Retention Credit claims, and it will be shifting the moratorium dates on processing.

The Internal Revenue Service will be processing about 50,000 "low-risk"Employee Retention Credit claims, and it will be shifting the moratorium dates on processing.

"The IRS projects payments will begin in September with additional payments going out in subsequent weeks," the agency said in an August 8, 2024, statement."The IRS anticipates adding another large block of additional low-risk claims for processing and payment in the fall."

The agency also announced that it is shifting the moratorium period on processing new claims. Originally, the agency was not processing claims that were filed after September 14, 2023. It is now going to process claims filed between September 14, 2023, and January 31, 2024.

"Like the rest of the ERC inventory, work will focus on the highest and lowest risk claims at the top and bottom end of the spectrum," the IRS said. "This means there will be instances where the agency will start taking actions on claims submitted in this time period when the agency has seen a sound basis to pay or deny any refund claim."

The agency also said it has sent out "28,000 disallowance letters to businesses whose claims showed a high risk of being incorrect," preventing up to $5 billion in improper payments. It also has "thousands of audits underway, and 460 criminal cases have been initiated" with potentially fraudulent claims worth nearly $7 billion. Thirty-seven investigations have resulted in federal charges, with 17 resulting in convictions.

Businesses that receive a denial letter will have the ability to appeal the decision.

The agency also offered some other updates on the ERC program, including:

• The claim withdrawal process for unprocessed ERC has led to more than 7,300 withdrawing $677 million in claims;
• The voluntary disclosure program received more than 2,600 applications from ERC recipients that disclosed $1.09 billion in credits; and
• The IRS Office of Promoter Investigations has received "hundreds" of referrals about suspected abusive tax promoters and preparers improperly promoting the ability to claim the ERC.

"The IRS is committed to continuing out work to resolve this program as Congress contemplates further action, both for the good of legitimate businesses and tax administration," IRS Commissioner Daniel Werfel said in the statement.

By Gregory Twachtman, Washington News Editor

The IRS has announced substantial progress in its ongoing efforts to modernize tax administration, emphasizing a shift towards digital interactions and enhanced measures to combat tax evasion. This update, part of a broader 10-year plan supported by the Inflation Reduction Act, reflects the agency's commitment to improving taxpayer services and ensuring fairer compliance.

The IRS has announced substantial progress in its ongoing efforts to modernize tax administration, emphasizing a shift towards digital interactions and enhanced measures to combat tax evasion. This update, part of a broader 10-year plan supported by the Inflation Reduction Act, reflects the agency's commitment to improving taxpayer services and ensuring fairer compliance.

The IRS’s push for digital transformation has seen significant advancements, allowing taxpayers to conduct nearly all interactions with the agency online. This initiative aims to reduce the reliance on paper submissions, expedite tax processing, and improve overall efficiency. In 2024 alone, the IRS introduced extended hours at Taxpayer Assistance Centers across the country, particularly benefiting rural and underserved communities. The agency also reported a notable increase in face-to-face interactions, with a 37 percent rise in contacts during the 2024 filing season.

In parallel with these service improvements, the IRS has ramped up efforts to disrupt complex tax evasion schemes. Leveraging advanced data science and technology, the agency has focused on high-income individuals and entities employing sophisticated financial maneuvers to avoid taxes. Among the IRS’s new measures is a moratorium on processing Employee Retention Credit claims to prevent fraud, alongside initiatives targeting abusive use of partnerships and improper corporate practices.

The IRS also highlighted its progress in eliminating paper filings through the introduction of the Document Upload Tool, which allows taxpayers to submit documents electronically. This tool, along with upgraded scanning and mail-sorting equipment, is expected to significantly reduce the volume of paper correspondence, potentially replacing millions of paper documents each year. These technological upgrades are part of the IRS’s broader goal to create a fully digital workflow, thereby speeding up refunds and improving service accuracy.

Additionally, the IRS has launched new programs to ensure taxpayers are informed about and can claim eligible credits and deductions. This includes outreach efforts related to the Child Tax Credit and the Earned Income Tax Credit, aiming to bridge the gap for eligible taxpayers who may not have claimed these benefits. These initiatives underline the IRS's dedication to a more equitable tax system, ensuring that all taxpayers have access to the credits and services they are entitled to while maintaining robust compliance standards.

As the 2013 filing season gets underway, some taxpayers may experience delays in filing returns and others need to revisit their returns because of the passage of the American Taxpayer Relief Act (ATRA) on January 1, 2013.  Late tax legislation always complicates tax planning and filing and 2013 is no exception.  ATRA extended many popular tax incentives for individuals and businesses retroactively to January 1, 2012.  This means that qualified taxpayers may claim them on their 2012 returns filed in 2013.  ATRA also made many changes that take effect in 2013, which will require careful planning as this year unfolds.

As the 2013 filing season gets underway, some taxpayers may experience delays in filing returns and others need to revisit their returns because of the passage of the American Taxpayer Relief Act (ATRA) on January 1, 2013.  Late tax legislation always complicates tax planning and filing and 2013 is no exception.  ATRA extended many popular tax incentives for individuals and businesses retroactively to January 1, 2012.  This means that qualified taxpayers may claim them on their 2012 returns filed in 2013.  ATRA also made many changes that take effect in 2013, which will require careful planning as this year unfolds.

Delayed start to filing season

The most immediate effect of ATRA is a delayed start to the 2013 filing season.  Shortly after passage of ATRA, the IRS announced that the 2013 filing season would begin on January 30, 2013.  That reflected a delay of eight days from the previously anticipated start date of January 22, 2013.  The IRS explained that it needed time to program its processing systems for ATRA.  As of January 30, the IRS was able to accept returns affected by the AMT patch as well as three very popular "tax extenders:" the state and local sales tax deduction, higher education tuition deduction and teachers' classroom expense deduction.

However, some taxpayers will experience a further delay.  A number of tax forms affected by late legislation require more extensive programming and testing of IRS systems. The IRS reported that it aims to begin accepting returns including these forms between late February and into March.  The IRS predicted that a specific date will be announced in the near future. Among the forms that require more extensive programming changes are some commonly used forms, most notably Form 4562 (Depreciation and Amortization). Other forms affected by the delay include Form 5695 (Residential Energy Credits) and Form 3800 (General Business Credit).

The IRS also announced special relief for farmers and fishermen who are affected by the delay.  Normally, farmers and fishermen who choose not to make quarterly estimated tax payments are not subject to a penalty if they file their returns and pay the full amount of tax due by March 1. Under the guidance to be issued, farmers or fishermen who miss the March 1 deadline will not be subject to the penalty if they file and pay by April 15, 2013.

Retroactive and prospective extensions

For individuals, some of the most popular incentives are the three mentioned above (the state and local sales tax deduction, the higher education tuition deduction and the teachers' classroom expense deduction).  Other incentives that were retroactively extended to January 1, 2012 by ATRA, and therefore are available for 2012 returns filed in 2013, include special rules treating mortgage insurance premiums as deductible interest that is qualified residence interest, and special rules for contributions of capital gains real property for conservation purposes. 

Another valuable incentive extended by ATRA is a tax break for energy efficient improvements.  ATRA extended retroactively to January 1, 2012 and through 2013 the Code Sec. 25C energy credit. Energy efficiency improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs. The credit has a lifetime limit; qualifying improvements must be placed into service to the taxpayer's principal residence before January 1, 2014, and there are other restrictions.

ATRA also provided transition relief for individuals wishing to make tax-free transfers of IRA funds to charitable organizations.  For tax year 2012 only, IRA owners could choose to report qualified charitable distributions made in January 2013 as if they occurred in 2012. Additionally, IRA owners who received IRA distributions during December 2012 could contribute, in cash, part or all of the amounts distributed to eligible charities during January 2013 and have them count as 2012 qualified charitable distributions.

For businesses, ATRA extended many temporary incentives.  Among the most commonly claimed are enhanced small business expensing, bonus depreciation, and the Work Opportunity Tax Credit (WOTC).  Under ATRA, the Code Sec. 179 small business expensing dollar limit for tax years 2012 and 2013 is $500,000 with a $2 million investment limit (both amounts indexed for inflation).  Bonus depreciation is available at 50 percent through 2013 and the WOTC is also available through 2013.  Many other business-related incentives that had expired at the end of 2011 are available for 2012 and 2013.

Another extended incentive is transit benefits parity. Qualified transportation fringe benefits include transit passes, van pooling, and qualified parking. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provided for parity for the exclusion limitation on transit passes, van pool benefits and qualified parking through 2011. ATRA extended transit benefits parity retroactively to January 1, 2012 and through 2013. In Rev. Proc. 2013-15, the IRS reported that the inflation-adjusted maximum monthly excludable amount for 2013 is $245 for transit passes and van pool benefits and also $245 for qualified parking. The IRS has issued administrative relief for employers that provided transit benefits in 2012 at their pre-ATRA rates.

Changes for 2013 and beyond

ATRA's most far-reaching changes – allowing the Bush-era tax rates to expire after 2012 for individuals with incomes over $400,000 and families with incomes over $450,000 along with increased capital gains and dividend taxes for higher income taxpayers – will be reflected on 2013 returns filed in 2014.  Other important provisions, such as the revived limitation on itemized deductions and the personal exemption phaseout, also will kick-in in 2013 and be reflected on 2013 returns filed in 2014.  Also taking effect in 2013 are an Additional Medicare Tax and a Net Investment Income surtax.  All these changes should be taken into account in planning your 2013 tax strategy.

Please contact our office for more information about the affect of ATRA on the 2013 filing season and tax planning for future years.

The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for individuals to determine the amount of their deductible home office expenses (IR-2013-5, Rev. Proc. 2013-13). Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes.

The IRS has announced a new optional safe harbor method, effective for tax years beginning on or after January 1, 2013, for individuals to determine the amount of their deductible home office expenses (IR-2013-5, Rev. Proc. 2013-13). Being hailed by many as a long-overdue simplification option, taxpayers may now elect to determine their home office deduction by simply multiplying a prescribed rate by the square footage of the portion of the taxpayer's residence used for business purposes.

The IRS cites that over three million taxpayers in recent tax years have claimed deductions for business use of a home, which normally requires the taxpayer to fill out the 43-line Form 8829. Under the new procedure, a significantly simplified form is used. The new method is expected to reduce paperwork and recordkeeping for small businesses by an estimated 1.6 million hours annually, according to the IRS. The new optional deduction is limited to $1,500 per year, based on $5 per square foot for up to 300 square feet.

The simplified method is not effective for 2012 tax year returns being filed during the current 2013 filing season, but it will become effective for 2013 tax year returns filed in 2014. Taxpayers may want to investigate now whether they could benefit from the election for the 2013 tax year. Acting IRS Commissioner Steven Miller advised upon announcement of the safe harbor that "The IRS … encourages people to look at this option as they consider tax planning in 2013."  A final decision on the election need not be made until 2014, when 2013 returns are filed.

Basic home office deduction rule

Under Code 280A, which governs the home office deduction rules on the simplified method election, a taxpayer may deduct expenses that are allocable to a portion of the dwelling unit that is exclusively used on a regular basis. This generally means usage as:

• The taxpayer's principal place of business for any trade or business
• A place to meet with the taxpayer's patients, clients, or customers in the normal course of the taxpayer's trade or business, or
• In the case of a separate structure that is not attached to the dwelling unit, in connection with the taxpayer's trade or business.

The new simplified method does not remove the requirement to keep records that prove exclusive use, on a regular basis, for one of the three designated uses listed above. It does help, however, in other ways.

Simplified safe harbor

Using the new simplified safe harbor method, a taxpayer determines the amount of deductible expenses for qualified business use of the home for the tax year by multiplying the allowable square footage by the prescribed rate. The allowable square footage is the portion of a home used in a qualified business use of the home, but not to exceed 300 square feet. The prescribed rate is $5.00 per square foot.

Taxpayers who itemize their returns and use the safe harbor method may also deduct, to the extent allowed by the Tax Code and regs, any expense related to the home that is deductible without regard to whether there is a qualified business use of the home for that tax year, the IRS explained. As a result, they will be able to claim allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A of Form 1040. These deductions do not need to be allocated between personal and business use, as is required under the regular method.

Depreciation

Taxpayers using the safe harbor cannot deduct any depreciation for the portion of the home that is used in a qualified business use of the home for that tax year. For many taxpayers, depreciation is the largest component of the home office deduction under the regular method that must be sacrificed if the new safe harbor method is used.  Depending upon the value of your home and the space devoted to an office at home, using the regular method may prove to be the far better choice than electing the simplified method.

Election

Taxpayers may elect from tax year to tax year whether to use the safe harbor method or actual expense method. Once made, an election for the tax year is irrevocable.  The IRS has provided rules for calculating the depreciation deduction if a taxpayer uses the safe harbor for one year and actual expenses for a subsequent year. The deduction of expenses that are not related to the home, such as wages and supplies, is unaffected and those deductions are still available to those using the new method.

Limitations

The IRS set various limits on the safe harbor, including:

• Taxpayers with more than one qualified business use of the same home for a tax year and who elect the safe harbor must use the safe harbor for each qualified business use of the home.
• Taxpayers with qualified business uses of more than one home for a tax year may use the safe harbor for only one home for that tax year.
• A taxpayer who has a qualified business use of a home and a rental use of the same home cannot use the safe harbor for the rental use.

If you are currently claiming a home office deduction, or if you have considered taking the deduction in the past but were discouraged by all of the paperwork and calculations required, you should consider whether the new, simplified safe harbor method is right for you. Please feel free to contact this office for further details.

Under the new health care law, starting in 2014, "large" employers with more than 50 full-time employees will be subject to stiff monetary penalties if they do not provide affordable and minimum essential health coverage. With less than eleven months before this "play or pay" provision is fully effective, the IRS continues to release critical details on what constitutes an "applicable large employer," "full-time employee," "affordable coverage," and "minimum health coverage."  Most recently, the IRS issued proposed reliance regulations that provide employers with the most comprehensive explanation of their obligations and options to date.

Under the new health care law, starting in 2014, "large" employers with more than 50 full-time employees will be subject to stiff monetary penalties if they do not provide affordable and minimum essential health coverage. With less than eleven months before this "play or pay" provision is fully effective, the IRS continues to release critical details on what constitutes an "applicable large employer," "full-time employee," "affordable coverage," and "minimum health coverage."  Most recently, the IRS issued proposed reliance regulations that provide employers with the most comprehensive explanation of their obligations and options to date.

Background

Under the Patient Protection and Affordable Care Act (PPACA) the federal government has made it possible for certain workers who do not otherwise have access to affordable health insurance coverage to obtain a tax credit that would help them pay the costs of their health care premiums. This credit applies to low-income workers whether employed by a small, mid-size or large employer or self-employed.  Under Code Sec. 4980H as added by the PPACA, however, an "applicable large employer" is subject to a shared responsibility payment (an assessable payment) after December 31, 2013 if any of its full-time employees are certified to receive an applicable premium tax credit or cost-sharing reduction and either:

• The employer does not offer to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (Code Sec. 4980H(a)); or
• The employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that with respect to a full-time employee who has been certified for the advance payment of an applicable premium tax credit or cost-sharing reduction either is unaffordable relative to an employee's household income or does not provide minimum value (Code Sec. 4980H(b)).

The Code Sec. 4980H(b) penalty applies to coverage that is "unaffordable," meaning that the coverage costs more than 9.5 percent of the employee's household income. Since employers may not be able to determine household income, the proposed regs provide three affordability safe harbors: the Form W-2 safe harbor (based on employee wages); the rate of pay safe harbor (based on hourly or monthly pay rates); and the federal poverty line safe harbor, the IRS explained.

The employer cannot be liable under both Code Secs. 4980H(a) and 4980H(b). Furthermore, the penalty cannot exceed the payment amount that would have been imposed under Code Sec. 4980H(a) if the employee had failed to offer coverage to its full-time employees.

Proposed reliance regs

The proposed reliance regs further clarify what employees are considered "full-time employees" for the purpose of the statute. This distinction is important because the number of full-time employees determines who is an applicable large employer, subject to the affordable coverage requirements and, potentially, the per-employee shared responsibility payment. The proposed reliance regs provide additional guidance on who is a full-time employee, and covers gray areas such as the treatment of seasonal employees.

Other guidance under the regs covers whether employers who have only become applicable large employers in the current year are exempt from the shared responsibility payment. (Generally, they are not.) The proposed reliance regulations also provide certain relief to employers who inadvertently miss some employees.

Finally, the proposed reliance regs provide several transition rules. A major rule allows employers with plans on a fiscal year to wait to apply the standards until the first day of the first plan year that begins in 2014. Another rule exempts employers from penalties in 2014 if they must add dependent coverage to their health plans. Other transition rules apply to health plans offered through cafeteria plans and multiemployer plans. In addition, there are many notification responsibilities that will be placed upon the shoulders of all employers regarding access by their employees to health insurance.

If you have questions about the health care requirements for employers, the shared responsibility payment under Code Sec. 4980H, or anything related to the tax provisions of the new health care law, please contact our offices.

Beginning in 2013, the capital gains rates, as amended by the American Taxpayer Relief Act of 2012, are as follows for individuals:

Beginning in 2013, the capital gains rates, as amended by the American Taxpayer Relief Act of 2012, are as follows for individuals:

• A capital gains rate of 0 percent applies to the adjusted net capital gains if the gain would otherwise be subject to the 10 or 15 percent ordinary income tax rate.
• A capital gains rate of 15 percent applies to adjusted net capital gains if the gain would otherwise be subject to the 25, 28, 33, or 35 percent ordinary income tax rate.
• A capital gains rate of 20 percent applies to adjusted net capital gains if the gain would otherwise be subject to the 39.6 percent ordinary income tax rate beginning after December 31, 2012.

Individuals are subject to the 39.6 percent ordinary income tax rate beginning in 2013 to the extent their taxable income exceeds the applicable threshold amount of $450,000 for married individuals filing joint returns and surviving spouses, $425,000 for heads of households, $400,000 for single individuals, and $225,000 for married individuals filing separate returns.

Comment:  The only change from 2012 rates is the 20 percent rate, applied as described, above.  Prior to 2013, the highest tax rate on net capital gain was 15 percent.

Comment: Adjusted net capital gain is net capital gain from capital assets held for more than one year other than unrecaptured Code Sec. 1250 gain (25 percent); collectibles gain (28 percent) or gain from qualified small business stock (varying rates).

Examples

Following the rules outlined above, computations for higher-income taxpayers (those whose taxable income together with net capital gains exceed the 39.6 percent tax bracket threshold amounts, which are also the threshold amounts for the 20 percent capital gain rate) are illustrated under three scenarios:

Example 1: Assume in 2013, joint filers with $475K in net capital gain and $200K in ordinary income:

• $200K ordinary income will be taxed under the regular income tax tables, which for 2013 indicate a $43,465.50 tax.
• $475K capital gain is taxed:
  • $250K of $475 net capital gain at 15 percent ($450K threshold less $200K ordinary income) = $37,500
  • The remainder of the net capital gain $225K ($475K less $250K that was taxed at 15 percent) is taxed at 20 percent = $45,000

Total tax liability: $43,465.50 on $200K ordinary income and $82,500 on $475K net capital gain.

Example 2: Assume in 2013, joint filers with $200K in net capital gain and $475K in ordinary income:

• $475K ordinary income will be taxed under the regular income tax tables, which for 2013 indicate a $135,746 tax.
• $200K capital gain is taxed:
  • All of $200K net capital gain at 20 percent ($450K threshold already exceeded by $475K in ordinary income) = $40,000.

Total tax liability: $135,746 on $475K ordinary income and $40,000 on $200K net capital gain.

Example 3: Assume in 2013, joint filers with $50K ordinary income and $425K in net capital gain:

• $50K ordinary income will be taxed under the regular income tax tables, which for 2013 indicate a $4,845
• $425K net capital gain is taxed:
  • $20,700 at zero percent ($70,700, which is the top of the 15 percent bracket less $50K ordinary income) = $0
  • $379,300 at 15 percent ($450,000 less $70,700) = $56,895
  • $25,000 at 20 percent (balance of ordinary income plus capital gain over $450K threshold) = $5,000.

Total tax liability: $4,845 on $50K ordinary income and $40,000 on $200K net capital gain.

An above-the-line deduction is an adjustment to income (deduction) that can be taken regardless of whether the individual taxpayer itemizes deductions. The adjustment reduces the taxpayer's adjusted gross income (AGI). These adjustments are also sometimes called deductions from gross income, as opposed to itemized deductions that are deducted from AGI. An above-the-line deduction is taken out of income "above" the line on the tax form on which adjusted gross income is reported.

An above-the-line deduction is an adjustment to income (deduction) that can be taken regardless of whether the individual taxpayer itemizes deductions. The adjustment reduces the taxpayer's adjusted gross income (AGI). These adjustments are also sometimes called deductions from gross income, as opposed to itemized deductions that are deducted from AGI. An above-the-line deduction is taken out of income "above" the line on the tax form on which adjusted gross income is reported.

Above-the-line deductions are more desirable than itemized deductions because:

• they are more available (for example, they are not phased out or subject to a floor like many itemized deductions);
• they can be claimed even if the taxpayer does not itemize deductions; and
• they lower the taxpayer's AGI, which can allow the taxpayer to qualify for more and/or larger deductions.

The above-the-line deductions include:

• Trade or business expenses
• Net operating loss deduction
• Loss from sales and exchanges
• Depreciation and depletion
• Deductions tied to rents and royalties
• Teacher's classroom expenses
• Jury pay turned over to employer
• Overnight travel expenses of Reserve or National Guard
• Supplemental unemployment compensation repayments
• Business expenses of qualifying performing artists
• Contributions to individual retirement accounts
• Student loan interest deduction
• Tuition and fees deduction
• Health savings account deduction
• Moving expenses
• ½ of self-employment tax
• Health insurance costs of the self-employed
• Contributions to SIMPLE or SEP plans
• Penalty for early withdrawal of funds from a savings account
• Alimony payments
• Legal fees and costs paid in certain actions involving civil rights violations or whistleblower awards
• Domestic production activities deduction

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2013.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2013.

February 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 26–29.

February 6
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 30–February 1.

February 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 2–5.

February 11
Employees who work for tips. Employees who received $20 or more in tips during January must report them to their employer using Form 4070.

February 13
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 6–8.

February 15
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 9–12.

February 21
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 13–15.

February 22
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 16–19.

February 27
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 20–22.

March 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 23–26.

March 6
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 27–March 1.

In what undeniably came down to the wire in the early hours of January 1, 2013, the Senate passed the American Taxpayer Relief Act of 2012, which, along with many other provisions, permanently extends the so-called Bush-era tax cuts for individuals making under $400,000 and families making under $450,000 (those above those thresholds now pay at a 39.6 percent rate). The House followed with passage late in the day on January 1; and President Obama signed the bill into law on January 2. Thus, the more than decade-long fight over the fate of the tax cuts, originally enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), accelerated under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and extended by Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) comes to an end.

In what undeniably came down to the wire in the early hours of January 1, 2013, the Senate passed the American Taxpayer Relief Act of 2012, which, along with many other provisions, permanently extends the so-called Bush-era tax cuts for individuals making under $400,000 and families making under $450,000 (those above those thresholds now pay at a 39.6 percent rate). The House followed with passage late in the day on January 1; and President Obama signed the bill into law on January 2. Thus, the more than decade-long fight over the fate of the tax cuts, originally enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), accelerated under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and extended by Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act) comes to an end.

Prelude to the Fiscal Cliff

On May 26, 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The legislation was hailed as the largest tax cut in 20 years and dramatically changed the landscape of the federal tax code. Two years later, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) was signed into law and accelerated many of the tax cuts set in motion under EGTRRA. Originally scheduled to sunset, or expire, after December 31, 2010, Congress extended these popular provisions for another two years in late 2010 with the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. In 2010, Congress acted before the end of the year to extend the cuts. At the end of 2012, Congress and President Obama engaged in intense negotiations over the “fiscal cliff,” a term that came to combine many federal laws that had a deadline of December 31, 2012, including the Bush-era tax cuts. Congress then passed the American Taxpayer Relief Act of 2012 on New Year’s Day, 2013, effectively averting the fiscal cliff.

What Does This Mean for You?

The new law extends a majority of the Bush-era tax cuts in the same form as they have existed since 2001 or 2003 when initially enacted. However, major exceptions include a rise in rates, including a maximum 20 percent on capital gains and dividends, on higher-income individuals, as described above, and an increase in the estate tax rate from 35 to 40 percent. In addition to a general extension of the tax rates, many other provisions, including some not affected by the sunset of the Bush-era tax cuts, are significantly or permanently extended, including:

• Marriage penalty relief;
• Inflation protection against the alternative minimum tax (AMT);
• Deductions for student loan interest and tuition and fees;
• Enhanced child tax and child and dependent care credits;
• Simplified earned income credit;
• Deductions for primary and secondary school teacher expenses;
• Deductions for state and local sales taxes;
• Research credits;
• Energy-efficiency credits for homes and vehicles; and
• Many more provisions.

Unfortunately, the new law is also significant in what it does not do in one important respect. It does not renew the so-called payroll tax holiday that had been in effect during 2011 and 2012. As a result, employees and self-employed individuals will be paying 2 percent more employment tax on their earnings up to the Social Security wage base (which is up to $113,700 for 2013).

Finally, the American Taxpayer Relief Act also includes extensions of provisions that expired at the end of 2011, but now apply to the 2012 tax year. That means it has immediate effect on the 2013 filing season.

The landscape of federal tax law has changed once again, and with it the need to reassess present tax strategies. Please call this office if you have any questions about the new law or how it impacts you directly.

Individual Retirement Accounts (IRAs) are popular retirement savings vehicles that enable taxpayers to build their nest egg slowly over the years and enjoy tax benefits as well. But what happens to that nest egg when the IRA owner passes away?

Individual Retirement Accounts (IRAs) are popular retirement savings vehicles that enable taxpayers to build their nest egg slowly over the years and enjoy tax benefits as well. But what happens to that nest egg when the IRA owner passes away?

The answer to that question depends on who inherits the IRA. Surviving spouses are subject to different rules than other beneficiaries. And if there are multiple beneficiaries (for example if the owner left the IRA assets to several children), the rules can be complicated. But here are the basics:

Spouses

Upon the IRA owner's death, his (or her) surviving spouse may elect to treat the IRA account as his or her own. That means that the surviving spouse could name a beneficiary for the assets, continue to contribute to the IRA, and would also avoid having to take distributions. This might be a good option for surviving spouses who are not yet near retirement age and who wish to avoid the extra 10-percent tax on early distributions from an IRA.

A surviving spouse may also rollover the IRA funds into another plan, such as a qualified employer plan, qualified employee annuity plan (section 403(a) plan), or other deferred compensation plan and take distributions as a beneficiary. Distributions would be determined by the required minimum distribution (RMD) rules based on the surviving spouse's life expectancy.

In the alternative, a spouse could disclaim up to 100 percent of the IRA assets. Some surviving spouses might choose this latter option so that their children could inherit the IRA assets and/or to avoid extra taxable income.

Finally, the surviving spouse could take all of the IRA assets out in one lump-sum. However, lump-sum withdrawals (even from a Roth IRA) can subject a spouse to federal taxes if he or she does not carefully check and meet the requirements.

Non-spousal inherited IRAs

Different rules apply to an individual beneficiary, who is not a surviving spouse. First of all, the beneficiary may not elect to treat the IRA has his or her own. That means the beneficiary cannot continue to make contributions.

The beneficiary may, however, elect to take out the assets in a lump-sum cash distribution. However, this may subject the beneficiary to federal taxes that could take away a significant portion of the assets. Conversely, beneficiaries may also disclaim all or part of the assets in the IRA for up to nine months after the IRA owner's death.

The beneficiary may also take distributions from the account based on the beneficiary's age. If the beneficiary is older than the IRA owner, then the beneficiary may take distributions based on the IRA owner's age.

If there are multiple beneficiaries, the distribution amounts are based on the oldest beneficiary's age. Or, in the alternative, multiple beneficiaries can split the inherited IRA into separate accounts, and the RMD rules will apply separately to each separate account.

The rules applying to inherited IRAs can be straightforward or can get complicated quickly, as you can see. If you have just inherited an IRA and need guidance on what to do next, let us know. Likewise, if you are an IRA owner looking to secure your savings for your loved ones in the future, you can save them time and trouble by designating your beneficiary or beneficiaries now. Please contact our office with any questions.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of January 2013.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of January 2013.

January 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 26-28.

January 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 29-January 1.

January 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 2-4.

January 10
Employees who work for tips. Employees who received $20 or more in tips during December must report them to their employer using Form 4070.

January 11
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 5-8.

January 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 9-11.

January 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 12-15.

January 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 16-18.

January 25
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 19-22.

January 30
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 23-25.

February 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 26-29.

February 6
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 30-February 1.

All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year.  President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year.  At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.

All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year.  President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year.  At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.

Taxes and spending

Almost immediately after President Obama won re-election, Democrats and Republicans scrambled to stake out their positions over the fiscal cliff.  Unless the White House and the GOP reach an agreement, the Bush-era tax cuts will expire for all taxpayers after 2012 and across-the-board spending cuts will take effect.  Many popular but temporary tax incentives, known as tax extenders, expired after 2011, with many more scheduled to expire after 2012.  The alternative minimum tax (AMT), intended many years ago to apply to wealthy taxpayers, is on track to encroach on more middle income taxpayers because it is not indexed for inflation.  Also, the employee-side payroll tax cut is scheduled to expire after 2012.

Since winning a second term, President Obama has repeated that the Bush-era tax cuts should expire for higher income individuals after 2012.  The top two tax rates would rise to 36 percent and 39.6 percent after 2012. All of the remaining rates would be extended.  Tax rates on capital gains and dividends would also increase for higher income individuals. On the campaign trail, President Obama described higher income taxpayers as individuals with incomes above $200,000 and families with incomes above $250,000. 

President Obama has talked about trimming $4 trillion from the federal budget deficit.  Approximately $1.6 trillion would come from increased taxes on higher income individuals.  To achieve a target of $1.6 trillion in tax revenue, the Bush-era tax cuts could not be extended for higher income individuals.  Other incentives for higher income individuals would likely be curtailed or possibly eliminated under the President’s plan. These include the personal exemption phaseout (PEP) and the Pease limitation on itemized deductions. President Obama may also re-propose his “Buffett Rule,” which, the President has explained, would ensure that individuals making over $1 million a year pay a minimum effective tax rate of at least 30 percent.

The GOP, its majority reduced in the House after the November elections, has offered few details about its plans to avoid the fiscal cliff.  House Speaker John Boehner, R-Ohio, has indicated that the GOP may be open to raising revenue by closing tax loopholes and capping certain unspecified deductions for higher income individuals.  Revenue could also be raised by limiting or abolishing business tax deductions and credits.  Among the business tax incentives most often hinted at for elimination are ones for oil and gas producers. President Obama, however, has said that he will not support a deficit reduction plan that relies on closing undefined tax loopholes.

Possible scenarios

Looking ahead, several scenarios may play out before year-end.  President Obama and the GOP could agree on a tax and deficit reduction package that meets or comes close to the President’s targets.  President Obama and the GOP may agree to extend the Bush-era tax cuts and delay the spending cuts for three or six months to give everyone more time to negotiate a long-term deal.  On the other hand, both sides could fail to reach any agreement before year-end and the Bush-era tax cuts would expire as scheduled.  The spending cuts also would kick-in as scheduled.

Filing season

Whenever Congress changes the tax laws, the IRS has to reprogram its return processing systems.  Tax laws passed late in 2012 have the potential to delay the start of the 2013 filing season depending on how long it takes the IRS to reprogram its systems.

IRS officials have told Congress that they are preparing for late tax legislation, especially legislation on the AMT.  In past years, Congress has routinely “patched” the AMT to shield middle income taxpayers from its reach.  The IRS appears to be anticipating that Congress will patch the AMT for 2012.  If Congress does not, the IRS has warned that the start of the 2013 filing season could be delayed for as many as 60 million taxpayers.

The IRS also must reprogram its processing systems for the tax extenders.  These tax law changes generally do not require the level of reprogramming the AMT patch requires.  The IRS has predicted that any year-end extension of the extenders will be manageable.

Please contact our office if you have any questions about the tax and spending negotiations underway in Washington.

As the end of the calendar year approaches, taxpayers ordinarily prefer to minimize current-year income by deferring the inclusion of taxable income to the following year, while accelerating deductions to the current year. However, as many taxpayers are aware, individual income tax rates may increase in 2013, with the potential for dramatic increases for higher-income individuals (if not all individuals).

As the end of the calendar year approaches, taxpayers ordinarily prefer to minimize current-year income by deferring the inclusion of taxable income to the following year, while accelerating deductions to the current year. However, as many taxpayers are aware, individual income tax rates may increase in 2013, with the potential for dramatic increases for higher-income individuals (if not all individuals).

While it is unclear how many taxpayers will see tax increases in 2013, it is certain that rates will not be any lower than they are in 2012. Thus, some, if not all, individuals will have an incentive to accelerate income into 2012.

Annual bonuses for 2012

Employees earning annual bonuses for services performed in 2012 ordinarily would receive the bonus in 2013. And generally the employer would take the deduction in 2013. However, some employees may prefer to receive the bonus in 2012, to take advantage of the lower current tax rates. An employer may want to deduct the bonus in the earlier year, to reduce taxable income. The IRS recently issued Chief Counsel Advice (CCA 201246029) on the treatment of a bonus that illustrates some of the practical obstacles to accelerating bonus income.

A lesson learned

In the CCA, the employer awarded bonuses for the calendar year (the year of service) based on company performance. The total bonus amount accrued for financial accounting purposes at the end of the year. The bonuses were paid early in the following year, after the employer finalized the amounts, provided that the employee still worked for the company.

In Rev. Rul. 2011-29, the IRS determined that the employer can accrue liability, and take a deduction, for bonuses in the earlier year, where the employer can establish the fact of the liability for bonuses paid to a group of employees, even though the recipients’ identities and amounts payable were determined in the following year. In contrast, in the CCA, the IRS concluded that the taxpayer’s liability to pay bonuses was not fixed until the contingency was satisfied – the employee had to be still employed on the date of payment. Therefore, the bonuses were not deductible until the following year, when they were paid.

While the CCA does not discuss it, presumably if the employer paid the bonuses in the year of service (2012), they would be deductible in that same year. The employees would take the bonuses into income in 2012, when tax rates were lower. Furthermore, the income would avoid the new 0.9 percent additional Medicare tax on earned income, which takes effect in 2013.

Important timing exception

In the CCA, the timing was identical for the employer and the employee. Under Code Sec. 404, concerning deferred compensation, the employer may not deduct the bonus until the same time that the employee takes it into income. Under an exception, however,  if the employer pays the bonus in 2013 but within 2 ½ months after the end of 2012, an accrual basis taxpayer can deduct the payment in the current year, even though the employee would not include it in income until it is paid in 2013. This presumes that the bonuses are fixed at the end of 2012 and that the employer does not use a plan like the one described in the CCA.

With 2013 bearing down on us, we hope you have a moment to spare from holiday preparation for some good old-fashioned year-end tax planning. By now you must be familiar with the term “fiscal cliff” and how the expiring provisions, tax rates, and budget appropriations may affect small business, big business, and politics in Washington, DC. However, the looming expiration dates for the Bush-era tax cuts and other tax provisions set to become effective in 2013 may also have consequences for how you save for retirement. This year we have advice for IRA account holders in particular.

With 2013 bearing down on us, we hope you have a moment to spare from holiday preparation for some good old-fashioned year-end tax planning. By now you must be familiar with the term “fiscal cliff” and how the expiring provisions, tax rates, and budget appropriations may affect small business, big business, and politics in Washington, DC. However, the looming expiration dates for the Bush-era tax cuts and other tax provisions set to become effective in 2013 may also have consequences for how you save for retirement. This year we have advice for IRA account holders in particular:

Avoiding increased tax. If you have a traditional individual retirement account (IRA) and you are thinking about converting to a Roth so you can accumulate tax-free earnings, you might want to do it before the year ends. First, if you are in a high-income tax bracket, your taxes are likely to increase if the Bush-tax cuts expire. Converting from a traditional IRA to a Roth IRA creates a taxable event, and you may lose more money to the government by converting in 2013 than you would if you convert before 2012 ends.

Secondly, taxpayers whose projected 2013 adjusted gross income (AGI) will approach $250,000 (or $200,000 for single filers) may want to avoid converting their traditional IRA in 2013. The addition of their IRA assets to their AGI may push them within the income range limits for taxpayers subject to the 3.8 percent tax on net investment income that goes into effect in 2013.

Please note that the converted IRA assets would not themselves be subject to the 3.8 percent surtax. However the surtax would apply to any investment income the taxpayer has. Such investment income would include items such as (but not limited to) dividends, rents, royalties, interest, except municipal-bond interest, capital gains, and income from the sale of a principal residence worth more than the $250,000/$500,000 exclusions.

Undoing a conversion. You might be asking what would happen if you convert to a Roth IRA in 2012 and then Congress extends the current tax rates. In such cases, you would have until October 15, 2013 to undo the transaction. You could put the money back into your traditional IRA as if you had never converted in the first place. In other words, there would be no taxable event.

2010 conversion and deferral. Taxpayers who already converted their traditional IRA to a Roth IRA in 2010 were given a one-time privilege of deferring half of the income from the conversion to 2011 and the other half until 2012. If taxpayers elected to defer their IRA conversion income in this way, the 2012 tax year has arrived. They must report that second half of their conversion income on their 2012 tax returns. If you are a taxpayer who must report income from a previous Roth IRA conversion in 2012, it might not be in your best interest to generate additional income by converting yet another IRA before the year ends.

Contributions. The 2012 year-end will also bring several changes to the rules on IRA contributions, which may affect your planning. In 2013, the limits on maximum annual contributions to an IRA will go up from $5,000 to $5,500 ($6,500 for contributors age of 50 and over, up from $6,000 in 2012). This increase in contribution limits is the first time the IRS has adjusted the limit since 2008.

The adjusted gross income level at which taxpayers must begin to phase-out their contributions will also go up in 2013:

However, tax planners should note that the deadline for making IRA contributions for the 2012 tax year remains unchanged. You still have until your filing date, which is April 15, 2013, to make contributions for 2012.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of December 2012.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of December 2012.

December 5
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 28–30.

December 7
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 1–4.

December 10
Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.

December 12
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 5–7.

December 14
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 8–11.

December 19
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 12–14.

December 21
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 15–18.

December 27
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 19–21.

December 28
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 22–25.

January 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 26–28.

January 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates December 29–31.

The fate of many of the tax incentives taxpayers have grown accustomed to over recent years will likely remain up in the air until Congress and the Administration finally face off weeks before year-end 2012. While the results of Election Day will have bearing on the outcome, no crystal ball can predict how the ultimate short-term compromise will unfold. As a result, some year-end tax planning must be deferred and executed ”at the eleventh hour” only after Congress passes and the President signs what will likely result in a stopgap, temporary compromise for 2013. Tax rates for higher-bracket individuals and a long list of “extenders” provisions such as the child tax credit, the enhanced education credits and the optional deduction for state and local sales tax, hang in the balance. Real tax reform for 2014 and beyond, in any event, won’t be hammered out until 2013 is well underway.

The fate of many of the tax incentives taxpayers have grown accustomed to over recent years will likely remain up in the air until Congress and the Administration finally face off weeks before year-end 2012. While the results of Election Day will have bearing on the outcome, no crystal ball can predict how the ultimate short-term compromise will unfold. As a result, some year-end tax planning must be deferred and executed ”at the eleventh hour” only after Congress passes and the President signs what will likely result in a stopgap, temporary compromise for 2013. Tax rates for higher-bracket individuals and a long list of “extenders” provisions such as the child tax credit, the enhanced education credits and the optional deduction for state and local sales tax, hang in the balance. Real tax reform for 2014 and beyond, in any event, won’t be hammered out until 2013 is well underway.

Traditional Planning for Individuals

2012 year-end legislation clearly plays a major role in 2012 year-end tax planning for many taxpayer. Nevertheless, traditional year-end tax planning should not be overlooked in the meantime. In many cases, attention to traditional considerations, now, will prove more important to a majority of taxpayers’ bottom line. Here is a checklist of some traditional year-end planning considerations not to be overlooked:

• Changes in filing status: marriage, divorce, death of a spouse, or a change in head-of-household status during 2012 (or anticipated for 2013) will impact on your tax bracket and bottom line tax liability. Anticipate the additional expense or lower tax bill that a change in filing status may bring.
• Birth of a child, adoption, combined families through re-marriage, and even the ages of children in 2012 and 2013 can matter to year-end tax planning. Dependency exemptions in some instances depend upon the amount of support provided within the tax year. The ability to take advantage of the child tax credit, the child-care credit, the earned income credit, application of the kiddie tax, and the ability to be covered under a parent’s health insurance under the new health care law in part hinges upon how a “child” is defined within certain age limits (varying from under age 13, to under age 17, 19, 24 or 26, depending upon the provision).
• Retirement and semi-retirement is also a major event for tax purposes for which first-year “required minimum distributions” from retirement savings must be calculated and made. Also an important year-end consideration for the newly retired is facing what is typically an entirely new matrix of investment income considerations focused on “smoothing” the amount of income and deductions among several years to achieve maximum tax results.
• Timing the recognition of capital gains and losses is important, in particular to maximize offsetting short-term gains (that are tax at ordinary income rates) with short-term losses. Also especially relevant to 2012 year-end timing of capital gains and losses is the introduction of a 3.8 percent Medicare contributions tax that will be assessed on excess net investment income starting in 2013.
• Projecting available itemized deductions for 2012, then controlling whether a better tax result might take place by deferring or accelerating some of those deductions, is frequently important. Some taxpayers who are close to the amount of their standard deduction amount may want to load deductions into a single year, say 2013, so they have enough to itemize deductions for that year, while still be entitled to the maximum amount of their standard deduction into an adjacent year (2012 in our example). Other taxpayers need to be aware of alternative minimum tax (AMT) exposure in which many deductions become cut back or eliminated.
• Unusual expenses that may generate an atypical deduction or credit, such as emergency medical expenses, moving expenses, or unemployment and job-search expenses, may need special attention. In connection with medical expenses, and particularly relevant to 2012 year-end planning, is the increase in the floor on deductible medical expenses from 7.5 percent adjusted gross income (AGI) in 2012 to 10 percent AGI in 2013 (7.5 percent for those who reach 65 years of age by the close of the tax year).
• Gift giving, both charitable and for estate planning purposes, usually reaches a high point at year end and for good reason. In addition to better knowing what assets remain available for gifting (or what income needs offsetting with a charitable deduction), certain tax benefits cannot be accumulated but must be used or lost each year. For example, the $13,000 annual gift tax exclusion per recipient cannot be carried over and used in addition to the $14,000 gift tax exclusion that will be available in 2013. A gift of $13,000 on December 31, 2012 and a $14,000 gift on January 1, 2013, for example, amount to a $27,000 tax-free gift; while a $27,000 gift all on January 1, 2013 will subject $13,000 of that gift to potential gift tax. A charitable gift can frequently require the same timing finesse, for example, if donors find themselves in a higher tax bracket in a particular year or not being able to otherwise itemize deductions.

Traditional Planning for Businesses

Businesses also face some traditional strategic decisions that often can only be made at year-end:

• Capital purchases that qualify for accelerated depreciation, bonus depreciation or so-called Section 179 expensing should be timed to fall into the current or the upcoming year, as the overall profit and loss of a business dictates. “Placed in service” requirements in addition to timing the purchase of equipment also apply to maximizing tax benefits.
• Determination of whether a business is on the cash or accrual method of accounting for tax purposes is also critical to year-end business strategies. Businesses using the cash basis method of accounting recognize and report income when the business actually or constructively receives cash or its equivalent; for accrual-basis taxpayers, generally the right to receive income, rather than actual receipt, determines the year of inclusion of income.
• Compensation and shareholder or partner distributions from a business, and drawing the often fine line between the two, can make a considerable difference to a business owner’s overall tax liability for the year. Differences often hinge upon whether self-employment tax is paid, or whether a distribution is taxed as ordinary income or at the capital gains rate.
• Determining the difference between ordinary business activities and passive activities before implementing a year-end strategy also just makes good sense. Rental income or losses, and other passive activity gains and losses, must be netted separately from business gains and losses. Year-end timing for one does not necessarily help control your bottom-line tax cost on the other.

Please contact us if you have any questions about how traditional year-end planning might benefit your bottom line. Once Congress acts on year-end tax legislation this year, we also suggest that most taxpayers consider what steps may then be taken before the 2012 tax year closes to mitigate against any unfavorable new tax provisions.