Lynn Ritter, CPA Becomes Principal at Cover & Rossiter

We are excited to welcome Lynn Ritter, CPA, as our newest Principal at Cover & Rossiter. Lynn comes to us with over 25 years of experience as a certified public accountant. She is now the head of our Middletown office, where she will serve business and individual clients with tax planning and compliance, specializing in estate and trust services.

Learn more about Lynn and the role she will be playing at Cover & Rossiter here: http://www.coverrossiter.com/about-us/team/#ritter

What is Next for the Payroll Tax Cut?

At the last minute in 2011, Congress passed a 2-month extension of the payroll tax cut, which reduces the American worker’s social security tax to 4.2% from 6.2%.  Less publicized, the extension also extended federal unemployment benefits for the long-term unemployed AND temporarily forestalled a deep cut in doctors’ Medicare fees that would make it harder for the elderly to find doctors who would treat them.  The cost of the 2-month extension will be paid for by increasing the fees charged to mortgage lenders by Government Sponsored Entities like Fannie Mae and Freddie Mac.  Thus, the same middle income families who are helped by the payroll tax cut will pay for the cut in increased mortgage fees.

Now, the two sides need to figure out how to extend all three measures through the end of 2012 at a $160 billion cost.  How quickly will an extension be reached, if at all?  We predict the law will be extended, but probably not until just before the February 29 expiration date.  Why?  The Democrats believe that, if the talks take a long time, this will damage the Republicans, who have already been criticized for wanting to increase taxes on 160 million workers while standing firm on not increasing taxes on the wealthiest of taxpayers.  Meanwhile the Republicans insist that the cost of the extension be covered by revenue increases; however, they object to the Democratic proposal to cover the cost with a millionaire surtax or a limit on tax deductions for the very wealthy.

On February 3, Democratic leaders announced they have a backup plan to cover the cost of the continuation of the payroll tax cut and the related provisions.  No details have been revealed, however.

What does this mean for the average taxpayer? The payroll tax cut lowers the amount of social security funds available for the checks paid out to the nation’s seniors.  Monies coming in from social security taxes generally go right out in payments to retirees.  So, let’s look at strategies to alleviate dependence on social security:

• Use your employer 401(k) or retirement plan matching – a $150 monthly contribution can be a $300 contribution with the employer match
• Have your HR department deposit a small, say 5%, percentage of your paycheck into a savings account that charges no fees
• Fund an IRA before 4/15/12 – you can contribute up to $5,000 and potentially reduce your taxes too!

Call Diane Burke at Cover & Rossiter at (302) 656 – 6632 for the latest information on tax changes and how you can respond in ways that secure your financial future.

Changes in the 2011 Tax Year

Filing your taxes can be a stressful thing; especially with all of the provisions that change from year-to-year. Today’s economy causes people to feel extra pressure to have their taxes filed properly and without any mistakes. That’s where the expertise at Cover & Rossiter comes in. You can rely on our team to help you stay updated on the tax provisions from one year to the next.

Below we have summarized the provisions that were extended for one year through 2011 and the provisions that became effective in 2011. We hope it will serve as a guide for you. They were compiled by Diane Burke, a very knowledgeable CPA and Director at Cover & Rossiter. For details on any of the provisions, you should speak with Diane, or one of the many CPAs at Cover & Rossiter, to gain a full understanding about the affects they could have on you.  Diane can be reached at dburke@coverrossiter.com. All of the facts are supported by the IRS code section.

The following provisions were extended for one year through 2011:

• The treatment of mortgage insurance premiums as deductible (Sec. 408 (d) (8))
• The deduction for tuition and related expenses (Sec. 222)
• The state and local sales tax deduction (Sec. 164)
• The deduction for elementary and secondary school teachers (Sec. 62(a) (2) (D))

The following provisions became effective in 2011:

• Employees of employers with more than 250 employees may see some new information on their Forms W-2 for 2011:  The value of the employee’s health insurance coverage sponsored by the employer. This reporting is strictly informational the amount reported will not affect the individual’s tax liability.
• Over the counter medications are no longer reimbursable from health savings accounts (HSAs) Archer medical savings accounts (MSAs), health FSAs or health reimbursement arrangements.
• The additional tax on distributions from an HAS or an Archer MSA that were not used for qualified medical expenses was increased to 20% of the disbursed amount, effective for disbursements made during the tax years starting after Dec. 31, 2010 (Under prior law, the tax was 10% of the disbursed amount for HSAs and 15% for Archer MSAs.
• Property acquired and placed in service between Sept. 9, 2010, and Dec. 31, 2011 may be eligible for 100% depreciation.
• Form 1099 B has been expanded to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year.

Please do not hesitative to give the Cover & Rossiter team a call with any questions about the 2011 Tax season. We are happy to assist you. www.coverrossiter.com/

End of the Year Tax Preparation Tips: What Should I Do Ahead of Time?

"What can you do to help them do a better job for you?"
To ensure a great experience with your CPA, get optimal results and a faster turnaround, you should follow these tips below:

1. Review your past year's tax return to familiarize yourself with what you reported income, adjustments and deductions last year. This will serve as a good guide for the categories of income and expenses you'll need to tell your accountant.
2. Look for any information - such as your address or dependents - that may have changed, and make a note to tell your accountant.
3. Don't send piles of receipts to your tax payer. Instead bring to your appointment a list of those items organized by category (for example, home, office, rental property, charity, etc.).
4. Being disorganized and unprepared wastes time, which will cost you money.
5. Open any envelopes with the words "tax information" or "tax documents" and sort the contents by category before you meet with your tax person.
6.  Remember to organize and bring:
   - Real estate tax receipts if you don't pay those taxes through escrow.
   - A new baby's Social Security number (needed to claim the child as a dependent).
   - The taxpayer-ID numbers, addresses, and phone numbers of child-care providers.
7. Remember that all charitable cash donations, no matter how small, must be substantiated either by a canceled check, a bank record with the charity's name, donation amount, and date; or a detailed receipt from the chairty, or the contribution is not deductible. So collect everything in one place. Did you drive your personal vehicle to do work for a chairty? That mileage may be deductible, at 14 cents per mile.
8. Gather your cost of investments sold. Cost basis is the purchase price, plus the transaction fees, etc of the investments you own.
9. Tell your preparer about major purchases such as a new vehicle, purchase of a home, refinance of your mortgage and even some major home improvements made in 2011. Doing so can save you real money.
10. Provide a list of the improvements, description and cost of any energy saving improvments made to your home in 2011.
11. Points, interest and property taxes paid in connection with the refinance of your mortgage or a home purchase can also be deductible.

We hope this list is helpful to you and will ease your tax experience. Contact us at Cover & Rossiter to get more information on our tax services. Call us at 302-656-6632.

Captive Insurance Taxation – The Basics

Captive Insurance Taxation – The Basics
A captive insurance company is essentially a form of self-insurance.   In its simplest form, an operating company sets up a subsidiary, which is the captive insurance company, and moves risk off the parent company’s book onto the subsidiary’s books by paying premiums to the captive insurance company.   The captive insurance company acts as the insurance company for the parent and invests the premium dollars so that they grow and are available to pay claims when they arise.

In recent years, the use of captives, both domestic and foreign, has increased dramatically.  Use of captives opens numerous issues which have ramifications for federal income tax purposes.

The main issue for captives is whether the captive insurance company is a valid insurance entity from an IRS standpoint.

This is an important factor in determining whether or not the insurance premiums that are paid to the captive insurance company are deductible by the insured and whether or not the captive insurance company is able to take advantage of the unique tax treatment available to insurance companies (i.e., deductibility of reserves). 

In order for the captive to be treated as a true insurance entity for income tax purposes, the elements of risk-shifting and risk distribution must be present.

Risk-shifting is defined as the transfer of the impact of a potential loss from the insured to the insurer.   If the insured has truly shifted the risk, then a loss incurred on the risk does not affect the insured.   Instead, the insurer bears the loss in its payment of proceeds to the insured. 

Risk-distribution is the spreading of the risk of loss to others beyond the insured (typically through reinsurance).  Therefore, if the insured suffers a loss, the cost of the loss is distributed to all parties who have paid a premium to the insurer.   The more parties which insure their risks and pay insurance premiums to the insurer, the more distribution of risk there is.

There are a number of revenue rulings and tax court cases that discuss these two factors at length.  
At the very least, I would recommend you read Revenue Rulings 2005-40, 2002-89, 90 and 2002-91.
If you have any questions or would like more information, please contact:

Joanne Shaver, CPA
302-656-6632
JShaver@CoverRossiter.com

Estate Taxes Eased

By now you may have heard that the Estate Tax has been lowered for 2011 and 2012. Taxpayers no longer have to pay federal estate tax unless they own more than $5 million in assets.  Let’s look at how these changes can affect you.

What does it mean to "own more than $5 million?" What possessions count as "your estate?" All investments, cash, vehicles, real estate, furniture, clothing, artwork and other collections, retirement assets and business interests are included in this calculation.   In some cases, life insurance counts, too.

What is the tax rate?  Every US taxpayer is entitled to bequeath up to $5 million to their heirs with zero tax.  Once you leave over $5 million in assets, there is a flat 35% rate.  Note that certain costs, such as funeral expenses, are allowable deductions against the total estate.

Another change in the new Estate Tax rules is that if the first-to-die spouse leaves less than $5 million, the surviving spouse can bequeath their own $5 million plus whatever amount the deceased spouse did not leave. For example, if a spouse has only $2 million in assets, she bequeaths $2 million upon her death. That leaves $3 million of her total $5 million allowance unused. If her surviving spouse has $10 million in assets, he can use his own $5 million plus the $3 million remaining from his wife – leaving only $2 million of his estate as being subject to the tax.

An important point to remember is that you don't have to wait until death to leave possessions to your loved ones.  You can give up to $13,000 of cash or other property to any individual each year – this applies to multiple individuals as well.  Beyond that, you can make lifetime gifts of up to the same $5 million level without paying any tax – the Estate and Gift Taxes have the same tax-free limits and rates.  By gifting now, you avoid any increase in value of that property between now and your death from your estate.

Does this mean you can forget about estate planning?  No, you should continue to work with competent legal resources to make sure your assets pass as you intend without any complications.  Furthermore, this summary applies to federal tax only – your state may assess an estate or inheritance tax as well.  Also, these rules may (and they probably will) change before their December 31, 2012 expiration and your attorney can help you be prepared no matter what happens in the future.

If you have any questions or would like more information, please contact:
Diane Burke, CPA, MBA, AEP
Cover & Rossiter
302-656-6632
DBurke@CoverRossiter.com

See more articles from Cover & Rossiter at www.coverrossiter.com/

Taming Tax Season

Sending your tax materials in each year can be a daunting process.  "Where did I put that Form 1099? Did it come in yet?” I have three copies of the same document what do I do?"  Listed below are seven tips to help insure a smooth tax season:

Designate a central location to store all incoming tax materials such as a box or large envelope.  If you get duplicates feel free to send us both. We can determine which document is most recent and use that document.
Complete and sign the Tax Organizer form as legibly as possible- We know that the organizer is quite lengthy for some of our clients.  You do not need to complete the entire organizer.  Instead complete the first 8-10 pages and provide us with your original tax documents.  This will save you some time and we can refer to the tax documents for the details.

We also ask that you complete certain organizer pages if you own a small business or have rental real estate instead of providing a shoe box of receipts.  Also please list the nature of the expense vs. the name of the party that you paid, i.e. "electrical repair" instead of "Joe Smith"

Be sure to include cost basis information if you sold stock.  You may be able to obtain this on line or by calling your broker.

Improperly listing estimated tax payments is the number one cause of tax notices.  Include the amount paid, date paid, tax year and quarter, check number, and payee.  Please be sure to list the details for the period 1/1/10 through 1/15/11 to properly identify all tax payments.

Provide totals of charitable contributions instead of providing a stack of receipts.  Please be sure to indicate if the contributions were cash, check or donated property.

Deliver your tax information to us as soon as possible and ideally no later than March 10th.   Some data may arrive later but send in the bulk of your information prior to March 10th, accumulate the second wave of information into one stack, and send it in at the end of March

If you have any questions or would like more information, please contact:
Loretta Manning, CPA
302-656-6632
LManning@CoverRossiter.com

See more articles from Cover & Rossiter at www.coverrossiter.com/