New Jersey State Business Income Tax / What kind of tax will you owe on New Jersey business income?

David Steingold for Nolo wrties: Most states tax at least some types of business income derived from the state. As a rule, the details of how income from a specific business is taxed depend in part on the business’s legal form. More particularly, in most states corporations are subject to a corporate income tax, while income from “pass-through entities” such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state’s tax on personal income. Tax rates for both corporate income and personal income vary widely among states; corporate rates, which more often are flat regardless of the amount of income, generally range from 4% to 9%, and personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.

Currently, four states (Nevada, South Dakota, Washington, and Wyoming) do not have a corporate income tax, and the same four states, along with Alaska, Florida, and Texas, have no personal income tax. Individuals in New Hampshire and Tennessee are only taxed on interest and dividend income.

Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a “franchise tax” or “privilege tax.” This is frequently defined as a tax simply for the right or “privilege” of doing business in the state. As with state taxes on business income, the specifics of a state’s franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business’s net worth.

New Jersey taxes corporate income through its corporation business tax (CBT), but the state does not have any franchise or privilege tax generally applicable to businesses. Also, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.

In general terms, the CBT requires that a traditional (C-type) corporation pay the greater of:

• a graduated tax based on entire net income
• an alternative minimum assessment (AMA) based on gross profits; or
• an alternative minimum assessment (AMA) based on gross receipts.

The CBT rates on entire net income are as follows:

• entire net income $50,000 or less = 6.5% tax rate
• entire net income greater than $50,000 up to $100,000 = 7.5% tax rate; and
• entire net income greater than $100,000 = 9% tax rate.

Broadly speaking, the AMA based on gross profits and the AMA based on gross receipts apply only to multistate corporations whose business presence in New Jersey is limited to soliciting orders. More specifically, the two AMAs apply to corporations that choose to exempt themselves from the CBT’s graduated tax on corporate income under a federal law relating to state taxation of businesses, PL 86-272. If you have questions about the AMAs, you should consult with a New Jersey tax professional.

Putting aside the CBT’s income-based tax and AMAs, there is also a required minimum tax on New Jersey gross receipts for traditional corporations, as follows:

• gross receipts less than $100,000 = $500 tax
• gross receipts at least $100,000 but less than $250,000 = $750 tax
• gross receipts at least $250,000 but less than $500,000 = $1,000 tax
• gross receipts at least $500,000 but less than $1,000,000 = $1,500 tax; and
• gross receipts more than $1,000,000 = $2,000 tax.

The CBT also applies to New Jersey S corporations that are subject to federal taxation (due, for example, to built-in gains, excess passive income, or passive investment income). In such cases, as long as the S corporation files the proper New Jersey S corporation election form (CBT 2553), the CBT is based on the S corporation’s New Jersey gross receipts, as follows:

• gross receipts less than $100,000 = $375 tax
• gross receipts at least $100,000 but less than $250,000 = $562 tax
• gross receipts at least $250,000 but less than $500,000 = $750 tax
• gross receipts at least $500,000 but less than $1,000,000 = $1,125 tax; and
• gross receipts more than $1,000,000 = $1,500 tax.

For purposes of comparison, note that for 2012 New Jersey taxes personal income at marginal rates ranging from 1.40% to 8.97%.

Let’s briefly look at additional details for five of the most common forms of New Jersey business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.

Corporations. New Jersey corporations are subject to the corporation business tax, which generally speaking is based on the corporation’s entire net income.

Example: For the 2012 tax year, your New Jersey corporation had entire net income of $300,000. Other things being equal, the corporation will owe New Jersey corporation business tax in the amount of $27,000 (9% of $300,000).

S Corporations. An S corporation is created by first forming a traditional corporation, and then filing a special form with the IRS to elect “S” status. Unlike a traditional corporation, an S corporation generally is not subject to separate federal income tax (exceptions include cases where the S corporation has built-in gains, excess passive income, or passive investment income). Rather, taxable income from an S corporation is passed through to the individual shareholders, and each individual shareholder is subject to federal tax on his or her share of the corporation’s income. In other words, S corporations usually are “pass-through” entities. (Note that a shareholder’s share of the S corporation’s income need not actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.)

New Jersey does not recognize the federal S election; instead, as mentioned above, in addition to the federal “S” election form you must also file a New Jersey election form. Moreover, New Jersey S corporations that owe federal tax are also required to pay corporation business tax based on New Jersey gross receipts. Also, independently of any CBT due from the business itself, individual S corporation shareholders will owe tax on their share of the company’s net income.

Example: For the 2012 tax year, your New Jersey S corporation had net income of $250,000 and owed no federal taxes. The corporation will not owe any New Jersey corporation business tax. The corporation’s $250,000 of net income will be allocated to you and your fellow shareholders, and you will each pay tax on your own portions on your respective state tax returns; the rate will vary depending on your overall net income for the year.

Limited Liability Companies (LLCs). Standard LLCs are pass-through entities and are not required to pay income tax to either the federal government or the State of New Jersey. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amount distributed to them.

Note that while by default LLCs are classified for tax purposes as partnerships (or, for single-member LLCs, “disregarded entities”), it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would also be subject to New Jersey’s corporation business tax.

Example: For the 2012 tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $250,000. The $250,000 in net income will be divvied up between you and your fellow LLC members, and you will each pay tax on your own portions on your respective state tax returns; the rate will vary depending on your overall net income for the year.

Partnerships. Partnerships are pass-through entities and are not required to pay income tax to either the federal government or the State of New Jersey. Instead, income from the business is distributed to individual partners, who then pay federal and state taxes on the amount distributed to them

Example: For the 2012 tax year, your partnership had net income of $100,000. The $100,000 in net income will be divvied up between you and your fellow partners, and you will each pay tax on your respective portions on your respective state tax returns; the rate will vary depending on your overall net income for the year.

Sole Proprietorships. Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income.

Example: For the 2012 tax year, your sole proprietorship had net income of $100,000. The $100,000 in net income is distributed to you personally, and you pay tax on that income on your individual state tax return; the rate will vary depending on your overall net income for the year.

Note on Multistate Businesses and “Nexus”

Our primary focus here is on businesses operating solely in New Jersey. However, if you’re doing business in several states, you should be aware that your business may be considered to have “nexus” with those states, and therefore may be obligated to pay taxes in those states. Also, if your business was formed or is located in another state, but generates income in New Jersey, it may be subject to New Jersey taxes. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated. If you run such a business, you should consult with a tax professional.

When Your Broker 'Outs' You / Read this before you file your 2012 tax return if you sold stocks, mutual funds or exchange-traded funds in a taxable account

Laura Sanders for the Wall St. Journal writes:  Last year, did you sell stocks, mutual funds or exchange-traded funds held in a taxable account?  If so, read this before you file your 2012 tax return. This is the second year investment firms have had to report to the Internal Revenue Service the "cost basis" of certain assets sold by clients.

Reporting began in 2011 for stocks and in 2012 for mutual funds, many exchange-traded funds and dividend-reinvestment plans, or DRIPs. Some firms already have sent 1099-B forms to clients detailing information the firms are giving the IRS, and others will soon.

Cost basis refers to the price of acquiring an investment—the starting point for figuring tax after the asset is sold. This crucial subject often is confusing to taxpayers.

For example, say a woman bought 100 shares of a company at $50 a share in 2003 and then another 100 for $70 a share in 2007. Last year, she sold her stake for $85 a share.

The taxable gain on the two lots is very different. On the 2003 shares, it is $35 a share, or $3,500, while the gain is half that for the 2007 lot—$15 a share, or $1,500. Calculating cost basis is trickier if shares are bought with reinvested dividends, such as in a mutual fund or DRIP, or if stock splits or spinoffs cause adjustments.

That is a lot to keep straight over several years or decades. Nevertheless, investors must report the correct cost basis to the IRS after a sale.

In order to help honest taxpayers and discourage cheaters, Congress passed a law requiring brokers to file cost-basis report. Here is what investors need to know:

Investment firms must track and report cost basis for sales of stocks bought on or after Jan. 1, 2011. For mutual funds, many ETFs and DRIPs, the requirement applies to purchases since the start of 2012. Reporting for individual bonds—as opposed to bond funds—begins in 2014.

For example, if you bought a stock in 1978 and sold it last year, your brokerage firm needn't report the cost basis to the IRS. If you bought the stock in 2011 and sold in 2012, the firm does.

Note that even if your brokerage tells you the cost basis of an asset after a sale, it may not be telling the taxman. How can you tell? If Box 6b of the 1099-B form is checked, the firm is reporting cost basis to the IRS, says tax attorney Stevie Conlon of Wolters Kluwer Financial Services.

Be aware of nuances. If you reinvested dividends paid by a bond ETF or DRIP last year, then you bought new shares. If you then sold the entire investment in 2012, your investment firm must report the cost of the shares acquired last year—but not of the shares acquired before then.

If you sold shares at a loss 30 days before or after a dividend reinvestment, then you might trigger a "wash sale." That means you can't deduct some or all of the loss right away, Ms. Conlon says.

Becky Groves, director of government reporting at TD Ameritrade, says wash-sale questions provoked more calls to the brokerage firm last year than any other tax issue.

Firms are only required to track and report cost basis for investments within one account. So if an investor bought shares of a stock in his IRA within 30 days of selling shares of the same stock at a loss from a joint account, then it is up to him to tell the IRS about the wash sale.

Check 1099-Bs for mistakes. Robert Green, an accountant who heads GreenTraderTax, a tax preparer for more than 1,000 investors, urges taxpayers to double-check brokerage cost-basis reports against their own records.

"Often the 1099-Bs don't match trading logs," he says, especially for frequent traders. In some cases, he has seen income over- or understated by $10,000 or more. Problems arise most frequently with wash-sale reporting, he says.

Investors subject to the new reporting should think twice before filing early, says Mr. Green's partner, Darren Neuschwander. Last year, some clients received five corrected versions of the same 1099-B, he says. Early indications are there will be many corrected forms this year, too, he adds.

Remember: If your investment is held within an individual retirement account, Roth IRA, 401(k) or other tax-sheltered retirement plan, it isn't subject to cost-basis reporting.

IRS Interest Rates Remain the Same for the Second Quarter of 2013

The Internal Revenue Service today announced that interest rates will remain the same for the calendar quarter beginning Apr. 1, 2013.  The rates will be: 

• three (3) percent for overpayments (two (2) percent in the case of a corporation);
• three (3) percent for underpayments;
• five (5) percent for large corporate underpayments; and
• one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. 

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced today are computed from the federal short-term rate determined during January 2013 to take effect February 1, 2013, based on daily compounding.

Tax Planning for Business Owners: An Insider's Perspective

Steve Parrish, Contributor writes for Forbes: While business owners have gotten tired of hearing about the new tax law, we in the advisor community are just getting revved up. Several of the big, annual, tax planning conferences are over and we’re getting a handle on ideas to help the business owner save on taxes. I wanted to see what my fellow colleagues in the business were experiencing with their clients, so I went old school. I picked up the phone and called one of the experts. The conversation was basically “Hey Terry, what are your business owner clients asking, and what are you telling them?”

Terry Stanaland is a Greensboro, NC-based national speaker and author on tax planning issues for business owners and their families. It’s impressive enough that he’s an attorney, CPA and Chartered Financial Consultant. More importantly, he serves on the front line, serving as an attorney for many business owners. Below are some of the comments Terry shared with me concerning the new tax law (American Tax Relief Act of 2012) and new planning opportunities.

How long is the new estate tax going to last?  When I asked about his clients’ mood concerning the new tax law, Terry quickly commented, “a lot of my clients are asking about how permanent this new estate tax law really is.” In Terry’s mind, this law may indeed be permanent for the foreseeable future. Congress knows the estate tax issue has been a political football, and this compromise legislation may well hang around for a while, leaving our legislators an opportunity to deal with other fiscal issues.

What’s a hot tax issue for business owners?  Terry is concerned with the ramifications of the 3.8% Medicare surtax on unearned income. This provision, a part of the Affordable Care Act, taxes the investment income of higher income taxpayers, and it applies in and above regular income taxes. One specific example Terry provided relates to business owner rental income. A common business structure is to have the company’s physical property placed in a separate LLC, an entity which is typically owned by the founder. The LLC charges the company rent for use of the building, thereby giving the owner an additional stream of income. The concern is that this rental income is unearned income for purposes of the new 3.8% surtax. Rather than saving taxes, this time- tested technique may actually increase the business owner’s personal taxes.

Will private business owners consider a C Corporation structure?  Terry agrees that C Corps may indeed come back into vogue with private businesses. With the top marginal bracket now being lower for C Corps (35%), than for individuals (39.6% plus the 3.8% surtax), we once again will have tax arbitrage by using a separate entity. Further, the C Corp structure allows more flexibility in benefits planning — another way to save on taxes.

Business versus personal assets.  In many of his lectures, Terry has railed against business owners holding too many personal assets, particularly passive income assets, in their businesses. He points out that, originally, most businesses became S Corps or LLCs in order to provide asset protection from personal creditors. However, as wealth actually accumulates in the business, the concern becomes asset protection from business creditors. When excess wealth accumulates, it should be taken out of the business, and either enjoyed or reinvested. He also notes that accumulating personal wealth in the business is a planning challenge: “Don’t hold passive assets in the business; all it does is complicate business succession.”

Last thoughts.  Terry Stanaland says it well for all of us who seek to help business owners with their taxes: “One thing this new tax law is not is simplified. We are now down to learning and applying tax trivia. It really gets in the way of true tax planning.”

Thanks Terry for your insight on what’s going on in the business owner tax world!

Cloud Accounting with Wave in Depth: Wave is a free, cloud based double-entry accounting system that combines features for both business and personal finances.

Charlie Russel for The Sleeter Group writes: In our attempt to come up with a standard for comparing online accounting systems, we (Doug Sleeter, MB Raimondi and myself) came up with a list of features that we would like to see in a good business accounting system. It is hard to compare products when they offer such different features. Each product has a number of differentiating features that make it unique or special, and it is easy to pay a lot of attention to those. However, we have to keep in mind that these are products that businesses will be using to manage their accounting processes. When it comes to managing accounting there are many features that a small business just cannot do without. As we review various online accounting products we will point out things that we like and things that we feel are missing. If a product has a whiz-bang exciting feature but it doesn’t cover the basics, there is a problem. So, we have our list of features that we will be using to compare any cloud (online) based accounting product that we look at.

I certainly don’t consider our list to be all-inclusive, and I’m open to suggestions as to what could be added. One of the dangers of making a list like this is that we tend to think of the features that we have in the product that we are the most familiar with (in my case, QuickBooks for Windows), without recognizing that an online accounting product is different than a desktop accounting product. Another consideration is that every business will have a business process that is critical, but not all businesses will have the same requirements. That makes evaluations complicated!

-SNIP-  The article Continues at Sleeter Group, Please Click here To Continue.

5 Tax-Planning Tips for Retirees

Jason Stipp & Christine Benz for Morningstar :  Morningstar's Christine Benz offers hints for how retirees should approach taxes in regard to portfolio withdrawals, RMD reinvestments, property, health care, and estate planning.

Jason Stipp: I am Jason Stipp for Morningstar. Retirement is supposed to be a time that you can step away from a lot of the day-to-day hassles of life, but unfortunately tax planning is not one of those things. Here to offer some top tips for retirees on the tax front is Morningstar's Christine Benz, our director of personal finance. Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: There are a few more complications that come into play when you go into that drawdown mode or retirement mode on the tax front. The first one is about withdrawals, so you will be taking money out of your portfolio. There can be some big tax implications here. What should investors keep in mind?

Benz: Well, I think that one of the key concepts to keep in mind is that there are some sensible sequences of withdrawals that will tend to make sense for retirees with a lot of different profiles. So, definitely you want to make sure you're taking your required minimum distributions from your traditional IRAs or 401(k)s.

Then probably in most cases move to the taxable accounts for the next set of distributions. Then [tap assets from] traditional IRAs and 401(k)s. And save those Roth assets--to the extent that you have any in your retirement plan--to the very last. The key idea across all of these different categories is that you want to save the accounts that have the most tax advantages until the last, while getting rid of those with the least tax advantages--or the heaviest tax costs from year to year--getting rid of those first.

Stipp: And even that first bucket Christine--those RMDs that if you're over age 70 1/2, you do need to take those, otherwise you face penalties--you say you don't have to always take them though from the same account. You could have some flexibility there?

Benz: You absolutely do. I think sometimes people think, well, I need to take proportionate shares out of every holding in this account. You can actually be quite strategic about where you go for the RMDs. So, for example, if you have a holding or two and they're at a low ebb--maybe the market is down and you think they'll recover--you can leave those alone and instead pull money from something that you think is maybe overpriced or something that's more liquid. So, you can definitely be strategic, and you should think about that when RMD season rolls around. As long as you're pulling money from the right account type, you can be fairly discretionary in terms of where you go for that cash.

Stipp:  A second tax tip for retirees, Christine, you say that, although a lot of folks go into drawdown mode and they're taking money out of their portfolio, it doesn't mean that you can't still also invest?
Benz: That's right. So, some people assume that while I'm taking RMDs, I have to spend that money; you can actually reinvest RMD proceeds that you don't need. And if you have earned income or if your spouse has enough earned income to cover your contribution amount, you can actually move that money into a Roth IRA where there are no [age] limits on contributions. So, it's definitely something to keep in mind, especially sometimes people say, "Well, my RMD amount is taking me over the withdrawal amount that I had wanted to stick with. I had wanted to stick with 4% and the RMD is going to put me at 6%."
Well, you can't go ahead and reinvest that money in a Roth if you can or certainly in a taxable account.
Stipp: The third tip for retirees is that a lot of attention is paid to federal tax rates, but you say it's also important to look at your local tax rates, your municipal tax rates, and some of the tax breaks that you could get there, as well?
Benz: That's absolutely right. And ideally this is something that you'd give some thought to before you decide where you will retire because people can really move the needle in terms of their living expenses by paying attention to the state and local, the municipal taxes that they pay. So, you'd want to think about this if you're thinking about a relocation decision, there are some nice tools out there on the Web to help you look at income taxes and other taxes at the state and municipal level.  And if you are living in your home, I think it's very important to keep in mind that there might be some property tax deductions or reductions that you can obtain if you are a senior. So there might be a long-time homeowners' exemption. And if your income falls below a certain level, many municipalities offer a freeze for people in that situation, so definitely investigate.
Another lever that people have is that they're able to appeal their property taxes if they feel that they are high relative to comparable properties in their area. So, definitely look at all those maneuvers because those property tax bills can be a very high share of many seniors' living expenses.
Stipp: Another thing, and your fourth tip, that is a big share of a lot of expenses for retirees is health care. What should investors in retirement think about on the tax front with health care?
Benz: Well, just bear in mind [that for the 2012 tax year] you can deduct your health-care-related expenditures that are over 7.5% of your adjusted gross income. That sounds like a big number, but really when you total all of the various premiums that you're paying, such as health-care premiums, long-term care insurance premiums, perhaps out-of-pocket prescription drug costs, all of those things if you carefully tally them, you may find that you're well over that 7.5% threshold. So, just saving all those receipts and totaling them up each year can be a really valuable exercise.
Stipp: A fifth tip for retirees is on estate planning. There was a lot of uncertainty about the estate tax recently; some of that has been settled and made more certain, but folks might have put off their estate plan. Your tip is, don't forget about estate planning.
Benz: No, [don't forget about estate planning]. And another related point is that the estate tax-exclusion amount is over $5 million currently. So, I think a lot of people, whether seniors or people who are still working might think, "Well, I do not need to worry about estate taxes, so why do I need to worry about estate planning?"
And the key thing to keep in mind is that estate planning encompasses so much more than tax planning, so that means: Do you have your executors named? Are your beneficiary designations up to snuff with where your current life stage is? Have you named powers of attorney for health-care and financial considerations? And finally, do you have a living will? All of those things fall under the estate-planning umbrella. Even if you're nowhere close to the exclusion amounts, it's still worth making sure that you're not completely neglecting this whole set of other very important decisions.
Stipp: Getting your tax plan in order, is an important component of a secure retirement. Thanks for offering those tips today, Christine.
Benz: Thank you, Jason.
Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.

 

1-3 of 3 Comments

M*_ChristineB

19 hours, 10 minutes ago

• Flag

Caleigh, many thanks for noticing my error. You're right--the threshold did move up to 10%. We'll correct the transcript.

I also misspoke in the video when I said that their's no income limit for Roth contributions. I meant to say that there's no age limit.

My apologies for these errors!
Christine

Caleigh

20 hours, 34 minutes ago

• Flag

Doesn't the deduction for medical expenses for 2013 and beyond have to exceed 10 percent of AGI?

polkster0

22 hours, 54 minutes ago

• Flag

A very good point on state & local taxes. Moving is definitely a part of my retirement planning. Sometimes moving just a short way can make a big, big difference in property tax.
I'm curious about the rules around charitable giving from an IRA or 401K. I heard somewhere that you can do direct asset transfers from an IRA to a charitable organization that will not incur any taxes. I'm wondering if there is a way to just do all charitable giving out of an IRA, and then not have to itemize all those as deductions on a tax return
.

The American Taxpayer Relief Act - How It Applies To Individuals & How It Applies To Businesses

Dave Erb and Karen Baksa for BerryDunn write: On January 2, President Obama signed the "American Taxpayer Relief Act of 2012" (ATRA) into law.  The law averted the so-called "Fiscal Cliff" and prevented the expiration of many of the tax provisions put in place during the Bush administration. Here is a summary of some of the changes included in the new tax law that may affect you:

INDIVIDUALS

• Income tax rates for most individuals will remain unchanged. However, a 39.6% rate will apply to high-income taxpayers with income above a threshold of $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately. 
• Tax on capital gains and dividends has changed for years beginning after 2012. The tax rate will be 20% for taxpayers with income above the thresholds defined above and will be 15% for others (0% for taxpayers in tax brackets below 25%.) In addition, the 3.8% investment surtax will apply to individuals with modified adjusted gross income (MAGI) in excess of $250,000 for joint filers ($200,000 for single and head of household). Note that the threshold triggering the 3.8% remains the same as it did before January 1—and it is lower than the income tax rate thresholds mentioned above.
• Marriage penalty relief has been reinstated. The size of the 15% tax bracket for joint filers and qualified surviving spouses remains at 200% of the 15% tax bracket for individual filers.
• Personal exemptions did not phase out, except for higher-income taxpayers. The starting threshold for phase-out is $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately.
• The "Pease" limitation on itemized deductions has been reinstated for 2013. Certain itemized deductions are reduced by 3% of the amount by which the taxpayer's adjusted gross income exceeds the same thresholds used for the personal exemption phase-out.
• The Alternative Minimum Tax relief has been extended and made permanent. The AMT exemption amounts have been increased and will be indexed for inflation.
• For estates of decedents dying after December 31, 2012, the maximum federal estate tax rate increases to 40% with a $5 million exclusion that will be adjusted annually for inflation. "Portability" between spouses has been made permanent.
• The exclusion for discharged home mortgage debt has been extended for one year through 2013.
• The treatment of mortgage insurance premiums as deductible qualified residence interest has been reinstated and extended through 2013.
• The state and local sales tax deduction has been reinstated and extended through 2013. This deduction is in lieu of state and local income taxes.
• The American Opportunity Tax Credit for qualified tuition and related expenses has been extended for five years.
• The above-the-line deduction for higher education expenses has been reinstated and extended so it can be claimed for tax years beginning before Janurary 1, 2014. 
• The provision to allow nontaxable IRA transfers up to $100,000 to eligible charities has been reinstated and extended for two years so that it's available for charitable IRA transfers made in tax years beginning before January 1, 2014. Two tax elections are available to allow the retroactive application of this provision to 2012; however, you must act before the end of January 2013.

BUSINESSES

On January 2, President Obama signed the "American Taxpayer Relief Act of 2012" (ATRA) into law. The law averted the so-called "Fiscal Cliff" and prevented the expiration of many of the tax provisions put in place during the Bush administration. Here is a summary of some of the changes included in the new tax law that may apply to your business:

• Bonus first-year depreciation has been extended for one year. The new law extends the 50% first-year bonus depreciation allowable for qualified property placed in service before January 1, 2014. In addition, the rules treating qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property as 15-year property have also been extended through 2013.
• Section 179 expensing amounts have been increased for 2012 and 2013 to $500,000. The cap on eligible purchases has been increased to $2,000,000. An extension has been granted to allow up to $250,000 of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property, to be eligible for expensing under code Section 179.
• The allowable increase in first-year deprecation for autos and trucks of $8,000 has been extended through 2013.
• The Work Opportunity Tax Credit has been extended through 2013.
• The Research Credit has been reinstated for 2012 and has been extended so that it applies for amounts paid or accrued before January 1, 2014.
• Permanently extends the exclusion from income and employment taxes of employer-provided education assistance up to $5,250.
• The exclusion of 100% of gain from the disposition of qualified small business stock has been extended to include qualified stock acquired after September 27, 2010 and before January 1, 2014. 

What's New For Tax Year 2012 (When Filing In 2013)

Steven Packer, CPA with Duane Morris writes: Individuals: 

Personal Exemptions: The personal exemption is $3,800 for 2012, an increase of $100.

Alternative Minimum Tax (AMT): Exemption increased to $50,600 (from $48,450) for single taxpayers, $78,750 (from $74,450) for joint filers and $39,375 (from $37,225) if married and filing separately. These increases are now permanent and will be indexed for inflation for tax years beginning after 2012. Also, for tax years beginning after 2012, certain non-refundable personal credits are permitted to offset the entire regular and AMT tax liability.

Refundable Child Credit: For 2012, any unused credit is refundable in an amount equal to the lessor of the unclaimed portion of the non-refundable credit, or 15 percent of the taxpayer's earned income in excess of $3,000. Special rules apply for taxpayers with three or more children.

Standard Mileage Rates: The standard mileage rate is 55.5 cents per mile for business use of car, 23 cents per mile for medical and moving purposes and 14 cents per mile for charitable purposes.

Roth IRA Conversions: Regardless of income, individuals may convert funds from retirement accounts, such as 401(k) or IRA accounts, to Roth IRAs. If such a conversion was made in 2010, and the election was made to defer the tax on the taxable amount, the remaining tax is due in 2012. Tax deferrals for Roth IRA conversions are no longer permitted.

IRA Contribution AGI Limits Increased: If you were covered by a retirement plan through your employer in 2012, your deduction for contributions to traditional IRAs is phased out starting at $58,000 of AGI for single taxpayers and $92,000 of AGI for joint filers.

American Opportunity Tax Education Credit Continues: Up to $2,500 credit per student for qualified higher-education expenses, such as tuition and cost of books. Phase-out begins at AGI of $80,000 for single filers and $160,000 for joint filers.

Retirement Savings Plans Continue: IRA deductions may be available for those covered by other plans subject to certain dollar limits and phased out for single and joint taxpayers with AGI between $58,000 to $68,000 and $92,000 and $112,000, respectively. For joint filers where only one spouse is covered by another plan, the phase-out range is $173,000 to $183,000.

Roth IRA Income Limits: Roth contributions may be allowed for those with AGI of less than $125,000 for single taxpayers and $183,000 for joint filers.

Tax Benefits for Adoption: Maximum adoption credit is $12,650 for 2012 (down from $13,360) for out-of-pocket expenses for the legal adoption of a child. The credit is no longer refundable.

Businesses

Domestic Production Activities Deduction: The provision is no longer available for production activities in Puerto Rico.

Empowerment Zone Employment Credit: This credit is no longer available for tax years ending after 2011.

Work Opportunity Tax Credit: For employees hired in 2012, the credit is available only for wages paid to qualified veterans. Previously, the credit was available for wages paid to employees in several targeted groups.

Bonus Depreciation: Property placed in service in 2012 will qualify for regular bonus depreciation, in which 50 percent of the cost is deductible in the year it is placed in service and the rest is depreciated using normal rules. The provision allowing 100-percent bonus depreciation that was available for property placed in service after September 8, 2010, and before the end of 2011 has expired.

Section 179: Businesses can expense up to $560,000 under Section 179 (previously $500,000), for tax years beginning in 2012, with phase-out beginning when property placed in service exceeds $2 million. Also, for 2012 only, a Section 179 election can be irrevocably revoked without IRS consent. Off-the-shelf software qualifies for the election through 2012.

Research Credit: This credit is no longer available for tax years ending after 2011.

Wealth Transfer Tax Planning for 2013 and Beyond

(Serious Stuff from The Social Science Research Network: a 52 page PDF, Summary Below, Click Here to Read)

Wealth Transfer Tax Planning for 2013 and Beyond

John A. Miller 

University of Idaho College of Law

Jeffrey A. Maine 

University of Maine School of Law
February 9, 2013

Abstract:      
On January 1, 2013 Congress avoided the tax part of the so called “fiscal cliff” when it passed the American Taxpayer Relief Act of 2012 (ATRA). Among its many impacts this law prevented the application of a number of sunset provisions that would have dramatically altered the operation of the federal wealth transfer taxes. Instead Congress made permanent two significant transfer tax provisions introduced as temporary measures in 2010: the indexed basic exclusion amount and the deceased spousal unused exclusion amount. The latter provisions are sometimes referred to as the portability rules. ATRA also introduced a new maximum transfer tax rate of 40%. In addition ATRA made permanent a deduction for state death taxes and prevented the return of the state death tax credit. Thus, the main transfer tax emphasis of the actions taken by Congress in ATRA was to stabilize the wealth transfer tax system in a fashion that eliminates or reduces its planning impact on most taxpayers while also permanently establishing a significant new planning tool for the wealthy, the deceased spousal unused exclusion (DSUE) amount.

In this article we summarize the operation of the federal wealth transfer taxes in the wake of ATRA and describe the basic tax planning techniques for wealth transmission. In doing so, we offer a thorough analysis of the operation of the portability rules and discuss their planning virtues and drawbacks. The overall design of this article is to bring the general practitioner into the current wealth transfer tax planning picture while providing references to more detailed treatments of particular topics within this broad field.

Click Here to Read

GoodApril : Online tax planning solution for individual American taxpayers is looking for investors

This is kind of interesting.....Looking to invest in a start up Online Tax Planning company?   I came across "GoodApril" on a venture capital fund raising website where Start-Ups Meet Investors called "Angel List" (Angel Investors). GoodApril helps consumers prepare for and pay less in taxes.  Unlike TurboTax, H&R Block, GoodApril provides in-year tax guidance to everyday American taxpayers.  GoodApril’s first product is a “Tax Checkup” that provides consumers with an analysis of their tax situation, measures how much they are likely to owe in the coming year as a result of new tax rules, and identifies potential tax savings opportunities.    Click this link here to check it out!  On their site they say, "GoodApril’s mission is to eliminate the pain of tax filing for Americans. We are giving everyday Americans access to the kind of tax-saving tools and expertise that the wealthy receive from their wealth planners and CPAs."    Whoa!   ExactCPA is founded by a CPA that worked in the Family Office High Net Worth space for Rockefeller & Co. for 7 years.  Rockerfeller & Co. is the very founding cornerstone of the "High Net Worth/Family Office" investment firm.    I say that to say we know "the kind of tax-saving tools and expertise that the wealthy receive from their wealth planners & CPAs" (to quote GoodApril).   I'm sorry, it's not what GoodApril does, what the wealthy receive is direct and personal client service in conversation on the phone or in person with highly credentialed expert advisers at an on-demand basis.    I just wanted to set the record straight on a bit of the hype coming from "GoodApril".    High Net Worth/Family Office clients are not served via software, online apps, or even email.   I get what GoodApril is aiming at though and we wish them good luck, want to bring them some attention and that's why we are profiling them here and now.  We do a lot of consulting to small business here and if I would have to guess.....I'm thinking "GoodApril" is trying to position themselves to be bought by Intuit or H&R Block.  

Tax Efficiency: Asset Class And Process Trump Vehicle Type ( ETFs can be more tax-efficient than active mutual funds but are not necessarily more tax-efficient than well-run index mutual funds)

Michael Rawson, CFA writes: With so much uncertainty in financial markets, there are few outcomes over which investors have much control. One area in which informed decision-making can consistently pay off is with regard to tax planning. Investors in high tax brackets or with a lot of money to invest should consider which asset classes and which strategies are best held in a taxable account and which are best held in a tax-deferred account. Passive strategies generally are more tax-efficient, but this is not always the case, particularly if an index fund invests in an asset class with high tax costs or tracks an index with high turnover.

Asset Class Tax Treatment Trumps All Else
Certain asset classes offer better aftertax returns in tax-deferred accounts, such as assets that throw off a large share of their total return in the form of interest income, which is taxed at ordinary income tax rates. For example, if an investor in the highest tax bracket were to hold iShares Core Total U.S. Bond Market ETF (AGG) in a tax-deferred account, they would have earned a 5.78% annualized return for the five years ended Dec. 31. That same investment held in a taxable account would have returned only 4.43% for an investor in the highest tax bracket. When choosing a fund for a taxable account, one would have been better off with the iShares National AMT-Free Muni Bond ETF (MUB) which returned 5.48%. But in the tax-deferred account, the muni fund underperformed the taxable iShares Total U.S. Bond Market fund.

Investments that generate nonqualified dividends, such as REITs, are also better held in tax-sheltered accounts because those dividends are taxed at investors' ordinary income tax rates. For example, T. Rowe Price Real Estate's (TRREX) 10-year annualized return of 12.53% drops to 10.99% for an investor in the highest tax bracket, once taxes are factored in.

Qualified dividend income, on the other hand, is somewhat tax-advantaged compared with ordinary income. For 2013, the highest ordinary income tax rate is 43.4% when including the 3.8% Medicare tax surcharge on high earners, while the highest tax rate is 23.8% on qualified dividends. Over the long term, dividend-paying stocks have performed well, so risk-tolerant investors with additional money to invest can hold dividend-focused funds in taxable accounts, despite the slight tax disadvantage compared with holding them in a tax-deferred account. Naturally, you would put dividend-paying funds in a tax-deferred account first, but those with large taxable accounts should not necessarily avoid dividend-paying stocks. It is important to remember that it is the total aftertax return that is most important, not necessarily minimizing taxes. For example, while it is true that during the past five years, an investor in Vanguard Dividend Growth (VDIGX) paid more in taxes than an investor in a typical S&P 500 Index fund, VDIGX still had a much higher aftertax return.

Strategies Still Play a Role
Although the decision about which asset classes to hold in which account types are a crucial component of tax management, investors can also help improve their aftertax results by focusing on tax-efficient strategies for their taxable holdings. Exchange-traded funds are often touted as tax-efficient investments because they can gain an edge through the use of an additional tax-fighting weapon at their disposal: the creation and redemption process. Rather than selling stock to meet investor redemptions, ETFs are redeemed through an in-kind transfer with an authorized participant. The in-kind, or shares for shares, transfer allows for the elimination of low-cost-basis shares, thus reducing (but not eliminating) the possibility of future capital gains distributions.

But here is the rub: This in-kind creation and redemption mechanism works best for U.S.-stock funds. Once we venture outside of the U.S.-stock asset class, the tax benefits stemming from the in-kind creation and redemption process might diminish somewhat. In addition, investors will owe taxes on the distributions of dividends or interest income that the fund receives and will face capital gains taxes when selling the fund, regardless if the fund is an ETF or index mutual fund. ETF tax efficiency only relates to the likelihood that the fund itself will incur and distribute capital gains to its shareholders.

And even for U.S.-equity ETFs, most of their tax efficiency stems from the fact that they are index funds, which typically have low turnover and thus generate fewer capital gains than actively managed funds. There are plenty of ETFs (and conventional index funds, for that matter), that follow higher-turnover, so-called strategy indexes, which might be less tax-efficient than traditional, market-cap-weighted index mutual funds. For example, the PowerShares Fundamental Pure Large Core (PXLC) had a five-year tax-cost ratio of 0.63, high by equity ETF standards, likely because of the fact that the fund has high turnover.

In addition, a handful of tax-managed mutual funds--traditional open-end funds that hew closely to market benchmarks but have active oversight--have achieved tax efficiency by following best practices, such as limiting trading, keeping track of tax lots, and appropriately timing the sale of high-cost-basis shares. In summary, tax efficiency comes from diligent implementation of a sound low-turnover strategy, not necessarily from some magical tax loophole afforded only to ETFs.

Delving Into the Details
Let's look at some specific examples to illustrate the point that ETFs can be more tax-efficient than active mutual funds but are not necessarily more tax-efficient than well-run index mutual funds.

The iShares Core S&P 500 ETF ( IVV) had a 10-year pretax annualized return of 7.03% and a post-tax (but preliquidation) return of 6.71%. This results in a tax-cost ratio of 0.30. The tax-cost ratio measures the amount of return lost to taxes, so a lower number in combination with a higher after return is better. A similar ETF,
SPDR S&P 500 (SPY) had a 6.99% pretax return and 6.65% post-tax return, for a tax-cost ratio of 0.32. The average tax-cost ratio for actively managed large-blend funds during the past decade has been 0.60, so these two ETFs have been much more tax-efficient.

But a number of index mutual funds and tax-managed funds have also been tax-efficient. The institutional share class of Vanguard Institutional Index (VINIX) had a pretax return of 7.11% and 6.78% post-tax, for a tax-cost ratio of 0.31. The Vanguard index mutual fund was equally tax-efficient as the two ETFs. Yet not all index mutual funds are as well-run as Vanguard's. T. Rowe Price Equity Index 500 (PREIX) had pretax and aftertax returns of 6.83% and 6.11%, resulting in a tax-cost ratio of 0.67%.

Data sourced from iShares, PowerShares, T. Rowe Price, Vanguard, and Morningstar. Tax-cost ratio data reflect five- and 10-year periods ended Dec. 31, 2012.

Tax Alert: A Business Friendly Change - New Jersey Alternative Business Calculation Adjustment

Wilken & Guttenplan write: For a number of years, New Jersey's Individual Gross Income Tax (GIT) has frustrated business owners due to the limitations it imposes on deducting losses. GIT created a "bucket" approach to taxing different types of income where losses can only be used to offset income in the same category. There are four different categories of income that can be generated by business owners:

• Income/loss from sole proprietorships
• Rentals and royalties
• Partnerships, and
• S corporations

Income earned from one category of business could not be offset by losses from another. This can result in a business owner paying tax even though they incur an economic loss for the year. For example, a taxpayer with $100,000 of income from an S corporation and a $100,000 loss from a partnership would be subject to tax on $100,000 even though they did not have any net business income. Additionally, net losses in any category were lost as New Jersey did not allow for any net losses to be carried forward.

Effective for taxable years beginning on or after January 1, 2012, New Jersey has created the "Alternative Business Calculation Adjustment" ("ABCA") which will help mitigate this situation for business owners. The ABCA will allow for a limited netting of gains from one category of gross income with losses from another category. For 2012, 10% of net losses from any category can be used to offset business income from another category limited to10% of income. This loss netting percentage will be increased by 10% each year through 2016 when it will be fully phased in at 50%.

This law change has also created a carryover concept for business losses in New Jersey. If an overall business loss is incurred for any year after netting all four categories of income, the net loss can be carried forward to offset future losses. The loss can be carried forward for a maximum of 20 years.

Using the example above, the taxpayer would now be subject to tax on $90,000 of income for 2012 ($100,000 of S corporation income less 10% of the $100,000 partnership loss). There would still be no carryover loss allowed in this scenario since an overall business loss has not been incurred. Had the partnership loss been $115,000, the taxable income would continue to be $90,000 ($100,000 of S corporation income less 10% of the $115,000 partnership loss, capped at $10,000) but a carryover loss of $15,000 would now be allowed for the net overall business loss incurred.

While this provision is a welcome development for business owners, it is important to note that even when fully implemented in 2016, the benefit of this rule will only allow a partial offset of income and losses between the four GIT categories. It is still better to try to structure business holdings so that they are in the same category to the extent possible to preserve the ability to fully offset income and losses from different businesses.

Three Programs, Two Ways: Test-Driving the Tax Software

Tim Gray for the New York Times writes: The makers of the better-known tax prep programs — TurboTax, H&R Block at Home and TaxAct — say that many customers, particularly younger ones, prefer Web-based programs to old-fashioned, desktop versions. Web-based programs — techies call this cloud computing — reside on remote servers that customers access via their browsers. They offer the convenience of working on a return from any Internet-connected computer and having that return stored on the software makers’ secure servers.

After spending several days running my family’s tax information through Web and desktop offerings, I learned that I’m old-school. For a decade, I’ve completed our return on my Mac desktop, and I prefer that. Desktop programs may be costlier and, in some ways, clunkier — you must buy them on CD or download them — but they also offer more flexibility.

A single purchase, for example, lets you prepare and file multiple returns, as you might want to do if you’re part of a same-sex couple or if you help family members or friends with their taxes. And you can more easily jump back and forth between the tax return and the interviews the programs use to gather information. That lets you check entries as you make them, as my wife, a C.P.A., insists upon. What you lose in convenience, you gain in control.

Each of the tax preparation programs, whether desktop or online, has strengths and shortcomings. TurboTax is the easiest to use, importing lots of financial information with just a few clicks. H&R Block promises the most reassuring help — its staff will represent you at no extra charge if you’re audited. TaxAct offers the best price. A look at each provider’s offerings shows where it excelled and stumbled in preparing my family’s 2012 return.

TurboTax

TurboTax’s maker, Intuit, has its roots in technology, not taxes, and its facility with bits and bytes shows in its wares. Its desktop and online programs make doing taxes as simple as such a time-eating task can be. If you end up cursing come tax time, the target will be the I.R.S., not your software.

I downloaded the desktop version of TurboTax Premier for $89.99 — though I learned later that I could have paid $10 less if I’d bought it on CD at my local Staples. The download took only a few seconds, as did the import of information from our 2011 return. All of the unchanged data from 2011 — names, addresses, federal ID numbers, even descriptions of business expenses — popped into the right places on the 2012 forms. Even the names of the charities we support carried over. The software also imported my wife’s W-2 and all of the information on our investments from Vanguard, T. Rowe Price and Fidelity. All I had to do was key in details for a few local banks and update the amounts we’d given to charity.

The online version of TurboTax, by contrast, didn’t import as much. My attempt to transfer our 2011 return failed, and an import from one of the fund companies went awry. I inherited an I.R.A., and the money is invested in about a half-dozen funds. Instead of creating an entry for a single 1099-R, the program created a half-dozen, which I had to combine.

Otherwise, the online program looked and worked much the same way as the desktop software. I didn’t have to pay to try it because TurboTax, like H&R Block and TaxAct, doesn’t require online users to pay until they file their returns. Had I filed with the online version of TurboTax Premier, I would have paid $49.99 for a single federal return — the price as it was discounted at the time. But TurboTax says it could rise to as much as $74.99, its list price, before April 15.

TurboTax upgraded its assistance features for this year’s tax filing season — a welcome improvement. In the past, I’d found some help links hard to locate and navigate. When I wanted to pose a question to a tax expert, I had to dig around. But not anymore. When I had a question about recording tax-exempt interest, I clicked on the help link, and TurboTax offered a choice between a call and an online chat. Within seconds, I was e-chatting with Marilyn G., and she pointed me to the right spot on the return. We were done in less than five minutes, and I paid nothing extra. I’ve had a tougher time buying jeans online. (All three companies also provide extensive tax-law explanations embedded in their programs.)

Where TurboTax irks is with its pitching of additional products and services. The online program asked if I wanted to set up an I.R.A. via Mint.com, an Intuit personal finance Web site. It encouraged me to contribute to a charity, Operation Homefront, that TurboTax supports. Both the online and desktop programs tried to sell me, for $39.95, the audit defense services of a company called TaxResources. And they both urged me to pay $10 to upgrade to TurboTax Home & Business.

Yes, businesses have to market themselves and grow, but this kind of promotion grates when you’re pondering the big bill you owe the I.R.S.

H&R Block at Home

In past years, I’ve liked H&R Block’s desktop software. It didn’t import quite as much information as TurboTax did, and occasionally didn’t provide some obscure piece of tax guidance that I could find in TurboTax. But I enjoyed its eye-pleasing, easy-to-use interface and concluded that, for most people, it could do a fine job. This year, I had problems installing it.

I tried to download the desktop version from Block’s Web site and failed — four times. I kept trying to remove any obstacles at my end. I quit my browser, Safari, and restarted. I turned off my pop-up blocker and my antivirus software. I rebooted my Mac. Nothing helped. Stymied, I trundled over to Staples, where I bought Block’s Premium software on CD for $59.99. After that 30-minute detour, I popped in the CD and set about installing the software and the latest updates. During the update installation, the program quit. I restarted. Finally, it worked.

Were the glitches my fault? Maybe. I’m no techie; my nephew who is about to turn 11 can do more with my iPhone than I can. But I was working with the same Mac and antivirus program as last year, and if any software should be idiot-proof, it’s a tax preparation program. Lots of nontechies use software to do their taxes.

After installation, Block’s desktop program was fine. As in years past, it didn’t import as much information as TurboTax, but it otherwise handled our return without problems. And I love the lime green of its interface, which calls to mind Kermit the Frog.

Block’s online offering operated just as smoothly. And because it didn’t have to be installed, it spared me a spike in blood pressure. Had I used it to file, I would have paid $49.95 for a federal return.

Block’s assistance also impresses. If you use its software to file your return, the company promises that one of its tax experts will represent you, free, if you’re audited. The chances of needing this help are slim — the I.R.S. audits less than 1 percent of individual returns, according to statistics it publishes. But even the idea of an audit brings angst, and that guarantee reassures.

TaxAct

TaxAct’s selling point is price. The desktop version of its Ultimate Bundle, which includes electronic filing of a federal and a state return, costs $21.95. TaxAct doesn’t sell a desktop version for the Mac, so in years past I had to load the software onto my wife’s PC and work on our return there. This year, I opted to try the online offering instead. I plowed through our return without difficulty, though I did have to type in more of our information because TaxAct imported less than TurboTax and Block did.

In addition to being inexpensive, TaxAct is quirky. Its maker, 2nd Story Software in Cedar Rapids, Iowa, does some things differently than its competitors. Its interview questions come in a different order, and some of them address surprising topics.

Only TaxAct, for example, asked me whether I had a conscientious objection to Social Security and had filed Form 4029 documenting it. Members of some religious denominations can be exempt from Social Security taxes, as long as they promise not to take benefits.

I didn’t need to know this, but it was a fascinating tidbit to learn — and I’m a fan of anything that relieves tedium at tax time.