Year-end tax saving strategies / A sample of 2013 tax saving and deferral strategies available to you by acting prior to Dec. 31

Barry Dolowich for the Monterey Herald writes:  A s the end of another year rapidly approaches, it is important to review your tax position to insure that you take advantage of every possible tax saving tool. Remember, 2013 tax planning in January 2014 will be too late!

A sample of 2013 tax saving and deferral strategies available to you by acting prior to Dec. 31:

1. Capital gains can be offset by capital losses. Therefore, it is recommended that you review your investment transactions for the year to ascertain your capital gains position. If you have a net capital gain position to date, you may want to review your investment portfolio for a loss position to sell before Dec. 31 to offset your net capital gain. Likewise, you may want to sell appreciated securities to take advantage of a capital loss position. Do not forget the capital gain income you may receive through your mutual funds.

2. Mortgage interest is generally paid in arrears (we pay interest on the first of each month for the prior month's interest). Therefore, by accelerating the Jan. 1 mortgage payment by paying it in December, you will be able to deduct the December 2013 mortgage interest in 2013 instead of 2014. It is recommended that you make this payment by the middle of December to insure that your mortgagee receives and records the payment prior to Dec. 31 and that your Form 1098 agrees with the deduction on your tax return.

3. Charitable contributions, when possible, should be accelerated into December instead of waiting until January. This is the time you should be packaging your unwanted clothing and furnishings for pickup by your favorite charity. Make sure to get a detailed receipt and retain it for your tax return preparer.There also can be tremendous tax saving opportunities by donating appreciated property (stocks, bonds, real estate, etc.) to charitable organizations by deducting the fair market value of the gift without having to recognize the capital gain.

4. Other deductible expenses, such as medical expenses, medical insurance premiums, real estate taxes, state estimated tax payments, etc., should be reviewed for possible acceleration into 2013. Please note that lumping of medical expenses in the same year may help you exceed the 10 percent (7½ percent for those over 65) adjusted gross income limitation.

5. Deferral of income into 2014 can often be accomplished with a little planning. There are numerous situations in which you may be able to elect to delay the receipt of taxable income until January.

6. Real estate tax payments can be accelerated and deducted in 2013 by paying your 2013/2014 second-half bill due April 10, 2014 by Dec. 31, 2013 instead.

The above is just a sampling of simple strategies that can help you reduce your income tax liability. Prior to taking any of the actions detailed above, I recommend that you consult your tax adviser to determine if you may be subject to the Alternative Minimum Tax. In addition to tax savings planning, this is the time of the year that many taxpayers should consider a tax projection to minimize, or eliminate, potential underestimation penalties.

2013 Year-End Tax Planning Strategies for Individuals and Businesses

Duane Morris writes: Many of our clients have finalized their tax planning for the year. For those who have not and with only weeks remaining in 2013, there are still a number of opportunities to do some last-minute planning to save as much as possible.

For most taxpayers, year-end provides the last opportunity for tax planning. Unlike previous years, however, tax planning for 2013 will be more challenging due to the comprehensive tax law changes made by the American Taxpayer Relief Act of 2012 ("the Act"), the provisions of and confusion with the Affordable Care Act and the recent Supreme Court decision on same-sex marriage. In addition, many tax incentives are scheduled to expire after 2013, unless Congress chooses to extend them. Such uncertainty is likely to further compound effective planning.

While last year's strategy was more often than not to accelerate income and postpone deductions due to the anticipated higher tax rates in 2013 than 2012, this year, many would likely benefit from reversing such strategy and instead accelerate deductions and postpone income.

To assist you in navigating your year-end tax options through the myriad of changes, we highlight below key changes and offer practical year-end planning tips for individuals and businesses with respect to the changes. It is important to note that year-end tax planning should not occur in a vacuum and each taxpayer's particular situation and goals should be considered with the aim of minimizing taxes to the greatest extent possible over a two-year period (not only for 2013 but also for 2014). Before making any moves, taxpayers may want to consult with their tax advisors.

Planning for Individuals

Top Tax-Bracket Increases

While the Bush-era tax cuts for lower- and middle-income taxpayers were extended permanently in 2013, the 39.6% bracket was restored, increasing the highest rate by 13%, from 35%. Your federal income-tax bracket is determined by two factors: your taxable income and your tax-filing status. The top brackets start at the following income levels:

Filing Status	2013	2014
Married Filing Joint and Surviving Spouse	$450,000	$457,600
Head of Household	$425,000	$432,200
Single	$400,000	$406,750
Married Filing Separately	$225,000	$228,800

For those with income greater than the amounts listed in the chart above, your tax bill will likely increase. For example, wage earners making between $500,000 and $600,000 will likely owe between $10,000 and $15,000 more this year.

Manage Your Tax Bracket

The lower your tax bracket, the lower your tax obligation. One way to lower your tax bracket is to defer income and accelerate deductions. For individuals, deferring income may also help to reduce or avoid adjusted gross income-based (AGI) phase-outs of various itemized deductions and credits.

Planning Tips:

Select income deferral strategies to consider include:

• Postpone asset sales that generate gains until 2014.
• Defer receipt of bonuses until 2014.
• Delay stock option exercises.
• Transfer funds from interest-bearing accounts to Treasury bills.
• Maximize retirement plan contributions.
• Consider like-kind exchanges.
• Enter into installment sale agreements.

Select options for accelerating deductions to consider include:

• Prepay 2014 property and state income taxes in 2013.
• Prepay January 2014 mortgage payment in December.
• Bunch large out-of-pocket medical expenses into one year to overcome the 10% of AGI threshold for taxpayers under age 65.
• Accelerate large charitable deductions into 2013, rather than 2014.
• Gift appreciated stock to avoid tax on the appreciation while obtaining a deduction for the full value of the stock.
• Sell loss stocks.
• Establish a health savings account (HSA) and contribute the maximum amount allowed.

Caveat: Beware of the Alternative Minimum Tax (AMT). A decision to accelerate a deduction or to defer an item of income to reduce taxable income for regular tax purposes may not always provide a tax benefit because of the AMT. If you determine that you will be subject to the AMT, you may benefit from reversing the strategy. Since the AMT rate (up to 28%) is lower than the maximum regular tax rate (39.6%), you may actually reduce your overall tax liability by accelerating income into 2013 and deferring deductions that typically trigger AMT to 2014 (assuming 2014 is a non-AMT year). See our discussion under AMT below for methods to manage exposure to AMT.

Planning Tip:

Executors and trustees should consider distributing income to avoid the compressed tax brackets for estates and trusts. The highest rate for estates and trusts kicks in at only $11,950 for 2013.

Increased Capital Gains and Qualified Dividends Tax Rates

Long-term capital gains and qualified dividends receive preferential tax treatment, although not as favorable as years before 2013. For 2013 and later, this income is taxed at the following rates:

• 20% for taxpayers in the highest (39.6%) tax bracket (up from 15%);
• 15% for taxpayers in or above the 25% tax bracket, but below the 39.6% tax bracket; and
• 0% for taxpayers below the 15% tax bracket.

The 28% and 25% rates still apply for collectibles and unrecaptured Code Section 1250 gains (e.g., gain from sale of real estate), respectively. Complex netting rules apply when a taxpayer has both short- and long-term capital losses. Only long-term gains are eligible for the favorable tax rate; however, long-term losses may offset ordinary income up to $3,000 ($1,500 if married filing separately).

Planning Tips:

• Consider holding capital assets for 12 months or more to avoid tax at ordinary income tax rates for short-term capital gains.
• Consider utilizing prior-year capital loss carryforwards by generating capital gains.
• Consider efforts to avoid unusual nonrecurring income, which could push capital gains into the higher capital gains bracket. Spreading this income over 2013 and 2014 may escape the increased rate.
• Consider taking advantage of the netting rules to minimize the net gain or loss subject to tax.
• Consider converting investment income taxable at regular rates, such as interest from bond funds, into qualified dividend income from dividend paying stocks to take advantage of the preferential tax rate for qualified dividends.

New 3.8% Medicare Tax on Net Investment Income

In addition to the increased rates in 2013, there is now the new 3.8% tax on net investment income (NII). The tax applies to most investment income, including capital gains and dividend income; most rental income (excluding rental income derived by real estate professionals); passive activity income; royalties; and net gain attributable to the disposition of property other than property held in a trade or business. Gain from the sale of interests in partnerships and S-corporations is also considered NII.

Taxpayers with modified adjusted gross income (MAGI) over $200,000 who file individually or $250,000 for married couples filing jointly ($125,000 if married and filing separately) could be subject to this new tax.

Illustration:

Luke, a single filer, has $180,000 in wages. The taxpayer also received $90,000 from a passive partnership interest, which is considered NII. Luke's MAGI is $270,000.

Luke's MAGI exceeds the threshold of $200,000 for single taxpayers by $70,000. Luke's NII is $90,000.

The NII Tax is based on the lesser of $70,000 (the amount that Luke's MAGI exceeds the $200,000 threshold) or $90,000 (Luke's NII). Luke owes NII tax of $2,660 ($70,000 x 3.8%).

Caveat: While distributions from retirement plans are not subject to the NII tax, you should be aware that a large distribution could push MAGI above the threshold. Taxpayers near the threshold should consider revising the timing of distributions from retirement plans or accelerating above-the-line deductions, such as classroom expenses for teachers and educators; student loan interest deductions; health savings account deductions; moving expenses; self-employment health insurance; retirement plan contributions; alimony; and domestic production activities deduction for certain types of businesses, to name a few.

Planning Tips:

• Consider shifting taxable investments to tax-exempt investments.
• Consider selling loss stocks to offset capital gains recognized earlier in the year.
• Consider installment sale treatment for 2013 sales to spread income over multiple years.
• Take steps to increase participation in a passive activity to qualify as a material participant and potentially avoid the NII tax.
• Consider an election to group multiple passive activities to qualify as a material participant. Taxpayers subject to the NII tax have a unique opportunity in 2013 or 2014 to regroup their pass-through and/or rental activities. Special rules allow taxpayers to group certain rental and/or trade or business activities based on the facts and circumstances surrounding the relation of those activities and will allow taxpayers to group activities together if they constitute an appropriate economic unit. This strategy may potentially allow taxpayers to utilize suspended passive losses to offset non-passive income. As these rules are complex, it may be worthwhile to consult with a qualified tax professional before making these moves.
• Consider contributing to a Roth IRA instead of a traditional IRA. Qualified Roth IRA distributions are not included in either MAGI or NII, while traditional IRA distributions increase MAGI.

New Additional 0.9% Medicare Tax on Wages/Self-Employment Income

An additional 0.9% Medicare tax is now imposed on wages and self-employment income above the NII thresholds detailed above. Unlike Social Security tax, there is no cap on the amount of wages subject to the new Medicare tax. Employers are required to withhold the additional tax to the extent an employer pays wages to an employee in excess of $200,000 during a calendar year, regardless of the taxpayer's filing status or other wages and/or compensation.

Caveat: Although married taxpayers may individually fall below the withholding threshold, their combined wages may exceed $250,000, thus subjecting them to the additional tax when they file their return. The same issue may also arise for taxpayers working for more than one employer. Failure to ensure adequate withholding and/or estimated tax payments could result in the imposition of the underpayment of estimated tax penalty.

Planning Tip:

Married taxpayers whose combined wages exceed the threshold and taxpayers with combined wages from more than one employer that exceed the threshold should consider increasing their withholding by filing an updated Form W-4 with their employer or making an estimated tax payment to potentially avoid underpayment of tax penalties.

Alternative Minimum Tax (AMT) Considerations

The AMT was originally aimed at preventing the most affluent taxpayers from avoiding tax. However, since it was not indexed for inflation, the AMT has impacted an increasing number of middle-income taxpayers each year. Congress attempted to correct this by annually "patching" the AMT with increased exemption amounts.

Taxpayers who traditionally monitor their exposure to AMT should continue to do so, as certain items will continue to trigger AMT. They include, but are not limited to:

• Medical expenses;
• Certain mortgage interest from home equity indebtedness;
• Real estate taxes;
• State and local income taxes;
• Miscellaneous itemized deductions, such as investment expenses;
• Income generated by the exercise of incentive stock options; and
• Installment sales.

Planning Tips:

• Taxpayers not liable for AMT in 2013 but who were liable in prior years may be eligible for a minimum tax credit against their regular tax liability.
• Taxpayers not expecting an AMT liability in 2013 but could experience one for 2014 should consider accelerating some of the deductions that typically trigger AMT. It may be prudent not to accelerate too many expenses, as you will creep toward AMT.

If you determine that you will be subject to the AMT, you may benefit from reversing the strategy of accelerating deductions and deferring income. Since the AMT rate (up to 28%) is lower than the maximum regular tax rate (39.6%), you may actually reduce your overall tax liability by accelerating income into 2013 and deferring deductions to 2014 (assuming 2014 is a non-AMT year).

Select methods for accelerating income to consider include:

• Cash basis taxpayers can speed up their billing and collection process.
• Cash basis taxpayers who sell property and realize a large long-term capital gain in 2013 can accelerate income by electing out of the installment method.
• Accelerate IRA and other retirement plan distributions into 2013.
• Harvest gains from investment portfolios.
• Convert a traditional IRA to a Roth IRA.
• Settle lawsuits or other claims that will generate taxable income.

Same-Sex Marriage

As a result of the Supreme Court decision in U.S. v. Windsor and a related IRS Revenue Ruling issued shortly thereafter, same-sex married couples may now file joint federal income-tax returns. The state where a couple was married rather than the state where a couple resides determines a same-sex couple's marital status for federal tax purposes. Civil unions and registered domestic partnerships recognized under state law do not qualify.

Caveat: Beginning in 2013, legally married, same-sex couples must file either as married filing jointly or married filing separately.

Planning Tip:

For tax years prior to 2013, same-sex spouses should consider consulting their tax advisor to determine whether any refund opportunities are available for amending prior-year returns with the filing status change. The statute for a refund claim is open for three years from the date the return was filed, or two years from the date the tax was paid, whichever is later.

Charitable Giving

Contributions can be an effective way of reducing taxable income. They are also a sizeable itemized deduction that is not added back when figuring taxable income for purposes of the AMT. Subsequently, the timing of charitable contributions can have a key impact on year-end tax planning.

Caveat: IRS audits are on the rise, so be sure to obtain acknowledgement letters for donations greater than $250. Cancelled checks alone are insufficient to support a gift greater than $250.

Planning Tips:

• For taxpayers expecting to be in a higher tax bracket in 2014, consider deferring a sizeable charitable contribution into 2014. Alternatively, for taxpayers expecting a lower 2014 tax bracket, consider accelerating contributions into the current year.
• Consider gifting appreciated stocks held more than one year to avoid capital gains tax while still getting a deduction for the fair market value of stock.
• Taxpayers over age 70½ should consider making a tax-free distribution of up to $100,000 from an IRA to a qualified charity. This option is currently set to expire at the end of 2013.

Itemized Deduction and Personal Exemption Phase-Outs

The phase-out of itemized deductions (often called the "Pease" Limitation) has returned for 2013. The Pease Limitation was temporarily suspended from 2010 to 2012 and allowed taxpayers to enjoy the full benefit of their itemized deductions, regardless of their adjusted gross income. For 2013, if taxpayers filing as married filing jointly have adjusted gross income of $300,000 or higher ($250,000 for single, $150,000 for married filing separately and $275,000 for head of household), itemized deductions will be reduced by 3% of the amount by which their adjusted gross income exceeds the thresholds. This reduction is capped at 80% of itemized deductions.

A similar phase-out will also occur for personal exemptions where the total amount of the exemption is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer's adjusted gross income exceeds the same thresholds mentioned above.

The phase-out of personal exemptions and the limitation on itemized deductions both reduce exemptions and deductions for certain taxpayers and, therefore, increase the amount of federal income tax by typically 1% to 2%.

Illustration:

Barbara and Vince have AGI of $412,500 for 2013 and two children. The threshold for a married couple is $300,000; thus, their income exceeds the threshold by $112,500.

Personal exemption phase-out: Dividing that sum by $2,500 equals 45. So (45 x 2%) of their $15,600 exemption allowance [four exemptions totaling $15,600 (4 x $3,900)] is phased out, leaving them with a reduced exemption deduction of $1,560. Assuming Barbara and Vince are in the 33% federal tax bracket, the phase-out costs them an additional $4,633 ($15,600 x 90% x 33%) in tax.

Pease Limitation – Assuming itemized deductions total $24,000, they must reduce their itemized deductions by $3,375 (3% of $112,500), but the reduction must not exceed 80% of the deductions. The phase-out is the lesser of $3,375 or $4,800, which is 80% of $24,000, or $19,200. The Pease Limitation will cost them an additional $1,114 ($3,375 x 33%).

Planning Tips:

• Taxpayers affected by these phase-outs should consider adjusting estimated taxes or withholding amounts to avoid underpayment of tax penalties.
• Deploying some of the AGI-reducing techniques throughout this Alert should help reduce the impact of the Pease Limitation and personal exemption phase-out.

Roth IRA Conversions

Taxpayers have the option of converting their traditional IRA into a Roth IRA, although the conversion is not tax-free. Amounts converted are includible in adjusted gross income, but may no longer be spread over two years. A conversion will not be subject to the 10% early withdrawal penalty. Taxpayers who believe that a Roth IRA is more advantageous than a traditional IRA, and who want to remain in the market for the long term, should consider converting traditional IRA money invested in beaten-down assets into Roth IRAs if they are eligible to do so. They can also recharacterize their conversion back to a traditional IRA if they determine the investment has underperformed subsequent to the conversion. This "recharacterization" must be done before October 15 of the subsequent tax year.

Caveat: Although the conversion amount is not included in NII for purposes of the new NII tax, it is included in MAGI for use in establishing the threshold for the same. It is essential to consider the impact of conversion upon NII tax.

Take Advantage of Expiring Individual Tax Incentives

Many popular tax incentives are set to expire at the end of 2013, unless Congress extends them. Since there are no guarantees, you should consider taking advantage of these expiring provisions in 2013.

• State Tax Deductions - Taxpayers living in states with no individual income tax may elect to claim sales and use taxes as an itemized deduction instead of state income taxes. This election may also be advantageous for retired taxpayers receiving payments from retirement funds not subject to a state-level income tax.
• Teachers' Classroom Expense Deduction - An above-the-line deduction for certain expenses incurred by elementary and secondary school teachers is allowed.
• Exclusion of Cancellation of Indebtedness on Principal Residence - Income discharge of qualified principal residence indebtedness, up to $2 million ($1 million for married taxpayers filing separately), which applied to discharges before January 1, 2013.
• Mortgage Insurance Premium Deduction - Mortgage insurance premiums are treated as qualified residence interest.
• Tuition Expenses - An above-the-line deduction for qualified tuition and related expenses is allowed.
• Residential Energy-Efficiency Tax Credit - A 10% credit is available for the cost of (1) qualified energy-efficiency improvements and (2) residential energy property expenditures, with a lifetime credit limit of $500 ($200 for windows and skylights). Taxpayers considering such improvements may wish to accelerate these expenditures into 2013.
• Alternative Fuel Vehicle Refueling Property Credit - Taxpayers may claim a 30% credit for qualified alternative fuel vehicle refueling property placed in service in 2013. Credits are also available for energy-efficient new homes and appliances.

Planning for Businesses

Similar to individuals, businesses seeking to maximize tax savings through year-end planning should consider the use of tried-and-true timing techniques for income and deductions, as well as utilizing tax incentives that are set to expire. Additionally, pass-through entities, such as partnerships, limited liability companies and S corporations, should consider the impact year-end planning strategies may have on their business owners.

Take Advantage of Operating Losses

A business with a loss in 2013 may be able to use that loss to generate cash in the form of a quick net-operating-loss carryback refund. This type of refund may be of particular value to a financially troubled business that needs a fast cash infusion. It may be prudent to forego carrying the net-operating-loss back to previous years and to save it for future years since tax rates will be higher. Individual net operating losses can be carried forward for a period of 20 years.

Take Advantage of Expiring Business Tax Incentives

Many popular business tax incentives are also set to expire at the end of 2013, unless Congress extends them. Consider taking advantage of these expiring provisions.

• Section 179 Depreciation Deduction - The Section 179 depreciation deduction is set to drastically decrease if Congress fails to extend the current limits into 2014. For tax years beginning in 2013, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. A limited amount of expensing (up to $250,000 of the $500,000 limitation) may also be claimed for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property. Unless Congress changes the rules, for tax years beginning in 2014, the dollar limitation will drop to $25,000, and the beginning-of-phase-out amount will drop to $200,000. Expensing will also not be allowed for qualified real property as referenced above. The generous dollar ceilings that apply in 2013 mean that many small- and medium-sized businesses that make timely purchases will be able to currently deduct most if not all of their outlays for machinery and equipment.
• First-Year Bonus Depreciation - Most new machinery and equipment (as well as software) bought and placed in service in 2013 qualifies for a 50% bonus first-year depreciation deduction. Unless Congress extends this tax break, property bought and placed in service in 2014 (other than certain specialized property) will not qualify for the 50% bonus first-year depreciation deduction. Thus, businesses planning to purchase new depreciable property may want to do so in 2013.
• Shorter Recovery Period for Certain Leasehold Improvements - Special rules permit qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property to be depreciated over a 15-year recovery period rather than the normal 39-year recovery period used for nonresidential real property. These provisions expire at the end of 2013. Thus, if your business is contemplating any such improvements, placing such improvements in service in 2013 may significantly increase your depreciation deductions.
• Work Opportunity Credit - For 2013, businesses are eligible for a 40% tax credit for qualified first-year wages paid or incurred during the tax year to individuals who are members of a targeted group of employees, generally those working in excess of 400 hours annually. The credit is reduced for those employees working less than 400 hours. This credit is not available after 2013.
• Special S Corporation Basis Rules for Charitable Contributions of Property - For 2013, the decrease in an S shareholder's stock basis by reason of a charitable contribution of property is equal to the shareholder's pro rata share of the adjusted basis of such property. This provision expires for contributions made in tax years beginning after 2013. As a result, for contributions made in tax years beginning after 2013, the amount of the basis reduction is the shareholder's pro rata share of the fair market value of the contributed property.
• Expiration of Reduced Recognition Period for S Corporation Built-in Gains - An S corporation may owe tax if it has net recognized built-in gain during the applicable recognition period. Generally, the applicable recognition period is 10 years. However, for purposes of determining the net recognized built-in gain for tax years beginning in 2012 or 2013, the recognition period was reduced from 10 to five years. Thus, no tax is imposed on the net recognized built-in gain of an S corporation if the fifth tax year in the recognition period preceded 2012 or 2013. This favorable rule applies separately with respect to any C corporation asset transferred in a carryover basis transaction to the S corporation. After 2013, the recognition period returns to 10 years. Thus, to escape gain recognition on property with built-in gain, you would have to hold the property for more than 10 years.

New Business Provisions

Businesses are also impacted by the many tax law changes in 2013. Select provisions are highlighted below.

• Disposition of Business Interests Subject to New Investment Tax - The new 3.8% percent tax on NII above the threshold, discussed above, became effective in 2013. This new tax generally covers sales of interests in a partnership or S corporation that are considered passive activities on the taxpayer's individual income tax return.
• Patient Protection and Affordable Care Act - The Patient Protection and Affordable Care Act (ACA) includes several provisions that may affect employers, including the shared responsibility provisions, also known as the "employer mandate." Originally, the employer mandate was scheduled to take effect on January 1, 2014. However, this has been delayed, and the shared responsibility provisions will not take effect until January 1, 2015. Under the employer mandate, a penalty is imposed on certain large employers that do not offer health insurance coverage, offer health insurance coverage that is unaffordable or offer health insurance coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60%.
• New Rules Apply to Dispositions of Business Property - The IRS recently issued rules dealing with dispositions of property, applicable to tax years beginning after December 31, 2013. The new regulations preserve the potential benefit of claiming a loss on disposed structural components without requiring taxpayers to use the general asset account rules.
  • The regulations provide that the building, including its structural components, is the asset for disposition purposes. Therefore, taxpayers are not required to recognize a loss on the disposition of a structural component; however, they may elect to claim a loss on the disposition of a structural component without having to identify the component as a separate asset before the disposition event.
  • Similar to the rules for capitalization and repairs, these rules can also be retroactively adopted.

The IRS also released final regulations governing how taxpayers treat materials and supplies, as well as repairs and maintenance costs for tangible and real property. These regulations are lengthy and complex in nature, and taxpayers should consult with their tax advisors to gain an understanding of the new regulations and set a policy for how these business expenses are treated subsequent to the required adoption date of tax years beginning after December 31, 2013.

• New Rules Apply to Property Purchased by Businesses - The IRS recently issued final repair regulations governing when taxpayers must capitalize and when they can deduct their expenses for acquiring, maintaining, repairing and replacing tangible personal property, which impact virtually all businesses. While these new rules apply to tax years beginning after December 31, 2013, businesses can adopt them retroactively back to the start of 2012. Because these rules are quite taxpayer-friendly, retroactive adoption of these rules could result in significant tax refunds. The new rules are extremely complex in nature and relate to materials and supplies, repairs and maintenance, among others.

Tax Whistleblower -- If You Get A Rejection Letter From The IRS

Dean Zerbe for Forbes writes: After teeth gnashing and working through conspiracy theories, you have 30 days to appeal to Tax Court.  A good starting point is to call your assigned case manager at the IRS whistleblower office.  The IRS has been moving to be better about illuminating to whistleblowers about their rejection letter – although it’s still a tea leaf reading exercise to a large extent.   The current policy of the IRS is not to disclose in either the rejection letter or any other discussions the reason why a rejection letter was issued. In order to obtain the background and the processing of the claim, the whistleblower will have to petition the Tax Court and seek the award evaluation material through formal discovery.  In the current proposed regulations which as of this date have neither been published or adopted there maybe relief for the whistleblower to obtain such information through an administrative process rather than the formal method of Tax Court.  There are usually three general reasons why your submission to the IRS may have been rejected:

1)   POOR PRESENTATION.  The material and information you have wasn’t presented in the best way possible to the IRS (see — 5 Keys to success for whistleblower awards)(shockingly one of the biggest problems I still see is people holding back key information or documents – don’t do that;  ANSWER – consider resubmitting (particularly if you have significant information that wasn’t previously provided) or if you believe you badly misfired on the first filing;

2)  ISSUE NOT OF INTEREST – NOT WORKED.   In a recent  panel I was on with the Director of the Whistleblower Office, Stephen Whitlock, he reminded everyone that there are issues of strong interest to the IRS (ex. offshore banking and accounts) and some issues of less interest (the fact that you believe your neighbor can’t afford the giant RV sitting in his driveway).

The IRS has limited resources – it has to pick and choose cases.  Unfortunately, with the IRS staffing reduced from 107,000 to 87,000 and the burden of the Affordable Care Act and out-of-control identity theft – now even good whistleblower submissions sometimes have trouble getting the attention they deserve.    Also, your filing may have other troubles with it — such as an old case; limited dollars at issue; uncertain legal matter; difficulty in recovering from the taxpayer, etc –see 5 Keys cited above.

ANSWER – you need to take a hard look at your case – if you think that it has the elements of a strong case then perhaps refile if there is justification (one above), otherwise maybe time to stop cursing the darkness and move on.

BAD ANSWER – file with the tax court asking the court to direct the IRS to investigate the taxpayer you blew the whistle on.  The tax court will say “no, no, no . . . oh let me think — no” – they do not have the authority to direct the IRS to conduct an

A number of whistleblowers have made this filing with the Tax Court – they have all been rejected.

3) ISSUE OF INTEREST TO IRS – WORKED BUT NO RECOVERY.  Ah this is the tricky one.  The questions you are trying to smoke out of the IRS are two:  1) Did the IRS pick up the ball on the issues the whistleblower raised regarding the taxpayer (in some cases the whistleblower will have a sense of what has happened to their case because of contacts with the taxpayer; working with the IRS; public records; or other indications or discussions.  If the issue or issues that the submission were in fact examined by the IRS and there was no adjustment made to the issue, the Tax Court does not have the authority under the whistleblower statute to make a redetermination of the findings.

- Did the IRS/US Government  a) take action against the taxpayer but collected other proceeds against the taxpayer — other payments – ex. penalties under title 18 or 31 (as opposed to title 26 – the tax code) b) take action on the issue you raised but are not giving you credit for what you brought to the table; c) take other action on the taxpayer (ie on an issue different than the one you raised?);  or, d) take action against a related party?

If you suspect (or even better — have evidence) that the above may be the case – you need to think hard about protecting your rights and filing with the Tax Court.  The IRS Chief Counsel has been putting forward proposed regulations that give an extremely narrow reading of the IRS whistleblower law – and in doing so is inappropriately barring whistleblowers from awards or full awards in some cases.  I will only touch on these issues briefly here – but to get a fuller understanding – read the National Whistleblower Center’s submission on the proposed regulations.

Here is a thumbnail of some of the key issues that could be gumming up the works for a whistleblower receiving an award:

A)     Collected proceeds – the law is broad saying that the whistleblower can collect from any proceeds but the IRS is seeking to interpret “proceeds” to mean only for tax, (tax) penalties and interest (on the tax).   For example, if a whistleblower blows the whistle on a taxpayer with an offshore account and the IRS subjects the taxpayer to title 31 penalties (not title 26 tax penalties) – the IRS is saying the whistleblower is out of luck.  The scope of “collected proceeds is being actively litigated in Tax Court now (full disclosure – I have two cases on this issue now before the Court).

B)      Proceeds based on – the IRS may view that they already had (or were going to have) the information you provided.  For example, that they were already aware of the issue or were planning to raise the issue.  The law requires that for a whistleblower to get an award the IRS must “proceed based on” the information provided by the whistleblower.  However, again this has been interpreted by IRS Chief Counsel against the whistleblowers and is setting an inappropriately high bar.  If you believe the IRS has used your information to proceed with an action (or to assist an ongoing action) against a taxpayer and that has resulted in collected proceeds then again you may want to consider going to Tax Court.

C)      Related action – if the whistleblower raised an issue and the IRS proceeds against the taxpayer, the whistleblower should get credit for the action raised and any related action against the taxpayer (for example, the whistleblower files a Form211 stating that taxpayer A is failing to report income, and in the audit the IRS finds out that taxpayer A also had an unreported offshore account – and takes only action on the unreported account – that is a related action).  However, a caution on attenuation – particularly with a major company – if you tell the IRS that a Fortune 500 company is engaged in a tax shelter don’t look for a recovery for a wholly separate transfer pricing issue at the same company’s subsidiary.

D)     Related party – The whistleblower tells the IRS about individual B engaged in a tax shelter and tax lawyer C assisting the individual.  The IRS doesn’t take action against individual B the whistleblower named – but does take action against tax lawyer C’s other clients who engaged in the tax shelter – that is a related party action and the whistleblower should get credit for any collected proceeds.

NOTE:  The taxpayer may have agreed with the initial findings of the Service and made full payment. This fact might be discerned from various SEC reports when looking at publicly traded corporations. Thus the whistleblower assumes that there is strong likelihood of an award. However, the taxpayer generally has two years in which to file a claim for refund especially if the dollar adjustments are large. The Service will not inform a whistleblower that this is the reason no award letter has been issued and generally these types of cases can be tied up in litigation for years.

I don’t encourage you to just run to the Tax Court because you got a rejection letter.  While the Tax Court has been friendly to whistleblowers in general – it is a time-consuming effort and suggest it’s important to discuss closely with legal counsel the reasons for going to court and whether it makes sense – and what relief you are seeking (and whether the Tax Court can grant it).  However, you can’t think deep thoughts forever – you do need to giddy up – you have 30 days from the day the letter was MAILED (not when you got it – so hold on to that envelope and letter) to file in Tax Court – whether you live in the U.S. or abroad.   The Tax Court is very strict on their jurisdiction and arguments about dentist appointments, weddings as for why you missed the 30 day deadline are of zero interest to the judges.

Confidentiality.  I recognize from working with whistleblowers for years that anonymity is important to many whistleblowers.  The Tax Court has been quite understanding of these concerns for whistleblowers and has granted in a number of cases that the whistleblower can proceed anonymously and even under seal.

Lastly, the best defense against getting a rejection letter is to ensure that you’ve done all you can to make a good filing and also to consider other issues/problems with your filing while it is still being considered – which I discussed in a previous column.  Best to keep that rejection letter from being sent in the first place.

Tax-Powered Philanthropy / Doing well by doing good could be even better in 2013

Carol Kroch for Wealth Management writes: The year 2013 is particularly good for affluent, charitably inclined individuals and families to give to favorite causes.  The strong equity performance in 2013 has helped many affluent families feel more comfortable making charitable gifts.  And today’s increased rates on higher-income taxpayers can make charitable giving more attractive from a tax perspective than last year.

The good news is that, generally, the value of a deduction increases when rates are higher. However, it’s always important to run the numbers, to see what your client’s actual tax savings will be.  The amount of the charitable income tax deduction depends on many factors, including the kind of asset given, the nature of the charitable recipient and the donor’s adjusted gross income (AGI). In addition, donated assets reduce a client’s taxable estate.

Benefits of Strategic Giving

Philanthropic planning can help your client save taxes while supporting favorite charities. And some philanthropic strategies can also benefit the entire family. The strategy that’s right for the client will depend on their giving and personal financial goals, the assets they wish to give and the level of complexity with which they are comfortable.

For example, writing a check to charity is easy, will likely provide an income tax deduction and will remove assets from the estate, but won’t offer as many tax planning opportunities as some of the strategies described below.  While there are many other forms of charitable gifts, I’ve highlighted those particularly suitable for high-net-worth families.

IRA Direct Charitable Distribution

The individual retirement account charitable “rollover,” scheduled to expire at year end, permits individuals aged 70½ or older to transfer up to $100,000 directly from an IRA to “qualified” charities without recognizing income or taking a charitable contribution deduction.  The distribution can also satisfy some or all of a client’s required minimum distribution.  The rollover contribution rulecan be helpful for taxpayers seeking to minimize their modified AGI tostay below the threshold for the new 3.8 percent surtax on net investment income. It can also help clients who: (1) don’t itemize deductions; (2) have already maximized their permitted charitable contribution deductions; (3) live in a state that doesn’t provide for charitable contribution deductions from state income tax; or (4) who can otherwise benefit from a lower amount of AGI.

IRA assets are particularly attractive to give to charity, rather than to leave for heirs, as heirs will pay income tax on the entire IRA distribution. Particularly if the estate is subject to estate tax, the combined wealth transfer and income tax burden on IRA assets can be extremely high.

Outright Gift of Appreciated Securities

An outright gift of appreciated securities that a client has held for at least a year can be a very effective giving strategy.  The client will generally be allowed a full fair market value (FMV) deduction for the donated securities, up to 30 percent of AGI, if donated to a public charity; 20 percent of AGI if donated to a private foundation. Beware, however, of advising a gift of closely held stock to a private foundation, as a full FMV deduction isn’t allowed. In addition to the deduction itself, a client will also save the capital gains taxes (both federal and state, if any) that would have applied if they sold the securities and donated the proceeds. Put differently, a gift of stock to a charity allows a client to put more in the charity’s hands without giving up more of their resources.

Gifts Benefitting the Donor and Charity

Charitable remainder trusts (CRTs) and charitable lead trusts (CLTs) are more complex forms of charitable giving, but they provide opportunities to benefit both charities and family members.

A CRT provides income to the donor or his family, for a term or for life, with the remainder going to charity.  Donors receive an income tax deduction for the actuarial value of the remainder interest. When a CRT sells appreciated assets, the capital gains tax is deferred, making a CRT particularly attractive to a donor whose goal is to diversify an asset and then derive an income stream from it. A CRT must pay out annually at least 5 percent of its initial value or 5 percent of its FMV.  In today’s low interest rate environment, a CRT can be an attractive way to provide a fixed income stream at considerably higher rates than most fixed income investments are yielding.

Basically the inverse of a CRT, a CLT provides an annual payment to charity for a term, with the remainder interest going to family members or trusts for their benefit. The value of the income or lead interest, determined under an IRS valuation rate, reduces the gift tax cost of the transfer of the remainder. Using a CLT permits the transfer of appreciation above the Internal Revenue Service valuation rate to family, free of estate tax. CLTs are particularly attractive in today’s low interest rate environment. CLTs may be structured in different ways to take advantage of income tax deductions or to leverage the generation- skipping transfer tax exemption.

Private Foundation

If a client wishes to contribute substantial assets to charity and is prepared to devote more time and expense to planning and administering a charitable entity, a private foundation could be an attractive option. Private foundations—typically funded by a single donor or family—provide numerous estate planning and income tax benefits, which may be even greater this year under the new higher tax rates.  Private foundations allow charitably minded individuals and families to maintain more control, create a long-term charitable legacy, and unite family members around a common philanthropic goal.

For a client who is philanthropically inclined and wishes to maximize gifts to charitable causes while reducing wealth transfer, income, capital gains or net investment income tax, there’s a charitable giving strategy to meet his goals.