This document provides information about tax planning and law updates. It discusses strategies for reducing 2012 income tax bills, such as estimating adjusted gross income, accelerating or deferring income and deductions. It also summarizes tax tips related to hiring family as employees, capital gains exclusions for home sales, and business use of residences. The document concludes with notes on upcoming tax law changes and the alternative minimum tax.

1. Tax Planning and Law Updates
Gary N Cooper CPA PC
www.garycoopercpa.com

2. Tax Planning - General
•As the first half of 2012 draws to a close, there is still plenty of
time to reduce your 2012 income tax bill and plan ahead for
the remainder of the year.
•You should have a 2012 income tax projection prepared to
maximize possible tax savings.
•Because many tax benefits are tied to or limited by adjusted
gross income (AGI), a key aspect of tax planning is to estimate
both your 2011 and 2012 AGI.
•When considering whether to accelerate or defer income or
deductions, you should be aware of the impact this action may
have on your AGI and your ability to maximize itemized
deductions that are tied to AGI.
•Your 2011 tax return, your 2012 pay stubs, and other income
and deduction-related materials are a good starting point for
estimating your AGI.

3. Tax Planning - General
There are many strategies and tax benefits that can be
analyzed during this time of year to help maximize your
income tax savings. Some of the items to keep in mind are:
 Deferring income to 2013
 Accelerating income into 2012
 Planning the recognition of capital gains and losses
 Personal deduction planning – method and sources
 Business deduction planning – method and sources
 Education and Child Tax Benefits
 Energy Incentives
 Business Tax Credits
 Charitable Gift Planning
 Family Gift Planning
 Investment Planning
 Social Security and Retirement Planning
 Alternative Minimum Tax Exposure

4. Tax Planning - General
•Now is the time to review your income tax situation and the
applicability of any of the items listed above.
•Remember that waiting until preparing your income tax return
is too late to strategize for reducing your 2012 income tax
liability.
•It is merely history with no proactive planning.
•Currently, the planning process will encompass the next three
years – 2012, 2013 and 2014, due to the upcoming tax law
changes.

5. Tax Planning Tips
•Hire your spouse to work as an official employee and
put him/her on payroll. There are five benefits that you
can gain:
• Build up tax-favored funds for retirement. You can put
retirement plans in place for up to 25% of the
compensation, or 50,000, whichever is less can be
deducted and put into a retirement account.
• 401(k), you can put back $17,000, and if the spouse is
always in 50, you can put back an additional $5,500.
• Shift taxable income away from the company if you
have a C corporation.
• If the C corporation is in a higher tax bracket, this would
not matter if you do have an S corporation because the
earnings flow through directly to your personal tax return.
• Get more tax mileage from business trips, and since you
wife is an employee, you can deduct the trip for both.

6. Tax Planning Tips
Family Members as Employees
•Health insurance coverage ills. You can set up a group
policy having more than one employee in your corporation.
•Join the employer paid life insurance group. First $50,000 of
employer paid group term coverage is tax-free for the
employee.
•Furthermore, setting up an S corporation with more than
one employee can create an opportunity to generate
distributions versus salary, which is not subjected to FICA or
Medicare taxes.

7. Real Estate Specific
Mortgage Interest and Points
•You can deduct interest expense on up to $1M of acquisition
debt. This is for a loan use to buy or build your personal residence.
•Mortgage points are fully deductible, in the year you pay them, if
you satisfy several rules, the points must be for the purchase or
renovation of your primary home.
•Points are not deductible if paid as part of a refinancing, or if the
loan is used for investment, tuition, etc.
• The points must be paid by you or the seller, not taken out of the
loan proceeds. You must have put down enough cash to cover the
points. This includes any loan origination fee, if the fees determine
as a percentage of the loan, one of these rules is not fully satisfied,
any deduction for points is spread over the life of the loan.
•Points paid when refinancing or deductible or the term of the
loan. If you refinanced a loan and your previous fee refinanced,
you can deduct off the points left on the prior loan. But, if you
refinanced with the same lender, IRS says that you must take the
deduction for the remaining points over the term of the new loan.

8. Real Estate Specific
Capital Gains
•Married couples can exclude gains up to $500,000 from
capital gains taxes. Singles can exclude up to 250,000 on
the sell of the personal residence.
•You must have lived in the home for two of the last five
years. There are other exceptions due to quick sales, to a
job change, illness, or for unforeseen circumstances such as
a divorce.
•It is still vital to keep records on your home. You will have to
prove your gain if the property appreciates and the gain
exceeds $500,000.
•Here's what you need: the original cost of the property vs.
what you spent on permanent improvement such as
additions, fences, shades, carpets, fitted drapes, shelves,
storm windows, and central air conditioning. These expenses
boost your home's cost basis, and reduce the gain.

9. Real Estate Specific
Business Use of Residence
•Using part of your residence for business may get you a
deduction. If you pay rent, part may be deductible. If
you're the owner, you may get depreciation.
•Deductions for operating a business in your residence are
allowed only for the portion that is used solely and regularly
as your primary place of business or when your home office
is used for seeing clients, customers or patients. But it need
not be exclusive use if inventory or samples are stored there.
•If you are an employee, you must show that use of your
home is for your employer's convenience, not just yours.
•Home office deductions will be allowed even if clients or
others are not there, or if it is not the main place for
managerial or administrative functions.
•The gain on your home office qualifies for the home sale
exclusion even though the space was not used as a
residence. However, any depreciation after May 6th, 1997 is
recaptured in tax at a maximum rate of 25%.

10. Real Estate Specific
Vacation Homes
•Vacation homes can provide you with some tax
deductions, but deductions are limited when your personal
use of the rented home exceeds certain limits.
Maintenance and depreciation are deductible only to the
extent that rental income exceeds the real estate taxes and
mortgage interest allowable to the renter.
•This rule is triggered if personal use exceeds 14 days and
10% of the home's rental time. If personal use is less it can
get full write-off for depreciation and maintenance. The IRS
counts stays rented to relatives as personal use of the
owner.
•Rent can be tax free if you rent your home for fewer than
15 days for the year. Keep this in mind if your area attracts
visitors for sports playoffs or other special happenings. But
you cannot deduct depreciation or upkeep.

11. Real Estate Specific
Tax Credit Recapture
•First-time home buyers who purchase their residences in
2008 are entitled to a tax credit of as much as $7,500.
But the credit was actually an interest free loan from the
government.
•Starting in 2010, the credit is recaptured over 15 years.
Filers who claim the maximum credit must report $500 in
extra tax each year.
•Any remaining credit is recaptured when the home is
sold. Filers who got the credit on home
•Buyers who got the credit on a home bought after 2008
avoid any recapture unless the home is sold within three
years of purchase.

12. Real Estate Specific
Investment Real Estate
•For residential buildings the rule is straight line
depreciation for 27 years and six months. For non-
residential property it's 39 years.
•Tax credits also are available for some buildings.
Renovations of old buildings and restorations of historic
structures and sites qualify for the credit. Credits equal
20% on historic sites and 10% on buildings first used before
1936.

13. Real Estate Specific
Passive Loss Rules
•Most passive losses are from two sources. One involves
limited partners. Also limited partners are passive no
matter what the size of the company or what it does.
The other involves most rental real estate, home
apartments and office buildings.
•Real estate professionals that are exempted from these
limits and can deduct their losses from rental real estate
in full.
•To qualify as a real estate professional you must satisfy a
couple of requirements. You must spend more than one
half of your working hours and at least 750 hours per year
materially involved in real estate as a developer, broker,
landlord and the like.

14. Real Estate Specific
Like Kind Exchange
•Code section 1031 - like kind property exchanges
postpone taxes on some businesses or investment real
estate. You may be able to work out a tax free change
even if your seller doesn't want your realty in return.
•You must use a qualified intermediary to hold the
proceeds from the sale of your property.
•You must identify replacement property within 45 days
of the sale and acquire it within 180 days. Follow the
rules carefully.

15. New Observations – IRS Audits
•According to new data released by the IRS, your chance
of being audited increases dramatically if your annual
earnings hit seven figures.
•Conversely tax payers earning less than $200,000 have less
cause for concern. The IRS fiscal year 2011 enforcement
and services results released in January show that audit rate
for taxpayers earning more than $1M is approximately 12%
in 2011 up from 8% in 2010.
• That is double of the 6% rate in 2009.
•In contrast only 4% of taxpayers earning more than
$200,000 were audited in 2011, up from approximately 3%
for the previous five years.
•Finally, the audit rate for taxpayers earning less than
$200,000 remained around 1% level the same as it has been
for the past five years.

16. New Observations – Contributions
•The IRS is becoming stricter for documentation relating to
charitable deductions on your personal tax return.
•No deduction is allowed for any contribution of cash,
check or other monitory gift unless you can show a bank
record or written communication from the charity.
•The written communication must indicate the amount of
the contribution, the date you made the contribution, the
name of the charity.
•Also, something very important that the IRS is looking at
during an audit, the acknowledgement must be obtained
by the earlier of the date you file your tax return, or the due
date of the return plus any extensions.
•It should include the amount of the cash of the check, a
description of any non cash property that was contributed,
and the value of any goods or services provided.
•Therefore, subsequent to the date of filing, you cannot go
to a charity and request substantiation and provide it to the
Internal Revenue Service to support an amount under audit.

17. AMT – An Added Tax
•First, let's briefly explain how the AMT works. In essence, you are required to run parallel
calculations of your regular income tax liability and AMT liability. Then, you must
effectively pay a higher of the two.
•There are five steps for competing the AMT liability.
• Figure out your taxable income for regular tax purposes.
• Add designated tax preference and adjustment items to this figure. What are the
adjustments? Some of the most common AMT adjustments and preferences are
as follows:
• Add back a personal exemption deductions.
• Add back a standard deduction for itemized deductions for state and local
income and property taxes, personal interest expense other than qualified
residents' interest, most miscellaneous deductions and part of medical
deductions.
• Subtraction of tax for refund of state and local income taxes.
• Changes to accelerated depreciation of property.
• Difference on the gain or loss on property sales reported for regular and
AMT purposes.
• Bargained element upon exercise of ISOs.
• Change in certain passive activity loss deductions.
• Add back of interest income from private activity defined interest.
•Subtract a special exemption amount based on your filing status. This is one of the
areas where congress has patched a law.

18. AMT – An Added Tax
•Subtract a special exemption amount based on your filing
status.
• This is one of the areas where congress has patched a law.
• Apply the AMT rate to the net amount. The AMT rate is 26% for
the first 175,000 of AMT income, 28% for AMT income above the
$175,000 level.
•Compare the AMT result to your regular income tax and pay
the higher tax liability.
•But here's the kicker - the exemption account mentioned
above could be reduced for high income tax payers. Fee
reduction is equal to $0.25 on each $1 of AMT income above
$150,000 for joint filers and 112,500
•Congress has not adjusted these dollar thresholds.
•Once AMT income exceeds $382,000 on a joint return, or
$273,500 for single, you get no exemption at all.

19. AMT – An Added Tax
There are four ways to sidestep the AMT.
• Delay capital gains. If you expect to realize a large
capital gain, postpone the sale until next year, or
arrange an installment sale.
• Two, time income tax payments. Don't prepay state
or local income and property taxes.
•All deductions for those prepaid amounts will cut
your regular income tax.
•They are added back to your AMT income
calculation.
•Instead, prepay just enough to bring down your
regular tax liability to equal the amount of your
AMT liability.
•Avoid private activity bonds.
•Put ISOs on hold.

20. Tax Law Changes
• Further, some of the tax law changes listed below could have
a direct effect on you and your business. These tax laws are
subject to change before the given tax year listed below.
Depends on Congress!
• Tax Rates – highest bracket could be going to 39.6% in
2013. This would be for married filers making over $250,000
and single filers making over $200,000.
• Surtax – starting 2013, this would hit married filers with AGI
exceeding $350,000 and single filers with AGI over
$280,000. To gain votes however, the Democrats are
considering raising the surtax starting points at $500,000 for
single filers and $1,000,000 for married filers. The surtax
could push the effective rate up to 50%.

21. Tax Law Changes
• Capital Gains and Qualified Dividends - Current Law Thru 2012
– Taxpayers in a tax bracket of 25% or higher pay a maximum
tax rate of 15% for long-term capital gains and qualified
dividends. Taxpayers in a tax bracket below 25% pay a
maximum tax rate of 0% for long-term capital gains and
qualified dividends. Effective 2013 - taxpayers in a tax bracket
of 25% or higher could pay a maximum long-term capital
gains rate of 20% and ordinary tax rates for qualified
dividends. Taxpayers in a bracket below 25% could pay a
maximum long-term capital gains tax of 10% and ordinary tax
rate for qualified dividends. This tax law change is currently
under consideration by congress.
• Tuition and Fees Deduction - Current Law - the tuition and
fees deduction allows tax payers to deduct up to $4,000 of
tuition in related fees for enrollment, attendance at an
eligible educational institution. Effective 2012 - the tuition fees
deduction is no longer allowed.

22. Tax Law Changes
•Estate gift tax exclusion increase from $1M to $5M 2012
•Estate and gift tax top rate reduced from 55% to 35% 2012
•LH improvements for restaurants and qualified retail space
•Eligible for section 179 up to $250,000 2011
•LH improvements for same type of property 15 years 2011
•No phase out for personal exemptions 2012
•No phase out for itemized deductions 2012
•S Corp built in gains period reduced from 10 years to 5 2011
•Sales tax deduction instead of State income taxes 2011
•Section 179 $500,000 2011
•Section 179 $125,000 2012
•Bonus depreciation at 100% - new equipment 2011
•Bonus depreciation at 50% - new equipment 2012

23. Tax Law Changes
• Gift tax – Current Law - the top gift tax rate equals 45%. The gift
tax exclusion equals $1M. Effective 2011 and 2012 - the gift tax
rate equals 35%. The gift tax exclusion equals $1M. Effective 2013 -
the gift tax rate equals 55%. The gift tax exclusion equals $1M.
• Adoption Credit - Current Law - for 2011 a taxpayer could have
claimed a credit up to $12,150 an also exclude up to $12,150
from income for expenses for adopting an eligible child.
• Effective 2013- the adoption credit and the adoption assistance
program exclusion are repealed with the exception of adoptions
of children with special needs.
• Itemized deductions - Current Law - the phase-out of itemized
deductions no longer applies. Effective 2013 - itemized
deductions for high-income taxpayers may be phased out as
much as 80% of otherwise deductible expenses.
• Student Loan Interest – Current Law –Effective 2012 – deduction
up to $2,500 for the first 60 months with phase-out, thereafter
interest is no longer deductible.

24. Tax Law Changes – up in the air
•Adoption Credit 2011
•AMT exemption amt increase over tax year 2000 amounts
2011
•AMT refundable credit for prior year AMT 2012
•Cap Gain and Qualified Div Max rates at 15%, 5% and 0% 2012
•Charitable Contributions of IRA deductions 2011
•Computer software eligible for section 179 2012
•Energy efficient credit 2011

25. Bush Tax Cuts
•Most believe the Bush tax cuts will be extended through 2013.
•If the Democrats keep the White House and senate, better
odds that rates on top –incomers will rise.
•Tax Reform – generally agreed by both Obama and Romney.
• Rates, deductions, credits, AMT refinement will all be on
the table.
• This will begin as early as 2013.

26. Conclusion
•Good news – we are on an airplane traveling at 400 MPH.
•Bad news – we really don’t know where we are going!
•The laws will change across the board and touch the entire
country in some way.

27. Gary N. Cooper CPA PC
1703 W. 12st Street
Houston, TX 77008
713-243-8590
www.garycoopercpa.com