Social Security Ideas for Married Couples

The decision regarding what age to begin receiving Social Security benefits can be complicated. The decision is further complicated if you are married, because spouses’ ages, estimated benefit entitlements, and life expectancies should factor into the decision. As each individual approaches retirement age, they as a couple have a unique set of fiscal needs and goals. There are several different scenarios that should be considered before a decision is made. Below are examples of two possible courses of action.

File and suspend
Generally, a husband or wife is entitled to receive the higher of his or her own Social Security retirement benefit (a worker's benefit) or as much as 50% of what his or her spouse is entitled to receive at full retirement age (a spousal benefit). But, according to Social Security rules, a husband or wife who is eligible to file for spousal benefits based on his or her spouse's record cannot do so until his or her spouse begins collecting retirement benefits. There is an exception--someone who has reached full retirement age but who does not want to begin collecting retirement benefits right away may choose to file an application for retirement benefits, then immediately request to have those benefits suspended, so that his or her eligible spouse can file for spousal benefits.

The file-and-suspend strategy is most commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based on his or her spouse's earnings record than on his or her own earnings record. Using this strategy can potentially boost retirement income in three ways: 1) the spouse with higher earnings who has suspended his or her benefits can accrue delayed retirement credits at a rate of 8% per year (the rate for anyone born in 1943 or later) up until age 70, thereby increasing his or her retirement benefit by as much as 32%; 2) the spouse with lower earnings can immediately claim a higher (spousal) benefit; and 3) any survivor's benefit available to the lower-earning spouse will also increase because a surviving spouse generally receives a benefit equal to 100% of the monthly retirement benefit the other spouse was receiving (or was entitled to receive) at the time of his or her death.

File for one benefit, then the other
Another strategy that can be used to increase household income for retirees is to have one spouse file for spousal benefits first, and then switch to his or her own higher retirement benefit later.

Once a spouse reaches full retirement age and is eligible for a spousal benefit based on his or her spouse's earnings record and a retirement benefit based on his or her own earnings record, he or she can choose to file a restricted application for spousal benefits, then delay applying for retirement benefits on his or her own earnings record (up until age 70) in order to earn delayed retirement credits. This may help to maximize survivor's income as well as retirement income, because the surviving spouse will be eligible for the greater of his or her own benefit or 100% of the spouse's benefit.

This strategy might be used when both spouses have substantial earnings but do not want to postpone applying for benefits altogether. Louis files for his Social Security retirement benefit of $2,400 per month at age 66 (based on his own earnings record), but his wife Sue wants to wait until age 70 to file. At age 66 (her full retirement age) Sue applies for spousal benefits based on Louis's earnings record (Louis has already filed for benefits) and receives 50% of Louis's benefit amount ($1,200 per month). She then delays applying for benefits based on her own earnings record ($2,100 per month at full retirement age) so that she can earn delayed retirement credits. At age 70, Sue switches from collecting a spousal benefit to her own larger worker's retirement benefit of $2,772 per month (32% higher than at age 66). This not only increases Louis and Sue household income but also enables Louis to receive a larger survivor's benefit in the event of Sue's death.

Every couple’s situation is unique and various scenarios should be considered before the decision to begin receiving Social Security benefits is made. Contacting the Social Security Administration during your decision process may be beneficial. The website is www.socialsecurity.gov.

Applying the Tax Basis and At Risk Rules to Partners by Karla Hopkins

Individuals who invest in partnerships need to be aware of rules that limit the ability of the partner to deduct losses. Individual partners who have been allocated a loss must satisfy three separate loss limitations before the loss can be used. The loss limitations, in the order in which they apply are, Tax Basis limitations, At Risk limitations, and Passive Loss limitations. Here we will address the first two.

A partner’s share of losses is limited to his Adjusted Tax Basis at the end of the year. In general terms, Basis includes money contributed, the adjusted basis of property contributed plus taxable income and tax exempt income allocated to him. These amounts are reduced by losses, nondeductible expenses and distributions allocated to him. A partner’s Basis is further adjusted by liabilities of the partnership that he is liable for. Losses that exceed the partner’s basis are suspended to a future year when Basis may be restored by future income or contributions to the partnership.

The second limitation is called At Risk. The amount At Risk includes the amount of money and adjusted basis of property contributed, amounts borrowed with respect to the activity to the extent the partner is personally liable or has pledged property as security for the debt and amounts borrowed by the partnership for holding real property for which no person is personally liable for repayment. The amount At Risk is also increased and decreased by the income and deductions of the partnership each year. Unlike basis, At Risk can go negative from items other than losses. The consequences of a negative At Risk amount are potential for recapture of previously deducted losses as income in the year the amount At Risk is negative.

When a partnership is initially funded with debt and incurs losses; the debt, while providing Tax Basis for deducting the losses, may limit the losses due to the At Risk rules. Losses suspended due to the At Risk rules may later become deductible in the year under the At Risk rules even when the Tax Basis has already been reduced.

When a partner’s Tax and At Risk Basis have been substantially diminished, losses allocated to the partner may not be deductible, and distributions to the partner may result in income recognition. These limitations are calculated each year and it is important for a shareholder to understand them and to maintain accurate and current records of their Basis. The partnership does not always provide the information to its shareholders. The calculation is especially important in the year that the partnership interest is terminated or sold.

A partner may avoid the Tax Basis and At Risk consequences by being aware of his tax basis and amount at risk and by taking measures to increase these amounts prior to the anticipated event.

The above is meant to be only a brief and general overview of the Tax Basis and AT Risk rules of partnerships. To calculate your basis requires a detailed evaluation of the partnership agreement and other relevant partnership elections.

Did you ever wonder what the total federal and state taxes you pay are?

The Total Tax Insights calculator using this link to an AICPA tool can make it easier to learn what you should know about what you’re paying in taxes. The result while approximate may surprise you. It might make you reconsider where to live and what kind of car to drive or whether you should change jobs or shop differently. Information is knowledge and knowledge is key for everyone's financial planning. It can help you work toward better tax and financial planning and decision-making. Follow this link to get started.
http://www.totaltaxinsights.org/Calculator

Thanksgiving: A truly American Holiday by Carolyn Flaherty

Thanksgiving resonates as a truly American holiday. Although not officially a holiday until President Lincoln declared it so in 1863, the tradition of Thanksgiving dates all the way back to 1621 when the Mayflower Pilgrims held a three day harvest festival to celebrate that year’s bountiful crops. After a truly devastating winter when the settlers lost nearly half their population, they had great reason to celebrate their survival, their plentiful crops and the help they garnered from Native Americans.

The Pilgrim settlers came to America seeking freedom and a better way of life. Indeed, historically immigrants to America come seeking freedom and prosperity. Imagine leaving everything you know, your family and friends and setting out to unknown, undeveloped lands. To embark on such a journey requires a great deal of courage, strength, faith, and confidence:  an overall quality I refer to as “true grit.”

To American stereotypes that label us loud, large and abrasive: I say,” Yes, we are gritty.” We are a nation built by those who were told they couldn't but knew they could. We are a nation of survivors. When I contemplate early Americans, those who built this great nation: I am proud of the entrepreneurial spirit upon which America evolved from the belief of freedom and prosperity to the reality of both.

The economy may be difficult when compared to recent decades. However, when you compare our economy and average wealth to that of the world, we have much to be thankful for. Times may feel uncertain or even volatile. You may be under great personal or professional stress. Yet, even on the worst day in the United States of America, there is still freedom and the potential for future prosperity. Therefore, today I am thankful for potential and for the inspiring people who have fought for, built and defended that potential and this great nation.

We wish you a very Happy Thanksgiving from Pavento, Ratcliffe, Renzi & Company. As you take pause today to share a meal with family and friends, we hope you will also reflect on and celebrate the things you are thankful for.

SALES TAX NEXUS by Karla Hopkins

Over the past three years states have increased their sales tax collection efforts because of the need to raise additional tax revenue. One way they have done this is to expand the definition of what activities create sales tax nexus for out-of-state retailers. In some states, courts have ruled that in addition to a seller’s direct physical presence, an indirect presence may create sales tax nexus. One example of an indirect presence is through independent contractors in a state.

To illustrate indirect nexus: In New York nexus can exist when a customer in New York purchases a product through a retailer’s agreement with a New York resident for commission even if the ultimate retailer is out-of-state. In other words, potential customers that reach the out-of-state retailer’s website by clicking on a link on the in-state affiliate’s website could be subject to sales tax by the ultimate retailer even though that retailer has no physical presence in New York. Two more states, Rhode Island and North Carolina have also developed similar legislation. In addition, during 2011 fifteen other states have proposed laws that expand the nexus laws in some way.

Some states have passed legislation to include a nexus determination for a controlled group where one member of the group is located in their state even if that entity is not even the retailer selling the product into the state.

While in most states, the legislation that was passed to capture the sales tax on out-of-state retailers is being challenged in the court systems, it appears that the trend for states to expand sales tax nexus standards to include remote out-of-state retailers is continuing forward. The federal government has also become much more involved and Congress is currently considering three remote sales tax proposals.

So, what’s the saying, buyers beware? When entering a new state with your business be sure that you are well versed on the laws specific to that state; not only for income and payroll tax, but especially sales tax.

Estate Planning In Our Digital World by Karla Hopkins

Nowadays most people have files and information stored on computers and smart phones such as online accounts with banks, email providers, social networks and music accounts.

These types of accounts and the identity of the service provider are often changing and as a result, planning for the location and security of online assets should now be a part of everyone’s estate planning.

Today, many people pay bills online, receive paperless account statements, keep their checkbooks online, and file their income tax returns online. It’s even possible that these important records are kept only in a digital format with no paper trail of the assets or bills.

Further complicating this subject is that since the digital world is fairly new, policies concerning access to these accounts upon the death or incapacity of someone are inconsistent and in flux. Often you must act quickly to protect online accounts from being deleted or frozen if the account has not been recently accessed. Yet, it is not uncommon for service providers to refuse to give to others the passwords for incompetent or deceased individuals.

Therefore, the first challenge is identifying the digital assets and then getting the username and passwords for the accounts. If there is no record, it could take a long time and a lot of effort to identify the accounts and gain access to them.

As such, individuals should prepare a list of all online accounts and other digital assets. This can be done with a written list. However, keep in mind that the list must be updated each time a password is changed or an account is added. Electronic lists, either on a computer or online, of usernames, passwords and accounts might prove to be more convenient to update.

The list should be kept secure. If you choose to maintain a written list, it should be kept in a safe deposit box, home safe, or with your attorney. Online lists can be secured by a master password. Keep the master password and instructions for accessing the electronic list in a safe deposit box, home safe, or with your attorney.

To begin to plan for your digital assets, consider what would happen if your computer were lost or stolen. What important information would be lost? Could your loved one obtain access to online accounts if you were to die or become incapacitated? What digital assets would you want your family to be able to access? Who would you want to have such access? In addition to personal electronic data, many also have business electronic files. It is important for your employer to be able to obtain access to your business files if necessary.

Planning ahead is always best to ensure that no account or asset is overlooked.

CONTRIBUTING TO A CHILD’s IRA by Karla Hopkins

Establishing an IRA in a child’s name can be an effective planning technique for a child with earned income. The annual limit cannot exceed the lesser of $5,000 or the earned income.

The key to contributing to an IRA is that the child actually earned income. This can include income from a part-time job, summer jobs, babysitting, lawn mowing or paper routes. Where you may not have reported the income in the past, you may elect to so that the child is eligible for an IRA. When a child is employed by a family member, the IRS can be expected to scrutinize carefully whether the income was in fact earned, and a reasonable hourly rate must be used for the work actually performed.

Parents often get frustrated when even a small amount of their child’s income is subject to tax. This occurs because of several things like the disallowance of the personal exemption, reduced standard deduction, higher interest and dividend income from savings accounts.

Under the Kiddie Tax rules, dependent’s investment income is taxed at the parent’s higher tax rate. (if the investment income exceeds $1,900) One way to shelter investment income of a dependent is by contributing to a deductible IRA. Because a deductible IRA is a pretax earnings account, the benefit of compounding investment income is a significant retirement benefit for the dependent.

Establishing and funding a ROTH IRA, which is a nondeductible contribution, can also be a significant retirement and long term tax favored savings strategy for a dependent. Contributions to a ROTH IRA are not deductible but if certain conditions exist, distributions are tax free.

Even though the contributions to a ROTH IRA are not deductible, this may be considered a small price to pay (i.e. the tax on the dependent’s investment income) for the power of tax free compounded earnings inside the ROTH IRA combined with the ability to withdraw funds tax free upon retirement or after age 59 1/2.

Also, if the ROTH IRA has been established for at least five years, the contribution amounts can be withdrawn tax free any time after the five year window which could be an advantageous college funding plan. The contribution does not necessarily have to come from the child’s earnings. As parents, you could gift the additional money for the IRA so that the child continues to keep his spending money. The long term savings available from this type of arrangement is highly recommended.

Planning for the 3.8 Percent Medicare Tax on Investment Income PART II by Karla Hopkins

With the potential for dramatic tax increases scheduled to go into effect in 2013, 2012 tax planning becomes imperative. The following taxes may be impacted:

• Not only are the Bush Administration tax cuts set to expire, but a new 3.8 percent surtax on investment income and a possible reinstated claw-back of itemized deductions could raise the tax rate on ordinary income to as high as an effective 44.6 percent for some taxpayers.
• Similarly, the tax rate on long-term capital gains could increase from 15 percent to 20 percent and the rate on qualified dividends from 15 percent to an effective 44.6 percent.
• Finally, if Congress doesn’t take action, the federal estate tax rate will increase from 35 percent to 55 percent and the exclusion amount will drop from $5,120,000 to $1,000,000.

Planning for these likely tax changes is a major undertaking and beginning the process now is prudent because it will allow you to become comfortable with the potential for a gifting process and provide you time to custom design trusts for your family.

Gain Harvesting

For many taxpayers it will make sense to harvest capital gains in 2012 to take advantage of the current lower rates. You would sell appreciated capital assets and immediately reinvest in the same or similar assets. You would then hold the new assets until you would otherwise have sold them, so there would be no change in your investment strategy.

Deciding whether to use the strategy is not as simple as it might appear on the surface, however, because the lower tax rates must generally be weighed against a loss of tax deferral. By harvesting the gains in 2012 you would be paying a lower tax rate, but recognizing the gains earlier. The greater the differential in tax rates and the shorter the time before the second sale the more favorable gain harvesting is.

In some cases, the correct decision will be clear without doing any analysis. If you are currently in the 0% long-term capital gains bracket, 2012 gain harvesting would always be favorable because it would give you a free basis step up. Gain harvesting would also be more favorable if you planned to sell the stock in 2013 or 2014 anyway. The time value of the tax deferral would be small compared with the future tax savings.

At the other extreme, if you are currently in the 15% long-term capital gain bracket and plan to die with an asset and pass it on to heirs with a stepped-up basis, there is no reason to recognize the gain now. You would be incurring tax now without any offsetting future benefit.

Nor would it make sense to harvest losses in 2012 to create additional capital loss carryovers. These loss carryovers would be better employed to offset capital gains in the future when rates are expected to be higher.

If you do not fall into one of these categories, you will have to do a quantitative analysis to determine whether 2012 gain harvesting would work for you. The decision could be thought of as buying a future tax savings by recognizing gain in 2012. By analyzing the decision in this way, you could measure a return on the 2012 investment over time. If this return on investment exceeds your opportunity cost of capital, gain harvesting would make sense.

Planning for the 3.8 Percent Medicare Surtax

For tax years beginning January 1, 2013, the tax law imposes a 3.8 percent surtax on certain passive investment income of individuals, trusts and estates. For individuals, the amount subject to the tax is the lesser of (1) net investment income (NII) or (2) the excess of a taxpayer's modified adjusted gross income (MAGI) over an applicable threshold amount.

Net investment income includes dividends, rents, interest, passive activity income, capital gains, annuities and royalties. Specifically excluded from the definition of net investment income are self-employment income, income from an active trade or business, gain on the sale of an active interest in a partnership or S corporation, IRA or qualified plan distributions and income from charitable remainder trusts. Modified adjusted gross income is generally the amount you report on the last line of page 1, Form 1040.

The applicable threshold amounts are shown below.

Married taxpayers filing jointly $250,000
Married taxpayers filing separately $125,000
All other individual taxpayers $200,000

A simple example will illustrate how the tax is calculated.

Example: Al and Barb, married taxpayers filing jointly, have $300,000 of salary income and $100,000 of Net Investment Income. The amount subject to the surtax is the lesser of (1) Net Investment Income ($100,000) or (2) the excess of their modified adjusted gross income ($400,000) over the threshold amount ($400,000 -$250,000 = $150,000). Because Net Investment Income is the smaller amount, it is the base on which the tax is calculated. Thus, the amount subject to the tax is $100,000 and the surtax payable is $3,800 (.038 x $100,000).

Fortunately, there are a number of effective strategies that can be used to reduce Modified Adjusted Gross Income and or Net Investment Income and reduce the base on which the surtax is paid. These include (1) Roth IRA conversions, (2) tax exempt bonds, (3) tax-deferred annuities, (4) life insurance, (5) rental real estate, (6) oil and gas investments, (7) timing estate and trust distributions, (8) charitable remainder trusts, (9) installment sales and maximizing above-the-line deductions.

Accelerating Ordinary Income into 2012

Another opportunity that should be noted is accelerating ordinary income into 2012. Perhaps the best way to do this would be to convert a traditional IRA to a Roth IRA in 2012, if a conversion otherwise made sense. Ordinary income could also be accelerated by selling bonds with accrued interest in 2012 or selling and repurchasing bonds trading at a premium. Finally, you might consider exercising non-qualified stock options in 2012.

Estate Tax Provisions

The estate tax exemption is currently $5,120,000 per person and will revert to $1,000,000 on January 1st, 2013 unless Congress acts. The President is suggesting a $3,500,000 exemption. The potential reduction in the estate tax exemption is resulting in many taxpayers making large gifts, in trust, for their family. In some instances the trusts are for the spouse, children and grandchildren and in others just for children and younger generations. Most experts would define the savings at 35%, 45% or 55% of the amount gifted over $1,000,000. On a $5,000,000 gift the savings would be $1,800,000 ($4,000,000*45%).

Planning for the 3.8 Percent Medicare Tax on Investment Income PART I by Karla Hopkins

The recently enacted health care reform package imposes a new 3.8% Medicare contribution tax on the net investment income of higher-income individuals. Although the tax does not take effect until 2013, it is not too soon to understand what it means and to examine strategies to lessen the impact of the tax.

Net investment income: Net investment income, for purposes of the new 3.8% Medicare tax, includes interest, dividends, annuities, royalties and rents and other gross income attributable to a passive activity. Gains from the sale of property that is not used in an active business and income from the investment of working capital are treated as investment income as well. Income from trading in financial instruments and commodities is subject to the tax. An individual's capital gains income will be subject to the tax. This would include gain from the sale of a vacation home.

It may be prudent to realize gains in 2012 instead of waiting until 2013.

The tax applies to estates and trusts, on the lesser of undistributed net income or the excess of the trust/estate adjusted gross income (AGI) over the threshold amount of $11,200 for the highest tax bracket for trusts and estates, and to investment income they distribute. This is a very low threshold so the impact to trusts is significant.

Deductions: Net investment income for purposes of the new 3.8% tax is gross income or net gain, reduced by deductions that are "properly allocable" to the income or gain. This is a key term that the Treasury Department expects to address at a later date. For passively-managed real property, allocable expenses will still include depreciation and operating expenses. Indirect expenses such as tax preparation fees may also qualify.

For capital gain property, this formula puts a premium on keeping tabs on amounts that increase your property's basis. It also puts the focus on investment expenses that may reduce net gains: interest on loans to purchase investments, investment counsel and advice, and fees to collect income. Other costs, such as brokers' fees, may reduce the amount realized from an investment. You may want to consider avoiding installment sales with net capital gains (and interest) running beyond 2012.

Thresholds and impact: The tax applies to the lesser of net investment income or modified AGI above $200,000 for individuals and heads of household, $250,000 for joint filers and surviving spouses, and $125,000 for married filing separately. MAGI is AGI increased by foreign earned income otherwise excluded under Code Sec. 911; MAGI is the same as AGI for someone who does not work overseas.

Example. Jim, a single individual, has modified AGI of $220,000 and net investment income of $40,000. The tax applies to the lesser of (i) net investment income ($40,000) or (ii) modified AGI ($220,000) over the threshold amount for an individual ($200,000), or $20,000. The tax is 3.8% of $20,000, or $760. In this case, the tax is not applied to the entire $40,000 of investment income.

The tax can have a substantial impact if you have income above the specified thresholds. Also, don't forget that, in addition to the tax on investment income, you may also face other tax increases proposed by the current administration that could take effect in 2013. The top two marginal income tax rates on individuals would rise from 33 and 35%t to 36 and 39.6%, respectively. The maximum tax rate on long-term capital gains would increase from 15 to 20%. Moreover, dividends, which are currently capped at the 15% long-term capital gain rate, would be taxed as ordinary income. Thus, the cumulative rate on capital gains would increase to 23.8% in 2013, and the rate on dividends would jump to as much as 43.4%. Because the thresholds are not indexed for inflation, a greater number of taxpayers may be affected as time elapses. Congress may step in and change these rate increases, but the possibility of rates going up for upper income taxpayers is sufficiently real that your tax planning must take them into account.

Exceptions: Certain items and taxpayers are not subject to the 3.8% tax. A significant exception applies to distributions from qualified plans, 401(k) plans, tax-sheltered annuities, individual retirement accounts (IRAs), and eligible 457 plans. The exception for distributions from retirement plans suggests that potentially taxed investors may want to shift wages and investments to retirement plans such as 401(k) plans, 403(b) annuities, and IRAs, or to 409B Roth accounts.

Increasing contributions will reduce income and may help you stay below the applicable thresholds. Small business owners may want to set up retirement plans, especially 401(k) plans, if they have not yet established a plan, and should consider increasing their contributions to existing plans.

Another exception covers income ordinarily derived from a trade or business that is not a passive activity, such as a sole proprietorship.

Investment income from an active trade or business is also excluded.

Self-Employment tax will still apply to proprietors and partners as it has in the past.

The tax does not apply to nontaxable income, such as tax-exempt interest or veterans' benefits.

It also does not apply to income from the sale of an interest in a partnership or S corporation, to the extent that gain of the entity's property would be from an active trade or business. The tax also does not apply to business entities (such as corporations and limited liability companies), nonresident aliens (NRAs), charitable trusts that are tax-exempt, and charitable remainder trusts that are nontaxable under Code Sec. 664.

The first step in any tax plan is to determine if the law applies to you. The second step is to review transactions that you may be considering to determine the timing of them to avoid the increased tax and thirdly to the extent that the tax cannot be avoided, gear up to understand what it means to your cash flow for estimated income tax payment and withholdings.

NEW REPAIR AND MAINTENANCE REGULATIONS by Karla Hopkins

The IRS recently released tangible property regulations (1.263S-3(T)), commonly referred to as “repair” regulations. The significant areas of the regulations include standards for Unit of Property definitions (UOP) for real and personal property, improvements to property, and modifications to the rules or dispositions of property. The regulations provide a general framework for determining whether an expenditure is an improvement to property or a deductible repair. A taxpayer must initially determine the UOP and then apply a series of tests to determine if the expenditure is a capital improvement or deductible repair.

The regulations make the UOP smaller, especially for buildings. As a general rule, the larger the UOP, the more likely the expenditure will be a deductible repair because they are proportionately smaller compared to a larger UOP. As the UOP gets smaller, more expenditures become capital improvements to the smaller UOP.

In the case of a building, an expenditure is treated as a capital improvement if it improves the building structure or any individual “building system”. Building systems include water, electrical, heating, ventilation, air conditioning, gas, plumbing, elevators, escalators and fire protection and security systems. For example if changes are being made to an elevator, they are considered in relation to the elevator system and not the total building itself to determine whether to capitalize it.

Under the new regulations, where an expenditure is incurred on any building system, the expenditure must be assessed against the respective building system to determine whether the expenditure is a deductible repair or capital improvement.

The regulations outline three tests to determine if an expenditure for personal property results in a betterment, restoration or adaptation to a UOP that requires capitalization. Characterizing an expenditure as an improvement requiring capitalization depends on the facts and circumstances in each case. The regulations themselves contain over 150 examples of how to interpret and apply the new rules and should be referred to during the preplanning phase of any significant repair or restoration project.

PAYROLL RELATED POINTS TO CONSIDER by Karla Hopkins

Outsourcing your payroll processing:

Remember that even though you have outsourced your payroll processing, you are always responsible for the payroll taxes. Payroll taxes accumulate quickly. Therefore, take the following steps to ensure that you are within the legal line with the company that processes your payroll:

• Make sure that the payroll company is bonded
• If you have a payroll company that files all taxes and returns, make sure that you verify that the filings are being completed by logging into the federal and state websites periodically
• Do not allow a hired individual to sign your tax returns, have them prepared for your signature and filing
• Make sure that all payroll correspondence goes directly to you and not the payroll service provider
• Request a transcript of your filings from the IRS and State periodically

When paying an employee’s final wages:

When you terminate an employee you generally have to pay them their final check at the time of termination. It’s easier to write a manual check for them and reconcile it with the payroll company later than to face possible legal action from the terminated employee. If a person in Massachusetts quits on their own, they are due their wages by the next business day.

DEDUCTING EMPLOYEE MBA EXPENSES by Karla Hopkins

The deductibility of the cost of a Master of Business Administration (MBA) degree as a trade or business expense for an employee is a complex subject with several factors to consider. The costs of an MBA are generally deductible if the degree maintains or improves skills required by the individual’s employment or trade or business or meets the express requirements of the individual’s employer or the requirements of applicable law.

If the MBA will qualify the employee for a new trade or business or is required to meet the minimum education requirements for qualification in the individual’s employment or other trade or business the costs are generally not deductible. However, the determination is fact intensive and depends in part on what the taxpayer did before, during, and after pursuing the degree.

To take a deduction the employee’s trade or business must have been previously established. An individual needs to have started their employment before pursuing a degree. The amount of time necessary to establish a trade or business is subjective and no set standard has been established.

It is clear that individuals are carrying on a trade or business of being an employee if they continue their employment while completing an MBA program. However, where a teacher took time off from employment to pursue a degree and then resumed her employment after, she was considered to have taken a temporary leave of employment and the costs were deductible. While a “one year or less” hiatus is a rule of thumb, it is not a statute but the longer the leave from employment, the more likely the IRS will determine that the individual has abandoned the former trade or business.

Assuming you are engaged in a trade or business, there are then three criteria that must also be met to determine that the costs are ordinary and necessary:

• The education is not required to meet the minimum requirements to qualify for the job.
• It is not part of a program that will qualify you for a new trade or business.
• The education either maintains or improves skills required by your employment or meets the express requirements of the employer.

Under the second item above, the regulations state that a change of duties does not constitute a new trade or business if the new duties involve the same general type of work as the present employment.

On the other hand when an individual’s duties were technical in nature before enrolling in an MBA program and then managerial afterword, a tax court disallowed the MBA costs.

If you are able to fall into the first two categories above, there is one more hurdle. In item three above, there must be a business purpose for incurring the expense which includes it being required for your employment or your employer.

Because the analysis of this type of expense is very fact based, an individual should thoroughly analyze their current job, focusing on the education and skill requirements, and the courses being taken to determine whether they meet the IRS criteria for deductibility.

Cleaning Out Your Financial House by Carolyn Flaherty

Twice a year I do a major house cleaning and reorganization. I polish the cabinets, clean out closets, either put in screens and wash windows in the spring or in the fall I take out and store all the screens and scrub the windows again. I go through all the children’s clothing and lug bags of used clothes to the Salvation Army. However, like the cobbler’s barefoot children… what I don’t always do (but should), is the same kind of spring cleaning overhaul of my finances. But where do you start a financial clean up?

Below is a list of things you can do to tidy your financial home:

1. Organize your filing in a tiered system. Start by purging your filing cabinets of old documents you no longer need to maintain. Keep paperwork that you will need within the next year in easy to access hanging file folders. Move older documents that you save long term such as tax returns into storage bins and consider a fireproof lockable box for items like your social security card, your will and other difficult to replace documents.

2. Get your free annual credit report and review it closely so that you can resolve any incorrect entries made by creditors.

3. Set up your monthly payments such as mortgage, cars, utilities etc. to be paid automatically through your bank and set up electronic reminders to your phone or e-mail so that you avoid late fees for all variable payment monthly bills such as credit cards.

4. If your workplace allows you to direct your paycheck to multiple accounts, set up a transfer from your paycheck to a savings account and then forget it. Allow the deposits to build an emergency fund for your family.

5. Review your insurance policies including your homeowner’s or renter’s policy, your auto insurance policies as well as life insurance, disability insurance, and any business protection or professional insurance you carry. Ensure adequate coverage and consider shopping around to determine whether you are getting the most competitive pricing for your coverage.

6. Reread your will and any other estate planning documents you have to discern whether changes in your life have necessitated revisions. If you don’t have a will or an estate plan, get some references and get the process started. The peace of mind that comes with a properly executed estate plan is invaluable particularly if you have minor children for which guardianship needs to be indicated.

7. While you are examining your estate planning documents, confirm that correct beneficiaries are designated in all instances including your will, any trusts created, and on insurance policies and retirement accounts.

8. Contemplate consolidating your investment accounts with one advisor. Having a single source for your investment information makes monitoring and rebalancing your accounts more efficient.

9. Set up a household budget. Begin by reviewing checks, credit card statements and debit transactions from the prior year. As you evaluate your spending trends you will understand where you spend the most money and where there may be potential to save. Having a working budget and comparing the budget to your actual spending on a regular basis is crucial for any household serious about their financial planning.

10. Develop short term and long term financial goals. Break the goals down in to 1-5 year short term goals and longer term life goals. If you don’t know where you want to go, there is very little chance that you’ll get there. Once you have established your goals consider employing a certified financial planner to compile a comprehensive financial plan.

Revisit this list annually and take the time to compare your goals to your progress. Next year you will enjoy seeing how the automatic savings you’ve created has grown. You may find it cathartic to purge out documents and move the current year into storage bins and older information in to the shredder. And, you may be surprised when you compare your annual budget to your actual revenues and expenditures. But, most importantly you will have a plan, you will be focused and you will be moving in a positive direction.

REPORTING REQUIREMENTS FOR FOREIGN FINANCIAL ASSETS by Karla Hopkins

Under the Bank Secrecy Act, U.S. persons with a financial interest in bank and other financial accounts in foreign countries are subject to a reporting requirement if the value of the accounts exceeds $10,000.
Failure to report can result in severe civil and/or criminal penalties.

The term U.S. person includes citizens, residents, corporations, partnerships, LLCs, Trusts or similar organizations created under U.S. laws. A resident refers to a noncitizen who is present in the U.S. a certain number of days in the current and preceding two years.

The maximum value of $10,000 is the largest amount of assets appearing on a quarterly or more frequent account statement in a year, converted to U.S. currency.

Foreign financial accounts that are reportable include bank accounts, accounts with persons engaged in the business of buying, selling, trading or holding stock or other securities and “other” financial accounts. The last term includes insurance and annuity policies with a cash value and also mutual accounts with mutual funds or similar pooled investments. Disclosure is not required for individual bonds, notes or stock certificates held by a taxpayer.

Financial interest includes the obvious such as legal title but it also includes a more indirect ownership. A U.S. citizen who directly or indirectly owns more than 50% of the total value or voting power of the stock in a corporation has a financial interest in the foreign financial accounts that the corporation owns. A financial interest also exists if a U.S. person has signature authority over a foreign financial account.

Failure to provide the IRS with the required information creates the potential for significant civil and criminal penalties. A taxpayer who willfully fails to file faces a civil penalty equal to the greater of $100,000 or 50% of the foreign financial account balance. This penalty applies to each year open under the statute of limitation which means that if the nondisclosure lasts several years, the penalty could easily exceed the amount in the account. Criminal penalties include a fine of $250,000 and/or five years prison.

Regardless of whether the IRS has brought this to the attention of the taxpayer, you should proactively volunteer reporting under the Bank Secrecy Act.

ELECTION YEAR TAX TALK – FIVE TERMS YOU SHOULD KNOW by Laticia Michelson

“BUSH TAX CUTS”Several “temporary” tax law changes occurred in 2001 and 2003, the majority of which were supposed to expire around 2010. Some of the changes included: lower federal income tax rates, lower maximum capital gain rates, lower tax rates for qualifying dividends, and increased standard deduction amounts. These are collectively referred to as “Bush tax cuts”. Many of these provisions were already extended at the end of 2010 and are now set to expire at the end of 2012. A significant amount of the election discussion will pertain to the extension of these provisions again for all taxpayers or only for taxpayers who earn less than a certain threshold.

ALTERNATIVE MINIMUM TAX (AMT)
The alternative minimum tax is calculated using a different set of tax rules than those used for regular tax. Under the AMT rules, some deductions taken for regular tax are not allowed or are limited. Also, certain income and expenses are recognized under different rules for AMT. If a taxpayer is subject to AMT, they are required to calculate their taxes twice (once under the regular way and once under the AMT rules) and pay the higher amount. Whether or not a taxpayer is subject to the AMT is directly related to the amount of the AMT exemption. The exemption amounts were increased via the Bush tax cuts and these increases were only extended through 2011. If the exemption increase provision expires, the exemption amounts will revert to significantly lower amounts and a large number of taxpayers will be subject to the AMT (and the resultant higher tax rates) in 2012.

THE “BUFFETT RULE”
During 2011, Warren Buffett, CEO of Berkshire Hathaway, wrote an editorial in the New York Times that essentially said he and his “mega-rich friends” were not paying their fair share of taxes. He noted that the tax he paid was a smaller percentage of his income than the percentage paid by many in his office. This is partly attributable to the lower capital gains rate and the fact that many “mega-rich” incur a significant amount of their income from the sale of capital assets, which is then taxed at a lower rate than ordinary income. President Obama has discussed what he considers a fairer tax treatment - the “Buffett rule”- that taxpayers making more than $1 million annually should not pay a smaller percentage of their income in taxes than middle-class families pay.

VALUE ADDED TAX (VAT)
A value added tax (VAT) is a consumption tax, similar to a sales tax. The difference between a VAT and a national sales tax is the assessment. A VAT is assessed and collected at every stage of production – raw materials, finished product, retailer, and consumer.

FLAT TAX
A flat tax applies a single tax rate to individual income and a separate rate to businesses.

Protecting the Reputation of your Non-profit Organization by Carolyn Flaherty

The reputation of a non-profit is perhaps their greatest asset and an equally important marketing tool. Therefore you should be proactive in protecting your organization’s good name particularly in today’s environment when a disgruntled employee, volunteer, donor or service recipient can instantly vent frustrations over the Web via any number of popular social media sites; Facebook, Twitter, YouTube, and blogs to name a few.

Below are a few ideas for how to mitigate reputational risk:

1. Set up and adhere to human resource policies. Ensure that employees and volunteers are fairly treated and issues are addressed in a timely manner.

2. Create a comprehensive conflict of interest policy that is distributed and understood.

3. The AICPA recommends setting up a whistleblower hotline or similar medium for stakeholders to direct concerns and frustrations. Having an outlet for your shareholders to turn to may keep them from turning to public platforms like social media.

4. Engage in social media. Having a social media presence keeps you in the conversation. Your participation in the conversation allows the stakeholders to gain a better understanding of you and your organization. If you can get to know the stakeholders and form a relationship, you will likely become aware early on of a brewing issue that could go public and therefore able to reach out to parties before the snow ball gets rolling. Furthermore, you will have a ready audience to engage and likely a veritable army of fans that will come to your defense should a problem arise.

Finally, there are also communication consultants and reputational monitoring and protection services available. Communication consultants can assist you with your social media personality and help you put a plan in place to deal with negative media. Reputational monitoring and protection services will aide in watching online and media activity concerned with your entity and can even help you rebuild your reputation.
Your non-profit organization’s good name is definitely an example of when the best defense is a good offense!

Does Your Child Need to File as a Result of a Distribution from a Qualified Tuition Program? By Carolyn Flaherty

Section 529 Plans, also known as Qualified Tuition Programs or QTP, have become extremely popular over the course of the previous decade. In many cases, the plans were set up so that a dependent child is listed as the owner and beneficiary of a plan. Therefore, when distributions are made, the child receives a Form 1099Q from the educational institution in their social security number. The Form 1099Q is also furnished to the IRS.

Distributions are generally fully excludable from taxable income if they do not exceed qualified higher education expenses. If distributions exceed qualified expenses, the excess (less original basis) is includable as taxable income to the recipient. Qualified higher education expenses include tuition, fees, books, supplies, equipment required for enrollment or attendance, expenses for special needs services and room and board costs for students who are at least ½ time students.

The question arises, if a taxpayer, who is not otherwise required to file a tax return (due to minimal amounts of reportable income), receives a Form 1099Q distribution that is fully excludable under the guidelines above: does the distribution cause the taxpayer to be required to file?

The correct answer is somewhat inconclusive at this time as the IRS has not perfected their matching program when it comes to 1099Q’s. Reportable/Includable Income and taxable income are two different things in the eyes of the tax law. Code Section 529(c)(3)(A) asserts that distributions for a QTP are INCLUDABLE in the recipient’s income under the Code Section 72 rules to the extent not excluded under any other Code provision. Therefore, though the issue is somewhat ambiguous, it seems that distributions are indeed income and hence reportable but not taxable assuming they meet the education requirements above.

Furthermore, because the IRS is provided a copy of Form 1099Q, they will match the form to the recipient’s social security number. If no return is filed, the IRS may generate a notice of deficiency. To avoid unnecessary complications and dealings with the IRS, our office has made it a policy to file a return for the student when these circumstances arise.

When is Form 8283 required to be filed for a charitable contribution? by Karla Hopkins

Form 8283, Non cash Charitable Contributions, must be filed with an individual’s income tax return to substantiate non cash charitable contributions. The instructions for the form say that you must attach the form to the return for the year in which you contribute the property and first claim the deduction.

But what if you make a non cash contribution and elect to utilize the standard deduction instead of itemizing? Is the form still required that year if the deduction was limited by adjusted income limits before making the standard deduction election?

In that case, the non cash charitable contribution would technically be eligible to be carried over to the following year.

How do you substantiate the non cash charitable contribution deduction?

The best practice in the case where the non cash charitable contribution deduction is limited and the taxpayer elects to utilize the standard deduction instead of itemizing is to attach the required Form 8283 in the year of making the non cash contribution even though the form is not required that year due to the standard deduction election.

Simple Ways to Protect your Corporate Shield by Carolyn Flaherty

Many small business owners are using the limited liability corporate structure in order to limit their personal liability. Once a business is incorporated, it exists as a separate legal entity. Therefore, generally the corporation and not the business owner will be responsible for the debts and liabilities of the entity. The commonly called, “corporate shield” separates your personal assets from the assets of the business.

However, in order for the shield to properly defend your personal assets, you must ensure your LLC remains in good standing. Below are several practices you should implement to keep your corporate shield in place.

1. Do not comingle your personal and business finances. Maintain separate bank accounts and credit cards for your business. Do not use corporate funds for personal expenditures as this may place your personal assets at risk.
2. File state required annual reports. Delinquent filings can result in penalties, late fees or even suspension or dissolution of your corporation.
3. Record any changes in the Articles of Incorporation. Such changes as company address, name change, authorization of additional shares, changes in the board members, etc. should be formalized in Articles of Amendment and submitted to the state.
4. Make sure your business is in compliance with the requirements in all states in which you operate. If you are doing business in a state other than your state of incorporation, you will need to qualify and register as a foreign entity and depending on your business type may require licenses or permits in order to legally operate.
5. Timely file your tax returns.

Many well intending business owners do not follow these steps to protect themselves. Business owners often spread themselves very thin taking on a great deal of responsibility in order to ensure their success. These administrative tasks must be part of the priority to avoid costly negative consequences.

USING A BUY/SELL AGREEMENT TO TRANSFER OWNERSHIP by Karla Hopkins

A buy/sell agreement is a contract that restricts business owners from freely transferring their ownership interests in a business. It is a tool for providing a planned and orderly transfer. Some of the important advantages of this type of agreement are:

• Provides for business continuity upon the death, disability, or retirement of a shareholder
• It establishes a market value for the corporation’s stock that might otherwise be difficult to sell
• It ensures that the ownership of the business remains with individuals selected by the owners or remains closely held
• It provides liquidity to the estate of a deceased shareholder to pay estate taxes
• It supports the deceased family members with proceeds upon the sale of the stock

A few disadvantages to a buy/sell agreement are:

• The cash paid for the life insurance premiums that fund the agreement is not available for business operations or shareholder personal expenses
• Circumstances may change after the agreement is adopted that cause purchasers to regret the obligation that they made to buy a withdrawing owner’s interest.

The contract can be between the shareholders of a corporation individually or between a corporation and a shareholder. The contract provides that a shareholder’s stock will be sold to the other shareholders or to the corporation upon an occurrence of a specified event. Events generally include death, disability, and retirement, but may also include divorce, bankruptcy or inability to practice due to licensure requirements. The agreement may also be designed as a right of first refusal in the event that one or more of the shareholders want to sell their stock.

In a redemption agreement, the shareholder and the corporation enter into a contract in which the shareholder agrees to sell their shares to the corporation for a certain price, term or circumstance that is specified in the agreement. If the stock redemption agreement is funded with life insurance, the corporation pays the premiums and the corporation owns the policy and is the policy’s beneficiary.

The costs of the insurance premiums are carried proportionately by all the shareholders because the corporation is responsible for all the premium payments. The administration of the arrangement is simplified because there is only one life insurance policy on each shareholder and the legal agreement can be drafted as a single document.

Redemption agreements can have complex tax implications and a potential for adverse income tax consequences. If a corporation pays more than the fair market value for the stock the selling shareholder could be deemed to receive a gift from the other shareholders or compensation from the corporation. If the corporation pays less than the stock’s fair market value, the remaining shareholders may have received either a gift or compensation. To qualify for tax advantaged sale treatment the transaction must meet some strict statutory requirements. If the corporation is the beneficiary of a life insurance policy that funds the stock redemption, the insurance proceeds could trigger Alternative Minimum Tax.

A cross purchase agreement is a contract between the shareholders of the corporation to offer their shares for sale to the other shareholders at the price and terms specified in the agreement. In the event of a shareholder’s death, the estate is normally required to offer the decedent’s ownership interest to the other shareholders at the specified price and terms. The other shareholders are generally obligated to buy the interest in the event of specified circumstances. These agreements are funded with insurance and therefore are best when a corporation has only 2 or 3 shareholders because each shareholder must carry life insurance on all the other shareholders which can be prohibitive.

Having no agreement is often the most costly of all because it can result in personal collateral damage. Shareholders become enemies and family members can become bankrupt. The decisions on exiting a business should always be made during the time of creation of the business and be readdressed regularly as circumstances come up that could affect the viability of a buy/sell agreement plan.

How to Assist a Newly Widowed Spouse with their Finances by Karla Hopkins

The loss of a loved one, especially a spouse, triggers many emotions. Reactions can be a serious hindrance to the survivor's ability to make intelligent, thoughtful financial decisions. The following are ways family members or financial advisors can help.

A key first step is to collect important documents including a will. It is strongly suggested that a copy of a will be kept outside of a safety deposit box because once an owner dies, the bank locks the safety deposit box. If there are no other authorized users, the bank will not open the box without a court order.

In addition to a will there might be other trust documents if the decedent was trustee or a beneficiary of a trust. Proper planning requires that these documents be available as soon as practical.

Also collect day-to-day financial documents such as savings and checking account statements, credit card bills, utility bills and loan payment books for mortgages and car loans.

In many cases the surviving spouse lacks knowledge of the family’s finances. A good place to start learning the household finances is to analyze the sources and amounts of recurring income, as well as any one-time income from the estate. You should also look for income that will cease upon the death of the spouse. The tax return is usually the best place to start this search.

If there is pension income, a death often affects the pension payments. Therefore, investigate the policies and plans and review what options may be available for the surviving spouse.

If the deceased was a partner or owner in a business, contact the entity to see what payments are due upon death.

The Social Security Administration should be contacted if the spouse is over 50. The survivor might be eligible for benefits.

Once you have determined the sources and timing of income, it’s time to look at expenditures. The checkbook and bank statements are the best place to start. Some expenses may get reduced, like a second car, but often it is disappointing how little monthly expenses actually decrease for the surviving spouse.

From a financial planning perspective, the difficult work begins when there is a monthly cash deficit. You may be able to affect a small life change to take care of this or life insurance could be used to retire some outstanding debt, or you may choose to make income-producing investments to bridge the small gap.

In more serious cases, a decision has to be made about the affordability of the home. A useful analysis for addressing cash flow is to divide the expenses into two categories; those that are needed to maintain a lifestyle, and those that are discretionary, such as rent, utilities and food.

When retaining the home is a major factor in finances you can consider taking out a new, longer term mortgage, selling the house and downsizing, a reverse mortgage, and moving in with relatives.

This is also an important time to review a plan for elder long-term care. Is there a plan? Long-term care insurance? Often the retirement and investment assets are only enough to afford a current lifestyle and do not even come close to the cost of elder care. Consider hiring a Medicare attorney to review medical needs.

The last step is to make sure the survivor updates their own financial documents. In many cases, most of their documents were either joint with their deceased spouse or listed the deceased spouse as a beneficiary. Documents to update include:

A will
A health care power of attorney
A general power of attorney
Bank and brokerage accounts
Insurance policies
Credit card accounts
Deeds
Retirement plan accounts

Good records help survivors get through the tough times immediately following the death of a spouse. The best time to understand the documents is before a death occurs.

Social Media: All the Cool Kids are Doing It by Carolyn Flaherty

Although Linked In is widely accepted among professionals as a means to expand networks, search for employment or employees and seek professional guidance; some professionals have been more leery of jumping on to other popular sites. I believe that most of the hesitation stems from a perception that their presence on Facebook, Twitter or certain other platforms could somehow compromise their professional persona. However, Facebook has become the new golf course.

Indeed, Facebook is said by some to BE the new internet. It is where people get to know you and it provides a platform to build relationships. However, it is important to remember some key points in order to successfully utilize any social media venue:

• God gave you two ears and one mouth. He had purpose in that design. Listen twice as much as you speak. Strive not just to be interesting but moreover to be INTERESTED.
• Provide value to others. Value is not determined by you, it is determined by your audience. Evaluate your audience. Determine what they respond to and comment on. Their activity illustrates their interests. They may be primarily seeking entertainment rather than hard facts. You need to play to your audience or you will lose them.
• Keep your posts PG.
• Facebook was made for people not for businesses, so put PERSONality into your posts.
• Create a brand. People want to do business with other people that they like. They cannot like you if you do not allow them to know you. Use your real name, be honest, be authentic and be transparent.
• Serve others. By reviewing comments and posts within your network you can discern their needs. This gives you an opportunity to serve them; to connect and share your knowledge.
• Posts with pictures and video attract attention more than simple posts. Whenever possible include a picture, video or link with your post.
• Post regularly. Fresh and consistent content is crucial. Most sources suggest posting three to five times daily.
• Selling should be done modestly. Your intent should primarily be to collaborate and share as opposed to selling.
• Posts are rated and prioritized by the powers that be on Facebook and these ratings determine where your post falls in the newsfeed. If your posts do not generate comments and “likes” they may be deemed unimportant and may not even appear in your friend’s newsfeeds. Therefore, the goal is interaction. Be sure to “like” comments left by others on your post and respond in the comment thread because the Facebook rating system gives you credit for ALL interaction.
• Sometimes being different can be better than being better.
• Embrace the negative comments. Feedback, BOTH positive and negative, helps you to improve. Negative comments give you an opportunity to respond publicly, (which may actually help you build your reputation if handled properly).
• Developing your network and your social presence is not a race. Take time to develop quality relationships because it is not the quantity of your relationships but the quality that determines value.

Finally, consider implementing a social media policy in your firm. The policy does not have to be overly specific but should include general guidelines such as: no talking about clients and no bad mouthing the firm.

Factors Influencing Key Employees Decisions-making by Andrea Hottleman

Business owners either rely on themselves or key employees for important decisions within their companies. Behavioral finance looks at the way emotions and psychology influence attitudes and beliefs in decision-making.

Examples of emotional and psychological influences are when decisions are made based on a trend that a person believes to exist but does not; or a feeling that a person has control over events when they do not.

Psychologists have broken the factors that influence the interpretation of data into the following areas: anchor effect, overreaction to random occurrences, overconfidence, optimism, follow the herd, loss aversion and the endowment effect.

Anchor effect occurs when more weight is given to the initial information received on a subject. This happens more often when the information is shared with others and it agrees with the key employee or owner’s point of view.

Overreaction to random occurrence happens when we create a relationship that does not exist based on data results. People tend to look for systematic patterns but sometimes these patterns are actually random.

Overconfidence results in mistakes of significant size. People tend to overestimate their abilities and knowledge.

Optimism is when a person underestimates a poor outcome. A few optimistic decisions put together could result in an overly positive financial forecast.

Follow the Herd provides a false sense of not being alone. A decision made based on the way the company has always done it or the way others in the company would agree with. The employee may not feel comfortable stepping outside the box for fear of failure.

Loss Aversion can hinder the growth of a company. Sometimes it may take a small loss first to take a giant step forward.

Endowment Effect is human nature to value an item they own higher than it is actually worth. For example, ask someone how much their house is worth?

Understanding the psychology behind decision making will help you to understand the management styles and decisions at work in your organization. Avoiding these psychological pit falls can be achieved by implementing a strong network of checks and balances within the company’s internal control structure. An organization’s internal controls should be evaluated annually.

Passive Activity Loss Rules by Karla Hopkins

The "passive activity loss rules" have developed into a complicated set of guidelines since their inception in the mid-1980s. However, if you keep in mind the general principles that drive loss limitations in this area, you will have a good foundation for selecting investment strategies that take full advantage of, rather than solely reacting to, the current tax rules.

A passive activity is one that involves the conduct of any trade or business in which the taxpayer does not materially participate. Any rental activity is a passive activity whether or not the taxpayer materially participates. However, there are special rules for real estate rental activities and real estate professionals.

Losses and credits that are attributable to limited partnership interests are generally treated as arising from a passive activity. However, losses from working interests in oil and gas property are not subject to the limitation.

Material Participation:
Generally, to be considered as materially participating in an activity during a tax year an individual must satisfy any one of the following tests:

(1) he participates more than 500 hours;
(2) his participation constitutes substantially all of the participation in the activity;
(3) he participates for more than 100 hours and this participation is not less than the participation of any other individual;
(4) the activity is a "significant participation activity" and his participation in all such activities exceeds 500 hours.  A significant participation activity is one in which the taxpayer participates more than 100 hours during the tax year but does not materially participate under any of the other six tests.
 (5) he materially participated in the activity for any five years of the 10 years that preceded the year in question;
(6) the activity is a "personal service activity" and he materially participated in the activity for any three years preceding the tax year in question;

or

(7) he satisfies a facts and circumstances test that requires him to show that he participated on a regular, continuous, and substantial basis.

How losses are deducted:
In most cases, losses from passive activities may not be deducted from other types of income (for example, wages, interest, or dividends). Therefore, to the extent that the total deductions from passive activities exceed the total income from these activities for the tax year, the excess (the passive activity loss) is not allowed as a deduction for that year.

Losses that are not deductible for a particular tax year because there is insufficient passive activity income to offset them (suspended losses) are carried forward indefinitely and are allowed as deductions against passive income in subsequent years. Unused suspended losses are allowed in full upon a fully taxable disposition of the taxpayer's entire interest in the activity.

Impacts of the JOBS ACT by Carolyn Flaherty

The Jumpstart Our Business Startups Act, known as the JOBS Act allows middle market company investment opportunities such as:

• raising small amounts of money using the Internet
• staying a private company longer and raising money in private placements from sophisticated investors
• raising significant sums of money, up to $50 million, in a 12-month period in a new Regulation A+ hybrid offering mechanism
• Tapping the U.S. capital markets in an initial public offering sooner than management may have considered

The JOBS Act also creates an “on-ramp” for middle market, non-public companies to access the IPO markets by easing accounting and reporting requirements for qualified emerging growth companies, (ECG). An emerging growth company is a company with less than $1 Billion that issues new common equity after December 8, 2011.

As a result of the JOBS ACT emerging growth companies are:

• Exempted from the requirement to have auditor reporting on their internal control systems
• Exempted from adopting new or revised accounting standards until the effective date of such standards for nonpublic companies
• Not generally subject to future PCAOB rules that require mandatory audit firm rotation or a supplement to the auditor’s report unless the SEC determines that the application is necessary for the public interest
• Allowed to present only two rather than three years of audited financial statement in the initial registration statements
• Exempted from requirements from certain Regulation S-K disclosure information
• Allowed an increased exemption limit for small offerings under Regulation A
• Able to enjoy scaled executive compensation disclosure

In addition emerging growth companies have the benefits of being able to file confidential submission drafts of registration statements to the SEC before filing and can also test the IPO waters by communicating with potential investors before a registration statement is filed.

Once a company achieves ECG status, the company can maintain this standing for up to five years after closing its first sale of common equity or until the occurrence of one of the below listed events (whichever is earlier):

• The last date of the fiscal year with gross revenues over $1 billion
• The date where over the previous three-year period $1 billion in nonconvertible debt has been issued
• The date on which the issuer is deemed a large accelerated filer

HIGH INCOME TAXPAYERS WILL BE IMPACTED BY THE ADDITIONAL MEDICARE TAX IN 2013 by Karla Hopkins

There are two parts to this new provision.  The first is a .9% increase in the employee portion of Medicare tax withheld on wages over a certain threshold amount.  The second part is an additional 3.8% tax on the lesser of unearned income or modified adjusted gross income over a threshold amount.

The threshold amount for both provisions is $250,000 for a joint return and $200,000 for a single return.  This means that an employer is obligated to withhold the .9% Medicare tax only on a person’s wages in excess of $200,000 (disregarding spousal wages). 

The 3.8% tax is on the lesser of the net investment income or the amount by which a modified adjusted gross income exceeds a threshold amount.  Thus individuals whose modified adjusted gross income does not exceed the threshold are not subject to this tax and individuals whose modified adjusted gross income does exceed the threshold are subject to the tax but only on their net investment income.

Net investment income includes:

·         Passive trade or businesses

·         Other nonbusiness passive income like interest, dividends, rents

·         Disposition of property ( i.e. net gain)

Income from retirement accounts are not considered net investment income for this tax.

Both of these taxes must be considered when planning your 2013 estimated income tax requirements. Proper planning may allow a taxpayer to develop a scenario for avoiding the tax all together.  When planning you could consider: bunching your income into every other year instead of each year, investing in growth instead of income paying stocks to minimize dividend and interest income, sharing wage income with a spouse or child, paying distributions instead of wages from an S corporation etc.  While there could be many tools, each plan is specific to a certain set of circumstances for each taxpayer.

WHO DEDUCTS THE MORTGAGE WHEN THERE ARE MULTIPLE OWNERS by Karla Hopkins

Due to the difficult economy, many individuals are having difficulty obtaining a loan for a new or a refinanced current home.  An alternative for many has been to tap into the credit worthiness of parents or other family members.  In which case, the debt is obtained by and in the name of, a family member with the understanding of the parties that the occupants of the home will be responsible for the monthly mortgage payment.  The question is: who deducts the mortgage interest? 

Qualified mortgage interest is deducted with respect to acquisition or home equity indebtedness with respect to any qualified residence of the taxpayer.   Qualified mortgage interest is debt incurred to acquire, construct or improve a qualified residence of the taxpayer and is secured by such residence.

In most instances, interest can be deducted only by the person that is legally responsible for the debt.  Therefore if a family member enters into an agreement with another family member for the debt on his home, the interest deduction could be lost.  There is a potential exception to this limitation however. 

If interest is paid on a mortgage which a person is the EQUITABLE OWNER of even though not directly responsible for the debt, he may deduct the interest paid.

Taxpayers who are considering using another party to assist them and ultimately hold the debt on their residence should be thoughtful of the tax rules when setting up the arrangement.  They should carefully structure a written, enforceable agreement that clearly identifies them as equitable owners of the property and assigns to them the corresponding burdens and benefits.  The written documentation will help them demonstrate their intent for ownership.  Then, the key is to act consistently in keeping with the agreement.  In other words, make all of the mortgage payments, pay all expenses relating to the property, and be the sole occupants.  If you treat the home as your legal home, it is likely the tax courts will also.