Summer 2012 Vol. XVII. No. 1 Newsletter

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Summer Notes:

winterSince our last newsletter, we’ve been quite busy completing individual and corporate tax returns. The agreed upon merger of individual tax practices with Travis Raml, CPA has worked out better than expected - Travis’s knowledge of software and hardware is unparalleled. Our associates Jeff Linker and Marilee Turnbull have remained on board for their seventeenth and eighth tax seasons respectively. Our goal of filing 100% of income tax returns electronically was almost accomplished – to date we have filed 99.4% of individual income tax returns in that fashion, speeding up return processing and refunds. Our future plans include:

  • giving clients an early look at their returns through a secure pdf
  • giving each client a secure portal to deliver tax information safely & securely
  • confirming that we have received the signature forms & that the tax returns have been successfully e-filed
  • giving each client the ability to pay via credit card or other electronic means

We also want to thank everybody for the many referrals during the year – they are very much appreciated. Periodically, we have great tickets to the Orioles games and also for Maryland Terrapin basketball games. If you’re interested, please call anytime for free tickets.

Tax Planning: A Crystal Ball Approach for 2012 & Beyond

There are several pieces of legislation that result in some tax provisions expiring, some taking effect, and others simply unknown. Core provisions, including income tax rates, estate and gift tax rules and other rules under the so-called Bush tax cuts (which were extended at the end of 2010) are now scheduled to expire at the end of 2012. Changes set to become effective in 2013 may lead to some tax action now. In 2013 there are two key tax changes that are scheduled to apply:

High income households will be paying more into Medicare as a result of the new health reform law. There is an additional 0.9% Medicare tax on wages and self-employment income over $200,000 for single individuals and $250,000 for married couples.

The health care act also applies a new 3.8% Medicare tax to net investment income for certain high-income individuals. Specifically, the new 3.8% tax will apply once adjusted gross income (AGI) gets above the $200,000 (single)/ $250,000 (married) threshold. Net investment income is defined as interest, dividends, commercially issued annuities, royalties, rents, capital gains, and passive activity gains. Not included in this definition are retirement annuities and tax-free interest.

A quick example: If Len, a single individual, had an AGI of $230,000, consisting of wages of $180,000 and net investment income of $50,000, Len would not be subject to the 0.9% increase in Medicare tax on wages, but would be required to pay the new 3.8% Medicare tax with respect to $30,000 of his investment income.

The result of these changes could be a renewed emphasis on tax-free bonds. Deferred annuities and life insurance may also be attractive. Wealthy individuals may want to take a look at using family limited partnerships to hold investments for the family to ease the effect of the 3.8% surtax. Small businesses may want to gravitate away from sole proprietorships and LLC’s and into S Corporations to minimize the .9% surtax on wages and self-employment income. S Corp owner-employees only pay FICA on wages - thus, S Corps can be used as a vehicle to limit all Medicare taxes (including this surtax) for all business owners.

How to Overcome Business Start-up Hurdles:

Every year, about 600,000 new businesses are launched in the United States. Many people dream of owning their own companies, but starting a business can be risky if not planned carefully. U.S. Small Business Administration data show that more than one-half of all new businesses do not survive for at least four years. If being an entrepreneur is your true calling, don’t let these stats hamper your dream. According to the Maryland Association of CPA’s, new ventures can succeed if their owners take the right steps from the outset.

A great idea for a service or a promising new product can be excellent starting points for a new business, but you’ll need a lot more than a marketable idea to make your venture successful. You should begin with a strategic plan that covers every aspect of your venture, including details on:

  • the product or service you plan to sell
  • your potential customers and how you are going to market to them
  • the company leaders and their experience
  • how you plan to produce the product or deliver the service
  • financial projections, which will add credibility when you meet with lenders or potential investors.

We recommend that you record all this information in a business plan, a document that describes how you expect to run your business. Creating a thorough business plan is not only a great strategic exercise for a new company, but it’s also a requirement if you hope to get outside financing or attract investors. Don’t skip this important initial step.

Money is of course, a crucial element in any business start-up. Your expenses will fall into two groups: one-time needs and ongoing costs. One-time costs include items such as the expense of equipment and furnishings, legal fees, registrations and licenses. You will also have to begin paying ongoing costs, which will include rent, salaries, supplies and utilities. Some of these ongoing expenses, such as leases, will be fixed, while others such as inventory costs, will depend on your sales from month to month. Create a projected budget of start-up expenses. Your budget will tell you how much money you’ll need in the early stages of your business. Next, determine how you are going to pay for the expenses you incur before the company begins generating income. Many new business owners use their own savings to cover these costs, while others borrow from banks or find investors who provide financing in exchange for part ownership in the business. Your budget should help you determine what you can cover with your own funds and how much you will need from outside sources.

Consult your team – it’s very important to have a team of professionals who are knowledgeable in their respective fields. They may include a CPA, attorney, banker, financial planner and insurance agent.

2012 Dollar Limitation for Retirement Plans:

Annual dollar limit for defined contribution plans, SEP’s $50,000
Maximum salary deferrals for 401(k), 403(b) plans $17,000
Catch-up contribution limits for 401(k), 403(b) plans $5,500
Maximum salary deferral for SIMPLE IRA plans $11,500
Maximum IRA contribution $5,000
Catch-up contribution limits for IRA’s $1,000
Social Security taxable wage base $110,100


Closing:

I’m going to give Travis the last word.

Travis says:
For clients that I did not have the chance to meet or talk to already, I plan on reaching out to you during the year to see if there are any ways we can better assist you. In the coming months we’re planning to add an email newsletter to complement the version you receive by mail. We’re also planning some free client seminars (with lunch or dinner provided) that will cover a range of topics later in the year. We’ll make you aware of exact dates and confirm availability if you would like to attend.

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Matthew R. Horowitz, C.P.A.
(410) 312-7622 • email
10015 Old Columbia Rd. Suite B-215, Columbia, Maryland 21046