Carol McAtee's Blog

Unlike last year, tax planning for 2013 is not hampered by uncertainties over a looming fiscal cliff. Unfortunately, there is always some uncertainty and a few expiring provisions to warrant special attention by taxpayers.

Managing income taxes at year end involves techniques designed to address three issues:

• Accelerating or deferring income: If a taxpayer expects to be in the same or a lower tax bracket next year, it’s best to defer as much income as possible until after the yearend.

• Accelerating or deferring deductions: If a taxpayer’s overall tax rate is the same in both years, accelerating deductions achieves tax savings this year rather than waiting for those tax savings to materialize next year.

• Take advantage of tax provisions scheduled to expire at the end of 2013. There are several temporary tax provisions which can only be used this year.

Tax planning begins by projecting income and deductions for the year to determine your tax bracket and income thresholds that trigger higher and/or additional taxes, or limits the effectiveness of deductions. One of the impacts of the American Taxpayer Relief Act of 2012 is the reintroduction of the Pease limitation, which can greatly limit itemized deductions. Once a taxpayer knows what his or her income taxes will look like, it’s time to evaluate which techniques will help the most.

Strategies to accelerate or defer income:

• Adjust your elective deferral plans at work: Taxpayers who participate in 401(k), 403(b), most 457 plans, or in the Thrift Savings Plan can defer up to $17,500 this year. Taxpayers age 50 and older can defer up to $23,000.

• Harvest capital gains or losses: Long-term capital gains are taxed at 0 percent for taxpayers in the 15 percent bracket. Capital losses can be used to offset capital gains and reduce other income up to $3,000.

• Use the IRA: Taxpayers age 59 ½ and older can accelerate IRA distributions in 2013. Contributions may be deductible depending on your income level and whether you’re covered by a retirement plan through work. Taxpayers under age 59½ can convert traditional IRAs to Roth IRAs to accelerate income.

• Health care assistance: People with health savings accounts—available with some high-deductible health insurance policies—can save up to $3,250 tax-deferred for an individual and $6,450 for a family. Those who are 55 and older can save an additional $1,000. Flex spending contribution limits are capped at $2,500 this year.

Strategies to accelerate or defer deductions:

• Medical expenses: The Affordable Care Act raises the income threshold this year to 10 percent of adjusted gross income for taxpayers under age 65. The threshold remains at 7.5 percent for those 65 and older. Taxpayers may need to prepare or defer medical bills to lump expenses in a single year to get the deduction.

• Gifts to charities: Use a donor-advised fund to maximize the tax savings from charitable giving. A DAF makes gifting appreciated securities easier. The DAF can be funded in tax years when the deduction will have the most impact. Distribution to charities can be made at any time without tax consideration.

• Qualified Charitable Distribution: This year only, taxpayers age 70½ or older can choose to direct up to $100,000 of their IRA-required minimum distribution to charity. By doing so, the distribution does not show up as taxable income, which can lower taxation of Social Security benefits and help reduce other threshold levels to further minimize taxes.

The American Taxpayer Relief Act extended—but did not make permanent—several tax incentives for individuals. Taxpayers should consider whether they can benefit from these incentives this year and plan accordingly. The following provisions are set to expire on Dec. 31 unless extended again:

• State and local sales taxes deduction: Taxpayers can choose between deducting state and local income taxes or the sales taxes they’ve paid through the year.

• Deduction for teacher expenses: Eligible educators can deduct up to $250 of any unreimbursed expenses.

• Deduction of mortgage insurance premiums: Payments of Private Mortgage Insurance premiums can be treated as deductible home mortgage interest in 2013.

• Discharge of principal residence indebtedness: This can be excluded from gross income this year.

• Qualified Charitable Distribution: Taxpayers can make tax-free charitable donations from their required IRA distributions.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

Some big-dollar tax deductions that affect businesses are set to expire in 2013, so now’s the time to make sure your company considers taking advantage of them for the current tax year. Doing so may allow you to buy more equipment, send less to the IRS, or both.

Here’s a rundown on some moves to consider:

Section 179 deduction: “Under the Section 179 deduction, businesses can write off dollar-for-dollar their equipment purchases,” with certain limits. A business could buy a new truck, new machinery, or new servers and deduct the first $500,000 in costs for the 2013 tax year.

Without an extension by Congress, the allowed first-year deduction drops to $25,000 in 2014.

–Example, if you were to order some new servers and you ordered them December 30 and installed them after January 5, technically, they don’t qualify for the deduction in 2013. Purchases exceeding $2 million start to lose that first-year deduction of $500,000. Items would need to be purchased and placed into service by December 31^st.

Real estate purchases aren’t covered by the Section 179 deduction, but if you’re a tenant and you’re making certain leasehold improvements, you might be able to write off up to $250,000 of those expenses.

First-year bonus depreciation: Larger companies that spend more than $2 million on capital equipment should look into the “first-year bonus depreciation” allowed in 2013 but set to expire. Under that rule, brand new equipment can qualify for a write-off of 50 percent, with no limits, so $5 million of a $10 million purchase could be expensed.

R&D tax credit: Another tax-related item set to expire in 2013 is the tax credit for research and development. It has been extended numerous times over the years, and it’s one that tends to get extended, sometimes retroactively. Despite the high-tech-sounding name, this credit is not for tech companies alone. Many businesses that might qualify for this tax credit aren’t aware that they qualify. Check with your tax advisor on the specifics of your situation

Another planning issue that small businesses should be looking at if they haven’t already this year is their business structure. The impact of new taxes for 2013 that are part of the Affordable Care Act (including a 3.8 percent tax on net investment income, which can affect investors in a business, and a 0.9 percent tax on earned income) can be reduced if your business is structured as an S-Corp.

 ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT AY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

The tax rules may change again in 2014, however, we did want to give you the updates for the following to help with your next year tax planning:

–    Social Security taxable wage limit increases from 2013 limit of $113,700 to $117,000 for 2014.  Retirees under full retirement age can earn up to $15,480 without losing benefits.

–     Amt Exemptions for 2014 are $52,800 for singles, $82,100 for couples, and $41,050 for married couples filing separately.

–     401 K Maximum salary deferral remains at $17,500 for 2014.  The catch-up limit for 50 and older also remains unchanged at $5,500.

–   Simple maximum deferral remains at $12,000 for 2014.  The catch-up limit for 50 and older also remains unchanged at $2,500.

–   IRA Contribution limit remains at $5,500 for 2014 ($6,500 for 50 and older).

–    HSA Contribution limit INCREASES for 2014 to $3,300 for individuals and to             $6,550 for families.  The catch-up contribution for 55 and older is $4000.

–    KIDDIE Tax threshold for 2014 remains at $2000.-

–    NANNY Tax threshold INCREASES from the 2013 level of $1,800 to $1,900 for    2014.

–   ANNUAL Gift Tax Exclusion remains at $14,000.

–   ESTATE Tax Exemption INCREASES from the 2013 amount of $5,250,000 to $5,340,000 for 2014.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

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Tax planning presents more challenges than usual this year due to the passage of the American Taxpayer Relief Act of 2012 (ATRA), which was signed into law on January 2, 2013, as well as certain tax provisions of the Patient Protection and Affordable Care Act of 2010 taking effect in 2013 and 2014.

Tax planning strategies for individuals this year–and for the next several years–require careful consideration of taxable income in relation to threshold amounts that might bump a taxpayer into a higher or lower tax bracket, thus, subjecting him or her to additional taxes such as the Net Investment Income Tax (NIIT) or an additional Medicare tax.

Even so, there are several more general tax planning strategies taxpayers might consider such as:

If you anticipate an increase in taxable income in 2014 and are expecting a bonus at year-end, try to get it before December 31. Keep in mind however, that contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file a tax return for tax year 2014.

If your company grants stock options, you may want to exercise the option or sell stock acquired by exercise of an option this year if you think your tax bracket will be higher in 2014. Exercise of the option is often but not always a taxable event; sale of the stock is almost always a taxable event.

If you’re self employed, send invoices or bills to clients or customers this year in order to be paid in full by the end of December.

Caution: Keep an eye on the estimated tax requirements.

More to come in this series.

The Internal Revenue Service has admitted to mistakenly assessing penalties on businesses that had requested extensions on filing the Form 5500 for their employee retirement plans.

The IRS is telling its help center representatives to apologize remove the penalties when they are contacted about the error, acknowledging a timing problem in posting the extension requests, according to a directive obtained by the siteBenefitsPro.

“Form 5500 filers that file their return before their extension Form 5558 has had a chance to post are receiving CP 283s assessing them a late filing penalty,” said the IRS. “Proposed changes to the penalty program would allow time for extensions to post before penalty notices are generated. However, until these changes can be implemented, tax examiners and telephone assistors should abate these penalties as Service Errors.

The IRS telephone assistance representatives and tax examiners are also supposed to prepare a Letter 168C explaining that the penalty has been removed due to a “Service Error.”

“If the caller is an administrator or sponsor with multiple plans/clients, you may abate up to five penalties for the caller,” said the IRS. Benefit plan administrators who get more than five penalty notices from the IRS need to put their requests for abatement in writing and send them to the IRS.
For more help with the Form 5500, visit the Form 5500 Corner on IRS.gov.

When it comes to creating a budget, it’s essential to estimate your spending as realistically as possible. Here are three budget-related errors commonly made by small businesses, and some tips for avoiding them.

1. Not Setting Goals. It’s almost impossible to set spending priorities without clear goals for the coming year. It’s important to identify, in detail, your business and financial goals and what you want or need to achieve in your business.

2. Underestimating Costs. Every business has ancillary or incidental costs that don’t always make it into the budget–for whatever reason. A good example of this is buying a new piece of equipment or software. While you probably accounted for the cost of the equipment in your budget, you might not have remembered to budget time and money needed to train staff or for equipment maintenance.

3. Failing to Adjust Your Budget. Don’t be afraid to update your forecasted expenditures whenever new circumstances affect your business. Several times a year you should set aside time to compare budget estimates against the amount you actually spent, and then adjust your budget accordingly.

Call our office if you want to discuss setting up a budget to meet your business financial goals. We’re happy to help.

WASHINGTON — The Internal Revenue Service today announced a delay of approximately one to two weeks to the start of the 2014 filing season to allow adequate time to program and test tax processing systems following the 16-day federal government closure.

The IRS is exploring options to shorten the expected delay and will announce a final decision on the start of the 2014 filing season in December, Acting IRS Commissioner Danny Werfel said. The original start date of the 2014 filing season was Jan. 21, and with a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than Jan. 28 and no later than Feb. 4.

The government closure came during the peak period for preparing IRS systems for the 2014 filing season. Programming, testing and deployment of more than 50 IRS systems are needed to handle processing of nearly 150 million tax returns. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year.

About 90 percent of IRS operations were closed during the shutdown, with some major work streams closed entirely during this period, putting the IRS nearly three weeks behind its tight timetable for being ready to start the 2014 filing season. There are additional training, programming and testing demands on IRS systems this year in order to provide additional refund fraud and identity theft detection and prevention.

“Readying our systems to handle the tax season is an intricate, detailed process, and we must take the time to get it right,” Werfel said. “The adjustment to the start of the filing season provides us the necessary time to program, test and validate our systems so that we can provide a smooth filing and refund process for the nation’s taxpayers. We want the public and tax professionals to know about the delay well in advance so they can prepare for a later start of the filing season.”

The IRS will not process paper tax returns before the start date, which will be announced in December. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit. The April 15 tax deadline is set by statute and will remain in place. However, the IRS reminds taxpayers that anyone can request an automatic six-month extension to file their tax return. The request is easily done with Form 4868, which can be filed electronically or on paper.

IRS processes, applications and databases must be updated annually to reflect tax law updates, business process changes, and programming updates in time for the start of the filing season.

The IRS continues resuming and assessing operations following the 16-day closure. The IRS is seeing heavy demand on its toll-free telephone lines, walk-in sites and other services from taxpayers and tax practitioners.

During the closure, the IRS received 400,000 pieces of correspondence, on top of the 1 million items already being processed before the shutdown.

The IRS encourages taxpayers to wait to call or visit if their issue is not urgent, and to continue to use automated applications on IRS.gov whenever possible.

“In the days ahead, we will continue assessing the impact of the shutdown on IRS operations, and we will do everything we can to work through the backlog and pent-up demand,” Werfel said. “We greatly appreciate the patience of taxpayers and the tax professional community during this period.”

The IRS Fresh Start program makes it easier for taxpayers to pay back taxes and avoid tax liens. Even small business taxpayers may benefit from Fresh Start. Here are three important features of the Fresh Start program:

• Tax Liens. The Fresh Start program increased the amount that taxpayers can owe before the IRS generally will file a Notice of Federal Tax Lien. That amount is now $10,000. However, in some cases, the IRS may still file a lien notice on amounts less than $10,000.When a taxpayer meets certain requirements and pays off their tax debt, the IRS may now withdraw a filed Notice of Federal Tax Lien. Taxpayers must request this in writing using Form 12277, Application for Withdrawal.

  Some taxpayers may qualify to have their lien notice withdrawn if they are paying their tax debt through a Direct Debit installment agreement. Taxpayers also need to request this in writing by using Form 12277.

  If a taxpayer defaults on the Direct Debit Installment Agreement, the IRS may file a new Notice of Federal Tax Lien and resume collection actions.

• Installment Agreements.  The Fresh Start program expanded access to streamlined installment agreements. Now, individual taxpayers who owe up to $50,000 can pay through monthly direct debit payments for up to 72 months (six years). While the IRS generally will not need a financial statement, they may need some financial information from the taxpayer. The easiest way to apply for a payment plan is to use the Online Payment Agreement tool at IRS.gov. If you don’t have Web access you may file Form 9465, Installment Agreement, to apply.Taxpayers in need of installment agreements for tax debts more than $50,000 or longer than six years still need to provide the IRS with a financial statement. In these cases, the IRS may ask for one of two forms: either Collection Information Statement, Form 433-A or Form 433-F.
• Offers in Compromise. An Offer in Compromise is an agreement that allows taxpayers to settle their tax debt for less than the full amount. Fresh Start expanded and streamlined the OIC program. The IRS now has more flexibility when analyzing a taxpayer’s ability to pay. This makes the offer program available to a larger group of taxpayers.Generally, the IRS will accept an offer if it represents the most the agency can expect to collect within a reasonable period of time. The IRS will not accept an offer if it believes that the taxpayer can pay the amount owed in full as a lump sum or through a payment agreement. The IRS looks at several factors, including the taxpayer’s income and assets, to make a decision regarding the taxpayer’s ability to pay. Use the Offer in Compromise Pre-Qualifier tool on IRS.gov to see if you may be eligible for an OIC.

Additional IRS Resources:

• Online Payment Agreement tool
• Fresh Start Notice of Federal Tax Liens
• Form 12277, Application for Withdrawal
• Understanding a Federal Tax Lien
• Offer in Compromise Pre-Qualifier tool
• Offer in Compromise
• Electronic Payment Options Home Page
• Payments (payment options)

On October 30, 2013, the Social Security Administration announced an upward cost-of-living adjustment for the Social Security taxable wage limit.  For calendar year 2014, the amount of earnings taxable for Social Security (Old Age, Survivors and Disability Insurance, or “OASDI”) will also increase from $113,700 to $117,000.  The employee and employer tax rate will remain unchanged at 6.2%.  With this increase in taxable wages, the maximum Social Security tax payable by an employee will be $7,254.00, an increase of $204.60 from the current maximum tax of $7,049.40. Employers will match the employee’s tax.

In 1993, the Omnibus Budget Reconciliation Act removed the taxable wage limit for the Medicare tax beginning in 1994 and years thereafter.  Therefore, there is no maximum employee or employer contribution amount for Medicare tax for 2014.  All covered wages will be subject to Medicare tax at a rate of 1.45%. Employers will match the employee’s tax.

As of January 2013, individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly, $125,000 for married couples filing separately, and $200,000 for filing single) pay an additional 0.9% in Medicare taxes.  For withholding tax purposes, covered wages in excess of $200,000 will be taxed at a rate of 2.35% (1.45% + 0.9%), regardless of filing status. The Additional Medicare Tax is not matched by employers.

Depending on the amount of taxable wages, the combined Social Security and Medicare employee tax rate will range from 7.65% (6.20% + 1.45%) to 8.55% (6.2% + 1.45% + 0.9% on Medicare wages in excess of $200,000 if the employee is a high-income earner). The combined employer rate will remain 7.65%.

For a copy of the Social Security Fact Sheet with the 2014 changes please click here.

 Starting a new business is a very exciting and busy time.  There is so much to be done and so little time to do it in.  If you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running.  That’s where we can help.

Employer Identification Number (EIN)

Securing an Employer Identification (also known as a Federal Tax Identification Number) is the first thing that needs to be done, since many other forms require it.  EINs are issued by the IRS to employers, sole Proprietors, corporations, partnerships, nonprofit associations, trust, estates, government agencies, certain individuals, and other business entities for tax filing and reporting purposes.

State Withholding, Unemployment, and Sales Tax

Once you have your EIN, you need to fill out forms to establish an account with the State for Payroll tax withholding, Unemployment Insurance Registration, and sales Tax collections (if applicable).

Payroll Record Keeping

Payroll reporting and record keeping can be very time consuming and costly, especially if it isn’t handled correctly.  Also keep in mind, that almost all employers are required to transmit federal payroll tax deposits electronically.  Personnel files should be kept for each employee and include an employee’s employment application as well as the following:

Form W-4 is completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and social security number.

Form I-9 must be completed by you, the employer, to verify that employees are legally permitted to in the U.S.

If you need help setting up the paperwork for your business, give us a call.  Letting our expert’s handle this part of your business will allow you to concentrate on running your business.