Congress has had their plate full in deciding the fate of our tax consequences. Some changes have already been made and some are still in the making.

Filing Deadline – This year your individual tax return deadline has been extended to April 17, 2012.

E-filing – For the most part, all accounting firms have been mandated to e-file all of their individual tax returns that are prepared. For those of you that already e-file your returns with your accountant, this will not change. However, those that have been requesting your accountant to paper file your return instead, this is a significant change. While e-filing is more the norm than the exception, there may be cases in which paper filing is necessary. Therefore, we do not know if the IRS will ever do away with paper filing but they may make it increasingly difficult.

Capital Gains – Through 2012, Capital Gains will remain at a tax rate of 0% for those in the 10% tax bracket and 15% for those in all other brackets. These rates were set to expire but with Tax Relief Act of 2010’s postponement the rates will continue through 2012.

Other Extended Items – The following items were also extended through 2012 so enjoy them while you can!

• American Opportunity Credit – This is a credit worth up to $2,500 for tuition and course materials paid. For more information visit: http://www.irs.gov/newsroom/article/0,,id=205674,00.html
• Child Tax Credit – This is a credit worth up to $1,000 depending on your income for each qualifying child.  For more information visit: http://www.irs.gov/newsroom/article/0,,id=106182,00.html
• Included in the extensions through 2011 is the $250 deduction for elementary and high school educators.  This is a deduction worth up to $250 of any unreimbursed expenses for books, supplies, etc.  For more information visit: http://www.irs.gov/taxtopics/tc458.html

If you have any questions regarding the most recent tax law changes, do not hesitate in contacting Marisol Martinez or any other KOS professional at 847.580.4100. 

The IRS generally requires taxpayers to shoulder most of the recordkeeping responsibilities. If you have not kept the necessary tax records in the past—or if your recordkeeping has been inadequate—make it your New Year’s resolution to improve in 2012.

Despite the hassle, you can make the process go a lot smoother if you organize your records in a logical fashion. Furthermore, using electronic recordkeeping methods may help simplify matters.

Most important, don’t wait until later in the year to get going. The longer you wait, the harder it will be. In the worst-case scenario, you will not have the records to support your claims when it is time to file your tax return. Here are several ways you may be able to relieve some of the stress.

• Keep a diary or ledger to record expenses that may be claimed as itemized deductions. The list includes interest expenses, charitable contributions, state and local income taxes, medical and dental expenses, miscellaneous expenses, casualty and theft losses, etc. You may want to maintain a separate diary for a detailed category of expenses.
• Set up a filing system for expenses and income. You might keep infrequent items together in a separate folder. However, travel and entertainment expenses should be handled separately due to the extensive substantiation requirements. In general, you must document the date, amount of the expense, the business purpose and other details (depending on the nature of the expenditure). You must keep receipts for items of $75 or more.
• Review your expenses on a regular basis. It is much easier to utilize tax planning during the year if you know where you stand. For instance, you might total up the expenses recorded in your diary at the end of each quarter. If you wait until the year is over, it may be too late to take action.
• Store your records in a safe place. Even the best record-keeping system will not do you any good if you cannot retrieve the records. Consider storing valuable documents in a fire-resistant strong box. You might keep check registers, credit card statements and the like in a safe deposit box. Back up any electronic records.
• Adjust your system over time as needed. No matter what kind of recordkeeping system you decide to adopt, try to remain flexible. A change in circumstances—for example, the purchase of a home—may require changes in your setup. Reminder: The system is for your benefit, not your burden.

Normally, the statute of limitations on IRS adjustments is three years. But the limit is doubled to six years for a return that omits 25% or more of an individual’s income. And there’s no time limit whatsoever if fraud is involved. To be on the safe side, it is often recommended that you hold onto your records for at least ten years.

As a reminder, your KOS professional tax adviser can provide assistance in this area.  In addition, you can discuss tax-saving opportunities that may be available on your 2011 return.  Call 847.580.4100 today to speak with a KOS tax professional. 

Make use of better time management

Frequently, business owners deal in “commodities,” such as the goods that the company might produce or sell to the general public. Yet they may pay scant attention to one of the precious commodities: time. Successful businesspeople understand this concept and treat time as one of their most valuable resources.

Knowing how to use time wisely increases your productivity and allows you to do “more with less.” As the business continues to grow, this lesson may enable you to provide greater profits through greater efficiency.

Be aware that different types of time can be used to solve different types of problems. For instance:

• Uninterrupted time: If you have a complex problem to solve, it is best to take a large uninterrupted block of time to work on it. Sometimes you have to create that block by removing yourself from day-to-day interruptions. Leave the office. Forward your phone calls to voice mail. Then dig into the problem.
• Reflective time: This is the time for evaluation. “Am I going in the right direction? Am I using my abilities and resources effectively? How can we improve what we are doing?” Without reflective time, you run the risk of running amok in the wrong direction.
• Relaxation time: Most people need a change of pace, a time to relax and recharge their batteries. Failure to provide this time can lead to loss of energy and a high level of stress.
• Downtime: We spend a large part of our time waiting for things to happen. Think of the time spent traveling to meetings, waiting for appointments, etc. Use this time to do routine tasks such as planning your calendar, revising a report, catching up on required reading, drafting a short memo, etc.

Keeping those differences in mind, here are four ways you might better manage your time:

• When it is feasible, delegate responsibility, not just tasks. Don’t feel that you have to do everything yourself.
• Follow up on results instead of “sweating the small stuff.” Keep your eyes on the big picture, and avoid being bogged down in the mundane.
• Collaborate with first-rate people. This reflects on your organization.
• Use technology to decrease time spent performing routine tasks. For example, communication is almost instant through the use of e-mail, smartphones, etc. Don’t spend a lot of time filing and storing documents when electronic archiving will suffice. Embrace faster and more efficient ways of doing business.

Last, but not least: Outsourcing is another possible method to save time. Your business advisers may be able to provide assistance or make recommendations that make sense for your operation.

Effective for tax year 2011, household employers must separately report Illinois Withholding Income Tax and Unemployment Insurance Contributions. Form UI-WIT, Combined Return for Household Employers, has been discontinued.

Illinois Withholding Income Tax: You may report the 2011 Illinois Income Tax withheld from household employees on your 2011 Form IL-1040, Individual Income Tax Return, line 22. This annual option is similar to the federal Schedule H (Form 1040), Household Employment Taxes. Pay your 2011 Illinois Income Taxes withheld by April 17, 2012, when you file your Form IL-1040 (or if you use the automatic 6-month filing extension, pay it with Form IL-505-1, Automatic Extension Payment for Individuals).

Unemployment Insurance Contributions: Household employers can continue to file their Unemployment Insurance Contributions annually with the Illinois Department of Employment Security. The new “2011 Return for Household Employers – Unemployment Contributions” (UI-HA) were mailed to current household annual filers on December 17, 2011. This form is not to be used for Illinois Department of Revenue payments. Additional information about how to report and pay Unemployment Insurance Contributions can be found at the Illinois Department of Employment Security website at www.ides.illinois.gov or by calling the IDES Employer Hotline at (800) 247-4984, Option 1.

If you have questions about these changes or any other tax or Unemployment Insurance Contribution issue, do not hesitate in contacting Geoff Harlow or any other KOS tax professional at 847.580.4100.

Over the last few years there have been a number of pieces of legislation passed by Congress that affect small business and will be implemented in the future.  The Housing and Economic Recovery Act of 2008 contains many provisions that affect tax years 2012 and beyond.  Section 3091 of the Housing and Economic Recovery Act of 2008 requires third party payment processors (i.e. credit card companies, banks, etc.) report customer transaction amounts to the IRS using form 1099-K.  This reporting requirement began on January 1, 2011 and the 1099-K report should be issued in January 2012.

The law requires that the third party processor report this information to you and the IRS.  Unlike other 1099 forms, the 1099-K will not report the amount of transactions processed annually, but will break down payments on a monthly basis.  The Form 1099-K will be issued to taxpayers in January 2012 and filed with the IRS before February 2012.

The IRS will be issuing redesigned income tax forms for 2011 for sole proprietors, partnerships and corporations which will show the amounts received  to include a line for “Merchant card and third-party payments received” under the income section of the returns.  In addition there will be some language relating to cash back taken from debit cards, so that taxpayers can appropriately show the total of the amounts received that should be excluded from income.

Payment processors have already started sending out form W-9’s for each of their customers which will request a confirmation of the name of the organization, current mailing address and most importantly the Taxpayer Identification Number (TIN) of each reporting entity.  Payment processors will be required to obtain this information or follow an IRS requirement to withhold 28% of future settlements.  When you receive this W-9, please fill out and send back to your processor by the date specified on the request.

Please do not hesitate to contact KOS if you have any questions about the Form W-9 issued by the payment processors or any other correspondence you receive regarding 1099-K.

Now is the season to complete college financial aid applications for the 2012-2013 academic year. Whether you have completed applications in the past, or this is your first time doing so, the FAFSA process can prove challenging to navigate.

FAFSA (free application for federal student aid) is the primary means by which federal and state agencies, as well as colleges and universities, determine a student’s eligibility for need-based financial aid. Essentially the application provides a snapshot of the student’s financial condition, as well as the finances of the student’s custodial parent or parents and their ability to contribute to the student’s education expenses. Basically income and financial resources are reported on the application, and based on the reported amounts an expected contribution is calculated. To the extent college costs are greater than the expected contribution, the student may be eligible for need-based financial aid from the federal government, the state student assistance agency, and/or the college or university.

It is important that the FAFSA be accurately completed. Clearly it is not in the student’s interest to erroneously over-report income or financial worth, as that could result in a lesser amount of financial aid than he or she is otherwise eligible to receive. On the other hand, understatements may have adverse consequences, including disqualification.

Bruce Kreisman, a KOS tax supervisor, has received advanced FAFSA training from the Illinois Student Assistance Commission and can assist or advise you with the application process. Please contact Bruce at bkreisman@koscpa.com or 847-580-4100, extension 139.

JANUARY 12, 2012
8:00 – 8:30 a.m……. Registration and Breakfast
8:30 – 10:30 a.m. …..Presentations by Bruce Taylor, Chairman with Cole Taylor Bank, Spencer Klein, CFA with MB Financial Bank, and Kathryn Capage with Invesco

Chicago Botanic Garden
1000 Lake Cook Road
Glencoe, Illinois

RSVP to Kelly at 847.580.4100 or kwallaert@koscpa.com

ABOUT THE SPEAKERS

• Since 1978 Bruce Taylor, Chairman has been instrumental in redefining strategy and developing key initiatives for Cole Taylor Bank and its parent company Taylor Capital Group, the sixth largest commercial bank in Chicago.  As Chairman, Bruce has consistently championed innovation in the banking and lending industry.  For a detailed biography, click here.

• With over 16 years of investment management experience, Spencer L. Klein, CFA advises affluent individuals, fiduciary and trust accounts, and public pension plans. He also leads MB Financial Bank’s research efforts on tactical asset allocation.  For a detailed biography, click here.

• As a director of retirement research for Invesco, Kathryn Capage has a wealth of knowledge of retirement and educational plans.  Her expertise ranges from the intricacies of recent tax law changes to ideas to bolster 401(k) participation.  For a detailed biography, click here.

If you have employees in Illinois, you pay both federal and state unemployment taxes.  For years the federal rate has been 0.8% applied to the first $7,000 of wages per employee, for a maximum of $56 per employee.  However, 0.8% was a net rate.  For example, in 2010 the gross federal rate was 6.2%, but a credit for state unemployment taxes of 5.4% was allowed.

The credit is reduced for taxpayers in certain states (see bullets below) that have not repaid loans from the federal government used to pay unemployment benefits.  For 2011 Illinois is one of these states, and the credit is reduced by 0.3%.  This will cost Illinois employers up to an additional $21 per employee in federal unemployment tax.

FUTA Credit Reduction

• 0.3% – Arkansas, California, Connecticut, Florida, Georgia, Illinois, Kentucky, Minnesota, Missouri, North Carolina, New Jersey, Nevada, New York, Ohio, Pennsylvania, Rhode Island, Virginia, Wisconsin
• 0.6% – Indiana
• 0.9% – Michigan

Bonus Depreciation and Section 179 Expensing Limits Dropping Next Year

Bonus depreciation and IRC Section 179 expensing limits will drop significantly after 2011. The aggregate cost of any Section 179 property a taxpayer may elect to treat as an expense cannot exceed $500,000 in 2011 (this decreases to $139,000 in 2012). The $500,000 ($139,000 in 2012) limitation is reduced (but not below zero) by the amount of the cost of Section 179 property placed in service during the 2011 taxable year that exceeds $2,000,000 (the threshold is only $560,000 for 2012). Bonus depreciation is also allowed at 100% for qualified assets acquired and placed in service after September 8, 2010 and before January 1, 2012. Bonus depreciation is still allowed after January 1, 2012 and before December 31, 2012 but the bonus amount decreases to 50% of the cost of the qualifying asset.

IRS Cost of Living Adjustments to Retirement Plan Limitations

The IRS recently announced its 2012 Retirement Plan Contribution Limits.  The 401k deferral limit will increase to $17,000 from $16,500, while the catch up contribution limit, for participants age 50 or older, remains the same at $5,500.  See the table below for more benefit limits.

Retirement can have more than one meaning these days.  It can mean “I will no longer be working” or “I am going to start receiving social security benefits but will continue working full or part-time.”  Planning is a first step to having the retirement you want.  Items to consider include your retirement income, healthcare, and legal documents.

If you will no longer have earned income where will your income come from and how much will you need?  The answer depends on the lifestyle you want in retirement, where you will live, and how long you expect to live.  As an example $1 million is the amount of assets needed to give you annual income of $50,000 per year for 25 years, assuming a 5% rate of return.  The amount of retirement assets you will need depends on the annual income you desire and other economic factors.

Suggestions to improve your retirement income:

• Maximize your 401(k) or 403(b) contributions ($16,500 for 2011 and $17,000 for 2012) and your IRA contributions ($5,000).
• For those 50 years and older make “catch-up” contributions of $5,500 to your 401(k) or 403(b) account or $1,000 to your IRA.
• Evaluate when you should begin taking social security benefits.  Find your full retirement age shown on page 2 of your annual social security statement.  If your full retirement age is 66 and you begin taking social security early your benefits decrease. Conversely, if you delay your social security benefits till after full retirement age your benefits will be increased by a certain percentage for each month you don’t receive benefits between your full retirement age and age 70.
• Review your Annual Social Security Statement to see that you are being credited for each year’s wages.  Note that the annual statements are no longer being mailed.  Visit www.ssa.gov to view your statements.
• If you or your spouse has earned a pension, keep documentation showing you are entitled to the pension or contact the company holding the pension and get a recent statement of account.  If the company no longer exists contact the U.S Department of Labor at 866-444-3278 for assistance in finding the pension’s funds.

Healthcare is one of your most significant expenses in retirement.  Even if you don’t plan to receive monthly social security benefits, you should sign up for Medicare three months before reaching age 65.  Medicare Part A is for hospitalization and has no cost, Part B is for outpatient services and doctor visits, and Part D is for prescription drug coverage through private carriers.  For both Part B and Part D you have to pay premiums. You can also purchase Medicare Supplement Insurance to cover gaps in Medicare coverage through private carriers.  If you retire before the age of 65, you need to plan for private healthcare expense.  Medicare does not pay for assisted living or nursing home care after 100 days.  Long Term Care Insurance policies provide coverage should you need at-home, assisted living, or nursing home care for an extended period of time.  Policies can be customized and should be considered in your overall retirement planning.

People don’t want to think that an accident or illness would prevent them from saying what they want or don’t want when it comes to their future medical care.  But things do happen in life that are out of our control.  Your family and friends need to know how you want them to handle situations if you are too ill to tell them.  Important legal documents you should have are a living will, a health care power of attorney, power of attorney over property, and a will.

A living will alerts medical professionals and your family to the treatments you want to receive or refuse and under what conditions.  A power of attorney over health and a power of attorney over property delegate a spouse, trusted family member or friend to make health care decisions for you or decisions regarding assets, finances, and property if you are unable to do so.  Lastly a will is a legal declaration by which you name one or more persons to manage your estate and provides for the transfer of property at death.

Review these legal documents every few years and keep them in a safe, easily accessible place.  Let your spouse or other trusted family member know where they can find these documents.

Useful retirement planning websites are www.mymoney.gov and www.dol.gov/ebsa/pdf/nearretirement.pdf.  To speak with a KOS professional about your proactive retirement plans, contact Cindy Schulze or your KOS contact person at 847.580.4100.

By Jeffrey Butler, KOS Director

Due to recent tax law changes, you may want to consider giving gifts to other family members.  The gifts can reduce the size of your taxable estate.  Here is an overview of the basic rules.

Under the annual gift tax exclusion, you can give away a specified amount each year to a recipient without paying any federal gift tax.  The exclusion, which is indexed for inflation is $13,000 for 2011.

Furthermore, the annual gift tax exclusion is doubled to $26,000 if your spouse joins in the gift giving.  In other words you can give away $26,000 to each done, free of gift tax.

The amount of any gifts made above the annual gift tax exclusion may be sheltered by a lifetime gift tax exemption.  This reduces the available tax shelter for your estate.  Prior to the 2010 tax relief act, the estate and gift tax systems were severed, with the lifetime gift tax exemption fixed at $1,000,000.  But now, the new tax act reunifies the two systems with a maximum exclusion of $5,000,000 per person for 2011 and 2012.  The exemptions are also portable between spouses.

Paying qualified expenses directly to a medical provider or educational institution on behalf of others does not incur gift tax liability.  For example if your child or grandchild is attending a university, pay the child’s tuition directly to the school.  These gifts do not count against the amounts sheltered from gift tax by the annual gift tax exclusion.

Note that you may also save income tax when you give gifts to other family members.  For instance, you might decide to transfer income producing property to a minor child.  The income subsequently earned from the gifts is taxable to a family member who is in a lower tax bracket then you are.  However, don’t overlook the impact of the “Kiddie Tax”.  If a child who is younger than 19 or a full time student younger than 24 receives more than $1,900 in unearned income for 2011, the excess is generally taxed at the income tax rate of the child’s parents, regardless of the source of gifts.

As the end of the year approaches, you can set up a gift giving program to maximize the tax benefits.  For example you can give $13,000 to a family member in December and another $13,000 to the same family member in January.  Since the gift tax exclusion is annual both gifts are sheltered from gift tax.

Should you decide to embark upon a gift giving plan, please call KOS at 847.580.4100.  We can guide you along the way.