Contrarian Tax Planning: Increasing Income To Take Advantage Of The AMT

Tony Nitti a contributor for Forbes writes: Let’s say 2013 turns out to be a niiice year for you down at the ol’ cracker factory. A little bit too nice, in fact, and you find yourself subject to the dreaded alternative minimum tax (AMT). Might I recommend a bit of contrarian advice? Consider accelerating even more income into 2013, despite the fact that it, too, might be subject to the AMT.  Actually, strike that…consider accelerating more income into 2013 precisely because it, too, will be subject to the AMT.

I’ll explain, but first, a bit of background:

Individual taxpayers must compute their federal tax liability twice, once under the so-called “regular” system, and again under the parallel AMT system, which limits or disallows many of the deductions and preferences allowed for regular tax purposes. After computing your regular and AMT liabilities, the taxpayer must pay the higher of the two.

To prevent the AMT from impacting the middle class, Congress built into the law an exemption amount which prevents the first dollars of a taxpayer’s AMT taxable income from being taxed. In 2013, the exemption amounts are $80,800 for married taxpayers and $51,900 for single taxpayers.

These exemption amounts, however, are subject to phase-out once a taxpayer’s AMT income exceeds $153,900 in 2013. Starting at this income level, for each additional dollar of AMT income the taxpayer loses 25% of the exemption. Thus, for a married taxpayer, the $80,800 exemption will be fully phased out once AMT income exceeds $477,100.

So where does this planning opportunity come in? While a taxpayer’s regular taxable income is subject to graduated rates with a low of 10% and a high of 39.6%, AMT income is taxed at a flat 28% rate once it exceeds $179,500 in 2013. And where I come from, 28% is less than 39.6%. And it’s this variance that gives rise to an often-overlooked planning opportunity.

To illustrate, assume Joe earns $515,000 in wages in 2013. Keeping things simple, that’s all the income Joe generates. On the deduction side, Joe’s got $5,000 of charitable contributions, $28,000 of state income tax, $30,000 of mortgage interest deductions, and $10,000 of real estate taxes.

Note, while Joe’s itemized deductions total $73,000, he falls victim to the return of the PEASE limitation, which reduces Joe’s itemized deductions by 3% for each dollar his adjusted gross income exceeds $300,000 (since he’s married, only $250,000 if he were single). As a result, Joe can only deduct $66,550 of itemized deductions against his $515,000 of adjusted gross income for regular tax purposes, resulting in taxable income of $448,500 and a regular tax liability of $125,000.

Unfortunately, Joe’s state income and real estate taxes are not deductible for AMT purposes; as a result, his AMT income is $480,000, and the resulting AMT liability is $131,000. Because Joe has to pay the higher of his AMT liability ($131,000) or regular tax liability ($125,000), Joe finds yourself subject to the AMT.

Now, let’s say Joe has the option to accelerate $40,000 of income into 2013. Should he do it? The common reaction is no, because when taxpayers find they are subject to the AMT, they tend to freeze like a deer in headlights, and assume any additional dollars of income will only bring more paid. That’s not the case however, and here’s why.

With taxable income (before considering the $40,000 bonus) of $448,000, the next $2,000 of income Joe earns will be taxed at 35% for regular tax purposes until Joe hits taxable income of $450,000, at which point all additional income will be taxed at the maximum 39.6% rate. In addition, because Joe would continue to lose 3% of his itemized deductions for each dollar of income he earns, the marginal tax on the $40,000 bonus would reach a high of 40.78% (39.6% * 1.03). As a result, if Joe accelerates the $40,000 of income into 2013, his regular tax liability will increase from $125,000 to $141,500.

But remember: Joe is in the AMT. And as long as his AMT liability exceeds his regular tax liability, Joe will continue to be subject to the AMT and its maximum tax rate of 28%.

If Joe chooses to take the $40,000 bonus in 2013, (and assuming no additional state withholding or estimated payments), his AMT income will rise to $520,000 and his AMT liability to $142,000. Because Joe’s regular  tax liability was only $141,500, he must pay the AMT tax of $142,000.

But that’s a good thing, because Joe’s total tax liability rose from $131,000 without the bonus to only $142,000 with the bonus. That’s an increase of $11,000 on $40,000 of taxable income, or exactly 28%. So despite having taxable income in excess of $450,000, Joe just paid tax on the $40,000 bonus at 28% — the AMT rate – rather than at the regular rate of 39.6%. Not a bad deal, right?

Once a taxpayer is aware of the limits of this opportunity, it can be used to their advantage. But first, you have to understand the floor and ceiling of the taxpayer’s AMT range:

The Floor

The key to this planning opportunity is taking advantage of the maximum AMT rate of 28%. Note, however, that while the 28% rate kicks in at AMT income of $179,500, the rate is actually 35% until the taxpayer is fully phased out of their AMT exemption. This is because for each dollar of AMT income the taxpayer earns in excess of $179,500, the taxpayer loses 25% of their exemption, subjecting even more AMT income to tax. Thus, on each dollar of income in excess of $179,500, the AMT rate is 35% (28% + (25% * 28%) until the exemption is completely eliminated.

Once the exemption is fully phased-out, however, the next dollars of income are taxed at a pure 28% tax rate. It is this amount – specifically, AMT income of $477,100 for married taxpayers in 2013 – that signify a taxpayer’s “floor.” Importantly, each dollar of income the taxpayer earns in excess of this floor will be taxed at a flat 28%.

The Ceiling

Of course, this opportunity has a ceiling as well; specifically, that point at which the taxpayer’s regular tax liability first exceeds the AMT liability. Once the taxpayer reaches this point, any additional dollars of income will no longer be subject to the AMT, but rather to the regular tax rates at a maximum marginal rate of $39.6%, or 40.78% when factoring in the phase-out of itemized deductions.

Now, let’s go back to our sample taxpayer. Joe’s “floor” was AMT income of $477,100. Because in our example Joe had AMT income of $480,000 and was subject to the AMT, he  had already exceeded his floor, and was in a position to take on additional income that would only be taxed at 28%.

But how far could he go?

Assuming he purely added income and no deductions, Joe could take on $45,000 of additional income before his regular tax ($143,500) would exceed his AMT  ($143,400). This is Joe’s AMT ceiling, and to the extent he accelerates any additional income, it will be taxed not at the AMT rate of 28%, but rather at a marginal rate of 40.78%.

The following table illustrates five items:

• Joe’s AMT “floor” – the amount where his AMT exemption is fully phased out and every dollar of additional AMT income is taxed at 28%.
• Joe’s actual facts: wages of $515,000, itemized deductions after PEASE limitation of $66,550, and AMT add-backs of $38,000 ($28,000 state and local taxes, $10,000 of real estate tax).
• Joe’s tax liability if he accelerates his $40,000 bonus into 2013. Note that accelerating the income generates $11,200 of additional tax on $40,000 of additional income, or a 28% rate.
• Joe’s AMT “ceiling,” or the point at which his regular tax and AMT are equal. At this point, if Joe generates any additional income, it will be taxed at a maximum regular ate of 40.78%.
• To illustrate, If Joe takes an additional bonus of $45,000 on top of the $40,000 he previously accelerated into 2013, his taxable income rises to $536,000 and his regular tax liability to $159,902. Thus, his regular tax liability exceeds his regular liability at the AMT ceiling by $16,315, meaning his additional $50,000 of bonus was taxed at 40.78%.

	AMT FLOOR	ACTUAL FACTS	$40,000 BONUS	AMT CEILING	ADDITIONAL INCOME
AGI		$515,000	$555,000	$560,000	$600,000
TAXABLE INCOME		$448,450	$489,650	$494,800	$536,000
AMTI	$477,100	$480,000	$520,000	$525,000	$565,000
REGULAR TAX		$125,304	$141,547	$143,587	$159,902
AMT TAX	$130,000	$130,810	$142,010	$143,587	$154,610

If you can determine your AMT floor and ceiling, you can turn the perceived negative of being in AMT into a positive by generating additional income subject to a favorable 28% rate. And of course, it doesn’t have to be bonus income; rather, you could take a distribution from your retirement account or exercise stock options as well.

Of course, as you can see, these computations require attention to detail, as there are a lot of moving parts. For example, if you accelerate income in the form of wages and have state income tax withheld, the additional state income tax deductions will change your taxable income and regular tax liability. In summary, it’s best not to go it alone. Hire a tax advisor, have them compare the benefits of acceleration versus deferral into the next year, and come up with a plan.

What’s New on 2012 Form 1040 and Schedules

The IRS has recently announced that it is accepting all 2012 tax returns for filing (IRS News Release IR-2013-25), and the April 15, 2013, deadline for filing Form 1040, U.S. Individual Tax Return, for 2012 is approaching. Every filing season brings changes to Form 1040, and this year is no exception. The 2012 Form 1040 carries some changes compared to the 2011 Form 1040.

Extended Incentives

Educator expenses (teachers’ classroom expense deduction) (Line 23). The above-the-line deduction for eligible educators for up to $250 of qualified expenses paid during the year is extended to tax years beginning in 2012 and 2013. If two eligible educators are married and file a joint return, they may deduct up to $250 in qualified expenses that they each incur, for a maximum deduction of $500.

Higher education tuition and fees deduction (Line 34). The above-the-line deduction for higher education qualified tuition and related expenses is extended two years for expenses paid before January 1, 2014. Taxpayers claiming the higher education tuition and fees deduction must attach Form 8917, Tuition and Fees Deduction.

Residential energy credits (Line 52). The Code Sec. 25C nonbusiness energy property credit and the Code Sec. 25D residential energy efficient property credit reward taxpayers who make qualified improvements to their residences. The Code Sec. 25C credit is extended for two years through 2013. The lifetime credit limit remains at $500 and no more than $200 of the credit amount can be attributed to exterior windows and skylights. The Code Sec. 25D credit is scheduled to expire after 2016. Both credits are claimed on Form 5695, Residential Energy Credits.

Other Credits

Adoption credit (Line 53). The Patient Protection and Affordable Care Act, P.L. 111-148, made the adoption credit refundable for 2010 and 2011. For tax year 2012, the credit has reverted to being non-refundable (which is why Form 1040, Line 71, box b is shown as “Reserved”).

COMMENT 

For 2012, the adoption credit has a dollar limitation of $12,650 per qualifying child. The maximum exclusion for employer-provided adoption assistance for 2012 is $12,650 per qualifying child (non-special needs and special needs adoptions). The credit and the exclusion are each subject to an income limitation and a dollar limitation. The income limit on the adoption credit or exclusion is based on modified adjusted gross income. For 2012, MAGI phase out begins at $189,710 and ends at $229,710. Under the American Taxpayer Relief Act of 2012, P.L. 112-240, the offset of the adoption credit against regular tax and alternative minimum tax liabilities is made permanent for tax years beginning after December 31, 2011.

Additional child tax credit (Line 65). For 2012, the IRS has instructed taxpayers claiming the additional child tax credit to use Schedule 8812, Child Tax Credit, to calculate their additional child tax credit and attach Schedule 8812 to their return.

First-time homebuyer credit (Line 67). The Code Sec. 36 first-time homebuyer credit is unavailable for 2012. This is why Form 1040, Line 67 is shown as “Reserved.”

COMMENT 

The 2012 Taxpayer Relief Act did not extend the D.C. first-time homebuyer credit, which expired after 2011 and is unavailable for 2012.

Standard Deduction

For 2012, the standard deduction for single individuals and married couples filing separately is $5,950. The standard deduction for married couples filing joint returns and qualifying widow(er)s is $11,900 for 2012. The standard deduction for heads of households is $8,700 for 2012.

COMMENT 

Note that for the 2013 tax year, the amount of otherwise allowable itemized deductions of a taxpayer will be phased out if his or her adjusted gross income exceeds a threshold amount for the year based on filing status. The applicable threshold amounts beginning in 2013 (and indexed for inflation in subsequent years) are $300,000 for married couples filing a joint return or a surviving spouse; $275,000 for heads of households; $250,000 for single individuals; and $150,000 for married couples filing separate returns.

Personal Exemption

For 2012, the amount for each exemption is $3,800.

COMMENT 

Note that for the 2013 tax year, the amount of otherwise allowable personal and dependency exemptions of a taxpayer will be phased out if his or her AGI exceeds a threshold amount for the year based on filing status. The applicable threshold amounts beginning in 2013 (and indexed for inflation in subsequent years) are $300,000 for married couples filing a joint return or a surviving spouse; $275,000 for heads of households; $250,000 for single individuals; and $150,000 for married couples filing separate returns.

Identity Protection PINs

Taxpayers who received an identity protection personal identification number from the IRS for 2012 should enter the IP PIN on their return. If taxpayers are filing a joint return and both taxpayers received an IP PIN, the IRS has instructed that only the taxpayer whose Social Security number appears first on the return should enter his or her IP PIN.

COMMENT 

The IRS recently reported that it has assigned more than 600,000 IP PINs for use on 2012 returns to taxpayers who have been victims of identity theft.

Schedule A, Itemized Deductions

Medical and dental expenses (Line 1). For 2012, the standard mileage rate for use of a motor vehicle to obtain medical care is 23 cents per mile.

COMMENT 

The medical (and moving) mileage rate for 2013 is 24 cents per mile.

State and local taxes (Line 5). The election to claim an itemized deduction for state and local general sales taxes in lieu of state and local income taxes is extended two years by the 2012 Taxpayer Relief Act and may be claimed for tax years beginning in 2012 and 2013.

COMMENT 

The election to state and local general sales taxes is available to all individual taxpayers, although it is primarily designed to benefit taxpayers in states without state and local income taxes. However, purchase of a big ticket item in 2012 may cause the state and local sales tax deduction to be more valuable than the state and local income tax deduction for some taxpayers.

Mortgage insurance premiums (Line 13). Taxpayers may deduct qualified mortgage insurance premiums paid or accrued in 2012 (and 2013), or are properly allocable to any period on or before December 31, 2013.

Unreimbursed employee expenses (Line 21). For 2012, the standard mileage rate for use of a vehicle is 55.5 cents per mile for business miles driven.

COMMENT 

The business standard mileage rate for 2013 is 56.5 cents per mile.

Schedule B, Interest and Ordinary Dividends

Excludable interest on series EE and I U.S. savings bonds (Line 3). For 2012, the phase-out of the exclusion for education-related savings bond interest begins at modified adjusted gross income above $72,850 for single individuals and $109,250 for married couples filing a joint return.

Schedule C, Profit or Loss From Business

Car and truck expenses (Part II, Line 9). For 2012, the standard mileage rate for use of a vehicle is 55.5 cents per mile for business miles driven.

Form 4562, Depreciation and Amortization

Election to expense certain property under Section 179. The 2012 Taxpayer Relief Act increased the Code Sec. 179 dollar and investment limitations to $500,000 and $2 million, respectively, for tax years beginning in 2012 and 2013. The new law also extended the Code Sec. 179 expense deduction for off-the-shelf computer software to apply to qualified software placed in service in tax years beginning before 2014. Under the 2012 Taxpayer Relief Act, for tax years beginning in 2012 and 2013, a taxpayer can elect to treat up to $250,000 of qualified real property as Code Sec. 179 property. Qualified real property generally consists of qualified leasehold improvements, qualified retail improvement property, and qualified restaurant property.

COMMENT 

As the Code Sec. 179 dollar and investment limitations have been increased for 2012, any further inflation adjustment for 2012 is eliminated.

Additional depreciation allowance. Qualified property placed in service before January 1, 2014 (January 1, 2015, for certain longer production period and transportation property), may be eligible for an additional depreciation allowance (50-percent bonus depreciation).

COMMENT 

The additional depreciation allowance for 2011 is 100 percent (available through 2012 for certain longer production period and transportation property).

Listed property. The first-year depreciation limit on luxury automobiles first placed in service in 2012 for business and investment purposes if bonus depreciation is claimed is $11,160 for passenger automobiles and $11,360 for trucks and vans. If bonus depreciation is not claimed, the first year cap is $3,160 for passenger automobiles and $3,360 for trucks and vans.

Schedule D, Capital Gains and Losses

Excluded gain on sale of small business stock. The 100-percent exclusion of gain applies to qualified small business stock that is acquired after September 27, 2010, and before January 1, 2014, and held for more than five years.

Schedule E, Supplemental Income and Loss

Information reporting requirements. Lines A and B, which address required filing of Forms 1099, are in Part I of Schedule E for 2012. In the Instructions for Schedule E, the IRS instructed taxpayers that they only need to answer the questions on lines A and B if they are completing Part I.

IRS Issues 2013 Vehicle Depreciation Dollar Limits

The IRS has released the inflation-adjusted limitations on depreciation deductions for business-use passenger automobiles, light trucks, and vans first placed in service during calendar year 2013 (Rev. Proc. 2013-21, 2013-12 IRB __). Some of the depreciation limits are identical to the limits for 2012; other ceilings have increased by $100.

COMMENT 

The 2013 dollar limits reflect the inflation adjustments both with the extension of bonus depreciation by the American Taxpayer Relief Act of 2012, P.L. 112-240, and without, Abe Schneier, senior technical manager, American Institute of Certified Public Accountants, told CCH. If bonus depreciation is allowed to lapse after 2013, the dollar limits for 2014 will be lower but will still be adjusted for inflation, Schneier explained.

Background

Code Sec. 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the vehicle in service in its business, and for each succeeding year. Under Code Sec. 280F(d)(7), the IRS adjusts for inflation the amounts allowable for depreciation deductions.

The 2012 Taxpayer Relief Act generally extended 50-percent first-year bonus depreciation under Code Sec. 168(k) to qualified property acquired and placed in service by December 31, 2013 (December 31, 2014 for certain longer-lived and transportation property). For vehicles subject to the Code Sec. 280F luxury vehicle limits, first-year bonus depreciation is increased by $8,000 (not indexed for inflation), unless the taxpayer elects out.

In Rev. Proc. 2013-21, the IRS provided depreciation limits for passenger automobiles, light trucks and vans, both for those qualifying for bonus depreciation and for those not qualifying for or electing bonus depreciation.

Passenger Automobiles

The maximum depreciation limits under Code Sec. 280F for passenger automobiles first placed in service during the 2013 calendar year are:

• $11,160 for the first tax year ($3,160 if bonus depreciation does not apply);
• $5,100 for the second tax year;
• $3,050 for the third tax year; and
• $1,875 for each succeeding tax year.

Trucks and Vans

The maximum depreciation limits under Code Sec. 280F for trucks and vans first placed in service during the 2013 calendar year are:

• $11,360 for the first tax year ($3,360 if bonus depreciation does not apply);
• $5,400 for the second tax year;
• $3,250 for the third tax year; and
• $1,975 for each succeeding tax year.

COMMENT 

Sport utility vehicles and pickup trucks with a gross vehicle weight rating in excess of 6,000 pounds continue to be exempt from the luxury vehicle depreciation caps based on a loophole in the operative definition. Congress in 2004 placed a $25,000 limit on Code Sec. 179expensing of heavy SUVs but has not extended it to Code Sec. 280F.

Leases

Lease payments for vehicles used for business or investment purposes are deductible in proportion to the vehicles business use. However, lessees must include a certain amount in income during the year that the vehicle is leased, to partially offset the amounts by the lease payments exceed the luxury automobile limits. Rev. Proc. 2013-21 includes tables that identify the income inclusion amounts for passenger automobiles, trucks and vans with lease terms that begin in calendar year 2013.

2012 Is the Last Year to Claim These 5 Tax Write Offs & Other Eye-Opening New Tax Changes

Anne Dullaghan for GoBankingRates.com writes: The Tax Relief Act of 2010 offered taxpayers many advantageous deductions. However, all good things must come to an end.

With tax season now in full swing and the hopefully temporary sequestration, there are several changes to tax write offs that may impact next year’s federal and state tax returns.

5 Tax Write Offs Out the Window

Here are some of the deductions you may not be able to take advantage of post-2012:

Alternative Minimum Tax (AMT)

The $33,750 Alternative Minimum Tax exemption amount expired in 2012. The tax was originally created in 1969 so that wealthy Americans would not be able to bypass the system to avoid paying federal income taxes. However, because AMT rates have not adjusted for inflation, the AMT targets both the rich, as well as the middle class. 

The government requires that you pay the higher of your tax liabilities. The Alternative Minimum Tax is a complicated dual tax system that, at times, confounds even the most financially savvy. First, you must calculate your regular tax, adding up total income, and then subtracting deductions, credits and personal exemptions. For the AMT, you can delete any standard deductions, personal exemptions or certain itemized deductions. As a result, depending on your income, you may owe more under the Alternative Minimum Tax than your tax liability under the regular tax rate.

It is estimated that this year, 27 million more Americans will be subject to the AMT.

The Payroll Tax Increase

If you’re employed in 2013, you’ve probably noticed a not-so-subtle decrease in your paycheck. The payroll tax cut, which reduced an employee’s share of Social Security taxes by two percentage points to new rate of 6.2 percent. Economists estimate this to account for approximately $700 extra per worker per year.

Limitation on Itemized Deductions

If you make more than $89,075 AGI under the married filing separately status and $178,150 for others in 2013, you may be limited in the number of itemized deductions you can claim on your tax return. These “Pease limitations” reduce 3% of your AGI over the threshold amount or by 80% of otherwise allowable itemized deductions.

Personal Income Tax Rates

Get ready to pay more taxes on your personal income beginning in 2013. For 11 years — from 2001 through 2012 — taxpayers were segmented into six tax rates ranging from 10% to 35%. In 2013, the five different new rates increased from 15% to 39.6%.

The Child Tax Credit

The Child Tax Credit was created as part of the Taxpayer Relief Act of 1997. It was established by Congress to address concerns that the tax structure did not adequately reflect a family’s reduced ability to pay taxes as their family size increased.

For several years, it has been worth as much as $1,000, per qualifying child under 17, depending on the income of the taxpayer. It ended in 2012, and beginning in 2013, a $500 deduction will be allowed for each qualifying child under 17 years.

Other Eye-Opening New Tax Changes

It seems the 2013 tax changes are never ending. The following are two more items that will take a bite out of most taxpayer’s wallets.

Student Loan Interest Deductions. With the high cost of a college and post-graduate education, a majority of people carry student loans for many years. In the past, you could deduct loans and interest up to $2,500 per year, with the amount of the deduction phased out based on income. In 2013, you will only be able to deduct the interest for the first five years of repayment.

Capital Gains Tax Rates. Most people invest in the stock market or in mutual funds, hoping to do well in building their portfolios. However, making a profit may mean being subject to a larger capital gains tax in coming years.

In 2012, long-term capital gains were taxed either at zero percent or at 15%. In 2013, the tax rate on long-term gains is scheduled to revert back to a rate of 20%, and a lower 10% rate would apply for those in the new 15% tax bracket. Additionally, if you own an asset for more than five years, you can expect an 18% capital gains tax rate, or if your income puts you in the 15% tax bracket, you’ll pay 8% in capital gains taxes.

Court Denies Second Attempt from H&R Block to Pull Intuit's TurboTax Ads

Intuit Inc. responded yesterday March 11 to a decision by the U.S. District Court for the Western District of Missouri denying, for the second time, H&R Block's attempt to stop Intuit from continuing to air two television advertisements for TurboTax.

In denying H&R Block's motion for a preliminary injunction, the court noted that although H&R Block makes "much of their training programs for tax preparers in their first year and beyond, training is not the same thing as experience." The judge further stated that "it is not false or misleading...to draw consumers' attention to the true statement that certain consumers who go to major tax stores could have their taxes prepared by someone who has no prior work experience preparing taxes."

The court further recognized that the statement "More Americans trusted their federal taxes to TurboTax last year than H&R Block stores and all other major tax stores combined" is true.

The statement below can be attributed to Dan Maurer, general manager and senior vice president of Intuit's Consumer Tax Group.

"Today's ruling is a victory for hardworking taxpayers. For the second time, the court has rejected H&R Block's attempts to pull advertisements that make clear to taxpayers that TurboTax hires only CPAs, Enrolled Agents and tax attorneys to assist Americans as they prepare their own tax returns. This stands in sharp contrast to the prior tax experience of some of those who major tax stores advertise for and hire.

"At TurboTax, we exist to help people keep more of their hard-earned money. We do that by combining the ease and convenience of preparing taxes anytime, anywhere, without an appointment, with help from only the most highly qualified and credentialed tax experts.

"We urge taxpayers to take a second and look at who is preparing their tax return at H&R Block. Not only does TurboTax save taxpayers on average $100 or more over H&R Block stores, we stand behind every return with our 100% Accurate Calculations Guarantee and our Maximum Refund Guarantee so customers can be confident they'll get it right the first time.

"Our customers - nurses, teachers, firefighters, U.S. service men and women, people who work the night shift, people who work double shifts, more than 25 million Americans in all, tell us they choose to do their own taxes with TurboTax because they get their maximum refund possible and save more of their hard-earned money in the doing.

"Think about who you trust to help keep what you earned. For 31 years, we've believed that the best person to do your taxes is you. And TurboTax is here for you every step of the way, whenever you need us. It's why more Americans trusted their federal returns to TurboTax last year than to H&R Block stores and all other major tax stores combined."

IRS Extends/Revises Mortgage Deduction Safe Harbor for Assistance Payments To Financially Distressed Homeowners

The IRS has extended through 2015 its safe harbor for homeowners receiving federal or state assistance to compute their deduction for mortgage payments (Notice 2013-7, 2013-6 IRB 477). The IRS also extended the reporting relief provided to mortgage servicers and state and federal agencies.

In Notice 2011-14, 2011-11 IRB 544, the IRS addressed the income tax consequences and reporting obligations for payments made to or on behalf of financially distressed homeowners by state housing finance agencies, HUD’s Emergency Homeowners’ Loan Program, and state programs substantially similar to the EHLP. Payments are treated as payments to homeowners and are excluded from their income under the general welfare exclusion.

Under a safe harbor method for tax years 2010, 2011, and 2012, homeowners in any of the programs could deduct the sum of all payments the homeowner makes during the tax year on the home mortgage, but not in excess of the sum of the amount shown in Box 1 (mortgage interest received), Box 4 (mortgage insurance premiums but only for 2010 through 2011), and Box 5 (real property taxes) on Form 1098 for the year.

Notice 2011-14 provided reporting relief for 2011 and 2012. The IRS also will not assert penalties against a state HFA that fails to furnish Form 1098, as long as the HFA provides a statement to the homeowner and the IRS with the homeowner’s name and tax identification number and the amount of payments to a mortgage servicer. HUD must provide similar information for its payments.

Notice 2013-7 extends the safe harbor method and the reporting relief through 2015 (through 2013 for mortgage insurance premiums). Treasury continues to approve more state programs to which the relief applies. A current list of approved state programs is on Treasury’s website.

Retirement Living: 5 tax tips for future retirees

Rodney Brooks for USA Today writes: There are plenty of things we think about when preparing for retirement. Unfortunately, taxes is not usually one of them.

With a little over a month to go before Tax Day, that could be a problem, according to tax experts and financial planners. Tax planning is an integral part of retirement planning. Not planning for taxes in retirement could be a critical and costly mistake.

So, here are five tax tips for those thinking about or getting ready for retirement.

1. Don't forget about taxes when you look at the size of that retirement nest egg.

"We look at our assets on a gross basis, which creates a wealth illusion," says Robert Fishbein, vice president and corporate counsel at Prudential Financial. "Wealth illusion is simply a term used to describe thinking an asset provides more value for retirement than it does."

In other words, look at our 401(k), pension or IRA balance with the view that we still have to pay taxes when we start withdrawing.

Fishbein's example: Your retirement nest egg is $100,000. You plan to withdraw 3% a year for living expenses, or $3,000. "But if the individual is subject to combined federal and state tax rate of 30%, that $3,000 of income provides $2,100 of after-tax income."

"The after-tax amount is what is there for paying for your housing costs, your food, your utilities," he says. "We live on after-tax dollars so we need to see though our retirement assets so that we see their true value."

2. Diversify your retirement assets by adding a Roth IRA, even if you are close to retirement.

Diversity does three things, says Fishbein. It creates tax-planning options, gives you the ability to manage your tax liability, and sets up a hedge against future tax increases. With a Roth, contributions are not tax-deductible, but withdrawals are tax-free. Thus, in retirement, the Roth will let you withdraw tax-free money along with your taxable income.

"It is hard for people to take the action to convert (a traditional IRA) to a Roth and pay a tax to the government before they have to," he says. "But for some of one's retirement nest egg, it makes sense to convert some of the funds."

3. Remember, you must pay estimated taxes in retirement. If you've been working all your life, you've probably had taxes taken out of your paycheck automatically. But when you retire, that's not necessarily the case. If you're getting pension payments and taking IRA withdrawals, you're going to have to get used to writing a check to the government every quarter.

"They [new retirees] are used to getting withholding," says Paul Gevertzman, tax partner at Anchin, Block & Anchin in New York. "Now they have to make estimated tax payments. They can end up with a big tax bill in April that they never thought about." There may also be a penalty for underpayment of tax.

Some financial institutions will let you withhold taxes from retirement plan withdrawals, but you have to set those up. You can also set up withholding from Social Security checks.

4. Even if you wait until 66, it may not pay to take Social Security the first year of eligibility. If you worked for part of the year, those earnings may push you over the limits and result in taxes on your Social Security, says Ted Sarenski, CEO of Blue Ocean Strategic Capital in Syracuse, N.Y.

"My birthday is Sept. 5," he says. "In the year I turn 66, I already have nine months of income. If I have earned $50,000, I am $10,000 over $40,000 limit. I have to give back $1 for every $3 over that. It may not pay for me to take Social Security (in the first year)."

5. Don't put retirement planning on autopilot. Be aware of changes to the tax laws and how they may affect you. It would be a mistake to not revisit your tax and financial-planning assumptions to make sure they are still accurate, planners say.

For example, the old rules of thumb on how much you should withdraw from your retirement savings each year may no longer apply, says Thomas Langdon, professor at Roger Williams University in Bristol, R.I. The old thinking was 4% a year, but after the financial crisis, he says, new research predicts that is too much and you may run out of money. Three percent may be a better goal.

Tax tips for small business (restaurant)

Bruce Freeman for the Republic writes: Dear Professor Bruce: I am the owner of a restaurant, and I know tax season is fast approaching. As a small business owner, I need some good tips and guidance on what I should be doing. — Answer: Since the year has ended, there is very little that you can do to reduce last year's taxes. However, you can start being proactive right now. Here are a few tips from accountant Michael H. Karu of Levine, Jacobs & Co. of Livingston, N.J.:

-- Recordkeeping is important. The more work you do, the less work required by your CPA, which translates into lower fees. While there are several excellent packages on the market, we recommend using QuickBooks for most small businesses.

-- Review your credit card charges monthly, and ask for lower rates. You always have the ability to go elsewhere if the rates are better. Also, some credit cards try to take the discounts when the charges are submitted. It makes it more difficult to reconcile. Contact them and ask to be billed monthly.

-- Check pricing with other vendors. You may be able to get better pricing by moving some of your purchases to someone new.

-- Review your insurance policies for proper coverage and rates.

-- Consider using a Simple IRA as a retirement vehicle. There are no filing requirements and the company match would be no greater than 3 percent of compensation or the amount contributed by employees, whichever is less.

-- If you have children who are 18 and younger, and have them on your company payroll -- assuming you are either filing as a sole proprietorship or a partnership in which you or you and your spouse own 100 percent -- they are exempt from payroll taxes. Don't confuse that with income taxes. They still are liable for those.

-- If you sell gift certificates, remember to treat them as a liability until redeemed. Also, if you donate gift certificates to your favorite charity, keep track of them and deduct them from sales when redeemed.

-- Workers' Compensation Insurance is required. By getting your coverage through your payroll company, you can avoid dealing with the annual audit, eliminate improper coding of employees, and since the cost is paid weekly, you can better manage your cash flow.

-- If you maintain inventory, be sure to match the invoices to the purchase orders and develop a reorder policy so you don't overstock.

-- Use a time clock to log employees in and out. Overtime is expensive and accurate timekeeping can help to keep those costs down.