Five tax planning opportunities in Obama’s re-election

FROM http://www.aspendailynews.com

While the presidential election may be complete, there is still significant uncertainty surrounding the future of tax policy. Although we know President Obama will serve a second term, we don’t know whether a divided Congress will reach an agreement on the fate of the soon-to-expire Bush tax cuts. And if congressional gridlock does in fact rule the next two months, the country faces its most dramatic tax law changes in decades when these cuts expire on Jan. 1, 2013.
In the absence of partisan agreement, tax rates will rise for every American in 2013. As a result, during the remaining days of 2012, tax planning takes on a heightened level of importance.
To that end, here are five planning ideas that may help you save significant tax dollars: 
1. Accelerate year-end bonuses into 2012. There is one axiom on which almost all tax planning opportunities are based: defer income, accelerate deductions. But in the waning months of 2012, high-income taxpayers will want to give strong consideration to taking a contrarian approach and accelerating income into the current year.
The maximum personal tax rate is currently 35 percent. With the expiration of the Bush tax cuts, this rate will rise to 39.6 percent in 2013. In addition, beginning next year taxpayers earning wage income in excess of $200,000 ($250,000 for married filing jointly) will pay an additional 0.9 percent Medicare tax on wages in excess of those thresholds.
Crunching the numbers, assuming you already reside in the highest tax bracket, accelerating a year-end bonus from January 2013 into December 2012 could save you up to 5.5 percent, (40.5 percent to 35 percent) in federal tax.
2. Accelerate corporate dividends into 2012. Currently, qualified dividends are taxed at a preferential 15 percent tax rate. Absent any further legislation, however, dividends will again be taxed at ordinary income rates as high as 39.6 percent in 2013. Tack on the additional 3.8 percent surtax imposed upon net investment income (primarily interest, dividends and capital gains) for taxpayers earning in excess of $200,000 ($250,000 for married filing jointly) that is slated to begin in 2013, and wealthy taxpayers will experience a near-tripling in their dividend rate, from 15 percent to 43.4 percent.
As a result, owners of corporations should consider accelerating any planned 2013 dividends into 2012 to take advantage of the lower rates.
3. Sell your business. The sale of corporate stock, an interest in a partnership, or the assets of a sole proprietorship generally results in capital gains. As does the sale of real estate, except to the extent the gain is attributable to previous depreciation deductions.
At the moment, the tax rate applied to these gains — provided the assets have been held longer than one year — is 15 percent. If the Bush tax cuts expire, this rate will rise to 20 percent, and beginning in 2013, the additional 3.8 percent surtax on net investment income discussed above may apply as well, raising the maximum rate on long-term capital gains for some taxpayers to a high of 23.8 percent.
Quite obviously, this increased tax could become prohibitive. To illustrate, imagine you own real estate valued at $1.2 million that you purchased years ago for a minimal investment. For simplicity’s sake, assume a sale of the property generates $1 million of long-term capital gain. In 2012, this gain would generate a federal income tax bill of $150,000, leaving you with $1,050,000 of after-tax cash.
Wait until January, however, and the tax rate on this same $1 million gain may well be 23.8 percent, leaving you with a $238,000 federal tax bill and only $962,000 of after-tax cash, a decrease of a rather substantial $88,000.
4. Elect out of the installment method. Should you sell your business or real estate in 2012 for a string of payments, at least one of which is to be received in a future year, you may be tempted to report the gain on the installment method. Under this method, you would be permitted to defer portions of the underlying gain until the related payments are subsequently received. But as previously highlighted, 2012 might not be the time to seek deferral.
The downside of the installment method is that you do not “lock in” to the tax rates in place during the year of sale for use against all future gain recognition. Instead, you are at the mercy of Congress, and if the tax rates rise during subsequent years, any gain recognized during those years is subject to the increased rates.
Consequently, if you sell an asset during 2012, you should consider electing out of the installment method and recognizing the full amount of gain on your 2012 tax return. This will allow you to pay tax at the current 15 percent rate, rather than at a potential 23.8 percent rate in 2013. 
Fortunately, you don’t have to make that decision in the next two months, as the election to opt out of the installment method is made upon the filing of a tax return. This means taxpayers have until October 2013 — assuming a timely extension is filed — to take in the fate of the Bush tax cuts before making any decisions. 
5. Die. I’m joking, of course, but if you haven’t been consulting with a competent estate tax attorney, it’s not the worst idea in the world. If you have a sizable estate, that estate is currently subject to a $5,120,000 lifetime exemption and a 35 percent tax rate. Should Congress fail to act by year-end, those amounts are set to return to $1,000,000 and 55 percent, respectively. So if you really want to provide for future generations, you may have to take one for the team before New Year’s Day. The family will miss you, but extra cash can heal a lot of pain.

Three Reasons Oct. 15 is the Second Most Important Day for Taxes

April 15 has a pretty good chance of remaining the No. 1 day for taxes, but Oct. 15 is likely a close second. Three reasons Oct. 15 is important for taxpayers: (1) extension filers must submit their returns to avoid a monthly 5-percent, late-filing penalty on balance due, (2) Fresh Start participants must pay taxes due to avoid further penalties and interest because their six-month grace period ends and (3) the 2013 filing season starts in 100 days so now is a good time to assess the impact of life changes on 2012 taxes.
October really is the new April for taxes. Taxpayers used to believe the only day they had to worry about was the April filing deadline, but more people are realizing how paying attention to their tax situation year-round can put more money in their wallet.

1. Extension to file deadline is Oct. 15 - returning clients eligible for special discount

On average, more than 10 million taxpayers applied for a tax filing extension each of the past few years - even though approximately 66 percent of them were due a refund.
One reason taxpayers put off filing is to make sure they have all the paperwork needed to file an accurate return. Rushing to file at the last minute can also result in missing out on claiming tax credits and deductions to which they may be entitled, which can lead to overpayment of taxes. Not claiming all the deductions and credits to which they are entitled, picking the wrong filing status, not filing at all and assorted other missteps cause taxpayers to forfeit $1 billion in refunds annually.

2. Fresh Start participants face payment deadline Oct. 15

This year, the IRS introduced Fresh Start Penalty Relief allowing a six-month payment grace period for those unemployed for 30 consecutive days and self-employed taxpayers who lost at least 25 percent of business income in 2011 due to the economy - in addition to meeting other qualifications.
Those who met the qualifications will not face failure-to-pay penalties if their 2011 taxes, interest and any other penalties due are paid by Oct. 15. Those who can't pay in full by the extended deadline will have to pay penalties on the amount not paid by Oct. 15. The failure-to-pay penalty is 0.5 percent of the unpaid taxes for each month after the due date (cannot exceed 25 percent of unpaid taxes). The "meter" on interest for the taxes due started April 15.

3. Oct. 15 signals 100-day countdown to e-file, means still time to impact 2012

Even with e-file starting in 100 days on Jan. 22, there is still time for taxpayers to review their 2012 tax situation and make changes that might improve it. Also, because the start of the filing season has been delayed this year, people who typically get their tax returns in January may have to prepare themselves for a later arrival in February.
"Sitting down with a tax professional in October to look at last year's return and estimate next year's return can help taxpayers develop a financial strategy to be more prepared during these uncertain times," Rice said.

Commonly Missed Federal Income Tax Deductions

Following are some of the most commonly missed deductions on federal income tax returns.

Charitable Contributions of Physical Items

Contributions given to a charitable organization are a common deduction on federal income tax returns. Many people know they can deduct the amount of any cash contributions made to such organizations. But they overlook deducting the value of other types of contributions to charitable organizations.

If you have donated clothing, furniture, baby toys, or any other item that is in good working condition, you can deduct the fair market value of that item on your federal income tax return.

Are you unsure how much an item you want to donate is worth? If so, some organizations publish guidelines to help you determine the fair market value.

Certain Costs Related to Refinancing

With many homeowners seeing the lowest mortgage interest rates they have seen in their lifetime, there has been an abundance of refinancing of homes. Some homeowners have been able to take advantage of the low interest rates to refinance their homes multiple times.

If you paid points related to your refinancing, you can deduct a portion of those points on your federal income tax return. You can calculate the amount of your deduction by dividing the number of months of your loan in the current year by the total number of months of your loan term, and then multiple that fraction by the amount you paid in points.

In addition, if you refinance and have points from a previous mortgage that you have not finished deducting, you can deduct the full amount of the remaining point cost.

Expenses as a Teacher

If you are a teacher of grades kindergarten through 12, or an office aide or principal in an elementary, middle, or high school, you can deduct up to $250 in expenses on suppliers you use for teaching that are not paid for by the school.

Energy Efficiency Upgrades to Your Home

The federal government has generally been supportive of providing an incentive for homeowners to improve the energy efficiency of their homes. Therefore, they offer federal income tax deductions on various energy efficiency improvements. These deductions can include a portion of expenses for insulation, high-seer air conditioning and heating equipment, solar panels, and energy efficient windows.

Casualty Losses

If your home was damaged due to any act of nature, including but not limited to tornadoes, hurricanes, floods, and forest fires, where the area was declared a federal disaster area, then your losses from the disasters can be deducted on your federal income tax.

RI-DOR CUP GOLF COMPETITION TO BE PLAYED TODAY IN KENOSHA, WISCONSIN

40 years ago, little did Maureen Rice know when she married Art Dorrington that her three sons would be competing in golf in the Ri-Dor Cup against her three nephews.  Throw in two son-in-laws and the first annual Ri-Dor Cup will be played today at Brighton Dale Links in Kenosha, Wisconsin between the Rice’s and the Dorrington’s – hence the Ri-Dor Cup.

Although the actual Ryder Cup will start on September 27, 60 miles south in Medinah, Illinois between Team USA and Team Europe, the Ri-Dor Cup will be just as competitive.  Golf has been part of the families for years.  They learned the game from their fathers who learned from their fathers. 

The Dorringtons, Dan, Brian, and Michael,  played competitively at Greendale, Wisconsin High School and currently reside in Wauwatosa, Wisconsin.   The fourth member of their team, brother-in-law Chris Muench,  is currently the golf coach at Greendale High School and is married to Colleen Dorrington.   The Rices, Kevin, Michael, and Bobby,  played competitively at Marquette University High School in Milwaukee.  The fourth member of their team, Rhett Holland of Wauwatosa, is married to Sara Dorrington and played competitively in college.

27 holes will be played on Saturday in true Ryder Cup format.  They will play Foursomes, Fourballs and Singles matches.  Team uniforms will be worn and trash talking will not be allowed on the course.  They will play for the Cup and the right to brag for the next year or two. 

Future plans are in the works.  Two of the Rices reside in the Chicago area, so it may become a Wisconsin versus Illinois competition in the future. 

Maureen Rice Dorrington lives in Greendale and has 10 grandchildren so the Ri-Dor Cup may go on for many years.

Who Should Take Education Tax Breaks: Parents or Students?

When it comes to education tax breaks, it’s important to carefully consider your options, and plan out who is going to take what tax break. This is an important distinction because it’s an either/or situation in terms of who gets the tax break. If the parent claims the education tax deduction or credit, then the child (in this case, the dependent) can’t claim it. If the child claims it for himself or herself, then the parent can’t claim it. Parents have to communicate with their kids since the education tax breaks are only allowed to be claimed on either one of your tax returns and not both.

Is the Student a Dependent?

First of all, you need to determine if the student is a dependent. If a parent claims his or her student as a dependent, then that’s who gets to take the tax credit or education deduction. Whether it’s the American Opportunity Tax Credit, Lifetime Learning Credit, or the Tuition and Fees Deduction, only one person gets the tax advantage and it often comes down to whether the student is a dependent in the eyes of the IRS. If a student is a dependent on someone else’s tax return, the student doesn’t qualify for these tax breaks.
If a student isn’t claimed as a dependent, though, it’s possible for him or her to claim an education tax credit, or take the deduction.  One thing to keep in mind, each student cannot claim more than one tax break. So it’s one of the education credits or education deduction (not all of them).

Should the Student Take the Tax Credit or Deduction?

In some cases, it makes sense for the student to take the tax break. If the student is married, and no longer dependent on a parent for support, obviously that’s who should take the education tax break. Additionally, if the student makes enough money to owe taxes, it makes sense to reduce that tax bill as much as possible.
Most of the time, though, students don’t earn enough money to owe taxes. As a result, in many cases, it makes more sense for parents to claim their children as dependents and reap the benefits of the tax breaks. After all, parents have spent quite a lot to raise their children, and probably help pay for college. It’s only reasonable that they receive some sort of financial benefit in return – and a lower tax bill is one way to recoup a few of those costs.

5 tips on how you pay taxes on gambling wins.

It fun to roll the dice, bet on the ponies or win in cards -- especially when you are on holiday.
Winning only makes your days off that much sweeter.
But there's a price: Your gambling winnings are fully taxable and must be reported on your income tax return, according to Mike Dobzinski, the Plantation-based spokesman for the Internal Revenue ServicesGambling income includes winnings from lotteries, raffles, horse races, and casinos -- whether it is cash or the fair market value of prizes such as cars and trips.
He gives four tips for gamblers to be aware of:

Gambling operators are required to  give you Form W-2G, Certain Gambling Winnings, if you win $1,200 or more in gambling winnings from bingo or slot machines and more than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament.
Report all gambling winnings on the “Other income” line of Form 1040, U.S. Federal Income Tax Return.
Claim your gambling losses up to the amount of your winnings on Schedule A, Itemized Deductions, under "Other Miscellaneous Deductions."  You must report the full amount of your winnings as income and claim your allowable losses separately. You cannot reduce your gambling winnings by your gambling losses and report the difference. Your records should also show your winnings separately from your losses.
Keep accurate records.
"If you are going to deduct gambling losses, you must have receipts, tickets, statements and documentation such as a diary or similar record of your losses and winnings," Dobzinski said.
Go to IRS Publication 529, Miscellaneous Deductions, for more information. Or call 1-800-829-3676.

Got IRS Penalties? Relying on Adviser Better Than TurboTax.

No one wants trouble with the IRS, especially not penalties. But they are a part of audits and can be downright Draconian. Getting out of penalties can be a big accomplishment.
One area of frequent flubs is IRS Form 3520. People know about FBARs these days and even the FATCA Form 8938. But filing Form 3520? Not so much.
An owner of a foreign trust must file it or face a penalty of $10,000 or 35% of the gross reportable amount, whichever is greater. IRC 6677(a). Then, the penalties can snowball. If you fail to file for 90 days after the IRS notifies you, there’s an additional $10,000 for each 30-days up to a maximum of the gross reportable amount.
Fortunately, there’s no penalty if you have reasonable cause. What’s reasonable? There are no regulations defining “reasonable cause” for failing to file Form Form 3520, but there is other “reasonable cause” learning.
In James v. USA, Dr. Brian Chivas James created a foreign trust in Nevis, West Indies to shield his assets from malpractice claims. From 2001 through 2003, he contributed $1,604,146, and filed Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner.
However, he failed to file the required Form 3520. He claimed that his accountant, George Famiglio, messed up. Dr. James relied on Famiglio for his personal and business taxes.  He gave Famiglio all appropriate trust documents and Famiglio was supposed to handle all filings.
Dr. James wasn’t trying to hide the trust, he just wasn’t up on the requirements. He argued he acted prudently in hiring Famiglio so had reasonable cause. The IRS didn’t agree and wouldn’t let the doctor off the hook.
The IRS assessed $578,950 in penalties for failure to file Form 3520 for 2001 – 2003. Dr. James paid and sued for a refund arguing he had reasonable cause. When the IRS asked for summary judgment, the court ruled against the IRS noting that:

• Dr. James timely provided all  required data to Famiglio and relied on him to advise him on trust filings;
• There was evidence Famiglio did advise him on some trust matters; and
• Based on his conversations with Famiglio, Dr. James believed he had filed all required forms.

The court said there was a genuine issue of material fact whether Famiglio provided Dr. James with advice on which he reasonably relied. This was a nice taxpayer victory. Yet keep in mind that Dr. James had to incur significant legal expenses.