Convert Traditional IRA into Roth IRA

Here's the best scenario for this idea: Your traditional IRA is (or was) loaded with equities and has still not fully recovered from the beating taken during the 2008/2009 stock market meltdown. So your account is now worth less than it once was. Correspondingly, the tax hit from converting your traditional IRA into a Roth IRA right now would also be less than it would have been at the market peak. Why? Because a Roth conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth IRA. While even the reduced tax hit from converting is unwelcome, it may be a small price to pay for future tax savings. After the conversion, all the income and gains that accumulate in your Roth IRA, and all withdrawals, will be totally free of any federal income taxes - assuming you meet the tax-free withdrawal rules. In contrast, future withdrawals from a traditional IRA could be hit with tax rates that are higher than today's rates.

Of course conversion is not a no-brainer. You have to be satisfied that paying the up-front conversion tax bill makes sense in your circumstances. In particular, converting a big account all at once could push you into higher 2012 tax brackets, which would not be good. You must also make assumptions about future tax rates, how long you will leave the account untouched, the rate of return earned on your Roth IRA investments, and so forth. If the Roth conversion idea intrigues you, please contact us for a full analysis of the relevant variables.

DON'T OVERLOOK ESTATE PLANNING

For 2012, the unified federal gift and estate tax exemption is a historically generous $5.12 million. However, the exemption will drop back to only $1 million in 2013 unless Congress takes action. In addition, the maximum federal estate tax rate for 2013 and beyond is scheduled to rise from the current 35% to a painfully high 55%. Therefore, planning to avoid or minimize the federal estate tax should still be part of your overall financial game plan. Even if you already have a good plan, it may need updating to reflect the current $5.12 million exemption and the uncertainty about next year's rules. Contact us for specifics.

Nine Tax Breaks That May Vanish

Tax breaks come and tax breaks go. But this year is different.

Strategy: Prepare for the possible loss of several critical tax winners at the end of 2012. These include the "Bush tax breaks" that were initially passed a decade ago. On the other hand, certain other tax provisions are likely to be extended, including the annual "patch" for the alternative minimum tax (AMT) and tax incentives for energy-saving home improvements.

Here's a quick rundown of nine key tax breaks for individuals and small business owners slated for the endangered list.


1. Tax rates: Absent any legislative action, tax rates will be higher in 2013. the income levels for all tax brackets will be adjusted upward and the "marriage penalty" for joint filers will become harsher. In addition, the two top tax rates of 33% and 35% will replaced by rates of 36% and 39.6%, respectively.

2. Capital gains and dividends: For 2012, the maximum tax rate for long-term capital gains and qualified dividends is 15% (0% for certain low income investors). Beginning in 2013, the maximum rate for long-term capital gains will increase to 20% (10% for low income investors), while qualified dividends will be taxed at ordinary income rates reaching as high as 39.6% (see No.1).

3. Higher education credit: Parents who send their children to college can claim (subject to certain restrictions) the American Opportunity Tax Credit, formerly known as the Hope scholarship credit. The maximum credit for 2012 is $2,500. But the maximum is scheduled to revert to $1,800 (the time for the Hope Scholarship credit) in 2013.

4. Section 179 deductions: Currently, a small business can write off a maximum of $125,000 of qualified property (inflation-indexed to $139,000 in 2012), although the maximum deduction is reduced on a dollar-for-dollar basis for purchases above a threshold of $500,000 (inflation-indexed to $560,000). The maximum is schedules to drop back to $25,000 in 2013 with a $200,000
phase out threshold.

5. Bonus depreciation deductions: As a complement to Section 179, you may also qualify for 50% bonus depreciation on qualified property placed in service in 2012. Without any extension, bonus depreciation will disappear completely next year.

6. Phaseouts of deductions: Previously, up to 80% of the most popular deductions, including deductions for charitable gifts, mortgage interest and state and local taxes, could be "phased out" under a special rule for high-income taxpayers. A similar rule applied to dependency exemptions. The phaseout rules were gradually reduced and finally repealed in 2010. But they will be back
with a vengeance in 2013.

7. Child tax provisions: Several favorable tax provisions, including the child tax credit, the dependent care credit (i.e., the "child care credit") and the adoption credit will be scaled back in 2013. Generally, the provisions will revert to limits established prior to 2010.

8. Payroll tax holiday: The 2% Social Security tax holiday for employees, was extended through 2012. Barring another extension, in 2013 employees will have to pay the full 6.2% tax on wages up to the Social Security tax ceiling.

9. Estate and gift tax breaks: Several estate and gift tax provisions will "sunset" after 2012. This includes the generous $5 million estate tax exemption (inflation-indexed to $5.12 million in 2012), a top estate tax rate of 35%, portability of exemptions between the estates of spouses and corresponding benefits for gift and generation skipping taxes. Generally, the law will return to
the way it was before the Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA).

Business Entertainment at Home

As many of you know, a business can generally deduct 50% of entertainment and meal expenses that either follow or precede a substantial business discussion with a client. If a client visits from a distant location, the entertainment may take place the day before or after the meeting.

Strategy: Host a house party within the time restraints. The cost of home entertainment attributable to your business guests is deductible even if you never actually discuss business during the get together. For this purpose, business guests may include your client, his or her associates, you and your employees and everyone’s spouses.

Tip: If you throw a holiday bash for all employees, you can deduct 100% of the cost, regardless of the location of the party. You must however include the entire workforce.

Tip on Gold Investing

As a hedge to the stock market volatility, some investors are turning to gold and other precious metals. When you sell gold, you must report the difference between the sales price and your basis as a capital gain or loss. If you held the gold for more than a year, any gain is treated as a long-term gain. The federal income tax rate on long-term gains from precious metals is 28%, not 15%!! By using retirement plan funds instead of personal funds for gold investments, you can dodge a tax disaster. For example, gold coins that are minted by the U.S. government or one of the states, and some other gold coins of sufficient purity, can be held by IRAs. This is an exception to the general rule that prohibits IRA investments in coins and other collectibles.

Here are some ways to invest in gold:

• Gold bars or bullion
• Gold certificates
• Gold coins
• Gold stocks and mutual funds

Tip: You might swap precious metals in a like kind exchange at year-end. There is no current tax on the deal, but a tax loss is allowed for the difference. (The swap is actually a simultaneous sale and purchase.)

Sales Tax Deduction Available for 2011 Tax Returns

Our Buchbinder Tunick & Co. November Online Advisor just came out with some information regarding the "Sales Tax Deduction" now available for 2011 tax returns.

WHAT YOU SHOULD KNOW:

MAKE THE RIGHT PRICING DECISION - In business, making pricing decisions is always tough - and even more so when the economy is slow and sales are slipping.

CHOOSING YOUR EXECUTOR: A CRITICAL ESTATE PLANNING DECISION - An executor is the person or legal entity that you appoint in your will to settle your estate after your death.

To learn more click on link for entire article...

How do your clients protect themselves from fraud?

An example: The executive director of a service fulfillment company insists on using high quality paper for surveys, and demands control of the ordering process. This allows the executive to set up a false vendor, pay exorbitant prices for inferior paper, and then receive "loans" back from the vendor. If this was your client, would they be able to identify the fraud and properly gather evidence against the perpetrator?

Studies show that, on average, organizations lose 5% of their gross revenue to fraud. Our forensic specialists, through seminars and consultation, teach how to understand fraud and how to implement internal controls to avoid it. We also offer the expertise to uncover fraud and gather evidence.

Fighting fraud requires a clear comprehension of fraud theory. This includes understanding the Fraud Triangle: Pressure, Opportunity, and Rationalization-elements that fraud theory asserts must exist for an employee to commit fraud. It also requires proficiency in gathering evidence: seeking accounting irregularities and analytical anomalies, and compiling notes from properly conducted interviews, properly prepared and signed statements, and forensically acceptable electronic media images.

In our November 2010 Forensic Accounting Seminar, our team of specialists explored this case, teasing out the factors that allowed the fraud to take place, the investigation that revealed the extent of the fraud, and the evidence that was gathered.

In this case, another employee discovered the fraud by questioning the executive's insistence on high-quality paper and noticing a suspicious address for the vendor. The company took the correct steps to investigate: putting the executive on paid leave, interviewing employees and vendors, and creating legally acceptable disk images. After accounting for most of the fraud, they interviewed the executive, obtained a statement, notified law enforcement, and began civil proceedings. Building the case from the ground up facilitated both the civil and criminal cases.

With appropriate controls in place, organizations can minimize their risk for this kind of fraud and lessen the damage if it occurs. We look forward to opportunities to work with you in the future to explore ways to best protect your clients.

Deductibility of Skybox Rentals

I would like to review briefly the tax rules for deducting the expenses of renting a skybox or other private luxury box at a sporting event. Skybox rentals are subject to the general business-related entertainment expense rules as well as rules specific to skybox rentals.

In general, entertainment expenses are deductible if they are either “directly related to” or “associated with” the active conduct of your trade or business or investment activities. The direct relationship test is the harder of the two to meet. It requires an active business discussion during the entertainment event aimed at getting immediate revenue (as opposed to generalized good relations).

Accordingly, the “associated with” test is more likely to apply in the case of a skybox rental. To qualify under this test, you only need to have engaged in a substantial and bona fide business discussion before or after the entertainment event. If the discussion and entertainment event occur on the same day, the test is passed. If they are on different days, it may be more difficult to link the two, and the particular facts and circumstances involved will have to be looked at, e.g., whether a business client is from out of town, the length of the business meetings, etc.

In general, qualifying entertainment expenses are only 50% deductible. That is, if you spend $300 to entertain a client, the deduction is limited to 50% of your cost, or $150.

Special rules also apply for meals: they aren't deductible to the extent their cost is “lavish or extravagant” under the circumstances, and either you (or an employee of yours) must be present at the meal for the expense to qualify.

In addition, another limitation applies to the rental of a skybox or other private luxury box if the box is leased for more than one event. In that case, the deduction can only be based on the value of nonluxury box seats for the same event. For example, say you rent a 10-seat skybox at a stadium for $3,000 for three ballgames, where a nonluxury box seat costs $20. Ten seats times $20 for three events totals $600. Then, applying the general 50% limitation, the deduction would be $300, if the skybox was used for each event for entertainment “directly related to” or “associated with” the active conduct of your trade or business.

In determining whether the skybox rental is for more than one event, each game or other performance is counted as one event. Thus, a single lease for three or four World Series games is a lease for more than one event. On the other hand, two or more separate leases for the same event would be treated as one. That is, if three skyboxes are rented for a single game, the three leases would be treated as one, so the lease wouldn't be for more than one event. Additionally, if separate charges are incurred for food and beverages consumed in the skybox, these are deductible separately under the regular rules for such expenses rather than under the skybox limits.