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Big Changes Coming for Investors in 2013

Long-Term Capital Gains Rates Increase – Taxpayers have enjoyed reduced long-term capital gains rates for several years as a result of the Bush era tax cuts. However, without Congressional action, which is not expected, those reduced rates will return to the higher rates in effect prior to 2003. The table below compares the current long-term capital gains rates to the anticipated rates for 2013 and subsequent years.

Taxpayer’s Regular Long-Term Capital Gains Rates
Tax Bracket Current Anticipated for 2013

15% and below 0% 10% (1)
Above 15% 15% 20% (2)

(1) 8% if held over 5 years
(2) 18% if held over 5 years

Taxpayers with unrealized long-term capital gains may wish to review their holdings and consider whether it is appropriate to sell during 2012 at the lower rates or whether to continue to hold for additional increases in value. This includes real estate as well. Where future increases in value are anticipated, a taxpayer could sell and realize existing gains in 2012 and then repurchase the investment for future anticipated increases. Investment strategies depend on a variety of issues, including existing capital loss carryovers, growth potential of individual investments, and other factors related to each individual, and should be carefully analyzed before taking action.

Regular Tax Rates – In addition to lower long-term capital gains rates, the regular marginal tax rates have been declining since 2001. However, without Congressional action, those reduced rates will return to higher rates in effect prior to 2001. The table below compares the current marginal individual tax rates to the anticipated rates for 2013 and subsequent years.

Year Regular Marginal Tax Brackets (%) Currently 10.0 15.0 25.0 28.0 33.0 35.0
Expected for 2013 15.0 15.0 28.0 31.0 36.0 39.6

These increased rates will apply to all varieties of ordinary income including interest, dividends, short-term capital gains, employment income, etc. Marginal tax rates increase as a taxpayer’s overall income increases, taxing the first block of income received at the lowest rate and each subsequent block at ever-increasing rates until the maximum rate is reached. As with assets eligible for the long-term capital gains rates, it may be appropriate for some taxpayers to accelerate ordinary income into 2012 to take advantage of the lower rates.

Surtax on Investment Income – Depending upon what the Supreme Court ultimately decides about the Health Care Law, starting in 2013 a new surtax, called the Unearned Income Medicare Contribution Tax, will be imposed on individuals, estates, and trusts. For individuals, the surtax is 3.8% of the lesser of:

The taxpayer’s net investment income or The excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others).

Thus, this surtax will only impact higher income individuals. “Net” investment income is investment income reduced by allowable investment expenses. Investment income includes:

Income from interest, dividends, annuities, and royalties, Rents (other than derived from a trade or business), Capital gains (other than derived from a trade or business),

Trade or business income that is a passive activity with respect to the taxpayer, and trade or business income with respect to trading financial instruments or commodities.

For surtax purposes, the net investment income does not include excluded items, such as interest on tax-exempt bonds, veterans' benefits, and excluded gain from the sale of a principal residence.

For planning purposes, existing law favors tax-exempt bond interest, which avoids both the surtax and the regular income tax. However, you should be aware that President Obama’s tax plan would also tax the income from “tax-exempt” bonds for higher-income individuals at generally the same threshold as this surtax kicks in.

It is not too early to start planning for the 2013 tax increases. Prudent planning can significantly reduce the tax bite. At the same time, keep a watchful eye on Congress. Since this is an election year, tax changes are most likely to come after the November elections.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.

How Long Should You Keep Your Tax Records

Generally, we keep “tax” records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns; and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we actually dispose of the assets.

With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25% of the income reported on a tax return. And, of course, the statutes don’t begin running until a return has been filed. There is no limit on the assessment period where a taxpayer files a false or fraudulent return in order to evade tax.

If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded; add a year or so to that if you live in a state with a longer statute.

For example: Sue filed her 2011 tax return before the due date of April 17, 2012. She will be able to dispose of most of her records safely after April 15, 2015. On the other hand, Don files his 2011 return on June 2, 2012. He needs to keep his records at least until June 2, 2015. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The big problem! The problem with discarding records indiscriminately for a particular year once the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. They need to be separated, and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into this category:

• Stock acquisition data — If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.

• Stock and mutual fund statements — Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gains when the stock is finally sold. Keep statements at least four years after the final sale.

• Tangible property purchase and improvement records — Keep records of home, investment, rental property or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com or www.SilkRoadRealtyInc.com. Thank you.

Employing a Family Member

A way to reduce the overall family tax bill is by employing family members through your business, which allows you to shift income to them and provide them with employment benefits.

· Employing your Spouse. Reasonable wages paid to your spouse entitle you to a business deduction. Although the wages are subject to income and FICA taxes, your spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, your spouse may also be entitled to receive coverage under the qualified retirement and health plans of your business, allowing you to obtain business deductions for contributions to your spouse’s retirement nest egg and health insurance premium payments made on behalf of your employed spouse. While maintaining the same family medical care coverage, you increase your business deductions by providing your spouse with family health insurance coverage as an employee.


· Employing your child. By employing your child, the income tax advantages include obtaining a business deduction for a reasonable salary paid to that child, thus reducing your self-employment income and tax by shifting income to the child. Since the salary paid to your child is considered earned income, it is not subject to the “Kiddie Tax” rules that apply to children under the age of 19, as well as some older children. The maximum standard deduction available to your child in 2013 is $6,100 (up from $5,950 in 2012) if he or she has at least that amount of earned income. Therefore, the standard deduction eliminates all tax on this income if you pay your child $6,100 (2013) in compensation. If your business is unincorporated, wages paid to your child under age 18 are not subject to social security taxes. Not only are there significant income tax advantages to employing your child, you may also provide him or her with fringe benefits such as group-term life insurance and qualified pension plan contributions.

Any type of business such as medical, professional, real estate and etc. can hire a family member and any entity as well such as a sole proprietorship, an LLC, partnership, a S or C corporation or a trust.

Your child may also make deductible contributions to an IRA of the lesser of earned income or the annual limitation. These contributions can offset earned and unearned income. As example, in 2013 your child could receive $11,600 gross income ($6,100 earned and $5,500 unearned) by combining the IRA deduction ($5,500) with the standard deduction ($6,100) and pay no tax. You should consider giving him or her part or all of the money needed to fund the IRA (as part of your $14,000/$28,000 annual exclusion for gifts) if your child does not want to use his or her earned income to fund an IRA contribution.

Your child can then withdraw money from his or her IRA account to pay for his or her college expenses. The money that he or she withdraws from their IRA account will be taxable but will not be subject to the early withdrawal penalty. However, most likely your child will not have any other source of income while going to school. Therefore, the amount that is taxable will first be offset by your child’s standard deduction and perhaps their personal exemption. Then any amount over those two deductions will be taxable and most likely at the lowest federal and state tax rates.

It is actually a great way to save for your children’s college expenses and get a tax deduction for it too.

Please keep in mind that, when you employ a family member through your business, the wages should be reasonable for the work performed and that the services performed are necessary to the business. Please call this office for additional information.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.

What is Basis

An important tax term that everyone should know is “basis”, especially if you’re in real estate. The odds are very high that you will encounter the term sometime during your lifetime, and it can have a profound impact on your tax liability.

Simply stated, “basis” is the monetary value from which a taxable gain or loss is calculated when an asset is sold. For example, you purchase 100 shares of ABC stock for $10 a share. Your basis for those shares of stock is $1,000 (100 x $10). Then, if the stock were sold for $1,500, you’d have a gain of $500, which is determined by subtracting your basis from the sale price. However this is a very simplistic example of basis. Determining basis, as you will see from the following explanation, can be complicated.

Cost Basis – This is the simplest form of basis and is what you originally pay when you purchase stock, other financial securities, a house, rental property, cars, business assets, land, and other assets. However, even cost can be a little tricky as it includes the asset acquisition costs such as: brokerage costs, escrow closing costs, acquisition travel, legal services, title charges, sales tax, etc. So in our earlier example, let’s say you paid a broker $50 to purchase the ABC stock; then your cost basis would have been $1,550.

Adjusted Basis – After purchasing an asset your basis will change, either up or down, if you make improvements to the asset, suffer damage due to casualty losses, or claim business depreciation or amortization. One example of how your basis increases would be purchasing your home and then adding a pool, family room or other improvements; the cost of the improvements would increase your basis. Keep in mind that routine maintenance is not considered an improvement and does not increase your basis in an asset.

Depreciated Basis - An example of when your basis decreases would be a business asset that you are depreciating (deducting as a business expense the cost of the asset over its useful life). In this case, the basis is reduced by the amount of the depreciation you have deducted against your rental or business income. Examples of assets where basis is typically adjusted downward due to depreciation include rental property, business vehicles, tools, business machinery, etc. In some cases, business assets can actually be 100% deducted (expensed) in the year they are acquired, in which case the asset’s basis is reduced to zero.

Inherited Basis – When you inherit an asset, you inherit it at its fair market value (FMV) at the decedent’s date of death. This is because the FMV is included in the value of the estate of the decedent and taxed if the estate’s value exceeds the exemption credit. This is not necessarily the basis for a future sale because there may be subsequent improvements, casualty losses, and perhaps depreciation taken after the inheritance. If the inherited asset was used in business before the inheritance, all prior depreciation is disregarded in the hands of the beneficiary.

Gift Basis – If someone gifts an asset to you, your gift basis generally is the same as the giver’s basis; however, the gift comes with some potential tax strings attached since you’ll also be receiving the giver’s built-in gains at the time of the gift. Thus, unlike inherited basis, you assume the tax liability for built-in gains.

For example, say your aunt gave you 100 shares of stock for which her basis was $1,000. Thus, your basis is $1,000. At the date of the gift, the stock was worth $2,500. You sell the stock for $5,000 a couple of years after receiving it. Your tax gain is $4,000 ($5,000 - $1,000), which includes the $1,500 ($2,500 - $1,000) gain your aunt would have had if she had sold the stock on the date she gave it to you, plus the $2,500 ($5,000 - $2,500) gain from the date you received the stock.

This is called the “gain basis.”

However, there is also the “loss basis” that must be calculated. The loss basis is the lower of:

a) the adjusted basis of the property prior to the date of the gift or

b) its fair market value at the time of the gift.

For example, assume David purchases a property for $100,000. Couple of years later he gifts the property to Raymond when the fair market value is $70,000. Assume no gift tax was paid on the transfer. Assume Raymond sells the property for $60,000. Raymond’s basis is $70,000 (the lower of fair market value or David’s adjusted basis). Therefore, Raymond’s loss is $10,000 ($60,000 - $70,000).

Note that if David had sold the property for $70,000, his loss would have been $30,000, not $10,000. That is because the loss basis rules prevent the person receiving the gift to receive a tax benefit from the decline in the fair market value of the property while the property was held by the person making the gift. The reason is that if this rule didn’t exist, there would be whole another economy created through gifts to shift properties with losses through gifts to others that would benefit from the loss more than the owner.

Also in some cases neither a gain nor a loss is recognized on the sale of the property received by gift because the selling price is less than the basis for gain and more than basis for loss.

For example, assume David purchases a property for $100,000. Couple of years later he gifts the property to Raymond when the fair market value is $70,000. Assume no gift tax was paid on the transfer. Assume Raymond sells the property for $80,000. The application of the gain basis rules produce a loss of $20,000 ($80,000 - $100,000). The application of the loss basis rules produce a gain of $10,000 ($80,000 - $70,000). Therefore, Raymond recognizes neither a gain nor a loss because the sells price or amount realized is between the gain basis and the loss basis.

If the giver paid a gift tax on the property he or she is gifting, then the rules are a bit more complex and not covered in this article.

Determining your basis and the resulting gain or loss when an asset is sold can be complicated, and of course, good records are needed to verify the basis, including improvements and other adjustments in case of an audit or the sale of that asset.

The above technical reference is provided as a courtesy to the reader by David Silkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation and SilkRoad Realty, Inc. The information is technical in nature, may not include all the details on a particular subject and may require review of the reader’s circumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed real estate broker. He specializes in real estate tax laws and accounting. If you have any questions, please do not hesitate to call him at 310.479.7020 x301, email him atdavid@saacpa.com or visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.

Are You Required to File 1099s

A business that pays an independent contractor $600 or more in a year must file Form 1099-MISC. Form W-9 is used to collect the independent contractor’s data. Deadlines for issuing 2013 1099-MISCs are January 31, 2014 (to independent contractors) and February 28, 2014 (to the IRS).

If you use independent contractors to perform services for your business and you pay them $600 or more for the year, you are required to issue them a Form 1099-MISC after the end of the year to avoid facing the loss of the deduction for their labor and expenses. The 1099s for 2013 must be provided to the independent contractor no later than January 31,2014.

It is not uncommon to have a repairman out early in the year, pay him less than $600, and then use his services again later, and have the total for the year exceed the $600 limit. As a result, you may overlook getting the information needed to file the 1099s for the year.Therefore, it is good practice to have individuals who are not incorporated complete and sign the IRS Form W-9 the first time that you use their services. Having properly completed, and signed, Form W-9s for all independent contractors and service providers eliminates any oversights, and protects you against IRS penalties and conflicts.

IRS Form W-9, Request for Taxpayer Identification Number and Certification, is provided by the government as a means for you to obtain the data required tofile the 1099s from your vendors. It also provides you with verification that you complied with the law should the vendor provide you with incorrect information. We highly recommend that you have a potential vendor complete the Form W-9 prior to engaging in business with them. The form can either be printed out, or filled out onscreen and then printed out. The W-9 is for your use only and is not submitted to the IRS. If you don’t have a W-9 for a vendor you used in 2013 and paid $600 or more, you should make every attempt to obtain one. You can download a copy of Form W-9 at http://www.saacpa.com/info_center.html?page=Nw==

In order to avoid a penalty, copies of the 1099s need to be sent to the IRS by February 28, 2014.

The above technical reference is provided as a courtesy to the reader by DavidSilkman, CPA, MST, Broker, Silkman & Associates Accountancy Corporation andSilkRoad Realty, Inc. The information is technical in nature, may not includeall the details on a particular subject and may require review of the reader’scircumstances by a professional. You should consult with your tax advisor.

David S. Silkman is a CPA, has a Masters in Taxation (MST) and is a licensed realestate broker. He specializes in real estate tax laws andaccounting. If you have any questions, please do not hesitate to call himat 310.479.7020 x301, email him atdavid@saacpa.comor visit www.saacpa.com orwww.SilkRoadRealtyInc.com. Thank you.