Authored by David Cash, CPA, MAcc. Dave has worked in the Logan and Salt Lake City offices of CMP. He spent 2 years in the Logan office and has been in the Salt Lake City office for over 5 years. Dave specializes in oil and gas taxation, pension administration and reporting, and individual and business tax planning and compliance.

In meeting with clients for over a decade to assist them with various tax related needs I have noticed that one misconception seems to be very common. In this article I would like to discuss that misconception and hopefully shed some light on the issue of the question, “What tax rate am I in?”

When I meet with clients and let them know that their marginal tax rate is at a particular percentage, say 25% for example, they usually will look at me and ask what they can do to get into a lower tax bracket. The ensuing discussion will usually go something like this:
Client: How can I lower my tax bracket?
CPA: You are in the 25% tax bracket but only $12,000 of your taxable income is being taxed at 25%
Client: What do you mean?
CPA: The tax system that we have is a graduated rate system. For the 2013 tax year if someone is Married Filing Joint then the first $17,850 of taxable income is going to be taxed at 10%.

The taxable income between $17,851 and $72,500 is going to be taxed at 15%, then if your taxable income falls between $72,501 and $146,400 only the taxable income above $72,500 will be taxed at 25%. You are benefiting from the tax brackets that are lower than your marginal tax bracket. The marginal tax bracket just lets us know what rate the last dollar of taxable income is taxed at.
Client: So not all of my income is being taxed at 25%?
CPA: No, not all of your taxable income is taxed at 25%. It is similar to having a bucket for each tax bracket. You start by filling up your 10% bucket with income, then filling up your 15% bucket, then the remaining taxable income starts to fill your 25% bucket. Once the last of your taxable income is in one of 3 buckets, either 10%, 15%, or 25% then we are able to let you know that you are in the 25% marginal tax bracket.

Just in this past filing season, I had variations of this discussion with no fewer than 7 new clients. At Cook Martin Poulson, we strive to help you keep what you earn. Part of what we hope to do for our clients is to help them have a better understanding of the tax system and how it works. A key component to this is to try to take some of the mystery out of the tax system, such as the misconception that exists that just because you may be in the new 39.6% tax bracket for the 2013 tax year, doesn’t mean that all of your income is taxed at that rate.

For those of you who may be interested the 25% bracket includes taxable income from $72,501 through $146,400. The next bracket is at 28% and that has taxable income from $146,401 to $223,050. The 33% tax bracket is taxable income from $223,051 to $398,350. The 35% tax bracket is taxable income from $398,351 to $450,000 (yes that tax bracket only includes about $52,000 of taxable income). Those with taxable income over $450,000 gets that excess taxed at 39.6%. These tax brackets are for those that are Married Filing Joint tax returns. The other filing statuses have different tax bracket floors and ceilings, but the concept is the same.

Authored By: Sheri Lewis, Staff Accountant, has worked at Cook Martin Poulson since November 2011. She recently received her Master of Accounting Degree and is in the process of taking the CPA exams.

Have some of you wondered what happened to “Your Social Security Statement” that you used to receive in the mail on an annual basis? The Social Security Administration used to mail out a copy of “Your Social Security Statement” each year around your birthday. This statement offers useful information to assist you in planning for your retirement. The statement provides the following:

a) Whether or not you have earned enough credits to qualify to receive social security benefits
b) Your estimated social security benefits when you retire based on ages 62, 67 and 70.
c) Estimated benefits if you become disabled
d) Family survivor benefits in the event of your death
e) Whether you have earned enough credits to qualify for Medicare
f) A description of how your benefits are estimated
g) A record of your lifetime earnings by year
h) Other helpful information about social security

Due to budget restraints, this statement is no longer being mailed each year. Only those people who have reached age 60 will receive a statement in the mail until they retire and apply for social security. However, you can still access “Your Social Security Statement” by going online to www.socialsecurity.gov and creating an account with a username and password. Upon accessing the website you would click on “New Get your Social Security Statement online” and follow the directions to create an account with an username and password. You will be asked to provide your name, social security number, birth date, mailing address and primary phone number. Additional screens will ask questions to verify your identity such as the name of your banking institution, what kind of car you recently purchased or what county you live in. Once you have created an account you can access “Your Social Security Statement” and use the information provided to assist you in planning for your financial future.

Authored by: Jake McCrea. Jake is a Staff Accountant, working out of the Salt Lake City office. Jake assists many clients with issues ranging from the setup or repair of accounting operations and systems to taxes for small businesses and individuals.

Recently sales tax laws in Utah have evolved on the sales, installation, and repair of computers or computer-related items. Generally, sales tax in Utah is collected on any tangible property or merchandise sold in the state, but not collected on most services provided. This is still generally the case with computer services, but there are key elements that make computer services subject or not subject to sales tax:

Sales tax is collected on:

1. Hardware,
2. Prewritten software,
3. Upgrades to prewritten software upgrades, and
4. License fees for prewritten software accessed remotely if the software is used in Utah (this can become complex if the software is used in multiple states, see publication for examples), and
5. Repairs or replacement of computer hardware, including any other service needed to complete that repair that wouldn’t normally be subject to sales tax.

Sales tax is not collected on:

1. Reasonably priced and necessary modifications to prewritten software that are separately stated on the invoice,
2. Custom software, or any software made for a specific client to meet their specific needs,
3. Most computer-related services, if it isn’t needed for the repair of hardware (see Publication 64 of the Utah State Tax Commission for a more complete list).

If your company deals with any of these things, make sure that the accounting and invoicing systems are able to catch these specific items that are subject to sales tax. If an invoice has multiple items that are both taxable and nontaxable, they need to be broken out by item or the entire invoice is subject to sales tax.

If you have any questions, feel free to call your accountant or go to http://tax.utah.gov/forms/pubs/pub-64.pdf to see the publication on this subject.

Authored by David Cash, CPA, MAcc. Dave has worked in the Logan and Salt Lake City offices of CMP. He spent 2 years in the Logan office and has been in the Salt Lake City office for over 5 years. Dave specializes in oil and gas taxation, pension administration and reporting, and individual and business tax planning and compliance.

The long awaited and eagerly anticipated passage of tax legislation with the apt title, “The American Taxpayer Relief Act of 2012 (ATRA)” has extended a number of tax cuts originally passed during the 1st term of President George W. Bush’s administration and during the 1st term of President Obama’s administration.

There are many parts of this legislation that is almost certainly going to affect most, if not all, taxpaying Americans. Most of this legislation had to do with the “fiscal cliff” and didn’t come into effect until the 2013 tax year. There are some parts of this Act that will affect the 2012 tax year and this post will mention some of the tax law changes that will affect the 2012 tax year and/or the 2013 tax year filings.

2013 Tax Rates
The part of this Act that probably received the most press coverage will take effect for the 2013 tax year that was the extension of the marginal tax rates of 10, 15, 25, 33, and 35% for those with taxable income below $400,000 (if you are married filing jointly then the taxable income amount goes to $450,000 before you are in the 39.6% tax bracket, that is a very heft marriage penalty for those with that level of taxable income).

This law also permanently extends the 15% tax rates on long-term capital gains and qualified dividends for taxpayers in the 25, 33, and 35% tax brackets. Those taxpayers in the 10 and 15% tax brackets will continue to enjoy a zero percent rate on their long-term capital gains and qualified dividends. Those in the new 39.6% tax bracket will have their long-term capital gains and qualified dividends taxed at a top rate of 20%; which although is not as nice as 15% it is still a tax savings (even after the 3.8% Medicare Tax on Investment and Unearned Income gets added to the mix).

Child Tax Credit
One of my personal favorite extensions is for the Child Tax Credit of $1,000 per child with partial refund ability being permanently extended.

Phase-Outs
Phase outs are back. What do you mean back. Well I will tell you. Prior to the Bush tax cuts there where two phase-outs of deductions. One phase-out was for your personal exemptions and the other was a phase-out of itemized deductions. If your income is over $250,000 single or $300,000 married you will lose some of the benefit of these deductions. An example of how this phase out works it as follows; If you income was $350,000 and you were a married couple then your phase out would be computed as follows $350,000-$300,000=$50,000 X .03=$1,500. The phase out would be $1,500. This means that your itemized deductions would be reduced by the $1,500. If your total itemized deductions were $45,000 then you would only be able to deduct $45,000-$1,500=$43,500. The most common question I will be asked will be should I make charitable contribution or not because they are phased out. This is simply not the case. The total itemized deductions will we be reduced by the phase out amount so any additional deductions will continue to save taxes. Phase-outs can act as a hidden tax increase because they don’t exclude deductions, they only limit how much can be deducted.

College Financing
Secondary Education has also seen the extension of various items. The permanent extensions included an increase in the annual contribution limit to the Coverdell Education Savings Accounts, and an increase in the phase out for the student loan interest deduction. The American Opportunity Tax Credit has also been extended through the 2017 tax year.

Premiums for mortgage insurance continue to be deductible as qualified residence interest and the deduction for state and local sales taxes can be taken as an itemized deduction, if elected, instead of taking the deduction for state income taxes. Both of these provisions have been extended through the 2013 tax year.

One thing to keep in mind is that some banks may not report the mortgage insurance on Form-1098 due to the late passage of this law. You may need to contact your mortgage company to have them send you the amount you paid for 2012.

Charitable Giving
A provision that has been extended that should help with planning is that through the 2013 tax year, those age 70 ½ or older can receive tax-free distributions from their IRAs to certain public charities. The IRA must make this distribution directly to the charity. Since this provides a tax-free distribution you can’t also claim a charitable contribution deduction. For those taxpayers that are 70 ½ or over an use the standard deduction this can provide an extra tax benefit that otherwise would not have been recognized. For those that have income at a level that would generate the extra Medicare tax this may also boost the benefit of this planning item. This provision is usually extended in December of the extension year; which provides for limited opportunities for planning.

AMT
An item that has been permanently extended is the Alternative Minimum Tax (AMT). This increases the AMT exemption amount to $78,750 for Married Filing Joint filers in 2012 and is indexed for inflation moving forward. This is a permanent change and is an item that would normally get an inflation adjustment each December, but it is nice to have the inflation adjustment in the law so that we have one less unknown item for tax planning. At least until the law is changed, again.

Depreciation
The Section 179 deduction has been increased up to $500,000 with a $2 million phase-out for the 2012 and 2013 tax years. After 2013 the Section 179 deduction will drop to $25,000. Before passage of this law the Section 179 deduction was only $139,000. Bonus depreciation was extended for 2014 and 2015 for certain long-term assets and transportation. This means that if you purchase “original use” assets (meaning brand new) you can write off 50% of the cost in the year of purchase. Qualified Leasehold improvements made by retail and restaurants will qualify for Section 179 for improvements made before 2014.

Estate Taxes
Surprise! We have a permanent fix to the Estate Tax Exclusion. The Estate exclusion will be set at the $5,120,000 per person and will be indexed for inflation. The rate was increased from 35% to 40% but with proper planning and a gifting program most estates will fall below this new exemption. It’s about time we have a law we can count on (with the caveat that tax laws can be changed in the future). The new law also makes permanent the “Portability” feature which allows spouses to pass along any unused portion of their Estate Exclusion to their surviving spouse.

Research & Development Tax Credit
The R&D credit was extended again for 2012 and 2013. I wish they would just make this permanent. This credit seems to be extended every year, but it makes planning for it difficult when the extension that included the 2012 tax year was signed into law in 2013.

Final Thoughts
Quite a few of the items mentioned here are things that I hoped would happen. It is nice to have a year or more to plan and have some items in the law. Some of the permanent provisions, like the AMT, and some of the 2012 and 2013 provisions, like the IRA distributions to charities, are items that have been extended for many years (usually in December of the effected tax year). Hopefully the United States Congress will see that it is easier to encourage action by using tax law, if the tax law is on the books early enough to make a decision, rather than after the year is already passed or almost over.

As with any tax items we recommend that you discuss these items with your tax professional to see which of these items may affect you and your specific tax situation.