For the first time since 2009, social security recipients will receive a raise!  A cost of living increase of 3.65% will commence on

December 30, 2011.   

 A portion of a special diet may be deductible, subject to the 7.5% limit, if the diet is prescribed by a doctor and exceeds the cost of a normal diet.

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 Q4 estimated tax payments are due on January 17th, 2012.  Please contact us if you want to engage us to do a year end tax projection or if your tax situation has changed substantially.

 Please start gathering information for your business' Form 1099 preparation.

Issue: 2011-03

December 2011

Please find our latest newsletter below.  If you have any questions or think there may be a planning opportunity that applies to you, please reach out to us.

Employment Credits

Don't forget about the work opportunity tax credit which was effective in 2010 but the credit will be on 2011 tax returns. 

Please let us know if you hired employees between February 2, 2010 and January 1, 2011.  These employees must have been unemployed or employed 40 hours or less during the 60 day period prior to employment with you.  These employees must remain employed by you for a consecutive 52 week period.

We have been moving our accounting practice to the cloud and a paperless environment.  Please contact us if this is something you would like to do with your accounting systems.  We would be glad to help you.

There are still planning opportunities for Roth IRA conversions.  Here are some of the reasons to convert:

• You do not want to withdraw your required minimum distributions at 70 1/2.
• You are in a lower tax bracket now than you expect to be when you are either retired or required to draw on your IRA or profit sharing plan.
• The investments in your IRA or profit sharing plan have dropped in value.
• You expect significant growth in your retirement investments.

The Nonbusiness Energy Property Tax Credit has been extended, but significantly reduced, in 2011 -

• Energy Property Tax Credit - 10% of a project and $500 max.  Here's the details:
  • Windows - $200 max.
  • Water heater - $300 max.
  • Air conditioning- $300 max.
  • Insulation, door and roofing - $500 max.
  • Furnace - $150 max.
• Homeowners should check the manufacturer's tax credit certification statement before purchasing any items to make sure the property qualifies for the credit.
• The KICKER - the credit has a lifetime limit of $500, so if the credit taken in prior years is more than $500, it can't be taken in 2011.

The Residential Energy Efficient Property Credit is designed to encourage investment in alternative energy equipment and is available through 2016. This is a 30% credit with no cap. The following installations qualify for the tax credit:

• Small wind turbines
• Solar electric systems
• Solar heating systems
• Geothermal heat pumps

These tax credits reduce the amount of tax owed dollar for dollar so if you are thinking about any of the above installations now is the time to act. All installations have to be in service by 12/31/11 to be taken on the 2011 tax return.

An annual 3.8% Medicare surtax on passive investment income is slated to take effect in 2013 for individuals, trusts and estates. The tax will be levied on all passive income including pass-through entities, interest, dividends, annuities, rents and capital gains.

For individuals, the tax is assessed on the lesser of net investment income or the excess of modified adjusted income (AGI) over the following limits:

• $250,000 for married filing joing or surviving spouses
• $125,000 for married filing seperate
• $200,000 in all other cases

For estates and trusts, the tax is assessed on the lesser of undistributed net investment income or the amount by which AGI exceeds the dollar amount at which the highest estate and trusts income tax bracket begins. The threshold amount is approximately $12,000 which will be indexed annually for inflation.

There may be planning opportunities in 2012 to reduce your exposure to the 3.8% surtax.

Income generated from tax exempt and tax deferred investment vehicles such as municipal bonds and life insurance are not included as investment income for purposes of the medicare surtax.

The IRS audits about 1% of all individual tax returns. According, to the U.S. Census Bureau 142,823,000 individual income tax returns were filed in 2010 with a little over 1,500,000 returns being examined. Statically speaking, your chances of being audited are low, but the following red flags can increase the IRS' scrutiny of your return:

• Failure to report all taxable income. The IRS receives copies of all 1099s and W-2s that you receive. Income which is reported to the IRS is matched up to income reported by you on your Form 1040.
• Returns claiming the home-buyer credit. The IRS is scrutinizing returns claiming this credit. Make sure all the proper documents (settlement statements for first-time buyers and proof of prior ownership for longtime homeowners) are submitted when claiming this credit.
• Claiming large charitable deductions. If your charitable deductions are disproportionately large compared to your income, it raises a flag. Make sure you retain proper documentation supporting your deduction.
• Home office deduction. This deduction has a high rate of adjustment upon IRS audit. In order to take advantage of the home office deduction the space must be exclusively and regularly used as your principal place of business.
• Meals, travel and entertainment. Beware all Schedule C filers, a large deduction for meals, travel and entertainment will spike the interest of the IRS. Make sure you retain proper documentation substantiating your deductions or kiss it good-bye upon examination.
• Claiming 100% business use of vehicle. Claiming 100% business use of your vehicle on your Schedule C sets off alarms for the IRS. The IRS is very weary of anyone claiming they use their vehicle exclusively for business purposes. You must keep detailed mileage logs documenting your business travels.
• Claiming a loss for a hobby. If you have W-2 income and file a Schedule C with significant losses your chances of being audited will increase. The IRS will examine your business closely to ensure it is not a hobby. You must prove to the IRS upon examination that you are operating a legitimate business for profit.
• Cash businesses. Cash intensive businesses, like hair salons and restaurants, are more likely to be examined. The IRS has it in its mind that taxpayers who primarily receive cash for their services are less likely to report their taxable income correctly.

Sincerely,

Laura Gannon and Jonalyn Sullivan