Prpr webinar 121411

Income Tax 2011: Are you the Biggest Loser?

Presented by Gregory O. Hyde, CPA, PFS, CFP®

December 14, 2011

© Gregory O. Hyde. December 201122

Presenter Information:Gregory O. Hyde, CPA, PFS, CFP®

Pinnock, Robbins, Posey, & Richins, PC136 East South Temple, Suite 2250Salt Lake City, UT 84111Phone: 801-533-0409Email: [email protected]: www.cpaandmore.com

This outline is for the purpose of a presentation and the speaker is not engaged in rendering legal, accounting, or professional services to the recipients of this outline. Users of this outline should verify its accuracy before relying on its contents. If legal advice or other professional assistance is required, the services of a competent professional person should be sought.

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© Gregory O. Hyde. December 201133

Today’s Presentation

• Often-overlooked tax deductions• Tax deductions set to expire 12/31/11• Retirement savings opportunities• Alternative minimum tax strategies

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Often-overlooked tax credits/ deductions for Business Owners• Domestic production activities deduction

– Deduction of up to 9% of net income from “qualifying” activities like manufacturing, construction, farming

– Limited to 50% of W-2 wages paid during year

• Increasing research activities credit– Must rely on “hard” sciences- computer sciences,

physics, chemistry, biology– Requires process of experimentation– Wages, 65% of contractor costs, and supplies costs– Many states (including Utah) also have own credit

4© Gregory O. Hyde. December 2011

Often-overlooked tax credits/ deductions for Business Owners• Small employer health insurance premiums

credit– Average annual wages must be below $50,000, although

owner wages are disregarded– 25 or fewer employees and state premium benchmark

limits apply

• Real estate professional– Allows current deduction of real estate-related losses

without regard to passive activity loss rules– Must participate for 750 hours or more, per year– Can’t rely on spouse’s hours, or investor hours


Often-overlooked tax credits/ deductions- individuals

• Health savings account– Effectively avoids the general 7.5% of AGI limitation

on deductible medical expenses– Must be coupled with a high-deductible health plan

• Triggering suspended passive and/or basis losses (via disposition and/or additional investment)

• Noncash charitable donations– Be careful of substantiation requirements


Often-overlooked tax credits/ deductions- individuals (cont’d)

• Points on home mortgage

• Forgiveness of debt income exceptions- can apply even if 1099-C received– Bankruptcy and/or insolvency– Qualified residential indebtedness– Qualified business real property indebtedness

• Consider additional withholding, rather than estimated payments, to avoid underpayment penalties


Significant tax cuts set to expire 12/31/11

• Tax-free direct transfers by those age 70 ½ or older from IRAs to qualified charities– Limited to $100,000 per year– Only certain charities qualify– Can meet minimum distribution requirements

• The option to deduct state & local sales taxes instead of state & local income taxes– Especially important in states with no income tax


Significant tax cuts set to expire 12/31/11 (cont’d)

• Credit of up to $500 for qualifying energy-efficient home improvements– Prior lifetime credits are applied against the limit– Refundable against A.M.T.– 10% of cost; $200 limit for windows

• The up-to-$4,000 above-the-line deduction for qualified higher education expenses– Many other education incentives, such as Lifetime

Learning and American Opportunity Credits, remain



• 100% UNLIMITED bonus first-year depreciation for most NEW machinery, equipment and software– Scheduled to decrease to 50% in 2012, and

disappear thereafter– No income limitations (unlike Section 179)– Asset must be “original use” (not just new to taxpayer)– Must “elect out” if not desired



• An extraordinarily high $500,000 “Section 179” immediate expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property)– Section 179 expense limitation scheduled to drop to

$139,000 in 2012– Phaseouts apply for large businesses– Not available for all vehicles, or rental property



• The research tax credit– Has been schedule to expire for a number of years:

extension is seen as likely, but not certain.

• Exclusion of 100% of gain on qualified small business stock (QSBS) purchased by the end of 2011.– Must be (1) purchased after September 27, 2010 and

before January 1, 2012, and (2) held for more than five years. In addition, such sales won’t cause AMT preference problems. Additional requirements apply.


Retirement savings- Roth IRA

• Roth IRA contribution and/or conversion- Advantages of Roth vs Traditional IRA;– No lifetime minimum distributions required- so

potentially a good “legacy” planning vehicle– Provided 5-year rule is met, income grows tax-free,

and lifetime distributions, if needed are also tax-free– No income limit on conversion (unlike contribution)– Must consider projected tax rates currently, and in

retirement, as well as other issues


Retirement savings- Roth (cont’d)

– Converting before 2013 may provide tax benefits, as the Medicare surtax looms beginning 1/1/13, and Roth conversion income could push you over limits. This surtax will apply if your “MAGI” exceeds 250K (or 200K if filing single). The rate is 3.8% on investment- type income, and 0.9% on compensation income.

– By converting, all of “traditional” IRA balance is taken in to income in the year of conversion (although taxable amount is reduced by any previous nondeductible IRA contributions). Staggered conversion may be beneficial.

– “Recharacterization” option provides flexibility.


Retirement savings (cont’d)

• Small business retirement plan options– 401(k)/profit sharing plan

• Up to $16,500 annual contribution (plus $5,500 “catchup” if over 50)

• Must contribute for employees• Most popular small business option

– Simplified Employee Pension (“SIMPLE”)• Up to $11,500 annual contribution (plus $2,500

“catchup” if over 50)• Less annual reporting by plan than 401(k)• Must be established by 10/1/11 for 2011


Retirement savings (cont’d)

– Simplified employee pension plan (“SEP”)• Can be adopted “late” (up to due date of tax year

for the contribution year)- so allows for flexibility• Allows for large contributions- up to lesser of 25%

of compensation or $49,000– Defined benefit plans

• Can allow for significantly larger contributions; ideal for self-employeds with very high income; higher administration costs than other plans

– Traditional deductible / nondeductible IRA


Alternative minimum tax (“AMT”)

• Name is a misnomer

• First imposed decades ago as a means to reduce benefit of certain deductions for ultra-wealthy taxpayers

• Applies to businesses and individuals

• Traps more and more taxpayers each year due to inadequate inflation indexing, and lower current regular tax rates


Alternative minimum tax (cont’d)

• Now TENDS TO apply to individuals with income from $150,000 to $500,000. Due to complexity of this tax, no absolute rules of thumb apply. Requires fact-specific planning, and often makes traditional planning strategies inapplicable.

• Individuals pay at a 26% and 28% tax rate (“flat tax”), denies numerous deductions

• Most AMT paid is never recoverable18© Gregory O. Hyde. December 2011


• Typical reasons AMT is owed include– Disallowed deductions, such as

• High state/local income, sales, and/or property taxes

• Mortgage interest on debt NOT paid to buy, build, or improve your home

• Miscellaneous itemized deductions, such as investment fees, tax preparation costs, and unreimbursed employee expenses

• Investment interest expense



• Other reasons AMT is owed– “Phantom income” for AMT purposes

• Exercise and hold of certain employee compensatory incentive stock options (“ISOs”)

• Private activity bond interest from certain “tax-exempt” bonds

• Certain life insurance proceeds (for corporations only)

– Income in the AMT exemption “phaseout” range (about 150K to 447K)

– No personal exemptions allowed (hurts large families)20© Gregory O. Hyde. December 2011

AMT planning strategies

• “Bunch” deductible taxes and/or misc. itemized deductions, where possible

• ISO holders should seek expert advice if pursuing “buy and hold” strategies

• Inquire about AMT taxability of municipal bonds before purchasing

• Don’t assume that all home equity or 2nd mortgage debt will be tax-deductible


Conclusion

• Don’t be the biggest loser! Take advantage of opportunities we’ve discussed today and start saving taxes!

• Review your specific situation with a competent tax advisor

• Request specific tax projections

• Tax increases are expected by 2013, if not sooner, so don’t delay.


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