"Supercommittee" Fails Miserably!

As expected, our wonderful politicians who made up the Congressional "supercommittee" have failed to agree on anything.  Although this theoretically puts many items on the potential chopping block to force a more balanced budget (we doubt this will fly as is), we at least won't have to deal with 12th hour changes to our tax laws like we saw last year.  However, this doesn't give us much certainty as to what the tax situation will look like a year from now and continues to put us in more of a reactive mode rather than a preferable proactive mode.  We doubt any major overhauls will be decided upon ahead of next year's election, but we do expect 2013 and beyond to be a much different landscape than we see currently - our government and our economy requires it.  We'll continue to keep you posted as to what we think we can expect.

Rental Property

Many of our clients own rental properties and many more are becoming landlords by default - they've moved and cannot (or do not want to in this environment) sell their prior residence.  So we felt this is a good time to discuss some of the highlights of the tax issues regarding owning rental property.

In a perfect world, it would be great if we could manage our rentals to be cash flow positive - bring in more rental income than we have to spend on the mortgage payments - but tax negative.  This is possible usually due to the deductions we are able to take for tax purposes, most notably the depreciation on the property.  But what costs are deductible?  Rental property owners are allowed to claim deductions for costs associated with the production of rental income and they are generally allowed when a property is held out/available for rent even though it may not actually be rented.  

You can see how this could very easily create losses on the tax return, especially if the property has not been rented out for the full year.  However, like any tax deduction, taxpayers must still be able to substantiate these expenses with good records.

Special tax circumstances occur when folks convert a primary residence into a rental - most folks understand that we typically do not have to pay taxes on gains we may realize when we sell our primary residence (within limits); however, what happens when we convert these to rentals changes the game.  The general rule to be able to exclude gain on the sale of our personal residence requires the property to have been our primary residence for 2 out of the last 5 years.  Therefore, if you have converted your property to a rental and have a significant built-in gain on your property that you were hoping to exclude from income someday, you must sell this property within three years of converting it to a rental!  Once a property is held past this three years after conversion, then a portion of the gain may be subject to tax.  One key value that must be taken seriously is the FMV of the property upon conversion as well as the true cost basis of the property - which includes the original purchase price PLUS any improvements.  Keeping detailed records is very important here and a written market value estimate (at a minimum) should be obtained from a realtor or appraiser when the property is converted.

If you are involved in a converted residence situation, please contact us to discuss.

Retirement Plan Increases

It's a bit interesting that in a completely non-inflationary period, the government has decided to bump up retirement plan amounts for 2012.  This is important for those of you that participate in retirement plans so that if you're trying to maximize these each year that you make sure you adjust your deferrals with your employer to ensure you continue to reach the maximum in 2012.  For 401k plans the limit has increased from $16,500 to $17,000 (with a $5,500 catch-up for those age 50+); the defined contribution plan limit will go from $49k to $50k.  However, Simple IRAs, traditional IRAs, and Roth IRAs remain unchanged at $5k (with a $1k catch-up for those age 50+).

A bigger surprise (somewhat) is the increase in the base wages that are subject to Social Security taxation - this has risen from $106,800 to $110,100 after not changing at all for a couple of years.  

Don't forget about Bonus Depreciation (businesses) 

Thanks to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, 100% first-year bonus depreciation is still allowed for new assets placed in service thru 12/31/11.  We doubt this will get extended to 2012!  So if you are considering purchasing new assets for your business within the next several months you may want to consider accelerating it to get it placed in service before year-end.  A couple things to note - the asset must be NEW (not used) and it must also be "placed in service" - i.e. not sitting on a shelf to be used at a later date.  One of the big "bonuses" with this bonus depreciation (as opposed to Section 179 accelerated depreciation) is that it can create or increase a loss in the business!

If you are thinking of ways to reduce your business taxable income this year, let's discuss this option!