1. Your Hedge Fund Investments  Many individuals have increased their use of this type of investment in an effort to obtain higher yields.  If you are invested in Hedge Funds expect your General Partner will provide only a rough  “estimate” of tax for your April 15th filing deadline.  As a result, you will need to request an extension for filing your personal return until you receive full supporting  information and can sort out the details behind your K-1 investment schedules (especially if you are invested in currency or commodity hedge investments).
2. Foreign Bank and Financial Assets  You may have a financial interest or signature authority over a foreign financial account.  If the aggregate value of your accounts is greater than $10K you must file Treasury Division form TD F 90-22.1.  This form must be filed by June 30th (not your tax return filing date).  AND, this year, there is a NEW IRS “Form 8938″ that is in addition to the FBAR.  This form must be filed with your tax return and filing is required by those individuals with foreign financial assets greater than $50K.   What if you own foreign Real Estate in an LLC?  File.  There are “stiff” penalties for noncompliance.
3. S Corp Shareholders  Many of us utilize “flow through” entities in our business endeavors.  S Corp shareholders prefer dividend distributions to save payroll tax.  This is a HOT IRS audit area.  Recent cases provide guidance on what constitutes a “reasonable” salary;  its a “facts and circumstances” test.  If you have a “personal service” business not all profits are required to be treated as “income.”  See Watson v. U.S., a 2010 case, for details of what constitutes a “reasonable” salary. Another IRS audit hot button is maintenance of your “basis” schedules; ensure these are up to date.
4. Independent Contractor vs. Employee ?  You may want to consider reclassification of your workers as employees under the IRS “Voluntary Classification Settlement Program.”  Misclassification can have significant payroll tax, retirement, health care, and State unemployment, disability and workman’s compensation impacts.  The Federal program allows a small payment (approximately 10% of the amount due for last year) with relief for all prior years.  However, be aware of State tax exposure.
5. State and Local Tax  Where is your “nexus” in a virtual world?  If you are dealing on EBay you may need a sales tax vendor number.  There is no “deminimus” exception.  If you have telecommuters who work from home (in another state) you may find yourself subject to state taxes in that state. Civil Unions?  Review what needs to be addressed between Federal and State filings or until Congress or the Supreme Court step in.
6. Cancellation of Debt  If you are liable for cancelled debt, then such amount is generally includible in your gross income (exceptions to inclusion include gifts, bequests, and certain qualified student loan debt forgiveness).  The Mortgage Forgiveness Debt Relief Act provides an exclusion of debt discharge of up to $2MM if married filing joint ($1M if filing single) on your principal residence through 2012.  Forgiven credit card debt?  You must be able to show insolvency on the date the debt was forgiven to qualify for exclusion.
7. Basis Reporting Rules  Your Schedule D will be new this year with required Form 8949 attachments.  What costs basis will you choose for reporting your securities investments?  The default is “average” cost, but you may choose, FIFO, LIFO, specific identification; Notice 2011-56 includes details.
8. Gross Receipts Reporting  Do you accept credit card payments from your customers?  Expect to receive a 1099K by January 31, 2012, in addition to a 1099 misc.  Be wary of duplicate reporting since this is a transition year.
9. Estate Tax Uncertainty  This year we have a $5M exemption, a 35% maximum tax rate, and “portability”.  The GSTT and Lifetime Gift tax exclusion are the same as the Estate Tax Exclusion.  With no action we will return to a $1M exemption and a 55% maximum estate tax rate in 2013.  Unanswered is whether there will be a “clawback” of 2011 and 2012 $5M gifts made if you pass after 2012 and we are back to a $1M gift tax exclusion.
10. Income Tax Uncertainty  Are we returning to the 2001 tax brackets of: 15%, 28%, 31%, 36% and 39.6%?  Will long term capital gains be 20%?  No AMT patch, no more qualified dividends?  Plan on maximizing your itemized deductions this year if possible to take advantage of this years tax rates.

Find out more by calling Paul Lechner at 708.460.6686.

1. Ordinary Income – Focus on Marginal Rates  Existing federal income tax rates for individuals will remain in place for 2011 and 2012 (10%, 15%, 25%, 28%, 33%, and 35%).  For planning purposes you should focus on your “marginal” rate, the rate that applies to your last dollar of taxable income.  After 2012 expect higher marginal rates.
2. Capital Gains  The top rate on net long-term capital gains remains at 15% in 2011 and 2012 (and the rate is 0% for net gains that would otherwise be taxed in the two lowest regular marginal brackets).  What do you expect it will be in 2013?  Plan accordingly.
3. Dividends  What are you earning on your bank balances and treasury investments?  Dividends, like long term capital gains continue to receive favorable tax treatment in 2011 and 2012.  You will generally pay tax on qualified dividends at a maximum rate of 15%, and, in the lowest two regular marginal tax brackets, qualified dividends are tax free.
4. Alternative Minimum Tax  Have you been surprised when you found you were subject to the alternative minimum tax (AMT) even if you had not paid it in the past?  If your AMT liability is higher than your regular tax, you will pay an additional amount on top of your regular tax.  You pay AMT if your AMT income is more than your AMT exemption ($48,450 filing single, $74,450 married filing jointly).  AMT tax rates remain the same at 26% and 28% for 2011.  This is a complex area and requires recomputing your taxable income under special rules.  Many deductions are not allowed for AMT purposes, and certain income that is otherwise nontaxable will be included in your AMT income.
5. Personal Exemptions, Deductions and Credits  You can choose between claiming a standard deduction or deducting specific actual expenses, i.e. “itemized deductions”, generally deducting the larger of the two.  Under the 2010 Tax Relief Act, no one will see their itemized deductions reduced or their personal exemptions phased out for 2011 and 2012 (each personal exemption in 2011 will trim  $3,700 from your income for tax purposes).
6. “Above” the Line Deductions  Certain expenses are deductible from your gross income in arriving at your AGI.  Examples include: qualified student loan interest of up to $2,500, alimony paid, self-employed retirement plan contributions and health insurance account (HSA) contributions.  Above the line deductions are especially valuable because they reduce your AGI, potentially allowing you to qualify for tax benefits you  wouldn’t otherwise be eligible for if your AGI were higher.
7. Charitable Contributions  You may deduct as an itemized deduction cash or property you give to a qualified charitable organization during the year, subject to AGI based limitations.  Excess contributions may be carried forward to future years.  Contributions of appreciated securities make a lot of sense.  If you’ve held the securities for longer than one year you’ll generally receive a deduction for their full market value on the date of the gift and will not have to include the appreciation in your income.
8. Employment Related Expenses   Employee business expenses are deductible as an itemized deduction.  They are combined with certain other miscellaneous deductions you may have, such as investment management fees, and only the amount that exceeds 2% of your AGI is deductible. Your business travel, entertainment, and car expenses are potentially deductible if your employer does not reimburse you (if your are reimbursed they are deductible only to the extent your employer includes the payments in your taxable wages on your W-2).
9. Credits  Make sure you take advantage of any tax credits available to you.  A tax credit reduces your tax dollar for dollar, and, certain tax credits are refundable for eligible taxpayers whose tax liabilities are not high enough to absorb the credit.
10. Other Factors  Taxes are just one factor to consider in your decision making.  Recognize that understanding and actually taking action can impact on your cash tax costs.

Selling your home, timing capital gains and losses, ensuring you are taking advantage of education tax incentives, and saving for retirement; these and other areas deserve a close review.   Spend some time on these items yourself, or with your Tax Preparer or Tax Attorney (for complex situations)  and your results will be better for your efforts.

1. The Joint Select Committee Cannot Agree  If a majority of the JSC members fail to approve a report and legislative language, “across-the board” reductions must be implemented with annual cuts starting in  2013.  The reductions would be split 50-50 between defense and domestic spending.
2. The End of the Bush era Tax Cuts  By letting the Bush era tax cuts expire at the end of 2012 nearly $1 trillion in deficit reduction would result.
3. Problems for the end of 2011  Congress needs to address a host of tax breaks set to expire at the end of 2011 such as the research, and work and opportunity tax credits, the above the line deduction for qualified tuition and related expenses, and, without another “patch” higher Alternative Minimum Tax.
4. Long Term Planning  An unofficial summary of the Senate’s bipartisan plan called for
• A single corporate tax rate between 23% and 29%
• Tax simplification.  There would be three tax brackets, 12%, 22% and 29% with any additional revenue collected as a result of tax simplification going to deficit reduction.
• Permanent repeal of the AMT.
• Reform, not elimination of current tax breaks for health, charitable giving, home ownership, and retirement savings.
• Retention of the earned income tax credit and child tax credit or some alternative that would provide support for qualified individuals.
5. Formulate Strategies, Develop Tactics, Support with detailed Action Plans   Stay current and develop “scenario” planning.  The IRS is conducting a webinar on August 31 that focuses on the agency’s “Fresh Start” Initiative.  The one hour seminar will offer tips about helping individual and small business taxpayers get a fresh start with their tax liabilities.  Registration can be done online any time before the program.  For additional information and registration go to Fresh Start Webinar