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Now is the Time to Start your Year-End Tax Planning

Next year, unless Congress acts before the end of 2012, year-end tax planning will be challenging. Since 2013 tax rates are set to go up, the conventional wisdom of deferring income into subsequent years should be reconsidered. Thus certain high-income taxpayers may want to actually accelerate income into 2012 rather than deferring income into 2013 when the tax rate will probably be higher.

If you expect to be in a higher tax bracket in 2013, there are a few tax planning strategies you should consider:

• Consider selling real estate, securities and other assets held more than one year in 2012, rather than deferring such gains to future years.

• The tax rate on qualified dividends could go from 15% to as high as 43.4% in 2013. Regular corporations and S corporations with excess earnings and profits should look at making dividend payments before the end of 2012.

• Business owners may want to consider pushing into a subsequent year such deductions as retirement plan funding contributions, year-end bonuses and other controllable expense deductions. Asset acquisitions eligible for Sec. 179 expensing could be deferred until 2013, and not electing the 50% bonus depreciation on 2012 assets purchased could be considered in order to increase depreciation deductions in later years.

• Estate and gift tax rates are set to rise from the current 35% rate to a maximum 55% and the lifetime exclusion is decreasing from $5.12 million to $1 million. Thus taxpayers with even modest sized estates should undertake a thorough estate plan review.

Of course, it is difficult to know if Bush tax rates will be extended again for all or just some taxpayers. However, you should be prepared to implement these strategies if tax rates go up significantly.

Having given financial literacy presentations to children in our community, I found the recent survey results published by the AICPA (American Institute of Certified Public Accountants) dismaying. According to the survey conducted by Harris Interactive, three in 10 parents never talk to their children about money, or have only had one big talk with their children regarding the subject.

 Just 13% of the parents surveyed talked daily to their children regarding financial matters. Instead, they spent time talking to their children about good manners, good eating habits, getting good grades, and the dangers of drugs and alcohol.

While I don’t disagree that those topics are important, I would argue that speaking to children about good personal financial habits is equally as important. And I’m not alone. Federal Reserve Chairman Ben Bernanke was quoted as saying early financial education is important for individual well-being and also the economic health of the United States. Think about how you yourself learned these skills. Was it the hard way or were you fortunate enough to learn these skills at a young age?

Since surveys show that parents, not teachers, have the greatest influence on a child’s financial literacy, parents should start having talks about financial habits as soon as a child is able to express a want. Here are some helpful suggestions: make sure you speak about financial habits at their level. Help them understand how to save birthday money or allowance money to pay for toys and other items they want. It has to be something they care about (trust me, hearing about saving for college at the ripe old age of 7 doesn’t mean much). Repeat these talks often and make them a part of daily life. Share with your children about how you are saving for a family vacation, a new car and how that might affect the family budget.

 Some great websites regarding financial literacy are 360 financialliterary.org   and feedthepig.org. I encourage you to check them out.

I recently came across an article on yahoo news, which left me flabbergasted. It explained that one home in Florida was the recipient of more than $1 million in refunds by filing 741 false income tax returns. This is a whole different level of tax fraud that goes way beyond fibbing on charitable donations or not reporting some cash income.

This is stealing identities at an unprecedented clip. Some of the identities stolen were children and dead people and others innocent, unsuspecting citizens. In total, the Inspector General’s office found that in Miami, Florida alone, 75,000 bogus returns were submitted with the perpetrators receiving $281 million in refunds.

This article left me with two thoughts:

One – why can’t the IRS catch these thieves before they give out millions of dollars in false refunds when they are supposed to have sophisticated computers that match up all sorts of income data. Why can’t they do this with social security numbers?

Second –  it left me with a sense of vulnerability that my identity could be stolen!

I did a quick Google search to find some pointers on how to protect myself and found that they were not too enlightening. You have to protect your social security number, check your credit reports often, shred all documents containing personal information, and put a halt to pre-approved credit offers. There are also many websites dedicated to this idea for a fee that may be worthwhile if you are extra paranoid, but I haven’t reached that level yet.

If you recently got an e-mail telling you that on January 1st all real estate transactions will be subject to a 3.8% federal sales tax, don’t believe it. That is simply not true.

The facts are as follows:

• First of all, the new tax is applicable only to the gain on sale, not the entire sales price.

• The tax applies only to single taxpayers with modified adjusted gross income in excess of $200,000 and married taxpayers with modified adjusted gross income over $250,000 if filing a joint return, or $125,000 if filing separately.

• The tax is actually only equal to 3.8% of the lesser of the taxpayers’ “net investment income” or the amount by which their modified adjusted income exceeds the threshold amount.

• Only taxpayers with modified adjusted gross income over $200,000 (or $250,000 if married filing jointly) who sell their principal residence AND realize more than $250,000 in GAIN ($500,000 if married filing jointly) will be subject to the 3.8% tax and only on the amount of gain they realize OVER the $250,000/$500,000 threshold (and on their other net investment income).

 

During the 2011 Nevada state legislative session the specter of a Texas-type margin tax was raised as a replacement to the Modified Business Tax we now “enjoy”. Fortunately, it never got traction. But guess what? Its back and now it is being proposed in ADDITION to the Modified Business Tax, not in lieu of.

How would this new Margin Tax work? It seems simple enough, but the devil is in the details.

As proposed, the tax would apply to firms with annual taxable revenues over $1,000,000. Such entities would have to pay a 2% tax rate calculated on a tax base of their choosing:

  1. 70% of total revenue
  2. Total revenue less wages
  3. Total revenue less the cost of goods sold

Having to choose amongst these various tax bases makes the process considerably more complicated, partly because the costs included in “cost of goods sold” can be subject to interpretation. Furthermore, such a tax could potentially penalize businesses that are actually incurring net losses due to other operating expenses, but still have a positive gross profit.

The Texas margin tax has been judged an abject failure. Let’s hope we here in Nevada do not step into the same trap that has ensnared Texans.





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Reno, NV 89501

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