Is Your Social Security Taxable? Here are the Rules

All Social Security recipients should receive a Form SSA-1099 from the Social Security Administration which shows the total amount of their benefits.

But many people may not realize the Social Security benefits they received in 2012 may be taxable. The information outlined below should help you determine whether those benefits you receive in 2012 are taxable or not.

1. How much, if any, of your Social Security benefits are taxable depends on your total income and marital status.

2. Generally, if Social Security benefits were your only income for 2012, your benefits are not taxable and you probably do not need to file a federal income tax return.

3. If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status (see below).

4. Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet. Your tax software program will also figure this for you.

5. You can do the following quick computation to determine whether some of your benefits may be taxable:

First, add one-half of the total Social Security benefits you received to all your other income, including any tax-exempt interest and other exclusions from income.
Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

6. The 2012 base amounts are:

$32,000 for married couples filing jointly.
$25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouse at any time during the year.
$0 for married persons filing separately who lived together during the year.

Confused? Give us a call. We’ll make sure you receive all of the Social Security benefits you’re entitled to.

While in the mode of holiday shopping, consider these 3 tax-smart purchases.

Make Charitable Contributions

Consider making charitable contributions before year-end both to obtain the maximum tax deduction and to fulfill any charitable programs or commitments you may have established for the year.

Pay Tax-Deductible Expenses

Consider paying tax-deductible expenses prior to year-end. Some common examples are real estate taxes, quarterly state or local income taxes, investment-related expenses, and dues. These must be paid by December 31 to obtain a deduction this year. Please call us if you’d like to discuss these deductions further.

Buy a New Car

If you need a new car, now is a great time to purchase or lease one. Frequently, dealers are anxious to clear out last year’s inventory prior to year-end. In making your choice, consider the federal tax (and occasional state tax) advantages for buying fuel-efficient vehicles such as plug-in hybrids and electric vehicles.

Whether you file as a corporation or sole proprietor here’s what business owners need to know about tax changes in 2012.

Standard Mileage Rates
The standard mileage rate in 2012 is 55.5 cents per business mile driven, 23 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.

Health Care Tax Credit for Small Businesses
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000. The credit can be claimed in tax years 2010 through 2013 and for any two years after that. The maximum credit that can be claimed is an amount equal to 35% of premiums paid by eligible small businesses.

Credit for Hiring Qualified Veterans
The maximum credit that employers can take for hiring qualified veterans in 2012 is $9,600 per worker for employers that operate for-profit businesses, or $6,240 per worker for tax-exempt organizations. See Tax Credit for Employers Hiring Veterans This Year (below) for additional details on this tax credit.

Section 179 Expensing
In 2012 the maximum Section 179 expense deduction for equipment purchases is $139,000 ($174,000 for qualified enterprise zone property) of the first $560,000 of certain business property placed in service during the year. The bonus depreciation is 50% for qualified property that exceeds the threshold amount.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.

Here’s what individuals and families need to know about tax changes for 2012.

From personal deductions to tax credits and educational expenses, many of the tax changes relating to individuals remain in effect through 2012 and are the result of tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on December 17, 2010.

Personal Exemptions
The personal and dependent exemption for tax year 2012 is $3,800, up $100 from 2011.

Standard Deductions
In 2012 the standard deduction for married couples filing a joint return is $11,900, up $300 from 2011 and for singles and married individuals filing separately it’s $5,950, up $150. For heads of household the deduction is $8,700, up $200 from 2011.

The additional standard deduction for blind people and senior citizens in 2012 is unchanged from 2011, remaining at $1,150 for married individuals and $1,450 for singles and heads of household.

Income Tax Rates
Due to inflation, tax-bracket thresholds will increase for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700 for a married couple filing a joint return, up from $69,000 in 2011.

Estate and Gift Taxes
The recent overhaul of estate and gift taxes means that there is an exemption of $5.12 million per individual for estate, gift and generation-skipping taxes, with a top rate of 35%. The annual exclusion for gifts remains at $13,000.

Alternative Minimum Tax (AMT)
AMT exemption amounts for 2012 have reverted to 2000 levels and will remain significantly lower than in 2011 unless Congress takes action before year-end: $33,750 for single and head of household fliers, $45,000 for married people filing jointly and for qualifying widows or widowers, and $22,500 for married people filing separately.

Marriage Penalty Relief
For 2012, the basic standard deduction for a married couple filing jointly is $11,900, up $300 from 2011.

Pease and PEP (Personal Exemption Phaseout)
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations do not apply for 2012, but like many other tax provisions, are set to expire at the end of the year.

Flexible Spending Accounts (FSA)
FSA (Flexible Spending Arrangements) are limited to $2,500 per year starting in 2013 and indexed to inflation after that and applies only to salary reduction contributions under a health FSA. However, IRS guidance issued this year recognizes that the term “taxable year” refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.

Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.

Further, the IRS is providing relief for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.

Long Term Capital Gains
In 2012, long-term gains for assets held at least one year are taxed at a flat rate of 15% for taxpayers above the 25% tax bracket. For taxpayers in lower tax brackets, the long-term capital gains rate is 0%.

Individuals – Tax Credits

Adoption Credit
In 2012 a refundable credit of up to $12,650 is available for qualified adoption expenses for each eligible child. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) in excess of $189,710 and is completely phased out for taxpayers with modified adjusted gross income of $229,710 or more.

Child and Dependent Care Credit
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit
The $1,000 child tax credit has been extended through 2012 as well. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.

Earned Income Tax Credit (EITC)
For tax year 2012, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270 (up from $49,078 in 2011). The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Individuals – Education Expenses

Coverdell Education Savings Account
You can contribute up to $2,000 a year to Coverdell savings accounts in 2012. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.

American Opportunity Tax Credit
For 2012, the maximum Hope Scholarship Credit that can be used to offset certain higher education expenses is $2,500, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.

Employer Provided Educational Assistance
Through 2012, you, as an employee, can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.

Lifetime Learning Credit
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2012, The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

Student Loan Interest
For 2012 (same as 2011), the $2,500 maximum student loan interest deduction for interest paid on student loans is not limited to interest paid during the first 60 months of repayment. The deduction begins to phase out for married taxpayers filing joint returns at $125,000, and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Individuals – Retirement

Contribution Limits
For 2012, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000. For persons age 50 or older in 2012, the limit is $22,500 (up from $22,000 in 2011). Contribution limits for SIMPLE plans remain at $11,500 for persons under age 50 and $14,000 for persons age 50 or older in 2012. The maximum compensation used to determine contributions increases to $250,000.

Saver’s Credit
In 2012, the AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, $43,125 for heads of household, and $28,750 for married individuals filing separately and for singles.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.

Call your tax lawyer or CPA.  Why?  Because big federal tax changes that would kick in January 1 could boost your tax bill.

As I write this and the so-called “fiscal cliff” looms, it’s anyone’s guess exactly what 2013 taxes will be. In less than two months the Bush tax cuts expire.  Congress must decide what to do about this in the next six weeks; the problem is, right now Congress and the President are meeting behind closed doors. But here’s what we do know: Current tax rates will expire at year-end.  Higher taxes will likely be the case in 2013.  So here are some things you must consider now.

1. Cashing in.

If you want to sell your business (or some part of it) before potential tax hikes hit in 2013, see your tax professional without delay.

2.  Expensing Business Investments.

The amount of new equipment your business can expense under bonus depreciation rules and Section 179 has fallen in 2012. You were allowed to fully expense eligible property placed in service during 2011 under 100% bonus depreciation, but property placed in service in 2012 will qualify for only regular bonus depreciation, which allows you to deduct half of the cost of the property while the rest is depreciated using normal rules. This still provides an incentive for investment, especially because bonus depreciation is scheduled to expire altogether for property placed in service in. To qualify for bonus depreciation, property must generally have a useful life of 20 or fewer years under the modified accelerated cost recovery system (MACRS). The amount of business investment that you can expense under Section 179 has also fallen from $500,000 to $139,000 for tax years beginning in 2012 (with the phase-out dropping from $2 million to $560,000). As I write this, lawmakers were discussing adjustment to these expensing provisions for 2012 and 2013.  How this will wind up is anyone’s guess.  Bottom line is that if you can swing the expense, you’ll get some valuable tax breaks on equipment purchases made this year. Next year? Who knows. Stay tuned.

3. Accelerate key payouts and spending before the end of this year.

Potentially higher tax rates is reason to shift key expenses into this year, 2012. Specific strategies follow: 

• If there will be a bonus in your company, make it happen in 2012—don’t wait. If Congress were to just let the Bush tax cuts expire, the top income tax rate will rise from 35% today to 39.6% in 2013.There is also a new 3.8% Medicare surtax (part of the Affordable Care Act or “Obamacare”) that kicks in next year for higher-income households. The surtax is only charged on net investment income. If you have none, no tax. If you do have net investment income, you still might not owe the extra 3.8% tax.   For highly compensated employees paying out a bonus this year guarantees they will pay a maximum rate of 35%. Pay it out in January and they could be hit with a higher tax bill.

• Accelerate dividend payouts. If you pay yourself and shareholders an annual dividend, consider accelerating a 2013 payment into 2012. As most CFOs know, the current maximum tax rate on qualified dividends is 15%. Another expiring tax law would mean that come 2013 dividends will revert to the old (pre-Bush tax cut) system that taxed dividends as ordinary income. Again, that could be as much as 43.4% next year. This represents a huge increase in tax, so pay it now; your shareholders will thank you for it.

So what does this actually mean for tax planning?

There is definitely an important opportunity for year-end business tax planning. Interest rates are at near-historic lows, and the values of many assets have declined with the struggling economy — perfect conditions for property transfers. With the prospect of income tax increases also looming, taxpayers may also be tempted to accelerate tax into 2012 by deferring deductions and recognizing income. But a careful analysis of several factors should come first, and there are many reasons why accelerating tax is a bad idea.  See or call your tax professional today to pinpoint your own situation.

From time to time I’m asked just how the IRS goes about locating people who are in hiding and trying to avoid the payment of taxes. The answer to this question is given in the Internal Revenue Manual (IRM), which provides as follows:

For domestic accounts, research of the following resources is required:

• Telephone directories
• Information Return Program (IRP) data, using Corporate Files On-Line (CFOL) command codes SUPOL or IRPTR
• Postal tracers, when a field call to the master file address confirms the taxpayer is unable to locate or contact, see IRM 5.1.18.12, United States Postal Service, for additional guidance on postal tracers.
• For international accounts, the same sources will be checked whenever available for the country in question.
• For domestic accounts where the aggregate unpaid balance of assessments is over ≡ ≡ ≡ ≡ ≡ , attempt to develop leads by researching the following additional sources:
• Motor vehicle records
• Employment commission
• On-line courthouse records for real and personal property, if you have access to the appropriate on-line tools, see IRM 5.1.18.4, Real Property Records
• In-person courthouse records for real and personal property if you do not have access to the appropriate online tools .
• Local licensing authorities when a taxpayer has a business that requires a license
• On-line services that help in locating taxpayers, such as Accurint; follow security guidelines when using public internet search engines
• Conduct Currency and Banking Retrieval System (CBRS) research when IRPTR reflects that a taxpayer has filed a Foreign Bank Account Reporting (FBAR) form to obtain the name of the bank where the account is located, the amount in the account, co-owners, and other useful information. See IRM 5.1.18.15, Foreign Bank and Financial Account Report.
• For international accounts, besides using these sources when and where practical, a Tax Attache could be consulted for further potential sources of value for the country in question.

The above list is not all inclusive. Local management may require that additional information sources be checked, for example U.S. Coast Guard and local licensing agencies where boat ownership is common.

For larger accounts, a field call to the taxpayer’s last known address is required. If it appears the taxpayer is still living at the address, but is unable to be contacted, check utility companies, to see who is paying the bills at the taxpayer’s address and how the bills are paid, for a possible levy source. In addition, a field call must be made to the courthouse to check real and personal property records if not available on-line. See IRM 5.1.18.4, Real Property Records.

Note: For taxpayers residing outside the United States, and territories other than Puerto Rico and the U.S. Virgin Islands, a field call may not be practical. Any taxpayer contact (including a field call) that requires foreign travel must be coordinated with the U. S. Competent Authority (delegated to the Deputy Commissioner (International), Large Business and International), who may authorize such travel based on treaties or other international arrangements.

Reminder:

W&I and SB/SE ACS call sites and tax examiners in the Collection Field function are exempt from the requirement to make field calls.

For Individual Master File (IMF) taxpayers, sole proprietor taxpayers, and for LLCs where an individual owner is identified as the liable taxpayer, secure and analyze a full credit report if the aggregate unpaid balance of assessments exceeds a certain amount . This includes cases where recently filed returns will result in liabilities in excess of a certain amount . For additional information on credit reports see IRM 5.1.18.17, Consumer Credit Reports.

When the aggregate unpaid balance of assessments exceeds ≡ ≡ ≡ ≡ ≡ , research the following additional sources:

Check CC AMDIS to determine if there is a current open examination. If there is an open examination, contact the revenue agent to see if he/she has a new address for the taxpayer or has identified any additional assets.

Request a passport check when the taxpayer travels overseas frequently or there is reason to believe the taxpayer travels overseas frequently in accordance with IRM 5.1.18.13, United States Passport Office.

Consider requesting that a taxpayer be placed on the Department of Homeland Security lookout list if you have been unable to locate or contact the taxpayer and if they live outside the U.S. or travel outside the U.S. See IRM 5.1.12.26, Treasury Enforcement Communications System.

Here’s the bottom line from attorney John Ellsworth: it’s never productive to hide from the IRS. Most tax problems can be quickly and efficiently resolved to your satisfaction and to the satisfaction of the IRS if you will just contact me, John Ellsworth, and discuss with me your worries and concerns. This kind of problem only gets worse with time, so please…call me now. All such discussions are confidential and cannot be obtained from me by the IRS or any other federal or state agency.

Why Did I Get Selected For Audit?

Did you know there’s no limit to the number of times you can submit an Offer In Compromise for consideration by the IRS? This fact can lead to some creative lawyering by your tax lawyer. Here’s how that might happen.

The Internal Revenue Manual at 5.8.2.4.1 provides examples of “hardship” and “equity” cases in almost laughingly obvious situations. But the IRS needs to provide more specific examples of hardship that more closely approximate what tax lawyers see over and over again among their clients: the unanticipated medical retirement, the disabling disease, the abandoned mother with four children, the destitute senior couple. These are all examples of people living in situations where a hardship discharge just might be accepted by the IRS. So go ahead and make such an offer, knowing that your right to make a subsequent offer more along common grounds (e.g. inability to pay) can still be used even if the hardship approach is denied. In fact, making the “inability to pay” offer can thereafter be enhanced by what you’ve learned in making the hardship offer. What I’m saying is that you’ve learned enough at this point of the offer process to indeed combine the two for a second tier of type of offers, part hardship and part inability to pay.

Thus the tax lawyer should–in every case that justifies such an approach–submit initial offer proposals containing smaller offer amounts based on equity or hardship, rather than the formula amounts found in “inability to pay,” clearly indicating the taxpayer’s position while making the taxpayer’s case.

Finally, don’t be afraid to file an appeal where necessary or even multiple appeals. That’s what the process is in place for, to be used by deserving taxpayers in trouble with their tax debt.

What If You Don’t File Your Tax Return?

One thing is for sure with the IRS, your non-filing will eventually float to the surface and you’ll be found out. What happens if you don’t file? Tell the truth, most people–and rightly so–are too frightened to find out. Warning: Never mess around with the IRS. Depending on the nature of the actual return, you are either faced with paying interest or even worse, penalties. Any tax audit lawyer can recite countless tales of people who fudged on their expenses and wound up owing more in interest and penalty than the tax itself. Read the rest of this entry »

When a case is opened, it is assigned to IRS special agents from the Criminal Investigation Division (CID) of the IRS. Usually, there is a joint investigation, utilizing revenue agents (auditors) who might already be familiar with the case as well as CID. Joint investigations usually arise from revenue agent audits that are accepted as fraud referrals by CID. In such cases, the special agent works cooperatively with the revenue agent to develop the tax fraud case.

Special agents usually perform a great deal of background work even before they make the initial direct contact with the taxpayer. By the time you get the knock on the door and the badges shoved at you, the CID has already done 85% of its work. They anticipate that taxpayers will refuse to cooperate with their investigation. The background work therefore yields information they might not otherwise get and also arms them for interviews with the taxpayer. Read the rest of this entry »