Devereaux, Kuhner & Chin LLP

As you have been seeing on the news, the U.S. House of Representatives and U.S. Senate passed a bill, (The American Taxpayer Relief Act of 2012 but commonly referred to as “fiscal cliff legislation”) which was signed into law by President Obama on Thursday. This legislation (effective January 1, 2013 with some provisions retroactive for 2012) has many parts to it but a summary of those related to “taxes” are as follows:

Permanent change for tax rates beginning January 1, 2013
A top rate of 39.6% (up from 35%) will be imposed on individuals making more than $400,000 a year, $425,000 for head of household, $450,000 for married filing jointly, and $225,000 for married filing separately. These brackets will be inflation adjusted after 2013.

2% Social Security reduction for employees and self-employed individuals is gone

AMT permanently patched
A permanent AMT patch, adjusted for inflation, will be made retroactive to 2012. 2012 exemption amounts are $50,600 for unmarried, $78,750 for Married filing joint and $39,375 for married filing separate.

Dividends and capital gains
The maximum capital gains tax will rise from 15% to 20% for individuals taxed at the 39.6% rates (those making $400,000, $425,000, $450,000, or $225,000 depending on filing status, as noted above). There will also be the 3.8% Obamacare Surtax which becomes effective on 1/1/13 for capital gains and other investment income.

Itemized deduction and personal exemption phase-outs
The itemized deduction phase-out is reinstated, and personal exemption phase-out is reinstated, but with higher AGI starting thresholds (adjusted for inflation): $300,000 for married filing joint, $275,000 for head of household, $250,000 for single, and $150,000 for married filing separately.

Estate tax
The estate tax will continue to provide an inflation-adjusted $5 million exemption (effectively $10 million for married couples) but the rate above the $5,000,000 exemption will be applied at a higher 40% rate (up from 35% in 2012). The 2012 amount is $5,120,000.

Personal tax credits
The $1,000 Child Tax Credit is permanent, but the enhanced Earned Income Tax Credit, and the enhanced American Opportunity Tax Credit will all be extended through 2017. (The provision that reduces the earnings threshold for the refundable portion of the Child Tax Credit is only extended to 2017.)

Other personal deductions and exclusions
The following deductions and exclusions are extended through 2013:

Discharge of qualified principal residence exclusion;

Business provisions

One of the most common tools used in estate planning – and one that everyone should at least give careful consideration to – is a program of making gifts. A carefully planned gift-giving program can reduce the amount of your estate that is subject to tax while still passing on wealth. While Congress made estate planning at least somewhat more certain under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act). For decedents dying after December 31, 2010 and before January 1, 2012, a revived estate tax with a $5 million exclusion (plus inflation adjustments after 2010) and top 35 percent tax rate applies. The 2010 Tax Relief Act also reunified the gift and estate tax, which was decoupled previously. The reunification applied to gifts made after December 31, 2010.

It is important to know, that when Congress reunified the gift and estate tax under the 2010 Tax Relief Act, it also added an inflation adjustment to the lifetime exclusion amount. For 2012 the lifetime exclusion has been adjusted to $5.12 million; $10.24 million if gifts are “split” with a spouse). THIS EXCLUSION EXPIRES DECEMBER 31, 2012 AND AFTER THAT DATE ESTATES AND GIFTS ARE SUBJECT TO TAX IF THEY ARE IN EXCESS OF $1 MILLION ($2 MILLION IF THE GIFTS ARE SPLIT WITH A SPOUSE).

There is a great deal of flexibility in the types of property that can be transferred. Gifts that qualify for the exclusion can be made in money, property such as stocks or bonds, or even a life insurance policy. Use of various different types of trusts can increase the amount given through use of valuations and market discounts.

One important thing to remember when you make a gift is that the recipient takes your tax cost basis in the property given. This means that if the recipient sells the property, any gain on the sale will be measured using what you paid for the property, not what the property was worth when he or she received it.

If used properly, a program of gift-giving can benefit everyone involved. The fact that recent changes to federal estate and gift taxes are expiring at the end of 2012, unless Congress acts, makes it all the more important for you to consider how a gift giving plan can be advantageous now. We believe there will never be a better time to consider a lifetime gift. If you have any questions about the best way of using gifts as part of your overall financial plan, please call us.

We are pleased to introduce our newest associate accountant, James Devereaux. He comes to Devereaux, Kuhner & Chin after working as a staff auditor at Mohler, Nixon & Williams. He earned his Bachelor of Science in Accounting from Santa Clara University.

As a self-declared “Bay Area for Life” man, it’s no surprise he loves all things Bay Area. He is a huge local sports fan. His favorite teams are The San Francisco Giants and San Jose Sharks. He recently became a season ticket holder of The San Francisco Bulls, Northern California’s newest hockey team. James has such a passion for hockey that he joined a hockey league in Oakland and plays all year long. He enjoys attending sporting events, exploring San Francisco neighborhoods (especially the restaurants), hiking Mt. Tamalpais, relaxing at Stinson Beach and reading a good book. He is looking forward to getting to know the DKC staff and clients. Next time you are in the office, stop by and say hello to James!

Mitsue Kuramoto joined Devereaux, Kuhner & Chin last month as a Tax Manager. She specialized in corporate and international tax at KPMG and Plante & Moran while living in Illinois. She earned both her Bachelor of Science and Masters in Tax from the University of Florida. Go Gators!

Mitsue moved to San Francisco from Chicago to be closer to her family who live in Japan. Although she misses the flat terrain of the windy city and Dunkin Donut coffee, she loves being close to nature and the variety of food choices available in San Francisco. Her favorite restaurant discovery so far? E’ Tutto Qua in North Beach. While not in the office, Mitsue can be found paying tennis, hiking, and traveling. The past few weekends she has been exploring her new home. She has already familiarized herself with the Sunset, Financial District and North Beach. Next up, she’ll be checking out the Mission district. She is very excited to be living on the west coast. Welcome to California Mitsue!

A SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA is a retirement savings plan designed specifically for small employers. A SIMPLE IRA is an IRA-based plan with ease ofuse features intended to encourage small employers, which may otherwise not offer a retirement plan, to create a retirement plan.

Basics

Generally, any business with I 00 or fewer employees can establish a SIMPLE IRA. If an employer establishes a SIMPLE IRA plan, all employees ofthe employer who received at least $5,000 in compensation from the employer during any two preceding calendar years (whether or not consecutive) and who are reasonably expected to receive at least $5,000 in compensation during the calendar year, must be eligible to participate in the SIMPLE IRA. For purposes ofthe 100-employee limitation, all employees employed at any time during the calendar year are taken into account

SIMPLE IRAs must be established under a written plan agreement. All employees must be notified about the SIMPLE IRA plan. Generally, employees must be informed about his or her opportunity to make or change a salary reduction choice under the SIMPLE IRA plan and the employer’s decision to make either matching contributions or nonelective contributions. Employees are always 100 percent vested in a SIMPLE IRA.

Salary reduction contributions

SIMPLE IRAs are subject to important limits on salary reduction contributions. The limit is $11,500 for 2012. However, employees age 50 or over may make so-called $2,500 “catch-up contributions for 2012.

Employer contributions

Employers have two choices in determining their contributions to a SIMPLE IRA plan:

• ♦A two percent nonelective employer contribution, where employees eligible to participate receive an employer contribution equal to two percent of their compensation (limited to $245,000 per year for 2012 and subject to cost-of-living adjustments for later years), regardless of whether the employee makes his or her own contributions.
• ♦A dollar-for-dollar match, up to three percent of compensation, where only the participating employees who have elected to make contributions will receive an employer contribution (this is called a matching contribution).

Each year, employers can choose which one they will use for the next year’s contributions. This choice must be communicated to employees. Owners ofsmall businesses can use SIMPLE IRA plans as vehicles for retirement savings for themselves without reference to how many of their employees actually participate, as long as the employees are given the option.

The three percent matching contribution applies if the employee has made a contribution. In contrast, the two percent nonelective contribution applies even if the eligible employee did not make a contribution.

Let’s look at an example: Jacob, age 29, has worked for his employer for five years. This year, the employer established a SIMPLE IRA plan for Jacob and its other 44 employees. The employer will match contributions made by Jacob and the other employees dollar-for-dollar up to three percent of each employee’s compensation. Jacob contributes three percent ofhis yearly compensation to his SIMPLE IRA (three percent of $40,000 or $1,200). His employer’s matching contribution is also $1,200. The total contribution to Jacob’s SIMPLE IRA is $2,400.

The three percent limit on matching contributions may be reduced for a calendar year at the election of the employer, but only if the limit is not reduced below one percent; the lìmit is not reduced for more than tvo years out of the five-year period that ends with (and includes) the year for which the election is effective; and employees are notified of the reduced liniit within a reasonable penod of time before the 60-day election period during which employees can enter into salary reduction agreements. If an employer fails to satisfy the contribution rules, the SIMPLE IRA plan is in jeopardy of losing its tax benefits for the employer and all participants.

If you have any questions about matching contributions to SIMPLE p1ans or how to set up a SIMPLE plan, please contact our office.

Supreme Court Hands Down Landmark Health Care Decision – Now What?

On June 28, the U.S. Supreme Court issued its long-awaited landmark decision on the Patient Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation Act (HCERA). In a 5 to 4 decision of historic proportions, the nation’s highest court upheld the law – except for a certain Medicaid provision involving state funding. Key to the Court’s approval of President Obama’s signature health care law was the finding that the linchpin individual mandate was constitutional. The requirement under the individual mandate that individuals pay a penalty if they fail to carry minimum essential health insurance coverage was declared within the Constitution based upon Congress’s power to tax.

The Supreme Court’s decision preserves all of the far-reaching tax provisions and health insurance reforms that were part of the overall health care reform legislation as passed in 2010. In coming months, lawmakers and legal scholars will examine all of the nuances of the Court’s highly complex decision. More immediately, individuals and businesses are concerned about what steps they need to take next.

Role of Taxes

To a large extent, the Obama administration’s health care law is driven by tax provisions, to provide the carrot, the stick and adequate funding in alternating quantities. The role played by taxes in the new health care provisions is also underscored by the predominate part that the IRS will play in its administration.

Under the health care law, a number of tax provisions are scheduled to take effect in 2013 and beyond. The court’s decision allows the numerous tax provisions within the health care laws to move forward on schedule. Some important provisions have already taken effect; others will take effect in 2013 and 2014. One provision, the excise tax on high-cost employer-sponsored coverage, will not take effect until 2018.

Main Provisions / Effective Dates

PPACA and HCERA include the following tax provisions (not a complete list):

• ♦Small employer Sec. 45R credit, effective for tax years beginning in 2010 – the government will provide a credit of 35 percent of health insurance premiums to small employers (25 percent for tax-exempt organizations. The credit expires after 2015.
• ♦Economic substance doctrine, effective after March 30, 2010 – the economic substance test was codified as a two-prong test, requiring that the transaction change the taxpayer’s economic position in a meaningful way, and that the taxpayer has a substantial business purpose for the transaction.
• Over-the-counter limitations for health accounts, effective for tax years beginning after December 31, 2010 – health accounts, such as flexible spending arrangements, health reimbursement arrangements, health savings accounts, and Archer Medical Savings Accounts, can only reimburse expenses for medicine and drugs if the item is a prescription drug (or insulin).
• ♦Indoor tanning services excise tax, effective on or after July 1, 2010 – amounts paid for indoor tanning services are subject to a 10-percent excise tax. Tanning salons must collect the tax and pay it quarterly.
• ♦Itemized deduction for medical expenses, effective for tax years beginning after December 31, 2012 – the threshold for deducting medical expenses as an itemized deduction is raised from 7.5 percent to 10 percent of adjusted gross income.
• ♦Additional 0.9% Medicare tax, effective after December 31, 2012 – an additional 0.9 percent Medicare tax is imposed on wages and self-employment income of higher-income individuals: individuals – above $200,000; married filing jointly – above $250,000; married filing separately – above $125,000.
• 3.8% Medicare contribution tax, effective after December 31, 2012 – a 3.8 percent Medicare tax is imposed on unearned income for higher-income individuals, including interest, dividends, annuities, royalties, rents and other passive income.
• ♦Medical device excise tax, effective for sales after December 31, 2012 – a 2.3 percent excise tax is imposed on sales of certain medical devices by manufacturers, producers and importers. Retail items such as eyeglasses are excluded from the tax.
• ♦Employer shared responsibility, effective after December 31, 2013 – the “employer mandate”: an applicable large employer (50 or more full-time employees) must make a payment if any full-time employee can receive the premium tax credit. The payment is required if the employer does not offer minimum essential coverage, or offers coverage that is not affordable.
• ♦Branded prescription drug fees, effective for calendar years beginning after December 31, 2010 – an annual fee imposed on manufacturers and importers with receipts from branded prescription drug sales.
• ♦Sec. 36B premium assistance credit, effective for tax years ending after December 31, 2013 – lower-income individuals who obtain health insurance coverage through an insurance exchange may qualify for the credit, unless they are eligible for other minimum essential coverage.
• ♦Excise tax on high-dollar insurance, effective for tax years beginning after December 31, 2017 – employer-sponsored health coverage whose cost exceeds a threshold amount ($10,200 for self-on coverage; $27,500 for other coverage) will be subject to a 40-percent excise tax.

Looking Ahead

Employers, taxpayers – indeed everyone – must prepare for sweeping changes in health care in coming years. Many of the provisions in the PPACA have already been implemented or are in the process of being implemented. Other provisions, as the above list indicated, are scheduled to take effect after 2012. The Supreme Court’s upholding of the PPACA clears the way for full implementation of the new law (unless a future Congress votes to repeal the law, which at this point would be an uphill battle).

The newest member of the Devereaux, Kuhner & Chin team, Ina Lamaka, joined the firm right in time for tax season. She graduated from San Francisco State with a Bachelor of Science in accounting and finance this past fall. “Accounting is in my genes” she says with a smile. Her mother is an accountant in Belarus.

Ina is the epitome of someone who lives life to its fullest. In her free time she loves to ballroom dance, play tennis and go for hikes. She is also an avid traveler. Her next big adventure is a trip to Thailand! She is a self declared “animal person.” She and her husband own two iguanas, salt water fish and a dog named Laike. Her life motto is “I believe that a joke and a positive attitude can prolong your life.”

In October 2011 DKC had the privilege of co-hosting  Integrated Advisory Group International’s Fall Assembly.  IAG is a global association of accounting professionals and attorneys who provide expertise in facilitating foreign counsel and cross-border transactions.  The group holds meetings three times a year in different counties, which allows members to develop strong bonds and trust.  Delegates from Europe, South America, Australia, Canada and the US came to San Francisco to network and explore the city.  After an all day business meeting on Friday, highlights of the weekend included dinner at the St. Francis Yacht Club, a walk across the Golden Gate Bridge followed by an afternoon in Sausalito, and dinner at Villa Taverna.  It was a great opportunity for the partners to reconnect with colleagues and for the staff to create relationships with accounting professionals throughout the world.  Being a member of IAG has been invaluable in allowing us to assist clients with international tax matters.

Perhaps it not a stretch to see where Cynthia Bonavia learned her love of numbers.

“My Mom and Dad each have eight brothers and sisters,” she says with a laugh. “So, we have huge family parties at Christmas and Easter with all the cousins, my sister and her three kids and my younger brother.”

That’s a lot of family members to count during the holidays.

On a professional level, Cynthia has been working with numbers since 2002 when she started her accounting career after graduating from the University of San Francisco in 2002 with a Bachelor of Science degree in Accounting and Finance.

She became interested in the tax side of accounting during her college days. “Tax just made more sense to me in college. When I first started out, I stuck with it, because it felt like I was doing more. Auditing is just verifying things, whereas in tax you bring more to the table with planning and consulting.”

Cynthia was one of the original members of DK&C, which was a thrill for her. “It was exciting to start something new with a group of great people that I got along with really well,” she says. “We were able to start our own firm with our own new ideas and a fresh start.”

Cynthia during a trip to Greece.

Outside of the office, Cynthia enjoys to travel. So far, she’s been around Europe — Italy, Ireland, Scotland and Malta, where she still has family — and Australia. “I like to plan the places where we are going to stay, but I don’t plan the sight-seeing so much,” she says, “it’s more like whatever we feel like doing that day or what we hear about from people we talk to.”

She took that spontaneous philosophy with her on a trip to Hawaii shortly after the October tax season ended. “I went with a friend and we spent Halloween on Oahu,” she says. “It was a great time to get away and see what the holiday was like over there. The whole trip was great fun.”