You want to give to a charitable cause, but you can’t decide which one because you receive so many solicitations.

How do you know which one to give to – and where your hard-earned dollars will do the most good?

GuideStar, a nonprofit group that helps donors investigate charitable groups, recommends the following five steps to determine which charity deserves your donation.

1. Clarify values and preferences. What means the most to you? The arts? Animals? Health research? Consider the type of charity that you would have the best connection with, including whether it would be a large charity or a small one, as well as if you would prefer local, national or international.

2. Focus on the mission. Make sure the nonprofit has an easy-to-understand mission that aligns with your principles and beliefs. You can look up a specific nonprofit in GuideStar’s database (www.GuideStar.org) of more than 1.8 million organizations, or use the advanced search to find charities by category, size and location. The mission should also be easily found on a nonprofit’s website.

3. Verify the charity’s legitimacy. There are sham nonprofits out there, and some charities that used to be tax-exempt no longer are. Verifying that the IRS currently recognizes a nonprofit as a tax-exempt organization is imperative and can be done at the GuideStar site. If the charity is not on GuideStar, ask to see its IRS letter of determination. If the organization is faith-based – churches and other religious nonprofits are not required to file with the IRS – ask to see its official listing in a directory for its denomination.

4. Trust your instincts. If you still have doubts about a charity, don’t contribute to it. There are usually multiple nonprofits focusing on a similar mission, so find another that does the same kind of work and makes you feel more comfortable.

Reputable charities:

• Are willing to send you literature about their work or direct you to a website.
• Don’t use pressure tactics and will take “no” for an answer.

5. Dig deeper to get the facts. Once you find a nonprofit that meets the previous  requirements, dig deeper. Closely review the organization’s GuideStar profile, visit the nonprofit’s website, read its annual report, or look into recent media articles to learn more about its programs and how it spends donation dollars.

A reputable organization defines its mission and programs clearly, is transparent about its inner workings, has measurable goals and uses concrete criteria to describe its achievements, and is open about programs and finances.

What questions should you ask a nonprofit before giving to it? GuideStar recommends:

• How are you collaborating with similar organizations on a local, regional or national level?
• What are the main obstacles that inhibit the fulfillment of your mission? How are you planning to overcome them?
• What are your annual goals, needs and results? How do they compare to similar organizations in your community?
• How much turnover have you experienced of employees and board members in the last two years?
• To what degree have you attracted new people and new ideas to your organization and board?
• How well have you utilized your funding? Describe how efficiently you have fulfilled your goals of recent years in relationship to the amount of funds you have raised.
• Most for-profit organizations have restructured themselves in recent years to become more efficient and productive. How, if at all, are you considering (or have you implemented) some version of this approach?
• How efficiently is your organization run? To what degree have you assigned day-to-day management responsibilities to a tightly run executive committee instead of relying upon your full board?
• Who are your main competitors, and how do your results in recent years compare to theirs?

Family business experts often advocate a family council to help the family sustain effective communication and make important decisions.

A family council serves as a forum where family members can discuss their expectations for the business and for one another.

The council can include all family members who are vital to the future of the business – the founder or current owner, spouse, children and other family members who have a significant interest in the business.

You may want to have a family business consultant’s assistance in establishing a family council. Your CPA can provide those services.

The consultant will first determine what your family wants to accomplish by discussing the following types of questions:

• What is the family’s overall vision for itself and for the business?
• Does the family want to continue the business as a family enterprise?
• What are the guidelines for bringing other family members into the business?
• What is the role of the business in the lives of family members who choose not to work in the business?

After the council is established, you might want to consider asking your consultant to facilitate the meetings as an objective third party.

You  have a business, and you need employees. You have children, perhaps adult or  teenage, who need a job. Seems like a logical connection, doesn’t it?

It isn’t unusual for business owners to hire their children, but care should be  taken to help it be a positive experience for everyone concerned – the parent, the child and the other employees in your company.

Hiring  anyone should be a deliberate process, but hiring adult children takes more  care. Here are the steps. But keep in mind: Your child and your business will  be better off if your child works up to five years outside of your business.

Step  1: Be clear on the job to be done. We  usually hire a new employee because we have a job or task that needs attention.  Understanding the reason for the job helps you be more clear on the qualifications  for doing the job successfully.

Your  children deserve the same clarity. If, as happens sometimes, you’re “creating”  a job for your child, think it through before moving forward. He or she will  have to have tasks to attend to, results to achieve. Decide what those are  before bringing your child on board.

Step  2: Evaluate the skills being brought to the job. Once you know  what the job is, you can make a list of the skills or experience that would be  helpful in accomplishing the job. Then, you should think about whether or not  your child has those skills.

Don’t  make assumptions. It’s easy for parents to have a blind side when it comes to  their children. Try to objectively review the skills and experience your child  brings to the job. Are they a good fit to the needs? Could additional training  be provided that would make success more likely?

Don’t  set your children up to fail by throwing them into a job not suited to the  knowledge and experiences they have.

Step  3: Share expectations with your child. Most employees want to do a good job, and you need  to be able to show them what that means. Again, don’t assume your children will know this just because they know you.

Clearly  lay out (for the sake of yourself, the child and the employees) where the child  fits in the organization and what results or performance is expected. With  clear expectations, you can more accurately gauge performance and hold your  child accountable.

Step  4: Supervise the employee. Outside  work, the person is your child. At work, the person is your employee, and he or  she needs to be supervised, coached, trained, evaluated and corrected.

One  of the toughest things about employing your children is being able to supervise  them effectively. If you are directly supervising them, there will likely be  some emotional challenges, trying to separate your home and work roles. If you  have a non-family member supervise the child, that person needs to be clear that  you don’t expect special treatment for the child.

No  employee wants to make the boss angry by writing up his offspring. You put your  good employees in a precarious place when you ask them to supervise your  children. Be sure you are able to separate yourself from the parent role when  dealing with that situation.

Step  5: Promote the employee. You  may be bringing your children into your business because you hope they will  take over one day. For that to happen, you’ll likely need to grow them through  the business so that they learn the various pieces of the puzzle. That will  sometimes mean that other employees who hoped for a promotion will be passed  over.

There’s  no easy way to deal with this, but the child needs to understand the dynamic. He will have people working for him who think it should be the other way  around. Family members sometimes have to work twice as hard to be thought half  as good by non-family employees.

Teach  your children that the relationship might help you get the position, but it won’t  mean automatic respect. They have to earn that by being fair and being very  good at what they do.

If you’re hoping to have your children work in the business, understand that there  will be challenges. Do your best to maintain your objectivity and to hold them  accountable like everyone else. With the right opportunities and coaching, they  might turn out to be stars.

 

If you’re like most taxpayers, on or before April 15 when you hit the button to confirm, drop the envelope in the mailbox or sign your form for the tax preparer, your first thought very well might be “I hope I don’t get audited!”

But just what are your chances of having your income tax return audited by the IRS?

It depends on how much money you make.

The average odds are approximately 1 in 100. In the latest figures released by the IRS, for tax year 2011, more than 1.4 million taxpayers were audited of 143 million tax returns filed.

But for Americans in higher tax brackets, the chances go up, with the wealthiest taxpayers having a 1 in 4 chance of hearing from the IRS.

The likelihood of being audited for taxpayers with the following adjusted gross incomes is:

• Between 25,000 and $50,000 – 0.70 percent
• Between 50,000 and $100,000 – 0.64 percent
• Between $100,000 and $200,000 – 0.85 percent
• From $200,000 to $500,000 – 1.96 percent
• From $500,000 to $1 million – 3.57 percent
• Between $1 million and $5 million – 8.9 percent
• Between $5 million and $10 million – 17.94 percent
• More than $10 million – 27.37 percent

For business income, the same is true: the higher the revenues, the higher the number of audits.

For businesses other than farms, with the following gross receipts, the chance of being audited is:

• Under $25,000 – 1.2 percent
• Between $25,000 to $100,000 –  2.4 percent
• Between $100,000 to $200,000 – 3.6 percent
• More than $200,000 – 3.4 percent
• Between $200,000 to $1 million – 2.8 percent
• More than $1 million –12.1 percent

Only 1 in 200 farm returns was audited.

For corporate returns, other than S corporations, the average chance of an audit was 1.5 percent. For partnership and S corporation returns, the audit rate was just 0.5 percent.

Again, the percentage goes up with the total assets of the corporation. The largest corporations are almost sure to be audited.

• $250,000 to $1 million – 1.7 percent
• $1 million to $5 million – 2.1 percent
• $5 million to $10 million – 2.6 percent
• $10 million to $50 million – 10.5 percent
• $50 million to $100 million – 20.7 percent
• $100 million to $250 million – 23.2 percent
• $250 million to $1 billion – 22.7 percent
• $1 billion to $5 billion – 31.4 percent
• $5 billion to $20 billion – 45.4 percent
• More than $20 billion – 93 percent

The sandwich generation is feeling increased pressure these days, but not as much from their parents as from their children, according to a new study by Pew Research.

Today, it’s Gen X that is the most sandwiched generation – 47 percent of Gen Xers have  a parent over 65 and a dependent child compared to 33 percent of Baby Boomers.

As  the sluggish economic recovery continues, nearly three-fourths of adults in their 40s and 50s with a grown child provided some financial support to the child during the past year, and half of those provided full support.

Of adults age 60 and over, half say they have given their grown children financial support during the past year, as the rate of employed young adults fell to the lowest since 1948 in recent years. Young adults new to the work force also had a greater drop in earnings than any other age group.

On the other hand, only one-third of adults have provided support to an aging  parent, according to the study that surveyed 2,500 adults in December 2012. One in seven provided financial support to both an adult child and an aging parent.

While sandwiched adults say they are pressed for time and feel rushed in the things  they have to do, the study also discovered that adults helping their family  members are just as happy with their lives as other adults. One-third said they are very happy with their lives, and half said they are happy.

The study found some other interesting facts about adults in the sandwich generation:

• Men and women are equally likely to be members of the sandwich generation.
• Hispanics are more likely than whites or blacks to be in the situation (31 percent,  compared to 24 percent and 21 percent, respectively).
• Married  people outnumber single people 3 to 1.
• Those  with household incomes of more than $100,000 are more likely than lower-income  brackets to be supporting family members.
• Adults  under age 40 are most likely to say an adult child has a responsibility to  support an elderly parent in need (81 percent, compared to 75 percent who are  40-59, and 68 percent who are over 60).
• Only half of the respondents believe a parent has a responsibility to financially  assist an adult child in need.

Health reform is changing the insurance landscape, but certain caveats still apply.

It is important to choose a plan that fits the healthcare needs of you and your family, as well as your lifestyle. And those needs can change from year to year.

Plan type

The most popular plans include a consumer-directed, high-deductible health plan (HDHP); network-based plans like a preferred provider organization (PPO); point-of-service plan (POS) or health maintenance organization (HMO); and traditional fee-for-service (FFS) plans that have no network requirements. Most large employers usually offer a choice of two or three plan types.

If freedom to visit the doctor of your choice without a referral is important to you, a traditional FFS or PPO will be more to your liking. The PPO, however, also offers cost-sharing savings if you stay within the plan’s provider network.

POS plans and HMOs require that you name a primary care physician and get referrals for specialists. Like the PPO, a POS allows you to go outside the network at a higher copayment or percentage of coinsurance, whereas HMOs restrict coverage to the network.

You may still be able to go outside the network if your state is one of the 34 that has passed “any willing provider” legislation. These laws require managed care plans to accept any appropriately licensed provider. The key is that the provider must be willing to accept the plan’s contract terms. Not all providers will.

An HDHP trades high premiums for high deductibles and offers a tax advantage. The plan usually provides catastrophic coverage that kicks in after the deductible is paid, although under health reform, certain preventive services must be covered at no cost. This year the IRS set the minimum deductible for single plans at $1,250 with the maximum amount to be paid out-of-pocket at $6,250. For family coverage, the amounts are $2,500 and $12,500, respectively.

HDHP participants contribute pretax earnings into a health savings account to pay for out-of-pocket medical expenses. Accounts are portable, meaning they go with you when you change jobs.

Under health reform, account funds can no longer be used to pay for over-the-counter drugs without a doctor’s prescription. Withdrawals for nonmedical purposes are subject not only to income tax but a 20 percent penalty.

For 2013, participants can contribute up to $3,250 tax free for single coverage or up to $6,450 for family coverage. Participants who are age 55 or older can sock away an additional $1,000. Money not used for medical expenses during the year can be rolled over.

Many plans offer an online tool to help consumers determine which type of plan is best for them.

Lifestyle considerations

When choosing a plan, consider your lifestyle and preferences:

• A healthy high-earning individual may want to consider a high-deductible plan with a health savings account (HSA). It costs less and affords tax-free savings. Under health reform, it must provide certain preventive services at no cost. One caveat for older individuals: If you have dependents age 26 or under on your health plan, you cannot use HSA funds to pay for their out-of-pocket medical expenses if they cannot be claimed on your income tax return.
• A comprehensive policy may be more suitable for family coverage or for older people. Small children, maternity or recurring medical issues, such as a chronic illness, may require a greater need for coverage of doctor’s visits and pharmacy costs.
• Traditional fee-for-service plans are the most expensive but offer complete freedom of choice. However, costs can be unpredictable. The insurer pays only a percentage (normally 80 percent) of what it considers a usual and customary charge. For anything more, you pay the balance. If you prefer predictable costs, stick with a plan that features a set copayment for office visits.
• If you or a dependent are taking prescribed medications, check the plan’s formulary to ensure those medications are included.
• Some network-based plans pay only for emergencies outside the plan’s service area. Check whether the plan will cover routine care if needed when you are away, particularly if you travel a lot or own a vacation home, for example.

A working spouse’s plan might include richer benefits, or your spouse’s employer might offer a greater number of plan types from which to choose. Compare plans to determine the best one.

Remember that if you are covered under both plans, the insurance companies will coordinate benefits. One will be primary; the other, secondary. The secondary insurer will cover any amounts not covered under the primary insurer, such as deductibles, copayments and coinsurance.

Tax-saving accounts

Medical savings accounts offered should be part of your tax-planning strategy. A flexible spending account (FSA) provides high earners an opportunity to keep some money out of Uncle Sam’s reach. Pretax dollars contributed to the account are used to pay for out-of-pocket medical expenses, like deductibles, copayments and coinsurance.

Unfortunately, the FSA has taken a hit under health reform. Funds can no longer be used to purchase over-the-counter drugs without a doctor’s prescription, and beginning this year, contributions are capped at $2,500.

The FSA is a use-it-or-lose-it account. Money left at the end of the plan year cannot be rolled over.

Another tax-advantaged plan is a health reimbursement arrangement, which is funded solely by your employer to cover medical expenses not paid by insurance. The employer determines the contribution amount, eligible expenses and whether money left in the account can be rolled over year to year. Contributions are tax-free to the employee.

 

No one enjoys having to deal with conflicts at work. But most people can at least leave those conflicts at the office. That’s not necessarily the case at a family-owned business.

It’s possible to prevent those conflicts from damaging family relationships   by taking some preventative measures.

• Establish and communicate clear rules.Before a child or other family   member is ever brought into a business, rules concerning roles, advancement,   supervision and compensation should be firmly established.Once established, rules need to be made very clear to the entire family. Families who have a clear understanding of these matters are far less likely to experience conflicts.
• Be fair with compensation.Nothing can create hostility faster among   family members than believing they are unfairly compensated compared to other family members.It should be made clear that all employees will be compensated according to their abilities and roles in the business, not on their   positions in the family. Having clearly established rules and open   communication concerning compensation will go a long way toward avoiding conflict.
• Deal with problems immediately and put them to rest. An old adage admonishes married couples to never go to bed angry. Similarly, family business   owners should make every effort to resolve conflicts quickly. The longer   conflicts are unresolved, the more damaging they can be to family – and business  – relationships.

• Keep your family’s personal business private.This may seem obvious,   but family conflicts and “dirty laundry” are not always kept out of the workplace.For example, when the employees of a small firm were recently asked by a consultant why their firm had high employee turnover, they all had the same answer. It seemed the husband and wife who owned the business  used the office as a public forum for their private quarrels. Consequently, employees left the firm, productivity suffered and the owners’ business was damaged.

Balancing family and business relationships in a healthy manner   is largely a matter of common sense. By taking steps to prevent conflicts before   they occur – and dealing with those that do arise immediately – company owners   can help to maintain both a strong business and a strong family.

 

Not  too many people have know-how when it comes to reading a financial statement.  Many think it’s a task best left to someone else.

But,  at some point, almost everyone in the business world will need to read and  understand a financial statement or, more accurately, a set of financial  statements.

Someone  who wants to invest in a business or, perhaps, has been recently appointed to a  company’s board of directors may not be familiar with financial statements and  the information they can reveal. With a few pointers and a little practice,  almost everyone can make sense of all the numbers.

What financial  statements contain

When  reading a set of financial statements, you may see the following items:

• Independent accountant’s/auditor’s report
• Balance sheet
• Income statement
• Statement of cash flows
• Statement of stockholders’ equity
• Statement of comprehensive income
• Notes to financial statements
• Supplemental schedules

Don’t be intimidated by the titles at the top of each page or  the number of sheets of paper involved. Sort through to locate the opinion,  balance sheet, income statement and notes.

The opinion

In  an audit, the independent, or external, auditor expresses an opinion on whether  an organization’s financial statements present fairly, in all material  respects, the financial position of the organization in accordance with the  stated method of accounting.

Typically, you can expect to see an unqualified opinion,  sometimes referred to as a clean opinion. There may be legitimate reasons for  qualifications, so don’t be shy about asking for and understanding the reasons.

The balance sheet

The  balance sheet and income statement are the two areas people typically focus on  and should be considered together. These two  statements hold the key to a balanced set of statements.

Each  statement tells only part of the story. In the case of the balance sheet, the  assets and liabilities of an organization are presented as of a specific date.

Beyond the cash, accounts receivable and payable balances and  outstanding debt, the balance sheet offers insight into current ratio,  liquidity and retained equity or assets.

Total assets in excess of total liabilities is a good  indicator to look for. Liquidity is determined based on the excess of current  assets over current liabilities. This information is important because a  business should have cash left over after the trade payables are satisfied.

The income statement

The  income statement presents revenues and expenses for a set period of elapsed  time.

Revenue  is shown often by category, less expenses. Expenses are typically split between  what is known as “cost of sales” and selling, general and operating expenses.  You should look for gross profit for the financial health of the operations and  net income for the overall financial performance.

The cash flow statement

The  cash flow statement provides an analysis of where cash is generated and where  it is spent during the same period as the income statement.

This  statement provides information on the net cash flows from operating, investing  and financing activities. A key focus should be on cash flow from operations. A  positive operational cash flow indicates that the entity is generating cash  from its operation.

Notes to the financial statements

The  notes to the financial statements hold a trove of often overlooked data. By  reading the notes, you can learn what a company does, what significant balances  and transactions are reflected in the financial statements and how key  transactions are recorded.

Many  contingent assets and liabilities are not measured for recording in the  financial statements and appear only in the notes, so be sure to read carefully  – and ask questions.

Ratios – why they’re important

Ratios  are key analysis factors. Banks and lending institutions use a variety of  ratios to determine ability to repay debt and viability for new loans.

Return on assets provides information on how efficient  capital is used to generate income. The gross profit ratio is a good indication  of financial health. Without adequate gross profit, an entity will be unable to  pay its other expenses. Both ratios can be compared to peer data.

A low ratio of debt to equity indicates a reduced risk for  the company’s creditors. This factor varies by industry, so the measurement is  certainly not one-size-fits-all.

A high ratio of debt to equity is not a signal of weakness if  the ratio is in the ballpark for the industry. Indeed, the use of debt may make  sense if the cost of debt is less than the return on stockholders’ equity.

If  you have questions about how to read a financial state, please contact our  firm.

 

How  Americans purchase health insurance will change dramatically in 2014 when the  individual mandate goes into effect and employers with 50 or more full-time  employees must offer “affordable” health insurance or pay a penalty.

Large  employers are expected to continue to offer health insurance to employees, but  smaller companies may opt to let workers purchase insurance from the health  insurance exchanges that are expected to be up and running for open enrollment  by Oct. 1, 2013, for coverage beginning Jan. 1, 2014.

Between  2014 and 2016, only individuals and small group employers with up to 100  workers are eligible to participate in the exchanges, although state-run  exchanges can limit groups to 50 or less.

Nondiscrimination  rule

Even  if your company continues to offer a health insurance plan, highly compensated  executives who enjoy gold-plated medical benefits as part of their total  compensation package may find extra perks cut back. Nondiscrimination rules in  the Affordable Healthcare Act generally will prohibit employers from favoring  higher-paid employees with special benefits, such as offering lower premiums,  paying deductibles or implementing shorter waiting periods for coverage.

Anticipating the change, some large companies have  already scaled back on supplemental benefits for senior executives.

Despite the nondiscrimination rule, employers are  permitted to  charge higher-earning employees more for the same coverage lower-paid workers receive without being in violation of  the nondiscrimination rule under Obamacare.

Employees  will face a 40 percent excise tax on the amount their employer pays for their  health insurance in 2018 if the insurance is considered a “Cadillac” healthcare  plan. Cadillac plans are defined as those costing $10,200 for an individual or  $27,500 for families.

Other rules

Next year, plans will no longer be able to cap annual  essential health benefits or exclude participants based on pre-existing conditions.  Additionally, insurers will not be able to charge higher premiums based on an  individual’s gender, occupation or health. The waiting period before insurance  kicks in will be limited to 90 days.

Currently,  some companies offer a reduced health insurance premium of up to 20 percent in  exchange for participation in a wellness program, such as a weight-loss,  exercise or smoking cessation program. The discount allowed will increase to 30  percent next year and may go as high as 50 percent.

If participating in a wellness program is “unreasonably difficult”  or inadvisable for you, your employer will be required to provide an  alternative standard to the wellness program.

Beginning  Jan. 1, 2014, a company with more than 200 full-time employees was supposed to  automatically enroll new employees in the company’s health plan with the lowest  premium. The employees would have had the option to choose a different company  plan or opt out altogether.

However,  the Department of Labor has postponed the deadline. Experts speculate that it  may not go into effect until 2015.

How Tax Changes in the New Act May Affect You

 

As the New Year’s ball worked its way down its 141-foot drop in the seconds leading up to midnight on Dec. 31, many people wondered if they were seeing the image of the United States dropping over the Fiscal Cliff.

But after a hectic 48 hours that ended at about 11 p.m. on New Year’s Day, Congress pulled the country back from the proverbial cliff by passing H.R 8, ironically titled the American Taxpayer Relief Act of 2012. President Obama quickly signed the bill on Jan. 2, 2013.

In a feat that would have made Harry Houdini proud, Congress even managed to pass what amounts to a $600 billion dollar tax increase and have it tallied as a $3.9 trillion tax cut. By waiting until after Dec. 31 to pass the bill, Congress allowed the tax increase resulting from the expiration of the 2001 and 2003 tax cuts to technically take effect. So, in the way Washington keeps score, the members of Congress can tell their constituents, “I voted a tax cut for you.”

The new law does not resolve fundamental deficit issues. It only delays for two months the automatic across-the-board “sequestration” spending cuts. And while much may be made of the “permanent” nature of the new tax changes, keep in mind that in Washington a law is permanent only until Congress changes it.

Here are some of the highlights of the new law.

Provisions Primarily Affecting Individuals

 

Income tax rate increases for the wealthiest

The rate brackets remain as they have been for the past 10 years, adjusted annually for inflation. The six existing tax rates – 10, 15, 25, 28, 33 and 35 percent – are retained. However, beginning Jan. 1, 2013, the act imposes a new 39.6 percent bracket that will apply to taxable income above the following amounts:

39.6% bracket starts at taxable income of	For filing status
$450,000	Married filing jointly
$425,000	Head of household
$400,000	Unmarried
$225,000	Married filing separately

The act also imposes a stealth type of rate increase by phasing out the personal exemption deduction and certain itemized deductions for those with adjusted gross income (AGI) above the following amounts:

Phaseout starts at AGI of	For filing status
$300,000	Married filing jointly
$275,000	Head of household
$250,000	Unmarried
$150,000	Married filing separately

Once AGI exceeds the applicable threshold by more than $122,500, the personal exemption deduction is lost entirely. Similarly, certain itemized deductions are lost as AGI exceeds the same threshold due to a 3 percent threshold phaseout.

Medical deductions, investment interest, casualty, theft and wagering losses are not subject to this phaseout. When planning charitable giving for 2013, taxpayers should keep in mind that their contribution deduction could be subject to this phaseout.

For itemized deductions subject to phaseout, taxpayers will always be entitled to at least 20 percent of the total, since the phaseout cannot eliminate more than 80 percent of their itemized deductions.

Maximum tax on capital gains and dividends

For tax years beginning after 2012, a new 20 percent tax rate will apply to dividends and long-term capital gains for married taxpayers with taxable incomes exceeding $450,000 ($400,000 for single taxpayers) to the extent they exceed these thresholds. For taxpayers between the 25 percent and 39.6 percent brackets, capital gains and dividends will continue to be taxed at 15 percent, while the lower bracket individuals will still enjoy a zero percent tax rate.

To avoid the effect of the 20 percent tax rate, more people may want to consider electing out of the installment sale method in 2012. In addition, the new 3.8 percent Medicare tax on investment income may apply (see below for more detail).

Estate and gift tax rate increases

For decedents dying and gifts made after Dec. 31, 2012, the top estate and gift tax rate is 40 percent. The estate and gift tax exemption remains unified at $5 million, indexed for inflation. For 2012, the exempt amount is $5.12 million.

In addition, the act made the portability election permanent. This election allows a surviving spouse�s estate to benefit from the deceased spouse�s unused exemption, providing shelter for married couples.

Alternative minimum tax adjusted for inflation

After years of annually patching the alternative minimum tax (AMT), Congress has finally added an automatic inflation adjustment provision. The act sets the AMT exemption for 2012 at $78,750 for joint filers, $50,600 for unmarried individuals and $39,375 for married people filing separately.

Beginning in 2013, these amounts are adjusted for inflation. Personal nonrefundable credits are able to offset the AMT.

Adoption credit/assistance permanently enhanced

Prior enhancements to the adoption credit and the income exclusion for employer-paid and/or reimbursed adoption expenses are made permanent for both non-special needs and special needs adoption. The credit phases out at specified inflation-adjusted levels of modified adjusted gross income (MAGI).

�	2012	2013
Maximum per child credit/exclusion	$12,650$12,770 (projected)
Phaseout begins at MAGI of	$189,710	$191,530 (projected)

Charitable distributions from IRAs reinstated

The provision allowing individuals age 70� and older to contribute up to $100,000 from their IRA to charity without having to include the distribution as income had expired at the end of 2011. The act reinstates this provision for 2012 and 2013.

Because passage occurred after Dec. 31, 2012, the act contains two important savings provisions:

1. Charitable contributions made from an IRA to a charity before Feb. 1, 2013, can be designated as a 2012 contribution.

2. Cash distributions received from an IRA during December 2012 can be treated as a direct contribution from the IRA to a charity to the extent that amount is actually contributed to a charity prior to Feb. 1, 2013.

Personal tax credits extended

All of the following credits are extended through 2017:

• The $1,000 child tax credit
• The enhanced earned income tax credit
• The enhanced American Opportunity credit for college tuition

Other expired tax provisions extended for two years

The following provisions, which expired at the end of 2011, are extended for 2012 and 2013:

• The exclusion from income for discharged home mortgage debt
• The up-to-$250 non-itemized deduction available to teachers who purchase classroom supplies
• The itemized deduction for mortgage insurance premiums
• The alternate itemized deduction for state and local sales taxes in lieu of state and local income taxes (This provision primarily benefits residents of states without an income tax.)
• The $4,000 non-itemized deduction for college tuition and fees

Various temporary tax provisions made permanent

Temporary tax provisions that are now permanent include:

• Some marriage penalty relief (i.e., the increased size of the 15 percent rate bracket and increased standard deduction for married taxpayers filing jointly), although many newly enacted provisions exacerbate the marriage penalty because the income thresholds that cause married couples to pay higher taxes are set far lower than double the comparable threshold for unmarried individuals
• The liberalized child and dependent care credit rules that allow the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one dependent
• The exclusion of up to $5,250 for employer-provided educational assistance
• The enhancements to Coverdell education savings accounts

Payroll tax holiday allowed to expire

The 2-percentage-point reduction in the Social Security tax paid by workers, including self-employed individuals, has been allowed to expire. For 2013, a worker earning $50,000 will pay an additional $1,000. Those with earnings above the $113,700 Social Security wage base will pay an additional $2,274.

Provisions Primarily Affecting Businesses

 

Expired business provisions extended

Several popular business provisions that had already expired were reinstated retroactively and temporarily extended, including:

R&D tax credit – The credit for increasing research and development activities, which expired at the end of 2011, is extended through 2013. A modification allows for partial inclusion of research expenses and gross receipts of an acquired business.

Higher expensing limit – The enhanced Section 179 small business expensing election is extended through 2013. The dollar limit for 2012 and 2013 is $500,000, with a $2 million investment limitation. The rule allowing off-the-shelf computer software is also extended.

Bonus depreciation – 50 percent bonus depreciation is extended through 2013. This extension allows for an increase of the first-year limit for luxury autos to $8,000 (not yet adjusted for inflation). In addition, the act extends the ability for taxpayers to forgo bonus depreciation in order to increase AMT credit limitations. Some transportation and longer production period property is eligible through 2014.

Work Opportunities Tax Credit – This provision provides a credit of up to $2,400 (up to $9,600 for qualified veterans) to employers hiring workers from a variety of difficult-to-employ groups. The credit is extended for workers hired through 2013.

Qualified leasehold improvements – The 15-year recovery period for qualified leasehold improvements, qualified retail improvements and qualified restaurant property is extended through 2013.

Other business extenders – A number of other business provisions that expired at the end of 2011 have been extended through 2013, including:

• New Markets Tax Credit
• 100 percent exclusion for gain on the sale of small business stock
• Extension of reduced recognition period (five years) for S corporation built-in gains
• Enhanced deduction for contributions of food inventory

Energy tax extenders – The act also extends through 2013, and in some cases modifies, a number of energy credits and provisions that expired at the end of 2011, including credits for:

• Energy-efficient existing homes
• Alternative fuel vehicle refueling property
• Energy-efficient new homes
• Energy-efficient appliances

New Healthcare Taxes Taking Effect in 2013

 

In addition to the various provisions contained in the new act, a number of new tax laws took effect Jan. 1, 2013, as a result of 2010′s heathcare reform legislation.

Hospital insurance tax on high-income individuals

The employee portion of the hospital insurance tax portion of FICA (which funds Social Security), normally 1.45 percent of covered wages, is increased by 0.9 percent on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both spouses filing a joint return.

The threshold amount is $250,000 in the case of a joint return or surviving spouse and $200,000 for an unmarried individual. Any portion of the tax not collected through payroll withholding will be paid with the annual income tax return.

Self-employed individuals are also subject to the additional tax if the combination of their net earnings from self-employment and any wages exceeds the threshold amount.

Medicare tax on investment income

An additional tax at the rate of 3.8 percent applies to the lesser of:

1. An individual’s net investment income for the year, or

2. The amount by which the individual’s AGI for the year exceeds a threshold amount.

The threshold amounts are the same as those for the new health insurance tax – $250,000 for a joint return or surviving spouse and $200,000 for an unmarried individual.

Medical expense itemized deduction threshold

The threshold for the itemized deduction for medical expenses not covered by insurance is increased to 10 percent of AGI. In the years 2013-2016, if the individual or either spouse on a joint return has turned age 65, the threshold remains at 7.5 percent of AGI.

Tax Planning Considerations

 

A common theme of recent tax legislation has been to place most, if not all, of the burden of new taxes on “wealthy” individuals. In so doing, Congress has defined the wealthy as those with an income above a certain threshold.

Unfortunately, Congress has chosen multiple different income levels. For example, a married couple filing a joint return is wealthy if:

• Taxable income exceeds $450,000 for purposes of the 39.6 percent tax rate.
• Adjusted gross income exceeds $300,000 for purposes of the phaseout of the exemption deduction and certain itemized deductions.
• Adjusted gross income exceeds $250,000 for purposes of the new healthcare taxes on earned income and net investment income.

Taxpayers should expect a significant element of future tax planning to include trying to manage their annual income to stay below the various thresholds. To do so, they will want to avoid income spikes – such as large one-time gains on the sale of a business or another investment, a large one-time bonus from their employer, or election of a lump-sum payout if they win the lottery.

Techniques like installment sales in the case of gains, deferred compensation arrangements for bonuses and annuitizing lottery winnings may prove advantageous in some cases. And, since the top tax rate on conventional C corporations remains at 35 percent, which is now lower than the top rate that applies to individuals, it may make sense to consider this entity structure for current or future businesses.

Now is an excellent time to visit with your tax adviser, who can help you plan to minimize these tax increases and take maximum advantage of the extended tax breaks.

Future Tax Legislation

The new legislation does not come close to solving the budget issues that Congress faces. Expect the debate to continue about future spending cuts and revenue enhancements.