2012 Tax Changes for Individuals

Here's what individuals and families need to know about tax changes for 2012.

From personal deductions to tax credits and educational expenses, many of the tax changes relating to individuals remain in effect through 2012 and are the result of tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on December 17, 2010.

Personal Exemptions 
The personal and dependent exemption for tax year 2012 is $3,800, up $100 from 2011.

Standard Deductions
In 2012 the standard deduction for married couples filing a joint return is $11,900, up $300 from 2011 and for singles and married individuals filing separately it's $5,950, up $150. For heads of household the deduction is $8,700, up $200 from 2011.

The additional standard deduction for blind people and senior citizens in 2012 is unchanged from 2011, remaining at $1,150 for married individuals and $1,450 for singles and heads of household.

Income Tax Rates 
Due to inflation, tax-bracket thresholds will increase for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700 for a married couple filing a joint return, up from $69,000 in 2011.

Estate and Gift Taxes 
The recent overhaul of estate and gift taxes means that there is an exemption of $5.12 million per individual for estate, gift and generation-skipping taxes, with a top rate of 35%. The annual exclusion for gifts remains at $13,000.

Alternative Minimum Tax (AMT) 
AMT exemption amounts for 2012 have reverted to 2000 levels and will remain significantly lower than in 2011 unless Congress takes action before year-end: $33,750 for single and head of household fliers, $45,000 for married people filing jointly and for qualifying widows or widowers, and $22,500 for married people filing separately.

Marriage Penalty Relief 
For 2012, the basic standard deduction for a married couple filing jointly is $11,900, up $300 from 2011.

Pease and PEP (Personal Exemption Phaseout) 
Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations do not apply for 2012, but like many other tax provisions, are set to expire at the end of the year.

Flexible Spending Accounts (FSA) 
FSA (Flexible Spending Arrangements) are limited to $2,500 per year starting in 2013 and indexed to inflation after that and applies only to salary reduction contributions under a health FSA. However, IRS guidance issued this year recognizes that the term "taxable year" refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.

Specifically, in the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.

Further, the IRS is providing relief for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.

Long Term Capital Gains 
In 2012, long-term gains for assets held at least one year are taxed at a flat rate of 15% for taxpayers above the 25% tax bracket. For taxpayers in lower tax brackets, the long-term capital gains rate is 0%.

Individuals - Tax Credits

Adoption Credit 
In 2012 a credit of up to $12,650 is available for qualified adoption expenses for each eligible child. The available adoption credit begins to phase out for taxpayers with modified adjusted gross income (MAGI) in excess of $189,710 and is completely phased out for taxpayers with modified adjusted gross income of $229,710 or more.

Child and Dependent Care Credit 
If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit 
The $1,000 child tax credit has been extended through 2012 as well. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.

Earned Income Tax Credit (EITC)
For tax year 2012, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270 (up from $49,078 in 2011). The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Individuals - Education Expenses

Coverdell Education Savings Account 
You can contribute up to $2,000 a year to Coverdell savings accounts in 2012. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.

American Opportunity Tax Credit
For 2012, the maximum Hope Scholarship Credit that can be used to offset certain higher education expenses is $2,500, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.

Employer Provided Educational Assistance 
Through 2012, you, as an employee, can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.

Lifetime Learning Credit 
A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2012, The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

Student Loan Interest 
For 2012 (same as 2011), the $2,500 maximum student loan interest deduction for interest paid on student loans is not limited to interest paid during the first 60 months of repayment. The deduction begins to phase out for married taxpayers filing joint returns at $125,000, and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Individuals - Retirement

Contribution Limits
For 2012, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased from $16,500 to $17,000. For persons age 50 or older in 2012, the limit is $22,500 (up from $22,000 in 2011). Contribution limits for SIMPLE plans remain at $11,500 for persons under age 50 and $14,000 for persons age 50 or older in 2012. The maximum compensation used to determine contributions increases to $250,000.

Saver's Credit 
In 2012, the AGI limit for the saver's credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, $43,125 for heads of household, and $28,750 for married individuals filing separately and for singles.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.

2012 Tax Changes for Businesses

Whether you file as a corporation or sole proprietor here's what business owners need to know about tax changes in 2012.

Standard Mileage Rates 
The standard mileage rate in 2012 is 55.5 cents per business mile driven, 23 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.

Health Care Tax Credit for Small Businesses 
Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000. The credit can be claimed in tax years 2010 through 2013 and for any two years after that. The maximum credit that can be claimed is an amount equal to 35% of premiums paid by eligible small businesses.

Credit for Hiring Qualified Veterans
The maximum credit that employers can take for hiring qualified veterans in 2012 is $9,600 per worker for employers that operate for-profit businesses, or $6,240 per worker for tax-exempt organizations. See Tax Credit for Employers Hiring Veterans This Year (below) for additional details on this tax credit.

Section 179 Expensing 
In 2012 the maximum Section 179 expense deduction for equipment purchases is $139,000 ($174,000 for qualified enterprise zone property) of the first $560,000 of certain business property placed in service during the year. The bonus depreciation is 50% for qualified property that exceeds the threshold amount.

Please contact us if you need help understanding which deductions and tax credits you are entitled to. We are always available to assist you.

IRS Provides Relief for Hurricane Sandy

In the aftermath of Hurricane Sandy, the Internal Revenue Service has announced several types of relief aimed at helping affected individuals and businesses. Here are two of them.

Qualified Disaster Treatment of Payments to Victims of Hurricane Sandy

In light of the designation of Hurricane Sandy as a qualified disaster for tax purposes, the IRS is notifying taxpayers and employers that qualified disaster relief payments made to individuals by their employer or any person can be excluded from those individuals' taxable income.

Qualified disaster relief payments include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair or replace the contents to the extent that they were not covered by insurance. Again, these payments would not be included in the individual recipient's gross income.

In addition, employer-sponsored private foundations may provide disaster relief to employee-victims in areas affected by the hurricane without affecting their tax-exempt status.

Return Filing and Tax Payment Deadline Extended to February 1, 2013

Following recent disaster declarations for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Connecticut, New Jersey and New York will receive tax relief. Other locations may be added in coming days based on additional damage assessments by FEMA.

The tax relief postpones various tax filing and payment deadlines that occurred starting in late October. As a result, affected individuals and businesses will have until February 1, 2013 to file these returns and pay any taxes due. This includes the fourth quarter individual estimated tax payment, normally due January 15, 2013. It also includes payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on October 31, 2012 and January 31, 2013 respectively. It also applies to tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period.

The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The IRS automatically provides this relief to any taxpayer located in the disaster area.

Taxpayers need not contact the IRS to get this relief.

Beyond the relief provided by law to taxpayers in the FEMA-designated counties, the IRS will work with any taxpayer who resides outside the disaster area but whose books, records or tax professional are located in the areas affected by Hurricane Sandy. All workers assisting the relief activities in the covered disaster areas who are affiliated with a recognized government or philanthropic organization are eligible for relief. Please contact us if you are a taxpayer who lives outside of the impacted area, but think you may qualify for this relief. We can help you sort it out.

In addition, the IRS is waiving failure-to-deposit penalties for federal payroll and excise tax deposits normally due on or after the disaster area start date and before November 26, if the deposits are made by November 26, 2012.

So far, IRS filing and payment relief applies to the following localities:

In Connecticut (starting October 27): Fairfield, Middlesex, New Haven, and New London Counties and the Mashantucket Pequot Tribal Nation and Mohegan Tribal Nation located within New London County;

In New Jersey (starting October 26): Atlantic, Bergen, Cape May, Essex, Hudson, Middlesex, Monmouth, Ocean, Somerset and Union;

In New York (starting October 27): Bronx, Kings, Nassau, New York, Queens, Richmond, Rockland, Suffolk and Westchester.

Questions? Don't hesitate to give us a call. We have answers!

Tax Credit for Employers Hiring Veterans This Year

Many businesses may qualify to receive thousands of dollars through the Work Opportunity Tax Credit (WOTC), but employers planning to claim an expanded tax credit for hiring certain veterans should act soon because they are only eligible for the credit if the veteran begins work before the new year.

Here are five key facts about the WOTC as expanded by The Veterans Opportunity to Work (VOW) to Hire Heroes Act of 2011.

1. Hiring Deadline: Employers may be able to claim the expanded WOTC for qualified veterans who begin work on or after November 22, 2011 but before January 1, 2013.

2. Maximum Credit: The maximum tax credit is $9,600 per worker for employers that operate for-profit businesses, or $6,240 per worker for tax-exempt organizations.

3. Credit Factors: The amount of credit will depend on a number of factors. Such factors include the length of the veteran's unemployment before being hired, the number of hours the veteran works and the amount of the wages the veteran receives during the first-year of employment.

4. Disabled Veterans: Employers hiring veterans with service-related disabilities may be eligible for the maximum tax credit.

5. State Certification: Employers must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their state workforce agency. The form must be filed within 28 days after the qualified veteran starts work. Some states accept Form 8850 electronically.

Please give us a call if you need assistance filling out Form 8850 or if you'd like more information about the expanded tax credit for hiring veterans.

Big Data Offers Huge Potential for Smaller Companies, Intuit Says

Thor Olavsrud CIO (US):  Tis the season for prognostications. Staring into the big data crystal ball one thing seems clear: We can expect to see the continuing growth of the Internet; wireless networks; social media; and the number of mobile devices, sensors and other digital technology that is flooding us with new data every minute of every day.

Analysts agree that organizations able to harness data stand to gain a competitive advantage. Web 2.0 companies like Google and Facebook have led the charge into the big data era--data is undeniably their bread and butter, and they have helped to create much of the technology that makes leveraging big data possible. Large enterprises, too, are poised to use big data to take their businesses to new heights. Demand forecasting, targeted marketing, fraud detection, medical research--the list of potential uses is seemingly endless.

"The growing access to this massive volume of information--and the ability to refine and analyze it--makes it a new type of raw material, on par with capital and labor," Emergent Technology and Intuit (maker of QuickBooks, Quicken and TurboTax) write in a new research report that forecasts data trends for the next seven years. "Advanced analytics will move from the domain of specialists to everyday users. Data will be a key driver of global economic growth in the 21st century digital economy, with a profound effect on all aspects of society--business, science, health care, finance, government and entertainment."

Will Big Data Create a New Digital Divide?

But what about the little guy? What about small businesses that do not have the resources to harness big data technology like their large enterprise competitors do? Will big data create a new form of digital divide?

No, says Intuit President and CEO Brad Smith. Instead, Smith says that (with Intuit's help) big data enables a new "data democracy" that will help small business owners and consumers use data as effectively as their large competitors.

"Big data has long been seen as a big opportunity for big business," he says. "We actually think that the biggest opportunity is giving consumers and small businesses the power of data. We look forward to a new era where big data benefits the little guy."

The report, The New Data Democracy: How Big Data Will Revolutionize the Lives of Small Businesses and Consumers, supports Smith's belief.

Big Data Will Help Consumers Save Time and Money

In the report, Emergent Technologies and Intuit note that the past few decades have increasingly seen risk management responsibilities shift from institutions to individuals--a trend that is likely to continue. At the same time, insurance, health care, retirement and other financial issues are growing more intricate.

"Data-driven solutions will come to the rescue, helping simplify--and even make--these decisions," the report says. "Over the next five to seven years, emerging technologies and new analytical tools will convert daunting data streams into actionable information that will ease personal decision making, reduce uncertainty and save individuals both time and money."

"These analytical tools will store, organize and analyze life's data feeds for us, aggregating anonymous information from large numbers of people to provide individuals with personalized comparisons and insights," the report adds. "Used on their own or in conjunction with advisors such as accountants, financial planners and health specialists, these data-driven tools will demystify the complexity associated with the business of life."

As early indicators of the trend, the report points to three companies that are already tapping into the new data resource to help consumers:

• Financial Engines. This firm uses cloud technologies, large financial data sets and advanced data analytics tools to help people navigate the complexities of retirement planning.

• Exmobaby. This firm creates baby pajamas with built-in biosensors that collect health and wellness data to help parents monitor their babies. The company hopes to aggregate the information into large databases on infant health and wellness.

• Parchment. This startup analyzes a large database of student profiles, including grade point averages, SAT scores and acceptance data to help students choose and apply for colleges by assessing a student's likelihood of admission to a specific school. It can also determine what a student can do to improve acceptance chances.

"Data empowers consumers," Smith says. "Navigating the maze of modern life is becoming increasingly complex. Data is going to help. Data and the analytical tools that come with it will enable individuals and households to make smarter and more informed decisions."

Big Data Will Help SMBs Know Their Customers

For businesses, Smith believes that digital data will help spark a return to the era when neighborhood merchants knew their customers and could anticipate their needs.

"We believe data is the Moneyball for small business," Smith says, referring to the book by Michael Lewis, recently released as a movie starring Brad Pitt. "It levels the playing field. It'll bring back the days of the local merchant who knew everything about you and was able to greet you by name with special recommendations based on your purchase habits. It's going to help small businesses operate more efficiently and enable local entrepreneurs to compete effectively with a company of any size anywhere around the globe."

Smith says Intuit is in a good position to help make this happen. After all, he says, it provides business and financial management services to small and mid-sized businesses, financial institutions like banks and credit unions, consumers and accounting professionals. About 25 percent of the U.S. economy moves through its products, Smith says, and Intuit users have opted to share that data with the company.

It has transactional data, behavioral data (drawn from products like TurboTax Online and Mint), user-generated data and even social data drawn from social networks and Twitter. By aggregating and anonymizing the data, Intuit is creating a massive data store that can be accessed and used by customers.

This data could be used in lots of different ways, from comparing what businesses similar to yours are paying in wages to a new hire, to finding the most cost-effective vendor for your raw materials.

"We're able to take an individual's small business and with a dashboard compare them to other small businesses that are like them," Smith says. "If you're a two-employee florist shop in Boston, we can compare you with other two-employee florist shops in Boston and around the country."

As Smith notes, Intuit has already begun the process of transforming its products to help small businesses and consumers harness the new era of big data. Examples include the following:

• QuickBooks Online's Trends feature. This feature anonymously aggregates customer data, allowing small businesses to see how their income and expenses stack up against similar businesses.

• Intuit Loan Finder. This service is a loan matchmaking service that analyzes a small business's data through QuickBooks, helping to "derisk" a loan decision for banks.

• Mint. Mint helps customers manage their financial data. It's Ways to Save engine analyzes that data and other data at Intuit's disposal to find ways to help customers save money on everything from lower credit card fees to better mortgage rates.

EXACT CPA COMMENT:  I've always believed that information is king, but this takes things to a whole new level.  The amount of information that corporations have gathered on consumers is overwhelming.  From a business perspective, it is great to have so much knowledge potentially at my fingertips.  Being able to do comparisons with other businesses like mine or more specific research on my target market is exciting.  Having access to this data will assist in leveling the playing field across all sizes of business.  Just as the internet has given small business a farther reach than ever before, having access to this nearly endless source of data will additional help to even the score.

On the flip side, on a personal note, I feel a little bit like there is always someone looking over my shoulder when I do anything  online.  Even if it is aggregated with millions of other datapoints, no longer (if ever) is anything online truly anonymous.  As the author mentioned above, businesses will be able to customize recommendations to specific individuals, giving them a more personal experience.  

So with my business hat on, I feel empowered by the opportunities having access to this data will bring, from a personal perspective I remain cautious. 

Are Your Social Security Benefits Taxable?

All Social Security recipients should receive a Form SSA-1099 from the Social Security Administration which shows the total amount of their benefits.

But many people may not realize the Social Security benefits they received in 2012 may be taxable. The information outlined below should help you determine whether those benefits you receive in 2012 are taxable or not.

1. How much, if any, of your Social Security benefits are taxable depends on your total income and marital status.

2. Generally, if Social Security benefits were your only income for 2012, your benefits are not taxable and you probably do not need to file a federal income tax return.

3. If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status (see below).

4. Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet. Your tax software program will also figure this for you.

5. You can do the following quick computation to determine whether some of your benefits may be taxable:

• First, add one-half of the total Social Security benefits you received to all your other income, including any tax-exempt interest and other exclusions from income.
• Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

6. The 2012 base amounts are:

• $32,000 for married couples filing jointly.
• $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouse at any time during the year.
• $0 for married persons filing separately who lived together during the year.
Confused? Give us a call. We'll make sure you receive all of the Social Security benefits you're entitled to.