ExactCPA.com Simple & Clear 2012 Tax Rates

2012 Tax Rates

2012 Tax Rates Schedule X - Single
If taxable income is over --	But Not Over --	The Tax is:
$0	$8,350	10% of the taxable amount
$8,350	$33,950	$835 plus 15% of the amount over $8,350
$33,950	$82,250	$4,675 plus 25% of the amount over $33,950
$82,250	$171,550	$16,750 plus 28% of the amount over $82,250
$171,550	$372,950	$41,754 plus 33% of the amount over $171,550
$372,950	no limit	$108,216 plus 35% of the amount over $372,950

2012 Tax Rates Schedule Y-1 - Married Filling Jointly or Qualifying Widow(er)
If taxable income is over --	But Not Over --	The Tax is:
$0	$16,700	10% of the taxable amount
$16,700	$67,900	$1,670 plus 15% of the amount over $16,700
$67,900	$137,050	$9,350 plus 25% of the amount over $67,900
$137,050	$208,850	$26,637.50 plus 28% of the amount over $137,050
$208,850	$372,950	$46,741.50 plus 33% of the amount over $208,850
$372,950	no limit	$100,894.50 plus 35% of the amount over $372,950

2012 Tax Rates Schedule Y-2 - Married Filing Separately
If taxable income is over --	But Not Over --	The Tax is:
$0	$8,350	10% of the taxable amount
$8,350	$33,950	$835 plus 15% of the amount over $8,350
$33,950	$68,525	$4,675 plus 25% of the amount over $33,950
$68,525	$104,425	$13,318.75 plus 28% of the amount over $68,525
$104,425	$186,475	$23,370.75 plus 33% of the amount over $104,425
$186,475	no limit	$50,447.25 plus 35% of the amount over $186,475

2012 Tax Rates Schedule Z - Head of Household
If taxable income is over --	But Not Over --	The Tax is:
$0	$11,950	10% of the taxable amount
$11,950	$45,500	$1,195.00 plus 15% of the amount over $11,950
$45,500	$117,450	$6,227.50 plus 25% of the amount over $45,500
$117,450	$190,200	$24,215 plus 28% of the amount over $117,450
$190,200	$372,950	$44,585 plus 33% of the amount over $190,200
$372,950	no limit	$104,892 plus 35% of the amount over $372,950

 

Miscellaneous 2012 Tax Rates
Personal Exemption	$3,650
Business Equipment Expense Deduction	$250,000
Prior-year safe harbor for estimated taxes of higher-income	110% of your 2008 tax liability
Standard mileage rate for business driving	55 cents
Standard mileage rate for medical/moving driving	24 cents
Standard mileage rate for charitable driving	14 cents
Child Tax Credit	$1,000
Unearned income maximum for children before kiddie tax applies	$950
Maximum capital gains tax rate for taxpayers in the 10% or 15% bracket	0%
Maximum capital gains tax rate for taxpayers above the 15% bracket	15%
Capital gains tax rate for unrecaptured Sec. 1250 gains	25%
Capital gains tax rate on collectibles	28%
Maximum contribution for Traditional/Roth IRA	$5,000 if under age 50 $6,000 if 50 or older
Maximum employee contribution to SIMPLE IRA	$10,500 if under age 50 $14,000 if 50 or older
Maximum Contribution to SEP IRA	25% of compensation up to $49,000
401(k) maximum employee contribution limit	$16,500 if under age 50 $22,000 if 50 or older
Self-employed health insurance deduction	100%
Estate tax exemption	$3,500,000
Annual Exclusion for Gifts	$13,000

 

IRS Reminds Taxpayers to Report 2010 Roth Conversions on 2012 Returns

The Internal Revenue Service reminds taxpayers who converted amounts to a Roth IRA or designated Roth account in 2010 that in most cases they must report half of the resulting taxable income on their 2012 returns.  Normally, Roth conversions are taxable in the year the conversion occurs. For example, the taxable amount from a 2012 conversion must be included in full on a 2012 return. But under a special rule that applied only to 2010 conversions, taxpayers generally include half the taxable amount in their income for 2011 and half for 2012, unless they chose to include all of it in income on their 2010 return.  Roth conversions in 2010 from traditional IRAs are shown on 2012 Form 1040, Line 15b, or Form 1040A, Line 11b. Conversions from workplace retirement plans, including in-plan rollovers to designated Roth accounts, are reported on Form 1040, Line 16b, or Form 1040A, Line 12b.  Taxpayers who also received Roth distributions in either 2010 or 2011 may be able to report a smaller taxable amount for 2012. For details, see the discussion under 2012 Reporting of 2010 Roth Rollovers and Conversions on IRS.gov. In addition, worksheets and examples can be found in Publication 590 for Roth IRA conversions and Publication 575 for conversions to designated Roth accounts.  Taxpayers who made Roth conversions in 2012 or are planning to do so in 2013 or later years must file Form 8606 to report the conversion.  As in 2010 and 2011, income limits no longer apply to Roth IRA conversions.

U.S. Foreign Account Tax Compliance Act: New Reporting Obligations On Foreign Financial Institutions About U.S. Individuals’ Accounts, Investments

Cadwalader, Wickersham & Taft  writes: The Foreign Account Tax Compliance Act (FATCA), signed into law on March 18, 2010, was enacted to combat tax evasion by U.S. citizens and residents who have offshore accounts and assets.  Under FATCA, beginning in 2014, the U.S. Internal Revenue Service (IRS) will receive annual reports (''FFI Reports'') from certain foreign financial institutions (FFIs)—including foreign banks and foreign investment funds that disclose information regarding accounts and investments held or owned at the FFI by U.S. citizens and residents, including lawful permanent residents who hold U.S. ''green cards'' (''U.S. Persons'').  Before FATCA, foreign financial institutions were not required to report to IRS information about accounts held directly or indirectly by U.S. Persons, except in limited situations.  Now, for the first time, the United States has instituted a tax reporting regime that imposes a potential penalty on FFIs that refuse to report information about U.S. Persons who hold accounts or investments with them. FATCA imposes a 30 percent withholding tax on payments to an FFI of:

• U.S.-source passive income;
• the gross proceeds from the sale of assets that produce U.S.-source income; and
• foreign-source ''passthru'' payments from other FFIs to the extent attributable to their U.S. assets, unless the FFI enters into an agreement (an ''FFI Agreement'') with IRS and complies with the terms of the agreement, or the foreign government of the country in which the FFI is located enters into an Intergovernmental Agreement (IGA) with IRS.

This withholding regime is intended to encourage FFIs to enter into FFI Agreements to report accounts and investments by U.S. Persons.   The filing of FFI Reports with IRS will substantially increase the likelihood that U.S. Persons who have failed to file tax returns and required reports with IRS will face severe penalties, including substantial fines, the payment of back taxes, and possible criminal penalties, including potential imprisonment.   Indeed, FFI Reports may, among other things:

• reveal foreign accounts that U.S. Persons failed to report previously to the United States on an annual Report of Foreign Bank and Financial Accounts (''FBAR'') or contradict information that U.S. Persons previously submitted to IRS on these or other forms;
• reveal income earned by non-resident U.S. Persons who have little connection to the United States other than their citizenship or green card status and have not paid U.S. income taxes; and/or
• otherwise reveal that U.S. Persons did not comply with their U.S. tax obligations.

IRS has instituted voluntary disclosure programs designed to permit delinquent taxpayers to become compliant. Under these programs, taxpayers generally must pay all back taxes, interest, and at least some percentage of the otherwise applicable civil penalty. In return, however, IRS frequently agrees not to refer the case to the Department of Justice for criminal investigation and prosecution. However, only persons not currently under investigation are eligible for such treatment.

For individuals and entities that hold foreign accounts and may not have complied with all of their federal and state tax liabilities, now may be the ideal (and perhaps last) time to take advantage of IRS voluntary disclosure programs to disclose and address their tax liabilities without criminal punishment.

This article addresses in detail the potential U.S. civil and criminal exposure individuals may face in the wake of FATCA, and potential strategies to assess and address any such exposure.

Pre-FATCA Reporting Requirements Involving Foreign Assets for U.S. Persons

Unlike most other countries, the United States taxes the worldwide income of its citizens and residents. Accordingly, U.S. Persons wherever they reside are generally obligated to file income tax returns and pay U.S. tax on income anywhere in the world.⁴

In light of this regime, many individuals living and working outside the United States are often surprised to learn that they have tax-related obligations to the United States. These include:

• adults born in the United States who have not set foot in the United States since they were very young;
• individuals who are citizens because they are foreignborn children of citizens or because they are foreignborn children adopted by U.S. citizen parents, provided certain conditions are met; and
• lawful permanent residents who acquired green cards many years ago, but who have left the United States without having terminated their green card status.

As discussed further below, these individuals are liable for U.S. tax and may be subject to increased risk of civil and criminal penalties when FFI Reports begin to be filed with IRS.

For those individuals who were unaware of their obligations, or thought they would escape detection, now may be the ideal time for them to address their tax liabilities, because the voluntary disclosure programs may help them avoid criminal penalties. After FATCA goes into effect, this window may close.

Tax Return Filing Obligations, Reporting Requirements Involving Foreign Assets

Generally, a U.S. citizen or resident must file a U.S. income tax return for 2011 if he or she had gross income in excess of $9,500 if single or $19,000 if married and filing jointly ($3,700 if married and filing separately).  In addition to the standard income tax return, U.S. Persons may be required to submit information to IRS regarding foreign trusts, gifts and bequests from foreign persons, and investments in foreign entities. These can include Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation; Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations; Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation; Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships; Form 8621, Information Return by a U.S. Shareholder of a Passive Foreign Investment Company; and Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities.   Finally, under the same legislation that adopted FATCA, U.S. Persons who hold an interest in foreign accounts or who own foreign stocks and debt obligations that generally aggregate more than $50,000 at year-end or $75,000 at any time during the year must report such accounts and investment assets to IRS on Form 8938, Statement of Specified Foreign Financial Assets, commencing for calendar year 2011.⁶

FBAR

In addition, U.S. Persons must also annually file an FBAR (Form TD F 90-22.1) with the U.S. Treasury to report their interests in, or signature authority over, financial accounts located outside the United States with foreign financial institutions if the aggregate value of such financial accounts exceeds $10,000 at any time during the calendar year. The obligation to file an FBAR is imposed by the Bank Secrecy Act and not by the Internal Revenue Code of 1986, as amended (the Code).

These financial accounts include many accounts that would be covered by FATCA, including brokerage, demand, savings, checking, commodity futures, or options accounts, insurance policies or annuities with cash values, and shares in certain mutual funds or similar pooled funds.⁷ Importantly, a U.S. Person must file an FBAR even if he or she has no current income from any of these accounts and is not required to file a U.S. income tax return.

FATCA Imposes New Requirement for FFIs to Report Information on Foreign Accounts

As described briefly above, FATCA requires FFIs to provide—either directly or through a foreign government intermediary—IRS with certain information about U.S. Persons or entities with substantial U.S. owners that hold debt or equity interests in, or have financial accounts maintained at, such FFIs^.  Generally, an FFI will be required to report the following information for each calendar year with respect to any account covered by FATCA :

• name, address, and taxpayer identification number of each account holder;
• the account number;
• the account balance or value;
• payments made on the account during the calendar year; and
• such other information as IRS requires in the FFI

Agreement or in other reporting forms and instructions. Accordingly, U.S. Persons, including dual residents, maintaining significant accounts with foreign banks and other financial institutions are very likely to be reported to IRS under FATCA commencing in 2014 with respect to calendar year 2013 accounts and income.

Potential Civil and Criminal Penalties

U.S. Persons that have not paid their U.S. tax liabilities or filed their required tax returns face severe civil penalties, including substantial fines, the payment of back taxes, and criminal penalties, including possibly imprisonment. FFI Reports will substantially increase the likelihood that these penalties will be asserted.

Civil Penalties

Civil penalties can be significant. For example, if a U.S. Person has failed to file a tax return, that person can be required to pay back taxes and numerous penalties, including a potential penalty equal to 75 percent of the unpaid taxes.  As another example, if an individual has failed to file an FBAR, that individual can be required to pay a fine of at least $10,000 per violation. In the case of willful failure to file an FBAR, the individual will be subject to a civil penalty equal to the greater of 50 percent of the aggregate value of the individual's reportable accounts or $100,000, plus possible criminal prosecution.  If an individual has failed to file a Form 8938, that individual will be required to pay the IRS $10,000 for each failure, plus $10,000 per month for each month such failure continues after the taxpayer is notified of the delinquency, up to $50,000.  Many of these civil penalties may be reduced or eliminated if the taxpayer can show ''reasonable cause'' for such failure.¹³ Reasonable cause, at a minimum, generally requires a taxpayer to have exercised ordinary business care and prudence in determining his or her tax obligations. The burden of proof is on the taxpayer to make an affirmative showing of reasonable cause and generally provide supporting information and certifications under penalties of perjury.

Criminal Penalties

Criminal penalties might also be imposed in some circumstances, resulting in substantial fines and possibly imprisonment. Generally, criminal felony liability may exist where the U.S. Person acted willfully to avoid tax or filing obligations. Such willful intent generally will exist only where the relevant U.S. Person knew of his or her obligation, but took deliberate steps to avoid satisfying that obligation.

The following are just a few of the most potentially relevant federal statutes:

• 26 U.S.C. Section 7201: This statute makes it a federal crime for any person to willfully seek ''in any manner to evade or defeat'' any U.S. tax payment. A person found guilty of violating this statute may be fined up to $100,000, imprisoned for up to five years per violation, and will be liable for the costs of prosecution.
• 26 U.S.C. Section 7206: This statute makes it unlawful for any person to willfully file a false U.S. tax return, Form 8938, or other required IRS filings discussed above. A person found guilty of violating this statute may be fined up to $100,000, imprisoned for up to three years per violation, and will be liable for the costs of prosecution.
• 26 U.S.C. Section 7203: This statute, a federal misdemeanor, may have particular application in matters involving FATCA. It makes it a crime for any person to willfully fail to file tax returns, Form 8938, or other IRS required filings discussed above. A person found guilty of violating this statute may be fined up to $25,000, imprisoned for up to one year per violation, and will be liable for the costs of prosecution.
• 31 U.S.C. Section 5322(a): This statute makes it unlawful for any person to willfully fail to file an FBAR. A person found guilty of violating this statute may be fined up to $250,000 and imprisoned for up to five years.
• 18 U.S.C. Section 1001: This statute makes it unlawful for any person to knowingly make any false or misleading statement to the federal government. According to available IRS guidance regarding this statute, this charge is only ''normally invoked in connection with false documents or statements submitted to an Internal Revenue agent during the course of an audit or investigation.''¹⁴ A person found guilty of violating this statute may be fined up to $250,000 and imprisoned for up to five years.

Strategies to Assess and Address Civil and Criminal Penalty Exposure

Because of the above civil and criminal exposure, and the imminent implementation of FATCA, it is very important that U.S. Persons promptly take steps to satisfy or settle their liabilities and mitigate their potential civil or criminal liability.

If such individuals or entities determine that they owe U.S. taxes or have failed to file their U.S. tax returns and face potential civil or criminal exposure, they can consider a number of options to potentially address this exposure, including the following:

Voluntary Disclosure: Take advantage of IRS programs that encourage the voluntary disclosure to IRS of past failures to file returns or reports and pay taxes. Under these programs, taxpayers generally must pay all back taxes, interest, and at least some percentage of the otherwise applicable civil penalty. In return, however, IRS frequently agrees not to refer the case to the Department of Justice for criminal investigation and prosecution. However, only persons not currently under investigation are eligible for such treatment. Once FFI Reports start being filed, the voluntary disclosure option may no longer be available.

New Procedure for 'Low Compliance Risk' U.S. Persons Residing Outside United States: IRS recentlyannounced a special procedure aimed at individualU.S. Persons living outside the United States who mayhave only recently learned of their filing obligationsand generally owe less than $1,500 in taxes due ineach delinquent year or otherwise present a low riskof failing to comply with their tax obligations. Underthis procedure, individuals will be required to file alldelinquent tax returns, including all related informationreturns for the past three years, and file delinquentFBARs for the past six years. Taxpayers claimingreasonable cause for abatement of penalties mustalso submit a dated statement under penalties of perjuryexplaining why there is reasonable cause for previousfailures to file.¹⁵

Quiet Disclosure: Some U.S. Persons have filed amended returns, reports, and other information, and paid all back taxes and interest, but have not entered the voluntary disclosure programs or expressly notified IRS of past failures. IRS strongly discourages this approach, and has warned that this approach may result in increased scrutiny and increased risk of criminal prosecution.¹⁶

These options and others carry considerable potential risks and rewards. For example, even voluntary disclosure will not guarantee that one will not face criminal prosecution. Whether to engage in any of the above strategies or others will depend entirely upon the unique facts and circumstances surrounding a particular U.S. Person's situation, and the facts and circumstances should be examined carefully.

How Does The 3.8% Net Investment Income Tax Apply To Real Estate Professionals?

Ana Coldwell for Ostrow Reisin Berk & Abrams writes:  If you own real estate that generates income, you could be paying an additional 3.8% net investment income tax (NIIT) which goes into effect in 2013. For the sake of discussion, let's assume that your adjusted gross income (AGI) is over the relevant threshold ($250,000 in the case of a married couple filing jointly). Even if your AGI is generally low, there may come a year when you sell property, giving you a high adjusted gross income and significant income subject to NIIT in that year. Is there any tax planning that can be done to offset the NIIT?

First, we need to understand the regulations that have been in place for real estate activities. These regulations are referred to as the passive activity loss rules (Code Section 469). They were part of the Tax Reform Act of 1986, and were meant to put a stop tax shelters. However, Section 469 led to fairly complicated regulations. Previously, you only had to worry about these rules if your real estate activity had losses that you wanted to use to reduce your AGI. If your real estate activities have been profitable, then you likely have not heard of these regulations. Now these rules may be more relevant to your profitable real estate activities. An activity that would be considered passive under Section 469 that produces net income will add to the amount subject to NIIT.

The NIIT includes "rents" among the items that it taxes. However, it appears that rents are excluded from the tax base if they are derived in the "ordinary course" of a trade or business that is not subject to the passive activity loss rules of Section 469. Rental activities are considered passive under IRC 469. There appears to be an exception: The passive rule does not apply to "real estate professionals" (see, "Are You a 'Professional'?" (March 23, 2011) at ORBA Blog, which provides a basic understanding of what it means to qualify as "real estate professional").

To be a "real estate professional," simply owning and managing multiple real estate activities may not be enough to treat a real estate activity as non-passive. You need to "materially participate" in each of the activities. The term "materially participate," for IRS purposes, consists of seven different, specific tests of which only one needs to be met (see, "Are You a 'Professional'?" (March 23, 2011) at ORBA Blog). The activities in which you do not "materially participate" will not be treated as non-passive under the real estate professional rules.

There is an election that can be made to group rental activities to (possibly) meet the material participation requirement to be considered a "real estate professional." If you do not meet the material participation tests for each separate rental property, then a valid grouping election can be made which considers your material participation in the aggregate. In the past, this has been a tax planning strategy to allow an individual to meet the real estate professional rules where there have been disallowed losses. The annual rental losses would then be allowed, despite the unavailability of any passive income since this "group" of rental properties is not subject to the passive activity loss rules. The tax planning now extends to individuals that have rental income (not just losses). According to how the regulation is currently being understood, if you instead have any net rental income from this group of rental activities, the "real estate professional" designation is considered to involve the "active conduct of a trade or business," it would not be included for purposes of calculating NIIT otherwise subject to the 3.8% NIIT (assuming you are over the AGI threshold).

The AICPA also takes the same position with regard to "real estate professionals" who otherwise avoid the passive activity loss rules on rental properties that they own because they "materially participate." In published guidance, they state that "rents are subject to the 3.8% NIIT unless the rent is derived in the ordinary course of a trade or business." Therefore, "investors in real estate would have more reason to look at the active real estate investors' rules to determine if they could avoid this tax via the active classification" (e.g., as a "real estate professional"). Thus, real estate investors need to consider the possibility of making an [grouping] election to treat all interests in rental real estate as one activity, thereby aggregating all real property interests into one trade or business" (i.e., so as to be able to meet at least one of the "material participation" standards).

If you have real estate activities with income, then the 3.8% net investment income tax may be avoided if you take some time do the tax planning.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Xero adds bank reconciliation to mobile accounting

Leading online accounting software firm Xero continues its rapid innovation with a world-first launch of bank reconciliation on mobile, available on both Apple iOS and Android devices. Bank reconciliation is incorporated into the latest versions of Xero Touch now available from the Apple App Store and Google Play.

Xero was the first cloud accounting software to introduce daily automated bank feeds for business owners, transforming the time-consuming bank reconciliation process into something people could actually finish in seconds and enjoy doing. And now, Xero is the first online accounting software to bring bank reconciliation to mobile - and it’s fast.

Bank reconciliation on Xero Touch automatically finds and suggests matching transactions, supports transfers and allows notes to be attached to statement lines.

“For many small business owners, checking bank accounts is the first thing they do in the morning. Keeping on top of cashflow is paramount. By reconciling bank data over coffee, at the bus stop, or on the train small businesses take advantage of downtime and can arrive at the office up-to-date on their accounts and cashflow,” says Xero Mobile Product Manager Matt Vickers.

Accounting on mobile devices improves cash flow and management of small business accounts on a number of fronts. Bank reconciliation is the latest feature for Xero Touch, which also lets you check on all account balances in one place, send invoices while still in the field, and manage expenses by taking photos of receipts.

“We’re now doing things you could never dream of with legacy desktop software,” says Vickers. “Getting key accounting features into small business owners' hands, anywhere and at anytime, has completely changed the way people run their business.”

5 Tax Errors That Rob Your Portfolio Of Returns

At Seeking Alpha, a writer who described themselves as " I am long IVV, IJR (stock symbol-investing)  I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article."

How can an investor minimize taxes and maximize returns? I'll begin by flagging a few common mistakes, and then offer a few suggestions.

5 Costly Tax Errors and How to Correct Them

Error #1: Putting REITs, Bonds, and other yield-generating investments in a regular brokerage account or taxable portfolio. The cost of doing so is clear: you are taxed on the yield at regular intervals, normally upon receipt (assuming you're a cash-basis taxpayer). Investing these same assets into a tax advantaged account such as an IRA can offer an investor a double tax-benefit: (1) he could possibly deduct all or part of what he contributes to the IRA and (2) the money in the IRA is not taxed until pulled out of the IRA. Of course, there are other considerations to keep in mind. Investing in an IRA offers tax advantages, at the expense of liquidity (i.e. the funds are effectively trapped in the IRA until the investor is 59 1/2).

Suggestion: After weighing the non-tax considerations of doing so, investors might consider using a tax-advantaged account such as an IRA for yield-generating assets. If an investor wants to allocate more money to fixed-income assets than the contribution limit allows, then he might consider letting his fixed-income allotment spill over into municipal bonds. Municipal bonds generate interest that is free from federal income tax. Bonds issued by the investor's home city yield interest that is free from city, state, and federal income tax. Many brokerages offer such funds (and several ETFs exist as well). Before investing in them, however, compare the after-tax returns of the municipal bonds and comparable corporate bonds to ensure that the bonds are worth the investment.

Error #2: Owning municipal bonds in a tax advantaged account, such as an IRA or 401(k). The primary tax benefit of municipal bonds stems from their tax-free interest. Notice that the interest rate of municipal bonds are lower as a result of this tax-benefit; comparing the interest rates of municipal bonds and comparable corporate bonds reveals this disparity. By investing in municipal bonds in a tax-advantaged account, investors needlessly suffer the lower interest rate of municipal bonds. The investor could hold the higher-interest rate bearing corporate bonds in the tax advantaged account, without being taxed on that interest either (until the asset is sold and pulled out of the account).

Suggestion: All else equal, an investor should try to avoid investing in municipal bonds in tax-advantaged accounts. While municipal bonds may have a place in an investor's taxable, brokerage account, an investor is better off holding other fixed-income assets--due to their corresponding higher interest--in a tax advantaged account.

Error #3: Failing to harvest tax losses. Most investors realize that short or long-term capital losses can offset short or long-term capital gains. Use this tax benefit effectively: when selling an asset at a gain, consider selling another asset at a loss, if the asset was held for a comparable time period. More sophisticated ways of harvesting tax losses also exist. Consider this example. Suppose it comes time for an investor to rebalance his portfolio. His underperforming asset is IJR. His overperforming asset is SPY. A tax strategy that harvests his tax losses, without overly altering his portfolio allocation, is as follows. He sells a portion of SPY, which generates capital gains. To offset those gains, he sells IJR. This results in no capital gains paid. But, the investor needs to make up for the IJR sold, because he still wants exposure to small cap stocks. So, he buys enough of IWM to compensate for the IJR sold and to bring his portfolio back into balance. Notice that the IRS targets "wash sales," which includes buying "substantially identical" securities within a 30 day window (26 USC § 1091). But upon examination, this doesn't look like a wash sale. He is buying two different types of securities that track two different indexes. Of course, he should consult a tax attorney or accountant for a definite answer and to ensure compliance with the Internal Revenue Code. But assuming this suffices, his portfolio isn't harmed much as a result. Both IJR and IWM are comprised of small cap stocks and give him similar exposure.

Suggestion: Think about harvesting tax losses, when it comes time to sell an asset at a large gain.

Error #4: Rebalancing portfolios by selling and buying. When it comes time to rebalance, a common strategy is to sell overperforming assets and buy underperforming assets. But this takes two bites into an investor's capital: (1) he pays commissions on both the sale and the ensuing purchase, and (2) he pays capital gains on the sale of the overperforming asset. A much more tax-efficient strategy is to only buy the underperforming asset to bring the allocation back into balance. Notice that this avoids any capital gains taxes and it results in only one level of commissions (on the purchase).

Suggestion: For those who have the extra cash to do so, rebalancing by buying more of an underperforming asset is a wise tax move. For those who do not have enough funds to do so, consider harvesting tax losses to minimize the tax burden of rebalancing.

Error #5: Ignoring commission-free funds. This is not a tax strategy per se, but it bears mentioning. Dollar-cost averaging is a useful concept, but the commissions involved can eat away at an investor's capital. If an investor wants to buy a set amount of SPY each month, for example, he will end up paying a hefty sum in commissions each year. A strategy of investing set amounts at regular intervals--such as monthly--works best with commission-free funds. Yet nonetheless, too many investors ignore the cumulative effect of commissions on their overall returns.

Suggestion: Think about constructing a portfolio out of commission-free index funds, and then investing a portion into those funds on a regular basis.

Conclusion

These are merely five ways that investors undercut their returns by ignoring tax implications. Hopefully, these suggestions will help others craft a more tax-efficient portfolio. Please keep in mind that there other considerations--such as liquidity, the effects of short versus long-term capital gains/losses, non-tax considerations, and the legal elements of a wash sale--which this article omits, but which should also be taken into account before making any investment decisions. Consult a financial advisor, attorney, and/or perform your own research, before making relevant investment decisions.

Additional disclosure: This communication is for informational purposes only. As of this writing, the author is not an attorney or a certified financial planner. Any U.S. Federal Tax advice contained in this communication is not intended or written to be used, and cannot be used, for avoiding penalties under the internal revenue code or promoting, marketing or recommending to another party any tax-related matters addressed herein. This post is not intended as a solicitation or endorsement for legal services, and all data and all information is not warranted as to completeness and are subject to change without notice and without the knowledge of the author.

At What Tax Rate Are Munis Attractive?

Daniel Morillo for iSharesblog.com  writes: With all the fiscal negotiation drama in Washington, interest in municipal securities has been particularly high in the last few months. We’ve talked a lot about munis on the blog including an ongoing call that they are attractive compared with Treasury securities, particularly for taxable investors looking for income.   Last week, Matt Tucker helped explain how investors can determine if a muni or a corporate bond offers a higher yield after taxes.

But we continue to field inquiries from investors who want to go beyond comparing muni yields with Treasury yields or benchmark corporate yields. They contend that comparison misses the possibility that muni yields appear comparatively high because they may reflect a justifiable difference in their credit quality and default potential. In addition, the on-again off-again talk that the muni tax exemption itself may be at risk as part of fiscal negotiations in Washington adds to the concern that a munis comparison with Treasuries may not be an apples-to-apples comparison.

To tackle the credit quality concern I want to run through a comparison of muni yields against corporate debt yields. In particular, I’ve taken the yields of the standard 20 Bond Buyer General Obligation Index (which consists of 20-year AA-rated munis) and the yields of the Moody’s AA-rated corporate index (which are long-term and similar maturity to the Bond Buyer index)[1]. This comparison is likely conservative because historical evidence suggests that munis generally have lower default rates than corporates of similar ratings[2]. Indeed, we’ve seen that even after the financial crisis munis have shown much lower default rates than many financial commentators predicted.

To make the comparison I have focused not on the yield difference between the two types of securities, but I have instead computed the tax rate at which the two yields would be equivalent for a taxable investor. For example, if an investor faces a tax rate of 25% then a 3% yield in a tax-exempt muni security is equivalent to investing in a corporate that yields 4% — because that yield will be taxed at 25%, resulting in an after-tax yield of 3%. In this example the “breakeven tax rate” for the 3% tax-exempt muni compared to the 4%-yield corporate is a 25% tax rate.

The chart below shows this breakeven tax rate since the early 1990s. The chart also shows the actual effective tax rate for households in the top quartile of income as reported by the Tax Policy Center until 2009 (the most recent year available).

Two things are immediately obvious from the chart. First, the breakeven tax rate has, at least on average, been reasonably close to the actual effective tax rate experienced by upper-income households (those most likely to buy and hold muni securities). Second, and most important, the current breakeven tax rate, while higher than during the depths of the crisis, is well below its historical mean and below the actual level of effective tax rates over the last 15 years.

In addition to the historical comparison, current breakeven tax rates are likely to be particularly low compared to actual tax rates going forward since the recent fiscal cliff “fix” has increased marginal rates for upper income households. In addition, the 3.8% Affordable Care Act (ACA) Net Investment Income Tax is now in effect for investors holding income-generating securities in their portfolios.

So, why are we seeing this big gap between breakeven tax rates and effective tax rates? As Matt has noted on this blog, part of the explanation is that liquidity and supply issues in the muni market last year coupled with concerns that the muni tax exemption may be at risk has driven some investors to look elsewhere for yield. This has opened up a potential valuation gap between munis and other taxable fixed income instruments.

What is the bottom line for investors? This comparison chart should help demonstrate that muni yields are attractive for investors facing a tax rate this year that is similar to or higher than the one they experienced in the last few years. This is the case even when compared to corporate securities of similar maturities and credit rating. Indeed, given the higher tax rates of 2013 one would have to believe that the muni tax exemption would have to be reduced quite significantly — far beyond what has been on the table in the various fiscal negotiations — to change the basic conclusion that muni yields appear attractive not just compared to Treasuries but also across a broader range of fixed income instruments.

Daniel Morillo, PhD, is the iShares Head of Investment Research and a regular contributor to the iShares Blog.  You can find more of his posts here.

Bonds and bond funds will decrease in value as interest rates rise and are subject to credit risk, which refers to the possibility that the debt issuers may not be able to make principal and interest payments or may have their debt downgraded by ratings agencies. A portion of a municipal bond fund’s income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains, if any, are subject to capital gains tax. Federal or state changes in income or alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. An investment in the Fund(s) is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

BlackRock does not provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

---

[1] Data is from Bloomberg. Data is obtained as an index of yields, in percent, at the monthly level (the Bond Buyer Index is weekly, so the last week of every month in that case) and averaged across 6-month rolling periods.

[2] See “U.S. Municipal Bond Defaults and Recoveries,1970-2011” from Moody’s investors service.

Social CRM Batchbook To Introduce New Integration with Xero During Xerocon, Global Conference For Online Accounting Software XERO

Raymond Bonachea, vice president of marketing atsocial CRM Batchbook, during the global accounting conference Xerocon, Feb. 21-22, will formally introduce the cloud-based software’s new integration with online accounting software Xero. Small businesses and entrepreneurs who use Batchbook and Xero together efficiently organize customer data, open invoices and To-Dos in a single place, offering a streamlined view of personal and financial exchanges with their contacts. This provides them with true clarity into the personal nuances that live in their contact database – insight that helps businesses increase revenue.

With a presentation and live demonstration on the conference’s Add-on and API Day, Bonachea will outline how to: 

●    Import Xero contacts into Batchbook
●    View segmented lists of Xero contacts
●    See which contacts have open invoices and assign invoice related To-Dos

Hosted by Xero, the event promises a glimpse of company’s future, its global vision, a sneak peek at upcoming features, new revenue streams for savvy accountants and more.

How to ease the growing tax bite: 4 considerations for investing in the new tax landscape.

Mark Jewell of the AP for My San Antonio writes:  This year's tax-filing deadline is a couple months away, and many investors are beginning to review whether they made any rash moves with their portfolios to trigger potentially unnecessary tax bills. It's a good instinct to follow because it can become a teachable moment on how to become a tax-savvy investor. But it's perhaps more important now to be mindful of new tax law changes approved in the deal that lawmakers struck in January to avoid the “fiscal cliff.”

Those changes could have a big effect on taxes filed in 2014 and beyond, especially for those in the top income bracket. They'll pay higher rates — and will want to invest with a heightened sense of tax implications starting this year. The rate increases are intended to help the U.S. get its fiscal house in order, but the medicine isn't entirely bitter. Historically low rates remain intact for investors in middle-income brackets, and the worst-case scenario rate hikes that were on the table during congressional negotiations failed to become law. Another plus: The high uncertainty over taxes in recent years is largely gone. President Barack Obama and congressional leaders continue to discuss raising revenue by capping or limiting some tax exemptions. But the rate levels in the Jan. 1 agreement to avert the fiscal cliff are expected to remain in place for the foreseeable future. There's no sunset date on the rates, unlike the Bush-era tax cuts approved in 2003. “The most important thing is to have a plan, and now you can plan,” says Duncan W. Richardson, chief equity investment officer with Eaton Vance, an investment manager whose specialties include tax-efficient investing. Tax-savvy investors keep in mind the type of account in which they hold their investments. Only withdrawals are taxed from IRAs and 401(k)s, so these tax-advantaged accounts are good places to keep investments that are likely to generate a tax bill. Taxable accounts are the place to hold municipal bonds and mutual funds that invest in munis because the income they generate is exempt from federal taxes. Here are four other considerations for investing in the new tax landscape:

1. Taxes higher, still modest historically: In the year ahead, investors should focus on their tax rates for capital gains and dividends. In the middle-income tax brackets — those with adjusted gross income of $72,501 to $223,050 for married couples filing jointly and $36,251 to $183,250 for single filers — the rate remains 15 percent on long-term capital gains. Those are the profits from selling such investments as stocks or funds held for at least a year. The 15 percent on long-term gains is the same rate that applies to income from stock dividends. But the rate for capital gains and dividends has climbed to 18.8 percent for joint filers with more than $250,000 in income and $200,000 for single filers. That factors in a new 3.8 percent investment income surtax to help pay for President Obama's health care overhaul. The biggest hit will be felt by top-bracket investors — those with adjusted gross income of more than $450,000 for couples and $400,000 for individuals. They now pay 23.8 percent on long-term gains and dividends, including the health care tax. They will pay nearly 9 cents more in taxes than they did last year on each dollar of dividend income flowing into a taxable account.

Despite that increase, these rates are modest historically. In the 1970s, the top rate on dividend income was 70 percent, for example.

2. Short-term gains, big tax bite: The distinction between a long-term capital gain and a short-term gain remains important for investors in the top brackets because tax rates continue to be far higher for the latter. Short-term gains are triggered by profits earned from a taxable investment held less than a year. They're taxed as ordinary income, such as wages, and high earners now face higher income tax rates. Those in the top bracket now pay a steep 43.4 percent including the health care tax, up from 35 percent. That's nearly 20 cents on the dollar greater than what they pay on long-term gains.

3. Muni bond advantage grows: The rate also rises to 43.4 percent for income that top earners receive from taxable bonds, such as corporate bonds. As a result, those investors can realize a greater tax advantage than they could previously from investing in municipal bonds and muni funds, rather than in taxable bonds.  Investors don't have to pay federal taxes on income from munis, which invest in local and state government bonds. Munis are also free of state taxes if they limit investments to the state where you live. So consider whether munis' tax advantages will offset the higher pretax returns you'd normally expect from investing in a taxable bond fund. Look at tax-equivalent yield. It tells how big of a return you'd need from a taxable investment to equal the return of a tax-free bond.

4. Backlog of taxable gains building up: Stocks have more than doubled since the market hit bottom in early 2009. That huge gain means there's a growing likelihood that investors will be hit with tax bills from capital gains. When fund managers sell investments that appreciated in value, they pass on the taxable gains to investors each year. Managers have been able to limit their investors' tax exposure in recent years by using losses incurred during the stock market meltdown of 2008 to offset gains. But that's no longer so easy, now that stocks have made such a sustained climb. Tax exposure is typically greater at funds that trade holdings frequently. It's an especially important consideration for wealthy investors, now that they're paying higher rates. One option is to choose funds with moderate to low portfolio turnover. A fund with a turnover ratio higher than 50 percent — meaning more than half the holdings changed hands in a year — could be one to avoid. If you're investing in an actively managed fund, consider those using strategies to limit capital gains — they often call themselves “tax-managed” funds.

It's not easy to sort out all the options on your own, so it might be worthwhile to seek professional help from a financial adviser.

A New Prescription for Taxes (Health Care & Taxes: Track Expenses Carefully Going Forward)

Anna Wilde Mathews for the Wall St. Journal writes: This year, several important tax changes tied to the federal health overhaul will start affecting consumers—including new limits on medical deductions and higher tax rates for some higher-income taxpayers. Tax advisers say consumers need to be aware of the tweaks. Some may need to take action to ensure they're complying with the new requirements or to try to reduce their exposure.

One key shift can already be spotted by many employees, though it isn't costing them money: Many larger employers now have to include on the W-2, the annual federal wage-data tax form, a figure that represents the cost of the worker's health coverage. The sum includes both the employee's and employer's contributions. It appears in box 12 after the letters DD.

The disclosure, required under the health-care law, highlights the value of the tax break given to employer-provided health coverage, the cost of which isn't counted as taxable income. Many employees don't know how much is spent on their health benefits, and the sum will be a shock to some.

Policy makers in Washington have floated the idea of capping the amount of deductions for higher-income taxpayers, a move that could limit the health-coverage exemption.

With this new disclosure, employees "become aware of how much money this is, and the impact on them if some or all of it became taxable," says Gary Claxton, a vice president at the Kaiser Family Foundation. The upshot would be to increase their taxable income.

Some employees already are feeling the effects of another tax change tied to the health law. For 2013, the annual contribution to flexible-spending accounts—which let you pay for qualifying medical expenses with pretax dollars—was capped at $2,500.

Some other changes may not yet be so obvious. One raises the bar for the itemized deduction that taxpayers can take for their medical expenses, a category that includes their out-of-pocket payments for things like doctor visits, prescriptions, physical therapy and hospital bills. For 2013, expenses can only be deducted if they exceed 10% of your adjusted gross income, up from 7.5% for 2012. For people age 65 and older, the 10% doesn't kick in until 2017.

The cutoff was already high, says Kristin Esposito, technical manager at the American Institute of CPAs, and "now it's going to be harder to meet that limit."

Tax experts say consumers should be careful in tracking their expenses to make sure they don't miss anything that might qualify and help them get over the threshold. Ms. Esposito says some taxpayers may also want to consider moves that hold down their income, perhaps by deferring some compensation or delaying plans to cash in an investment that would bring a gain.

The other big changes will affect individuals with adjusted gross income of more than $200,000 and married couples making above $250,000 who file jointly; for spouses who file separately, the threshold is $125,000 each. For wages above these cutoffs, taxpayers this year face a Medicare tax rate of 2.35%, up from 1.45% in 2012.

The increase comes with an added wrinkle, says Debera Salam, director of payroll information services for Ernst & Young. In the past, employers were easily able to withhold the proper amount of Medicare tax because the rate was consistent. Now, because employers won't know a spouse's income, they may not get the figure right.

To ensure the amount is correct and they aren't at risk of a tax penalty, higher-income taxpayers have "got to be proactive," says Ms. Salam, and talk to a tax adviser. Among the options: Employees can make their own estimated payments throughout the year, or file a W-4 form with the employer to request the proper withholding.

For the higher earners, the health law also includes a new 3.8% tax on unearned income above the thresholds mentioned earlier. That hits income from sources such as rent and investments, rather than wages. Robert S. Keebler, a certified public accountant in Green Bay, Wis., is suggesting clients look at investment options that will minimize the impact of the new tax, such as municipal bonds or rental real-estate properties where, for tax purposes, depreciation will likely cancel out the income.

Tax filing tips and what you should know. Some highlights of tax-filing season.

Carole Feldman of the AP for the Seattle Times writes: More than 90 percent of taxpayers go to a tax preparer or use tax software to file their returns, estimated Jim Buttonow, a 20-year IRS veteran who is now vice president of products for New River Innovation, a tax-technology company.

• Last year, the agency received 137 million returns.

• Electronic filing increased by 6.2 percent to 113 million in 2012, an upward trend that tax experts expect to continue.

• Nearly 104 million people received refunds last year totaling about $283 billion. The average refund was $2,707, slightly less than the year before, the IRS said.

• The standard deduction has been adjusted higher for inflation, to $11,900 for married couples filing jointly, $8,700 for heads of households and $5,950 for singles. About two-thirds of taxpayers claim the standard deduction, said Barbara Weltman, an author of J.K. Lasser’s Tax Guide 2013.

• Each personal exemption is worth $3,800 for 2012, up from $3,700 in 2011.

• There also are higher mileage-rate deductions — 55.5 cents per mile if you use your car for business, 23 cents per mile for moving or medical issues and 14 cents a mile for charity.

• Capital-gains rates are unchanged from 2011 — a maximum of 15 percent for assets held more than a year.

• You can contribute up to $5,000 to a traditional individual retirement account — $6,000 for people age 50 and older — and reduce income by that amount. If you haven’t made a contribution yet, there’s still time. You have until April 15, the tax-filing deadline.

• The alternative-minimum-tax exemption is $50,600 for unmarried individuals and $78,750 for joint filers.

• The American Opportunity Tax Credit can be worth as much as $2,500 for college tuition. The credit, which can be claimed for each of the first four years of college, was extended through 2017.

• Taxpayers will have the choice of deducting state and local sales taxes instead of state and local income taxes. This is especially important to residents of states such as Washington, which doesn’t have an income tax.