Tax, consulting and business planning professional
The Forest and the Trees



 Attentive service and professional advice for challenging times.


News and Commentary


First Novel Published!

Coyote Point Casino, a lighthearted take on Indian Gaming, identity politics, California's celebrity culture, and the decline of the American university, published by Christopher Matthews Publishing.


Also available on Amazon.


2012 Year-End Tax Planning Overview

Every November, as part of my continuing professional education requirement, I attend an all-day tax seminar, where tax law changes and recent court decisions are explained and discussed.

Normally, this conference is about as exciting as a root canal, but this year, because of all the uncertainties surrounding the impending “fiscal cliff,” the mood was more like a convention of psychics discussing the impending Mayan apocalypse.

For the CURRENT 2012 tax year, the changes from 2011 are relatively minor, and shouldn’t affect most of you, with the singular exception of California Proposition 30 which RETROACTIVELY increased the highest marginal tax rates for individuals with taxable incomes in excess of $250,000 and couples with incomes in excess of $500,000 from one to three percent. Because this change was retroactive to the beginning of the year, you may have been under-withheld on your California income taxes (or paid in less than the required quarterly estimates). If you think you may be subject to this increase, contact me before the end of the year so that the shortfall can be calculated.

As far as the situation for 2013 and beyond is concerned, your guess is as good as mine. As of this writing, Congress has yet to act on proposals to prevent a “worst-case” scenario, but presumably some action will be taken before December 31. Nonetheless, the consensus view is that in all likelihood, EFFECTIVE tax rates will increase for MOST taxpayers, either from an increase in marginal tax rates, or the reduction or the elimination of certain credits, deductions and benefits.

For that reason, the normal tax planning strategy of deferring income until next year and accelerating deductions to the current tax year should probably be reversed.

For example, if you are sitting on investments with sizable gains, it might be a good idea to sell them before year end and take the gains in 2012. If these investments are still sound, you can repurchase the same shares and effectively “lock in” a higher basis. The “wash sale” rules that apply to losses do NOT apply to gains, so there will be no 30-day waiting period for the repurchase.

Similarly, you may want to prepay medical and educational expenses to take advantage of current tax provisions that may not be available next year.

If you have any questions about your own situation, please contact me before year end.

The following is a partial list of credits and deductions that have changed or expired in 2012: 

  • Educator expenses: $250 maximum deduction for professional educators is no longer available for 2012
  • Tuition deduction for those who itemize. The American Opportunity (“Hope”) Tax Credit is still available for 2012, however.
  • State and local general sales tax deduction for those who itemize
  • Deduction for mortgage insurance premiums
  • Nonrefundable credits can no longer be used to offset alternative minimum tax (AMT)
  • Temporary AMT exemption amounts in effect for the 2010 and 2011 are set to expire (unless Congress passes an “AMT Patch” before the end of the year)
  • Nonbusiness energy credits
  • IRA-to-Charity exclusion

For businesses and investors in income property, these include: 

  • Sec. 179 and 15-year depreciation allowances for certain real estate investments
  • Sec. 179 depreciation $500,000 maximum reduced to $139,000
  • 100% bonus depreciation allowed for certain assets reduced to 50% in 2012
  • Enhanced transportation fringe benefits
  • Reduced built-in gains holding period
  • Research credit
  • Enhanced charitable deductions for computer, book and food inventories
  • S corporation basis adjustment for charitable contributions
  • Work-Opportunity Credit (non-veterans only)
  • 100% exclusion for small business stock (Sec. 1202)
  • Sec. 181 expensing of film and television production costs
  • 7-year motorsports depreciation

If you think any of these might apply to you, contact me if you have any questions.

I anticipate sending out organizers to my returning clients before the end of January. When you receive yours, please take extra care in preparing it and providing all supporting documentation.  

Finally, if you want to file early because you’re expecting a sizable refund or for any other reason, please let me know before mid-January so I can schedule your return for filing before the usual March-April tsunami.

Thanks once again for letting me be your “tax guy,” and best wishes for the holidays.

Yours very truly,

Rick Zalon, CPA


Impact of Early Distributions


Taxpayers may sometimes find themselves in situations when they need to withdraw money from their retirement plan early. What they may not realize is that that transaction may mean a tax impact when they file their return.

Here are 10 facts from the IRS about the tax implications of an early distribution from your retirement plan.

1. Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.

2. Early distributions are usually subject to an additional 10 percent tax.

3. Early distributions must also be reported to the IRS.

4. Distributions you roll over to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.

5. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.

6. If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.

7. If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.

8. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.

9. There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home (up to $10,000), for certain medical or educational expenses, or if you are totally and permanently disabled.

10. For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions, see IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at or by calling 800-TAX-FORM (800-829-3676).


  • Publication 575, Pensions and Annuities (PDF 227K)
  • Publication 590, Individual Retirement Arrangements (IRAs) (PDF 449K)
  • Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax Favored Accounts (PDF 72K)
  • Form 5329 Instructions (PDF 40K)


Year-End Tax Letter

I hope that 2011 has, thus far, been a happy and prosperous one for you and your family.


In terms of legislation, 2011 was a quiet year on the tax front. Barring any last-minute retroactive congressional mischief, rates, deductions and credits are virtually unchanged from 2010.


This means that the usual year-end strategy of deferring gains and income, taking losses, and accelerating deductions holds true.


This doesn’t mean that the taxing agencies at the federal and state level have been idle, however. Both the IRS and the California Franchise Tax Board have new requirements and compliance programs, so here’s a “heads-up” for what to look out for this year.


Sales of stock and securities: If you sold stock or securities through a broker, the broker will issue you a revised form 1099-B. This form is intended to report all the details of each sale including the sales price and cost basis (usually what you paid for the stock) for determining capital gains and losses. This requirement is new, however, and the form provided by the broker will not yet capture all sales.


Most of you have provided excellent detail of your trading activities in the past, and in many cases you’ve been maintaining your own spreadsheets. Please continue to do so, but also please provide copies of any 1099-Bs and all other information provided by your broker that can help establish cost-basis.


Merchant charges, 1099-Ks: Those of you who are in business, rent property, or sell merchandise online will likely receive a new form – Form 1099-K. This form will report credit card or other merchant payments (PayPal for example) over specified amounts. Be on the lookout for this new form and please provide me with any 1099-Ks you receive.


This is no doubt part of a concerted effort by the taxing authorities to focus on the growing problem of unreported income. As this is the first year for this requirement, in all likelihood only PayPal vendors and Amazon affiliates will be affected, but if you maintain a website that serves as a portal for various forms of e-commerce, you will face this reporting requirement in 2012.


Beginning with your 2012 returns, you will have to report sales figures separately, on two separate lines: one for merchant cards and third party payments (generally, credit cards and remittances reported on Form 1099-K); and the other for cash and check payments. This requirement will apply to sole proprietorships (Schedule C) or rental properties (Schedule E), or other business returns (corporation, partnership, etc.).


You will therefore need to start tracking payments by type beginning in January, 2012. If you need any help setting up your accounting systems and procedures to separately track these amounts, please let me know.


Foreign accounts: The reporting requirements for assets held overseas are increasing convoluted, and the penalties for failure to report them are becoming increasingly draconian. Not all foreign holdings must be reported. If, for example you hold stock in a foreign company through a U.S. broker, foreign holdings are already reported. If you directly hold any other types of foreign assets, including bank accounts and securities accounts, please let me know, and if you have any doubt as to whether any of your assets are “foreign” for the purposes of compliance with current requirements, please contact me.


Property tax statements: California’s Franchise Tax Board has stated that they will require parcel numbers and other information pertaining to property taxes for any taxpayer who deducts property tax. Although this requirement isn’t slated to take effect in 2012, I would like you to provide me with copies of your property tax statements this year so I can do a preliminary review of them in preparation for the new requirement.


Use tax: California has long required payment of use tax if you purchase goods out-of-state that are used, consumed or stored in California, when no sales tax is collected on the purchase. Most such purchases are currently made over the internet or by mail order from out-of-state sellers. Taxpayers who don’t hold a California seller’s permit have the option of reporting the use tax on their California income tax returns , and in the past, reporting had been “voluntary,” and therefore ineffective. 


This is no longer the case. You now will have two options. You can total all untaxed out-of-state purchases and I will compute the use tax, or I can use  an official “lookup table” and report an amount due based on your California adjusted gross income. For example, if your adjusted gross income is $75,000, your use tax “due” will be $49. If your purchases are both over and under $1,000, you may elect to total just the purchases that are over $1,000 and I can compute the use tax on those and use the lookup tables for the small purchases.


New tax benefits


Not all the news is bad. There are a number of tax benefits that I can use to reduce your tax liability for this year and the future. There are new tax credits for employers providing health insurance, for small businesses increasing the number of employees, and an amnesty for payroll taxes, which has some major flaws, but could benefit your company.


Roth IRA conversions are still available and can be a useful way to reduce the tax you’ll pay later when you need the money.


Other changes


There are a number of other changes that might affect your tax return this year, including new rules for those who do not wish to file electronically, and a mandatory electronic payment requirement for higher income California individuals.


I anticipate sending out organizers to my returning clients before the end of January. When you receive yours, please take extra care in preparing it and providing all supporting documentation.  


Finally, if you want to file early because you’re expecting a sizable refund or for any other reason, please let me know before mid-January so I can schedule your return for filing before the March-April tsunami.


Thanks once again for letting me be your “tax guy,” and best wishes for the holidays.


Yours very truly,


Rick Zalon, CPA



The Higher Education Bubble