Wednesday, December 5, 2012

2012 Popular AZ Tax Credits

With year-end approaching it is time to be looking at tax moves that can be taken to put you in a better position.  This is a reminder of the tax credits available for charitable contributions to certain causes (available to those indviduals that file and pay Arizona income taxes).


Arizona tax credits are available to reduce your tax liability, but are not refundable. Unused contribution credits roll forward to future years. A taxpayer who makes $1,800 of eligible contributions but has only a $400 liability will reduce their liability to $0 and have $1,200 available for future years. You will find your 2011 State of Arizona tax liability on Form 140 Line 24. If you have any questions, please contact the office.

Working Poor Tax Credit - $200/$400 Single/Married

Qualifying Organizations -
The Working Poor Credit contributions are reserved for charitable organizations that spend at least 50% of their budget on services to Arizona residents who received Temporary Assistance for Needy Families (TANF), households living below a certain income level, or households containing chronically ill or physically disabled children.

School Tuition Organization - $503/$2,006 Single/Married

Qualifying Organizations -

The STO credit changed in the past year. It is now automatically indexed for inflation and there is a new additional tax credit available, increasing the total amount available. The purpose of the credit is to allow students attending underperforming schools to attend private schools based on merit or need, however there is no limitation on who may accept scholarships. Additionally, the contribution can now be made up to the April 15 tax deadline.

Credit for Contributions Made or Fees Paid to a Public School - $200/$400 Single/Married

Any public or charter school

Credit amount benefit the school's general activity fund or designated extracurricular programs such as music, sports, arts, and civic activities. This is a great opportunity for individuals to provide funding for programs they are passionate about or participated in during their high school careers. This is also a chance to support an under-served school that might not otherwise get funding.

Arizona Military Family Relief Fund - $200/$400 Single/Married

Contributions to this fund assist military families during the loss of a loved one, unforeseen financial hardships, or rehabilitation stints. This fund, an incredibly worthy cause, is capped at $1 million dollars of contributions annually.  I urge you to CONTRIBUTE AS SOON AS POSSIBLE. As of December 4, 2012, the fund has received $649,570.73. If your contribution is received subsequent to the fund's cap, your contribution will be returned and the credit will not be available.

If you have any questions about how the tax credits are applicable to your tax return, please contact the office.
Best Regards,

Tuesday, October 9, 2012

2012 Year End Tax Planning and beyond...

2012 Year-End Tax Planning for Individuals

As the end of 2012 is drawing within view, it is time to consider year end planning for 2012 and looking forward to the uncertainty that potentially looms for January 1, 2013.  As the year draws to a close, many taxpayers are asking how they can plan in light of the uncertainty surrounding the fate of the Bush-era tax cuts and other expiring tax provisions and incentives.
A host of reduced tax rates, credits, deductions, and other incentives (collectively called the “Bush-era” tax cuts) are scheduled to expire after December 31, 2012. To further complicate planning, over 50 tax extenders are up for renewal, either having expired at the end of 2011 or which are scheduled to expire after 2012. At the same time, the federal government will be under sequestration (aka "The Fiscal Cliff"), which imposes across-the-board spending cuts after 2012. The combination of all these events has many referring to 2013 as “taxmaggedon.”

Expiring Provisions

Effective January 1, 2013, the individual income tax rates, without further congressional action, are scheduled to increase across-the-board, with the highest rate jumping from 35 percent to 39.6 percent. The current 10-percent rate will expire and marriage-penalty relief will sunset. Additionally, the current tax-favorable capital gains and dividends tax rates (15 percent for taxpayers in the 25-percent bracket rate and above, and 0 percent for all other taxpayers) are scheduled to expire. Higher-income taxpayers will also be subject to revived limitations on itemized deductions and their personal exemptions. The child tax credit, one of the most popular incentives in the Code, will be cut in half. Millions of taxpayers would be liable for the alternative minimum tax because of expiration of the AMT “patch.” (Note that the AMT patch also has not been extended for the 2012 tax year.) Countless other incentives for individuals may either disappear or be substantially reduced after 2012. While a divided Congress may indeed act to prevent some or all of these tax increases, a year-end planning strategy that protects against worst-case scenarios may be especially wise to consider this year.

Year-End Planning
Income tax withholding. Expiration of the reduced individual tax rates will have an immediate impact. Income tax withholding on payrolls will immediately reflect the increased rates. One strategy for taxpayers to avoid being surprised in 2013 is to adjust income tax withholding. Keep in mind that the current 2-percent payroll tax holiday (for the employee portion of Social Security) is also scheduled to expire after 2012, so it is a good time to review if a taxpayer is having too much or too little federal income tax withheld from pay.

As mentioned, traditional year-end planning techniques should be considered along with some variations on those strategies. Instead of shifting income into a future year, taxpayers may want to recognize income in 2012, when lower tax rates are available, rather than shift income to 2013. Another valuable year-end strategy is to run the numbers for regular tax liability and AMT liability. Taxpayers may want to explore whether certain deductions should be more evenly divided between 2012 and 2013 and which deductions may qualify, or will not be as valuable, for AMT purposes.

Harvesting losses. Now is also a good time to consider loss-harvesting strategies to offset current gains or to accumulate losses to offset future gains (which may be taxed at a higher rate). The first consideration is to identify whether an investment qualifies for either a short-term or long-term capital gains status, because short-term gains are first offset with short-term losses and long-term gains with long-term losses. Remember also that the wash-sale rule generally prohibits taxpayers from claiming a tax-deductible loss on a security if the taxpayer repurchases the same or a substantially identical asset within 30 days of the sale. If you have long-term gains, it may be worth considering recognizing the gain this year while long term capital gains rates are at historically low levels and scheduled to increase in 2013.

Education expenses. Taxpayers with higher educational expenses may want to consider the scheduled expiration of the American opportunity tax credit after 2012 in their plans. The AOTC (an enhanced version of the Hope education credit) reaches the sum of 100 percent of the first $2,000 of qualified expenses and 25 percent of the next $2,000 of qualified expenses, subject to income limits. If possible, pre-paying 2013 educational expenses before year-end 2012 could make the expenses eligible for the AOTC before it expires. The “regular” Hope credit, and another popular education tax incentive, the Lifetime Learning credit, are not scheduled to expire after 2012.

Job search expenses. Some expenses related to a job search may be tax deductible. There is one important limitation: The expenses must be spent on a job search in the taxpayer’s current occupation. A taxpayer may not deduct expenses incurred while looking for a job in a new occupation. Examples of job search expenses are unreimbursed employment and outplacement agency fees paid while looking for a job in the taxpayer’s present occupation. Travel expenses to look for a new job may be deductible. The amount of job search expenses that may be claimed is limited. A taxpayer can claim the amount of expenses only to the extent that they, together with other miscellaneous deductions, exceed 2 percent of the taxpayer’s adjusted gross income.

Gifts. Gift-giving as a year-end tax strategy should not be overlooked. The annual gift tax exclusion per recipient for which no gift tax is due is $13,000 for 2012. Married couples may make combined tax-free gifts of $26,000 to each recipient. Use of the lifetime gift tax exclusion amount ($5.12 million for 2012) should also be considered. Without congressional action, the lifetime exclusion amount drops to $1 million in 2013.

Charitable giving. For many individuals, charitable giving is also a part of their year-end tax strategy. Under current law, the so-called “Pease limitation” (named for the member of Congress who sponsored the law) is scheduled to be revived after 2012. The Pease limitation generally requires higher income individuals to reduce their tax deductions by certain amounts, including their charitable deductions. A special rule for contributing IRA assets to a charity by individuals age 701/2 and older expired after 2011 but could be renewed for 2012.

Friday, June 1, 2012

Social Security Mis-information

I was meeting with a client this morning and again finding the need to explain the 2 implications to Social Security retirement benefits.  The mis-information comes in to play when taxpayers think that when they attain Full Retirement Age (FRA) that they can make as much money as they want and pay no income tax on their benefits. This is sadly not the case as I explain their are 2 distinct and different items that affect each individual.

The first is the limitation of earned income and the correlation on the Social Security benefits when a person has taken early Social Security benefits (this is before reaching the Full Retirement Age (FRA) as defined by Social Security Administration).  If you take Social Security early (before attaining FRA), the benefit received is reduced for taking it prior to reaching the full retirement age but more importantly is that if the recipient has earned income in excess of prescribed limits, then the Social Security benefits will be reduced or the recipient may have to repay excess benefits received.  For 2012, benefits will be reduced by $1 for each $2 earned over $14,640 during the year.  This can be a critical factor in whether you want to take benefits early because you may be tempted to go back to work if the right opportunity comes along.  Just remember that you may be penalized for earning too much income and have to repay Social Security.

The second impact is the effect on your taxable income.  Regardless of your age your Social Security benefit may be taxable if you receive other forms of income.  Generally if your income is less than a certain threshold (Single/Head of Household - $25,000, Married Filing Joint - $32,000), then your Social Security is not taxable.  Over those amounts you may have to include up to 85% of your Social Security benefit in your Federal taxable income.  This can have profound effects on itemized deductions for income based deductions (for example - medical expenses or investment expenses which both must exceed a certain percentage of your Adjusted Gross Income).

Each circumstance is unique so caution is advised as to the timing of applying for Social Security benefits.  If you take retirement benefits early, caution should be taken with regard to health insurance as well as Medicare does not apply until you attain age 65.  So if you take early Social Security benefits, be sure to consider the impact on medical benefits in the intervening years.

Monday, January 16, 2012

2012 Tax Changes

Although we are looking to start filing season for 2011 tax returns, it is also important to consider changes in effect for 2012. Some important tax changes for 2012 are:


• Each personal and dependent exemption is $3,800 - an increase of $100 over 2011.
• The 2012 standard deduction rose slightly. A taxpayer filing as single (or married filing separately), saw a $150 increase to the basic deduction as it rose to $5,950. Married couples filing a joint return gained a $300 deduction to $11,900. Those filing as Head of Household have an additional $200 deduction as the amount increased to $8,700.
• The maximum earned income tax credit for low and moderate income workers rose to $5,891 for 2012, a $140 increase from 2011.
• Standard mileage rates regarding medical miles driven remained unchanged at 14 cents per mile. The deduction for charitable mileage increased by 4 cents, however, as it rose to 23 cents per mile. Business miles driven increased to 55.5 cents per mile for most vehicles earlier in 2011 and that amount remains unchanged going into 2012.
• Though the credit amounts don't change for 2012, the modified adjusted gross income threshold at which the lifetime learning education credit begins to phase out is $104,000 for joint filers and $52,000 for single filers. This is up from $102,000 and $51,000, respectively.
• Perhaps the item with the potential for greatest impact is the decreased Alternative Minimum Tax (AMT) exemption from $74,500 to $45,000 for a married couple. Single taxpayers and those filing Head of Household experience an exemption decrease from $48,450 to $33,750. If you are unsure about this change and it's impact please discuss with the office.
• Lastly, the FICA ceiling rose to $110,100 from $106,800. The good news is that the employee rate remains at 4.2% at least through February 29, 2012. Currently, that rate is slated to increase to the historic rate of 6.2% after that date, but many believe the lower rate will be extended for the entire year.

These are some of the changes that have already occurred and I expect additional changes to occur as this is an election year and most politicians will be looking to keep things to the advantage of the American public to stay in their good graces.