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TOP TEN THINGS TO CONSIDER IN YEAR-END INCOME TAX PLANNING

December 19th, 2011

Accelerate or defer income. If you have deferred compensation, consider which best suits your planning: to take your earned income now and pay taxes immediately at today’s historically low tax rates or to defer income until later and pay taxes when rates may be higher. Similarly, if you are eligible for qualified plan distributions and option grants, you need to decide whether to accelerate income recognition.
Paying deductible expenses sooner may help you in 2011. Does it make sense for you to accelerate deductions into 2011? If you itemize deductions, it might help your 2011 bottom line to pay deductible expenses like medical costs, qualifying interest, and state and local taxes before the end of the year, instead of waiting until 2012. This may include accelerating your estimated state income tax payment that would normally be due in January.
Income tax rates to remain the same in 2012. The same federal income tax rates that apply in 2011 will apply in 2012. Based upon the level of your income, the current graduated rates are 10%, 15%, 25%, 28%, 33% or 35%. Also, as in 2011, long-term capital gains and qualifying dividends will continue to be taxed at a maximum rate of 15% in 2012; and if you are in the 10% or 15% tax rate bracket, a special 0% tax rate will generally continue to apply.
Harvest gains and losses before year-end. Selling stock at a loss to offset capital gains is a classic year-end tax strategy. Harvesting gains this year also may be especially useful if capital gains rates increase in the near future; however, investors should be careful not to violate the “wash sale rule,” which disallows any loss if a taxpayer buys nearly identical securities 30 days before or after the sale.
Make sure that your deferred compensation elections are in place by December 31. You are allowed to defer salary and guaranteed or non-performance bonuses due in 2012 as long as you make the appropriate election by December 31, 2011. The election must identify the timing of any future distributions of the deferred compensation and the mode by which those future payments will be made.

Closely-held and self-employed business owners who want to create a qualified plan must establish those plans by the end of the tax year.

IRA and retirement plan contributions. Employer-sponsored retirement plans like 401(k) plans and traditional IRAs (if you qualify to make deductible contributions) present an opportunity to contribute funds on a pre-tax basis, reducing your 2011 taxable income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) are not deductible, so there’s no tax benefit for 2011-they’re still worth considering, though, because qualified distributions are free from federal income tax. The window of opportunity to make 2011 contributions to your employer-sponsored plan closes at the end of the year, but you can generally make 2011 contributions to your IRA up to April 17, 2012.
IRA and retirement plan distribution requirements at age 70 ½. Once you reach age 70 ½, your are generally obligated to start taking required minimum distributions (RMDs) from any traditional IRAs or employer-sponsored retirement plans. It is important to make withdrawals by the date required- the end of the year for most individuals. The penalty is significant for failing to do so: 50% of the amount that should have been distributed. Absent new legislation, 2011 will be the last year to take advantage of a popular provision allowing individuals age 70 ½ or older to make qualified charitable distributions of up to $100,000 from an IRA directly to a qualified charity (these charitable distributions are excluded from your income, and count toward satisfying your RMDs obligation that you would otherwise have to take from your IRA for 2011).
Diversify out of a concentrated stock position. Diversifying out of a concentrated portfolio can greatly reduce risk in a portfolio, but it can also trigger a capital gains tax liability. This liability can lead individuals to defer diversification, especially if the concentrated position has a low cost basis (which is often the case). That delay, though, may cost you more. Now is a particularly good time to consider diversifying because capital gains tax rates appear poised to increase to 20% or possibly higher in 2013. Remember that the lower the basis, the higher the tax liability, and consequently, the higher the incremental return on any new investments will need to be as a way to compensate for those taxes.
Depreciation and expense limits to drop for business owners and self-employed. If you’re a small business owner or a self-employed individual, you’re permitted a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011. This “bonus” first year additional depreciation deduction will drop to 50% for property acquired and place in service for 2012. For 2011, the maximum amount that can be expensed under Section 179 of the Internal Revenue Code is $500,000, but in 2012 the limit will drop to $139,000.
Last chance to deduct energy-efficient home improvements. This is the last year to claim a credit for energy-efficient improvements you make to your home (up to 10% of the cost of qualifying property). Improvements can include a qualifying roof, windows, skylights, exterior doors, and insulation materials. Specific credit amounts may also be available for the purchase of energy-efficient furnaces and hot water boilers. Note, however, that there is a lifetime credit cap of $500 ($200 for windows). Therefore, if you have claimed the credit in one or more years since 2005, you will only be entitled to the difference between the current cap and the amount claimed in the past.

For more information, please contact Mark E. Kellogg at 517.377.0890 or at mkellogg@fraserlawfirm.com. The above information is not intended to be legal, tax or investment advice. Please consult with your attorney or tax advisor prior to making any tax decisions.

‘Tis the season to be gifting’

November 16th, 2011

Thanksgiving is right around the corner and many of us are busy counting our blessings. We wonder how to bless those who have blessed us. We ask, “What would be an appropriate gift?” “Should I get a present, give cash, or simply write a check?” If your next question is, “What are the tax ramifications of my gift?” then you must be a tax attorney. If that wasn’t your next question, this Q&A summary of the federal gift tax law is for you.

Caveat: Some believe the gift tax laws are among the most complicated in the Internal Revenue Code; accordingly, this column is intended as general educational information only and not legal advice.

Q: What is a gift?

A: Any transfer to an individual where less than fair market value is given in return.

Q: What triggers the gift tax?

A: Each person is entitled to make annual gifts with no tax consequences if the combined total of annual gifts is less than or equal to $13,000 per person per calendar year. If a gift exceeds these limits, a United States Gift (and Generation-Skipping Transfer) Tax Return, Form 709, must be filed. This is an informational return unless a person’s lifetime gift tax exemption has been exceeded at which point gift tax must be paid.

Q: How much can my spouse and I gift to our children this year without incurring any gift tax liability?

A: This year, each spouse can give up to $13,000 to each child (or anyone else) without incurring any gift tax liability and without using up the lifetime gift tax exemption. In a family with two children, each spouse could give $13,000 to each child, for a total of $52,000 in tax-free gifts. Each spouse should write one check for $13,000 instead of a combined check for $26,000. If gifting with the annual exclusion amount in mind, be sure to add up ALL gifts given during the year. Before writing a $13,000 check for Christmas, consider all gifts made during the year (such as birthday and anniversary presents), and all payments made on behalf of your child (such as paying off credit card debt).

Q: What if annual gifts exceed the tax-free amount?

A: In addition to our annual gift tax exclusion amount of $13,000, in 2011 and 2012, we each have a $5,000,000 lifetime gift tax exemption. The amount of an annual gift that exceeds the $13,000 limit per person, uses up part of the lifetime gift tax exemption. This lifetime exemption amount is reduced dollar for dollar by the amount of gifts that exceed the annual gift tax exclusion. Each gift that reduces our lifetime gift tax exemption also correspondingly reduces the amount we can pass to others tax-free upon death. For 2011, the federal estate tax exemption amount is $5 million. For 2012, it has been indexed for inflation to $5,120,000; however, under current law, the exemption reverts in 2013 to $1 million indexed for inflation unless Congress passes legislation changing this amount.

Q: What if I make gifts during life that exceed my $5,000,000 lifetime gift tax exemption?

A: Gift taxes must be paid during life on gifts exceeding the $5,000,000 lifetime gift tax exemption amount. The current rate of tax is 35%.

Q: Are there any exceptions to the gift tax rules?

A: Yes there are many exceptions; specific advice should be obtained to handle such gifts correctly. Generally, paying another’s tuition or medical expenses directly to the institution or care provider does not trigger gift tax rules. Gifts to spouses are also excluded from the gift tax rules; however, there are limitations for gifts to non-US citizen spouses. Gifts to charities have special rules as do gifts to fund Education Savings Plans (MESP or 529 Plans).

Q: What is a split gift?

A: A split gift allows a gift of property by one spouse to be attributed equally to both spouses; a gift tax return must be filed timely to indicate a split gift has been made.

Q: What are some benefits of making annual gifts?

A: Besides the joy of seeing loved ones enjoy your gift, there are several estate tax benefits using annual gift tax exclusion gifts. One of the most common reasons for annual exclusion gifts is to reduce one’s estate to minimize federal estate taxes paid at death. Planning is needed to retain enough money for future expenses. Further, such plans should be made in consultation with your estate planning, tax, and accounting team.

For advice regarding your situation, please call to make an appointment with one of our Lansing Attorneys, such as Marlaine C. Teahan (517-377-0869) or Mark E. Kellogg (517-377-0890); in Grand Rapids, call Melisa M.W. Mysliwiec (517-377-0887). Note that gifts to spouses and charities do not necessarily follow the rules discussed above. Gifts of closely-held entities, appreciated assets and within three years of death deserve special treatment. Finally, be aware that these rules change often.

For more information visit Fraser Trebilcock.

Backups at the Tribunal

October 5th, 2011

At a recent luncheon organized by the Real Property Section of the Ingham County Bar Association, Kimball R. Smith, III, Chair of the Michigan Tax Tribunal, gave his “Michigan Tax Tribunal Update.” As we all are aware, real property values in Michigan have significantly decreased in recent years. As one may suspect, the inverse is true of filings with the Michigan Tax Tribunal. For these reasons, I thought I would share some highlights of Mr. Smith’s presentation with our readers.

Smith reminded us that the Michigan Tax Tribunal is an administrative tax court that hears tax appeals for nearly all cases dealing with Michigan taxes. Many of those tax appeals relate to the “true cash value” of property, a concept, which in practice is similar to fair market value. The Tax Tribunal is divided into two divisions. They are the Entire Tribunal and the Small Claims Division. Smith indicated that fiscal years 2009, 2010, and 2011 represent the highest number of cases ever filed with the Entire Tribunal. Specifically,

6,900 cases were filed in 2009;
5,500 cases in 2010; and
4,600 cases were filed in 2011.

In recent years, a high number of cases were also filed with the Small Claims Division. Specifically,

12,083 small claim appeals were filed in 2009;
20,469 in 2010; and
as of August 25, 2011, 17,098 cases have been filed this year.

Although the Tax Tribunal is experiencing increased case loads, it continues to be allocated essentially the same level of resources as in previous years. Unfortunately, this has resulted in long delays in bringing tax appeals to decision. For example, the Tax Tribunal only recently started work, other than docketing, on small claims tax appeals filed during the 2010 tax year. However, the Tax Tribunal has taken measures to expedite tax appeals and, under Mr. Smith’s direction, additional measures will be implemented. Although most tax appeals are resolved between the parties before a hearing, the number of decisions entered by the Tax Tribunal has significantly increased in recent years. For example, the Entire Tribunal entered 37 and 81 decisions in years 2008 and 2009, respectively. In 2010, the Entire Tribunal entered 204 decisions and for 2011 through August 25, the Entire Tribunal has entered 172 decisions. With the hiring of hearing referees, many more decisions are being entered by the Small Claims Divisionand almost twice as many appeals were closed by this division in fiscal year 2010 as in fiscal year 2009.

As we look forward to expedited processes at the Tax Tribunal, property tax year 2012 is right around the corner. Assessments will be issued in January and February of next year. Taxpayers should review property tax assessments and contact counsel. Protests may be filed in March and, depending on the property classification, tax appeals must be filed by May 31 or July 31. If a tax appeal is already pending, a subsequent tax year can be added, sometimes automatically, to that appeal.

For more information, please feel free to contact Fraser Trebilcock or Lansing Attorney Loukas P. Kalliantasis at 517.377.0893 or lkall@fraserlawfirm.com.

NonProfits Beware….There are new rules by the IRS for Donor and Grantmakers

September 16th, 2011

The IRS has recently updated rules relating to donations and transfers to nonprofit organizations by donors and sponsors of donor-advised funds (DAFs). These rules are utilized by donors to assure themselves that their donations are eligible for charitable income tax donation and by DAFs who are required to exercise expenditure responsibility.

The Internal Revenue Code allows a charitable income tax deduction for contributions to certain nonprofit organizations. To qualify for the deduction, the organization must qualify at the time of the donation. The Treasury Regulations provide that once an organization qualifies under Section 509(a)(1), (2) or (3), the tax deductibility of contributions are not affected by an IRS revocation of such status until the date the revocation is made public.

Accordingly, there are certain steps that a DAF and a donor should take to assure that its donations are going to a qualified organization. The most common way to do so is to check IRS Publication 78, available on the IRS’s website. Under the new rules, the IRS has made it clear that donors and DAFs may also rely on the IRS Business Master File, also available online.

Private foundations and DAFs must also determine whether an organization that is a public charity is in fact a supporting organization as it affects the level of expenditure responsibility for the DAF. Unfortunately, Publication 78 does not currently identify separately those organizations that are supporting organizations (the IRS Business Master File does, however). Unfortunately, this information is not enough as the type of supporting organization also determines the expenditure responsibility, something that the IRS Business Master File does not provide. While the IRS has announced plans to modify its coding system, such modification has not occurred.

Finally, once the classification of the recipient charitable organization has been determined, donors and DAFs must confirm that the organization is still in good standing with the IRS. The IRS publishes a revocation list that will be periodically updated on its website.

It is recommended that donors and their advisors follow the best practices to document compliance with these rules by documenting that the donor or the DAF has checked Publication 78 or the IRS Business Master File and the IRS website to confirm that the tax-exempt status remains in place.

For more information, please contact Fraser Trebilcock attorney J.J. Burchman at 517.377.0817 or jburchman@fraserlawfirm.com.

Focus remains on job creation

September 6th, 2011

Just as our children return to school to acquire the skills, knowledge and experience to enter the job market, so to does Congress and state legislatures return to work to create the environment to stimulate job growth.

The Federal Agenda
In Washington, Congress returns to an agenda that will focus on the “deficit debate,” that Democrats will insist must also include measures to create jobs. According to Congressional Quarterly, “Democrats, especially in the House, are pushing for the Joint Select Committee on Deficit Reduction to include jobs initiatives in the legislation that the panel is directed to produce by Nov. 23. Republicans are likely to oppose such proposals, particularly if the cost would add to the federal government’s $14 trillion debt.” In fact, Rep. John Larson (D-Conn) has a bill to expand the panel’s mandate to include jobs.

The 12-member bipartisan panel, created by the debt limit increase law (PL 112-25), is charged with finding ways to trim the deficit by at least $1.2 trillion over a decade. The committee is also free to seek additional savings. The committee is already limited with already established discretionary spending caps and as a result, are expected to focus on finding additional reductions through savings in entitlement programs (ex. Medicare, Medicaid) and tax changes. They will have their first meeting on September 8, the same day the President will speak to Congress laying out the Administration’s jobs plan. They have until January 15 to enact at least $1.2 trillion in deficit reduction, or across-the-board spending cuts will be triggered.

Congress also will consider a number of regulatory changes to stimulate jobs and reduce the regulatory hurdles of doing business. In fact, in August, House Majority Leader Eric Cantor (R-VA) sent a memo on what those changes will be. The President outlined 7 regulatory changes he wants, including 4 EPA rules and 3 transportation rules. This includes:

A delayed EPA rule restrictions hazardous emissions by coal- and oil-fired electric utility steam generators, at $10 billion.
New emissions standards for emissions by major industrial and commercial boilers, $3 billion.
Standards for disposal of coal ash from power plants, $0.6 billion to $1.5 billion.
New vehicle safety regulations for rear view mirrors, $2 billion.
Electronic on-board recorders and documents for supporting restrictions on the hours that commercial truck drivers can operate their vehicles, $2 billion.
New hours of service rules for commercial truck drivers, $1 billion.

Republicans are focused on changing some labor regulations Finally Congress will try to work on a few bills dealing with transportation and infrastrucutre, extensions of the Federal Aviation Administration and surface transportation programs. The FAA authroization was quickly extended before Congress left for the summer until September 16 and it seems likely will be extended again as Congress will not have enough time to consider something else. A sticking point in the authorization deals with the right of airline and railroad workers to unionize. Also, subsidies to airlines flying into small airports remain a concern. If Congress fails to act, we can expenct som shutdowns of non-essential government workers at airports, as well as a number of key construction projects put on hold.

As for any movement on projects, the current extension expires September 30 and neither chamber has a bill. As a result, states will not be reimbursed for varous highway and transit projects and some may even suspend the work completely.

Other issues Congress will focus on this Fall, include:

Alternative Minimum Tax – if current exemptions expire at the end of this year, many middle and upper-middle class tax payers will see their taxes rise.
Defense Authorization – There are a number of questions lingering with the Defense Authorization bill which the Senate still has not acted upon, including: pay for our soldiers, potential upgrades for tanks, tirals for terrorists detained at Guantanamo Bay, potential updates to use of military force and alternatives for the F-35 engine.
Doc Reimbursements – Doctors who take medicare patients are scheduled to have their reimbursement rates cuts unless Congress fixes it and fixes it for the long term… not another short term fix. Unless fixes, physicians may choose not to treat Medicare patients.
Education Left Behind – Despite some action on re-authorizing education policy in this country, the law (PL 107-110) expired four years ago, with no measures emerging yet in the Senate. If Congress fails to act on implementing new education policies, states will be forced to have all their students be 100 percent proficient in math and reading by 2014 under the existing law or their schools will be labeled failures and be forced to undergo costly restructuring unless the state receives a waiver from the Secretary of Education.
Payroll Tax Deductions – Payroll tax for Social Secrutity was reduced for employees with the employer half unchanged. Self-employed individuals also were reduceted. Unless changed, the employee half of the Social Security Tax will increase from 4.2 percent to 6.2.
Taxes – Some tax breaks extended under a 2010 tax law expire at the end of this year. This includes tax breaks for R&D.
Trade – Congress has yet to approve trade agreements with South Korea, Colombia and Panama. The issue is how to help American workers displaced by trade. Look out for a new trade agreement between Canada and the EU and how we can take advantage of that in Michigan.

Jobs Debate

While there is agreement between Democrats and Republicans that economic growth and job creation are crucial issues to move forward on, the government’s role in that effort is up for debate. The Democrats want new programs or tax breaks to promote growth while Republicans want regulatory changes and reduce tax burdens on business.

If you can think of any changes to the tax code or ways to improve existing regulations, please comment at the end of this blog or contact us at www.fraserlawfirm.com.

Michigan Tax Law Changes Signed Into Law

May 26th, 2011

On Wednesday, May 25, 2011, Governor Snyder signed a number of new tax Bills to revise Michigan’s tax structure. The new laws include elimination of the Michigan Business Tax (MBT), creation of a Michigan Corporate Income Tax and permanent spending reductions, elimination of tax credits for low-income workers, phase-out of most senior tax breaks and eliminates numerous income tax deductions and credits. The new law is effective January 1, 2012.

Some of the key changes for businesses are the following:

The MBT is eliminated as of January 1, 2012. A new corporate income tax will be levied on C Corporations at a tax rate of 6.0%. The method of computing the tax is similar to the income tax portion of the current Michigan Business Tax (MBT) Act. The tax is effective January 1, 2012.
S Corporations, Limited Liability Companies, partnerships and individuals are not subject to the corporate income tax.
Income will be apportioned to Michigan based on the ratio of Michigan sales to total sales.
Unitary filing is required for corporations under common control.
Companies with apportioned gross receipts of less than $350,000 will not be required to file a return, as well as companies with a liability of less than $100.
The small business credit is still available for eligible companies. The credit is available for qualifying “small business” (e.g. less than $20 million in gross receipts and income less than $1.3 million). There are additional limits based on compensation and directors fees to individual shareholders and officers.
All other credits provided for under the MBT are eliminated.
For those taxpayers that would like to continue claiming certificated credits, an election can be made to file under the MBT Act instead of the new corporate income tax. Certificated credits include (but are not limited to) Brownfield Credits, MEGA Credits, The Media Production and Infrastructure Credit, and Renaissance Zone Credit. An election would be required to file under the MBT rather than the corporate income tax. Once made the taxpayer would be subject to the MBT until the credits have expired. Taxpayers claiming certificated credits would be required to pay a tax based on the greater of their Michigan business liability or a modified version of the liability under the corporate income tax.
Some of the key changes for individuals are the following:
The law will keep the tax rate of 4.35% through January 1, 2013 and then lower it to 4.25%

The deduction for pension and retirement income (including social security) has been modified. The changes are determined based on the age of the older spouse as follows:

• For individuals born before 1946, there is no change; pensions are not taxable.

• For individuals born in 1946 through 1952, the deduction is limited to $20,000 for a single return and $40,000 for a joint return. However, the deduction will be limited if the taxpayers income exceeds certain thresholds.

• For individuals born after 1952, there will be no deduction allowed for retirement income. However, once the taxpayer reaches age 67, the taxpayer may elect to deduct $20,000 for single or $40,000 for joint return against all types of income. However, the deduction will be limited if the taxpayers income exceeds $75,000 for single return or $150,000 for a joint return.
A taxpayer born after 1945 can no longer deduct a portion of interest, dividends and capital gains received.
Taxpayers can no longer receive an additional $600 exemption for each dependent child under the age of 19 or $1,800 for each taxpayer age 65 and older.
The personal exemption is fixed at $3,700 through 2012. Beginning in year 2013, the exemption will be adjusted annually for inflation. The personal exemption will be phased out for single taxpayers with household resources between $75,000 and $100,000 and married couples filing joint return with household resources between $150,000 and $200,000.
Business income reported on an individual income tax return would be apportioned based on 100% of a sales factor rather than a three factor formula equally weighted.
Elimination of many non-refundable credits such as the city income tax credit, the public contribution credit, the community foundation credit, the homeless/food bank credit, the college tuition credit and the vehicle donation credit.
Political contributions are no longer deductible.
The Michigan Earned Income Tax Credit is eliminated.

This information is a brief summary of a complex new law and is provided for informational purposes only. It is not intended to constitute tax advice which may be relied upon to avoid penalties. If you have questions on the new law, please contact by Edward J. Castellani, J.D., C.P.A. at Fraser Treblcock at 517.377-0845 or ecast@FraserLawFirm.com.