December 6, 2011

Dear Client:

Season’s greetings!  No doubt you are hearing about many tax issues reported in the media that may affect you in 2011.  Even as we write this letter today, decisions by lawmakers have yet to be made and published by the IRS.  We would like to remind you of some of the tax related issues you should be aware of at this time.

The Social Security wage base will increase next year to $110,100, a $3,300 increase over this year’s figure and the first jump since 2009.  The wage base did not go up in 2010 and 2011 because the law bars any increase in the cap in years when there’s no cost-of-living hike for Social Security beneficiaries.  The tax rates are in limbo.  For 2011, the rate on employees was reduced by two percentage point, to 4.2%, while the rate paid by employers stayed at 6.2%.  But this cut is set to expire after Dec. 31.  We think Congress will extend the break for 2012 and possibly expand the reduction to 3.1% for employers and employees.  The Medicare tax is not affected by this, remaining 1.45% on all wages in 2012.  The threshold for the nanny tax will rise to $1,800 in 2012, a $100 boost.

Several key ceilings on retirement plans will be higher next year:  The maximum 401(k) contribution rises to $17,000 in 2012, up $500 over this year.  Individuals born before 1963 can put in as much as $22,500.  The contribution limits apply to 403(b) and 457 plans as well.  The ceiling on SIMPLEs will remain $11,500.  Folks age 50 or older in 2012 can put in an additional $2,500.  Plan contributions can be based on up to $250,000 of salary next year.  The payin limitation for defined contribution plans increases to $50,000 in 2012.  That’s a $1,000 increase for Keogh plans, profit sharing plans and the like.  Anyone making over $115,000 is highly paid for plan discrimination testing.  And the benefit limit for pension plans is set to rise to $200,000 next year.  There’s no change in the payin limits for IRAs and Roth IRAs.  The limits remain at $5,000, plus $1,000 more for anyone who was born in 1962 or earlier.

Reporting your capital gains for 2011 is going to be more complicated.  You will have to use two forms: Form 8949 and Schedule D.  The reason?  Basis reporting rules that went into effect for securities bought after 2010 and sold in 2011 and later.  All sales will be listed on the 8949, and the totals will be carried to Schedule D.  Separate 8949s must be filed for sales where the basis is reported by the broker, for sales where the tax basis isn’t reported and for any disposition where no 1099-B is received reporting the gross proceeds.  This way, the Service will be able to cross-check the basis information it receives with the sellers’ returns.

Now let’s turn to practical ways your business can save taxes right away, with the end of the calendar year just a few weeks away.  Moves made between now and the end of the year can save you and your company plenty of taxes.

If you are buying assets, it usually pays to put them in service by Dec. 31.  The reason:  100% bonus depreciation.  Firms can write off the entire cost of qualifying assets placed in use this year, even for assets purchased in late Dec.  They can take bonus depreciation on new assets with useful lives of 20 years or less…machines, equipment, land improvements and farm structures such as chicken coops.  Leasehold improvements made to the interiors of commercial realty are eligible, too.  The bonus depreciation percentage is scheduled to fall to 50% for assets put in use in 2012, although there is a good chance Congress will extend the 100% write-off because of the weak economy.  Even if that occurs, putting a qualifying asset in service in 2011 rather than in 2012 accelerates the income tax benefit from the deduction.

New heavy SUVs put in service in 2011 are entitled to a huge tax break:  You can write off 100% of the cost if no personal use is made of the vehicle, thanks to 100% bonus depreciation.  SUVs must have loaded gross vehicle weights over 6,000 pounds to qualify for this break.  The $25,000 ceiling on expensing SUVs doesn’t apply if you take bonus depreciation.  Used SUVs don’t get bonus depreciation.  And you can fully write off new pickup trucks with loaded weights over 6,000 pounds.  Ditto for used heavy pickup trucks if the cargo bed is at least six feet in length.  For lighter vehicles, the maximum write-off in the first year is $11,060.

Expensing is also available for assets placed in service by Dec. 31.  If you are putting used assets in service, you cannot claim 100% bonus depreciation on them, but those assets are eligible for expensing.  For 2011, firms can expense up to $500,000 of the assets’ cost.  Although this cap is supposed to fall sharply after 2011, Congress is likely to keep the higher cap for 2012.  The $500,000 ceiling is reduced dollar for dollar after more than $2 million of assets are placed in service.

Buying too many assets in the last quarter can cost you some write-offs on property that isn’t eligible for bonus depreciation.  If you make more than 40% of your 2011 asset purchases after Sept., regular depreciation on all assets put in use in 2011 is figured on a quarterly basis.  So assets you buy in late 2011 get 1 ½ months of depreciation instead of six months’ worth.  This rule does not apply to buildings.

Business owners can shift income and expenses between 2011 and 2012.  Professionals can opt to delay year-end billings.  Or they can speed them up if they expect to be in a higher tax bracket next year.  Since 2012 is an election year, we don’t think that lawmakers will be increasing income tax rates for any filers.  Firms can shift expenses from one year to another to tweak their income.  However, the Revenue Service will balk if there is too much distortion of earnings.  Owners can delay paying year-end bonuses so they aren’t taxed until 2012.  But this doesn’t work for a majority owner if the bonus amount is fixed during 2011 and the firm has the cash to pay it…the owner is in constructive receipt of the money.

Deductions for accrual method firms are limited.  They can’t deduct bonuses in 2011 that are deferred to 2012 by owners of more that 50% of regular corporations or by owners of any interest in an S corporation, personal service firm or partnership.  And weigh taking dividends in lieu of salary.  This pays off if the corporation is in a low tax bracket and the owner is in a high bracket.  The owner’s tax savings due to the 15% top rate on dividends plus the payroll tax savings on the dividend can exceed the extra tax the corporation pays because the dividend isn’t deductible.  This won’t work for S firms.  Or for personal service firms…they pay a flat 35% tax.

In 2012, the basic Medicare Part B premium will rise to $99.90 per month, up from $96.40 currently.  However, this will be a reduction for seniors who first enrolled in 2010 or 2011.  Their monthly premium for 2011 was higher.  Upper-income seniors still will pay a significantly larger Part B premium if their modified adjusted gross incomes for 2010 exceeded $170,000 for couples and $85,000 for single persons.  Modified AGI is AGI plus any tax-exempt interest, EE bond interest that’s used for education and excluded foreign earned income.  And higher-income seniors will also owe a surcharge on Part D premiums for coverage of their prescription drug costs.  The following table summarizes the impact: