Sherrin Fielder, CPA

12277 Soaring Way # 104 Truckee, CA 96161 (530) 550-9600 phone (530) 550-9621 fax Sherrin@fieldercpa.com

November 16, 2012 As in previous years, we would like to take this opportunity to review a few of the tax law changes and alert you to some tax saving moves that can still be made for the year 2012. Year-end planning will be more challenging than normal this year. Unless Congress acts, starting in 2013, individuals will see higher tax rates across the board and a number of popular deductions and credits will be gone. Estate and gift tax rates will be higher as well. Therefore, tax planning actions taken between now and year-end may be more important than ever. This letter presents some planning ideas to consider while there is still time to act before the year-end. To see the chart summarizing the major differences between 2012 and 2013 tax laws for Federal and California purposes go to: http://fieldercpa.com/pdfs/Chart%20of%20Expiring%20Tax%20Provisions%20Fed%20and%20CA.pdf.pdf If congress passes legislation, we will continue to keep you updated.

As a result of the Healthcare Act (PPACA), two new Medicare taxes will kick in starting in 2013. First, there will be a new 0.9% Medicare surtax tax (HI) on wages and self-employment earnings exceeding $200,000 ($250,000 if married filing jointly; $125,000 if married filing separately). There will also be a new 3.8% Medicare contribution tax (MIIT) that will apply to the lesser of (1) net investment income, including interest income (but not if it is tax-exempt), capital gains, dividends, annuities, rents, royalties, and passive income; or (2) modified adjusted gross income (MAGI) in excess of $200,000 ($250,000 for married filing jointly; $125,000 for married filing separately). For more information regarding the Health Care Law in general go to: http://www.healthcare.gov/law/information-for-you/index.html California passed Proposition 30 in the recent election. This created new increased tax brackets for individuals with income greater than $250,000 and married couples with income greater than $500,000. More over, it is RETROACTIVE to 1/1/2012. Also as a result of this proposition, sales tax in California will increase by .25% on 1/1/2013. Alternative Minimum Tax (AMT) This is a parallel tax calculation which must be performed each year. If your AMT taxes owed exceed your regular taxes owed then you will pay the additional amount required by AMT. If in subsequent years your AMT is lower than your regular tax, then you may receive a credit for AMT paid in prior years. Surprising to most people, is that AMT disallows many types of deductions. Personal and dependency exemptions, state taxes, real estate taxes, unreimbursed employee expenses, mortgage interest on consumer debt lines of credit are all excluded in the AMT calculation. Also AMT uses a slower method of depreciation. If you live in a state that has high income taxes you are likely affected by AMT since it is a large itemized deduction for regular tax. At this time, congress has not enacted the temporary AMT patch. This patch increases the income threshold at which individuals are subject to this parallel calculation. If no action is taken by congress, then many individuals who were not subject to AMT in 2011 may be subject now in 2012. Failure to Enact AMT Patch by Year-end: In an 11/13/13 letter to Senator Orrin Hatch, acting IRS Commissioner Steven Miller said that he had instructed his staff to leave the IRS's core systems "as-is" with respect to the AMT and hold off on any substantial design and engineering work. If Congress enacts an AMT patch, including both increased exemption amounts and the special tax credit ordering rules, by the end of 2012, the IRS "would likely be able to open the 2013 tax filing season with minimal delays for most taxpayers." If an AMT patch is not enacted by year-end, there "would be serious repercussions for taxpayers." Roughly 28 million taxpayers would be faced with a very large, unexpected tax liability for 2012. Furthermore, the IRS would have to instruct more than 60 million taxpayers that they cannot file their tax return or receive a refund until the IRS completes the necessary systems changes. Due to "the magnitude and complexity of the changes, it is entirely possible that these taxpayers would not be able to file until late March 2013, if not even later."
To view the chart of Retirement Contribution limits for 2012 and 2013: limits.php To view the chart of Depreciation for Business Equipment for 2012 and 2013 http://fieldercpa.com/pdfs/Chart%20of%20Depreciation%20Expense.pdf.pdf To view the chart of 2012 Standard Mileage Rates: http://fieldercpa.com/standard-mileage-rates.php http://fieldercpa.com/chart-of-retirement-contribution-

Foreclosure or Short Sale of Rental or Investment Properties Depending on whether your debt was recourse or non-recourse there may be taxable consequences to your debt forgiveness or loan modification. Reduction in principal owed, change in interest rates, or life of loan may all impact this calculation. Please contact us as soon as you are aware of a potential issue. Make sure you contact the lender regarding the income reporting documents. (Form 1099-A or 1099C) Estate and Gift Tax For 2012, estates over $5,120,000 will be subject to estate tax. As shown in the chart above, this exemption will decrease to $1,000,000 for 2013. You may choose to make annual exclusion gifts before year end to minimize estate tax. You can give $13,000 to an unlimited number of individuals free of gift tax. However, you may not carry over unused exclusions from one year to the next. The transfers also may save family income taxes where incomeearning property is given to family members in lower income tax brackets who are not subject to the kiddie tax. Gifts in excess of the annual exclusion may require you to report on Form 709. Nanny Tax- If you have individuals over the age of 18 performing service in your residence their earnings may be subject to payroll taxes. The threshold for this is earnings greater than $1,800 for 2012 and $1,800 for 2013. You may also be required to issue them a Form W-2. Small Employer Health Insurance Credit- If you pay at least 50% of your employees premiums and have fewer than 25 employees with an average annual salary not more than $50,000, you may qualify for this tax credit. The credit is generally 35% (50% for tax years beginning after 2013) of the contributions towards the employees health insurance premiums. If you are a non-profit organization the credit is 25%. California Proposition 30 Increase to Sales Tax Beginning on January 1, 2013 sales tax increase of .25% takes effect. General Reminders Foreign Accounts or Investments- The reporting requirements for assets held overseas are increasing and the penalties for failure to report them are significant. Foreign bank accounts, notes receivable, ownership in a foreign partnership or corporation, and interest in Canadian RRSPS are some examples. Form 8938 may be required to be attached with your annual tax return and Form TD F 90-22.1 may be required to be filed separately each June. If you have any questions about any foreign accounts please contact me. QuickBooks Mac v. Windows - If you are contemplating converting or obtaining the Mac version of QuickBooks, please call so we can discuss cost benefit issues. Versions earlier than 2010- If you are using a QuickBooks version 2009 or earlier, please call so we can discuss technology issues regarding those versions. Inventory- Make sure you take a thorough and accurately priced detail of your inventory at your business year-end. This documentation is critical in the event there is an audit. S-Corporation Shareholders- Remember to contact your payroll service for common year-end adjustments to your W-2. Health insurance paid for you by your corporation should be added to your W-2. Also, personal use of vehicles owned by your corporation may result in income to be reported by you on your W-2. This calculation should be done in early January in order to avoid amending your W-2. It may be helpful to review your investment basis in a partnership or scorporation prior to year-end in order to utilize any losses incurred. Please contact us for any year end calculations related to tax planning. IRS Email Spam Beware of any emails you receive claiming that they are from the IRS. The IRS has issued several recent consumer warnings on the fraudulent use of the IRS name or logo by scamsters trying to gain access to consumers financial information in order to steal their identity and assets. The IRS never contacts you by email. Documentation - IRS recently ruled that credit card statements are not sufficient support and that actual receipt of charges are required. Please keep 7 years of records. If assets are still owned, please keep purchase records for 7 years after the date of sale. Investment Records The IRS is requiring that your investment brokers report cost basis on sales of securities. This requirement is being phased in for years 2011-2013. It is recommended that you work closely with your brokers to determine the correct costs basis especially if you inherited stocks or are participating in a dividend reinvestment program. If you are contemplating changing your broker, it would be helpful to obtain correct cost basis prior to any change.

Form 1099s A reminder that these are due to recipients by January 31, 2013. If your trade or business pays a nonincorporated service provider greater than $600/year then you will need to issue them a Form 1099-MISC. The requirement that this would apply to landlords or payment for goods was repealed. Penalties for not filing can be $100 per each omission. Even though California does not have a separate Form 1099, you may be denied the deduction for that expense by California if no federal 1099 was issued. In addition, California requires that you submit Form DE 542 to report service providers you expect to do business with in 2013. This form is due within 20 days of paying or entering into a contract with an independent contractor. It may save time to process these in conjunction with your 1099s. Withholding for California Nonresidents- A 7% withholding is required on payments made to nonresident independent contractors for services performed in California for payments in excess of $1,500 for the calendar year. This also applies to payments made to non-resident partners or s-corporation shareholder. In addition, this withholding is required for non-resident property owners with California rental properties. Form 588 should be filed by the payee to request exemption from this requirement by agreeing to file non-resident California income tax returns. Use Tax Use tax is the amount of sales taxes that may not have been collected on a purchase you made. This often happens when you purchase items on the internet and are charged no sales taxes, or purchase items in another county and pay less sales tax than the county you live in. Most states which have a sales tax in place have a requirement for you as an individual or business owner to pay the use tax. Please visit my website www.fieldercpa.com for links to different states use tax rules. The California Board of Equalization (BOE) is sending letters to businesses with at least $100,000 in gross receipts who are not already registered and do not hold sellers permits. This means all businesses, regardless of business type, must register (even strictly service providers). The purpose is to track all businesses that may be liable for use tax. Businesses that received this letter from BOE will be subject to a filing requirement even if no use tax is due. The use tax returns are due by April 15th each year if you do not normally file sales tax returns. These returns are required even if you owe no taxes. In some cases, if you have registered and reported zero use tax owed for three years in a row the BOE is sending out notices they are closing out your registration for annual reporting. If you are unclear about your status or reporting requirement, please let me know. California individuals who owe use tax on internet or out of state purchases should report those transactions on their annual California income tax returns. Change in Ownership of California Real Estate If you transferred more than 50% interest in real estate you should file a change in ownership report with California BOE within 45 days to avoid penalties. There are some transfers which are excluded from this requirement, please check with me for your responsibilities.

Remember that your in-office tax appointments are prescheduled and included in your organizer that we will be sending out in the next few weeks. Please call us asap if the appointment time is inconvenient for you.

Sincerely,