April 2, 2012 Client Newsletter

On March 12, the Tax Court issued an opinion challenging what many of us thought was a well-settled strategy for maximizing depreciation deductions for rental real estate. It's unclear what effect this decision will have in the long run, but we want to let you know that we're paying attention to help protect your tax breaks on your properties.

"Depreciation" is the process of deducting your investment in assets like real estate over a period of time intended to reflect its useful life. A "cost segregation study" is the process of dividing a property between structural components such as windows and roofs (which depreciate over 27.5 or 39 years) and personal property such as carpeting and appliances (which depreciate over five, seven, or 15 years). Depreciating those components faster gives you bigger deductions in the first few years of ownership.

In the recent AmeriSouth decision, the Tax Court sided with the IRS and refused to let an apartment owner accelerate a number of deductions, including site preparation and earthwork, the water distribution system, sanitary sewer, gas line, special plumbing and electric, HVAC, finish carpentry, millwork, interior windows and mirrors, and special painting. But while this sounds like yet another blow for the taxpayer, there's a twist. The owner actually sold the property before the case came to trial, and even stopped defending their position in court.

The AmeriSouth decision may just wind up being another example of bad cases making bad law. It's unclear what the Court might have ruled if the owner had actually put up a fight. It's also worth noting that if the decision does set new policy, it won't actually eliminate any deductions. Rather, it will merely slow them down. You can be sure we'll keep a close eye on developments as they arise, and we'll keep you posted. In the meantime, if you have any questions, don't hesitate to call us.

April 15th or should I say April 17th is closer than you think.  If you haven’t had a chance to drop off your tax information, we encourage you to do so.  We are open every day, including Easter Sunday, until the April 17th due date.   

The 2012 presidential election already seems like it's been on for years.  President Obama has proposed to raise taxes on those earning above $200,000 ($250,000 for joint filers), including a new surtax on incomes over a million.  Republicans have pledged to cut taxes in hopes of stimulating the economy.  And regardless of who wins in November, the Bush tax cuts are scheduled to automatically expire at the end of this year.

Since taking office, Obama has offered a variety of cuts for lower- and middle-income Americans.  These include new credits for working individuals, expanded breaks for higher education, extended breaks for home buyers, and even a temporary sales-tax deduction for new car purchases.  While these changes have made taxes more complicated, they've done nothing to stall future tax hikes for higher incomes.  

The Supreme Court recently debated the constitutionality of the new health care reform law.  We won’t know until June their decision. If the Court decides to uphold the law your taxes will never be the same.  
 
As it stands right now the new health care reform act improves coverage and extends it to more Americans, but actually makes it harder to deduct unreimbursed expenses.  (Under current law, you can deduct medical expenses exceeding 7.5% of your Adjusted Gross Income.  Under the new law, starting in 2013, that floor rises to 10%.)  It also limits contributions to employer-sponsored flexible spending plans to $2,500/year.   

If you're free to select your own coverage, consider choosing a "high-deductible health plan"  and opening a Health Savings Account.  These arrangements bring down premium costs and use pre-tax dollars for out-of-pocket costs, bypassing the floor on AGI.   

If you're self-employed, consider establishing a Medical Expense Reimbursement Plan, or MERP. These plans let you pay family medical expenses with pre-tax business dollars.  They may even help you avoid self-employment tax. We can help you adopt a MERP plan.

With the federal budget deficit topping $1 trillion per year, many observers see the new healthcare taxes as the tip of a looming iceberg.  We shall see.....soon.