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.

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

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.

Sign up to download our social media whitepaper![email-download download_id=”1″ contact_form_id=”209″]As a business, the thought of approaching social media can be daunting.  The amount of information available on the subject is overwhelming, and you probably have many questions.  Although the needs of businesses vary greatly, there are a few key principles that apply to everyone.

Here are a few common questions to start with.

Does my company need social media?
First things first – social media is no longer an option.  If you don’t have an online presence, you run the risk of becoming obsolete.  Today’s consumers regularly go online to research companies and products that they are interested in.  If you’re not there, and your competition is, you’re not going to be found.

Should there be a social media policy?
Before implementing social media, be sure to have some sort of policy in place.  You want to make sure that anything put out there in connection with your company reflects your business in a positive manner.  Make sure that anyone delegated to use social media in your company’s name knows the level of professionalism that is expected.

What are we trying to accomplish?
Remember that social media is social.  Interact with others.  Share ideas and information.  Be personable.  People don’t want to do business with a company.  They want to do business with another person who is available to interact with them.  Try engaging your clients, or those you would like to become your clients.  Offer them valuable information and resources that distinguish you as an expert in your field.

If used properly, social media can be a powerful tool to develop and enhance your business relationships.  Make the most of it!

After being in session for only two weeks in September, Congress has now adjourned until after the November 6 elections — without reducing any tax law uncertainty. The “lame duck” session is the next possibility for legislative activity. The Senate will return for the week of Nov. 15, break for the week of Thanksgiving and return again on Nov. 29 for a period of time yet to be determined. The House’s schedule likely will be similar.

Congress has a full plate awaiting them in the lame duck session. This includes addressing tax breaks that expired at the end of 2011 as well as the rates and breaks that are scheduled to expire at the end of this year.

The results of the election should shed some light on what Congress will try to accomplish in the lame duck session — and what they’ll punt to next year. (In terms of the latter, tax law changes could be made retroactive.)

According to popular wisdom, the Republican leadership may be more likely to strike an agreement with Democrats on the substance of extending tax cuts if President Obama is re-elected. If Gov. Romney is elected, Republicans would have less reason to compromise.

Other election results that will affect legislative action are which party will control the Senate and by what margin. The Republicans are expected to retain control of the House, but also significant will be how many of the Tea Party members elected two years ago retain their House seats.

As tax law uncertainty continues, year-end tax planning remains a challenge. It’s a good idea to perform a year-to-date review of your income, deductions and potential tax now. That way you can be ready to take quick action once it’s clear what, if any, tax law changes Congress will make before year-end.