Benefits of Roth IRA, by Chicago Accountants.

Many investors and financial professionals are familiar with the primary benefits of a Roth IRA: that after you pay taxes on the money going into the Roth IRA that the plans investments grow tax free and come out tax free.  That being said, there are so many more benefits to the Roth IRA that need to be noted. I’ll note just three.

First, Roth IRAs are not subject to RMD. Traditional retirement plan owners are subject to rules known as Required Minimum Distribution rules which require the account owner to start taking distributions and paying tax on the distributions (since traditional plan) when the account owner reaches the age of 70 ½. Not being subject to RMD rules allows the Roth IRA to keep accumulating tax free income (free of capital gain or other taxes on its investment returns) and allows the account to continue to accumulate tax free income during the account owner’s life time.

Second, a surviving spouse who is the beneficiary of a Roth IRA can continue contributing to that Roth IRA or can combine that Roth IRA into their own Roth IRA.  Allowing the spouse beneficiary to take over the account allows additional tax free growth on investments in the Roth IRA account. A traditional IRA on the other hand cannot be merged into an IRA of the surviving spouse nor can the surviving beneficiary spouse make additional contributions to this account. Non spouse beneficiaries (e.g. children of Roth IRA owner) cannot make additional contributions to the inherited Roth IRA and cannot combine it with their own Roth IRA account. The non spouse beneficiary becomes subject to required minimum distribution rules but can delay out required distributions up to 5 years from the year of the Roth IRA account owner’s death and is able to continue to keep the tax free return treatment of the retirement account for 5 years after the death of the owner. The second option for non-spouse beneficiaries is to take withdrawals of the account over the life time expectancy of the beneficiary (the younger the beneficiary the longer they can delay taking money out of the Roth IRA). The lifetime expectancy option is usually the best option for a non-spouse beneficiary to keep as much money in the Roth IRA for tax free returns and growth.

Third, Roth IRA owner’s are not subject to the 10% early withdrawal penalty for distributions they take before age 59 ½ on amounts that are comprised of contributions or conversions. Growth and earning are subject to the early withdrawal penalty and to taxes too but you can always take out the amounts you contributed to your Roth IRA or the amounts that you converted without paying taxes or penalties (note that conversions have a 5 year wait period before you can take out penalty and tax free).

Roth IRAs are a great tool for many investors. Keep in mind that there are qualification rules to being eligible for a Roth IRA that leave out many high income individuals. However, you can convert your traditional retirement plan dollars to a Roth IRA (sometimes known as a backdoor Roth IRA) as the conversion rules do not have an income qualification level requirement on converted amounts to Roth IRAs. This conversion option has in essence made Roth IRAs available to everyone regardless of income

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Ten Facts about the Child Tax Credit, by Chicago CPAs.

The Child Tax Credit is an important tax credit that may be worth as much as $1,000 per qualifying child depending upon your income. Here are 10 important facts from the IRS about this credit and how it may benefit your family.

  1. Amount – With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.
  2. Qualification – A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence.
  3. Age Test – To qualify, a child must have been under age 17 – age 16 or younger – at the end of 2012.
  4. Relationship Test – To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
  5. Support Test – In order to claim a child for this credit, the child must not have provided more than half of their own support.
  6. Dependent Test – You must claim the child as a dependent on your federal tax return.
  7. Citizenship Test – To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien.
  8. Residence Test – The child must have lived with you for more than half of 2012. There are some exceptions to the residence test, which can be found in IRS Publication 972, Child Tax Credit.
  9. Limitations – The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.
  10. Additional Child Tax Credit – If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

Please call Chicago Accountants at 773-728-1500 if you need help in getting your individual or corporation income tax prepared.

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Five Facts to Know about AMT, by Chicago Accountants:

The Alternative Minimum Tax may apply to you if your income is above a certain amount. Here are five facts the IRS wants you to know about the AMT:

1. You may have to pay the tax if your taxable income plus certain adjustments is more than the AMT exemption amount for your filing status.

2. The 2012 AMT exemption amounts for each filing status are:

  • Single and Head of Household = $50,600;
  • Married Filing Joint and Qualifying Widow(er) =      $78,750; and
  • Married Filing Separate = $39,375.

3. AMT attempts to ensure that some individuals and corporations who claim certain exclusions, tax deductions and tax credits pay a minimum amount of tax.

4. You should use IRS e-file to prepare and file your tax return. You figure AMT using different rules than those you use to figure your regular income tax. IRS e-file software will determine if you owe AMT, and if you do, it will figure the tax for you.

5. If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax.

We prepare tax returns for our clients who owe AM.  If you need help, please contact us, the Chicago Tax Accountants at 773-728-1500.  If you need help with filing extentions, please call us or email us at asif@taxcutters.com and we will help you out.

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Deducting Business Expenses

Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.

What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

It is important to separate business expenses from the following expenses:

  • The expenses used to figure the cost of goods sold,
  • Capital Expenses, and
  • Personal Expenses.

Cost of Goods Sold

If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses that go into figuring the cost of goods sold.

  • The cost of products or raw materials, including freight
  • Storage
  • Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
  • Factory overhead

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.

This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.

For additional information, refer to the chapter on Cost of Goods Sold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods.

Capital Expenses

You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.

  • Business start-up cost (See the note below)
  • Business assets
  • Improvements

Note: You can elect to deduct or amortize certain business start-up costs. Refer to chapters 7 and 8 of Publication 535, Business Expenses.

Personal versus Business Expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 4 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.

Business Use of Your Home

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Home Office Deduction and Publication 587, Business Use of Your Home, for more information.

Business Use of Your Car

If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses. For a list of current and prior year mileage rates see the Standard Mileage Rates.

Other Types of Business Expenses

  • Employees’ Pay – You can generally deduct the pay you give your employees for the services they perform for your business.
  • Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’ retirement.
  • Rent Expense – Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
  • Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities.
  • Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
  • Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.

If you have a business and need help in completing your Income Tax Return, please contact us at 773-728-1500.  We, the Chicago Accountants, are here to help you.

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The taxes alphabet

Taxes can be fun, accountant is a seerious word, but the tax preparation can be a lot of fun.

A is for Alimony

Alimony payments are deductible by the payer and taxable as income to the recipient. The deduction is “above the line” which means that you do not have to itemize to claim the deduction

B is for Barter.

The treatment of bartered goods and services is like accepting cash: the exchange of services is still reportable and taxable. You must include in gross income on your federal income tax return the fair market value of goods and services received in exchange for goods or services you provide.

C is for Capital Losses

When you sell or otherwise dispose of a capital asset, the difference between the amount you sell it for and your basis is a capital gain (if the value at disposition is more than your basis) or a capital loss (if the value of the disposition is less than your basis). You can only deduct capital losses on investment property, not on personal use property.

D is for Deductible Taxes.

If you itemize, you may be able to deduct state and local taxes; real estate taxes; foreign income taxes and property taxes on your federal income tax return. You may not deduct federal income taxes, Social Security taxes, Medicare taxes, FUTA (federal unemployment taxes), and RRTA (railroad retirement taxes).

E is for Educator Expenses.

If you are an eligible educator, you can deduct up to $250 of any unreimbursed expenses paid or incurred for books, supplies, computer equipment, other equipment, and supplementary materials used in the classroom; these expenses must be paid or incurred during the tax year

F is for FSA.

FSAs are flexible spending accounts. The most common FSA is a health flexible spending arrangement which allows you to pay qualified medical expenses from a fund set up with pre-tax dollars: withdrawals from the fund are income tax free.

G is for Gift Expenses.

Generally, if you provide an item to a customer (or a customer’s family) without an expectation of payment or compensation, that’s a gift. The IRS limits the amount that you can deduct for gifts: you can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year.

H is for Home Improvements.

In most cases, repairs to your home increase your basis for purposes of calculating a gain or a loss at sale, but your run of the mill home repair expenses – even if significant – are not deductible on your federal income tax return

I is for Injured Spouse.

You are an injured spouse if your share of your tax refund as shown on your joint return was, or is expected to be, applied against your spouse’s past-due federal debts, state taxes, or child or spousal support payments. If you are an injured spouse, you may be entitled to get your share of the refund released to you.

J is for Job Search Expenses.

If you itemize, you can deduct out of pocket expenses related to your job hunt even if you don’t get a new job.

K is for Kiddie Tax.

When income is unearned (generally, income from dividends and interest) for children under the age of 18, or under the age of 23 while a full time student, the first $950 is considered tax-free and the next $950 is taxed at the child’s rate. Unearned income over $1,900 is taxed at the child’s parents’ tax rate

L is for Levy.

One of the ways that the IRS works to make sure they get paid is the use of a levy. A levy is a legal seizure of your property.

M is for Making Work Pay Credit.

There is no Making Work Pay Credit for 2011. That also means no Schedule M.

N is for Non-Citizen Spouse.

Generally, a husband and wife cannot file a joint return if either spouse is a nonresident alien at any time during the year. However, if you were a nonresident alien or a dual-status alien and were married to a U.S. citizen or resident alien at the end of 2011, you may elect to be treated as a resident alien and file a joint return.

O Is For Offer in Compromise.

If you can’t pay your tax debt in full, you might consider an Offer in Compromise (OIC) which allows you to resolve your tax obligations for less than the full amount you owe.

P is for Penalty on Estimated Tax.

If you receive income without having any federal income taxes withheld, you should consider making estimated payments throughout the year to avoid any penalties.

Q is for Qualified Dividends.

For 2011, taxpayers who would normally have paid a 10% or 15% ordinary income tax rate will pay 0% on qualified dividends. All other taxpayers pay a mere 15%.

R is for Refund.

If you e-file and use direct deposit, you can receive your refund in as few as ten days.

S is for Standard Deduction.

For the tax year 2011, the standard deduction for single taxpayers or for those married filing separately is $5,800; for married taxpayers or qualifying widow(er)s, the standard deduction is $11,600; and for head of household, the standard deduction is $8,500.

T is for Tuition and Fees Deduction.

You may be able to deduct qualified tuition and related expenses of up to $4,000 that you pay for yourself, your spouse, or a dependent, as a tuition and fees deduction.

U is for Unreasonable Compensation.

S corporations must be sure that compensation paid to shareholders who are also employees is not unreasonable.

V is for Vacation Home.

Assuming that your vision of a vacation home and the IRS’ vision are similar enough, you can get a tax break or two on purchasing and owning a vacation home.

W is for Wash Sale.

A wash sale is, at its most basic, when you sell or trade stock or securities at a loss while simultaneously (or nearly simultaneously) buying something nearly identical.
For tax purposes, you generally cannot deduct losses from sales or trades of stock or securities in a wash sale.

X is for X-Mark (Signature).

No matter how thorough and accurate your tax return is, it’s not considered a valid return unless you sign it. If you are filing a joint tax return, your spouse must also sign.

Y is for Year End.

Y is for Year End. Tax returns are filed based on your tax year end. Individual filers have a calendar year which means that federal income tax returns are due on April 15 of each year – unless that day falls on a Saturday, Sunday or holiday as it does in 2012. This year, we have both (!) so returns are due April 17, 2012

Z is for Zero.

The general rule is that the more exemptions that you claim, the less in federal taxes is withheld. If you claim zero exemptions, the maximum amount of withholding will be taken from your check.

Please give us a call 773-728-1500 if you have any questions regarding your tax return, we the accountants in Chicago are here to help you!!

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Chicago Businesses – Watch out for scams

Many of us are looking for cash. We’re all looking for ways to create wealth and save taxes. But when a prospective tax scheme or business strategy sounds too good to be true, it usually is.

Many times I have seen how a client became caught up in an elaborate business ruse, and as aCPA in Chicago area, who have helped countless businesses in filing their corporation tax returns, I have to sort through the resulting disaster for them. They never had to needlessly lose money in this way.

Considering these days economic times, when the wolves come out in sheep’s clothing, there are more crooks out there, and they’re looking for an edge. It’s a recipe for disaster.

Some of the most common scams you should watch out for:

The non licensed business coach, or tax adviser

“Coach” is a title someone often uses when they weren’t smart enough to finish school and get a graduate degree. Now there are great reasons for “coaching” in certain areas of business, but when they start giving tax and legal advice, watch out.

There are a plethora of call center operations that rope would-be entrepreneurs into paying money to talk to someone wearing sandals and a headset who has no business offering tax and legal advice, or doesn’t know anything about running a business.

The “I have a deal for you guys.”

It’s called “affinity fraud.” A friend or relative tells you that someone in their neighborhood or church has found a “great new business” to invest in, and you should chip in big money, too.

On its own, investing in a start-up can be a great idea if you can stomach the risk, but watch out if someone says you don’t need a lawyer or makes big promises. Be realistic, and make sure you use a lawyer to properly document the investment. Suing to recoup losses can often prove too costly to make a lawsuit worth it.

The corporate credit “shelf corporation.”

I have had numerous clients come through my office wondering what they might do with a “shelf corporation” they paid $5,000 to $15,000 for.

Many of  were sold on flashy terms like Dunn and Bradstreet numbers, Paydex scores and unsecured credit, and how they would somehow win larger loans by using the shelf corporation name. The truth is there is no short-cut process. Building corporate credit takes time.

The bogus state filing fee bill.

You register a corporation or LLC in your state, or make the other required filings. Then, all of a sudden you get a piece of mail with a state insignia on the envelope, telling you that you owe another fee.

Plain and simple, these can often be a scam. There are so many times I’ve had clients call me and say, “We got this piece of mail about a state fee. What’s this all about?” And I say, “It’s a scam. Don’t pay it.” And they say, “Really?” Don’t ignore any notice you receive that looks official, but make sure you get a second opinion.

Conclusion

Unfortunately the list could go on and on. So what’s the best way to avoid a scam?

Ask for credentials, make sure you understand who is actually going to be doing the work for you or giving advice, perform due, and get a second opinion from a trusted licensed adviser when tax and legal matters are at stake.

Finally, don’t forget, if it’s too good to be true, it probably is.

Don’t forget to call us at 773-728-1500 if you have any questions related to tax planning issues.  We also provide bookkeeping services for businesses in the Chicagoland area.

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Black Friday Savings -Tax Perspectives

We are accountants in Chicago, and we keep an eye on any significant changes that would affect every taxpayer one way or another. Let’s analyze last week’s celebration of our most uniquely American holiday and no, we are not talking about Thanksgiving. We’re talking aboutBlack Friday, our national homage to consumerism, conspicuous consumption, and all things capitalist. Walmart and other “big box” retailers pounded a final nail in Thanksgiving’s coffin, opening at 8 PM that night so shoppers could skip out on the pumpkin pie to save a couple hundred bucks on a flat-screen TV.

And this year, Walmart founder Sam Walton’s heirs, who still own 48% of the company, have taken a lesson from their own shoppers. Only, the Waltons aren’t just saving hundreds. They’ve found a way to save millions, just by accelerating a regularly-scheduled dividend payment from January 2 to December 27. (Apparently, they think “everyday low prices” applies to their tax bills, too!)

Under current law, tax on dividends is capped at just 15%. The Walmart dividend will be 39.75 cents/share, and the Waltons own approximately 1.6 billion shares. That means the family’s payout will be $636 million, and their federal income tax bill on that payout will be a hefty $95.4 million.

If Walmart waits until January 1 to make the payment, though, taxes could go up — possibly way up. That’s because the so-called “Bush tax cuts,” in effect since 2003, expire. At that point, dividends lose their special protection, and the top rate jumps to 39.6%. Congress and the White House have both said they want to extend the current rates for most taxpayers. But if they can’t come to some agreement to the contrary, the Waltons will pay an extra $156 millionin tax on their dividend. (A recent CNN poll shows that two-thirds of Americans expect Washington officials to act like “spoiled children” rather than “responsible adults” during those upcoming negotiations, so the Waltons better cross their fingers!)

Waiting until January 1 would also make the Walton heirs subject to the new “Unearned Income Medicare Contribution” of 3.8%. (This is a special tax on investment income for taxpayers making over $200,000, or $250,000 for joint filers.) That would bring the effective tax rate on the January 2nd payment all the way up to 43.4%, and bring the Waltons’ final tax bill up to a whopping $276 million. Ouch!

Walmart is hardly the only company accelerating dividends to beat the tax hike. One financial data firm estimates that 109 public companies will issue special dividend payments before January 1, more than three times as many as in recent years. Those special payments will actually be enough to give the IRS a significant spike in 2012 tax revenue. The New York Timesreported last week that two recent studies show that companies where board members own a large percentage of company shares are likeliest to make this move. The three Walton family members who serve on the company’s board of directors rescued themselves from last week’s vote, but a company spokesman confirmed the company did make the decision because of uncertainty over taxes.

It may be too late to take advantage of Black Friday shopping specials at Walmart. But us, as theAccountants in Chicago say it’s surely not too late to take advantage of Black Friday planning for taxes! Tax planning is the key to paying the legal minimum, especially with the “fiscal cliff” looming on the horizon. And a good tax plan can pay for a holiday season full of gifts and fun. Socall us773-728-1500 if you don’t already have a plan, and let us, the Chicago CPA show you what we can do. We’re sure you’ll give thanks for the savings!

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SMART TAX MOVES BY THE END OF THE YEAR

The annual scramble to make smart tax moves before Dec. 31 is proving especially vexing this year, here are some of our CPA in Chicago suggestions.

Congress still hasn’t settled 2013 tax rates on income, investments, large gifts and estates. Deductions and other breaks are also in doubt, now that politicians from both parties are calling for cutbacks—although in different ways.  Many questions remain unanswered even for the 2012 tax year. For example, the Internal Revenue Service on Nov. 13 warned lawmakers that if they don’t act soon, the alternative minimum tax, which reduces the value of some tax breaks, will apply to 33 million households for 2012 rather than four million. More than 60 million people might not be able to file returns or receive refunds until late March, the IRS says, because it would have to reprogram computers.

Yet despite the uncertainties, year-end tax planning is possible and it will impact your Income Tax. We do know that 2013 will mark the debut of the 3.8% flat levy on net investment income for joint filers with adjusted gross income of $250,000 or more ($200,000 for singles). Congress passed this levy, plus a 0.9% increase in Medicare tax for affluent earners, to help fund the massive 2010 health-care changes. The tax introduces new layers of complexity into investors’ planning. (For more details, see box on this page.)

Big unknowns include the top rates on long-term capital gains and qualified dividends, both now 15%. The rate on gains could hit 23.8% or more, and the rate on dividends could be as high as 43.4%. .

There are few ways taxpayers can shrink 2012 taxes after Dec. 31, other than contributing to some retirement accounts or health savings accounts. Here are moves to consider before year end, plus a few to avoid.

  • Make charitable gifts. The best value often comes from donating appreciated assets, because donors can get a full deduction while skipping capital-gains tax on the asset’s growth. Cash donations to charities are often deductible up to 50% of adjusted gross income.
  • If you want to donate IRA assets to charity, wait a bit longer. Since 2006, IRA owners 70½ and older have been able to give up to $100,000 of the required payout directly to a charity. There’s no deduction, but no taxable income either. This wildly popular provision expired at the beginning of 2012, but lawmakers might yet reinstate it—as they did in 2010.
  • Make an extra mortgage payment, or pay down principal. Usually taxpayers can’t accelerate more than one month of mortgage interest, but that helps a bit if you think the mortgage-interest deduction will be curbed next year. Or find cash to pay down principal, which reduces overall interest.
  • Maximize contributions to employer-sponsored retirement plans. Unlike with IRAs, the deadline for 401(k) contributions is Dec. 31. This year, the employee limit is $17,000, or $22,500 for workers 50 or older.
  • Harvest capital losses, up to a point. Investment losses can offset investment gains plus up to $3,000 of ordinary income, both for single and joint filers. Note that “wash sale” rules penalize buyers who acquire the same asset within 30 days of selling at a loss.
  • Use up funds in a medical flexible-spending account. They often don’t carry over, although some employers will allow workers to spend 2012 funds in the first weeks of 2013. Next year, the contribution limit will be $2,500, less than some employers now allow.
  • Accelerate medical expenses. The threshold for deducting these expenses, now 7.5% of adjusted gross income (10% for AMT payers), rises to 10% next year for most taxpayers. People who are 65 and older, however, can use the 7.5% threshold through 2016. This phase-in will be useful, say advisers, because most taxpayers claiming large medical deductions are in the final years of life. Note that the IRS’s list of what’s deductible is far broader than what insurance typically reimburses, extending to contact-lens solution, assisted-living costs and even special education.
  • Write next semester’s tuition checks before year end. The American Opportunity Tax Credit allows qualified taxpayers to get a benefit this year for next spring’s tuition if the payment is made before year end—even though the credit is set to expire for 2013.
  • Prepay state taxes. Deductions for state and local income, sales and property taxes are already disallowed by the alternative minimum tax, and they might shrink further next year, even if Congress reinstates the expired sales-tax deduction for 2012. Consider accelerating next year’s state tax payments if they don’t throw you into the AMT, in which case you’ll lose the write-off altogether.
  • Make gifts up to $13,000 to relatives or friends. Such gifts are tax-free, and the number of recipients isn’t limited as long as the value of each gift doesn’t exceed $13,000. Cash is often the best gift, as presents of assets such as stock carry their “cost basis” with them.
  • Contribute to 529 education savings accounts. Assets in these accounts enjoy tax-free growth, and withdrawals from them are tax-free when used for tuition and other qualified expenses. Some states also provide tax benefits to givers. These accounts also offer a rare benefit: Contributions leave the giver’s estate, yet he or she can take back the principal without penalty if the money is needed. Contributions do count toward the $13,000 gift limit, however.

Please call Accountants in Chicago at 773-728-1500. We can help you plan and get the right tax deductions.

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New Tax Rules To Watch Out For!

Here’s a quick rundown of what to expect starting January 1, when a bunch of current tax rules expire, and some new rules take effect. : The Bush tax cuts expire.

That means the top rates on ordinary income goes from 35% to 39.6%; the top rate on capital gains goes from 15% to 20%; and the top rate on qualified dividends jumps from 15% to 39.6%. Much of the debate over tax rates focuses on income at the top. But, the expiration of the Bush tax cuts affects all of us. The lowest 10% rate will disappear entirely, and everyone who actually pays income tax will pay more.

  1. the 2011-2012 payroll tax cuts expire, which means Social Security and self-employment taxes go up by 2% on all earned income up to $113,700. Two percent may not sound like a lot — but it means higher taxes for about 163 million working Americans.
  2. new taxes imposed by the 2010 “Obamacare” legislation take effect – the Medicare portion of Social Security and self-employment taxes goes up from 2.9% to 3.8% on earned income topping $200,000 ($250,000 for joint filers). And there’s a new 3.8% “Unearned Income Medicare Contribution” (which sounds so much better than “tax’) on “net investment income” (interest, dividends, capital gains, rents, royalties, and annuities) over those same amounts.
  3. the Alternative Minimum Tax exemptions revert back to where they stood in 2000. Under current law, those exemptions are not adjusted for inflation. So, every couple of years, Congress “patches” the system by temporarily raising the exemptions to where they would be if they were indexed for inflation. The AMT currently hits about 4½ million Americans – but without the “patch,” that number explodes to 33 million.

Oh, and do not think dying solves your tax problem. That is because estate taxes, which currently start at 45% on estates over $5 million, will jump to 55% on estates over just $1 million.

So, January 1 2013 is our fiscal cliff, and we’re hurtling towards it.  What can we do? Well, plenty of legislators have proposed extending part or all of the Bush tax cuts, extending the payroll tax cuts, patching the AMT, and raising the estate tax exemption. But actually passing anything will be a challenge — Congress has passed just 132 bills this year, and 20% of those were to name post offices!

The partisan gridlock has many observers convinced that we will actually go over that fiscal cliff. We may see Washington wait for the election results and pass something noncontroversial like the AMT patch before the end of the year. Then in 2013 they will pass legislation extending at least part of the Bush tax cuts and make it retroactive to January 1.

We, the Chicago Accountants want you to know that we are watching everything closely to help you make the most of your opportunities and avoid land mines where possible. And remember, we are here for your family, friends, and colleagues, too so give us a call: 773-728-1500

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MARRIED COUPLES VS. SAME SEX COUPLES? WHO PAYS MORE: BY CHICAGO CPA

The federal 1996 Defense of Marriage Act doesn’t offer tax breaks for gay spouses even more because the federal government doesn’t recognize gay marriage it results in paying as much as $6,000 extra a year for the same sex couples.

While filing jointly, as a married couple provides tax benefits, the same sex couples can not enjoy the same perks because they are not allowed to file their federal returns jointly.

However, there are some states (more than 12 now) that grant full or partial marriage rights to same sex couples, but the federal government is governed by the 1996 Defense of Marriage Act, which has the support of conservatives who consider that repealing the act would erode religious liberty for people who believe in the traditional definition of marriage.

We, the Chicago CPA have done the following analysis to compare who would pay more in individual income tax – A Married couple or a same sex couple??

Just to make it clearer we will give you an example of the act’s tax implications for a family with one spouse earning $100,000 and the other spouse staying home with the family’s two kids.

Case I: same sex couple

The working spouse files as head of a household and the spouse that stays home with the kids is considered to be a qualifying relative. As a result the federal tax owed by the household’s is $13,199.

Case II: married couple

The tax liability that the married couple who files a jointly tax return would be $8,656.

The result is a $4543 higher payment for the same sex couple. WHY? Because when you file as head of a household such a designation comes with disadvantages. When you file as head of a household instead of married filing jointly exposes more income to a higher bracket, plus the standard deductions are lower for a head of household than they are for married couples filing jointly.

To find out which status is right for you, please call us at 773-728-1500.

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