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Small Business Tax Saving Strategies for the 2012 Filing Season*

INTRODUCTION

1: Welcome

2: Advice for Small Businesses from CPAs

It is my pleasure to present to you a few of the important tax issues that may have an impact on your 2011 tax returns.

Whether it’s the economic uncertainty that many of you continue to face as small business owners or the complexities of new tax laws that affect your business, there rarely has been a time when meeting your tax responsibilities has been more challenging.

Understanding these laws, and correctly applying them when preparing your tax return, can be overwhelming, especially when new demands on your business and the growing competition seem to consume more and more of your time and resources. However, the proper application of these rules can help the business owner finance the asset purchases by conserving earnings that can be used to finance growth.

Below I will present tax law provisions dealing with expenses, employees, reporting requirements and planning opportunities. These discussions will offer some of the latest information and practical strategies you can use to minimize your tax bill.

However, I’d like to remind you that tax planning and the timing of your tax decisions are critical, and that tax issues may change throughout the year. I therefore recommend that you regularly monitor your financial situation and consult with your CPA at least quarterly if you believe your business may be affected by any tax-law changes or other circumstance.

By taking the necessary responsive steps when the need arises, rather than delaying action until the end of your tax year, you can better protect the financial interests of your business.

It is impossible to predict what Congress might ultimately decide to do next year with the uncertainties in the world economies and as pressure on tax and spending changes grow. So stay in touch with your CPA.
 
*Information is current as of Dec. 12, 2011.

SELECT 2011 TAX PROVISIONS

3: Section 179 Expense Deduction

I’d like to start with a discussion of the special rules available to small businesses for purchasing capital assets. The Section 179 expense deduction is an expensing provision that applies to tangible business property placed in service during the tax year. By claiming it, you can deduct the full cost of newly purchased equipment in the year of purchase and, in the process, you receive a larger tax benefit, improve cash flow and have additional capital to invest.

Regardless of whether you made the purchase with cash or credit, the maximum write-off on a per-taxpayer basis is:
* $500,000 in 2011
* $139,000 in 2012
You are eligible for the deduction on a wide range of property purchases, from computer software to office equipment. For 2011, the deduction also is available for qualified restaurant, leasehold and retail improvement property. This expansion is not available in 2012, unfortunately.
You need to keep in mind that the deduction is reduced by every dollar more than $2 million. So, for example, if you spend $2.5 million or more on eligible property, your Section 179 expense deduction will be zero. Normal depreciation rules will then apply. In 2012, the $2 million dollar limit decreased to $560,000, and the deduction reaches zero for amounts more than $699,000.
The Section 179 expense deduction is limited and cannot be greater than your business’s taxable income and it does not apply to property you inherited or initially purchased for personal use, even if you later change it to a business use.

4: Bonus Depreciation

An additional depreciation that was implemented to encourage asset purchases is the provision for bonus depreciation. You can use the bonus depreciation rules to write off the entire cost of certain business property you first placed in use in 2011. This rule, known as first-year bonus depreciation, allows you to write off 100 percent of your costs in 2011. For property placed in service in 2012, the bonus depreciation allowance is decreased to 50 percent of the property’s cost. Any remaining cost not fully deducted under the bonus depreciation rules is subject to the regular depreciation rules. Thus, it must be deducted over a period of several years.

The allowance generally applies to tangible personal property, including property with a recovery period of 20 years or fewer, office equipment, computer software and certain leasehold improvements. The property must be new, it can’t be used.

By providing immediate tax relief, improving cash flow and providing additional capital for reinvestment in the business, this rule delivers a number of benefits to small business owners. It is important to properly coordinate between using the Section 179 rules versus the bonus depreciation rules as there can be tax consequences to each choice.

5: Start-up and Organizational Expenses

As a small business owner, you typically incur a wide range of costs in the launch of your business. However, relief is available to you. The tax law allows you to deduct some of those costs in the year that you started the business, and others must be amortized, or deducted, over the course of succeeding years.

These start-up costs include expenses incurred when investigating whether to start or buy a business and which business to start or buy. Costs can range from market analysis and feasibility studies to advertising and consultant fees.

In 2011, you may elect to deduct up to $5,000 of start-up expenses incurred during the tax year, down from $10,000 in 2010. The balance must be amortized over 180 months, beginning in the month the business was launched.

However, the deduction phases out dollar-for-dollar in 2011 if costs are greater than $50,000, with no immediate deduction available when start-up costs are greater than $60,000. In that case, all of the costs must be amortized over 180 months.

Also, you can deduct certain organizational costs (up to $5,000, subject to a dollar-for-dollar phaseout if your costs are greater than $50,000) incurred in the setup of a C or S corporation or a partnership, under the same rules for business start-up costs. Organizational costs include legal and accounting fees relating to the creation of the entity.

These rules help small business owners by promoting entrepreneurship and making additional capital available to business owners that can be used for other purposes.

6: Federal Unemployment Tax Act (FUTA)

Generally, all employers pay FUTA tax to support federal and state programs that pay benefits to unemployed workers. The amount of FUTA tax owed by an employer is a percentage of the total amount of wages paid by the employer during the year, limited to the first $7,000 of wages paid to each employee during the year. The FUTA tax rate was set at 6.2 percent for many years, but it was reduced to 6 percent as of July 1, 2011.

If you were required to pay unemployment tax in 2011 for a state unemployment program, you will be allowed a credit against your FUTA tax. The credit is limited to 5.4 percent of wages, producing an effective FUTA tax rate of only 0.6 percent in 2011 – for all of 2011, not just as of July 1.

7: Deduction for Health Insurance When Computing Self-Employment Tax

If you’re self-employed as a sole proprietor, partner or LLC member, you must pay self-employment tax on business earnings. The tax is based on your net earnings from self-employment and generally is equal to 15.3 percent. However, in 2011, the tax was temporarily decreased by two percentage points, to 13.3 percent, consisting of a Social Security tax rate of 10.4 percent and a Medicare insurance tax rate of 2.9 percent.

When you determined your net earnings from self-employment in 2010, you could deduct health insurance costs incurred for yourself, your spouse, your dependents and any of your children who had not reached age 27. This deduction is not available in 2011, but under a separate provision, you can continue to deduct these health insurance costs from your gross income when determining your income tax.
8: Worker Retention Credit and Credit for Hiring Unemployed Veterans

You may take an additional general business tax credit for each formerly unemployed worker you hired after March 18, 2010, and before Jan. 1, 2011, and who you keep on the job for at least one year. Although the credit is available for employees hired in 2010, the credit cannot be claimed until 2011.

If you hired new employees in 2010 with the intention of claiming this credit, don’t forget about it when filing your 2011 returns. The credit is equal to the lesser of $1,000 or 6.2 percent of the wages the taxpayer paid to the retained worker during the one-year period.

9: Credit for Hiring Unemployed Veterans
In late 2011, Congress and the White House created the Returning Heroes Tax Credit and Wounded Warriors Tax Credit to give an additional incentive for employers to hire unemployed veterans. The credit is a component of the work opportunity credit, which is available to employers who hire a specifically targeted individual, such as individuals receiving welfare assistance, ex-felons and summer youth.
 
The credit is worth up to $5,600 for hiring a long-term unemployed veteran, $2,400 for hiring short-term unemployed veteran and $9,600 for hiring an unemployed veteran with a service-related disability. It is available for the first year you hire each unemployed veteran after Nov. 11, 2011, and before Jan. 1, 2013.
 

10: Certain Form 1099-MISC Reporting Repealed

If you were engaged in a trade or business in 2011 and made payments of $600 or more to an individual or business in the form of wages, interest, rent or other similar payments, you must provide the payee with a Form 1099-MISC and send a copy to the IRS.
Historically, you have not been required to send a 1099-MISC to corporations, other than with respect to the payment of legal fees or medical or health-care services that are otherwise reportable, but a requirement was enacted in 2010 to report such payments after Dec. 31, 2011. Similarly, a provision was enacted that would have required individuals receiving rental income from real estate to file information returns for payments made after Dec. 31, 2010.
These two new reporting requirements were eliminated before they could come into full effect thanks to the efforts of the business community, the AICPA, and others. Thus, corporate payments and an individual’s rental income generally remain excepted from the information reporting requirements. However, all other  requirements remain in effect and, as I will discuss in a minute, the penalties for not reporting as required have gone up.

11: Credit Card Transactions

Beginning with Jan. 31, 2012, by Jan. 31 of each year, merchants conducting credit card, debit card or gift card transactions may receive a Form 1099-K from the card processing company reporting the gross amount paid to the merchant during the prior year. Payments made through a third-party settlement network, such as PayPal or eBay, will be reported only if the payee receives more than $20,000 in aggregate and the total number of payment transactions exceeds 200.

Form 1099-K is a new form for the 2012 tax year, implemented to ensure that businesses, especially small businesses, pay tax on their credit and debit card income, especially from online sales. Even merchants who already properly report their credit and debit card income are affected by this new requirement because they must establish new accounting procedures. This is because Form 1099-K will report the gross amount received through payment cards, and therefore you must reconcile the form with your own records to take into account fees, returned items, cash back and other similar amounts. 

Pay attention to requests for filing W-9 forms from your credit card vendors as the card processing company may be required to institute backup withholding on your credit card transactions if you do not provide them with a correct taxpayer identification number, such as an EIN. The IRS has delayed this requirement until after 2012, however. The IRS also has provided that for payments made to a third party settlement network, backup withholding will not apply to payees who receive fewer than 200 payment transactions, even if they receive more than $20,000 in payments.

12: Information Reporting Penalties

A penalty may be imposed if you fail to file any correct and timely information statement with the IRS, or if you fail to furnish a correct and timely information statement to the payee. The amounts of these penalties have increased in 2011.

Both penalties are now $100 per return, reduced to $30 for returns fewer than 30 days late and to $60 for returns 30 or more days late that are filed before Aug. 1. The penalties are capped at a certain amount, depending on the amount of the per-return penalty and the gross receipts of the business. The penalties may be waived for reasonable cause or increased in cases of intentional disregard.

In summary: (1) the new information reporting requirements enacted in 2010 are not gone, as if they never existed, (2) the IRS will now receive more information about merchants who accept credit cards and (3) higher penalties will apply to businesses that do not correctly and in a timely manner file information statements.

13: Corporation Built-in Gains

If you converted a C corporation to an S corporation, the built-in-gains tax applies to certain property held by the S corporation at the time of the conversion. If you sell the property after the conversion, you may need to pay tax on the gain, known as net recognized built-in gain, equal to 35 percent, the highest corporate tax rate.

This tax generally applies to property sold within 10 years of the conversion to an S corporation, but in 2011, that time frame is decreased to 5 years. So a built-in gain on a property sold in 2011 is not subject to the built-in gains tax if the conversion to an S corporation occurred more than five years before the date of the sale.

This rule lowers your tax burden and may provide additional capital for business investment.

14: Planning for 2012 and Beyond

Potentially, 2013 could be a momentous year for tax, and planning for it should begin in 2012.

First, in addition to the normal 2.9 percent Medicare tax, a new Medicare tax of 0.9 percent will apply to certain wages. Businesses will be required to withhold additional amounts from the paychecks of their employees, and the new tax may cause some business owners to rethink their own compensation planning.

Second, a new Medicare tax of 3.8 percent will apply to certain investment income, including pass-through income from a passive trade or business such as a partnership or S corporation. You may want to rethink their business structure to accommodate this new tax.

However, these two Medicare taxes will only apply to amounts in excess of $200,000, although this limit is increased to $250,000 for joint returns and is decreased to $125,000 in the case of married taxpayers filing separate returns.

Third, the Bush-era tax cuts may expire. The expiration of these tax cuts would, among other things:
* increase the tax rates on regular income, capital gains and dividends
* increase the number of individuals subject to the Alternative Minimum Tax (AMT)

The bulk of these changes will affect individuals, but they will also have a major impact on businesses. In particular, the highest tax rate on individuals will increase to 39.6% percent, which is 4.6 percentage points higher than the highest tax rate on corporations. Therefore, although there has been a move in recent years toward pass-through entities, such as LLCs, the C corporation may again come back into favor as individual rates are increased.

As part of the expiration of the Bush-era tax cuts at the end of 2012, capital gain tax rates generally will increase from 15% to 20%, or 0% to 10% for taxpayers in lower-income tax brackets. This increase affects all taxpayers, including small businesses, other than C corporations, for which special rules apply. As a side note, a separate increase occurred at the end of 2011 that affects the sale of qualified stock in a small business that is a C corporation. Special rules, such as a five-year holding period, must be met for a stock to meet the requirements of qualified small business stock, but if it does, some of the gain on the sale of the stock can be excluded from income. In 2011, all of the gain could be excluded, but in 2012 and beyond, half of the gain can be excluded.

15: Planning for Net Operating Losses

When a business’s deductions exceed its income, a net operating loss, or NOL, arises, which may be carried either back or forward to offset gain in past or future years. Generally, NOLs are carried back to offset gain in the two prior tax years, and any unabsorbed NOLs are then carried forward up to 20 years. Any NOLs left after the 20-year period disappear. This may sound simple, but significant planning is required to maximize an NOL. Factors that must be taken into account include the business’s tax liability in past years, anticipated gains in future years, the expected tax rates in future years, whether the entire NOL will be used before it expires in 20 years, and whether the business is, or will be, subject to the Alternative Minimum Tax (AMT).

Additionally, you may need to decide whether it would be better to generate an NOL or to take the Section 179 expense deduction. The Section 179 deduction cannot create an NOL and cannot be carried back to prior years, so, if there is gain in a prior year that you’d like to erase, it may be advantageous to depreciate the relevant cost and create an NOL carryback.

Also, the presence of an NOL may affect the decision of whether to claim bonus depreciation. If an NOL carryforward is about to expire, you may be better off giving up the bonus depreciation to instead claim a combination of regular depreciation and the NOL carryforward.

An NOL offers significant tax advantages, but also requires significant planning. In past years a longer carryback period was permitted and, as the business moves forward, it must be sure to reconcile any unused losses that must be carried forward.

This should be discussed with your CPA.

16: Planning for Retirement

It’s never too early to think about retirement. Business owners have several options when it comes to choosing a retirement plan, including:

* A 401(k) plan, which allows employee salary deferrals and/or employee contributions, may be a good option for businesses seeking flexibility and room to grow.
* A Savings Incentive Match Plan, or SIMPLE, is specifically designed for small employers. The SIMPLE comes in two versions, allowing contributions to either a 401(k) or an IRA. Both the employer and employee may make contributions to the IRA or a 401(k). Unlike with the normal 401(k) plan, the SIMPLE 401(k) requires employers to contribute a certain amount to their employees’ retirement accounts.
* A Simplified Employee Pension Plan, or SEP, is a simple, inexpensive plan that allows you to contribute up to 25 percent of the employee’s compensation to an IRA each year.

If you are self-employed, the simplest and most flexible options are the same: a solo-401(k), a SIMPLE IRA or a SEP IRA.

 

17: Planning for Business Succession

Most business owners believe that business succession planning is only important as one of the principal owners or partners are nearing retirement. That is unwise.

Succession planning is critical not just for retirement but from the outset because the unexpected can occur at any time and any age. Consider the impact on your business if a principal owner or partner suddenly died or was forced to retire due to an illness. Failing to plan for this is a critical mistake.

For business owners nearing retirement, having a plan in place is essential to ensure the business continues to function. Luckily, several strategies can help ease the transition between business owners. To finance a transition, a plan may rely on life insurance, a buy-sell agreement, a grantor trust or a family-limited partnership, among other options. The best succession plan for you depends on your particular needs and wishes, and may depend on the structure of the company, such as whether it is a sole proprietorship or partnership, and whether the business will be handed over to a family member or to a third party. Especially with the constantly changing estate tax rules, an appropriate plan that meets your needs should be a part of your annual discussions with your CPA.

CLOSING

18: Key Takeaways

As I conclude my presentation, I would like to leave you with three important takeaways.

First, remember that your CPA can be your valuable partner when helping to keep your tax bill to a minimum.
Second, don’t be afraid to ask questions to make sure you understand the advice you’re considering. 
Third, don’t wait until the end of the year to implement these and other tax-planning strategies because, by then, it will be too late. Be sure to plan for tax savings throughout the year.

If you need help to keep your tax bill to a minimum, please contact us at BmK360CPA &  Associates, PC

 
19: Thank You

 

 

 

INTRODUCTION

1: Advice from CPAs

Whether you’re training for a marathon, landing the job of your dreams or closing a sale, you’re not going to succeed without being well prepared and fully informed.

Well, the same holds true when managing and preparing your taxes.

Waiting until the return due date of April 17^th for the 2012 filing season to put your financial house in order is a straight path to paying higher taxes. To manage your taxes and minimize your tax bill, you need to know the rules of the game, which are constantly changing, and you want to take advantage of year-round tax-planning opportunities.    

In this presentation, I’ll share with you the most recent tax-law information, incentives and planning strategies that will not only help you complete your tax return, but may also help you minimize your 2011 tax bill.

However, before we get started, I’d like to remind you that planning and timing are critical, and that tax issues will change throughout the year.

You should therefore regularly monitor your financial situation and consult with your CPA at least quarterly if you believe you may be affected by any tax-law changes. You particularly need to work with your CPA if you had a life-changing event such as a marriage, divorce, parenthood or new business launch.

 By taking the necessary responsive steps as soon as the need arises, rather than delaying action until the end of the year, you can better protect your and your family’s financial interests.

 Now we’re ready to begin.

 *Information is current as of December 12, 2011.

NEW FOR 2011 

2: Select 2011 Tax Law Changes

We’ll start today with recent tax law changes. In 2011, there were not a lot of changes from 2010. However, there was one change that affects almost all working taxpayers:  the Making Work Pay Credit. This was a refundable credit up to $400 for a single individual ($800 if married) based on a percentage of earned income. The credit was essentially replaced with the 2% reduction in the employee portion of Social Security tax. This incentive is worth up to $2,136 per person. It also applies to self-employed individuals.

3: Expiring Provisions

 I’d also like to discuss a few of the tax incentives that expired at the end of 2011. These incentives include the increased Alternative Minimum Tax (AMT) exemption amounts, the State/Local Sales Tax deduction, the Mortgage Insurance Premiums deduction, School Teacher Expenses and Qualified Charitable Distributions from IRAs.

 We’ll be covering the AMT in a moment but I’d like to first discuss other tax incentives that expired in 2011. 

• The State/Local Sales Tax deduction is an election in lieu of deducting state income taxes. It is mostly used by taxpayers residing inWashington,Texas,Nevada,Floridaand other states where there is no income tax. Also, it only applies to taxpayers who itemize.
• The Mortgage Insurance Premiums deduction applied to homeowners who made down payments of less than 20% of their homes’ value and were required to carry private mortgage insurance (PMI). These premiums were deductible similar to mortgage interest.
• School Teacher Expenses provision provided a $250 deduction for teachers, counselors, principals and aids for books, supplies and other materials.
• Qualified Charitable Distributions provision was very popular among taxpayers. It allows individuals who are over age 70½ to make a direct charitable gift from their IRA in lieu of taking a required minimum deduction.

 FILING

 4: The Basics

 An understanding of the tax-return filing process can make tax season a more positive experience, so we’ll begin  by taking a quick look at a few of the basics, beginning with the standard deduction.

 5: Standard Deduction

 Now let’s talk about the standard deduction – the basic deduction all taxpayers can take.

 Every year, the IRS adjusts the standard deduction to account for inflation. For 2011, the standard deduction is $5,800 if single or married filing separately and $11,600 if married filing jointly or qualifying widow(er)s. It’s $8,500 if head of household. 

 6: Standard Deduction Additions

 Taxpayers age 65 and older or taxpayers who are blind receive an additional standard deduction of $1,450 (single or head of household) or $1,150 (married filing jointly, married filing separately or qualifying widow/er).

 7: Itemizing Deductions

 An alternative to claiming the standard deduction is itemizing your deductions. To determine the best strategy, total all of your deductions. In general, if your total allowable itemized deductions are more than the standard deduction, then you should probably itemize, although there are exceptions.

 Itemized deductions include medical expenses, certain state and local taxes, mortgage interest, charitable contributions, casualty and theft losses, and other miscellaneous items such as tax-return preparation fees, investment advisory fees and unreimbursed employee business expenses. For 2011, you may also choose to deduct sales taxes paid if you reside in a state without a state income tax. Tables for this are provided in the IRS instructions. 

 There is no phaseout of itemized deductions for 2011. 

 If you find you’re getting close to exceeding the standard deduction limit, try bunching your tax breaks every other year. This allows you to claim the standard deduction one year and itemize the next, but it also allows you to plan for the maximum tax benefit.

 Also, since itemized deductions are a factor in determining if you’re subject to the AMT, which I’ll be discussing in detail, some pre-planning might help if you’re in this situation.

 8:  Charitable Deductions

 Making charitable contributions can instill a feeling of goodwill and tax laws have been created to recognize philanthropic efforts.

 Donations you make by cash, check or credit card to qualified religious, charitable, educational or other philanthropic institutions are deductible up to 50% of your AGI, if you itemize your deductions. Contributions that are not deductible include those made to political groups, fraternities and sororities, certain scholarships, for-profit hospitals, and blood banks.  If your donations exceed 50%, you can carry them forward for up to five years. 

 Also, remember to obtain and keep a record to substantiate all donations, regardless of the amount, even cash donated to charitable organizations such as the Salvation Army’s Red Kettle drive during the holidays and when attending religious services. Substantiating documents range from a cancelled check and credit-card statement to a W-2 form and a written statement from the organization. The type and extent of documentation is usually determined by the amount of the donation.  

 Your charitable donations of more than $75 require a disclosure statement from the organization stating the value of any received benefit. Also, you can only deduct a charitable donation of $250 or more if you have a statement from the charitable organization showing the amount of money contributed, and a description, but not value, of any property donated and whether the organization did or did not provide you with any goods or services in return for the contribution.

 Donating appreciated assets that qualify for the long-term capital gains treatment can actually do more to cut your tax bill. However, in most cases donations are limited to 30% of AGI, with excess amounts carried forward for up to five years.

 When you give appreciated long-term securities to a nonprofit, you deduct the full market value of the asset at the time of the donation and you avoid paying capital gains tax on the appreciation. Be sure to follow substantiation and other requirements.

 A tax deduction for clothing and household items is generally allowed only if the items are in  good condition. Automobiles may be contributed to a charity, but the amount of the deduction may depend on what the charity does with the vehicle. These types of donations, as with other donations of tangible property, are included with your cash contributions to determine your annual limit. A single item with a value greater than $500 is subject to special substantiation rules. 

 9: Alternative Minimum Tax (AMT)

 In addition to the regular income tax, more and more taxpayers are subject to the AMT.  

 The AMT applies to both higher-income taxpayers as well as to lower-income taxpayers with a large number of exemptions or other tax adjustments. Since the AMT is not indexed for inflation, taxpayers are increasingly finding themselves affected by the AMT.

 Some items that can trigger the AMT include:

• A higher-than-average number of dependency exemptions
• Large deductions for state and local income taxes 
• High real estate taxes
• Miscellaneous itemized deductions and medical expenses

 10: AMT Exemption Amounts

 Congress has attempted to limit the impact of the AMT by increasing the amount of exempt income.

 For 2011, the AMT exemption amounts are $48,450 for single filers and $74,450 for married taxpayers filing jointly. However, the exemption amount begins to phase out when AMT income exceeds $112,500 if single or $150,000 if married filing jointly. Exemption amounts may decrease in 2012.

 Unfortunately, the AMT defies most traditional tax-planning strategies. If you’ve been close to the threshold, you’ll need to consult with your CPA for specific advice on how the AMT may affect you this tax season.

 TAX STRATEGIES & INCENTIVES

 11: Tax Strategies & Incentives

 Now that we have the basics behind us, it’s time to move further ahead. I’ve organized my presentation into six categories that all of us can relate to:

• Family
• Education
• Job
• Home
• Investments
• Retirement

 We’ll then wrap things up with a few tips that will give you a start on preparing your tax return.

 FAMILY

 12: Family Tax Incentives

 Let’s start with some tax breaks for which you may be eligible if you are raising a family. If you’re a parent, you want to be sure to take advantage of every tax-saving opportunity available. In this section, we’ll discuss:

• Kiddie Tax
• Child Tax Credit
• Adoption Credit
• Health Savings Accounts
• Health Flexible Spending Arrangements
• Dependent Care Tax Credit
• Long-term Care Premium
• Shifting Income

 And as I mentioned, a credit is the best tax break you can get. Deductions reduce the amount of taxable income on which you must pay taxes, but tax credits reduce, dollar-for-dollar, the taxes you actually owe.

 13: Kiddie Tax 

 A tax strategy long employed by parents was to shift assets to a child’s name with the result that the investment income would be taxed at the child’s lower tax bracket. However, recent changes make this strategy less beneficial.

 To discourage income splitting of investment income between parents and minor children, the tax law has imposed a Kiddie Tax under which any investment income over $1,900 will be taxed at the parent’s tax rate. If a child has unearned income of $1,900 or less, the tax is computed based on the child’s regular tax liability. Thus, the first $950 of unearned income would not be taxed – that is the standard deduction amount for a child. The next $950 of unearned income would be taxed at the child’s tax rate.

 Even if the Kiddie Tax does apply, regular tax liability must be computed, with the child paying the higher tax liability.

 The tax does not apply if both of a child’s parents were deceased at the end of 2011 and regular rules are followed to determine the child’s tax. 

 The Kiddie Tax applies to investment income of children in these three categories: (1) children under age 18 at the end of 2011, (2) children who are age 18 at the end of 2011 and do not have earned income exceeding 50% of their support for the year and (3) children age 19 through 23 at end of 2011 and who are full-time students and who do not have earned income exceeding 50% of their support for the year. The tax also applies if the child is married and files separately.

 14: Child Tax Credit

 The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 extended the Child Tax Credit to tax years 2011 and 2012.

 The credit is worth $1,000 for each qualifying child who is under age 17 at the end of the calendar year and who qualifies as a dependent – your son, daughter, adopted child who lived with you all year, stepchild or eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals. The child must also be aU.S.citizen, resident or national. The Child Tax Credit is in addition to the child’s dependency exemption.

 That means if you have three children, the child credit can potentially reduce your tax bill by $3,000. 

 15: Adoption Credit

 There is good news for people who are planning to adopt a child under age 18 or a person incapable of self-care due to physical or mental challenges because there are two tax benefits that offset escalating adoption expenses.

 In 2011, the adoption credit, which is fully refundable, rose to a maximum of $13,360 per child. Parents who work for companies with an Adoption Assistance Program can receive up to a $13,360 reimbursement from their employer for qualified adoption expenses without paying taxes on that benefit.

 When adopting a child who is aUnited Statescitizen or resident, the family is permitted to take the credit in the year following the year when the actual expense was incurred. These expenses may be taken as a credit even if the adoption ultimately is not completed. Where a foreign adoption is involved, the family may not deduct any expenses, regardless of the year incurred, until the adoption is final.

 When you adopt a child with special needs, you are allowed to claim the full credit regardless of actual expenses paid. 

 16: Health Savings Accounts

 Health Savings Accounts (HSAs) are designed for individuals covered by a High Deductible Health Plan (HDHP) and are not covered by Medicare.

 HSAs offer a wide range of tax advantages: contributions within certain limits are tax deductible and earnings that accumulate within the account are not taxed until withdrawn, and even under those circumstances, withdrawals to pay for qualified medical expenses are tax free.

 However, withdrawals you may make for medical expenses that are not qualified are both taxable and subject to a 20% penalty unless you are age 65 or older or disabled.  

 17: Health Flexible Spending Arrangements

 Although employees are increasingly responsible for some or all of their medical expenses, many companies are offering Flexible Spending Arrangements (FSAs) to help employees pay for these expenses.

 Employees can contribute some of their wages to these special accounts and the amounts are not taxed in 2011. Funds can be accessed any time during the year to pay for health insurance premiums as well as medical costs and other expenses not covered by insurance, although they must qualify as a deductible medical expense.

 Reimbursable medical expenses include prescription medications such as over-the-counter drugs prescribed by your doctor. Beginning in 2011, the cost of non-prescription drugs other than insulin can no longer be reimbursed by an FSA.

 The company’s plan determines contribution terms and limits. It is important to remember that funds not used during the year, or by the end of any grace period the plan may offer, are lost.

 18: Dependent Care Tax Credit

 Working parents know how expensive child care can be. The Dependent Care Tax Credit aims to ease some of the burden.

 Basically, the credit works like this: If you pay someone to care for a dependent under age 13, you may be eligible for a tax credit of up to $2,100. The credit is a percentage of qualifying expenses that range from 20% to 35%, depending on your AGI. You must have earned income to receive the credit and if married, file a joint return.

 The dollar limit on the expenses toward which you can apply the credit percentage is $3,000 for the care of one qualified dependent and $6,000 for the care of two or more. Thus, the maximum credit allowed in 2011 is $1,050 if you have one qualified dependent and $2,100 if you have two or more qualified dependents.

 I should note that the dependent care credit is reduced by the value of qualifying day care provided by your employer under a written, non-discriminatory plan, which generally is not taxable up to $5,000 ($2,500 if married filing separately).

 This credit is not restricted to child-related care costs. If you pay someone to look after an incapacitated spouse or dependent of any age, such as a parent or disabled family member, you may also be eligible for this tax break.

 19: Long-term Care Premium

 An increasing number of Americans require long-term care due to advanced age or chronic conditions. Unfortunately, nursing homes and their high costs, which can exceed $70,000 annually, are not covered by Medicare or supplemental Medicare insurance.

 However, long-term care insurance pays for this type of care and a portion of your premiums, based on your age, is tax deductible as a qualified medical expense. The deductible increased in 2011.

 You can include your premiums for qualified long-term care services as medical expenses up to the following amounts:

• Age 40 or under – $340
• Age 41 to 50 – $640
• Age 51 to 60 – $1,270
• Age 61 to 70 – $3,390
• Age 71 or over – $4,240

 20: Shifting Income

 Investment strategies have to be right for you and appropriate for the economic environment. The current economy makes some of the following strategies more or less beneficial, depending on your circumstances. Income tax rates may increase after 2012, although there is also some movement to see the rates decreased. Regardless of what may ultimately happen, you need to be prepared to react to any change so I recommend that you first check with your CPA financial advisor on these matters.

 Kiddie Tax

 Now, let’s begin with strategies for how parents can save on taxes.

 As we discussed earlier, shifting income to a child in a lower tax bracket can be a smart strategy and may provide the Kiddie Tax with a place in your overall tax plan. However, as I mentioned, it won’t pay to shift a significant amount of income to a child falling under the Kiddie Tax rules, but transferring a few income-producing assets to a child might still lower your overall tax bill.

 And it’s important to know that shifting income to your child will also reduce the AGI on your personal return, which may mean you’ll lose less of your itemized deductions and personal exemptions. Lowering your AGI may also make you eligible for other tax benefits.

 Gift Tax

 Be sure to also consider the gift tax when shifting assets.

 For 2011, you generally can give a gift to a child, or anyone else, valued at up to $13,000 each without being subject to the gift tax. It rises to $26,000 if your spouse agrees to split the gifts. The exclusion is allowed only for cash gifts or present interests in property.

 If you think there may be any potential gift tax consequences to a transaction, make sure to consult with your CPA.

 Family Business

 If you’re a sole proprietor, you can shift income by hiring your minor children to help in your business. In addition to providing valuable work experience for your child, this arrangement can offer tax savings to the business.

 As long as the work your children do is legitimate, you follow all the rules and your children receive reasonable wages, you can deduct their wages as a business expense and shift the money to your children in lower tax brackets.

 And as an added bonus, if your son or daughter is under age 18, you don’t have to pay Social Security or Medicare taxes on the wages you pay.  Also, since their wages are earned income, they are not subject to the Kiddie Tax.

 EDUCATION

 21 Education Strategies

 Since in most cases education accounts for the greatest cost associated with raising kids, you’ll want to listen carefully to learn all you can about the credits and deductions for education expenses. Keep in mind that these benefits are available to college students of every age.

 22: Tax Credits

 Two popular tax credits – the American Opportunity Tax Credit and the Lifetime Learning Credit – can help defray education expenses for you and your children. And because they are credits rather than deductions, they take a bigger bite out of your tax bill. However, you cannot claim both credits for the same student’s expenses in the same tax year so you’ll need to decide which credit delivers the greater tax savings.

 23: American Opportunity Tax Credit

 For 2011 and 2012, the American Opportunity Tax Credit, previously known as the Hope Scholarship Credit, is available to each eligible student and for the first four years of college or other postsecondary school that leads to a degree, certificate or other recognized educational credential. It does not apply to graduate-level courses.

 The maximum credit is $2,500 per student for each year and 40% of the credit is refundable, meaning it can reduce your liability below zero and you can receive up to $1,000 even if you owe no taxes.

 The credit applies to 100% of the first $2,000 of costs and 25% of the next $2,000 of costs. This means you must spend at least $4,000 to obtain the maximum credit of $2,500.

 Costs include tuition as well as student-activity fees required for enrollment and attendance. They also include books, supplies and equipment needed for a course of study that must be purchased from the educational institution as a condition of enrollment or attendance.

 This credit is allowed against the AMT.

 24: Lifetime Learning Credit

 The Lifetime Learning Credit provides a credit of up to $2,000 per year. It applies so long as the American Opportunity Tax Credit is not also being claimed for the same student and can be claimed for every year that you qualify to receive it.

 As its name suggests, the Lifetime Learning Credit can be used by you, your spouse or your dependent(s) for undergraduate, graduate and professional-degree expenses at an eligible educational institution – tuition as well as student-activity fees required for enrollment and attendance. It also applies to books, supplies and equipment needed for a course of study that must be purchased from the educational institution as a condition of enrollment or attendance.

 Unlike the American Opportunity Tax Credit that applies to each student, the Lifetime Learning Credit applies to each taxpayer and courses taken do not need to be toward a recognized educational credential. 

 25: Student Loan Deduction

 If you’re paying off student loans, you’ll be happy to know that the rules for deducting student loan interest remain liberal. Taxpayers can continue to deduct up to $2,500 of the interest paid on a qualified student loan as an adjustment to gross income, regardless of how long it takes to repay the loan.

 And you don’t have to itemize in order to take this deduction. However, there is no deduction if you file as married filing separately, you are claimed as a dependent or the loan is from a related party or a qualified employer plan.

 Similar to many other provisions, the deduction is limited for certain income amounts.

 26: Higher Education Tuition and Fees Deduction

 In 2011, you can claim a tuition and fees deduction – up to $2,000 or $4,000 – as an adjustment to gross income for qualified expenses that you paid for higher education at an eligible educational institution. This deduction, which is available each year you qualify for it, generally applies to the same expenses as those covered by the American Opportunity Tax Credit and Lifetime Learning Credit.

 The deduction applies to you, your spouse and any dependents who you claim as an exemption.

 The deduction is barred if your filing status is married filing separately, you can be claimed as a dependent, or if you claimed the American Opportunity Tax Credit or Lifetime Learning Credit.  Similar to many other provisions, there are limits for certain income thresholds.

  27: Qualified Tuition Programs (529 Plans)

 Qualified Tuition Programs, also known as 529 Plans, give parents and other family members a tax-advantaged way to save money for college expenses. While there is no tax deduction or credit available on contributions to the plan, the money in the plan grows tax free and no tax is due on withdrawals if the distribution is used to pay for qualified higher-education expenses. There may also be state income tax breaks for plan contributors.

 Expenses include tuition, room and board, books, supplies, and fees. There is no dollar limit for these expenses. Unlike 2010, computers and other technology equipment and services are no longer qualified expenses.

 529 Plans are often used as vehicles for gifts from family members, especially grandparents. 

 28: Prepaid Tuition Plans

 When saving for tuition, you are not restricted to using your state’s savings plans and can use any state’s plan. The Internet is an invaluable research tool. However, if you select another state’s plan, you may lose a state tax deduction that some states offer to residents who use their state’s prepaid or 529 Plans.

 Many states have instituted savings plans substantially similar to 529 Plans that propose to create a prepaid tuition account for a student in that state. The amount contributed will depend on when the plan is begun and the child’s age. States have created actuarial tables that they believe will result in a fully funded tuition based on a schedule of deposits and investment-return rates.

 The advantage of these plans is that they guarantee tuition costs will be covered. However, they do not guarantee admissions, and they do not cover room and board and the cost of books. These expenses would have to be funded separately.

 The plans provide assistance if the student decides not to attend an in-state school; however, it may not cover the full tuition costs of these schools.

 In general, the tax treatment of these prepaid tuition plans is similar to 529 Plan rules. 

 29: U.S. Savings Bonds

 Generally, investors who redeemU.S.savings bonds to pay for qualified higher-education expenses may exclude the interest redeemed from gross income. The exclusion has no dollar limit and it applies to Series EE bonds issued after 1989 or Series I bonds.

 JOB 

 30: Job Search Tax Benefit

 For many of us, we spend the majority of our day on the job and the hours we typically devote to our work seem to grow even greater during rocky economic times. However, in addition to a paycheck, experience and hopefully some degree of satisfaction, we receive a number of benefits that have important tax implications, one of which pertains to our job search efforts. 

 Many unreimbursed expenses incurred as a result of employment are deductible as miscellaneous itemized deductions, though they can only be claimed to the extent they are greater than 2% of adjusted gross income.

 Included among these expenses are job search costs. These expenses are deductible if the search is for a job in the same line of work, regardless of whether a new position is obtained. However, if a period of unemployment is lengthy, the IRS may disallow the deduction. Also, expenses for finding a first job are not deductible.

 HOME

 31: Homeowner Strategies

 Now let’s turn our attention to the tax benefits of owning a home, because as a homeowner there are many tax-saving opportunities available to you.

 32: Deductions

 Mortgage Interest

 In most cases, you can deduct all of the interest you pay on any loan secured by your home if you itemize your deductions. Interest is generally deductible on up to $1 million ($500,000 if married filing separately) of home-acquisition loans. These are loans used to buy, build or substantially improve your principal residence or second home, and are secured by that same residence.

 Interest on a home-equity loan up to $100,000 ($50,000 if married filing separately) is also deductible. You can also use this deduction for one additional residence that you identify as your second home.

 This means you can deduct interest on total home debt up to $1.1 million ($550,000 if married filing separately).

 As long as the home-equity loan is secured by your home, it doesn’t matter how you spend the proceeds. Home improvements, college tuition, debt consolidation or an exotic vacation – it’s up to you. Just be sure you have a plan to pay it back. 

 The IRS defines points as any extra charges paid by a home buyer at closing in order to obtain a mortgage. In effect, points are prepaid interest. Points paid to secure a loan for the purchase, construction or improvement of a principal residence are usually fully deductible in the year you paid them. Points paid to buy or improve a second home must be deducted ratably over the term of the loan.

 Real Estate Taxes

 After the home-mortgage interest deduction, the next most important tax break for homeowners is the deduction for real estate taxes.

 You can deduct as an itemized deduction real estate taxes and state and local property taxes on all the real estate you own. There are no limits on the dollar amount of real estate taxes you can deduct or on the number of homes for which you can claim the deduction. The only decision you may need to make is whether you prepay the coming year’s taxes or delay the current year’s taxes to see which way it might benefit you.

 33: Selling Your Home

 Excluding the gain on the sale of a home is another major incentive for buying a home.

 If you meet certain requirements, you can keep a significant portion of the profit of the sale of your principal residence without having to pay tax on the gain. Any gain is taxed as a capital gain so the amount owed is not as high. However, any losses on the sale of a principal residence are not deductible.

 When you sell your principal residence, you can exclude from income up to $250,000 in gains ($500,000 if married filing jointly or a surviving spouse if the sale is within two years of the other spouse’s death). If you realize a gain on the sale greater than the exclusion, that amount is taxed at capital-gains rates.

 To qualify, you must have owned and used your home as a principal residence for at least an aggregate of two of the five years preceding the sale.   

 The exclusion is available even if you took temporary absences, including vacations, or rented out the home while not living there.

 Special rules are provided for sales of the home due to certain health issues, employment reasons or unforeseen circumstances, and for members of the uniformed services.

 Keep in mind that if you took a First-time Homebuyer Credit, you may have to repay or recapture some or all of the loan/credit in 2011. Also, if you used your residence as a home office, you may need to make other adjustments.

 34: First-time Homebuyer Credit

 The First-time Homebuyer Credit does not apply to home purchases made in 2011 unless the taxpayer or his or her spouse is a specific public employee on extended official duty outside theUnited States. The credit for other homebuyers ended with purchases completed by or in contract on April 30, 2010.

 However, if you claimed the 2008 credit for a home you purchased after April 8, 2008 and before January 1, 2009, in most cases the credit must be repaid, though interest free, over 15 years in 15 equal installments. For all taxpayers, no matter the year claimed, if you sold or otherwise disposed of the home, or used it differently in 2011, you generally are required to repay the complete credit when you file your 2011 tax return.

 35: Home Energy Incentives  

 In 2011, homeowners can again claim tax credits for making certain energy-saving improvements to their home. These credits include the (1) Nonbusiness Energy Property Credit and (2) Residential Energy Efficient Property Credit. However, the credits are not as favorable as 2010.

 Under the Nonbusiness Energy Property Credit, homeowners can receive a credit of 10% of the costs of qualified energy-efficient improvements and 100% of the costs of certain energy property expenditures, although dollar limitations may apply to specific types of property, including a maximum lifetime credit of $500.

 Energy efficient improvements include insulated walls or ceilings; energy-efficient exterior doors and windows, including skylights; specially treated metal or asphalt roofs; and a high-efficiency furnace, water heater or central air conditioning system, and energy property expenditures such as certain heat pumps, water pumps and circulating fans. 

 The 30% Residential Energy Efficient Property Credit applies to costs for qualified residential solar panels, a geothermal heat pump, solar water-heating equipment, qualified solar electric property costs and small wind-energy property. This credit has no dollar limit or principal-residence requirement. A second 30% credit for qualified fuel-cell plants has principal-residence and kilowatt-capacity requirements, and cannot be greater than $500 for each 0.5 kilowatt of capacity.  

 INVESTMENTS

 36: Investment Strategies

 Strategy and timing are as important as skill in investing, particularly with regard to taxes. There are a number of tax-smart investment strategies you may want to consider, especially in light of legislation that has lowered the tax rate on dividends and capital gains.

 These same strategies can be applied during today’s difficult economic times when many people have suffered substantial investment losses. As you prepare your 2011 returns, some of these rules can help. However, be aware that Congress may make changes to them in the future.

 37: Dividends

 Qualified dividend income received by an individual shareholder is taxed at a top rate of 15%. It is taxed at 0% for taxpayers in the 10% or 15% income tax bracket. 

 38: Capital Gains Tax

 The maximum tax rate on net capital gains remains at 15% for 2011. If you’re in the 10% or 15% income tax bracket, your tax rate on net capital gains is zero, and you will not be taxed for 2011. The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 extended these tax rates through 2012.

 To qualify for long-term tax treatment, an asset must generally be held for more than one year before it is sold. Capital gains on investments held for one year or less are taxed at regular income tax rates.

 39: Offset Capital Gains with Losses  

 When it comes to investment decisions, knowing when to make a move is critical. Then there are times, such as those we are experiencing today, when many of our conventional ideas about investing are dramatically challenged. Many of you may be finding yourselves buying high and selling low, creating a loss.

 In 2011, capital losses are netted against capital gains. If your capital losses exceed your capital gains, you can deduct up to $3,000 of your combined long-term and short-term capital losses against ordinary income.  

 Any remaining net capital losses may be carried forward to future years and can be used to offset future gains. It is very important to keep track of these unused losses and whether they are short-term or long-term losses.

 Keep in mind that an investment sold at a loss in 2011 need not be gone forever. If you believe it was a good long-term investment, you can buy it back. Just be sure to wait at least 31 days after the sale. Otherwise you’ll get caught up in the wash sale rule.

 This rule disallows losses on securities sold if substantially identical securities are bought within 30 days before or after the date of the sale, creating a 61-day wash-sale period, although the definition of “substantially identical” provides some flexibility. 

 RETIREMENT

 40: Retirement Strategies

 We all know that contributing to a retirement plan is a key step when working toward a secure retirement, but did you know it can lower your current income tax bill as well?

 41: Employer Sponsored Plans

 Pre-tax contributions to an employer-sponsored retirement plan reduce the amount of taxable wages you report on your tax return, making qualified retirement plans an excellent way to cut your tax bill.

 Matching contributions and income earned within your plan are also tax deferred. If you have a 401(k) and you haven’t arranged to contribute the maximum, try to increase your contributions before year end. This is especially important if your employer makes matching contributions, which, in effect, represents free money.

 For 2011, if you’re under age 50, your maximum contribution to a 401(k) plan is $16,500. Taxpayers who are age 50 or older by the end of 2011 can make an additional $5,500 “catch-up” contribution for that calendar year to reach $22,000 for 2011.

42: Individual Retirement Accounts (IRAs)  

The top annual contribution for traditional or Roth IRAs remains at $5,000 for 2011. If you’re age 50 or older by the end of 2011, you can make an additional $1,000 “catch-up” contribution.

 You cannot contribute more than your qualifying income for the year, but if your spouse has little or no income, you can contribute to either a traditional IRA or Roth IRA for your spouse based on your earnings.

 Traditional IRA contributions may be deductible depending on your modified AGI and whether you or your spouse (if filing jointly) is covered by an employer-sponsored retirement plan. Also, you must begin to take minimum required distributions from the IRA once you reach age 70 ½, but this does not apply to Roth IRAs.

 Roth IRA contributions are not deductible, but you can withdraw them at any time tax free. You can also withdraw earnings on contributions tax free after five years if you are age 59½ or older, disabled or paying qualifying first-time homebuyer expenses.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                 Earnings on both types of IRAs accumulate tax free until distributions are made.

 You have until the filing deadline of April 17, 2012 to open and contribute to an IRA for 2011. But why wait? The sooner you contribute, the longer your money grows tax deferred or tax free.

43: Conversion to Roth IRA   

Regardless of your filing status or income, you can convert traditional IRAs to Roth IRAs, with no dollar limit on the amount converted. However, the entire transfer must be reported as income unless after-tax contributions were made to any of your traditional IRAs. Although income tax is due on the amount converted, the 10% early-distribution penalty does not apply if you are under age 59½ and keep the funds in the Roth IRA for at least five years. 

There is no modified AGI requirement needed for a conversion and it can be reversed no later than the extended due date for the 2012 tax return.

 Your CPA can help you decide whether a conversion to a Roth IRA is best for you.

 CLOSING

  44: Key Takeaways  

 I know this was a lot to cover, but my key takeaways for you are these:

 First, remember that your CPA can be a valuable partner in providing answers to your questions and helping to keep your tax bill to a minimum.

 Second, don’t hesitate to ask a lot of questions to make sure  you understand the advice you’re  being given.

 Third, don’t wait until tax time to seek professional tax assistance. Your CPA can help you plan for tax savings throughout the year.

Finally, if you need help to keep your tax bill to a minimum contact us at BmK360CPA @ Associates, PC

 45: Thank you