Wessel & Company Tax Tips

      

      Wessel & Company is a professional corporation committed to providing the highest quality services to our clients. In addition, we will go beyond just the numbers and provide non-traditional services. Our goal is to enhance our client's profitability by honoring our promise to our clients, and providing proactive assistance and consultation while enriching the lives of our staff and community by supporting and participating in civic and community activities

TT

1. Tax Dur Dates for February 2013

February 11

Employers - Federal unemployment tax. File Form 940 for 2012. This due date applies only if you deposited the tax for the year in full and on time.

Employers - Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2012. This due date applies only if you deposited the tax for the quarter in full and on time.

Small Employers - File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2012. This due date applies only if you deposited the tax for the year in full and on time.

Farm Employers - File Form 943 to report Social Security and Medicare taxes and withheld income tax for 2012. This due date applies only if you deposited the tax for the year in full and on time.

Certain Small Employers - File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2012. This tax due date applies only if you deposited the tax for the year in full and on time.

Employers - Nonpayroll taxes. File Form 945 to report income tax withheld for 2012 on all nonpayroll items. This due date applies only if you deposited the tax for the year in full and on time.

Employees - who work for tips. If you received $20 or more in tips during January, report them to your employer. You can use Form 4070.

February 15

Employers - Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in January.

Employers - Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in January.

Individuals - If you claimed exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by this date to continue your exemption for another year.

February 16

Employers - Begin withholding income tax from the pay of any employee who claimed exemption from withholding in 2012, but did not give you a new Form W-4 to continue the exemption this year.

February 28

Businesses - File information returns (Form 1099) for certain payments you made during 2012. There are different forms for different types of payments. Use a separate Form 1096 to summarize and transmit the forms for each type of payment. See the 2012 Instructions for Forms 1099, 1098, 5498, and W-2G for information on what payments are covered, how much the payment must be before a return is required, what form to use, and extensions of time to file.

If you file Forms 1098, 1099, or W-2G electronically (not by magnetic media), your due date for filing them with the IRS will be extended to April 1. The due date for giving the recipient these forms is still January 31.

Payers of Gambling Winnings - File Form 1096, Annual Summary and transmittal of U.S. Information Returns, along with Copy A of all the Forms W-2G you issued for 2012. If you file Forms W-2G electronically (not by magnetic tape), your due date for filing them with the IRS will be extended to April 1. The due date for giving the recipient these forms remains January 31.

Employers - File Form W-3, Transmittal of Wage and Tax Statements, along with Copy A of all the Forms W-2 you issued for 2012.

If you file Forms W-2 electronically (not by magnetic media), your due date for filing them with the SSA will be extended to April 1. The due date for giving the recipient these forms is still January 31.

Employers - with employees who work for tips. File Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. Use Form 8027-T, Transmittal of Employer's Annual Information Return of Tip Income and Allocated Tips, to summarize and transmit Forms 8027 if you have more than one establishment. If you file Forms 8027 electronically (not by magnetic tape), your due date for filing them with the IRS will be extended to April 1.

March 1

Farmers and fishermen - File your 2012 income tax return and pay any tax due. However, you have until April 15 to file if you paid your 2012 estimated tax by January 15, 2013. (See Penalty Relief for Farmers and Fishermen in Tax Tips section above)

2.  Itemized medical Expenses:

Taxpayers who itemize their deductions can write off qualified medical costs not covered by insurance or other sources.  However, the costs must exceed 7.5% of adjusted gross income (AGI) and in 2013 must exceed 10%of AGI.  Deductible expenses include those for you as well as for a spouse or dependent(s).  Once the threshold is passed, there is no dollar limit on the deduction amount.   The tax professionals at Wessel & Company have the experience to make sure your taxes are done right.

3. If You’re Self-employed, Employ Family Members to Save Taxes:

Hiring a family member to work for your business can create tax savings for you; in effect, you shift business income to your relative. Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you. Be aware, though, that the IRS can question compensation paid to a family member if the amount doesn't seem reasonable, considering the services actually performed. Also, when hiring a family member who's a minor, be sure that your business complies with child labor laws.

As a business owner, you're responsible for paying FICA (Social Security and Medicare) taxes on wages paid to your employees. The payment of these taxes will be a deductible business expense for tax purposes. However, if your business is a sole proprietorship and you hire your child who is under age 18, the wages that you pay your child won't be subject to FICA taxes.

As is the case with wages paid to all employees, wages paid to family members are subject to withholding of federal income and employment taxes, as well as certain taxes in some states.

The tax professionals at Wessel & Company are dedicated to helping you keep more of what you earn.

4. Establish an employer-sponsored retirement plan for tax (and nontax) reasons

If you're self-employed, you'll need to take care of your own retirement needs. You can do this by establishing an employer-sponsored retirement plan, which can provide you with a number of tax and nontax benefits. With such a plan, your business may be allowed an immediate federal income tax deduction for funding the plan. You can also generally place pretax dollars into a retirement account to grow tax deferred until withdrawal. You may want to use one of the following types of retirement plans:

The type of retirement plan that your business should establish depends on your specific circumstances. Explore all of your options and consider the complexity of each plan. And bear in mind that if your business has employees, you may have to provide coverage for them as well. For more information about your retirement plan options, consult the tax professionals at Wessel & Company or go to www.wesselcpa.com  and visit the Tax Center on our Resources Page.

5. If You’re Self-employed, Take full advantage of all business deductions to lower taxable income

Because deductions lower your taxable income, you should make sure that your business is taking advantage of any business deductions to which it is entitled. You may be able to deduct a variety of business expenses, including rent or home office expenses, and the costs of office equipment, furniture, supplies, and utilities. To be deductible, business expenses must be both ordinary (common and accepted in your trade or business) and necessary (appropriate and helpful for your trade or business). If your expenses are incurred partly for business purposes and partly for personal purposes, you can deduct only the business-related portion.  For this and other tax advice contact the tax professionals at Wessel & Company.  814-536-7864

6. Deduct health-care related expenses

If you qualify, you may be able to benefit from the self-employed health insurance deduction, which would enable you to deduct up to 100 percent of the cost of health insurance that you provide for yourself, your spouse, and your dependents. This deduction is taken on the front of your federal Form 1040 (i.e., "above-the-line") when computing your adjusted gross income, so it's available whether you itemize or not.

Contributions you make to a health savings account (HSA) are also deductible "above-the-line." An HSA is a tax-exempt trust or custodial account you can establish in conjunction with a high-deductible health plan to set aside tax-free funds for health-care expenses.  For more information contact Wessel & Company, CPAs - your tax professionals at 814-536-7864.

7. Hope credit (American Opportunity credit) can help with college expenses

The Hope credit (American Opportunity credit) is a tax credit that covers the first four years of your, your spouse's or your child's undergraduate education. Graduate and professional-level courses aren't eligible. The credit is worth a maximum of $2,500 in 2010. It's calculated as 100 percent of the first $2,000 of tuition and related expenses that you've paid for the year, plus 25 percent of the next $2,000 of such expenses.

To take the credit, both you and your child must clear some hurdles:

• Your child must attend an eligible educational institution as defined by the IRS (generally, any post-secondary school that offers a degree program and is eligible to participate in federal aid programs qualifies).

• Your child must attend college on at least a half-time basis.

• Your child can't have a felony conviction.

• You must claim your child as a dependent on your tax return. If your child has paid the tuition expenses, you can still take the credit as long as you claim your child as a dependent on your return. But if your child has paid the tuition expenses and isn't claimed as a dependent on your return, your child can take the credit on his or her own return.

The American Opportunity credit can be taken for more than one student in the same year, provided each student qualifies independently. So, if you have twins who are in their freshman year of college (and you otherwise meet the requirements), your credit would be worth $5,000. However, there are other restrictions. You can't take both the American Opportunity credit and the Lifetime Learning credit in the same year for the same student. And whatever education expenses you cover with a tax-free distribution from your 529 plan or Coverdell education savings account cannot be the same expenses you use to qualify for the American Opportunity credit.

For more information contact Wessel & Company, CPAs - your tax professionals at 814-536-7864.

8. Lifetime Learning credit can help with college, graduate school, and individual course expenses

The Lifetime Learning credit is a tax credit for the qualified education expenses that you, your spouse, or your child incur for courses taken to improve or acquire job skills (even courses related to sports, games, or hobbies qualify if they meet this requirement!). The Lifetime Learning credit is much less restrictive than the American Opportunity credit. In addition to college expenses, the Lifetime Learning credit covers the tuition expenses of graduate students and students enrolled less than half-time.

The Lifetime Learning credit is generally worth a maximum of $2,000. It's calculated as 20 percent of the first $10,000 of tuition and related expenses that you've paid for the year.

One major difference between the American Opportunity credit and the Lifetime Learning credit is that the Lifetime Learning credit is generally limited to a total of $2,000 per tax return, regardless of the number of students in a family who may qualify in a given year. So if you have twins who are in their senior year of college, your Lifetime Learning credit would be worth $2,000, not $4,000.

As with the American Opportunity credit, if you withdraw money from your 529 plan or Coverdell ESA in the same year that you claim the Lifetime Learning credit, your withdrawal cannot cover the same expenses that you use to qualify for the Lifetime Learning credit.

For more information contact Wessel & Company, CPAs - your tax professionals at 814-536-7864.

9. Paying tax on investment income

The taxation of your investment income depends on several factors, including the type of investment income you have (e.g., tax exempt, ordinary, capital gain, or tax deferred).

If you have municipal bonds, the interest they generate is typically exempt from federal taxation and state taxation in the state the bonds are issued. The interest may or may not be subject to state income tax in the state of your residence, if different from the state of issue. U.S. Treasury bills and certain types of government savings bonds generate interest that is typically subject to federal tax, but not state tax.

Of course, not all investments are tax exempt. Investment income is generated by either the income it produces during the ownership of the investment (e.g., interest, dividends, or rent) or the gain it produces when the investment is sold at an appreciated value. Investment income such as interest and rent is considered ordinary income and will generally be taxed according to your ordinary income tax rate. If you have investment income from the sale of a capital asset that is held for more than one year (e.g., stock or investment property), the income is generally considered capital gain and is taxed at long-term capital gains rates. Qualifying dividends are also taxed at long-term capital gains rates (dividends that don't qualify for long-term capital gains rates are taxed at ordinary income tax rates).

Finally, you should know that tax-deferred investments (such as 401(k) plans) produce earnings and gains that are not taxed until later, when the money is distributed to you.For more information contact Wessel & Company, CPAs - your tax professionals at 814-536-7864. 

10. Can I roll a retirement plan distribution into an IRA?

If you're asking this question, you probably have a 401(k) or other retirement plan through a former employer. The short answer is yes--most retirement plans allow you to roll your plan funds over into an IRA after you've left your employer's service. However, there is more than one way to do a rollover, and how you do it can be critical.

In most cases, your best strategy is to do a direct rollover. This is a direct transfer of funds from your employer-sponsored plan to your IRA. The administrator of your employer-sponsored plan may send the check right to the trustee of the IRA you have selected. That way, the money never passes through your hands. Alternatively, the plan administrator may give the check to you to deliver to the IRA trustee. This also qualifies as a direct rollover as long as the check isn't made payable to you. Instead, it should be made payable to the IRA trustee for your benefit. A direct rollover will avoid tax consequences and penalties.

You can also do an indirect rollover, but it's rarely a good idea. Here, the check is made payable to you. When you receive the check, you cash it and deposit the funds in the new IRA within 60 days. The big drawback: Before releasing your plan funds to you, the plan administrator is required to withhold 20 percent of the taxable amount for federal income tax. To make sure you deposit the correct amount, you must replace this 20 percent out of your own pocket. However, if you properly follow all the IRS rules for rollovers, you will avoid tax consequences and can get back the amount withheld for taxes when you file your annual income tax return.

You can roll your distribution into either a traditional IRA or Roth IRA. If you roll the funds over into a Roth IRA (often called a "conversion") you'll include the taxable portion of the distribution in your taxable income in the year you roll the funds over. Note: A special rule applies to 2010 conversions only--you can elect to report all of the resulting income on your 2010 federal income tax return, or you can instead report half on your 2011 return, and half on your 2012 return.

Finally, you may not be allowed to roll over certain types of retirement plan distributions into an IRA. 

For more information contact Wessel & Company, CPAs - your tax professionals at 814-536-7864. 

11. Tax implications of child support payments

When a separation or divorce occurs and the couple involved has one or more children, the noncustodial parent is usually ordered to pay some child support to the custodial parent. The child's expenses over and above this sum are generally borne by the custodial parent. Whether you are paying or receiving child support, you should be aware of the federal income tax consequences. You are not taxed on child support that you receive, and you cannot deduct child support that you pay.

Payments will be classified as child support for federal income tax purposes if the divorce decree or separation agreement:

For example, John agrees to pay his ex-wife, Carol, $2,500 per month until she dies. (Note that the words child support are not specifically mentioned.) Carol has custody of their child, Justin. The divorce agreement states that upon a certain date, John's required payment to Carol will decrease by $800. Because Justin will turn 18 within six months of the date on which the payment is scheduled to decrease, the payment reduction is assumed to be related to Justin's reaching 18 years old. Therefore, the $800 per month reduction is treated as child support, regardless of the parties' intent.

From a tax perspective, being a custodial parent can be advantageous in terms of claiming the child dependency exemption and the child-care credit. In addition, the custodial parent can potentially qualify for head of household filing status.

For more information contact Wessel & Company, CPAs - your tax professionals at 814-536-7864. 

12. Limited Non-Business Energy Property Credits

Non-business energy credits expired in 2011, but were extended (retroactive to 2012) through 2013 by ATRA. For 2012 (as in 2011), this credit generally equals 10 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $500 (down significantly from the $1,500 combined limit that applied for 2009 and 2010). 

Because of the way the credit is figured however, in many cases, it may only be helpful to people who make energy-saving home improvements for the first time in 2012. That's because homeowners must first subtract any non-business energy property credits claimed on their 2006, 2007, 2009, 2010, and 2011 returns before claiming this credit for 2012. In other words, if a taxpayer claimed a credit of $450 in 2011, the maximum credit that can be claimed in 2012 is $50 (for an aggregate of $500). 

The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items do not. 

13.  Missing Your Form W-2

You should receive a Form W-2, Wage and Tax Statement, from each of your employers for use in preparing your federal tax return. Employers must furnish this record of 2012 earnings and withheld taxes no later than January 31, 2013 (if mailed, allow a few days for delivery).

If you do not receive your Form W-2, contact your employer to find out if and when the W-2 was mailed. If it was mailed, it may have been returned to your employer because of an incorrect address. After contacting your employer, allow a reasonable amount of time for your employer to resend or to issue the W-2.

If you still do not receive your W-2 by February 15th, contact the IRS for assistance at 1-800-829-1040. When you call, have the following information handy:

• The employer's name and complete address, including zip code, and the employer's telephone number;

• The employer's identification number (if known);

• Your name and address, including zip code, Social Security number, and telephone number; and

• An estimate of the wages you earned, the federal income tax withheld, and the dates you began and ended employment.

If you misplaced your W-2, contact your employer. Your employer can replace the lost form with a "reissued statement." Be aware that your employer is allowed to charge you a fee for providing you with a new W-2.

You still must file your tax return on time even if you do not receive your Form W-2. If you cannot get a W-2 by the tax filing deadline, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement (available on the IRS website), but it will delay any refund due while the information is verified.

If you receive a corrected W-2 after your return is filed and the information it contains does not match the income or withheld tax that you reported on your return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.For more information contact Wessel & Company, CPAs - your tax professionals at 814-536-7864.

14.  IRS Announces 2013 Standard Mileage Rates

Beginning January 1, 2013, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) is:

• 56.5 cents per mile for business miles driven

• 24 cents per mile driven for medical or moving purposes

• 14 cents per mile driven in service of charitable organizations

The standard mileage rate are based on an annual study of the fixed and variable costs of operating an automobile.

Let us know if you have questions about which driving activities you should monitor as tax year 2013 begins. For more information contact Wessel & Company, CPAs - your tax professionals at 814-536-7864