Maximizing Your Itemized Tax Deductions

Tax Attorneys at Ainer & Fraker, LLP Discuss How to Maximize your Itemized Tax Deductions:

  • Bunching allows you to maximize your itemized deductions in one year and take the standard deduction in the next.
  • The medical expense threshold for deductibility has been increased to 10% of AGI for individuals under the age 65.
  • You have the option of deducting the larger of: (1) State and local income tax paid, or (2) state and local sales tax paid during the year.
  • Charitable contributions generally require substantiation (no more deduction for unsubstantiated cash in the kettle or the collection plate).
  • Documented gambling losses are deductible to the extent of gambling winnings.
  • Home (and second home) mortgage interest is deductible up to the acquisition debt and equity debt limits.
  • Overall itemized deduction limitation applies in 2013 and later years for higher-income filers.

As you plan for your tax year, keep in mind that you benefit from itemizing your tax deductions if they exceed the standard deduction, and sometimes when you are subject to the alternative minimum tax (AMT), it is beneficial to itemize even if the result is less than the standard deduction. The following is a run-down on itemizing your deductions.

  • Bunching Deductions—If your itemized deductions exceed the standard deduction, you will want to itemize them. Itemized deductions consist of five basic categories, each with its own limitations and special considerations. If your deductions only marginally exceed the standard deduction, consider “bunching” your deductions in one year. You can bunch your deductions by pre-paying some of your expenses in one year, such as your church contribution. This allows you to produce higher than normal itemized deductions that year and then take the standard deduction the other year. Also consider pre-paying your state’s January estimated tax payment in December, or paying your property tax in full rather than in installments carrying over to the next year.
  • Medical Expenses—Deductible medical expenses are limited to unreimbursed expenses for you, your spouse if married, and dependents that exceed 10% (7½% if age 65 or older) of your adjusted gross income (AGI) for the year. If you are 65 or older, for AMT purposes, your medical deduction will be less because only the excess of unreimbursed expenses above 10% of your AGI is deductible.

Expenses most frequently thought of as deductible medical expenses include medical and dental insurance premiums, charges by doctors and dentists, and the cost of prescription medication. Medical insurance premiums and other expenses paid with pre-tax dollars (e.g., through an employer’s cafeteria plan) cannot be included. Some less common deductions include the following:

– The cost of a weight-loss program (not including food) for the treatment of a specific disease or diseases (including obesity) diagnosed by a physician.

– Medicare-B premium payments and Medicare-D premiums for drug coverage.

– Participation in smoking-cessation programs and for prescribed drugs (but not non-prescription items such as gum or patches) designed to alleviate nicotine withdrawal.

– Elder Care, generally including the entire cost of nursing homes, homes for the aged and assisted living facilities. Long-term care insurance premiums are deductible, but with an additional limitation on the allowed amount based on the   insured’s age. See the table below for the annual limit per insured individual.

2013 Long-Term Care Insurance

Age

40 or less

41 to 50

51 to 60

61 to 70

71 & Older

Limit

$360

$680

$1,360

$3,640

$4,550

–      Medical dependent: For medical purposes, an individual may be a dependent even if his gross income precludes a dependency exemption, thus enabling you to deduct the individual’s medical expenses that you paid.

–      A child of divorced parents is considered a dependent of both parents for medical expenses purposes (so that each parent may deduct the medical expenses he or she pays for the child.)

Generally, travel costs (not including meals) may be a deductible expense if the trip is primarily for medical purposes. Cosmetic surgeries are generally not deductible.

  • Taxes—Deductible taxes primarily consist of real property taxes, state and local income taxes, and personal property taxes. Planning tip: Since taxes are not deductible for AMT purposes, you should attempt to minimize the payment of taxes in a year you are subject to the AMT if you can avoid late payment penalties for the tax payments. Where property taxes were paid on unimproved and unproductive real estate, you can annually elect to capitalize the taxes in lieu of deducting them (add the amount paid to your cost basis for the property).For 2013, you have the option of deducting on Schedule A as part of your itemized deductions the LARGER of: (1) State and local income tax paid, or (2) State and local sales tax you paid during the year.
  • Interest—The only interest that is deductible as an itemized deduction is home mortgage interest and investment interest. Although this category does not have an AGI limitation, each interest type has special limitations. Home mortgage interest is limited to the interest paid on acquisition debt that does not exceed $1 million and home equity debt (not exceeding $100,000) on your main home and a designated second home. In addition, the interest on most equity debt is not deductible against the AMT. Note: Home acquisition debt is the original debt (current balance) incurred to purchase or substantially improve the home and is not increased by refinanced debt.Taxpayers can elect to treat any debt secured by the home as unsecured. The election is irrevocable without IRS consent. By making the election, the interest on the loan can be allocated to use of the proceeds, except none of the interest can be allocated back to the home itself. This election is for income tax purposes only and does not change how the loan is secured with the lender. If made, the election applies for both regular tax and AMT purposes, and it applies for the year the election is made and all future years. There is no specific IRS form to use to make the election. Instead, attach a statement to your return (timely filed) for the year the election is to be effective, stating the election is to apply.Investment interest is interest on debts incurred to acquire investments such as securities or land. The investment interest deduction is limited to net investment income (investment income less investment expenses), and any excess not deductible in the current year is carried over to future years. Interest on debt to acquire tax-free investment income is not deductible. You can elect to treat capital gains as investment income in order to increase the amount of deductible investment interest. However, the same capital gains are then not eligible for the lower capital gains tax rate. Qualified dividends taxed at the reduced capital gains tax rates are not treated as investment income for the investment interest deduction calculation.
  • Charitable Contributions—You may, within certain limits, deduct charitable contributions of cash and property to qualified organizations to the extent you receive no personal benefit from the donations. All cash contributions regardless of the amount must be documented with a written verification from the charity or a bank record. Non-receipted cash contributions are not deductible. Non-cash contributions also require an acknowledgement of the contribution from the qualified charitable organization except for donations of $250 or less left at unmanned drop points. For non-cash contributions of more than $5,000 (except for publicly-traded securities), you are generally required to have a qualified appraisal of the property donated. Please call this office for further details. Charitable deductions are limited by a percent of income depending upon the type of contribution. Contributions in excess of the AGI limitation may be carried forward for five years. Although there are 20% and 30% of AGI limitations, generally, contributions to qualified organizations are deductible to the extent they don’t exceed 50% of your AGI. One notable exception is the 30% limitation for gifts of capital gains property, where the contribution is based on the fair market value of the property.Frequently overlooked contributions include those made to governmental organizations such as schools, police and fire departments, parks and recreation, etc. Uniforms, travel expenses, and out-of-pocket expenses for a charity are also deductible, but not the value of your time or the cost of equipment such as computers, phones, etc., if you retain ownership.Congress imposed some tough rules that substantially limit the deduction for the popular charitable car donation. If the claimed value of the vehicle exceeds $500, the deduction will generally be limited to the gross proceeds from the charity’s sale of the vehicle. The IRS provides Form 1098-C that incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat, or airplane.There is an exception to the rules for donated vehicles that the charity retains for its own use “to substantially further the organization’s regularly conducted activities or provides to a needy family.” Please call this office for more information.For 2013, if you are age 70½ and over you are allowed to make direct distributions (up to $100,000 per year) from your Traditional or Roth IRA account to a charity. The distribution is tax-free, but there is no charitable deduction. The distribution counts toward your required minimum distribution. This provision can be very beneficial if you have Social Security income and/or do not itemize your deductions.
  • Miscellaneous Deductions—Miscellaneous deductions fall into two basic categories: those that are reduced by 2% of your AGI and those that are not.

Those Subject to the 2% Reduction—This category generally includes your investment expenses, costs of having your tax return prepared, and employee business expenses.

Those NOT Subject to the 2% Reduction—This category includes gambling losses (but cannot exceed the amount reported as gambling income), personal casualty losses (after first reducing each loss by $100 and the total loss for the year by 10% of your AGI), repayments of income (over $3,000) reported in prior years, and estate tax deductions. The estate tax deduction is considered by many to be the most overlooked deduction in taxes. It is a deduction based on the additional taxes paid as a result of the same income being taxed to both the estate and to the beneficiaries of the estate. Only certain types of income are doubly taxed. As an example, if the decedent had a Traditional IRA account, the value of the IRA would be included in the decedent’s estate and also would be taxable to the beneficiary. If the estate paid any tax at all (on Form 706), the beneficiary in this example would have an estate tax deduction equal to the portion of the estate tax paid attributable to the IRA.

Overall Itemized Deduction Limitation—If your 2013 adjusted gross income exceeds $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 for married taxpayers filing separately, your total itemized deductions will be limited, adding another factor to consider for planning purposes. This overall limitation had been reduced or suspended for the last few years. If the limitation applies to you, the total amount of your itemized deductions is reduced by 3% of the amount by which your AGI exceeds the threshold amounts listed above, with the reduction not to exceed 80% of your otherwise allowable itemized deductions. The threshold amounts are inflation-adjusted for tax years after 2013.

Please Contact a Tax Attorney at Ainer & Fraker, LLP to discuss tax planning, tax projections, or modifying your withholding and estimated payments.

IRS Form 8938 – Who is Required to File?

International Tax Attorneys at Ainer & Fraker, LLP discuss the Reporting Requirements of IRS Form 8938: Statement of Specified Foreign Financial Assets:

According to the IRS, certain U.S. taxpayers holding specified foreign financial assets with an aggregate value exceeding $50,000 will report information about those assets on new Form 8938, which must be attached to the taxpayer’s annual income tax return.  Higher asset thresholds apply to U.S. taxpayers who file a joint tax return or who reside abroad (see below).

IRS Form 8938 reporting applies for specified foreign financial assets in which the taxpayer has an interest in taxable years starting after March 18, 2010.

Upon issuance of regulations, FATCA may require reporting by specified domestic entities.  For now, only specified individuals are required to file IRS Form 8938.

  • If you do not have to file an income tax return for the tax year, you do not need to file Form 8938, even if the value of your specified foreign assets is more than the appropriate reporting threshold.
  • If you are required to file Form 8938, you do not have to report financial accounts maintained by:
    • a U.S. payer (such as a U.S. domestic financial institution),
    • the foreign branch of a U.S. financial institution, or
    • the U.S. branch of a foreign financial institution.

Refer to IRS Form 8938 instructions for more information on assets that do not have to be reported.

You must file Form 8938 if:

1. You are a specified individual. 

A specified individual is:

  • A U.S. citizen
  • A resident alien of the United States for any part of the tax year (see Pub. 519 for more information)
  • A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return
  • A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico (See Pub. 570 for definition of a bona fide resident)

AND

2. You have an interest in specified foreign financial assets required to be reported. 

A specified foreign financial asset is:

  • Any financial account maintained by a foreign financial institution, except as indicated above
  • Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely:
    • Stock or securities issued by someone other than a U.S. person
    • Any interest in a foreign entity, and
    • Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.

Refer to the Form 8938 instructions for more information on the definition of a specified foreign financial assets and when you have an interest in such an asset.

AND

3. The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:

  • Unmarried taxpayers living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year
  • Married taxpayers filing a joint income tax return and living in the US: The total value of your specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year
  • Married taxpayers filing separate income tax returns and living in the US: The total value of your specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
  • Taxpayers living abroad.  You are a taxpayer living abroad if:
    • You are a U.S. citizen whose tax home is in a foreign country and you are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year, or
    • You are a US citizen or resident, who during a period of 12 consecutive months ending in the tax year is physically present in a foreign country or countries at least 330 days.

If you are a taxpayer living abroad you must file if:

  • You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
  • You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

Refer to the Form 8938 instructions for information on how to determine the total value of your specified foreign financial assets.

Reporting specified foreign financial assets on other forms filed with the IRS.

If you are required to file a Form 8938 and you have a specified foreign financial asset reported on Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, or Form 8891, you do not need to report the asset on Form 8938.  However, you must identify on Part IV of your Form 8938 which and how many of these form(s) report the specified foreign financial assets.

Even if a specified foreign financial asset is reported on a form listed above, you must still include the value of the asset in determining whether the aggregate value of your specified foreign financial assets is more than the reporting threshold that applies to you.

Please Contact an International Tax Attorney at Ainer & Fraker, LLP if you have questions about the IRS Form 8938 Statement of Specified Foreign Financial Assets and its reporting requirements.

IRS Form 8938 and FBAR – Comparison Chart

International Tax Attorneys at Ainer & Fraker, LLP discuss the Reporting Requirements of IRS Form 8938 and Report of Foreign Bank and Financial Accounts (FBAR):

According to the IRS, the new IRS Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts).

Individuals must file each form for which they meet the relevant reporting threshold.

Form 8938, Statement of Specified Foreign Financial Assets Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)
Who Must File? Specified individuals, which include U.S citizens, resident aliens, and certain non-resident aliens that have an interest in specified foreign financial assets and meet the reporting threshold U.S. persons, which include U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold
Does the United States include U.S. territories? No Yes, resident aliens of U.S territories and U.S. territory entities are subject to FBAR reporting
Reporting Threshold (Total Value of Assets) $50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad) $10,000 at any time during the calendar year
When do you have an interest in an account or asset? If any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return Financial interest: you are the owner of record or holder of legal title; the owner of record or holder of legal title is your agent or representative; you have a sufficient interest in the entity that is the owner of record or holder of legal title.Signature authority: you have authority to control the disposition of the assets in the account by direct communication with the financial institution maintaining the account.See instructions for further details.
What is Reported? Maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets Maximum value of financial accounts maintained by a financial institution physically located in a foreign country
How are maximum account or asset values determined and reported? Fair market value in U.S. dollars in accord with the Form 8938 instructions for each account and asset reportedConvert to U.S. dollars using the end of the taxable year exchange rate and report in U.S. dollars. Use periodic account statements to determine the maximum value in the currency of the account.Convert to U.S. dollars using the end of the calendar year exchange rate and report in U.S. dollars.
When Due? By due date, including extension, if any, for income tax return Received by June 30 (no extensions of time granted)
Where to File? File with income tax return pursuant to instructions for filing the return Mail to:Department of the Treasury
Post Office Box 32621
Detroit, MI 48232-0621For express mail to:

IRS Enterprise Computing Center
ATTN: CTR Operations
Mailroom, 4th Floor
985 Michigan Avenue
Detroit, MI 48226

Certain individuals may file electronically at BSA E-Filing System

Penalties Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000; criminal penalties may also apply If non-willful, up to $10,000; if willful, up to the greater of $100,000 or 50 percent of account balances; criminal penalties may also apply

Types of Foreign Assets and Whether They are Reportable

Financial (deposit and custodial) accounts held at foreign financial institutions Yes Yes
Financial account held at a foreign branch of a U.S. financial institution No Yes
Financial account held at a U.S. branch of a foreign financial institution No No
Foreign financial account for which you have signature authority No, unless you otherwise have an interest in the account as described above Yes, subject to exceptions
Foreign stock or securities held in a financial account at a foreign financial institution The account itself is subject to reporting, but the contents of the account do not have to be separately reported The account itself is subject to reporting, but the contents of the account do not have to be separately reported
Foreign stock or securities not held in a financial account Yes No
Foreign partnership interests Yes No
Indirect interests in foreign financial assets through an entity No Yes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail.
Foreign mutual funds Yes Yes
Domestic mutual fund investing in foreign stocks and securities No No
Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor Yes, as to both foreign accounts and foreign non-account investment assets Yes, as to foreign accounts
Foreign-issued life insurance or annuity contract with a cash-value Yes Yes
Foreign hedge funds and foreign private equity funds Yes No
Foreign real estate held directly No No
Foreign real estate held through a foreign entity No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate No
Foreign currency held directly No No
Precious Metals held directly No No
Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles No No
‘Social Security’- type program benefits provided by a foreign government No No

FBAR – Who is Required to File?

Tax Attorneys at Ainer & Fraker, LLP Discuss Who Must File a Report of Foreign Bank and Financial Accounts (FBAR):

According to the IRS, United States persons are required to file an FBAR if:

  1. The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
  2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

The IRS defines a United States person as U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

Exceptions to the FBAR Reporting Requirement

Exceptions to the FBAR reporting requirements can be found in the FBAR instructions. There are filing exceptions for the following United States persons or foreign financial accounts:

  1. Certain foreign financial accounts jointly owned by spouses;
  2. United States persons included in a consolidated FBAR;
  3. Correspondent/nostro accounts;
  4. Foreign financial accounts owned by a governmental entity;
  5. Foreign financial accounts owned by an international financial institution;
  6. IRA owners and beneficiaries;
  7. Participants in and beneficiaries of tax-qualified retirement plans;
  8. Certain individuals with signature authority over but no financial interest in a foreign financial account;
  9. Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust); and
  10. Foreign financial accounts maintained on a United States military banking facility.

Please Contact a Tax Attorney at Ainer & Fraker, LLP if you have questions about the Report of Foreign Bank and Financial Accounts (FBAR) regulations and reporting requirements.

Does a Solo 401(k) Plan Make Sense for Your Owner-Only Businesses?

Tax Attorneys at Ainer & Fraker, LLP Discuss whether a Solo 401(k) Plan Make Sense for Your Owner-Only Businesses

  • Solo 401(k) plans allow greater income deferral than most other retirement plans.
  • A Solo 401(k) plan suits self-employed and owner-only corporations.
  • The plan needs to be established prior to year’s end.
  • The plan is generally not beneficial if company has employees other than a spouse.

It goes by many names: Solo 401(k), Mini 401(k), and single-participant 401(k). We will use Solo 401(k) in this article to describe probably the best type of pension plan for owner-only businesses. It provides for larger contributions, including a Roth option for a portion of the contribution, and the ability to borrow funds from the plan at reasonable rates. Consequently, Solo 401(k) plans have become more attractive options than SEP-IRAs, SIMPLE IRAs, or profit-sharing or money purchase plans. In addition, if the plan permits—and most do—assets from other retirement plans can be rolled over into the Solo 401(k) plan.

Generally, Solo 401(k) plans are a natural fit for two categories of people. The first are those who operate a business as an independent contractor, sole proprietor, or owner-only C or S corporation. The second are those who have dual incomes: they are W-2 wage earners as employees of a company that offers a 401(k) plan, but also have consulting income from corporate directorships or freelance work that requires them to file a Schedule C as a sole proprietor. Since the 401(k) contribution limits apply to each individual for the year and not to the individual plans, the taxpayer who has multiple 401(k) plans needs to make sure that no more than the annual limit is contributed to the total combination of plans.

For 2013, the rules limit employer contribution (profit-sharing contribution) to 25% of compensation. The employee can also make salary deferral contributions up to $17,500. Together, these contributions cannot exceed the lesser of $51,000 or 100% of compensation. In addition, if the employee is aged 50 or over, he or she can make an additional catch-up contribution of $5,500. The business owner in these arrangements is considered to be both an employee and an employer.

Example: Susan Lewis, 49, is the sole employee of an incorporated business. Her earned income is $100,000 in 2013. Under the law, Susan can contribute $25,000 to a SEP-IRA ($100,000 × .25), $14,500 ($11,500 plus 3% of $100,000) to a Simple IRA, or $25,000 to a profit-sharing or money purchase plan. On the other hand, she can contribute $42,500 to a Solo 401(k) plan ($25,000 employer contribution plus $17,500 employee deferral), which is still under the $51,000 maximum for the year. If Susan is 50 or over, she can also make a catch-up contribution of $5,500, increasing her 401(k) contribution total to $48,000.

In some cases, 401(k) plan contributions for an unincorporated business may be slightly lower than the above amounts. For unincorporated businesses, compensation is net profit minus half of self-employment taxes minus employer contributions.

Although single-participant 401(k) plans are limited to the business owner and his or her spouse, business owners should note the added benefits of having his or her spouse as the business’s only other employee. Having the spouse on the payroll allows the business owner to shelter some or all of his or her income by having his or her spouse make an elective deferral to a 401(k) plan in addition to the business making a profit-sharing contribution. Although the spouse and the business would be responsible for their respective shares of employment taxes on the salary, combined employer and employee contributions could be up to the lesser of $51,000 (for 2013) or 100% of compensation. This limit applies separately to the business-owner and the spouse, thus allowing a combined total of up to $102,000 (for 2013). In addition, if aged 50 or over, each individual could defer an additional $5,500 each year.

Potential downside: If a business grows and begins to hire employees, the single-participant 401(k) plan must become a full-blown 401(k) plan subject to other, more stringent rules, including discrimination testing, that can serve to limit contributions by highly paid executives. Many providers recommend that businesses with immediate expansion plans not set up one of the Solo 401(k) arrangements.

Caution: If the business owner has other businesses or is part of a controlled group of corporations, partnerships, proprietorships, or affiliated service groups, the employer aggregation rules may apply and the employees of those other businesses may have to be considered for purposes of meeting qualification and minimum coverage requirements for the Solo 401(k).

If you are considering a Solo 401(k) plan, be aware that the plan must be set up before year’s end.

Please Contact a Tax Attorney at Ainer & Fraker, LLP for additional information about Solo 401(k) plans and how they might fit into your tax strategy and retirement-planning.

Avoid Tax Surprises by Conducting a Withholding and Payments Audit

Tax Attorneys at Ainer & Fraker, LLP Discuss How to Avoid Tax Surprises by Conducting a Withholding and Payments Audit:

  • 2013 could hold some unpleasant tax surprises because of :
    • Increased long-term capital gains rates.
    • Increased ordinary tax rates.
    • A new 3.8% tax on net investment income.
    • The new additional 0.9% HI (Medicare) payroll and self-employment tax.
    • Life-changing events such as marriage, birth of a child, or new job.
    • One-time increase in income from sales of stock or real estate.
  • Under-withholding and underpaid estimates could cause penalties, but corrective actions before year-end may mitigate the penalties.

2013 will hold some unpleasant tax surprises for many taxpayers simply because of the increased long-term capital gains tax rates, the ordinary income tax rates, and the imposition of two new taxes as part of the Affordable Care Act, including a new 3.8% surtax on net investment income and an additional 0.9% payroll and self-employed health insurance tax.

Other factors can also have an impact on the results of your tax return. These include life events such as marriage, birth, or adoption of a child; divorce or separation; the death of a spouse; a new job; a bonus; or a spouse going to work.

You may have sold a business, real estate, stocks, or other assets that will produce a one-time increase in income.

So, if you have a substantial increase in tax as the result of any of the above or other events, it may be wise to review your withholding and/or estimated tax payments to ensure you have set aside funds for the increase in taxes and have paid in enough in advance to avoid or minimize an underpayment penalty.

Generally if you have not paid evenly throughout the year withholding and estimated taxes, so that they will equal 90% of your tax liability for the year or 100% of the prior year’s liability (110% if your income is over $150,000), you may be subject to an underpayment penalty for the year. This office can project your 2013 tax liability to prepare you for your tax liability and so you can either adjust your withholding or make estimated tax payments to minimize penalties. If you are already set up to pay estimated tax, revising the remaining payment vouchers may be appropriate.

If a potential large tax liability is discovered early enough, your withholding for the rest of the year can be adjusted. Withholding is treated as deposited ratably over the course of the year even if paid towards the end of the year, which helps mitigate underpayment penalties where you are underpaid in the earlier quarters.

Please Contact a Tax Attorney at Ainer & Fraker, LLP to discuss tax planning, tax projections, or modifying your withholding and estimated payments.

October Extension Due Date Rapidly Approaching

Tax Attorneys at Ainer & Fraker, LLP Discuss the October Extension Deadline for Individual Tax Returns:

  • October 15 is the extended due date for filing 2012 federal individual tax returns.
  • Late-filing penalty for individual federal returns is 5% of the tax due for each month, or part of a month, for which a return is not filed, up to a maximum of 25% of the tax due. A separate penalty applies for filing a state return late.

If you could not complete your 2012 tax return by the normal April filing due date, and are now on extension, that extension expires on October 15, 2013, and there are no additional extensions. Failure to file before the extension period runs out can subject you to late-filing penalties.

There are no additional extensions, so if you still do not or will not have all of the information needed to complete your return by the extended due date, please call the office so that we can explore your options for meeting your October 15 filing deadline.

If you are waiting for a K-1 from a partnership, S-corporation, or fiduciary return, the extended deadline for those returns was September 16.  So, if you have not received that information yet, you should probably make inquiries.

Late-filed individual federal returns are subject to a penalty of 5% of the tax due for each month, or part of a month, for which a return is not filed, up to a maximum of 25% of the tax due. If you are required to file a state return, and do not do so, the state will also charge a late-file penalty.

If this office is waiting for some missing information to complete your return, we will need that information at least a week before the October 15 due date.

Please Contact a Tax Attorney at Ainer & Fraker, LLP immediately if you anticipate complications related to providing the needed information, so that a course of action may be determined for avoiding the potential penalties.