Senate leaders failed to agree Sunday on a compromise to avert the “fiscal cliff” of
tax increases and spending cuts scheduled to take effect Tuesday. Talks took a
new direction late in the day, with Senate Minority Leader Mitch McConnell,
R-Ky., opening talks with Vice President Joe Biden on how to break the deadlock.
More discussions are planned today; for full story go to: I think we’re going over the cliff
As a taxpayer, you are facing what is perhaps an unprecedented set of circumstances – the expiration of the tax rates enacted in 2001, the expiration of more than 150 tax provisions and a tax increase of more than $500 billion overall – that could result in a much higher tax liability when you file your next return.
If Congress and the President do not make changes, the combined effect could result in an average tax hike of around $3,500 per household for up to 90% of Americans. We want to inform you of possible tax increases and loss of tax benefits that could negatively impact your finances. We encourage you to contact us to start planning now – there may be some steps (as mentioned below) you can take immediately to soften the impact on your bottom line.
We have come to the edge of a “fiscal cliff,” as it is being called, because of several events that will have an impact all at once:
- Tax cuts enacted during the Bush Administration are set to expire at year-end.
- A new 3.8% Medicare surtax on some investment income will become effective Jan. 1, 2013.
- A 2% reduction in the payroll taxes that fund Social Security expires on Dec. 31, 2012.
- Changes to some itemized deductions could increase the rate on ordinary income to an effective rate that is as much as 44.6% for some taxpayers.
- A possible increase on long-term capital gains could push rates from 15% to 20% and the rate on qualified dividends could jump to an effective 44.6% from 15% today.
- A rise in the estate tax rate to 55% from 35% and a cut in the exclusion amount for what is subject to estate taxes to $1 million from $5.12 million.
- A reduction in the Alternative Minimum Tax Exemption will impact tens of millions of taxpayers.
- Potential across-the-board budget cuts in both defense and non-defense spending.
We are recommending that clients take a two-pronged approach that involves addressing many of the possible changes directly while also making use of all options for deductions and credits, or other tax-advantaged opportunities to lower their taxable income. Planning for these changes should begin now, since it may involve significant modifications in your tax strategy.
Prepare for the Worst Case Scenario – Reduce Your Liability
In light of the looming potential tax law changes, you may want to consider the following:
- Review your mix of investments as capital gains rates might increase as well as income tax rates. If your portfolio includes significant long-term capital gains, should you take advantage of the lower rates in 2012?
- Moving into tax deferred or federally non-taxable investments like municipal bonds.
- Lowering your net investment income or modified adjusted gross income if you may be subject to the 3.8% surtax on certain passive income of individuals, trusts and estates.
- Gifting to family members now to avoid the confusion from the estate tax issues. If you’d like the beneficiaries of your will to avoid a possible spike in estate tax, you can give them up to $13,000 a year tax free right now. Sharing the wealth now may also make it possible to reduce the value of your overall estate so that little or none of it is subject to estate taxes when your beneficiaries inherit it.
- Accelerating ordinary income into 2012. If you have flexibility on when you can receive payments of income before year end, consider that they may be subject to lower taxes than in 2013. Another option may be to convert a traditional IRA to a Roth IRA this year, if a conversion otherwise makes sense. Or reverse a conversion if it has not benefited your IRA accounts to have made the conversion.
- Deferring expenses into 2013 but take care not to violate accounting method rules.
- Delaying some contributions. If you always make year-end donations to favorite charities, consider putting them off until January 2013 so they can offset the higher tax rates that may come into play then. If you have securities that have appreciated in value, consider donating them to charities to avoid potential new taxes on dividends.
Take Sound Tax Planning Steps
Some of our recommendations are always good items to check off your year-end tax planning checklist. They include:
- Make the greatest possible contribution to your 401(k) or other employer-based retirement plan. A contribution of pretax income to a plan not only lowers your taxable income, but also it may be eligible for a matching contribution from your employer to your retirement account. You can enhance your retirement income by contributing enough to receive the maximum match offered.
- Do not leave your 401(k) investments on auto pilot – – review the investment mix to determine if you are maximizing value here.
- Set up or contribute to a 529 college savings plan. Your earnings on these accounts grow tax free as long as they are ultimately used for qualified education expenses.
- In many states, taxpayers are required to pay a use tax on Internet purchases when the seller did not collect sales tax on that purchase. This is a good time to determine whether you might be subject to a use tax so that it’s not a surprise later. Determine if you must begin taking a required minimum distribution from a retirement account. Taxpayers generally must begin taking them during the year in which they reach 70½ (although the first year’s payment may be delayed until April 1 of the following year). For 2012, take advantage of the ability to make charitable contributions from your IRA if you have excess retirement savings.
- Wherever possible, use valuable credits, such as the American Opportunity Credit, which can be used for the first four years of college. For eligible taxpayers, it is a dollar-for-dollar reduction of taxes owed. If your tax bill is going to rise, such credits will become even more valuable.
BMK360CPA & Associates, PC can help you understand the effect these possible increases could have on your tax situation and create strategies to minimize the impact. Please don’t hesitate to contact us today at 410 720 9845 or email us at firstname.lastname@example.org to schedule an appointment for discussing your options. You can also visit us at www.bmk360cpa.com
Selecting the right structure for your business can be complicated.There is a lot to consider in starting your own business: Developing a business plan, obtaining sufficient funding, marketing and host of other concerns. Also, critical is determining the organizational structure that best suits the business, because it will impact the operating efficiency, the way you report income, the taxes you pay and your personal liability. There are four basic types to choose from:
- Sole Proprietorship
- Partnership- General and Limited
- Corporation- S and C Corporation
- Limited Liability Company (LLC)
To make an informed decision, you must consider income tax law and tax rates, as well as issues such as transferability, control and potential legal liability. These matters likely will be complicated, and errors can be costly. That is why it is important to do research and seek out the advice of a Certified Public Accountant (CPA) who can help you understand how business structure impacts your organization’s bottom line.CPAs are dedicated to helping Americans start, build and grow their small businesses. That is the mission of BmK360CPA and Associaties, PC.
For additional information visit us at: www. bmk360cpa.com
Practice & Procedures
Recently, the Tax Court denied a taxpayer a deduction for a claimed theft loss because, even if he could prove that the loss had occurred, he had not filed a tax return for the year of loss and as a result did not make a proper election to itemize deductions (Murray, T.C. Memo. 2012-213). The Tax Court’s opinion illustrates that not filing a return on time can have results other than a nonfiling penalty. For more details go to The Tax Adviser
You can’t pick up a newspaper or go online this fall without seeing stories about the coming “tax cliff” or “taxmageddon”—the time at the end of this year when the current tax rates for income, capital gains, gifts, and estates are scheduled to expire. For more details go to Journal of Accountancy
Various scenarios can trigger an Audit by the IRS.The common belief is that this occurs randomly.However, this is not the case.Full report
The type of form 990 a nonprofit files depends on its financial activities as regards gross receipts, total assets or the type of the nonprofit. For detailed information for these requirements go to: IRS Form 990 filing requirements.
If you need assistance completing this form contact BmK360CPA & Associates, PC at:bmk360cpa.com
With unemployment still near the highest rate in decades, it is not surprising to find many people working out of their homes. Now may be a good time to review the criteria for claiming a deduction for the business use of part of a person’s residence. To coninue reading this article published by the journal of Accountany go to : Journal of Accountancy
Even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. For most organizations, unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. An organization must pay estimated tax if it expects its tax for the year to be $500 or more.
The obligation to file Form 990-T is in addition to the obligation to file the annual information return, Form 990, 990-EZ or 990-PF. Each organization must file a separate Form 990-T, except title holding corporations and organizations receiving their earnings that file a consolidated return under Internal Revenue Code section 150. Source: Unrelated Business Income.
However, there are some exceptions. For additional Information on these exceptions go to: Unrelated Business Income Tax Exceptions and Exclusions
Obtaining and maintaining 501(c)(3) tax-exempt status is crucial to the success of charitable organizations. This online training provides you with the tools and knowledge necessary to keep your organization’s exempt status intact. To learn more about maintaining your tax-exempt status go to:Maintaining Your Tax-Exempt Status