CHARLES A



CHARLES A. KERNER

Certified Public Accountant

A Professional Corporation

261 West 35th Street

Floor 14, Suite 1401 FAX (212) 675-5660

New York, NY 10001 kerner@

Tax Year 2012

Table of Contents

Tips to Get Organized, Be Informed, and Save Money 3

Income 3

Gifts 3

Adjustments to Income 3

Deductions 3

Itemized Deductions 3

Personal Exemptions 3

Child Tax Credits 4

Tax Rates 4

The Quick Ten 4

Year-End Tax Planning for Individuals 5

• Sharing Your Stock Market Losses with Uncle Sam. 5

• Charge deductible expenses on your credit card 6

• Prepay your January mortgage payment in December 2012 6

• Review your 1099’s 6

• Energy Savings Home Improvement Tax Credit 6

• Donate high-flying stock 6

• Make a donation from your IRA 7

• Keep better records 7

• Dump your losers 7

• Boost your retirement savings 7

• Drain flexible spending accounts 7

• Be wary of mutual funds 8

• Adjust your timing 8

• Non-Cash and Cash Contributions 8

• Exhaust Flexible Spending Accounts (FSAs). 9

• Health Savings Accounts (HSAs) 9

• Kiddie Tax 9

• The 529 Plans 9

• Seniors 10

• Estate Tax Planning 10

Deductions and Credits 10

• First-Time Homebuyer Credit. 10

• Sales tax deduction 10

• Job search expenses 10

• Medical insurance 10

• Treatment for alcoholism 10

• Investment advisor fees 10

• Interest on margin accounts 10

• Safe deposit box fees 11

• Labor union dues 11

• Subscriptions 11

• Penalties 11

• Real estate taxes 11

• Your state’s personal property taxes 11

• Medical and Charitable mileage deductions 11

• Student Loan Interest 11

• College tuition tax credits 11

• Electric Vehicle: 11

• Non-reimbursed employee business expenses 11

Year-End Tax Planning for Individuals and Businesses 11

• If you pay an individual for services rendered 11

• For cash basis taxpayers 11

• Mark down slow moving inventory 11

• For accrual basis taxpayers 11

• Changing the status from a C-Corporation 11

• Employers can reimburse employee business expenses 11

• S-Corporation owners who need additional capital 11

• New per diem rates 11

• The IRS does not require receipts 12

• Deposits in bank for cash basis taxpayers 12

• For equipment placed in service in 2012 12

• For business travel, meals, and entertainment 12

• Auto mileage for business use 12

• Social Security Cap 12

• Retirement Planning 12

In Your Year-End Board Meeting 12

Tax Advice Disclosure: 13

Tips to Get Organized, Be Informed, and Save Money

Income

From whatever source derived.

Gifts

Gifts received are not taxable to you. Gifts paid out are not deductible from the payer. The amount of gift you may payout per year is $13,000 per person. With your spouse, you may give an additional $13,000. So, if you and your spouse wanted to give $13,000 each to five people, you could reduce your estate by $130,000. This strategy is for the liquid taxpayer and allows the recipient of the gift to report the earnings.

Adjustments to Income

Included as deductible are IRA’s/ SEP’s/ KEOGH’s/ Student Loan Interest/ Medical Savings Accounts/ Certain Moving Expenses/ Self-Employed Health Insurance. For IRA contributions, SEP’s, KEOGH’s for 2012, the amount must be funded on or before April 15, 2013.

Deductions

Filing Status 2012 2011 2010 2009

Single $5,950 $5,800 $5,700 $5,700

Married $11,900 $11,600 $11,400 $11,400

Head of Household $8,700 $8,500 $8,400 $8,350

Married File Separate $5,950 $5,800 $5,700 $5,700

Itemized Deductions

Medical- Greater than 7.5% of Adjusted Gross Income

Taxes- State Income or Sales; Real Estate; Personnel Property

Interest- Mortgage/ Points/ Investment Interest Expense

Charity- Cash and/or checks

Non-Cash Items Please be able to support the value claimed. Receipts to a qualified charity should be a part of your annual tax return. For the Thrift Value Method greater than $500, we will file form 8283, which indicates to whom, with their address; a description of the donated items; the date acquired; the cost; and the (THRIFT VALUE) of the donated property. All the donated property must be in good condition. Please include your mileage for charity. It is deductible at $0.14 per mile.

Personal Exemptions

2012 2011 2010 2000

Per Person $3,800 $3,700 $3,650 $2,800

Child Tax Credits

2013 2012 2011 2010

Per Child (under 17) $500 $1,000 $1,000 $1,000

There are phase-outs all for large incomes.

Tax Rates

For your information, the tax rates for 2011 are as follows:

Year

2012 10% 15% 25% 28% 33% 35%

The Quick Ten

(Please attach (enclose) the following if applicable)

1. Forms. W2

2. Forms 1099 & 1098. Self-Employed; Dividends; Interest & Mortgage Interest.

3. Stock trades default to first in first out unless you specifically designate the stocks. You may want to include your broker’s name and telephone number for better clarification if needed.

4. Interest Income. For seller-financed mortgages, please supply the name, address, and Social Security number.

5. Estimated Tax Payments. (Please include) Date; to whom paid; Tax Year; and Amount. Please remember that state tax payments remitted in 2012 are deductible in 2012.

6. Retirement Contributions. SEP’s/ IRA’s/ ROTH IRA’s/ 401K’s/ 403B’s/ etc. We would assist you and your broker (if applicable) in calculating the above contributions for you. In certain instances, your contributions may be limited. Please call for clarification.

7. Dependants. Name; Date of Birth; Social Security number; and months lived with you.

8. Childcare Credit. We are required to report the Name; Address; and TAX I.D. number of the provider, as well as the amount paid.

9. Principle Residence. In addition to the mortgage interest received by the mortgager, please supply the closing statements of the purchase, sale and refinancing statement if it occurred in 2012.

10.) Flow Throughs. K-1’s from corporations, partnerships, trusts and LLC’s.

Year-End Tax Planning for Individuals

• Sharing Your Stock Market Losses with Uncle Sam.

If you've lost money in the stock market, you should be aware of the tax breaks that capital losses can generate and how to avoid the tricky wash sale trap. Uncle Sam is always happy to tax you when you make money. But what happens to your tax situation when you experience losses? Not every investment will be a winner, so learning how to take advantage of the tax treatment of capital losses may be as important to you as the recent run-up in the major stock indexes.

Generally speaking, capital gains and capital losses are reported on federal Form 1040, Schedule D, for the year in which the actual sale of capital assets such as stocks, bonds, and mutual funds occurs. A temporary decrease (or increase) in the value of an asset is not reported on your tax return; the asset must actually be disposed of. In the eyes of the federal government, the old Wall Street adage applies: "You don't make a profit or take a loss until you sell."

Net capital gains and losses are aggregated, and up to $3,000 of a net capital loss may be deducted against ordinary income items such as wages, interest, and dividends. Capital losses in excess of $3,000 are carried forward and deducted in future years, subject to the same limitation.

Gains and losses from the sale or disposition of capital assets are classified as long-term or short-term, depending on how long you held the asset. For example, a long-term capital asset is currently defined as an asset you have held for more than one year. Long-term capital gains generally receive favorable tax treatment. While the top tax bracket for ordinary income items such as wages is 35%, the maximum tax rate for long-term capital gains is capped at 15%. Short-term capital gains are taxed at ordinary income tax rates.

* Note: Some taxpayers may effectively pay 0% long term capital gains tax if their income is below certain threshold levels for 2012.

In addition to netting rules that apply when there are both capital losses and gains, you need to understand the "wash sale" loss limits, especially if you engage in frequent or "day" trading. The wash sale rule is intended to prevent you from selling assets to claim a tax loss and quickly reacquiring them. The rule stipulates that your loss will be disallowed if you purchase substantially identical stock or securities, including put and call options, within 30 days of the original sale.

The IRS of course is on the watch for wash sale violations. The wash-sale period runs for a total of 61 days -- 30 days before and 30 days after the date of the claimed loss. Year-end sales made in December also do not escape this treatment. Even if the tax year ends during the 61-day wash sale period, the loss will be disallowed if the wash sale period is violated.

Here's a coordinated investment and tax strategy you may want to consider.

While the wash sale rule prohibits you from reacquiring substantially identical securities during the specified time period, it does not prohibit you from reacquiring comparable securities. For example, you could sell shares of an industrial stock like Caterpillar, claim the loss for tax purposes subject to the rules discussed above, and immediately acquire shares of a comparable security such as Deere. This is known as tax loss swapping. Some investors recently have been selling municipal bonds at a loss, thus nailing down capital losses that can be used to cut taxes, and then reinvesting the proceeds in other municipal bonds with similar credit ratings and durations. The theory behind it is that if Caterpillar (the security sold at a loss) subsequently rises, so will Deere (the comparable replacement security), giving you both an economic gain and the benefit of the tax loss.

In theory, tax loss swapping is an excellent strategy, but it can prove risky in the real world. For example, the replacement security could go down even if the disposed-of security recovers. On the other hand, the replacement security could increase a small amount, while the disposed-of security enjoys bigger gains. The acceptable risk and return ratio and performance spread for tax loss swapping depends on your tax bracket, liquidity, net worth, and risk tolerance.

Fundamental economics of investment decisions should not be ignored in pursuit of tax benefits. The laws and risks applicable to wash sales and tax loss swapping are complex, and mistakes can be expensive.

• Charge deductible expenses on your credit card.

For example, charge medical bills and charity- if charged in 2012 and paid for in 2013, it is still deductible in 2013.

• Prepay your January mortgage payment in December 2012.

The interest is deductible when paid. If you choose to prepay the January mortgage payment, keep a copy of the check and it should be received by the mortgage company in 2012. Otherwise, send the payment return receipt requested on or before December 31, 2012.

• Review your 1099’s.

Historically 10% of the ones issued are inaccurate.

• Personal Injury Lawsuit.

When you are involved in a personal injury lawsuit, make sure that any settlement compensates you for physical injuries, not emotional injuries. Physical injuries are not taxable.

• Energy Savings Home Improvement Tax Credit.

If you purchase an energy-efficient product or renewable energy system for your home, you may be eligible for a federal tax credit. Please inform us of such purchase

• Donate high-flying stock.

If you itemize your deductions instead of claiming the standard deduction, consider making last-minute gifts to qualified charities. But don’t just write out a check. Think about donating shares of stock or mutual funds that have risen sharply in value over the years. That way, you won’t owe capital-gains tax on the gain and you typically can deduct the full market value of your gift.

• Keep better records.

If you itemize your deductions and want to claim charitable donations, pay close attention to new recordkeeping rules. Cash contributions made in 2012, regardless of the amount, can’t be deducted unless you have a “bank record,” such as a canceled check, or a detailed receipt from the charity that includes the amount and date of your gift. (For more details, see IRS Publication 526 at .)

This rule has altered the way some people donate cash to charities such as religious organizations. Instead of dropping cash into the plate begin using pew envelopes, noting name, etc.

• Dump your losers.

Take a fresh look at your investments. Look for stocks, mutual-fund shares and other securities that are now selling for less than you paid for them. If you have some and have been considering bailing out, now could be a good time to do so.

There are some powerful advantages. First, you can use your losses to soak up your gains on a dollar-for-dollar basis with no limit. Second, if your losses exceed your gains, you typically can deduct as much as $3,000 a year of net capital losses from wages and other ordinary income. (The limit is $1,500 a year if you’re married and filing separately from your spouse.) Additional net losses are carried over into future years.

Please avoid the Wash Sale Rule (see discussion of this rule on page 5). If you sold a stock at a loss and bought it back within 31 days, the loss is disallowed. Do not overlook capital gains from mutual funds when calculating your gains for the year.

• Boost your retirement savings.

This year, millions of workers who are under age 50 can sock away as much as $17,000 in a 401(k) plan. Those who are 50 or older by the end of this month can put away an additional $5,500. Thus, the limit for 2012 is $22,500.

• Drain flexible spending accounts.

These accounts allow millions of people to pay for health-care and dependent-care with pretax dollars. But there’s a catch: you have to spend every penny you set aside or lose whatever you haven’t spent.

If you signed up for an account, check with your employer to see what the closing date is for draining your account. The treasury allows employers to extend the deadline for 2 ½ months beyond the end of the plan year. (That would mean, for example, that an employer with a plan-year deadline of Dec. 31 could give employees until mid-March next year to incur expenses and drain their account for 2012.) But employers aren’t required to grant the extra time, and some haven’t.

• Be wary of mutual funds.

Be especially careful this month before you invest significant amounts of money in mutual funds, especially those that invest in stocks, through a taxable account. Otherwise, you could wind up getting hit with a tax bill that could easily have been avoided. It’s especially important this year, because fund managers say this could be the biggest year ever for year-end distributions- and this is the time of year when many mutual funds distribute capital gains to shareholders.

If you get a payout, it’s typically taxable- unless you’re investing through a tax-favored account. Thus, before you invest, check the fund’s web site, or call the fund, to see if it’s planning a year-end distribution. If so, find out how much the payout will be when and whether it will result in a significant tax bill for you. If the distribution will drive up your taxes significantly, consider waiting to invest in that fund until after the date to qualify for the payment.

• Adjust your timing.

Try to time income and deductions, whenever possible to achieve the maximum tax savings. For example, if you’re a consultant or free-lance writer, it may pay to defer income into 2013 by waiting to send out bills until then. Conversely, if you know you won’t have enough medical expenses to qualify for medical expense deductions for fall 2012 - but are relatively sure you will qualify for the deduction for 2013 - consider delaying non-urgent medical visits and payments until next year, whenever possible.

• Non-Cash and Cash Contributions.

Non-cash contributions before year-end consist of personal items wherein you can deduct the fair market value of the items donated and appreciated long-term stock instead of cash. When donating appreciated securities, you get to deduct the full fair market value of the shares and you will not owe Capital Gains Tax on the build-up since you bought it. Non-cash charitable contributions are generally deductible up to 35% of the cost of the donated property. This is referred to as the Thrift Value Method.

The Internal Revenue Service has added the term “good used condition” for items donated after August 17, 2006. If you have donated after this date, please be prepared to prove the items meet the conditions test or exception. The definition of “good” has not yet been determined.

Please enclose your log of items with the fair market values, date of purchase, and date of contribution for non-cash donations when you send in your information. When deducting a gift greater than $250, you need to get an acknowledgement from the charity. (Cash or a cancelled check is not enough). If you donated a vehicle and the charity or agent sells it, the value of the donation for tax purposes is limited to the sales proceeds. Charities must report to both you and the Internal Revenue Services what the sales proceeds were. In order to maximize your deduction, contribute your car to an organization that intends to use it in its charitable activities.

• Exhaust Flexible Spending Accounts (FSAs).

If you have a medical or dependent-care FSA at work, spend all your contributions to it by year-end. You can also now use your FSAs for buying over-the-counter drugs when purchased with a doctor’s prescription. You may be able to use expenses up through March 15, 2013 to absorb your 2012 balance. Check it with your Employer since it is at their discretion. Otherwise, if not spent by December 31, 2012, the remaining money is forfeited.

• Health Savings Accounts (HSAs).

Contributions to an HSA are tax deductable and withdrawals to pay medical expenses are not taxed.

For 2012, the maximum annual HSA contribution for an eligible individual with self-only coverage is $3,100. For family coverage, the maximum annual HSA contribution is $6,250.

Catch up contribution for individual who are 55 or older is increased by statute to $1,000 for 2012 and all years going forward. Individuals who are eligible individuals on the first day of the last month of the taxable year (December for most taxpayers) are allowed the full annual contribution (plus catch up contribution, if 55 or older by year end); regardless of the number of months the individual was an eligible individual in the year. For individuals who are no longer eligible individuals on that date, both the HSA contribution and catch up contribution apply pro rata based on the number of months of the year a taxpayer is an eligible individual.

Moreover, investigate the availability of High Deductable Health Plan (HDHP) coverage combined with a Health Savings Account (HSA). .

New Amounts for Out-of-Pocket Spending on HSA-Compatible HDHPs:

For 2012, the maximum annual out-of-pocket amounts for HDHP self-coverage increase to $6,050 and the maximum annual out-of-pocket amount for HDHP family coverage is twice that, $12,100.

Minimum Deductible Amounts for HSA-Compatible HDHPs:

For 2012, the minimum deductible for HDHPs stays at $1,200 for self-only coverage and $2,400 for family coverage.

In addition, a fiscal year plan that satisfies the requirements for an HDHP on the first day of the first month of its fiscal year may apply that deductible for the entire fiscal year.

• Kiddie Tax.

If your child has unearned income (interest, trust payments, or just about anything other than wages), your child will have to pay the “kiddie tax” at your highest marginal tax rate. The threshold amount for the kiddie tax will remain at $1,900 in 2012. There are no tax or filing requirements for children, who are less than 18 years of age, when their income is less than or equal to $950.00 The most effective way to control income for a child is to place a certificate of deposit in the child’s name and use the child’s social security number. There is a lower rate for income between $950.00 and $1,900.00, thereafter; the rate charged for the dependent child will be at the “allocable parental tax” rate.

• The 529 Plans.

529 Plans are the education funds for your dependants; you can open an account with just $25 ($15 if contributing through payroll deduction). New York taxpayers can deduct up to $5,000 ($10,000 for a married couple filing jointly) in contributions to the Direct Plan on their state income tax return each year. New York requires that the investment must be placed in the Vanguard 529 plan. New Jersey has no State deduction for a contribution to a 529 plan.

• Seniors.

The Social Security earning limit for 2012 is $110,100. Seniors between 62.5 and full retirement age, who are collecting Social Security benefits and continuing to work, can earn up to $14,640 in 2012; for every $2 over the limit, $1 is withheld from benefits. In the year you reach full retirement age you can earn up to $38,880; for every $3 over the limit, $1 is withheld from benefits until the month you reach full retirement age. For these individuals continuing to work and who have reached full retirement age, there is no earned income limit.

An annual Social Security benefit statement is available to you. Some taxpayers are already receiving this information. You can get this information by calling 800-722-1213

• or visiting the web site at . It is called a Personal Earning Statement.

• Estate Tax Planning.

As of the 2012 law, the federal estate tax exclusion on assets is $5 million per person. New York State 2012 exclusion is only $1 Million. Other states are looking to collect the estate tax themselves which would allow them to set the own limits in the future. The estate tax has changed for 2012 but after 2012 the possible imposition of pre-2001 exists. In 2013 the Federal estate tax exemption is scheduled to drop to $1,000,000, and the estate tax rate is scheduled to jump from 35% to 55%. If you Plan on gifting property in any form 2012 is the year to do it.

Deductions and Credits

• Sales tax deduction. Please include in your information to our office, any tax paid on cars and boats. We can add these amounts to the table if greater than your state taxes paid.

• Job search expenses. Include costs of resume preparation, outplacements agencies and travel to job interviews.

• Medical insurance. Self-employed taxpayers can finally deduct 100% of medical insurance premiums.

• Long Term care Insurance. A portion can be deductible for federal purposes and NYS gives the taxpayer a 20% credit for premiums paid.

• Treatment for alcoholism, smoking and drug abuse.

• Investment advisor fees.

• Interest on margin accounts with a brokerage firm. Most stock dividends (called “qualified dividends”), are being taxed as ordinary income to the capital gains rate of 15%. If you are in the 15% or lower tax bracket, your hit is softened to only 5%. This is great for most investors; however, if you have margin interest expense, it is only deductible up to interest income and certain dividend levels. Tactic: To get a deduction for the excess expense now, rather than carrying it forward, you can elect to treat an amount of tax favored capital gains and dividends as income, taxed at ordinary rates, then deduct the excess investment interest against it.

• Safe deposit box fees if the box is used to hold savings bonds, stock certificates, or other investments.

• Labor union dues.

• Subscriptions to trade publications related to your job.

• Penalties on the early withdrawal of certificate of deposits.

• Real estate taxes related to the sale or purchase of property.

• Your state’s personal property taxes on cars and boats.

• Medical and Charitable mileage deductions are:

55.5 cents for every business mile

23 cents for every medical or moving mile

14 cents for every charitable service mile

• Student Loan Interest.

• College tuition tax credits.

• Electric Vehicle: If you acquired an electric vehicle, a tax credit between $2,500 and $7,500 is available, depending on the cost and type of the vehicle.

• Non-reimbursed employee business expenses.

Year-End Tax Planning for Individuals and Businesses

• If you pay an individual for services rendered, make sure you either prepare a 1099 for non-employee compensation or a W-2 for an employee’s wages. Set up a retirement plan before year-end. We should have already discussed this option. Please call me if you think we need to discuss further.

• For cash basis taxpayers, pay all outstanding bills before December 31, 2012.

• Mark down slow moving inventory so your business can take a write down this year.

• For accrual basis taxpayers, write off non-collectible accounts receivable.

• Changing the status from a C-Corporation to an S-Corporation or vice-versa. We should have already discussed this option. Form must be submitted to the IRS no later than two months and 15 days past the beginning of the tax year for which you made the election.

• Employers can reimburse employee business expenses before year-end when the employer has an “accountable plan.” This can reduce salaries, create savings on payroll taxes and reduce the employee taxable income.

• S-Corporation owners who need additional capital (loans) should borrow the funds individually and lend them directly to the corporation. Since most small companies’ debt requires a personal guarantee anyway, this process will add to the basis of the company for deduction of certain losses.

• New per diem rates. Manhattan Rate October 1, 2012 – December 31, 2012, $295 for lodging. January 1, 2013 – March 31, 2013, $204 for lodging. April 1, 2013 – June 30, 2013, $241 for lodging. July 31, 2013 – August 31, 2013 $216 for lodging. September 1, 2013 – September 30, 2013, $295 for lodging. October 1, 2012 – September 30, 2013, $71 for meals and incidental expenses per day. However, there are other locations with various per diem rates.

• The IRS does not require receipts for cash expenses of less than $75 if you record them in your business diary at the time they were incurred.

• Deposits in bank for cash basis taxpayers are taxable when deposited and recorded in your checkbook.

• For equipment placed in service in 2012, Section 179 Threshold for total of equipment & software that can be purchased has increased to $560,000. the deduction limit has increased to $139,000.

• For business travel, meals, and entertainment expenses, please document whom, what, where and when.

• Auto mileage for business use of car and truck expenses in 2012 is deductible at 55.5 cents per mile. The business portion of parking fees and tolls may be deducted in addition to the standard mileage rate.

• Social Security Cap

Year Amount

2013 113,700

2012 110,100

2011 106,800

2010 106,800

2009 106,800

2008 102,000

1990 51,300

• Retirement Planning

401(k) Deferral Cap Simple IRA’s (for Business) IRA’s (Individual)

Year Amount Amount Amount

2010 $16,500 $11,500 $5,000

2011 $16,500 $11,500 $5,000

2012 $17,000 $11,500 $5,000

2013 $17,500 $12,000 $5,500

For those taxpayers who are 50 years of age or older at December 31, 2012, a “catch-up” contribution is available for the tax year 2012. For 401(k) plans the catch up contribution is $5,500 in 2012; for Simple IRA’s 2012, $2,500; and finally, for traditional IRA’s the catch-up contribution for 2012 is $1,000.

The maximum contribution for a SEP plan FY 2012 is $50,000, or 25% of the employee’s salary, whichever is smaller. Also in 2012, the first $250 of an employee’s compensation may be considered.

In Your Year-End Board Meeting.

Wherever it may be, please discuss and reference in your memorandum the following items:

Charitable contributions

Year-end bonuses and/or profit sharing arrangements

Reasons why earnings are being retained

Any changes to the business organization

Tax Advice Disclosure:

To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this communication (including any attachments), unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein.

The information contained in this transmission may contain privileged and confidential information. It is intended only for the use of the person(s) named above. If you are not the intended recipient, you are hereby notified that any review, dissemination, distribution or duplication of this communication is strictly prohibited. If you are not the intended recipient, please contact the sender by reply email and destroy all copies of the original message

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