1040 Quickfinder Handbook (2012 Tax Year) Updates for the American Taxpayer Relief Act of 2012

(1)

Quickfinder

®

1040 Quickfinder

®

_Handbook

(2012 Tax Year)

Updates for the American Taxpayer Relief Act of 2012

Instructions: This packet contains “marked up” changes to the pages in the 1040

Quickfinder

®

_{Handbook that were affected by the American Taxpayer Relief Act of 2012,}

which was enacted after the handbook was published. To update your handbook, you

can make the same changes in your handbook or print the revised page and paste over

the original page.

Note: For many pages, the change is simply a matter of crossing out a paragraph and/

(2)

TAX PREPARATION

2012 Key Amounts

Standard Deduction Earned Income Credit (Maximum) MFJ or QW1_{... $ 11,900 No children ... $ 475} Single2_... _{5,950 1 child ...} _3,169 HOH2_... _{8,700 2 children ...} _5,236 MFS1_... _{5,950 >2 children ...} _5,891 Dependent2_... ₉₅₀3 _{Investment income limit ...} _3,200

Personal Exemption Kiddie Tax Threshold

$3,800 $1,900

Gift Tax Annual Exclusion Elective Deferral Limits

$13,000 SIMPLE IRA Plan

Estate and Gift Tax Exclusion Amount < age 50 ... $ 11,500 $5,120,000 ≥ age 50 ... 14,000 Standard Mileage Rates

401(k), 403(b) and 457 Plans Business ... 55.5¢ Medical/moving ... 23¢ < age 50 ... $ 17,000 Charitable ... 14¢ ≥ age 50 ... 22,500 Profit-Sharing Plan/SEP Contribution limit ... $ 50,000 Compensation limit4_{... $250,000}

Health Savings Accounts (HSAs)

Self-only coverage Contribution (deduction) limit ... $ 3,100 Plan minimum deductible ... 1,200 Plan out-of-pocket limit ... 6,050 Family coverage Contribution (deduction) limit ... $ 6,250 Plan minimum deductible ... 2,400 Plan out-of-pocket limit ... 12,100 Additional contribution amount if age 55 or older ... $ 1,000 1_{Add $1,150 for age 65 or older or blind, each.}

2_{Add $1,450 for age 65 or older or blind, each.}

3_{If greater, amount of earned income plus $300 (but not to exceed $5,950).} 4_{For computing employer contributions.}

Form 1040

2012 Tax Year

1040

2012 Quick Tax Method

1

MFJ or QW Taxable Income $ 0 – $ 17,400 × 10% minus $ 0.00 = Tax 17,401 – 70,700 × 15 minus 870.00 = Tax 70,701 – 142,700 × 25 minus 7,940.00 = Tax 142,701 – 217,450 × 28 minus 12,221.00 = Tax 217,451 – 388,350 × 33 minus 23,093.50 = Tax

388,351 and over × 35 minus 30,860.50 = Tax

Single Taxable Income

$ 0 – $ 8,700 × 10% minus $ 0.00 = Tax

8,701 – 35,350 × 15 minus 435.00 = Tax

35,351 – 85,650 × 25 minus 3,970.00 = Tax

85,651 – 178,650 × 28 minus 6,539.50 = Tax

178,651 – 388,350 × 33 minus 15,472.00 = Tax

HOH Taxable Income

$ 0 – $ 12,400 × 10% minus $ 0.00 = Tax

12,401 – 47,350 × 15 minus 620.00 = Tax

47,351 – 122,300 × 25 minus 5,355.00 = Tax

122,301 – 198,050 × 28 minus 9,024.00 = Tax

198,051 – 388,350 × 33 minus 18,926.50 = Tax

MFS Taxable Income $ 0 – $ 8,700 × 10% minus $ 0.00 = Tax 8,701 – 35,350 × 15 minus 435.00 = Tax 35,351 – 71,350 × 25 minus 3,970.00 = Tax 71,351 – 108,725 × 28 minus 6,110.50 = Tax 108,726 – 194,175 × 33 minus 11,546.75 = Tax

1_{Assumes taxable income is all ordinary income. Multiply taxable income by the} applicable tax rate and subtract the amount shown.

Caution: IRS Tax Tables must be used for taxable income under $100,000. To calculate the exact tax using the Quick Tax Method for taxable income under $100,000, round taxable income to the nearest $25 or $75 increment before using the formula. Round $50 or $100 increments up.

Quickfinder

_Handbook

®

2012 AGI Phase-Out Amounts/Ranges

Filing

Status Tuition and Fees Deduction1 Student Loan Interest _Deduction _{Bond Interest Exclusion}Education Savings Lifetime Learning _Credit American Opportunity _Credit Education Savings _{Account (ESA)} MFJ $130,000 / $160,000 $125,000 – $155,000 $109,250 – $139,250 $104,000 – $124,000 $160,000 – $180,000 $190,000 – $220,000 QW 65,000 / 80,000 60,000 – 75,000 109,250 – 139,250 52,000 – 62,000 80,000 – 90,000 95,000 – 110,000 Single 65,000 / 80,000 60,000 – 75,000 72,850 – 87,850 52,000 – 62,000 80,000 – 90,000 95,000 – 110,000 HOH 65,000 / 80,000 60,000 – 75,000 72,850 – 87,850 52,000 – 62,000 80,000 – 90,000 95,000 – 110,000

MFS Do Not Qualify Do Not Qualify Do Not Qualify Do Not Qualify Do Not Qualify 95,000 – 110,000

Child Tax

Credit 2 Saver’s _Credit3

Earned Income Credit3 _{Traditional IRA}

Deduction4 Roth IRA Contribution Passive Loss in Active _{Rental Real Estate} No Child 1 Child 2 Children >2 Children

MFJ $ 110,000 $ 57,500 $ 19,190 $ 42,130 $ 47,162 $ 50,270 $ 92,000 – $112,000 $173,000 – $183,000 $100,000 – $150,000

QW 75,000 28,750 13,980 36,920 41,952 45,060 92,000 – 112,000 173,000 – 183,000 100,000 – 150,000

Single 75,000 28,750 13,980 36,920 41,952 45,060 58,000 – 68,000 110,000 – 125,000 100,000 – 150,000

HOH 75,000 43,125 13,980 36,920 41,952 45,060 58,000 – 68,000 110,000 – 125,000 100,000 – 150,000

MFS 55,000 28,750 Do Not Qualify 05_{– 10,000} ₀5_{– 10,000} _{50,000 – 75,000}

1 _{Caution: Deduction expired 12/31/11, but has been reinstated in the past.}_{Amounts shown are thresholds for $4,000 and $2,000} deduction, respectively.

2_{Amount at which phase-out begins.} 3_{Amount at which phase-out is complete.}

4_{Phase-out only applies if taxpayer is covered by an employer retirement plan. For MFJ, phase-out range for non-covered spouse is} $173,000–$183,000.

(3)

Replacement Page 01/2013

Quick Facts, Worksheets, Where to File

All worksheets included in Tab 3 may be copied and used in your tax practice.



Table continued on the next page

Tab 3 Topics

Quick Facts Data Sheet ... Page 3-1 Business Use of Home Worksheet ... Page 3-4 Capital Loss Carryover Worksheet (2012) ... Page 3-5 Child Tax Credit Worksheet (2012) ... Page 3-5 Donations—Noncash ... Page 3-6 Donated Goods Valuation Guide ... Page 3-6 Donations Substantiation Guide ... Page 3-7 Earned Income Credit (EIC) Worksheet (2012) ... Page 3-8 Forms 1098 and 1099—What’s Reported ... Page 3-9 Net Operating Loss Worksheet #1 ... Page 3-10 Net Operating Loss Worksheet #2—

Computation of NOL ... Page 3-11

Net Operating Loss Worksheet #3—NOL

Carryback ... Page 3-11 Social Security Benefits Worksheet (2012) ... Page 3-12 Reporting Capital Gains and Losses—

Form 8949 ... Page 3-13 State and Local General Sales Tax Deduction

Worksheet ... Page 3-13 Student Loan Interest Deduction Worksheet ... Page 3-13 Where to File 2012 Form 1040, 1040A,

1040EZ ... Page 3-14 Where to File Form 1040-ES for 2013 ... Page 3-14 Where to File Form 4868 for 2012 Return ... Page 3-14

Quick Facts Data Sheet

2013 2012 2011 2010 2009

General Deductions and Credits

Standard deduction:

MFJ or QW $ 12,200 $ 11,900 $ 11,600 $ 11,400 $ 11,400

Single 6,100 5,950 5,800 5,700 5,700

HOH 8,950 8,700 8,500 8,400 8,350

MFS 6,100 5,950 5,800 5,700 5,700

Additional for age 65 or older or blind each (MFJ, QW, MFS) 1,200 1,150 1,150 1,100 1,100

Additional for age 65 or older or blind each (Single, HOH) 1,500 1,450 1,450 1,400 1,400

Itemized deduction phase-out begins at AGI of:

MFJ, QW, Single or HOH $ * N/A N/A N/A $ 166,800

MFS 150,000 N/A N/A N/A 83,400

Personal/dependent exemption $ 3,900 $ 3,800 $ 3,700 $ 3,650 $ 3,650

Personal exemption phase-out begins at AGI of:2

MFJ or QW $ 300,000 N/A N/A N/A $ 250,200

Single 250,000 N/A N/A N/A 166,800

HOH 275,000 N/A N/A N/A 208,500

MFS 150,000 N/A N/A N/A 125,100

Earned income credit:

Earned income and AGI must be less than (MFJ):3

No qualifying children $ 19,680 $ 19,190 $ 18,740 $ 18,470 $ 18,440

One qualifying child 43,210 42,130 41,132 40,545 40,463

Two qualifying children 48,378 47,162 46,044 45,373 45,295

Three or more qualifying children 51,567 50,270 49,078 48,362 48,279

Maximum amount of credit (all filers except MFS):

No qualifying children $ 487 $ 475 $ 464 $ 457 $ 457

One qualifying child 3,250 3,169 3,094 3,050 3,043

Two qualifying children 5,372 5,236 5,112 5,036 5,028

Three or more qualifying children 6,044 5,891 5,751 5,666 5,657

Investment income limit 3,300 3,200 3,150 3,100 3,100

Child tax credit:

Credit per child $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000

Additional (refundable) credit—earned income floor 3,000 3,000 3,000 3,000 3,000

Adoption credit/exclusion:

Maximum credit/exclusion (and amount allowed for

adoption of special needs child) $ 12,970 $ 12,650 $ 13,360 $ 13,170 $ 12,150 Credit/exclusion phase-out begins at AGI of:

All taxpayers except MFS $ 194,580 $ 189,710 $ 185,210 $ 182,520 $ 182,180

MFS Not Allowed Not Allowed Not Allowed Not Allowed Not Allowed

Kiddie tax unearned income threshold $ 2,000 $ 1,900 $ 1,900 $ 1,900 $ 1,900

Foreign earned income exclusion $ 97,600 $ 95,100 $ 92,900 $ 91,500 $ 91,400

(4)

Quick Facts Data Sheet (Continued)

2013 2012 2011 2010 2009

FICA/SE Taxes

Maximum earnings subject to tax:

Social Security tax $ 113,700 $ 110,100 $ 106,800 $ 106,800 $ 106,800

Medicare tax No Limit No Limit No Limit No Limit No Limit

Maximum tax paid by:

Employee—Social Security $ 7,049.40 $ 4,624.20 $ 4,485.60 $ 6,621.60 $ 6,621.60

Self-employed—Social Security 14,098.80 11,450.40 11,107.20 13,243.20 13,243.20

Employee or self-employed—Medicare No Limit No Limit No Limit No Limit No Limit

Business Deductions

Section 179 deduction—limit $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 250,000

Section 179 deduction—SUV limit (per vehicle) 25,000 25,000 25,000 25,000 25,000

Section 179 deduction—qualified real property limit 250,000 250,000 250,000 250,000 N/A

Section 179 deduction—qualifying property phase-out threshold 2,000,000 2,000,000 2,000,000 2,000,000 800,000

Depreciation limit—autos (1st year) 1 _3,1605 _3,0605 _3,0605 _2,9605

Depreciation limit—trucks and vans (1st year) 1 _3,3605 _3,2605 _3,1605 _3,0605

Standard mileage allowances:

Business 56.5¢ 55.5¢ 51¢ / 55.5¢ 50¢ 55¢

Charity work 14¢ 14¢ 14¢ 14¢ 14¢

Medical/moving 24¢ 23¢ 19¢ / 23.5¢ 16.5¢ 24¢

Health Care Deductions

Health savings accounts (HSAs):

Self-only coverage: Contribution limit $ 3,250 $ 3,100 $ 3,050 $ 3,050 $ 3,000

Plan minimum deductible 1,250 1,200 1,200 1,200 1,150

Plan out-of-pocket limit 6,250 6,050 5,950 5,950 5,800

Family coverage: Contribution limit 6,450 6,250 6,150 6,150 5,950

Plan minimum deductible 2,500 2,400 2,400 2,400 2,300

Additional contribution limit—age 55 or older 1,000 1,000 1,000 1,000 1,000

Long-term care insurance—deduction limits:

Age 40 and under $ 360 $ 350 $ 340 $ 330 $ 320

Age 41 – 50 680 660 640 620 600

Age 51 – 60 1,360 1,310 1,270 1,230 1,190

Age 61 – 70 3,640 3,500 3,390 3,290 3,180

Age 71 and older 4,550 4,370 4,240 4,110 3,980

Long-term care—excludible per diem $ 320 $ 310 $ 300 $ 290 $ 280

Medical savings accounts (MSAs):

Self-only coverage: Plan minimum deductible $ 2,150 $ 2,100 $ 2,050 $ 2,000 $ 2,000

Plan maximum deductible 3,200 3,150 3,050 3,000 3,000

Family coverage: Plan minimum deductible 4,300 4,200 4,100 4,050 4,000

Plan maximum deductible 6,450 6,300 6,150 6,050 6,050

Education Tax Incentives

Education savings accounts (ESAs) phase-out begins at AGI of:

MFJ $ 190,000 $ 190,000 $ 190,000 $ 190,000 $ 190,000

Single, HOH, QW and MFS 95,000 95,000 95,000 95,000 95,000

Hope/American Opportunity Credit—maximum credit (per student) $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500 Lifetime learning credit (LLC)—maximum credit (per return) $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 2,000 Education credit phase-out begins at AGI of:

MFJ: Hope/American Opportunity $ 160,000 $ 160,000 $ 160,000 $ 160,000 $ 160,000

LLC 107,000 104,000 102,000 100,000 100,000

Single, HOH and QW: Hope/American Opportunity 80,000 80,000 80,000 80,000 80,000

LLC 53,000 52,000 51,000 50,000 50,000

MFS Not Allowed Not Allowed Not Allowed Not Allowed Not Allowed

Student loan interest deduction limit $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 2,500

Student loan interest deduction phase-out begins at AGI of:

MFJ $ 125,000 $ 125,000 $ 120,000 $ 120,000 $ 120,000

Single, HOH and QW 60,000 60,000 60,000 60,000 60,000

(5)

Quick Facts Data Sheet (Continued)

2013 2012 2011 2010 2009

Savings bonds income exclusion phase-out begins at AGI of:

MFJ and QW $ 112,050 $ 109,250 $ 106,650 $ 105,100 $ 104,900

Single and HOH 74,700 72,850 71,100 70,100 69,950

Tuition deduction phase-out begins at AGI of:

MFJ $ 130,000 $ 130,000 $ 130,000 $ 130,000 $ 130,000

Single, HOH and QW 65,000 65,000 65,000 65,000 65,000

Alternative Minimum Tax (AMT)

AMT exemption:

MFJ or QW $ 80,800 $ 78,750 $ 74,450 $ 72,450 $ 70,950

Single or HOH 51,900 50,600 48,450 47,450 46,700

MFS 40,400 39,375 37,225 36,225 35,475

Child subject to kiddie tax—earned income plus $ 7,150 $ 6,950 6,800 6,700 6,700

Retirement Plans

IRA contribution limits:

Under age 50 at year end $ 5,500 $ 5,000 $ 5,000 $ 5,000 $ 5,000

Age 50 or older at year end 6,500 6,000 6,000 6,000 6,000

Traditional IRA deduction phase-out begins at AGI of (taxpayer or spouse covered by employer retirement plan):

MFJ and QW (covered spouse) $ 95,000 $ 92,000 $ 90,000 $ 89,000 $ 89,000

MFJ (non-covered spouse) 178,000 173,000 169,000 167,000 166,000

Single and HOH 59,000 58,000 56,000 56,000 55,000

MFS 0 0 0 0 0

Roth IRA contribution phase-out begins at AGI of:

MFJ and QW $ 178,000 $ 173,000 $ 169,000 $ 167,000 $ 166,000

Single and HOH 112,000 110,000 107,000 105,000 105,000

MFS 0 0 0 0 0

Roth IRA conversion—AGI limit:

MFJ, Single and HOH N/A N/A N/A N/A $ 100,000

MFS N/A N/A N/A N/A Not Allowed

SIMPLE IRA plan elective deferral limits:

Under age 50 at year end $ 12,000 $ 11,500 $ 11,500 $ 11,500 $ 11,500

Age 50 or older at year end 14,500 14,000 14,000 14,000 14,000

401(k), 403(b), 457 and SARSEP elective deferral limits:

Under age 50 at year end $ 17,500 $ 17,000 $ 16,500 $ 16,500 $ 16,500

Age 50 or older at year end 23,000 22,500 22,000 22,000 22,000

Profit-sharing plan/SEP contribution limits $ 51,000 $ 50,000 $ 49,000 $ 49,000 $ 49,000 Compensation limit (for employer contributions to profit sharing plans) $ 255,000 $ 250,000 $ 245,000 $ 245,000 $ 245,000

Defined benefit plans—annual benefit limit $ 205,000 $ 200,000 $ 195,000 $ 195,000 $ 195,000

Retirement saver’s credit phased-out when AGI exceeds:

MFJ $ 59,000 $ 57,500 $ 56,500 $ 55,500 $ 55,500

HOH 44,250 43,125 42,375 41,625 41,625

Single, MFS and QW 29,500 28,750 28,250 27,750 27,750

Key employee compensation threshold $ 165,000 $ 165,000 $ 160,000 $ 160,000 $ 160,000

Highly compensated threshold $ 115,000 $ 115,000 $ 110,000 $ 110,000 $ 110,000

Social Security

Maximum earnings and still receive full Social Security benefits: Under full retirement age (FRA) at year-end, benefits

reduced by $1 for each $2 earned over $ 15,120 $ 14,640 $ 14,160 $ 14,160 $ 14,160

Year FRA reached, benefits reduced $1 for each $3 earned

over (months up to FRA only) 40,080 38,880 37,680 37,680 37,680

Month FRA reached and later No Limit No Limit No Limit No Limit No Limit

Estate and Gift Taxes

Estate and gift tax exclusion $ 5,250,0008 _{$ 5,120,000}8 _{$ 5,000,000}8 _{$ 5,000,000}9 _{$ 3,500,000}9

GST tax exemption $ 5,250,000 $ 5,120,000 $ 5,000,000 $ 5,000,000 $ 3,500,000

Gift tax annual exclusion $ 14,000 $ 13,000 $ 13,000 $ 13,000 $ 13,000

1_{Amount not released by IRS at publication time. Tax professionals should watch for developments.} 2_{Regardless of AGI, the exemption cannot be reduced below $2,433 (2009).}

3_{To get earned income/AGI phaseout amount for all other filers (except MFS), reduce amount shown by: $5,210 in 2012; $5,080 in 2011; $5,010 in 2010; $5,000 in 2009.}

4_{Amount could be affected by legislation. Watch for developments.}

5_{Add $8,000 if special depreciation claimed.}

6_{Caution: Expired on 12/31/2011 but has been reinstated in the past. Watch for developments.}

7_{Congress has consistently raised this amount in the past. When the 2012 amount is available, an update will be posted at www.quickfinder.com.}

8_{Plus the amount, if any, of deceased spousal unused exclusion amount.} 9_{The lifetime gift tax exclusion was limited to $1,000,000.}

(6)

Reporting Capital Gains and Losses—Form 8949

For 2012, sales and exchanges of capital assets (if not reported on Form 4684, 4797, 6781 or 8824) are reported on Form 8949, even if some or all of the gain or loss is not recognized. The totals from Form 8949 are carried to Schedule D. In some cases, an adjustment to the gain or loss will also be reported on Form 8949 along with a code indicating the type of adjustment. At the date of publication, the IRS had not released the final list of codes to be used. When available, the codes

will be posted to the Updates section of Quickfinder.com.

State and Local General Sales Tax Deduction Worksheet

For 2011, taxpayers could elect to deduct state and local sales taxes instead of state and local income taxes (see Electing

to Deduct Sales Tax on Page 5-5). Instead of deducting their actual expenses, taxpayers could use optional sales tax tables

[based on the taxpayer’s state(s) of residence] provided by the IRS. The deduction for state and local general sales taxes expired on December 31, 2011 and, at the time of publication, had not been extended to 2012. If the deduction is extended to 2012, The tables and a worksheet to figure the state and local sales tax deduction for 2012 will be posted to the Updates

section of Quickfinder.com when they are available.

Student Loan Interest Deduction Worksheet

Caution: Do not use this worksheet if taxpayer filed Form 2555 or 2555-EZ (related to foreign earned income) or Form 4563 (income

exclusion for residents of American Samoa) or if taxpayer is excluding income from sources within Puerto Rico. Use the worksheet in IRS Pub. 970 instead.

1) Enter the total interest paid in 2012 on qualified student loans. Do not enter more than $2,500 ... 1)

2) Enter the amount from Form 1040, line 22 ... 2)

3) Enter the total of the amounts from Form 1040, lines 23 through 32, plus any write-in adjustments

entered on the dotted line next to line 36 ... 3) 4) Subtract line 3 from line 2 ... 4) 5) Enter the amount shown below for taxpayer’s filing status:

• Single, HOH or QW—$60,000.

• MFJ—$125,000... 5) 6) Is the amount on line 4 more than the amount on line 5?

No Skip lines 6 and 7, enter -0- on line 8 and go to line 9.

Yes Subtract line 5 from line 4 ... 6)

7) Divide line 6 by $15,000 ($30,000 if MFJ). Enter the result as a decimal (rounded to at least three places).

If the result is 1.000 or more, enter 1.000... 7) 8) Multiply line 1 by line 7 ... 8) 9) Student loan interest deduction. Subtract line 8 from line 1. Enter the result here and on Form 1040,

line 33. Do not include this amount in figuring any other deduction on taxpayer’s return (such as on

Schedules A, C, E, etc.)... 9)

2012 _can

(7)

Contributions:

• Can be made for the entire year if the individual is HSA-eligible on the first day of the last month of the year. The HSA contribu-tion limit is the full-year amount (but see Recapture below). • Must be made in cash or through a cafeteria plan.

• Can be made in one or more payments, but cannot be made before the beginning of the tax year.

• For 2012, must be made by April 15, 2013. [IRC §223(d)(4)]

Example: Jennifer enrolls in a HDHP on December 1, 2012, and is otherwise

an eligible individual for that month. She was not an eligible individual in any other month in 2012. Jennifer may make HSA contributions as if she had been enrolled in the HDHP for all of 2012. If she ceases to be an eligible individual (for example, if she ceases to be covered under the HDHP) at any time dur-ing 2013, an amount equal to the HSA deduction attributable to treatdur-ing her as an eligible individual for January through November 2012 is included in her income in 2013. In addition, a 10% additional tax applies to the includible amount. (See Recapture below.)

Excess contributions:

• Are not deductible if made by or for an individual,

• Are included in gross income of the employee if made by an employer and

• Are subject to a 6% excise tax imposed on the account benefi-ciary unless withdrawn (with earnings) by the return due date (including extensions).

Reporting:

• Report HSA contributions on Form 8889, Health Savings

Ac-counts (HSAs). The deductible amount of the contribution is

carried to Form 1040, line 25.

• Taxpayers should receive Form 5498-SA from the HSA trustee showing the HSA contributions during the year.

• An employer's contributions to an employee’s HSA are shown

in box 12 of Form W-2 with code W. Note: A more-than-2%

shareholder is not treated as an employee for this purpose. See

S corporation shareholders on Page 4-16.

Rollovers. A rollover is a distribution of as-sets from one HSA or MSA that is deposited in another HSA. Generally, the rollover must be completed within 60 days. Amounts rolled over are not taxable (or deductible) and do not affect the annual limit on contributions or deductions. Only one rollover contribution can be

make to an HSA during a one-year period. Exception: An unlimited number of trustee-to-trustee transfers between HSAs can be made.

Recapture. All or part of a deductible HSA contribution or

other-wise nontaxable transfer to an HSA (from an HRA, FSA or IRA) is included in income and subject to a 10% penalty tax if the taxpayer fails to remain HSA-eligible (for any reason other than death or disability) for a required length of time following the contribution or transfer. Report the income on line 21 and the penalty tax on line 60 of Form 1040.

• Part-year HDHP coverage. An HSA contribution made by an individual who is not HSA-eligible the entire year is recaptured to the extent allocable to the ineligible months if

the individual fails to qualify for an HSA anytime during the following year.

• Tax-free transfers from an HRA, FSA or IRA. Individual must remain HSA-eligible from the

month the funds are transferred into the HSA until the last day of the 12th following month.

High deductible health plan (HDHP). A HDHP is one with higher

annual deductibles than typical health plans. Only HDHPs with the following deductibles qualify for HSA purposes.

2012 HSA High Deductible Health Plan (HDHP) Limits

Type of

Coverage Minimum Annual Deductible Maximum Annual Deductible and Out-of-Pocket Expenses (other than for premiums)1

Self-Only $ 1,200 $ 6,050

Family 2,400 12,100

1_{Only the deductible and out-of-pocket expenses for services within the network} should be used to figure whether the limit applies. The limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers.

• Non-HDHP health insurance. An individual (or spouse if filing

jointly) generally cannot have any other health plan that is not an HDHP. However, an individual may have additional insurance that only covers the following items:

– Accidents. – Disability. – Dental care. – Vision care. – Long-term care.

– Liabilities related to workers’

compen-sation laws, torts or ownership or use of property. – Specific diseases or illnesses.

– A fixed amount per day (or other period) of hospitalization.

• Prescription drug benefits. In general, if an individual is covered

by both an HDHP that does not cover prescription drugs and by a separate prescription drug plan that provides benefits before the minimum annual deductible of the HDHP has been satisfied, the individual is not eligible to contribute to an HSA. (Rev. Rul. 2004-38)

• Preventive care. A plan that provides preventive care without a

deductible or with a deductible below the HSA requirements can still be treated as a HDHP. Preventive care includes: (IRS Notice 2004-23)

– Periodic health evaluations, including tests and diagnostic procedures ordered in con-nection with routine examinations. – Routine prenatal and well-child care. – Child and adult immunizations. – Tobacco cessation programs. – Obesity weight-loss programs. – Many screening services.

• State-mandated benefits. If a state requires health plans to

pro-vide certain benefits without a deductible or with a deductible below the HSA limitations, the plan will not be an HDHP.

• Other employee health plans. A taxpayer covered by his (or his

spouse’s) employer’s medical expense reimbursement plan, a healthcare flexible spending account (FSA) plan or a health re-imbursement arrangement (HRA) is generally ineligible to make HSA contributions.

HRA or FSA Transfers



Expired Provision Alert: The ability to transfer funds tax-free from an HRA or FSA to an HSA expired after 2011. It’s possible that Congress will extend this provision to 2012, but it had not done so at the time of this publication. See Expired Tax Provisions on Page 17-1 for more information.

Before 2012, an employer could make a one-time direct transfer from an employee’s HRA account or health FSA account to the employee’s HSA. The maximum transfer is the smaller of the amount in those accounts on September 21, 2006, or the date of the transfer. For the employee, the amount transferred is not taxable, is not deductible as an HSA contribution and does not reduce his HSA contribution limit for the year.

(8)

Insurance Reimbursements

Deductible medical costs must be reduced by any insurance re-imbursements received. Excess rere-imbursements are taxable only to the extent they were provided for under an employer plan and attributable to the employer’s contribution that was not included in income.

Over-the-Counter Drug Reimbursements

From FSA

Reimbursements for over-the-counter drugs through an employer health flexible-spending arrangement (FSA) or other employer health plan are not tax-free to the employee. Any distributions for non-prescribed drugs are treated as disqualified distributions subject to tax and penalty. Exceptions: Any over-the-counter drug prescribed by a doctor and insulin.

T

axes

See also IRS Pubs. 523, 530 and 535

State and Local Income Taxes

State and local income taxes are deductible on Schedule A in the year paid. The tax may be paid either through withholding, esti-mated payments or payments for prior year returns. The IRS may disallow deductions for large estimated state income tax payments made solely to increase itemized deductions (Rev. Rul. 82-208). The prepayment of estimated state income tax should be based on tax liability. Penalties and interest are not deductible.

Court Case: A taxpayer claimed the standard deduction and deducted

non-resident state income taxes from royalties on Schedule E. The court found that state income taxes are not expenses incurred in the production of royalty income. [Strange, 88 AFTR 2d 2001-6752 (9th Cir. 2001)]

Electing to Deduct Sales Tax



Expired Provision Alert: The election to deduct state and lo-cal sales tax expired at the end of 2011. It’s possible Congress will extend it to 2012, but had not done so at the time of this publication. See Expired Tax Provisions on Page 17-1 for more information. For 2011, taxpayers could elect to deduct state and local sales tax rather than state and local income taxes. Taxpayers who made this election could deduct either:

1) Actual sales tax amounts (based on their records) or 2) Predetermined deduction figures from IRS tables.

To deduct actual amounts. Add up the nonbusiness general state

and local sales taxes (including any compensating use taxes) paid during the year plus any selective sales taxes if the rate is the same as the general sales tax rate. Include selective sales taxes on food, clothing, medical supplies and motor vehicles even if the rate is lower than the general sales tax rate. If the selective sales tax rate on a motor vehicle is higher than the general rate, deduct only the amount that would have resulted from charging the lower general sales tax rate.

To deduct amounts from IRS tables. The table amounts depend

on the taxpayer’s AGI plus nontaxable income (for example, tax-exempt interest and nontaxable portion of Social Security benefits), the number of exemptions claimed on Form 1040 and the state of residence. If the taxpayer lives in more than one state during the year, pro-rate the amount from the table for each state (based on the number of days spent there divided by 365), add up the pro-rated amounts and deduct the total.

 Note: In addition to the table amounts, the taxpayer can deduct

additional actual sales tax amounts from purchases of motor ve-hicles (including leased veve-hicles). If the sales tax rate on a motor

vehicle is higher than the general rate, deduct only the amount that would have resulted from charging the lower general sales tax rate. Also add sales taxes paid on boats, airplanes, homes (including mobile and prefabricated) or home building materials if the rate was the same as the general sales tax rate.

See Page 3-13 for the State and Local General Sales Tax

Deduc-tion Worksheet. Also, a Sales Tax DeducDeduc-tion Calculator can be

found at www.irs.gov.

Real Estate Taxes

A real estate tax is deductible in the year it is paid to the taxing authority. Prepaid real estate taxes can generally be deducted in the year of the prepayment if the taxpayer is on the cash basis and does not live in an area in which the prepayment would be considered a deposit by the taxing authority. How prepaid taxes are treated varies among local jurisdictions. Taxes placed in escrow are deductible when actually paid to the taxing authority, not when paid to the escrow agent. Penalties and interest on late payments are not deductible. Also, see Electing to Capitalize Taxes and

Interest on Page 5-8.

Generally, real estate taxes can be deducted only by the owner of the property upon which the tax is imposed. Regulation Section 1.164-3(b) defines real property taxes as “taxes imposed on inter-ests in real property and levied for the general public welfare…” Because of the lack of a detailed definition, the issue has been the subject of several court cases and IRS rulings. For example, the tax imposed on renters by the New York Real Property Tax Law is not deductible for federal tax purposes. Taxes paid under this law are considered rent, not property taxes. (Rev. Rul. 79-180) In contrast, Revenue Ruling 71-49 stated that certain payments made to an educational construction fund by a cooperative housing corporation did qualify as real property taxes, and were deductible by the tenant-shareholders.

More than one property. Real estate taxes are deductible for all

property owned by a taxpayer.

Sale of real estate. The buyer and the seller must divide real

estate taxes according to the number of days that each owned the property during the year. Both are considered to have paid their share of taxes, even if one or the other paid the entire amount.

• Buyer-paid taxes. Deductible by the buyer only for the period

he owned the property. The buyer cannot deduct the real estate taxes of the seller. The buyer must add these taxes to the basis of the property. The seller treats this as additional sales proceeds.

• Seller-paid taxes. If the seller pays real estate tax owed by the

buyer (beginning on the date of sale), the buyer is considered to have paid the tax. The tax is deductible by the buyer. The buyer must reduce the basis in the property by the tax paid. The seller treats this as a reduced selling price.

Equitable owner. Taxpayers who do not have legal title to a

prop-erty may still claim a Schedule A deduction for real estate taxes paid if they are equitable owners of the property. An equitable

owner is a person who has the economic benefits and burdens

of ownership, based on the facts. Occupying and maintaining the home and paying the mortgage and taxes on it are factors that

might indicate equitable ownership. See Trans

(TC Memo 1999-233), Uslu (TC Memo 1997-551) and Edosada (TC Summ. Op.

2012-17) for situations where taxpayers were equitable owners.

Cooperative Housing Corporations (Co-Ops)

Mortgage interest and property taxes allocated to a tenant-share-holder in a co-op are generally treated the same as those paid by other homeowners, provided the following conditions are met. 1) The corporation has only one class of stock outstanding.

Continued on the next page

2012

(9)

3) Loan proceeds must be directly traceable to home construction expenses, including the purchase of a lot.

4) Before construction begins, the loan does not qualify as acqui-sition debt and interest incurred during that period is treated generally as personal interest.

5) 90-day rule. A loan incurred within 90 days after construction is complete may also qualify, provided the debt is secured by the home. Construction expenses made within the period starting 24 months before completion of the house and ending on the date of the loan qualify.

Timeshares

Homes owned under a time-sharing plan can be considered second homes for deducting interest expense. A time-sharing plan is an arrangement between two or more people that limits each person’s interest in the home or right to use it to a certain part of the year. However, if

any portion of the timeshare is rented to a third party, the ability to claim a deduction for the personal portion of the mortgage interest may be lost.

Boats, Mobile Homes and House Trailers

For the qualified residence mortgage interest deduction, a quali-fied home includes a boat, mobile home, house trailer or similar property that has sleeping, cooking and toilet facilities. However, local law must allow for such use. A houseboat would not qualify if moored at a marina where overnight sleeping is prohibited.

Prepaid Mortgage Interest

Mortgage interest prepaid in 2012 that fully accrues by January 15, 2013, may be included in Form 1098, box 1. However, this prepaid interest is not deductible in 2012; it should be deducted in 2013.

 Note: Some lenders apply prepaid amounts to both interest

and principal; others apply prepayments to principal only.

Reverse Mortgages

A reverse mortgage is used to convert home equity into cash. The homeowner receives payments (as a line of credit, a lump sum, monthly payments for a specified number of years, or payments over his life). The amount received is a loan, so it is tax-free and will not affect Social Security benefits.

When a reverse mortgage comes due, the lender recovers the amount owed from the borrower (or the heirs).

Mortgage interest deduction. Mortgage interest is added to the

loan balance over the term of the loan, but is not deducted under the personal residence interest rules until the loan is repaid.

Mortgage Insurance Premiums



Expired Provision Alert: The deduction for mortgage

insur-ance premiums expired at the end of 2011. It’s possible Congress will extend it to 2012, but had not done so at the time of this publication. See Expired Tax Provisions on Page 17-1 for more information.

For 2011, mortgage insurance premiums paid or accrued

dur-ing the year in connection with acquisition debt on a taxpayer’s primary or second home are deductible as residence interest. The deduction phases out ratably by 10% for each $1,000 (or portion thereof) by which the taxpayer’s AGI exceeds $100,000. Phase-out amounts are halved for married filing separately. Thus, it is not available for taxpayers with AGI greater than $109,000 ($54,500 for MFS). Only amounts paid on mortgage insurance contracts issued after 2006 qualify.

Amortizing Points

Amortization is per month, not per year. Thus, if a taxpayer incurs $2,000 in points on a 30-year loan of 360 monthly payments and the first payment is for November of 2012, only $11.12 is deductible for 2012 ($2,000 ÷ 360 = $5.56 × 2 months = $11.12).

Home equity line-of-credit points. Points paid initially for a line

of credit of up to $100,000 secured by the home are deductible as home equity debt interest over the period of time until the credit line expires. However, if funds from a line of credit are used for home improvements for the principal residence, the points are fully deductible the first year.

Business or investment property. Amortize the points over the

life of the loan.

Second Home

Assuming the home is treated as the second home under the quali-fied residence interest expense rules, points are treated as follows.

Personal use only. Points are amortized as mortgage interest

expense over the entire loan period.

Rental and personal use:

1) If personal use is not more than the greater of 14 days or 10% of the days the home is rented, the second home is treated as a rental property. Amortize and deduct the rental portion of the points over the life of the loan. Points allocated to personal use are non-deductible.

2) If personal use exceeds the 14-day or 10% use rule, divide the points proportionately based on rental and personal use. Amortize and deduct the amount attributable to the rental ac-tivity against the rental income, and amortize and deduct the balance as qualified residence interest expense.



Note: See Renting Out a Home on Page 8-1.

O

Ther

M

OrTgage

I

nTeresT

D

eDucTIOn

r

ules

Late Payment Charges

Late payment charges are generally deductible as mortgage inter-est if they are not for a specific service such as a collection fee.

Land Rent (Redeemable Ground Rent)

Periodic lease payments made for the use of land on which a house is located can be deductible as mortgage interest. To be deductible, all of the following must be true.

1) The land lease term is more than 15 years, including renewal periods, and is freely assignable by the lessee,

2) The lessee has the right to terminate the lease and purchase the lessor’s land by paying a specific amount and

3) The lessor’s interest in the land is a security interest to protect the entitlement to rental payment.

Construction Loans

Interest on construction loans or loans to buy a lot is qualified residence interest if the following requirements are met:

1) A home under construction is treated as a qualifying home for up to 24 months provided that when ready for occupancy, the house is used as a main or second home. The deduction was allowed even when the home was never completed because the taxpayers could not obtain financing. [Rose, TC Summary Opinion 2011-117 (2011)]

2) If the construction period exceeds 24 months, the interest for the remaining months is considered personal interest.

(10)

Deceased spouse. Carryovers allocable to the excess

contribu-tions of a deceased spouse may only be claimed on the final return of the deceased spouse, not by the surviving spouse. [Reg. §1.170A-10(d)(4)(iii)]

Qualified Conservation Contributions



Expired Provision Alert: Special rules for qualified conserva-tion contribuconserva-tion expired at the end of 2011. It’s possible Congress will extend them to 2012, but had not done so at the time of this publication. See Expired Tax Provisions on Page 17-1 for more information.

For 2011, the deduction for qualified conservation contributions is limited to 50% of AGI (100% of AGI for qualified farmers and ranch-ers) minus the deduction for all other charitable contributions. Any excess amount is carried forward 15 years. Absent these rules, a qualified conservation contribution is subject to the 30%-of-AGI limit and a five-year carryforward period.

Contributions That Benefit the Taxpayer

Contributions that are made partly for goods or services provided by the organization are deductible if:

1) The amount of the payment exceeds the FMV of goods and services received, and

2) The donor intends to make a payment in excess of the FMV of goods and services.

Example: Anita makes a large contribution to a charity that has a history of

sponsoring a dinner-dance for donors making substantial contributions. The charitable deduction is limited to amount of the donation less the FMV of the anticipated dinner-dance even if the dance takes place in the following year.

Refused benefits. A donor can claim a full deduction if all benefits

are actively refused (such as checking off a refusal box on a form sent by the charity). (Rev. Rul. 67-246)

Gifts of more than $75. If the donor receives some benefit, the

charity must provide a statement as to the deductible amount of the contribution. The charity must make a “good faith estimate” of the FMV of goods/services provided to the donor.

Token benefits. A donor can disregard benefits if either:

• The benefits received do not exceed the lesser of 2% of the contribution or $99 (for 2012) or • The gift is $49.50 of more and the benefit received

bears the charity’s name or logo and has an ag-gregate cost not more than $9.90 (for 2012).

Membership benefits. Certain benefits can be

dis-regarded if the annual payment is $75 or less. A payment of more than $75 can be made if the organization does not require a larger payment to receive these benefits. Benefits may include rights or privileges that members can exercise frequently (such as free or discounted admission and parking) or admission to member-only events if the cost is $9.90 (for 2012) or less per person.

Tickets to college games. A payment made to a college or

university in exchange for a right to buy tickets to a sporting event qualifies for a charitable deduction of 80% of the amount paid. Any amount actually paid for tickets is not deductible. [Reg. §1.170A-13(f)(14)]

Cash Donations—Substantiation

No deduction is allowed unless the taxpayer has either (1) bank records (for example, a canceled check or account statement) or (2) written acknowledgment from the charity documenting the contribution’s amount and date. [IRC §170(f)(17)]. This means that donors who give cash will need to get written acknowledgement from the charity to claim a deduction. Using a check for small donations, rather than cash, may be preferable.

$250 or more. Charitable contributions of $250 or more in any

one day to any one organization must have written acknowledg-ment from the organization [IRC §170(f)(8)]. The acknowledgment must be received by the earlier of the date the tax return is filed for the contribution year or the extended due date for filing. It must state whether the charitable organization provided any goods or services in exchange for the contribution (and if so, an estimate of the FMV of the goods or services provided). Payroll deduction

contributions: Employees can substantiate a payroll deduction of

$250 or more with (1) a Form W-2 or other document from the employer showing payroll deduction and (2) a pledge card or other document prepared by the charity.

Noncash Donations—Substantiation

General recordkeeping requirements for noncash contribu-tions:

1) Name of charitable organization. 2) Date and location of contribution.

3) Reasonably detailed description of contributed property.

4) Fair market value and method of valuing the property.

5) Cost or other basis of the property if FMV must be reduced. See

Required Reductions in FMV—Donating Appreciated Property

on Page 5-14.

Specific requirements. See the Donations Substantiation Guide

on Page 3-7 for specific requirements based on the type and amount of the donation.

Form 8283, Noncash Charitable Contributions. Must be filed if

noncash property donations are in excess of $500.



Note: Special rules apply to donations of less than a

tax-payer’s entire interest in a property. See Pub. 526, Charitable Contributions.

Out-of-pocket expenses. Acknowledgment from the charity is

required if a volunteer claims a deduction for a single contribution of $250 or more in the form of out-of-pocket expenses. The acknowl-edgement must contain a description of the service provided and a statement about whether goods or services were provided by the charity to reimburse the taxpayer for the expenses incurred (includ-ing an estimate of the FMV of any goods or services provided). The charity must substantiate the type of services performed (not dates or amounts of expenses).

Clothing and household items. No deduction is allowed for

donat-ing clothdonat-ing or household items unless they are in good used condi-tion or better. Excepcondi-tion: Deduccondi-tion is allowed for an item of clothing or a household item that is not in good used condition or better if the deduction is more than $500 and a qualified appraisal of it is included with the tax return. Household items include furniture and furnishings, electronics, appliances, linens and other similar items.

Valuation

For guidelines on the value of donated goods, see the Donated

Goods Valuation Guide table on Page 3-6.

Appraisals

A written appraisal is required for charitable contributions of prop-erty for which the claimed value exceeds $5,000 if an income tax deduction is claimed. Also, the recipient organization must file an information return if it disposes of the property within two years of receipt. See Notice 2006-96 for guidance on qualified appraisals and qualified appraisers. Exception: Publicly traded securities do not require written appraisal. (Nonpublicly traded securities must be appraised if the claimed value is more than $10,000.)

Fees paid to determine the FMV of donated property are not deductible as contributions. Claim them on Schedule A as miscel-laneous deductions subject to 2% of the AGI limitation.

(11)

Sale or exchange of timber:

• Timber sold primarily for sale to customer. Gain or loss is treated

as ordinary income subject to SE tax. Farmers who cut and sell timber on their land in the form of logs, firewood or pulpwood report income and expenses as ordinary income and expenses on Schedule F.

• Standing timber sold from investment property. Treated as a

capital gain or loss, reported on Form 8949.

• Outright sales of timber. Outright sales of timber by landowners

qualify for capital gains treatment if the timber was held for more than one year before the date of disposal.

Generally, cutting of timber results in no gain or loss until sold or exchanged. Exception: Under Section 631(a) taxpayers can elect to treat the cutting of timber as a sale under Section 1231 in the year it is cut. To qualify for the Section 631(a) election, the timber must be cut for sale or for use in the taxpayer’s trade or business, and the taxpayer must own or hold a right to cut timber for more than one year before the timber is cut.

Timber depletion. The depletion deduction for timber must be

calculated using cost depletion. The depletion is taken in the year of sale or other disposition of the products cut from the timber, un-less the taxpayer elects to treat the cutting of timber as a sale or exchange. The depletion deduction is limited by the adjusted basis of the timber. The adjusted basis for depletion cannot include the residual value of land and improvements at the end of operations. [Reg. §1.612-1(b)(1)]

Example: Samuel purchases a timber tract for $160,000. The residual value

of the land at the time of purchase, assuming all timber has been cut, equals $100,000. The depletable basis of the timber for cost depletion is $60,000 ($160,000 – $100,000). Samuel determines that the standing timber will pro-duce 1,000 units when cut. Samuel’s depletion per unit equals $60 ($60,000 ÷ 1,000). If Samuel sold 300 units during the year, his depletion allowance would be $18,000 (300 × $60).

D

OMesTIc

P

rODucer

D

eDucTIOn

(DPD)

Form 8903

For 2012, the DPD is 9% of the lesser of the business’s: 1) Qualified production activities income or

2) Taxable income (AGI for individual taxpayers) determined without regard to the DPD.

The DPD cannot exceed 50% of the wages paid and reported on Form W-2 by the business for the year (and allocable to domestic production gross receipts).

Oil and gas activities. Individuals with oil-related qualified

pro-duction activities income must reduce their DPD by 3% of the least of their (1) oil-related qualified production activities income, (2) qualified production activities income or (3) AGI (determined without regard to the DPD). [IRC §199(d)(9)]

Oil-related qualified production activities income is qualified

pro-duction activities income attributable to the propro-duction, refining, processing, transportation or distribution of oil, gas or any primary product thereof.

Qualified Production Activities Income

To determine the net income that qualifies for the 9% deduction, the taxpayer’s receipts must be divided into those from eligible activities (domestic production gross receipts or DPGR) and

non-DPGR. Then, the taxpayer’s expenses are allocated between the two categories of income. The DPGR less allocable expenses equals qualified production activities income.

Eligible activities. The following activities generate DPGR if

performed in the U.S.: [IRC §199(c)(4)]

• Manufacture, production, growth or extraction of:

– Tangible personal property (for example, clothing, goods, food, agricultural products).

– Computer software. – Sound recordings. • Certain film production.

• Production of electricity, natural gas or potable water.

• Construction or substantial renovation of residential and com-mercial buildings and infrastructure by taxpayers engaged in the construction business.

• Engineering and architectural services performed by a taxpayer engaged in the business of performing engineering or architec-ture.

N

Observation: While most U.S. farming activities will generate

DPGR, income from custom farming if the farmer does not have the benefits and burden of ownership of the property is not DPGR.



Expired Provision Alert: For 2006–2011, qualified production activities performed in Puerto Rico was included in the domestic production gross receipts calculation as long as the activity in Puerto Rico was subject to U.S. tax. It’s possible Congress will extend this provision to 2012, but had not done so at the time of this publication. See Expired Tax Provisions on Page 17-1 for more information.

Allocating costs. There are three methods for allocating costs to

DPGR (that is, income that qualifies for the DPD) and non-DPGR. [Reg. §1.199-4]

Small business simplified overall method. Allocate all

deductions (including cost of goods sold) and losses between DPGR and non-DPGR based on relative gross receipts. Available to:

• Taxpayers with average gross receipts under $5 million.

• Taxpayers with average gross receipts of $10 mil-lion or less, if they qualify to use the cash method under Revenue Procedure 2002-28.

• Farmers not required to use the accrual method.

Simplified deduction method. Use gross receipts to allocate all

costs and expenses except cost of goods sold. Cost of goods sold must be specifically traced to DPGR and non-DPGR. Available to taxpayers with average annual gross receipts of $100 million or less or total assets of $10 million or less at the end of the year.

Section 861 Method. Deductions are allocated to DPGR using

the rules under Section 861 for allocating deductions to foreign income. This is the most complex method because it requires tracing each cost to income.

S Shareholders and Partners

The DPD is determined at the shareholder or partner level so taxpayers should get the information from the S corporation or partnership Schedule K-1. Eligible small S corporations and partnerships can choose to compute qualified production activi-ties income and Form W-2 wages at the entity level and allocate those amounts to the shareholders or partners, who then report the amounts on lines 7 and 17 of Form 8903.

—End of Tab 6—

2013

(12)

Reporting Different Long-Term Rates

All long-term capital gains and losses are entered on Part II of Form 8949, regardless of whether they are subject to the 0%, 15%, 25% or 28% rates. The totals from Form 8949 carry to Schedule D, where long-term and short-term gains and losses are combined or netted.

If the taxpayer has a net capital gain (that is, net long-term capital gain exceeds net short-term capital loss):

• Unrecaptured Section 1250 gains are carried to the

Unrecaptured Section 1250 Gain Worksheet in the

Schedule D (and Form 8949) instructions to calculate the net gain subject to the 25% rate. This amount is then carried to Line 19 of Schedule D.

• Gains subject to the 28% rate are carried to the 28% Rate

Gain Worksheet in the Schedule D (and Form 8949) instructions

to calculate the net gain subject to the 28% rate. This amount is then carried to Line 18 of Schedule D.

Taxpayers with any net capital gains subject to the 25% or the 28% rates must use the Schedule D Tax Worksheet in the Schedule D (and Form 8949) instructions.

Partnerships and S corporations. Pass-through entities must

provide the necessary information on Schedule K-1 to determine gains eligible for the different maximum tax rates.

Unrecaptured Section 1250 Gain

For sales of Section 1250 property (most depreciable real prop-erty), any long-term capital gain attributable to depreciation (other than depreciation recaptured as ordinary income) is taxed at a maximum rate of 25%. In general, unrecaptured Section 1250 gain is the gain to the extent of straight-line (SL) depreciation allowed.

Calculation. Generally, the unrecaptured Section 1250 gain is

the smaller of (1) depreciation claimed or (2) total gain less any recaptured depreciation that is taxed at ordinary rates (that is, accelerated depreciation in excess of SL). This amount is then limited to the net Section 1231 gain. Finally, any net 28% rate loss is used to offset the unrecaptured Section 1250 gain.

Example: Harry sold rental property for $150,000. He

paid $100,000 for the property several years ago and had depreciated $20,000 under MACRS (SL depreciation). Of his total $70,000 gain ($150,000 proceeds – $80,000 adjusted basis), $50,000 is attributable to appreciation (which is taxed at a maximum rate of 15%), and $20,000 is attributable to depreciation (which is taxed as unrecaptured Section 1250 gain at a maximum rate of 25%).

28% Rate Gain

Collectibles gain or loss. A collectibles gain (loss) is any

long-term gain or deductible long-long-term loss from the sale or exchange of a collectible that is a capital asset. Collectibles include works of art, rugs, antiques, metals (such as gold, silver and platinum bullion), gems, stamps, coins, alcoholic beverages and certain other tangible property. Also include any gain (but not loss) from the sale or exchange of an interest in a partnership, S corporation or trust held for more than one year and attributable to unrealized appreciation of collectibles.

Qualified small business stock. Up to 50% (60% for

certain empowerment zone business stock) of the gain from the sale of Section 1202 qualified small business stock (QSBS) is excluded from gross income if held for more than five years. The taxable portion of the gain is included in income as long-term capital gain subject to the 28% rate.

 Note:

A 75% gain exclusion rate applies to QSBS (including

QSBS stock in certain empowerment zone businesses) acquired from February 18, 2009–September 27, 2010. A 100% gain ex-clusion applies to QSBS acquired from September 28,

2010–De-cember 31, 2011. However, the 75% and 100% gain exclusions

will not apply to 2012 sales since the five-year holding period will not be met.

Under Section 1045, gain from the sale of QSBS held over six months may be rolled over by acquiring the stock of another quali-fied small business within 60 days. If a partnership or S corporation sells such stock and does not elect to defer the gain on the sale, a non-corporate partner or shareholder can purchase replacement stock within 60 days of the date of the sale and elect to defer his distributive share of the pass-through entity’s gain.

See AMT for Individuals—Adjustments and Preferences on Page 12-14 for AMT rules on QSBS. Also see Small Business Stock in

Tab C in the Small Business Quickfinder®_Handbook.

Related-Party Transactions

In general, a loss on the sale of property between related parties is not deductible (IRC §267). If the property is later sold to an un-related party, gain is recognized only to the extent that it is more than the loss not allowed from the previous transfer.

Example: Colin sells stock with a cost basis of $10,000 to his brother Finn for

$7,600. Colin’s $2,400 loss is not deductible. Finn later sells the same stock to an unrelated person for $10,500. Although Finn has a gain of $2,900, his taxable gain is only $500, the amount the gain exceeds Colin’s unallowed loss. If the property is later sold to an unrelated party at a loss, the loss disallowed to the related party cannot be recognized.

Definition. A related party is a family member who is a brother or

sister (whether by whole or half blood), spouse, ancestor (parent, grandparent, etc.) or lineal descendant (child, grandchild, etc.) of a taxpayer. A cousin, aunt, uncle, nephew, niece, stepchild, step-parent or in-law is not a related party for this purpose.

For related party rules between individuals, corporations, trusts, fiduciaries and other organizations, see Related-Party Transactions

in Tab O in the Small Business Quickfinder®_Handbook.

Deceased Spouse’s Capital Loss Carryover

A surviving spouse cannot claim a deceased spouse’s capital loss carryover from joint return years (Ltr. Rul. 8510053). The annual $3,000 net capital loss limitation applies to the final Form 1040 of the deceased taxpayer (if a joint return is filed). Any remaining capital losses allocable to the deceased spouse are lost and cannot be carried over to the surviving spouse’s Form 1040, the Form 1041 filed by the decedent’s estate or to any other beneficiary’s return.



Strategy: In Letter Ruling 8510053, the property sold was the

decedent spouse’s separate property. If the property was owned jointly by decedent and surviving spouse or owned by a decedent and surviving spouse residing in a community property state at the time of decedent’s death, the survivor would be entitled to half the loss carryforward.

Schedule D/Form 8949 Reporting Tips

• Gains and losses are reported on Form 8949 and totals are carried to Schedule D. Separate Forms 8949 are completed for (1) transactions reported on Form 1099-B with basis reported to the IRS (amount in box 3 and box 6b checked), (2) transactions reported on Form 1099-B but basis not reported to the IRS (box 6a checked) and (3) transactions for which a Form 1099-B was not received.

• Report a sale of a principal residence only if required (see Tax

Reporting Rules on Page 7-16).

(13)

Reimbursements

When an employer reimburses an employee for travel, meals or entertainment expenses, the reimbursement is excluded from the employee’s income if the reimbursement arrangement is an accountable plan. Similar rules apply to independent contractors [Temp. Reg. §1.274-5T(h)(2)]. Employees cannot deduct meal and entertainment expenses if the employer reimburses the expenses under an accountable plan and does not treat the reimbursement as wages. See Accountable Plan/Nonaccountable Plan below. Independent contractors cannot deduct meals and entertainment expenses if the customer or client makes direct reimbursement for the expenses and adequate records are submitted to the customer or cli-ent. See Elements to Prove Certain Business Expenses on Page 9-6.



Note: If reimbursements for meals are excluded from the

income of the employee or independent contractor, the employer (or customer/client) is generally subject to the 50% deduction limit. See 50% Limit on Page 9-2.

Failure to claim reimbursement. Employees may not deduct

busi-ness expenses that are eligible for reimbursement from the employer.

Accountable Plan/Nonaccountable Plan

Accountable plan. Reimbursements made to an employee under

an accountable plan are not included in the employee’s income, and the employee does not deduct the expenses.

Nonaccountable plan. Reimbursements made to an employee

under a nonaccountable plan are treated as taxable wages and re-ported in box 1 of Form W-2. The employee deducts the expenses on Form 2106, subject to the 2%-of-AGI limitation on Schedule A. An employee who receives payments under a nonaccountable plan cannot convert the payments to an accountable plan by voluntarily accounting to the employer or returning excess payment.

Accountable plan requirements: [IRC §62(c)]

1) Business Connection. The reimbursement must be for job- related expenses the employee would reasonably be expected to incur. A plan that reimburses personal expenses does not qualify as an accountable plan. Caution: An arrangement that recharacterizes wages as nontaxable reimbursements or allow-ances does not satisfy the business connection requirement. (Rev. Rul. 2012-25)

2) Substantiation. The employee must substantiate the expense by providing receipts or other documentation to the employer within a reasonable period of time.

3) Return of Excess Reimbursement. The employee must be required to return any excess reimbursement to the employer within a reasonable period of time.

Reasonable period of time. The following situations will be

considered within a reasonable period of time for purposes of accountable plans.

1) The employee receives an advance within 30 days of the time the expense is incurred.

2) The employee adequately accounts for the expense within 60 days of the time the expense was paid or incurred.

3) Any excess reimbursement is returned to the employer within 120 days after the expense was paid or incurred.

4) The employer provides a statement to the employee (at least quarterly) asking the employee to either return or adequately account for outstanding advances, and the employee complies within 120 days of the statement.

If the above requirements are not met, the plan is considered a nonaccountable plan.

Part accountable plan or part nonaccountable plan. If an

employer makes reimbursements to an employee under an ac-countable plan, but some reimbursements do not qualify under accountable plan rules, only the reimbursements falling under the nonaccountable plan are considered taxable wages. Each plan is viewed separately, and the employer treats the employee as having received reimbursements under two different plans.

a

bOve

-

The

-l

Ine

D

eDucTIOn

fOr

c

erTaIn

e

MPlOyees

Government officials paid on a fee basis, qualified performing art-ists, Armed Forces reservists and educators can claim business expenses as an adjustment to income. [IRC §62(a)(2) and 162]

Government fee basis officials (FBOs). Individuals who are

employed by a state or local government and paid in whole or in part on a fee basis.

Qualified performing artists (QPAs):

1) Perform services as an employee in performing arts for at least two employers during the tax year and receive at least $200 from any two of the employers,

2) Incur performing arts-related business expenses of more than 10% of the gross income from performing arts and

3) Have AGI of $16,000 or less before deducting performing arts expenses. To qualify, married individuals must file a joint return unless they lived apart for all of the tax year.

Armed Forces reservists. National Guard members and Armed

Forces reservists who must travel more than 100 miles away from home and stay overnight to fulfill their training and service com-mitments can claim an above-the-line deduction for the cost of transportation, meals (subject to the 50% disallowance rule) and lodging. The deductible amounts are limited to general federal government per diem amounts for the applicable locale.

Form 2106 is completed to report eligible expenses for FBOs, QPAs and reservists. The expenses are then entered on line 24 of Form 1040.

Educators. For 2011 grades K–12 teachers, instructors, counsel-ors, principals and aides can deduct up to $250 of unreimbursed expenses on line 23 of Form 1040 (up to $500 if MFJ and both spouses are educators). Only expenses in excess of excludable U.S. bond interest, nontaxable qualified tuition plan distributions and nontaxable Coverdell ESA distributions are allowable. The taxpayer must spend at least 900 hours during a school year as an educator. Qualified expenses include amounts paid for books, supplies (other than nonathletic supplies for courses of instruction in health and PE), computer software and equipment, and other equipment and materials used in the classroom. Amounts that can-not be deducted above the line can be deducted as unreimbursed employee business expenses, subject to the 2%-of-AGI limit.



Expired Provision Alert: The educator’s expense deduction

expired at the end of 2011. It’s possible Congress will extend it to 2012, but had not done so at the time of this publication. See

Expired Tax Provisions on Page 17-1 for more information.

P

er

D

IeM

r

aTes

See also IRS Pub. 1542

Per Diem Substantiation Methods

The federal per diem rates accepted by the IRS for meals, lodging and other incidental expenses vary depending on the travel location. The per diem rates for travel are revised each year on October 1. For the last three months of the year, taxpayers use either the per diem rates effective October 1 of the preceding year or the revised rates effec-tive October 1 of the current year. They must use either the current rates or the revised rates consistently for all travel during that period.

Meals and incidental expenses (M&IE) rate. Instead of

deduct-ing actual expenses incurred for M&IE while traveling for business, employees and self-employed individuals may deduct the per diem amounts, if they document the time, place and business purpose for the travel. Also, employees and self-employed individuals who are reimbursed for their meals and incidental expenses are treated as substantiating the amount of those expenses up to the IRS per