Sapurstein & Associates is blogging about Estate taxes and how gifts of inherited closely held stock could present a problem.

For instance, a gift of 50% or more of an inherited business will negate your estate tax break. IRS says when more than 35% of an estate is made up of interests in closely held (for instance, family) businesses, estate tax due on the business portion can be deferred for an initial five-year period. The tax can then be paid in up to 10 annual installments, which may be a huge help to your bottom line if your estate tax is large.

That said, if half or more of an interest in the stock of an inherited closely held business is sold or otherwise disposed of, the tax deferral is terminated. According to IRS rules, an heir’s gift of 51% of the stock in a closely held inherited business even to family members is considered a “disposal.”

It’s a simple explanation, but it can get complicated if you are in the midst of working on an estate. The CPAs at Sapurstein & Associates know the ins and outs of federal and state taxes and are small to medium sized business tax experts. They can help you understand how estate tax rules apply to your particular circumstance. If you have a question, call Sapurstein & Associates. Your first hour of consultation is free.

Barry Sapurstein, CEO of Sapurstein & Associates states that your capital gains reporting for 2011 is likely to be more complicated.

The IRS has made it necessary to use two tax forms in 2011, Form 8949 and Schedule D, for more complete records and to be able to cross-check seller information, resulting, they hope, in increased federal tax income for the government.

The reason for the additional forms is because of the basis reporting rules that went into effect for securities bought after 2010 and sold in 2011 and later. All sales will be listed on Form 8949, and the totals must now be carried to Schedule D.

Beginning this tax year, 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.

In this way, the IRS will be able to cross-check the basis information it receives with the sellers’ returns.

Barry and Leanne can help you navigate through the IRS regulations for federal income taxes. Your first hour is free –so give Sapurstein & Associates a call to set up an appointment.

The CPAs at Sapurstein & Associates have learned that several key retirement plan ceilings will be higher next year. This is good news for many near-retiring baby boomers.

New 2012 Benefit Plan Ceilings:

• The maximum 401(k) contribution rises to $17,000 in 2012. That’s up $500 over 2011. So those born before 1963 can put in as much as $22,500 beginning next year. New contribution limits apply to 403(b) and 457 plans as well.
• The ceiling on SIMPLEs will remain at $11,500 in the coming year. 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 pay-in 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 pay-in 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.

Give Barry or Leanne a call or leave a note on our website — if you need additional information.

If you are an “owner-employee” (employee who owns 2% or more of the S Corporation stock on any day of the year) or an owner or partner of an S corporation, you are in good company these days. As small-to-medium size business tax and accounting specialists, the CPAs at Sapurstein & Assoc. work with a great many owner-employees. The numbers of owner-employee companies are on the rise.

Most S Corporation business owner/managers are aware that “owner-employees” have special tax laws/rules in place regarding their health insurance premiums AND their participation in the S corporation’s Section 125 “cafeteria” plan.

There are, however, two very important owner-employee rules to follow. Do you know what they are?

Owner-Employee Rule #1: Owner/employees can NOT PARTICIPATE in the company’s Section 125 “cafeteria” plan. They cannot pay for neither insurance premiums, flexible spending accounts for medical or childcare expenses, HSAs and other like-minded programs through a pre-tax payroll withholding.

Owner-Employee Rule #2: The S Corporation 2% owner can deduct his/her health insurance premium on page 1 of his/her form 1040 as an adjustment to gross income. The health insurance premiums are added to the owner’s wages, however they are not subject to social security or Medicare tax.

There are many benefits of being an owner-employee of an S corp, as long as you play by tax rules. Having an expert guide you – especially when it comes to all things financial – can be a huge relief.

If you have any hesitations or concerns about your health insurance, tax or accounting needs, the CPAs at Sapurstein can help.

Generally when married couples make end of life requests legal with wills and estate plans, they assume the older spouse will pre-decease the younger spouse. But life doesn’t always take its cues from general assumptions, legally noted or not.

The CPAs at Sapurstein & Associates wondered what happens when the younger spouse dies first. The answer depends on the circumstances, but is very interesting.

Sapurstein notes that there may be an opportunity for the surviving spouse to postpone distributions from a qualified retirement plan when spouses die “out of order.” Here’s an example of how to recalculate a plan to suit this situation.

Husband Smith, age 72, is married to Wife Smith, age 65, who predeceases him. Mrs. Smith left a retirement account naming her husband as the death beneficiary. Although Mr. Smith has the option to roll his wife’s account over to his own IRA, he has already reached the age when mandatory distributions are required, and doesn’t need or want this additional income.

An interesting alternative might be for Mr. Smith to leave the account in his deceased wife’s name and delay the start of required distribution. He can legally delay distribution until the date on which his wife would have had to begin withdrawals, had she lived.

What if Mr. Smith does need the additional funds? Mr. Smith may take withdrawals, just as his wife could have, AND he has the ability to “park” the funds in his account for several additional years. Why park them? This permits tax-deferred growth of the funds that may eventually benefit other family members when Mr. Smith dies – without Mr. Smith paying taxes on these parked funds until they are withdrawn by him or his heirs.

It’s good to ask questions about “what if…” and “then what?” when you are planning for the future. Ask the CPAs at Sapurstein & Associates and we can help you find the answers.

The CPAs at Sapurstein & Associates have been blogging about expenses related to college, and how to make tuition fees and post secondary costs work for you. Here is part 2.

Student Loan Interest Deduction:

Besides the American Opportunity Credit and the Lifetime Learning Credit, there are other ways to positively affect your tax return with post secondary related costs.

• If your modified adjusted gross income is less than $75,000 ($150,000 if filing a joint return), before this deduction you may be able to deduct interest paid on a student loan used for higher education during the year. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

Tuition and Fees Deduction is an alternative way to reduce your tax rather than claiming a credit:

You can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions by claiming the tuition and fees deduction for qualified higher education expenses for an eligible student if your modified adjusted gross income before the deduction is below $80,000 ($160,000 if married filing jointly).

Claiming the American Opportunity Credit, Lifetime Learning Credit or Tuition and Fees Deduction in 2011:

You can claim the American Opportunity Credit for, say, your sophomore daughter and the Lifetime Learning Credit for your senior son/you cannot claim the tuition and fees deduction for the same student in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction, depending on which is more beneficial for you.

If you have tax questions related to student loans, college fees and tuition, give Barry or Leanne a call. As CPAs we will assist you in choosing the best alternative for your particular situation.

Sapurstein and Associates has learned that the IRS is not presently responding to taxpayers in a “timely fashion,” according to Treasury inspectors. In too many cases, the IRS isn’t meeting its stated goal of answering taxpayer correspondence within 30 days. Public frustration with the tax system is growing.

If you are among the many taxpayers who keep getting erroneous notices after mailing in documents and payments to resolve an IRS dispute, don’t despair. Contact the CPAs at Sapurstein & Associates with copies of your records and proof of submission. They have access to hot lines specifically established for practitioners and may be able to resolve your issue in an expedient fashion.

As an example, a client filed his form 1040 in a timely fashion, yet received a number of letters from the IRS stating they were reviewing his return and could not process his refund until they completed their review. After several of these monthly letters, he contacted Sapurstein & Associates. We are happy to report he has received his refund after our contacting the IRS on his behalf.

Working with a reduced staff and with an exceptional number of IRS scams being investigated and audits taking place, the IRS is overburdened. Your patience with the IRS system and working with experienced tax experts like the CPAs at Sapurstein & Associates may help keep you sane.

The CPAs at Sapurstein & Associates have some recommendations for those who have made a 2011 taxable gift and will be filing an Annual Gift tax form 709 in April 2012.

Medical Care and Tuition Expenses Gifts: An unlimited gift tax exclusion exists for payment of a donee’s medical care and tuition expenses provided the payment paid by the donor is made directly to the provider or institution.

To clarify, the exclusion is not available for reimbursements that are paid directly to the donee. This must be understood in order to properly file Form 709, whether or not the $5 million exclusion effectively zeros out any immediate gift tax liability.

However, contributions to qualified state tuition programs and education IRAs do NOT qualify for this unlimited exclusion. Therefore, the gift tax form may be required for these types of gifts (contribution into a student’s 529 plan).

Charitable Gifts: Form 709 instructions state that a tax return does not need to be made if gifts to charities are made. However, if a return to report non-charitable gifts is required, ALL gifts to charities then must also be reported on the return.

Yes, it’s complicated and can be confusing. If you’re not quite sure how this relates to your situation, ask the CPAs at Sapurstein & Associates to take a look at your gifts and how they may affect this year’s taxes.

Does the following scenario reflect advice you may have received?

Are you putting off withdrawing funds from your IRAs and other qualified retirement plans until your required distributions begin after age 70 ½? Instead, conventional wisdom has you spend down your non-growth assets so that they don’t become tax deferred.

However, it now may be smarter from an income tax perspective to begin taking withdrawals from retirement plans at an earlier age. Why? Withdrawals from IRAs and 401(k) plans are taxed as ordinary income. If the plan assets continue to grow, the higher minimum distribution amounts could push the account owner into a higher income tax bracket every year.

However, assets sold from an investment portfolio are generally taxed at capital gains rates which have generally been lower than ordinary income tax rates.

How does this help your bottom line? By spreading out the distributions from qualified retirement plans over a longer period, the required minimum distributions may be smaller, and that’s smart thinking.

Distributions prior to age 70 ½ that aren’t needed for immediate living expenses can be invested in growth stock or other instruments that will defer the recognition of income.

Think of it this way: Upon death, an IRA or 401k plan, items of income in respect of a decent subject to both income and estate tax, will be smaller. Investments outside the sheltered accounts may be larger, but they will be entitled to a stepped up basis in the names of the beneficiary.

The CPAs at Sapurstein & Associates do think out of the box to help you maximize your estate potential. Talk to us about your goals. Your first hour of consultation is free.

When you make a bequest from your estate, be sure your will clearly expresses your wishes, the tax experts at Sapurstein & Associates have learned.

An IRS private letter made this clear responding to a heavily indebted decedent who had language in his will stating his desire to leave closely held investments to his children in equal shares. This became important when the IRS interpreted the deceased man’s will as having “mandatory language constituting a specific bequest and not a gift of the residuary assets of the estate.”

Since the man died leaving an estate with large debts, this IRS determination had the effect of reducing what the man’s surviving spouse inherited. As a result, the marital deduction allowed to the estate was also trimmed.

The lesson here is to be sure your will clearly expresses your bequest intentions. Otherwise, the IRS could interpret the language in a way to boost your tax bill, something you and your descendants will want to avoid.