I’ll admit it. I love watching the NFL Draft.

More than that, I’m addicted to anything about the NFL Draft. I haven’t missed watching the draft in at least 15 years. There are a few reasons for it of course:

• Hope springs eternal, and if you’re a Detroit Lions fan like me, hope is all you have.  The NFL draft represents each team that isn’t on top’s opportunity to bring on board the few players it needs to make the Super Bowl run that is almost….almost….reachable.
• There is always the interest in seeing where your favorite college players will end up. Being a Michigan State University alum, I always want to see where the Spartans will be playing. Those teams become my favorite teams AFTER Detroit.
• Drama.  The NFL Draft is a miniseries made for men.  Who will draft who?  Will there be  a trade so a team can move up to get the player they covet? Will some team surprise and select someone in the 1st round that you never heard of? Will there be a player like Brady Quinn, expected to be a top 10 pick, who falls precipitously down the draft? The NFL invites several top picks to New York so that when they are selected, they can take part in a photo op with their new team’s jersey. You’ll see crying, unrestrained happiness, bitter disappointment, you name it.  It is quite compelling TV.
• The background stories about some of the potential draftees.  I remember hearing about Michael Oher, the subject of the movie The Blind Side (an Academy Award Winner) during the 2009 NFL draft, 7 months before the movie was released. If you haven’t seen the movie yet, rent it. It’s truly a must see. Every draft has stories of guys who beat the odds to become NFL players.

The NFL draft is perenially ESPN’s #1 rated broadcast every year, so I am not alone.  Recently it has been moved from Saturday morning to primetime on Thursday and Friday night. The entire first night is devoted to just the 1st round. The draft takes place in Radio City Music Hall. I have been in NYC on draft day and did walk by RCMH the morning of the draft.  There were hundreds of fans from all of the different teams, outside.  Some had tickets to go in and watch and others were just there to commune. I did chat with a few fans from other teams and found that so many people were just like me – hopelessly hopeful that the draft will bring success to their favorite team.

So no calls on Thursday night, April 26th. I won’t be picking up the phone.

“With the 23rd pick in the 2012 draft, the Detroit Lions select…..”

I cannot wait!

If you area parent with college-bound children, you are concerned with setting up a financial plan to fund future college costs. If your children are already college age, your goal is to pay for current or imminent college bills. I’d like to address both of these concerns by suggesting several approaches that seek to take maximum advantage of tax benefits to minimize your expenses. (Please note that the following suggestions are strictly related to tax benefits. You may have non-tax-related concerns that make the suggestions inappropriate. One concern would be the impact on financial aid. Please consult an expert on college financial aid to consider the impact of any of these strategies).

Planning for college expenses. In some cases, transferring ownership of assets to children can save taxes. You and your spouse can transfer up to $26,000 in 2012 in cash or assets to each child with no gift tax consequences. And for 2012, if your child isn’t subject to the “kiddie tax,” he or she is taxed on income from assets entirely at his or her lower tax rates—as low as 10% (or 0% for long-term capital gain).

However, where the kiddie tax applies, the child’s investment income above $1,900 for 2012 is taxed at your tax rates and not the child’s rates. The kiddie tax applies if: (1) the child hasn’t reached age 18 before the close of the tax year or (2) the child’s earned income doesn’t exceed one-half of his or her support and the child is age 18 or is a full-time student age 19 to 23.

A variety of trusts or custodial arrangements can be used to place assets in your children’s names. Note, it’s not enough just to transfer the income, e.g., dividend checks, to your children. The income would still be taxed to you. You must transfer the asset that generates the income to their names.

Tax-exempt bonds. Another way to achieve economic growth while avoiding tax is simply to invest in tax-exempt bonds or bond funds. Interest rates and degree of risk vary on these, so care must be taken in selecting your particular investment. Some tax-exempts are sold at a deep discount from face and don’t carry interest coupons. Many are marketed as college savings bonds. A small investment in these so-called zero coupon bonds can grow into a fairly sizable fund by the time your child reaches college age.“Stripped” municipal bonds (munis) provide similar advantages.

Series EE U.S. savings bonds. Series EE U.S. savings bonds offer two tax-savings opportunities when used to finance your child’s college expenses: first, you don’t have to report the interest on the bonds for federal tax purposes until the bonds are actually cashed in; and second, interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the bond proceeds are used for qualified college expenses.

To qualify for the tax exemption for college use, you must purchase the bonds in your own name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees, etc., not room and board. If only part of the proceeds are used for qualified expenses, then only that part of the interest is exempt.

If your adjusted gross income (AGI) exceeds certain amounts, the exemption is phased out. For bonds cashed in during 2012, the exemption begins to phase out when joint AGI hits $109,250 for joint return filers ($72,850 for singles) and is completely phased out if your AGI is at $139,250 ($87,850 for singles).

Qualified tuition programs. A qualified tuition program (also known as a 529 plan) allows you to buy tuition credits for a child or make contributions to an account set up to meet a child’s future higher education expenses. Qualified tuition programs can be established by state governments or by private education institutions.

Contributions to these programs aren’t deductible. The contributions are treated as taxable gifts to the child, but they are eligible for the annual gift tax exclusion ($13,000 for 2012). A donor who contributes more than the annual exclusion limit for the year can elect to treat the gifts as if they were spread out over a five-year period.

The earnings on the contributions accumulate tax-free until the college costs are paid from the funds. Distributions from qualified tuition programs are tax-free to the extent the funds are used to pay qualified higher education expenses. Distributions of earnings that aren’t used for qualified higher education expenses will be subject to income tax plus a 10% penalty tax.

Coverdell education savings accounts. You can establish Coverdell ESAs (formerly called education IRAs) and make contributions of up to $2,000 for each child under age 18. This age limitation doesn’t apply to a beneficiary with special needs, defined as an individual who because of a physical, mental or emotional condition, including learning
disability, requires additional time to complete his or her education.

The right to make these contributions begins to phase out once your AGI is over $190,000 on a joint return ($95,000 for singles). If the income limitation is a problem, the child can make a contribution to his or her own account.

Although the contributions aren’t deductible, funds in the account aren’t taxed, and distributions are tax-free if spent on qualified education expenses. If the child doesn’t attend college, the money must be withdrawn when the child turns 30, and any earnings will be subject to tax and penalty, but unused funds can be transferred tax-free to a Coverdell ESA of another member of the child’s family who hasn’t reached age 30. These requirements that the child or member of the child’s family not have reached 30 do not apply to an individual with special needs.

The above are just some of the tax-favored ways to build up a college fund for your children. If you wish to discuss any of them, or other alternatives, please call.

Paying college expenses.
You may be able to take a credit for some of your child’s tuition expenses. There are also tax-advantaged ways of getting your child’s college expenses paid by others.

Tuition tax credits. You can take an American Opportunity tax credit of up to $2,500 per student for the first four years of college—a 100% credit for the first $2,000 in tuition, fees, and books, and a 25% credit for the second $2,000. You can take a Lifetime Learning credit of up to $2,000 per family for every additional year of college or graduate school—a 20% credit for up to $10,000 in tuition and fees.

The American Opportunity tax credit is 40% refundable. That means that you can get a refund if the amount of the credit is greater than your tax liability. For example, someone who has at least $4,000 in qualified expenses and who would thus qualify for the maximum credit of $2,500, but who has no tax liability to offset that credit against, would qualify for a $1,000 (40% of $2,500) refund from the government.

Both credits are phased out for higher-income taxpayers. The American Opportunity tax credit is phased out for couples with income between $160,000 and $180,000, and for singles with income between $80,000 and $90,000. The Lifetime Learning credit is phased out (for 2012) for couples with income between $104,000 and $124,000, and for singles with income between $52,000 and $62,000. The phase-out range for the Lifetime Learning credit is adjusted annually for inflation.

Only one credit can be claimed for the same student in any given year. However, a taxpayer is allowed to claim an American Opportunity tax credit or a Lifetime Learning credit for a tax year and to exclude from gross income amounts distributed (both the principal and the earnings portions) from a Coverdell education savings account for the same student, as long as the distribution isn’t used for the same educational expenses for which a credit was claimed.

Scholarships. Scholarships are exempt from income tax, if certain conditions are satisfied. The most important are that the scholarship must not be compensation for services, and it must be used for tuition, fees, books, supplies, and similar items (and not for room and board).

Although a scholarship is tax-free, it will reduce the amount of expenses that may be taken into account in computing the Hope and Lifetime Learning credits, above, and may therefore reduce or eliminate those credits.

In an exception to the rule that a scholarship must not be compensation for services, a scholarship received under a health professions scholarship program may be tax-free even if the recipient is required to provide medical services as a condition for the award.

Employer educational assistance programs. If your employer pays your child’s college expenses, the payment is a fringe benefit to you, and is taxable to you as compensation, unless the payment is part of a scholarship program that’s “outside of the pattern of employment.” Then the payment will be treated as a scholarship (if the other requirements for scholarships are satisfied).

Tuition reduction plans for employees of educational institutions. Tax-exempt educational institutions sometimes provide tuition reductions for their employees’ children who attend that educational institution, or cash tuition payments for children who attend other educational institutions. If certain requirements are satisfied, these tuition reductions are exempt from income tax.

College expense payments by grandparents and others. If someone other than you pays your child’s college expenses, the person making the payments is generally subject to the gift tax, to the extent the payments and other gifts to the child by that person exceed the regular annual (per donee) gift tax exclusion of $13,000 for 2012. Married donors who consent to split gifts may exclude gifts of up to $26,000 for 2012.

However, if the other person pays your child’s school tuition directly to an educational institution, there’s an unlimited exclusion from the gift tax for the payment. The relationship between the person paying the tuition and the person on whose behalf the payments are made is irrelevant, but the payer would typically be a grandparent.

The unlimited gift tax exclusion applies only to direct tuition costs. There’s no exclusion (beyond the normal annual exclusion) for dormitory fees, board, books, supplies, etc. Prepaid tuition payments may qualify for the unlimited gift tax exclusion under certain circumstances.

Student loans. You can deduct interest on loans used to pay for your child’s education at a post-secondary school, including some vocational and graduate schools. (This is an exception to the general rule that interest on student loans is personal interest and, therefore, not deductible.) The deduction is an above-the-line deduction (meaning that it’s available even to taxpayers who don’t itemize). The maximum deduction is $2,500. However, for 2012, the deduction phases out for taxpayers who are married filing jointly with AGI between $125,000 and $155,000 (between $60,000 and $75,000 for single filers).

Some student loans contain a provision that all or part of the loan will be cancelled if the student works for a certain period of time in certain professions for any of a broad class of employers—e.g., as a doctor for a public hospital in a rural area. The student won’t have to report any income if the loan is canceled and he performs the required services. There’s also no income to report if student loans are repaid or forgiven under certain federal or state programs for health care professionals. These are exceptions to the general rule that if a loan or other debt you owe is canceled, you must report the cancellation as income.

Bank loans. The interest on loans used to pay educational expenses is personal interest which is generally not deductible (unless you qualify for the deduction for education loan interest, described above). However, if the loan is “home equity indebtedness,” and interest on the loan is “qualified residence interest,” the interest is deductible for regular income tax purposes, although not for alternative minimum tax purposes. If interest is deductible as qualified residence interest, it can’t be deducted as education loan interest.

Borrowing against retirement plan accounts. Many company retirement plans permit participants to borrow cash. This option may be an attractive alternative to a bank loan, especially if your other debt burden is high. However, the loan must carry an interest rate equal to the prevailing commercial rate for similar loans, and, unless you qualify for the deduction for education loan interest (described above), there’s no deduction for the personal interest paid. Moreover, unless strict requirements are satisfied, a loan against a retirement account is treated as a premature distribution (withdrawal) that’s subject to regular income tax and an additional penalty tax.

Withdrawals from retirement plan accounts. IRAs and qualified retirement plans represent the largest cash resource of many taxpayers. You can pull money out of your IRA (including a Roth IRA) at any time to pay college costs without incurring the 10% early withdrawal penalty that usually applies to withdrawals from an IRA before age 591/2 . However, the distributions are subject to tax under the usual rules for IRA distributions.

Some qualified plans either don’t permit withdrawals or restrict them. For example, a 401(k) cash-or-deferred plan may allow distributions if the participant has an immediate and heavy financial need and lacks other resources to meet that need. IRS regulations name a college education as such a need. To the extent they represent previously untaxed dollars and earnings, amounts withdrawn from a retirement plan are fully subject to tax and are also hit by a 10% penalty tax if they are made before the participant reaches age 591/2 . (Note, however, that you cannot roll over a 401(k) plan “hardship” distribution into an IRA to set up a later penalty-free withdrawal to pay college costs.)

A younger plan participant may avoid triggering the penalty tax by annuitization payouts from an IRA or a SEP. This method doesn’t work for 401(k) type plans. The strategy works because the penalty tax doesn’t apply if annual or more frequent withdrawals are made in substantially equal payments over the life or life expectancy of the taxpayer (or the joint lives or joint life expectancies of the taxpayer and designated beneficiary).

Not all of the above breaks may be used in the same year, and use of some of them reduces the amounts that qualify for other breaks. So it takes planning to determine which should be used in any given situation. If you would like to discuss one or more of the above planning or payment possibilities, or any other alternatives, in more detail, please call.

While all contributions must be substantiated, contributions of $250 or more require a written receipt from the charity. If you donate property valued at more than $500,  additional requirements apply. 

General rules. For a contribution of cash, check, or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the donee organization showing its name, plus the date and amount of the contribution.  It’s not sufficient to maintain other written records, such as a log of contributions.

For a contribution of property other than money, you generally must maintain a receipt from the donee organization showing its name, the date and location of the contribution, and a detailed description (but not the value) of the property. You need not obtain  a receipt for a property donation, however, if circumstances make obtaining a receipt impracticable. In that case, you must maintain a reliable written record of the contribution. The information required in such a record depends on factors such as the type  and value of property contributed.

Stricter substantiation requirements apply in the case of charitable contributions with a value of $250 or more. No charitable deduction is allowed for any contribution of $250 or more unless you substantiate the contribution by a contemporaneous written  acknowledgement of the contribution by the donee organization. You must have the receipt in hand by the time you file your return (or by the due date, if earlier) or you won’t be able to claim the deduction.

The acknowledgement must include the amount of cash and a description (but not value) of any property other than cash contributed, whether the donee provided any goods or services in consideration for the contribution, and a good faith estimate of the value  of any such goods or services. If you received only “intangible religious benefits,” such as attending religious services, in return for your contribution, the receipt must say so. This type of benefit is considered to have no commercial value and so  doesn’t reduce the charitable deduction available.

If you make separate contributions of less than $250, you won’t be subject to the requirement to get a written receipt, even if the sum of the contributions to the same charity total $250 or more in a year. Also, if you have contributions withheld from your  wages, the deduction from each payment of wages is treated as a separate contribution for purposes of the $250 threshold.

In general, if the total charitable deduction you claim for non-cash property is more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return or the deduction is not allowed. In general, you are required to obtain  a qualified appraisal for donated property with a value of more than $5,000, and to attach an appraisal summary to the tax return. A qualified appraisal isn’t required for publicly-traded securities for which market quotations are readily available. A partially  completed appraisal summary and the maintenance of certain records are required for (1) nonpublicly-traded stock for which claimed deduction is greater than $5,000 and no more than $10,000, and (2) certain publicly-traded securities for which market quotations  are not readily available. A qualified appraisal is required for gifts of art valued at $20,000 or more. IRS may also request that you provide a photograph.

If an item has been appraised at $50,000 or more, you can ask IRS to issue a “Statement of Value” which can be used to substantiate the value.

Recordkeeping for contributions for which you receive goods or services.If you receive goods or services, such as a dinner or theater tickets, in return for your contribution, your deduction is limited to the excess of what you gave over the  value of what you received. For example, if you gave $100 and in return received a dinner worth $30, you can deduct $70. But your contribution is fully deductible if:

•         you received free, unordered items from the charity that cost no more than ($9.70 in 2011 ($9.60 in 2010) in total;
•         you gave at least $48.50 in 2011 ($48.00 in 2010) and received only token items (bookmarks, key chains, calendars, etc.) that bear the charity’s name or logo and cost no more than $9.70 in 2011 ($9.60 in 2010) in total; or
•         the benefits that you received are worth no more than 2% of your contribution and no more than $97 in 2011 ($96 in 2010).

If you made a contribution of more than $75 for which you received goods or services, the charity must give you a written statement, either when it asks for the donation or when it receives it, that tells you the value of those goods or services.  Be sure  to keep these statements.

Cash contribution made through payroll deductions. A contribution that you make by withholding from your wages may be substantiated by a pay stub, Form W-2, or other document furnished by your employer that shows the amount withheld for the  purpose of a payment to a charity. You can substantiate a single contribution of $250 or more with a pledge card or other document prepared by the charity that includes a statement that it doesn’t provide goods or services in return for contributions made  by payroll deduction.

The deduction from each wage payment of wages is treated as a separate contribution for purposes of the $250 threshold.

Substantiating contributions of services.Although you can’t deduct the value of services you perform for a charitable organization, some deductions are permitted for out-of-pocket costs you incur while performing the services. You should keep  track of your expenses, the services you performed and when you performed them, and the organization for which you performed the services. Keep receipts, canceled checks, and other reliable written records relating to the services and expenses.

As discussed above, a written receipt is required for contributions of $250 or more. This presents a problem for out-of-pocket expenses incurred in the course of providing charitable services, since the charity doesn’t know how much those expenses were.  However, you can satisfy the written receipt requirement if you have adequate records to substantiate the amount of your expenditures, and get a statement from the charity that contains a description of the services you provided, the date the services were  provided, a statement of whether the organization provided any goods or services in return, and a description and good-faith estimate of the value of those goods or services.

Please call me if you have any questions about these rules. Together we can make sure that you’ll get all the deductions to which you’re entitled come next filing deadline.

If you are planning to make a relatively substantial contribution to a charity, college,  etc., you should consider donating appreciated stock from your investment portfolio instead  of cash. Your tax benefits from the donation can be increased and the organization will be just as happy to receive the stock.

This tax planning tool is derived from the general rule that the deduction for a donation of property to charity is equal to the fair market value of the donated property. Where  the donated property is “gain” property, the donor does not have to recognize the gain on  the donated property. These rules allow for the “doubling up,” so to speak, of tax benefits:  a charitable deduction, plus avoiding tax on the appreciation in value of the donated property.

Example: Tim and Tina are twins, each of whom attended Yalvard University. Each  plans to donate $10,000 to the school. Each also owns $10,000 worth of stock in ABC,  Inc. which he or she bought for just $2,000 several years ago.

Tim sells his stock and donates the $10,000 cash. He gets a $10,000 charitable deduction, but must report his $8,000 capital gain on the stock.

Tina donates the stock directly to the school. She gets the same $10,000 charitable  deduction and avoids any tax on the capital gain. The school is just as happy to receive the stock, which it can immediately sell for its $10,000 value in any case.

Caution: While this plan works for Tina in the above example, it will not work if the stock has not been held for more than a year. It would be treated as “ordinary income  property” for these purposes and the charitable deduction would be limited to the stock’s  $2,000 cost.

If the property is other ordinary income property, e.g., inventory, similar limitations  apply. Limitations may also apply to donations of long-term capital gain property that is  tangible (not stock), and personal (not real estate).

Finally, depending on the amounts involved and the rest of your tax picture for the  year, taking advantage of these tax benefits may trigger alternative minimum tax concerns.

If you’d like to discuss this method of charitable giving more fully, including the  limitations and potential problem areas, please give me a call

I base a lot of the consulting I do on simple principles which then are applied  with specificity to the particular client.  I have 10 that I work with on a regular basis.  Well, 10-10-10 was last year so that doesn’t really work today.  But I think I can come up with an 11th for the sake of this post, but you’ll have to wait to the end to know what it is.  I’ll say just a few words about each principle as I will be expanding on each in detail as the weeks go on.  Here are the 11:

1. You must have a compelling offer – At the root of all business is the idea that you sell something for a price. Is your offer to customers compelling? If not, think about getting one.
2. You must communicate with customers constantly – Want referrals? Want to keep the customers you have? Communicate with them all the time and you’ll get what you want.
3. You must have a referral system – It isn’t enough to ask for them. It’s about how you ask for them, being sure you do it consistently and at the right time.
4. You must survey your customers – This includes asking in person and passively. Not all customers will tell you what they really think to your face.
5. You must have documented systems – The best way to have effective products and services delivered efficiently, is to have everyone doing it the way that is best…every time.
6. You must open your monthly bank statement – This is one financial move you don’t offload. Open the statement, ask questions and follow up and you’ll be doing a lot to prevent theft.
7. You must know your customer lifetime value – How much is each customer worth to you? When you know it, you’ll do a lot more to keep them and market much more aggressively to get them.
8. You must know the highest and best use of your time – For sure it isn’t working the cash register or doing the books. If someone can do it 80% as well as you can, let them do it!
9. You must have a problem resolution program – When mistakes happen, everyone in your business should know what to do, and it should be impressive.
10. You must have an advisory board – Either formally or informally, you must collaborate with others to help you solve your business challenges. You simply must have people to advise you.
11. You must implement – That’s a great business plan. Would have been nice if you implemented it. Failure to implement is why most businesses fail to achieve their objectives.

So there are the 11. The difference between success and failure usually lies in maximizing the value that the ownership brings to the table.  Owners must create leverage with their time. Managing their own time, those of their key people and having everyone on the same page is critical to success.  By sticking to these principles and having laser-like focus to them can bring about the results you desire.

Happy 11-11-11 to all but particularly to our brave folks in uniform. You are the reason we have the freedom and liberty to succeed. You’ll always be loved.

Larry

On November 1^st, 1983, I walked in the door at
Janz & Knight CPAs (J&K) in Bloomfield Hills, Michigan to begin what
had been so far to date, a 28 year adventure. Its cliché but I really can’t
believe it has been that long. A few memories from that first year:

-I first shared an office with another CPA who had 5 or 6
years of experience. I remember observing him on a ten-key calculator typing in
numbers so fast it was intimidating. I thought there was no way I would survive
if I needed to be that fast. I was a horrible typist and no work experience or
education involved using a calculator like that.  As it turns out, gaining skill on the ten-key
didn’t take long and to this day, though I am not called on to use it often, I
am blazing quick at using a calculator. Probably was those 1^st 7 or
8 years when we had no computers on our desks and all the tax returns we did
were by hand. A very interesting time indeed.

-I had never had a sit down job in my life prior to working
at J&K. I was a stock boy, paper boy, bowling lane attendant, grocery
bagger and cashier and a cook. I was completely unprepared for the experience
of tax season.  While you engage with
clients a lot, there are times during tax season where you just have to slug it
out. Slug it out means sit at your desk and grind out tax returns. That first
tax season was to me brutal because I simply could not stay seated. I shifted
in my seat, sat backwards, used a conference room for a change in environment,
anything to get by. I made it through that first tax season. When the next tax
season came, I was officially “broken.” I could sit at my desk for whatever
time was needed to get the job done. For the record, I am still an excellent
bagger of groceries.

-It became clear to me that making my mark (standing out) as
an accountant meant being willing to put myself out there and speak on behalf
of my firm. Barely a year at the firm I took the opportunity to speak on taxes
to a group of… piano teachers. I really was far from an expert on taxes at that
point, but I did know I knew more than my audience. And that was enough. From
that point forward I was sort of the unofficial spokesperson for my firm,
largely because I was the only one willing to speak publicly. 28 years later
and I am still nervous every time when I’ve spoken. I’ve been on TV several
times, radio, seminars, you name it, and the nerves never go away. The point is
that I’ve enjoyed a unique opportunity as a CPA because I was willing to take
chances and do things my colleagues weren’t.

So the message of this post is to tell you that there are
always opportunities to bring excitement, fun and notoriety to whatever you do.
You have to be willing to make yourself uncomfortable and get out there. The
rewards so far exceed the cost because you get to have a voice, an opinion and
you learn a lot about yourself, which translates into personal growth.

It has been a pretty cool 28 years and yes, I am up for 28
more.

IRS has announced the 2012 cost-of-living adjustments (COLAs) for retirement plans. Most of the limits related to pension and other retirement plans, which are adjusted by reference to Code Sec 415(d) are changed  for 2012, since the increase in the cost-of-living  index met the statutory thresholds that trigger their adjustment.

The following plan limits are increased effective Jan. 1, 2012:

• Defined benefit plans. The limitation on the annual benefit under a defined benefit plan under Code Sec.  415(b)(1)(A) is increased from $195,000 to $200,000. For participants who separated from service before Jan. 1, 2010, the 100% of average high-three-years’  compensation under Code Sec.  415(b)(1)(B) for 2012 is computed by multiplying the participant’s 2011 compensation limitation by 1.0327 in order to  reflect changes in the cost-of-living  index from the quarter ended Sept. 30, 2008 to the quarter ended September  30, 2011. For participants who separated from service during 2010 or 2011, the participant’s  2011 compensation limitation is multiplied  by  1.0376 in order to reflect changes in the cost-of-living index from the quarter ended September 30, 2010, to the quarter  ended Sept. 30, 2011.
• Defined contribution plans. The limit on the annual additions to a participant’s defined contribution account under Code Sec.  415(c)(1)(A) is increased from $49,000 to $50,000.
• Annual compensation limit. The maximum amount of annual compensation that can be taken into account for various qualified plan purposes, including Code Sec.  401(a)(17), Code Sec.  404(l), Code Sec.  408(k)(3)(C), and Code Sec.  408(k)(6)(D)(ii), is increased  from $245,000 to $250,000.
• Elective deferrals. The Code Sec.  402(g)(1) limit on the exclusion for elective deferrals described in Code Sec.  402(g)(3)  is increased from $16,500  to $17,000.
• Deferred compensation plans. The limit on deferrals under Code Sec.  457(e)(15), concerning deferred compensation plans of state and local governments and tax-exempt organizations, is increased from $16,500 to $17,000.
• Key employee in top-heavy plan. The dollar limit under Code Sec.  416(i)(1)(A)(i), relating to the definition of key employee in a top-heavy plan  is increased from $160,000 to $165,000.
• ESOP five-year distribution period. The dollar amount under Code Sec.  409(o)(1)(C)(ii) for determining the maximum account balance in an employee  stock ownership plan (ESOP) subject to a five-year distribution period is increased from $985,000 to  $1,015,000, while the dollar amount used to determine the lengthening of the five-year distribution period is increased from $195,000 to $200,000.
• Highly compensated employee. The dollar limit used in defining a highly compensated employee under Code Sec.  414(q)(1)(B) is increased from $110,000 to $115,000.
• Government plans. The annual compensation limitation under Code Sec.  401(a)(17) for eligible participants in certain governmental plans that, under  the plan as in effect on July 1, ’93 allowed  COLAs to the plan’s compensation limit under Code Sec.  401(a)(17) to  be taken into account, is increased from $360,000 to $375,000.

The following plan limits are unchanged:

…   Catch-up contributions. The dollar limit under Code Sec.  414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a  plan described in Code Sec.  401(k)(11) or Code Sec.  408(p) for  individuals aged 50 or  over is $5,500.  The dollar limit under Code Sec.  414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Code Sec.  401(k)(11) or Code Sec.  408(p) for  individuals  aged 50 or over remains at $2,500.

…   SEPs. The compensation limit under Code Sec.  408(k)(2)(C) (amount of compensation above which an employee who meets other requirements must be able to participate in the employer’s SEP plan) remains at  $550.

…   SIMPLE accounts. The maximum amount of compensation an employee may elect to defer under Code Sec.  408(p)(2)(E) for a SIMPLE plan remains at $11,500.