Day camp is a qualified expense under the child or dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2013, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more. The credit’s value had been scheduled to drop in 2013, but the American Taxpayer Relief Act of 2012 made higher limits permanent.

Be aware, however, that overnight camp costs don’t qualify for the credit.

A wide variety of tax breaks are available to parents. If you’d like to learn more, please contact us.

Under the health care act, starting in 2013, taxpayers with earned income over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) must pay an additional 0.9% Medicare tax on the excess earnings. Employers are required to withhold the tax beginning in the pay period in which wages exceed $200,000 for the calendar year — without regard to the employee’s filing status or income from other sources. So, it’s possible your employer:

Will withhold the tax even though you aren’t liable for it. You can’t ask your employer to stop withholding the tax, but you can claim a credit on your income tax return.

Won’t withheld the tax even though you are liable for it. You may use Form W-4 to request additional income tax withholding to cover your liability and avoid interest and penalties.

If you have questions about how withholding issues related to the new 0.9% Medicare tax might affect you, please contact us.

When you sell your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain if you meet certain tests. Gain that qualifies for exclusion also is excluded from the new 3.8% Medicare contribution tax.

Losses on the sale of your home aren’t deductible. But if part of it is rented or used exclusively for your business, the loss attributable to that portion is deductible, subject to various limitations.

Because a second home is ineligible for the gain exclusion, consider converting it to rental use before selling. It can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss, but only to the extent attributable to a decline in value after the conversion.

If you’re thinking about putting your home on the market, please contact us to learn more about the potential tax consequences of a sale.

If you’re considering expanding your staff, hiring from certain disadvantaged groups before the end of 2013 can save you tax. The American Taxpayer Relief Act of 2012 extended the Work Opportunity credit for hires from most eligible groups through 2013.

Examples of eligible groups include food stamp recipients, ex-felons and nondisabled veterans who’ve been unemployed for four weeks or more, but less than six months. For these groups, the credit generally equals 40% of the first $6,000 of wages paid to qualifying employees, for a maximum credit of $2,400. A larger credit of up to $4,800 is generally available for hiring disabled veterans.

If you’re hiring veterans who’ve been unemployed for six months or more in the preceding year, the maximum credits are even greater:

• $5,600 for nondisabled veterans, and
• $9,600 for disabled veterans.

Please contact us for more information on how to qualify for the credit.

With commencement ceremonies for high school seniors coming up, many parents and grandparents are contemplating making cash gifts the student can use for college expenses. But if gift and estate taxes are a concern, consider a potentially more tax-efficient gift: paying some of the child’s college tuition.

Cash gifts to an individual generally are subject to gift tax unless you apply your $14,000 per beneficiary annual exclusion or use part of your $5.25 million lifetime gift tax exemption (which will reduce the estate tax exemption available at your death dollar-for-dollar). Gifts to grandchildren are generally also subject to the generation-skipping transfer (GST) tax unless, again, you apply your $14,000 annual exclusion or use part of your $5.25 million GST tax exemption.

But tuition payments you make directly to the educational institution are tax-free without using any of your exclusions or exemptions, preserving them for other asset transfers. If you’d like to learn more about tax-smart ways to fund education expenses or make gifts to reduce your taxable estate, please contact us.

For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. The American Taxpayer Relief Act of 2012 has extended this break — but only through 2013.

The break can be valuable to those residing in states with no or low income tax rates. But wherever you live, it can be a powerful tax saver if you purchase a major item, such as a car or boat.

With tax reform being discussed and the federal deficit continuing to be a major issue, it’s hard to predict whether the deduction will be extended again. If you’re contemplating a major purchase, you may want to make it in 2013 to ensure the sales tax deduction is available.

Most IRA owners invest their funds in traditional assets, such as stocks, bonds and mutual funds. But some intrepid investors have enjoyed impressive, tax-deferred returns — or even tax-free returns in the case of a Roth IRA — by using their IRAs to hold rental real estate, business interests or other alternative assets.

Despite the appeal of earning higher returns in a tax-advantaged account, alternative-asset IRAs contain a minefield of tax traps that can quickly wipe out the potential benefits. For example:

• Mortgaged real estate held in an IRA can trigger unrelated business income tax. Real estate may also create problems when traditional IRA minimum distributions are required (beginning after age 70½).
• Your dealings with a business in which your IRA has an interest may violate the prohibited transaction rules, resulting in substantial taxes and penalties.
• Transferring S corporation stock to an IRA may terminate the company’s S status and trigger corporate tax liability.

So if you’re contemplating an alternative-asset IRA, please contact us for professional advice.

The Patient Protection and Affordable Care Act of 2010’s shared responsibility provision, commonly referred to as “play or pay,” is scheduled to take effect Jan. 1, 2014. It doesn’t require employers to provide health care coverage, but it in some cases imposes penalties on larger employers that don’t offer coverage or that provide coverage that is “unaffordable” or that doesn’t provide “minimum value.”

A large employer is one with at least 50 full-time employees, or a combination of full-time and part-time employees that’s “equivalent” to at least 50 full-time employees. The nondeductible penalties generally are $2,000 per full-time employee.

Although the shared responsibility provisions don’t take effect until 2014, employers will use information about the workers they employ in 2013 to determine whether they’re subject to the provisions and face the potential for penalties in 2014. The rules are complex, so contact us today to learn whether you might be subject to penalties and what steps you can take to avoid, or at least minimize, them.

Jeff Steiner and Cliff Gelber

Exemption portability, made permanent by the American Taxpayer Relief Act of 2012, provides significant estate planning flexibility to married couples if sufficient planning hasn’t been done before the first spouse’s death. How does it work? If one spouse dies and part (or all) of his or her estate tax exemption is unused at death, the estate can elect to permit the surviving spouse to use the deceased spouse’s remaining estate tax exemption.

But making lifetime asset transfers and setting up trusts can provide benefits that exemption portability doesn’t offer. For example, portability doesn’t protect future growth on assets from estate tax like applying the exemption to a credit shelter trust does. Also, the portability provision doesn’t apply to the GST tax exemption, and some states don’t recognize exemption portability.

Have questions about the best estate planning strategies for your situation? Contact us — we’d be pleased to help.

With the 2012 tax filing season behind us, it’s time to start thinking seriously about 2013 tax planning — especially if you’re a higher-income taxpayer, because you might be subject to one or more significant tax increases this year:

• Taxpayers with FICA wages and self-employment income exceeding $200,000 for singles and $250,000 for joint filers face an additional 0.9% Medicare tax on the excess.
• Taxpayers with modified adjusted gross income exceeding $200,000 for singles and $250,000 for joint filers may face a new 3.8% Medicare tax on some or all of their net investment income.
• Taxpayers with taxable income in excess of $400,000 for singles and $450,000 for joint filers face the return of the 39.6% marginal income tax rate — and of the 20% long-term capital gains rate on long-term capital gains and qualified dividends.

Contact us to learn whether you’re likely to be hit with these tax hikes and what strategies you can implement to minimize the impact.