In 2012, Many Tax Benefits Increase Due to Inflation Adjustments

IR-2011-104, Oct. 20, 2011 WASHINGTON — For tax year 2012, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation, the Internal Revenue Service announced today.  New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following: § The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011. § The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes. § Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011. Credits, deductions, and related phase outs § 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. § The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011. § 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. § For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts; please see the table below. Medical Savings Accounts (MSAs) Self-only coverage Family coverage Minimum annual deductible $2,100 $4,200 Maximum annual deductible $3,150 $6,300 Maximum annual out-of-pocket expenses $4,200 $7,650   § The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a 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.    Estate and Gift § For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011. § The annual exclusion for gifts remains at $13,000. Other Items § The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012. § Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains $1,150 for married individuals and $1,450 for singles and heads of household. As always, should you have any questions, please feel free to contact your trusted avisor at DiSanto, Priest & Co. 401.921.2000

Social Security wage base increases to $110,100 for 2012

(Social Security News Release, 10/19/2011)

The Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) in 2012 increases to $110,100 from $106,800, which was the wage base for 2009 through 2011. The $3,300 increase, which is about 3%, is due to an increase in average total wages.

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers-one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax).

The FICA tax rate for employees and employers normally is 7.65% each-6.2% for OASDI and 1.45% for HI. However, for 2011, the OASDI rate for employees is 4.2%.  

For self-employed workers, the FICA tax normally is 15.3%-12.4% for OASDI and 2.9% for HI. However, for 2011, the self-empoyment tax rate is 13.3%: 10.4% for OASDI, reflecting the two percentage point drop in the OASDI rate for employees, plus 2.9% for HI.  

There is a maximum amount of compensation subject to the OASDI tax, but no maximum for HI.  

As always, should you have any questions, please feel free to contact your trusted advisor at DiSanto Priest & Co. 401.921.2000

Tax Relief for Those Affected By Natural Disasters

With hurricanes, tornadoes, floods, wildfires, and other natural disasters affecting so many people throughout the US this year, many have been left wondering how they're going to pay for the cleanup or when their businesses will be able to reopen. The good news is that there is some relief for tax payers--but only if you meet certain conditions.
Recovery efforts after natural disasters can be costly. For instance, when Hurricane Irene struck last month causing widespread flooding, many homeowners were not covered because most standard insurance policies do not cover flood damage.

Tax Relief for Homeowners

Fortunately, personal casualty losses are deductible on your tax return as long as the property is located in a federally declared disaster zone AND these four conditions are met:
1. The loss was caused by a sudden, unexplained, or unusual event
Natural disasters such as flooding, hurricanes, tornadoes, and wildfires all qualify as sudden, unexplained, or unusual events.
2. The damages were not covered by insurance
You can only claim a deduction for casualty losses that are not covered or reimbursed by your insurance company. The catch here is that if you submit a claim to your insurance company late in the year, your claim could still be pending come tax time. If that happens you can file an extension on your taxes. Call us if you need help filing an extension or have any questions about what losses you can deduct.
3. Your losses were sufficient to overcome reductions required by the IRS
The IRS requires several "reductions" in order to claim casualty losses on your tax forms. The first is that effective December 31, 2009 you must subtract $100 from the total loss amount. This is referred to as the $100 loss limit.

Second, you must reduce the amount by 10 percent of your adjusted gross income (AGI) or adjusted gross income. For example, if your AGI is $25,000 and your insurance company paid for all of the losses you incurred as a result of flooding except $3,100 you would first subtract $100 and then reduce that amount by $2500. The amount you could deduct as a loss would be $500.
4. You must itemize
As it now stands, you must itemize your taxes in order to claim the deduction. If you normally don't itemize, but have a large casualty loss you can calculate your taxes both ways to figure out which one gives you the lowest tax bill. Contact us if you need assistance figuring out which method is best for your circumstances.

Tax Relief for Individuals and Business Owners

The Internal Revenue Service (IRS) is also providing tax relief to individual and business taxpayers impacted by Hurricane Irene that are located in federally declared disaster zones. The measures postpone certain tax filing and payment deadlines until October 31, 2011 and includes corporations and businesses that previously obtained an extension until September 15, 2011 to file their 2010 returns. Individuals and businesses that received a similar extension have until October 17 to file their 2010 returns. Also included are estimated tax payments for the third quarter of 2011, which would normally be due September 15. Please call our office if you need help figuring out when your tax payments are due.

Tax Relief Tips

The IRS also states that you have two options when it comes to deducting casualty losses on your tax returns. You can deduct the losses in the year in which they occurred or claim them for the prior year's return. So if you were affected by Hurricane Irene this year you can claim your losses on your 2011 tax return or amend your 2010 tax return and deduct your losses. If you choose to deduct losses on your 2010 tax return, then you have one year from the date the tax return was due to file it.
Confused about whether you qualify for tax relief after a recent natural disaster? Give us a call. We'll help you figure out the best way to handle casualty losses related to Hurricane Irene and other natural disasters.

3 Tips for Getting an Accurate Business Valuation

If you're conscientious about financial reporting, you may already have a sense of your company's worth, but in some instances you might need a formal business valuation, such as:

• For certain transactions. Selling your business? Planning an IPO? Need financing?
• For tax purposes. Includes estate planning, stock option distribution, and S Corporation conversions.
• For litigation. Needed in cases like bankruptcy, divorce, and damage determinations.

There isn't a single formula for valuing a business, but there are generally-accepted measures that will give you a valid assessment of your company's worth. Here are some tips business valuation.

1.       Take a close look at how your business operates. Does it incorporate the most tax-efficient structure? Have sales been lagging or are you selling most of your merchandise to only a few customers? If so, then consider jump-starting your sales effort by bringing in a seasoned consultant.

Do you have several products that are not selling well? Maybe it's time to remove them from your inventory. Redesign your catalog to give it a fresh new look and make a point of discussing any new and exciting product lines with your existing customer base.

It might also be time to give your physical properties a spring cleaning. Even minor upgrades such as a new coat of paint might increase the value of your business valuation.

2.       Keep in mind that business valuation is not just an exercise in numbers where you subtract your liabilities from your assets, it's also based on the value of your intangible assets.

It might be easy to ascertain the value of your real estate and fixtures, but what is your intellectual property worth? Do you hold any patents or trademarks? And what about your business relationships or the reputation you've established with existing clients and in the community? Don't forget about key long-term employees whose in-depth knowledge about your business also adds value to its net worth.

3.       Choose your appraisal team carefully. We have the expertise you need to arrive a fair valuation of your business.

If you need a business valuation for whatever reason, give us a call today.