Non-Profits: Make Your Mark By Benchmarking

The word “benchmark” may strike some as organizational lingo, but the practice of benchmarking often proves valuable for non-profits. Non-profit organizations that incorporate financial benchmarks into their operations are better at anticipating negative financial trends and may even see revenues climb, expenses drop and efficiencies improve.

What is Benchmarking?

Benchmarking is an ongoing process of measuring an organization against expectations, past experience or industry norms for productivity and profitability, and then making adjustments to improve performance in relation to those metrics. Ideally, your non-profit will consider both:

1. Internal benchmarks to monitor and detect trends, based on your organization’s historical results and statistics, as well as expectations.
2. External benchmarks to ascertain where you’re thriving and where you lag behind, based on data from peers.

Benchmarking provides essential information for effectively developing and implementing strategic plans. It helps an organization keep a watchful eye on its financial health and determine where costs can be cut and revenues increased. Non-profits can use benchmarks to demonstrate their efficiency to stakeholders such as donors and grantors.

Benchmarks for Non-Profits

The first step is to define what your non-profit needs to measure. Focus on the metrics that are most critical to the success of your mission and the key indicators of the organization’s financial health and operational effectiveness. For many nonprofits, those metrics will include:

Program efficiency (program service expenses/total expenses). This ratio identifies the amount you spend on your primary mission, as opposed to administrative and fundraising costs. This ratio is of utmost importance to stakeholders.

Fundraising efficiency (unrestricted contributions/unrestricted fundraising expenses). How many dollars do you collect for every dollar you spend on fundraising? The higher this ratio, the more efficient your fundraising. What qualifies as a good ratio depends on the organization’s size, its types of fundraising activities, and so on.

Operating reliance (program service revenue/total expenses). This ratio indicates whether your nonprofit could pay all of its expenses solely from program revenues.

Organizational liquidity (expendable net assets/total expenses). How much of the year’s total expenses is considered expendable equity or reserves? The higher the ratio, the better the liquidity.

Also consider benchmarks such as average donor contributions, expenses per member and other ratios that measure trends for liquidity, operating yield, revenue, borrowing, assets and similar metrics. No matter which benchmarks you choose, though, you’ll need reliable processes for collecting and reporting the data.

For Comparison’s Sake

Comparing the non-profit’s performance to benchmarks allows you to zero in on areas with the greatest potential for improvement. Armed with this information, you may be able to improve performance without making significant changes in your operations. Further, when comparing against external benchmarks, you might improve performance by simply adopting best practices used by your peers.

You can obtain information on other non-profits’ metrics from websites such as GuideStar and Charity Navigatoror from commercial software. Information also may be available from state government databases and trade associations. Take steps, though, to ensure you’re comparing apples to apples – that the two organizations you are stacking up against each other are truly comparable.

Make it a Team Effort

Some organizations have found it worthwhile to include staff in the benchmarking process. Their involvement in setting aggressive but attainable benchmarks – and measuring progress – can achieve buy-in and help foster teamwork as your non-profit moves toward and surpasses its goals.

Contact Doeren Mayhew for more information. 

Notices Due Oct. 1 as Part of Health Care Reform

Most employers are required to provide a written notice to employees about the new Health Insurance Marketplace (previously called “the Exchange”) by Oct. 1, 2013, as part of the Affordable Care Act.

If your business is subject to the Fair Labor Standards Act (FLSA), you are required to provide this notice to all existing employees regardless of whether you currently offer a health plan or not. The notice also must be provided to new employees at the time of hiring beginning Oct. 1. Your insurance carrier or third-party health plan administrator is not responsible for providing the notice to employees for you.

According to the Department of Labor, the notice can be provided by either mail, or electronically if electronic disclosure safe harbor requirements are met. The notice to inform employees of coverage options must include:

• Information about the new Marketplace
• Contact information and description of the services provided
• Notice that employees may be eligible for a premium tax credit if they purchase a qualified health plan through the Marketplace
• Notice that employees may lose the employer portion of their health benefits plan if they purchase a plan through the Marketplace, and that all or a portion of such contribution may be excludable from income for Federal income tax purposes

Employers can view sample notifications in both English and Spanish on the DOL website.

First delayed in March to the new Oct. 1 date, and in light of the recent postponement of key mandates of the ACA to 2015, the requirement could again be delayed. However, employers will want to keep the requirement on their radars and be prepared to send by the Oct. 1 deadline in case it remains intact.

Contact Doeren Mayhew for more information.

Doeren Mayhew Viewpoint: Insight, Oversight and Foresight for Your Business

Doeren Mayhew Viewpoint: Insight, Oversight and Foresight for Your Business

Contact Doeren Mayhew for more information.

Doeren Mayhew Moves Up on Top 100 CPA Firm List

Doeren Mayhew Moves Up on Top 100 CPA Firm List
Contact Doeren Mayhew for more information.

Tax Implications of Renting Out Your Vacation Home

Many people might not know that if you rent out your vacation home for 15 days or more, you must report the income on your tax returns. Determining how this impacts your tax liability and what expenses are eligible to be deducted related to a vacation home can get tricky.

The expenses you can deduct depend on whether the home is classified as a rental property for tax purposes, based on the amount of personal vs. rental use. Adjusting your personal use — or the number of days you rent it out — might allow the home to be classified in a more beneficial way.

Rental Properties

With a rental property, you can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.

Non-Rental Properties

With a non-rental property, you can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property taxes.

Contact Doeren Mayhew for more information.

How Business Identity Theft Impacts Your Taxes

Facilitated by the speed, ubiquity and anonymity of the Internet, criminals are able to easily steal valuable information such as Social Security numbers and use it for a variety of nefarious purposes, including filing false tax returns to generate refunds from the IRS. One estimate from the National Taxpayer Advocate Service has calculated that individual identity theft case receipts have increased by more than 666 percent from fiscal year 2008 to 2012.

There’s another dangerous facet of identity theft that costs the government, taxpayers and businesses millions of dollars each year. That is business identity theft, which like its consumer counterpart involves the theft or impersonation of a business’s identity. To add insult to injury, business identity theft can have crippling federal tax consequences. The following article summarizes the problem of business taxpayer identity theft, the methods employed by thieves and the means by which you can protect your business.

Business v. Individual Identity Theft
Businesses generally deal with larger transactions, have larger account balances and credit lines than individual taxpayers, and can set up and accept merchant credit card payments with numerous banks. Business information regarding tax identification numbers, profit margins and revenues, officers, and even officer salaries are often public and easily accessed. Yet, remedies and enforcement tend to focus more on individual identity theft. Thus, business identity theft can be more lucrative and arguably less dangerous to engage in than individual taxpayer identity theft.

Methods Used
Only some of the many business identity theft schemes relate to tax. Nevertheless, such schemes can be devastating for businesses, resulting in massive employment tax liabilities for fictitious wages or huge deficiencies in reported income. Identity thieves can use a business’s employer identification number (EIN) to initiate merchant card payment schemes, file false tax returns and even generate hundreds of fake Form W-2s in furtherance of more individual taxpayer identity theft.

How They Do It
Business identity theft can require less effort than individual identity theft because less information is required to establish a business or open a line of credit than is required of individuals. In general, the thief needs to obtain the business’s EIN, which is easy to acquire. Common sources for an EIN include:
Filings made to the Securities and Exchange Commission (SEC) such as the Form 10-K, which includes the EIN on its first page

Public databases that enable users to search for business entities sometimes also display the employer’s EIN

Websites specifically designed to search for EINs, such as EINFinder.com

A business website that openly displays the EIN

Forms W-2, W-9 or 1099
Once a thief has the EIN, he or she may file reports with various state Secretaries of State to change registered business addresses and registered agents’ names, or even appoint new officers. In some cases the thief will apply for a line of credit using this new information. Since the official secretary of state records display the changed information, potential creditors will not be alerted to the fraud. In one case, however, criminals changed the names of a business’s officers by filing with the secretary of state’s office and then sold the whole business to a third party. Once an identity thief has established a business name, EIN and address information, he or she has all the basic tools necessary to perpetrate business identity theft.

Best Practices
Businesses should review their banks’ policies and recommendations regarding fraud protection. They should know what security measures are being offered and, if commercially reasonable, take them. In a recent U.S. district court case from Missouri, the court found that a bank was not liable for a fraudulent $440,000 wire transfer because it had offered the business a commercially reasonable security procedure, and the business had rejected it. The decision cited Uniform Commercial Code Article 4A-202(b), as adopted by the Missouri Code. Many other states have also adopted the UCC, meaning victimized businesses might find themselves without recourse against their banks in the event of a large fraudulent wire transfer.

Other easy preventative measures that businesses can take include monitoring their financial accounts on a daily basis. They should follow up immediately on any suspicious activity. Businesses should also enroll in email alerts so that they would immediately be apprised of any change in your account name, address or other information.

A business should also monitor the information on its business registration frequently, whether or not the business is active or inactive. Often businesses that close do not go through the formal dissolution process, which terminates all of the corporate authority. They instead let the charter be forfeited by the secretary of state. These forfeited charters may be easily reinstated and hijacked by identity thieves.

After Fraud Occurs
If it is too late, and a fraudulent transaction has occurred in your business’s name, take immediate action by contacting your bank, creditors, check verification companies and credit reporting companies. Report the crime to your local law enforcement authorities and your state’s secretary of state business division. Finally, whenever possible, memorialize all correspondence in writing and keep it in your records.

Contact Doeren Mayhew for more information.

Alternative Dispute Resolution: A Remedy to Costly Contract Litigation

Alternative dispute resolution (ADR) has been touted as the remedy to settling contractor conflicts in the courts. For starters, it’s significantly less costly and timely. But the greatest benefit is that there are truly no “winners” or “losers” in these disputes, as the goal is to find a common ground between the parties involved. It’s no wonder that ADR is commonly used in the construction industry. Read below for more about what ADR involves and how it can be applied in disputes.

ADR: Is it Truly Effective?

ADR is a technique used to assist disagreeing parties in coming to some sort of agreement, short of the traditional legal system. For decades, studies have proven ADR is not simply a fad, but a reliable, less costly process, leaving room to maintain respectable business relationships.

In spite of the statistics, many construction associations have steered clear of mandating ADR procedures in contracts. However, contractors and subcontractors have taken the initiative to individually implement ADR clauses. There are three ADR techniques commonly used by contractors:

1. Non-binding neutral
2. Mediation
3. Arbitration

Non-Binding Neutral

A non-binding neutral is a person or person(s) impartial to the dispute at hand. They hear each respective party’s position, access all of the evidence and legal concerns, and conduct interviews to gather further information when needed. This process enables neutrals to advise both parties on the way to resolve the dispute.

Mediation

Whereas a non-binding neutral provides an opinion on how the dispute should be settled, mediators go a step beyond to help the parties come to an agreement. This process typically involves one or a group of mediators and can be held in an informal, public setting. This can cut court costs and fees, as mediation does not require mandating circumstances or time consumption. It can take a few weeks to come to an agreement in a mediation process, versus the months and even years to settle a court case.

Arbitration

If the above non-binding and mediation processes are ineffective in your particular circumstance, arbitration is another common process that is considered to be more efficient, private and direct. Different from a non-binding approach, arbitration leads to a final, binding decision that results in an “award.” Of the three most common forms of ADR, arbitration is most similar to traditional litigation. Judges can be hired to help facilitate resolution. The parties are given the power to determine the issues to discuss in litigation and even how the award is to be given, which is transferred in writing. Arbitrators overseeing construction legal proceedings are usually a panel of three experts with extensive industry-related experience.

Do the Research and Check Your Facts

Having a solid case is critical to any dispute, and facts are the key. Financial advisors and accountants can be very influential in this process, known as fact-finding. Usually performed in tandem with ADR, a “fact-finder” will either work as a neutral or partial contact, disseminating information and relaying it through reports. Their goal is to assist the parties in reaching a settlement or solution through the bare facts.

Finding the Best Neutral

It takes effort and thorough research to find a neutral (otherwise referred to as mediator or arbitrator) to navigate the issues and find resolutions to complex faults in a project. However, this step is critical in finding the right person to advise your case and reap results. The American Arbitration Association (AAA), along with several industry advisory committees, has established criteria to help you make the best selection. Your neutral should have acquired most or all of the following:

• At least 10 years of construction industry experience
• Mandatory AAA training for dispute avoidance and resolution
• Strong sense of neutrality and commitment to impartiality and objectivity
• Effective judicial skills
• Reputation for neutrality work
• Availability and accessibility to guide this process quickly and with ease

The AAA’s website, www.ADR.org, offers a list of mediators and arbitrators who are trusted in the industry.

While no project will ever be perfect, many disputes can be avoided by simply creating open communication of the responsibilities and resolution options within your contracts with clients and subcontractors.

Contact Doeren Mayhew for more information.

Could You Be Overpaying Your Vendors?

For most businesses, vendors are part of day-to-day operations, generating thousands of payments to suppliers and service providers over the course of a year. Does your business have the internal controls in place to detect whether you may be overpaying?

Overpayment to vendors is a very real risk that could impact your organization’s bottom line and result in significant financial loss if not quickly detected and resolved. A variety of errors can result in overpayment, including miscalculations, duplicate payments, neglected rebates and allowances, misunderstanding of contract terms, tax overpayment, and charges for goods and services not received.

To avoid financial loss, you may want to consider a vendor audit. A vendor audit is an external audit of invoices, contracts and other related data from your suppliers. Other best practices for detecting overpayment include:

Consider the “most favored nation” clause, which is a contract provision in which a seller agrees to give the buyer the best terms it makes available to any other buyer. During a recent Doeren Mayhew audit, the vendor refused to reveal invoices distributed to other clients, which triggered our client to question whether the supplier was in compliance with the agreement.

Compare estimates and invoices to ensure charges are accurately reflected. Often times estimates are used to create contracts, and buyers may forget to review actual invoices versus estimated prices.

Ensure vendor invoices are being regularly monitored. Look out for double costs that may not catch your eye as a mistake.

Conduct select testing on larger suppliers, some of which may tend to increase prices each year. A Doeren Mayhew client was assured a discount for each purchase under a three-year contract with a major automobile parts supplier. Our vendor audit specialists found that third-year prices were significantly higher.

Review contracts before renewing them and take note of percentage-of-fee increases.

Frequently gain bids from other vendors to ensure you’re receiving market prices.

Regularly review vendor charges for expenses to ensure there are no duplicates, such as charged meals to hotels and meal receipts for the same day.

Verify that audit clauses are written into vendor contracts and purchase orders, so that auditors may obtain and review any documents related to your contract and agreement. Should you need a vendor audit, this clause will ensure auditors can review all data necessary to provide an accurate report.

Strong vendor relationships are essential to your business, and while they are trusted suppliers, miscommunication and missteps may sometimes occur. Vendor audits not only help improve supplier relationships, but help detect fraud and improve systems and controls both in your business as well as the vendor’s.

Contact Doeren Mayhew for more information.

New Medicare Tax: Watch Out for Withholding Issues

Under the recent health care act, starting in 2013, taxpayers with earned income over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) must pay an additional 0.9 percent Medicare tax on the excess earnings. Employers are required to withhold the tax beginning in the pay period in which wages exceed $200,000 for the calendar year — without regard to the employee’s filing status or income from other sources. So, it’s possible your employer:

• Will withhold the tax even though you aren’t liable for it. You can’t ask your employer to stop withholding the tax, but you can claim a credit on your income tax return.
• Won’t withhold the tax even though you are liable for it. You may use a Form W-4 to request additional income tax withholding to cover your liability and avoid interest and penalties.

Contact Doeren Mayhew for more information.

Foreign Corrupt Practices: It Shouldn’t Happen to Any Business

According to the New York Times, in September 2005, a senior Wal-Mart lawyer received an email from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico. The former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance.

Fast forward to 2013, when Wal-Mart recently disclosed in its SEC filing the ongoing impact of its alleged violations of the Foreign Corrupt Practices Act (FCPA), including:

• Expanded investigations into additional allegations regarding potential violations of the FCPA in foreign markets such as Brazil, China and India
• Lawsuits filed by several Wal-Mart shareholders
• The threat of settlements, fines, penalties, injunctions, cease-and-desist orders, debarment or other relief, and criminal convictions and/or penalties
• Costs in the ongoing review and investigations
• Increased media and governmental interest

A recent study by Deloitte Forensics Center reports that only 29 percent of executives surveyed were very confident their company’s anti-corruption program would prevent or detect corrupt activities. This low level of confidence indicates that many businesses may need to evaluate and upgrade their anti-corruption efforts. All businesses, public and private, that operate in foreign markets need to take steps to avoid having to make a similar disclosure.

In general, the FCPA:

• Prohibits U.S. businesses (incorporated or unincorporated “domestic concerns”), residents and citizens, and foreign companies listed on a U.S. stock exchange from paying or offering to pay, directly or indirectly, money or anything of value to a foreign official to obtain or retain business.
• Requires any company (including foreign companies) with securities traded on a U.S. exchange or required to file periodic reports with the SEC to:
• Keep books and records that accurately reflect business transactions.
• Maintain effective internal controls.
• Contains an Anti-Bribery provision that includes broad third-party payment provisions under which the actions of foreign subsidiaries and other third parties (including agents, consultants, distributors, joint venture partners, etc.) can result in FCPA liability to a parent company or the entity engaging the third party. Even without actual knowledge that an improper payment has been made, a company can be found guilty of a violation.

Contact Doeren Mayhew for more information.

Vacation Homes: Are You Enjoying the Tax Benefits?

Vacation homes offer owners many tax breaks similar to those for primary residences, as well as the opportunity to earn tax-advantaged and even tax-free income from a certain level of rental income. The value of vacation homes are also on the rise again, offering an investment side to ownership that can ultimately be realized at a beneficial long-term capital gains rate.

Homeowners can deduct mortgage interest they pay on up to $1 million of “acquisition indebtedness” incurred to buy their primary residence and one additional residence. If your total mortgage indebtedness exceeds $1 million, you can still deduct the interest you pay on your first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.

As a vacation homeowner, you don’t need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. You can deduct interest paid on a loan secured by a timeshare, yacht or motor home so long as it includes sleeping, cooking and toilet facilities.

Below are two ways to account for your vacation home:

1. Capital gain on vacation properties.

Gains from selling a vacation home are generally taxed as long-term capital gains on Schedule D. As with a primary residence, basis includes the property’s contract price (including any mortgage assumed or taken “subject to”), nondeductible closing costs (title insurance and fees, surveys and recording fees, transfer taxes, etc.), and improvements. “Adjusted proceeds” include the property’s sale price, minus expenses of sale (real estate commissions, title fees, etc.). The maximum tax on capital gain is now 20 percent, with an additional 3.8 percent net investment tax depending upon income level. There’s no separate exclusion that applies when selling a vacation home as there is up to $500,000 for a primary residence.

2. Vacation home rentals.

Many vacation home owners rent those homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.

• Income from rentals totaling not more than 14 days per year is nontaxable.
• Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E of Form 1040. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.
• Owners who use their home personally for fewer than 14 days and less than 10 percent of the total rental days can treat the property as true “rental” property, which entitles them to a greater number of deductions.

Own a vacation home, or thinking about buying one? Contact our tax advisors in Michigan, Houston or Ft. Lauderdale to ensure you enjoy the associated tax benefits.

Tax Reform Proposal: What Lies Ahead

President Obama recently said that he wants a tax reform/deficit reduction package by August, and lawmakers now have many proposals to consider, including House and Senate blueprints as well as the Simpson-Bowles Plan. Whatever is adopted, it is sure to impact your tax strategy and planning.

All of the proposals have one common goal: reduce the federal government’s approximate $16 trillion federal budget deficit. Many of the plans propose to cut spending and raise revenues. Let’s take a look at how some of the tax proposals would affect individuals, businesses and others.

Individuals

• New individual tax rates have been set at 10, 15, 25, 28, 33, 35 and 39.6 percent for 2013 and beyond.
• The House GOP budget blueprint would consolidate the current seven individual income tax rate brackets into two rates. The lower rate would be 10 percent with the goal of a top rate of 25 percent.
• A proposed minimum 30 percent tax on individuals with incomes exceeding $1 million (full phase in at $2 million). These taxpayers would also be limited to reduce their tax liability to a maximum of 28 percent.
• Potential to limit contributions and accruals on tax-favored retirement accounts, including IRAs, qualified plans, tax-sheltered annuities and deferred compensation plans.
• Across-the-board limits on itemized deductions claimed by the top 2 percent of income earners, by capping the rate at which itemized deductions and other tax preferences reduce tax liability, a percentage of income cap or a specific dollar cap.
• Repeal of the 3.8 percent net investment income surtax and the 0.9 percent, alternative minimum tax and additional Medicare tax.
• Increase in federal estate tax by raising the estate tax at a maximum rate of 45 percent with a $3.5 million exclusion (not indexed for inflation) after 2017.

Businesses

President Obama says he supports lowering the corporate tax rate in exchange for businesses giving up unspecified tax preferences. These could include tax incentives for fossil fuels, the Code Sec. 199 deduction and more. The House blueprint would reduce the top corporate tax rate to 25 percent, paid for by tax savings elsewhere. The Simpson-Bowles plan also calls for a reduction in the corporate tax rate, contingent on businesses relinquishing unspecific tax preferences.

President Obama and the House and Senate budgets also propose a number of incentives to encourage business spending and job creation, including:

• Enhanced small business expensing (Obama and House at different amounts)
• Permanent research tax credit (Obama, House and Senate)
• Temporary tax credit for increasing payrolls (Obama)
• Special incentives for manufacturing in the United States (Obama)

Another key difference among the competing proposals: the House budget plan would repeal the Patient Protection and Affordable Care Act, including all of its business tax-related provisions, such as employer-shared responsibility provisions, the medical device excise tax, and more. The Senate approved a non-binding resolution to repeal the medical device tax but is not expected to go along with repeal of the entire Affordable Care Act.

Internet Sales Tax

In May, the Senate is expected to approve the Marketplace Fairness Act (H.R. 743). The bill gives states the authority to compel online merchants, no matter where they are located, to collect sales tax at the time of a transaction. However, states would be able to compel collection of sales tax only after they have simplified their sales tax laws, such as by adopting the Streamlined Sales and Use Tax Agreement. The bill has the support of President Obama. However, the bill may not pass in the House, where many lawmakers view it as a tax increase.

Looking Ahead

Tax reform coupled with deficit reduction is starting to gain momentum. Whether this will lead to legislation this summer or before year-end is unclear. As long as the key players continue their discussions, there is the chance of tax reform.

Doeren Mayhew will keep you posted of developments.

How to Use Your 2012 Tax Return for Future Planning

Did you owe tax on your 2012 tax return? Did you receive a sizeable refund? Or, conversely, did you receive a smaller refund than you expected? Taking another look at your tax return from this past year and making a few changes could put more money in your pocket in the short term. And by examining your investments as they are reported on your tax return, you may be able to strategize for the long-term. Start by looking at six key elements:

1. Federal Withholding

If you received a large tax refund, it might be time to adjust the amount of tax the federal government withholds from your paycheck. Although next year your refund check may not be as large, you will have the advantage of seeing a larger sum deposited directly into your pocket every month. To adjust your withholding, fill out and sign a Form W-4, and submit it to your employer. Do this in cases where your adjustments to income, exemptions and deductions remain relatively steady from year-to-year, and where the government consistently is required to give you a large refund.

2. State Withholding

Some people are entirely exempt from state tax, but it is withheld from their paychecks nevertheless. At the end of each year, they may include the amount of their state taxes in their itemized deductions, but then receive a refund they have to declare as income in the next year. This problem particularly applies to active duty military families, many of whom are posted in states other than their state of residency. Military families can check with their state income tax authority to see if there is an appropriate form that can be completed and filed to exempt them from withholding. A higher adjusted gross income (AGI), even if it is subsequently reduced by itemized deductions, can erode other adjustments to income, such as a deduction for student loans, IRA contributions, higher education expenses and more because of certain AGI caps on these benefits.

3. Tax Rates and Adjusted Gross Income

As you may have heard, Congress allowed the Bush-era tax cuts to expire for higher-income earners. That means joint filers with more than $450,000 of adjusted gross income ($400,000 for single individuals) are now in the 39.6 percent tax bracket. Taxpayers at this level of income or above are also subject to a higher long-term capital gains tax rate: 20 percent, up from 15 percent paid by other taxpayers.

In addition, for tax years beginning in 2013, the 33 percent tax bracket for individual taxpayers ends at $398,350 for married individuals filing joint returns, heads of households and single individuals. If you were hovering near the bottom of the 35 percent bracket for the 2012 tax year, then you might want to see if you can readjust your income so that you fall within the 33 percent category.

Higher-income taxpayers also have two new taxes to worry about for 2013 and beyond. Joint-filing taxpayers with modified adjusted gross income of $250,000 ($200,000 for single filers) are also subject to the 3.8 percent surtax on net investment income and a .9 percent additional Medicare tax. Does your adjusted gross income for last year approach these figures? Is it on the edge of the income brackets? Will stock market increases this year put you over the top of those income thresholds? If so, it may be time to find ways to reduce your income for 2013.

4. Investments

At some point in your efforts over the years to accumulate a savings nest egg, you will need to consider diversification, the process of putting your money in the right kind of investment vehicles to satisfy your personal risk strategy and achieve your goals. Looking at your tax return will help you decide whether the investments you now have are the right ones for you. For example, if you are in a high tax bracket and need to diversify away from common stocks, investing in tax-exempt bonds might help, especially if you have state income taxes to worry about, too.

5. Medical Costs

Should you be taking advantage of the medical expense deduction? Many people assume that with the 10 percent adjusted gross income floor on medical expenses now imposed for tax years starting in 2013 (7.5 percent for seniors) that it doesn’t pay for them to keep track of expenses to test whether they are entitled to itemize. But with the premiums for certain long-term care insurance contracts now counted as a medical expense, some individuals are discovering that along with other health insurance premiums, deductibles and timing of elective treatments, the medical tax deduction may be theirs for the taking.

6. Retirement Planning

Don’t forget to protect for eventualities. Are you maximizing the amount that Uncle Sam allows you to save tax-free for retirement? A look at your W-2 for the year, and at the retirement contribution deductions allowed in determining adjusted gross income, should tell you a lot. Should your spouse set up his or her own retirement fund, too? Are you over-invested in tax-deferred retirement plans? If so, you may lose a significant amount of your nest egg to tax after retirement.

Look to our dedicated Tax Group to help you plan properly for maximizing future tax savings. For more information, contact our Doeren Mayhew.

Is Your Institution Prepared for New Escrow Requirements for Higher-Priced Mortgages?

Beginning June 1, 2013, financial institutions originating higher-priced mortgage loans (HPMLs) on residential structures will have to extend escrow account durations for consumers under a final rule issued by the Consumer Financial Protection Bureau (CFPB).

Driven by the CFPB’s mission to strengthen consumer protection, the new rules are designed to help:

• Prevent consumers from purchasing homes they can’t afford due to taxes and insurance not being taken into account at the time of purchase
• Avoid unexpected cost shock for consumers by spreading tax and insurance costs over a year instead of a burdensome lump sum
• Minimizing foreclosure rates for first-lien, higher-priced mortgages

What Are the New Rule Changes?

The final rule, resulting from amendments to the Truth in Lending Act (Regulation Z) established by the Dodd-Frank Act, lengthens the time frame for which an escrow account should be maintained for HPMLs. It will now be extended to a minimum of five years, up from the current requirement of one year. Consumers will have the opportunity to remove the escrow after this five-year time allotment if they have not been delinquent in payments and the loan value is less than 80 percent of the original property value.

Be aware that having additional years of the escrow account will impact the costs associated to extending maintenance.

Although the new rule will apply to many, not every creditor and transaction will be impacted by the escrow account modifications. The rule defines and expands upon several exemptions, including:

Transaction Exemptions – The following transactions are exempt from obliging to the statute’s escrow requirements:

• Loans on cooperative properties
• Construction loans that do not include permanent financing
• Temporary or bridge loans with terms less than 12 months
• Reverse mortgages
• Subordinate liens
• Open-end credit (home equity lines of credit)
• Insurance premiums purchased by the consumer, but not required by the creditor

Creditor Exemptions – Creditors who operate in predominantly rural or underserved areas are exempt if they:

• Made more than 50 percent of first-lien covered transactions in rural or underserved counties
• Combined with affiliates, completed less than 500 first-lien loans in the preceding calendar year
• Have total assets fewer than $2 billion, adjusted annually for inflation
• Generally do not escrow for mortgage obligations they or their affiliates currently service
• Hold the consumer’s loan in their portfolio

Existing Exemption Expansion – Expanding on existing exemptions related to escrowing insurance premiums for condominium units, the new rule includes an exemption for instances where an individual’s policy is covered by a master insurance policy.

How to Prepare for the Changes

With any regulatory change come adjustments. To avoid penalties and potential punitive damage claims by consumers related to ineffectively implementing the regulation, be proactive in accommodating the change at your financial institution by:

• Developing and implementing systematic changes and business practices to ensure escrow accounts for HPMLs are not waived in the first five years
• Training impacted departments and staff on the new requirements and related new procedures
• Evaluating the need to outsource escrowing to a third-party servicing firm to help minimize internal resources’ time and related cost

Even if your institution is exempt from this rule, but still escrows for higher-priced mortgages today, you may need to rethink your current escrow program to accommodate applications received on or after June 1, 2013, to remain exempt.

To learn more about what you can do to prepare for the regulatory change, contact Doeren Mayhew.