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January 2012

MONEY

by Andrew D. Schwartz, CPA

Wikipedia defines money as follows:

Money is any object or record that is generally accepted as payment for foods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment. Any kind of object or secure verifiable record that fulfills these functions can serve as money.

Here's how Vince Vaughn and Jon Favreau define money in their hit movie Swingers:  Money: (adj) Top shelf (e.g., "You're so money.")

Trent:  Baby, that was money! Tell me that wasn't money.
Mike:  That was so demeaning.
Trent:  She smiled, baby.
Mike:  I can't believe what an a**hole you are.
Trent:  Did she, or did she not smile.
Mike:  She was smiling at what an a**hole you are.
Trent:  She was smiling at how money I am, baby.

Regardless of how you view money, let's give some thought to some tax-savvy and prudent steps you can take with your money during 2012.

Find Some Money:

What better way to start the year than by uncovering some money sitting there waiting for you to find?  Start by making sure you submitted sufficient receipts to get back all the money you set aside last year to fund your employer's Flexible Spending Accounts (FSA).  Many people take advantage of FSAs to pay for their family's healthcare expenses and dependent care expenses with pre-tax dollars.  Most FSAs give you until 3/15 to submit receipts for the prior year.

You might also consider checking to see if there is any of your money sitting in your state's unclaimed money fund.  The Massachusetts Abandoned Property Division web site estimates that one person in every ten has abandoned property.  According to the Massachusetts Abandoned Property Laws, most financial assets that have been inactive for more than three years are declared “abandoned” and turned over to the Commonwealth.

Save Some Money:

As we wrote in our November 2012 Newsletter, the retirement limits have increased for 2012.  The maximum amount of money you can contribute into your 401k or 403b account through salary deferrals is now $17k.  Anyone 50 or older by 12/31/2012 can contribute an additional $5,500.  Are you on track to max out your 401k or 403b plan this year? 

Perhaps you are not in a financial position to put away the full $17k this year.  If your employer matches your salary deferrals, do whatever you can to contribute enough money to max out the matching contribution.  Otherwise, you are leaving some of your employer's money on the table.

Businesses, including self-employed individuals, can also put away more money on behalf of their owners and staff in 2012.  The max that a business can contribute for an employee, or a self-employed person can contribute into a SEP IRA or Solo 401k, is higher by $1k for 2012 - up to $50k.

And as the health insurance industry continues to evolve, consider contributing money to a Health Savings Accounts (HSA) if you have a qualifying high-deductible plan.  For 2011, single individuals can contribute $3,050 and families can contribute up to $6,150.  Anyone 55 or older can contribute an additional $1,000. You have until 4/15/2012 to fully fund your HSA for 2011.

How great are HSA's?

  • Money contributed to an HSA is pre-tax.
  • Money within the HSA grows tax-deferred.
  • Money withdrawn from an HSA to pay for your family's healthcare costs is tax-free.
  • The money in the HSA is your money, and any money remaining in an HSA once you turn 65 can be used to supplement your retirement income.

Put Away Some Money for College:

If you have children, grandchildren, or other people who you plan to help pay for college, contributing money to a 529 Account on behalf of each person is a great way to earmark that money.  While you contribute post-tax dollars into a 529 plan, the money grows tax-free as long as it's ultimately used for college.  Please note that many states do offer a tax break for taxpayers who contribute to 529 plans.

Another advantage of these accounts is that you can take back all the money sitting in a 529 account at any time down the road.  Expect to owe taxes plus a 10% penalty on the earnings portion of any money withdrawn that isn't used for college, however.

Spend Some Money:

Certain itemized deductions are only allowable to the extent they exceed a percentage of your income. For medical expenses, the threshold is 7.5% of your Adjusted Gross Income (AGI). For miscellaneous itemized deductions, which include your professional expenses not claimed against independent contractor income on a Schedule C, the threshold is 2% of AGI.

The catch is that you can’t just put an expense to the year you want. Since you are on the cash basis of accounting, the expense is deductible in the year the money was spent or the credit card transaction occurred.

if you think you are on track to exceed either of these thresholds this year, consider "bunching your allowable expenses" into 2012.  Beware of the Alternative Minimum Tax, however, which might cause this strategy to backfire.

Give Away Some Money to Charities:

People who itemize can deduct donations made to qualified charitable organizations during the calendar year.  The IRS maintains a list of organizations they consider to be legitimate. Now is the time to set a goal for your 2012 contributions, and put yourself on a budget to meet that goal.

For gifts of money, keep track of the amount given.  Expect to receive a written acknowledgement from the charity for gifts over $250 during the year, and make sure to keep that acknowledgement with that year's tax forms and receipts.

Please be aware that you always have the option of donating appreciated investments to charities. While you get to claim your donation based on the value of the assets donated, you avoid paying any capital gains taxes on the appreciation.

And don't forget to clean out your closets and donate your clothing and household items to a charitable organization, since "non-cash" contributions are deductible if you itemize.  Make sure to get a receipt.  And you should make a list of each item donated, along with its condition.  Remember, only donations of clothing and household items in "good condition or better" qualify for a deduction.  (To track what you donate, download our Non-Cash Contribution Worksheet - Excel Version  or the PDF version, or use the App UDoGood.)

Read About Money:

Check out a list of 37 Must Read Books for Small Business Owners & Entrepreneurs as compiled by Ashley Bodi of BusinessBeware.Biz.  Please make sure to pay careful attention to the deeply insightful recommendation #17 regarding the book, "First, Break All The Rules".

Listen About Money:

Want to hear the soothing tones of my voice as I am interviewed on the topic of tax-savvy and prudent steps to take with your money?  Check out: Prudent Year End Tax Planning Strategies (on Greater Boston Media) (11 minutes).  The interview was actually about year-end planning issues, but George Knight and I discussed many of the items listed in this article which are relevant to taxpayers year round.

Final Words About Money:

I think Jackie Mason sums up the concept of money quite well by saying, "I have enough money to last me the rest of my life, unless I buy something."

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PAYROLL TAX CUT TEMPORARILY EXTENDED INTO 2012

by Andrew D. Schwartz, CPA

In our January 2011 Newsletter, we wrote an article called The 2% Solution about the one-year 2% reduction in Social Security Taxes.   This tax break was recently extended into the first two months of 2012.  According to our friends at the IRS:

Nearly 160 million workers will benefit from the extension of the reduced payroll tax rate that has been in effect for 2011. The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.

Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.

Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).    

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.

The IRS will issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision. For most employers, the quarterly employment tax return for the quarter ending March 31, 2012, is due April 30, 2012.

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IRS ANNOUNCES NO INCREASE TO STANDARD MILEAGE RATE FOR 2012

by Andrew D. Schwartz, CPA

The IRS announced that the standard mileage rate will remain at 55.5 cents per business mile driven in 2012.  Remember, the mileage rate jumped to that level on July 1, 2011, up from $.51 per mile at the start of last year. 

When you use your car for business, driving between job sites is deductible.  So is driving between your home and a temporary job site, job interviews, and conferences.  Commuting between your home and a regular place of business generally isn't tax deductible.

There are two ways for you to calculate your automobile expenses.  You can either claim $.555 per business mile driven in 2012 , or you can base your deduction on the percentage of miles your car is driven for business multiplied by the actual costs incurred during the year.  Allowable costs include gas, insurance, repairs, parking at home, and either your lease payments, or if you own your car, a factor for depreciation.

Generally, unless you drive your car relatively few miles each year, with most of those miles being allowable business miles, you're better off basing your deduction on the standard mileage rate.

How to Claim The Deduction

Taxpayers who are compensated as employees generally will claim their deductible automobile expenses as an unreimbursed employee business expense. These type expenses are reported on a Form 2106 and are deducted as a miscellaneous itemized deduction on the Schedule A.  Keep in mind that miscellaneous itemized deductions are only allowable to the extent they exceed 2% of your income, and are not allowable when calculating the Alternative Minimum Tax (AMT).

Those taxpayers compensated as independent contractors will generally claim their allowable automobile expenses directly against their self-employment income on a Schedule C, Profit or Loss from Business.

Other Deductible Miles

The use of an automobile in connection with a charitable activity is deductible at a rate of 14 cents per mile for 2011 and 2012 and should be reported with other charitable contributions as an itemized deduction of the Schedule A. 

Any mileage driven in connection with a qualified move is deductible at a rate of 23 cents per mile in 2012, decreasing from 23.5 cents per mile for the second half of 2011, and should be reported on a Form 3903, Moving Expenses.

And don't forget that medical related mileage is also deductible. Medical mileage is allowable at 23 cents per mile in 2012 and should be reported with all other medical expenses on the Schedule A.

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2011 & 2012 TAX FACTS

  • For 2011, the standard deduction for a single individual is $5,800 and for a married couple is $11,600. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2011, the personal exemption is $3,700. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $110,100 for 2012, up from $106,800 in 2011.
  • The standard mileage rate is $.555 per business mile as of July 1, 2011, up from $.51 per mile for the first six months of 2011.
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $17,000 in 2012, up from $16,500 in 2011.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account that year.
  • The maximum annual contribution to your IRA is $5,000 for 2011 and 2012.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2012 to make your 2011 IRA contributions. 

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