Tuesday, November 27, 2012

Tax Strategies to Deal with New Healthcare Taxes

Trying to make business or investment decisions based on whether the Bush tax cuts will expire on Dec. 31 is like rolling the dice. But there is little or no speculation required when it comes to the taxes needed to fund President Obama’s health care overhaul. Regardless of who wins the presidential election, new taxes on investment income and a boost in payroll tax are slated for 2013. The new taxes are expected to yield $210 billion over a decade to help fund the health care law, which aims to expand insurance coverage to more than 32 million Americans. Here’s an overview of how the new levies will be imposed as of Jan. 1, 2013. It is estimated that about 4 percent of the tax-paying population will be affected by the new health care law levies:
  • A 0.9 percent boost in payroll taxes for individuals earning more than $200,000 a year or households earning more than $250,000;
  • A 3.8 percent tax increase on investment income for individuals earning more than $200,000 a year or households earning more than $250,000.
Higher-income taxpayers and business owners would be wise to have strategies in place to shelter their investment and other types of incomes – as much as the law permits – well before year-end.

Bearing in mind the complexity of the 70,000-page tax code and the specific considerations of individual taxpayers, there is no one-size-fits-all strategy. However, there are some basic tips that might alleviate the blow and some information on gray areas. As always, your tax strategy should be developed in consultation with a qualified professional tax advisor.

Timing a Sale

If you are in the midst of selling a business, finish the deal by year-end to pre-empt the additional tax hit. Likewise, if you are already planning to offload a large single stock position in the next five years to free up some cash, try to do it before Dec. 31. Real estate sales are also subject to the new investment income levy, but bear in mind there’s no change to the tax exemptions allowed on primary residences.


Depending on the individual taxpayer’s circumstances, other avenues should be explored, including cashing in gains in 2012 rather than next year and moving business profits into capital expenditures not subject to taxation.

As it stands now, the 3.8 percent tax will be levied in addition to the existing 15 percent rate on income from capital gains, dividends and other investments for those in the $200,000-plus salary bracket. The law does make an exception to the new 3.8 percent tax on investment if the income is earned in the ordinary course of a trade or business. Whether the income is classified as wages or investment income hinges on how the new law characterizes the provider of the service. This is where the law gets into a gray area, which tax professionals don’t expect to see clarified until after the election. This issue affects business partnerships involving, for example, real estate, law and private equity management firms (like Bain Capital, the firm co-founded by Mitt Romney) – businesses where profits are dispensed as distributions to partners and not as wages.

Deferred compensation plans are another area needing further clarification. So far, more input from the Internal Revenue Service is required to determine if the investment built up in such plans will be subject to the new 3.8 percent investment tax.

Tax professionals will be hard at work devising appropriate strategies as soon as the IRS spells out exactly how the new taxes will be applied. Be sure to consult your tax professional to determine how these new health care taxes will affect you.

Thursday, November 22, 2012

Getting the Most Out of LinkedIn

LinkedIn can be a powerful tool for making business connections, but its effectiveness is up to you and is dependent on the effort you are willing to put into presenting your information and keeping the data current. If you haven’t taken the time to review your profile lately, now would be a good time. At the end of the summer, LinkedIn rolled out a new look that reduces or relegates profile information to less prominent locations. You might want to look at how this has affected your profile and – if necessary – revise certain sections to put the information you consider most important up front and clearly visible. Here are some ideas to consider:
  1. Why are you participating in LinkedIn? To find new business; to be visible to new employers; to find new employees? Make sure you know why you are networking, and who you are trying to reach. LinkedIn should be part of your professional goals and your marketing efforts.
  2. Use a professional headshot. This has always been important; and even more so now because LinkedIn has given more space to your profile photo. Use a good quality, professional looking shot of your face – not a recent snapshot from a social event. If you don’t want recruiters or others to see your face next to your credentials, change your privacy settings so that only your connections are permitted to view your photo.
  3. Maximize the impact your headline delivers. LinkedIn has lopped off the full synopsis of the work history, recommendations and educational experience section, and so your headline has to work even harder to grab a reader’s attention. The headline doesn’t have to be your job title. Consider key words that apply to you, and use your job title only if it is helpful.
  4. The summary section is now much more prominent. Make the first few sentences really count. This summary should be about you – not your company. If your website is important, you might include a link here, as well as in the contact section (see below), because the link to your website is no longer displayed on your profile page. To avoid sounding self-serving, itemize the key tasks you manage on a daily basis and the measurable results you have attained over the past year.
  5. The contact information section is like your business card. Include all ways that people can reach you – email, phone, instant messaging, address, etc. LinkedIn has relegated website information (formerly upfront) to the contact section, and it might be appropriate to include it in the summary, too (see above), if you consider it an important marketing tool.
  6. Connect with care. Your network is only as useful as the strength of your contacts. Some people appear to send out invites to everyone on their email list (as they do with Facebook). If you ask to connect with someone who might not know you well professionally, consider sending a note explaining why you think connecting might be mutually advantageous.
Finally, invest a little time to explore groups that might be useful to you. There are some valuable industry and professional support groups that can be especially helpful to owners of small businesses or sole proprietors.

Tuesday, November 20, 2012

2012 Year-End Tax Planning Tips

One day, we might find ourselves looking back at 2012 as the grand old days of tax planning. While the 2010 Tax Relief Act’s lower rates could be extended next year, it is likely some tax breaks will hit the chopping block, be it specific deductions or investment income. Furthermore, the 2 percent payroll tax cut we currently enjoy will probably go away, with an additional 0.9 percent Medicare surtax scheduled to take its place.

If possible, this is an ideal time to see if you can accelerate any 2013 income into this year by paying yourself future compensation in advance or conducting a Roth IRA conversion.

The Bush tax cuts reduced the capital gains tax rate from 20 percent to 15 percent – a rate scheduled to return to 20 percent at year’s end. Taxes on dividends are also scheduled to return to ordinary income rates in 2013, with a top rate as high as 39.6 percent. Thus, if you have any highly appreciated assets or dividend-producing investments you’ve thought about selling to take and reposition profits, this would be a good time to do so. You have until year-end to sell and be liable at the lower tax rates; if you wait until next year, your liability will likely increase substantially.

How much will it increase? In addition to the rates scheduled to return, the capital gains tax will be subject to an additional 3.8 percent Medicare tax imposed by the Health Care and Education Reconciliation Act of 2010 for single taxpayers with income over $200,000 ($250,000 for married taxpayers). This means that starting on Jan. 1, 2013, the total capital gains tax rate will increase to 23.8 percent.

Estate Planning

From an estate planning perspective, today’s higher gift tax exclusions make 2012 a particularly good year to take advantage of the higher limits for lifetime gifts to children and grandchildren. Currently, the estate and lifetime gift tax exemptions are $5.12 million per person ($10.24 million per couple) with a 35 percent top tax rate on amounts that exceed those thresholds. Beginning in 2013, these exemptions are scheduled to drop to $1 million per person ($2 million per couple) with the potential top tax rate of 55 percent.
Consider that making gifts during your lifetime offers several advantages:
  • The assets you transfer while still alive are removed from your estate (and subsequent estate taxes).
  • Any future appreciation that could be earned by these assets would also be removed from your estate.
  • That potential future income is shifted to your loved ones, who may be able to keep more of the income generated if they are in a lower income tax bracket.
  • The transferred assets and their subsequent appreciation would also be protected from potential creditors, lawsuits or divorce proceedings.
If you are interested in making a substantial gift but are uncomfortable relinquishing complete control over the assets, consider placing your gift in a trust. Speaking of which, you can use a trust strategy to benefit from today’s lower real estate values. For example, you could transfer a piece of property – such as a family vacation home – to a Qualified Personal Residence Trust (QPRT). The present-day value of the home is considered a taxable gift that would count against your $5.12 million lifetime gift tax exemption. If you are still alive when the QPRT term expires, ownership of the property would transfer to your heirs without incurring gift or estate tax consequences. Note, however, that should you die before the term is up, the property would remain part of your estate and be subject to estate taxes.

The current favorable tax environment offers many strategies that can help you position your assets for the future. Regardless of who sits in the White House next term, it might be wise to take advantage of today’s lower rates before they are scheduled to expire at the end of the year. Be sure to consult with a tax advisor and/or experienced estate planner to see which year-end strategies would work best for your situation.

Thursday, November 15, 2012

Small Businesses Squeezed by Credit Crunch

According to a recent survey by the New York Stock Exchange, more than half of small businesses cannot get access to the credit they need. As a result, two-thirds of these small business owners do not expect to add jobs in 2013. In light of the ongoing credit crunch from the Great Recession, small business owners have to refine their borrowing strategies in order to increase their chances of finding the funding to continue growing.

The credit crunch has hit small business owners especially hard in recent years. Another survey by the Federal Reserve Bank of New York recently found that only 13 percent of small business owners who applied for credit received the full amount they requested. Often, banks will restrict loan amounts to 25 percent of yearly gross revenue and devalue small businesses’ financial statements by as much as 30 percent. Even Small Business Administration loans have become arduous – borrowers often have to wait for a separate valuation of their business by the SBA even after the borrower has already paid for a professional valuation and their bank has approved the loan.

A small business needs to do serious research and present itself in the best possible light when applying for a loan in the current market conditions. In the past, small business owners were advised to cultivate a close relationship with only one financial institution. Although it remains true that small businesses should continue to cultivate those relationships, they should also look to other lenders – especially in this climate. Flexibility and a backup plan are vital for small businesses, and competitive pressure on lenders to give the business a good deal can only help.

Small business owners can research lenders in their area by asking for borrower references, talking to people who have done business with the lenders in the past, finding out how different lenders perform at simple services such as processing payments, and getting opinions from other customers about a bank’s flexibility. Loan brokers, financial advisers, accountants and local attorneys can all share valuable information as a result of their working relationships with multiple lenders.

A small business should also make sure its own affairs are in order before applying for a loan. Every business needs a carefully articulated business plan that will help reduce a lender’s uncertainty about the level of risk. The owner should also be prepared to explain any past credit blemishes that could be an issue. It is always better to be proactive about past difficulties – identify the problem and explain how you survived it. Turning past difficulties into a success story instead of a failure will encourage a potential partner to share in the firm’s future growth.

A small business owner should also be prepared with a statement explaining the owner’s personal financial status. Lenders will be interested in how much money the owner is personally willing to invest in the business, including as collateral for a loan. This will show the owner’s commitment to the enterprise and will help the lender assess the amount of risk. Lenders will also evaluate the owner’s experience, background and expertise as part of the risk evaluation.

Small business owners must be aware of their credit rating and attempt to repair any credit blemishes before applying for a business loan. They should have financials, cash flow projections and past business tax returns available for examination. Finally, with lenders being so cautious about risk, small business owners ought to anticipate site visits by prospective lenders. Make sure that financials are in order and work spaces look professional. In addition, lenders today will check social media on prospective borrowers as part of their risk assessment. Owners have to ensure that Twitter and Facebook accounts reflect favorably on their business.

Today’s business climate is especially difficult for small businesses. But with a few common sense steps and thorough preparation, small business owners can get the credit they need to succeed and grow their business. Professionals are available to help get a firm’s house in order and provide valuable advice.

Tuesday, November 13, 2012

Understand the Innocent Spouse Relief and Tax Filing Status

When a married couple files a joint tax return, each spouse is legally responsible for the entire tax liability, even if only one of the spouses is responsible for the failure to pay. Known as joint and several liability, this legal concept still applies after a divorce and even in cases of misrepresentation or fraud. In the past, the IRS offered Innocent Spouse Relief in order to protect a spouse who did not know or have reason to know that an understated tax existed. Last year, the IRS announced a revision of the Innocent Spouse Relief program so that knowledge that the tax return was incorrect is no longer fatal to a claim for relief.

When taxpayers sign their tax returns, they are declaring to the IRS that their return is correct. With a joint tax return filed by a married couple, both spouses are responsible for the entire amount due, meaning that if the IRS later determines that a joint return was incorrect, it can go after either spouse for the entire amount of any additional tax, interest and penalties. The IRS is not even bound by a divorce decree stating that only one of the spouses is solely responsible for back taxes.

Recognizing this possible injustice, the IRS has offered various forms of Innocent Spouse Relief since 1971. However, the program has had several restrictions. For instance, relief was denied for spouses who knew or had reason to know that they signed an incorrect return, even if the signature was made under duress. In addition, to apply for relief, the IRS imposed a two-year statute of limitations from the date on which the IRS first contacted the innocent spouse to collect the tax. Because of these restrictions, many otherwise-qualified innocent spouses were held liable for taxes for which the other spouse should have been held responsible; 85 percent to 90 percent of these were women.

Last year, the IRS revamped the Innocent Spouse Relief program. Based in Florence, Ky., the Innocent Spouse unit was assigned increased staff and agents were provided training on domestic abuse and how to interview petitioners. The IRS also increased the statute of limitations to apply for relief to 10 years and relaxed the requirement that the innocent spouse did not know the return was incorrect when it was signed. Now the IRS is more likely to grant relief in cases of abuse or when one spouse had financial control over money matters during the marriage. Cases will also be evaluated to determine whether the innocent spouse signed the joint return while suffering from physical, psychological, sexual or emotional abuse.

To apply for Innocent Spouse Relief taxpayers must file Form 8857, which the IRS uses to begin its evaluation under a facts and circumstances test. Form 8857 contains questions about how involved the spouse was in the household’s finances, whether he or she assisted in preparing the joint tax return, and whether the spouse suffered from abuse.

Innocent Spouse Relief is one way to avoid joint and several liability, but the most straightforward technique is to not file a joint tax return at all. All married couples have the option of filing under the Married Filing Separately designation. In fact, the advantages of joint returns are not as abundant as is commonly believed, especially for two-income households where each spouse makes a similar amount. A joint return really only lowers the overall tax bill when one salary is responsible for the bulk of the income. However, those filing taxes under the Married Filing Separately designation are ineligible for certain tax breaks, including the Earned Income Credit, child and dependent care credits and the student loan interest deduction.

Tax professionals can provide assistance in determining whether a joint tax return or a Married Filing Separately return is best for your particular situation. In addition, with many more people now eligible under the Innocent Spouse Relief Program, seasoned tax professionals are recommended for the often long and complicated application process.