Social Security and IRS Announce 2013 Benefit and Pension Amounts

There's good news for those who collect Social Security benefits and those who want to contribute to pension plans in 2013.

The Social Security Administration recently announced benefit increases for 2013 of 1.7 percent for millions of Americans. For eight million recipients of Supplemental Security Income, the cost-of-living increase will begin on December 31, 2012, while 56 million Social Security beneficiaries will see payment increases beginning in January 2013.

Other changes include a higher wage base on which those who remain in the workforce will pay Social Security tax. In 2012, that maximum is $110,100 and it will rise in 2013 to $113,700.

The IRS also just announced changes to the dollar limitations for contributions to qualified retirement plans for 2013. These limitations are provided through the Internal Revenue Code, and are adjusted annually by the IRS for cost-of-living increases.

Here are the amounts (some remain unchanged):

Annual Qualified Plan Limits	2013	2012
Defined contribution plan dollar limit on additions (Section 415(c)(1)(A))	$51,000	$50,000
Defined benefit plan limit on benefits  (Section 415(b)(1)(A))	$205,000	$200,000
Maximum compensation used to determine contributions	$255,000	$250,000
401(k), SARSEP, 403(b) Plan Deferrals (Section 402(g)) & 457 Plan deferrals (Section 457(b)(2))	$17,500	$17,000
401(k), 403(b), 457 & SARSEP additional "catch-up" contributions for employees age 50 and older	$5,500	$5,500
SIMPLE deferrals (Section 408(p)(2)(A))	$12,000	$11,500
Simple additional "catch-up" contributions for employees age 50 and older	$2,500	$2,500
The dollar amount under Section 409(o)(1)(C)(ii) to determine the maximum account balance in an employee stock ownership plan subject to a 5‑year distribution period, and the amount used to determine the lengthening of the 5‑year distribution period	$1,035,000/ $205,000	$1,015,000/ $200,000
Compensation defining highly compensated employee (Section 414(q)(1)(B))	$115,000	$115,000
Compensation defining key employee (officer)	$165,000	$165,000
The compensation amounts under Section 1.61‑21(f)(5)(i) of the Income Tax Regulations concerning the definition of  "control employee" for fringe benefit valuation purposes	$100,000	$100,000
Compensation triggering Simplified Employee Pension (SEP) contribution requirement (Section 408(k)(2)(c))	$550	$550

* IRS note: "Administrators of defined benefit or defined contribution plans that have received favorable determination letters should not request new determination letters solely because of yearly amendments to adjust maximum limitations in the plans."

Year-End Alert: Don't Forget to Take IRA Required Minimum Distributions

If you have one or more traditional IRAs set up in your name and will be age 70 1/2 or older at year end, you must comply with the so-called required minimum distribution (RMD) rules or face a stiff penalty. These rules force older account owners to take annual withdrawals from their IRAs and pay the resulting extra federal income tax. The same rules also apply to simplified employee pension (SEP) accounts and SIMPLE-IRAs, because they count as traditional IRAs for this purpose. (Thankfully, if you own one or more Roth IRAs, those accounts are exempt from the RMD rules for as long as you live.)
 

Table of Life Expectancy Divisors for IRA Owners

This table lists the IRS-provided life expectancy divisors generally used to calculate RMDs for IRA owners. To find the appropriate divisor, use your age at the end of the year for which you are calculating the RMD. (Do not use this table if you are the beneficiary of a deceased person's IRA. In that case,

you must use different life expectancy divisors to calculate annual RMDs

from the inherited account. Consult with your tax adviser for details.)

Age	Divisor
70	27.4
71	26.5
72	25.6
73	24.7
74	23.8
75	22.9
76	22.0
77	21.2
78	20.3
79	19.5
80	18.7
81	17.9
82	17.1
83	16.3
84	15.5
85	14.8
86	14.1
87	13.4
88	12.7
89	12.0
90	11.4
91	10.8
92	10.2
93	9.6
94	9.1
95	8.6
96	8.1
97	7.6
98	7.1
99	6.7
100	6.3

Exception: Do not use this table to calculate RMDs if your spouse is designated as the sole

beneficiary of your account, and he or she is more than 10 years younger than you. In that case, use the bigger life expectancy divisors from Table II of Appendix C in IRS Publication 590

(available at www.irs.gov). The bigger divisors result in smaller annual RMDs,

 which is helpful if you want to obtain maximum tax deferral from your IRA.

If you think the RMD rules are just a minor nuisance that you can ignore, think again! If you fail to withdraw at least the annual RMD amount, the IRS can assess a 50 percent penalty on the shortfall (the difference between the RMD amount you should have withdrawn for the year and the actual amount you did withdraw). It's one of the harshest tax penalties on the books.

Here's what you need to know about the RMD rules and what you may need to do before year end to stay out of the penalty box.

Required Minimum Distribution Basics

Your first RMD is for the year you turn 70 1/2. Then, you must take another RMD for each succeeding year for as long as you live or as long as you have a balance in one or more traditional IRAs.

Your annual RMD amount equals the total of your traditional IRA balances (including any SEP or SIMPLE-IRA balances) as of December 31 of the previous year divided by a life expectancy divisor provided by the IRS.

The RMD amount must be recalculated annually, because your IRA balance as of the end of the previous year is a moving target, and so is the life expectancy divisor. As you grow older, the life expectancy divisors get smaller and smaller, which means the annual RMDs become a bigger and bigger proportion of the IRA balance. See the SIDEBAR for the table of life expectancy divisors that most IRA owners should use.
Note: In January of each year, your IRA custodian or trustee is supposed to notify you if an RMD must be taken for that year and tell you the amount. You may be able to arrange to have that amount distributed to you automatically in a lump sum or monthly or quarterly installments. However, don't take anything for granted. By knowing how the RMD rules work and by taking personal responsibility for complying with them, you can be certain that you will not get hit with the 50 penalty penalty.

If You Turn 70 1/2 This Year

As we said earlier, your initial RMD is for the year you turn age 70 1/2. Thanks to a special timing rule that only applies to that initial RMD, you have two options for when to withdraw it.

Option No. 1: Take Initial RMD before Year End. The first option is to take the initial RMD by December 31 of the year you turn the magic age. So if you turn 70 1/2, this year and choose this option, you should take your initial RMD by no later than December 31, 2012.

Example 1: You reached age 70 1/2 this year. For purposes of this example, let's assume you'll not yet be 71 as of December 31, 2012. To calculate your initial RMD, divide the combined balance of all your traditional IRAs as of December 31, 2011 by 27.4, which is the life expectancy divisor for a 70-year-old from the table in the right-hand box.

Your combined IRA balance as of December 31, 2011 was $300,000. Your initial RMD, which is for the 2012 tax year, equals $10,949 ($300,000/27.4). Withdraw at least that amount by December 31, 2012. If you've already taken some IRA withdrawals earlier this year, they offset the amount you must take out by the end of this year.

Your second RMD, which will be for the 2013 tax year, must be withdrawn by no later than December 31, 2013. The amount will equal your December 31, 2012 IRA balance divided by 26.5, which is the life expectancy divisor for a 71-year-old from the table. And so on for subsequent years.

If you follow this drill, you won't get hurt by the 50 percent penalty for not complying with the RMD rules.
Option No. 2: Take Initial RMD Next Year. The other option is to take your initial RMD by no later than April 1 of next year (the year after the year you turn 70 1/2). However, if you choose this option, you must withdraw your first and second RMDs next year.

Example 2: Same basic facts as in Example 1, but this time you choose to withdraw your initial RMD next year, by the April 1, 2013 deadline.

To calculate that initial RMD (which is actually for your 2012 tax year), divide the combined balance of all traditional IRAs as of December 31, 2011 by 27.4 (the life expectancy divisor for a 70-year-old from the table). Say your combined IRA balance as of December 31, 2011 was $300,000. Your initial RMD is $10,949 ($300,000/27.4). Withdraw at least that amount by April 1, 2013.

You must withdraw your second RMD (for your 2013 tax year) by no later than December 31, 2013. The amount will equal your December 31, 2012 IRA balance divided by 26.5, which is the life expectancy divisor for a 71-year-old.

You must take your third RMD -- which will be for your 2014 tax year -- by no later than December 31, 2014. The amount will equal your December 31, 2013 IRA balance divided by 25.6, which is the life expectancy divisor for a 72-year-old from the table.

And so on for subsequent years.

Why Option No. 2 May Not Be the Tax-Smart Choice. As you can see from Example 2, choosing to defer your initial RMD until next year will cause a double-dip of extra taxable RMD income in 2013. That could be a bad idea for several reasons.

• The double dip could push you into a higher 2013 tax bracket.

• Your 2013 tax bracket may be higher due to the scheduled expiration of the Bush tax cuts. If so, a double dip of RMD income next year could be taxed at higher rates than if you take a single dip this year and another single dip next year.

• Taking a double dip in 2013 could also increase your exposure to the new 3.8 percent Medicare surtax on net investment income. While the surtax will only affect higher-income taxpayers, taking two RMDs in 2013 could cause you to owe more for the surtax than if you take one this year and another one next year.

Bottom Line: For the preceding reasons, taking your initial RMD this year (Option 1) may be advisable even though you would be taxed on the amount sooner than if you take the initial RMD next year (Option 2). Work with your tax advisor to factor this issue into your overall year end tax planning strategy.

If You Turned 70 1/2 before this Year

If you turned 70 1/2 in 2011 or earlier, your RMD situation is pretty simple. Withdraw at least the RMD amount for your 2012 tax year by no later than December 31, 2012. To calculate the amount, divide the combined balance of all your traditional IRAs as of December 31, 2011 by the life expectancy divisor from the table, based on your age as of December 31, 2012.

If You Have Multiple IRAs
As explained earlier, when you own several traditional IRAs (including any SEP accounts or SIMPLE-IRAs), you must withdraw at least the annual RMD amount based on the combined balance of all those accounts. However, there's no requirement to actually withdraw money from any specific account. As long as you withdraw the proper RMD in total, you can take the money out of as few or as many accounts as you wish. 

Beneficiary of a Deceased Individual's Tax-Favored Account

If you are the beneficiary of a deceased person's traditional IRA, Roth IRA, or qualified retirement plan account (such as a 401(k) account), you must comply with a separate set of RMD rules for inherited accounts. Depending on the circumstances, it may be necessary to withdraw an RMD by as early as December 31, 2012 in order to avoid the 50 percent penalty. Consult with your tax adviser to determine what must be done this year, if anything.

Conclusion

Complying with the RMD rules is an important tax issue for traditional IRA owners who are age 70 1/2 and older and for beneficiaries of inherited tax-favored retirement accounts. You may need to take action by year end to avoid the 50 percent penalty for noncompliance.
If you turn 70 1/2 this year, you may be better off withdrawing your initial RMD by December 31, 2012 instead of putting it off until next year.
If you have questions about RMDs or want additional information, contact your advisor.

IRS Announces Standard Mileage Rates for 2013

The Internal Revenue Service has issued the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 56.5 cents per mile for business miles driven.
• 24 cents per mile driven for medical or moving purposes.
• 14 cents per mile driven in service of charitable organizations

The rate for business miles driven during 2013 increases 1 cent from the 2012 rate.  The medical and moving rate is also up 1 cent per mile from the 2012 rate.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.  In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

List of Expiring (and Expired) Tax Breaks for Individuals

Next year, Americans are facing numerous tax changes. To start with, tax rates on ordinary income are going up for everyone, unless Congress acts to extend the lower rates currently in effect. At the low end of the income scale, the existing 10 percent bracket will become 15 percent. At the top of the scale, the existing 35 percent bracket will be replaced by a 39.6 percent bracket.

Below are some of the other tax breaks that will expire on December 31, and those that expired on December 31, 2011.

Of course, no one can predict with certainty whether Congress will extend some of these deductions, credits and rates. It depends on what happens in Washington. As we've learned in the past, Congress could pass laws to bring some of these tax breaks back -- even retroactively after the new year. Stay tuned.

Tax Break	Description	Expiring/ Expired?	What Could Happen?
Reduced Social Security Tax Rate (also Known as the Payroll Tax Holiday)	For 2012, the Social Security tax hits the first $110,100 of wages and/or self-employment income. The withholding rate for the employee's share of the Social Security tax is temporarily reduced by 2 percent from 6.2 percent to 4.2 percent. For self-employed people, the Social Security tax component of the self-employment tax is also temporarily reduced by 2 percent, from the usual 12.4 percent to only 10.4 percent. The maximum savings is $2,202 (2 percent times $110,100). A working couple could save up to $4,404 (2 percent times $2,202).	Expiring December 31, 2012	While it would further threaten the stability of the Social Security system, the payroll tax holiday could be extended through 2013. The goal of keeping more cash in consumers' hands in order to spur the economy might be an overriding consideration. For 2013, Social Security tax will hit the first $113,700 of wages and/or self-employment income. So if the tax holiday is extended through 2013, the top tax savings per worker would be $2,274 (2 percent times $113,700) while a working couple could save up to $4,548 (2 times $2,274).
Reduced Long-term Capital Gains Rates	For 2012, the maximum federal income tax rate on most long-term capital gains is 15 percent. (Short-term gains are taxed at ordinary income tax rates.)	Expiring December 31, 2012	Unless Congress extends the current rates, the top rate will increase to 20 percent. An 18 percent top rate will apply to most long-term gains from investments acquired after December 31, 2000 and held more than five years. The existing rates could be extended if lawmakers believe it will help the economy.
Reduced Dividend Rate	For 2012, qualified dividends are taxed at a maximum rate of only 15 percent.	Expiring December 31, 2012	Unless Congress acts, for 2013, dividends will be treated as ordinary income taxed at regular rates of as high as 39.6 percent. Congress could extend the existing rates in order to improve the economy.
Alternative Minimum Tax Patch	Every year, Congress "patches" the AMT rules to prevent millions more households from getting socked with this add-on tax. The annual patch consists of allowing bigger AMT exemptions and allowing various personal tax credits to offset the AMT. Without a new patch for 2012, many more taxpayers will face higher tax bills.	Expired December 31, 2011	It is likely that a new AMT patch will be installed for 2012.
Option to Deduct State and Local Sales Taxes	For 2011, individuals had the option of claiming an itemized deduction for general state and local sales taxes instead of claiming an itemized deduction for state and local income taxes. This option can be beneficial if a taxpayer lives in a state with no personal income tax or a very low state income tax rate.	Expired December 31, 2011	The option will probably be extended through at least 2012.
Tax-Free Treatment for Forgiven Principal Residence Mortgage Debt	For federal income tax purposes, cancelled debts generally count as gross income: so-called cancellation of debt (COD) income. However a temporary exception applies to COD income from cancelled mortgage debt that was used to acquire a principal residence. Under the temporary favorable rule, up to $2 million of COD income from principal residence acquisition debt that is cancelled in 2007-2012 is treated as a federal-income-tax-free item.	Expiring December 31, 2012	It appears doubtful that this break will be extended through 2013 in its current form. However an exception for smaller amounts of post-2012 forgiven principal residence mortgage debt might prove to be acceptable to lawmakers.
Charitable Donations from IRAs	For 2011, IRA owners who had reached age 70 1/2 by year end were allowed to make charitable donations of up to $100,000 directly out of their IRAs. The donations count as IRA required minimum distributions. So, charitably inclined seniors with more IRA money than they need could reduce their taxes by arranging for IRA donations to take the place of taxable required minimum distributions.	Expired December 31, 2011	It may be too late to bring this one back for 2012. In any case, it would not be surprising if it is reinstated for the 2013 tax year.
Favorable Child Credit Rules	For 2012, the maximum credit for an eligible under-age-17 child is $1,000. For 2013, the top credit is scheduled to drop to only $500. The current liberalized rules for calculating the refundable portion of the credit are also scheduled to expire at the end of 2012. The refundable amount is generally limited to the lesser of: (1) 15 percent of the taxpayer's earned income in excess of the applicable threshold or (2) the amount of credit remaining after the taxpayer's liability is reduced to zero. For 2012, however, a reduced $3,000 earned income threshold is in effect, which allows more households to claim the credit.	Expiring December 31, 2012	The current rules will likely be extended through at least 2013.
Favorable Earned Income Credit Rules	Legislation enacted in 2009 and 2010 increased the earned income credit (EIC) percentage for families with three or more qualifying children from 40 to 45 percent through 2012 and increased the income threshold for the phase-out rule that can reduce or eliminate EICs for married joint-filing couples (the threshold was made $5,000 higher than the threshold for singles). These provisions allow larger EICs for affected families.	Expiring December 31, 2012	The current rules will probably be extended through at least 2013.
Favorable Dependent Care Credit Rules	For the past few years, parents have been allowed to claim a credit of up to $600 for costs to care for one under-age-13 child or up to $1,200 for costs to care for two or more kids under 13 so both parents can work. Lower-income parents could claim larger credits of up to $1,050 and $2,100, respectively. For 2013 and beyond, the top credit amounts are scheduled to drop to only $480 and $960, respectively ($720 and $1,440 for lower-income parents). Note: This credit can also be claimed for costs to care for a qualified individual who is not an under-age-13 child, such as a disabled spouse or dependent parent, so a taxpayer can work.	Expiring December 31, 2012	The current rules will probably be extended through at least 2013.
Tax Breaks for Adoptive Parents	An earlier tax law included a major liberalization in the adoption credit rules and the establishment of tax-free employer adoption assistance payments. Beginning in 2013, the maximum adoption credit is scheduled to basically be cut in half. In addition, only special-need children will qualify and stricter income phase-out rules will apply. Tax-free employer reimbursements for adoption expenses will disappear.	Expiring December 31, 2012	The current rules will probably be extended through at least 2013.
The American Opportunity Higher Education Credit	The 2009 stimulus law created the American Opportunity credit which can be worth up to $2,500 for 2012, can be claimed for up to four years of undergraduate study, and is 40 percent refundable. The credit is scheduled to be replaced by the Hope Scholarship credit which is smaller, can only be claimed for the first two years of undergraduate study, is subject to phase-out at lower income levels, and is not refundable.	Expiring December 31, 2012	The existing credit and rules will probably be extended through 2013.
Higher Education Tuition Deduction	For 2011, this write-off was up to $4,000 or $2,000 for higher-income folks.	Expired December 31, 2011	This deduction will probably be extended through at least 2012.
Favorable Student Loan Interest Rules	This deduction can be up to $2,500 annually, whether the taxpayer itemizes or not. Less-favorable rules are scheduled to kick in for 2013 and beyond. Specifically, a 60-month limit on deductible interest will apply and stricter phase-out rules will reduce or eliminate write-offs for many middle-income households.	Expiring December 31, 2012	The current rules will likely be extended through at least 2013.
Favorable Coverdell Education Savings Account Contribution Rules	After 2012, the maximum contribution to federal-income-tax-free Coverdell education savings accounts (CESAs) is scheduled to drop to only $500 (down from the current $2,000 maximum). In addition, a stricter phase-out rule would reduce or eliminate contributions for many taxpayers.	Expiring December 31, 2012	The current rules will probably be extended through at least 2013.
Section 127 Educational Assistance Plans	For the last few years, employers have been allowed to provide up to $5,250 in annual federal-income-tax-free educational assistance to each eligible employee under Section 127 plans. Both undergraduate and graduate school costs are covered and the education need not be job-related. Employers can deduct the cost of running plans as an employee benefit expense.	Expiring December 31, 2012	Section 127 plans will probably be extended through at least 2013.
$500 Energy-Efficient Home Improvement Credit	For 2011, taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence.	Expired December 31, 2011	This credit will probably stay dead.
Larger Salary Reduction Opportunity for Transit Passes	An employer may allow employees to sign up to reduce their taxable salaries to pay for transit passes to get to and from work. In 2011, the maximum monthly amount you could set aside on a tax-free basis was $230. The maximum monthly amount for 2012 is only $125, unless Congress decides to allow a larger amount at the last minute. If that happens, the amount would be $240.	Expired December 31, 2011	It may be too late to bring a larger amount back for 2012. In any case, a larger amount could be allowed for 2013.
$250 Deduction for Teachers' School Expenses	For 2011, teachers and other personnel at K-12 schools were able to deduct up to $250 of school-related expenses they paid out of their own pockets -- whether they itemized or not.	Expired December 31, 2011	This will probably be extended through at least 2013.
Deduction for Home Mortgage Insurance Premiums	For 2011, eligible taxpayers were allowed to treat qualifying personal residence mortgage insurance premium amounts as deductible home mortgage interest.	Expired December 31, 2011	It is unclear if this deduction will be extended.
Charitable Qualified Conservation Contributions	Qualified conservation contributions are donations of real property interests (including remainder interests and easements) that restrict the use of the property. For individuals, the maximum write-off for 2011 qualified conservation contributions of long-term capital gain property was increased from 30 to 50 percent of adjusted gross income (AGI). Qualified contributions also weren't counted when calculating allowable 2011 write-offs for other charitable contributions. Qualified contributions in excess of what could be deducted could be carried forward for 15 years (only a five-year carryover period is allowed under the normal rules). For a qualified farmer or rancher, the qualified conservation contribution write-off for 2011 donations of farm or ranch property could be up to 100 percent of AGI.	Expired December 31, 2011	It may be too late to bring these provisions back for 2012. However, Congress could resurrect them for the 2013 tax year.