In light of the events of the last year, particularly Hurricane Sandy, the preparation and filing of our 2012 individual and business income tax returns could involve the consideration of a casualty loss for far too many of us.

Casualty Losses:

If your home or other property is damaged as a result of a fire, earthquake, flood, hurricane, vandalism or similar event, you may be able to take a deduction for your loss.  To be deductible, the property must be damaged, lost or destroyed by a sudden, unexpected or unusual event.  If you have suffered any losses, there are several tax issues that you need to consider, including valuation of the property, limitations and adjustments to the loss, insurance reimbursements and recoveries, and other factors.

The amount of any deductible loss is generally determined by the difference in the fair market value of the property before and after the loss, or in some cases, the cost of repairs necessary to restore the property to its original (not improved) condition.  However, the amount of the deductible loss cannot exceed your cost basis in the property.  In the case of a home or building, the cost basis of the building must be determined separate from the cost basis of the land.

The amount of the deductible loss is further reduced by any amounts covered by your insurance company, regardless of whether or not you file a claim.  After the loss is determined and the insurance reimbursement is subtracted, the loss deduction is generally reduced by $100 per casualty and by 10 percent of your adjusted gross income.

Of course, documentation will be required to support any deduction, which could include appraisals, contracts, photographs, receipts, etc.  Obtaining a written appraisal from a qualified appraiser to document the post-casualty, reduced value of your property could be the difference in a loss deduction that would stand up to an Internal Revenue Service examination, and could also assist with any insurance claim filings.

While recovering from a casualty loss takes time and planning, the tax considerations need to be addressed now.  There are many things to consider, and our office is available to answer any tax-related questions you may have.

Other News:

For many individuals and businesses affected by Hurricane Sandy, the Internal Revenue Service has extended the deadline for various tax filings and payments that would otherwise be due between October 31, 2012 and March 15, 2013, to April 1, 2013.

This filing and payment relief applies only to taxpayers located in:

·         New Jersey – Monmouth and Ocean counties
·         New York – Nassau, Queens, Richmond and Suffolk
counties

Affected filings and payments:

·         Individual estimated tax payments normally due
January 15, 2013.
·         Payroll and excise tax returns for the third and fourth
quarters of 2012, normally due October 31, 2012 and
January 31, 2013, respectively.
·         Calendar year corporate income tax returns due March
15, 2013.
·         Tax-exempt organization Form 990 series returns with
an original or extended due date between October
31, 2012 and March 15, 2013.

The recently enacted 2012 American Taxpayer Relief Act is a sweeping tax package that includes, among many other items, permanent extension of the Bush-era tax cuts for most taxpayers, revised tax rates on ordinary and capital gain income for high-income individuals, modification of the estate tax, permanent relief from the Alternative Minimum Tax for individual taxpayers, limits on the deductions and exemptions of high-income individuals, and a host of retroactively resuscitated and extended tax breaks for individual and businesses.

Because of the amount and complexity of many of these provisions, we have addressed them in three E-mail Bulletins over the last few weeks:

• Two Weeks Ago:  Provisions that are retroactive to 2012, including some that require action this month.
• Last Week:  Provisions that affect our business clients for 2013 and beyond.
• Today:  Individual provisions that take effect in 2013.

Here’s a look at the key elements of the package:

• Tax rates:  For tax years beginning in 2013, the 10%, 15%, 25%, 28%, 33% and 35% tax brackets from the Bush-era tax cuts will remain in place and are made permanent.  However, there will be a new 39.6% rate, which will begin at the following thresholds: $400,000 (single), $425,000 (head of household), $450,000 (joint filers and qualifying widow(er)s), and $225,000 (married filing separately). These dollar amounts will be inflation-adjusted for tax years after 2013.
• Estate tax:  The new law prevents steep increases in estate, gift and generation-skipping transfer (GST) taxes that were slated to occur for individuals dying and gifts made after 2012 by permanently keeping the exemption level at $5,000,000 (indexed for inflation). However, the new law also permanently increases the top estate, gift, and GST tax rate from 35% to 40% It also continues the portability feature that allows the estate of the first spouse to die to transfer his or her unused exclusion to the surviving spouse.
• Capital gains and qualified dividends rates:  The new law retains the 0% tax rate on long-term capital gains and qualified dividends, modifies the 15% rate, and establishes a new 20% rate. Beginning in 2013, the rate will be 0% if income falls below the 25% tax bracket; 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if income falls in the 39.6% tax bracket. It should be noted that the 20% top rate does not include the new 3.8% surtax on investment-type income and gains for tax years beginning after 2012, which applies on investment income above $200,000 (single) and $250,000 (joint filers) in adjusted gross income. So actually, the top rate for capital gains and dividends beginning in 2013 will be 23.8% if income falls in the 39.6% tax bracket. For lower income levels, the tax rate will be 0%, 15%, or 18.8%.
• Personal exemption phase-out:  Beginning in 2013, personal exemptions will be phased-out if your adjusted gross income (AGI) is over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers). Taxpayers can claim exemptions for themselves, their spouses and their dependents. Last year, each exemption was worth $3,800.  Under the phase-out, the total amount of exemptions that can be claimed is reduced by 2% for each $2,500, or portion thereof, by which your AGI exceeds the applicable threshold amount, which will be inflation-adjusted for tax years after 2013.
• Itemized deduction limitation:  Beginning in 2013, itemized deductions will be limited for AGI over $250,000 (single), $275,000 (head of household) and $300,000 (joint filers).  The total amount of your itemized deductions will be reduced by 3% of the amount by which your AGI exceeds the applicable threshold amount, with the reduction not to exceed 80% of your otherwise allowable itemized deductions. The threshold amounts will be inflation-adjusted for 2014 and beyond.
• Alternative Minimum Tax (AMT) relief:  As addressed in our first E-mail Bulletin of this series, the new law provides permanent AMT relief, increasing the AMT exemption amounts to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately for 2012. In addition, for tax years beginning in 2013, these exemption amounts will be indexed for inflation.
• Tax credits for low to middle wage earners:  The new law extends for five years the following items:

(a) The American Opportunity tax credit, which
provides up to $2,500 in refundable tax credits
for undergraduate college education.
(b) Eased rules for qualifying for the refundable child
credit.
(c) Various earned income tax credit (EITC) changes.

• Pension provision:  For transfers after 2012, a plan provision in an applicable retirement plan (which includes a qualified Roth contribution program) can allow participants to elect to transfer amounts to designated Roth accounts with the transfer being treated as a taxable qualified rollover contribution.
• Payroll tax “Holiday” was not extended:  The 2% Social Security payroll tax cut was allowed to expire at the end of 2012.

We hope this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to contact our office.

The recently enacted 2012 American Taxpayer Relief Act is a sweeping tax package that includes, among many other items, permanent extension of the Bush-era tax cuts for most taxpayers, revised tax rates on ordinary and capital gain income for high-income individuals, modification of the estate tax, permanent relief from the Alternative Minimum Tax for individual taxpayers, limits on the deductions and exemptions of high-income individuals, and a host of retroactively resuscitated and extended tax breaks for individual and businesses.

Because of the amount and complexity of many of these provisions, we are addressing them in three E-mail Bulletins:

• Last Week:  Provisions that are retroactive to 2012, including some that require action this month.
• Today:  Provisions that affect our business clients for 2013 and beyond.
• Next Week:  Individual provisions that take effect in 2013.

The following depreciation provisions are retroactively extended by the Act:

•  Extension of additional first-year depreciation. For qualified property acquired and placed in service during 2012 the additional first-year depreciation is 50% of the cost. The new law extends this additional first-year depreciation for investments placed in service before Jan. 1, 2014.
• Increased expensing limitations and treatment of certain real property as Section 179 property.  The new law provides that for tax years 2012 or 2013, a small business taxpayer will be allowed to write off up to $500,000 of capital expenditures subject to a phase-out once capital expenditures exceed $2,000,000. For tax years beginning after 2013, the maximum expensing amount will drop to $25,000 and the phase-out level will drop to $200,000.  The new law also extends the rule which treats off-the-shelf computer software as qualifying property through 2013.
• 15-year straight line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
• 7-year recovery period for motorsports entertainment complexes.
• Accelerated depreciation for business property on an Indian reservation.
• Special expensing rules for certain film and television productions.
• The election to expense mine safety equipment.

The following business credits and special rules are also extended through 2013:

• The research credit.
• The temporary minimum low-income tax credit rate for non-federally subsidized new buildings.
• The Indian employment tax credit.
• The new markets tax credit.
• The railroad track maintenance credit.
• The mine rescue team training credit.
• The employer wage credit for employees who are active duty members of the uniformed services.
• The work opportunity tax credit.
• The enhanced charitable deduction for contributions of food inventory.
• Allowance of the domestic production activities deduction for activities in Puerto Rico.
• Exclusion from a tax-exempt organization’s unrelated business taxable income (UBTI) of interest, rent, royalties, and annuities paid to it from a controlled entity.
• Treatment of certain dividends of regulated investment companies (RICs) as “interest-related dividends”.
• Inclusion of RICs in the definition of a “qualified investment entity”.
• Exclusion of 100% of gain on certain small business stock.
• Basis adjustment to stock of S corporations making charitable contributions of property in tax years beginning before Dec. 31, 2013.
• The reduction in S corporation recognition period for built-in gains tax is extended through 2013, with a 5-year period instead of a 10-year period.
• Various empowerment zone tax incentives, including the designation of an empowerment zone and of additional empowerment zones.
• Tax-exempt financing for New York Liberty Zone is extended for bonds issued before Jan. 1, 2014.
• Temporary increase in the limit on cover-over rum excise taxes to Puerto Rico and the Virgin Islands.
• American Samoa economic development credit.

We hope this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to contact our office.

The recently enacted 2012 American Taxpayer Relief Act is a sweeping tax package that includes, among many other items, permanent extension of the Bush-era tax cuts for most taxpayers, revised tax rates on ordinary and capital gain income for high-income individuals, modification of the estate tax, permanent relief from the Alternative Minimum Tax for individual taxpayers, limits on the deductions and exemptions of high-income individuals, and a host of retroactively resuscitated and extended tax breaks for individual and businesses.

Because of the amount and complexity of many of these provisions, we will be addressing them in three E-mail Bulletins over the next few weeks:

• Today:  Provisions that are retroactive to 2012, including some that require action this month.
• Next Week:  Provisions that affect our business clients for 2013 and beyond.
• Two Weeks:  Individual provisions that take effect in 2013.

Here’s a look at the key elements of the package that are retroactive to 2012:

·     The new law extends the following items for 2012 and 2013:

• The deduction for certain expenses of elementary and secondary school teachers.
• The parity for the exclusions for employer-provided mass transit and parking benefits.
• The deductibility of mortgage insurance premiums as qualified residence interest.
• The option to deduct state and local general sales taxes in lieu of state and local income taxes.
• The special rule for contributions of capital gain real property made for conservation purposes.
• The above-the-line deduction for qualified tuition and related expenses.
• Tax-free distributions from Individual Retirement Accounts for charitable purposes. Because 2012 has already passed, a special rule permits distributions taken in 2012 to be transferred to charities for a very limited period in 2013.

·     Alternative Minimum Tax (AMT) relief:

• The new law provides permanent AMT relief, which increases the individual AMT exemption amounts for 2012 to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. In addition, for 2013 and beyond, these exemption amounts will be indexed for inflation.

·     Energy-related tax credits reinstated for 2012 and 2013:

• The non-business energy property credit for energy-efficient existing homes. Taxpayers can claim a 10% credit on the cost of qualified energy efficiency improvements and residential energy property expenditures, with a lifetime credit limit of $500 ($200 for  windows and skylights).
• The alternative fuel vehicle refueling property credit. Taxpayers can claim a 30% credit for qualified alternative fuel vehicle refueling property, subject to the $30,000 and $1,000 thresholds.
• The credit for 2- or 3-wheeled plug-in electric vehicles.
• The cellulosic biofuel producer credit.
• The credit for biodiesel and renewable diesel.
• The production credit for Indian coal facilities.
• The credits with respect to facilities producing energy from certain renewable resources, including wind.
• The credit for energy-efficient new homes.
• The credit for energy-efficient appliances.
• The alternative fuels excise tax credits for sale or use of alternative fuels or alternative fuel mixtures.

We hope this information is helpful. If you would like more details about this or any other aspect of the new law, please do not hesitate to contact our office.

Social Security Earnings:

While most of us only think about Social Security when we are approaching retirement, wage earners and self-employed individuals of all ages should be reviewing their Social Security information annually to ensure they receive the benefits to which they are entitled at retirement and/or any Survivor’s Benefits, as may be applicable.

Within the next month, the Social Security Administration will be mailing the annual Earnings Record Statement.  Please review this carefully to ensure that your statement reflects your correct earnings for all years you were employed.  If any errors are found, we recommend that you contact the Social Security Administration as detailed in the statement to correct your earnings record.  Please note that the statement will only report your taxable earnings for each year which are limited to a statutory maximum as follows:

1937-1950                               $ 3,000
1951-1954                                  3,600
1955-1958                                  4,200
1959-1965                                  4,800
1966-1967                                  6,600
1968-1971                                  7,800
1972                                          9,000
1973                                        10,800
1974                                        13,200
1975                                        14,100
1976                                        15,300
1977                                        16,500
1978                                        17,700
1979                                        22,900
1980                                        25,900
1981                                        29,700
1982                                        32,400
1983                                        35,700
1984                                        37,800
1985                                        39,600
1986                                        42,000
1987                                        43,800
1988                                        45,000
1989                                        48,000
1990                                        51,300
1991                                        53,400
1992                                        55,500
1993                                        57,600
1994                                        60,600
1995                                        61,200
1996                                        62,700
1997                                        65,400
1998                                        68,400
1999                                        72,600
2000                                        76,200
2001                                        80,400
2002                                        84,900
2003                                        87,000
2004                                        87,900
2005                                        90,000
2006                                        94,200
2007                                        97,500
2008                                      102,000
2009-2011                              106,800
2012                                      110,100
2013                                      113,700

Social Security Tax:

Despite the recent “fiscal cliff” tax legislation, the Social Security tax increased for 2013 to the pre-2011 rate of 6.2% for employees and 12.4% for self-employed individuals.  Both rates are a 2% increase from the rates in effect for 2011 and 2012.

Applying for Medicare:

As we had discussed in our “Thinking of Retiring?” e-mail bulletin from earlier this year, everyone should apply for Medicare three months before their 65^th birthday, regardless of whether or not they are still working.  If you fail to do so then, when you do apply, your monthly medicare premiums will be higher and these higher premiums will continue for the remainder of your lifetime.

If you have already applied for Medicare, but did so after you turned 65, you may be able to reduce your monthly premiums.  If you applied after 65 because you were still employed and covered by your employer’s health insurance plan, a letter from your employer stating this can be presented to Medicare and your premiums can be reduced accordingly.

Medicare Premiums:

As many Medicare participants may have already noticed, the monthly base Medicare Part B premiums increased $5.00 per month for 2013 to $104.90 monthly.  However, as a result of the Federal health care legislation passed in 2010, the premiums can also be increased on an income-based formula based on your 2011 Adjusted Gross Income (AGI).  As such, your base premiums can be as high as $335.70 per month for single individuals where their AGI for 2011 was over $214,000 and for married couples where their 2011 AGI exceeded $428,000.

Over the last two days, the Senate and the House have passed legislation, which President Obama is expected to quickly sign into law, to avoid the fiscal cliff.

“The American Taxpayer Relief Act” (the Act), will prevent many of the tax hikes that were scheduled to go into effect yesterday and retain other favorable tax breaks that were scheduled to expire.  However, the Act would also increase income taxes for high-income individuals and increase transfer tax rates.  Highlights of the Act include the following:

• Raises the top tax rate to 39.6% for married couples earning over $450,000 and single taxpayers earning over $400,000 for 2013. In future years, these amounts will be indexed for inflation.
• Raises long-term capital gains and qualifying dividends tax rate to 20% (from 15%) for taxpayers in the 39.6% tax bracket for both regular and alternative minimum tax.
• Permanently extends Bush-era tax cuts from 2001 and 2003 for all other taxpayers.
• Reinstates the phase-out of personal exemptions and overall limitation on itemized deductions for married couples filing jointly earning over $300,000 and single taxpayers earning over $250,000.
• Raises the maximum estate tax rate to 40% but keeps the exemption amount at $5 million for 2013, which will be adjusted for inflation for future years.
• Extends for 5 years, through 2018, the American Opportunity Tax Credit for higher education expenses, and the special relief for families with three or more children for the refundable portion of the child tax credit and increased the percentage of the earned income tax credit.
• Patches the Alternative Minimum Tax for 2012 and adjusts the exemption amount for inflation going forward.
• Extends through 2013 the following individual tax benefits: above-the-line deduction for teacher expenses, relief from cancellation of debt income for principal residences, parity for employer-provided mass transit benefits, deduction for mortgage insurance premiums as interest, election to deduct state and local sales taxes in lieu of income taxes, above-the-line deduction for qualified education expenses, tax-free distributions from IRA accounts for charitable purposes.
• Extends through 2013 certain business tax provisions that expired at the end of 2011 including: the research credit, the new markets tax credit, railroad track maintenance credit, mine rescue team training credit, work opportunity credit, the Section 179 asset expensing limit at $500,000, Section 1202 stock exclusion at 100%, and empowerment zone incentives.
• Extends the 50% bonus depreciation through 2013.
• Extends through 2013 certain energy tax incentives that expired at the end of 2011 including: energy efficient credit for existing homes, alternative fuel vehicle refueling property credit, biodiesel and renewable diesel incentives, wind credit, energy efficient credit for new homes, and credit for manufacture of energy efficient appliances.

While the Act is intended to protect roughly 99 percent of Americans from an income tax increase, most will still end up paying more federal taxes in 2013.  That’s because this legislation did nothing to prevent a temporary reduction in the Social Security payroll tax, known as “the payroll tax holiday”, from expiring.  As such, all employees will immediately notice an increase in the Social Security tax being withheld from their paychecks from 4.2% to 6.2%.  The same increase will also affect self-employed taxpayers for 2013.

Of course, we will continue to monitor this legislation as it becomes law and will keep you abreast of the likely impact it may have for you.

Please feel free to contact our office to discuss how you might be affected by these recent developments and what techniques can be implemented to minimize their effect.

If you are required to make estimated tax payments, your fourth quarter federal and state estimated tax payments are due and payable on January 15, 2013. If you anticipate that your taxable income for 2012 will be considerably different from 2011, please contact our office immediately so that we can recalculate your payment.

Please mail your federal estimated tax voucher with your check or money order payable to the “United States Treasury.” Write your social security number and “2012 Form 1040-ES” on your check or money order. Also include your address and daytime phone number. Do not send cash. Enclose, but do not staple or attach, your payment with the voucher. If you are filing a joint estimated tax payment voucher, use the social security number that will appear first on your joint return. However, if you and your spouse plan to file separate returns, file separate vouchers instead of a joint voucher.   If you file state estimated tax payments please follow the instructions as were provided with your return.

The envelope(s) must be postmarked by January 15, 2013. (*)

Electronic payment options are a convenient, safe, and secure alternative to paying by mail. You can authorize an electronic funds withdrawal, use a credit or debit card, or enroll in the U.S. Treasury’s Electronic Federal Tax Payment System (EFTPS).  For information on paying taxes electronically, you can go to www.irs.gov/e-pay.

Please call our office if you have any questions regarding your estimated tax payment(s), or if you would like to discuss the alternative methods of paying your estimated tax(es).

(*)  In the aftermath of Hurricane Sandy, the Federal government has postponed this payment deadline until February 1, 2013 for individuals in New Jersey and several counties in Connecticut and New York.  Please note that your state payment deadline remains January 15, 2013.

Things to consider!
Retirement can have more than one meaning these days.  It can mean that you have applied for Social Security retirement benefits or that you are no longer working.  Or it can mean that you have chosen to receive Social Security while still working, either full or part-time.  All of these choices are available.  Your retirement decisions can have a very real effect on your ability to maintain a comfortable retirement. If you retire early, you may not have enough income to enjoy the years ahead of you.  Likewise, if you retire later, you will have a larger income, but fewer years to enjoy it.  Everyone needs to try to find the right balance, based on his or her own circumstances.

What is the best option for you?
Each situation is different.  That is why Social Security has created several retirement planners to help you decide what would be best for you and your family.  Social Security has a new online calculator that can provide immediate and accurate retirement benefit estimates to help you plan for your retirement. The online Retirement Estimator is a convenient, secure and quick financial planning tool.  It uses your own earnings record information, thereby eliminating any need to manually key in years of earnings information.  The estimator also will allow you to create “what if” scenarios.  You can, for example, change your “stop work” date or expected future earnings to create and compare different retirement options.

To use the Retirement Estimator, go to the website at www.socialsecurity.gov/estimator.

There is an additional item you should remember as you crunch the numbers for your retirement.  You may need your income to be sufficient for a long time, as people are living longer than ever before, and generally, women tend to live longer than men.  For example:

• The typical 65-year-old today will live to age 83;
• One in four 65-year-olds will live to age 90; and
• One in 10 65-year-olds will live to 95.

Once you decide on the best age for you to actually retire, remember to complete your application three months before the month in which  you want retirement benefits to begin.

It is easy to apply online for benefits.
The easiest way to apply for Social Security retirement benefits is to go online at www.socialsecurity.gov/applyforbenefits. If you do not have access to the Internet, you can call 1-800-772-1213 between 7 a.m. and 7 p.m., Monday through Friday, to apply by phone. You can also apply at any Social Security office. To avoid having to wait, call first to make an appointment.

Monthly benefit amounts differ based on the age you decide to start receiving benefits.
Example assumes a benefit of $1,000 at a full retirement age of 66.
Age   Monthly benefit amount
62        $   750
63        $   800
64        $   866
65        $   933
66        $1,000
67        $1,080
68        $1,160
69        $1,240
70        $1,320

What about Medicare?
Even if you do not plan to receive monthly benefits, you should sign up for Medicare three months before reaching age 65.  Otherwise, your Medicare could be delayed and you could be charged higher premiums. Even if you do not plan to receive monthly benefits, you should sign up for Medicare three months before reaching age 65. Otherwise, your Medicare medical insurance as well as prescription drug coverage could be delayed and you could be charged higher premiums. For more information about eligibility and costs, visit www.mediare.gov.

Receiving benefits while you work.
When you reach your full retirement age, you can work and earn as much as you want and still receive your full Social Security benefit payment.  If you are younger than full retirement age and if your earnings exceed certain dollar amounts some of your benefit payments during the year will be withheld. This does not mean you must try to limit your earnings.  If Social Security withholds some of your benefits because you continue to work, they will pay you a higher monthly benefit amount when you reach your full retirement age.  In other words, if you would like to work and earn more than the exempt amount, you should know that it will not, on average, reduce the total value of lifetime benefits you receive from Social Security and may actually increase them. After you reach full retirement age, Social Security will recalculate your benefit amount to give you credit for any months in which you did not receive some benefit because of your earnings.  In addition, as long as you continue to work, Social Security will check your record every year to see whether the additional earnings will increase your monthly benefit. Many people can continue to work and still receive retirement benefits.  If you want more information on how earnings affect your retirement benefits, ask for how Work Affect Your Benefits (Publication No. 05-10069), which has current annual and monthly earnings limits, and is available on the Social Security website.

Retirement age consideration.

Full Retirement Age
For persons born during the years 1943-1954, the full retirement age is 66.  If you were not born in this period, you can find your full retirement age on the Social Security website.

Retiring Early
If you have earned 40 credits you can start receiving Social Security benefits at 62 or at any month between 62 and full retirement age.  However, your benefits will be reduced based on the number of months you receive benefits before you reach full retirement age. If your full retirement age is 66, benefits will be reduced:

• 25 percent at age 62;
• 20 percent at age 63;
• 13 1/3 percent at age 64; or
• 6 2/3 percent at age 65.

Delaying Retirement
You may decide to wait beyond your full retirement  age before choosing to receive benefits.  If so, your benefit will be increased by a certain percentage for each month you do not receive benefits between your full retirement age and age 70.  This table shows the rate your benefits increase if you delay retirement.

Year of Birth   Yearly Increase Rate
1937-1938                   6.5 %
1939-1940                   7.0 %
1941-1942                   7.5 %
1943 or later                8.0 %

Rules that May Affect Your Survivor
If you are married and die before your spouse, he or she may be eligible for a benefit based on your work record.  If you start benefits before your full retirement age, the Social Security Administration cannot pay your surviving spouse a full benefit from your record. If you wait until after your full retirement age to begin benefits, the surviving spouse benefits based on your record will be higher.

2012 began with great uncertainty over federal tax policy and now, with the end of the year approaching, that uncertainty appears to be far from any long-term resolution. 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 scheduled to expire after 2012. At the same time, the federal government will be under sequestration, which imposes across-the-board spending cuts after 2012. The combination of all these events has many referring to 2013 as “taxmeggedon.”
Expiring incentives:
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 zero 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 Tax Code, will be cut in half. Millions of taxpayers would be liable for the alternative minimum tax (AMT) because of expiration of the AMT “patch.” Countless other incentives for individuals would 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” situations 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 to avoid being surprised in 2013 is to adjust your income tax withholding. Keep in mind that the current two percent payroll tax holiday is also scheduled to expire after 2012 so it is a good time to review if you are having too much or too little federal income tax withheld from your 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 if 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 tax 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 you must first balance short-term gains with short-term losses and long-term ones with long-term losses. Remember also that the “wash sale rule” generally prohibits you from claiming a tax-deductible loss on a security if you repurchase the same or a substantially identical asset within 30 days of the sale.
Education expenses: Taxpayers with higher educational expenses may want to consider the scheduled expiration of the American Opportunity Tax Credit (AOTC) 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. Another popular education tax incentive, the Lifetime Learning Credit, is 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 your current occupation. You may not deduct expenses you incur while looking for a job in a new occupation. Examples of job search expenses are unreimbursed employment and outplacement agency fees you pay while looking for a job in your present occupation. Travel expenses to look for a new job may be deductible. The amount of job search expenses that you can claim on your tax return is limited. You can claim the amount of expenses only to the extent that they, together with other “miscellaneous” deductions exceed two percent of your 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 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 deduction. A special rule for contributing IRA assets to a charity by individuals age 70½ and older expired after 2011 but could be renewed for 2012.
New Medicare taxes
In 2013, two new taxes kick-in. The Patient Protection and Affordable Care Act (PPACA) imposes an additional 0.9 percent Medicare tax on wages and self-employment income and a 3.8 percent Medicare contribution tax. The 3.8 percent Medicare contribution tax will apply after 2012 to single individuals with a modified adjusted gross income (MAGI) in excess of $200,000 and married taxpayers with an MAGI in excess of $250,000. MAGI for purposes of the Medicare contribution tax includes wages, salaries, tips, and other compensation, dividend and interest income, business and farm income, realized capital gains, and income from a variety of other passive activities and certain foreign earned income. For individuals liable for the tax, the amount of tax owed will be equal to 3.8 percent multiplied by the lesser of (1) net investment income or (2) the amount by which their MAGI exceeds the $200,000/$250,000 thresholds. Taxpayers with MAGIs below the $200,000/$250,000 thresholds will not be subject to the 3.8 percent tax.
More changes for 2013
Many employers with health flexible spending arrangements (health FSAs) limit salary reduction contributions to between $2,500 and $5,000. Effective 2013, the PPACA requires health FSAs under a cafeteria plan to limit contributions through salary reductions to $2,500. After 2013, the $2,500 limitation is scheduled to be adjusted for inflation. Individuals with unused health FSA dollars should consider spending them before year-end, or a 2½ month grace period if applicable, to avoid the “use it or lose it” rule. Keep in mind that health FSA dollars cannot be used for over-the-counter medications (except for insulin) after 2011.
Additionally, the threshold to claim an itemized deduction for unreimbursed medical expenses increases from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI after 2012. The PPACA provides a temporary exception for individuals (or their spouses) who are age 65 and older. This exception ends after 2017. While many medical expenses cannot be timed for tax-deduction purposes, batching expenses into 2012, when the threshold is 7.5 percent, may make it more likely that the expenses will exceed that threshold.
Looking ahead
In July 2012, the House and Senate passed competing bills to extend many of the expiring incentives one more year. Both bills would extend the current income tax rates (10, 15, 25, 28, 33, and 35 percent) through 2013. The House bill would extend the current capital gains and dividends treatment but the Senate bill would extend the tax favorable rates only for individuals with incomes below $200,000 (families with incomes below $250,000). For income in excess of $200,000/$250,000 the tax rate on capital gains and dividends would be 20 percent. Both bills would extend the $1,000 child tax credit through 2013 and provide for an AMT patch for 2012 (the House bill also provides an AMT patch for 2013).
At this time, it is increasingly likely that the fate of all the expiring tax provisions will be decided by the lame-duck Congress after the November elections. Although the House and Senate bills passed in July differ, they have many points in common; the most important being that lawmakers could agree on a one-year extension of the Bush-era tax cuts. However, some observers anticipate no resolution until January 2013 or beyond.
Today’s uncertainty makes doing nothing or adopting a wait and see attitude very tempting. Multi-year tax planning, which takes into account a variety of possible scenarios and outcomes, however, can provide a win-win combination irrespective of what happens. Please contact our office for more details on how we can customize a tax strategy for you in uncertain times.

Your third quarter federal and state estimated tax payments are due and payable on September 17, 2012. If your 2011 return has been filed, the payment amount is based on your taxable income for 2011. If your 2011 return has not been filed, or if you anticipate that your taxable income for 2012 will be considerably different from 2011, please contact our office immediately so that we can recalculate your payment.

Mail your federal estimated tax voucher with your check or money order payable to the “United States Treasury.” Write your social security number and “2012 Form 1040-ES” on your check or money order. Also include your address and daytime phone number. Do not send cash. Enclose, but do not staple or attach, your payment with the voucher. If you are filing a joint estimated tax payment voucher, use the social security number that will appear first on your joint return. However, if you and your spouse plan to file separate returns, file separate vouchers instead of a joint voucher.   If you file state estimated tax payments please follow the instructions as provided with your return.

The envelope must be postmarked by September 17, 2012.

However, electronic payment options are a convenient, safe, and secure alternative to paying by mail. You can authorize an electronic funds withdrawal, use a credit or debit card, or enroll in the U.S. Treasury’s Electronic Federal Tax Payment System (EFTPS)®.

For information on paying taxes electronically, go to www.irs.gov/e-pay.

Please call our office if you have any questions regarding your estimated tax payment, or if you would like to discuss the alternative methods of paying your estimated tax.