Get organized for 1099 filing

January is always a busy month for companies. You're trying to get business off to a good start in the new year, you're trying to close the books on last year, and there's 1099 reporting to complete by month-end.

There are several variations of the information returns known as Form 1099. Most are specific to certain industries. But nearly every company, large or small, has to issue Form 1099-MISC. And you have to send it to recipients by January 31, 2013.

In many businesses, it becomes a late-January panic. There's a scramble to find out who needs to receive the form, their current address, and their taxpayer ID number. But if you're smart, you can get a head start on that before year-end.

You use Form 1099-MISC to report miscellaneous payments to non-employees. This includes fees for services paid to independent contractors, such as consultants, Web designers, accountants, lawyers, and others. If you pay fees to your outside directors, they should be on the list. Generally, you don't report fees paid to corporations, but there are exceptions. For example, you must report payments to all law firms, incorporated or not.

You obviously won't know the dollar amount to report until after year-end. But you can start to assemble the list of recipients, verify whether they're a corporation, and obtain their taxpayer ID information. Ideally you would have a process to collect this information when a new contract is signed. But if not, December is a perfect time to do the ground work. Then you might have one less crash project at the end of January.

Tax breaks are available for disaster victims

When natural disasters occur, they often leave many people with severely damaged or destroyed homes and businesses. Some lose everything they own. If you are affected by a disaster that is declared by the President to qualify for federal assistance, there are several provisions in the tax law that may provide relief.

Extended tax deadline and interest abatement. The IRS is authorized to postpone the deadlines for filing returns and paying taxes for up to 120 days in a Presidentially declared disaster area. Also, the IRS will not charge interest that would otherwise accrue for the extension period.

Faster refund. Taxpayers suffering losses in a federal disaster area have a choice of which tax year to deduct the casualty loss. You may deduct it on the return for the year the loss occurs, or it can be claimed on your prior year's tax return. Amending your prior year's return may give you a refund of much-needed cash sooner than waiting to deduct the loss on your current year's tax return.

Tax-free gain. If the insurance payments you receive exceed the tax basis of your property, you will end up with a casualty gain. Casualty gains in federal disaster areas receive special tax treatment. For example:

*Individuals may qualify for up to a $250,000 gain exclusion ($500,000 for married couples) on their principal residence. That's because the destruction of the residence is treated as a "sale" for tax purposes.

*No gain is recognized on the insurance reimbursement for the contents of a building as long as those contents were not separately listed on the insurance policy.

*If you replace your property with similar property within four years, you may be able to avoid or postpone paying tax on any gain from your involuntary conversion.

If you suffer a casualty loss, give us a call to discuss the best tax course of action in your situation.

Do a year-end business review

Business owners and managers spend most of their time monitoring operations and dealing with everyday problems. But just as an annual checkup from your physician helps to monitor and manage your personal health, an annual checkup can do the same for your business. The benefits of such a review are holding your company accountable and evaluating current performance to better plan and execute future operations. Here are seven things that you should make time to do every year. These are important for your longer-term business health and personal success.

1. Review your business insurance coverage. Don't just automatically write a check to renew your insurance policies when they come due. Instead, you should sit down with your insurance agent every year. Review your business operations, focusing on any changes. Discuss types of risk that could arise. Ask about new developments in business insurance. Use your agent's expertise to identify risk areas and suggest suitable coverage.

2. Review your business tax strategy. Consider adjusting taxable earnings for the year, perhaps by accelerating expenses or delaying income at year-end. (You may want to reverse that strategy this year if you think tax rates will actually increase in 2013.) If you're a cash-basis taxpayer, you could boost 2012 deductions by declaring and paying bonuses in December rather than in early January. Also, you may be able to defer invoicing or make early purchases to reduce your 2012 tax bill.

Look into the "Section 179" rule that allows you to take an immediate tax deduction for most purchases of business furniture and equipment. By deducting the full cost immediately instead of depreciating it over several years, you'll cut this year's tax bill. For 2012, you can deduct up to $139,000 of qualifying purchases, subject to limits.

As your business grows, it's always good to make sure you're using the most appropriate form of business -- whether it's sole proprietor, S or C corporation, LLC, or partnership.

Look for other tax breaks, such as specialized tax credits, that you might not be using to full advantage.

3. Survey your customers. An annual customer satisfaction survey is a great way to assess performance, obtain insight on potential new products or services, and to let your customers know how much you value their business.

4. Check the effectiveness of your marketing. Are your current methods and channels working well, or are you simply doing what you've always done?

5. Update succession planning for your business. Review your succession planning annually. You should have a specific plan for each key manager position, including yourself. Be prepared for a short-term absence or a permanent vacancy. Your plan might mean promoting from within or recruiting externally. An up-to-date plan can be invaluable if you have an unexpected vacancy.

6. Review your business banking relationships. Annually, you should go over your cash balances and banking relationships with your controller, CFO, or accountant. Then both of you should meet with your banker. Ask about new products or services that could help your company. Address any service concerns or problems you might have had. Look for ways to reduce idle cash, boost interest earned, and improve cash flows.

7. Review and update your personal estate planning. If you're a business owner, your company is likely to be a significant part of your estate. A good estate plan is essential if you hope to pass the business on to your heirs. Your company, your personal circumstances, and the tax laws are continually changing. You should take time each year to make sure your plans are current.

What's ahead? Tax changes scheduled for 2013

Unless Congress acts by year-end, these are the changes you'll see in the tax rules effective January 1, 2013.

*SOCIAL SECURITY TAXES. Employee's share will increase to 6.2% after 2012, up from 4.2%.

*INCOME TAX RATES. 2012 rates of 10%, 15%, 25%, 28%, 33%, and 35% will change to 15%, 28%, 31%, 36% and 39.6% for 2013.

*CAPITAL GAINS. Maximum long-term rate will increase from 15% to 20% after 2012.

*DIVIDENDS. Top 15% rate will be eliminated; dividends will be taxed as ordinary income with a top rate of 39.6%.

*CHILD TAX CREDIT. Current $1,000 credit per qualifying child will be reduced to $500 after 2012.

*AMT. Exemption amounts will be $33,750 for singles, $45,000 for couples.

*ESTATE TAX. Top 2013 rate will increase to 55% (up from 35%); exclusion amount will be reduced to $1,000,000 (down from 2012 amount of $5,120,000).

*DEDUCTIONS & EXEMPTIONS. After 2012, higher-income taxpayers will again lose a portion of itemized deductions and personal exemptions.

*DEPRECIATION. Section 179 expensing limit will be reduced to $25,000, with a total qualifying property limit of $200,000, down from 2012 levels of $139,000 and $560,000 respectively. 50% bonus depreciation will expire.

*EDUCATION. Education savings account contribution limit will be $500, down from 2012 limit of $2,000. Expanded American Opportunity Credit will expire and be replaced by prior Hope Credit.

*TAX EXTENDERS. These tax breaks expired at the end of 2011: Teachers' classroom expense deduction, state and local sales tax deduction, tax-free charitable IRA distributions for those 70½ and older, higher education tuition deduction, business R&D credit, and 15-year depreciation for leasehold improvements and restaurant property.

Stay tuned. Congress and President Obama may agree to extend or revise some or all of these provisions. We'll keep you informed.

Give your children some lessons about money

There's one important subject that your children may not learn in school: personal finance. If you want your kids to pick up good money skills and become financially responsible adults, you should give them some training yourself.

Pre-schoolers and teenagers obviously have different financial concerns and abilities. But there are a few basic lessons that all children should learn by the time they enter college or start a career.

*Having money means making choices. Teach your child how to choose between spending and saving, and how to do both intelligently. A regular allowance will help your child gain real-world financial experience.

*Money requires planning. At the appropriate age (usually about nine or ten), show your child how to develop a simple spending plan. In later years, show how to plan for larger expenditures.

*Money means responsibility. Inevitably, your child is going to make some money mistakes. Try to avoid criticism, but don’t automatically fix every problem and let your child off the hook. Help analyze the reason for the mistake, and suggest how to avoid it in the future.

*Money needs to be managed. Specific lessons might range from how to compare interest rates on savings accounts, to the pros and cons of mutual fund investing. But there should be one common element to all of your teaching in this area: money doesn’t take care of itself.

The way you handle your money may be the most powerful lesson of all for your children. For your child’s sake, as well as your own financial well-being, it’s important to practice what you preach.

Analyze your customers for a better business

If your business is like most, you put a lot of effort into attracting new customers. After all, that's an essential part of growing the business. But sometimes it's more productive to step back and review your existing customers, and perhaps even get rid of a few.

You might be surprised at what you find if you take the time to analyze your customers. Start by listing customers in order of sales. Then make your best estimate about the cost of those sales. For example, you might give volume price breaks to your biggest customers that make them less profitable than smaller customers. But don't just look at the cost of sales. Ask your sales staff, your customer service staff, and your accounting staff to assign a simple grade to your customers (e.g., A, B, C, D, or F). This will give you a relative measure of how much time and effort each customer requires.

Once you have profitability and customer care information, you can begin to rank your customers in groups from best to worst. The "best" are easy. They're the customers you should make a special effort to appreciate and retain.

You have several options for the "worst" group. With some customers, you might want to change your pricing structure to charge them for the excessive costs and attention they require. With others, you might want to sit down and address specific problem areas. Sometimes just making customers aware of problems can produce positive joint solutions.

In some cases, the only solution is to part ways. Do this gracefully, without creating unnecessary ill will that can come back to haunt you. If possible, find a plausible business reason to support your action. But if necessary, be blunt and tell the customer that you're cutting back to provide better service to your top customers. Suggest alternative suppliers they might contact to fill their needs.

Eliminating customers may be counter-intuitive, but it can work wonders for your bottom line and your staff's morale. Call us if you'd like assistance with the financial analysis of your customers.

Rethink your capital gains strategy this year

The typical investment advice at year-end is to sell losing stocks to offset gains you have taken for the year. This year that strategy may just be the wrong way to go. Here's why.

The maximum rate on long-term capital gains is scheduled to rise from the current 15% to 20% next year. Also scheduled for 2013 is an increase in the top rate on dividend income from the current 15% to 39.6%.

If you expect these scheduled rates to occur in 2013, it may make sense to harvest gains before year-end. Remember, wash sale rules do not apply to gains, so you can repurchase a similar investment immediately. This tactic may allow you to "reset" your basis for a future sale while benefiting from current low rates.

What about investment losses? Despite the uncertainty over a possible increase in tax rates, it's a good bet that some rules -- such as those covering capital losses -- will not change. When pruning stocks from your portfolio, keep in mind that capital losses are more valuable when tax rates are higher. You may want to postpone taking losses until 2013 if you think rates will be higher next year.

In your investment review, don't overlook the new 3.8% Medicare surtax that will apply to certain unearned income, including interest, dividends, capital gains, and passive rental income. If this surtax goes into effect as scheduled, an individual with adjusted gross income of $200,000 or more ($250,000 for couples filing jointly) could pay an effective federal income tax rate of 43.4% on some income.

Individual situations will vary, so consider all the relevant factors in making your year-end decisions. For assistance in your analysis, contact our office.

Beware of tax scams

It's likely to be a daily occurrence: Your e-mail inbox contains at least one message touting a too-good-to-be-true offer. You probably shake your head and delete the pleas from mysterious mock millionaires who need your help recovering imaginary inheritances.

But what do you do when the e-mail has the Internal Revenue Service web address in the FROM box and a subject line that claims you're about to be audited by the Criminal Investigation Division?

*Step 1. Stop and think. You've never given the IRS your e-mail address in relation to your tax return. Even if you had, the government does not request personal information such as your bank account, credit card, or social security numbers via e-mail.

*Step 2. Without clicking on any links or responding to the e-mail, forward the entire message to the IRS (phishing@irs.gov). The IRS established this e-mail box in 2006 to investigate and shut down online fraud.

Note: You will not get a response, either online or off, from the IRS when you report scams.

*Step 3. Delete the e-mail.

Besides the audit subterfuge, other common e-mail tax schemes to know and avoid include a promise of additional money due, bogus government grants, and requests for you to check the status of your refund.

Tax scams never die, and they can be taxing. Before you react to any communication from -- or purporting to be from -- the Internal Revenue Service, contact us. We're here to help you resolve tax issues.

The alternative minimum tax: Will it affect you?

In your tax planning, don't overlook how your tax-saving strategies might be affected by the alternative minimum tax.

 * What is the alternative minimum tax?

Enacted back in 1969, the alternative minimum tax (AMT) was designed to make sure that high-income taxpayers pay a minimum amount of taxes, even if they have sufficient deductions and credits to reduce their federal income tax liability to zero.

The AMT is like a flat tax. You get a lower tax rate in exchange for losing most deductions.

To calculate the AMT, start with regular taxable income, which includes all your familiar deductions and exemptions. Then make certain adjustments and add back certain "preferences" to arrive at your AMT income. Preferences include personal exemptions, state and local taxes, certain interest on home-equity loans, and miscellaneous itemized deductions.

After adding back the preferences, you're entitled to an exemption amount, though the exemption phases out at higher income levels. The exemption for 2012 is $33,750 for singles and $45,000 for married couples filing a joint return.

You then calculate your AMT by applying a tax rate of 26% to the first $175,000 of AMT taxable income, and 28% to any additional amounts. Finally, you compare your AMT to your regular tax and pay whichever is greater.

* Who is affected by the AMT?

Congress created the AMT to ensure that wealthier taxpayers, who often have the kinds of income and deductions that qualify for preferential tax treatment, would pay at least a minimum amount of tax. Congress also wrote exemptions into the law, so that middle-income taxpayers wouldn't be subject to the AMT.

Unfortunately, these exemptions were not indexed for inflation. As incomes have continued to rise, more and more people have found that they need to calculate their tax bill twice -- once under regular tax rules, and again under the AMT.

Though Congress has expressed a desire to eliminate the AMT, it is still in effect. Every year thousands of middle-income taxpayers find themselves subject to the alternative minimum tax.

 * Will the AMT affect you?

Do you need to concern yourself with the AMT? You do if you have a lot of dependents or if you claim substantial itemized deductions. You may also be subject to the AMT if you realized hefty capital gains during the year or exercised incentive stock options. Claiming certain tax credits might trigger the AMT as well. And if you are an owner of rental real estate or a capital intensive business, you need to be aware that the amount of depreciation allowed under the AMT is limited.

Don't forget the AMT in your tax planning. You may be one of those middle-income taxpayers who is now subject to this tax. For details or planning assistance, contact our office.

Important deadline approaching for tax-exempt organizations

Here's an important reminder for small nonprofit organizations: If your organization had its tax-exempt status revoked for failing to file an annual return from 2007 through 2009, the IRS is giving you a chance to get reinstated.

The IRS has issued guidance for small organizations with gross annual receipts of less than $50,000 that will allow them to regain tax-exempt status retroactive to the date of revocation. To qualify for this reinstatement and a reduced application fee of $100, the organization must submit an application postmarked no later than December 31, 2012.

Tips for cutting costs in your business

Keeping costs under control is crucial in today’s challenging business environment. Without a doubt, one of the quickest ways for a business to cut costs is through staff reduction. But cutting jobs is not always the best cost-cutting strategy. Drastic job cuts can lead to a vicious cycle of reduced productivity, followed by even slower growth and decreased profitability. Replacing skilled workers when times improve may be difficult, leaving your company to struggle longer still.

Here are some alternative cost-control strategies that companies could consider.

* Look at the cost of your office or plant. If the company owns expensive office space, consider moving to a less costly location that will not mean losing clients or business. If a move is out of the question, consider sharing office space with a compatible company. What you save in shared operating costs goes directly to the bottom line (after taxes, of course).

* Consider sale-leaseback arrangements, which enable the company to generate funds for operations and transfer the burden of ownership to the buyer from whom you rent back the office space.

* Review the cost of supplies and inventory. Analyze the cost of materials and supplies. Are you stocking too much material too far in advance? Can you arrange to have products shipped directly to customers by your suppliers?

Periodically conduct a competitive review of suppliers, and select those who can deliver good quality and service at the lowest cost possible. Also, you may not have to pay full price; inquire about volume discounts.

* Outsource some processes. Consider outsourcing certain activities that either consume a great deal of time and resources or are prone to errors. For example, you may be able to have payroll processing done by a vendor at a fraction of the current cost to you.

Don't let the AMT catch you by surprise

According to the Congressional Research Service, 34

million taxpayers could be hit by the alternative

minimum tax (AMT) this year. Are you one of the many

unsuspecting or uninformed taxpayers who will be caught

by the AMT in 2012? With a better understanding of the

rules, you may be able to avoid or reduce adverse tax

consequences.

The AMT was set up in the 1960s to make sure wealthy

taxpayers didn't use deductions and exemptions to avoid

paying any income tax. The AMT applies a 26% or 28% tax

rate to income above a certain exempt amount. Because

this exempt amount is not indexed for inflation, the

AMT has begun to affect more and more middle-income

taxpayers each year.

The AMT is a separate tax calculation that parallels

the regular income tax, but it does not let you claim

personal or dependent exemptions, the standard

deduction, and certain itemized deductions. You compute

your tax liability under the regular tax system; then

you make the necessary adjustments for "tax preferences"

and calculate your tax under the AMT rules. You compare

your AMT liability to your regular tax liability and

pay whichever tax is greater.

It's wise to estimate your AMT exposure before year-end.

Depending on your situation, it may make sense to avoid

tax preference items or postpone certain deductions.

Strategies might include adjusting when you make tax

payments or charitable contributions, accelerating

income, or changing how you exercise stock options.

Act soon to cut your 2012 taxes

Time is running out to make tax-saving moves for 2012. Here's a sampling of ideas to consider.

* Maximize the contributions to your employer's tax-deferred retirement savings plan, thereby saving taxes immediately and deferring taxes on earnings in your account. Also don't overlook an IRA contribution if you qualify.

* If you've held appreciated stock for more than one year, consider donating those shares to charity rather than making cash donations. You'll avoid paying taxes on the stock's appreciation, but can generally claim the full fair market value of the stock as a charitable deduction.

* Adjust your withholding. Increase the income tax withheld from your paycheck through year-end to cover extra amounts due from Roth conversions or other taxable income increases in order to avoid underpayment penalties. Alternatively, reducing your withholding to account for an overpayment puts money in your pocket now, instead of next year when you file your return.

* Schedule charitable contributions. Cash and checks mailed by year-end count as 2012 deductions, as do credit card charges you make by December 31. Donations of appreciated securities are deductible when you relinquish control. Allow extra time for stock transfers handled by your broker or a mutual fund company.

* Make family gifts. For 2012, the annual amount you can give away to any individual, free of gift tax, is $13,000 ($26,000 when you're married and make the gift with your spouse).

* Plan for elective health care expenses. Use up the balance in your flexible spending account (FSA) by year-end, and figure out how much you'll contribute in 2013. No FSA? You still have time to set up a health savings account (HSA) and make a deductible contribution.

* Remember required minimum distributions. Failing to take a required distribution from your traditional IRA before year-end could cost you 50% of the amount you should have withdrawn.

Recordkeeping tips from the pros

If you want to give your tax recordkeeping skills a performance boost, do what accounting professionals do.

1. Maintain a separate bank account for all self-employed business activity. This will greatly minimize confusion come tax time by giving you just one place to look for business transactions. The same is true for credit cards; have a card used solely for business and another for personal purchases.

2. Reconcile your bank statements. Though tedious, it is the only way to know for sure if you've included everything in your records.

3. Take advantage of technology. There are many software applications available for organizing tax records, and digitizing your records can also save office filing space.

4. Track your finances by important tax categories. Knowing how to classify your expenses and income is half the battle. Look at your last tax return or accountant's tax organizer for clues. Individuals should focus on itemized deductions and tax credit categories; business owners should look at Schedule C line items.

5. Be diligent and consistent. Make recordkeeping a year-round task, not a year-end burden. For instance, update business mileage records daily. File away receipts before they are lost. Record tax transactions as they occur throughout the year.

6. Watch for important receipts. You probably already know you should collect the standard items: W-2s, 1099s, and annual mortgage statements. But did you know that charitable donations of $250 or more must be substantiated by a receipt from the charity to be deductible? Also, keep all pay stubs and brokerage statements. They might contain hidden deductions.

7. Hold on to prior-year tax records. Because an IRS audit is always a possibility, keep copies of tax returns and supporting records for seven years.

8. Be aware of special tax breaks. Some records become important as tax rules change. For instance, business owners should be careful to maintain records on major equipment purchases to qualify for enhanced expensing perks. Homeowners need to keep supporting documents for energy-efficient purchases.

9. Keep your tax advisor abreast of major life changes. New happenings in your life, like a job change, new child, or change in marital status might affect how you track your income and expenses. A quick call to your tax pro will help you stay on top of things.

How to succeed in a new business

If the current job market has you thinking about starting a business of your own, take some steps to increase the odds that your business will succeed.

* The first step is an honest self assessment. Common characteristics of a successful entrepreneur are the drive to achieve and the willingness to take risks. To succeed in business, you need good organizational and people skills, confidence to make good decisions under pressure, and the emotional and physical endurance to work long hours. Experience in the type of business you're planning is a major factor.

* Take the time to do your homework. A business is more likely to fail if you're in a hurry to open the doors. Consult trade associations, other successful business owners, governmental agencies, and professional advisors for information relating to your new business. Is there a demand for your type of product or service? If so, who will your customers be, and where should you locate in order to be easily accessible to them? How will you set your prices to attract customers, yet maximize profits? How will you make your business stand out from the competition?

* Look for ways to limit your overhead expenses. For example, determine whether you should lease or buy your premises and equipment. If you only need an office to meet with clients, consider places that rent space on an as-needed basis and furnish secretarial help and equipment. Check out the benefits of an enterprise zone, where taxes and even the cost of utilities and phone service may be lower.

* Incorporate your research into a business plan. Have your accountant assist you with this. Chances of obtaining the necessary start-up capital improve if you have a clear business plan.

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Don't miss these upcoming tax deadlines

Several important tax deadlines are coming up between

now and the end of the year. Check the list below to

see if any apply to you or your business.

* September 17 - Due date for the third quarter

  installment of 2012 individual estimated income tax.

* September 17 - Filing deadline for 2011 tax returns

  for calendar-year corporations that received an

  extension of the March 15 filing date.

* September 17 - Filing deadline for 2011 partnership

  tax returns that received an extension of the April 17

  filing date.

* October 1 - Generally, the deadline for self-employed

  individuals and small businesses to establish a SIMPLE

  retirement plan for 2012.

* October 15 - Filing deadline for 2011 individual

  income tax returns that received an extension of the

  April 17 filing date.

* October 15 - Deadline for undoing a 2011 conversion

  of a regular IRA to a Roth IRA and switching the Roth

  back to a regular IRA without penalty.

* December 31 - Deadline for small nonprofit organizations

  that lost their tax-exempt status to file an application

  for reinstatement and pay a reduced application fee

  of $100.

* December 31 - Deadline for taking a required minimum

  withdrawal from an IRA or other retirement plan for

  2012, or face a penalty of 50% of the required

  withdrawal not taken.

What's more important - saving for children's college or your retirement?

A college education. Retirement. What do these major life events have in common?

One shared characteristic is that each comes with a price tag. Here's another: If you have school-age kids, you might be facing the challenge of having to decide which goal to save for. They're both important. So how do you make the choice?

Here are some suggestions that can help you reach a sensible solution.

* Eliminate excuses for not making a decision. Procrastination can be costly. For example, to accumulate $100,000 in five years, you'd have to deposit a little over $1,500 every month in an account that earns 4%. But with a ten-year time horizon, assuming the same return, you can build up $100,000 by socking away less than half that amount, or approximately $700 per month.

What you need to know: Estimate the total amount required for both goals, how much time you have, and how much cash you'll need to set aside on a regular basis.

* Expand your resource horizon. Once you've computed the expense side of the equation, figure out how much you can afford to save. You may find that, with one pool of income and two goals, there's not enough money to fully fund both goals.

But who says you have to pay for everything yourself? Turn an obstacle into an opportunity by searching out alternatives. For instance, while your income in retirement may be dependent in large part on your savings, there are plenty of options for paying

college tuition.

Where to look: Investigate the possibility of advanced placement credits while your child is still in high school. Other potential sources of help include scholarship prospects, federal work/study programs, and summer internships.

* Adopt a flexible approach. Broadly speaking, you have three alternatives for divvying up your available savings between the two goals. You can save for retirement only, save for college only, or opt to do both.

Yet within each alternative are creative strategies. As an illustration, you could start out by saving strictly for retirement, shift toward saving for college when your child reaches a certain age, then switch back after graduation.

Caution: Be careful of falling into the deadline trap. It's likely your kids will attend college before you retire. Since the tuition deadline is closer, you might be tempted to reduce or eliminate retirement plan contributions in the early years of your savings plan in order to focus on education savings.

But consider this: A typical retirement will generally last longer and cost more than your child's education. By putting college tuition first, you could end up with less than you need in your retirement nest egg. Instead, take your overall time horizon into account.

Capital gains and losses: New twists for 2012

The end of the year is the traditional time for securities investors to "harvest" capital losses for federal income tax purposes. But there's an added wrinkle in 2012: Due to pending tax law changes, you might try to reap more capital gains than losses. Thus, the usual strategy of harvesting losses could be turned upside down.

Here's a recap of the basic rules. The capital gains and capital losses you realize during the year are "netted" under complex rules when you file your tax return. A gain or loss is treated as being long-term if you've held the securities for more than one year. For 2012, net long-term capital gain is taxed at a maximum tax rate of 15% (0% for investors in the regular 10% and 15% tax brackets).

If you're showing a net capital gain on paper as year-end approaches, any capital losses you realize will reduce the amount of the taxable gain or offset it completely. An excess loss can then offset up to $3,000 of highly taxed ordinary income before any remainder is carried over to next year. However, the usual strategy of harvesting losses is complicated this year by three key tax law changes scheduled for 2013.

1. The maximum tax rate for net long-term capital gain will increase to 20% (10% for investors in the lower tax brackets).

2. Ordinary tax rates are going up. For example, the top rates of 33% and 35% will increase to 36% and 39.6%, respectively.

3. A special 3.8% Medicare surtax will apply to the lesser of net investment income for the year or the amount by which modified adjusted gross income (MAGI) exceeds $250,000 ($200,000 for single filers).

Barring any late legislation by Congress, investors may be inclined to harvest capital gains instead of losses at year-end. As a result, you can benefit from the favorable tax rates in effect for 2012. If you've already realized short-term gains in 2012, you might want to realize short-term losses to offset those gains. But don't use short-term losses to offset long-term gains, if you can help it, because long-term gains are taxed at a maximum rate of only 15% in 2012.

Other considerations may come into play. The best approach is to do what's best for your situation. Contact us for assistance in reviewing your options.

Know the facts about IPOs

Do you know anybody who's tripled his money investing in the IPO (initial public offering) of a hotshot new company? It can happen. And many investors thought the recent Facebook IPO was a way to quick riches.

Yet the truth is, most investors don't make money playing IPOs. It's just that no one brags when they lose money. Nonetheless, investors of all kinds are lined up for a shot at the next IPO. So it pays to know the facts before diving in.

First bit of advice: Don't bet the farm. The problem is that generally IPOs are issued by companies with no track record, inexperienced management, and few assets. And, unfortunately, the underwriters for these IPOs are motivated to complete the transaction, collect their fees, and move on. Their compensation is linked not to the quality of the firms they take public, but rather to the number of deals they sell to the public.

To protect yourself, you must do your homework, as you would for any investment. A company planning an IPO writes a prospectus that describes the business and details management's plans for what they intend to do with the money, how fast they intend the company to grow, and what profits they expect. The prospectus also discusses the competition and markets, and, most importantly, describes the risks of investing in the IPO.

Do the necessary research, and be sure you understand the risks before you make an investment in an IPO.

How to fix tax return errors

Suppose you discover a mistake or omission of an item

on the 2011 federal tax return you recently filed.

Should you ignore the error? Although it can depend on

the nature and significance of the item, the answer is

generally "no." But the matter may be resolved by filing

an amended 2011 return.

Clearly, you should file an amended return right away

if you've paid less tax than the amount you actually

owe for 2011. If the IRS eventually detects the mistake,

it can require you to pay the difference in tax liability

plus substantial interest and penalties. As a general

rule, the IRS has three years in which to audit a return,

but the statute of limitations is extended to six years

if you underreport income by more than 25%. And there's

no time limit if fraud is involved.

When a change works in your favor, consider all the

ramifications. If you stand to receive only a few extra

dollars back, it's probably not worth the effort. This

also gives the IRS another chance to scrutinize your

return. On the other hand, if you expect a sizable refund

in return, it usually makes sense to pursue this action.

One of the common reasons for amending a return is to

change your tax filing status or dependency exemptions.

For instance, there could be some confusion over

claiming exemptions for children following a divorce.

Similarly, you may have overlooked special deductions

or credits available on 2011 returns.

If you discover an error or missing information on a

return you already filed, give us a call. We can review

the situation with you and help you file an amended

return if necessary.

Tax rules apply to family loans

There are many worthwhile reasons to lend money to a relative. For example, you may want to help a child or sibling continue their education or start their own business.

But lending money to relatives can have tax consequences. The IRS requires that a minimum rate of interest be charged on loans. If you do not charge at least the minimum rate, the IRS will still require you to pay tax on the difference between the interest you should have charged and what you actually charged. If these excess amounts become large, or if the loan is forgiven, there may also be gift tax implications.

There are some exceptions, though. Loans of up to $10,000 generally can be made at a lower (or zero) rate of interest, as long as the proceeds aren’t invested. Loans between $10,001 and $100,000 are exempt from the minimum interest requirement as well, as long as the borrower’s investment income is $1,000 or less. If the investment income exceeds $1,000, you’ll be taxed on the lesser of this income or the minimum IRS interest.

For the IRS to treat the transaction as a loan and not a gift subject to the gift tax rules, the transaction must look like a loan. The borrower should have the ability to repay the principal and interest. A contract should be prepared which specifies the loan amount, interest rate, the payment dates and amounts, any security or collateral, as well as late fees and steps to be taken if the borrower doesn’t pay. Have the document signed and dated by all the parties.

Can you qualify for the home office deduction?

The home office deduction is available when you use part of your home regularly and exclusively as your primary place of business, or for meeting clients.

If you're an employee who works from home, there's an additional rule: The exclusive use must be for the convenience of your employer.

In either case, "exclusive" is defined as "all or nothing." Conduct any personal activities in the space you've designated as your office and the deduction is lost.

But satisfy the requirements and you can write off part of the expenses of running your home, including utilities, interest, and property taxes, as a business deduction. That means those costs can directly reduce business income, saving you income tax. If you're a sole proprietor, the deduction may also reduce self-employment tax. Though the amount you can claim is generally limited to business income, disallowed expenses can be carried forward to future years.

What are the drawbacks? One drawback to taking a home office deduction is the potential for depreciation "recapture" that may apply when you sell your home, potentially reducing the amount of gain you can exclude from income.

Supreme Court rules on health care law

On June 28, the Supreme Court ruled that the "Patient Protection and Affordable Care Act of 2010" was constitutional, including the provision in the law requiring individuals to have health insurance coverage starting in 2014.

Several provisions in the health care law had already gone into effect, and many new tax provisions are scheduled to take effect in 2013. These are the provisions you should factor into your tax planning for the rest of this year. A quick review of these tax provisions:

* Annual contributions to health flexible spending accounts (FSAs) will be limited to $2,500.

* The 7.5% income threshold for deducting unreimbursed medical expenses increases to 10% for those under age 65. Those 65 and older may continue to take an itemized deduction for medical expenses exceeding 7.5% of adjusted gross income through the year 2016.

* The payroll Medicare tax will increase from 1.45% of wages to 2.35% on amounts above $200,000 earned by individuals and above $250,000 earned by married couples filing joint returns.

* A new 3.8% Medicare tax will be imposed on unearned income for single taxpayers with income over $200,000 and married couples with income over $250,000.

Wedding bells ringing? Take care of taxes

Will wedding bells be ringing for you or a family

member this summer? If so, add tax updating to the long

list of things to do.

Here are some of the tax concerns newlyweds need to

take care of.

* Check the effect marriage will have on your tax bill.

  If both spouses work and earn about the same income,

  you may pay higher taxes due to the "marriage penalty."

  You may need to adjust your tax withholding to avoid

  a big tax bill next April, and perhaps even penalty

  and interest charges for underpayment of taxes.

* Notify the Social Security Administration if you

  change your name.

* Notify the IRS of your address change if you move to

  a new home.

* File new Forms W-4 at work to reflect your married

  status.

* If either of you has an IRA, check the effect marriage

  will have on the deductibility of contributions.

* Update your estate plan, making appropriate changes

  to wills, powers-of-attorney, health care directives,

  etc.

* Review the beneficiary designations on your retirement

  plans and insurance policies.

Watch out for bogus e-mails

The e-mail from your bank gets your attention right away. It says you need to log into your account in the next 48 hours to continue your online privileges. Something about a system upgrade. You wonder, is it legitimate? How can you know for sure?

Bogus e-mails designed to steal your identity, also known as phishing, are becoming a bigger problem these days. While they can take many different forms, most scams are designed to trick you into revealing personal information such as your social security number or online account password. Through clever use of logos and familiar-looking web addresses, these e-mails often appear to be an urgent message from your bank, mortgage lender, or e-mail provider.

You may not realize it, but thieves are especially eager to gain access to your web e-mail account. Why? Once a scammer has access to your e-mails, he or she can often figure out where you bank and detect clues to passwords you might use.

So what can you do to protect yourself? Take a moment and think before you click. Never respond to an e-mail asking for your social security number or birth date. You can almost bet that it is a scam. If an e-mail contains a website link that you are not familiar with, do not click on it. Instead, either go directly to the company’s trusted website, or contact them by phone.

Also remember that e-mail scams become more prevalent following a significant public event, such as a natural disaster or sudden stock market drop. Thieves will prey on your sympathies or fears during these times, so be extra careful when responding to appeals for charity or notices to update your financial records. Also, be leery of e-mails with demanding language or incorrect grammar -- both are potential signs of a counterfeit e-mail.

For preventive measures, try to use a different password for every online account, and change your passwords regularly. Make your passwords stronger by using combinations of letters, symbols, and numbers. Also, keep your computer anti-virus software up to date.

Finally, do your part to thwart these crimes by reporting any suspected scam e-mails to reportphishing@antiphishing.org. If you receive a bogus tax-related e-mail, forward it to the IRS at phishing@irs.gov. And of course, feel free to contact our firm if you need a second set of eyes on any suspicious-looking e-mail.

Don't let the tax tail wag the economic dog

Some tax-cutting strategies make good financial sense. Other tax strategies are simply bad ideas, often because tax considerations are allowed to override basic economics.

Here’s one example of the tax tail wagging the economic dog. Let’s say that you run an unincorporated consulting business. You want some additional tax write-offs, so you decide to buy $10,000 of office furniture that you don’t really need. If you’re in the 28% tax bracket and you deduct the entire cost, this purchase will trim your tax bill by $2,800 (28% of $10,000). But even after the tax break, you’ll still be out of pocket $7,200 ($10,000 minus $2,800) -- and stuck with furniture that you don’t really need.

There are other situations in which people often focus on tax considerations and ignore the bigger financial picture. For example:

* Someone increases the size of a home mortgage, solely to get a larger tax deduction for mortgage interest.

* A homeowner hesitates to pay off a mortgage, just to keep the interest deduction.

* Someone turns down extra income, because it might “push them into a higher tax bracket.”

* An investor holds an appreciated asset indefinitely, solely to avoid paying the capital gains tax.

Tax-cutting strategies are usually part of a bigger financial picture. If you are planning any tax-related moves, we can help make sure that everything stays in focus.

Two important deadlines in June

Don't overlook the following two deadlines this month

if they apply to you:

* The second quarterly payment of estimated income tax

  for 2012 is due on June 15.

* TD Form 90-22-1 (Report of Foreign Bank and Financial

  Accounts) must be filed by June 30. This report, also

  known as "FBAR," is required if you have an interest

  in foreign bank, savings, or investment accounts and

  the aggregate value of those accounts exceeded $10,000

  at any time last year. This is not a form that you

  file with your income tax return. Rather, it is a

  separate form filed with the Treasury Department in

  Detroit. The report must be received by the Treasury

  Department, not postmarked, by the June 30 due date.