September 2012

High income households, as well as many trusts and estates, will be paying more Medi-care taxes beginning in 2013. This is a result of the Patient Protection and Affordable Care

Act of 2010.

Medicare Tax on Investment IncomeMedicare Tax on Investment IncomeMedicare Tax on Investment IncomeMedicare Tax on Investment Income Beginning in 2013, high income households will be subject to a 3.8% Medicare tax on net investment income. High income households are defined as those whose Modified Adjust-ed Gross Income (“MAGI”) exceeds $200,000 (if single) and $250,000 (if mar-

ried filing jointly).

Investment income includes not only interest, dividends and capital gains, but also royal-ties, passive rents and passive income from other sources. Any investment income that is characterized as tax exempt will not be sub-

ject to the Medicare tax. Most retirement plan distributions are also exempt from the

Medicare tax.

Additional Medicare Tax for Additional Medicare Tax for Additional Medicare Tax for Additional Medicare Tax for High Wage EarnersHigh Wage EarnersHigh Wage EarnersHigh Wage Earners Currently, the Medicare payroll tax is 2.9% on all wages. This tax is split equally between the employee and employer, resulting in each paying 1.45%. Self-employed individu-als pay both halves of this tax, but are al-lowed to deduct half this amount for income

tax purposes.

Starting in 2013, individuals who make more than $200,000 in wages and couples mak-ing more than $250,000, will be required to pay an additional 0.9% in Medicare payroll tax on earned income in excess of those base amounts. The self-employed will pay a total of 3.8% on earnings (cont’d on Page 4)

NEW TAXES AND INCREASED TAX RATES

FOR HIGH INCOME HOUSEHOLDS

I N S I D E T H I S I S S U E :

Tax Changes for 2012 and 2013

2

Foreign Financial Asset Reporting

2

More Complex Capital Gains Re-porting

3

Substantiating Charitable Contributions

3

Saving for College: 529 Plans

4

Estate Planning: Updating your Will

5

Household Employees and the ‘Nanny Tax’

5

King & Oliason News

6

TAX NOTES AND PERSPECTIVES

G I FT ING

Gifting is a good way to reduce your taxable estate and is an important element of your estate plan. Congress has enacted temporary changes that increase the amount of tax free gifts you can make during your lifetime. The 2010 Tax Relief Act temporarily increased the lifetime gift

tax exemption amount from $1,000,000 to $5,120,000 per taxpayer in 2012.

This increased exemption is scheduled to expire after 2012, when it will revert to the lower ex-emption amount of $1,000,000. If you plan on transferring significant assets to your children or others, either outright or in trust, you should consider taking advantage of this limited oppor-

tunity in 2012.

The annual gift tax exclusion remains at $13,000 per person for 2012. This means you may make a gift of up to $13,000 each year to an individual without affecting your lifetime gift tax

exemption.

Note that you can also avoid gift tax if you make tuition payments for another individual directly to an educational organization or if you pay medical expenses on behalf of another directly to a medical care provider. These exclusions are available in addition to the $13,000 annual gift tax exclusion. Contact us soon if you would like to take advantage of these opportunities before

year end.

For Individuals:For Individuals:For Individuals:For Individuals:

Unless Congress enacts alternative legislation, ordinary and capital gains tax rates are scheduled to increase on January 1, 2013.

• The top ordinary rate will increase from 35% to 39.6% and the top qualified dividend rate from 15%

to 39.6%.

• The top tax rate on long-term capital gains is sched-uled to increase from 15% to 20%. If the “Buffet Rule” is enacted, taxpayers who make more than a million dollars a year could be taxed at a maximum

rate of 30% on their long-term capital gains.

Investment decisions shouldn’t be based solely on tax rates, but you may want to consider selling appreciated securities held for more than a year while the rates are still low.

• Securities sold at a gain can be bought back immedi-ately, which will step up your tax basis to the current

value, at a 15% tax cost.

Specified foreign financial assets include:

• Savings, deposit, checking and brokerage accounts held in a foreign financial institution,

• Stock or securities issued by a foreign corporation that are held directly by the taxpayer,

• A note, bond or debenture issued by a foreign person that is not held in a financial institution, including a brokerage firm,

• An interest in a foreign partnership, such as a foreign hedge fund or a foreign private equity fund,

• An interest in a foreign retirement plan or a foreign de-ferred compensation plan,

• An interest in a foreign estate or trust,

• An interest in a foreign-issued insurance or annuity con-tract with a cash-surrender value.

Residential property or rental property directly held in a foreign country is not reportable. Taxpayers who are not required to file an income tax return are not required to file Form 8938. For guidance and more information, please contact our office.

Beginning with tax year 2011, the IRS expanded the re-porting requirements for foreign financial assets. In addi-tion to current FBAR reporting (TD F 90-22.1 Report of Foreign Bank and Financial Accounts), taxpayers are also required to report foreign assets on Form 8938, Form 8938, Form 8938, Form 8938, Statement of Specified Foreign Financial AssetsStatement of Specified Foreign Financial AssetsStatement of Specified Foreign Financial AssetsStatement of Specified Foreign Financial Assets. The form asks for similar disclosures as the FBAR; however, the information is used for different purposes and there are some key differences in the reporting requirements. - For the 2011 tax year, only individuals are required to file Form 8938 with their tax returns. - Certain domestic entities may need to file the form starting in 2012. Entities required to file would include domestic partnerships, domestic corporations and do-mestic trusts. Domestic estates will not be subject to the new filing requirement. If you own specified foreign financial assets above the threshold prescribed by the IRS (more than $100,000 on December 31st or more than $150,000 at any time dur-ing the tax year for taxpayers filing a joint return and liv-ing in the U.S.), you may be required to file Form 8938.

Page 2

TAX CHANGES FOR 2012 AND 2013

NEW REPORTING OF FOREIGN F INANCIAL ASSETS

Tax Notes and Perspect ives

• Consider waiting until 2013 to sell securities at a loss so that the losses can be used to offset long-term gains when the tax rates are higher.

For Business Owners:For Business Owners:For Business Owners:For Business Owners:

Several tax changes will impact business owners.

• Bonus depreciation reverted from 100% back to 50% for new property placed in service during 2012. No bonus

depreciation is generally available after 2012.

• Qualified leasehold improvement property placed in ser-vice during 2012 must be depreciated over 39 years in-stead of 15 years; however, the property generally quali-

fies for 50% bonus depreciation.

• The Section 179 deduction currently allows businesses to deduct up to $139,000 of assets purchased during the year. The allowed 179 deduction phases out once the business’s purchases exceed $560,000 for the year. The Section 179 limit for 2013 is reduced to $25,000.

Tax Notes and Perspect ives

The Emergency Economic Stabilization Act of 2008 re-quires brokers to begin reporting the adjusted cost basis to investors and the IRS for security transactions occurring after January 1, 2011. As a result of this Act, the IRS intro-duced a new tax form for reporting capital gains and loss-es from the sale of stocks, bonds and similar investments, Form 8949, Sales and Other Dispositions of Capital As-Form 8949, Sales and Other Dispositions of Capital As-Form 8949, Sales and Other Dispositions of Capital As-Form 8949, Sales and Other Dispositions of Capital As-

setssetssetssets.

Investment transactions are now grouped into one of three

categories:

1) sales of ‘covered’ securities (for which the cost basis

isisisis provided to the IRS on Form 1099-B),

2) sales of ‘non-covered’ securities (for which the cost

basis is not is not is not is not reported on Form 1099-B), and

3) sales of investment assets for which no Form 1099-B

is provided.

Page 3

SUBSTANTIAT ING CHARITABLE CONTRIBUTIONS

CAPITAL GAINS REPORTING BECOMES

MORE COMPLEX

Recent Tax Court cases have emphasized the crucial im-portance of ‘dotting your i’s and crossing your t’s’ when it comes to documenting charitable contributions. In general, for cash donations, regardless of amount, you must maintain a bank record, or written communication from the donee organization showing its name, date of contribution, and amount of donation. A written log is not sufficient. For contributions of property other than money (non-cash donations), you must maintain a receipt from the donee organization showing its name, date and location of contri-bution, and a detailed description of the property donated. When the contribution of cash or property is $250 or

more, a much stricter set of substantiation rules apply:

1. The taxpayer must receive written acknowledgment of the contribution by the donee organization before filing the tax return, or before the due date of the return, if earli-

er.

2. The acknowledgment must include:

• the amount of cash contributed,

• a description of any property other than cash contrib-uted,

• An explicit statement as to whether the donee organi-zation provided any goods or services in consideration

A separate Form 8949 must be completed for each type of transaction for both short-term and long-term sales. Totals from the six separate Forms 8949 are then sum-marized on the newly revised Schedule D, Capital Gains Schedule D, Capital Gains Schedule D, Capital Gains Schedule D, Capital Gains and Lossesand Lossesand Lossesand Losses. Form 8949 also has an adjustments column if the gain or loss needs to be adjusted from that report-

ed by the broker.

What was once reported on a two-page form can now require up to eight pages. Complying with the new report-ing requirements often takes additional time to summa-rize and reconcile the covered and non-covered sales if the 1099 does not summarize this information. The un-fortunate consequence for taxpayers is that, despite sig-nificant efforts to streamline the preparation of Form 8949, additional time is often required to comply with the

new reporting requirements.

of the contributed cash or property and a good faith estimate of the value of any such goods or services.

In a recent Tax Court case, taxpayers were denied a charitable contribution deduction for donations to their church because even though they received an acknowl-edgment letter, it did not include the necessary state-ment regarding goods and services provided. The Court found that this specific statement was required by the statute for the allowance of a charitable contribution deduction.

As demonstrated by this case, taxpayers must be vigi-lant when it comes to receiving proper acknowledgment letters in a timely manner.

For donations of property that exceed $5,000, other than publicly traded securities, the taxpayer must obtain a qualified appraisal from a qualified appraiser and at-tach a summary to the tax return. A qualified appraisal has to be made no more than 60 days before the donation and no later than the due date of the return and be signed by the appraiser. The ap-praiser cannot be the taxpayer or the donee organiza-tion. (continued on Page 5)

over those thresholds.

Employers will be responsible for collecting the extra 0.9% on wages exceeding $200,000, just as they have previously withheld Medicare taxes. Companies will not be required to determine whether a worker’s combined income with his or her spouse makes them subject to the tax. Therefore, some taxpayers will need to remit additional Medicare taxes when

they file their income tax returns and some may get a tax credit for amounts overpaid.

Here is an example of how the tax bill of a high income household might change in 2013: A married couple making $1,000,000 in wages and having $200,000 in capital gains would pay an additional $14,350 in Medicare taxes. Wages would be subject to an additional Medicare payroll tax of $6,750 ($750,000 x 0.9%) and the capital gains would be subject to an additional Medicare tax of $7,600 ($200,000 x 3.8%). Trusts and estates Trusts and estates Trusts and estates Trusts and estates will also be subject to the 3.8% Medicare tax on net investment income. These entities are subject to

the tax at much lower income thresholds (approximately $12,000 in 2013).

Planning IdeasPlanning IdeasPlanning IdeasPlanning Ideas

• Taxpayers may want to consider accelerating capital gains or other income in 2012 to minimize the impact of this tax change. (See related article on Page 2).

• If consistent with investment objectives, taxpayers may want to shift some taxable bonds to tax free municipal bonds.

• Converting a regular IRA to a Roth IRA in 2012 may also be beneficial. Not only will future distributions from a Roth IRA avoid taxation, but by converting in 2012, taxpayers avoid increasing MAGI in future years when the Medicare tax applies. In 2013, an IRA distribution would increase MAGI, which may result in more investment income being subject to the 3.8% Medicare tax.

• Structure your business activities to minimize passive income.

Please contact us for assistance in planning for these changes.

used at nearly any private or public college or university in the U.S. More details about Washington’s plan are available at www.get.wa.gov. Note that the GET plan cur-rently charges a significant premium over the current cost of tuition when purchasing units. The other type of 529 Plan is a college savings plan. These plans allow the donor to establish an account for a beneficiary to pay eligible college expenses. The account holder may typically choose among several investment options; most investments are subject to market risk, and investments are not guaranteed by the state. Neither the account holder nor the beneficiary is required to be a

resident to enroll in a state’s college savings plan.

When an individual contributes money to a 529 Plan, the transaction is a gift that must be reported on the individu-al’s gift tax return. The gift is eligible for the annual exclu-sion ($13,000 in 2012), and the individual can elect to spread the reporting of the gift equally over a five year period in order to take advantage of the annual exclusion in each year. The account owner (usually the contributor)controls any distributions from the account and can change the account beneficiary.

It is never too early to start saving for college. One popular option is to contribute to a 529 Plan. Also called a Quali-fied Tuition Program, a 529 Plan is an account funded on behalf of a specified beneficiary that can be used to cover the beneficiary’s qualified higher education expenses in

the future.

Although contributions to a 529 Plan are not deductible by the contributor (who may be a parent, grandparent, or fam-ily friend), current earnings are not taxable, and the beneficiary is not taxed on distributions that are used to pay for qualified higher education expenses such as tuition, fees, books, and certain room and board expenses. Many states have their own 529 Plan. Washington’s plan, called GET (Guaranteed Education Tuition), is a prepaid plan – the donor prepays for college tuition today for use in the future. The payout value is based on the cost of tuition at the state’s most expensive public university at the time the units are used. The state guarantees that it will pay out tuition costs at the determined value in the future, re-gardless of the plan’s investment earnings over time. Ei-ther you or your designated beneficiary must be a Washing-ton resident at the time of enrollment, but the units can be

Page 4

NEW TAXES AND INCREASED TAX RATES ( C O N T I N U E D F R O M P A G E 1 )

SAVING FOR COLLEGE : 529 PLANS

Tax Notes and Perspect ives

Tax Notes and Perspect ives

Life and circumstances change over time and your will and related estate planning documents may need to be updated to account for those changes. Since a will protects your most important asset, your family, it is essential that it be kept current. Some reasons for

an update include:

• Family Status Family Status Family Status Family Status Any time you or your family mem-bers experience a major life change such as mar-riage, divorce, birth of a child, or death of a family

member is a reason to revisit your will.

• Moving to a different state Moving to a different state Moving to a different state Moving to a different state If you are moving out of the state where you executed your will, you should meet with an estate planning attorney in your new state to determine whether your will is still valid. State laws vary with respect to wills; your will may need to be updated to comply with

Page 5

E STATE PLANNING : UPDATING YOUR WILL

the new state’s laws.

• Substantial changes in your financial status or Substantial changes in your financial status or Substantial changes in your financial status or Substantial changes in your financial status or changes in large assets changes in large assets changes in large assets changes in large assets If the value of your as-sets significantly increase or decrease, you bought or sold a home or a business, or added new insurance policies or pension plans, an up-

date may be in order.

• Changes in Tax Laws Changes in Tax Laws Changes in Tax Laws Changes in Tax Laws Federal and state tax laws are frequently changing, so you will want to be aware of how any changes may affect your es-

tate plan.

King & Oliason recommends that you consult with an estate planning attorney if you need to update your will. Our office can assist with planning for the estate

tax or income tax impact of any changes.

SUBSTANTIAT ING CHARITABLE CONTRIBUTIONS ( C O N T I N U E D F R O M P A G E 3 )

In another recent Tax Court case, a taxpayer was denied an $18.5 million contribution for failure to obtain a qualified appraisal. In this case, the Court acknowledged that the donation was made, and even speculated that the taxpayer’s self-appraisals had undervalued the property, but nonetheless denied the charitable contri-bution deduction because of the failure to satisfy the substantiation requirements. In their decision, the Court recognized that its complete denial of the charitable contribution in this case was “harsh,” but emphasized that potential abuses for misvaluing property and the very specific statutory rules related to substantiating charita-ble donations could not be undermined “in a single sympathetic case.”

HOUSEHOLD EMPLOYEES AND THE ‘NANNY ’TAX

The ‘nanny tax’ is a popular term encompassing Social Security and Medicare taxes, federal unemployment tax, and state employment taxes applicable to household employees. To determine your potential tax liability, it

is important to understand what constitutes a household employee.

A household employee is someone that you have hired to work around your house. You control not only what work is done, but how it is done. Typically, you provide all of the tools, equipment and/or supplies used by the worker. If the worker is your employee, it does not matter whether the work is full time or part time or whether the worker is paid hourly, weekly or by the job. Examples of household employees could include: nannies,

house cleaners, babysitters, health aides, private nurses, and yard workers.

If only the worker can control how the work is done, the worker is not your employee but is self-employed. A self-employed worker usually provides his or her own tools and offers services to the general public through an

independent business.

If you have a household employee, you may need to pay state and federal employment taxes. For more infor-

mation, refer to IRS Publication 926, Household Employer’s Tax GuidePublication 926, Household Employer’s Tax GuidePublication 926, Household Employer’s Tax GuidePublication 926, Household Employer’s Tax Guide or contact our office.

K ING � OLIASON NEWS

King & Oliason is pleased to introduce four new additions to our staff:

Brett NorvilleBrett NorvilleBrett NorvilleBrett Norville

Graduating from Washington State University with a degree in Business Management and a

minor in French, Brett completed an internship at a business in Antibes, France. Upon his

return to this country, he obtained an Accounting degree from Washington State University.

His career has spanned both public accounting and work for the IRS.

David Ghanaie, CPADavid Ghanaie, CPADavid Ghanaie, CPADavid Ghanaie, CPA David received his B.A. in Business Administration, Accounting from Washington State Uni-versity and his Master of Accounting, Taxation from Gonzaga University. He has worked in

both private and public accounting.

John Wilkinson, CPAJohn Wilkinson, CPAJohn Wilkinson, CPAJohn Wilkinson, CPA John received his B.A. in Business Administration, Accounting from Gonzaga University and his Master of Professional Accounting, Taxation from the University of Washington. He is a U.S. Army veteran who began his accounting career at a national firm in New York and

worked as a controller for a minor league baseball team before joining King & Oliason.

Abby FoltzAbby FoltzAbby FoltzAbby Foltz Abby joined King & Oliason this summer as an administrative assistant. She graduated from Central Washington University with a Bachelor of Arts degree in History. Her background in-

cludes the food and retail industries.

Professional Limited

Liability Company

CERTIFIED PUBLIC ACCOUNTANTS 514 2nd Avenue W Seattle, WA 98119 PHONE 206 285-7242 FAX 206 285-7426 info@kingoliason.com

Our Mission:Our Mission:Our Mission:Our Mission:

To serve clients in the Pa-To serve clients in the Pa-To serve clients in the Pa-To serve clients in the Pa-

cific Northwest who value cific Northwest who value cific Northwest who value cific Northwest who value

exceptional and ethical exceptional and ethical exceptional and ethical exceptional and ethical

management of their com-management of their com-management of their com-management of their com-

plex tax situations.plex tax situations.plex tax situations.plex tax situations.

Visit our website Visit our website Visit our website Visit our website

www.kingoliason.comwww.kingoliason.comwww.kingoliason.comwww.kingoliason.com

Learn more about the range of tax consulting services we offer, our peo-ple, and our firm. Use the links to access the client portal, tax forms, financial information, past newslet-

ters, and more.

Page 6 Tax Notes and Perspect ives

Other News:Other News:Other News:Other News:

• Congratulations to Norma Oliason! For the second time, Norma was recognized as a Five Star Wealth Manager. The Five Star award is presented annually to outstanding service

professionals in more than 45 markets in the U.S. http://www.fivestarprofessional.com

Standing: Abby Foltz, Brett Norville Seated: David Ghanaie, John Wilkinson