Do You File Forms 1099? Updated Requirements


As you begin thinking about tax return filing, we want to make you aware of two new questions on the business tax returns that must be answered by every business owner.  The questions are related to the filing of Forms 1099.

New Questions:
·         Did you make payments in 2012 that would require you to file Form 1099?
·         If yes, did you or will you file all required Forms 1099?

Requirements:
1099 Forms are required to be filed with the federal government to provide information regarding certain payments your business has made.  If your trade or business makes payments for the following items to an unincorporated business, trust, LLC, partnership, or individual, in the amounts specified below, you are required to file Form 1099.

1.      Subcontractors or others providing services - $600 or more
2.      Rents and commissions - $600 or more
3.      Interest or dividends - $10 or more
4.      Pension / profit-sharing plans - $10 or more
5.      Direct sales of consumer products of at least $5,000 to a buyer for resale anywhere other than a permanent retail establishment
6.      All payments to attorneys must be reported regardless of whether the recipient is a professional corporation

The due date for filing Form 1099 with the government is February 28, 2013.  Forms should be mailed to recipients by January 31, 2013.  The penalties for failure to file Form 1099 can be substantial.  The responsibility for filing the Form 1099 rests with you, the business owner.  It is the responsibility of the individual / business receiving the Form 1099 to report it on their tax return.

Please call our office, 317-248-2202, if you have any questions about filing 1099s.

2012 Year End Tax Planning


To Our Clients and Friends:

Year-end planning will be more challenging than normal this year.  Unless Congress acts, starting in 2013, individuals will see higher tax rates across the board and a number of popular deductions and credits will be gone.  Estate and gift tax rates will be higher as well.  Additionally, a number of popular deductions expired at the end of 2011 and won’t be available for 2012. 

Deductions not available this year include, for example, the election to deduct state and local sales taxes instead of state and local income taxes and the above-the-line deductions for tuition and educator expenses.  Deductions and credits that will disappear at the end of this year include generous bonus depreciation and expensing allowances for business property and the expanded tax credits for higher education and dependent care costs.  Also, the phase-out rule that reduces write-offs for the most popular itemized deduction items (including home mortgage interest, state and local taxes, and charitable donations) for high income taxpayers is scheduled to come back in 2013.

Finally, as a result of the Healthcare Act, two new Medicare taxes will kick in starting in 2013.  First, there will be a new 0.9% Medicare surtax tax on wages and self-employment earnings exceeding $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately).  There will also be a new 3.8% Medicare contribution tax that will apply to the lesser of (1) net investment income, including interest income (but not if it is tax-exempt), capital gains, and dividends; or (2) modified Adjusted Gross Income (AGI) in excess of $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately). 

These tax increases are by no means a certainty.  Congress could extend the Bush-era tax cuts for some or all taxpayers, revive some favorable tax rules that have expired, and extend those that are slated to expire at the end of this year.  Which actions Congress will take remains to be seen.  For the latest developments and additional details, visit our website at www.dehmelcpa.com. Additionally, tax planning appointments are available in our office, call us at 317-248-2202.

Despite uncertainties, what we can say for sure is that the 2012 federal income tax environment is still quire favorable, but we may not be able to say that for long.  Therefore, tax planning actions taken between now and year-end may be more important than ever.  This letter presents some planning ideas to consider while there is still time to act before year end.  Some of the ideas may apply to you, some to family members, and others to your business.

Traditional Strategy of Deferring Income is Dicey This Year

Be careful when considering the time-honored strategy of deferring taxable income from this year into next year.  The strategy makes sense if you’re confident you’ll be in the same or lower tax bracket next year, but the tax picture for 2013 is blurry.  While we can hope that Congress will deal with these issues now that the election has passed, even with an outcome there will be very little, if any, time for planning.

The best course of action may be to start now to identify ways you could defer or accelerate some of your income and deductions between 2012 and 2013, but wait to pull the trigger until we know more.  Cash-basis businesses may be able to control the timing of income by sending out December invoices early (if they want the income received in 2012) or late (if they want it received in 2013).  They may also be able to accelerate or defer deductions by carefully timing the payment of expenses or the purchase of business supplies and equipment, so they fall in 2012 or 2013, whichever is preferred.

The uncertainty about future tax rates makes definitive advice difficult.  When we have better information about 2013 tax rates, we will update this blog with thoughts about deferring income (or not).

Ideas for Increasing Deductions

Make Charitable Gifts of Appreciated Stock.  If you have appreciated stock (or mutual fund shares) that you’ve held more than a year and you plan to make significant charitable contributions before year-end, consider keeping your cash and donating your stock instead.  You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. 

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.  However, if you sell the stock as a loss, you have to wait 31 days to buy it back.  Otherwise, you will trigger the wash sale rules, which 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 documentation (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.

Accelerate Itemized Deductions into This Year.  For 2012, itemized deductions are allowed in full regardless of your AGI.  However, this phase-out rule that reduces write-offs for the most popular itemized deduction items (including home mortgage interest, state and local taxes, and charitable donations) is scheduled to come back in 2013 unless Congress takes action to prevent it.  If the phase-out rule comes back, it will wipe out $3 of affected itemized deductions for every $100 of AGI above the applicable threshold.  For 2013, the AGI threshold will probably be around $178,000, or around $89,000 for married individuals who file separate returns.

Bottom Line:  Depending on your AGI, you may get more tax-saving benefit from accelerating into 2012 your state and local tax payments that are due early next year and some charitable donations that you’d normally make in 2013.  However, things get a bit tricky if you’ll be subject to Alternative Minimum Tax (AMT) this year.  Please contact us if you have questions about the advisability of accelerating itemized deductions into this year.


Leverage Standard Deduction by Bunching Deductible Expenditures.  If your 2012 itemized deductions are likely to be just under, or just over, the standard deduction amount, you might want to consider the strategy of bunching together expenditures for itemized deductions every other year, while claiming the standard deduction in the intervening years.  The 2012 standard deduction is $11,900 for married joint filers, $5,950 for single and married filing separate filers, and $8,700 for heads of households.

Take Advantage of the 0% Rate on Investment Income

For 2012, the federal income tax rate on long-term capital gains is 0% to the extent they 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 taxable gains and qualified dividends) does not exceed $70,700 if you are married and file jointly ($35,350 if you are single).  While your income may be too high to benefit from the 0% rate, you may have children or grandchildren who will be in one of the bottom two brackets.  If so, consider giving them some appreciated stock or mutual fund shares that they can 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.

If the Bush-era tax cuts are allowed to expire at year-end, the minimum tax rate on 2013 long-term gains for these taxpayers will be 10% (or 8%) for gains from certain investments held for over five years).  So consider doing what you need to do to take advantage of the 0% rate this year.  Next year, it might be history.

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 beginning with the year they reach age 70 ½.  Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn.  If you turned age 70 ½ in 2012, you can delay your required distribution to 2013 if you choose.  But, waiting until 2013 will result in two distributions in 2013 – the amount required for 2012 plus the amount required for 2013.

Year-end Moves for Your Business

Take Advantage of Tax Breaks for Purchasing Equipment and Software.  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 2012, the maximum Section 179 deduction is $139,000 (assuming eligible property purchases for the year don’t exceed $560,000).  For tax years beginning in 2013, however, the maximum deduction is scheduled to drop back to only $25,000.

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 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.  Contact us if your want more details about these generous, but temporary, tax breaks.

Check Your Partnership and S Corporation Stock Basis.  If you own an interest in a partnership or S corporation, your ability to deduct any losses it passes through is limited to your basis.  Although any unused loss can be carried forward indefinitely, the time value of money diminishes the usefulness of these suspended deductions.  If you expect the partnership or S corporation to generate a loss this year and you lack sufficient basis to claim a full deduction, you may want to make a capital contribution (or in the case of an S corporation, loan it additional funds) before year end.

Watch out for AMT

While many tax-law changes over the last 10 years have been helpful in reducing your 2012 federal income tax bill, they didn’t do much to reduce the odds that you’ll owe the Alternative Minimum Tax (AMT).  It is critical to evaluate all tax planning strategies in light of the AMT rules before actually making any moves.  Because the AMT rules are complicated and we still don’t know exactly what they will be for 2012, you may want our assistance.  Again, tax planning appointments are available, call us at 317-248-2202.

Don’t Overlook Estate Planning

For 2012, the unified federal gift and estate tax exclusion is a historically generous $5.12 million.  However, the exclusion will drop back to only $1 million in 2013 unless Congress takes action.  In addition, the maximum federal estate tax rate for 2013 is scheduled to rise from the current 35% to a painfully high 55%.  Therefore, planning to avoid or minimize the federal estate tax should be part of your overall financial game plan.  Even if you already have a good plan, it may need updating to reflect the current $5.12 million exclusion and the uncertainty about next year’s rules. 

To be Continued

This letter is intended to give you just a few ideas to get you thinking about tax planning moves for the rest of this year.  For more up-to-date information, continue to visit this blog. For thoughts and ideas specific to your situation, schedule an appointment with us at 317-248-2202.

Best regards,

Dehmel & Associates, PC, CPAs

Halftime Checkup?

Halfway through the calendar year, this is a great time for a tax planning checkup!

When we prepare tax returns for our clients, we also run a projection for the coming year.  This enables us to make sure either:

  • The proper amount of tax is being withheld from wages, and / or
  • Your quarterly estimated tax payments will be sufficient to avoid an unexpected balance due with next year's return.
How has the first half of the year been for you?  

If you are exceeding expectations, you may need to increase your estimates or withholdings.  IRS rules generally allow for underpayment penalties unless total withholding and estimated payments equal the smaller of:
  • 90% of the tax shown of the 2012 return, or
  • 100% of the tax shown on the 2011 return (110% if your 2011 adjusted gross income (AGI) was over $150,000 ($75,000 if married filing separately)).
If you are below expectations, adjusting your withholding or quarterly estimates accordingly could put more money in your pocket if you do not need to pay as much.

Contact Dehmel & Associates, PC, CPAs today if you have questions about estimated taxes or tax planning for the remainder of 2012!

Heads Up - New e-mail Scam Alert

According to the IRS, be on the lookout for a new e-mail based scam (commonly called "pfishing") targeting military member, retirees, and certain civilian employees.  The e-mail looks as if it is coming from Defense Finance and Accounting Services, even its e-mail address ends with ".mil."

The content of the e-mail says that those receiving disability compensation from the Department of Veterans Affairs (VA) may be able to obtain additional funds from the IRS.  To get these funds, the e-mail instructs the reader to send various VA and IRS documents, containing personal and financial information, such as copies of VA award letters and copies of tax returns, to an address in Florida.

The information in these documents can then be used to commit identity theft.  Common examples of identity theft include using someone else's personal data to steal from the victim's financial accounts, use victim's credit cards, and apply for new credit cards, loans, or other services in the victim's name.

For more information, follow this link at the IRS website called Suspicious e-mails and identity theft.

Selected Indiana Individual Inheritance Tax Changes

The Indiana Inheritance Tax is going away!  Not all at once, but it is phasing out.  The 2012 Indiana General Assembly passed several bills that affect Indiana taxes, especially inheritance taxes.  Earlier this year a family friend asked me about Indiana taxes.  As it turns out,  with all the changes and potential confusion surrounding Federal Estate and Inheritance Tax, it is easy to forget about state rules.  The (very) simplified explanation for Indiana tax is:

  • The estate is given a certain value based on cash, securities, real estate, etc.
  • The taxable estate is reduced by exemptions, that is reductions based who gets how much.  The exemption amounts vary depending on how close the heir is to the decedent.  For example, an inheritance given to a son or daughter earns a higher exemption than to a charity.
  • Also, each heir has an exemption.  Therefore, distributions to multiple children are better than a distribution to only one, because each has an exemption.
  • After subtracting the amount of exemptions from the estate value, the estate pays tax to Indiana.
Here are some of the changes:
  • The most valuable exemptions, called "Class A Transferees" increase from $100,000 to $250,000 going back to January 1, 2012.  This class includes children that we talked about above.
  • Also effective January 1, 2012, "Class A Transferees" also include not only children but also children's spouses, and if the child dies, the child's widow or widower.  "Child" also includes "stepchildren."
  • Effective in 2013, the tax paid will be reduced by a 10% credit - meaning the tax is reduced by 10%. Each year the credit will increase by another 10% - 20% in 2014, 30% in 2015, and so on until Inheritance Tax is phased out after 2021.


The information here is generic in nature and if you have specific questions, you can learn more from the Indiana Department of Revenue's website page about changes to the Inheritance Tax or you can ask the advice of your Certified Public Accountant.  If you do not have a CPA, why not consider the firm Dehmel & Associates?  Give us a call, 317-248-2202.

Selected Changes to Business / Corporate Tax - Indiana

In the recent 2012 Indiana General Assembly session, several bills were passed that affect Indiana taxes for businesses.  Many of them change the way existing information is reported, from paper filing to electronic filing.  For example, effective January 1, 2013:

  • If you are a retailer who collects sales tax, you must file your reports and submit the funds online.
  • If you withhold Indiana state and county income tax from your employees, you must file your reports and submit the funds online.
Indiana is also liberalizing the state and county withholding reporting requirements for small employers who withhold less than $1,000 annually.  This isn't very many and probably doesn't apply to you because this is $1,000 for all employees total, not just $1,000 each.  But if this applies to you, effective January 1, 2013, you may file annually instead of quarterly or semi-annually.

Many other bills that affect Indiana taxes and taxpayers were passed.  The full legislative update can be found at this link to the Indiana Department of Revenue website, Legislative Update.  Scroll down to get to the bullet point lists.

If you have any questions or concerns about your withholding or sales taxes, call the Certified Public Accounting firm of Dehmel & Associates at 317-248-2202.

Do You Need To Report Your Foreign Financial Assets?


Do you have assets, financial or otherwise, being held outside the U.S.?  If so, this is for you.  A deadline is coming up on June 30 that has no extensions.  This applies to a lot of people – U.S. citizens and resident aliens.  It also applies to non people – trusts, estates, domestic entities (think businesses).

If you have a “financial interest” in a foreign account that reaches $10,000 at any time during the past year, you have to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts.  In other words, if you have assets outside the United States, the U.S. wants to know about it.  To determine if you need to file this form, let’s define “financial interest,” “foreign account,” and “$10,000.”

You have a financial interest if any one of these is true: 
  • You are the owner of record
  • You are the holder of legal title
  • You have an agent or representative who is owner of record or holder of legal title
  • You have “sufficient interest” in an “entity” that is the owner of record or holder of legal title
  • You have signature authority, meaning that you have the ability to control the assets by communicating with the financial institution maintaining the account

A foreign accounts include, but not necessarily limited to:
  • A financial (such as a deposit) account held at a foreign financial institution (for example, the proverbial “swiss bank account”)
  • A financial account in a U.S. institution but held in a foreign branch
  • Foreign stock
  • Foreign mutual funds
  • Foreign accounts in a grantor trust if you are the grantor
  • Foreign issued life insurance or annuity with a cash value

How to determine if the account reaches $10,000:
  • Figure out the highest balance at any time during the year (not necessarily a month or year end)
  • Use a bona fide currency converter to figure the U.S. dollars

If you qualify, now what?

The TD F 60-22.1, Report of Foreign Bank and Financial Accounts (FBAR) must be filed so that it is received by (not postmarked by) June 30.  No extension of time is granted.  Mail to

Department of the Treasury
Post Office Box 32621
Detroit, MI 48232-0621

What if you already filed Form 8938, Statement of specified Foreign Financial Assets, with your tax return?

That is a separate issue, with separate filing requirements.  Filing this form with your tax return does not replace the TD F 90-22.1 and does not affect this requirement.  This is so separate, in fact, that it warrants an article on its own.  You can learn more at the IRS page here.  You can also compare Form 8938 and FBAR requirements.  Notice that they are indeed different.

What if you don’t file the form?

The penalties are severe.  If you can prove that you were not willfully negligent (hard to do), the fines are up to $10,000.  If you willfully avoid the requirement, up to the greater of $100,000 or 50% of account balances.  Criminal charges may also be filed against you.

Reporting of foreign assets has been an issue with the IRS for several years.  They have offered two separate voluntarydisclosure initiatives in the past, a chance to “come clean” and report your accounts with a reduced risk of criminal prosecution.

If you find yourself in a situation where you should have reported your foreign assets but did not, retain a competent professional as soon as possible.  The CPA firm of Dehmel & Associates, PC, has experience handling these cases.  We can be reached at 317-248-2202.

This article about foreign financial reporting is general in nature and, accordingly, is not necessarily exhaustive in nature.  To learn more, access www.irs.gov.  For answers to your specific issues, the advice of a competent professional should be sought.