Tax Strategies

The election is over…

The Patient Protection and Affordable Care Act of 2010 established a new 3.8% Medicare tax on investment income for taxpayers whose modified adjusted gross income exceeds $200,000 ($250,000 for joint filers) which takes effect on 1/1/13.  This legislation is part of Obama Care and therefore it is separate from the “fiscal cliff” issues.

If the bottom line on your federal form 1040, page 1 is greater than $200,000 then you will incur a 3.8% tax on your net investment income.  Net investment income includes the sum of the following:  a) gross income from interest, dividends, annuities, rent and royalties, b) net capital gains, c) trade or business income that is considered either passive activity income or is derived from trading in financial instruments or commodities.

What strategies can you implement to minimize the burden of this new tax:  a) convert to a Roth IRA by the end of 2012 to lower your threshold for the tax, b) gift income-producing investments, c) invest in growth rather than income stocks, d) invest in tax-free municipals, e) sell appreciated capital assets before the end of 2012, or f) use installment sales to spread gain over several years.

As I am writing this Newsletter, President Obama is holding a press conference on the “fiscal cliff” issues.  We will need to stay tuned for the negotiations ahead but keep in mind that the House only has sixteen working days scheduled before it adjourns on December 14^th…

Our TaxPro Journal reports that the frequency and inaccuracy of IRS Notices are on the Rise.  I have noticed the inaccuracy of the Notices to be alarming.  One example is IRA contributions which are not allowed unless you have earned income but as always, there are exceptions to the rules and one is alimony.  CP 2000 Notices are often issued for this set of facts.  When it is explained, the Notice goes away but it takes time to respond and time for the IRS to correct the individual account.  It would be much easier if they would correct their program.

Since it is the end of the year and we are reviewing our contributions to charity for 2012 deductions, keep in mind the IRS does deny contributions due to incorrect receipts.   Here are the rules for the documentation requirements:  No deduction will be allowed for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgement of the contribution by the donee organization.  Acknowledgement must state the amount contributed, indicate whether the donee organization provided any goods or services in consideration for the contribution and provide a description and good faith estimate of the value for any goods or services provided by the donee organization.

At Fillo Financial, we are happy to welcome Marie Taylor to our team to serve our client needs.  Marie previously worked for us eight years ago and has experience in tax preparation, office management and business development and also holds a certificate in customer service.

As we mentioned in our last Newsletter, we have a new website:  www.fillofinancial.com.  We have just completed coordinating our email with the new website and now each of us has their name as part of their email address.  For your convenience I have listed our individual email addresses here:  maryellen@fillofinancial.com, brian@fillofinancial.com, joe@fillofinancial.com   and marie@fillofinancial.com.  We are all looking forward to helping you with your tax needs during the upcoming tax season.

Happy Thanksgiving from all of us at Fillo Financial.