This Will Impact Your Wallet - Tax Changes Proposed in Obama 2012 Budget

President Obama’s fiscal year 2013 budget has the potential to trim the deficit by Four Trillion ($4,000,000,000,000.00) Dollars through a combination of spending cuts and tax increases. These proposals will effect all taxpayers, but have particular impact to top earnings, business owners, and those with asset in excess of $5 million.  

President Obama unveiled his fiscal year 2013 budget on February 13, 2012 amidst a cloud of uncertainty relating to Bush era tax cuts and the more immediate the fate of the payroll tax cuts (which news channels advise are to be extended later today). President Obama’s fiscal year 2013 budget proposals incorporate initiatives from his “Blueprint for America” as described in his 2012 State of the Union address. While some of the President’s proposals were immediately rejected by the GOP, others could move along quite quickly. The expected extension of the Employee Side Payroll Tax Cut could serve as a vehicle to move some of the proposals, such as an extension to the 100% bonus depreciation.

What you will find striking in the summary outlining the budget proposal is the effect directly on individuals and businesses. The most significant issue are:

  • Reinstatement of the top individual income tax rates at the 36% and 36.9% tax brackets
  • Reinstatement of  the personal exemption phase out/limitation of itemized deductions for taxpayers earning more than $200,000 a year for individuals or joint returns with incomes over $250,000
  • Return of a $ 1million lifetime gift tax exemption
  • Capping the federal estate tax and generation skipping tax exemptions at $3.5 million per person (with portability between spouses)

Click here for a complete summary.

 

2011 Mileage Rates for Deduction Purposes

Well, we now know one thing about taxes for 2011 - the rates you can use to deduct for mileage and what your employer may reimburse you for mileage starting January 1:

  • 51 cents per mile for business miles driven
  • 19 cents per mile for medical or moving miles driven
  • 14 cents per mile for miles driven in service of charitable organizations

Can your parent be a Dependent and you get a Deduction?

Clearly your parents can be dependent on you (an issue beyond the scope of any article) , but can you claim them  as dependents and get a tax deduction?

The answer - maybe (a lawyers stock in trade).  There is a 5 (possibly 6)  step test if you can claim a parent as a dependent and get a tax deduction.  You can find more details on the deduction in IRS Publication 501, although not necessarily more clearly explained.

What do you get if you can claim a parent as a dependent?  You receive an additional dependent exemption valued at $3650 and 2010.  This is the same standard deduction that you can claim for a dependent child, although with children there is not normally an analysis that you need to go through to see whether or not they qualify as dependents.

The 5 Step Test:

(1)  The person you're claiming as a dependent must be related to you or living with you.  This is generally going to include parents, grandparents, great grandparents, stepmother or stepfather, and an aunt or uncle.  Alternatively, the person must live with you all year as a member of your household. A person can be related to you and your dependent but not live with you   -- this is very important when a mother or father might still live in their own household, or reside in assisted living or nursing home.

(2) There are citizenship requirements.  The person must be a United States citizen, United States resident, or a citizen of Canada or Mexico.

(3)  The dependent person cannot file a joint return with any other person.  For example, if your mother is married to your stepfather, and they're filing a joint return, and you won't be able to claim your mother as a dependent.

(4) The dependent parent cannot earn more than  $3650 of includable income.  A great post from the New York Times "Ask an Elder Law Attorney: Claiming a Parent as a Dependent" explains this further:

Now, here come the tricky parts. The parent’s gross taxable income can’t exceed the I.R.S.’s personal exemption, which is set each year. It’s $3,650 for 2010. Social Security income, however, isn’t taxable unless someone receives more than $25,000 in total income. So if your mother’s only income is $6,000 of Social Security, then she meets this test.

(5) You, the child, and must provide at least 50% of the dependent parents support.  An example from the New York Times article.:

Let’s say your mother’s expenses for the year amount to $12,500 for food, lodging, clothing, medical and dental care, transportation and recreation — anything spent on her behalf. Your mother will collect $6,000 in Social Security benefits this year, so you have to spend more than that, at least $6,001, to claim her as a dependent.

This last point can be the most challenging to determine.  If you are paying all of your mother's bills directly, then it can be pretty easy to say if what you paid is greater than what she earned.  However, if your dad lives with you and you are buying your dad stuff (food, clothes, furniture) it can be more difficult to determine if you meet the 50% test.  You will need to look back to Publication 501 to determine the "fair rental value" of what you are providing.  There is a great article at Bankrate.com "Tax Help in Caring for an Aging Parents" that has more examples of how you can look at the support test.

Oh, and one last point.  If you are a "high income earner" the amount that you can take as a dependent deduction is reduced, and possibly eliminated.  If your Adjusted Gross Income (AGI) is more than $250,200 for joint filers, $166,800 for single filers, or $208,500 for heads of household (using 2009 figures), then the $3650 starts to reduce.  

Regardless of the complexities, the dependent parent deduction can put money in your pocket, so it is worth exploring if you are caring for older relatives.

Image: graur razvan ionut / FreeDigitalPhotos.net

Tax Deduction for Dependent Pets?

I love animals - I have 2 large and happy labs, and have had a host of cats, dogs, fish, rabbits, guinea pigs and mice over the years.  My dogs are truly family members and I am not sure they don't think they are children with furry coats.

Apparently U.S. Rep. Thaddeus McCotter, R-Mich., also loves pets, because he has sponsored the The Humanity and Pets Partnered through the Years (HAPPY) Act, which would permit an income tax deduction of up to $3500 a year.  Seriously - this legislation is being put before Congress.  As an opinion piece from the Press of Atlantic City points out "With 62 percent of American homes owning a pet, that bill could cost a lot of tax money at a time when the federal government can least afford it."

A pet owner who can't care for his or her pet is heartbreaking - the op-ed piece shares the story of an elderly couple who had to turn in their German Shepherd for adoption because they couldn't care for him.

Unfortunately our tax woes go beyond our pets. It saddens me that congressmen waste their time issuing legislation that has no chance of going anywhere instead of looking at the real fact that our government spends more money then it takes in.  As in small business owner will tell you, that is a recipe for disaster. 

So Congress, get real and spend your time on legislation that addresses the fact that the elderly couple above couldn't afford to feed themselves, much less their dogs.

And for you pet lovers out there like me, take a page from the Atlantic City Press and donate pet food to a local food bank - Fido, Fifi and their owners will thank you (woof).

Image: freedigitalphotos.net

Charitable Deduction from an Estate?

A great answer to a frequently asked question when handling a loved ones estate was recently posted by taxgirl.com.

Here is the situation - Grandma wanted to give $10,000 to the ASPCA.  She told everyone in the family, but didn't put it in her Will. Can the deduction for a charitable contribution still be made?

Like all good questions - the answer is yes and no (isn't the law great?).  Taxgirl summarizes the issues nicely:

Here’s the unhappy rule: if a charitable donation is not specifically authorized in a will or trust, the estate may not properly take a deduction for the donation. <snip>

However, there is some light at the end of the tunnel. Individuals may properly donate items which pass to them from an estate and claim a charitable deduction on their personal return. 

So what to do.  Well, you could take $10,000 from your share of the estate and donate it to charity. Grandma's wishes would be honored, and you would be able to take the deduction on your personal tax return. If there are 4 beneficiaries, each could donate $2500 in her honor.

What if the item to be donated isn't cash, but stuff?  For example, donating all of Grandma's furniture and household items to charity? In that case the best idea is to value the property (have a personal property appraiser come in), distribute the property to the beneficiaries, and then the beneficiaries can take the charitable deduction on their tax returns.  Note that there is not a requirement that the beneficiaries physically take ownership of the property - the property could be transferred to the beneficiaries via an assignment and then all the personal property picked up by the charity at the house.