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.