Tax Update from Miller Cooper & Co.

December 2011

Edited by Howard Bakrins, CPA, Senior Manager
and Steve Glover, Principal, Miller Cooper

Year End Tax Planning Tips

IRS Announces Pension Plan Limitations for 2012

Tax Benefits Increase in 2012 Due to Inflation

Protect Your Personal Information 

 Year-End Tax Planning Tips

As the 2011 year winds down, there are still many tax planning opportunities that can produce significant tax savings for individuals and businesses. Some of these opportunities for individuals include:

• Delaying the receipt of income, such as a bonus or commission, or the sale of property until 2012.

• Increasing the contribution to your company’s 401(k) plan.

• Selling stocks and securities that have depreciated in value relative to their cost. You can offset any gains from similar transactions during the year plus shield up to $3,000 of ordinary income from taxes. Excess losses can be carried forward.

• Accelerating payment of deductible expenses, including state income and real estate taxes, charitable donations or out-of-pocket medical expenses. However, watch out for the Alternative Minimum Tax in the case of certain deductions.

• Shifting income to other family members. However, be aware of the Kiddie Tax.

• Donating appreciated securities to charities. The amount of the deduction is the current value of the property rather than its cost, and the capital gain of the appreciated security is not taxed. Special deduction limitations may apply.

• Making energy-efficient improvements to your principal residence before December 31 may reduce your tax bill by up to 10% of the cost of the improvements, up to a maximum of $500. This credit is not available if you took advantage of it in previous years.

• Considering Roth IRA conversions and reconversions.

• Gifting at least the $13,000 annual exclusion per donee before year end.

For businesses:

• Accelerating fixed asset acquisitions into 2011. For 2011, 100% bonus depreciation applies to purchases of most new equipment used in a trade or business and placed in service during 2011. For property purchased and placed in service in 2012, 50% bonus depreciation applies.

• Reviewing accounts receivable for uncollectable amounts that should be deducted.

• Claiming a loss on the valuation of obsolete or subnormal inventory offered for sale within 30 days of the inventory date.

• Creating a self-employed retirement plan before year end and accruing the contribution deduction.

• Reviewing your S Corporation and/or partnership income tax basis to determine whether a capital contribution or loan before year end will enable you to deduct current year losses.

• Reviewing fixed asset additions to determine whether one or more should be reclassified as a repair.

As these planning opportunities may have certain requirements and limitations, we suggest that you contact us to discuss the best way to implement those that apply.

These planning techniques and many others can be found on the Miller Cooper online 2011 Tax Planning Guide. The guide can be accessed by clicking here. We encourage you review the guide and to call us with any questions or further suggestions. Our goal is to help you plan effective tax strategies to save money.

IRS Announces Pension Plan Limitations for 2012

 The IRS has announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for 2012. Highlights include:

•  The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), and most 457 plans is increased from $16,500 to $17,000.

•  The catch-up contribution limit for those age 50 and over remains unchanged at $5,500. 

• The deduction for a taxpayer who is single or the head of household and making contributions to a traditional IRA is phased out if he/she is covered by a workplace retirement plan and has modified adjusted gross incomes (AGI) between $58,000 and $68,000; up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which both spouses are covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000; up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000; up from $169,000 and $179,000.

• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

• The annual benefit limit for defined benefit plans increased to $200,000 from $195,000.

• The maximum compensation limitation increased to $250,000 from $245,000.

Tax Benefits Increase in 2012 Due to Inflation

For tax year 2012, personal exemptions and standard deductions will increase and the tax brackets will widen due to inflation.

By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 tax income returns, include the following: 

• The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.

• The new standard deduction is $11,900 for married couples filing a joint return, up $300; $5,950 for singles and married individuals filing separately, up $150; and $8,700 for heads of household, up $200.

• Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.

 Credits, Deductions and Related Phase Outs

• The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.

• The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers; up from $102,000, and $52,000 for singles and heads of household, up from $51,000.  

• For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts; please see the table below.

The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000; an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Estate and Gift

For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.

The annual exclusion for gifts remains at $13,000 per donee.

Other Items

• The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.

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• Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains $1,150 for married individuals and $1,450 for singles and heads of household.

 For federal tax updates and effective tax planning strategies, please visit the Miller Cooper website to view our 2011 Tax Planning Guide.

Protect Your Personal Information from Criminals Posing as the IRS

 Some taxpayers have been the target of “phishing,” which is a scam typically carried out by unsolicited email and/or websites that pose as legitimate sites and lure unsuspecting victims to provide personal and financial information.

 Taxpayers need to be aware that the IRS does not initiate taxpayer communications through email. If you receive an email claiming to be from the IRS that contains a request for personal information, do not reply. In addition:

•  Do not open any attachments. Attachments may contain malicious code that will infect your computer.

• Do not click on any links.

• The IRS requests that you forward the email, as-is, to phishing@irs.gov.

• After you forward the email and/or header information, delete the original email message you received.

 If you receive a phone call or paper letter via mail from an individual claiming to be the IRS but you suspect he/she is not an IRS employee:

•  Ask for a call back number and employee badge number.

• Contact the IRS to determine if the caller is an IRS employee with a legitimate need to contact you.

• If you determine the person calling you is an IRS employee with a legitimate need to contact you, call them back.

 If you receive a letter or notice via paper mail: 

• Contact the IRS to determine if the mail is a legitimate IRS letter.

• If it is a legitimate IRS letter, reply if needed.

For more information on these articles, please contact Ricky Max, Principal or Avrum Katz, Principal. You can also call us at 847-205-5000.

Miller, Cooper & Co., Ltd.

1751 Lake Cook Road, Suite 400, Deerfield, IL  60015     500 West Madison St., Suite 3350, Chicago, IL  60661