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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Feature Articles

 

- White House, Congress seek to avert Fiscal Cliff


- Additional 0.9 percent Medicare tax on wages starts January 1st
 

- Bonuses and year-end tax planning
 

- FAQ: Should I convert to a Roth IRA before 2012 ends?
 

- How do I use low interest rates to my tax advantage?
 

- December 2012 tax compliance calendar

 

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Health Savings Accounts, Health Care Credit, Year End Planning, Converting Your IRA, Understanding CA’s Proposition 30, and more…

Winter 2012
 

Dear Client and Friend,

 

Now that we are out of an election year, I hope that you can focus on some positive aspects of the past year and look forward to a new year and new possibilities!

 

This issue is about “Planning” for the end of this year and beyond. Tips on how tax laws can help you acquire the best plan for both your practice’s and personal financial success are included.

Let's get started...

 

HEALTH SAVINGS ACCOUNT

 

The Health Savings Account will still be available in 2013. Deductions will increase slightly for individuals with self-only coverage to $3,250 and individuals with family coverage to $6,250. This plan is only for those with qualified HSA “high deductible health plans” and in 2013 those deductible limits change slightly to not less than $1,250 for self-only and not less than $2,500 for family coverage. Remember, you can no longer deduct over-the-counter medicines from this plan. This plan is not offered to Medicare Recipients.

HEALTH CARE CREDIT

 

The Small Business Health Care Tax Credit is still in effect and will be the same through 2013. Some enhanced form will be available in 2014. Eligibility requirements are as follows:


· Must cover at least 50% of the cost of single health care for each employee


· Must have fewer than 25 full-time equivalent employees. (2 half-time employees = 1 FTE.)


· Employee average wages must be less than $50,000/year

 

The formula used to calculate the credit works on a “sliding” scale, so the smaller the business, the greater the credit. If you have 10 FTE’s and over $25,000 average wage the credit becomes 0%.

YEAR END PLANNING STRATEGIES

 

1. If you itemize, pre-pay your medical bills if the total will exceed 7.5% of your income.

 

2. Hire a veteran before the end of the year and you may qualify for the Work Opportunity Tax Credit. Maximum credit is $9,600 to for-profit businesses or $6,240 for tax-exempt organizations.

 

3. Purchase that much needed new automobile by the end of the year and you can qualify for the 50 Percent Bonus Depreciation in 2012. Same goes for other qualified new property such as computer software, water utility property and qualified leasehold improvement property.

 

4. Charge expenses with your bank credit cards before Jan. 1, 2013. Even though you pay your card off in January you can still deduct the expense for 2012. Retail store cards are only deductible in the year you pay the bill.

 

5. Consider purchases of new equipment before Jan. 1, 2013 as a new 2.3% excise tax starts in 2013, plus you can take a 50% bonus write off of cost. This bonus is not available next year.

 

6. If you expect to owe a lot to IRS, have more income tax withheld or maximize your 401K from your paychecks in December. You need to prepay 90% of your previous tax bill to not have the penalty assessed. To be safe, pay 100% of 2011 tax.

7. If your income other than gains and dividends places you in the 10%-15% bracket, (income les than $17,000) profits on the sale of assets owned for more than a year and dividends are tax free until they push you into the 25% bracket, which starts at $35,350 for singles and $70,700 for couples.

 

8. Planning your gifting:

 

- For 2012 the limits are $13,000, or $26,000 with your spouse without any tax consequences. (2013 limits increase to $14,000 and $28,000) Remember, your lifetime limit is $5.12-million exemption. That is a one-time exemption. If the exemption falls to $1,000,000 next year and you have already gifted $3.5 million you will not be able to gift any more. In other words, if it falls next year, you will not get an additional amount over what you have already gifted. The formula goes like this; the 2013 limit minus your gifts over your lifetime equals the balance of what you can gift. You may be in the negative range and not be able to at all.


- Plan for gifting through a college savings plan up to $65,000 or $130,000 with your spouse. These gifts are tax free if used for tuition, fees or books. If you give the maximum this would be a one-time only as you have then used up your 2012 gift exclusion and most of exclusion from 2013 – 2016. This also counts toward your lifetime limit. As an alternative, consider a direct tuition payment made for a student. This does not count against the $13,000 exclusion or the 5.12 million exemption.


 


Should I Convert to a Roth IRA Before 2012 Ends?
 
With 2013 bearing down on us, we hope you have a moment to spare from holiday preparation for some good old-fashioned, year-end tax planning. By now you must be familiar with the term “fiscal cliff” and how the expiring provisions, tax rates, and budget appropriations may affect small business, big business, and politics in Washington, DC.
 
However, the looming expiration dates for the Bush-era tax cuts and other tax provisions set to become effective in 2013 may also have consequences for how you save for retirement. This year we have advice for IRA account holders in particular:
 
Avoiding increased tax. If you have a traditional individual retirement account (IRA) and you are thinking about converting to a Roth so you can accumulate tax-free earnings, you might want to do it before the year ends. First, if you are in a high-income tax bracket, your taxes are likely to increase if the Bush-tax cuts expire. Converting from a traditional IRA to a Roth IRA creates a taxable event, and you may lose more money to the government by converting in 2013 than you would if you convert before 2012 ends.
 
Secondly, taxpayers whose projected 2013 adjusted gross income (AGI) will approach $250,000 (or $200,000 for single filers) may want to avoid converting their traditional IRA in 2013. The addition of their IRA assets to their AGI may push them within the income range limits for taxpayers subject to the 3.8 percent tax on net investment income that goes into effect in 2013.
 
Please note that the converted IRA assets would not themselves be subject to the 3.8 percent surtax. However the surtax would apply to any investment income the taxpayer has. Such investment income would include items such as (but not limited to) dividends, rents, royalties, interest, except municipal-bond interest, capital gains, and income from the sale of a principal residence worth more than the $250,000/$500,000 exclusions.
 
Undoing a conversion. You might be asking what would happen if you convert to a Roth IRA in 2012 and then Congress extends the current tax rates. In such cases, you would have until October 15, 2013 to undo the transaction. You could put the money back into your traditional IRA as if you had never converted in the first place. In other words, there would be no taxable event.
 
2010 conversion and deferral. Taxpayers who already converted their traditional IRA to a Roth IRA in 2010 were given a one-time privilege of deferring half of the income from the conversion to 2011 and the other half until 2012. If taxpayers elected to defer their IRA conversion income in this way, the 2012 tax year has arrived. They must report that second half of their conversion income on their 2012 tax returns. If you are a taxpayer who must report income from a previous Roth IRA conversion in 2012, it might not be in your best interest to generate additional income by converting yet another IRA before the year ends.
 
Contributions. The 2012 year-end will also bring several changes to the rules on IRA contributions, which may affect your planning. In 2013, the limits on maximum annual contributions to an IRA will go up from $5,000 to $5,500 ($6,500 for contributors age of 50 and over, up from $6,000 in 2012). This increase in contribution limits is the first time the IRS has adjusted the limit since 2008.
 
The adjusted gross income level at which taxpayers must begin to phase-out their contributions will also go up in 2013.
 

 

Income levels for a traditional IRA contribution

2013

2012

Singles

$59,000 to $69,000

$58,000 to $68,000

Married (filing jointly)*

$95,000 to $115,000

$92,000 to $112,000

Married (filing jointly)**

$178,000 to $188,000

$173,000 to $183,000

*If the spouse who makes the IRA contribution is covered by a workplace retirement plan.
**If the contributing spouse is not covered by a workplace retirement plan, but is married to a spouse who is covered.

 

Income levels for a ROTH IRA contribution

2013

2012

Singles

$112,000 to $127,000

$110,000 to $125,000

Married (filing jointly)

$178,000 to $188,000

$173,000 to $183,000

 


However, tax planners should note that the deadline for making IRA contributions for the 2012 tax year remains unchanged. You still have until your filing date, which is April 15, 2013, to make contributions for 2012.

 

WHO’S PAYING WHAT?  IRS statistics from 2010 show that the top 1% of earners, making at least $369,691 annually, paid 37.4% of all federal income taxes. The highest 5%, at $161,579 income or more, paid 51.9% of the total tax. The top 10%, at $116,623 or more, made up for 70.6%of the total tax burden and the bottom 50% paid 2.35% of the total federal tax.

 


 


UNDERSTANDING CALIFORNIA’S PROPOSITION 30!

As you know, the people have spoken and requested more taxes to try to solve the present situation. These new taxes will affect everyone to some extent.

First, the vote approved an increase in California income taxes starting with this 2012 tax year.
 
These new California tax rates will be effective to the end of 2018, and are as follows:

 

The tax rate on individuals with income $250,000 to $300,000, and joint filers with income $500,000 to $600,000, will increase 1% from 9.3% to 10.3%.

 

The tax rate on individuals with income $300,000 to $500,000, and joint filers with income $600,000 to $1,000,000 will increase 2% from 9.3% to 11.3%; and

 

The rate on individuals with income more than $500,000 and joint filers with income more than $1,000,000 will increase 3% from 9.3% to 12.3%.

 

Additionally there is an additional 1% tax for incomes over $1,000,000 under the previously approved California Mental Health Services Tax. The result is a maximum California income tax rate of 13.3% for single filers with income of more than $500,000 or joint filers with income of more than $1,000,000. 

 

These above income brackets will be adjusted for inflation in future years under Prop 30. 

 

These new California tax rates will affect people selling their businesses, real estate, houses and those with large incomes. 

 

Since this increase is effective retroactive to January 1, 2012, many may have under-withheld income and find they need to pay additional taxes not planned for. Even though you are allowed an extension to file, the full balance due must be paid by April 15, 2013 or be subject to penalties of 5% plus 0.5% for each month thereafter.

 

Secondly, every one will be affected as of January 1, 2013 with the new state sales tax increase of 0.25% bringing the state total to 7.5%. Some counties and cities have additional increases. If you’re planning large purchases and can afford it now, you might want to do it before the end of the year. This increase is slated to expire on December 31, 2016.

 

At this time it still remains unclear what changes Congress and the President will agree to on the federal income taxes, and estate and gift taxes. As you can observe in the News a lot of predictions are being thrown around of what changes to the federal tax system will be made and when those changes will occur.


 

TAX TIPS

 

- Expect delays on acceptance of some returns until mid-February, due to tax writers waiting to reinstate the expired tax provisions. This will most likely affect those who itemize.

 

- Check the balance in your Flexible Spending Account. Clean it out by prepaying expenses by December 31 or you will forfeit the money. Remember, 2013’s limit will be at $2,500.

 

- If you are 70½ yrs. or over you must take your payouts from IRAs and company plans by the year-end. You can only delay until April 1, 2013 if you turned that age this year. If you decide to defer, remember you will be taxed on both 2012 and 2013 withdrawal and you may be pushed into a higher tax bracket.

 

- If you are gifting securities, endorse them over to the donee and deliver them by year-end if you want it to count for 2012. Sending them to the corporation to be retitled may not be completed by December 31.

 

- In 2013 standard mileage rate for business driving will increase to 56.5 cents per mile. Medical travel and moving rate will increase to 24 cent per mile. Charitable driving rate is remaining at 14 cents per mile.

 

- If you are a corporation trying to qualify for Section 179 expensing on equipment that you rent to your corporation, meeting the three rules required by the IRS can be tough. Another method is to have your corporation reimburse you for the deduction using the employee reimbursement rules. This moves the Section 179 deduction to the corporation; allows you to continue to own the asset personally; creates a gain or loss when you sell the expensed asset; avoids claiming the asset as an “employee-business expense”.

 



Additional Medicare Surtaxes

President Obama’s health care package enacted two new taxes that take effect January 1, 2013. 

 

One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. 

The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates.
 
The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.
 
Additional tax on higher-income earners
 
There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.
 
The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).
 
Passthrough treatment
 
For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.
 
Withholding rules
 
Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.
 
Planning techniques
 
One planning device to minimize the tax would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.
 
Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp
 
If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact me at the office.


 


ALERT!

 

New California Employment Law
Are you paying employees based upon production?

 

During 2012, California passed a new employment law bill AB1396. This law is a requirement for employers who compensate employees for services rendered in the sale of services or goods, and that compensation is based upon the value of the product or services sold. This is considered a commission plan and there must be a Compensation Agreement in place by January 1, 2013.

 

Although there is a provision in the law, that seems to indicate if the individual actually performs the services sold, this Compensation Agreement may not apply. However, the law is unclear as it is new and untested.

 

The Compensation Agreement must include:
1. The method by which the compensation is calculated
2. Signatures of both the employee and employer

There are very limited exceptions to the law, mostly dealing with employees meeting a very short term goal.

 

If you have questions or need help with the Compensation Agreement, I encourage you to contact Anita York at (949) 222-0166. She specializes in employment law for dentists and has the agreements ready for you.

 

Do you treat your associate dentists as independent contractors? If so, you need to be sure they are not employees. Once you have confirmed that they are not employees, you need a contract with the Associate Dentist that includes the following:

 

“I do have my own practice. I am an independent contractor and I sell my dental services to other dentists. I have contractual relationships with dental offices for days and times I am able to see patients. The dental office in no way determines, goversn or influences what and how I perform dental services to my patients. I set my fees for dental services and I charge the dental offices. I do not receive 100% of the collections of the dental work I do and reimburse the dental offices for the following:


1. Setting patient appointment in my calendar for me.
2. Sending in billing paperwork to insurance companies for me.
3. Rental of dental equipment
4. Use of dental supplies in the dental office
5. Use of the dental assistant help in the dental office, whenever possible.”

 

Additionally, the Associate Dentist must bill the dental office monthly, like the lab, etc. The invoice must start with gross collections, but subtract the costs to show what the dental office is to pay the Associate on a monthly basis.

 

If the dentist is an employee, contact Anita York at (949) 222-0166 for assistance with that contract, as discussed above.

 


 


Tips to Organize Your Tax Records
Creating order out of Chaos

 
As important tax records start filling mailboxes, how can you make sure your tax preparation goes smoothly and efficiently this year? Here are some tips. 

 

1. Keep it all in one place. It seems obvious, but how often have you found yourself going through piles of paper looking for that elusive missing 1099 tax form or charitable deduction receipt? If you only do one thing, this is it. Granted if all you do is this, you end up with a massive jumble of paper, but it is better than missing something. 

 

2. Time to sort. The best idea here is to sort your information into the same buckets as your tax return. At minimum sort the information into the basic categories. If you have a lot of something, then sort into sub-detail categories. A basic list of the more common items is here for your use.

   
  Income
- Wages
- Interest Income (1099 INT)
- Social Security
- Alimony
- Dividends (1099 DIV)
- Investments (1099 B)
- Business income (K-1s)
- Winnings (W-2G, 1099 G)
- Other Income Items
Income Adjustments
- Student loan interest
- Educator expenses
- IRA contributions
- Tuition & fees deduction
- Moving expenses
- HSA/MSA contributions
- Alimony paid
- Other education expenses
   
  Itemized Deductions
- Taxes Paid
- Medical/Dental expenses
- Casualty/Theft losses
- Charitable contributions
- Investor/other expenses
- Unreimbursed employee
   expense
- Interest expense 
  > (mortgage/home equity)

    Credit information
- Child & dependent care expense
- Adoption expenses
- Education expenses
- Other credit related expense

 

Business/Rental


- Sort income and expenses for

each business activity or hobby

activity or rental unit.  

 

      
3. Not sure bucket. There may be things you receive that you are not certain about needing for tax filing purposes. These items should be gathered in one place for review. 

 

4. Time to sum. Once the information has been categorized, create a summary of the information. This summary can be a printed copy of an organizer or it could be a simple recap you create.

 

5. Is something missing? Pull out last year’s tax return and create a list of things you needed last year. Use this as checklist against this year’s information. While this process will not identify new items, it will help identify missing items that qualified in prior years.

 

6. Finalize required documentation. Certain deductions require substantiation and/or logs to qualify your expense. Common areas that require this are: business mileage, charitable mileage, medical mileage, moving mileage, non-cash charitable contributions, and certain business expenses. These logs should be maintained throughout the year, but now is a good time to make sure they are complete and ready to go for tax filing.

7. Utilize those smart phones. Several applications are out there for your use to help you organize the information. A few to mention are expensify.com, lemon.com or proongo.com.

 

THE 1099 REQUIREMENT
Although 1099’s do not have to be given to corporations, they still must be made out for any individual or sole proprietor who has received payment of $600 or more for work performed. Be sure to have a W-9 filled out, signed and dated by the individual, which includes name, address, tax ID# or social security #. Fill out 1099 and give one copy to the individual by January 31 each year and to the IRS.


 

Bonuses and Year End 2012 Tax Planning
 
As the end of the calendar year approaches, taxpayers ordinarily prefer to minimize current-year income by deferring the inclusion of taxable income to the following year, while accelerating deductions to the current year.
 
However, as many taxpayers are aware, individual income tax rates may increase in 2013, with the potential for dramatic increases for higher-income individuals (if not all individuals).
 
While it is unclear how many taxpayers will see tax increases in 2013, it is certain that rates will not be any lower than they are in 2012. Thus, some, if not all, individuals will have an incentive to accelerate income into 2012.
 
Annual bonuses for 2012
 
Employees earning annual bonuses for services performed in 2012 ordinarily would receive the bonus in 2013. And generally the employer would take the deduction in 2013. However, some employees may prefer to receive the bonus in 2012, to take advantage of the lower current tax rates. An employer may want to deduct the bonus in the earlier year, to reduce taxable income. The IRS recently issued Chief Counsel Advice (CCA 201246029) on the treatment of a bonus that illustrates some of the practical obstacles to accelerating bonus income.
 
A lesson learned
 
In the CCA, the employer awarded bonuses for the calendar year (the year of service) based on company performance. The total bonus amount accrued for financial accounting purposes at the end of the year. The bonuses were paid early in the following year, after the employer finalized the amounts, provided that the employee still worked for the company.
 
In Rev. Rul. 2011-29, the IRS determined that the employer can accrue liability, and take a deduction, for bonuses in the earlier year, where the employer can establish the fact of the liability for bonuses paid to a group of employees, even though the recipients’ identities and amounts payable were determined in the following year. In contrast, in the CCA, the IRS concluded that the taxpayer’s liability to pay bonuses was not fixed until the contingency was satisfied – the employee had to be still employed on the date of payment. Therefore, the bonuses were not deductible until the following year, when they were paid.
 
While the CCA does not discuss it, presumably if the employer paid the bonuses in the year of service (2012), they would be deductible in that same year. The employees would take the bonuses into income in 2012, when tax rates were lower. Furthermore, the income would avoid the new 0.9 percent additional Medicare tax on earned income, which takes effect in 2013.
 
Important timing exception
 
In the CCA, the timing was identical for the employer and the employee. Under Code Sec. 404, concerning deferred compensation, the employer may not deduct the bonus until the same time that the employee takes it into income. Under an exception, however,  if the employer pays the bonus in 2013 but within 2 ½ months after the end of 2012, an accrual basis taxpayer can deduct the payment in the current year, even though the employee would not include it in income until it is paid in 2013. This presumes that the bonuses are fixed at the end of 2012 and that the employer does not use a plan like the one described in the CCA.

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.

 

I wish you all a Happy, Healthy, Prosperous New Year. Remember, your success is our business!

Sincerely,

Monica Rebella, CPA

 

 

 

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