NEW LAW REPEALS 3% WITHHOLDING AND EXPANDS HIRING CREDITS
HOLD YOUR INVESTMENTS WHERE TAXES WILL BE LOWEST
By KAMLESH PATEL, CPA
How much does it matter whether you hold your stock and bond investments in a taxable account or a retirement account?
Conventional thinking is that you should shelter the annual income from bond funds and high-dividend stock funds by keeping them in your tax-deferred accounts, such as IRAs or 401(k)s. Meanwhile you keep your growth stock funds, where the return comes mostly from capital appreciation, in your taxable accounts. There you can take advantage of the lower tax rates on long-term capital gains.
But these rules don’t always apply. For example, if you frequently buy and sell stocks, you’ll tend to generate short-term capital gains that are taxable at ordinary income rates. In this case, you may be better off in a tax-deferred account. Generally, you should keep stock investments in a tax-deferred account if you trade actively, if you’re relatively young and have many years for your investments to grow, or if you invest in funds that generate a high proportion of short-term capital gains or current income. Keeping stocks in a taxable account may be favored if you invest mainly in index funds, which produce relatively few capital gains, or if you trade your investments infrequently.
The rules for Roth IRAs are different because all earnings in these accounts are tax-free if you meet certain requirements. So keep those investments which generate the greatest total earnings, such as aggressive growth funds, in your Roth IRA.
One rule is clear, though. Never put tax-deferred investments such as annuities or tax-free municipal bonds in a tax-sheltered IRA or 401(k). Not only are you duplicating the tax-deferral, but with tax-exempt bonds you’ll earn a lower return and convert what would be tax-free income into a taxable distribution.
Highlight these tax dates on your 2012 calendar
Get out your red pen and circle these dates on your 2012 calendar if any of the following upcoming tax deadlines apply to you or your business.
Jan. 17 — Due date for the fourth and final installment of 2011 estimated tax for individuals (unless you file your 2011 return and pay any balance due by Jan. 31).
Jan. 31 — Employers must furnish 2011 W-2 statements to employees. 1099 information statements must be furnished to payees by payers. (Deadline for providing 1099-Bs and consolidated statements to customers is Feb. 15.)
Jan. 31 — Employers must generally file 2011 federal unemployment tax returns and pay any tax due.
Feb. 28 — Payers must file information returns (such as 1099s) with the IRS. (April 2 is the deadline if filing electronically.)
Feb. 29 — Employers must send W-2 copies to the Social Security Administration. (April 2 is the deadline if filing electronically.)
March 1 — Farmers and fishermen who did not make 2011 estimated tax payments must file 2011 tax returns and pay taxes in full.
March 15 — 2011 calendar-year corporation income tax returns are due.
April 17 — Individual federal income tax returns for 2011 are due unless you file for an automatic extension. Taxes owed are due regardless of extension.
April 17 — 2011 federal partnership returns are due.
April 17 — 2011 annual gift tax returns are due.
April 17 — Deadline for making your 2011 IRA and education savings account contributions.
April 17 — First installment of 2012 individual estimated tax is due.
June 15 — Second installment of 2012 individual estimated tax is due.
Sept. 17 — Third installment of 2012 individual estimated tax is due.
Oct. 15 — Deadline for filing your 2011 individual tax return if you filed for an extension of the April 17 deadline.
Remember the ‘nanny tax’
Though it hasn’t made headlines recently, the nanny tax is still around – and it still applies to other household workers in addition to nannies. Here’s what you need to know.
What is the nanny tax? It’s simply employment taxes on the wages you pay to certain domestic workers, such as baby sitters or housekeepers. If you paid a domestic worker more than $1,700 in 2011 (or will pay more than $1,800 in 2012), you may be required to report and pay Social Security and Medicare taxes on their wages. You could owe federal unemployment tax if you paid all your employees more than $1,000 in any calendar quarter.
To whom does the tax apply? It doesn’t matter what type of work is performed (gardening, babysitting, nursing or general household chores). What does matter is whether your worker is considered to be your employee or an independent contractor. Independent contractors are typically self-employed and, therefore, exempt from the nanny tax. Generally, if you control how and when workers do their jobs, they’re probably your employees. Independent contractors operate their own businesses. For example, a nanny who takes care of your kids in your home is probably an employee but a day care provider who cares for many children is not.
Some employees are exempt. For example, you generally don’t have to pay nanny taxes on wages paid to your spouse, your child under age 21, or any employee under age 18. But there are exceptions, so you should check the rules carefully.
Avoid penalties and interest. If you fail to pay the tax, you could be liable for interest and penalties on the tax owed, and possibly even a penalty for underpaying estimated taxes. You might also have obligations to pay state employment taxes.
Jan. 31, 2012 is the deadline for sending W-2 forms to your workers if the nanny tax applies for 2011.
IRS Releases Adjustments to 2012 Tax Numbers
The tax law requires that certain tax numbers be adjusted for inflation each year. Here are some of the 2012 tax numbers you’ll need to use as you get started with this year’s tax planning.
The standard mileage rate for business driving remains at 55.5¢ per mile for 2012. The rate for medical and moving mileage decreases from 23.5¢ per mile to 23¢ per mile. The general rate for charitable driving remains at 14¢ per mile.
The maximum earnings subject to social security tax increases to $110,100. The earnings limit for those under full retirement age is $14,640. For those at full retirement age, there is no earnings limit.
The “nanny tax” threshold increases to $1,800 for 2012. If you pay household workers more than this amount during the year, you’re responsible for payroll taxes.
The “kiddie tax” threshold is unchanged for 2012. If your child under age 19 (under age 24 for students) has more than $1,900 of unearned income this year (e.g., dividends and interest income), the excess could be taxed at your highest rate.
The maximum individual retirement account (IRA) contribution you can make in 2011 remains unchanged at $5,000 if you’re under age 50 and at $6,000 if you are 50 or older.
The maximum amount of wages employees can put into a 401(k) plan increases to $17,000. The 2012 maximum allowed for SIMPLE plans remains at $11,500. If you are 50 or older, you can contribute up to $22,500 to a 401(k) and $14,000 to a SIMPLE plan.
For 2012, the maximum amount that can be contributed to a health savings account (HSA) increases to $3,100 for individuals and $6,250 for families.
Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail firstname.lastname@example.org or email@example.com.
Women, Money and Today’s Retirement
Despite all of the other advances made in our society in recent generations, women continue to face unique challenges when it comes to preparing for their financial futures.
For starters, women on average still earn less than men, according to the Department of Labor's Bureau of Labor Statistics. And because women tend to serve as primary caregivers for young children and aging parents, women typically spend fewer years in the workforce. As a result, the average woman could earn significantly less than the average man during the course of a lifetime.
That combination of lower earning power and fewer years in the workforce translates into less retirement savings for women. In addition, the average annual pension benefit for a retired woman is less than that of the average retired man.
Adding to the inequity, Social Security benefits, based in part on workplace longevity, are also adversely affected. The end result is that retired women also tend to receive smaller monthly Social Security checks than men.
Consequently, it's essential that all women and their loved ones embrace a more active approach to investments to make up for the financial shortfalls they could face at retirement.
It's particularly important to take advantage of tax-deferred individual retirement accounts and employer-sponsored savings plans when available. Annuities can be an important tool for bridging the retirement income gap.
Remember, even a small increase in the amount of your investments or annuity contributions may add up to significant savings over time.
Seema Ramroop, financial advisor, Morgan Stanley Smith Barney, can be reached at Seema.Ramroop@morganstanleysmithbarney.com or call (727) 773-4629.