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Accounting & Tax Solutions

Individual Tax News

By 2013, Tax Tips

As of this date, Congress still has not agreed on extending the Bush tax cuts or what changes will be made.

Employee portion of Social Security Tax: The 2% reduction in the employee portion of social security tax will also expire at the end of 2012, unless Congress extends this provision.

Also, the alternative minimum tax (AMT) patch has not been fixed for 2012. If Congress does not address this issue, 33 million taxpayers will be affected by AMT in 2012.

The only thing we know for certain is that two new Medicare surcharges, which are part of the Health Care Act, will go in effect for 2013 for single taxpayers over 200K in income and married taxpayers over $250K.

There will be a 0.9% surtax imposed on wages and self-employed earnings in excess of those amounts. And, there will be a 3.8% surtax on the lesser of net investment income or the excess of AGI over those levels.

IDENTITY THEFT:

Tax-related identity theft is likely to result in slower refunds next year, according to IRS officials. Fraudsters take stolen Social Security numbers and file for unauthorized refunds early in the filing season. Victims discover that their identity has been stolen only after their true tax return filing is rejected. The problem is increasing rapidly. IRS will take measures to stop phony refunds, but as a result, the agency will end up taking longer to issue refunds to taxpayers.

FILING SEASON:

IRS won’t be giving precise dates for refunds in the upcoming filing season. This past winter, many taxpayers complained that the refund date shown on the IRS “Where’s My Refund” page was inaccurate. The problem was compounded when a glitch caused refund delays for some early filers. The Service now has decided to fuzz the refund date. Filers who are seeking the status of their refunds will be told that refunds will generally be paid within 21 days of the date of the return was filed.

MEDICAL EXPENSES:

In 2013, there will be an increase from 7.5% to 10% in the threshold for deducting medical expenses.

CHILD CARE TAX CREDIT:

Unless Congress acts differently, the Child Tax Credit for children under 17 will be reduced from $1,000 per qualifying child to the pre-Bush tax cut level of $500 for 2013 and later.

MEDICAL FSA’s:

Employees flexible spending accounts will be reduced from $5,000 to $2,500 beginning in 2013.

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Business News

By 2013, Tax Tips

The standard mileage rate for business use of a vehicle will increase to 56.5 cents per mile as of January 2, 2013.

The Social Security Wage base will increase to $113,700 for 2013.

The Colorado State Unemployment Wage Base will increase to $11,300 for 2013.

S-CORPORATION HEALTH INSURANCE:

This amount must be reported on W-2 Forms for anyone who is more than a 2% shareholder.

ENTERPRISE ZONE:

Don’t forget that you must now pre-qualify if you are eligible for Enterprise Zone credits. This pre-qualification form should be filed in January, 2013 to qualify for 2013 credit.

STATE WITHHOLDING BOOKLETS NO LONGER MAILED:

The Colorado Department of Revenue is working to find state budget savings wherever possible. Due to the increase in electronic filing, it is becoming less cost-effective to create and mail coupon booklets. Wage withholding tax has a very simple tax form and many employers are already filing and paying their tax by Electronic Funds Transfer (EFT) and do not need coupon booklets.

For this reason, 2013 wage withholding coupon booklets will not be mailed to any withholding tax account holder. These booklets would normally be sent in January and February. Also, the Department will not issue coupon booklets if they are requested.

Withholding account holders are encouraged to sign up for account access to file and pay through Revenue Online at www.Colorado.gov/RevenueOnline. Revenue Online is a one-stop, secure, streamlined website where you can file returns (including “zero returns”) register for EFT; make payments online by EFT, e-check or credit card; and monitor your account activity. Visit www.Colorado.gov/RevenueOnline and choose “Business” to get started.

Each new wage withholding tax license sent to businesses will contain a Letter ID number that can be used to sign up for Revenue Online Login ID and Password access to the tax account. Click the “View Tutorial” link under “Login” for step-by-step instructions on how to sign up for Revenue Online.

EMPLOYERS RESPONSIBLE FOR ADDITIONAL WITHHOLDING MEDICAL SURCHARGE:

Employers will be responsible for withholding the additional 0.9% Medicare surcharge for single employees with W-2 earning over $200,000 and married employees over $250,000. This additional withholding will begin when employers exceed those amounts.

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Reminder About (2) New Taxes Starting in 2013

By Tax Tips

The first levy is a special 3.8% Medicare surtax on unearned income of single filers with modified adjusted gross income (AGI) over $200,000 and joint filers above $250,000. Modified AGI is AGI plus any excluded foreign earned income. The surtax is imposed on the smaller of the filer’s net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income, but not tax free interest or payouts from retirement plans such as 401(k)s, IRAs, Roths, profit sharing plans and defined benefit plans. So annuity payouts from retirement plans are exempt. A couple with $50,000 of investment income and AGI of $280,000 will pay $1,140 … 3.8% on the $30,000 excess over $250,000. A single taxpayer with AGI of $400,000 and $50,000 of investment income will pay an additional $1,900 … 3.8% of $50,000.

The surtax boosts the top rate on capital gains and dividends to 18.8%… the 15% nominal maximum rate that we expect will be in effect for 2013, plus 3.8%. If you sell your primary residence, only the portion of the profit over the $250,000 or $500,000 exclusion will be subject to the tax if your AGI is high enough to trigger it. The full profit on sales of rental properties and second homes can be hit by the surtax. And note that the taxable gain may push your income over the surtax thresholds.

So consider selling highly appreciated assets in 2012 instead of 2013.

The second levy is a 0.9% surtax on earned income … wages and income from self-employment. Singles will owe the extra 0.9% Medicare tax once total earnings are more than $200,000. Couples … over $250,000. So the effective Medicare tax rate on earnings over the thresholds will be 3.8% … the usual 2.9% rate plus an extra 0.9%.

This is another reason you may not want to defer compensation into 2013.

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2012 – 2013 Tax Planning

By 2012, Tax Tips

Despite all of the uncertainty over 2013 taxes, one thing we know for sure is that the top rate on capital gains and dividends will increase for higher income taxpayers. The culprit is the new 3.8% Medicare surtax.

This tax boosts the top rate on capital gains and dividends to 18.8%, rather than the current 15% for single taxpayers with modified adjusted gross income over $200,000 and couples over $250,000. Yes, the “marriage penalty” is back into play once again! The surtax is imposed on the lower of the filer’s net investment income or the excess of modified AGI over the thresholds. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income. It does not include tax free interest or retirement plan distributions.

Also, if the Democrats retain the White House and the Senate this fall, there is a good chance that the top rate for capital gains will increase from 15% to 20%. So, this would then be an 8.8% increase in tax.

It may be a good time to consider selling appreciated assets this year instead of in 2013. We would suggest consulting with your financial adviser in this area.

If you are planning a Roth conversion, doing it this year may be advantageous, as this will increase your AGI and may put you over the Medicare surtax AGI limitation in future years. Deferring compensation beyond 2012 may have the same results, so it may be more beneficial to recognize income in 2012 rather than future years if the opportunity is there.

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Work Opportunity Tax Credit

By 2012, Tax Tips

The Three Percent Withholding Repeal and Job Creation Act, P.L. 112-56, extended the work opportunity tax credit (now called the returning heroes and wounded warriors work opportunity tax credits) for businesses that hire certain military veterans. Employers are eligible for a credit of up to $9,600 for each qualified veteran that they hire after the law’s enactment (Nov. 21, 2011) and before Jan. 1, 2013. Tax-exempt organizations can qualify for a credit against their share of the Federal Insurance Contributions Act (FICA) tax they pay on wages to qualified veterans, provided the veterans are performing services related to the organizations tax-exempt function.

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Homestead Exemption Re-Instated

By 2012, Tax Tips

For 2012 property taxes due in 2013, please read below to see if you qualify:

Property Tax Exemption for Qualifying Seniors

The constitutional amendment providing for a Homestead Exemption for qualifying senior citizens was passed by voters in November 2000. For those who qualify, the exemption exempts 50% of a portion of the appraised actual value of the property from property taxes, as determined by the State Legislature. The portion of appraised actual value to which the 50% exemption applies can be changed by the State Legislature.

A property tax exemption is available to senior citizens, surviving spouses of senior citizens, and disabled veterans. For those who qualify, 50 percent of the first $200,000 in actual value of their primary residence is exempted. The amount of this exemption can be changed each year by the State Legislature (see above). The state pays the exempted portion of the property tax. Application requirements are as follows:

Frequently Asked Questions:

Who is Eligible? 
If you were 65 or older as of January 1, and you have continuously owned and occupied your primary residence in Colorado for at least ten consecutive years prior to January 1.

I applied for the exemption previously. Do I have to apply again? 
You need not reapply for the Senior Exemption if you applied and have been approved or previously received the senior property tax exemption and you still own and occupy the same property (and nothing has changed in ownership or occupancy since being approved for the exemption). You may download an application by visiting the website of your county assessor, or by contacting your county assessor’s office. You must apply by July 15th if not already registered.

How much is the exemption? 
The exemption exempts 50% of a portion of the appraised actual value of the property from property taxes, as determined by the State Legislature. The portion of appraised actual value to which the 50% exemption applies can be changed each year by the State Legislature and can vary from 0% to any amount the Legislature selects given budgetary and other requirements.

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