Tax Hot Topics for Year End

It’s hard to believe the end of the year is almost here! As we enter the fourth quarter, it’s time for taxpayers to get organized and plan for their 2013 tax returns and recordkeeping needs. Here are some  important issues affecting many of our clients:

1.  Trustee’s Dilemma: Additional 3.8% tax on trust’s net investment income

As of January 1, 2013, trusts are subject to an additional 3.8% tax on net investment income (NII) exceeding $11,950. That’s a pretty low threshold, and it’s in addition to the trust’s income tax for the year. Trustees will need to consider several factors for this new tax, including but not limited to:

  • Passive income from a trade or business is subject to the additional tax. Trustees will need to make an active/passive determination on income from pass-through entities (i.e., S Corps, LLCs, partnerships).
  • Should the Trustee retain the income in the trust or distribute to the beneficiaries? The threshold for individuals is much higher than that for trusts. The tax will not apply to individuals with adjusted gross income below $200,000 for single filers and $250,000 for married filers. Remember that the threshold for trusts is only $11,950.

2.  Simplified Home Office Deduction

Starting in 2013, taxpayers can elect to use a simpler method for calculating their home office deduction, greatly reducing required recordkeeping. Taxpayers can simply deduct $5 per square foot of home office, up to 300 square feet, for a maximum deduction of $1,500. Taxpayers with more than one home office can elect this simplified method for only one per year, and the election is not binding for future tax years.

3.  Auto Mileage Log – Written Evidence Required

Taxpayers who take a deduction for auto mileage should remember the IRS requires the supporting documentation be written. The IRS has denied the deduction during audits if the taxpayer is unable to produce the written documentation. Mileage rates for 2013 are 56.5 cents/mile for business miles, 24 cents/mile for medical/moving and 14 cents/mile driven in the service of a charitable organization.

4.  Tax on Gain from the Sale of a Home

If you’re considering putting your home on the market, plan now to limit your tax bill by utilizing the Exclusion of Gain from Sale of Principal Residence. Subject to an ownership test and a use test, individuals can exclude from gross income up to $250,000 (or $500,000 if Married Filing Jointly status) of the gain realized on the sale or exchange of their principal residence. What the homeowner spent to replace the roof, doors and windows, etc., will increase cost basis and lower that potential tax bill. The IRS requires that the homeowner document the expenses, so keep your receipts with that settlement sheet.

5.  Tax Tips for Newlyweds

Newlyweds  should prepare now for their first tax season as a married couple. Key takeaways:

  • If you’re married on December 31, you’re considered married for the entire tax year. Taxpayers cannot amend a jointly filed return to file Married Filing Separately once they’ve filed jointly,so taxpayers should be sure their new spouse doesn’t have any prior years’ tax issues before saying “I Do” to filing a joint return.
  • Your name and Social Security Number must match the Social Security Administration’s records, or processing your return—and any refund due—will be delayed. If you’ve changed your name, report it to the Social Security Administration on Form SS-5 Application for a Social Security Card, available at ssa.gov or your local Social Security Administration office, or by calling 800-772-1213.
  • File Form 8822 Change of Address to notify the IRS if you’ve moved. It’s available at irs.gov or from your BWFA tax advisor.
  • Consider adjusting your payroll withholdings. Your BWFA tax advisor can assist with income tax projections and the revised Form W-4.

Organize Now for Your 2013 Tax Returns

Now’s the time to prepare for the 2013 tax season. Do you need to make estimated tax payments on income not subject to withholding? Should you donate appreciated stock or your Required Minimum Distribution to your favorite charity? Start to organize those receipts for charitable donations, etc., now—and beat the last-minute rush.

Look for your 2013 BWFA tax organizers in December, and call us anytime if you’d like to talk taxes!