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January 2013 Newsletter

Feature Articles

Tax Tips

This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.

Tax Changes for 2013: A Checklist


Welcome 2013! As the new year rolls around, it's always a sure bet that there will be changes to the current tax law and 2013 is no different. From health savings accounts to retirement contributions here's a checklist of tax changes to help you plan the year ahead. 

Individuals 

For 2013, standard deductions and the personal exemption, as well as most retirement contribution limits have been adjusted upward to reflect inflation. In addition, tax rate structure and other tax provisions have been modified or extended by the American Taxpayer Relief Act of 2012, commonly referred to as the "fiscal cliff" bill. 

Alternative Minimum Tax (AMT)

Exemption amounts for the AMT are now permanent and indexed for inflation and allow the use of nonrefundable personal credits against the AMT. Retroactive to January 1, 2012, exemption amounts are $50,600 (individuals) and $78,750 (married filing jointly). These amounts are indexed for inflation in 2013. 

"Kiddie Tax" 

For taxable years beginning in 2013, the amount that can be used to reduce the net unearned income reported on the child's return that is subject to the "kiddie tax," is $1,000 (up from $950 in 2012). The same $1,000 amount is used to determine whether a parent may elect to include a child's gross income in the parent's gross income and to calculate the "kiddie tax". For example, one of the requirements for the parental election is that a child's gross income for 2013 must be more than $1,000 but less than $10,000. 

For 2013, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to "kiddie tax" is $2,000. 

Health Savings Accounts (HSAs) 

Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return. 

A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care. 

For calendar year 2013, a qualifying HDHP must have a deductible of at least $1,250 (up $50 from 2012) for self-only coverage or $2,500 (up $100 from 2012) for family coverage (unchanged from 2011) and must limit annual out-of-pocket expenses of the beneficiary to $6,250 for self-only coverage (up $200 from 2012) and $12,500 for family coverage (up $400 from 2012). 

Medical Savings Accounts (MSAs) 

There are two types of Medical Savings Accounts (MSAs): the Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high deductible health plan (HDHP). 

Self-only coverage. For taxable years beginning in 2013, the term "high deductible health plan" means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,150 (up $50 from 2012) and not more than $3,200 (up $50 from 2012), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,300 (up $100 from 2012). 

Family coverage. For taxable years beginning in 2013, the term "high deductible health plan" means, for family coverage, a health plan that has an annual deductible that is not less than $4,300 (up $100 from 2012) and not more than $6,450 (up $150 from 2012), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $7,850 (up $200 from 2012). 

Eligible Long-Term Care Premiums 

Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or less at the end of 2013, the limitation is $360. Persons over 40 but less than 50 can deduct $680. Those over age 50 but not more than 60 can deduct $1,360, while individuals over age 60 but younger than 70 can deduct $3,640. The maximum deduction $4,550 and applies to anyone over the age of 70. 

Foreign Earned Income Exclusion 

For taxable years beginning in 2012, the foreign earned income exclusion amount is $97,600, up from $95,100 in 2012. 

Long-Term Capital Gains and Dividends

In 2013 tax rates on capital gains and dividends for taxpayers whose income is at or below $400,000 ($450,000 married filing jointly) remain the same as 2012 rates. As such, for taxpayers in the lower tax brackets (10% and 15%), the rate remains 0%. For taxpayers in the middle tax brackets, the rate is 15%. An individual taxpayer whose income is at or above $400,000 ($450,000 married filing jointly), the rate for both capital gains and dividends is capped at 20% (up from 15% in 2012). 

Pease and PEP (Personal Exemption Phaseout) 

Pease (limitations on itemized deductions) is permanently extended for taxable years beginning after December 31, 2012 for taxpayers with income at or below $250,000 for single filers) and $300,000 for married filing jointly. The PEP (personal exemption phase-out) limitations was also reinstated, but with higher thresholds of $250,000 for single filers and $300,000 for married taxpayers filing joint tax returns.

Estate Tax 

For an estate of any decedent during calendar year 2013, the basic exclusion amount is $5,120,000 (indexed for inflation--same as 2012). The maximum tax rate rises to 40% (up from 35% in 2012). 

Individuals - Tax Credits

Adoption Credit 

For taxable years beginning in 2013, there is a maximum (non-refundable) credit of $6,000, which is limited to domestic adoption of a child with special needs. The phase-out range (modified adjusted gross income) for the credit is $75,000 to $115,000. 

Earned Income Tax Credit 

For tax year 2013, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $5,981, up from $5,891 in 2012. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Child Tax Credit 

For tax year 2013, the child tax credit is $1,000 per child.

Child and Dependent Care Credit

The child and dependent care tax credit was permanently extended for taxable years beginning in 2013. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income. 

Individuals - Education 

American Opportunity Tax Credit and Lifetime Learning Credits 

The American Opportunity Tax Credit (formerly Hope Scholarship Credit) is extended to the end of 2017. The maximum credit is $2,500 per student. The Lifetime Learning Credit remains at $2,000. 

Interest on Educational Loans 

Starting in 2013, the $2,500 maximum deduction for interest paid on student loans is repealed and no longer limited to interest paid during the first 60 months of repayment. The deduction is phased out for higher-income taxpayers.

Tuition and Related Expenses Deduction

In 2013, there is once again an above-the-line deduction of up to $4,000 for qualified tuition expenses. This means that qualified tuition payments can directly reduce the amount of taxable income, and you don't have to itemize to claim this deduction. However, this option can't be used with other education tax breaks, such as the American Opportunity Tax Credit, and the amount available is phased out for higher-income taxpayers.

Individuals - Retirement

Contribution Limits 

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $17,000 to $17,500. Contribution limits for SIMPLE plans increase from $11,500 to $12,000. The maximum compensation used to determine contributions increases to $255,000 (up $5,000 from 2012 levels). 

Income Phase-out Ranges 

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified adjusted gross income (AGI) between $59,000 and $69,000, up from $58,000 and $68,000 in 2012. 

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range is $95,000 to $115,000, up from $92,000 to $112,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple's modified AGI is between $178,000 and $188,000, up from $173,000 and $183,000. 

The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $178,000 to $188,000 for married couples filing jointly, up from $173,000 to $183,000 in 2012. For singles and heads of household, the income phase-out range is $112,000 to $127,000, up from $110,000 to $125,000. For a married individual filing a separate return who is covered by a retirement plan, the phase-out range remains $0 to $10,000. 

Saver's Credit 

The AGI limit for the saver's credit (also known as the retirement savings contribution credit) for low and moderate income workers is $59,000 for married couples filing jointly, up from $57,500 in 2012; $44,250 for heads of household, up from $43,125; and $29,500 for married individuals filing separately and for singles, up from $28,750.

Businesses

Standard Mileage Rates 

The rate for business miles driven is 56.5 cents per mile for 2013, up from 55.5 cents per mile in 2012. 

Section 179 Expensing 

For 2013 the maximum Section 179 expense deduction for equipment purchases increases to $500,000 of the first $2,000,000 of business property placed in service during 2013. The bonus depreciation of 50% is also extended through 2013. 

Transportation Fringe Benefits 

If you provide transportation fringe benefits to your employees, for tax years beginning in 2013 the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $125 (same as 2012). The monthly limitation for qualified parking is $240 (same as 2012). 

While this checklist outlines important tax changes for 2013, additional changes in tax law are more than likely to arise during the year ahead. 

Don't hesitate to call us if you want to get an early start on tax planning for 2013. We're here to help! 

How to Get Paid on Time


Due to current economic conditions, it's likely that collecting on your accounts receivables is becoming more and more of a challenge. Strengthening your collection procedures may allow you to improve collection rates and shorten the aging days of your accounts receivables.

The following suggestions will help your business improve its cash flow and tighten up its credit and collections policies. Some of the tips discussed here may not be suitable for every business, but can serve as general guidelines to give your company more financial stability.

Define Your Policy. Define and stick to concrete credit guidelines. Your sales force should not sell to customers who are not credit-worthy, or who have become delinquent. You should also clearly delineate what leeway sales people have to vary from these guidelines in attempting to attract customers.

Tip: You should have a system of controls for checking out a potential customer's credit, and it should be used before an order is shipped. Further, there should be clear communication between the accounting department and the sales department as to current customers who become delinquent.

Clearly Explain Your Payment Policy. Invoices should contain clear written information about how much time customers have to pay, and what will happen if they exceed those limits.

Tip: Make sure invoices include a telephone number and website address so customers can contact you with billing questions. Also include a pre-addressed envelope.

Tip: The faster invoices are sent, the faster you receive payment. For most businesses, it's best to send an invoice with a shipment, rather than afterward in a separate mailing.

Follow Through on Your Stated Terms. If your policy stipulates that late payers will go into collection after 60 days, then you must stick to that policy. A member of your staff (but not a salesperson) should call all late payers and politely request payment. Accounts of those who exceed your payment deadlines should be penalized and/or sent into collection, if that is your stated policy.

Train Staff Appropriately. The person you designate to make calls to delinquent customers must be apprised of the seriousness and professionalism required for the task. Here is a suggested routine for calls to delinquent payers:

  • Become familiar with the account's history and any past and present invoices.
  • Call the customer and ask to speak with whoever has the authority to make the payment.
  • Demand payment in plain, non-apologetic terms.
  • If the customer offers payment, ask for specific dates and terms. If no payment is offered, tell the customer what the consequences will be.
  • Take notes on the conversation.
  • Make a follow-up call if no payment is received and refer to the notes taken as to any promised payments.

1099 Forms: 5 Key Reporting Changes for Businesses


According to the IRS, under-reporting of income is the biggest contributing factor to the IRS tax gap--the amount owed by individuals and businesses versus the amount that was actually paid in taxes. In 2006, the most recent year for which data are available, under-reporting across taxpayer categories accounted for an estimated $376 billion of the gross tax gap. 

Overall, the IRS found that compliance is highest where there is third-party information reporting (1099 forms used to report taxable income earned that is not considered salary and wages) and/or withholding (W-2 forms). In the case of W-2 forms, the IRS found that a net of only 1% of wage and salary income was misreported; however, amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.

In an effort to close that tax gap, the IRS has changed some reporting requirements for 1099s for tax year 2012. Here are some of those key changes:

  1. 1099-MISC. Starting in 2012, compensation of $600 or more paid in a calendar year to an H-2A visa agricultural worker who did not give you a valid taxpayer identification number must be reported on 1099-MISC. You must also withhold federal income tax under the backup withholding rules. However, if the worker does furnish a valid taxpayer identification number, then report the payments on Form W-2.
  2. 1099-B. New boxes have been added to Form 1099-B for reporting the stock or other symbol (box 1d), quantity sold (box 1e), whether basis is being reported to the IRS (box 6b), and state income tax withheld (boxes 13-15). Other boxes on the form have been moved or renumbered. In addition, brokers must report on Form 1099-B sales of covered securities by an S corporation if the S corporation acquired the covered securities after 2011.
  3. 1099-C. The titles for boxes 1, 2, and 6 on Form 1099-C have changed. Box 1 is now Date of Identifiable Event; box 2 is now Amount of Debt Discharged; and box 6 is now Identifiable Event Code, and requires the entry of a code for the identifiable event. See Box 6--Identifiable Event Code. For 2012, all codes are optional except for Code A--Bankruptcy. 
  4. 1099-DIV. Exempt-interest dividends from a mutual fund or other regulated investment company (RIC) are now reported on Form 1099-DIV and are no longer reported on Form 1099-INT, Interest Income. Also, boxes 12 through 14 have been added to Form 1099-DIV to report state income tax withheld. 
  5. 1099-INT. Exempt-interest dividends from a mutual fund or other regulated investment company (RIC) are no longer reported on Form 1099-INT. Instead, those amounts are reported on Form 1099-DIV, Dividends and Distributions. In addition, boxes 11 through 13 have been added to Form 1099-INT to report state income tax withheld.

If you need help with 1099s this year, don't hesitate to give us a ring. We're happy to help you out.

IRS Announces 2013 Standard Mileage Rates


Beginning January 1, 2013, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) is:

  • 56.5 cents per mile for business miles driven 
  • 24 cents per mile driven for medical or moving purposes 
  • 14 cents per mile driven in service of charitable organizations 

The standard mileage rate are based on an annual study of the fixed and variable costs of operating an automobile.

Let us know if you have questions about which driving activities you should monitor as tax year 2013 begins. 

Retirement Accounts Distributions for Sandy Victims


The Internal Revenue Service announced that 401(k)s and similar employer-sponsored retirement plans can be used to make loans and hardship distributions to victims of Hurricane Sandy and members of their families. 

401(k) plan participants, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, and state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.

Retirement plans can provide this relief to employees and certain members of their families who live or work in the disaster area. To qualify for this relief, hardship withdrawals must be made by Feb. 1, 2013.

The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

This broad-based relief means that a retirement plan can allow a Sandy victim to take a hardship distribution or borrow up to the specified statutory limits from the victim's retirement plan. It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.

Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, the plan can ignore the limits that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in the Announcement.

Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable. Also, a 10 percent early-withdrawal tax usually applies.

If you have any questions about hardship distributions from your retirement account, please give us a call. We can help. 

Don't Fall for Phony IRS Websites


The Internal Revenue Service is issuing a warning about a new tax scam that uses a website that mimics the IRS e-Services online registration page.

The actual IRS e-Services page offers web-based products for tax preparers, not the general public. The phony web page looks almost identical to the real one. The IRS gets many reports of fake websites like this. Criminals use these sites to lure people into providing personal and financial information that may be used to steal the victim's money or identity.

The address of the official IRS website is www.irs.gov. Don't be misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov.

If you find a suspicious website that claims to be the IRS, send the site's URL by email to phishing@irs.gov. Use the subject line, 'Suspicious website'.

Be aware that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

If you have any questions, don't hesitate to contact us and be sure to report any unsolicited email that appears to be from the IRS by sending it to phishing@irs.gov. 

Tax Due Dates for January 2013


January 10

Employees - who work for tips. If you received $20 or more in tips during December, report them to your employer. You can use Form 4070, Employee's Report of Tips to Employer.

January 15

Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in December 2012.

Individuals - Make a payment of your estimated tax for 2012 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES. This is the final installment date for 2012 estimated tax. However, you do not have to make this payment if you file your 2012 return (Form 1040) and pay any tax due by January 31, 2013.

Employers - Nonpayroll Withholding. If the monthly deposit rule applies, deposit the tax for payments in December 2012.

Farmers and Fishermen - Pay your estimated tax for 2012 using Form 1040-ES. You have until April 15 to file your 2012 income tax return (Form 1040). If you do not pay your estimated tax by January 15, you must file your 2012 return and pay any tax due by March 1, 2013, to avoid an estimated tax penalty.

January 31

Employers - Give your employees their copies of Form W-2 for 2012 by January 31, 2013. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee of the posting by January 31.

Businesses - Give annual information statements to recipients of 1099 payments made during 2012.

Employers - Federal unemployment tax. File Form 940 for 2012. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you already deposited the tax for the year in full and on time, you have until February 11 to file the return.

Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2012. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 11 to file the return.

Employers - Nonpayroll taxes. File Form 945 to report income tax withheld for 2012 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 11 to file the return.

Individuals - who must make estimated tax payments. If you did not pay your last installment of estimated tax by January 15, you may choose (but are not required) to file your income tax return (Form 1040) for 2012. Filing your return and paying any tax due by January 31 prevents any penalty for late payment of last installment.

Payers of Gambling Winnings - If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of Form W-2G.

Certain Small Employers - File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2012. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more from 2012 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return. 

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