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Is a Roth Conversion right for you? | |
2012 may be the year to convert your IRAs (or a portion of them) to Roth IRAs. While that does mean a taxable transaction in 2012, it also locks in tax-free qualified distributions in the future.
There are plenty of angles to consider. Give the office a call to discuss. |
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Will you be audited?
Overall, approximately 1.1% of all tax returns are audited. If there is business activity in the tax return, the audit chance increases to about 4.1%.
Not surprisingly, audits increase when income increases.
If the income is above $200,000 the audit rate increases to more than 2.5%.
If the income is above $1,000,000 the audit rate is 11.8%. | | |
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2012
Standard Mileage Rates:
Per Mile
Business: 55.5¢
Medical or Moving: 23¢
Service of Charitable Organizations: 14¢ | |
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Tax Trivia - why e-file? | | |
It costs the IRS $3.66 to process a paper tax return and there is a 20% error rate on the data entry.
By contrast it costs the IRS $0.17 to process an e-filed tax return with no data entry errors. |
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Greetings!
Have you heard the terms "Taxmageddon" or "falling off the fiscal cliff" ? They have been in the news this fall with the election season in full swing. Taxmageddon marks the expiration of the Bush tax cuts, as well as the end of the payroll tax holiday - all scheduled for January 1, 2013. Also effective at the same time are automatic spending cuts mandated by Congress as a result of last year's super committee failure. These changes to taxes and to government spending are considered so dramatic that they risk putting the economy back into recession.
It is possible that Congress will act to extend temporarily some or all of the expiring Bush tax cuts. Nothing is certain especially with a lame duck Congress returning to work after the election. This newsletter will provide you with general information and some specific strategies to minimize the impact of the coming changes. Please note that nothing has been decided definitively and we will need to watch how this unfolds in November / December and be prepared to act before year-end.
In the mean time there are definitive tax increases as part of the 2010 Patient Protection and Affordable Care Act that will go into effect on January 1, 2013 . See impacts in the article at the bottom. |
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Unless Congress acts .... here's what's in store for 2013 | |
At a glance, here are the new tax rates:
Ordinary Income Tax Rates:
2013 (2012 rates in parentheses)
15% (10% &15%)
28% (25%)
31% (28%)
36% (33%)
39.6% (35%)
Capital Gains Tax Rates:
2013 (2012 rates in parentheses)
10% (0%)
20% (15%)
23.8% if subject to Medicare surtax (15%)
- In addition, dividends will be subject to ordinary income tax rates instead of the preferred capital gains tax rates.
- Higher income taxpayers will be subject to the return of the Personal Exemption Phaseout (PEP) if adjusted gross income levels for a married couple exceed $267,200 ($178,150 for single filers).
- Higher income taxpayers will also be subject to the return of limitations on itemized deductions if adjusted gross income levels for a married couple exceed $178,150 ($89,075 for single filers).
- The marriage penalty is back whereby the standard deduction will no longer be double that of a single person's deduction, and the lower rate brackets will no longer be double the level at which you entered the next bracket from that of a single or two single filers.
- It is also expected that the Payroll Tax holiday whereby the employee share of Social Security Taxes was reduced from 4.2% from 6.2% will expire at December 31, 2012.
- Alternative minimum tax (AMT) exemption levels have expired putting many middle class taxpayers at risk for this tax. It is expected that Congress will reinstate the exemptions. Planning tips to minimize this tax are not included in the discussion below.
What can you do to minimize or avoid the higher tax rates in 2013?
- In general, when tax rates are increasing, the guidance is to accelerate income into the current year and defer deductions to future years.
- Examples of accelerations include receiving bonuses before January, exercising stock options, accelerate deferred compensation payments, sell appreciated assets or harvest capital gains, complete Roth conversions, maximize retirement distributions, accelerate bond interest income, take corporate liquidation distributions, and if you are a sole proprietor, accelerate billing and collections.
- Examples of deduction and credit deferrals include bunch itemized deductions into 2013 and take standard deduction in 2012 (common areas include property tax payments), postpone bill payments including charitable contributions. Watch out for limitations of deductions that may occur in 2013 if adjusted gross income levels exceed $178,150.
- Other general strategies to reduce tax impacts include funding a Health Savings account, maximizing 401(k) and SEP contributions (including provisions for those over 50 years old), purchasing tax-exempt securities, and matching passive activity income with losses.
- Read below for specific information on minimizing tax impacts from the 2010 PPACA.
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Contact the office to discuss your specific situation as it relates to the impending tax increases. As always, I am honored to handle your tax and accounting matters. Thank you for your business!
Sincerely,
Doris Cloud
This newsletter is for general guidance only, and does not constitute tax advice or professional consulting. Before any action, consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information. |
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