Now that we’ve become complacent about federal income tax rates being 35% or less, and capital gains and qualified dividends increasing from zero to 15%, it’s time to consider that low tax rates may soon expire…and develop a plan for that possible change.

We already know investment income will have a 3.8% surtax and the Medicare tax rate will be 0.9% higher for salaries around $200,000, beginning in 2013. We also know Warren Buffet wants to pay more and thinks many of you should join him. So, the key question is this: if higher rates are inevitable, how should you prepare for them?

First, consider accelerating income to be recognized by the end of 2012. That tactic, of course, is easy with most capital gains, as we can choose when we want to sell most assets, although from an investment perspective, selling solely for tax purposes may be foolish, so look at all angles.

During the next year, consider dividends paid from closely held corporations if they are within your control. Also, if you have an installment sale in which income is being deferred over several years, you might elect out of that treatment and declare the balance of the gain in 2012. It may make sense to do some IRA rollovers to a Roth account if it doesn’t push you into a much higher tax bracket; then, you can draw on your account income tax free in future years.

The strategy of accelerating income and deferring deductions may also be wise because we potentially will see the phase-out rules kick in again for itemized deductions, thus making that income taxable at 39.6% or higher in 2013.

You may also want to consider the traditional strategy of shifting income to other family members by putting them on the company payroll or gifting them income producing property so it can be taxed at a lower rate. Be sure you understand their tax situations before you employ this route, though, so you don’t have any unintended consequences.

Your deduction strategy may call for deferring charitable contributions or the payment of real estate taxes until 2013, as they may be worth more to you in a higher tax bracket.  Be aware, though, of the impact this decision may have on potential Alternative Minimum Tax (AMT) that year. If you expect a large medical expense, 2012 may be your best year to deduct it because the long-lived 7.5% exclusion will rise to 10% the next year, so it’ll be even harder to meet that test.

If you have a pass-through business, don’t forget the additional timing opportunities stemming from that. For example, if you don’t generally maximize your retirement contributions, you may be able to reduce your 2012 contribution and  add that amount to what you contribute in 2013; thus, you will have accelerated income to 2012, which may be a lower tax rate year.

This list isn’t all-inclusive, but it should get you to thinking about your options. For professional help developing a strategy that fits your income, deduction, family and tax matrix, email Patrick & Robinson CPAs at Office@CPAsite.com or call us at 904-396-5400.

Filed under: Tax by Mark Patrick
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Even though the 2012 plan limits increased only nominally, at least they moved up for the first time in three years. Conventional wisdom has guided us towards deferring income taxes through contributions to our retirement plans; but the prevailing low returns and the prospects of future higher tax rates may prompt adjustments to our old plans.

Following, are the qualified retirement plan options with the maximum employer limits through tax-year 2011 (some of which allow final 2011 contributions by April 17 this year or filing date if you use an extension. Not sure what your plan allows? Contact us.):

• The Individual Retirement Account (IRA) is limited to $5,000, plus $1,000 for those older than 49.
• The Savings Incentive Match Plan for Employees (SIMPLE) IRA is limited to $11,500 of employee contribution plus 3% of salary added by the employer.*
• The Simplified Employer Pension (SEP) IRA is paid by the employer and limited to 20% of salary.*
• 401(k) and 403(b) plans are limited to $16,500 of employee contribution, plus $5,500 for those older than 49, plus a maximum of 25% salary added by the employer.*
• The Defined Contribution Plan is paid by the employer and limited to 25% of salary.*
• The Defined Benefit Plan is paid by the employer and based on actuarial assumptions of age, retirement date and investment returns. ^#

*  In each of these plans, the total contribution that can be added to any participant’s account cannot exceed $49,000.

^# The maximum compensation that can be included in the computation is $195,000.

For 2012, 401(k) and 403(b) employee limits will be $17,000, with the maximum total contribution limited to $50,000 and the Defined Benefit Plan compensation is capped at $200,000.

Here are some items to consider when choosing a plan:

• Regardless of the tax deduction, it makes sense to contribute to an employer plan when the employer is going to match you, as your immediate rate of return is substantial.
• It’s important to look at the benefit of the current income tax deduction against the tax rate on your benefits in your retirement years.
• Consider that the appreciation of your investments will be taxed at ordinary rates instead of capital gains rates for traditional investments.
• Qualified plans and IRAs have creditor protection while traditional investments don’t.
• The place between a qualified plan/IRA and traditional investments would be a Roth IRA or a Roth 401(k) plan, where you have creditor protection, potentially an employer match on the 401(k), and tax-free appreciation. There’s no addition to your adjusted gross income, which affects the deductibility of many other items and the taxability of your Social Security benefits.

If you keep tax-deferred funds in either a qualified plan or a traditional IRA, you can still choose to roll over to a Roth account; paying the taxes in the current year would give you a tax-free benefit in retirement. While you can’t make a Roth contribution if your AGI is greater than $169,000 (if you’re married filing jointly;  $107,000 if you’re single), you can make a non-deductible IRA contribution regardless of your income or qualified plan participation; then, simply roll those funds into a Roth.

Generally, your current employer won’t permit a 401(k) rollover to an IRA while you’re actively employed; but, when you’re eligible, consider the administrative cost of professional management in the former employer’s plan versus your IRA account and your ability to manage your investments on your own.

As you can see, many considerations exist in making these decisions, so plan wisely and feel free to ask Patrick and Robinson CPAs for help. You can reach us at Office@CPAsite.com or, to speak with someone directly, call us at 904-396-5400.

Filed under: General by Mark Patrick
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Last week we opened our two-part series on funding for secondary education and the tax credits available to you. If you missed it, click here. This week, we’ll address some additional options available to you:

Lifetime Learning Credit

The Lifetime Learning Credit helps parents and students pay for post-secondary education.

For the tax year, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. Although no limit exists on the number of years the Lifetime Learning Credit can be claimed for each student, a taxpayer cannot claim both the American Opportunity Credit and Lifetime Learning Credits for the same student in one year. Thus, the Lifetime Learning Credit may be particularly helpful to graduate students, students who are only taking one course and those who aren’t pursuing a degree.

Generally, you can claim the Lifetime Learning Credit if all three of the following requirements are met:

• You pay qualified education expenses of higher education
• You pay the education expenses for an eligible student
• The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return

If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. Meaning, for example, you can claim the Hope or American Opportunity Credit for one student and the Lifetime Learning Credit for another student in the same year.

Tuition and Fees Deduction

You may be able to deduct qualified education expenses paid during the year for yourself, your spouse, or your dependent. You can’t claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. Additionally, the qualified expenses must be for higher education.

The tuition and fees deduction can reduce the amount of your taxable income by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income; meaning you can claim it even if you don’t itemize deductions on Schedule A (Form 1040). This deduction may be especially beneficial to those who can’t take the Lifetime Learning Credit because their incomes are too high.

Generally, you can claim the tuition and fees deduction if all three of the following requirements are met:

• You pay qualified education expenses of higher education
• You pay the education expenses for an eligible student
• The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return

You cannot claim the tuition and fees deduction if any of the following apply:

• Your filing status is married filing separately
• Another person can claim an exemption for you as a dependent on his or her tax return. You can’t take the deduction even if the other person doesn’t actually claim that exemption
• Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return)

Qualified Education Expenses

Student-activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance.

However, expenses for books, supplies and equipment needed for a course of study are included in qualified education expenses whether or not the materials are purchased from the educational institution.

Education Expenses That Don’t Qualify

• Insurance
• Medical expenses (including student health fees)
• Room and board
• Transportation
• Similar personal, living or family expenses

Confused about the information contained in these last two blogs? Or do you just need some guidance from a trusted CPA? We can help you decide which route fits best for your needs. For personalized service, contact us today at Office@CPAsite.com or (904) 396-5400.

Filed under: Tax by Adam Robinson
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What does secondary education share in common with health care? Among other things:

• costs for both have risen significantly above the inflation rate for years, and
• both are essential in today’s economy.

This week and next, we’ll discuss several options that exist regarding funding education costs and tax credits available for your dependents or yourself.

Prepaid state college plans and 529 plans offer two long-term financing options. Some people think theFlorida prepaid program is useful only if your child attends a state school, but the program actually allows you to use the funds at any school (public or private) based on a standard per credit hour rate. The 2011 credit was about $120 per semester hour, which may not go very far at Harvard or Georgia Tech but it does help.

The 529 plan enables you to fund a plan with after-tax dollars, which hopefully will appreciate in value. The appreciation isn’t taxable as long as the funds are used for educational purposes. If the child you set it up for doesn’t need it for undergraduate studies, it can be used for graduate work or transferred to another child. Most importantly, remember to adjust the portfolio as your child gets closer to college. Your window for needing the funds for college is very small and often can’t be delayed as you may do with retirement.

Many Florida families rely on the Bright Futures program to fund their children’s education. For 2011, though, the maximum funding it provided was $100 per semester hour. With most state universities charging closer to $150 per semester hour, some additional funding will be required to cover this deficit. A prerequisite to receiving the Bright Futures Scholarship is the filing of a Free Application for Federal Student Aid (FAFSA). It’s likely that the Bright Futures program will not be available to higher income families in the upcoming years.

While several tax benefits for education exist, many have income restrictions:

American Opportunity Credit

Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualify for the American Opportunity Tax Credit to pay for college expenses.

Originally a modification of Hope credit for tax years 2009 and 2010, the American Opportunity Tax Credit was later extended for an additional two years – 2011 and 2012.  This extension made the benefit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Required course materials were also added to the list of qualifying expenses, and the credit can be claimed for four post-secondary education years instead of two. Many of those eligible qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less – $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and Lifetime Learning Credits.

Check back next week when we’ll discuss additional options for funding education. In the meantime, if you have any questions about this blog or other financial matters, contact us at office@CPAsite.com or (904) 396-5400.

Filed under: General by Adam Robinson
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Happy New Year! We’re sure you’ve heard about the Christmas gift fromWashingtonwith the extension of the 2011 payroll tax cut into the first two months of 2012, but did our leaders consider what an interesting puzzle they created for employers to implement?

The extension seems to be a basic 4.2% rate on the employee side of the FICA withholding, while the 6.2% rate will be maintained on the employer side. But wait, that only applies until February 29^th; after that date, this carriage returns to the pumpkin of a 6.2% rate for both sides. Sounds simple, but let’s look at how these 11^th hour rules will be implemented:

The Temporary Payroll Tax Cut Continuation Act of 2011 (you know they spent hours thinking up that clever title) was just signed into law December 23^rd. A handful of loyal IRS staffers waived their last- minute shopping opportunity to provide initial guidance on how this extension will work. With such a short window, it’s likely we’ll see our Circular E (Employer’s Tax Guide) booklets a little later in January this year.

Rule 1:  Any incorrect withholding of FICA taxes in January needs to be fixed by the end of the month. If we mistakenly fall back to the old rule of 6.2% after the first of the year (which is what was expected), then we can provide a refund of the taxes in excess of 4.2% any time before the end of March. All employers should be withholding the correct rates by February 1^st. Of course, whatever is withheld must be deposited using the EFTPS system according to the standard protocol.

Rule 2: This rule applies to employees who are on track to earn greater than the 2012 FICA limit of $110,100 in 2012. It’d be easy to assume someone earning this higher income could unfairly benefit from the lower interim rate by taking a large salary in the limited, two-month period of FICA reduction using the 4.2% rate, then having the smaller balance for their FICA taxable payroll assessed at the higher rate the rest of the year. To prevent individuals from gaining a discriminatory advantage, Congress provided an alternative approach for us to follow. High-income individuals will benefit from the lower FICA rate on their salaries, but will have to pay a new 2% income tax on the salary that exceeds $18,350 (and is less than $110,100) during that two-month period.

The interim guidance comes with the reassurance that a fun-filled Form 941 will be developed for the first quarter to help us report two months at the 4.2% rate and one month at the 6.2% rate, plus rules for them to recapture any excess benefit that may occur for employees who have FICA wages from more than one employer this year. Employees most likely will not notice any changes if their companies get it right, however.

See, wasn’t that fun? Just wait until they return to discuss extending this opportunity for the rest of the year. In the meantime, if you need a good payroll service, we can help; contact Patrick & Robinson CPAs today at Office@CPAsite.com or 904-396-5400.

Filed under: Tax by Mark Patrick
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Residents of theUnited Statesholding foreign bank accounts with more than $10,000 in the aggregate at any time during the previous year are required to file a report of Foreign Bank and Financial Accounts (FBAR) to explicitly report the existence of and income from such accounts.

The goal of FBAR is to enable people holding foreign bank accounts a way to bring that money into the United States in a “clean” way, without any civil or criminal consequences and only a small penalty (anywhere from 0 to 25%), if applicable.

So if you hold $500,000 in a bank account in Bermuda, which is notorious for such activities, filing the FBAR is a good way to convey that information to theU.S.government.

However, several issues have become clear:

1.   FBAR is not new. Residents were always required to file it. If you file it freshly in any year, the IRS can question the reason and potentially assess penalties for failure to file in the past…and come back with more questions.

2.   If you reported all your foreign income in your tax returns and simply didn’t file the FBAR, you’re better off than if you didn’t declare it. You can claim ignorance of the requirement, though the success of such petitions is unclear. In addition, if you checked the box on your Schedule B that asked if you own foreign accounts, that’s even better. As long as you didn’t explicitly deny the existence of those accounts, and declared that income in your returns, you fall in this category and have a shot at incurring no penalties.

3.   If you didn’t declare that income, you’re now in a bit of a challenging situation. A “Voluntary Disclosure Practice” enables you to come clean with your disclosure and income reporting. However potential penalties still exist with this program.

IRS problems don’t go away by ignoring their existence, so we recommend addressing them as soon as you can.  If you need someone to help steer you in the right direction – or to prepare your taxes so you can avoid problems from the start – contact us at Office@CPAsite.com or (904) 396-5400.

Filed under: Tax by Adam Robinson
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Recently we talked about the estate tax laws, but the gift tax laws also changed dramatically at the end of last year. The interaction between estate and gift taxes through the “unified credit” remains essentially the same from 2001, with the exception of the tax rates and the amount of the resulting exclusion.

A window of opportunity opened in late 2010 that may last only through the end of 2013: a short-term increase in the gift tax limit from $1 million to $5 million. With a spouse, that limit can rise to $10 million. So how can you leverage this opportunity?

For years, tax professionals routinely suggested ways to freeze an estate by gifting assets to their potential beneficiaries well before death, so that those assets can appreciate outside the donor’s estate. Since many family assets have deflated in recent years, gifting now may provide more leverage for that appreciation.

The downside of early gifts is that the donor’s tax basis stays with the property gifted, so the potential income tax to the recipient needs to be weighed against the potential future estate tax if the assets are not gifted.

Of course we have no idea what the future gift or income tax rates will be, nor do we know when any of us will die; but we must make some assumptions to develop a plan.

So what does estate freeze gifting look like?  Well, quite frankly, illustrating an example is a bit more complicated than this blog permits, so contact us and we’ll walk you through a couple of examples.

As the title of this post suggests, the cliché, “timing is everything” is especially true when we’re discussing family gifts. So if this issue applies to your situation, make time soon to reach our Patrick & Robinson CPA professionals at office@CPAsite.com or 904-396-5400.

Filed under: Tax by Mark Patrick
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Last weekwe laid out the details of Medicare benefits and gave you an outlook on what is scheduled to happen next. Now we’ll finish this two-part series with our thoughts on how to handle the changes.

Specifically, you’re probably asking, “How do we protect ourselves from the effects of this painful process?” Here are two suggestions:

1. Prepare yourself for covering more of the costs by getting healthier and becoming a better healthcare consumer. Diet and exercise have been neglected by our aging society for decades and it’s up to us individually to change that. Plus, the third-party pay system of letting our insurance carriers decide who provides our care and at what price does not promote good consumerism. Clarke Howard would be ashamed of us. 
2. Get informed and involved in the process of healthcare and entitlement reform. The luxury of an unlimited entitlement budget is about to end. No matter how much we want it, or what process we use to protest it, it should be clear that the Grecian model of publicly paid benefits is not in our future. Learn about how reimbursement systems work. (You’re aware that everyone doesn’t pay the same price for the same procedure at the same doctor or hospital, right?) Ask why a particular test needs to be run. Look for treatment alternatives. Talk with your Congressman about what’s being done to reduce waste, fraud and bureaucracy in the system. Get fired up about the cost of the current extra treatments known as defensive medicine, and insist on tort reform.

Our collective voice can steer this ship toward a better course, but complacency isn’t likely to bring a happy result. Many will take notice when the Medicare tax rises from 1.45% to 2.35% for compensation more than $200,000 per year in 2013. (Interesting how that change was planned for implementation after the presidential election.)

We’ll also feel a pinch when investment income (interest, dividends and capital gains) have a tax increase of at least 3.8% that year. It could be higher if the current tax rates expire for qualified dividends (up to 35%) and capital gains rise to 20%, without the surtax. This train is gathering steam, so let’s decide whether to lead, follow or get out of the way. 

If you have additional questions regarding the information in this two-part series, contact us at your convenience – (904) 396-5400 or Office@CPAsite.com.

Filed under: General by Mark Patrick
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You’re not alone. Who really understands Medicare benefits? 

Even if you think you’ve figured out the program, the rules will likely change next year, so you’ll be confused again.

This week, we’ll cover the fundamentals and look at the major concerns regarding the sustainability of the current plan. Next week, we’ll discuss how to protect ourselves for the future.

What do we have now? Basically, there are four parts to Medicare which are intended to apply to those older than 65 years.

Part A covers hospital inpatient care, with some support for skilled nursing facilities, hospice and home healthcare. It’s paid from the Medicare taxes withheld from workers’ salaries.

Part B pays for physicians, outpatient care, an additional amount of home healthcare, and limited preventive care services. The premium is paid by enrolled participants.

Part C covers so-called Medicare advantage plans. These plans are similar to a private HMO/PPO, and include Parts A and B. Enrolled participants pay the premiums.

 Part D is the latest addition, which covers some costs of prescription drugs and is intended to control the self-pay portion of that which it does not. It’s partially paid by the government, and participant premiums are based on income. This part is basically government-mandated private insurance coverage.

According to the Urban Institute, a married couple just enrolled for Medicare will enjoy $350,000 of benefits, with premiums likely under $100 per month. Since the healthcare inflation rate is much higher than the general consumer rate, you can see this model isn’t sustainable.

Ideas abound from nearly everyone in the presidential race, but none of the plans contain enough teeth to get the program under control. The Democrats want to maintain the same model introduced a half century ago, and the Republicans want to revamp it sufficiently to be credible without getting shot down by those who have come to depend on it.

In reality, only two solutions exist:          

1. Spend less by a delicate reduction of benefits paid to providers and curtailment of who qualifies for benefits, or

2. Increase revenue through higher taxes or premiums.

If a plan can survive the dissension in Congress and be supported by the President, it likely will be effective years from now and take even longer to catch up to the demand.

So what’s likely to happen next? If you’re old enough – let’s say over 55 – you may see little change, other than perhaps more means testing for benefits. Even then, the potential medical benefits will be a bargain for the premiums paid. In the future, you may see restrictions on certain benefits. The biggest risk to this demographic is lower doctor and hospital reimbursements, which would affect either service quality or availability.

If you’re not part of the Baby Boomer generation, life after retirement may be much different. Proposals such as Representative Paul Ryan’s (R-Wis.), which shift benefit management to the private sector with a subsidy from the Feds, are unpopular with groups trying to maintain the traditional Medicare entitlement. But this model moves risk away from the budget and makes the end users more attentive to how their healthcare dollars are spent.

Does this problem give you a headache? Again, you’re not alone. Next week, we’ll discuss some actions we can take as individuals. Until then, take two aspirin and contact us if you have any questions – (904) 396-5400 or Office@CPAsite.com.

Filed under: General by Mark Patrick
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In recent years, the sustainability of Social Security has raised considerable concern and rightfully so. While this problem is one for us to solve collectively, strategies to improve benefits under the current system certainly exist.

First we’ll discuss the process that determines your benefits and look at the importance of timing your application. Then we’ll discuss the impact on benefits from continuing to work after applying, and look at the income tax considerations of receiving benefits.

1.       How is my basic benefit determined?

By now, we’re all aware that most employment in the United States is subject to the Federal Insurance Compensation Act (FICA) tax (and an equivalent system exists under the Railroad Retirement Act). The current FICA rate is 6.2 percent of gross wages by both the employer and employee, with a wage cap in 2011 of $108,600 ($110,100 in 2012). For 2011, employees have a one-year-reduction in that rate to 4.2 percent, and if you’re self-employed these taxes are collected at equivalent rates on your Form 1040.

The Social Security Administration maintains a record from your employer of your lifetime taxable earnings, which historically have been mailed to you annually about two months before your birthday. Currently, you can check for these records at www.SSA.gov.

Your potential benefit is generally based on the average FICA wages of your highest 35 years of employment compared to the average wages for others in your age range. If you worked fewer than 35 years, your income from the years you did work will be divided by 35 to determine your average. This number is known as Old-Age, Survivors, and Disability Insurance limits and is used to figure your Primary Insurance Amounts and Average Indexed Monthly Earnings (AIME). Once you know your AIME, your monthly benefit can be determined for that amount.

2.       Does it matter at what age I decide to start taking Social Security Benefits?

Of course it does! Your benefit is determined by a sliding scale that reduces it if you begin receiving benefits before your normal retirement date and increases it after that date.

Your normal retirement date is your 65^th birthday if you were born before 1938, age 67 if you were born after 1959, and a series of progressive two-month brackets between those birth years. For each year prior to your normal retirement date, your monthly amount is reduced by approximately 6 ⅔ percent. However, for each year your start date is delayed after your normal retirement date, 8 percent is added. For example, the potential benefit of someone turning 62 today would be approximately 58 ⅔ percent less than if they were to wait until age 70.

If you’re applying for benefits from your spouse’s history, the benefits are first reduced by half and then become subject to the same rules. It doesn’t matter how old your spouse is, or when he or she begins taking benefits, but spousal benefits are only available if the couple has been married a minimum of 10 full years.

3.       What if I start drawing benefits before I retire or if I get bored and go back to work?

If you haven’t yet reached your full retirement age and earn more than $14,160, you’ll lose $1 in benefit for each $2 of earnings; so, someone aged 64 earning $24,160 would lose $5,000 of benefits this year. The year you reach your full retirement date, you’re only penalized for the portion of the year prior to your birth date.

4.       How is Social Security taxed?

There are two income tax effects from Social Security benefits. First, these benefits aren’t taxed until your Adjusted Gross Income (AGI) reaches $25,000 for someone single or $32,000 if filing jointly. Eighty-five percent of your Social Security benefits are then taxed on half of this additional income until it reaches $34,000 for single or $44,000 on a joint return.

Second,  many other tax attributes are based on your AGI, so this higher income can reduce several itemized deductions, qualification for tax credits or other surprises such as Alternative Minimum Tax. Thus, the timing of other taxable benefits, such as an IRA withdrawal or large capital gains in one year, can trigger an unexpected multiplier on the taxation of these benefits.

Now that you have a fundamental understanding of how Social Security benefits work, you can begin to build a matrix of how to manage your benefit amount during your working career, time the start of your benefits to maximize them against your life expectancy, consider the interaction of working while drawing benefits, and time your taxable income to avoid unpleasant surprises each April.

If you’re confused by the information we’ve provided or would like to talk more about maximizing your Social Security benefits, contact Patrick & Robinson CPAs at Office@CPAsite.com or 904-396-5400. We’ll help you start planning a better financial future.

Filed under: General by Mark Patrick
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