IRS audits of higher income taxpayers increase The IRS audited one in eight individuals with incomes over $1
million in fiscal year (FY) 2011. While the overall audit coverage
rate for individuals remained steady at just over one percent, the
a...
Tax gap grows to $450 billion; compliance rate holds steady The "gross tax gap," or the amount of tax owed to the U.S.
government that is not paid on time, climbed from $345 billion in
Tax Year (TY) 2001 to $450 billion in TY 2006, the IRS has
reported. (Be...
MN - Tax evasion involving recreational vehicles investigated The Minnesota Department of Revenue is investigating cases
involving the evasion of motor vehicle sales taxes required to be
paid on recreational vehicles. The tax evasion cases in...
The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.
The IRS has released much-anticipated temporary and proposed regulations on the capitalization of costs incurred for tangible property. They impact how virtually any business writes off costs that repair, maintain, improve or replace any tangible property used in the business, from office furniture to roof repairs to photocopy maintenance and everything in between. They apply immediately, to tax years beginning on or after January 1, 2012.
These so-called “repair regulations” are broad and comprehensive. They apply not only to repairs, but to the capitalization of amounts paid to acquire, produce or improve tangible property. They are intended to clarify and expand existing regulations, set out some bright-line tests, and provide some safe harbors for deducting payments.
The regulations are an ambitious effort to address capitalization of specific expenses associated with tangible property. The regulations affect manufacturers, wholesalers, distributors, and retailers—everyone who uses tangible property, whether the property is owned or leased. The rules provide a more defined framework for determining capital expenditures.
Most taxpayers will have to make changes to their method of accounting to comply with the temporary regulations and will need to file Form 3115. Taxpayers who filed for a change of accounting method following the issuance of the 2008 proposed regulations will probably have to change their accounting method again.
The IRS has promised to issue two revenue procedures that will provide transition rules for taxpayers changing their method of accounting, including the granting of automatic consent to make the change. The regulations require taxpayers to make a Code Sec. 481(a) adjustment; this means that taxpayers will have to apply the regulations to costs incurred both prior to and after the effective date of the regulations.
The new regulations provide rules for materials and supplies that can be deducted, rather than capitalized. The rules provide several methods of accounting for rotable and temporary spare parts, and allow taxpayers to apply a de minimis rule so that they can deduct materials and supplies when they are purchased, not when they are consumed.
Costs to acquire, produce or improve tangible property must be capitalized. The regulations address moving and reinstallation costs, work performed prior to placing property into service, and transaction costs. Generally, costs of simply removing property can be deducted, but costs of moving and then reinstalling property may have to be capitalized.
To determine whether a cost incurred for property is an improvement, it is necessary to determine the unit of property. Generally, the larger the unit of property, the easier it is to deduct expenses, rather than have to capitalize them. The regulations provide detailed rules for determining the unit of property for buildings and for non-building tangible property. For buildings, the IRS identified eight component systems as separate units of property, requiring more costs to be capitalized. However, the new rules also provide for deducting the costs of property taken out of service, by treating the retirement as a disposition.
The new regulations require virtually every business to review how repairs, maintenance, improvements and replacements are handled for tax purposes, with both mandatory and optional adjustments made to past treatment as appropriate.
Please feel free to call this office for a more targeted explanation of how these new regulations impact your business operations.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.
The fate of the employee-side payroll tax cut along with a host of tax extenders and other expired provisions could be decided in coming weeks. A conference committee of House and Senate members is negotiating a full-year extension of the payroll tax cut and could add some or all of the tax extenders to a final package. Lawmakers also could extend the payroll tax cut without acting on any tax incentives.
Payroll tax cut
The Temporary Payroll Tax Cut Continuation Act of 2011 extended the employee-side OASDI tax cut through the end of February 2012. The employee-share of OASDI taxes is 4.2 percent for the two-month period, rather than 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent for the two month period. Self-employed individuals also benefit from a two percentage point reduction in OASDI taxes.
Unless extended, the employee-share of OASDI taxes is scheduled to revert to 6.2 percent after February 29, 2012. The White House and the leaders of the two parties in Congress agree that the payroll tax cut should be extended a full-year. They disagree, however, how to pay for the extension; even if it should be paid for at all.
Congress could extend the two-month payroll tax cut through the end of 2012 without paying for it. The 2011 payroll tax cut was unfunded. Congress appropriated to the Social Security trust funds amounts equal to the reduction in payroll tax revenues. The 2011 payroll tax cut was estimated by the Congressional Budget Office cost approximately $111 billion. Extending it through the end of 2012 is estimated to cost just as much if not more.
House Republicans reportedly have proposed a number of revenue raisers to offset the cost of extending the payroll tax cut through the end of 2012. One GOP proposal would extend the current pay freeze for employees of the federal government. Another GOP proposal would require higher-income individuals to pay increased Medicare premiums.
One possible revenue raiser, increasingly under discussion by Democrats, is a change in the taxation of so-called carried interest. Current law generally taxes carried interest as capital gains and not as ordinary income. Past efforts to change the tax treatment of carried interest have failed to pass Congress.
Extenders
The so-called tax extenders, popular but temporary tax provisions, expired at the end of 2011. Many taxpayers are surprised to learn that their particular tax break, whether it be the state or local sales tax deduction, the teachers’ classroom expense deduction, or the research tax credit, are temporary. The extenders have been routinely revived many times in the past. This year, however, could be different. Faced with record federal budget deficits, lawmakers may decide to extend only some of the expired provisions.
President Obama’s FY 2013 proposals
President Obama is expected to release his fiscal year (FY) 2013 federal budget proposals in early February, which will reignite debate over the Bush-era tax cuts. President Obama is expected to urge Congress to allow the Bush-era tax cuts to expire after 2012 for higher-income taxpayers, which President Obama defines as individuals earning more than $200,000 or families earning more than $250,000. In recent weeks, there has been speculation that President Obama may revisit those definitions in his FY 2013 budget, possibly raising the amounts.
Few Capitol Hill observers expect Congress to take any action on the Bush-era tax cuts before the November elections. Instead, Congress may take up some of President Obama’s other proposals. As in past budgets, President Obama will likely propose to extend some energy tax breaks for individuals and businesses, extend tax incentives for education and provide some targeted-tax breaks to businesses. President Obama has also promised to introduce proposals to encourage U.S. companies to “insource” jobs at home.
On some issues, such as energy and education, lawmakers may find common ground but negotiations are likely to go down to the wire. Our office will keep you posted of developments.
If you have any questions about the payroll tax cut, tax extenders or the various tax proposals under discussion, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.
The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.
Previous disclosure programs
The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. Both programs offered reduced penalties in exchange for full disclosure. In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.
Reopened program
The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011. The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.
The reopened program requires taxpayers to file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as pay accuracy-related and/or delinquency penalties. Additionally, taxpayers must pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. In comparison, the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.
In limited circumstances, taxpayers may qualify for a 12.5 percent penalty or a five percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.
The requirements for the five percent penalty are very narrow. The IRS has explained that taxpayers must meet four conditions: (1) The taxpayer did not open or cause the account to be opened; (2) the taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address; (3) except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (4) the taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).
The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.
Quiet disclosures
One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.
Critics
The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.
If you have any questions about the reopened offshore voluntary disclosure program, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.
Taxpayers with children should be aware of the numerous tax breaks for which they may qualify. Among them are: the dependency exemption, child tax credit, child care credit, and adoption credit. As they get older, education tax credits for higher education may be available; as is a new tax code requirement for employer-sponsored health care to cover young adults up to age 26. Employers of parents with young children may also qualify for the child care assistance credit.
Dependency Exemption
In addition to the personal exemption an individual taxpayer may take for him or herself to reduce taxable income (Line 42 on Form 1040), that taxpayer may also take an exemption for each qualifying dependent who has lived with the taxpayer for more than half of the tax year. A dependent may be a natural child, step-child, step-sibling, half-sibling, adopted child, eligible foster child, or grandchild, and generally must be under age 19, a full-time student under age 24, or have special needs. The amount of the exemption is the same as the taxpayer’s personal exemption, $3,700 for the 2011 tax year and $3,800 for the 2012 tax year.
Child Tax Credit
Parents of children who are under age 17 at the end of the tax year may qualify for a refundable $1,000 tax credit. The credit is a dollar-for-dollar reduction of tax liability, and may be listed on Line 51 of Form 1040. For every $1,000 of adjusted gross income above the threshold limit ($110,000 for married joint filers; $75,000 for single filers), the amount of the credit decreases by $50.
Child and Dependent Care Credit
If a taxpayer must pay for childcare for a child under age 13 in order to pursue or maintain gainful employment, he or she may claim up to $3,000 of his or her eligible expenses for dependent care. If one parent stays home full-time, however, no child care costs are eligible for the credit.
Adoption Credit
Taxpayers who have incurred qualified adoption expenses in 2011 may claim either a $13,360 credit against tax owed or a $13,360 income exclusion if the taxpayer has received payments or reimbursements from his or her employer for adoption expenses. For 2012, the amount of the credit will decrease to $12,650, and in 2013 to $5,000.
Higher Education Credits
There are two education-related credits available for 2012: the American Opportunity credit and the lifetime learning credit. The American Opportunity credit amount is the sum of 100 percent of the first $2,000 of qualified tuition and related expenses plus 25 percent of the next $2,000 of qualified tuition and related expenses, for a total maximum credit of $2,500 per eligible student per year. The credit is available for the first four years of a student's post-secondary education. The credit amount phases out ratably for taxpayers with modified AGI between $80,000 and $90,000 ($160,000 and $180,000 for joint filers). The lifetime learning credit is equal to 20 percent of the amount of qualified tuition expenses paid on the first $10,000 of tuition per family. The phaseout for 2012 ranges from $52,000 to $62,000 ($104,000 to $124,000 for joint filers). Parents also find tax relief in saving for college though Coverdell accounts, section 529 plans and specified U.S.. savings bonds.
Extended Health Care Coverage
Effective since September 23, 2010, the new health care law requires plans to provide coverage for children until they attain age 26. Further, effective on or after March 30, 2010, children under the age of 27 are considered dependents of a taxpayer for purposes of the general exclusion from income for reimbursements for medical care expenses of an employee, spouse, and dependents under an employer-provided accident or health plan. Therefore, a plan must provide coverage to a child who is still a dependent up to age 26; but can do so up to age 27 without income tax consequences. A child includes a son, daughter, stepson, or stepdaughter of the taxpayer; a foster child placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction; and a legally adopted child of the taxpayer or a child who has been lawfully placed with the taxpayer for legal adoption.
Child Care Assistance Credit (for businesses)
Employers may take up to $150,000 of the eligible costs of providing employees with child care assistance as tax credit. These costs may include a portion of the costs of acquiring, constructing, improving, and operating a child care facility.
If you have any questions about these provisions and how they may benefit you, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.
The Treasury Department is authorized to offset a taxpayer’s tax refund to satisfy certain debts. A spouse who believes that his or her portion of the refund should not be used to offset the debt that the other spouse owes may request a refund from the IRS.
Offset
If an individual owes money to the federal government because of a delinquent debt, the Treasury Department’s Financial Management Service (FMS) can offset that individual's tax refund (and certain other federal payments) to satisfy the debt. The debtor will be notified in advance of the offset.
A taxpayer’s refund may be reduced by FMS and offset to pay:
Past-due child support
Federal agency non-tax debts
State income tax obligations, or
Certain unemployment compensation debts owed a state.
FMS advises taxpayers by written notice of an offset. FMS has explained that the notice will reflect the original refund amount, the taxpayer’s offset amount, the agency receiving the payment, and the address and telephone number of the agency. FMS will notify the IRS of the amount taken from your refund.
Form 8379
If a taxpayer filed a joint return and is not responsible for the debt of his or her spouse, the taxpayer may request his or her portion of the refund by filing Form 8379, Injured Spouse Allocation, with the IRS. Form 8379 may be filed with the original return or by itself after the taxpayer is aware of the offset.
The IRS has instructed taxpayers filing Form 8379 by itself to attach a copy of all Forms W-2 and W-2G for both spouses, and any Forms 1099 showing federal income tax withholding to Form 8379. Failure to attach these items may result in a delay in processing by the IRS.
The IRS has reported on its website that it generally processes Forms 8379 that are filed after a joint return has been filed in approximately eight weeks. The timeframe for processing a Form 8379 that is attached to a joint return is approximately 11 weeks (14 weeks if the joint return is filed on paper).
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.
As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of February 2012.
February 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 25–27.
February 3
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates January 28–31.
February 8
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 1–3.
February 10
Employees who work for tips. Employees who received $20 or more in tips during November must report them to their employer using Form 4070.
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 4–7.
February 15
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 8–10.
Monthly depositors. Monthly depositors must deposit employment taxes for payments in January.
February 17
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 11–14.
February 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 15–17.
February 24
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 18–21.
February 29
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 22–24.
March 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 25–28.
March 7
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates February 29–March 2.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
The IRS recently announced that inflation is increasing many dollar amounts in the Tax Code for 2012. For taxpayers, the inflation adjustments may help reduce their overall tax liability in 2012.
The IRS recently announced that inflation is increasing many dollar amounts in the Tax Code for 2012. For taxpayers, the inflation adjustments may help reduce their overall tax liability in 2012.
Inflation adjustments
Many provisions in the Tax Code are required to be adjusted annually for inflation. These include various deductions, exemptions and exclusion amounts. The tax law also requires that the individual income tax brackets be adjusted annually for inflation. Low inflation in 2009 and 2010 resulted in many of the provisions experiencing no increases for 2010 and 2011.
Next year is different. In October, the IRS announced that inflation is running at just over 3.8 percent. In response, the IRS adjusted a number of amounts in the Tax Code upward for 2012.
Retirement accounts
401(k) plans. For 2012, the maximum amount an individual can contribute tax-free to a 401(k) plan increases $500 from $16,500 to $17,000. However, some 401(k) plans limit maximum contributions to levels below the ceiling in the Tax Code.
IRAs. The deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of households who are covered by a workplace retirement plan and whose modified adjusted gross incomes fall within certain ranges. For 2012, the income phaseout range starts at $58,000 and ends at $68,000, up from $56,000 and $66,000, respectively, for 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phaseout range for 2012 starts at $92,000 and ends at $112,000, up from $90,000 and $110,000, respectively, for 2011. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out for 2012 if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000, respectively, for 2011.
Roth IRAs are subject to similar rules. The AGI limit for maximum Roth IRA contributions for a married couple filing a joint return for 2012 is $173,000, an increase of $4,000 from 2011. The AGI limitation for all other taxpayers (other than married taxpayers filing separate returns) increases from $107,000 for 2011 to $110,000 for 2012.
Saver’s credit. The Code Sec. 25B credit rewards eligible individuals with a tax credit for contributing to a retirement plan or an IRA. For 2012, the AGI limit for the “saver’s credit” increases for single individuals to $28,750, an increase of $500 from 2011. The AGI limit for married couples filing joint returns increases from $56,500 for 2011 to $57,500 for 2012.
Individual income tax brackets
Inflation also impacts the individual income tax rate brackets (which are 10, 15, 25, 28, 33, and 35 percent, respectively, for 2011 and 2012). Indexing of the income tax rate brackets effectively lowers tax bills by including more of an individual’s income in lower brackets.
More inflation adjustments
Standard deduction. Taxpayers who elect not to itemize deductions use the standard deduction amount. The standard deduction increases by $500 for married couples filing a joint return from $11,400 for 2011 to $11,900 for 2012. The standard deduction for single individuals increases from $5,700 for 2011 to $5,950 for 2012.
Personal exemption. Taxpayers may claim a personal exemption deduction (and an exemption deduction for each person they claim as a dependent). The amount of the personal exemption and the dependency exemption increases from $3,700 for 2011 to $3,800 for 2012. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) repealed the personal exemption phaseout for higher income taxpayers for 2011 and 2012.
Estate tax. The 2010 Tax Relief Act provided that the basic exclusion amount for determining the amount of the unified credit against estate tax for estates of decedents dying after December 31, 2009 is $5 million. The $5 million amount is adjusted for inflation for tax years beginning after December 31, 2011. For 2012, the inflation-adjusted amount is $5,120,000.
Gift tax exclusion. For 2012, you can give up to $13,000 to any person without incurring gift tax. Married couples can gift up to $26,000 tax-free to any person. There is no limit on the number of individuals you can make the $13,000 ($26,000) gift. The $13,000 and $26,000 amounts are unchanged from 2011.
If you have any questions about these or other inflation adjustments, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), which it announced this fall, the distinction between independent contractors and employees has become a “hot issue” for many businesses. The IRS has devoted considerable effort to rectifying worker misclassification in the past, and continues the trend with this new program. It is available to employers that have misclassified employees as independent contractors and wish to voluntarily rectify the situation before the IRS or Department of Labor initiates an examination.
In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), which it announced this fall, the distinction between independent contractors and employees has become a “hot issue” for many businesses. The IRS has devoted considerable effort to rectifying worker misclassification in the past, and continues the trend with this new program. It is available to employers that have misclassified employees as independent contractors and wish to voluntarily rectify the situation before the IRS or Department of Labor initiates an examination.
The distinction between independent contractors and employees is significant for employers, especially when they file their federal tax returns. While employers owe only the payment to independent contractors, employers owe employees a series of federal payroll taxes, including Social Security, Medicare, Unemployment, and federal tax withholding. Thus, it is often tempting for employers to avoid these taxes by classifying their workers as independent contractors rather than employees.
If, however, the IRS discovers this misclassification, the consequences might include not only the requirement that the employer pay all owed payroll taxes, but also hefty penalties. It is important that employers be aware of the risk they take by classifying a worker who should or could be an employee as an independent contractor.
“All the facts and circumstances”
The IRS considers all the facts and circumstances of the parties in determining whether a worker is an employee or an independent contractor. These are numerous and sometimes confusing, but in short summary, the IRS traditionally considers 20 factors, which can be categorized according to three aspects: (1) behavioral control; (2) financial control; (3) and the relationship of the parties.
Examples of behavioral and financial factors that tend to indicate a worker is an employee include:
The worker is required to comply with instructions about when, where, and how to work;
The worker is trained by an experienced employee, indicating the employer wants services performed in a particular manner;
The worker’s hours are set by the employer;
The worker must submit regular oral or written reports to the employer;
The worker is paid by the hour, week, or month;
The worker receives payment or reimbursement from the employer for his or her business and traveling expenses; and
The worker has the right to end the employment relationship at any time without incurring liability.
In other words, any existing facts or circumstances that point to an employer’s having more behavioral and/or financial control over the worker tip the balance towards classifying that worker as an employee rather than a contractor. The IRS’s factors do not always apply, however; and if one or several factors indicate independent contractor status, but more indicate the worker is an employee, the IRS may still determine the worker is an employee.
Finally, in examining the relationship of the parties, benefits, permanency of the employment term, and issuance of a Form W-2 rather than a Form 1099 are some indicators that the relationship is that of an employer–employee.
Conclusion
Worker classification is fact-sensitive, and the IRS may see a worker you may label an independent contractor in a very different light. One key point to remember is that the IRS generally frowns on independent contractors and actively looks for factors that indicate employee status.
Please do not hesitate to call our offices if you would like a reassessment of how you are currently classifying workers in your business, as well as an evaluation of whether IRS’s new Voluntary Classification Program may be worth investigating.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Charitable contributions traditionally peak at the end of the year-end. While tax savings may not be your prime motivator for making a gift to charity, your donation could help your tax bottom-line for 2011. As with many tax incentives, the rules for tax-deductible charitable contributions are complex, especially the rules for substantiating your donation. Also important to keep in mind are some enhanced charitable giving incentives scheduled to expire at the end of 2011.
Charitable contributions traditionally peak at the end of the year-end. While tax savings may not be your prime motivator for making a gift to charity, your donation could help your tax bottom-line for 2011. As with many tax incentives, the rules for tax-deductible charitable contributions are complex, especially the rules for substantiating your donation. Also important to keep in mind are some enhanced charitable giving incentives scheduled to expire at the end of 2011.
Tips
The IRS has posted tips for deducting charitable contributions on its website. The tips are a good refresher of the fundamental rules for deducting charitable contributions:
--To be tax-deductible, a contribution must be made to a qualified organization.
--To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.
--If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.
--Donations of clothing and household items must generally be in good used condition or better to be tax-deductible.
--Special rules apply to donations of motor vehicles.
--Many donations must be substantiated; the substantiation rules vary for different donations.
Qualified organizations
Some individuals are surprised to learn that their donation is not tax-deductible because the recipient is not a qualified charitable organization. Generally, churches, temples, synagogues, mosques, and other religious organizations are qualified charitable organizations. Nonprofit community service, educational, and health organizations are also generally qualified charitable organizations. Special rules apply to foreign charities. If you have any questions whether the organization is a qualified charitable organization, please contact our office.
Substantiation rules
In 2006, Congress significantly revised the rules for substantiating your charitable contributions. Unless a contribution is properly substantiated, the IRS may deny your deduction.
Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. Remember, this rule applies to all cash contributions, even contributions of small monetary amounts. The IRS will not accept certain personal records. For example, you cannot substantiate a contribution by reference to a diary or notes made at the time of the donation.
In recent years, text message donations have grown in popularity. For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.
To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.
One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more. If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.
Additional rules apply for donations valued at more than $5,000. These donations generally require an appraisal and you must advise the IRS of that appraisal by filing a special form.
Expiring provisions
Under current law, certain IRA owners can directly transfer tax-free, up to $100,000 annually from the IRA to a qualified charitable organization. The benefit is limited. The IRA owner must be age 70 ½ or older. Additionally, the contribution does not qualify for the deduction for charitable donations. To qualify, the IRA funds must be contributed directly by the IRA trustee to the qualified charitable organization. You can also take advantage of this tax incentive if you itemize or do not itemize deductions.
Unless extended, this incentive is scheduled to expire after December 31, 2011. It is unclear if Congress will extend the incentive into 2012 or beyond. If you are considering a charitable contribution from your IRA, please contact our office so we can review the rules in detail.
Several other enhanced charitable giving incentives are also scheduled to expire at the end of 2011. They include special rules for contributions of food inventory, contributions of computer equipment to schools by corporations, and other special rules for corporations.
Clothing and household items
Cleaning out your closet can help generate year-end tax savings. However, not all charitable contributions of clothing and household items are deductible. Generally, clothing and household items donated to a charitable organization must be in good used or better condition. Other rules also apply to donations of clothing and household items.
Motor vehicles and other types of donations
The tax deduction for a motor vehicle, boat or airplane donated to charity is fraught with complexity. The substantiation requirements depend on the amount of your claimed deduction. If you are considering donating a motor vehicle, boat or airplane to charity, please contact our office so we can help you navigate the substantiation rules to maximize your tax benefits.
The rules for donations of conservation easements, intellectual property and other items likewise require expert planning. Otherwise, you could miss the tax benefit.
Limitations
The Tax Code includes a number of provisions limiting tax-deductible contributions. Limitations may be based on the individual’s income, the type of donation and the nature of the recipient organization. Our office can describe how these limitations may impact you.
In past years, a provision known as the limitation on itemized deductions applied to higher-income individuals. This provision reduces the total amount of a higher-income individual's otherwise allowable deductions; however, some deductions are not impacted. For 2011 and 2012, this limitation does not apply.
If you have any questions about the mechanics of tax-deductible charitable contributions, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Under a flexible spending arrangement (FSA), an amount is credited to an account that is used to reimburse an employee, generally, for health care or dependent care expenses. The employer must maintain the FSA. Amounts may be contributed to the account under an employee salary reduction agreement or through employer contributions.
Under a flexible spending arrangement (FSA), an amount is credited to an account that is used to reimburse an employee, generally, for health care or dependent care expenses. The employer must maintain the FSA. Amounts may be contributed to the account under an employee salary reduction agreement or through employer contributions.
Use-it or lose-it
The general rule is that no contribution or benefit from an FSA may be carried over to a subsequent plan year. Unused benefits or contributions remaining at the end of the plan year (or at the end of a grace period) are forfeited. This is known as the “use it or lose it” rule. The plan cannot pay the unused benefits back to the employee, and cannot carry over the unused benefits to the following calendar year.
Example. An employer maintains a cafeteria plan with a health FSA. The plan does not have a grace period. Arthur, an employee, contributes $250 a month to the FSA, or a total of $3,000 for the calendar year. At the end of the year (December 31), Arthur has incurred medical expenses of only $1,200 and makes claims for those expenses. He has $1,800 of unused benefits. Under the “use it or lose it” rule, Arthur forfeits the $1,800.
Grace period
Because the “use it or lose it” rule seemed harsh, the IRS gave employers the option to provide a grace period at the end of the calendar year. The grace period may extend for 2½ months, but must not extend beyond the 15th day of the third month following the end of the plan year. Medical expenses incurred during the grace period may be reimbursed using contributions from the previous year.
Example. Beulah contributes $3,000 to her health FSA for 2010. The FSA is on January 1 through December 31 calendar year. On December 31, 2010, Beulah has $1,800 of unused contributions. Her employer provides a grace period through March 15, 2011. On January 20, 2011, Beulah incurs $1,500 of additional medical expenses. Because these expenses were incurred during the grace period, Beulah can be reimbursed the $1,500 from her 2010 contributions. On March 15, 2011, she has $300 of unused benefits from 2010 and forfeits this amount.
Exceptions
There are other exceptions to the prohibition against deferred compensation within the operation of an FSA. A cafeteria plan is permitted, but not required, to reimburse employees for orthodontia services before the services are provided, even if the services will be provided over a period of two years or longer. The employee must be required to pay in advance to receive the services.
Another exception is provided for durable medical equipment that has a useful life extending beyond the health FSA’s period of coverage (the calendar year, plus any grace period). For example, a health FSA is permitted to reimburse the cost of a wheelchair for an employee.
If you have any questions on setting up an FSA, whether as an employer or an employee, and which benefits must be covered and which are optional, please do not hesitate to call this office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Job-hunting expenses are generally deductible if you are not searching for a job in a new field. This can be useful in a tough job market. It does not matter whether your job hunt is successful, or whether you are employed or unemployed when you are looking.
Job-hunting expenses are generally deductible if you are not searching for a job in a new field. This can be useful in a tough job market. It does not matter whether your job hunt is successful, or whether you are employed or unemployed when you are looking.
The expenses are deductible as a miscellaneous itemized deduction. You can deduct job-hunting expenses if the amount of all your miscellaneous itemized deductions exceeds two percent of your adjusted gross income. However, if you claim the standard deduction, you cannot deduct job-hunting expenses. Therefore, as a practical matter for many job seekers, job hunting expenses do not materialize as a tax deduction.
For those who are able to use job seeking expenses as a deduction, it can be difficult to determine what a new field is. A professional photographer who pursues a job in the retail industry clearly is searching in a new field and cannot deduct any of his or her job-hunting expenses. But there are exceptions. The IRS has allowed persons who retired from the military to search for jobs in new fields and claim their job-hunting expenses. Taking a temporary job while searching for permanent employment in your current field will not be considered a job change that disqualifies your job-hunting expenses.
Persons entering the job market for the first time, such as college students, and persons who have been out of the job market for a long period of time, such as parents of young children, cannot deduct their job-hunting expenses. However, a college student who worked in a particular field while in school may be able to deduct job-hunting expenses.
Deductible expenses include typing, printing and mailing a resume. Long-distance phone calls are also deductible. You can deduct travel costs for going on a job search or an interview, including air transportation, railroad, or car expenses. The standard rate for car expenses for business is 51 cents per mile for the first six months of 2011, and 55.5 cents per mile for the period July 1-December 31, 2011. Amounts you pay to a job counselor, employment agency or job referral service are all deductible.
It is important to keep records of your costs. While your individual expenses may not be substantial, your total expenses can add up to a significant amount.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
The monthly compliance calendar for November 2011.
November 2 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 26–28.
November 4 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates October 29–November 1.
November 9 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 2– 4.
November 10 Employees who work for tips. Employees who received $20 or more in tips during October must report them to their employer. Form 4070 may be used.
Employers. Employers file Form 941 for the third quarter of 2011.
November 14
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 5–8.
November 15 Monthly depositors. Monthly depositors must deposit employment taxes for payments in October.
November 16 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 9–11.
November 18 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 12–15.
November 23 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 16–18.
November 28 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 19–22.
November 30 Employers. Semi-weekly depositors must deposit employment taxes for payroll dates November 23–25.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
2011 year end tax planning for individuals lacks some of the drama of recent years but can be no less rewarding. Last year, individual taxpayers were facing looming tax increases as the calendar changed from 2010 to 2011; particularly, increased tax rates on wages, interest and other ordinary income, and higher rates on long-term capital gains and qualified dividends.
2011 year end tax planning for individuals lacks some of the drama of recent years but can be no less rewarding. Last year, individual taxpayers were facing looming tax increases as the calendar changed from 2010 to 2011; particularly, increased tax rates on wages, interest and other ordinary income, and higher rates on long-term capital gains and qualified dividends.
Thanks to legislation enacted at the end of 2010, tax rates are stable for 2011 and 2012, although the uncertainty will return as 2013 approaches, as political pressure in Washington builds to do something quickly for the economy. Ordinary income tax rates for individuals currently are 10, 15, 25, 28, 33 and 35 percent; capital gains rates are zero and 15 percent.
President Obama has proposed to preserve these tax rates for taxpayers with income below $200,000 (individuals) and $250,000 (married couples filing jointly) and to raise the rates for taxpayers in these higher-income brackets. If Congress is gridlocked and takes no action, everybody’s rates will rise, but again, not until 2013.
Expiring tax breaks
Unfortunately, not all is quiet on the tax front despite no dramatic rate changes until 2013. There are some specific tax provisions that will terminate at the end of 2011, unless Congress and the President agree to extend them. These include the tuition and fees above-the-line deduction for high education expenses, which can be as high as $4,000. Another expiring provision is the deduction for mortgage insurance premiums, which covers premiums paid for qualified mortgage insurance.
Several other benefits (“extenders”) are also scheduled to expire after 2011:
The state and local sales tax deduction;
The classroom expense deduction for teachers;
Nonbusiness energy credits;
The exclusion for distributions of up to $100,000 from an IRA to charity;
A higher deduction limit for charitable contributions of appreciated property for conservation purposes.
Retirement accounts
An old standby that makes sense from year-to-year is maximizing contributions to an IRA. The contribution is deductible up to $5,000 ($6,000 for taxpayers over 50), depending on some specific taxpayer income levels and circumstances. Taxpayers in a 401(k) plan can reduce their income by contributing to their employer plan, for which the limit in 2011 is $16,500.
In 2010, it was particularly important to consider whether to convert a traditional IRA to a Roth IRA, because the income realized on conversion could be recognized over two years. While a conversion continues to be worthwhile to consider (because distributions from a Roth IRA are not taxable), there are no longer any special break to defer a portion of the income from the conversion.
Alternative minimum tax
The AMT has been “patched” for 2011. The exemptions have been temporarily increased from the normal statutory levels to the “patched” levels:
From $33,750 to $48,450 for single individuals;
From $45,000 to $74,450 for married couples filing jointly and surviving spouses; and
From $22,500 to $37,335 for married couples filing separately.
The amounts return to the “normal levels” of $33,750/$45,000/$22,500, respectively, in 2012 unless Congress takes action to maintain the patch. Elimination of the AMT is a goal of long-term tax reform, but the loss of revenue has been considered too high in the past. Without the “patch,” the Congressional Budget Office estimates that an additional 20 million middle-class taxpayers would suddenly become subject to an AMT once designed only for millionaires.
While planning for the AMT is difficult, taxpayers may want to consider realizing AMT income, such as capital gains, in 2011, when the patch is higher, rather than in 2012.
Conclusion
Taxpayers can take advantage of 2011 provisions to realize last-minute tax benefits. Some of these benefits may not be available in 2012. It is worthwhile to look at these planning opportunities as part of an overall year-year financial strategy.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Many tax benefits for business will either expire at the end of 2011 or become less valuable after 2011. Two of the most important benefits are bonus depreciation and Code Sec. 179 expensing. Both apply to investments in tangible property that can be depreciated. Other sunsetting opportunities might also be considered.
Many tax benefits for business will either expire at the end of 2011 or become less valuable after 2011. Two of the most important benefits are bonus depreciation and Code Sec. 179 expensing. Both apply to investments in tangible property that can be depreciated. Other sunsetting opportunities might also be considered.
Bonus depreciation
Bonus depreciation is 100 percent for 2011. A business can write-off, in the first year, the entire cost of its investment in new depreciable property. Under current law, bonus depreciation will decrease to 50 percent in 2012 and will terminate after 2012. (These deadlines are extended one year for certain transportation property and property with a longer production period). President Obama has proposed to extend 100 percent bonus depreciation through 2012. Normally, this would have a good chance of being approved, but with the focus on deficit reduction and the linking of tax benefits to tax increases, it is not at all clear what will happen.
So, if a business has income in 2011 and plans to invest in depreciable property, it is worthwhile to consider making that investment in 2011, while the available write-off is at its highest. Under normal depreciation rules, a business will still be able to claim accelerated write-offs, but this may be 50 percent or less of the cost of the property, with the balance written-off over several years, instead of all in one year.
Planning for bonus depreciation is important because the property must satisfy placed-in-service and acquisition date requirements. Property is placed in service when it is in a condition or state of readiness on a regular ongoing basis for a specifically assigned function in a trade or business. The acquisition date rules may vary. For 2011, property is acquired when the taxpayer incurs or pays its cost. This could occur when the property is delivered, but it could also be when title to the property passes. For 2012, property is acquired when the taxpayer takes physical possession of the property.
Code Sec. 179 expensing
Code Sec. 179 expensing (first-year writeoff) has been around for awhile, but at higher amounts more recently. While there is no limit on bonus depreciation, expensing is limited to a statutory amount. For 2011, this amount is $500,000. It is scheduled to drop to $125,000 in 2012 and to $25,000 after 2012 (adjusted for inflation). Moreover, the cap is reduced for the amount of total investment in Code Sec. 179 property. The phaseout threshold is $2 million for 2011, dropping to $500,000 for 2012 and $200,000 for 2013 and subsequent years. For businesses who want to invest in depreciable property, the payoff is definitely greater in 2011. Taxpayers taking advantage of expensing should write off assets that would otherwise have the longest recovery periods.
Other 2011 benefits
Some other important benefits expire at the end of 2011 or become less valuable. A significant benefit in 2011 is the 100 percent exclusion for small business stock. After 2012, the normal exclusion rate will drop to 50 percent, although it has been 75 percent in recent years. The exclusion is based on the year the stock is acquired; the stock must be held for five years before sold and satisfy other requirements.
Another important benefit is the 20 percent research credit. The credit has been extended one year at a time for a long period, so it is likely to be extended again. Nevertheless, until Congress acts, there is some uncertainty for research expenses incurred after 2011.
Conclusion
To maximize the benefits of 2011 year-end tax planning, a business must be proactive in determining what upcoming capital investments might be accelerated into this year and what investments become cost effective because of the immediate tax benefits that they offer. Some business-related tax benefits will be less valuable after 2011; for others, it is not clear what Congress and the administration will do in terms of surprising taxpayers with a year-end tax bill. Please contact this office if you have any questions over how year-end tax strategies that begin now and continue through December can help maximize tax benefits for your business.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Autumn 2011 in Washington, D.C. is expected to be a season of contentious debates over tax reform, and at the heart of the debate is the amount of taxes paid by higher-income individuals. President Obama wants Congress to raise taxes on higher-income individuals to help reduce the federal government’s budget deficit and to pay for a jobs program. Many lawmakers, especially Republicans, are opposed to any tax increases. The two sides appear far apart but the need to cut the nation’s deficit could encourage compromise.
Autumn 2011 in Washington, D.C. is expected to be a season of contentious debates over tax reform, and at the heart of the debate is the amount of taxes paid by higher-income individuals. President Obama wants Congress to raise taxes on higher-income individuals to help reduce the federal government’s budget deficit and to pay for a jobs program. Many lawmakers, especially Republicans, are opposed to any tax increases. The two sides appear far apart but the need to cut the nation’s deficit could encourage compromise.
Bush-era tax cuts
In 2001, Congress enacted the Economic Growth and Tax Reconciliation Act (EGTRRA), which set in motion a gradual decrease in the individual marginal income tax rates and the federal estate tax, along with marriage penalty relief, the introduction of a new 10 percent tax bracket and more. The Jobs and Growth Tax Act of 2003 accelerated the reductions in the individual tax rates and also reduced capital gains and dividend tax rates (currently taxed at 15 percent for taxpayers in tax brackets above 15 percent and at zero percent for or all other taxpayers). All of these tax cuts are collectively known as the Bush-era tax cuts.
In 2010, Congress passed, and President Obama signed, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act. The 2010 Tax Relief Act extended the Bush-era tax cuts through the end of 2012. The extension proved especially valuable for higher-income taxpayers. Without the extension, the top two individual income tax rates would have risen from 33 and 35 percent to 36 and 39.6 percent, respectively, after December 31, 2010.
White House proposals
President Obama released a Deficit Reduction Plan on September 19 and proposed to allow the Bush-era tax cuts to expire for higher-income taxpayers and to return the federal estate tax to its 2009 parameters. The White House broadly defines higher-income taxpayers for purposes of the Bush-era tax cuts as individuals with annual incomes over $200,000 and families with annual incomes over $250,000.
The President’s Deficit Reduction Plan would:
--Allow the Bush-era high-income tax cuts to expire
--Return the federal estate tax to its 2009 levels
--Reduce the value of itemized deductions and other tax preferences to 28 percent for families with incomes over $250,000
All of these changes would apparently take place after 2012.
Keep in mind that if Congress does nothing before 2013, the Bush-era tax cuts are scheduled to automatically expire after 2012. Tax rates would not only rise for higher-income individuals but for all taxpayers. The federal estate tax would return to its pre-EGTRRA levels (with some minor modifications) and capital gains/dividends would be taxed at much less taxpayer-friendly rates than under current law.
Additionally, higher-income individuals will pay more in taxes after 2012 because of existing laws. An additional 0.9 percent Medicare tax on wages and self-employment income and a 3.8 percent Medicare contribution tax on unearned income are scheduled to take effect after 2012 for higher-income taxpayers.
Buffett Rule
President Obama has asked Congress to enact legislation to provide that no household making over $1 million annually should pay a smaller share of its income in taxes than middle-income families. President Obama calls this tax treatment, the “Buffett Rule” after billionaire investor Warren Buffett, who said that his effective tax rate is lower than the tax rate of his secretary.
The White House has been deliberately vague on the mechanics of the Buffet Rule. In his Deficit Reduction Plan, President Obama said that the Buffett Rule would be enacted as part of overall tax reform, which increases the progressivity of the Tax Code.
The Buffett Rule could take the shape of increased taxes on capital gains and dividends. Higher-income individuals typically have a significant portion of their income from investment activity. The Buffett Rule could also reform the alternative minimum tax (AMT). The AMT was originally enacted to prevent very wealthy taxpayers from avoiding taxes. Because the AMT was not indexed for inflation, and for other reasons, the AMT has encroached on middle income taxpayers.
Payroll tax cuts
The 2010 Tax Relief Act enacted a temporary payroll tax holiday. The employee-share of OASDI taxes is reduced from 6.2 percent to 4.2 percent for calendar year 2011 up to the Social Security wage base ($106,800 for 2011). An individual with earnings at or above $106,800 in 2011 receives a $2,136 tax benefit. Self-employed individuals receive a comparable tax benefit. Under current law, the payroll tax holiday ends after December 31, 2011 and the employee-share of OASDI taxes is scheduled to revert to 6.2 percent.
President Obama has proposed to extend and enhance the payroll tax cut for calendar year 2012. The employee-share of OASDI taxes for 2012 would be reduced from 6.2 percent to 3.1 percent, under the President’s proposal.
The President’s proposal has a reasonably good chance of being enacted. Taxpayers have become accustomed to the two percent reduction in effect for 2011. Moreover, lawmakers are reluctant to raise taxes in an election year. However, opponents of any extension question its impact on the long-term health of Social Security.
If you have any questions about the proposals being debated in Washington, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Taxpayers who wish to withdraw funds from a retirement account such as an IRA before they reach the age of 59½, can do so without their distributions becoming subject to the additional 10 percent tax. One option is to have their distributions made in substantially equal periodic payments, as outlined in Sec. 72(t) of the IRC. Taxpayers can use one of three methods to calculate these substantially equal payments:
Taxpayers who wish to withdraw funds from a retirement account such as an IRA before they reach the age of 59½, can do so without their distributions becoming subject to the additional 10 percent tax. One option is to have their distributions made in substantially equal periodic payments, as outlined in Sec. 72(t) of the IRC. Taxpayers can use one of three methods to calculate these substantially equal payments:
(1) Required minimum distribution method. Under this method, a taxpayer divides the retirement account’s principal by the appropriate number on the IRS’s life expectancy table for the year in which distributions will begin. That number depends upon the taxpayer’s age. Payment amounts will be predetermined each year by dividing the remaining principal by the number corresponding to the taxpayer’s age.
Note: Although this method of computation is much simpler than the second and third, it results in lower annual distributions. The length of time, however, over which the distributions are made is generally greater than for the amortization and annuitization methods.
(2) Fixed amortization method. Under the amortization method, the annual amount of payments is fixed at the time the first payment is made. The amount of the annual distribution is determined by amortizing the taxpayer’s account balance using the appropriate reasonable interest rate released by the IRS over a number of years, which equals the life expectancy of the account owner.
(3) Fixed annuitization method. As with the amortization method, all resulting annual payments remain the same for each succeeding year. The amount of the payments is determined by dividing the account principal by the appropriate annuity factor, which is based on the IRS’s mortality table and an interest rate of not more than 120% of the federal mid-term rate.
Payments made calculated through the annuitization method are generally the highest. Taxpayers electing to use this method should be aware that higher annual payments will more quickly exhaust their principal.
So long as the distribution payment scheme remains unmodified for a five year period beginning from the first payment date, the distributions will not be subject to the additional 10 percent tax.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.
A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.
The main advantage of an LLC is that in general its members are not personally liable for the debts of the business. Members of LLCs enjoy similar protections from personal liability for business obligations as shareholders in a corporation or limited partners in a limited partnership. Unlike the limited partnership form, which requires that there must be at least one general partner who is personally liable for all the debts of the business, no such requirement exists in an LLC.
A second significant advantage is the flexibility of an LLC to choose its federal tax treatment. Under IRS's "check-the-box rules, an LLC can be taxed as a partnership, C corporation or S corporation for federal income tax purposes. A single-member LLC may elect to be disregarded for federal income tax purposes or taxed as an association (corporation).
LLCs are typically used for entrepreneurial enterprises with small numbers of active participants, family and other closely held businesses, real estate investments, joint ventures, and investment partnerships. However, almost any business that is not contemplating an initial public offering (IPO) in the near future might consider using an LLC as its entity of choice.
Deciding to convert an LLC to a corporation later generally has no federal tax consequences. This is rarely the case when converting a corporation to an LLC. Therefore, when in doubt between forming an LLC or a corporation at the time a business in starting up, it is often wise to opt to form an LLC. As always, exceptions apply. Another alternative from the tax side of planning is electing "S Corporation" tax status under the Internal Revenue Code.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.
Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.
Basic rules
The "basic" rules governing estimated tax payments are not always synonymous with "straightforward" rules. The following addresses some basic rules regarding estimated tax payments by corporations and individuals:
Corporations. For calendar-year corporations, estimated tax installments are due on April 15, June 15, September 15, and December 15. If any due date falls on a Saturday, Sunday or legal holiday, the payment is due on the first following business day. To avoid a penalty, each installment must equal at least 25 percent of the lesser of:
-- 100 percent of the tax shown on the corporation's current year's tax return (or of the actual tax, if no return is filed); or
-- 100 percent of the tax shown on the corporation's return for the preceding tax year, provided a positive tax liability was shown and the preceding tax year consisted of 12 months.
A lower installment amount may be paid if it is shown that use of an annualized income method, or for corporations with seasonal incomes, an adjusted seasonal method, would result in a lower required installment.
Individuals. For individuals (including sole proprietors, partners, self-employeds, and S corporation shareholders who expect to owe tax of more than $1,000), estimated tax payments are due on April 15 (April 18 for 2011), June 15, and September 15 of 2011, and January 15 of 2012. Individuals who do not pay at least 90 percent of their tax through withholding generally are required to estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year. The required annual payment is generally the lesser of:
-- 90 percent of the tax ultimately shown on your return for the 2011 tax year, or 90 percent of the tax due for the year if no return is filed;
-- 100 percent of the tax shown on your return for the preceding (2010) tax year if that year was not for a short period of less than 12 months; or
-- The annualized income installment.
For higher-income taxpayers whose adjusted gross income (AGI) shown on your 2010 tax return exceeds $150,000 (or $75,000 for a married individual filing separately in 2011), the required annual payment is the lesser of 90 percent of the tax for the current year, or 110 percent of the tax shown on the return for the preceding tax year.
Adjusting estimated tax payments
If you expect an uneven income stream for 2011 your required estimated tax payments may not necessarily be the same for each remaining period, requiring adjustment. The need for, and the extent of, adjustments to your estimated tax payments should be assessed at the end of each installment payment period.
For example, a change in your or your business's income, deductions, credits, and exemptions may make it necessary to refigure estimated tax payments for the remainder of the year. Likewise for individuals, changes in your exemptions, deductions, and credits may require a change in estimated tax payments. To avoid either a penalty from the IRS or overpaying the IRS interest-free, you may want to increase or decrease the amount of your remaining estimated tax payments.
Refiguring tax payments due
There are some general steps you can take to reconfigure your estimated tax payments. To change your estimated tax payments, refigure your total estimated tax payments due. Then, figure the payment due for each remaining payment period. However, be careful: if an estimated tax payment for a previous period is less than one-fourth of your amended estimated tax, you may be subject to a penalty when you file your return.
If you would like further information about changing your estimated tax payments, please contact our office.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Under the Patient Protection and Affordable Care Act (PPACA) enacted in March 2010, small employers may be eligible to claim a tax credit of 35 percent of qualified health insurance premium costs paid by a taxable employer (25 percent for tax-exempt employers). The credit is designed to encourage small employers to offer health-insurance to their employees.
Under the Patient Protection and Affordable Care Act (PPACA) enacted in March 2010, small employers may be eligible to claim a tax credit of 35 percent of qualified health insurance premium costs paid by a taxable employer (25 percent for tax-exempt employers). The credit is designed to encourage small employers to offer health-insurance to their employees.
Employees and wages
An employer can claim the maximum 35 percent credit if it has no more than 10 full-time equivalent (FTE) employees receiving average annual wages of $25,000 or less. The credit is phased out as the number of FTEs increases to 25 and as average annual wages increase to $50,000. An employer with 25 or more employees, or paying average annual wages of $50,000 or more per employee, will not receive a credit.
In counting FTEs, the employer should not include owners and family members. Seasonal employees are not counted unless they work at least 120 days during the year. In determining average annual wages, employers must count all wages, bonuses, commissions or other compensation, including sick leave and vacation leave.
Applicable years
The credit took effect in 2010. It did not expire at the end of 2010 but can be claimed from year to year. The credit applies at the 35/25 percent levels for four years, through 2013. After 2013, the maximum credit increases to 50 percent for for-profit employers and 35 percent for tax-exempt employers, but only for two years. Thus, the credit can be claimed every year for the six years from 2010 and 2015. The credit is recalculated every year based on the total health insurance premiums paid. Only non-elective employer premiums are counted; salary reduction contributions paid through a cafeteria plan or other arrangement are not counted.
Premiums
An employer must pay at least 50 percent of the premium cost of health insurance coverage, and must pay the same uniform percentage of costs for each employee who obtains health insurance through the employer. A transition rule for 2010 treats an employer as satisfying the uniformity rule as long as the employer pays at least 50 percent of the coverage costs of each employee, based on the cost of employee-only (single) coverage, even if the employer does not pay the same percentage of costs for each employee.
The premiums must be paid for qualified health insurance, such as a hospital or medical service plan or health maintenance organization. It includes coverage for dental, vision, long-term care, nursing home care, and coverage for a specified disease or illness. Coverage does not accident insurance, disability income insurance, and workers' compensation.
Claiming the credit
The credit is determined on Form 8941, Credit for Small Employer Health Insurance Premiums. For-profit employers report the amount of the credit on Form 3800, General Business Credit, and attach the forms to their income tax return. As a general business credit, any unused credit (in excess of taxable income) can be carried back one year (except for a credit arising in 2010, the first year) or carried forward 20 years. For-profit employers deduct the credit from the premiums paid for health insurance, when computing the deduction for health insurance premiums.
Tax-exempt employers report the credit on Form 990-T, Exempt Organization Business Income Tax Return, regardless of whether the organization is subject to tax on unrelated business income. The credit is refundable for tax-exempt employers, provided it does not exceed the employer’s income tax withholding and Medicare taxes. The credit is not refundable if the employer does not claim the credit on Form 990-T.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
Long-term care premiums are deductible up to certain amounts as itemized medical expense deductions. The amount is based upon your age. Unfortunately, most taxpayers do not have enough other medical expense deductions to exceed the non-deductible portion equal to the first 7 ½ percent of adjusted gross income (10 percent if you are subject to alternative minimum tax (AMT)). Furthermore, more taxpayers now take the standard deduction rather than itemize, making even those medical expenses useless as a tax deduction.
Long-term care premiums are deductible up to certain amounts as itemized medical expense deductions. The amount is based upon your age. Unfortunately, most taxpayers do not have enough other medical expense deductions to exceed the non-deductible portion equal to the first 7 1/2 percent of adjusted gross income (10 percent if you are subject to alternative minimum tax (AMT)). Furthermore, more taxpayers now take the standard deduction rather than itemize, making even those medical expenses useless as a tax deduction.
A tax bill has been before Congress for several years now to allow long-term care premiums to be deductible "above the line," that is, by anyone irrespective of whether you itemize. The impetus behind this recommendation is that encouraging individuals to fund their own eventual eldercare is preferable to having federal Medicare payments to so. So far, however, Congress has not brought the matter to a vote. Some state income tax laws already allow such an above-the-line deduction.
Long-term care premiums. Long-term care insurance premiums are deductible in figuring itemized medical expense deductions up to the following amounts:
- Age 40 or younger: $290 in 2007; $310 in 2008;
- Over 40 but not older than 50: $550 in 2007; $580 in 2008;
- Over 50 but not older than 60: $1,110 in 2007; $1,150 in 2008;
- Over 60 but not older than 70: $2,950 in 2007; $3,080 in 2008; and
- Over 70: $3,680 in 2007; $3,850 in 2008.
If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose.
