Business changes taking effect in 2012 and late 2011:

New guidance on deduction versus capitalization of tangible property costs.
Recently the IRS has published temporary regulations, generally effective in tax years beginning after 2011, in regards to the treatment of amounts paid to acquire, construct, or improve tangible property. These new regulations explain and broaden the standards in the current regulations; make available certain new bright-line tests for employing these standards; providing guidance concerning the accounting for, and disposition of, property.

Estimated taxes for large corporations.
Corporations having assets of at least $1 billion (established as of the end of the preceding tax year), the amount of any mandatory installment of corporate estimated tax which is otherwise due in July, Aug. or Sept. of 2012 is 100.5% of that amount, and the amount of the next mandatory installment after the installment due in July, Aug. or Sept. of 2012 is properly reduced to indicate the amount of the 0.5% increase.

Lump-sum payouts from defined benefit plans.
Many defined benefit plans extend participants the choice of receiving a lump-sum distribution in place of an annuity. For plan years beginning after 2007, the Pension Protection Act of 2006 forces defined benefit plans to calculate the minimum lump-sum value of an annuity using blended corporate bond rates in place of 30-year Treasury bond rates, which were the benchmark under past law. Since corporate bond rates are normally more than long-term Treasury bond rates, the modification had the overall effect of reducing lump-sum distributions. This new regulation was phased in over 2008 through 2011 and will be completely in effect for plan years beginning after 2011.

Work opportunity tax credit (WOTC) not usable except when employing qualified veterans.
The WOTC under Code Sec. 51 normally can’t be claimed for a person who starts work for an employer after Dec. 31, 2011. But, the WOTC is still available for employers that hire qualified veterans who begin employment with the employer before Jan. 1, 2013.

Reduced bonus depreciation allowance for qualified property.
This applies to qualified property that was purchased and placed in commission after 2011 and before 2013 (for aircraft and certain long production period property, 2012 and before 2014) a 50% bonus first-year depreciation allowance pertains.

Reduced Expensing.
For a tax year commencing in 2012, Code Sec. 179 expensing election is reduced from $500,000 to $139,000, with a $560,000 investment-based ceiling (down from $500,000/$2 million). For tax years starting after 2012, it will be reduced to $25,000 with a $200,000 investment-based ceiling. In addition, for a tax year commencing after 2011, expensing for qualified real property can no longer be claimed.

Furthermore, the prior obligation to report the Report of Foreign Bank and Financial Accounts on Form TDF90-22.1, Foreign Account Tax Compliance Act must now be reported on a new Form 8938.

Additionally, premiums paid to cover an adult child under age 27 at the end of the year, also qualify, even though the child is not the taxpayer’s dependent.

As before, the insurance plan must be set up under the taxpayer’s business, and the taxpayer cannot be eligible to participate in an employer-sponsored health plan.

$74,450 for a married couple filing a joint return and qualifying widows and widowers, rising from $72,450 in 2010.

$37,225 for a married person filing separately, increasing from $36,225.

$48,450 for singles and heads of household, rising from $47,450.

In order to qualify for the credit, the employer is required to have paid wages in
the last 26 weeks equal to no less than 80% of the wages for the first 26
weeks. Use Form 5884-B to claim the credit. The amount will be the lesser of
$1,000 or 6.2% of the retained worker’s wages during the period.

Rates for medical or moving activities will be .23 per mile driven. 

Miles driven in the service of charitable organizations will be .14 cents per mile.

Taxpayers are not allowed to utilize the business standard mileage rate for a vehicle after using any depreciation method from the Modified Accelerated Cost Recovery System, or following a claim using a Section 179 deduction for that vehicle.

Furthermore, the business standard mileage rate cannot be utilized for more than four vehicles used concurrently.

The federal gift tax exists for one purpose: to prevent citizens from sidestepping the federal estate tax by giving away their assets before they die.

New rules related to the lifetime gift limit have increased the popularity of transferring real estate as a gift to family members.  The IRS has increased their activity towards finding taxpayers who have failed to file and report such transactions on a gift tax return or those that have filed but reported transfers of property to a related party for little or no consideration.  The IRS is utilizing state land-transfer records as evidence of an omitted filing of certain gift transactions.

Review any properties or assets that you changed title for in the past five years for any reason. If you find that you transferred an asset, to anyone, make sure a gift tax return, was filed.

You can avoid gift tax returns if the asset’s value was less than the annual limit of $13,000 per person. If the asset value was higher, there are still methods around the gift tax.  But, you will still be required to file the gift tax return.

Gift tax limits

Any gift of property, including real estate, valued over $13,000 to one person must be reported on a gift tax return in the year the gift is made.  In 2011, a married couple can gift up to $26,000 to each person.

The relationship between gift taxes and estate taxes

At the time of your death, your estate will be composed of the total value of all of your assets, less any debts. The estate tax rules for 2011 tax estates over $5 million at rates as high as 35%. The first $5 million of your estate will not get taxed.

Perhaps, at this point you are considering giving all of your assets to your heirs before you die, thus avoiding any estate tax altogether? Unfortunately, the government has already anticipated this.  You can move a lot of assets out of your estate by utilizing the annual gift tax exclusion. Go past that though, and you begin to carve away at the exclusion that offsets the cost on the first $5 million of lifetime gifts. If you go beyond the $5 million, you’ll be required to pay the gift tax at rates that are almost equal to the individual income tax, up to 35% in 2011.

The basic tax basis matter

As you contemplate making gifts, consider that very distinct rules regulate the tax basis of property a beneficiary receives as a gift vs. receives as an inheritance. For instance, if your daughter inherits your property, her tax basis would be the fair market value of the property as of the date you become deceased. That makes all appreciation during your lifespan tax-free.

But, if you gift the property to her, her tax basis is what your tax basis was. Now she will owe tax on appreciation during your lifetime, just like you would have if had you sold the asset.

Make sure to determine that you are making gifts of the correct type of property, because if not you might be thwarting your tax planning strategies.  You must decide what are your tax goals, and if you are attempting to reduce current income taxes, future estate taxes, or maybe both.

What is a gift?

A gift is a transfer of property for little or no consideration. A gift only becomes valid when you give up ownership to the asset.  This is particularly important when making gifts of or your personal residence or stock in the family business.

Gifts that are not subject to the gift tax rule

The following are some of the gifts that are not considered “taxable gifts” and, consequently, do not count towards your $5,000,000 lifetime sum.

• Present-interest gift of up to $13,000 in 2011.
• Charitable gifts.
• Gifts to a spouse who is a U.S. citizen.
• Gifts for educational expenses.
• Payments to 529 state tuition plans.
• Gifts of medical expenses.

Gifts that are subject to the gift tax

The following gifts are categorized as taxable gifts when they surpass the annual gift exclusion amount of $13,000 in 2011.

•Checks.

•Adding a joint tenant to real estate. This type of arrangement turns into a taxable gift if the new joint tenant has the right under government statutes to separate his interest in the joint tenancy and receive his portion of the property.

•Loaning $10,000 or more at less than the current market interest rate. The value of the gift will be based on the difference between the interest rate charged and the related federal rate.

•Erasing indebtedness or making a payment owed by another party.

•Making a gift as an individual to a corporation. This becomes a gift to the individual shareholders of the business except if there is a legal business reason for the gift.

•A gift of foreign real estate from a U.S. citizen.

•Giving real or tangible property located in the U.S.

Pros for making a gift

• Lower estate taxes. Pulling money out of your estate thru lifetime gifts can be effective even if those gifts trigger the gift tax. Why? By eliminating future appreciation on the asset from your estate.
• Lower income taxes. If you give property that has a low tax basis or property that generates a great deal of taxable income, you may be able to reduce income taxes paid within a family by moving those assets to family members in lower tax brackets.

Cons for making a gift

• Reduces your net worth.
• The Kiddie Tax.

Tips on reporting and paying the gift tax

In the year of gifting, you are required to file Form 709: U.S. Gift Tax Return, which is due April 15 of the subsequent year.

On the gift tax return, show the fair market value of the gift as of the date of the transfer, your tax basis (as giver) and the identity of the recipient. Attach an explanation of the value used for gifting determinations.

Once the return is filed, the statute of limitations begins to run, assuming all valuations are accurately disclosed.  The IRS has 3 years from the date of filing to address any questions about the valuation used on your tax return filing.