Rebella Accountancy | 507 E. First Street, Suite A | Tustin, CA 92780 | Phone: 714-619-0667 | Fax: 714-544-0236

       

 

 

Monica Rebella, CPA

Rebella Accountancy

 

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Other Articles

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Feature Articles

- Mid-year brings no resolution to fate of Bush-era tax cuts, extenders and more
- Don't overlook the value of depreciation deductions
- Coordinating education tax incentives requires careful planning
- June 2012 tax compliance calendar
- The Saver's Credit: An underused retirement savings benefit
- Using fringe benefits as an income substitute during the economic downturn

How Do I?

- Comply with the upcoming
- Obtain an appraisal for a noncash charitable contribution
- Deduct a contribution of clothing or a household item under the new rules?

Frequently Asked Questions

- How much proof is enough, when contributing used clothing to charity?
- What is IRS's new "real-time" tax system?
- When is the best time of year to contribute to an IRA?
- How does a 60-day loan from an IRA work?
- What if I owe taxes and can't pay the full amount?
- How does the new sales tax deduction for vehicle purchases work?

 

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Summer 2012

Dear Client and Friend,

  I hope you are enjoying some summer fun and relaxation!  You know it is well deserved!

  As we end the summer, we're finishing up mid-year reviews for our clients.  If you:

- got married
- were divorced/separated
- bought a house
- sold a house
- bought or will buy new equipment
- inherited property
- hired independent contractors

please call our office.  I have blocked out time this summer to meet with clients to review changes and implement new strategies if necessary.

   I want to share some valuable information with you at this time, especially in regard to the Affordable Health Care Act and how it will affect you.  You can also listen to my recorded video conference on this subject on my website, www.mydentalcpa.com. In knowing what to prepare for, you can set a plan for success even in this uncertain climate.  As usual, I am also including other pertinent information you should pay attention to in order to maximize your earnings.

Let's get started...

 



Effects of the Patient Protection Affordable Care Act

Now that the Supreme Court has decided to allow the "Affordable Care Act" to go forward as a tax, let's look at what is now in place and some of the changes ahead.

Currently in effect now:

" Small Employer Health Care Credit

" No Rescission Of Health Insurance Coverage by Insurance Companies

" Elimination of Lifetime Limits on Essential Healthcare Benefits

" No denial of coverage on children under 19

" Children (unmarried) under 26 can be included in parents insurance

" Distribution out of Health Saving Account for non-qualified medical expenses is now penalized @ 20% of the expense cost

" No over-the-counter drug reimbursement from Cafeteria/Flexible Spending plans

Effective in 2013:

• Starting with the 2012 W-2 Forms - the cost of employer provided health insurance must be included

• 2.3% sales tax on purchases of medical/dental equipment must be charged

• Employers are required to withhold additional Medicare Surtaxes of .09% on employees where W-2 income will be over $250,000 (married) and $200,000 (single).

• Additional 3.8% tax on lower of net investment income (interest, dividends, capital gains, royalties, rents) or income over the $250,000 (married) and $200,000 (single)

• Cafeteria Plan/Flexible Spending accounts reimbursement is limited to $2,500

• Employers will need to provide an 8 page benefit notice including information on Healthcare

• Ability to deduct medical expenses as itemized deduction for individuals must now exceed 10% of income rather than 7.5% (65 yrs+ not until 2017)

Effective in 2014:  

The IRS will be collecting the "tax" for any individual not carrying "minimum" health insurance starting with the 2014 tax returns

New "tax" for no insurance will be calculated as follows:

Year 2014 - the higher of $95 per adult (18 yrs.+) and ½ this for children in the household uncovered - or 1.5% of income over the filing threshold

Year 2015 - the higher of $325 per adult and ½ this for children or 2% of income over the filing threshold

Year 2016 - the higher of $695 per adult and ½ this for children or 2.5% of income over the filing threshold

Example of above - 2014 income of $50,000 and filing threshold is $5,000. ($50,000 - $5,000 =$45,000 X 1.5% = $675. This is greater than $95.00, but there is a maximum of $285.00/household) This would be a tax in 2014 of $285, 2015 of $900, (maximum is $975.00) and 2016 of $1,125 (maximum is $2,085.00)for the household.  

Insurance companies may be required to issue 1099's to the IRS to verify coverage.  These will be attached to your tax returns.

Employers with 50 plus "full-time" employees in the prior calendar year must provide affordable "minimum essential benefit" health insurance coverage for full time employees or pay an excise tax.  This tax on the employer is non-deductible.   

Seasonal workforces are exempt.  The tax is $2,000 per year per employee. (Tax rate increases to $3,000 if any employee buys coverage through an exchange.) The tax can also be imposed if: 1) Coverage is not the "minimum essential benefit" 2) Plan does not cover 60% of the costs 3) An employee obtains insurance through the state insurance exchange 4) Coverage is deemed not to be affordable or 5. Costs to the employee is more than 9.5% of their income.  Employers will now need to collect information about their employees total household income in order to determine if they are eligible for Federal finance assistance (below poverty level qualifies).

- Employers, who have less than 50 employees and are currently offering health insurance, may come under these rules.  It is unclear at this time.

Health Insurance Exchanges will be available to individuals with Federal assistance for those with income under 400% of the Federal "poverty level".  Right now, this is about $55,000 for a family.

Insurance cannot be denied for individuals with pre-existing conditions.

WHAT TO DO NOW

Check List for Employers

• Check with your insurance and payroll companies on the method needed to report each employee's heath insurance premium on the 2012 W-2s.  

• Work with your office manager to make sure you have information about the cost of health insurance per employee.

• Find out how your insurance company can help with the required 8-page notice to your employees of health benefits.

• Make sure your employees are not getting reimbursed for over-the counter-drugs through Cafeteria/Flexible Spending Plans

• Let employees know that in 2013 the Cafeteria/Flexible spending reimbursement amounts drop to $2,500/year.

• If you are an employer who is not required to provide health insurance consider:

1. Looking to high deductible plans for HSA account and perhaps consider funding part of HSA account for employees

2. Reimburse employees all or a percentage of their own health insurance premium

3. Give employees a bonus for the new "Tax" for no health insurance

My personal belief is that the Patient Protection Affordable Care Act is going to create higher insurance premiums and more taxes.  Many insurance companies are already pulling out of the market since they can no longer refuse children with pre-existing conditions and in 2014 cannot refuse anyone with pre-existing conditions.  If they aren't leaving, they are increasing premiums as there are no constraints built into the Act to reign in the upper end of the price of insurance.  Also, it is likely that more individuals will have less benefits in their health coverage as this Act only requires employers provide for "minimum essential benefits".  Employers may need to work with insurance providers to offer employees options for benefits over the  "minimum".

 


Employee versus Independent Contractor, That is the Question!


The IRS and State of California have raised the penalties on an employer for improperly classifying employees as independent contractors to $5,000 a year for every misclassification. Even if, your associate dentist is incorporated, it does not mean you are OK. Be sure to evaluate the guidelines set by the IRS in maintaining the Independent Contractor status of your associate. The following three areas are recommended for review by the IRS as constituting an Employee status:

• Behavioral Control - if the hiring entity has the right to direct or control the work by instructing when and where the work is done, what tools or equipment to use, etc.  The more detailed the directions, the more this is an employee situation.

• Financial Control - if the hiring entity has the right to control the economic aspects of the worker's job, this is more likely to be classified as employee.  Do you provide a guarantee rate or calculate the associate payment vs. the Associate bills you?

• Type of Relationship - this is how both the hiring entity and worker perceive their relationship with each other.  Contracts do not necessarily mean an independent contractor status and if the relationship is continued indefinitely, this is most likely an employee.

Does this mean you can no longer pay associates as independent contractors?  Not necessarily, but careful review of your situation is needed and potentially new procedures will also be needed.

Related to this issue, is the problem of the •household employee•.  If you are paying a household worker $1,800 or more in one year, and they are under the •employee status• then you must submit a

W-2.  Much the same as above, here are some factors the IRS looks for:

• If the worker controls how the work is done, uses their own tools, and has a number of other customers, they are more likely to be self-employed.

• If an agency supplies the worker or daycare is provided in the worker's home, they are not your employee.  

• If you determine they are your employee, you must obtain an employer identification number from the IRS and file a W-2 each year.


THE STATE OF CALIFORNIA WANTS TO KNOW!

If you inherit or want to gift any California real estate, you should be aware of a little known law on the books, stating that you must report the change to the California State Board of Equalization or be fined.  Since the State is in such dire need of additional funds, they are now cracking down and assessing significant penalties for failing to report these changes.  The only exception is, if you are moving the property into a Family Living Trust.  Penalties are now up to 10% of the new property tax value assessment.  

This means that if you have property valued at $1,000,000 and the tax on this is $12,000, the penalty is $1,200 plus interest for each year the change was not reported.  The State is now going back 6 years and working with the IRS on gift returns filed, that includes California real estate with no change in ownership reported to California.  

If you have inherited or gifted real estate in California, you need to file the change using Form 100B with the California State Board of Equalization.  Please also be aware, that if 50% or more of the ownership in California real estate changes, California may reassess the property value for real estate tax purposes.  There are planning opportunities.  If you are, or have changed the ownership in California real estate, give me a call and set up an appointment.


TAX RECORD KEEPING SHOULD EXTEND TO 7 - 10 YEARS!

One of my clients was recently audited and was requested to produce records on equipment purchased eight years ago.  When I questioned the IRS agent as to what code and regulations pointed to this, I was informed that it was stated in the IRS agent manual, not necessarily in the IRS code, however.  Here is the rule; if you are still depreciating the asset (taking a current tax deduction) then you need to have the original purchase records.

 Therefore, I recommend you keep your tax and business records for 10 years.  If you own real estate, stock or other long-lived assets, you need to keep your original purchase documents until you sell.

 


Tax Tips


1.   Avoid any gift tax filing by not exceeding the maximum annual limit of giving $13,000 to any individual.  If you are married, this maximum limit can be $26,000 per individual.   No limits apply if you make payments directly to a provider on behalf of the individual, such as payment to medical providers or educational institutions for tuition.

2. Do not assume that any IRS or California notice is automatically correct.  Many have received incorrect notices stating they owe more tax.   Recently, a client received a notice from California that they owed more tax due to a difference in their H.S.A. contribution.  California does not allow a deduction for an H.S.A.; therefore there cannot be any additional tax due.  Open any notice immediately, review carefully and respond timely or send it to us.  Any responses to the IRS and California should be sent by certified mail to provide proof.  Never assume ignoring the problem will make it go away.  

3.  Need to draw funds from your Traditional IRA prior to retirement?  Here are some instances where you can, without the 10% penalty for early withdrawal.

a. Pay medical insurance premiums for you and your family if you have been on unemployment for 12 weeks or more.

b. Pay for college tuition, books, fees supplies and equipment for you or members of your immediate family.

c. Pay for medical expenses in excess of 7.5% of your AGI.

d. Up to $10,000 for first-time home buyer.

e. Amounts withdrawn while on active duty for more than 179 days.

f. You can take out money for up to 60 days and then replace the money, without penalty or tax.

Remember, you still must pay income tax on any withdrawals.

4.  In order to deduct travel expenses on a business trip the IRS applies the "overnight" rule.  If you are away from home for business purposes and you stay overnight you can deduct airfare, ground transportation, meals and lodging.  If you do not stay overnight, only airfare and ground transportation is deductible. Food is only deductible at 50%, but all else is 100%.  It is a business day, if you are in the pursuit of business for at least 50% of the business day (4 hours).

5. Own your own building as an individual, S corp or single-member LLC and rent it to your business, whether it is a proprietorship, S corp, or single-member LLC.  Federal tax law allows you to treat both the rental and the building as one under what is known as "grouping".  This will allow tax deductions for your rental property losses.  You must be an owner of each with the same proportionate ownership interest.   If you own the building 100 percent and your practice 100 percent, you pass the "appropriate-economic-unit" test.  If you are husband and wife, with separate ownership in each and you are filing a joint return, you are once again allowed to "group" the two.  For example, a business which has $300,000 in net income can use the rental property's loss of $100,000 to reduce the taxable income to $200,000.  You must make a formal election to the IRS for this.  If you are interested in forming a "grouping" contact our office for assistance.  

6. Still thinking of retiring early?  Here are some items to consider to assist you in planning :

• Maximize tax advantaged retirement accounts like traditional IRAs and 401(k)s, profit sharing, defined benefit

• Use the "catch -up" provisions if you are 50 yrs. plus.  Maximum contribution amounts increase by up to $5,500 depending on your plan

• Consider adding Roth IRAs or Roth 401(k)s if you expect tax rates to increase during your retirement years.

• Set up Health Savings Accounts to take advantage of the •catch-up• provisions.  You must be in a qualified high deductible, medical insurance plan to be eligible, but unused funds can be invested and carried forward to future retirement years.  

• Plan where you want to live in your retirement.  Some states have  no income tax and others have plans for higher taxes.  Research is needed before you move.



ROTH IRA CONVERSIONS

Consider converting your Traditional IRA to a Roth IRA now!  Why?  Taxes that you pay on the conversion will be less now as rates are set to increase in 2013.   The amount in the Roth IRA will not be taxed further, at a later date when taken as a distribution, which means the lesser rate to pay is right now!  Remember, you do need to pay the tax on the converted amount with 2012 rates, but we are guaranteed the rate will increase in 2013.  Why wait to pay more?  Get the lowest tax rate now!



A DIFFERENT INSURANCE NEED


Although the new tax rules are about Health Insurance, I want to share my thoughts and experience with what I consider to be a very important need in planning for your future and that of your family.  The need is of Life and Disability Insurance.

I know many people don't want to think about the inevitable, and want to take the gamble of self-insuring, but in this instance, it can cost greatly in the end.   I recently lost a client to a sudden diagnosis and rapid end of life.  During his decline, he had to sell his business with very little planning time.  In planning for the future of his wife, several years younger than he, we found that since he saw little need for Life and Disability insurance as he got older and the family was grown, he had canceled the insurance to reinvest the premiums in other forms of investment strategies.  Sadly, he couldn't make it to that end.  Retirement was many years off for him.  Prior to his passing he was able to receive state and federal disability, but these did not transfer to the wife after his death.  There was still a mortgage on the home but without life insurance the mortgage could not be paid off or go into a reverse mortgage to stay in the home.  

Needless to say, I was surprised and saddened by the loss of my client and the situation it put his family in.  I know that was never his intention.  So, I just want to caution all of you that there are situations in life in which we need to have a plan to cover; taxes, health, retirement, disability and death.  Where there is one, perhaps there are more, and I would hate to have this happen to any of my clients again.

Therefore, with the uncertainty about health insurance coverage by employers for employees, cost of health insurance, as well as life and disability insurance, I recommend contacting an insurance agent that I know, who really takes care of my clients, Bart Korsak with New York Life at 951-264-0963.  Take care!


TAX PLANNING

Planning ahead for tax season is very important so you can reduce taxes and maximize your income.  Know the deadlines and tips to planning.  Here are some of my favorites:

1.  Your child or grandchild has a summer job: Consider setting up a Roth IRA for them

• You can put in up to $5,000 (but, no more than their earnings). This amount counts toward the annual gift tax exclusions ($13,000 individual/$26,000 spouses).  

• Growth benefits:  contribute $5,000 to a Roth IRA , for your 16 year old.  It earns 7% each year and grows to $138,000 by age 65 and $193,000 by 70.  

• Additional advantages: all withdrawals made after age 59½ are tax free.  Also your child can take out the contributions (not earnings) free of tax at any time.  Certainly useful for a down payment on house, college tuition, etc.

2.  You inherited an IRA last year:  beware of tax deadline

• Beneficiaries for IRAs are set on Sept. 30 in the year following the death of the IRA owner.  

• If just one beneficiary is not an individual (i.e. charity or college), the IRA must be cleaned out within five years for all, instead of an individual beneficiary taking distributions over their lifetime.

• Remedy: Redeem the non-individual's IRA interest by Sept. 30 and the remaining individuals can enjoy the distributions over their lifetime, creating more tax free buildup of the IRA.


STUDY GROUP TRIP CAN BE DEDUCTIBLE EDUCATION

Many of my clients who are in professions that require continuing education have questioned whether their study group's trips are tax deductible or not.  Here are some key points to keep in mind.

• A study group is putting on the trip for the purpose of educating and has evidence of the programs and material covered that can clearly establish the educational purpose for the trip.

• Activity of trip is to promote extra time for business discussions within the group and makes it more practical for all to participate in the business discussion.

• Location must be in the tax-defined North America area.

• If you automatically qualify for CE credit this is a bona fide benefit to your business.

• To qualify a day as a •business• day, you need to have at least 4 hours out of 6 hours of scheduled CE activity.  So go for four hours and one minute or more.

• Courses should take place in an •educational• setting, such as a meeting room in a restaurant or lodge.

• Assume that this is for 4 day, 3 night trips.  The 1st and 4th day are travel days, day 2 & 3 are "trip" days.  You are now away for the required 3 nights.

• Here's what you get:  Tax-deductible lodging for three nights;  tax-deductible travel costs to and from location; tax-deductible meals, drinks and other costs of sustaining life

• Any extra entertainment costs that brought the group together i.e. sailing, fishing, golfing is deductible at 50% of the cost.  Lodging is 100% deductible if it is incurred for CE purposes.


          Business Miles and Home Office

Congress has clarified and relaxed the rules regarding home office.  If you have no other work office, you should establish an office in your home to be able to take as many business miles on your car as possible.  If you have another work office, you can still have an office in your home for administration.  By establishing a home office, every mile from your home office to your first business stop each day is deductible mileage. .  If you cannot establish an office in your home, you will lose deductible business miles.

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I hope you have found this information useful to you for planning out your year end strategies for your dental practice and/or personal life. I am always available to assist you further in your tax or financial needs.  

Please feel free to call the office at
714-619-0667 or visit my website at www.mydentalcpa.com where you will find additional information and many tools for you to use for your tax needs.  

Remember, your success is our business!

Sincerely,

Monica Rebella, CPA/IAR

 

 

 

Monica Rebella, CPA | President - Rebella Accountancy | Certified Public Accountants
507 E. First Street, Suite A | Tustin, CA 92780 | Phone: 714-619-0667 | Fax: 714-544-0236
Email: mrebella@rebellacpa.com | www.RebellaCPA.com | www.MyDentalCPA.com