Other News & Info Archives - Page 74 of 77

Lock in the 0% Long-Term Capial Gains Rate While It's Still Available

mnarog on October 25, 2012

The long-term capital gains rate is currently 0% for gain that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate. But the 0% rate is scheduled to expire after 2012. To lock it in, you may want to transfer appreciated assets to adult children or grandchildren in one of these tax brackets in time for them to sell the assets by year end.

Before acting, make sure the recipients you’re considering won’t be subject to the “kiddie tax.” This tax applies to children under age 19 as well as to full-time students under age 24 (unless the students provide more than half of their own support from earned income). For children subject to the kiddie tax, any unearned income beyond $1,900 (for 2012) is taxed at their parents’ marginal rate rather than their own, likely lower, rate. So transferring appreciated assets to them will provide only minimal tax benefits.

It’s also important to consider any gift and generation-skipping transfer (GST) tax consequences. You can exclude certain gifts of up to $13,000 per recipient in 2012 ($26,000 per recipient if your spouse elects to split the gift with you or you’re giving community property) without using up any of your lifetime gift tax exemption.

The GST tax generally applies to gifts made to people more than one generation below you, such as your grandchildren. This is in addition to any gift tax due. But annual exclusion gifts are generally exempt from the GST tax, so they also help you preserve your GST tax exemption for other transfers.

Finally, keep an eye on the Nov. 6 elections and Congress — it’s possible the 0% rate could be extended beyond 2012 or even expanded to include more taxpayers.

Image courtesy of www.freedigitalphotos.net.

Why 2012 May Be the Right Year for a Roth IRA Conversion

mnarog on October 18, 2012

If you have a traditional IRA, you might benefit from converting all or a portion of it to a Roth IRA. A conversion can allow you to turn tax-deferred future growth into tax-free growth. It also can provide estate planning advantages: Roth IRAs don’t require you to take distributions during your life, so you can let the entire balance grow tax-free over your lifetime for the benefit of your heirs.

The downside of a conversion is that the converted amount is taxable in the year of the conversion. But there are a couple of reasons why 2012 may be the right year to make the conversion and take the tax hit:

1. Saving income taxes. Federal income tax rates are scheduled to increase for 2013 and beyond unless Congress extends current rates or passes other rate changes. So if you convert before year end, you’re assured of paying today’s relatively low rates on the conversion. In addition, you’ll avoid the risk of higher future tax rates on all postconversion growth in your new Roth account, because qualified Roth IRA withdrawals are income-tax-free.

2. Saving Medicare taxes. If you convert in 2012, you don’t have to worry about the extra income from a future conversion causing you to be hit with the new 3.8% Medicare tax on investment income, which is scheduled to take effect in 2013 under the health care act. While the income from a 2013 (or later) conversion wouldn’t be subject to the tax, it would raise your modified adjusted gross income (MAGI), which could cause some or all of your investment income in the year of conversion to be hit with the Medicare tax.

Likewise, you won’t have to worry about future qualified Roth IRA distributions increasing your MAGI to the extent that it would trigger or increase Medicare tax on your investment income, because such distributions aren’t included in MAGI. While traditional IRA distributions won’t be subject to the Medicare tax, they will be included in MAGI and thus could trigger or increase the Medicare tax on investment income.

Make the Most of Depreciation-Related Breaks While You Can

mnarog on October 10, 2012

Many businesses may benefit from purchasing assets by Dec. 31 to take advantage of depreciation-related deductions that are scheduled to either disappear or become less favorable in 2013:

Bonus depreciation. For qualified assets acquired and placed in service through Dec. 31, 2012, this additional first-year depreciation allowance is, generally, 50%. Among the assets that qualify are new tangible property with a recovery period of 20 years or less and off-the-shelf computer software. With a few exceptions, bonus depreciation is scheduled to disappear in 2013.

Section 179 expensing. This election allows a 100% deduction for the cost of acquiring qualified assets, and it’s subject to different rules than bonus depreciation. On the plus side, used assets can qualify for Sec. 179 expensing. On the minus side, a couple of rules may make Sec. 179 expensing less beneficial to certain businesses:

For 2012, expensing is subject to an annual limit of $139,000, and this limit is phased out dollar for dollar if purchases exceed $560,000 for the year. So larger businesses may not benefit.

The election can’t reduce net income below zero. So for businesses that are having a bad year, it can’t be used to create or increase a net operating loss for tax purposes.

The expensing and asset purchase limits are scheduled to drop to $25,000 and $200,000, respectively, in 2013.

These depreciation opportunities, however, bring with them a challenge: Determining whether the larger 2012 deductions will prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules.

In some situations, future deductions could be more valuable. For example, tax rates for individuals are scheduled to go up in 2013, which means flow-through entities, such as partnerships, limited liability companies and S corporations, might save more by deferring the deductions.

Finally, keep an eye on Congress: It’s possible the current versions of these breaks could be extended or even enhanced.

Image courtesy of freedigitalphotos.net

Time is Running Out for Tax-Free Treatment of Home Mortgage Debt Forgiveness

mnarog on October 5, 2012

Income tax generally applies to all forms of income, including cancellation-of-debt (COD) income. Think of it this way: If a creditor forgives a debt, you avoid the expense of making the payments, which increases your net income.

Debt forgiveness isn’t the only way to generate a tax liability, though. You can have COD income if a creditor reduces the interest rate or gives you more time to pay. Calculating the amount of income can be complex, but essentially, by making it easier for you to repay the debt, the creditor confers a taxable economic benefit. You can also have COD income in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure.

Under the Mortgage Forgiveness Debt Relief Act of 2007, homeowners can exclude from their taxable income up to $2 million in COD income ($1 million for married taxpayers filing separately) in connection with qualified principal residence indebtedness (QPRI). But the exclusion is available only for debts forgiven (via foreclosure or restructuring) through 2012.

QPRI means debt used to buy, construct or substantially improve your principal residence, and it extends to the refinance of such debt. Relief isn’t available for a second home, nor is it available for a home equity loan or cash-out refinancing to the extent the proceeds are used for purposes other than home improvement (such as paying off credit cards).

If you exclude COD income under this provision and continue to own your home, you must reduce your tax basis in the home by the amount of the exclusion. This may increase your taxable gains when you sell the home. Nevertheless, the exclusion likely will be beneficial because COD income is taxed at ordinary-income rates, rather than the lower long-term capital gains rates. Plus,https://whalencpa.wpengine.com/blog/time-is-running-out-for-tax-free-treatment-of-home-mortgage-debt-forgiveness/ it’s generally better to defer tax when possible.

So if you’re considering a mortgage foreclosure or restructuring in relation to your home, you may want to act before year end to take advantage of the COD income exclusion while it’s available.

Image courtesy of www.freedigitalphotos.net

The Rise of Hydraulic Drilling and What It Means to Ohio

rlewis on October 1, 2012

$fracking$ In recent months, there has been much interest in the rise of the Ohio Shale Play currently taking place on the eastern side of our state. As widely reported in the news media, new technologies and discoveries have given many energy companies the ability to drill hydraulically fractured horizontal wells, also known as “fracking.” With the ability to actually drill into the shale of the earth 5,000 to 6,000 beneath the surface, they are primarily extracting “wet gas,” which is later processed into butane, propane and methane.

Currently, only about 100 wells have been drilled in the state, but the potential is for thousands of these wells to be drilled here. The economic impact has significant implications for almost all industries in Ohio.

Approximately $2.3 billion have already been invested from companies both inside and outside the state. Analysts project that because of this development there will be 65,680 new jobs created, value added growth of $4.9 million and $433 million generated in state and local taxes in Ohio by 2014. So great is the impact, Governor Kasich has proposed that the personal income tax be significantly reduced or eliminated.

This is an industry that is on the rise, and clients, including surveyors, contractors and engineering firms, may be directly affected. In addition to the impact on businesses, many individuals who live in the eastern counties of the state are receiving significant lease bonus payments, up to and exceeding $1 million. These payments preclude any royalty payments based on quantities extracted.

There are several tax implications if you or someone you know is involved at any level with this industry. Business owners who derive source income related to services provided with the oil and gas industry may find unique savings and tax-planning opportunities.

Likewise, manufacturing companies that are selling products related to this industry may also be able to take advantage of such savings. Finally, individuals who are recipients of lease bonus payments and royalties need to be aware that those payments are subject to federal, state, and possibly local taxation. Strategic tax planning may be needed.

For more information about this subject, contact your Whalen tax adviser.

Rich Vogt is a tax specialist and has been with the firm for four years. He provides tax and consulting services to business and individual clients. Rich has more than 10 years of experience in the accounting and tax industry.