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Reporting of 2011 Organizational Actions Affecting Basis of Securities Due January 17

Posted 8:03 PM by

The IRS has released a new form, Form 8937, for the reporting of transactions that affect a security holder's basis. Examples of transactions that may require Form 8937 are stock splits, stock dividends, nontaxable dividends, mergers, and acquisitions. This form is required retroactively to report transactions occurring on or after Jan. 1, 2011.

Form 8937 has two parts. Part I is the general information regarding the reporting entity. Part II requires the information related to the specific transaction.

Who must file: Any taxpayer that takes an organizational action that affects the basis of all holders of the security.

Exceptions: Form 8937 is not required to be filed with the IRS if, by the due date of the form, a completed Form 8937 is posted to a primary public website. In addition, the form is not required if all the holders of the security are exempt recipients.

Special rules: S corporations can satisfy the reporting requirement by reporting any actions that affect the basis of the stock on a timely filed Schedule K-1 for each shareholder and timely gives a copy to all proper parties. A real estate investment trust (REIT) that reports undistributed capital gains to shareholders on Form 2439 satisfies the reporting requirements if Form 2439 is timely filed and given to all the proper parties.

Due date: For transactions occurring during 2011, the form is due Jan. 17, 2012. For transactions occurring after Dec. 31, 2011, the due date for Form 8937 is the earlier of: (1) the 45th day following the transaction; or (2) Jan. 15th of the year following the calendar year of the transaction.

For more information, please contact your KSM advisor.

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Unreimbursed Education Expenses Deduction

Posted 12:00 AM by

The state of Indiana recently released new legislation that entitles an individual tax deduction for up to $1,000 per dependent child for unreimbursed education expenditures. These expenditures include costs for tuition, fees, software, textbooks and school supplies for dependent children in grades K-12 enrolled in private school or who are homeschooled. This legislation is retroactive for year 2011 so the deduction can be made on the parent’s 2011 tax return.
 
For more information on this deduction, please see the information bulletin released by the Indiana Department of Revenue or contact your KSM advisor.

 

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Year-End Tax Planning

Posted 12:00 AM by
As each year comes to a close, Americans scamper to unearth tax deductions that have escaped their grasp until this point. It is an adage as old as time – or at least since The Revenue Act of 1861 was passed. This year is no different. In fact, due to the uncertain future of our tax laws, 2011 may prove to be one of the most beneficial years to plan accordingly.
 
Here are some recommendations to maximize tax efficiency in 2011 and beyond:
 
Debt Cancellation
If possible, and if the circumstances so warrant, defer the debt cancellation until Jan. 1, 2012. Deferral of this event will typically provide increased opportunities to plan for the adverse tax consequences associated with cancellation of debt events.
 
Qualified Higher Education Expenses
Unless extended by Congress, the up-to-$4,000 deduction for qualified higher education expenses will expire at the end of 2011. As a result, individuals should consider prepaying eligible expenses if doing so will increase the deduction. The deduction is generally allowed for qualified education expenses paid in 2011 in connection with enrollment at an institution of higher education.
 
Traditional IRA Conversion to Roth
If you think that a Roth IRA is better than a traditional IRA, and you plan to remain in the market long-term, consider converting your traditional IRA (depressed valued stocks and mutual funds) into a Roth IRA, if eligible, because it will result in greater taxable income for 2011; however, your assets will increase in value tax-free under the Roth structure. This action is particularly attractive if you believe tax rates will increase in future years.
 
Realize Losses on Stock
Sell a depressed stock holding and repurchase the same holding 31 days later, which will allow you to take the loss in 2011. The obvious risk is that the stock appreciates during the period (31 days) that you are not an owner. Furthermore, this loss will only be allowed to the extent of your net capital gains plus $3,000. Any disallowed losses will carry forward to future tax years.
 
Purchase Qualified Small Business Stock (QSBS)
There is no tax on gain from the sale of QSBS if it is purchased before Jan. 1, 2012, and held for more than five years. To qualify for this break, the stock must be issued by a regular 'C' corporation with total gross assets of $50M or less (amongst other requirements).
 
If You Own Partnership or S-Corporation Interests with Suspended Losses
S-Corporation: Consider making a contribution to the entity to increase basis so the losses can be recognized in 2011. You may also be able to make loans to the entity that will provide you with basis and allow otherwise suspended losses to be recognized in 2011.
 
Partnership: Consider making a contribution to the entity to increase basis so the losses can be recognized in 2011. Additionally, consider other debt arrangements which will increase basis and free up losses.
 
Energy Credit
Homeowners: Consider making energy saving improvements before Jan. 1, 2012. A tax credit may be available if these improvements are made in 2011.
 
Annual Gift Exclusion
If you have not done so already, consider making a gift of up to $13,000 per individual donee (spouses can give a combined $26,000 per individual donee). Qualifying gifts will not be subject to gift or estate taxes as they are below the annual gift tax exclusion amount. In order to utilize the 2011 annual gift tax exclusion, the gift must be made in 2011. Taxpayers are not permitted to carry the exclusion forward.
 
Time Is Expiring
With just weeks remaining in 2011, individuals should be considering these planning opportunities today. Each opportunity is dependent upon the individual's particular situation, so please consult your Katz, Sapper & Miller tax advisor before effectuating any of them.
 
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