Just after everyone's favorite time of year comes everyone's least favorite:

Tax season.

But it doesn't have to be stressful. In fact, January is the perfect time to prepare and organize for the filing dates ahead, said public accountant David Riggs, owner of Accounting Services of York in Springettsbury Township.

Riggs -- who purchased the firm in 2009 -- offered a few tips for those who want to start the season off right:

GET ORGANIZED >> "If you don't have a filing system, January's the perfect time to start," Riggs said. "They can start fresh and put everything in the files instead of a shoebox. We see a lot of shoeboxes."

There are many apps available for smart phones and tablets that can help you in this quest.

Riggs recommends one called "Tax Pocket," which, he said, is sanctioned by the National Association of Tax Professionals.

"It helps you keep your receipts organized and track miles," he said. "It emails your accountant at the end of the year."

CHARITABLE CONTRIBUTIONS >> If a contribution is made before Dec. 31, the deduction will count on this year's filing, Riggs said.

This works well for people who itemize -- a way to reduce your taxable income by reporting things such as property taxes and mortgage interest.

If you're donating clothing or other items to, say, charities such as Goodwill or Salvation Army, make sure the receipt you are given includes a dollar figure, Riggs said.

Your accountant -- or whoever does the taxes in your family -- will need that information for filing.

RETIREMENT ACCOUNTS >> If you're saving for retirement, make a contribution to an existing account through April 15, said Riggs.

If you're planning to start a new account and want it included on this year's taxes, do so by Dec. 31.

Contributions to retirement accounts translate into "savers credit."

For a single person, the maximum savers credit is $1,000, Riggs said. For couples, it is $2,000.

The more you contribute, the larger the credit.

"If you put the max -- $5,000 -- into an IRA, you get the full $2,000," Riggs said. "It's a good sized credit."

KNOW YOUR DATES >> Filing season officially starts Jan. 31, Riggs said.

"The IRS pushed back the date because of the government shutdown last fall," he added. "You can still get your taxes done and be prepared. When the filling season starts, if you have your W2s, they can be filed."

This year, Riggs said, accounting professionals are being told that refunds will arrive much earlier than in years past -- about seven to 10 days.

As we approach year-end, it’s again time to focus on
last-minute moves you can make to save taxes—both on your 2013 return and in
future years.


For most individuals, the ordinary federal income tax rates
for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%.
However, the fiscal cliff legislation, passed early this year, increased the
maximum rate for higher-income individuals to 39.6% (up from 35%). This change
affects taxpayers with taxable income above $400,000 for singles, $450,000 for
married joint-filing couples, and $425,000 for heads of households. In addition,
the new 0.9% Medicare tax and 3.8% Net Investment Income Tax (NIIT) potentially
kick in when modified adjusted gross income (or earned income in the case of the
Medicare tax) goes over $200,000 for unmarried, $250,000 for married
joint-filing couples, which can result in a higher-than-advertised federal tax
rate for 2013.


Despite these tax increases, the current federal income tax
environment remains relatively favorable by historical standards. This letter
presents a few tax-saving ideas to get you started. As always, you can call on
us to help you sort through the options and implement strategies that make sense
for you.


Ideas for Your Business


Take Advantage of Tax Breaks for Purchasing
Equipment, Software, and Certain Real Property. If you have plans to
buy a business computer, office furniture, equipment, vehicle, or other tangible
business property or to make certain improvements to real property, you might
consider doing so before year-end to capitalize on the following generous, but
temporary tax breaks:


·        
Bigger Section 179 Deduction. Your business may be able to take
advantage of the temporarily increased Section 179 deduction. Under the Section
179 deduction privilege, an eligible business can often claim first-year
depreciation write-offs for the entire cost of new and used equipment and
software additions. (However, limits apply to the amount that can be deducted
for most vehicles.) For tax years beginning in 2013, the maximum Section 179
deduction is $500,000. For tax years beginning in 2014, however, the maximum
deduction is scheduled to drop to $25,000.


·        
Section 179 Deduction for Real Estate. Real property costs are
generally ineligible for the Section 179 deduction privilege. However, an
exception applies to tax years beginning in 2013. Under the exception, your
business can immediately deduct up to $250,000 of qualified costs for restaurant
buildings and improvements to interiors of retail and leased nonresidential
buildings. The $250,000 Section 179 allowance for these real estate expenditures
is part of the overall $500,000 allowance. This temporary real estate break will
not be available for tax years beginning after 2013 unless Congress extends
it.


Note: Watch out if your business is already expected
to have a tax loss for the year (or be close) before considering any Section 179
deduction, as you cannot claim a Section 179 write-off that would create or
increase an overall business tax loss. Please contact us if you think this might
be an issue for your operation.


·        
50% First-year Bonus Depreciation. Above and beyond the bumped-up
Section 179 deduction, your business can also claim first-year bonus
depreciation equal to 50% of the cost of most new (not used) equipment and
software placed in service by December 31 of this year. For a new passenger auto
or light truck that’s used for business and is subject to the luxury auto
depreciation limitations, the 50% bonus depreciation break increases the maximum
first-year depreciation deduction by $8,000 for vehicles placed in service this
year. The 50% bonus depreciation break will expire at year-end unless Congress
extends it.


Note: First-year bonus depreciation deductions can
create or increase a Net Operating Loss (NOL) for your business’s 2013 tax year.
You can then carry back a 2013 NOL to 2011 and 2012 and collect a refund of
taxes paid in those years. Please contact us for details on the interaction
between asset additions and NOLs.


Evaluate Inventory for Damaged or Obsolete Items.
Inventory is normally valued for tax purposes at cost or the lower of cost or
market value. Regardless of which of these methods is used, the end-of-the-year
inventory should be reviewed to detect obsolete or damaged items. The carrying
cost of any such items may be written down to their probable selling price (net
of selling expenses). [This rule does not apply to businesses that use the Last
in, First out (LIFO) method because LIFO does not distinguish between goods that
have been written down and those that have not].


To claim a deduction for a write-down of obsolete inventory,
you are not required to scrap the item. However, in a period ending not later
than 30 days after the inventory date, the item must be actually offered for
sale at the price to which the inventory is reduced.


Employ Your Child. If you are self-employed, don’t
miss one last opportunity to employ your child before the end of the year. Doing
so has tax benefits in that it shifts income (which is not subject to the Kiddie
tax) from you to your child, who normally is in a lower tax bracket or may avoid
tax entirely due to the standard deduction. There can also be payroll tax
savings since wages paid by sole proprietors to their children age 17 and
younger are exempt from both social security and unemployment taxes. Employing
your children has the added benefit of providing them with earned income, which
enables them to contribute to an IRA. Children with IRAs, particularly Roth
IRAs, have a great start on retirement savings since the compounded growth of
the funds can be significant.


Remember a couple of things when employing your child. First,
the wages paid must be reasonable given the child’s age and work skills. Second,
if the child is in college, or is entering soon, having too much earned income
can have a detrimental impact on the student’s need-based financial aid
eligibility.


Ideas for Maximizing Nonbusiness
Deductions


One way to reduce your 2013 tax liability is to look
for additional deductions. Here’s a list of suggestions to get you started:


Make Charitable Gifts of Appreciated Stock. If you
have appreciated stock that you’ve held more than a year and you plan to make
significant charitable contributions before year-end, keep your cash and donate
the stock (or mutual fund shares) instead. You’ll avoid paying tax on the
appreciation, but will still be able to deduct the donated property’s full
value. If you want to maintain a position in the donated securities, you can
immediately buy back a like number of shares. (This idea works especially well
with no load mutual funds because there are no transaction fees involved.)


However, if the stock is now worth less than when you
acquired it, sell the stock, take the loss, and then give the cash to the
charity. If you give the stock to the charity, your charitable deduction will
equal the stock’s current depressed value and no capital loss will be available.
Also, if you sell the stock at a loss, you can’t immediately buy it back as this
will trigger the wash sale rules. This means your loss won’t be deductible, but
instead will be added to the basis in the new shares.


Don’t Lose a Charitable Deduction for Lack of
Paperwork. Charitable contributions are only deductible if you have proper
documentation. For cash contributions of less than $250, this means you must
have either a bank record that supports the donation (such as a cancelled check
or credit card receipt) or a written statement from the charity that meets
tax-law requirements. For cash donations of $250 or more, a bank record is not
enough. You must obtain, by the time your tax return is filed, a
charity-provided statement that shows the amount of the donation and lists any
significant goods or services received in return for the donation (other than
intangible religious benefits) or specifically states that you received no goods
or services from the charity.


Maximize the Benefit of the Standard Deduction. For
2013, the standard deduction is $12,200 for married taxpayers filing joint
returns. For single taxpayers, the amount is $6,100. Currently, it looks like
these amounts will be about the same for 2014. If your total itemized deductions
are normally close to these amounts, you may be able to leverage the benefit
of your deductions by bunching deductions in every other year. This allows you
to time your itemized deductions so that they are high in one year and low in
the next. You claim actual expenses in the year they are bunched and take the
standard deduction in the intervening years.


For instance, you might consider moving charitable donations
you normally would make in early 2014 to the end of 2013. If you’re temporarily
short on cash, charge the contribution to a credit card—it is deductible in the
year charged, not when payment is made on the card. You can also accelerate
payments of your real estate taxes or state income taxes otherwise due in early
2014. But, watch out for the AMT, as these taxes are not deductible for AMT
purposes.


Manage Your Adjusted Gross Income (AGI). Many tax
breaks are only available to taxpayers with AGI below certain levels. Some
common AGI-based tax breaks include the child tax credit (phase-out begins at
$110,000 for married couples and $75,000 for heads-of-households), the $25,000
rental real estate passive loss allowance (phase-out range of $100,000–$150,000
for most taxpayers), and the exclusion of social security benefits ($32,000
threshold for married filers; $25,000 for other filers). In addition, for 2013
taxpayers with AGI over $300,000 for married filers, $250,000 for singles, and
$275,000 for heads-of-households begin losing part of their personal exemptions
and itemized deductions. Accordingly, strategies that lower your income or
increase certain deductions might not only reduce your taxable income, but also
help increase some of your other tax deductions and credits.


Making the Most of Year-end Securities
Transactions


For most individuals, the 2013 federal tax rates on long-term
capital gains from sales of investments held over a year are the same as last
year: either 0% or 15%. However, the maximum rate for higher-income individuals
is now 20% (up from 15% last year). This change affects taxpayers with taxable
income above $400,000 for singles, $450,000 for married joint-filing couples,
$425,000 for heads-of-households, and $225,000 for married individuals who file
separate returns. Higher-income individuals can also get hit by the new 3.8%
NIIT on net investment income, which can result in a maximum 23.8% federal
income tax rate on 2013 long-term gains.


As you evaluate investments held in your taxable brokerage
firm accounts, consider the tax impact of selling appreciated securities
(currently worth more than you paid for them). For most taxpayers, the federal
tax rate on long-term capital gains is still much lower than the rate on
short-term gains. Therefore, it often makes sense to hold appreciated securities
for at least a year and a day before selling to qualify for the lower long-term
gain tax rate.


Biting the bullet and selling some loser securities
(currently worth less than you paid for them) before year-end can also be a
tax-smart idea. The resulting capital losses will offset capital gains from
other sales this year, including high-taxed short-term gains from securities
owned for one year or less. For 2013, the maximum rate on short-term gains is
39.6%, and the 3.8% NIIT may apply too, which can result in an effective rate of
up to 43.4%. However, you don’t need to worry about paying a high rate on
short-term gains that can be sheltered with capital losses (you will pay 0% on
gains that can be sheltered).


If capital losses for this year exceed capital gains, you
will have a net capital loss for 2013. You can use that net capital loss to
shelter up to $3,000 of this year’s high-taxed ordinary income ($1,500 if you’re
married and file separately). Any excess net capital loss is carried forward to
next year.


Selling enough loser securities to create a bigger net
capital loss that exceeds what you can use this year might also make sense. You
can carry forward the excess capital loss to 2014 and beyond and use it to
shelter both short-term gains and long-term gains recognized in those
years.


Identify the Securities You Sell. When selling stock
or mutual fund shares, the general rule is that the shares you acquired first
are the ones you sell first. However, if you choose, you can specifically
identify the shares you’re selling when you sell less than your entire holding
of a stock or mutual fund. By notifying your broker of the shares you want sold at the time of the sale, your gain or loss
from the sale is based on the identified shares. This sales strategy gives you
better control over the amount of your gain or loss and whether it’s long-term
or short-term.


Secure a Deduction for Nearly Worthless Securities. If
you own any securities that are all but worthless with little hope of recovery,
you might consider selling them before the end of the year so you can capitalize
on the loss this year. You can deduct a loss on worthless securities only if you
can prove the investment is completely worthless. Thus, a deduction is not
available, as long as you own the security and it has any value at all. Total
worthlessness can be very difficult to establish with any certainty. To avoid
the issue, it may be easier just to sell the security if it has any marketable
value. As long as the sale is not to a family member, this allows you to claim a
loss for the difference between your tax basis and the proceeds (subject to the
normal rules for capital losses and the wash sale rules restricting the
recognition of loss if the security is repurchased within 30 days before or
after the sale).


Ideas for Seniors Age
701/2 Plus


Make Charitable Donations from Your IRA. IRA
owners and beneficiaries who have reached age 701/2 are permitted to make
cash donations totaling up to $100,000 to IRS-approved public charities directly
out of their IRAs. These so-called Qualified Charitable Distributions, or
QCDs, are federal-income-tax-free to you, but you get no itemized charitable
write-off on your Form 1040. That’s okay because the tax-free treatment of QCDs
equates to an immediate 100% federal income tax deduction without having to
worry about restrictions that can delay itemized charitable write-offs. QCDs
have other tax advantages, too. Contact us if you want to hear about them.


Be careful—to qualify for this special tax break, the funds
must be transferred directly from your IRA to the charity. Also, this
favorable provision will expire at the end of this year unless Congress extends
it. So, this could be your last chance.


Take Your Required Retirement Distributions. The tax
laws generally require individuals with retirement accounts to take withdrawals
based on the size of their account and their age every year after they reach age
701/2. Failure
to take a required withdrawal can result in a penalty of 50% of the amount not
withdrawn. There’s good news for 2013 though—QCDs discussed above count as
payouts for purposes of the required distribution rules. This means, you can
donate all or part of your 2013 required distribution amount (up to the $100,000
limit on QCDs) and convert taxable required distributions into tax-free
QCDs.


Also, if you turned age 701/2 in 2013, you can
delay your 2013 required distribution to 2014, if you choose. However, waiting
until 2014 will result in two distributions in 2014—the amount required for 2013
plus the amount required for 2014. While deferring income is normally a sound
tax strategy, here it results in bunching income into 2014. Thus, think twice
before delaying your 2013 distribution to 2014—bunching income into 2014 might
throw you into a higher tax bracket or have a detrimental impact on your other
tax deductions in 2014.


Ideas for the Office


Maximize Contributions to 401(k) Plans. If
you have a 401(k) plan at work, it’s just about time to tell your company how
much you want to set aside on a tax-free basis for next year. Contribute as much
as you can stand, especially if your employer makes matching contributions. You
give up “free money” when you fail to participate to the max for the match.


Take Advantage of Flexible Spending Accounts (FSAs).
If your company has a healthcare and/or dependent care FSA, before year-end you
must specify how much of your 2014 salary to convert into tax-free contributions
to the plan. You can then take tax-free withdrawals next year to reimburse
yourself for out-of-pocket medical and dental expenses and qualifying dependent
care costs. Watch out, though, FSAs are “use-it-or-lose-it” accounts—you don’t
want to set aside more than what you’ll likely have in qualifying expenses for
the year.


Married couples who both have access to FSAs will also need
to decide whose FSA to use. If one spouse’s salary is likely to be higher than
what’s known as the FICA wage limit (which is $113,700 for this year and will
likely be somewhat higher next year) and the other spouse’s will be less, the
one with the smaller salary should fund as much of the couple’s FSA needs as
possible. The reason is the 6.2% social security tax levy for 2014 is set to
stop at the FICA wage limit (and doesn’t apply at all to money put into an FSA).
Thus, for example, if one spouse earns $120,000 and the other $40,000 and they
want to collectively set aside $5,000 in their FSAs, they can save $310 (6.2% of
$5,000) by having the full amount taken from the lower-paid spouse’s salary
versus having 100% taken from the other one’s wages. Of course, either way, the
couple will also save approximately $1,400 in income and Medicare taxes because
of the FSAs.


If you currently have a healthcare FSA, make sure you drain
it by incurring eligible expenses before the deadline for this year. Otherwise,
you’ll lose the remaining balance. It’s not that hard to drum some things up:
new glasses or contacts, dental work you’ve been putting off, or prescriptions
that can be filled early.


Adjust Your Federal Income Tax Withholding. As stated
at the beginning of this letter, higher-income individuals will likely see their
taxes go up this year. This makes it more important than ever to do the
calculations to see where you stand before the end of the year. If it looks like
you are going to owe income taxes for 2013, consider bumping up the federal
income taxes withheld from your paychecks now through the end of the
year. When you file your return, you will still have to pay any taxes due less
the amount paid in. However, as long as your total tax payments (estimated
payments plus withholdings) equal at least 90% of your 2013 liability or, if
smaller, 100% of your 2012 liability (110% if your 2012 adjusted gross income
exceeded $150,000; $75,000 for married individuals who filed separate returns),
penalties will be minimized, if not eliminated.


Watch Out for Alternative Minimum
Tax


Recent legislation slightly reduced the odds that you’ll owe
the alternative minimum tax (AMT). Even so, it’s still critical to evaluate all
tax planning strategies in light of the AMT rules before actually making any
moves. Because the AMT rules are complicated, you may want our assistance.


Don’t Overlook Estate Planning


For 2013, the unified federal gift and estate tax exemption
is a historically generous $5.25 million, and the federal estate tax rate is a
historically reasonable 40%. Even if you already have an estate plan, it may
need updating to reflect the current estate and gift tax rules. Also, you may
need to make some changes for reasons that have nothing to do with taxes.


Conclusion


Through careful planning, it’s possible your 2013 tax
liability can still be significantly reduced, but don’t delay. The longer you
wait, the less likely it is that you’ll be able to achieve a meaningful
reduction.

For most individuals, the ordinary federal income tax rates
for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%.
However, the fiscal cliff legislation passed early this year increased the
maximum rate for higher-income individuals to 39.6% (up from 35%). This change
only affects taxpayers with taxable income above $400,000 for singles, $450,000
for married joint-filing couples, $425,000 for heads of households, and $225,000
for married individuals who file separate returns. Higher-income individuals can
also get hit by the new 0.9% Medicare tax and the 3.8% Net Investment Income Tax
(NIIT), which can result in a higher-than-advertised federal tax rate for
2013.


Despite these tax increases, the current federal income tax
environment remains relatively favorable by historical standards. This letter
presents some tax planning ideas to consider this summer while you have time to
think. Some of the ideas may apply to you, some to family members, and others to
your business.


Leverage Standard Deduction by Bunching
Deductible Expenditures


If your 2013 itemized deductions are likely to wind being
just under, or just over, the standard deduction amount, consider bunching
together expenditures for itemized deduction items every other year, while
claiming the standard deduction in the intervening years. The 2013 standard
deduction is $12,200 for married joint filers, $6,100 for single filers, and
$8,950 for heads of households.


For example, say you’re a joint filer whose only itemized
deductions are about $4,000 of annual property taxes and about $8,000 of home
mortgage interest. If you prepay your 2013 property taxes by December 31 of this
year, you could claim $16,000 of itemized deductions on your 2013 return ($4,000
of 2013 property taxes, plus another $4,000 for the 2014 property tax bill, plus
the $8,000 of mortgage interest). Next year, you would only have the $8,000 of
interest, but you could claim the standard deduction (it will probably be around
$12,500 for 2014). Following this strategy will cut your taxable income by a
meaningful amount over the two-year period (this year and next). You can repeat
the drill all over again in future years. Examples of other deductible items
that can be bunched together every other year to lower your taxes include
charitable donations and state income tax payments.


Consider Deferring Income


It may pay to defer some taxable income from this year into
next year if you expect to be in the same or lower tax bracket in 2014. For
example, if you’re self-employed and a cash-method taxpayer, you can postpone
taxable income by waiting until late in the year to send out some client
invoices. That way, you won’t receive payment for them until early 2014. You can
also postpone taxable income by accelerating some deductible business
expenditures into this year. Both moves will defer taxable income from this year
until next year. Deferring income may also be helpful if you’re affected by
unfavorable phase-out rules that reduce or eliminate various tax breaks (child
tax credit, education tax credits, and so on). By deferring income every other
year, you may be able to take more advantage of these breaks every other
year.


Take Advantage of 0% Rate
on Investment Income


For 2013, the federal income tax rate on long-term capital
gains and qualified dividends is still 0% when those gains and dividends fall
within the 10% or 15% federal income tax rate brackets. This will be the case to
the extent your taxable income (including long-term capital gains and qualified
dividends) does not exceed $72,500 for married joint-filing couples ($36,250 for
singles). While your income may be too high, you may have children,
grandchildren, or other loved ones who will be in the bottom two brackets. If
so, consider giving them some appreciated stock or mutual fund shares that they
can then sell and pay 0% tax on the resulting long-term gains. Gains will be
long-term as long as your ownership period plus the gift recipient’s ownership
period (before he or she sells) equals at least a year and a day.


Giving away stocks that pay dividends is another tax-smart
idea. As long as the dividends fall within the gift recipient’s 10% or 15% rate
bracket, they will be federal-income-tax-free.


Warning: If you give securities to someone who is
under age 24, the Kiddie Tax rules could potentially cause some of the resulting
capital gains and dividends to be taxed at the parent’s higher rates instead of
at the gift recipient’s lower rates. That would defeat the purpose. Also, if you
give away assets worth over $14,000 during 2013 to an individual, it will
generally reduce your $5.25 million unified federal gift and estate tax
exemption. However, you and your spouse can together give away up to $28,000
without reducing your respective exemptions.


Time Investment Gains and Losses


For most individuals, the 2013 federal tax rates on long-term
capital gains are the same as last year: either 0% or 15%. However, the maximum
rate for higher-income individuals is now 20% (up from 15% last year). This
change only affects taxpayers with taxable income above $400,000 for singles,
$450,000 for married joint-filing couples, $425,000 for heads of households, and
$225,000 for married individuals who file separate returns. Higher-income
individuals can also get hit by the new 3.8% NIIT on net investment income,
which can result in a maximum 23.8% federal income tax rate on 2013 long-term
gains.


As you evaluate investments held in your taxable brokerage
firm accounts, consider the tax impact of selling appreciated securities
(currently worth more than you paid for them). For most taxpayers, the federal
tax rate on long-term capital gains is still much lower than the rate on
short-term gains. Therefore, it often makes sense to hold appreciated securities
for at least a year and a day before selling to qualify for the lower long-term
gain tax rate.


Biting the bullet and selling some loser securities
(currently worth less than you paid for them) before year-end can also be a
tax-smart idea. The resulting capital losses will offset capital gains from
other sales this year, including high-taxed short-term gains from securities
owned for one year or less. For 2013, the maximum rate on short-term gains is
39.6%, and the 3.8% NIIT may apply too, which can result in an effective rate of
up to 43.4%. However, you don’t need to worry about paying a high rate on
short-term gains that can be sheltered with capital losses (you will pay 0% on
gains that can be sheltered).


If capital losses for this year exceed capital gains, you
will have a net capital loss for 2013. You can use that net capital loss to
shelter up to $3,000 of this year’s high-taxed ordinary income ($1,500 if you’re
married and file separately). Any excess net capital loss is carried forward to
next year.


Selling enough loser securities to create a bigger net
capital loss that exceeds what you can use this year might also make sense. You
can carry forward the excess capital loss to 2014 and beyond and use it to
shelter both short-term gains and long-term gains recognized in those
years.


Sell Loser Shares and Give Away the Resulting
Cash; Give Away Winner Shares


Say you want to make some gifts to favorite relatives and/or
favorite charities. You can make gifts in conjunction with an overall revamping
of your holdings of stocks and equity mutual fund shares held in taxable
brokerage firm accounts. Here’s how to get the best tax results from your
generosity.


Gifts to Relatives. Do not give away loser
shares (currently worth less than you paid for them). Instead, sell the shares
and take advantage of the resulting capital losses. Then, give the cash sales
proceeds to the relative. Do give away winner shares to relatives. Most
likely, they will pay lower tax rates than you would pay if you sold the shares.
In fact, relatives who are in the 10% or 15% federal income tax brackets will
generally pay a 0% federal tax rate on long-term gains from shares that were
held for over a year before being sold. For purposes of meeting the
more-than-one-year rule for gifted shares, count your ownership period plus the
recipient relative’s ownership period, however brief. Even if the shares are
held for one year or less before being sold, your relative will probably pay a
lower tax rate than you (typically only 10% or 15%). However, beware of one
thing before employing this give-away-winner-shares strategy. Gains recognized
by a relative who is under age 24 may be taxed at his or her parent’s higher
rates under the so-called Kiddie Tax rules (contact us if you are concerned
about this issue).


Gifts to Charities. The strategies for gifts to
relatives work equally well for gifts to IRS-approved charities. Sell loser
shares and claim the resulting tax-saving capital loss on your return. Then give
the cash sales proceeds to the charity and claim the resulting charitable
write-off (assuming you itemize deductions). This strategy results in a double
tax benefit (tax-saving capital loss plus tax-saving charitable contribution
deduction). With winner shares, give them away to charity instead of giving
cash. Here’s why. For publicly traded shares that you’ve owned over a year, your
charitable deduction equals the full current market value at the time of the
gift. Plus, when you give winner shares away, you walk away from the related
capital gains tax. So, this idea is another double tax-saver (you avoid capital
gains tax on the winner shares, and you get a tax-saving charitable contribution
write-off). Because the charitable organization is tax-exempt, it can sell your
donated shares without owing anything to the IRS.


Make Charitable Donations
from Your IRA


IRA owners and beneficiaries who have reached age 70½ are
permitted to make cash donations totaling up to $100,000 to IRS-approved public
charities directly out of their IRAs. These so-called Qualified Charitable
Distributions, (QCDs) are federal-income-tax-free to you, but you get no
itemized charitable write-off on your Form 1040. That’s okay, because the
tax-free treatment of QCDs equates to an immediate 100% federal income tax
deduction without having to worry about restrictions that can delay itemized
charitable write-offs. QCDs have other tax advantages too. Contact us if you
want to hear about them.


Be careful—to qualify for this special tax break, the funds
must be transferred directly from your IRA to the charity. Also, this
favorable provision will expire at the end of this year unless Congress extends
it.


Watch out for Alternative Minimum
Tax


Recent legislation slightly reduced the odds that you’ll owe
the alternative minimum tax (AMT). Even so, it’s still critical to evaluate all
tax planning strategies in light of the AMT rules before actually making any
moves. Because the AMT rules are complicated, you may want our assistance.


Take Advantage of Generous But Temporary
Business Tax Breaks


Several favorable business tax provisions have a limited
shelf life that may dictate taking action between now and year-end. Here are the
most important ones.


Bigger Section 179 Deduction. Your business may be
able to take advantage of the temporarily increased Section 179 deduction. Under
the Section 179 deduction privilege, an eligible business can often claim
first-year depreciation write-offs for the entire cost of new and used equipment
and software additions. For tax years beginning in 2013, the maximum Section 179
deduction is a whopping $500,000. For tax years beginning in 2014, however, the
maximum deduction is scheduled to drop back to only $25,000.


Note: Watch out if your business is already expected
to have a tax loss for the year (or close) before considering any Section 179
deduction. You cannot claim a Section 179 write-off that would create or
increase an overall business loss. Please contact us if you think this might be
an issue for your operation.


Section 179 Deduction for Real Estate. Real property
improvement costs are generally ineligible for the Section 179 deduction
privilege. However, a temporary exception applies to tax years beginning in
2010–2013. Under the exception, your business can immediately claim a Section
179 deduction of up to $250,000 of qualified improvement costs for (1) interiors
of leased nonresidential buildings, (2) restaurant buildings, and (3) interiors
of retail buildings. The $250,000 Section 179 allowance for real estate
improvements is part of the overall $500,000 allowance. Unless extended, this
real estate break will not be available for tax years beginning after 2013.


Note: Once again, watch out if your business is
already expected to have a tax loss for the year (or is close to it) before
considering any Section 179 deduction. You can’t claim a Section 179 write-off
that would create or increase an overall business tax loss.


50% First-year Bonus Depreciation. Above and beyond
the Section 179 deduction, your business can claim first-year bonus depreciation
equal to 50% of the cost of most new (not used) equipment and software placed in
service by December 31 of this year. For a new passenger auto or light truck
that’s used for business and is subject to the luxury auto depreciation
limitations, the 50% bonus depreciation break increases the maximum first-year
depreciation deduction by $8,000. The 50% bonus depreciation break will expire
at year-end unless Congress extends it.


Note: 50% bonus depreciation deductions can create or
increase a Net Operating Loss (NOL) for your business’s 2013 tax year. You can
then carry back the NOL to 2012 and/or 2011 and collect a refund of taxes paid
in one or both those years.


100% Gain Exclusion for Qualified Small Business Stock
Issued This Year. The fiscal cliff legislation enacted earlier this year
extended the temporary 100% gain exclusion privilege for eligible sales of
Qualified Small Business Corporation (QSBC) stock issued in calendar-year 2013.
So, there is a short fuse on stock issuances that will qualify for the 100% gain
exclusion break, unless Congress extends it.


Note: QSBC shares must be held for more than five
years to be eligible for the 100% gain exclusion break, so we are talking about
sales that will occur well down the road.


Employ Your Child


If you are self-employed, you might want to consider
employing your child to work in the business. Doing so has tax benefits in that
it shifts income (which is not subject to the Kiddie tax) from you to your
child, who normally is in a lower tax bracket or may avoid tax entirely due to
the standard deduction. There can also be payroll tax savings since wages paid
by sole proprietors to their children age 17 and younger are exempt from both
social security and unemployment taxes. Employing your children has the added
benefit of providing them with earned income, which enables them to contribute
to an IRA. Children with IRAs, particularly Roth IRAs, have a great start on
retirement savings since the compounded growth of the funds can be
significant.


Remember a couple of things when employing your child. First,
the wages paid must be reasonable given the child’s age and work skills. Second,
if the child is in college or entering soon, having too much earned income can
have a detrimental impact on the student’s need-based financial aid
eligibility.


Don’t Overlook Estate Planning


For 2013, the unified federal gift and estate tax exemption
is a historically generous $5.25 million, and the federal estate tax rate is a
historically reasonable 40%. Even if you already have an estate plan, it may
need updating to reflect the current estate and gift tax rules. Also, you may
need to make some changes for reasons that have nothing to do with taxes.

Q: After what period is my federal tax return safe from audit?


A: Generally, the time-frame within which the IRS can examine a federal tax
  return you have filed is three years. To be more specific, Code Sec. 6501
states  that the IRS has three years from the later of the deadline for filing
the  return (usually April 15th for individuals) or the date you actually filed
the  return. This means that if you file your return on May 10, 2009, the IRS
will  have until May 10, 2012 to look at it and "assess a deficiency;" not April
17,  2012.


There are exceptions and caveats to this general principle, however. If you
  file prior to April 15, the IRS still has until April 15 of the third year that
  follows to audit your return. This means that if you filed an income tax return
  on February 10, 2009, you still won't be out-of-the-woods until April 15, 2012.
  For taxpayers who file fraudulent returns, incorrect returns with the intent to
  evade tax, and those who do not file at all, the IRS may open an audit at any
  time.


(Don't confuse the deadline for IRS tax assessments with your right to file a
  refund claim for an amount that you overpaid, either on a filed return or
  through withholding or estimated tax payments. That deadline is the later of
  three years from the filing deadline or two years from your last tax
  payment.)


You may also find some comfort in the practical IRS audit-cycle rhythm. While
  you are never truly beyond an audit until the statute of limitations has
  properly run, there are some general standards to keep in mind. Office audits
  are usually done within 1 1/2 years of the time the return was filed, and field
  office audits are complete by 2 1/2 years. The rule of thumb is that if you
  haven't been contacted within this time frame, you're probably not going to be.
  Especially for small businesses, the IRS has promised to shorten its normal
  audit cycle so that those taxpayers are not "left hanging" on potential tax
  liabilities (with interest and penalties) until the three-year limitations
  period has expired. Whether this shortened period happens, however, is still
  open to speculation. Most businesses should continue to make it a practice to
  keep "tax reserves" to cover such audit liabilities.

 IRS Overwhelmed by Requests for
Offers in Compromise
Washington, D.C. (April 12, 2012)
By  Michael Cohn, Accounting Today

 The Internal Revenue Service is having trouble coping with an enormous backlog of
requests for offers in compromise from taxpayers who are struggling with the
tough economy.
A  new report from the Treasury Inspector General for Tax Administration found that
the combination of the weak economy, and efforts by the IRS to promote its OIC
program for helping taxpayers pay off a portion of their outstanding tax debts
has increased the number of requests for offers by 28 percent between fiscal
years 2007 and 2011. At the same time, the resources available to work on the
offers have decreased, creating an inventory backlog and delaying responses to
taxpayers.
An offer in compromise is an agreement between a taxpayer and the IRS to settle a
tax liability for payment of less than the full amount owed. TIGTA undertook the
audit to assess the effectiveness of the IRS’s OIC program at processing
requests in a timely manner, consistently apply OIC guidelines, accurately
measure program results, and effectively promote the program.
 “TIGTA’s review found that the Internal Revenue Service has taken positive steps to
improve and promote the offer in compromise program,” said TIGTA Inspector
General J. Russell George in a statement. “Now, current backlogs in the program
make it imperative that the IRS implement needed improvements.”
 TIGTA reviewed a statistically valid sample of offers and found that the IRS did not
process all of the offers on a timely basis. In 73 of the 99 offers studied,
that is, 74 percent of them, the IRS failed to contact the taxpayer by the
promised date. The report estimates that 9,509 taxpayers who submitted offers
between July 1 and Dec. 31, 2010, may not have been contacted when
promised.Not only that, but as of Oct. 25, 2011, there were 7,472 unassigned offers in
holding queues awaiting assignment to OIC staff. TIGTA found that one processing
site had more than four times as many unassigned offers from self-employed
taxpayers compared with the other site, and 37 percent of those offers were more
than six months old. TIGTA auditors also determined that an incorrect date was used when offers were
returned to the IRS because of some IRS processing errors. The report estimates
that the wrong date may have been used for 712 taxpayers who submitted offers
between July 1, 2010, and Dec. 31, 2010.
Finally,  the IRS does not have formal performance measures for the streamlined offer
process, which allows IRS employees to make taxpayer contact by phone rather
than by mail so they can quickly make a determination on an OIC
request. TIGTA  recommended that the IRS revise its OIC processing procedures, train employees,
and add a formal performance measure for the streamlined offers or apply the
streamlined process to all offers.
 IRS  officials agreed with TIGTA's recommendations and the report's outcome measures
and plan to take appropriate corrective actions.
 “We  concur that the weak economy and efforts to promote the OIC program have
resulted in a 28 percent increase in receipts since 2007,” wrote Faris R. Fink,
commissioner of the IRS’s Small Business/Self-Employed Division. “This increase,
along with resource limitations, has led to a backlog of inventory.”
 The  IRS plans to better inform taxpayers by lengthening the time by which they will
be contacted or issued an interim letter, initiate reassignment of offers
between IRS sites as needed, and apply most aspects of the streamlined process
to the remainder of the OIC cases.