Congress Extends Social Security Tax Break . . . for Two (2) Months

 

As you may already be aware, Congress has finally agreed on an extension of the social security payroll tax break for the first two (2) months of 2012. The bill was approved this morning and will now be sent to the President for his expected signature.

For payroll paid during January and February 2012, the employee’s portion of social security taxes should continue to be withheld at a reduced rate of 4.2%. Without this extension, the rate would have returned to 6.2%.

Please note that the 4.2% rate applies to all wages paid in January and February. If Congress fails to extend this break beyond February, individuals may be required to pay, when filing their 2012 income tax returns, 2% of any wages paid January through February in excess of $18,350. $18,350 represents 2/12 of the $110,100 social security wage base for 2012.

 

It’s not too late to make some final moves . . .

As the year comes to a close and our minds are on the holidays, we just wanted to remind you that it is not too late to make some final moves that could reduce your 2011 tax bill.

Consider:

• Purchasing business equipment or machinery as section 179 and bonus depreciation will drop in 2012
• Accelerate deductions into 2011, such as making your fourth quarter state estimated tax payment or your January mortgage payment prior to the end of the year (if you think you may be in AMT in 2011, consult us before doing this)
• Postpone bonus payments until after January 1
• If you claim miscellaneous itemized deductions, consider bunching them into 2011 or 2012 in order to exceed the 2.5% adjusted gross income threshold
• If you claim medical expenses, consider bunching them into 2011 or 2012 in order to exceed the 7.5% adjusted gross income threshold
• Making a tax-free charitable contribution from your IRA in lieu of taking a required minimum distribution
  Review your investment portfolio for any unrealized capital losses that can be realized to offset any realized capital gains that you may have
• If making annual exclusion gifts, make sure that the recipient deposits any checks by December 31
  

 

You should also be sure to check your unused balance in any flexible spending account. Perhaps you could use a new pair of glasses?

These are just a few items to consider.

All of us at O'Connor & Drew, P.C. wish you and your loved ones a safe and joyous holiday season!

 

New Cola Limits

 

The IRS announced on October 20, 2011 cost-of-living adjustments applicable to dollar limitations for pension plans and other items for tax year 2012. Please feel free to contact us if you have any questions.

 

 

Tax Compliance Review

 

Are you due for a tax compliance review?
The answer is most likely yes.

 

When was the last time you had O'Connor & Drew review your dealership for tax compliance?

The answer is quire awhile ago.

 

Even if you had a tax compliance review not so long ago, personnel turnover could make this a good time to have O'Connor & Drew review your dealership's tax compliance.

 

Our tax compliance review is designed to look into your dealership's exposure in the following areas:

• Sales and Use Tax
• Demonstrator Tax Reporting
• Cash Reporting

Non-compliance in any of these areas can lead to costly assessments of taxes, interest and/or penalties.

Give yourself some piece of mind and call Lauren Carnes at (617) 471-1120 to schedule your tax compliance review.

 

Limited Opportunity to Reduce Your Estate

 

Between now and December 31, 2012, a limited opportunity exists under current tax law that allows you to reduce your estate by up to $5,000,000 (combined $10,000,000 if married) of lifetime gifts.

If you have never made lifetime gifts, or if you have previously used only $1,000,000 of your lifetime exclusion (combined $2,000,000 if married), now is the time to consider making tax-free gifts and reducing the size of your estate that may be subject to estate taxes in the future.

Gifts do not have to be outright. They can be made into trusts where you provide instructions as to how the assets are managed and distributed.

There is an art in picking the proper assets to gift. Current gifting removes not only the current value of the gift from your estate, but all future appreciation as well. So a well thought out plan can save substantial estate taxes.
Example

Current taxable estate = $20,000,000
Federal estate tax in 2013 without gifting any assets = @ $8,000,000
Federal estate tax in 2013 if gifted $5,000,000 in assets in 2011 & 2012 = $6,750,000
Potential Federal estate tax savings = @ $1,250,000

It gets even better if you are a Massachusetts resident because Massachusetts does not have a gift tax, but does have an estate tax. Any gifts that are tax-free for Federal purposes will also be tax-free for Massachusetts purposes and reduce your Massachusetts estate taxes as well.

Get the process started now, so that a well thought out plan can be developed and implemented before the expiration of this limited time opportunity.

Call us now to discuss how to get started.

 

Recent IRS Changes - Effective July 1, 2011
New Form 8300

 

– New Form 8300 for Cash Reporting Issued

– Mileage Rate Increased to 55.5 Cents/Mile

Recently the Internal Revenue Service issued two changes to current practices of which dealerships should take note.

First, the IRS revised its Form 8300, which is used for reporting certain cash transactions in
excess of $10,000. The new form, along with its instructions, can be downloaded and printed
at www.irs.gov/pub/irs-pdf/f8300.pdf The new form must be used for applicable transactions beginning July 1, 2011. The new form notes "Rev. June 2011" in the upper left hand corner and "Rev. 6-2011" in the lower right hand corner. Be sure to discard all old versions of the form. For additional information on the cash reporting rules, dealers can reference the IRS website, www.irs.gov

 

Second, the IRS issued an increase in the mileage reimbursement rate. As of July 1, 2011, the standard business mileage reimbursement rate has been increased to 55.5 cents per mile for business miles driven, up from the prior 51 cents per mile in effect since January 1, 2011. Dealers can access additional information at www.irs.gov/pub/irs-drop/a-11-40.pdf

 

Roth IRAs: To Convert or Not To Converts

 

To convert or not to convert? That is the question that many taxpayers are currently asking with respect to converting their traditional IRAs into a Roth IRA. Unfortunately, there is not a clear yes or no answer.

Why all the fuss all of a sudden?

 

Until recently, the Roth IRA eligibility requirements limited the number of taxpayers who could have a Roth IRA. Taxpayers with income over a specified amount could not have a Roth IRA account. Beginning in 2010, the income limitations for Roth IRA rollovers has been lifted, although the income limitations for Roth IRA contributions remain. Thus, many taxpayers who previously could not have a Roth IRA are now trying to determine whether or not it makes sense for them to rollover amounts from their traditional IRAs to a Roth IRA.

What are the distinctions between a Roth IRA and a traditional IRA?

A Roth IRA, like a traditional IRA, is a retirement fund that grows in an account sheltered from current income taxes. The key distinction is that a Roth IRA, unlike a traditional IRA, is not subject to income taxes upon withdrawal. This is because a Roth IRA is funded with after-tax dollars. Furthermore, required minimum distributions, starting at age 70 1/2, are not required from Roth IRAs.

What are the tax consequences of converting to a Roth IRA?

Since an account funded with before-tax dollars is being rolled over into an account designed to hold after-tax dollars, there will be income taxes due on the amounts rolled into a Roth IRA (other an amounts attributable to after-tax dollars such as previously non-deductible contributions). These amounts will be taxed at ordinary income tax rates. A unique opportunity exists with respect to rollovers completed in 2010. A taxpayer can elect to include the income in 2010 and pay the taxes due by April 15, 2011 or the taxpayer can elect to include 1/2 of the income in 2011 (paying taxes due by April 15, 2012) and 1/2 of the income in 2012 (paying taxes dues by April 15, 2013). This would ordinarily be considered a "no brainer," but in today's political environment, it is quite possible that deferring and spreading the tax over 2 years could result in a higher total tax bill if, as expected, income tax rates are raised.

Who should consider converting to a Roth IRA?

The "ideal" taxpayer that should consider a Roth IRA conversion in one that has several of the following characteristics:

• Can pay the income taxes upon conversion with fund other than those being converted 
• Does not need the funds that will be converted to meet cash flow needs
• Has a long time horizon until retirement (this applies to someone that may need the cash flow from the converted funds in retirement)
• Expects their income tax bracket, or that of their heirs, to be lower in retirement than it is currently
• Has the ability to offset the income tax on conversion with deductions or credits (such as charitable contribution or net operating loss carryforwards)
• Value of funds being considered for conversion are depressed, but expected to increase substantially in the future

 

If several of the items listed above are "in play", a Roth IRA conversion should be considered and an analysis of the costs and benefits should be performed based upon the taxpayer's particular facts and circumstances. The answer will not be the same for everyone and certain assumptions will have to be made that could end up differing with the passage of time. Also, please keep in mind this does not have to be an "all of nothing" decision. The law does not prohibit a partial conversion...so a taxpayer can hedge their bets by leaving some funds in a traditional IRA.

 

Heads you win, tails you win. 

If a taxpayer converts a traditional IRA to a Roth IRA and later, for whatever reason, decides it was not the best decision, the law allows the taxpayer to undo the conversion. To undo a conversion, the taxpayer needs to have the funds transferred from the Roth IRA back to a traditional IRA no later than the due date, including extensions, of the tax return for the year of conversion. If the conversion occurred anytime in 2010, even as early as January 1, the taxpayer can undo the conversion as late as October 17, 2011 (October 15th falls on a Sunday). The "extended due date" for the conversion is applicable even if the particular taxpayer did not extend their return. If the taxpayer then wishes to re-convert back into a Roth IRA, the taxpayer must wait until the later of the beginning of the year following the year of the original Roth IRA conversion or 30 days after the original conversion was undone. Thus, if a taxpayer converted a traditional IRA to a Roth IRA on March 1, 2009 and, due to the fact that the Roth IRA decreased in value as of October 1, 2011, the taxpayer undid the Roth IRA conversion as of October 1, 2011, the taxpayer could then re-convert back into a Roth IRA no earlier than November 1, 2011.

As you can see, there are many factors to consider before converting a traditional IRA to a Roth IRA. The best advice is to discuss this with your advisors, make some assumptions, have them provide you with the appropriate analysis and then relax . . . there is no right or wrong answer and you can change your mind up until October 15th of the year following conversion.

Roth IRA Conversion Analysis Questionnaire Worksheet

Answer the following questions, then contact Lauren Carnes at (617) 471-1120.
Name(s):

1. What is the current value of your traditional IRA (if multiple IRAs, please list each separately)?
2. How much of your traditional IRA consists of non-deductible contributions (if multiple IRAs, please list separately)?
3. What is your date of birth? 
4. At what age do you plan to retire? 
5. What is your annual rate of return on your IRA?
6. What is your anticipated adjusted gross income, prior to any IRA conversion, for the year of
   conversion (we will use this to determine your tax rate, including amounts converted)?
7. What is your anticipated adjusted gross income during retirement (we will use this to determine your tax rate in retirement)?
8. Do you have "outside" funds to pay any taxes as a result of an IRA conversion?

Small Business Jobs Bill Provides Increased Expensing for 2010 & 2011

 

Congress recently passed the Small Business Jobs Act providing increased expensing opportunities for 2010 & 2011. The bill awaits the president's signature, which is expected next week.

• Amongst the many provisions of the bill, the ones we have identified as potentially most beneficial to our clients include:
• Increase in Section 179 expensing from $250,000 to $500,000 for tax years 2010 and 2011
• Beginning of phase-out for cost of property placed in service increased from $800,000 to $2,000,000
• Up to $250,000 of "qualified real property" (qualified leasehold improvement property, qualified
  restaurant property, qualified retail improvement property) is now eligible for Section 179 expensing (counted towards overall $500,000 limitation).
• 50% bonus first year depreciation extended through 2010

There are several other items included in the bill, including those reducing the recognition period for built-in gain on S corporation stock, allowing self-employed health insurance to be deducted in calculating the self-employment tax (2010 only), increasing the first year depreciation cap for autos and light trucks (2010 only) and removing cell phones from the definition of listed property.

We will be seeking to take advantage of these opportunities as we meet with you to discuss year end planning. In the meantime, if you should have any questions, please do not hesitate to contact us.

Reunification of the Estate and Gift Tax

Late in 2010, Congress enacted some significant changes in estate and gift taxation. These changes are scheduled to take effect for the 2011 and 2012 calendar years. Now is the time to take advantage of planning opportunities that may no longer exist once the calendar turns to 2013.

The most significant opportunity relates to the "reunification" of the estate and gift tax. Beginning in 2011, and continuing through 2012, each person now has a $5,000,000 lifetime exemption from both estate and gift tax. In other words, the estate and gift tax has been unified to provide the same lifetime exemption for estate and gift tax purposes. This is in contrast to as recently as 2009, where the estate tax lifetime exemption was $3,500,000 and the gift tax lifetime exemption was only $1,000,000. This meant individuals could only gift, without incurring a gift tax, $1,000,000 worth of assets during their lifetime (exclusive of $13,000 annual exclusion gifts) with another $2,500,000 of lifetime exemption available only at death.

The opportunity now exists to make total lifetime gifts (again, exclusive of $13,000 annual exclusion gifts) of $5,000,000 per person or $10,000,000 per couple without incurring a gift tax. Even if you have already used the $1,000,000 gift tax lifetime exemption previously available, you can now make an additional $4,000,000 of lifetime gifts or $8,000,000 per couple if both spouses have already used their $1,000,000 exemptions.

The time to act is now as the $5,000,000 estate and gift exemption amounts are scheduled to be reduced to $1,000,000 after 2012.

Please contact us so that we can assist you in taking advantage of this limited time planning opportunity.