IRA Qualified Charitable Distribution Reinstated

IRA Qualified Charitable Distribution Reinstated

There are very few opportunities to conduct tax planning for 2012 once the calendar year flips to 2013.  However, a unique, very limited opportunity is available for the 2012 tax year.  One of the provisions of the recently passed American Taxpayer Relief Act of 2012 was the reinstatement of the Qualified Charitable Distribution (QCD) from an IRA to a charity.  To be eligible for QCD treatment and count toward an owner’s required minimum distribution (RMD) obligation for the year:

• You must transfer funds directly from your IRA to a charity
• Distributions must be made from an IRA account (not another retirement plan like a 401(k))
• The IRA owner must be 70 ½ years of age or older on the date of the donation from the IRA to the charity.
• The limitation per person in a single year is $100,000
• The donation must be to a public charity (most private foundations, CRATs, CLATs and some other entities do not qualify)

Many of you may now be asking the question, “How can I do this now when the year-end has already passed and I have received my RMD for 2012?”  Congress added special “look-back” provisions for the QCD since the legislation did not pass until January 1, 2013.  There are two options available:  one option is to elect to have a QCD made in January of 2013 count as if it was made on December 31, 2012, and option two is to re-characterize a distribution made in the month of December 2012 as a QCD as long as the same amount is donated to a qualified charitable organization by January 31, 2013.

The second question many of you may ask at this point is “why would this be worthwhile?”  IRA owners are required to take required minimum distributions out of their IRA once the taxpayer turns 70 ½ years of age.  In some instances, a taxpayer may not be able to realize the full benefit of a charitable contribution.  For instance, their income may be so low that they don’t exceed the standard deduction threshold (i.e. not able to itemize), or their charitable contributions may be so high in a year that they exceed the charitable contribution limits.  In these situations a QCD will enable them to “circumvent” thresholds to obtain the full taxable deduction for their contribution.

If you are interested in using this planning strategy for 2012, please contact Marie Holliday at (302) 691-2211 or MHolliday@CoverRossiter.com.

 You can also access this article on our website here.

The Fiscal Cliff

Talk of “going off the fiscal cliff” has been haunting me over the last several months. I started researching the provisions, and realized that the impact was much more far reaching than I had originally understood. The combination of the expiration of the Bush-era tax cuts as well as the impending start of the Obama Care tax provisions would have resulted in significant tax increases for virtually all of the American population, which could potentially cripple economic recovery. However, most people believed that these negotiations were related only to higher income taxpayers. For several months now, Cover & Rossiter has been providing emails, conducting seminars and even meeting individually with our clients to inform them of the impact of the pending changes. It was extremely difficult to adequately predict what would actually transpire because of the differing proposals from the Democrats and Republicans. I suspected these negotiations would go to the last minute, but hoped that legislation would pass with significant time to assist each one of you with year-end planning opportunities.

However, in true Congressional fashion of recent years, nothing was agreed upon until January 1, 2013. The tax side of the fiscal cliff was averted when the American Taxpayer Relief Act of 2012 was signed into law by President Obama on January 2. Outlined below are many of the provisions of this law:

• The Bush-era tax rates were extended for taxpayers with incomes below $400,000 (single) and $450,000 (married filing jointly); a new ordinary income tax bracket of 39.6% was created for taxpayers who exceed those thresholds. Originally, President Obama proposed that these increases would apply to AGI levels of $200,000 (single) and $250,000 (married filing jointly).
• Capital gains and qualified dividends for taxpayers that exceed those thresholds will now be 20% (to the extent that their income exceeds the thresholds). Taxpayers below the thresholds will continue to be taxed at the 15% rate on this income.
• The payroll tax holiday, which reduced Social Security tax from 6.2% to 4.2% in 2011 and 2012, was not extended. All wage earners will see a 2% increase in their Social Security tax withholdings for 2013.
• Trusts will continue to be taxed at the Bush-era tax rate levels except for the highest bracket. Trusts with income in excess of $11,950 will be taxed at the top rate of 39.6%.
• A permanent Alternative Minimum Tax (AMT) “patch” was enacted increasing the 2012 exemption levels to $50,600 for single taxpayers and $78,750 for married filing jointly taxpayers. In future years, the amounts will be indexed for inflation.
• Itemized deductions will once again be subject to phaseouts when income exceeds the threshold of $250,000 for single and $300,000 for married filing jointly.
• Personal exemption phaseouts will be reinstated as well once incomes exceed the threshold levels also indicated for itemized deductions.
• The maximum federal estate tax rate will be 40% for decedents dying after December 31, 2012 who have taxable estates in excess of approximately $5.12 million. The portability election between spouses will now be permanent.
• The child tax credit level was scheduled to be reduced to $500 in 2013, but has been permanently extended to $1,000.
• The 50% bonus depreciation provisions were extended through 2013.

There are many other provisions that were extended with this Act, so if you have specific questions please feel free to contact Marie Holliday at (302) 691-2211 or MHolliday@CoverRossiter.com.  
You can view this article on our website here.

Tax Deficiencies Can Now Result in License Suspensions

Marie Holliday, CPA, MBA & Susan Marley, CPA of Cover & Rossiter, P.A. were recently published in the Medical Society of Delaware's Delaware Medical Journal.

The economic downturn of the past several years has put tremendous pressure on state budgets. As a state’s citizens experience a reduction in their levels of income there is a corresponding decrease in a state’s tax revenues. States are expanding efforts to increase tax compliance in order to deal with their dwindling tax revenues. Although the vast majority of taxpayers voluntarily comply with the requirements to file their tax returns, there is an ever-increasing trend of non-compliance, particularly at the state level. As a result, many States have begun to adopt initiatives to “encourage” compliance. One of Delaware’s initiatives was the passage of House Bill 257 in June of this year. This new law enables Delaware’s Director of Revenue to authorize the Division of Professional Regulation to suspend or deny a taxpayer’s professional or occupational license for the failure to pay taxes that exceed $1,000, and a judgment has been assessed. Therefore, in order to maintain your professional license you must comply with all provisions of the state tax code or place your ability to practice medicine in Delaware in jeopardy. Obviously, no physician wants to risk this type of penalty. Filing timely returns and responding promptly to any tax notices issued by the state are keys to avoiding any suspension of your license. It is also imperative that you are knowledgeable about what taxes you may be liable for. Listed below are some of the taxes that licensed physicians may be responsible for:

• Personal Income Tax
• State of Delaware Payroll Withholding Tax
• Gross Receipts Tax
• State Unemployment Tax
• Corporate Income Tax (not all entities will be subject to this)
• S-Corporation Non-Resident Shareholder Estimated Tax

The issuance of a tax notice or deficiency will not immediately result in the suspension of your license. The state cannot initiate the suspension process until a taxpayer has had sufficient opportunity to address the issue. We recommend that upon notification from the state of a tax deficiency that you (or your tax advisor) investigate whether the notification is accurate. The notice will indicate a deadline by which the state requires a response. If you determine that the deficiency is indeed accurate, submit the required tax payment by the due date indicated in the notice. If you cannot determine the accuracy of the assessment by the due date, make sure to inform the state either by phone or by mail correspondence, and request an extension of time to investigate the matter. If you encounter a situation in which you cannot pay in full the amount due with a tax notice, do not delay responding until you have the ability to pay. Be proactive, and contact the representative listed on the notice to arrange a payment plan. You will be assessed additional penalties and interest on your tax liability until you pay in full, but will preserve your ability to practice as a physician because the state will not initiate proceedings to suspend your license. If you or your practice needs assistance dealing with state tax notices or tax compliance issues please contact Marie Holliday at (302) 691-2211 or Susan Marley at (302) 691-2232.

The published article can be seen here. See the article on our website here.