Should You Buy or Lease Your Next Vehicle?

Buying or leasing tips

  • Shop wisely. Advertised deals may be too good to be true once you read the fine print. To qualify for the deal, you may need to meet certain requirements, or pay more money up front.

  • To get the best deal, be prepared to negotiate the price of the vehicle and the terms of any loan or lease offer.

  • Read any contract you’re asked to sign, and make sure you understand any terms or conditions.

  • Calculate both the short-term and long-term costs associated with each option.

After declining dramatically a few years ago, auto sales are up, leasing offers are back, and incentives and deals abound. So if you’re in the market for a new vehicle, should you buy it or lease it? To decide, you’ll need to consider how each option fits into your lifestyle and your budget.

The chart below shows some points to compare.

Buying considerations Leasing considerations
Ownership When the vehicle is paid for, it’s yours. You can keep it as long as you want, and any retained value (equity) is yours to keep. You don’t own the car–the leasing company does. You must return the vehicle at the end of the lease or choose to buy it at a predetermined residual value; you have no equity.
Monthly payments You will have a monthly payment if you finance it; the payment will vary based on the amount financed, the interest rate, and the loan term. When comparing similar vehicles with equal costs, the monthly payment for a lease is typically significantly lower than a loan payment. This may enable you to drive a more expensive vehicle.
Mileage Drive as many miles as you want; a vehicle with higher mileage, though, may be worth less when you trade in or sell your vehicle. Your lease will spell out how many miles you can drive before excess mileage charges apply (typical mileage limits range from 12,000 to 15,000).
Maintenance When you sell your vehicle, condition matters, so you may receive less if it hasn’t been well maintained. As your vehicle ages, repair bills may be greater, something you generally won’t encounter if you lease. You generally have to service the vehicle according to the manufacturer’s recommendations. You’ll also need to return your vehicle with normal wear and tear (according to the leasing company’s definition), so you may be charged for dents and scratches that seem insignificant.
Up-front costs These may include the total negotiated cost of the vehicle (or a down payment on that cost), taxes, title, and insurance. Inception fees may include an acquisition fee, a capitalized cost reduction amount (down payment), security deposit, first month’s payment, taxes, and title fees.
Value You’ll need to consider resale value. All vehicles depreciate, but some depreciate faster than others. If you decide to trade in or sell the vehicle, any value left will be money in your pocket, so it may pay off to choose a vehicle that holds its value. A vehicle that holds its value is generally less expensive to lease because your payment is based on the predicted depreciation. And because you’re returning it at the end of the lease, you don’t need to worry about owning a depreciating asset.
Insurance If your vehicle is financed, the lien holder may require you to carry a certain amount of insurance; otherwise, the amount of insurance you’ll need will depend on personal factors and state insurance requirements. You’ll be required to carry a certain amount of insurance, sometimes more than if you bought the vehicle. Many leases require GAP insurance that covers the difference between an insurance payout and the vehicle’s value if your vehicle is stolen or totaled. GAP insurance may be included in the lease.
The end of the road You may want to sell or trade in the vehicle, but the timing is up to you. If you want, you can keep the vehicle for many years, or sell it whenever you need the cash. At the end of the lease, you must return the vehicle or opt to buy it according to the lease terms. Returning the vehicle early may be an option, but it’s likely you’ll pay a hefty fee to do so. If you still need a vehicle, you’ll need to start the leasing (or buying) process all over.

AVOIDING COMMON BUSINESS MISTAKES

How to Avoid Common Business Mistakes

It is not uncommon for business owners to become so involved with their day-to-day operations that they overlook some important issues associated with being in business. Here are some tips to help you avoid making costly mistakes and to ensure that your business runs smoothly.

Minimize personal liability. Individuals should try to avoid putting their personal assets at risk when they enter into a business venture whether solely or with others. Many overlook or dismiss the fact that personal liability can be minimized with the proper business structure. There are several types of entity forms that afford different degrees of protection, but there is no perfect entity that will provide an all-purpose, one-size-fits-all protection. Included among the various entity options for business owners are sole proprietorships, partnerships, corporations, s-corporations, and limited liability companies. In addition to liability protection, when choosing an entity, take into account the character of the business, the business partners you have, your options for exiting the business, and your estate plan.
Consider a buy-sell agreement. When partners first go into business together, they do so with high expectations and mutual respect. A joint business venture is like a marriage, and often, it ends in a divorce. A binding buy-sell agreement is probably one of the most important documents that a business with multiple owners can have. Typically, a buy-sell agreement is entered into by the owners of a business, and possibly the business entity itself, to purchase or sell interests of the business at a preset price or formula in the event of a future occurrence that will impact the operation and continuance of the business. Such events are numerous and can include death, disability, divorce, disagreement, or retirement. Imagine your business partner passing away and his or her heirs or surviving spouse stepping in as a partner.
Hold shareholder and board meetings. “Piercing the corporate veil” is terminology we hear associated with court cases when someone is attempting to go around the liability protection provided through an entity such as a corporation. Courts can “pierce the corporate [or business] veil” and hold the business owner personally liable for failure to conduct the business properly. Failure to hold the required meetings and maintain a minutes book is one indicator that a business is not being run as a corporation but rather by an individual or group of individuals. Bottom line…Hold the required meetings and maintain the minutes book.
Plan for family business succession. Determine whether there is a desire by a family member or members to participate in the business. If family succession is anticipated, then the business should be organized in a type of entity that lends itself to transfers of entity interests to family members with little or no loss of management or control, such as family-limited partnerships, limited liability companies, and subchapter s-corporations. The main goal is to allow the donor to retain control and derive income from the entity while removing considerable estate value through gifts of interests or making gifts using the applicable exemption amount ($1 million) or the annual gift tax exclusion amount. An understanding of estate and gift tax ramifications of gifts of entity interests, such as valuation issues and available discounts, is also crucial.
Understand the tax ramifications of your actions. Just about everything that we do that is related to business, investments, and retirement has tax ramifications. Many individuals fail to consider these ramifications, and they find themselves caught in tax traps or miss out on available tax deductions and credits, at significant cost. What we do know is that Congress has not, and probably will not, let a year go by without making changes to the tax code. Before making any major decisions such as purchasing a new business, making substantial purchases for an existing business, buying equipment for an existing one, setting up a retirement plan, selling a business or investment asset, or making investments, investigate the tax ramifications beforehand so that you can structure the course of action in a way that provides the most tax benefits.
If you need assistance with any of the above, please give our office a call so that we might help you directly or refer you to someone who can assist with your particular situation.

FUTA Credit Reduction State

Retroactive to January 1, 2012, Arizona is now one of the 19 “FUTA Credit Reduction States”,

Under the provisions of the American Federal Unemployment Tax Act (FUTA), a Federal tax is levied on employers covered by the Unemployment Insurance program program at a current rate of 6.0% on wages up to $7,000 a year paid to a worker. The law, however, provides a credit against federal tax liability of up to 5.4% to employers who pay state taxes timely under an approved state UI program. Generally, employers may receive this credit of 5.4% when they file their Form 940 (PDF), Employer’s Annual Federal Unemployment (FUTA) Tax Return, to result in a net FUTA tax rate of 0.6% (6.0% – 5.4% = 0.6%).

The credit against the Federal tax may be reduced if the state has an outstanding advance (commonly called a “loan”). When states lack the funds to pay UI benefits, they may obtain loans from the federal government. To assure that these loans are repaid, and in accordance with Title XII of the Social Security Act, the federal government is entitled to recover those monies by reducing the FUTA credit it gives to employers, which is the equivalent of an overall increase in the FUTA tax. When a state has an outstanding loan balance on January 1 for two consecutive years, and the full amount of the loan is not repaid by November 10 of the second year, the FUTA credit will be reduced until the loan is repaid. This process is commonly called FUTA Credit Reduction and was designed as an involuntary repayment mechanism. The reduction schedule is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan is repaid. From the third year onward, there may be additional reduction(s) in the FUTA tax credit (commonly dubbed “add-ons”).

As of November 11, 2012, there were 19 states that had outstanding UI federal loans and as a result, employers in these states will pay extra FUTA taxes that are effective retroactively to January 1, 2012.

Below is a list of FUTA Credit Reduction states. The rates listed in the “Potential” column for 2013 and 2014 are projected under the assumption that the Title XII loans on those states will not be repaid by November 10th of the column year.

State Effective FUTA   Tax Rate
Actual Potential
2012 2013 2014
Arizona 0.90% 1.20% 1.50%
Arkansas 1.20% 1.50% 1.80%
California 1.20% 1.50% 1.80%
Connecticut 1.20% 1.50% 1.80%
Delaware 0.90% 1.20% 1.50%
Florida 1.20% 1.50% 1.80%
Georgia 1.20% 1.50% 1.80%
Indiana 1.50% 1.80% 2.10%
Kentucky 1.20% 1.50% 1.80%
Missouri 1.20% 1.50% 1.80%
Nevada 1.20% 1.50% 1.80%
New Jersey 1.20% 1.50% 1.80%
New York 1.20% 1.50% 1.80%
North Carolina 1.20% 1.50% 1.80%
Ohio 1.20% 1.50% 1.80%
Rhode Island 1.20% 1.50% 1.80%
South Carolina* 1.80% 2.10%
Vermont 0.90% 1.20% 1.50%
Virgin   Islands** 2.10% 1.50% 1.80%
Wisconsin 1.20% 1.50% 1.80%

Vehicles and Section 179

One of the more popular uses of the Section 179 Deduction has been for vehicles. In fact, several years ago the Section 179 deduction was sometimes referred to as the “Hummer Tax Loophole,” because at the time it allowed businesses to buy large SUV’s and write them off. While this particular use (or abuse) of the tax code has been modified with the limits explained below, it is still true that Section 179 can be advantageous in buying vehicles for your business.

Vehicles used in your businesses qualify – but certain passenger vehicles have a total depreciation deduction limitation of $11,060, while other vehicles that by their nature are not likely to be used more than a minimal amount for personal purposes qualify for full Section 179 deduction. Here are the general guidelines for using the Section 179 Deduction for vehicle purchases (full policy statement available at: irs.gov)

Update / IRS Guidelines for Vehicles in 2013

The IRS has not yet released guidance concerning Section 179 and Bonus Depreciation as it relates to vehicles for the year 2013. The guidance will be published in the Internal Revenue Bulletin sometime after April 15th, 2013. So be patient, and check back here often for the release date.

Please note that there are a number of qualifications for vehicles, all with varying tax treatment.

What are the limits on Typical Passenger Vehicles?

For passenger vehicles, trucks, and vans (not meeting the guidelines below), that are used more than 50% in a qualified business use, the total deduction for depreciation including both the Section 179 expense deduction as well as Bonus Depreciation
is limited to $11,060 for cars and $11,160 for trucks and vans.

Exceptions include the following vehicles:

  • §Ambulance or hearse used specifically in your business;
  • §Taxis, transport vans, and other vehicles used to specifically transport people or property for hire;
  • §Qualified non-personal use vehicles specifically modified for business (i.e. van without seating behind driver, permanent shelving installed, and exterior painted with company’s name).

Limits for SUVs or Crossover Vehicles with GVWR above 6,000lbs
Certain vehicles (with a gross vehicle weight rating above 6,000 lbs but no more than 14,000 lbs) qualify for expensing up to $25,000 if the vehicle is financed and placed in service prior to December 31 and meet other conditions.

What Vehicles Qualify for the full Section 179 Deduction?

Many vehicles that by their nature are not likely to be used for personal purposes qualify for full Section 179 deduction including the following vehicles:

  1. Heavy “non-SUV” vehicles with a cargo area at least six feet in interior length (this area must not be easily accessible from the passenger area.) To give an example, many pickups with full-sized cargo beds will qualify (although some “extended cab” pickups may have beds that are too small to qualify).
  2. Vehicles that can seat nine-plus passengers behind the driver’s seat (i.e.: Hotel / Airport shuttle vans, etc.).
  3. Vehicles with: (1) a fully-enclosed driver’s compartment / cargo area, (2) no seating at all behind the driver’s seat, and (3) no body section protruding more than 30 inches ahead of the leading edge of the windshield. In other words, a classic cargo van.

Other Considerations

Vehicles can be new or used (“new to you” is the key).

The vehicle can be financed with certain leases and loans, or bought outright.

The vehicle in question must also be used for business at least 50% of the time – and these depreciation limits are reduced by the corresponding % of personal use if the vehicle is used for business less than 100% of the time.

Remember, you can only claim Section 179 in the tax year that the vehicle is “placed in service” – meaning when the vehicle is ready and available – even if you’re not using the vehicle. Further, a vehicle first used for personal purposes doesn’t qualify in a later year if its purpose changes to business.

Tax Due Dates for January 2013

 

January 10 Employees – who work for tips. If you received $20 or more in tips during December, report them to your employer. You can use Form 4070, Employee’s Report of Tips to Employer.
January 15 Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in December 2012.

Individuals – Make a payment of your estimated tax for 2012 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES. This is the final installment date for 2012 estimated tax. However, you do not have to make this payment if you file your 2012 return (Form 1040) and pay any tax due by January 31, 2013.

Employers – Nonpayroll Withholding. If the monthly deposit rule applies, deposit the tax for payments in December 2012.

Farmers and Fishermen – Pay your estimated tax for 2012 using Form 1040-ES. You have until April 15 to file your 2012 income tax return (Form 1040). If you do not pay your estimated tax by January 15, you must file your 2012 return and pay any tax due by March 1, 2013, to avoid an estimated tax penalty.

January 31 Employers – Give your employees their copies of Form W-2 for 2012 by January 31, 2013. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee of the posting by January 31.

Businesses – Give annual information statements to recipients of 1099 payments made during 2012.

Employers – Federal unemployment tax. File Form 940 for 2012. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you already deposited the tax for the year in full and on time, you have until February 11 to file the return.

Employers – Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2012. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until February 11 to file the return.

Employers – Nonpayroll taxes. File Form 945 to report income tax withheld for 2012 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the year in full and on time, you have until February 11 to file the return.

Individuals – who must make estimated tax payments. If you did not pay your last installment of estimated tax by January 15, you may choose (but are not required) to file your income tax return (Form 1040) for 2012. Filing your return and paying any tax due by January 31 prevents any penalty for late payment of last installment.

Payers of Gambling Winnings – If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of Form W-2G.

Certain Small Employers – File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2012. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more from 2012 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return.

Summary – Tax Changes for 2013

As the new year rolls around, it’s always a sure bet that there will be changes to the current tax law and 2013 is no different. From health savings accounts to retirement contributions here’s a checklist of tax changes to help you plan the year ahead.

Individuals

For 2013, the big news is the signing of the American Taxpayer Relief Act of 2012 (ATRA), which modified, made permanent or extended a number of tax provisions that expired in 2012 and 2011, for both individuals and businesses. Standard mileage, health savings account contribution limits, and foreign earned income exclusion, as well as most retirement contribution limits have been adjusted upward to reflect inflation as well.

Alternative Minimum Tax (AMT) Exemption amounts for the AMT are now permanent and indexed for inflation and allow the use of nonrefundable personal credits against the AMT. Retroactive to January 1, 2012, exemption amounts are $50,600 (individuals) and $78,750 (married filing jointly). These amounts are indexed for inflation in 2013.

“Kiddie Tax” For taxable years beginning in 2013, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $1,000 (up from $950 in 2012). The same $1,000 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax”. For example, one of the requirements for the parental election is that a child’s gross income for 2013 must be more than $1,000 but less than $10,000.

For 2013, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to “kiddie tax” is $2,000.

Health Savings Accounts (HSAs) Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.

A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.

For calendar year 2013, a qualifying HDHP must have a deductible of at least $1,250 (up $50 from 2012) for self-only coverage or $2,500 (up $100 from 2012) for family coverage (unchanged from 2011) and must limit annual out-of-pocket expenses of the beneficiary to $6,250 for self-only coverage (up $200 from 2012) and $12,500 for family coverage (up $400 from 2012).

Medical Savings Accounts (MSAs) There are two types of Medical Savings Accounts (MSAs): the Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high deductible health plan (HDHP).

Self-only coverage.For taxable years beginning in 2013, the term “high deductible health plan” means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,150 (up $50 from 2012) and not more than $3,200 (up $50 from 2012), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,300 (up $100 from 2012). 

Family coverage. For taxable years beginning in 2013, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,300 (up $100 from 2012) and not more than $6,450 (up $150 from 2012), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $7,850 (up $200 from 2012).

 

Increased AGI Limit for Deductible Medical Expenses In 2013, the amount individuals can deduct for medical expenses increases to 10 percent of AGI. The 7.5 percent threshold continues through 2016 for taxpayers aged 65 and older, including those turning 65 by December 31, 2016.

Eligible Long-Term Care Premiums Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or less at the end of 2013, the limitation is $360. Persons over 40 but less than 50 can deduct $680. Those over age 50 but not more than 60 can deduct $1,360, while individuals over age 60 but younger than 70 can deduct $3,640. The maximum deduction $4,550 and applies to anyone over the age of 70.

Medicare Taxes Starting in 2013, there will be an additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly). Also starting in 2013, there is a new Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,00 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts and self-employed individuals are all liable for the new tax.

Foreign Earned Income Exclusion For taxable years beginning in 2012, the foreign earned income exclusion amount is $97,600, up from $95,100 in 2012.

Long-Term Capital Gains and Dividends In 2013 tax rates on capital gains and dividends for taxpayers whose income is at or below $400,000 ($450,000 married filing jointly) remain the same as 2012 rates. As such, for taxpayers in the lower tax brackets (10% and 15%), the rate remains 0%. For taxpayers in the middle tax brackets, the rate is 15%. An individual taxpayer whose income is at or above $400,000 ($450,000 married filing jointly), the rate for both capital gains and dividends is capped at 20% (up from 15% in 2012).

Pease and PEP (Personal Exemption Phaseout) Pease (limitations on itemized deductions) is permanently extended for taxable years beginning after December 31, 2012 for taxpayers with income at or below $250,000 for single filers) and $300,000 for married filing jointly. The PEP (personal exemption phase-out) limitations was also reinstated, but with higher thresholds of $250,000 for single filers and $300,000 for married taxpayers filing joint tax returns.

Estate and Gift Taxes For an estate of any decedent during calendar year 2013, the basic exclusion amount is $5,120,000 (indexed for inflation–same as 2012). The maximum tax rate rises to 40% (up from 35% in 2012). The annual exclusion for gifts increases to $14,000 (up from $13,000 in 2012).

Individuals – Tax Credits

Adoption Credit In 2013, a non-refundable (only those individuals with tax liability will benefit) credit of up to $10,000 is available for qualified adoption expenses for each eligible child.

Earned Income Tax Credit For tax year 2013, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $5,981, up from $5,891 in 2012. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Child Tax Credit For tax year 2013, the child tax credit is $1,000 per child.

Child and Dependent Care Credit The child and dependent care tax credit was permanently extended for taxable years beginning in 2013. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses. For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Individuals – Education

American Opportunity Tax Credit and Lifetime Learning Credits The American Opportunity Tax Credit (formerly Hope Scholarship Credit) is extended to the end of 2017. The maximum credit is $2,500 per student. The Lifetime Learning Credit remains at $2,000.

Interest on Educational Loans Starting in 2013, the $2,500 maximum deduction for interest paid on student loans is repealed and no longer limited to interest paid during the first 60 months of repayment. The deduction is phased out for higher-income taxpayers.

Tuition and Related Expenses Deduction   In 2013, there is once again an above-the-line deduction of up to $4,000 for qualified tuition expenses. This means that qualified tuition payments can directly reduce the amount of taxable income, and you don’t have to itemize to claim this deduction. However, this option can’t be used with other education tax breaks, such as the American Opportunity Tax Credit, and the amount available is phased out for higher-income taxpayers.

Individuals – Retirement

Contribution Limits The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,000 to $17,500. Contribution limits for SIMPLE plans increase from $11,500 to $12,000. The maximum compensation used to determine contributions increases to $255,000 (up $5,000 from 2012 levels).

Income Phase-out Ranges The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified adjusted gross income (AGI) between $59,000 and $69,000, up from $58,000 and $68,000 in 2012.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range is $95,000 to $115,000, up from $92,000 to $112,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $178,000 and $188,000, up from $173,000 and $183,000.

The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $178,000 to $188,000 for married couples filing jointly, up from $173,000 to $183,000 in 2012. For singles and heads of household, the income phase-out range is $112,000 to $127,000, up from $110,000 to $125,000. For a married individual filing a separate return who is covered by a retirement plan, the phase-out range remains $0 to $10,000.

Saver’s Credit The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low and moderate income workers is $59,000 for married couples filing jointly, up from $57,500 in 2012; $44,250 for heads of household, up from $43,125; and $29,500 for married individuals filing separately and for singles, up from $28,750.

Businesses

Standard Mileage Rates The rate for business miles driven is 56.5 cents per mile for 2013, up from 55.5 cents per mile in 2012.

Section 179 Expensing For 2013 the maximum Section 179 expense deduction for equipment purchases increases to $500,000 of the first $2,000,000 of business property placed in service during 2013. The  bonus depreciation of 50% is also extended through 2013.

Work Opportunity Tax Credit (WOTC) The WOTC is extended through 2013 (retroactive to 2012) and includes a one-year extension of the enhanced credit for hiring certain veterans. When a business hires a person from one of several specific economically disadvantaged groups it may claim a Work Opportunity Tax Credit, generally equal to 40 percent of the first $6,000 in wages paid to a new hire.

Transportation Fringe Benefits If you provide transportation fringe benefits to your employees, for tax years beginning in 2013 (through 2017) the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $240. The monthly limitation for qualified parking is also $240.

While this checklist outlines important tax changes for 2013, additional changes in tax law are more than likely to arise during the year ahead.

Don’t hesitate to call us if you want to get an early start on tax planning for 2013. We’re here to help!

2013 SOCIAL SECURITY CHANGES

Cost-of-Living Adjustment (COLA):

Based on the increase in the Consumer Price Index (CPI-W) from the third quarter of 2011 through the third quarter of 2012, Social Security and Supplemental Security Income (SSI) beneficiaries will receive a 1.7 percent COLA for 2013. Other important 2013 Social Security information is as follows:

Tax Rate:
2012 2013
Employee 7.65%* 7.65%
Self-Employed 15.30%* 15.30%
NOTE:  The 7.65% tax  rate is the combined rate for Social Security and Medicare.  The Social Security portion (OASDI) is 6.20%  on earnings up to the applicable taxable maximum amount (see below).  The Medicare portion (HI) is 1.45% on all earnings.
* The Temporary Payroll Tax Cut Continuation Act of 2011 reduced the Social Security payroll tax rate by 2% on the portion of the tax paid by the worker through the end of February 2012. The Middle Class Tax Relief and Job Creation Act of 2012 extended the reduction through the end of 2012. Under current law, this temporary reduction expired at the end of December 2012. For 2013, the rate is back to 6.2%. Please keep in mind that this might again change during 2013.
Maximum Taxable Earnings:
2012 2013
Social Security (OASDI only) $110,100 $113,700
Medicare (HI only) N o   L i m i t
Quarter of Coverage:
2012 2013
Earnings needed to earn one Social Security Credit $1,130 $1,160
Retirement Earnings Test Exempt Amounts:
2012 2013
Under full retirement ageNOTE: One dollar in benefits will be withheld for every $2  in earnings above the limit. $14,640/yr.        ($1,220/mo.) $15,120/yr.        ($1,260/mo.)
The year an individual reaches full retirement ageNOTE: Applies only to earnings for months prior to attaining full retirement age. One dollar in benefits will be withheld for every $3 in earnings above the limit.There is no limit on earnings beginning the month an individual attains full retirement age. $38,880/yr.        ($3,240/mo.) $40,080/yr.        ($3,340/mo.)
Social Security Disability Thresholds:
2012 2013
Substantial Gainful Activity (SGA)            Non-Blind            Blind       $1,010/mo.       $1,690/mo.       $1,040/mo.       $1,740/mo.
Trial Work Period (TWP) $720/mo. $750/mo.
Maximum Social Security Benefit: Worker Retiring at Full Retirement Age:
2012 2013
$2,513/mo. $2,533/mo.
SSI Federal Payment Standard:
2012 2013
Individual $698/mo. $710/mo.
Couple $1,048/mo. $1,066/mo.
SSI Resources Limits:
2012 2013
Individual $2,000 $2,000
Couple $3,000 $3,000
SSI Student Exclusion:
2012 2013
Monthly limit $1,700 $1,730
Annual limit $6,840 $6,960
Estimated Average Monthly Social Security Benefits Payable in January 2013:
Before       1.7% COLA After       1.7% COLA
All Retired Workers $1,240 $1,261
Aged Couple, Both Receiving Benefits $2,014 $2,048
Widowed Mother and Two Children $2,549 $2,592
Aged Widow(er) Alone $1,194 $1,214
Disabled Worker, Spouse and One or More Children $1,887 $1,919
All Disabled Workers $1,113 $1,132

Questions and Answers for the Additional Medicare Tax

The following questions and answers provide employers and payroll service providers information that will help them as they prepare to implement the Additional Medicare Tax which goes into effect in 2013. The Additional Medicare Tax applies to individuals’ wages, other compensation, and self-employment income over certain thresholds; employers are responsible for withholding the tax on wages and other compensation in certain circumstances. The IRS has prepared these questions and answers to assist employers and payroll service providers in adapting systems and processes that may be impacted.

BASIC FAQs

  1. When does Additional Medicare Tax start? Additional Medicare Tax applies to wages and compensation above a threshold amount received after December 31, 2012 and to self-employment income above a threshold amount received in taxable years beginning after December 31, 2012.
  2. What is the rate of Additional Medicare Tax? The rate is 0.9 percent.
  3. When are individuals liable for Additional Medicare Tax? An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:
    Filing Status Threshold Amount
    Married filing jointly $250,000
    Married filing separately $125,000
    Single $200,000
    Head of household (with qualifying person) $200,000
    Qualifying widow(er) with dependent child $200,000
  4. What wages are subject to Additional Medicare Tax? All wages that are currently subject to Medicare Tax are subject to Additional Medicare Tax if they are paid in excess of the applicable threshold for an individual’s filing status. For more information on what wages are subject to Medicare Tax, see the chart, Special Rules for Various Types of Services and Payments, in section 15 of Publication 15, (Circular E), Employer’s Tax Guide.
  5. What Railroad Retirement Tax Act (RRTA) compensation is subject to Additional Medicare Tax? All RRTA compensation that is currently subject to Medicare Tax is subject to additional Medicare Tax if it is paid in excess of the applicable threshold for an individual’s filing status. All FAQs that discuss the application of the Additional Medicare Tax to wages also apply to RRTA compensation, unless otherwise indicated.
  6. Are nonresident aliens and U.S. citizens living abroad subject to Additional Medicare Tax? There are no special rules for nonresident aliens and U.S. citizens living abroad for purposes of this provision. Wages, other compensation, and self-employment income that are subject to Medicare tax will also be subject to Additional Medicare Tax if in excess of the applicable threshold.
  7. Additional Medicare Tax goes into effect for taxable years beginning after December 31, 2012; however, the proposed regulations (REG-130074-11) are not effective until after the notice and comment period has ended and final regulations have been published in the Federal Register. How will this affect Additional Medicare Tax requirements for employers, employees, or self-employed? Additional Medicare Tax applies to wages, compensation, and self-employment income received in tax years beginning after December 31, 2012. Taxpayers must comply with the law as of that date. With regard to specific matters discussed in the proposed regulations, taxpayers may rely on the proposed regulations for tax periods beginning before the date that the final regulations are published in the Federal Register. If any requirements change in the final regulations, taxpayers will only be responsible for complying with the new requirements from the date of their publication.

Customer Refunds: Are You Doing Them Right?

Refunds……You probably wince at the word. Some — like customer refunds for returns — are fairly uncomplicated, thanks to QuickBooks’ tools. Others, not so much. You may find yourself unable to balance your accounts receivable.

There are numerous scenarios that necessitate the use of credit memos, including overpayment, order cancellations and bad debt write-off. It’s critical that these are entered correctly. If they aren’t, you may lose a lot of the time that QuickBooks helped you save as you try to chase down a few dollars.

 

Figure 1: QuickBooks helps you identify refunds quickly.

Sending money back

Let’s say a customer pays for an order but cancels before it ships. You could:

  • Apply the balance to an existing invoice
  • Keep it as an available credit
  • Issue a refund

Click Customers | Create Credit Memos/Refunds. Select the correct customer and job (and A/R account, if you have more than one). Enter the items just as they appear on the invoice.

When you’re finished, click Save & New.  The Available Credit window opens, displaying your options:

Figure 2: The Available Credit window displays your credit balance options.

You would select Give a refund and click OK. The Issue a Refund window opens and should already be filled in. If everything is correct, click OK. The refund check has now been entered in the checking register, ready to be processed.

WARNING: If the invoice was paid with a credit card, it gets complicated. Your instructions will depend on whether you are using Intuit Merchant Service for QuickBooks or another merchant account service. You’ll also have to deal with transaction fees. We can help you deal with this.

Other refund options

If the customer has open invoices, you may want to choose Apply to an invoice in the Available Credit window. A list opens;  just select the correct invoice. Or if you want to have those extra funds available for other invoices but don’t want to apply them immediately, click Retain as an available credit.  When you want to use them, click the Apply Credits button in the lower right corner of the invoice.

Figure 3: When issuing a refund, QuickBooks can hold those funds to be applied to invoices later.

Sometimes, customers overpay an invoice or statement charge, or make a down payment for which there is no invoice. This is easy to fix. Open the Customer Payment screen (Customer Center | Transactions | Received Payments) and double-click the related payment. In the screen’s lower left corner, you’ll see this:

Figure 4: Click the correct option here.

Click the correct button, then Save & Close. The Issue a Refund window opens; you’d treat it the same way you did when you dispatched a return refund.

Another use

You can also use credit memos to write off bad debt if you are using the accrual method of accounting.

If you don’t already have a Bad Debt item in your item list, set up a new item as an Other Charge. Name it “Bad Debt” and match it to the correct account.

Open the Credit Memo window and select the customer, then select Bad Debt as the item. You’ll get a message saying that the item is associated with an expense account; click OK. Enter the write-off amount minus sales tax if taxable (be sure the Tax column is correct) and click Save & Close.

WARNING: Enter two lines on the credit memo if it combines both taxable and non-taxable items (both charged to the Bad Debt account), one for each type. Be sure that the Tax Columns are correct.

The Available Credit window opens. Select Apply to an invoice. Put a check mark next to the correct one and click Done.

Make refunds make sense

It seemed easier in the days when you just wrote a check for a refund or made an entry in a paper ledger, didn’t it? Using QuickBooks credit memos, though, helps you maintain records that follow standard accounting procedures and simplifies our understanding of your files. We’ll be glad to help you make sure that this sometimes-complex task is done right from the start.

2011 IRA Contribution

If you haven’t contributed funds to an Individual Retirement Arrangement for tax year 2011, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April due date for filing your tax return for 2011, not including extensions.Be sure to tell the IRA trustee that the contribution is for 2011. Otherwise, the trustee may report the contribution as being for 2012 when they get your funds.

Generally, you can contribute up to $5,000 of your earnings for 2011 or up to $6,000 if you are age 50 or older in 2011. You can fund atraditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these amounts.

Note: IRA contribution limits remain the same in 2012 – $5,000, or $6,000 if age 50 or older.

Traditional IRA: You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer’s pension plan.

Roth IRA: You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.Each year, the IRS announces the cost of living adjustments and limitation for retirement savings plans. In 2011 and 2012, however, the contribution limits for defined benefit and defined contribution plans did not change as the Consumer Price Index did not meet the regulatory thresholds.

Saving for retirement should be part of everyone’s financial plan and it’s important to review your retirement goals every year in order to maximize savings. If you any questions regarding this matter, give us a call. We’re here and happy to help.