<![CDATA[MBAF - Tax Advisories]]> <![CDATA[Tax Services Advisory - IRS Makes More Employers Eligible for VCSP Reclassification of Workers Program]]>
Phillip S. Sroka
Sandra Eisele

The IRS has revised and temporarily expanded its Voluntary Classification Settlement Program (VCSP), for payment of employment taxes owed by employers that agree to treat their workers as employees prospectively.

In one announcement on December 17, the IRS expanded the VCSP until June 30, 2013 to taxpayers that are under audit other than an employment tax audit.

In that announcement, the IRS permanently eliminated the VCSP requirement that made all employers in the program subject to a special six-year statute of limitations on assessing employment taxes rather than the usual three years.

In a second announcement on December 17, the IRS expanded the VCSP until June 30, 2013 to employers who have not filed all Forms 1099 for the previous three years.

The IRS launched the VCSP on September 21, 2011. The program provides partial relief, without fines or future liability, from federal payroll taxes for eligible taxpayers that agree to prospectively treat workers as employees.

Generally, to be eligible for the VCSP an employer must be currently and consistently treating its workers as independent contractors or as other non-employees and want to treat them prospectively as employees.

There is no set deadline to apply for employers that are current on filing Forms 1099 and are not under audits.

Employers accepted into the program will pay 10 percent of the employment tax liability that would have been applied if the workers were reclassified for the most recent tax year.

No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years.

Through June 30, 2013, employers can file for the VCSP Temporary Eligibility Expansion. Employers who have not filed all Forms 1099 for the previous three years must furnish those forms to their workers and electronically file them to the IRS.

Employers in the expanded VCSP also must pay a penalty of 25 percent of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year.

If you would like additional information about the IRS's Voluntary Classification Settlement Program (VCSP), do not hesitate to contact our Tax and Accounting specialists or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - Congress chooses compromise - The tax step of Fiscal Cliff is averted; bill awaits President's signature]]>
Miguel G. Farra
Emilio Escandon
Daniel Flugrath

In the early morning hours the day after New Year's, the House of Representatives agreed with the U.S. Senate—the terms of a fiscal cliff resolution have finally been agreed upon. Early on Jan. 1, 2013, the Senate by a vote of 89 to 8 approved H.R. 8, "the American Taxpayer Relief Act." Later the same day, the House of Representatives followed suit and passed the bill by a vote of 257 to 167. The President is expected to sign the bill into law.

The major tax provisions of the American Taxpayer Relief Act of 2012, H. R. 8, are

  • The income tax rate increases to 39.6% (up from 35%) for individuals making more than $400,000 a year for single filers; the 39.6% rate is increased to $450,000 for joint filers; $425,000 for heads of household. The rate structure for years after 2013 will be adjusted for inflation. The maximum tax rates for estates and trusts presumably are taxed at 35%.
  • The two-percentage-point reduction in payroll taxes for Old Age, Survivors and Disability Insurance has expired. For 2013 Maximum Wages subject to this tax is $113,700 at a tax rate of 6.2%. A household earning $50,000 in 2013 will pay approximately $1,000 more in payroll taxes.
  • The higher exemption amounts of alternative minimum tax — the so-called "patch" — are now permanent, resulting in an estimated 30 million taxpayers not being subject to the AMT. The 2012 exemptions amounts are $78,750 for married filing jointly, $39,375 for married filing separate and $50,600 for others. These exemption amounts will be adjusted for inflation.
  • Dividends and capital gains are taxed at 20% (up from 15%) for individuals making at least $400,000 ($450,000 for joint returns); all other taxpayers' capital gains will be taxed at 15% or 0% Capital gains taxed at zero are for individuals who are not claimed as dependents and are in the lower tax brackets.
  • The Personal Exemption Phase-out is reinstated starting at $300,000 for joint filers and surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately. Under the phase-out, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 by which the taxpayer's adjusted gross income (AGI) exceeds the applicable threshold. Itemized deductions Taxpayers subject to this limitation known as the "Pease" limitation, reduce their itemized deductions by 3% of the amount by which the their AGI exceeds the above amounts, with the reduction not to exceed 80% of the otherwise allowable itemized deductions;
  • For estate, gift, and generation-skipping transfer tax purposes, for individuals dying and gifts made after 2012, the $5 million exemption remains and is adjusted for inflation. The top estate, gift and GST rate is permanently increased from 35% to 40%;
  • Tax credits for businesses, including the Code Sec. 41 research credit and the Code Sec. 199 domestic production activities deduction, are generally extended through the end of 2013;
  • There is a five-year extension of credits that were enhanced as part of the stimulus, including the college tuition credit, the Code Sec. 32 earned income tax credit, and the Code Sec. 24 child tax credit;
  • Bonus depreciation was retained same as 2012 at 50%. Qualified leasehold improvement depreciation over 15 years remains.
    • The exclusion for discharge of qualified principal residence indebtedness, which applied for discharges before Jan. 1, 2013 is now continued to apply for discharges before Jan. 1, 2014;
    • The option to deduct State and local general sales taxes, which expired at the end of 2011has been extended to 2012 and 2013;
    • Tax-free distributions from individual retirement plans for charitable purposes, which expired at the end of 2011 is now revived for 2012 and continued through 2013. Because 2012 has already passed, a special rule permits distributions taken in 2012 to be transferred to charities for a limited period in 2013;
    • The Section 179 expensing limitations of $139,000 and treatment of certain real property as 179 property is retained at 2012 amounts for tax years through December 31, 2013.

There are more provisions to the recently passed America Taxpayer Relief Act of 2012, which can impact your taxes for 2012, 2013 and into the future. If you would like additional information on the above bill and the implications of its provisions, do not hesitate to contact our Tax and Accounting specialists or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - IRS Permits Retirement Plans to Make Loans and Distributions to Hurricane Sandy Victims]]>
Boris Rosen
Emilio Escandon

The IRS is permitting 401(k) plans and similar employer-sponsored retirement plans to make loans and hardship distributions to victims of Hurricane Sandy and members of their families—with a deadline of February 1, 2013 for withdrawals.

In an announcement on November 16, the IRS said that 401(k) plan participants, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, and state and local government employees with 457(b) deferred-compensation plans may be eligible for the withdrawals.

Retirement plans will be able to make loans and distributions to employees and certain members of their families who live or work in a state or county that is part of the Hurricane Sandy disaster area.

To make a Hurricane Sandy-related loan or hardship distribution, a qualified employer plan that does not provide for such withdrawals must be amended to provide for loans or hardship distributions no later than the end of the first plan year beginning after December 31, 2012.

To qualify for the relief, a hardship distribution must be made on account of a hardship resulting from Hurricane Sandy and be made on or after October 26, 2012, and no later than February 1, 2013.

A retirement plan can allow a Sandy victim to take a hardship distribution or borrow up to the specified statutory limits from the victim's retirement plan. A person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent that lived or worked in the disaster area.

Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable. Also, a 10 percent early-withdrawal tax usually applies.

If you would like additional information on the procedures for retirement plans to make loans to Hurricane Sandy victims, do not hesitate to contact our Tax and Accounting specialists or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - IRS Raises Standard Mileage Rate for Businesses by One Cent for 2013]]>
Manuel Pravia
Ira M. Rubenstein

The IRS on November 21 announced that the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business purposes will increase from 55.5 cents per mile to 56.5 cents per mile beginning January 1, 2013.

The rate for medical and moving purposes also will increase by one cent in 2013, while the rate for charitable organization purposes will be unchanged.

As of January 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 56.5 cents per mile for business miles driven
  • 24 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

The IRS standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

If you would like additional information about the IRS standard mileage rates, do not hesitate to contact our Tax and Accounting Specialists or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - IRS Will Delay Effective Date of Tangible Property Regulations]]>
Rosamaria D. Bravo
Mark Fenaughty

The IRS on November 20 issued Notice 2012-73 announcing that it will delay the required effective date of the proposed regulations affecting the deduction and capitalization of expenditures related to tangible property until tax years beginning or after January 1, 2014.

Prior to this announcement, these rules would have been applicable for tax years beginning on or after January 1, 2012.

The IRS said it anticipates that it will release the final regulations during 2013, and may be modifying certain sections that will simplify the implementation in the areas of:

  • The De Minimis Rule – Temp. Reg. 1.263(a)-2T(g)
  • Dispositions – Temp. Reg. 1.168(i) 1T and 8T
  • Safe Harbor for Routine Maintenance – Temp. Reg. 1.263(a)-3T(g)

The current temporary rules will be available to taxpayers that choose to implement them for years beginning on or after January 1, 2012 and before the effective date of the final regulations, by applying for automatic consent to change their accounting method pursuant to Revenue Procedures 2012-19 and 2012-20.

If you would like additional information on the IRS's decision to delay the effective date of its proposed tangible property regulations and on how that might impact your business, do not hesitate to contact our Tax and Accounting specialists or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - Lifetime Exemption on Gift Tax is Scheduled to Drop from $5,120,000 to $1 million in 2013]]>
Daniel Flugrath

Daniel Flugrath
CPA, CFP, Principal
dflugrath@mbafcpa.com
(305) 373-5500

Emilio Escandon

Emilio Escandon
CPA, Principal
eescandon@mbafcpa.com
(212) 931-9197

Leif Novie

Leif Novie
CPA*, JD, Principal
lnovie@mbafcpa.com
(305) 373-5500

Michael Moss

Michael J. Moss
CPA, JD, Principal
mmoss@mbafcpa.com
(212) 931-9156

*Licensed to practice in the states of Florida and New York

If you are planning to make a large one-time gift to a family member, you should be aware that an individual donor’s lifetime tax exemption on such gifts is scheduled to decline from $5,120,000 to $1 million as of January 1, 2013.

Therefore, we are recommending that you "act now" and meet with your tax advisors to determine if it is feasible to make such gifts before the end of 2012 rather than in 2013 or succeeding years.

There is still time during the next two months to structure and transfer gifts—such as cash, real estate, stocks and other liquid investments as well as interests in family-owned and other closely-held business.

By doing that, you could save hundreds of thousands or even several million dollars in taxes under the favorable tax rates and rules on the gift tax and on the estate tax that are set to expire at the end of this year.

  • The maximum tax rate for the gift tax is scheduled to increase from 35 percent in 2012 to 55 percent in 2013 and succeeding years.

    The size of lifetime gifts that are exempt from that tax is scheduled to be reduced from $5,120,000 per individual and $10,240,000 per married couple in 2012 to $1 million and $2 million, respectively.

  • The maximum tax rate on the federal estate tax, often called the death tax, is scheduled to increase from 35 percent for 2012 to 55 percent. A surtax of 5 percent would be added on some larger estates.
  • The exemptions from the estate tax, for individuals and married couples, are the same as for the gift tax in 2012 and also are scheduled to be reduced to $1 million and to $2 million.

There is a prospect out that in December the Congress and President Obama will agree to a one-year extension on some or all of the current rates and rules on the gift tax and estate tax.

The recently re-elected President Obama has expressed that the lifetime estate tax exemption should be reduced from $5,120,000 to $3.5 million and that the maximum rate on that tax should rise from 35 percent to 45 percent,

A review of a $3 million one-time gift made by an individual provides an example of the impact of the pending changes.

In 2012, there is no gift tax on that gift because it is less than $5,120,000. However, in 2013 the gift tax on a $3 million gift would be $1.1 million ($3 million minus the $1 million exemption leaves $2 million taxed at 55 percent).

Under rules of the gift tax, a transfer of assets can reduce the size of an estate and in some instances reduce or even eliminate the estate tax that is owed upon a family member's death. If you would like additional information on how you can accelerate one-time gifts into 2012 and benefit from favorable tax rules, do not hesitate to contact our Tax and Accounting specialists or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - Tax Deductions are Available on Some Superstorm Sandy Property and Casualty Losses]]>
Emilio Escandon
Daniel Flugrath

Taxpayers who experienced certain types of major personal property casualties or business property casualties from Superstorm Sandy and related weather events in late October may be able to recoup some of their losses through tax deductions.

If your state or county is declared a presidential disaster area, your personal casualty losses can be timely elected to be deducted as sustained in the tax year immediately before the tax year when the disaster actually occurred.

As of October 31, the list of states that the President has declared a disaster area includes New York, New Jersey, Connecticut, Maryland and several other Atlantic Coast states where MBAF is advising clients on post-Sandy tax issues

Details on presidential disasters are on the Web site of the Federal Emergency Management Agency (FEMA).

Following a natural disaster such as Superstorm Sandy, an itemized deduction may be available for personal losses from fires, storms, car accidents and similar "sudden, unexpected, or unusual" events. Losses from theft are included.

The deduction is only available for physical damage or loss to your property. Thus, if a tree from your yard falls on your neighbor’s residence and you pay for the damage done to the residence, the cost does not qualify.

Similarly, if you're injured in the accident, your medical bills do not qualify as part of your casualty loss (although they may result in a medical expense deduction). The limitation to deduct these medical expenses increases to 10 percent of adjusted gross income (AGI) in 2013.

Figuring the Loss on Personal Casualties

The loss is not always the decline in economic value you suffer. It is measured as the lesser of (a) the drop in value and (b) your basis in the property (usually, your cost).

Example: Mr. Joseph bought an antique vase for $5,000 which rose in value to $30,000. It was damaged in a fire after which it was worth only $10,000. For tax purposes, the casualty loss is only $5,000, even though the economic loss was $20,000 ($30,000 − $10,000). The lesser of cost ($5,000) and drop in value ($20,000) is used.

It may be difficult to establish these elements. If you have your original receipt, you can show your cost. In some cases, appraisals will be needed to establish pre-loss and post–loss values.

Keep in mind what your appraised value was if you refinanced your property in the recent past. Sometimes, repair costs can be used as a measure of drop in value.

Limitations on Deduction of Personal Casualties

The loss figure must be reduced by three amounts. In many cases, these reductions result in no deduction being available.

First, to the extent you are insured, you must reduce your loss by your reimbursement. If you should not file an insurance claim for fear of an increase in insurance premiums and thinking this increases your deduction, the IRS will reduce your loss by the insurance reimbursement you could have received.

Second, for each personal casualty you must reduce your loss amount by $100. Note that this reduction is per "event", not per item damaged. Thus, if a storm knocks over a tree that damages your car and home, you have three property losses (tree, car, and house) and only one reduction.

Third, after combining all your personal losses under the above guidelines, you must reduce them by 10 percent of AGI. Only the loss amount above this "floor" can be deducted.

This final limitation is often the one that wipes out the deduction. For example, if your AGI is $75,000 your losses (determined as described above) are only deductible to the extent they exceed $7,500 (10 percent of $75,000).
 
However, the second and third adjustments described above were both lifted for Hurricane Katrina losses.  It is expected that similar legislation will be enacted in connection with Hurricane Sandy. 
 

Business Casualty Losses

A tax deduction for casualty losses to business property is allowed. Similar to personal casualty losses, the loss is generally the lesser of:

  1. The adjusted basis of the affected property.
  2. The decrease in the property's fair market value (using reputable appraisals)

Three important differences exist in the tax treatment of business casualty losses, and personal casualty losses.

  1. There is no $100 reduction and no 10 percent-of-AGI adjustment for business losses.
  2. The loss is calculated separately for each identifiable piece of property.
  3. If business property is totally destroyed in a casualty, the decrease in FMV is not considered. Thus, the measure of the loss is calculated solely by considering the property's adjusted basis.

Example: Speedy Jones owns a delivery company. One of his delivery trucks is completely destroyed by a flood. Before the flood, the truck had a $7,000 adjusted basis and $8,000 fair market value, respectively. If Speedy has no insurance recovery, he will be entitled to a loss of $7,000 (the adjusted basis of the truck). The $8,000 decrease in FMV is not relevant to this computation.

Casualty Losses from a Passive Activity

The exclusion of non-recurring casualty losses from the passive activity deductions means that losses from sudden and unexpected natural disasters, such as hurricanes and earthquakes, are not subject to the passive activity limitations.

However, the passive activity rules may disallow theft losses such as shoplifting or accident losses typically sustained in an auto rental business. Furthermore the reductions of $100 and 10 percent of AGI do not apply.

Example: A calendar-year taxpayer, subject to passive loss rules bought an apartment building for $1,500,000. To determine basis, he properly allocated $1,000,000 of the purchase price to the building and $500,000 to the land.

In 2012, the building's fair market value was $2,000,000; its adjusted basis was $100,000. The land's fair market value was $1,000,000; its adjusted basis was $500,000. The owner used the property in a rental activity for all taxable years.

In 2012, a hurricane destroyed the building, reducing its fair market value to $0. In addition, the hurricane reduced the land's fair market value to $800,000 by burdening the land with rubble and a useless building.

The estimated cost of demolishing the building and removing the rubble was $200,000. The building was not insured against casualties. As of the beginning of 1989, $100,000 of passive activity deductions from the rental activity in which the building and land were used were disallowed under passive loss rules.

The calculation for this casualty loss allowable under Section 165 of the Tax Code is as follows:

  • Loss to be taken into account for purposes of Section 165(a): Lesser amount of property actually destroyed ($2,000,000) or adjusted basis of property ($100,000)
Loss: $100,000
Less: Insurance received -0-
Deduction allowable $100,000
Land:  
Value of property immediately before casualty $1,000,000
Less: Value of property immediately after casualty $800,000
Value of property actually destroyed $200,000
  • Loss to be taken into account for purposes of Section 165(a): Lesser amount of property actually destroyed ($200,000) or adjusted basis of property ($500,000)
Loss: $200,000
Less: Insurance received -0-
Deduction allowable $200,000
Total:
Deduction allowable for building $100,000
Deduction allowable for land $200,000
Total deduction allowable under Section 165 $300,000

Involuntary Conversions

When a taxpayer uses all of the insurance proceeds that are received from a casualty event to purchase replacement property within two years, the casualty gain will not be taxed. However, the basis of the replacement property is reduced by the untaxed gain. Here are three examples:

  1. If within two years, Mrs. Jefferson purchases a new home for $230,000 (i.e., more than her insurance recovery), she is able to defer taxation of her casualty gain, and the basis in her new residence is $100,000 (the cost of $230,000 less the untaxed gain of $130,000).

    Alternatively, gain must be recognized to the extent the cost of the replacement property is less than the insurance proceeds.
  2. The facts are the same, except that Mrs. Jefferson reinvested only $200,000 of her insurance money in a replacement residence. Mrs. Jefferson must report a casualty gain of $20,000 (the $220,000 insurance received less the $200,000 cost of the replacement property). Mrs. Jefferson's basis in the replacement home would be $90,000 (the $200,000 cost minus the untaxed gain of $110,000.

    To postpone the reporting of gains, the replacement property must be acquired (or all repairs completed) within two years after the close of the first tax year in which any part of the gain is realized. Property qualifies as replacement property only if it is "similar or related in service or use" to the property that was destroyed.

    If the casualty occurs in a presidentially declared disaster area, the involuntary conversion replacement period is extended to four years for primary residences (among other benefits).
  3. If Mrs. Jefferson sustained a casualty in October 2012, she would have until December 31, 2014 to find suitable replacement property. If the President declared her county a national disaster area, she would have until December 2016 to replace her home.

    A request for an extension of the replacement period can be made to the IRS for the area in which the taxpayer resides. The request may be granted if the taxpayer can show a reasonable cause for not making the replacement within the specified period. The request must be made before the replacement period expires.

It is important to call upon experienced accountants and consultants to advice on the availability of tax deductions and on other aspects of the recovery process.

MBAF is highly experienced in Property and Casualty Losses due to our Florida and New York City locations. For example, MBAF assisted many businesses and individuals following Hurricane Andrew in 1992 and Hurricane Wilma in 2005 in determining their losses from these hurricanes and then helping them with claims and other appropriate financial steps to obtain recoveries.

While we sincerely hope that you and your family and your business have not been impacted by Superstorm Sandy, we respectfully recognize that many individuals and businesses may have been affected due to the overwhelming size of this storm. If you would like guidance in the aftermath of Superstorm Sandy, do not hesitate to contact our Tax specialists or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - Fraudulent Refund Indictments Point Out the Urgency of Identity Theft Protection]]>
Kashyap Bakhai

Kashyap Bakhai
CPA / ABV / CFF, M.S.T.
Principal
kbakhai@mbafcpa.com
(305) 373-5500

Phil Sroka

Phillip S. Sroka
CPA, Principal
psroka@mbafcpa.com
(305) 373-5500

The recent federal indictments in Miami of 40 individuals on charges of using stolen identities to file fraudulent income tax returns are a reminder to all taxpayers to protect their financial information, personal as well as business, from potential identity theft.

Taking steps to deter, detect and defend against identity theft is especially important in Florida, which according to data from the Federal Trade Commission (FTC) has the largest number of per-population complaints of identity theft.

In the indictments it announced on October 10, the U.S. Attorney's Office for the Southern District of Florida said the identity theft rate in Miami has reached "near epidemic proportions."

The indictments were for 20 separate cases that included thousands of stolen identities and millions of dollars of fraudulent identity theft tax filings.

In a tax refund filing fraud, the perpetrator uses a legitimate taxpayer's identity and personal information to file a tax return and claim a fraudulent refund.

An IRS notice informing a taxpayer that more than one return was filed in the taxpayer's identification number or that the taxpayer received wages from an unknown employer may be the first information about that fraud.

For a victim, the consequences could include a delay in obtaining a legitimate tax refund. Or the identity thief might have made fraudulent purchases that have not yet been discovered by the victim or by other parties such as financial institutions and government agencies.

The IRS Web site has a section on preventing identity theft and recovering stolen information. Tips include basics such as not giving personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know the other party.

A July 2012 report by the U.S. Treasury Inspector General for Tax Administration (TIGTA) showed that Florida is the state with the highest rate of stolen identity tax refund fraud.

The report identified 74,496 potentially fraudulent returns filed in Miami resulting in more than $280 million in bogus refunds. The City of Miami's per capita number of false returns based on identity theft was 46 times the national average, and its per capita fraud dollar value was more than 70 times the national average.

We recommend that you take these basic steps to prevent identity theft:

  • Do not provide your Social Security numbers at any medical offices, hospitals or other care providers. Your health insurance information should be sufficient.
  • No vendors should have your Social Security numbers.
  • If you are filing for an extension on your tax return, request a Tax Transcript from the IRS.
  • Ask your payroll service provider for information about how they maintain the confidentiality of employees' Social Security numbers.
  • Obtain annual credit reports to check for any unauthorized activities.

If someone has stolen your identity and used it to file a fraudulent tax return, we recommend that you take the following actions to protect yourself from further identity theft:

  • Place a fraud alert on your credit reports. This can be done by notifying any one of the three consumer reporting companies, and the company you call is required to contact the other two so that a fraud alert will be placed on all three reports.

The companies are:

  • File an identity theft complaint with the FTC. Visit the following website for more information: www.ftc.gov/idtheft
  • Review the earnings posted to your record on your Social Security statement. You can obtain a copy of the statement by calling 1-800-772-1213.

If you would like additional information on steps you can take to safeguard your business and personal financial information from fraudulent income tax identity theft and other types of identity theft, do not hesitate to contact our Tax specialists or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - 2012-2013 Tax Planning Guide]]>
Miguel G. Farra

With continued uncertainty about tax laws and the economy, tax planning is more important than ever. You need to proactively look for ways to reduce your taxable income and take advantage of every tax break you're entitled to – while they're still available.

This is exactly what our 2012-2013 Tax Planning Guide is designed to help you do. Simply click on the link above to view it and learn about ways to reduce your personal and business tax liability.

As you look through the guide, please note the strategies and tax law provisions that apply to your situation or that you would like to know more about. Then call us with any questions you may have about these or other tax matters.

Our professionals are thoroughly familiar with the latest tax laws and tax-reduction strategies, and are eager to help you take full advantage of them. So please send a reply email or call us today at 1-800-239-1474 to schedule a time to talk about ways to lighten your tax burden and better achieve your financial objectives.

]]> <![CDATA[Tax Services Advisory - IRS Begins Post-Hurricane Isaac Tax Relief Program]]>
Boris Rosen

The IRS on September 5th, 2012 said it has postponed various tax filing and payment deadlines for individuals and businesses in designated counties of Louisiana and Mississippi that were affected by Hurricane Isaac.

In a news release, the IRS said that within several days it also might provide tax relief in other locations based on the Federal Emergency Management Agency's (FEMA) assessment of damages caused by Isaac.

For taxpayers included in the September 5th announcement, the IRS is postponing several tax filing and payment deadlines that were scheduled for August 26th or later dates. As a result, affected individuals and businesses will have until January 11th, 2013 to file those returns and pay any taxes due.

This includes corporations and businesses that previously obtained an extension until September 17th, 2012 to file their 2011 returns and individuals and businesses that received a similar extension until October 15th. It also includes the estimated tax payment for the third quarter of 2012, normally due September 17th.

The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The IRS also is waiving failure-to-deposit penalties for federal employment and excise tax deposits normally due on or after August 26th and before September 10th if the deposits are made by September 10th, 2012.

Details on available relief, including information on how to claim a disaster loss by amending a prior-year tax return, can be found on the disaster relief page on IRS Web site.

If you would like additional information on the IRS's tax relief program for Hurricane Isaac or on other tax issues of that storm, do not hesitate to contact our Tax and Accounting specialists, or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - Family Businesses That Act Now Can Avoid Higher Gift Tax on Transfers of Minority Interest]]>
Leif Novie
Roy S. Beckerman

With favorable tax rates and rules on the gift tax and on the estate tax set to expire as of January 1, 2013, it is crucial for family businesses to consider the potential tax advantages of transferring minority interests well before the end of 2012.

Barring any change in tax laws, starting next year the lifetime tax exemptions on gifts to a family member are scheduled to decline from $5,120,000 to $1 million and the minimum tax rates are scheduled to rise from 35 percent to 55 percent.

By acting now, it could prove to be the perfect time for transfers at discounted values of minority interests in an appreciating family business or in a family-owned partnership or a limited liability company (LLC) that own appreciating real estate.

Other taxpayers who are considering gifts to family members as part of their estate planning might want to make such transfers of cash and other assets before the end of this year.

As of early September, it appears unlikely that Congress and the Obama administration will approve any legislation that would prevent the following changes from taking place as scheduled for 2013 and succeeding years:

  • The maximum tax rate for the federal gift tax is scheduled to increase from 35 percent in 2012 to 55 percent.

    The size of lifetime gifts that are exempt from that tax is scheduled to be reduced from $5,120,000 per individual and $10,240,000 per married couple in 2012 to $1 million and $2 million, respectively.
  • The maximum tax rate on the federal estate tax, often called the death tax, is scheduled to increase from 35 percent for 2012 to 55 percent. A surtax of 5 percent would be added on some larger estates.
  • The exemptions from the estate tax, for individuals and married couples, are the same as for the gift tax in 2012 and also are scheduled to be reduced to $1 million and to $2 million.

We are suggesting that clients assume that the changes will take place on the gift tax and the estate tax. We are advising them on possible acceleration of gifts into 2012, as part of their overall plans for their businesses and their estate planning.

A review of a $3 million one-time gift provides an example of the impact of the pending changes.

In 2012, there is no gift tax on that gift. However, in 2013 the gift tax on a $3 million gift would be $1.1 million ($3 million minus the $1 million exemption at 55 percent).

Under rules of the gift tax, a transfer of assets can reduce the size of an estate and in some instances reduce the estate tax that is owed upon a family member's death.

There are additional tax advantages for LLCs and for family limited partnerships (FLPs), where minority interests are transferred to younger generations.

The full fair market value of all fractional partnership interests may be less than the fair market value of the underlying assets. When the owner gifts the less valuable limited partnership interests, the result is substantial tax savings.

Values of interests in such closely held entities may also be discounted for lack of marketability where they are subject to restrictions and lack of control where they constitute minority ownership interests

If you would like additional information on how you might accelerate transfers of minority interests in a family business in anticipation of changes in the gift tax and the estate tax, do not hesitate to contact our Tax and Accounting specialists or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - Gift and estate tax credit of $5.1 million will return to $1 million on January 1, 2013]]>
Ira M. Rubenstein
Marjorie A. Horwin

The gift and estate tax credit of $5.1 million will return to $1 million on January 1, 2013 unless Congress acts before the end of the year. Taxpayers who are considering one-time gifts to family members and other changes in their estate planning should consider implementing those steps soon because relatively favorable tax rates and exemption levels for the gift tax and the estate tax are set to expire at the end of 2012.

The maximum tax rate for the federal gift tax is scheduled to increase from 35 percent in 2012 to 55 percent in 2013. The size of lifetime gifts that are exempt from that tax is scheduled to be reduced from $5,120,000 per individual and $10,240,000 per married couple in 2012 to $1 million and $2 million in 2013 and succeeding years.

The maximum tax rate on the federal estate tax, often called the death tax, is scheduled to increase from 35 percent for 2012 to 55 percent for 2013 and succeeding years. A surtax of 5.0 percent will be added on some larger estates in 2013 and succeeding years.

The exemptions from the estate tax, for individuals and married couples, are the same as for the gift tax in 2012 and also are scheduled to be reduced to $1 million and to $2 million for 2013

For example, there is no gift tax in 2012 on a lifetime gift of $3 million. However, in 2013 the gift tax on that gift would be $1.1 million ($3 million minus the $1 million exemption at 55 percent).

As of late July, it appears unlikely that Congress and the Obama administration will approve any legislation that would change the rates and exemptions on the two taxes that are scheduled for 2013 and succeeding tax years.

Therefore, the final months of 2012 are an important period for families and for family-owned businesses in making decisions on the timing of transfers of cash and other assets. Valuing business assets such as business shares or real estate is an important part of such a decision.

Under rules of the gift tax, a transfer of assets can reduce the size of an estate and in some instances reduce the estate tax that is owed upon a family member's death.

Additionally, several estate planning techniques could be eliminated after 2013 if new legislation is implemented. There has been discussion to curtail discounts used when valuing assets as well as on changing rules related to Grantor Retained Annuity Trusts (GRATS).

The portability exclusion in the estate tax also is scheduled to expire in 2013.

Generally with portability, if the first spouse dies and doesn't use up all of his or her exclusion from the estate tax the unused exemption is transferred to the surviving spouse's exemption.

The rates and exemptions for the gift tax and the estate tax for 2012 and subsequent years were established under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Act), which Congress passed and President Obama signed in December 2010.

If you would like additional information on your tax planning and estate planning or with business valuation or appraisals in preparation for changes in the gift tax and the estate tax, do not hesitate to contact our Tax and Accounting specialists or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - Utilizing Portability to Increase Estate Tax Exemption]]>
Leif Novie
Michael Moss

The IRS has issued temporary regulations on the estate tax exemption that clarify how the deceased spouse's unused exemption amount can be transferred to the surviving spouse.

The transfer, also known as the portability election, applies to married spouses where the death of the first spouse occurs in 2011 or in 2012.

The new regulations, which the IRS issued on June 15, include an explanation on how estimates can be used to calculate the value of assets in an estate and thus calculate an individual's lifetime exemption from the estate tax.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 authorized a lifetime exclusion of $5 million per individual for 2011. That exclusion is $5,120,000 per individual for 2012. A portability election can increase the exemption for the surviving spouse.

Unless Congress passes new legislation this year, portability transfers will not be permitted in 2013 and succeeding years. If Congress extends portability, the IRS can be expected to issue final rules that would be similar to the rules it issued on June 15.

One important aspect in calculating a portability exclusion is that a surviving spouse can only use the exclusion of the last deceased spouse. Thus, the amount of exemption due to portability may change for individuals who re-marry.

To utilize the unused amount of a deceased spouse, the executor of the deceased spouse must file a complete IRS Form 706 within nine months of death. An extension for six additional months may be obtained.

The Form 706 must be filed even if the gross estate is under the threshold amount ($5,120,000 in 2012) that would be subject to an estate tax return. All surviving spouses need to contemplate having a Form 706 filed if they want the portability benefit.

If you would like additional information on IRS requirements for exercising the portability exclusion from the estate tax, do not hesitate to contact our Tax and Accounting specialists or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - High Net Worth Families Should Act Now to Avoid Higher Rates on the Estate Tax and Gift Tax]]>
Leif Novie
Michael Moss

Taxpayers who are considering one-time gifts to family members and other changes in their estate planning should consider implementing those steps soon because relatively favorable tax rates and exemption levels for the gift tax and the estate tax are set to expire at the end of 2012.

The maximum tax rate for the federal gift tax is scheduled to increase from 35 percent in 2012 to 55 percent in 2013. The size of lifetime gifts that are exempt from that tax is scheduled to be reduced from $5,120,000 per individual and $10,240,000 per married couple in 2012 to $1 million and $2 million in 2013 and succeeding years.

The maximum tax rate on the federal estate tax, often called the death tax, is scheduled to increase from 35 percent for 2012 to 55 percent for 2013 and succeeding years. A surtax of 5.0 percent will be added on some larger estates in 2013 and succeeding years.

The exemptions from the estate tax, for individuals and married couples, are the same as for the gift tax in 2012 and also are scheduled to be reduced to $1 million and to $2 million for 2013

For example, there is no gift tax in 2012 on a lifetime gift of $3 million. However, in 2013 the gift tax on that gift would be $1.1 million ($3 million minus the $1 million exemption at 55 percent).

As of late July, it appears unlikely that Congress and the Obama administration will approve any legislation that would change the rates and exemptions on the two taxes that are scheduled for 2013 and succeeding tax years.

Therefore, the final months of 2012 are an important period for families and for family-owned businesses in making decisions on the timing of transfers of cash and other assets.

Under rules of the gift tax, a transfer of assets can reduce the size of an estate and in some instances reduce the estate tax that is owed upon a family member's death.

Additionally, several estate planning techniques could be eliminated after 2013 if new legislation is implemented. There has been discussion to curtail discounts used when valuing assets as well as on changing rules related to Grantor Retained Annuity Trusts (GRATS).

The portability exclusion in the estate tax also is scheduled to expire in 2013.

Generally with portability, if the first spouse dies and doesn't use up all of his or her exclusion from the estate tax the unused exemption is transferred to the surviving spouse's exemption.

The rates and exemptions for the gift tax and the estate tax for 2012 and subsequent years were established under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Act), which Congress passed and President Obama signed in December 2010.

If you would like additional information on your tax planning and estate planning in preparation for changes in the gift tax and the estate tax, do not hesitate to contact our Tax and Accounting specialists or call us at 1-800-239-1474.

]]> <![CDATA[Tax Services Advisory - Health Plans Have August 1 Deadline on Medical Loss Ratio Rebates]]>
Ronald D. Finkelstein
Michael H. Ehrenpreis

As August 1 approaches, employers that sponsor an insured group health plan may be receiving a Medical Loss Ratio ("MLR") rebate notice from their insurers, and could be required to distribute portions of the rebate to plan participants. Self-funded medical benefit plans are not subject to these requirements.

Under the Affordable Care Act (ACA) health insurers are required to disclose the percentage of medical plan premiums spent on paying claims and health quality improvement initiatives, versus the portion spent on administration, marketing and insurance company profit.

Under the Medical Loss Ratio ("MLR") rules, insurers in the large group market (100+ employees) must achieve a loss ratio of at least 85 percent, while insurers in the individual and small group markets must achieve a loss ratio of at least 80 percent.

By June 1, every insurance company offering health insurance coverage was required to report its prior year MLR data to the U.S. Department of Health and Human Services (HHS).

If the minimum standards described above were not met, premium rebates must be provided to policyholders no later than August 1 under the Medical Loss Ratio Rebate Requirements for Non-Federal Governmental Plans; Interim Final Rule.

The rebates raise several fundamental questions for employers including:

Q1: How much (if any) of the rebate must be distributed to plan participants?

A1: Plan sponsors will first need to determine total participant contributions for the year used to calculate the MLR rebate. Current rebates are based on premiums paid to the carrier for calendar year 2011.

Q2: How quickly must I distribute the participant's share?

A2: Generally, rebates should be distributed to participants within three months of receipt by the plan sponsor.

Q3: What options do I have in distributing the employees' share?

A3:The three most common methods of distributing the participants' share of the rebate are:

  • To apply the rebate as a reduction of future participant contributions (a so-called, "premium holiday")
  • To return the rebate to the participant as a cash payment
  • To apply the rebate toward the cost of benefit enhancements

Q4: What are the tax consequences of the various distribution options that are available?

A4: In April of this year, the Internal Revenue Service (IRS) published a set of Frequently Asked Questions (FAQs) related to the tax treatment of various forms of MLR rebate distribution.

According to the IRS guidance, if participant contributions were made on a pre-tax basis the rebate portion returned to the participant as cash or a premium holiday must be treated as taxable income and is also subject to employment taxes. On the other hand, for contributions made on an after-tax basis the rebate will not be taxable.

If you would like additional information regarding the MLR rebate, do not hesitate to contact our Healthcare specialists or our Tax and Accounting specialists or call us at 1-800-239-1474

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