Penalties
A filer who didn’t pay self-employment
taxes still gets a break on penalties from the Tax Court. As an employee at the International Monetary
Fund, she was required to pay SECA taxes on her salary. She met with an IMF employee, who prepared a
schedule of estimated tax payments for her that included SECA tax, and she made
the payments. But she never fully
understood that self-employment tax was due, so she didn’t fill out Schedule SE
and wound up receiving a large refund by mistake. IRS caught her error and slapper her with a
20% negligence penalty, but the Tax Court said she made an honest mistake
(Chien, TC Memo. 2012-277).
But another taxpayer wasn’t so
lucky. He worked for the World Bank
and similarly failed to pay self-employment tax on his wages. The Tax Court didn’t let him off the hook
for the penalty because his employment agreement and his W-2 stated that he
owed SECA tax. When he took his W-2 to
his preparer, he cut off the portion that said SECA tax was due (Diaz, TC Memo.
2012-280).
Estate
Taxes
Using a family limited partnership
can save a bundle in estate taxes…Even if the asset transfer to the partnership
is incomplete before death, as this case shows. A widow’s tax advisers told her that if she
transferred her bonds to a newly formed family partnership, her estate would be
able to claim discounts on her interest.
She agreed to the plan, but she died before transferring the bonds. Nevertheless, an Appeals Court ruled that the
partnership was validly established before her death because, under state law,
her intent to fund the partnership was enough to deem that the bonds had been
transferred to it (Keller, 5th Cir.). Her executors eventually formalized the
transfer of the bonds after her death.
IRS has finally released Form 706
for estates of people who die this year, just as returns are due for those who
died in Jan. The instructions provide
guidance for electing portability of a deceased spouse’s unused estate and gift
tax exemption.
Estates wanting to make the
portability election must timely file Form 706, even if they are not
otherwise required to file an estate tax return. But executors of these small estates can
estimate the value of assets passing to spouses or charity. There’s a table in the Form 706 instructions
to help executors on what to enter.
A draft of the 2012 gift tax return
is also available. It has a new
schedule to account for the higher exemption for surviving spouses who benefit
from portability.
Year-End
Planning
Turn to year-end moves that your
business can make to save taxes, now that we are in the final quarter of
2012. Actions taken between now and the
end of the year can save you and your company a boatload of taxes.
If you are purchasing assets, try
to place them in service by Dec. 31. 50%
bonus depreciation is the reason.
Firms can write off half of the cost of qualifying assets put in service
this year, even for assets bought in late Dec.
Bonus depreciation is available on new assets with useful lives of 20
years or less…Machines, equipment, land improvements and farm structures such
as chicken coops. Leasehold improvements
made to the interiors of commercial realty are eligible, too. Bonus depreciation is scheduled to end after
2012, and probably won’t be revived.
Expensing is also available for
assets placed in service by Dec. 31.
Right now, businesses can expense up to $139,000 of assets put in use in
2012. And the ability to take expensing
in lieu of depreciation phases out dollar for dollar once over $560,000 of
assets are placed in service. There is a
good chance that lawmakers will act to raise the 2012 maximum write-off to
$500,000 and start the phaseout at $2 million.
It really pays to put a new heavy
SUV in service before the end of 2012.
You can deduct much of the cost
this year. Say your business pays
$60,000 for a new SUV with a loaded gross weight over 6,000 pounds and puts it
in use in Dec. First, the firm can
expense $25,000. Half of the remaining
$35,000 cost…$17,500…qualifies for 50% bonus depreciation. The firm can take 20% of the $17,500 balance…$3,500…as
regular depreciation. If the vehicle is
used 100% of the time for business, the total first-year write-off is
$46,000. Used SUVs don’t get bonus
depreciation.
You can fully write off new pickups
with loaded weights over 6,000 pounds.
Ditto for used heavy pickup trucks if the cargo bed is at least six feet
in length.
For lighter vehicles, the maximum
deduction in the first year is $11,060.
Buying too many assets in the last
quarter can cost you some write-offs on property that isn’t eligible for
bonus depreciation. If you make more
than 40% of your 2012 asset purchases after Sept., regular depreciation on all
assets put in use in 2012 is figured on a quarterly basis. So assets you buy in late 2012 get 1 ½ months
of depreciation instead of six months’ worth.
This rule does not apply to buildings.
Business owners can shift income
and expenses between 2012 and 2013.
High-income professionals may want
to speed up billings to report income in 2012. That will lock in the 35% top rate. If Obama wins in Nov., it is conceivable that
rates on upper-incomers will rise in 2013.
Those who will be in the same bracket or a lower tax bracket in 2013 can
adopt the opposite strategy and delay their billings.
Similarly, owners may want to
ensure year-end bonuses are taxed in 2012 rather than in 2013. There will be time after the elections to
implement a strategy.
Deductions for accrual method firms
are limited. They can’t deduct in
2012 bonuses that are deferred to 2013 by owners of more than 50% of regular
corporations or by owners of any interest in an S corporation, personal service
firm or partnership.
Firms can shift expenses from on
year to another to tweak their income.
However, the Revenue Service will balk if there is too much distortion
of earnings.
And weigh taking dividends in lieu
of salary. This pays off if the
corporation is in a low tax bracket and the owner is in a high bracket. The owner’s tax savings due to the 15% top
rate on dividends plus the payroll tax savings on the dividend can exceed the
extra tax the corporation pays because the dividend isn’t deductible. This won’t work for S firms. Or for personal service firms…they pay a flat
35% tax. No matter who is elected
president, the maximum tax rate on dividends received by high-incomers is going
up next year on account of the 3.8% Medicare surtax.
To
be continued…
