2012 Tax Developments
The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.
Health Care Law Upheld Update
On June 29th the Supreme Court largely upheld the Affordable Care Act; therefore, taxpayers should prepare for the following provisions that become effective January 1, 2012:
The hospital insurance portion of the FICA tax will be increased from 1.45% to 2.35% for wages over $200,000 ($250,000 if MFJ; $125,000 if MFS).
Medical expenses will be deductible as itemized deductions only to the extent they exceed 10% of AGI (7.5% threshold will still apply to taxpayers who turn 65 before the end of the tax year).
Taxpayers with modified AGI over $200,000 ($250,000 if MFJ; $125,000 if MFS) will be subject to a 3.8% surtax on net investment income.
Employer-provided health Flexible Spending Arrangements will be limited to $2,500 per year.
Please contact us if you have questions or would like more detailed information.
Careful 2012 Tax Planning Required as Income Tax Rates are Scheduled to Increase in 2013
With current tax rates set to expire on December 31, 2012 extra attention should be given to 2012-2013 tax planning. Income tax rates for both ordinary income and capital gains are scheduled to increase after December 31, 2012. For tax years after December 31, 2012 the ordinary income tax rates are scheduled to increase, first by eliminating the 10% current bracket and increasing the corresponding rates a minimum of 3%, increasing the top rate to 39.6% from the existing top rate of 35%.
After 2012 the current qualified dividends tax r ate of 15% will be eliminated and dividends will be taxed at ordinary tax rates. The maximum 2013 capital gain rate is also scheduled to increase up to a maximum of 20% from the existing maximum rate of 15%.
In addition to the above rate changes, in 2013 a 3.8% Medicare surtax is scheduled to apply to net investment income of higher income taxpayers. A surtax of 3.8% will be imposed on the lesser net investment income, or the excess of modified adjusted gross income over the following threshold limits, $250,000 married filing jointly (MFJ) or $125,000 married filing separately (MFS) and $200,000 single filers.
S Corporation Shareholder-Employee Reasonable Salary Update
A federal appeals court, affirming a district court, held that an S Corporation shareholder-employee's salary was unreasonably low. As a result, it allowed the IRS to reclassify as salary a substantial amount of dividend payments made to the officer during the years at issue. This resulted in the corporation owing employment taxes on the reclassified dividend payments.
The IRS warns S Corporations not to attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages. Fact Sheet 2008-25 lists the following factors that courts have considered in determining reasonable compensation:
Training and experience; duties and responsibilities; time and effort devoted to the business; dividend history; payments to non-shareholder employees; timing and manner of paying bonuses to key people; what comparable businesses pay for similar services; compensation agreements; and use of a formula to determine compensation.
Standard Mileage Rate for 2012
For 2012, the standard mileage rates for using a vehicle will be 55.5 cents per mile for business purposes with 23 cents per mile treated as depreciation, 23 cents per mile for medical or moving purposes, and 14 cents per mile for charitable purposes. However, a taxpayer cannot use the business mileage rate in certain limiting situations such as when more than four vehicles are used or when the vehicle was previously depreciated using an accelerated depreciation method.
Foreign Account/Assets Reporting - Chart Explains Foreign Asset Reporting Requirements
Form 8938 Statement of Foreign Financial Assets is required for individuals when specified foreign financial assets exceed either $50,000 ($100,000 for married filing jointly) on the last day of the tax year, or $75,000 ($150,000 for married filing jointly) at any time during the year. The new form's filing requirement does not replace or otherwise affect a taxpayer's obligation to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). Individuals must file each form for which they meet the relevant reporting threshold.
On December 23, 2011, the IRS issued temporary regulations that provide guidance on whether businesses can deduct, or must capitalize, amounts that they pay to acquire, produce or improve tangible property. These regulations are lengthy and complex. We would be happy to sit down with you to discuss the regulations at length and see how they will affect your specific business situation. The new regulations went into effect January 1, 2012.