Janell A. Israel & Associates
1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814 Phone: 808-942-8817
March 2013 Tax Newsletter
What's New in Taxes:
Extended Tax Breaks Could Cut Your Taxes In 2012 and 2013
The new tax law signed in January extended a number of tax breaks that could lower your tax bill in 2012 and 2013. So check out the list below to see if any apply to you or your business.
Extended for individuals:
* The optional deduction for state and local sales taxes in lieu of deducting state and local income taxes.
* The above-the-line deduction for up to $4,000 for qualified tuition and related expenses.
* The above-the-line deduction for up to $250 for classroom supplies purchased by teachers.
* The deduction for mortgage insurance premiums.
* Allowing taxpayers 70½ or older to make tax-free contributions of up to $100,000 from an IRA to a charity.
* The exclusion from income for cancellation of mortgage debt of up to $2 million on a principal residence.
Extended for businesses:
* An increase to $500,000 in the Section 179 first-year expensing option for the purchase of new or used business equipment, with an investment limit of $2,000,000.
* 50% bonus depreciation on purchases of new business equipment.
* The research tax credit and the work opportunity tax credit.
* 15-year depreciation for leasehold improvements, restaurant property, and retail space improvements.
For assistance in identifying and applying all the deductions and credits that lower your taxes -both for 2012 and 2013 - please contact our office.
Do You Owe Self-employment Tax?
If you earned more than $400 during 2012 from work as a sole proprietor or independent contractor, you may owe self-employment tax. That's true no matter what your age - even if you're receiving social security benefits.
The tax is assessed on your earnings from self-employment, which can include income from qualified joint ventures and partnerships, as well as fees you earn working as a director for a corporation. In this context, "earnings" generally means your income after deducting expenses incurred while operating your business. If you have multiple businesses, you combine the net income and losses.
For your 2012 return, the self-employment tax rate is 13.3% on the first $110,100 that you earned. For 2013, the taxable base rises to $113,700, and the tax rate increases to 15.3%. Income above the base amounts is still subject to Medicare tax at a 2.9% rate.
What happens when you earn social security wages or tips from an employer and also have a side business? Your wages count toward the taxable base. Depending on how much you earn as an employee, your self-employment income may be subject to part or all of the tax.
You can pay self-employment tax on a quarterly basis as part of your estimated tax payments. One half of the total self-employment tax that you pay during the year is deductible on your income tax return, and you don't have to itemize to claim the deduction.
Are you new to self-employment? Give us a call. We're happy to offer guidance and help you make smart tax decisions.
New Home-office Deduction Option Simplifies Recordkeeping
The IRS is reducing the recordkeeping required for the home-office deduction, effective for 2013. Taxpayers who qualify may use a new optional deduction calculated at $5 a square foot for up to 300 square feet of an area in a home that is used regularly and exclusively for business. The deduction is capped at $1,500 a year.
Taxpayers opting for the simplified deduction cannot depreciate a portion of the home as they can under the other method. However, business expenses not related to the home, such as advertising, supplies, and employee wages are still fully deductible.
This simplified option is available starting with the 2013 tax return which will be filed in 2014.
What's New in Finances:
Review Your Estate Plan Under The New Rules
There has been a lot of uncertainty about the tax rules - what has changed for 2013 and what has remained the same. This uncertainty includes the rules covering estate and gift taxes.
The estate tax exemption was scheduled to drop in 2013 to $1,000,000, with a top tax rate of 55%. However, the American Taxpayer Relief Act of 2012 signed in January kept that change from happening and instead brought some certainty to the estate and gift tax rules for some years going forward.
The new law permanently sets the estate and gift tax exemption at $5,000,000 and sets the top tax rate at 40%. The exemption amount is adjusted annually for inflation. That inflation adjustment puts the 2012 exemption at $5,120,000 and the 2013 exemption at $5,250,000. The annual gift tax exclusion for 2013 is $14,000 per recipient.
Now that the rules have been made "permanent," you would be wise to review your estate plan to be sure the plan will still accomplish your wishes. Contact us and your attorney for any assistance you need.
You Can't Change Your Mind After You Convert
Under the new tax law, it is now easier to convert your employer-sponsored retirement plan such as a 401(k), 403(b), or 457 into a Roth IRA account. This is similar to converting your traditional IRA into a Roth IRA, but with one very significant difference.
When you convert a traditional IRA into a Roth IRA, you can change your mind and undo this conversion (also known as a recharacterization) by October 15 of the following year. This may make sense when the value of the account has dropped since you did the conversion, because you do not want to pay tax on a higher value than the account currently has.
When you convert an employer-sponsored retirement plan, you do not have the option of undoing the conversion by October 15. Once you convert your employer-sponsored retirement plan into a Roth IRA, it cannot be undone.
If you decide to convert your entire 401(k) into a Roth IRA, the entire balance will be taxable in the year of the conversion.
If you want to take advantage of this new provision, please contact our office first because there are some very important tax planning consequences to consider. If done without proper tax counsel, you may be paying more taxes than you should. In light of the new tax law, there are now more variables that need to be considered in your tax planning.
All information is believed to be from reliable sources, however we make no representation as to its completeness or accuracy. The information contained in this newsletter is provided by Mostad & Christensen, Inc. The information is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in this newsletter, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Mosted & Christensen, Janell Israel & Associates and NPC are separate and unrelated companies.
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Rep is not an attorney. Rep can help review the documents and recommend a local attorney that specializes in Estate Planning. Estate planning can involve a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing any strategy.