PREPARING FOR TAX CHANGES IN 2013 by Karla Hopkins

2012 was a year of negation and election.  Many of us were watching and waiting for our congressional leaders to come to agreement on the terms of our federal budget and especially changes that would impact our tax liabilities in 2012 and future.  Here are a few highlights on these changes which will be important for you to consider for 2013:

• A 3.8% additional tax on the lower of net investment income  or the amount of  modified adjusted gross income over the $250,000/$200,000 threshold.  Net investment income includes, interest, dividends, rents, and gains.

• Additional .9% Medicare Tax for employees (not employers) on compensation over a $250,000/$200,000 threshold.  Because the threshold amounts are based on filing status and combined wages for a joint return, not all employees will have the correct amount of withholdings.

• The top federal  tax rate will return to 39.6% for a married couple with in excess of $450,000 of income and a single taxpayer with $400,000 of income.

• Capital gain rates will return to 20% based on a threshold again of $450,000/$400,000.

• Phase outs of personal exemptions and itemized deductions will return for taxpayers over a threshold of $300,000/$250,000 in income.

• The payroll tax holiday has ended.  Employees' FICA withholdings will return to a 6.2% rate from the reduced 2012 rate of 4.2%.

• Personal tax credits including the $1,000 child tax credit and advanced opportunity college tax credit are extended.

• The elective contribution to a 401(K) plan has been increased to $17,500.

• The elective contribution to an IRA account has been increased to $5,500.

Because many of these came so late in the year, it will be critical in 2013 for all taxpayers to play an active role in their tax planning during the year.  Follow our newsletters and blogs for the most up-to-date information and as always, contact our office with questions and we will gladly assist you with your tax planning: http://www.prrllc.net/ 508-553-3091.

MA Septic Credit by Carolyn Flaherty

The cost to repair or replace a failed septic system can be financially crippling to home owners. As such, the Title V testing that is required as part of the sale of all Massachusetts homes can be a nerve racking undertaking. Should you find yourself the unfortunate owner of a failed system, you may find some consolation in the MA Septic Credit.

The MA Septic Credit is equal to 40% of the actual costs (actual costs not to exceed $15,000), incurred to repair or replace a failed system. The credit is available on your primary residence located in Massachusetts.

Actual costs include materials, equipment, demolition, relocation, design, engineering, testing and inspection paid to upgrade, replace or connect a failed system to a sewer system.

The maximum septic credit is $6,000 (40% of $15,000), but the maximum allowed for any one tax year is $1,500. The remaining credit is carried forward for a period not to exceed five tax years after the initial credit is claimed. The initial credit is taken on MA Schedule SC in the year in which the repair or replacement of the failed system is completed. A Certificate of Compliance or verification letter stating that the system complies with the Title V Department of Environmental Protection requirements along with the bills for costs incurred to cure the system, must be kept for your records to substantiate the credit.

Massachusetts also offers qualified home owners low interest loans and betterment for the repair or replacement of failed systems. The interest subsidy associated with any such loan or betterment will be subtracted from the Septic Credit. The reduction of the Septic Credit is generally equal to the difference between the annualized non-subsidized state interest rate (as determined under General Law c. 62C, s. 32(a)) and the state subsidized rate.

Note: The taxpayer claiming a MA Septic Credit cannot be a dependent of another. In addition voluntary repairs or replacements of a cesspool or septic tank do not qualify for the MA Septic Credit. However, if a federal or state court order or similar mandate causes the taxpayer to pay for connection to a municipal sewer system, the credit is allowed.

Form 990 Audit Triggers by Carolyn Flaherty

Each year the IRS announces its exempt organization work plan. Evaluation of the plan reveals exempt organization audit triggers. For 2013 the IRS will be scrutinizing entities with the following characteristics:

1. Organizations with high foreign expenditures.

2. Medium to large organizations that report substantial fundraising income but proportionally small fundraising expenses.

3. Entities that report high annual gross receipts but low compensation of directors, trustees, officers and key employees.

4. Organizations reporting considerable unrelated business income for three or more consecutive tax years with little or no related taxable income.

5. Exempt organizations that have potential impermissible campaign spending.

6. 501(c)(4), (c)(5) and (c)(6) filers including social welfare organizations; labor, agricultural and horticultural groups; and trade associations that have self-declared themselves tax-exempt without an IRS determination.

Because the IRS continues to use analytical evaluators of Form 990 responses to select organizations for audit and review: filers should take care to review and follow Form 990 instructions.

Refinancing Your Rental Property by Carolyn Flaherty

Mortgage interest rates have been trending downward for many years. As such, many people have taken the opportunity to re-finance their loans to ascertain shorter terms or lower monthly payments. Although you are only allowed to deduct qualified points and interest on your primary residence: you may be able to deduct more from a rental property you own.

The fees associated with the refinance are deducted over the term of the loan. However, if the refinance is done to take equity out of the property in order to make substantial improvements on the property; the fees may be deductible in the year they are paid.

Some of the settlement expenses that can be deducted include the following:

• Abstract fees
• Appraisal fees
• Attorney fees
• Bank fees
• Mortgage commissions
• Notary fees
• Points
• Recording fees
• Title search fees
• Underwriting fees

These amounts can be found on your closing statement and again, should be amortized over the life of your loan.

The remaining balance of charges from the previous loan that were being amortized may be deducted in full the year you refinance if you refinance with a new lender. On the other hand, if you refinance with the same lender, you should deduct your unamortized balance of old charges over the life of the new loan.

The 411 on Social Security

As published by Bank Investment Consultant:

You don’t need to retire to collect Social Security, even at age 62, but you will pay a penalty
Those who retire at 62, or before reaching full retirement age of 66 (67 for those born after 1960), pay a penalty of $1 for each $2 earned over $15,120 in 2013. For those who are reaching full retirement age of 66 this year and who start collecting Social Security will pay a $1 penalty for every $3 earned over $40,080 (these limits are raised each year for inflation). But don’t be too troubled by the penalty. The Social Security Administration, after you reach full retirement age, will adjust upward your benefit amount to reflect the extra money you earned by continuing to work while collecting early benefits, and the money that was withheld as a penalty.

Social Security income is protected by law from most creditors – but not from debts owed to the IRS, federal student loans or other federal government claimants (or from alimony or child-support payments).
This means you may want to settle federal debts using other assets before you are depending upon your Social Security benefits in retirement, but it also suggests that if you have transferred other assets, for example into a Trust for your children, you don’t have to worry about private creditors.

Social Security income is taxes at less than other income
If your taxable income is less than $25,000 or $32,000 for a couple filing jointly, you owe no income tax on your Social Security benefits. Above that amount, the taxable amount of your Social Security benefits increases with income to a maximum of 85%. However, since withdrawals from a Roth IRA don’t count as taxable income, it can be advantageous to start withdrawals from non-Roth retirement funds, holding Roth withdrawals until you start collecting benefits.

Link to Article: http://www.bankinvestmentconsultant.com/news/Social-Security-Debts-Fees-and-How-to-Avoid-Them-2683475-1.html?ET=bankic:e12984:34921a:&st=email

Biggest Social Security Misconceptions: http://www.bankinvestmentconsultant.com/video/Social-Security-Biggest-Misconceptions2683480-1.html?ET=bankic:e12984:34921a:&st=email

UGMA & UTMA Custodial Accounts for Minors by Tish Michelson

The Uniform Gifts to Minors Act (UGMA) was adopted in 1956 to provide a convenient way to make gifts of money and securities to minors. Later, it became clear that a more flexible law was desirable and the Uniform Transfer to Minors Act (UTMA) was adopted in 1986. UTMA expands the types of property that can be transferred to a minor and provides the ability to make other types of transfers besides gifts. Nearly all states have adopted UTMA, but it is up to each individual state to designate the age in which control passes to the child (generally 18 or 21).

Custodial accounts are similar in some ways to trusts. Both vehicles place property under the control of a person who is not the beneficial owner. In the case of a trust, a trustee manages the property for the benefit of the beneficiaries. In the case of a custodial account, the custodian manages the property for the benefit of the minor.

Custodial accounts are also very different from trusts. The whole point of UGMA and UTMA is to permit you to transfer property to a minor without setting up a trust. Trusts provide greater protection and more flexibility, but are more expensive, time-consuming and complicated. As a general rule, custodial accounts are a better option for smaller transfers. If you expect to transfer tens of thousands of dollars, a trust may be a better vehicle.

A transfer to a child under UTMA or UGMA requires the involvement of a custodian. This is an adult who will manage the property until the child reaches the age (dictated by state) when control passes to the child. Even though the child will not have control of the property until later, the child is the owner as soon as the property is transferred to the account. Any income earned on the account is taxed to the child.

Once you have transferred assets into a custodial account, the assets belong to the child (the beneficial owner) - you are not permitted to take them back. When the child reaches the state-specified age, the account terminates and the custodian is legally required to transfer the property to the child, who can use it any way he or she chooses.

Another difference that may affect your decision between setting up a trust or a custodial account is the number of possible beneficiaries. A custodial account may only belong to one child. It is non-transferable until the account terminates. A trust can be set up for the benefit of many beneficiaries.

Because of non-transferability and financial aid implications, it may not be the best vehicle to save for college. It also may not be the best vehicle to avoid taxes. The best use of a custodial account is in situations where you have a genuine desire to make a specific financial gift to a specific child.

Transfer on Death (TOD) Registration By Tish Michelson

The Uniform TOD Security Registration Act provides non-probate transfers of specifically registered investment securities from owner to named beneficiaries at the owner’s death. The letters T.O.D. stand for “transfer on death” signaling that the investment or account is to be re-registered on request after the owner’s death in the name of the beneficiary.

State law, rather than federal law, governs the way securities may be registered in the names of their owners. Most states (48 out of 50) and the District of Columbia and US Virgin Islands, have adopted the Uniform TOD Security Registration Act, although some have modified it. In addition, brokerage firms may decide whether or not to offer TOD registration.

Transfer on Death (TOD) registration allows you to pass the securities you own directly to another person or entity (the “TOD beneficiary”) upon your death without having to go through probate. By setting up your account or having your securities registered this way, the executor or administrator of your estate will not have to take any action to ensure that your securities transfer to whomever you have designated. The TOD beneficiary will have to re-register the security or account in their own name once the owner has died. The re-registration typically involves sending a copy of the death certificate and completing an application.

The TOD registration enables avoidance of probate without the risk of problems caused by joint and survivor security titles. Control of an investment registered in TOD beneficiary form, including the right to change or cancel the death beneficiary, lies solely with the owner.